SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
For Quarter Ended June 30, 1996 Commission File
Number 0-16882
THE COMMERCE GROUP, INC.
(Exact name of registrant as specified in its charter)
Massachusetts 04-2599931
(State or other IRS Employer
jurisdiction Identification
of Incorporation) No.)
211 Main Street Webster, Massachusetts 01570
(Address of principal
executive offices)
(Zip Code)
Registrant's telephone number, including area code: (508)
943-9000
Indicate by check mark whether the registrant (1) has
filed all reports required to be filed by Section 13 or
15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90
days. Yes X No___
As of August 1, 1996, the number of shares outstanding of
the
registrant's common stock (excluding Treasury Shares) was
36,339,452.
Page 1 of 16
<page
The Commerce Group, Inc.
Table of Contents
Page No.
Part I - Financial Information
Consolidated Balance Sheets at
June 30, 1996 (Unaudited) and December 31,
1995............................................................
3
Consolidated Statements of Earnings for the
Three and Six Months Ended June 30, 1996 and
1995(Unaudited)...................................... 4
Consolidated Statements of Cash Flows for the
Six Months Ended June 30, 1996 and
1995(Unaudited)......................................................
5
Notes to Unaudited Consolidated Financial
Statements............................................................
6
Management's Discussion and
Analysis................................................................
................... 7
Part II - Other Information
Item 4
Results of Votes of Security
Holders.................................................................
.................. 15
Item 6
Exhibits and Reports on Form 8-
K.......................................................................
.............. 16
Signature...............................................................
................................................................
16
- - 2 -
<page
THE COMMERCE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Thousands of Dollars)
<TABLE>
<CAPTION>
June 30, December 31,
1996 1995
(Unaudited)
ASSETS
<S>
<C> <C>
Investments:
Fixed maturities, at market (cost: $824,296 in 1996 and $801,308
in 1995)....................... $ 818,398 $ 815,277
Equity securities, at market (cost: $186,521 in 1996 and $140,157
in 1995)...................... 196,020 151,579
Mortgage loans on real estate (less allowance for possible loan
losses of $2,373 in 1996 and
$2,660 in
1995)...................................................................
............. 73,679 73,783
Collateral notes receivable (less allowance of $600 in 1996 and
$513 in 1995).................... 1,557 1,826
Investments in real
estate..................................................................
..... 46 348
Total
investments.............................................................
............... 1,089,700 1,042,813
Cash and cash
equivalents.............................................................
............. 19,067 75,906
Accrued investment
income..................................................................
........ 14,649 14,633
Premiums receivable (less allowance for doubtful receivables of
$1,096, in 1996 and $1,103 in 1995) 188,428 127,243
Deferred policy acquisition
costs..................................................................
88,835 67,160
Property and equipment, net of accumulated
depreciation............................................ 30,790
30,981
Residual market
receivable..............................................................
........... 191,055 200,124
Due from
reinsurers..............................................................
.................. 19,145 21,897
Deferred income
taxes...................................................................
........... 10,355 1,415
Goodwill................................................................
........................... 1,303 1,374
Total
assets..................................................................
............... $1,653,327 $1,583,546
LIABILITIES AND
STOCKHOLDERS' EQUITY
Liabilities
Losses and loss adjustment
expenses..............................................................
$ 646,032 $ 618,791
Unearned
premiums................................................................
................ 414,530 330,454
Current income
taxes...................................................................
.......... 3,548 1,180
Deferred
income..................................................................
................ 9,548 8,954
Contingent commissions
accrued.................................................................
.. 16,773 32,550
Payable to securities
broker..................................................................
... 8,010 -
Other liabilities and accrued
expenses...........................................................
7,644 41,903
Total
liabilities.............................................................
............... 1,106,085 1,033,832
Stockholders' equity
Preferred stock, authorized 5,000,000 shares at $1.00 par value;
none issued in 1996 and 1995.... - -
Common stock, authorized 100,000,000 shares at $.50 par value;
issued and outstanding 38,000,000 shares in 1996 and
1995...................................... 19,000 19,000
Paid-in
capital.................................................................
................. 29,621 29,621
Net unrealized gains on investments, net of income taxes of $1,260
in 1996 and $8,887 in 1995.... 2,341 16,504
Retained
earnings................................................................
................ 528,534 508,948
579,496 574,073
Treasury stock 1,660,548 shares in 1996 and 1,263,433 shares in
1995 ........................... (32,254) (24,359)
Total stockholders'
equity..................................................................
. 547,242 549,714
Total liabilities and stockholders'
equity................................................... $1,653,327
$1,583,546
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
- - 3 -
<page
THE COMMERCE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
Three and Six Months Ended June 30, 1996 and 1995
(Thousands of Dollars Except Per Share Data)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1996 1995 1996 1995
<S>
<C> <C> <C> <C>
Revenues
Earned premiums ................................................
$ 165,533 $ 145,705 $ 317,269 $ 288,119
Net investment income...........................................
19,472 17,250 38,430 34,655
Premium finance fees............................................
2,265 4,876 6,284 9,835
Net realized investment losses..................................
(822) (457) (1,733) (773)
Total revenues.........................................
186,448 167,374 360,250 331,836
Expenses
Losses and loss adjustment expenses.............................
122,402 85,727 245,524 180,400
Policy acquisition costs........................................
44,165 41,788 77,481 82,062
Total expenses.........................................
166,567 127,515 323,005 262,462
Earnings before income taxes...........................
19,881 39,859 37,245 69,374
Income taxes......................................................
3,616 10,572 6,387 17,816
NET EARNINGS...........................................
$ 16,265 $ 29,287 $ 30,858 $ 51,558
NET EARNINGS PER COMMON SHARE..........................
$ .45 $ .77 $ .85 $ 1.36
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING...
36,346,559 38,000,000 36,451,730 38,000,000
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
- - 4 -
<page
THE COMMERCE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended June 30, 1996 and 1995
(Thousands of Dollars)
(Unaudited)
1996 1995
<TABLE>
<CAPTION>
<S>
<C> <C>
Cash flows from operating activities:
Net
earnings................................................................
...... $ 30,858 $ 51,558
Adjustments to reconcile net earnings to net cash provided by
operating activities:
Premiums
receivable.............................................................
(61,185) (38,122)
Deferred policy acquisition
costs...............................................
(21,675) (12,818)
Residual market
receivable......................................................
9,069 (5,235)
Due to/from
reinsurers..........................................................
2,752 1,030
Losses and loss adjustment
expenses.............................................
27,241 7,014
Unearned
premiums...............................................................
84,076 52,064
Current income
taxes............................................................
2,368 (5,803)
Deferred income
taxes...........................................................
(1,314) (1,188)
Deferred
income.................................................................
594 452
Contingent
commissions..........................................................
(15,777) (2,195)
Other liabilities and accrued
expenses.......................................... (26,178)
(441)
Net realized investment
losses..................................................
1,733 773
Other -
net.....................................................................
2,739 1,505
Net cash provided by operating
activities................................ 35,301
48,594
Cash flows from investing activities:
Proceeds from maturity of fixed
maturities...................................... 74,228
10,815
Proceeds from sale of fixed
maturities...........................................
26,590 16,472
Purchase of fixed
maturities.....................................................
(126,120) (38,754)
Purchase of equity
securities.....................................................
(48,387) (10,830)
Proceeds from sale of equity
securities...........................................
2,028 5,091
Payments received on mortgage loans on real
estate............................... 4,577
2,460
Mortgage loans on real estate
originated..........................................
(4,819) (11,436)
Mortgages sold to investors on the secondary
market............................... -
1,566
Payments received on collateral notes
receivable.................................. 151
236
Collateral notes receivable
originated............................................ -
(240)
Proceeds from sale of real estate acquired by
foreclosures........................ 92
275
Purchase of property and equipment
............................................... (1,420)
(2,256)
Proceeds from sale of property and
equipment...................................... 107
91
Net cash used in investing
activities.................................... (72,973)
(26,510)
Cash flows from financing activities:
Dividends paid to
stockholders....................................................
(11,272) (4,180)
Purchase of treasury
stock........................................................
(7,895) -
Net cash used in financing
activities.................................... (19,167)
(4,180)
Increase (decrease) in cash and cash
equivalents.................................... (56,839)
17,904
Cash and cash equivalents at beginning of
period.................................... 75,906
5,485
Cash and cash equivalents at end of
period.......................................... $ 19,067
$ 23,389
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
- - 5 -
<page
The Commerce Group, Inc.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. The financial information has been prepared on a basis consistent
with the accounting principles reflected in the audited
consolidated financial statements for the year ended December 31,
1995. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with
generally accepted accounting principles have been omitted
pursuant to the Securities and Exchange Commission rules and
regulations, although the Company believes the disclosures which
have been made are adequate to make the information presented not
misleading.
2. The information furnished includes all adjustments and accruals
consisting only of normal recurring adjustments which are, in the
opinion of management, necessary for a fair presentation of
results for the interim periods. Certain 1995 account balances
have been reclassified to conform to the current year's
presentation.
3. The consolidated financial statements should be read in
conjunction with the Company's Annual Report on Form 10-K filed
with the Securities and Exchange Commission.
4. Neither the results for the six months ended June 30, 1996 nor
comparison with the corresponding six months ended June 30, 1995
should be considered indicative of the results which may be
expected for the year ending December 31, 1996.
5. In May 1995, the Board of Directors announced that it had approved
a stock buyback program of up to 3 million shares. As of June 30,
1996, 1,660,548 shares of Treasury Stock were purchased under the
program, of which 397,115 shares were purchased in 1996.
6. In May 1996, the Board of Directors of the Company voted to
increase its quarterly stockholder dividend from $0.06 per share
to $0.25 per share.
7. Disclosure of supplemental cash flow information:
<TABLE>
<CAPTION>
Six Months Ended
June 30,
1996 1995
<S>
<C> <C>
Cash paid during the period for:
Federal and state income taxes
$ 5,374 $24,815
State premium and related taxes
of insurance subsidiaries
11,141 9,653
Non-cash investing and financing activities:
Real estate acquired by foreclosure
74 534
</TABLE>
- - 6 -
<PAGE>
The Commerce Group, Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS
Three months ended June 30, 1996 compared to
three months ended June 30, 1995
Direct premiums written during the second quarter of 1996, increased
$29,197,000 or 20.6% to $170,757,000, as compared to the same period in
1995. The increase was primarily attributable to a $23,959,000 increase
in direct premiums written for Massachusetts personal automobile
insurance and an increase of $6,577,000 which was derived from the
Company's California subsidiary, Western Pioneer Insurance Company
("Western Pioneer"). The increase in Massachusetts personal automobile
direct premiums written resulted primarily from an increase of 33.7 % in
the number of personal automobile exposures written, offset by a 9.6%
decrease in the average personal automobile premium per exposure (each
vehicle insured). This was primarily the result of the Company's
affinity group marketing programs, safe driver rate deviations and the
effect of the 1996 state mandated rate decrease of 4.5%. In January
1996, the Company was granted approval to offer their customers safe
driver deviations of 10%. For drivers who qualify, both group discount
and safe driver deviations can be combined for up to a 19% reduction
from state mandated rates. Direct premiums written for commercial
automobile insurance decreased by $1,251,000, or 11.9%, due primarily to
a 6.9% decrease in the number of policies written, as well as a 5.0%
decrease in the average commercial automobile premium per policy.
Direct premiums written for homeowners insurance (excluding
Massachusetts Fair Plan) increased by $155,000, or 1.2% due primarily to
a 2.7% increase in the average premium per policy, offset by a decrease
in the number of policies written of approximately 1.5%.
Net premiums written during the second quarter of 1996 increased
$25,745,000 or 18.6% as compared to 1995. The increase in net premiums
written was primarily due to changes in direct premiums written as
described above, offset by the effect of reinsurance. Additionally,
written premiums assumed from the Commonwealth Automobile Reinsurers
("C.A.R.") decreased $605,000 or 2.5% and written premiums ceded to
C.A.R. decreased $1,600,000 or 7.5% as compared to the second quarter of
1995, as a result of changes in the industry's and the Company's
utilization of C.A.R. reinsurance.
Earned premiums increased $19,828,000 or 13.6% during the second quarter
of 1996 as compared to the same period in 1995. The increase in earned
premiums was due to changes in direct premiums written and net premiums
written as described above. Earned premiums assumed from C.A.R.
increased $926,000, or 3.8% during the second quarter of 1996 compared
to the same period in 1995. This was in addition to an increase of
$18,902,000, or 15.6% in earned premiums on all other lines of business
of which $6,961,000 was attributable to Western Pioneer.
Net investment income increased $2,222,000, or 12.9%, compared to the
second quarter of 1995, principally as a result of an increase in
average invested assets (at cost) of 12.1% as compared to the second
quarter of 1995. Annualized net investment income as a percentage of
total average investments was 7.1 % for both the three months ended
June, 1996 and 1995.
- - 7 -
<page
The Commerce Group, Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued)
Premium finance fees decreased $2,611,000, or 53.5% during the second
quarter of 1996 as compared to the same period in 1995. The decrease
was primarily attributable to a change from interest based finance fees
to a "late payment" fee based system for personal automobile policies
with effective dates of January 1, 1996 and forward. The change was in
response to competitive forces that occurred in the Massachusetts
marketplace.
Net realized investment losses totaled $822,000 during the second
quarter of 1996 as compared to $457,000 for the same period in 1995.
The realized losses in the second quarter of 1996 were primarily the
result of sales of GNMA's and tax-exempt bonds.
Losses and loss adjustment expenses incurred as a percentage of
insurance premiums earned ("loss ratio") increased to 73.9% for the
second quarter of 1996 as compared to 58.9% for the same period in 1995.
The ratio of net incurred losses, excluding LAE, to premiums earned
("pure loss ratio") on personal automobile increased to 66.6% compared
to 54.5% in the second quarter of 1995. This increase was primarily due
to the adverse impact of weather conditions experienced in the
northeast, diminished loss reserve redundancies as compared to previous
years, primarily in the automobile bodily injury line, and a decrease
in the personal automobile average earned premium rate of approximately
8%. The average rate decrease was due to the effects of affinity group
marketing programs, safe driver rate deviations and the 1996 state
mandated rate decrease of 4.5%. The commercial automobile pure loss
ratio decreased to 51.5% compared to 57.8% during the second quarter of
1995. For homeowners, the pure loss ratio increased to 92.9% compared
to 37.2% during the second quarter of 1995. This increase was due to
severe weather during the second quarter of 1996 as compared to mild
weather during the same period in 1995.
Policy acquisition costs increased by 5.7% during the second quarter of
1996 compared to the same period in 1995. However, as a percentage of
net premiums written, underwriting expenses (on a statutory basis) were
27.6% during the second quarter of 1996 as compared to 30.0% for the
same period in 1995. The increase in policy acquisition costs was
primarily due to the impact of the increase in premium volume brought
about by the Company's affinity group marketing programs and safe driver
rate deviations. This was offset by a decrease in agents profit sharing
compensation resulting from the impact of adverse weather conditions on
the Company's loss ratio, a decrease in the state mandated Massachusetts
personal automobile commission rates and the impact of affinity group
marketing service fee income. Agents' profit sharing compensation is
based in part on the underwriting profits of agency business written
with the Company. These items resulted in the decreased underwriting
expenses as a percentage of net premiums written.
Net earnings decreased $13,022,000 during the second quarter of 1996 as
compared to the same period in 1995, as a result of the factors
mentioned above.
- - 8 -
<page
The Commerce Group, Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS
Six months ended June 30, 1996 compared to
six months ended June 30, 1995
Direct premiums written during the first six months of 1996, increased
$62,861,000 or 18.0% to $ 412,277,000, as compared to the same period in
1995. The increase was primarily attributable to a $52,629,000 increase
in direct premiums written for Massachusetts personal automobile
insurance and an increase of $14,056,000 which was derived from the
Company's California subsidiary, Western Pioneer. The increase in
Massachusetts personal automobile direct premiums written resulted
primarily from an increase of 31.7% in the number of personal automobile
exposures written, offset by a 10.1% decrease in the average personal
automobile premium per exposure (each vehicle insured). This was
primarily the result of the Company's affinity group marketing programs,
safe driver rate deviations and the effect of the 1996 state mandated
rate decrease of 4.5%. In January 1996, the Company was granted
approval to offer their customers safe driver deviations of 10%. For
drivers who qualify, both group discount and safe driver deviations can
be combined for up to a 19% reduction from state mandated rates. Direct
premiums written for commercial automobile insurance decreased by
$3,278,000, or 12.2%, due primarily to a 7.3% decrease in the number of
policies written, as well as a 4.9% decrease in the average commercial
automobile premium per policy. Direct premiums written for homeowners
insurance (excluding Massachusetts Fair Plan) increased by $85,000, or
0.4% due primarily to a 2.8% increase in the average premium per policy,
offset by a decrease in the number of policies written of approximately
2.4%.
Net premiums written during the first six months of 1996 increased
$58,098,000 or 17.0% as compared to 1995. The increase in net premiums
written was primarily due to changes in direct premiums written as
described above, offset by the effect of reinsurance. Additionally,
written premiums assumed from the Commonwealth Automobile Reinsurers
("C.A.R.") decreased $3,264,000 or 6.1% and written premiums ceded to
C.A.R. increased $1,280,000 or 2.7% as compared to the first six months
of 1995, as a result of changes in the industry's and the Company's
utilization of C.A.R. reinsurance.
Earned premiums increased $29,150,000 or 10.1% during the first six
months of 1996 as compared to the same period in 1995. The increase in
earned premiums was due to changes in direct premiums written and net
premiums written as described above. Earned premiums assumed from
C.A.R. decreased $2,122,000, or 4.5% during the first six months of 1996
compared to the same period in 1995. This was offset by an increase of
$31,272,000, or 13.0% in earned premiums on all other lines of business
of which $13,919,000 was attributable to Western Pioneer.
Net investment income increased $3,775,000, or 10.9%, compared to the
first six months of 1995, principally as a result of an increase in
average invested assets (at cost) of 9.3% as compared to the first six
months of 1995. Annualized net investment income as a percentage of
total average investments was 7.2% during the six months ended June,
1996 as compared to 7.1% during the same period in 1995.
- - 9 -
<page
The Commerce Group, Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued)
Premium finance fees decreased $3,551,000, or 36.1% during the first six
months of 1996 as compared to the same period in 1995. The decrease was
primarily attributable to a change from interest based finance fees to a
"late payment" fee based system for personal automobile policies with
effective dates of January 1, 1996 and forward. The change was in
response to competitive forces that occurred in the Massachusetts
marketplace.
Net realized investment losses totaled $1,733,000 during the first six
months of 1996 as compared to $773,000 for the same period in 1995. The
realized losses in the first six months of 1996 were primarily the
result of sales of GNMA's and tax-exempt bonds.
Losses and loss adjustment expenses incurred as a percentage of
insurance premiums earned ("loss ratio") increased to 77.5% for the
first six months of 1996 as compared to 62.6% for the same period in
1995. The ratio of net incurred losses, excluding LAE, to premiums
earned ("pure loss ratio") on personal automobile increased to 67.0%
compared to 57.6% in 1995. This increase was primarily due to the
adverse impact of the severe winter weather conditions experienced in
the northeast, diminished loss reserve redundancies in the automobile
bodily injury area as compared to pervious years, and a decrease in the
personal automobile average earned premium rate of approximately 8%.
The average rate decrease was due to the effects of affinity group
marketing programs, safe driver rate deviations and the 1996 state
mandated rate decrease of 4.5%. The commercial automobile pure loss
ratio increased to 61.0% compared to 56.4% during the first six months
of 1995. For homeowners, the pure loss ratio increased to 136.6%
compared to 52.1% during the first six months of 1995. This increase
was due to severe weather during the first half of 1996 as compared to
mild weather during the same period in 1995.
Policy acquisition costs decreased by 5.6% during the first six months
of 1996 compared to the same period in 1995. The decrease in policy
acquisition costs was primarily due to a decrease in agents profit
sharing compensation resulting from the impact of adverse weather
conditions on the Company's loss ratio, a decrease in the state mandated
Massachusetts personal automobile commission rates and the impact of
affinity group marketing service fee income. Agents' profit sharing
compensation is based in part on the underwriting profits of agency
business written with the Company. As a percentage of net premiums
written, underwriting expenses (on a statutory basis) were 24.7% during
the first six months of 1996 as compared to 27.6% for the same period in
1995. This decrease was primarily attributable to the reasons as
mentioned above.
- - 10 -
<PAGE>
The Commerce Group, Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued)
The Company's effective tax rate was 17.1% for the first six months of
1996 as compared to 25.7% for the same period in 1995. In both years
the effective tax rate was lower than the statutory rate of 35.0%
primarily due to tax-exempt interest income. The 1996 rate was further
reduced by the effect of equivalent tax-exempt interest in the first six
months of 1996 as compared to the same period in 1995 coupled with
reduced earnings in the first six months of 1996 (taxed at the 35.0%
rate) as compared to the same period in 1995.
Net earnings decreased $20,700,000 during the first six months of 1996
as compared to the same period in 1995, as a result of the factors
mentioned above.
Liquidity and Capital Resources
The focus of the discussion of liquidity and capital resources is the
Consolidated Balance Sheets on page 3 and the Consolidated Statements of
Cash Flows on page 5. Stockholders' equity decreased by $2,472,000, or
0.4%, during the first six months of 1996. This decrease was the result
of net earnings of $30,858,000, offset by the decrease in net unrealized
gains, net of income taxes, on fixed maturities and equity securities of
$14,163,000, dividends paid to stockholders of $11,272,000, and treasury
stock purchased of $7,895,000. Total assets at June 30, 1996 increased
by $69,781,000, or 4.4%, to $1,653,327,000 as compared to total assets
of $1,583,546,000 at December 31, 1995. The majority of this growth was
reflected in an increase in invested assets of $46,887,000 or 4.5%,
$61,185,000, or 48.1 % in premiums receivable, $21,675,000, or 32.3% in
deferred policy acquisition costs, offset by a decrease in all other
assets of $59,966,000. The increase in premiums receivable was
attributable to the increase in personal automobile business as well as
the elimination of premium finance fees. The increase in deferred
acquisition costs was attributable to the increase in personal
automobile business.
As of June 30, 1996, the book value of the Company's fixed maturity
portfolio exceeded its market value by $5,898,000 ($3,834,000 after
taxes, or $0.11 per share) due to prevailing conditions in the bond
market. At December 31, 1995 the market value of the Company's fixed
maturity portfolio exceeded its book value by $13,969,000 ($9,080,000
after taxes, or $.25 per share).
The Company's liabilities totalled $1,106,085,000, at June 30, 1996 as
compared to $1,033,832,000 at December 31, 1995. The $72,253,000 or
7.0% increase was comprised of a $27,241,000 or 4.4% increase in losses
and loss adjustment expenses, an increase of $84,076,000 or 25.4% in
unearned premiums, offset by a $39,064,000 or 46.2% decrease in all
other liabilities. These changes primarily resulted from the increase
in personal automobile direct premiums written, as previously mentioned,
coupled with the adverse impact of severe winter weather in the
northeast.
- - 11 -
<page
The Commerce Group, Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued)
The primary sources of the Company's liquidity are funds generated from
insurance premiums, net investment income and maturing investments as
reflected in the Consolidated Statements of Cash Flows on page 5. In
response to the changing competitive forces in the marketplace, the
Company eliminated interest based premium finance fees for both new and
renewal personal automobile insurance policies with effective dates on
or after January 1, 1996 and replaced it with a "late payment" fee based
system. The impact of this change through the second quarter of 1996
has resulted in a 36.1% decrease in premium finance fees as compared to
the same period in 1995.
The Company's operating activities provided net cash of $35,301,000 in
the first six months of 1996 as compared to $48,594,000 in 1995. These
cash flows were primarily impacted by the Company's premium writings
attributable to the affinity group marketing programs mentioned
previously, offset by higher loss payments due to adverse weather
conditions.
The net cash flows used in investing activities were primarily the
result of purchases of fixed maturities and equity securities offset by
proceeds from the sale and maturity of fixed maturities. Investing
activities were funded by accumulated cash and cash provided by
operating activities during 1996 and 1995.
Cash flows used in financing activities totaled $19,167,000 during the
first six months of 1996 compared to $4,180,000 during the same period
in 1995. This is due to dividends paid to stockholders of $0.31 per
share in 1996 ($0.11 per share in 1995) and the purchase of 397,115
shares of Treasury Stock under the Company's stock buyback program.
The Company's funds are generally invested in securities with maturities
intended to provide adequate funds to pay claims without the forced sale
of investments. At June 30, 1996, the Company held cash and cash
equivalents of approximately $19,067,000. These funds provide
sufficient liquidity for the payment of claims and other short-term cash
needs. The Company relies upon dividends from its subsidiaries for its
cash requirements. Every domestic insurance company seeking to make any
dividend or other distributions to its stockholders must file a report
with the Commissioner. An extraordinary dividend is any dividend or
other property, whose fair value together with other dividends or
distributions made within the preceding twelve months exceeds the
greater of ten percent of the insurer's surplus as regards policyholders
as of the end of the preceding year, or the net income of a non-life
insurance company for the preceding year. No pro-rata distribution of
any class of the insurer's own securities is to be included. No
domestic insurance company shall pay an extraordinary dividend or other
extraordinary distribution until thirty days after the Commissioner has
received notice of the intended distribution and has not objected. The
Company did not pay any extraordinary dividends in 1996.
- - 12 -
<page
The Commerce Group, Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued)
Periodically, sales have been made from the Company's fixed maturity
investment portfolio to actively manage portfolio risks, including
credit-related concerns and matching of asset and liability cash flows,
to optimize tax planning and to realize gains. This practice will
continue in the future.
Industry and regulatory guidelines suggest that the ratio of a property
and casualty insurer's annual net written premiums to statutory
policyholders' surplus should not exceed 3.00 to 1.00. The Company's
statutory premiums to surplus ratio was 1.62 to 1.00 and 1.60 to 1.00
for the twelve months ended June 30, 1996 and 1995, respectively.
Recent Significant Events
The Company continues to monitor acquisition opportunities consistent
with a long term growth strategy to expand outside Massachusetts through
acquisitions of smaller automobile insurance companies that are in need
of capital, have established management in place and present significant
growth opportunities in their market areas. The Company has
applications pending for licenses in the states of New Hampshire and
Rhode Island. During the second quarter of 1996, the Company decided to
pursue licenses in the states of Maine and Vermont. In March 1996, the
Company was notified that its application for a license in the state of
Connecticut was approved, effective May 1, 1996.
The Company began a stock buyback program during the second quarter of
1995. The program, which was approved by the Board of Directors on May
19, 1995, authorizes the Company to purchase up to 3 million shares of
Treasury Stock. Since the inception of the program through June 30
1996, the Company has purchased 1,660,548 shares of Treasury Stock, of
which, 397,115 shares were purchased during the first six months of
1996. Additionally, the Company's Employee Stock Ownership Plan has
purchased more than 225,000 shares in open market transactions since the
buyback program was announced, of which 147,400 shares were purchased
during the first six months of 1996.
In the second quarter, the Company increased its quarterly stockholder
dividend from $0.06 per share to $0.25 per share, an increase of $0.19
per share.
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.
- - 13 -
<page
The Commerce Group, Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued)
To the extent inflation and economic recession influence yields on
investments, the Company is also affected. As each of these
environments affect current market rates of return, previously committed
investments may rise or decline in value depending on the type and
maturity of investment.
Inflation and recession must also be considered by the Company in the
creation and review of loss and LAE reserves since portions of these
reserves are expected to be paid over extended periods of time. The
anticipated effect of economic conditions is implicitly considered when
estimating liabilities for losses and LAE. The importance of
continually adjusting reserves is even more pronounced in periods of
changing economic circumstances.
- - 14 -
<page
The Commerce Group, Inc.
PART II - OTHER INFORMATION
ITEM 4. RESULTS OF VOTES OF SECURITY HOLDERS
On May 17, 1996, at the Annual Meeting of the stockholders of the
Company, the slate of Directors as presented in the Annual Proxy was
approved. The votes as tabulated by Boston Equiserve, L.P. were as
follows:
<TABLE>
<CAPTION>
Total Vote For Total Vote
Withheld
Each Director From Each
Director
<S> <C> <C>
Herman F. Becker 31,393,048 291,543
Joseph A. Borski, Jr. 31,392,448 292,143
Eric G. Butler 31,393,248 291,343
Henry J. Camosse 31,393,048 291,543
Gerald Fels 31,393,248 291,343
David R. Grenon 31,393,248 291,343
Robert W. Harris 31,393,048 291,543
Robert S. Howland 31,393,048 291,543
John J. Kunkel 31,383,988 300,603
Raymond J. Lauring 31,152,241 532,350
Roger E. Lavoie 31,393,071 291,520
Normand R. Marios 31,393,048 291,543
Suryakant M. Patel 31,391,548 293,043
Arthur J. Remillard, Jr. 31,392,448 292,143
Arthur J. Remillard, III 31,389,992 294,599
Regan P. Remillard 31,376,857 307,734
Antranig A. Sahagian 31,393,248 291,343
Gurbachan Singh 31,379,631 304,960
John W. Spillane 31,390,051 294,540
</TABLE>
- - 15 -
<page
The Commerce Group, Inc.
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Form 8-K - none filed during the second quarter of 1996.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
THE
COMMERCE GROUP, INC.
RANDALL V. BECKER __
Randall V. Becker
Treasurer and Chief Accounting Officer
- - 16 -
<page
The Commerce Group, Inc.
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Form 8-K - none filed during the second quarter of 1996.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
THE
COMMERCE GROUP, INC.
__
Randall V. Becker
Treasurer and Chief Accounting Officer
- - 16 -
<page
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
JUNE 1996 - 1OQ
</LEGEND>
<S> <C> <C>
<PERIOD-TYPE> 6-MOS 12-MOS
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1995
<PERIOD-END> JUN-30-1996 DEC-31-1995
<DEBT-HELD-FOR-SALE> 0 0
<DEBT-CARRYING-VALUE> 824,296 801,308
<DEBT-MARKET-VALUE> 818,398 815,277
<EQUITIES> 196,020 151,579
<MORTGAGE> 73,679 73,783
<REAL-ESTATE> 1,603 2,174
<TOTAL-INVEST> 1,089,700 1,042,813
<CASH> 19,067 75,906
<RECOVER-REINSURE> 19,145 21,897
<DEFERRED-ACQUISITION> 88,835 67,160
<TOTAL-ASSETS> 1,653,327 1,583,546
<POLICY-LOSSES> 646,032 618,791
<UNEARNED-PREMIUMS> 414,530 330,454
<POLICY-OTHER> 0 0
<POLICY-HOLDER-FUNDS> 0 0
<NOTES-PAYABLE> 0 0
0 0
0 0
<COMMON> 19,000 19,000
<OTHER-SE> 528,242 530,714
<TOTAL-LIABILITY-AND-EQUITY> 1,653,327 1,583,546
317,269 592,590
<INVESTMENT-INCOME> 38,430 71,313
<INVESTMENT-GAINS> (1,733) 712
<OTHER-INCOME> 6,284 19,420
<BENEFITS> 245,524 367,552
<UNDERWRITING-AMORTIZATION> 77,481 166,741
<UNDERWRITING-OTHER> 0 0
<INCOME-PRETAX> 37,245 149,742
<INCOME-TAX> 6,387 39,541
<INCOME-CONTINUING> 30,858 110,201
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 30,858 110,201
<EPS-PRIMARY> .85 2.93
<EPS-DILUTED> .85 2.93
<RESERVE-OPEN> 0 448,331
<PROVISION-CURRENT> 0 442,027
<PROVISION-PRIOR> 0 (74,475)
<PAYMENTS-CURRENT> 0 (184,182)
<PAYMENTS-PRIOR> 0 (145,028)
<RESERVE-CLOSE> 0 618,791
<CUMULATIVE-DEFICIENCY> 0 0
</TABLE>
