SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT
OF 1934 [FEE REQUIRED]
For the fiscal year ended December 31, 1995
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE
ACT OF 1934 [NO FEE REQUIRED]
For the transition period from to
.
Commission file number 0-16882
The Commerce Group, Inc.
(Exact name of registrant as specified in its charter)
Massachusetts 04-2599931
(State or other jurisdiction (IRS Employer Identification
No.)
of incorporation)
211 Main Street 01570
Webster, Massachusetts (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code: (508) 943-9000
Securities registered pursuant to Section 12(b) of the Act:
Name of each Exchange
Title of each Class on Which Registered
None None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.50 Par Value Per Share
(Title of Class)
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not contained herein, and will
not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of
this Form 10-K or any amendment to this Form 10-K. [ ]
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 [ ]
The aggregate market value of the voting stock held by non-
affiliates of the registrant as of March 1, 1996, was approximately
$396,009,000.
As of March 1, 1996, the number of shares outstanding of the
registrant's common stock (exclusive of treasury shares) was 36,442,147.
DOCUMENTS INCORPORATED BY REFERENCE
Parts I and II of this Form 10-K incorporate by reference
information from the registrant's annual report to stockholders for the
fiscal year ended December 31, 1995 (the "1995 Annual Report"). The
1995 Annual Report, except for portions thereof which have been
specifically incorporated by reference, shall not be deemed "filed" as
part of this Form 10-K.
Portions of the registrant's definitive Proxy Statement for its
annual meeting of stockholders which the Company intends to file within
120 days after the end of the registrant's fiscal year ended December
31, 1995 are incorporated by reference into Part III hereof as provided
therein.
TABLE OF CONTENTS
Page
Glossary of Selected Insurance
Terms................................................ 3
Part I
Item 1.
Business.......................................................
......... 7
A.
General........................................................
... 9
B. Commonwealth Automobile
Reinsurers................................ 10
C.
Marketing......................................................
... 12
D.
Underwriting...................................................
... 13
E.
Reinsurance....................................................
... 14
F. Settlement of
Claims.............................................. 16
G. Loss and Loss Adjustment Expense
Reserves......................... 17
H. Operating
Ratios.................................................. 18
I.
Investments....................................................
... 19
J.
Regulation.....................................................
... 21
K.
Competition....................................................
... 25
L. Other
Matters..................................................... 26
Item 2.
Properties.....................................................
......... 26
Item 3. Legal
Proceedings.......................................................
26
Item 4. Submission of Matters to a Vote of Security
Holders..................... 26
Item 4A. Executive Officers of the
Registrant.................................... 27
Part II
Item 5. Market for Registrant's Common Stock and Related
Stockholder Matters.... 28
Item 6. Selected Financial
Data................................................. 28
Item 7. Management's Discussion and Analysis of Financial
Condition and
Results of
Operations.................................................. 28
Item 8. Financial Statements and Supplementary
Data............................. 29
Item 9. Changes in and Disagreements with Independent Accountants
on Accounting
and Financial
Disclosure............................................... 29
Part III
Item 10. Directors and Executive Officers of the
Registrant...................... 29
Item 11. Executive
Compensation.................................................. 29
Item 12. Security Ownership of Certain Beneficial Owners and
Management.......... 29
Item 13. Certain Relationships and Related
Transactions.......................... 29
Part IV
Item 14. Exhibits, Financial Statement Schedules and Reports on
Form 8-K......... 29
Signatures.....................................................
......... 30
Index to Financial Statement
Schedules.................................. 32
Index to
Exhibits....................................................... 43
2
GLOSSARY OF SELECTED INSURANCE TERMS
Assumed premium.................... Premiums acquired or allocated to
an insurer other than through its
independent agencies.
Best's............................. A.M. Best Company, Inc. is a
rating agency reporting on the
financial condition of insurance companies. The
Best's statistics cited in this Form 10-K are based
upon information voluntarily submitted
to it by insurers. The
Company is aware of at least one
domestic insurer that has not
submitted data to Best's and therefore may not
be reflected in Best's market share statistics.
Casualty insurance................. Insurance which is primarily
concerned with the losses of the
insured due to injuries to other persons and to
the property of others, and the legal liability
imposed on the insured resulting
therefrom.
Catastrophe, catastrophic loss..... A severe loss, usually involving
many risks such as
conflagration, earthquake, windstorm, explosion and
other similar events.
Combined ratio..................... A combination of the underwriting
expense ratio and the loss and LAE
ratio determined in accordance with SAP.
The underwriting expense ratio measures the ratio of
underwriting expenses to net premiums
written, determined in
accordance with SAP. The loss and LAE
ratio measures the ratio of incurred losses and LAE to
earned premiums, determined in
accordance with SAP.
Commissioner....................... The Commissioner of the Division
of Insurance of the
Commonwealth of Massachusetts.
Commonwealth Automobile
Reinsurers ("C.A.R.").............. C.A.R. is a Massachusetts
mandated reinsurance
mechanism, under which all premiums, expenses and losses
on ceded business are shared by all
insurers. It is
similar to a joint underwriting
association because a number of
insurers (48 in 1995) act as Servicing
Carriers for the risks it insures.
Direct............................. Refers to premiums, losses, LAE
and expenses on policies which a
company writes before accounting for business
ceded and assumed through reinsurance.
Direct loss ratio.................. The ratio of direct incurred
losses and LAE to direct earned
premiums.
Direct premiums written............ Total premiums for insurance sold
to insureds, as opposed to, and
not including, reinsurance premiums.
Domestic insurer................... An insurance company that
operates solely in
Massachusetts.
Earned premiums.................... The portion of net premiums
written that is equal to the expired
portion of policies recognized for accounting
purposes as income during a period. Also known as
premiums earned.
3
Excess of loss reinsurance......... Reinsurance which indemnifies the
reinsured against all or a specified
portion of losses under reinsured
policies in excess of a specific dollar amount or
"retention".
Exclusive representative
producer ("ERP")................... A Massachusetts automobile
insurance agency which does not have
a voluntary agency automobile insurance
relationship with an insurer, and which is assigned by
C.A.R. to an insurer who is a
Servicing Carrier.
Exposure........................... An insurable unit defined as an
automobile.
Group Marketing Program............ A "group marketing program" is
any system, design or plan
whereby motor vehicle or homeowner insurance is
afforded to employees of an employer or to
members of a trade union,
association or organization in accordance
with those provisions of M.G.L. c. 175, s. 193R,
distinguishing such plans from a
"mass merchandising plan."
Specifically, a group marketing
program contemplates the issuance
of such insurance through other than standard
policies that preclude individual underwriting, contains
an option to continue coverage by
a standard policy upon termination of
employment or membership, restricts
cancellation, requires the continuance of certain
participation, in ways not
applicable to standard policies,
and provides for the modification of rates
based upon the experience of the insured group.
Hard Market........................ An insurance market in which the
demand for insurance exceeds the
readily available supply and premiums are
relatively high.
Incurred but not reported
("IBNR") reserves.................. Reserves for estimated losses
which have been incurred by
insureds but not yet reported to the insurer.
Incurred losses.................... The total losses sustained by an
insurance company under a policy
or policies, whether paid or unpaid. Incurred
losses include a provision for IBNR.
Inland marine insurance............ As used by the Company, insurance
that provides protection for
specific types of personal property, such
as jewelry, coins and fine arts, over the limits covered
in a standard homeowners
insurance policy.
Loss adjustment expenses ("LAE")... The expense of settling claims,
including legal and other
fees and the portion of general expenses allocated
to claim settlement costs.
LAE ratio.......................... The ratio of LAE, net of
reinsurance recoveries, to
earned premiums.
Loss ratio......................... The ratio of incurred losses and
loss adjustment expenses, net
of reinsurance recoveries, to earned
premiums.
4
Loss reserves...................... Liabilities established by
insurers to reflect the
estimated cost of claims payments and the related
expenses that the insurer will
ultimately be required
to pay in respect of insurance it
has written. Reserves are established
for losses and for LAE.
Net premiums written............... Direct premiums written for a
given period less premiums ceded to
reinsurers during such period plus premiums
assumed during such period.
Participation ratio................ A Massachusetts insurer's share
of the C.A.R. deficit based upon the
insurer's market share of automobile
risks not reinsured through C.A.R., adjusted for
utilization of C.A.R., credits
for voluntarily writing less
desirable business and ceded exclusions.
Premium-to-surplus ratio........... The ratio of net premiums written
to policyholders' surplus.
Property insurance................. Insurance that indemnifies a
person with an insurable interest
in tangible property for loss related to damage
to or loss of use of the subject property.
Pure loss ratio.................... The ratio of net incurred losses,
excluding LAE, to
premiums earned.
Quota share reinsurance............ Reinsurance in which the
reinsured shares a proportion of
the original premiums and losses under the reinsured
policy. Also known as pro rata reinsurance.
Rate deviation..................... A specific state approved
departure from an otherwise
applicable state set rate level.
Reinsurance........................ The acceptance by one or more
insurers, called
reinsurers, of all or a portion of the risk underwritten
by another insurer who has directly
written the coverage.
However, the legal rights of the insured
generally are not affected by the reinsurance
transaction and the insurance
company issuing the
insurance policy remains liable
to the insured for payment
of policy benefits.
Safe Driver Insurance Plan (SDIP).. A program mandated by state law
that encourages safe driving
by rewarding drivers who do not cause an
accident, or incur a traffic law violation and by making
sure that high-risk drivers pay a
greater share of insurance
costs.
Servicing Carrier.................. A Massachusetts automobile
insurer which can reinsure risks
through C.A.R. while remaining responsible for
servicing the related policies and which must
provide a market for ERPs assigned to
it by C.A.R.
Soft Market........................ An insurance market in which the
supply of insurance exceeds
the current demand and premiums are relatively
low.
5
Statutory accounting practices
("SAP")............................ Recording transactions and
preparing financial
statements in accordance with the rules and procedures
prescribed or permitted by an insurer's
state insurance regulatory authority
for the purposes of financial
reporting to regulators, which in general reflect a
liquidating, rather than going concern,
concept of accounting.
Statutory surplus.................. The excess of admitted assets
over total liabilities
(including loss reserves), determined in accordance with
SAP.
Take-all-comers.................... A phrase used to characterize the
Massachusetts automobile
regulatory system under which all insurers
are required to underwrite virtually all risks submitted
to them.
Underwriting....................... The insurer's process of
reviewing applications submitted
for insurance coverage, deciding whether to
accept all or part of the coverage requested and
determining the applicable
premiums.
Underwriting expenses.............. The aggregate of policy
acquisition costs, including
commissions, and the portion of administrative, general
and other expenses attributable to
underwriting operations.
Underwriting expense ratio......... The ratio of underwriting
expenses to net premiums
written determined in accordance with SAP.
Unearned premiums.................. The portion of a premium
representing the unexpired
amount of the contract term as of a certain date.
6
PART I
ITEM 1. BUSINESS
The Commerce Group, Inc. (the "Company") is engaged primarily
in providing personal and commercial property and casualty insurance
in Massachusetts. The Company's principal insurance line is motor
vehicle insurance, primarily covering personal automobiles. The
Company also offers commercial automobile, homeowners, inland marine,
fire, general liability and commercial multi-peril insurance. Also
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. In addition, the Company originates residential and
commercial mortgages on a limited basis primarily within
Massachusetts and operates an insurance agency dealing in a full line
of insurance products, including those of the Company.
The Company's business strategy is to focus its insurance
activities primarily in Massachusetts. Presently, the Company has
over 605,000 policies in force, 579,000 of which are in force
throughout the state of Massachusetts. 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. The Company is also one of the leading writers of
commercial automobile insurance in the state. During 1995, 97.4% of
the Company's $626,666,000 in direct premiums written were derived
from personal automobile (including four months of Western Pioneer's
direct written premiums of $7,592,000), commercial automobile and
homeowners insurance, its three core lines of business. These lines
represented $514,637,000, $45,184,000 and $50,256,000, or 82.2%,
7.2%, and 8.0% respectively, of the Company's direct premiums
written.
The Company attributes its success primarily to its strong
relationships with professional independent agencies that provide
quality business for the Company. Other factors that have been
important to its success include an in-depth understanding of the
Massachusetts regulatory and underwriting environments, advanced
information systems and an extensive underwriting data base, coupled
with the withdrawal in previous years of several insurers from the
Massachusetts automobile insurance market.
Because the Company offers its product lines only through
independent agencies, its relationships with those agencies are
critical to its continued success. The Company believes that it is
the preferred provider for most of its agencies and that as a result
of such position it has gained access to policyholders with average
or above-average underwriting profit characteristics in its personal
and commercial automobile insurance lines. The Company carefully
selects and retains agencies whose premium growth and loss ratio
experience meet the Company's agency criteria, and devotes
substantial resources to fostering and maintaining strong
relationships with its existing agencies. The Company pays its
agencies significant compensation in the form of profit sharing
payments which are based in part on the underwriting profits of the
agency's business written with the Company. Based upon agency
surveys conducted several times a year, the Company believes it is
attentive to the needs and requirements of its agencies. The Company
emphasizes its commitment to the Massachusetts insurance market, its
responsiveness in servicing claims and its internal support for
agency operations, including direct billing of insureds and on-line
inquiry systems for its agents.
The Company's focus on automobile and homeowners insurance
primarily in Massachusetts has also been a factor in its success.
The terms, conditions and rates of personal automobile insurance are
subject to extensive regulation by the Commissioner. Because the
Company has primarily served the Massachusetts market, it has both an
in-depth understanding of this market and the ability to respond
effectively to shifts in the state's regulatory and underwriting
environments. Currently, the Company is required to accept virtually
all automobile insurance business submitted to it by its agencies.
The Company's ability to underwrite this business profitably,
however, depends on its understanding of the risks in the business as
well as its management of reinsurance through C.A.R.
7
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.
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
safe driver deviations of 10 percent to customers with Safe Driver
Insurance Plan ("SDIP") classifications of either Step 9 or 10.
These are the two best SDIP driver classifications in Massachusetts,
representing drivers with no accidents or 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.
The Company's other than personal automobile products tend to
be derived from its other two core product lines and therefore have
had relatively predictable risk profiles. Since 1992, the Company
has offered a preferred risk homeowners product through Citation,
which has an alternative pricing and commission schedule for selected
insureds meeting more restrictive underwriting guidelines. A similar
preferred risk program was introduced through Citation in July 1993
for commercial automobile insurance.
The Company has devoted substantial time and resources to the
development of its information systems, which enhance both its
underwriting and its agency support. Through the use of several
customized software programs, the Company has the ability to analyze
its internal historical underwriting data and use such information in
making, in the Company's belief, more informed underwriting
decisions. In particular, the Company believes that the amount and
extent of detail data accumulated as a result of its share of the
personal automobile market give the Company a competitive advantage
in determining which automobile risks to reinsure through C.A.R. The
Company's information systems also enable it to provide extensive
support to its agencies. This support includes a direct billing
system, which covers over 90% of the Company's policyholders, an on-
line inquiry system, which allows agencies to ascertain the status of
pending claims and direct bill information, and a system which allows
Company agencies to quote premiums for the Company's three core
product lines directly to policyholders. The Company also emphasizes
its commitment to enhancing and expanding the role of its information
systems. The Company has provided agencies with the ability to
generate personal automobile policies from their offices and is
continuing to explore the desirability of systems which would allow
agencies to write policies for all of the Company's product lines
directly from their offices.
The Company's long-term commitment to providing consistent
markets for Massachusetts independent agencies, coupled with the
withdrawal by several national companies from the Massachusetts
personal automobile market in recent years, has been a significant
factor in enabling the Company to increase its market share by adding
agencies which meet its agency criteria. Since 1982, 17 insurers,
including national companies such as Aetna, Allstate and Fireman's
Fund, have withdrawn from the Massachusetts personal automobile
insurance market. The Company believes that, as a result of such
withdrawals, Massachusetts agencies are more likely to seek to
develop and expand relationships with domestic insurers, which, like
the Company, have a long-term commitment to the Massachusetts
personal automobile market.
8
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, a personal automobile
insurer, located in Pleasanton, California. Additionally, to achieve
this objective, the Company has strategically targeted several states
contiguous to Massachusetts and is currently pursuing licenses in the
states of Connecticut, New Hampshire and Rhode Island.
A. General
Insurance Lines
Commerce and Citation currently have a combined Best's rating
of A (Excellent). Western Pioneer currently has a Best's rating of
A- (Excellent). According to Best's, an insurer with an Excellent
rating has demonstrated, in Best's opinion, excellent overall
performance when compared to standards developed by Best's.
Direct premiums written totalled approximately $626,666,000 in
1995, of which motor vehicle insurance accounted for approximately
$559,821,000, homeowners insurance accounted for approximately
$50,256,000 and commercial multi-peril insurance accounted for
approximately $10,471,000. During 1994, direct premiums written
totalled approximately $625,023,000, of which motor vehicle insurance
accounted for approximately $558,460,000, homeowners insurance
accounted for approximately $49,040,000 and commercial multi-peril
insurance accounted for approximately $11,866,000. Earned premiums
are included in total revenues of the Company and represent the net
earned premiums remaining after reinsurance assumed and ceded, on an
earned basis. In 1995 and 1994, total revenues included insurance
premiums earned of approximately $592,590,000 and $572,053,000,
respectively. Motor vehicle insurance accounted for approximately
92.7% and 92.9%, homeowners insurance accounted for approximately
5.3% and 5.0% and commercial multi-peril insurance accounted for
approximately 1.5% and 1.6% of total earned premiums, in 1995 and
1994, respectively.
The Company's principal insurance line is motor vehicle
insurance. The Company offers automobile policyholders the following
types of coverage: bodily injury liability coverage, including
underinsured and uninsured motorist coverage, property damage
liability coverage and physical damage coverage, including fire,
theft and other hazards specified in the policy. Policies are
usually written for one year terms. The Company's published
liability limits are $500,000 per person for bodily injury,
$1,000,000 per accident and $100,000 for property damage. Liability
limits of $100,000 per person injured, $300,000 per accident and
$100,000 for property damage are the limits most commonly offered by
the Company.
Personal automobile insurance is completely regulated by The
Commonwealth of Massachusetts. Marketing and underwriting strategies
for companies operating in this state continue to be dominated by
automobile premium rates and commission levels which are mandated by
the Massachusetts Division of Insurance and by current and
prospective legislation affecting the industry. Automobile premium
rates in Massachusetts are among the highest in the nation as a
direct result of high costs incurred by companies which provide this
type of protection. Claims, the costs associated with the processing
and settling of claims, assessments required to subsidize the
involuntary market mechanism, 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.
The Company also offers homeowners insurance. The Company's
standard homeowners policy is an all risk, replacement cost insurance
policy covering a dwelling and the contents contained therein. The
Company's published limits of liability for property damage to a
dwelling are a minimum coverage of $60,000 and a maximum coverage of
$600,000. For personal liability, the minimum coverage is $100,000
and the maximum coverage is $1,000,000. The average property damage
coverage amount per policy is approximately $135,000, and generally,
the average amount of contents coverage is 70% of the amount of
coverage for the dwelling, with limitations on the amount of coverage
per item placed on securities, cash, jewelry, furs, silverware and
firearms. However, additional coverage for such items can be
9
purchased on a scheduled personal property basis. The Company also
offers $1,000,000, $2,000,000 and $3,000,000 personal liability
umbrella coverage for homeowners policies requiring certain specified
underwriting coverages which are reinsured through American
Reinsurance Corporation.
In addition, the Company offers a preferred homeowners product
through Citation which has higher policy limits and a lower premium
and agency commission structure and is designed primarily for homes
with above-average market values. The Company also applies more
stringent underwriting criteria by, among other things, limiting the
product to homes with modern electrical systems.
The Company no longer writes multi-peril (including homeowners)
policies in certain coastal areas. The designated coastal areas
include all of Cape Cod, Martha's Vineyard and Nantucket. With
respect to other portions of the southern coast of Massachusetts, the
Company no longer writes policies for any property located within
five miles of the shore. With respect to all other coastal regions,
the Company no longer writes policies for any property located within
one mile of the coast.
The Company also offers inland marine, fire, general liability
and commercial multi-peril insurance.
Mortgage Operations
Insurance companies are authorized to invest in mortgages and
in order to obtain a higher return on its investments, the Company
formed Bay Finance Company, Inc. ("Bay Finance") to originate and
service residential and commercial mortgages primarily in
Massachusetts. During fiscal 1995 and 1994, the mortgage operations
accounted for approximately $6,967,000, or 1.0% and $4,228,000, or
0.6% of the Company's consolidated total revenues, respectively.
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 originating 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.
Insurance Agency
Clark-Prout Insurance Agency, Inc. ("Clark-Prout") is a wholly-
owned insurance agency that writes both for the Company and for other
insurance companies. During fiscal 1995 and 1994, Clark-Prout
revenues amounted to $1,203,000, or 0.2% and $1,194,000 or 0.2% of
the Company's consolidated total revenues, respectively.
B. Commonwealth Automobile Reinsurers
A significant aspect of the Company's automobile insurance
business relates to its interaction with C.A.R. C.A.R. is a state-
mandated reinsurance mechanism, which enables the Company and
approximately 47 other writers of automobile insurance in
Massachusetts ("Servicing Carriers") to reinsure any undesirable
automobile risk. 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. In addition, Servicing Carriers are obligated to accept
involuntary agencies, known as ERPs, from C.A.R. and to provide an
automobile insurance market in Massachusetts for those agencies.
10
C.A.R. maintains separate pools for liability and physical damage
coverage in personal and commercial automobile risks. All companies
writing automobile insurance in Massachusetts share in the underwriting
results of C.A.R. business for their respective product line or lines,
whether or not they are Servicing Carriers. Since its inception, C.A.R.
has annually generated multi-million dollar underwriting losses in both
the personal and commercial pools. Accordingly, each automobile insurer
attempts to develop and implement underwriting strategies that will
minimize its relative share of the C.A.R. deficit while maintaining
acceptable loss ratios on risks not reinsured through C.A.R.
In general, the C.A.R. reinsurance mechanism operates as follows.
Within established time frames, a Servicing Carrier must identify which
policies it wishes to retain and which policies it wishes to cede to
C.A.R. A Servicing Carrier pays to C.A.R. all of the premiums generated
by the policies it has ceded, and C.A.R. reimburses Servicing Carriers
for all losses incurred on account of ceded policies, although, as with
reinsurance generally, reinsurance of a policy through C.A.R. does not
legally discharge the Servicing Carrier from its liability to the
policyholder for the full amount of the policy. In addition, Servicing
Carriers also receive fees for servicing ceded policies based upon the
expense structure established by C.A.R.
An insurer's proportionate share of the C.A.R. deficit is
allocated on the basis of a formula called a participation ratio, which
can vary significantly between the personal and commercial pools, and
between different policy years. Under current regulations, an insurer's
share of the C.A.R. deficit is based upon its market share for retained
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.
reinsurance exceeds that of the Massachusetts industry and favorably
affected if its relative use of C.A.R. reinsurance is less than that of
the Massachusetts industry. During 1995 and 1994 the Company's
Massachusetts private passenger automobile market share was 16.4% and
16.3%, respectively. The current formula also contains a provision
whereby certain high risk business, if reinsured through C.A.R., is
excluded in determining an insurer's participation ratio. Finally, for
the personal automobile C.A.R. pool, an insurer's participation ratio
may be affected by credits received for not reinsuring through C.A.R.
automobile risks in selected underpriced classes and territories. An
insurer's participation ratio will be favorably affected if its relative
use of credits exceeds the Massachusetts industry's.
The Company's objective is to develop and implement underwriting
strategies to obtain the optimum balance between its C.A.R.
participation ratio and the loss ratios on automobile risks not
reinsured through C.A.R. For each automobile risk, the Company makes a
judgment as to whether the projected impact on the Company's
profitability from retaining the risk outweighs the incremental cost of
reinsuring the risk through C.A.R. In determining the incremental cost
of reinsuring a risk through C.A.R., the Company estimates its
participation ratio for a given period by modelling the anticipated
Massachusetts industry-wide C.A.R. trends. Once the Company estimates
its participation ratio, it is then able to compare the incremental
effect on the Company's share of the C.A.R. deficit of either reinsuring
or retaining the particular automobile risks. Finally, the Company
utilizes its internal underwriting database and internally-developed
actuarial reporting and analysis systems to develop for each risk a
projected underwriting loss ratio, which it then compares to the impact
of the automobile risk on the Company's participation ratio in order to
estimate whether, after taking all C.A.R. and other factors into
account, the Company's profitability will be enhanced by reinsuring or
retaining such risk. The Company believes that, because of its leading
share of the Massachusetts automobile insurance market, it can utilize
statistically credible data for a greater array of underwriting factors
than its competitors, which in turn gives it a competitive advantage in
deciding which automobile risks to reinsure through C.A.R.
The C.A.R. utilization-based participation ratio has been in place
since 1993, and individual companies in the marketplace are expected to
make minor yearly changes to find the optimum balance between voluntary
and ceded writings. Significant changes in the industry-wide private
passenger cession percentage are not expected for 1996.
A phase-in of a utilization-based participation formula was
implemented in the Massachusetts commercial automobile market. The
phase-in began in 1992 and ended in 1995. Although commercial
automobile insurance is a relatively smaller portion of the Company's
total insurance writings, the related commercial automobile risk
selection decisions remain an important element in determining
profitability.
11
C.A.R. rule changes regularly occur, as C.A.R. adjusts the
operations of the personal and commercial reinsurance mechanisms to
address the needs of the Massachusetts automobile insurance market. Any
material change to the C.A.R. rules in the future will affect the
Company. The Company is not currently aware of any likely future rule
changes that could have a material impact on the Company, but there can
be no assurance that such rule changes will not occur.
C. Marketing
The Company markets its insurance products through a network of
720 licensed independent agencies, 551 throughout Massachusetts, (of
which 164 are ERPs) and 169 are in California. These independent
agencies may also represent other insurance companies, some of which may
compete directly with the Company. The independent insurance agencies
are under contract with the Company's subsidiaries and must conduct
their business according to the provisions of their contract. Contracts
for Massachusetts agencies may be terminated by the Company upon 180
days' notice to the agency or at will by the agency.
The Company seeks to establish long-term relationships with
agencies that can generate a sizable volume of business with profitable
underwriting characteristics and for which the Company will be among the
top two or three preferred writers of its core products. The Company
also assesses whether the mix of a prospective agency's business will
expand the Company's presence in one or more of its core product lines.
In 1995, each agency representing the Company in Massachusetts produced
an average of approximately $1,124,000 of Company direct premiums
written. Also in Massachusetts during 1995, 156 agencies produced in
excess of $1.0 million of direct premiums written, an additional 42
agencies produced over $2.0 million, an additional 15 agencies produced
over $3.0 million and lastly, an additional 9 agencies produced over
$4.0 million. The Company's three largest agencies produced
approximately $17.1, $15.8 and $10.5 million of Company direct premiums
written, respectively, or approximately 2.7%, 2.5% and 1.7%, of the
Company's total direct premiums written in 1995.
Once appointed, each agency's performance is carefully monitored.
An Agency Evaluation Committee, comprised of representatives of the
Company's Marketing, Underwriting and Premium Accounting departments,
utilizes a host of pre-established criterion (Loss Ratio, Premium
Volume, etc.) to continuously evaluate agencies. Generally, the Company
will counsel an agency on how to improve its underwriting and
profitability before any agency will be terminated.
Company agencies receive commissions on policies written for the
Company and are eligible to receive contingent commissions through a
profit sharing arrangement. The Commissioner annually establishes a
minimum average direct commission for personal automobile insurance,
which in 1995 was 15.3%. With respect to policies reinsured through
C.A.R., the maximum amount of commissions that C.A.R. will reimburse the
Company is fixed at that prescribed rate. Consequently, there is an
incentive for insurers not to permit their direct commission rate to
vary materially from the prescribed rate. The Company's contingent
commissions are tied to the underwriting profit on policies written by
an agency based upon a rolling three year experience method. The
Company generally pays up to 45% of the underwriting profit attributable
to the agency's business; generally, if the agency's loss ratio for its
policies exceeds 50% in a year, the agency will not receive any
contingent commission. In 1995, total commissions paid by the Company
to its agencies amounted to 19.5% of direct premiums written, of which
direct commissions and contingent commissions constituted 16.5% and
3.0%, respectively. Direct commissions paid are higher than the
personal automobile rates primarily due to higher commission rates paid
on other lines of business. In 1995, 205 of the Company's 387 eligible
agencies that are not ERPs received contingent commissions. The average
contingent commission paid was approximately $90,200 per agency in 1995.
The Company also sponsors incentive award programs to encourage and
reward agency profitability and growth.
The Company's information systems enable it to provide extensive
support to its agencies. This support includes a direct billing system,
which covers over 90% of the Company's policyholders, an on-line inquiry
system which allows agents to ascertain quickly the status of pending
claims or direct bill information and a system which allows Company
agents to quote many premiums directly to policyholders. The Company
also emphasizes its commitment to enhancing and expanding the role of
its information systems. The Company has introduced a pilot project to
provide agencies with the ability to generate personal automobile
policies from their offices and is actively considering the desirability
of a system which will allow agencies to write policies for all product
lines of the Company directly from their offices.
12
The Company believes that because of its compensation arrangements
and providing a consistent market with emphasis on service, an
increasing number of the Company's agencies will rely on it as their
principal supplier of insurance products. The Company believes that it
is the preferred provider for most of its agencies. Although the
Company believes, based on annual surveys of its agencies, that its
relationships with its independent agencies are excellent, any
disruption in these relationships could adversely affect the Company's
business.
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") 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.
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, Commerce was granted approval to offer safe
driver deviations of 10% to customers with SDIP classifications of
either Step 9 or 10. These are the two best SDIP driver 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.
D. Underwriting
The Company seeks to achieve an underwriting profit, as measured
by a statutory combined ratio of less than 100, in each of its three
core product lines in both hard and soft markets. The strategy is
designed to achieve consistent profitability with substantial growth in
net premiums written during hard markets and more modest growth during
soft markets. All of the Company's policies have been written on a
"claims incurred basis," meaning that the Company covers claims based on
occurrences that take place during the policy period.
Agencies are authorized to bind the Company on risks as limited by
the Company's written underwriting rules and practices, which set forth
eligibility rules for various policies and coverages, unacceptable
risks, and maximum and minimum limits of liability. With respect to
non-automobile policies, other than umbrella policies, the Company's
agencies have the ability to bind the Company for a limited period,
typically 60 days, during which time the Company reviews all risks to
determine whether it will accept or reject the policy. During this
review period, the Company is obligated to pay any claim which would be
covered under the policy. Violation of the Company's underwriting rules
and practices is grounds for termination of the agency's contract with
the Company.
13
The Company and each of the approximately 47 other Servicing
Carriers must write all automobile risks submitted to them.
Massachusetts personal automobile insurance rates are fixed annually by
the Commissioner. All companies writing personal automobile policies
are required to use such rates, unless they have received prior approval
from the Commissioner to offer a lower rate. The actual premium paid by
a particular policyholder, however, is adjusted, either up or down,
based upon the SDIP record of the insured operator. Moving violations
and accidents for which the insured was at fault within the most recent
six year period are used to determine each operator's SDIP surcharge or
credit.
Prices for Massachusetts commercial automobile insurance policies
that are not reinsured through C.A.R. are set competitively subject to
the Commissioner's authority to disapprove such prices. The rate for
commercial automobile risks reinsured through C.A.R. is mandated by the
Commissioner, except for private passenger type non-fleet business. The
Company's rates for other product lines, including homeowners and
commercial lines of general liability and property insurance, are based
in part on loss cost data from the Insurance Services Office ("ISO"),
which is an industry bureau providing policy forms and rate making data,
and in part, on the Company's own experience and industry price levels.
The Company is not obligated by statute to accept every homeowners
risk submitted to it. Accordingly, risks meeting the Company's
underwriting guidelines are accepted, and all other risks are declined
or not renewed. The Company has established an independent rate level
for its homeowners product line, based on its own loss experience and
recognizing the price levels available in the competitive marketplace.
The Company uses ISO policy forms and has added special coverage
features to meet its product needs. Rates and forms are filed with the
Commissioner.
Under Massachusetts law, residential property owners are strictly
liable for damages caused by lead poisoning in children under age six
residing in the premises. In 1988, the Massachusetts courts expanded
the potential for claims under the statute by abolishing the doctrine of
parental immunity, thereby allowing children to sue their parents. The
Company has reduced its exposure to lead poisoning claims by (i)
excluding from coverage all interfamilial claims for bodily injury or
medical expenses brought by minors living in an insured's household,
(ii) revising its underwriting standards for new and renewal business to
avoid insuring properties with lead poisoning hazards and (iii)
beginning in 1992, excluding from coverage all lead poisoning claims for
bodily injury to children under age six under homeowners policies on
one-to four-family residences built prior to 1965 where at least one
unit is rented. With regard to the exclusion described in (iii),
policyholders may buy a reinstatement of the excluded coverage through a
policy endorsement for an additional premium, but very few such
endorsements have been written. As a result of these remedial steps and
its historical claims experience, the Company does not believe that its
exposure to lead poisoning claims is material.
The Company believes that its information systems give it a
competitive advantage in making underwriting decisions, particularly in
deciding which personal automobile risks should be reinsured through
C.A.R. Utilizing data the Company accumulates as a result of its major
market presence in the Massachusetts personal automobile line, the
Company believes that its information systems allow it to make informed
risk assessments and to respond effectively to shifts in the automobile
insurance markets and regulatory environment.
E. Reinsurance
In addition to participating in C.A.R., the Company reinsures with
other insurance companies on a claims incurred basis, a portion of its
potential liability under the policies it has written, protecting itself
against severe loss under individual policies, or catastrophic
occurrences where a number of claims can produce an extraordinary
aggregate loss. Reinsurance does not legally discharge the Company from
its primary liability to the insured for the full amount of the
policies, but it does make the reinsurer liable to the Company to the
extent of the reinsured portion of any loss ultimately suffered. The
Company seeks to utilize reinsurers which it considers adequately
capitalized and financially able to meet their respective obligations
under reinsurance agreements with the Company. The Company utilizes a
variety of reinsurance mechanisms to protect itself against loss as
described above.
14
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 $125,000 and reinsuring 100% of the next $875,000.
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 reinsurers each
risk, retaining $125,000 and reinsuring 100% of the next $875,000. 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 was $100.0 million.
This coverage was placed with a number of reinsurers, both foreign and
domestic.
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:
Net Loss
Total Reinsurance Retained by
Loss Recovery the Company
$ 25,000,000 $ 11,300,000 $13,700,000
50,000,000 35,000,000 15,000,000
75,000,000 58,800,000 16,200,000
100,000,000 82,500,000 17,500,000
125,000,000 105,000,000 20,000,000
150,000,000 110,000,000 40,000,000
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).
15
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).
The Company believes that the terms of its reinsurance contracts
are consistent with industry practice in that they contain standard
terms with respect to lines of business covered, limits, retentions,
arbitration and occurrence. Based on its review of its reinsurers'
financial statements and their reputations in the reinsurance
marketplace, the Company believes that its reinsurers are financially
sound. The Company had no amount of reinsurance receivables more than
90 days past due at December 31, 1995.
F. Settlement of Claims
Claims under insurance policies written by the Company are
investigated and settled primarily by claims adjusters employed by the
Company. The Company employs a staff of 485 people at its claims
department, located in Webster, Massachusetts. In addition to these
individuals, the Company utilizes the services of approximately 20
independent appraisal firms and 10 independent property adjusting
companies who are strategically located throughout the state. The
Company also has a special unit which investigates suspected insurance
fraud and abuse. If a claim or loss cannot be settled and results in
litigation, the Company retains outside counsel to represent it.
The Company believes that through its claims staff of experienced
adjusters, appraisers, managers, and administrative staff, it has
achieved lower LAE than the industry average and higher customer
satisfaction than many of its competitors. All claims office staff
members work closely with agents and claimants with a goal of settling
claims fairly, rapidly and cost effectively.
Certain of the Company's Massachusetts agencies have settlement
authority for claims for property losses which are less than $2,500 and
are not covered by an automobile policy. The settlement authority of
agencies under automobile policies is limited to claims for towing.
The Massachusetts Unfair Claims Settlement Practices Act ("Chapter
176D") prohibits insurers from engaging in certain claim settlement
practices, including failing to acknowledge and act reasonably promptly
upon communications with respect to claims arising under insurance
policies, refusing to pay claims without conducting a reasonable
investigation based upon all available information, failing to
effectuate prompt, fair and equitable settlements of claims in which
liability has become reasonably clear, and compelling insureds to
institute litigation to recover amounts due under an insurance policy by
offering substantially less than the amounts ultimately recovered in
actions brought by such insureds. An insurer's violation of any of
these obligations expressly violates the Massachusetts Consumer
Protection Act ("Chapter 93A"). Any party, including claimants and
insureds, whose rights are affected by an insurer's violation of Chapter
176D, is entitled to bring a claim against the insurer under Chapter
93A.
The damages available under Chapter 93A may not necessarily be
related to the harm caused by the insurer's violation of Chapter 176D.
Chapter 93A provides in effect that the party bringing the Chapter 93A
claim will be entitled, at a minimum, to the amount of the judgment on
all claims arising out of the same underlying occurrence, regardless of
the limits of the policy issued by insurer. Moreover, Chapter 93A
permits the court to double or triple the party's damages if the
insurer's violation of Chapter 176D was willful or knowing. If the
underlying policy risk was ceded to C.A.R., the Company may seek
reimbursement from C.A.R. for the damages it will be obligated to pay if
it is found liable under Chapter 93A or amounts paid in settlement of
such claim. Such reimbursement is discretionary and C.A.R. may not
reimburse an insurer if C.A.R. determines that the insurer was negligent
in the handling of such claim and such negligence was the cause of
Chapter 93A liability. Additionally, certain time notification
restrictions apply to these judgements, which if not met, could preclude
an insurer from seeking reimbursement from C.A.R. Accordingly, there
can be no assurance that the Company will be reimbursed by C.A.R. in any
particular instance involving a Chapter 93A claim.
16
In March 1996, the Company began providing an after hours claim
reporting service available to insureds and third party claimants. The
service ensures complete twenty four (24) hour service including
weekends and holidays.
G. Losses and Loss Adjustment Expense Reserves
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. The Company's reserving policy is intended to result in
a small redundancy. 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 losses incurred but not yet reported ("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.
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. The Company's loss and LAE reserves also includes
its share of the aggregate loss and LAE reserves of all Servicing
Carriers.
For a reconciliation of beginning and ending reserves for losses
and LAE, net of reinsurance, see Note E to the Company's 1995
Consolidated Financial Statements, which is incorporated herein by
reference from pages AR-28 through AR-29 of the Company's 1995 Annual
Report.
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 $11,151
in 1995 and 1994, respectively.
17
The following table represents the development of reserves, net of
reinsurance, for 1985 through 1995. The top line of the table shows the
reserves at the balance sheet date for each of the indicated years.
This represents the estimated amounts of losses and LAE for claims
arising in all years that were unpaid at the balance sheet date,
including losses that had been incurred but not yet reported to the
Company. The upper portion of the table shows the cumulative amounts
paid as of successive years with respect to that year's current reserve
liability expressed as a percentage. The lower portion of the table
shows the re-estimated amount as a percentage of the previously recorded
reserves based on experience as of the end of each succeeding year,
including cumulative payments made since the end of the respective year.
The estimate changes as more information becomes known about the
frequency and severity of claims for individual years. Favorable
(adverse) loss development exists when the original reserve estimate is
greater (less) than the re-estimated reserves at December 31, 1995.
In evaluating the cumulative information in the table, it should
be noted that each year's amount includes the effects of all changes in
amounts for prior periods. This table does not present accident or
policy year development data. Conditions and trends that have affected
development of the liability in the past may not necessarily occur in
the future. Accordingly, it is not appropriate to extrapolate future
development based on this table.
Year ended December 31,
1995 1994 1993 1992
1991 1990 1989 1988 1987 1986
1985
($ in thousands)
Reserves for
losses and loss
adjustment
expenses............ $486,673 $448,331 $415,613 $316,261
$228,657 $177,657 $138,456 $100,882 $70,457
$49,069 $33,918
Paid (cumulative)
as a percentage
of current re-
serves as of:
One year later..... 38.8 46.9 46.6
43.3 43.8 45.0 40.7 39.2 39.9
40.1
Two years later.... 63.9 70.1
66.7 64.9 66.6 66.2 58.2 62.0
60.1
Three years later.. 78.4
81.8 80.2 78.6 80.2 78.1 75.1
76.3
Four years later...
85.5 90.7 86.8 87.0 86.3 90.0
84.3
Five years later... 91.3
94.4 90.1 89.6 95.0 91.6
Six years later....
94.3 97.0 90.8 97.5 95.4
Seven years later..
97.3 98.4 98.4 97.6
Eight years later..
98.7 98.6 98.7
Nine years later...
98.9 98.5
Ten years later....
99.3
Reserves re-estimated
as a percentage of
initial reserves as of:
One year later..... 83.4 83.7 87.2
82.3 84.5 92.7 96.9 99.4 95.3
97.0
Two years later.... 75.5 78.6
82.8 74.6 82.8 87.7 98.9 91.7
94.7
Three years later.. 73.0
77.1 75.1 76.7 80.5 90.1 91.8
94.0
Four years later...
72.2 71.7 78.2 76.3 86.2 85.0
93.6
Five years later...
68.2 75.6 80.2 83.9 83.5 89.3
Six years later....
74.0 78.0 90.8 83.0 89.1
Seven years later..
77.3 88.5 82.5 88.9
Eight years later..
87.9 82.3 88.7
Nine years later...
82.0 88.2
Ten years later....
88.6
Favorable loss development
expressed as a percentage of
year end reserves... 16.6 24.5 27.0
27.8 31.8 26.0 22.7 12.1 18.0
11.4
H. Operating Ratios
Loss and Underwriting Expense Ratios
Loss and underwriting expense ratios are used to interpret the
underwriting experience of property and casualty insurance companies.
Losses and LAE are stated as a percentage of premiums earned because
losses may occur over the life of a policy. Underwriting expenses on a
statutory basis are stated as a percentage of net premiums written
rather than premiums earned because most underwriting expenses are
incurred when policies are written and are not spread over the policy
period. Underwriting profit margins are reflected by the extent to
which the combined loss and underwriting expense ratios, the combined
ratio, is less than 100%. The combined ratio is considered the best
simple index of current underwriting performance of an insurer. The
Company's loss ratio, underwriting expense ratio and combined ratio, and
the industry combined ratio, on a statutory basis, are shown in the
following table. The Company's ratios include lines of insurance other
than automobiles as do the industry combined ratios for
18
all writers. Data for the property and casualty 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.
Year Ended
December 31,
1995 1994 1993
1992 1991
Company Statutory Ratios (unaudited):
Loss Ratio...................... 62.0% 64.6% 68.0%
66.2% 61.9%
Underwriting Expense Ratio...... 29.0 27.1 25.7
28.1 30.0
Combined Ratio................. 91.0% 91.7% 93.7%
94.3% 91.9%
Industry combined ratio
(all writers)(1)................ 107.2% 108.5% 106.9%
115.8% 108.8%
(1) Source:Best's Review (January, 1996), for all property and
casualty insurance companies.
1995 industry information is estimated by A.M. Best.
Premiums to Surplus Ratio
The following table shows, for the periods indicated, the
Company's and the industry's statutory ratios of net premiums written
to policyholders' surplus. While there is no statutory requirement
applicable to the Company which establishes a permissible net premiums
to surplus ratio, guidelines established by the National Association
of Insurance Commissioners provide that this ratio should be no
greater than 300%.
Year Ended
December 31,
1995 1994 1993
1992 1991
(dollars in
thousands)
Net premiums written by the
Company........................... $603,421 $589,197 $563,416
$508,847 $310,999
Policyholders' surplus of the
Company........................... 440,110 349,775 284,631
221,434 153,778
The Company's ratio................ 137.1% 168.5% 197.9%
229.8% 202.2%
Industry ratio(1).................. 120.0% 134.7% 132.5%
139.5% 140.5%
__________________________________
(1) Source:Best's Review (January, 1996), for all property and
casualty insurance companies.
1995 industry information is estimated by A.M. Best.
I. Investments
Investment income is an important source of revenue for the
Company and the return on its investment portfolio has a material
effect on its net earnings. The Company's investment objective is to
maintain high quality diversified fixed maturity investments
structured to maximize after-tax investment income while minimizing
risk. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations" incorporated herein by reference
from pages AR-4 through AR-13 of the Company's 1995 Annual Report.
The Company's investment portfolio carried at market value as of
December 31, 1995, was $1,042,813 excluding cash and cash equivalents.
Of that amount, 78.2% was invested in fixed maturities, 14.5% was
invested in equity securities and 7.3% was invested in mortgage loans.
19
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 on
sales proceeds less book value.
The Company's bond portfolio is comprised of Government
National Mortgage Association ("GNMA") mortgage backed bonds (27.5%)
and municipal bonds (72.5%). Of the Company's bonds, 100.0% are
rated in the two highest quality categories provided by the National
Association of Insurance Commissioners ("NAIC").
The Company's investment policy is determined in accordance
with guidelines established by the Company's Board of Directors. The
Board of Directors reviews and ratifies management's investment
decisions on a quarterly basis. State insurance laws also impose
restrictions on the nature and extent of investments by the Company.
The tables below set forth investments (at cost) and the income
thereon for the five years ended December 31, 1995.
Year Ended
December 31,
1995 1994 1993
1992 1991
(dollars in
thousands)
Average net investments............ $996,169 $889,700 $749,821
$520,890 $360,832
Net realized gains on investments.. 712 45,612 7,506
1,537 3,153
Unrealized gains (losses) on fixed
maturities........................ 13,969 (56,366) 27,477
- -
Unrealized gains (losses) on equity
securities........................ 11,422 (8,887) 13,199
22,279 3,857
Net investment income.............. 71,313 62,901 53,068
39,223 31,951
Net investment income as a
percentage of total average
investments....................... 7.16% 7.07% 7.08%
7.53% 8.85%
The following table sets forth an analysis of carrying value by
the type of investment at December 31, 1991 and 1992 at cost and 1993
through 1995 at fair market value:
Year Ended
December 31,
1995 1994 1993
1992 1991
(dollars in
thousands)
Type of Investment
GNMA mortgage-backed bonds....... $ 221,373 $233,287 $202,403
$102,873 $135,703
Tax exempt state and municipal
bonds........................... 593,904 511,723 447,088
402,692 194,232
Redeemable preferred stocks...... - - -
2,261 869
Total fixed maturity
investments................. 815,277 745,010 649,491
507,826 330,804
Mortgages and collateral loans (net
of allowance for possible loan
losses)........................... 75,609 58,590 63,301
69,948 73,297
Common stocks...................... 40,359 9,656 65,863
53,345 30,055
Non-redeemable preferred stocks.... 111,220 85,574 80,058
- -
Investments in real estate......... 348 216 1,004
2,351 4,229
Total investments.................. $1,042,813 $899,046 $859,717
$633,470 $438,385
20
The table below sets forth as of December 31, 1995 the
composition of the Company's fixed maturity investments, excluding
short-term investments, by time to maturity at the dates indicated:
Percent
of
Amount Portfolio
(dollars in thousands)
Period from December 31, 1995 to maturity:
One year or less................................. $
- - - %
More than one year to five years.................
1,149 .1
More than five years to ten years................
20,183 2.5
More than ten years..............................
793,945 97.4
$815,277 100.0%
The Company attempts to achieve a balanced maturity schedule in
order to protect investment income in the event of a downturn in
interest rates in a year when a large amount of securities would
mature. At December 31, 1995, the Company's fixed income portfolio,
which represented 78.2% of the Company's total invested assets, had
an average stated maturity of approximately 24 years. The
calculation for average stated maturity utilizes the actual maturity
date for a security. In contrast, the Company's weighted average
maturity and weighted average duration can be significantly less.
Previous studies using the Bloomberg Financial System have shown that
the time frames for the weighted average maturity and weighted
average duration are approximately equal to one-half and one-third,
respectively, of the average stated maturity.
The weighted average maturity is the calculated weighted
average time until the receipt of all principal payments for a
security. The weighted average duration of a security is the time-
weighted present value of the security's expected cash flows and is
used to measure a security's price sensitivity to changes in interest
rates. The weighted average duration and weighted average maturity
are shorter compared to the average stated maturity because of the
relatively large percentage of GNMA's and housing finance authority
municipal bonds in the fixed maturity portfolio. The duration of
GNMAs reflects industry prepayment patterns and assumptions. With
respect to GNMAs, investors are compensated primarily for
reinvestment risk rather than credit quality risk. In regards to
municipal bonds, the Bloomberg Financial System utilizes optional
call dates, sinking fund requirements and assumes a non-static
prepayment pattern in deriving these averages. During periods of
significant interest rate volatility, the underlying mortgages may
prepay more quickly or more slowly than anticipated. If repayment of
principal occurs earlier than anticipated during periods of declining
interest rates, investment income may decline due to the reinvestment
of these funds at the lower current market rates.
J. Regulation
General
The Company's primary business is subject to extensive
regulation by the Commissioner who is appointed by the Governor of
Massachusetts. The Commissioner has broad authority to fix and
establish maximum policy rates and minimum agent commission levels on
personal automobile insurance. In addition, the Commissioner grants
and revokes licenses to write insurance, approves policy forms, sets
reserve requirements, determines the form and content of statutory
financial statements and establishes the type and character of
portfolio investments. The Commissioner also approves company
submissions regarding group insurance programs and corresponding
discounts along with SDIP "safe driver" deviations. Consequently,
the policies and regulations set by the Commissioner are an important
element of writing insurance in Massachusetts.
21
The State Divisions of Insurance are responsible for conducting
periodic examinations of insurance companies. Both Commerce and
Citation were last examined for the five year period ended December
31, 1993. Western Pioneer was last examined for the three year
period ended December 31, 1991. These examinations produced no
material findings. Massachusetts Division of Insurance regulations
provide that insurance companies will be examined every five years or
more frequently as deemed prudent by the Commissioner. California
Division of Insurance regulations provide that insurance companies
will be examined every three years.
Automobile Insurance Regulation Overview
Massachusetts has required compulsory automobile insurance
coverage since 1925. Under current law, all motorists are required
to carry certain minimum coverages mandated by the state. The
Commissioner fixes and establishes, among other things, the maximum
rates insurers may charge for the compulsory personal automobile
coverages. With very limited exceptions, each insurer writing
automobile insurance in Massachusetts must accept all risks submitted
to it for the compulsory coverage, but is permitted to reinsure these
risks (including group insurance risks) through C.A.R.
Compulsory Coverage. Compulsory coverage includes no-fault
coverage, limited bodily injury coverage, property damage coverage
and coverage against uninsured or hit and run motorists. The
Massachusetts no-fault statute provides for personal injury
protection ("PIP") coverage, which entitles a party to be reimbursed
directly by the party's own insurer for certain medical expenses,
lost wages and other defined expenses arising from an automobile
accident, up to a specific amount, even if another party caused the
accident.
Rates and Commissions. All Massachusetts personal automobile
insurance rates are fixed and established annually by the
Commissioner. Group insurance programs and rate deviations must be
approved by the Commissioner. For Massachusetts commercial
automobile insurance, the rates for the voluntary market are
competitive, with insurers filing rates for review by the
Commissioner based on their own experience. The rates for the
Massachusetts commercial automobile risks reinsured through C.A.R.
are fixed and established by the Commissioner except for non-fleet,
private passenger-type automobiles.
In fixing classifications of risks and establishing rates, the
Commissioner must consider numerous factors including driver and
automobile characteristics and the claim rate in the state's
designated geographical territories. These factors are based upon
data which are two or more years old. The insurer adjusts the
premiums it charges to a policyholder based upon the SDIP record of
the operator. Moving violations and at-fault accidents affect each
driver's SDIP record. In addition, the Extra Risk Rating regulations
permit insurers to deny or charge surcharged rates for physical
damage coverage to both high risk vehicles and insureds with
excessive prior loss or violation activity.
The Commissioner sets an average minimum direct agency
commission rate for personal automobile insurance, which in 1995 was
15.3%. With respect to risks reinsured through C.A.R., the maximum
amount of commissions that C.A.R. will reimburse is fixed at that
prescribed rate.
Mandatory Underwriting. Massachusetts law specifies that all
individuals holding a valid driver's license are entitled to purchase
the mandatory automobile insurance regardless of their driving
experience or accident record. The Massachusetts Legislature has
also placed certain restraints on insurers' discretion to refuse to
renew automobile insurance policies. Policyholders are entitled to
renew except in cases of fraud, material misrepresentation,
revocation or suspension of an operator's license or nonpayment of
premiums. With very limited exceptions, Servicing Carriers writing
automobile insurance in Massachusetts must accept every automobile
risk submitted to them.
22
Under the Massachusetts system of rate regulation, it is
intended that some personal automobile insurance risks are
underpriced at the maximum rate permitted by the Commissioner, and
therefore, absent state-intervention, insurers would not ordinarily
choose to write those risks. The C.A.R. reinsurance program
described below is intended to mitigate the burden imposed by the
Massachusetts take-all-comers system by allowing insurers to transfer
the exposure for undesirable risks to an industry pool.
Commonwealth Automobile Reinsurers
General. C.A.R. is a state-mandated reinsurance mechanism,
under which all premiums, expenses and losses on ceded business are
shared by all insurers. It is similar to a joint underwriting
association because a number of insurers (approximately 48, including
the Company) act as Servicing Carriers for the risks it insures.
Agencies. In general, agencies licensed to issue automobile
insurance policies are entitled to be assigned to at least one
Servicing Carrier. There are two categories of agencies: those who
have voluntary agreements with one or more Servicing Carriers and
those who do not. The latter are assigned by C.A.R. to a single
Servicing Carrier and are known as ERPs.
C.A.R. Operations. All companies writing automobile insurance
in Massachusetts share in the underwriting results of the C.A.R.
business for their respective product line or lines, whether or not
they are Servicing Carriers. An insurer's share of the C.A.R.
deficit is allocated on the basis of a formula called a participation
ratio, which can vary significantly between the personal and
commercial pools, and between different policy years. See "Business-
- -Commonwealth Automobile Reinsurers" for a detailed discussion of the
method of calculating the participation ratio.
An insurer may terminate its participation in C.A.R. as of the
close of C.A.R.'s fiscal year by surrendering its license to write
automobile policies in Massachusetts. Termination does not discharge
or otherwise affect liability of an insurer incurred prior to
termination. A withdrawing insurer is assessed a share of C.A.R.'s
projected deficits for future years based on the insurer's prior
years' participation in C.A.R. The assessment paid by the
withdrawing insurer is redistributed to the remaining insurers based
upon their participation ratios.
An insurer can transfer its obligations for its personal
insurance policies to another insurer who formally agrees to assume
these obligations. The transferring insurer is thereby relieved of
future C.A.R. obligations which otherwise would have arisen as a
consequence of the business transferred. See "Business--Commonwealth
Automobile Reinsurers."
Insurance Holding Company Structure
As an insurance holding company, the Company is subject to
regulation under the insurance holding company statutes of the states
in which they are domiciled. Because the Company's subsidiaries are
members of an insurance holding company system, they are required to
register with their respective Divisions of Insurance and to submit
reports describing the capital structure, general financial
condition, ownership and management of each insurer and any person or
entity controlling the insurer, the identity of every member of the
insurance holding company system and the material outstanding
transactions between the insurer and its affiliates.
Each member of the insurance holding company system must keep current
the information required to be disclosed by reporting all material
changes or additions within 15 days of the end of the month in which
it learns of such change or addition.
23
Massachusetts law prohibits a party which is not a domestic
insurer from acquiring "control" of a domestic insurer or of a
company controlling a domestic insurer without prior approval of the
Commissioner. Control is presumed to exist if a party directly or
indirectly holds, owns or controls more than ten percent of the
voting stock of another party, but may be rebutted by a showing that
control does not exist.
In the event of the insolvency, liquidation or other
reorganization of any of the Company's insurance subsidiaries, the
creditors and stockholders of the Company will have no right to
proceed against the assets of those subsidiaries, or to cause the
liquidation or bankruptcy of any company under federal or state
bankruptcy laws. State laws govern such liquidation or
rehabilitation proceedings and the Division of Insurance would act as
receiver for the particular company. Creditors and policyholders of
the insurance subsidiaries would be entitled to payment in full from
such assets before the Company, as a stockholder, would be entitled
to receive any distribution therefrom.
Payment of Dividends
Under Massachusetts law, insurers may pay cash dividends only
from earnings and statutory surplus, and the insurer's remaining
surplus must be both reasonable in relation to its outstanding
liabilities and adequate to its financial needs.
As Massachusetts domestic insurance companies, neither Commerce
nor Citation may pay an extraordinary dividend or distribution unless
the insurer gives the Commissioner at least 30 days' prior notice of
the declaration and the Commissioner does not disapprove of the plan
of payment prior to the date of such payment. An extraordinary
dividend or distribution is one whose fair market value, together
with that of other dividends or distributions within the preceding
twelve-month period (excluding pro rata distribution of any class of
the insurer's own securities) exceeds the greater of (i) ten percent
of the insurer's statutory surplus as of the preceding December 31,
or (ii) the statutory net investment income for the twelve-month
period ending on the preceding December 31. See "Market for
Registrant's Common Stock and Related Stockholder Matters."
Protection Against Insurer Insolvency
All of the insurers writing the types of insurance covered by
The Massachusetts Insurers Insolvency Fund ("M.I.I.F.") are M.I.I.F.
members. M.I.I.F. is obligated to pay any unpaid claim, up to
$300,000, against an insolvent insurer if the claim existed prior to
the declaration of insolvency or arose within 60 days thereafter.
M.I.I.F. assesses members the amounts necessary to pay both its
obligations and the expenses of handling covered claims. Subject to
certain limitations, assessments are made in the proportion that each
member's net written premiums for the preceding calendar year for all
property and casualty lines of business bare to the corresponding net
written premiums for all members for the same period. The statute
that established M.I.I.F. also provides for the recoupment by
insurers of amounts paid to M.I.I.F. Historically, the Commissioner
has allowed insurers to recoup the amounts they paid M.I.I.F. through
rate increases.
Consistent with industry practice in Massachusetts, it is the
Company's policy to record all assessments when they are assessed.
M.I.I.F. assessed Commerce and Citation an aggregate of $338,000 in
1995, $331,000 in 1994 and $0 in 1993. The Company anticipates that
there will be additional assessments. 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. The Company believes that any such additional
assessments should not have a material adverse effect on the
consolidated financial position of the Company, although the timing
and amounts of any such assessments cannot be presently ascertained.
24
NAIC Guidelines
Insurance Regulatory Information System Ratios. The NAIC
Insurance Regulatory Information System ("IRIS") was developed by a
committee of state insurance regulators and is intended primarily to
assist state insurance regulators in executing their statutory
mandates to oversee the financial condition of insurance companies
operating in their respective states. IRIS identifies eleven
industry ratios and specifies "usual values" for each ratio.
Departure from the usual values on four or more of the ratios can
lead to inquiries from individual state insurance commissioners as to
certain aspects of an insurer's business. For the year ended
December 31, 1995, the Companies consolidated property and casualty
operations had no ratios outside the "normal" range.
Risk-Based Capital ("RBC"). In order to enhance the regulation
of insurer insolvency, the NAIC developed a formula and model law to
implement RBC requirements for property and casualty insurance
companies which are designed to assess capital adequacy and to raise
the level of protection that statutory surplus provides for
policyholder obligations. The RBC model for property and casualty
insurance companies measures three major areas of risk facing
property and casualty insurers: (i) underwriting, which encompasses
the risk of adverse loss development and inadequate pricing; (ii)
declines in asset values arising from credit risk; and, (iii) other
business risks from investments. Insurers having less statutory
surplus than required by the RBC calculation will be subject to
varying degrees of regulatory action, depending on the level of
capital inadequacy.
The Company's subsidiaries, Commerce and Citation, have RBC
amounts at December 31, 1995 of $42 million and $8 million,
respectively, and they have statutory surplus of approximately $372
million and $68 million, respectively. The Statutory surplus of
Commerce and Citation at December 31, 1995 exceeded the RBC Company
Action Levels of $83 million and $15 million by approximately $289
million and $53 million. The RBC model formula proposes four levels
of regulatory action. The extent of regulatory intervention and
action increases as the level of surplus to RBC falls. The first
level, the Company Action Level, requires an insurer to submit a plan
of corrective actions to the regulator if surplus falls below 200% of
the RBC amount. The Regulatory Action Level (as defined by the NAIC)
requires an insurer to submit a plan containing corrective actions
and permits the Commissioner to perform an examination or other
analysis and issue a corrective order if surplus falls below 150% of
the RBC amount. The Authorized Control Level (as defined by the
NAIC) allows the regulator to rehabilitate or liquidate an insurer in
addition to the aforementioned actions if surplus falls below 100% of
the RBC amount. The fourth action level is the Mandatory Control
Level (as defined by the NAIC) which requires the regulator to
rehabilitate or liquidate the insurer if surplus falls below 70% of
the RBC amount.
K. Competition
The property and casualty insurance industry is highly
cyclical, characterized by periods of increasing premium rates and
limited underwriting capacity, followed by periods of intensive price
competition and abundant underwriting capacity. This industry also
is highly competitive, with a large number of companies, many of
which operate in more than one state, offering automobile,
homeowners, commercial property and other lines of insurance. Some
of the Company's competitors have larger volumes of business and
greater financial resources. Some sell insurance directly to
policyholders rather than through independent agents.
In 1995, several insurers within the Massachusetts Insurance
Industry continued pursuing group marketing programs as a means of
shifting market share. Arising from this pursuit, additional
programs such as safe driver deviations and the elimination of
finance fees have followed. Both group automobile discounts and SDIP
deviations can be combined for up to a 19% reduction from the state
mandated rates. The Company has actively pursued each of these
endeavors in 1995 and will continue to do so in 1996.
Because the Company's insurance products are marketed
exclusively through independent agencies--most of whom represent more
than one company--the Company faces competition within each agency.
The Company competes for business from independent agencies by paying
them significant compensation in the form of profit sharing payments
which are based in part on the underwriting profits of the agency
business written with the Company, providing a
25
consistent market, promptly servicing policyholder claims and
providing agency support services. Although the Company believes,
based upon regular surveys of its agencies, its relationships with
its independent agencies are excellent, any disruption in these
relationships could adversely affect the Company's business.
The Company believes the Massachusetts regulatory environment,
which fixes maximum personal automobile insurance rates, apportions
losses incurred by C.A.R. and establishes minimum agency commissions,
has discouraged certain companies with more diverse geographic
markets and interests from establishing a presence or expanding their
market share in Massachusetts.
L. Other Matters
Human Resources
As of January, 1996, the Company and its subsidiaries employed
1,202 people. The Company is not a party to any collective
bargaining agreements and believes its relationship with employees to
be good.
The Company offers benefits, compensation and employee
relations programs to assure a productive and positive working
environment. The Company monitors job grades and salary scales of
peer companies to assure that its compensation levels and benefits
are competitive both within the property and casualty industry and
geographically within Central Massachusetts. The Company has been
recognized for its progressive programs designed to meet the needs of
a modern-day workforce. On-site child care has been offered to
employees since 1986. Commerce was one of the first businesses in
the region to offer this benefit. The child care center was expanded
in the past year, and currently serves over 97 children of our
employees.
The Company maintains an Employee Stock Ownership Plan
("E.S.O.P."), for the benefit of all employees and former employees
still participating in the E.S.O.P. There were a total of 1,406
participants at December 31, 1995.
ITEM 2. PROPERTIES
The Company conducts its operations from approximately 277,000
square feet of space in several buildings which it owns in Webster,
Massachusetts, which is located approximately 50 miles west of
Boston. The Company's principal administrative offices in Webster
consist of recently rehabilitated and newly constructed buildings.
Its data processing and claims departments are housed in newly
constructed buildings on a separate nine acre site. The Company's
new acquisition, Western Pioneer, currently leases approximately
15,000 square feet of office space in Pleasanton, California.
Western Pioneer expects to lease up to an additional 5,000 square
feet in 1996. For additional information concerning property, see
Note D to the Company's 1995 Consolidated Financial Statements, which
is incorporated herein by reference from page AR-27 of the Company's
1995 Annual Report.
ITEM 3. LEGAL PROCEEDINGS
As is common with property and casualty insurance companies,
the Company is a defendant in various legal actions arising from the
normal course of its business, including claims based on Chapter 176D
and Chapter 93A. See "Business - Settlement of Claims". 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 position of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS
There were no matters submitted to a vote of security holders
during the fourth quarter of 1995.
26
ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT
The Company's executive officers are as follows:
Name Age Position with
Company
Arthur J. Remillard, Jr. 65 Chief Executive
Officer, Director
Gerald Fels 53 Executive Vice
President,
Chief Financial
Officer, Director
Arthur J. Remillard, III 40 Senior Vice President--
Policyholder
Benefits, Assistant Clerk, Director
Regan P. Remillard 32 Senior Vice President--
General Counsel,
Director
David H. Cochrane 42 Senior Vice President--
Underwriting of
Commerce and Citation
Mary M. Fontaine 39 Senior Vice President--
Human Resources
Robert E. Longo 61 Senior Vice President--
Marketing of
Commerce and Citation
Joyce B. Virostek 53 Senior Vice President--
Management
Information Systems of Commerce and
Citation
Arthur J. Remillard, Jr. has been the Chief Executive Officer of
the Company since 1972 and has been in the insurance business for more
than 30 years. Mr. Remillard, Jr. is also Chairman of the Governing
Committee, Chairman of the Actuarial Committee, and is a member of the
Personnel and Servicing Carrier Committees of the C.A.R.
Gerald Fels, a certified public accountant, was elected Executive
Vice President of the Company in 1989. From 1981 to 1989, Mr. Fels had
been Senior Vice President of the Company. Mr. Fels was the Treasurer
of the Company from 1975 to 1994. Mr. Fels has also been Chief
Financial Officer since 1975. Mr. Fels also serves on the C.A.R. Audit
Committee.
Arthur J. Remillard, III was elected Senior Vice President--
Policyholder Benefits in 1988. From 1981 to 1988, Mr. Remillard, III
had been Vice President--Mortgage Operations. In addition, Mr.
Remillard, III has also served on the Board of Governors of the
Insurance Fraud Bureau of the Automobile Insurers Bureau of
Massachusetts ("A.I.B.") since January, 1991, the C.A.R. Claims
Advisory Committee since June 1990 and the A.I.B. Claims Committee
since April 1991.
Regan P. Remillard was elected Senior Vice President--General
Counsel in 1995. From 1994-1995, Mr. Remillard was a practicing
attorney at Hutchins, Wheeler & Dittmar, a Massachusetts law firm
specializing in corporate law and litigation. From 1989-1993, Mr.
Remillard was Government Affairs Monitor of the Company. Mr. Remillard
is a member of the Massachusetts Bar. Effective March 6, 1996, Mr.
Remillard was elected President of Western Pioneer Insurance Company.
David H. Cochrane has been the Senior Vice President--
Underwriting of Commerce and Citation since 1988. For approximately
four years prior to that, Mr. Cochrane was the Vice President of
Financial Services of C.A.R. Mr. Cochrane has also served on the
C.A.R. Market Review Committee since 1988.
Mary M. Fontaine has been the Senior Vice President--Human
Resources of the Company since 1988. From 1982 to 1988, Ms. Fontaine
was Assistant Vice President--Human Resources of Commerce and Citation.
Robert E. Longo has been the Senior Vice President--Marketing of
Commerce and Citation since 1988. From 1985 to 1988, Mr. Longo served
as Marketing Manager of Commerce and Citation.
27
Joyce B. Virostek has been the Senior Vice President--Management
Information Systems of Commerce and Citation since 1988. From 1981 to
1988, Ms. Virostek had been Vice President of Commerce and Citation in
charge of data processing.
The executive officers are elected to hold office until their
successors are elected and qualify.
The only family relationship among the executive officers is that
Arthur J. Remillard, III and Regan P. Remillard are the sons of Arthur
J. Remillard, Jr.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED
STOCKHOLDER MATTERS
Beginning March 31, 1995, the Company's common stock began
trading on the New York Stock Exchange, under the symbol "CGI".
Previously, the Company's common stock had been traded on the NASDAQ
National Market 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:
1995 1994
High Low Close High Low Close
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
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 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 dividends by 20% to $.06 per share, and announced
the approval of a stock buyback program of up to three million shares.
As of December 31, 1995, the Company purchased 1,263,433 shares of
Treasury Stock under this program.
The Company's cash flow consists primarily of dividends received
from CHI, which receives dividends from Commerce and Citation. The
payment of any cash dividends to holders of common stock by the Company
therefore depends on the receipt of dividend payments from CHI. 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. The payment of dividends by Commerce and Citation is subject
to limitations imposed by Massachusetts law, as discussed under the
caption "Payment of Dividends" in Item 1J of this report.
ITEM 6. SELECTED FINANCIAL DATA
The five-year financial information under the caption "Selected
Consolidated Financial Data" on page AR-37 of the Company's 1995 Annual
Report is incorporated herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND
RESULTS OF OPERATIONS
The information on pages AR-4 through AR-13 of the Company's 1995
Annual Report is incorporated herein by reference.
28
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Company's Consolidated Financial Statements for the years
ended December 31, 1995, 1994 and 1993 and the report of its
independent accountants on pages AR-15 through AR-36 of the Company's
1995 Annual Report are incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH INDEPENDENT
ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information called for by this Item and not provided in Item
4A will be contained in the Company's Proxy Statement which the Company
intends to file within 120 days after the end of the Company's fiscal
year ended December 31, 1995 and such information is incorporated
herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information called for by this Item will be contained in the
Company's Proxy Statement which the Company intends to file within 120
days after the end of the Company's fiscal year ended December 31, 1995
and such information is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT
The information called for by this Item will be contained in the
Company's Proxy Statement which the Company intends to file within 120
days after the end of the Company's fiscal year ended December 31, 1995
and such information is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information called for by this Item will be contained in the
Company's Proxy Statement which the Company intends to file within 120
days after the end of the Company's fiscal year ended December 31, 1995
and such information is incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND
REPORTS ON FORM 8-K
A. (1) The following financial statements have been incorporated
herein by reference from the pages indicated below of the Company's
1995 Annual Report:
Page
Report of Independent Accountants............................................
AR-15
Consolidated Balance Sheets as of 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
(2) The financial statement schedules are listed in the Index
to Consolidated Financial Statement Schedules.
(3) The exhibits are listed in the Index to Exhibits.
B. No Reports on Form 8-K were filed during the quarter ended
December 31, 1995.
29
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
Dated: March 29, 1996
THE COMMERCE GROUP,
INC.
By
ARTHUR J. REMILLARD,
JR.
(Arthur J. Remillard,
Jr.)
(President, Chief Executive Officer
and Director)
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed by the following persons on behalf
of the registrant and in the capacities and on the dates indicated.
Signature Title
ARTHUR J. REMILLARD, JR. President, Chief
Executive Officer and (Arthur J. Remillard, Jr.)
Director
GERALD FELS Executive Vice
President, Chief Financial
(Gerald Fels) Officer and Director
ARTHUR J. REMILLARD, III Senior Vice
President--Policyholder (Arthur J. Remillard, III)
Benefits, Assistant Clerk and Director
REGAN P. REMILLARD
(Regan P. Remillard) Senior Vice
President, General Counsel and
Director
JOHN W. SPILLANE Clerk and Director
(John W. Spillane)
RANDALL V. BECKER Treasurer and Chief
Accounting Officer
(Randall V. Becker)
HERMAN F. BECKER
(Herman F. Becker) Director
JOSEPH A. BORSKI, JR. Director
(Joseph A. Borski, Jr.)
Director
(Eric G. Butler)
HENRY J. CAMOSSE
(Henry J. Camosse) Director
30
DAVID R. GRENON Director
(David R. Grenon)
ROBERT W. HARRIS Director
(Robert W. Harris)
ROBERT S. HOWLAND Director
(Robert W. Howland)
JOHN J. KUNKEL Director
(John J. Kunkel)
RAYMOND J. LAURING Director
(Raymond J. Lauring)
(Roger E. Lavoie) Director
NORMAND R. MAROIS Director
(Normand R. Marois)
(Suryakant M. Patel) Director
ANTRANIG A. SAHAGIAN Director
(Antranig A. Sahagian)
GURBACHAN SINGH Director
(Gurbachan Singh)
31
THE COMMERCE GROUP, INC. AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENT SCHEDULES*
Page
Reports of Independent Accountants on Financial Statement Schedules..... 33
Schedules
I Condensed Financial Information of the Registrant as of and for
the
years ended December 31, 1995, 1994 and
1993........................... 34
III Supplementary Insurance Information for the years ended
December 31, 1995, 1994 and
1993....................................... 39
IV Reinsurance for the years ended December 31, 1995, 1994 and
1993........ 40
V Valuation and Qualifying Accounts for the years ended
December 31, 1995, 1994 and
1993....................................... 41
X Supplemental Information Concerning Property-Casualty Insurance
Operations for the years ended December 31, 1995, 1994 and
1993........ 42
* Financial statement schedules other than those listed are omitted because
they are not required, not applicable or the required information has been
included elsewhere.
32
REPORT OF INDEPENDENT ACCOUNTANTS
ON FINANCIAL STATEMENT SCHEDULES
To the Board of Directors and Stockholders of
The Commerce Group, Inc.
Our report on the consolidated financial statements
of The Commerce Group, Inc. and Subsidiaries as of
December 31, 1995 and 1994, and for each of the three
years in the period ended December 31, 1995, has been
incorporated by reference in this Form 10-K from page AR-
15 of the 1995 Annual Report to Stockholders of The
Commerce Group, Inc. In connection with our audits of
such financial statements, we have also audited the
related financial statement schedules as of December 31,
1995 and 1994 and for each of the three years in the
period ended December 31, 1995, listed in the index on
page 32 of this Form 10-K.
In our opinion, the financial statement schedules
referred to above, when considered in relation to the
basic financial statements taken as a whole, present
fairly, in all material respects, the information
required to be included therein.
COOPERS & LYBRAND L.L.P.
Boston, Massachusetts
January 25, 1996
33
THE COMMERCE GROUP, INC. AND SUBSIDIARIES
SCHEDULE I
CONDENSED FINANCIAL INFORMATION
THE COMMERCE GROUP, INC.
(Parent Company Only)
BALANCE SHEETS
December 31,
(Thousands of Dollars)
1995
1994 1993
ASSETS
Investments:
Common stocks, at market............................... $ -
$ - $ 18,400
Investment in Commerce Holdings, Inc................... 513,966
379,259 351,625
Investment in Bay Finance Company, Inc................. 30,932
29,283 18,729
Investment in the Clark-Prout Insurance Agency, Inc.... 1,156
824 488
Total investments.................................. 546,054
409,366 389,242
Cash and cash equivalents................................ 6
142 139
Property and equipment, net of accumulated depreciation.. 1,465
1,450 5,718
Receivable from affiliates............................... 5,746
5,385 -
Current income taxes..................................... 1,459
20 1,105
Other assets............................................. 832
1,530 419
Total assets....................................... $555,562
$417,893 $396,623
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Accounts payable and accrued expenses.................. $ 5,096
$ 3,804 $ 5,418
Payable to affiliates.................................. -
- 4,167
Deferred income taxes.................................. 752
500 1,190
Other liabilities...................................... -
- - 2,500
Total liabilities.................................. 5,848
4,304 13,275
Stockholders' equity:
Capital stock:
Preferred stock...................................... -
- -
Common stock......................................... 19,000
19,000 19,000
Paid-in capital........................................ 29,621
29,621 29,621
Retained earnings...................................... 525,452
364,968 334,727
574,073
413,589 383,348
Treasury stock, 1,263,433, 0 and 0 shares in 1995, 1994
and 1993, respectively............................... (24,359)
- -
Total stockholders' equity......................... 549,714
413,589 383,348
Total liabilities and stockholders' equity......... $555,562
$417,893 $396,623
The accompanying notes are an integral part of these condensed
financial statements.
34
THE COMMERCE GROUP, INC. AND SUBSIDIARIES
SCHEDULE I
CONDENSED FINANCIAL INFORMATION
THE COMMERCE GROUP, INC.
(Parent Company Only)
STATEMENTS OF EARNINGS
Years ended December 31,
(Thousands of Dollars)
1995
1994 1993
Revenues
Dividends received from subsidiaries................... $ 34,650
$ 23,625 $15,750
Rent income............................................ 287
1,674 1,967
Investment income...................................... 11
5 138
Realized investment gains.............................. -
2,073 1,288
Total revenues...................................... 34,948
27,377 19,143
Expenses
Depreciation........................................... 157
854 992
Administrative expenses................................ 3,571
3,115 4,299
Total expenses...................................... 3,728
3,969 5,291
Earnings before income tax benefits and equity in
net earnings of subsidiaries over amounts distributed... 31,220
23,408 13,852
Income tax benefits...................................... (1,211)
(106) (666)
Earnings before equity in net earnings of subsidiaries
over amounts distributed................................ 32,431
23,514 14,518
Equity in net earnings of subsidiaries over amounts
distributed............................................. 77,770
99,069 60,798
Net earnings........................................ $110,201
$122,583 $75,316
The accompanying notes are an integral part of these condensed
financial statements.
35
THE COMMERCE GROUP, INC. AND SUBSIDIARIES
SCHEDULE I
CONDENSED FINANCIAL INFORMATION
THE COMMERCE GROUP, INC.
(Parent Company Only)
STATEMENTS OF CASH FLOWS
Years ended December 31,
(Thousands of Dollars)
1995
1994 1993
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:
Dividends received from consolidated subsidiaries...... 34,650
23,625 15,750
Equity in earnings of consolidated subsidiaries........ (112,420)
(122,694) (76,548)
Depreciation and amortization.......................... (28)
(2,982) 934
Other liabilities and accrued expenses................. 1,990
(3,152) (808)
Balances with affiliates............................... (361)
(9,552) 13,609
Income taxes (benefits)................................ (1,187)
395 (462)
Other--net............................................. -
(3,170) (1,621)
Net cash provided by operating activities............ 32,845
5,053 26,170
Cash flows from investing activities:
Purchase of common stocks................................ -
- (8,001)
Proceeds from sale of common stock....................... -
18,400 -
Purchase of property and equipment for company use....... (285)
(841) (532)
Proceeds from sale of property and equipment............. 298
8,091 -
Net cash provided by (used in) investing activities.. 13
25,650 (8,533)
Cash flows from financing activities:
Capital contribution to subsidiaries..................... -
(25,000) (17,500)
Dividends paid to stockholders........................... (8,635)
(5,700) -
Purchase of treasury stock............................... (24,359)
- -
Net cash used in financing activities................ (32,994)
(30,700) (17,500)
Increase (decrease) in cash and cash equivalents........... (136)
3 137
Cash and cash equivalents at beginning of year............. 142
139 2
Cash and cash equivalents at end of year................... $ 6
$ 142 $ 139
The accompanying notes are an integral part of these condensed
financial statements.
36
THE COMMERCE GROUP, INC. AND SUBSIDIARIES
SCHEDULE I
CONDENSED FINANCIAL INFORMATION
THE COMMERCE GROUP, INC.
(Parent Company Only)
NOTE TO CONDENSED FINANCIAL STATEMENTS
(Thousands of Dollars)
The accompanying condensed financial statements should be read
in conjunction with the Consolidated Financial Statements and the
accompanying notes thereto in the Annual Report.
NOTE A--Dividends
The amounts of cash dividends paid to The Commerce Group, Inc.
(Parent only) were as follows:
1995
1994 1993
Consolidated insurance subsidiaries................. $34,650
$23,625 $15,750
See Note K to the Consolidated Financial Statements in the
Annual Report for a description of dividend restrictions applicable
to the Company's subsidiaries.
NOTE B--Federal Income Tax Allocation
As a member of a consolidated group for tax purposes, the
Company and its subsidiaries (said parties constituting an
"Affiliated Group" as defined in and for purposes of the Internal
Revenue Code) are jointly and severally liable for federal income
taxes of the Affiliated Group and have entered into an agreement
establishing an allocation of tax liability and for compensation of
the respective members of the Affiliated Group for use of their tax
losses and credits.
The method of allocation, as approved by the Board of
Directors, calls for current taxes to be allocated among all
affiliated companies based on a written tax-sharing agreement. Under
this agreement, allocation is made primarily on a separate return
basis with current payment for losses and other tax items utilized in
the consolidated return. However, to the extent that a payor member
of the group has future net operating losses which it cannot absorb
in the year incurred, other members within the group will refund
payments to the payor.
NOTE C--Capital Contributions to Subsidiaries
During 1994, the Company made a capital contribution to Bay
Finance in the amount of $10,000,000. As part of this capital
contribution, $4,100,000 of furniture and equipment, net of
accumulated depreciation, was transferred by the Company to Bay
Finance.
Also during 1994, the Company made a capital contribution to
Citation in the amount of $15,000,000.
37
NOTE D--Consolidated Financial Statements
In preparing the consolidated financial statements of the
Company and its subsidiaries, the following amounts have been
eliminated:
At December 31,
Balance Sheet 1995 1994
1993
Investment in subsidiaries......... $546,054 $409,366
$370,842
Receivable from affiliates......... 5,746 5,385
- -
Payable to affiliates.............. - -
4,167
At December 31,
Statement of Earnings 1995 1994
1993
Dividends from subsidiaries........ $ 34,650 $ 23,625 $
15,750
Rent income........................ 287 1,674
1,967
3
THE COMMERCE GROUP, INC. AND SUBSIDIARIES
SCHEDULE III
SUPPLEMENTARY INSURANCE INFORMATION
Years Ended December 31, 1995, 1994 and 1993
(Thousands of Dollars)
Future
Policy
Other Benefits,
Amortization
Deferred Benefits,
Policy Claims, of
Deferred
Policy Claims and
Claims and Net Losses and Policy
Other Net
Acquisition Loss
Unearned Benefits Premium Investment Settlement Acquisition
Operating Premiums
Segment Costs Expenses
Premiums Payable Revenue Income(1) Expenses Costs
Expenses Written
1995
Property and casualty insurance........... $61,546 $618,791
$330,454 None $592,590 $64,335 $367,552 $166,741
NONE $603,421
Real estate and commercial lending........ - -
- - - 6,967 - -
- -
Corporate and other....................... - -
- - - 11 -
- -
Total............................... $61,546 $618,791
$330,454 $592,590 $71,313 $367,552 $166,741
$603,421
1994
Property and casualty insurance........... $56,769 $592,373
$314,719 None $572,053 $54,682 $369,660 $157,415
NONE $589,197
Real estate and commercial lending........ - -
- - - 4,228 - -
- -
Corporate and other....................... - -
- - - 3,991 - -
- -
Total............................... $56,769 $592,373
$314,719 $572,053 $62,901 $369,660 $157,415
$589,197
1993
Property and casualty insurance........... $50,093 $567,797
$283,526 None $548,560 $44,657 $373,959 $150,195
NONE $563,416
Real estate and commercial lending........ - -
- - - 5,317 - -
- -
Corporate and other....................... - -
- - 3,094 -
- -
Total............................... $50,093 $567,797
$283,526 $548,560 $53,068 $373,959 $150,195
$563,416
(1) The allocation of net investment income is based upon the
specific identification of activity within the various segments.
39
THE COMMERCE GROUP, INC. AND SUBSIDIARIES
SCHEDULE IV
REINSURANCE
Years Ended December 31, 1995, 1994 and 1993
(Thousands of Dollars)
Assumed
Percentage
Ceded to From
of Amount
Gross Other Other
Net Assumed
Insurance Premiums Earned Amount Companies Companies
Amount to Net
1995
Property and casualty insurance.. $622,455 $120,720 $90,855
$592,590 15.3%
1994
Property and casualty insurance.. $609,767 $115,863 $78,149
$572,053 13.7%
1993
Property and casualty insurance.. $576,149 $100,190 $72,601
$548,560 13.2%
40
THE COMMERCE GROUP, INC. AND SUBSIDIARIES
SCHEDULE V
VALUATION AND QUALIFYING ACCOUNTS
Years Ended December 31, 1995, 1994 and 1993
(Thousands of Dollars)
Net
Addition
(Reduction)
Balance charged to
Balance
beginning costs and
at end
of year expenses
Deductions(1) of year
1995
Allowance for losses on mortgage loans
and collateral notes receivable........ $3,324 $ (151) $
- - $3,173
Allowance for doubtful premium
receivables............................ $1,120 $ 136 $
(153) $1,103
1994
Allowance for losses on mortgage loans
and collateral notes receivable........ $3,644 $ (277) $
(43) $3,324
Allowance for doubtful premium
receivables............................ $1,100 $ 638 $
(618) $1,120
1993
Allowance for losses on mortgage loans
and collateral notes receivable........ $3,362 $2,820
$(2,538) $3,644
Allowance for doubtful premium
receivables............................ $1,100 $1,318
$(1,318) $1,100
(1) Deductions represent net write-offs of amounts determined to be
uncollectible.
41
THE COMMERCE GROUP, INC. AND SUBSIDIARIES
SCHEDULE X
SUPPLEMENTAL INFORMATION CONCERNING
PROPERTY-CASUALTY INSURANCE OPERATIONS
Years Ended December 31, 1995, 1994 and 1993
(Thousands of Dollars)
Claims and Claim
Paid
Adjustment Expenses
Claims
Affiliation Incurred Related to
and Claim
with Current Prior
Adjustment
Registrant Year Years
Expenses
1995
Consolidated property-casualty entities...... $442,027 $(74,475)
$329,210
1994
Consolidated property-casualty entities...... $435,713 $(66,053)
$336,942
1993
Consolidated property-casualty entities...... $412,369 $(38,410)
$274,607
42
THE COMMERCE GROUP, INC. AND SUBSIDIARIES
INDEX TO EXHIBITS(A)
Exhibit
Number Title
3.1 Articles of Organization, as amended(B)
3.2 By-Laws(B)
4 Stock Certificate(B)
10.1 Loan Agreement, Mortgage and Assignment and Trust
Agreement dated February 20,
1981 between Town of Webster, The Commerce Insurance
Company and Mechanics Bank,
as Trustee(B)
10.2 First Supplemental Loan Agreement, Mortgage, Assignment
and Trust Agreement
dated as of August 1, 1984 between Town of Webster, The
Commerce Insurance
Company and Mechanics Bank as Trustee(B)
10.3 Second Supplemental Loan Agreement, Mortgage, Assignment
and Trust Agreement
dated as of October 1, 1985 between Town of Webster, The
Commerce Insurance
Company and Mechanics Bank as Trustee(B)
10.4 Loan Agreement dated December 4, 1985 among Bay Finance
Company, Inc., The
Commerce Group, Inc. and The First National Bank of
Boston, as modified by
Modification No. 1 dated December 18, 1986(B)
10.4A Loan Agreement dated December 4, 1985 among Bay Finance
Company, Inc., The
Commerce Group, Inc. and The First National Bank of
Boston, as modified by
Modification No. 2 dated March 18, 1988(C)
10.5 Loan Agreement dated December 18, 1986 between The
Commerce Group, Inc. and
The First National Bank of Boston(B)
10.6* Form of Stock-Appreciation Right Agreement(B)
10.7* 1995 Stock-Appreciation Right and Book Value Award
Agreement.
10.8* 1994 Management Incentive Plan(F)
10.9 Property Combination Reinsurance Agreement(F)
10.10 Owner-Contractor Agreement dated April 20, 1988 between
The Commerce Group,
Inc. and Lauring Construction Co., Inc.(D)
10.11 Asset Transfer Agreement between Commerce Insurance and
Providence Washington
Insurance Company dated December 23, 1991.(E)
10.12 Asset and Liability Transfer Agreement between Commerce
Insurance and
American Hardware Mutual Insurance Company and American
Merchants Casualty
Company dated November 8, 1991.(E)
10.13 Asset Transfer Agreement between Commerce Insurance and
The Continental
Insurance Company dated October 24, 1991.(E)
43
10.14 Asset Transfer Agreement between Commerce Insurance and
Home Insurance
Company dated October 3, 1991.(E)
10.15 Asset and Liability Transfer Agreement between Commerce
Insurance and New
Hampshire Insurance Company dated August 12, 1991.(E)
10.16 Asset Transfer Agreement between Commerce Insurance,
Utica Mutual Insurance
Company and Graphic Arts Mutual Insurance Company dated
June 24, 1991.(E)
13.1 Annual Report for the year ended December 31, 1995 to
Security Holders.
22.1 Subsidiaries of the Registrant filed herewith.
24.1 Power of Attorney(B)
28.1 Information from Reports Furnished to State Insurance
Regulatory
Authorities--1995 Consolidated Schedule P of Annual
Statement provided to state
regulatory authorities filed herewith. During 1989, the
use of Schedule O was
discontinued by State Insurance Regulatory Authorities
and all information which was previously contained in this
schedule has now been combined into Schedule P.
(A) Exhibits other than those listed are omitted because they are not
required or are not
applicable. Copies of exhibits are available without charge by
writing to the Assistant
to the President at 211 Main Street, Webster, MA 01570.
(B) Incorporated herein by reference to the exhibit with the same
exhibit number, filed as
an exhibit to the Registrant's Registration Statement on Form S-
18 (No. 33-12533-B).
(C) Incorporated herein by reference to the exhibit with the same
exhibit number, filed as
an exhibit to the Registrant's Registration Statement on Form 8-
A.
(D) Incorporated herein by reference to the exhibit with the same
exhibit number, filed as
an exhibit to the Registrant's Form 10-K for the year ended
December 31, 1988.
(E) Incorporated herein by reference to the exhibit with the same
exhibit number, filed as
an exhibit to the Registrant's Form 10-K for the year ended
December 31, 1993.
(F) Incorporated herein by reference to the exhibit with the same
exhibit number, filed as
an exhibit to the Registrant's Form 10-K for the year ended
December 31, 1994.
* Denotes management contract or compensation plan or arrangement.
44
EXHIBIT 10.7
THE COMMERCE GROUP, INC.
1995 STOCK APPRECIATION RIGHT AND
BOOK VALUE AWARD AGREEMENT
THIS AGREEMENT (the "Agreement") is entered into as
of this 19th day of
June, 1995 by and between The Commerce Group, Inc., a
Massachusetts corporation with its principal place of
business in Webster, Massachusetts (the "Company"), and
(the "Officer").
Witnesseth:
WHEREAS, the Board of Directors of the Company has
adopted the 1994 Management Incentive Plan (the "Plan")
on May 20, 1994, which authorizes the Compensation
Committee of the Board of Directors (Committee) to grant
various Awards, including Stock Appreciation Rights and
Book Value Awards, to officers of the Company and its
subsidiaries;
WHEREAS, the stockholders of the Company have
approved the Plan; and
WHEREAS, the Committee has approved the grant of
Stock Appreciation Rights and Book Value Awards to the
Officer, subject to the terms and conditions set forth in
this Agreement;
NOW, THEREFORE, it is agreed as follows:
1. Definitions. Capitalized terms used herein and
not otherwise defined shall have the meaning given to
them in the Plan.
2. Cash-Only Stock Appreciation Rights
2.1 Grant. The Company hereby grants to the
Officer Stock Appreciation Rights (the "Stock Rights"),
which represent a fixed number of Stock Units for which
the Officer shall be entitled to receive only a cash
payment upon the Settlement Date (as hereinafter
defined), subject to the terms and conditions set forth
in this Agreement.
2.2 Base Price. The base price for each Stock
Right shall be $20.50 (the "SAR Base Price").
45
2.3 Settlement Date. Except as provided in
Section 6 hereof, any cash payment to which the Officer
may be entitled hereunder with respect to the Officer's
Stock Rights shall be paid by April 30, 1998 (the
"Settlement Date").
2.4 Cash Settlement. Provided the Officer has
satisfied the condition set forth in Section 4 hereof, no
later than the Settlement Date the Company shall pay to
the Officer, in cash, an amount equal to the excess, if
any, of the Average Market Price (as hereinafter
defined), plus (a) the amount of all cash dividends which
the Officer would have been entitled to receive had the
Officer owned shares of Common Stock equal to the number
of Stock Rights granted hereunder and held such shares
throughout the period beginning March 31, 1995 and ending
March 31, 1998 (the "SAR Measurement Date") and (b) the
fair market value of all distributions of property made
by the Company to holders of Common Stock (other than
shares of Common Stock issuable by way of a stock split,
stock dividend, combination of shares, recapitalization
or the like) which the Officer would have been entitled
to receive had the Officer owned shares of Common Stock
equal to the number of Stock Rights granted hereunder and
held such shares throughout the period beginning March
31, 1995 and ending on the SAR Measurement Date over the
SAR Base Price. For purposes of this Section 2.4, the
term "Average Market Price" means the three-month
average, for the three months ending on the SAR
Measurement Date, of the daily average of the high and
low per share sale prices for Common Stock on the New
York Stock Exchange as reported in the Wall Street
Journal.
3. Cash-Only Book Value Awards.
3.1 Grants. The Company hereby grants to the
Officer Book Value Awards (the "Book Value Awards)",
which represent a fixed number of Stock Units for which
the Officer shall be entitled to receive only a cash
payment upon the Settlement Date, subject to the terms
and conditions set forth in this Agreement.
3.2 Base Price. The base price for each Book
Value Award shall be $14.88 (the "BVA Base Price").
3.3 Settlement Date. Except as provided in
Section 6 hereof, any cash payment to which the Officer
may be entitled hereunder with respect to the Officer's
Book Value Awards shall be paid by the Settlement Date.
3.4 Cash Settlement. Provided the Officer has
satisfied the condition set forth in Section 4 hereof, no
later than the Settlement Date the Company shall pay to
the Officer, in cash, an amount equal to the excess, if
any, of the Book Value per share of Common Stock as of
December 31, 1997 (the "BVA Measurement Date"), plus (a)
the amount of all cash dividends which the Officer would
have been entitled to receive had the
46
Officer owned shares of Common Stock equal to the number
of Book Value Awards granted hereunder and held such
shares throughout the period beginning January 1, 1995
and ending on the BVA Measurement
Date and (b) the fair market value of all distributions
of property made by the Company to holders of Common
Stock (other than shares of Common Stock issuable by way
of a stock split, stock dividend, combination of shares,
recapitalization or the like) which the Officer would
have been entitled to receive had the Officer owned
shares of Common Stock equal to the number of Book Value
Awards granted hereunder and held such shares throughout
the period beginning January 1, 1995 and ending on the
BVA Measurement Date over the BVA Base Price.
For purposes hereof, "Book Value" shall be the
book value of a share of the Company's Common Stock on
December 31, 1997. The "Book Value" shall be determined
in accordance with generally accepted accounting
principles consistently applied. In the event of any
dispute as to "Book Value", the matter shall be referred
to the Company's independent public accountants whose
determination shall be final and binding.
4. Condition to Cash Settlement. It shall be a
condition to any payment to be made hereunder that
throughout the period beginning on the date hereof and
ending on the Settlement Date the Officer shall have been
in the continuous employ of the Company or any of its
subsidiaries as an officer. The officer shall be deemed
to have been in the continuous employ of the Company or
any of its subsidiaries as an officer in the event of
death or an approved leave of absence for sickness and/or
disability or for any other purpose approved by the Board
of Directors of the Company.
5. Adjustment for Stock Dividends, Stock Splits,
Etc. The SAR Base Price and BVA Base Price shall be
appropriately adjusted in the event of any stock
dividend, stock split, combination of shares,
recapitalization or the like effective as to shares of
the Common Stock after the date hereof and prior to the
SAR Measurement Date or the BVA Measurement Date, as
applicable.
6. Sale of the Company. In the event the Company
shall sell all or substantially all of its assets or
consolidate or merge with or into any other entity (other
than a merger or consolidation which results in the
persons who hold a majority of the outstanding shares of
Common Stock immediately prior to such merger or
consolidation holding, immediately after such merger or
consolidation, a majority of the outstanding shares of
common stock of the entity resulting from such merger or
consolidation) or in the event the holders of a majority
of the outstanding shares of Common Stock shall sell, in
a single or related series of transactions, a majority of
the outstanding shares of Common Stock to a person or
entity, or related persons or entities (any such event
being hereinafter referred to as a "Sale"), for all
purposes hereunder the term "Settlement Date" shall mean
the date the Sale becomes effective and the terms
"Average Market Price" and "Book Value" shall mean the
purchase price per share received by holders of shares of
Common Stock pursuant to the Sale.
47
7. No Rights of a Stockholder. Nothing herein
shall entitle the Officer to any voting or other rights
of an actual owner of shares of Common Stock.
8. No Right to Continued Employment. The Officer
shall have no right to continued employment by the
Company or any of its subsidiaries by virtue of this
Agreement, and nothing contained herein shall be
construed to limit the Company's right at any time to
terminate the Officer's employment, with or without
cause, subject only to those obligations the Company may
have for unpaid salary and/or expenses, in accordance
with provisions of law.
9. Non-Transferability. The Awards and any right
to receive payment hereunder shall not be transferable;
provided, however, that in the event of the Officer's
death, the Officer's beneficiary shall be entitled to
receive any payment due hereunder.
IN WITNESS WHEREOF, each of the parties hereto has
caused this Agreement to be duly executed in its name and
on its behalf, all as of the date first above written.
THE COMMERCE GROUP, INC.
CORPORATE ) The
SEAL ) Company
By:
)
Arthur J. Remillard, Jr.
Its President
) The
) Officer
48
EXHIBIT 13.1
1995
annual
report
The
CGI
The Commerce Group, Inc.
211 Main Street, Webster, Massachusetts 01570
49
INDEX TO 1995 ANNUAL REPORT
Page
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
FINANCIAL HIGHLIGHTS
(Dollars in Thousands, Except Per Share Amounts)
1995
1994 1993
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%
AR-1
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
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
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
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
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 attributable 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
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
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 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
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 mentioned above.
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
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 discussed above.
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
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 it 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
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
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:
1995
1994
High Low Close
High Low Close
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
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
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
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
THE COMMERCE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31,
(Thousands of Dollars Except Per Share Data)
1995 1994
ASSETS
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
LIABILITIES AND STOCKHOLDERS' EQUITY
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
The accompanying notes are an integral part of these consolidated
financial statements.
AR-16
THE COMMERCE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
For the years ended December 31,
(Thousands of Dollars Except Per Share Data)
1995
1994 1993
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
The accompanying notes are an integral part of these consolidated
financial statements.
AR-17
THE COMMERCE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the years ended December 31,
(Thousands of Dollars)
Net
Common Paid-in Unrealized
Retained Treasury
Stock Capital Gains/Losses
Earnings Stock Total
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
6,099
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
The accompanying notes are an integral part of these consolidated
financial statements.
AR-18
THE COMMERCE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended December 31,
(Thousands of Dollars)
1995
1994 1993
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
The accompanying notes are an integral part of these consolidated
financial statements.
AR-19
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.
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.
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.
2. Investments
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.
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
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
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:
Percent
Asset Classification
Per Annum
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
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
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:
Gross
Gross Estimated
Amortized Unrealized
Unrealized Fair Market
Cost Gains
Losses Value
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
Proceeds from sales of investments in fixed maturities, gross
gains, and gross losses realized on those sales were as follows:
Proceeds
Gross Gross
From
Realized Realized
Sales
Gains Losses
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 $ -
AR-23
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:
1995
1994
Fair
Fair
Amortized
Market Amortized Market
Cost Value
Cost Value
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
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:
1995
1994
Fair
Fair
Market
Market
Cost Value
Cost Value
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
3. Mortgage Loans on Real Estate
At December 31, 1995 and 1994, mortgage loans on real estate
consisted of the following:
December 31,
1995
1994
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
AR-24
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:
Year
Ended December 31,
1995
1994 1993
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
The following table describes mortgage principal balances by
maturity and discloses over 90 days past due and foreclosure
information:
1995
1994 1993
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
AR-25
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:
Year
ended December 31,
1995
1994 1993
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
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:
Year ended
December 31,
1995 1994
1993
Net realized investment gains:
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
A summary of accumulated unrealized gains and losses on equity
securities and fixed maturity investments in 1995, 1994 and 1993
follows:
Year ended
December 31,
1995 1994
1993
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
NOTE C-Deferred Policy Acquisition Costs
Policy acquisition costs incurred and amortized to income are
as follows:
Year ended
December 31,
1995 1994
1993
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
AR-26
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:
1995 1994
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
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 acquistion costs.
NOTE E-Losses and Loss Adjustment Expenses
Liabilities for unpaid losses and loss adjustment expenses at
December 31, consist of:
1995 1994
Direct and assumed business...............
$662,591 $630,357
Salvage and subrogation recoverable.......
(43,800) (37,984)
$618,791 $592,373
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
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.
Year
ended December 31,
1995
1994 1993
(in
thousands)
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
AR-28
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 (as defined below).
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
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:
Net Loss
Total Reinsurance Retained
by
Loss Recovery the
Company
$ 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
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
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:
Year ended December 31,
1995 1994
1993
Ceded Assumed Ceded Assumed
Ceded Assumed
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 - 27,454 -
34,832 -
Residual Market
Receivable......... 200,124 - 214,818 -
220,312 -
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:
Year ended
December 31,
1995
1994 1993
Earned premiums ceded.......................... $28,056
$28,278 $18,855
Losses and loss adjustment expenses ceded...... 21,454
17,936 5,120
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:
Year ended
December 31,
1995
1994 1993
Current...................... $34,891
$54,181 $32,106
Deferred..................... 4,650
(4,776) (5,776)
$39,541
$49,405 $26,330
AR-31
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:
Year
ended December 31,
1995
1994 1993
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
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:
1995 1994
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)
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:
Year ended December
31,
1995 1994
1993
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%
AR-32
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 authorizes a Book Value Rights Program
which provides for the payment of awards in cash to key employees
based upon increases in the book value of the Company's Common Stock
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.
AR-33
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)
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.
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
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:
1995 1994
1993
Earnings Equity Earnings
Equity Earnings Equity
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
NOTE M-Segment Information
Selected information by industry segment for 1995, 1994 and 1993
is summarized as follows:
Earnings
Before Identifiable
Revenue Income
Taxes Assets
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
AR-35
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:
Year ended
December 31,
1995
1994 1993
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
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, 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:
FIRST SECOND
THIRD FOURTH
QUARTER QUARTER
QUARTER QUARTER
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
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
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.
Year Ended
December 31,
1995 1994 1993
1992 1991
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
Year Ended
December 31,
1995 1994 1993
1992 1991
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
AR-37
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:
5
Year Period
1991-95
1986-90 1981-85
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%
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
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)
1995 1994
1993 1992 1991
ASSETS
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
AR-39
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)
1990 1989 1988 1987 1986 1985 1984
1983 1982 1981
ASSETS
$ 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
AR-40
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)
1995 1994 1993
1992 1991
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
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%
AR-41
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)
1990 1989 1988 1987 1986 1985 1984
1983 1982 1981
$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%)
AR-42
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
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
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
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
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
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
Assistant Vice President.......................................
Robert E. McKenna
Clerk..........................................................
John W. Spillane
Treasurer and Chief Accounting Officer.........................
Randall V. Becker
Assistant Treasurer............................................
Thomas A. Gaylord
* 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 President..........................................
Arthur J. Remillard, III
Senior Vice President and General Counsel......................
Regan P. Remillard
Senior Vice Presidents.........................................
David H. Cochrane
Mary M. Fontaine
Robert E. Longo
Joyce B. Virostek
Vice Presidents................................................
Peter J. Dignan
Elizabeth M. Edwards
Mark W. Rayla
Angelos Spetseris
Henry R. Whittier, Jr.
Assistant Vice Presidents......................................
Burton C. Aaronson
Robert M. Blackmer
Stephen R. Clark
Raymond J. DeSantis
Warren S. Ehrlich
John V. Kelly
Ronald J. Lareau
Karen A. Lussier
Donald G. MacLean
Robert E. McKenna
Robert L. Mooney
Kenneth E. Morrison
Michael J. Richards
Treasurer......................................................
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
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 the NASDAQ National Market under the symbol
"COMG".
Independent Accountants
Coopers & Lybrand L.L.P.
One Post Office Square
Boston, MA 02109
(617) 478-5000
AR-46
THE COMMERCE GROUP, INC. AND SUBSIDIARIES
EXHIBIT 22.1
ANNUAL STATEMENT FOR THE YEAR 1995 OF THE COMMERCE INSURANCE
COMPANY
THE COMMERCE GROUP, INC.
A MASSACHUSETTS CORPORATION
FID #04-2599931
BAY FINANCE COMPANY, INC.
A MASSACHUSETTS CORPORATION
A WHOLLY-OWNED SUBSIDIARY
FID #04-2671429
CLARK-PROUT INSURANCE AGENCY
A MASSACHUSETTS CORPORATION
A WHOLLY-OWNED SUBSIDIARY
FID #04-2397488
COMMERCE HOLDINGS, INC.
A MASSACHUSETTS CORPORATION
A WHOLLY-OWNED INSURANCE HOLDING COMPANY
FID #04-3207145
THE COMMERCE INSURANCE COMPANY
A MASSACHUSETTS CORPORATION
A WHOLLY-OWNED SUBSIDIARY
FID #04-2495247 NAIC #34754
WESTERN PIONEER INSURANCE COMPANY
A CALIFORNIA CORPORATION
A WHOLLY-OWNED SUBSIDIARY
FID #94-1137122 NAIC #13161
CITATION INSURANCE COMPANY
A MASSACHUSETTS CORPORATION
A WHOLLY-OWNED SUBSIDIARY
FID #04-2739876 NAIC #40274
50
<TABLE> <S> <C>
<ARTICLE> 7
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> YEAR YEAR
<FISCAL-YEAR-END> DEC-31-1995 DEC-31-1994
<PERIOD-END> DEC-31-1995 DEC-31-1994
<DEBT-HELD-FOR-SALE> 0 0
<DEBT-CARRYING-VALUE> 801,308 801,376
<DEBT-MARKET-VALUE> 815,277 745,010
<EQUITIES> 151,579 95,230
<MORTGAGE> 73,783 57,031
<REAL-ESTATE> 2,174 1,775
<TOTAL-INVEST> 1,042,813 899,046
<CASH> 52,718 5,485
<RECOVER-REINSURE> 21,897 16,892
<DEFERRED-ACQUISITION> 61,546 56,769
<TOTAL-ASSETS> 1,554,744 1,377,380
<POLICY-LOSSES> 618,791 592,373
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0 0
0 0
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<OTHER-SE> 530,714 394,589
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592,590 572,053
<INVESTMENT-INCOME> 71,313 62,901
<INVESTMENT-GAINS> 712 45,612
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<BENEFITS> 367,552 369,660
<UNDERWRITING-AMORTIZATION> 166,741 157,415
<UNDERWRITING-OTHER> 0 0
<INCOME-PRETAX> 149,742 171,988
<INCOME-TAX> 39,541 49,405
<INCOME-CONTINUING> 110,201 122,583
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 110,201 122,583
<EPS-PRIMARY> 2.93 3.23
<EPS-DILUTED> 2.93 3.23
<RESERVE-OPEN> 448,331 415,613
<PROVISION-CURRENT> 442,027 435,713
<PROVISION-PRIOR> (74,475) (66,053)
<PAYMENTS-CURRENT> (184,182) (188,002)
<PAYMENTS-PRIOR> (145,028) (148,940)
<RESERVE-CLOSE> 618,791 592,373
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