UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
For Quarter Ended September 30, 1997 Commission File Number 0-16882
THE COMMERCE GROUP, INC.
(Exact name of registrant as specified in its charter)
Massachusetts 04-2599931
(State or other (IRS Employer
jurisdiction Identification
of Incorporation) No.)
211 Main Street Webster, Massachusetts 01570
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (508) 943-9000
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90
days.
Yes X No___
As of November 1, 1997, the number of shares outstanding of the
registrant's common stock (excluding Treasury Shares) was
36,042,652
Page 1 of 30
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The Commerce Group, Inc.
Table of Contents
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Page No.
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Part I - Financial Information
Consolidated Balance Sheets at
September 30, 1997 (Unaudited) and December 31,
1996............................................... 3
Consolidated Statements of Earnings for the
Three and Nine Months Ended September 30, 1997 and 1996
(Unaudited) ...................... 4
Consolidated Statements of Cash Flows for the
Nine Months Ended September 30, 1997 and 1996
(Unaudited)...................................... 5
Notes to Unaudited Consolidated Financial
Statements.........................................................
6
Management's Discussion and
Analysis..............................................................
...... 7
Part II - Other Information
Item 4
Submission of Matters to a Vote of Security
Holders.........................................................
18
Item 6
Exhibits and Reports on Form 8-
K.....................................................................
............. 30
Signature
......................................................................
..................................................... 30
</TABLE>
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<PAGE>
THE COMMERCE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Thousands of Dollars)
<TABLE>
September 30, December 31,
1997 1996
(Unaudited)
ASSETS
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Investments:
Fixed maturities, at market (cost: $590,713 in 1997 and $700,511
in 1996)....................... $ 610,305 $ 716,702
Equity securities, at market (cost: $238,139 in 1997 and $214,406
in 1996)...................... 251,690 233,721
Mortgage loans on real estate and collateral notes receivable
(less allowance for possible loan
losses of $2,974 in 1997 and $2,760 in
1996)................................................... 70,939
74,586
Short-term
investments.............................................................
.............. 199,582 -
Cash and cash
equivalents.............................................................
........... 81,293 140,535
Other
investments.............................................................
................... 2,441 2,127
Total
investments.............................................................
............... 1,216,250 1,167,671
Accrued investment
income..................................................................
........ 12,237 12,819
Premiums receivable (less allowance for doubtful receivables of
$1,454 in 1997 and $1,500 in 1996). 203,207 157,835
Deferred policy acquisition
costs..................................................................
94,194 82,968
Property and equipment, net of accumulated
depreciation............................................ 35,305
32,100
Residual market
receivable..............................................................
........... 185,982 195,213
Due from
reinsurers..............................................................
.................. 18,114 19,659
Other
assets..................................................................
..................... 10,251 8,534
Total
assets..................................................................
............... $1,775,540 $1,676,799
LIABILITIES AND
STOCKHOLDERS' EQUITY
Liabilities
Losses and loss adjustment
expenses..............................................................
$ 662,981 $ 662,832
Unearned
premiums................................................................
................ 419,040 367,991
Current income
taxes...................................................................
.......... 9,856 171
Deferred income
taxes...................................................................
......... 7,573 4,223
Deferred
income..................................................................
................ 7,735 7,974
Contingent commissions
accrued.................................................................
.. 13,892 25,712
Payable to securities
broker..................................................................
... 581 -
Other liabilities and accrued
expenses...........................................................
24,998 20,857
Total
liabilities.............................................................
............... 1,146,656 1,089,760
Stockholders' equity
Preferred stock, authorized 5,000,000 shares at $1.00 par value;
none issued in 1997 and 1996.... - -
Common stock, authorized 100,000,000 shares at $.50 par value;
issued and outstanding 38,000,000 shares in 1997 and
1996...................................... 19,000 19,000
Paid-in
capital.................................................................
................. 29,621 29,621
Net unrealized gains on investments, net of income taxes of
$11,600 in 1997 and $12,427 in 1996.. 21,543 23,079
Retained
earnings................................................................
................ 597,407 553,539
667,571 625,239
Treasury stock 1,957,348 shares in 1997 and 1,937,348 shares in
1996 ........................... (38,687) (38,200)
Total stockholders'
equity..................................................................
. 628,884 587,039
Total liabilities and stockholders'
equity................................................... $1,775,540
$1,676,799
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
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<PAGE>
THE COMMERCE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
Three and Nine Months Ended September 30, 1997 and 1996
(Thousands of Dollars Except Per Share Data)
(Unaudited)
<TABLE>
Three Months Ended Nine Months Ended
September 30, September 30,
1997 1996 1997 1996
<CAPTION>
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Revenues
Earned premiums ................................................
$ 182,480 $ 172,441 $ 542,608 $ 489,710
Net investment income...........................................
19,750 19,426 58,936 57,856
Premium finance fees............................................
1,857 1,717 5,253 8,001
Net realized investment gains (losses)..........................
20,995 (1,251) 22,915 (2,984)
Total revenues.........................................
225,082 192,333 629,712 552,583
Expenses
Losses and loss adjustment expenses.............................
124,647 116,492 396,443 362,016
Policy acquisition costs........................................
50,597 49,315 138,217 126,796
Total expenses.........................................
175,244 165,807 534,660 488,812
Earnings before income taxes...........................
49,838 26,526 95,052 63,771
Income taxes......................................................
14,826 5,090 23,431 11,477
NET EARNINGS...........................................
$ 35,012 $ 21,436 $ 71,621 $ 52,294
NET EARNINGS PER COMMON SHARE..........................
$ .97 $ .59 $ 1.99 $ 1.44
CASH DIVIDENDS PAID PER COMMON SHARE...................
$ .26 $ .25 $ .77 $ .56
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING...
36,042,652 36,284,475 36,045,363 36,395,571
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
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<PAGE>
THE COMMERCE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended September 30, 1997 and 1996
(Thousands of Dollars)
(Unaudited)
<TABLE>
1997 1996
<CAPTION>
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Cash flows from operating activities:
Premiums
collected...............................................................
. $544,020 $511,285
Net investment
income.............................................................
59,518 58,112
Premium finance
fees..............................................................
5,253 8,001
Losses and loss adjustment expenses
paid.......................................... (379,521)
(314,461)
Policy acquisitions costs
paid....................................................
(156,895) (161,144)
Federal income tax
payments.......................................................
(9,569) (10,694)
Net cash provided by operating
activities................................ 62,806
91,099
Cash flows from investing activities:
Proceeds from maturity of fixed
maturities....................................... 91,783
85,133
Proceeds from sale of fixed
maturities............................................
118,032 55,938
Purchase of fixed
maturities......................................................
(98,098) (180,151)
Purchase of equity
securities.....................................................
(193,735) (67,404)
Proceeds from sale of equity
securities...........................................
191,029 7,023
Net increase in short-term
investments............................................
(199,582) -
Payments received on mortgage loans and collateral notes
receivable............... 7,810 6,192
Mortgage loans and collateral notes
originated.................................... (5,021)
(6,363)
Mortgages sold to investors on the secondary
market............................... 11 -
Proceeds from sale of real estate acquired by
foreclosures........................ 167
92
Purchase of property and equipment
............................................... (6,307)
(2,756)
Proceeds from sale of property and
equipment...................................... 103
121
Net cash used in investing
activities.................................... (93,808)
(102,175)
Cash flows from financing activities:
Dividends paid to
stockholders....................................................
(27,753) (20,357)
Purchase of treasury
stock........................................................
(487) (13,841)
Net cash used in financing
activities.................................... (28,240)
(34,198)
Decrease in cash and cash
equivalents...............................................
(59,242) (45,274)
Cash and cash equivalents at beginning of
period.................................... 140,535
52,718
Cash and cash equivalents at end of
period.......................................... $ 81,293
$ 7,444
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
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<PAGE>
The Commerce Group, Inc.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. The financial information has been prepared on a basis consistent
with the accounting principles reflected in the audited
consolidated financial statements for the year ended December 31,
1996. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with
generally accepted accounting principles have been omitted
pursuant to the Securities and Exchange Commission rules and
regulations, although the Company believes the disclosures which
have been made are adequate to make the information presented not
misleading.
2. The information furnished includes all adjustments and accruals
consisting only of normal recurring adjustments which are, in the
opinion of management, necessary for a fair presentation of
results for the interim periods. Certain 1996 account balances
have been reclassified to conform to the current year's
presentation.
3. Statements in this Form 10-Q concerning future premium writings
and profit levels look forward in time and involve risks and
uncertainties that may affect the Company's actual results of
operations. Actual results may differ materially from those set
forth in the forward looking statements.
4. The consolidated financial statements should be read in
conjunction with the Company's Annual Report on Form 10-K filed
with the Securities and Exchange Commission.
5. Neither the results for the nine months ended September 30, 1997
nor comparison with the corresponding nine months ended September
30, 1996 should be considered indicative of the results which may
be expected for the year ending December 31, 1997.
6. In May 1995, the Board of Directors announced that it had approved
a stock buyback program of up to 3 million shares. As of
September 30, 1997, 1,957,348 shares of Treasury Stock were
purchased under the program, of which 20,000 shares were purchased
in 1997.
7. In May 1997 the Board of Directors voted to increase its quarterly
stockholder dividend from $0.25 per share to $0.26 per share.
8. In October 1997, the Company received Massachusetts Division of
Insurance approval to institute a $3.00 billing statement fee for
new and renewal personal lines policies with effective dates
beginning in 1998.
- - 6 -
<PAGE>
The Commerce Group, Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS
Three months ended September 30, 1997 compared to
three months ended September 30, 1996
Direct premiums written during the third quarter of 1997, increased
$10,983,000 or 6.4% to $182,087,000 , as compared to the same period in
1996. The increase was primarily attributable to a $10,849,000, or 7.9%
increase in direct premiums written for Massachusetts personal
automobile insurance and an increase of $126,000 which was derived from
the Company's California subsidiary, Western Pioneer Insurance Company,
("Western Pioneer"). The increase in Massachusetts personal automobile
direct premiums written resulted primarily from a 9.6% increase in the
number of personal automobile exposures written, offset by a 1.8%
decrease in the average personal automobile premium per exposure (each
vehicle insured). The increase in the volume of personal automobile
exposures was primarily the result of the Company's affinity group
marketing programs. The decrease in the average personal automobile
premium per exposure was primarily due to the 1997 state mandated
average rate decrease of 6.2%. The 1.8% decrease for the Company is
significantly less than the mandated 6.2% rate decrease due to the fact
that the rate decision does not anticipate purchases of new automobiles
in the year to which the rate decision applies and the Company's mix of
personal auto business differs from that of the industry. In March
1997, the Company was granted, for the 1997 calendar year, approval to
offer its customers safe driver deviations of 10%. Companies must re-
apply annually, after the state sets rates, to offer safe driver
deviations. For drivers who qualify, both group discount and safe
driver deviations can be combined for up to a 19% reduction from state
mandated rates. Direct premiums written for commercial automobile
insurance decreased by $680,000 or 8.6%, due primarily to a 6.0%
decrease in the number of policies written, as well as a 2.7% decrease
in the average commercial automobile premium per policy. Direct
premiums written for homeowners insurance increased by $720,000 or 4.8%
due primarily to a 6.1% increase in the number of policies written,
offset by a slight decrease in the average premium per policy.
Net premiums written during the third quarter of 1997 increased
$4,425,000 or 2.6% as compared to 1996. The increase in net premiums
written was primarily due to changes in direct premiums written as
described above, as well as to the effects of reinsurance. Written
premiums assumed from the Commonwealth Automobile Reinsurers ("C.A.R.")
decreased $5,609,000, or 24.0% and written premiums ceded to C.A.R.
increased $620,000, or 3.5% as compared to the third quarter of 1996, as
a result of changes in the industry's and the Company's utilization of
C.A.R. reinsurance.
- - 7 -
<PAGE>
The Commerce Group, Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued)
Earned premiums increased $10,039,000, or 5.8% during the third quarter
of 1997 as compared to the same period in 1996. The increase in earned
premiums was primarily due to the increased direct premiums written from
affinity group marketing programs during the latter part of 1996 and the
first nine months of 1997, and also a result of the changes in direct
premiums written and net premiums written as described above. Earned
premiums assumed from C.A.R. decreased $5,041,000 or 21.3% and earned
premiums ceded to C.A.R. decreased $2,962,000, or 14.7% as compared to
the third quarter of 1996. Direct premiums earned for Massachusetts
personal automobile insurance increased $13,010,000, or 9.1% compared to
the same period in 1996. Commercial automobile insurance direct
premiums earned decreased $863,000, or 8.3%, and homeowners direct
premiums earned increased $460,000, or 3.6%, as compared to the third
quarter of 1996. Earned premiums attributable to Western Pioneer
increased $217,000 to $7,123,000 for the three months ended September
30, 1997, compared to $6,906,000 for the same period in 1996.
Net investment income increased $324,000, or 1.7%, compared to the third
quarter of 1996 versus a 3.1% increase in average invested assets for
the period. This slight increase was the result of the previously
announced change in the Company's investment strategy. The Company is
seeking greater flexibility to provide for enhanced potential future
capital appreciation. The Company's strategy is to acquire equity
investments, including potential acquisitions, which forego current
investment yield in favor of potential higher yielding capital
appreciation in the future. As a result, the Company is carrying
approximately $281 million in cash and short-term investments which
yield lower returns than its current long-term investment portfolio.
Premium finance fees increased $140,000 or 8.2% during the third quarter
of 1997 as compared to the same period in 1996. The increase for the
third quarter of 1997 versus 1996 was primarily attributable to a 13.0%
increase in the direct bill receivable balance compared to the same
period last year. The increase to the receivable is attributable to
increased volumes of premiums written as well as more policyholders
choosing to pay over a ten month period. In addition, the percentage of
direct bill receivables to direct premiums written also increased to
43.3% through the third quarter of 1997 versus 36.6% through the same
period in 1996. Premium finance fees decreased for the nine month
period of 1997 versus 1996 as a result of a change from interest based
finance fees to a "late payment" fee based system. This change, which
was announced in late 1995 and impacted personal lines policies with
effective dates which began in 1996, was in response to competitive
forces that occurred in the Massachusetts marketplace. In October 1997,
the Company received Massachusetts Division of Insurance approval to
institute a $3.00 billing fee for new and renewal personal lines
policies with effective dates beginning in 1998.
- - 8 -
<PAGE>
The Commerce Group, Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued)
Net realized investment gains totaled $20,995,000 during the third
quarter of 1997 as compared to net realized investment losses of
$1,251,000 for the same period in 1996. A significant portion of the
net realized investment gains were the result of a merger of a major New
England financial corporation and it's property and casualty subsidiary.
The merger election and exchange of stock resulted in net realized
investment gains of $15,178,000. Subsequent post merger sales of this
corporation's common stock resulted in additional net realized
investment gains of $3,790,000. The remainder of the realized
investment gains in the third quarter of 1997 were primarily the result
of sales of non-taxable bonds offset by minimal realized investment
losses in the sales of GNMA's and preferred stocks.
Losses and loss adjustment expenses ("LAE") incurred (on a statutory
basis) as a percentage of insurance premiums earned ("loss ratio")
decreased to 67.3% for the third quarter of 1997 as compared to 67.6%
for the same period in 1996. The ratio of net incurred losses,
excluding LAE, to premiums earned ("pure loss ratio") on personal
automobile decreased to 59.3% compared to 63.1% in the third quarter of
1996. This was the result of favorable loss development in prior years
on our voluntary book of business. The commercial automobile pure loss
ratio increased to 45.9% compared to 30.4% during the third quarter of
1996. This increase was primarily due to a higher loss ratio on
voluntary business, as well as adverse loss experience on business
assumed from C.A.R. For homeowners, the pure loss ratio decreased to
4.5% compared to 44.1% during the third quarter of 1996. This decrease
was due to extremely favorable weather conditions during the third
quarter of 1997 as compared to normal weather conditions experienced
during the same period in 1996, coupled with favorable development in
the homeowners liability area.
Policy acquisition costs increased by 2.6% during the third quarter of
1997 compared to the same period in 1996. As a percentage of net
premiums written, underwriting expenses for the insurance companies (on
a statutory basis) were 28.5% during the third quarter of 1997 as
compared to 27.9% for the same period in 1996. On a consolidated
financial statement basis, policy acquisition costs were impacted by a
$3.4 million stock appreciation rights expense recorded during the third
quarter of 1997 versus $0.6 million in 1996. This expense was primarily
due to the increase in the average three month share price of the
Company's common stock of $5.00 per share during the third quarter of
1997. The increase in policy acquisition costs is also attributable to
higher computer services expense related to upgrading the Company's
computer systems.
The Company's effective tax rate was 29.7% for the third quarter of 1997
as compared to 19.2% for the same period in 1996. The increase was
primarily the result of the net realized investment gains mentioned
previously. In both years the effective tax rate was lower than the
statutory rate of 35.0% primarily due to tax-exempt interest income and
the corporate dividends received deduction.
Net earnings increased $13,576,000 during the third quarter of 1997 as
compared to the same period in 1996, as a result of the factors
mentioned above.
- - 9 -
<PAGE>
The Commerce Group, Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS
Nine months ended September 30, 1997 compared to
nine months ended September 30, 1996
Direct premiums written during the first nine months of 1997, increased
$29,173,000 or 5.0% to $612,554,000, as compared to the same period in
1996. The increase was primarily attributable to a $31,259,000 or 6.5%
increase in direct premiums written for Massachusetts personal
automobile insurance and an increase of $235,000 which was derived from
Western Pioneer. The increase in Massachusetts personal automobile
direct premiums written resulted primarily from an 8.5% increase in the
number of personal automobile exposures written, offset by a 1.8%
decrease in the average personal automobile premium per exposure (each
vehicle insured). The increase in the volume of personal automobile
exposures was primarily the result of the Company's affinity group
marketing programs. The decrease in the average personal automobile
premium per exposure was primarily due to the 1997 state mandated
average rate decrease of 6.2%. The 1.8% decrease for the Company is
significantly less than the mandated 6.2% rate decrease due to the fact
that the rate decision does not anticipate purchases of new automobiles
in the year to which the rate decision applies and that the Company's
mix of personal auto business differs from that of the industry. In
March 1997, the Company was granted approval to offer its customers safe
driver deviations of 10%. Companies must re-apply annually, after the
state sets rates, to offer safe driver deviations. For drivers who
qualify, both group discount and safe driver deviations can be combined
for up to a 19% reduction from state mandated rates. Direct premiums
written for commercial automobile insurance decreased by $ 2,901,000, or
9.2%, due primarily to a 7.8% decrease in the number of policies
written, as well as a 1.4% decrease in the average commercial automobile
premium per policy. Direct premiums written for homeowners insurance
increased by $790,000 or 2.0% due primarily to a 3.7% increase in the
number of policies written, offset by a slight decrease in the average
premium per policy. Direct premiums written for all other lines
decreased $210,000, or 1.7%.
Net premiums written during the first nine months of 1997 increased
$23,790,000 or 4.2% as compared to 1996. The increase in net premiums
written was primarily due to changes in direct premiums written as
described above as well as to the effects of reinsurance. Written
premiums assumed from C.A.R. decreased $15,638,000 or 21.1% and written
premiums ceded to C.A.R. decreased $10,339,000 or 15.7% as compared to
the first nine months of 1996, as a result of changes in the industry's
and the Company's utilization of C.A.R. reinsurance.
- - 10 -
<PAGE>
The Commerce Group, Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued)
Earned premiums increased $52,898,000, or 10.8% during the first nine
months of 1997 as compared to the same period in 1996. The increase in
earned premiums was primarily due to the increased direct premiums
written from affinity group marketing programs during the latter part of
1996 and the first nine months of 1997, and also as a result of changes
in direct premiums written and net premiums written as described above.
Earned premiums assumed from C.A.R. decreased $6,930,000, or 10.1% and
earned premiums ceded to C.A.R. decreased $8,627,000, or 14.2% during
the first nine months of 1997 compared to the same period in 1996.
Direct premiums earned for Massachusetts personal automobile insurance
increased $50,312,000, or 12.4% compared to the same period in 1996.
Commercial automobile direct premiums earned decreased $3,123,000, or
9.8%, and homeowners direct premiums earned increased $1,237,000, or
3.3%, as compared to the first nine months of 1996. Earned premiums
attributable to Western Pioneer increased $284,000 to $21,109,000 for
the nine months ended September 30, 1997, compared to $20,825,000 for
the same period in 1996.
Net investment income increased $1,080,000 or 1.9%, compared to the
first nine months of 1996 versus a 4.2% increase in average invested
assets for the period. This modest increase was primarily the result of
the previously announced change in the Company's investment strategy.
The Company is seeking greater flexibility to provide for enhanced
potential future capital appreciation. The Company's strategy is to
acquire equity investments, including potential acquisitions, which
forego current investment yield in favor of potential higher yielding
capital appreciation in the future. As a result, the Company is
carrying approximately $281 million in additional cash and short-term
investments which yield lower returns than its current long-term
investment portfolio.
Premium finance fees decreased $2,748,000, or 34.3% during the first
nine months of 1997 as compared to the same period in 1996. The
decrease was primarily attributable to a change from interest based
finance fees to a "late payment" fee based system for personal
automobile policies with effective dates of January 1, 1996 and forward.
This change, which was announced in late 1995, was in response to
competitive forces that occurred in the Massachusetts marketplace. In
October, 1997 the Company received Massachusetts Division of Insurance
approval to institute a $3.00 billing statement fee for new and renewal
policies with effective dates beginning in 1998.
Net realized investment gains totaled $22,915,000 during the first nine
months of 1997 as compared to net realized investment losses of
$2,984,000 for the same period in 1996. A significant portion of the
net realized investment gains were the result of a merger of a major New
England financial corporation and it's property and casualty subsidiary
during the third quarter of 1997. The merger election and exchange of
stock resulted in a net realized gains of $15,178,000. Subsequent post
merger sales of this corporation's common stock resulted in additional
net realized investment gains of $3,790,000. The remainder of the net
realized gains for the first nine months of 1997 were primarily the
result of sales of non-taxable bonds, common and preferred stocks offset
by minimal realized investment losses in the sales of GNMA's.
- - 11 -
<PAGE>
The Commerce Group, Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued)
The loss ratio (on a statutory basis) decreased to 72.7% for the first
nine months of 1997 as compared to 74.0% for the same period in 1996.
The pure loss ratio on personal automobile decreased slightly to 64.3%
compared to 65.3% in 1996. The commercial automobile pure loss ratio
increased slightly to 50.6% compared to 49.4% during the first nine
months of 1996. For homeowners, the pure loss ratio decreased to 42.3%
compared to 102.2% during the first nine months of 1996. This decrease
was due to more normal weather during the first nine months of 1997 as
compared to severe weather during the first half of 1996, coupled with
favorable development in the homeowners liability area.
Policy acquisition costs increased by 9.0% during the first nine months
of 1997 compared to the same period in 1996. The increase in policy
acquisition costs was primarily due to higher volumes of business
written during the first nine months of 1997 and fewer acquisition costs
being deferred as compared to 1996. This was due to a higher rate of
growth in 1996 primarily from affinity groups. As a percentage of net
premiums written, underwriting expenses for the insurance companies (on
a statutory basis) were 25.0% during the first nine months as compared
to 25.6% for the same period in 1996. On a consolidated financial
statement basis, the decrease in this percentage was primarily
attributable to lower commission rates and were also partially offset by
higher stock appreciation rights expense of $4.8 million in the first
nine months of 1997 versus $1.0 million for the same period in 1996.
This expense was the direct result of the increase in the average three
month share price of the Company's common stock during 1997 versus 1996.
The increase to policy acquisition costs is also impacted by higher
expenses for computer services related to upgrading the Company's
computer systems.
The Company's effective tax rate was 24.7% for the first nine months of
1997 as compared to 18.0% for the same period in 1996. The increase was
primarily the result of the net realized investment gains mentioned
previously. In both years the effective tax rate was lower than the
statutory rate of 35.0% primarily due to tax-exempt interest income and
the corporate dividends received deduction.
Net earnings increased $19,327,000 during the first nine months of 1997
as compared to the same period in 1996, as a result of the factors
mentioned above.
- - 12 -
<PAGE>
The Commerce Group, Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued)
Liquidity and Capital Resources
The focus of the discussion of liquidity and capital resources is the
Consolidated Balance Sheets on page 3 and the Consolidated Statements of
Cash Flows on page 5. Stockholders' equity increased by $41,845,000 or
7.1%, during the first nine months of 1997. This increase was the
result of net earnings of $71,621,000, offset by the decrease in net
unrealized gains, net of income taxes, on fixed maturities and equity
securities of $1,536,000, dividends paid to stockholders of $27,753,000,
and treasury stock purchased of $487,000. Total assets at September 30,
1997 increased by $98,741,000 or 5.9%, to $1,775,540,000 as compared to
total assets of $1,676,799,000 at December 31, 1996. The majority of
this growth was reflected in an increase in invested assets of
$48,579,000 or 4.2%, $45,372,000 or 28.7% in premiums receivable,
$11,226,000, or 13.5% in deferred policy acquisition costs, offset by a
decrease in all other assets of $6,436,000. The increase in premiums
receivable was primarily attributable to the seasonality of the policy
effective dates of the Company's business, as well as the increase in
personal automobile business and the elimination of premium finance
fees. The increase in deferred acquisition costs was attributable to
the increase in personal automobile business and factors described
previously.
As of September 30, 1997, the market value of the Company's fixed
maturity portfolio exceeded its book value by $19,592,000 ($12,735,000
after taxes, or $0.35 per share). At December 31, 1996 the market value
of the Company's fixed maturity portfolio exceeded its book value by
$16,191,000 ($10,524,000 after taxes, or $0.29 per share). The
increase in unrealized gain on fixed maturities resulted primarily from
the prevailing conditions in the bond market caused by the improved
interest-rate environment and to a change in the Company's investment
strategy. The Company's strategy is to acquire equity investments,
including potential acquisitions, which forego current investment yield
in favor of future potentially higher yielding capital appreciation. As
a result, the Company is carrying approximately $281 million in cash and
short-term investments which yield lower returns than its current long-
term investment portfolio.
The Company's liabilities totalled $1,146,656,000, at September 30, 1997
as compared to $1,089,760,000 at December 31, 1996. The $56,896,000 or
5.2% increase was comprised of an increase of $149,000 in loss and loss
adjustment expenses, an increase of $51,049,000 or 13.9% in unearned
premiums and a $5,698,000 or 9.7% increase in all other liabilities.
The change in unearned premiums primarily resulted from the increase in
personal automobile direct premiums written, as previously mentioned.
- - 13 -
<PAGE>
The Commerce Group, Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued)
The primary sources of the Company's liquidity are funds generated from
insurance premiums, net investment income and maturing and sales of
investments as reflected in the Consolidated Statements of Cash Flows on
page 5. In response to the changing competitive forces in the
marketplace, the Company eliminated interest based premium finance fees
for both new and renewal personal automobile insurance policies with
effective dates on or after January 1, 1996 and replaced it with a "late
payment" fee based system. The impact of this change through the third
quarter of 1997 has resulted in a 34.3% decrease in combined premium
finance fees and late payment fees as compared to the same period in
1996. The elimination of interest based fees contributed to the
increase in premium receivables. In October 1997, the Company received
Massachusetts Division of Insurance approval to institute a $3.00
billing statement fee for policies effective in 1998 for customers who
pay their premium in installments versus in total at the beginning of
the policy term.
The Company's operating activities provided net cash of $62,806,000 in
the first nine months of 1997 as compared to $91,099,000 in 1996. These
cash flows were primarily impacted by the Company's premium writings
attributable to the affinity group marketing programs mentioned
previously and higher loss payments. Premiums collected increased
approximately 6.4% during the first nine months which were more than
offset by an increase in total loss and loss adjustment expense payments
on the direct personal automobile lines of approximately 20.7%. Net
loss payments in the direct personal automobile lines of business were
approximately 23.9% or $57,000,000 higher and were offset by a decrease
in payments for other than automobile lines of business of approximately
$13,700,000 compared to the prior year. The decrease in other than
automobile loss payments was primarily the result of more normal weather
in 1997 versus the severe weather experienced in 1996. The increase in
automobile loss payments was attributable primarily to two factors:
increased payments for collision coverages and increased payments for
bodily injury claims. Bodily injury payments were higher primarily due
to increased business writings coupled with initiatives in the claims
department to accelerate the claims settlement process in an effort to
reduce the overall cost of bodily injury claims in the long run as well
as to reduce the overall number of open bodily injury claims.
The net cash flows used in investing activities were primarily the
result of purchases of fixed maturities, equity securities and the net
increase in short-term investments offset by proceeds from the sale and
maturity of fixed maturities and equity securities. Investing
activities were funded by accumulated cash and cash provided by
operating activities during 1997 and 1996.
Cash flows used in financing activities totaled $28,240,000 during the
first nine months of 1997 compared to $34,198,000 during the same period
in 1996. This is due to dividends paid to stockholders of $27,753,000
in 1997 ($20,357,000 in 1996) and the purchase of Treasury Stock under
the Company's stock buyback program of 20,000 shares for $487,000 during
the first nine months of 1997 compared to 673,915 shares for $13,841,000
during the same period in 1996.
- - 14 -
<PAGE>
The Commerce Group, Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued)
The Company's funds are generally invested in securities with maturities
intended to provide adequate funds to pay claims without the forced sale
of investments. At September 30, 1997, the Company held cash and cash
equivalents of approximately $81,293,000. These funds, coupled with
short-term investments of $199,582,000, provide sufficient liquidity for
the payment of claims and other short-term cash needs. The Company also
relies upon dividends from its subsidiaries for its cash requirements.
In February 1997, the Company entered into an agreement to invest short-
term funds through Salomon Brothers Asset Management, Inc. The Company
intends to purchase short-term securities via this arrangement until
such time that the Company believes longer term investments are
appropriate. In April 1997, the Company began purchasing Commercial
Paper via this arrangement. At September 30, 1997, the Company held
$199,582,000 in Commercial Paper. As a general rule the Company limits
its exposure in any single issue to not more than $5,000,000.
Periodically, sales have been made from the Company's fixed maturity
investment portfolio to actively manage portfolio risks, including
credit-related concerns and matching of asset and liability cash flows,
to optimize tax planning and to realize gains. This practice will
continue in the future.
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 1.54 to 1.00 and 1.61 to 1.00
for the twelve months ended September 30, 1997 and 1996, respectively.
The Company has established the Team 2000 and Century Change projects
which are corporate-wide efforts to prepare the Company's systems for
the next millennium. Team 2000 and Century Change will particularly
address the Company's computer systems and applications that support the
Company's primary insurance line: private passenger automobile in the
state of Massachusetts. These projects involve internal staff costs as
well as consulting expenses to prepare the systems for the year 2000.
Administration, programming, testing and implementation of system
applications related to Century Change are expected to cost $5,000,000
to $7,000,000 over the next 24 months. The majority of the Century
Change effort will represent a redeployment of existing internal
technical resources. Upon completion of the Century Change project, the
Company expects to focus its efforts on the Team 2000 project which will
eventually replace the Company's existing internal computer systems for
Massachusetts business utilizing software purchased from Policy
Management Services Corporation, Inc. ("PMSC"). Costs to date for the
Team 2000 effort have been approximately $24,000,000 ($12,500,000 of
which relate to 1997). Total Team 2000 project costs over the next 5 to
7 years have been estimated at approximately $60,000,000 including funds
expended to date. This amount includes the purchase of a main frame
computer, license fees and the costs associated with programming,
implementation and training.
- - 15 -
<PAGE>
The Commerce Group, Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued)
Recent Significant Events
In February, 1997 the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards No. 128, "Earnings
Per Share" ("FAS 128"). FAS 128 is effective for financial statements
issued for periods ending after December 15, 1997, (including interim
periods) with earlier application not permitted. The statement
specifies the computation, presentation and disclosure requirements for
earnings per share. The Company believes that the adoption of this
statement will not have a material impact on the Consolidated Financial
Statements.
In June 1997, the FASB issued Statement of Financial Accounting
Standards No. 131, "Disclosures about Segments of an Enterprise and
Related Information" ("FAS 131"), effective for years beginning after
December 15, 1997. FAS 131 requires that a public company report
financial and descriptive information about its reportable operating
segments pursuant to criteria that differ from current accounting
practice. The financial information to be reported includes segment
profit or loss, certain revenue and expense items and segment assets and
reconciliations to corresponding amounts in the general purpose
financial statements. The Company believes that the adoption of this
statement will not have a material impact on the Consolidated Financial
Statements.
In October 1997, the Company received Massachusetts Division of
Insurance approval to institute a $3.00 billing statement fee for
policies effective in 1998 for customers who pay their premium in
installments versus in total at the beginning of the policy term.
An application for a license in the state of Maine is pending. In late
July, the Company was notified that it was granted a license in the
state of New Hampshire. Prior to this, the Company was granted licenses
in the states of Connecticut, Rhode Island and Vermont. The Company is
currently gearing its internal operating systems to accommodate multiple
state operation. To address this undertaking, the Company in 1996,
entered into an agreement with PMSC. The Company purchased PMSC's
software and began the implementation process which will allow for the
development of internal operating systems thus enabling the Company to
process policies in the aforementioned five New England states. The
Company expects these systems to be available during the first quarter
of 1998. Therefore the Company does not expect to begin writing
insurance in any of those states until that time.
The Company continues to monitor acquisition opportunities consistent
with a long term growth strategy to expand outside Massachusetts through
acquisitions of smaller automobile insurance companies that are in need
of capital, have established management in place and present significant
growth opportunities in their market areas.
- - 16 -
<PAGE>
The Commerce Group, Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued)
The Company began a stock buyback program during the second quarter of
1995. The program, which was approved by the Board of Directors on May
19, 1995, authorizes the Company to purchase up to 3 million shares of
Treasury Stock. Since the inception of the program through March 31,
1997, the Company has purchased 1,957,348 shares of Treasury Stock, of
which 20,000 shares were purchased during the first nine months of 1997.
Additionally, the Company's Employee Stock Ownership Plan has purchased
more than 556,000 shares in open market transactions since the buyback
program was announced, of which 132,900 shares were purchased during the
first nine months of 1997 for $3,323,087.
On September 19, 1997, the Company paid a quarterly dividend of $0.26 to
stockholders of record as of September 5, 1997. The Company increased
its quarterly dividend to stockholders from $0.25 to $0.26 during the
second quarter of 1997.
Effects of Inflation and Recession
The Company generally is unable to recover the costs of inflation in its
personal automobile insurance line since the premiums it charges are
subject to state regulation. The premium rates charged by the Company
for Massachusetts personal automobile insurance are adjusted by the
Commissioner only at annual intervals. Such annual adjustments in
Massachusetts premium rates may lag behind related cost increases.
Economic recessions will also have an impact upon the Company, primarily
through the policyholder's election to decrease non-compulsory coverages
afforded by the policy and decreased driving, each of which tends to
decrease claims.
To the extent inflation and economic recession influence yields on
investments, the Company is also affected. As each of these
environments affect current market rates of return, previously committed
investments may rise or decline in value depending on the type and
maturity of investment.
Inflation and recession must also be considered by the Company in the
creation and review of loss and LAE reserves since portions of these
reserves are expected to be paid over extended periods of time. The
anticipated effect of economic conditions is implicitly considered when
estimating liabilities for losses and LAE. The importance of
continually adjusting reserves is even more pronounced in periods of
changing economic circumstances.
- - 17 -
<PAGE>
The Commerce Group, Inc.
PART II - OTHER INFORmation
Item 4. Submission of Matters to a Vote of Security Holders
EXHIBIT A
THE COMMERCE GROUP, INC.
1994 MANAGEMENT INCENTIVE PLAN
(AS AMENDED AT THE MAY 30, 1997
BOARD OF DIRECTOR'S MEETING
OF THE COMMERCE GROUP, INC.)
Section 1. Purpose
The purpose of the 1994 Management Incentive Plan (the "Plan") of
The Commerce Group, Inc. (the "Company") is to enable the Company and
its subsidiaries to attract, retain and motivate their employees and
other persons providing services to them and to enable such persons to
participate in the long-term growth of the Company by increasing the
motivation of such persons to strive toward enhancing the Company's
growth and success.
Section 2. Definitions
As used in the Plan:
"Act" means the Securities Exchange Act of 1934, as amended.
"Award" means any Option, Stock Appreciation Right, Book Value
Award, Performance Stock Unit, Restricted Stock or Stock Unit awarded
under the Plan.
"Board" means the Board of Directors of the Company.
"Book Value" means the book value of the Company determined in
accordance with generally accepted accounting principles consistently
applied, provided that the Committee in its sole discretion may include
in Book Value for the purposes of the Plan the amount of any dividends
paid on the Common Stock during the Performance Cycle. In the event of
any dispute as to Book Value, the matter shall be referred to the
Company's independent pubic accountants whose determination shall be
final and binding.
"Book Value Award" means an award to a Participant under Section 8
hereof.
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<PAGE>
The Commerce Group, Inc.
Item 4. Submission of Matters to a Vote of Security Holders
- CONTINUED
"Closing Price" means the closing price of a share of Common Stock
on the New York Stock Exchange or, if not listed on such exchange, on
any other national exchange on which the Common Stock is listed or on
NASDAQ.
"Code" means the Internal Revenue Code of 1986, as amended from
time to time.
"Committee" means the Compensation Committee of the Board (or a
Subcommittee thereof), which shall consist of two or more directors,
each of whom shall be a non-employee director within the meaning of Rule
16b-3 under the Act and an outside director within the meaning of
Section 162(m) of the Code, including any regulations (final, temporary
or, in lieu thereof, proposed) promulgated thereunder.
"Company" means The Commerce Group, Inc., and any present or future
subsidiary corporation (as defined in Section 424 of the Code) or any
successor to such corporations.
"Common Stock" or "Stock" means the common stock of the Company.
"Fair Market Value" means, with respect to Common Stock or any
other property, the fair market value as determined by the Committee in
good faith or in the manner established by the Committee from time to
time.
"Incentive Stock Option" means an option to purchase shares of
Common Stock awarded to a Participant under the Plan which is intended
to meet the requirements of Section 422 of the Code or any successor
provision.
"Non-Qualified Stock Option" means an option to purchase shares of
Common Stock awarded to a Participant under the Plan which is not
intended to be an Incentive Stock Option.
"Option" means an Incentive Stock Option or a Non-Qualified Stock
Option.
"Participant" means a person selected by the Committee to receive
an Award under the Plan.
"Performance Cycle" or "Cycle" means the period of time selected by
the Committee during which performance of Book Value is measured for the
purpose of determining the extent to which an Award has been earned, the
value of such Award or both.
"Performance Stock Unit" means shares of Common Stock awarded to a
Participant under Section 9 hereof.
- - 19 -
<PAGE>
The Commerce Group, Inc.
Item 4. Submission of Matters to a Vote of Security Holders
- CONTINUED
"Restricted Period" means the period of time selected by the Committee
during which an award of Restricted Stock may be forfeited to the
Company.
"Restricted Stock" means shares of Common Stock awarded to a
Participant under Section 10 hereof which are subject to forfeiture.
"Stock Appreciation Right" or "SAR" means a right awarded to a
Participant under Section 7 hereof.
"Stock Unit" or "Unit" means a share of Common Stock or a unit that
is valued in whole or in part by reference to, or otherwise based on,
the Book Value, Fair Market Value or other value of a share of Common
Stock awarded to a Participant under the Plan.
Section 3. Administration
(a) The Plan shall be administered by the Committee. Among other
things, the Committee shall have the authority, subject to a similar
right in the Board and to the terms of the Plan, to grant Awards, to
determine the individuals to whom and the time or times at which Awards
may be granted and to determine the terms and conditions of any Award
granted hereunder.
(b) Subject to the provisions of Section 12(a) hereof, the
Committee shall have authority to adopt, alter and repeal such
administrative rules, guidelines and practices governing the operation
of the Plan as it shall from time to time consider advisable, to
interpret the provisions of the Plan and any Award, and to decide all
disputes arising in connection with the Plan. The Committee's decisions
and interpretations shall be final and binding. Any action of the
Committee with respect to the administration of the Plan shall be taken
pursuant to a majority vote or by the unanimous written consent of its
members.
(c) Section deleted.
Section 4. Eligibility
All directors, officers and other senior management employees of the
Company shall be eligible to participate in the Plan.
- - 20 -
<PAGE>
The Commerce Group, Inc.
Item 4. Submission of Matters to a Vote of Security Holders
- CONTINUED
Section 5. Stock Available for Awards
(a) Awards may be made under the Plan for up to 2,500,000 shares of
Common Stock, provided, however, that not more than 500,000 shares of
Common Stock and Units, in the aggregate, may be awarded to any
Participant during a calendar year. Except as otherwise provided in
this section, if any Award in respect of shares of Common Stock expires
or is terminated before exercise or is forfeited for any reason, without
a payment in the form of Common Stock being made to the Participant, the
shares of Common Stock subject to such Award, to the extent of such
expiration, termination or forfeiture, shall again be available for
award under the Plan, provided, however, that such shares would continue
to be included for purposes of the 500,000 share and Unit limit per
Participant per year. Notwithstanding the immediately preceding
sentence, no shares subject to Awards that have expired, terminated or
been forfeited will be available for award under the Plan if such
shares are still deemed to be outstanding for purposes of Rule 16b-3
under the Act. Shares of Common Stock issued under the Plan may
consist in whole or in part of authorized but unissued shares or
treasury shares.
(b) In the event that the Committee determines in its sole
discretion that any stock dividend, extraordinary cash dividend,
creation of a class of equity securities, recapitalization,
reclassification, reorganization, merger, consolidation, split-up, spin-
off, combination, exchange of shares, warrants or rights offering to
purchase Common Stock at a price substantially below fair market value,
or other similar transaction affects the Common Stock such that an
adjustment is required in order to preserve the benefits or potential
benefits intended to be made available under the Plan to Participants,
the Committee shall have the right to adjust equitably any or all of (i)
the number and kind of shares of stock of securities in respect of which
Awards may be made under the Plan to Participants, (ii) the number and
kind of shares subject to outstanding Awards held by Participants, and
(iii) the award, exercise or conversion price with respect to any of the
foregoing held by Participants, and if considered appropriate, the
Committee may make provision for a cash payment with respect to an
outstanding Award held by a Participant, provided that the number of
shares subject to any Award shall always be a whole number.
- - 21 -
<PAGE>
The Commerce Group, Inc.
Item 4. Submission of Matters to a Vote of Security Holders
- CONTINUED
Section 6. Options
(a) Subject to the provisions of the Plan, the Committee may award
Incentive Stock Options and Non-Qualified Stock Options and determine
the number of shares to be covered by each Option, the option price
therefor, the term of the Option, and the other conditions and
limitations applicable to the exercise of the Option, The terms and
conditions of Incentive Stock Options shall be subject to and comply
with Section 422 of the Code, or any successor provision, and any
regulations thereunder. Anything in the Plan to the contrary
notwithstanding, no term of the Plan relating to Incentive Stock Options
shall be interpreted, amended or altered, nor shall any discretion or
authority granted to the Committee under the Plan be so exercised, so as
to disqualify the Plan or, without the consent of the optionee, any
Incentive Stock Option granted under the Plan, under Section 422 of the
Code.
(b) The option price per share of Common Stock purchasable under an
Option shall not be less than 100% of the Fair Market Value of the
Common Stock on the date of award but in no event less than the par
value of the Common Stock. If the Participant owns or is deemed to own
(by reason of the attribution rules applicable under Section 424(d) of
the Code) more than 10% of the combined voting power of all classes of
stock of the Company or any subsidiary or parent corporation of the
Company and an Incentive Stock Option is granted to such Participant,
the option price shall be not less than 110% of Fair Market Value of the
Common Stock on the date of award.
(c) No Option shall be exercisable more than ten years after the
date the Option is awarded. If a Participant owns or is deemed to own
(by reason of the attribution rules of Section 424(d) of the Code) more
than 10% of the total combined voting power of all classes of stock of
the Company or any subsidiary or parent corporation of the Company and
an Incentive Stock Option is awarded to such Participant, such Option
shall not be exercisable after the expiration of five years from the
date of award.
(d) No shares shall be delivered pursuant to any exercise of an
Option until payment in full of the option price therefor is received by
the Company. Such payment may be made in whole or in part in cash or by
certified or bank check or, to the extent permitted by the Committee at
or after the award of the Option, by delivery of a note or shares of
Common Stock owned by the Participant, valued at their Fair Market Value
on the date of delivery, or such other lawful consideration as the
Committee may determine.
- - 22 -
<PAGE>
The Commerce Group, Inc.
Item 4. Submission of Matters to a Vote of Security Holders
- CONTINUED
(e) No Option shall be transferable by the Participant otherwise
than by will or by the laws of descent and distribution, and all Options
shall be exercisable during the Participant's lifetime only by the
Participant. A Participant shall notify the Committee in the event that
he or she disposes of Common Stock acquired upon exercise of an
Incentive Stock Option within the two-year period following the date the
Incentive Stock Option was granted or within the one-year period
following the date he or she received Common Stock upon the exercise of
an Incentive Stock Option.
(f) The Committee may at any time accelerate the exercisability of
all or any portion of any Option.
Section 7. Stock Appreciation Rights
(a) A Stock Appreciation Right (or "SAR") is an Award entitling the
Participant to receive an amount in cash or shares of Common Stock or a
combination thereof having a value equal to (or if the Committee shall
so determine at time of grant, less than) the excess of the Fair Market
Value of a share of Common Stock on the date of exercise over the Fair
Market Value of a share of Common Stock on the date of grant (or over
the option exercise price, if the Stock Appreciation Right was granted
in tandem with an Option) multiplied by the number of shares with
respect to which the Stock Appreciation Right shall have been exercised.
(b) Subject to the provisions of the Plan, the Committee may award
SARs in tandem with an Option (at or after the award of the Option), or
alone and unrelated to an Option, and determine in its sole discretion
the terms and conditions applicable thereto, including the form of
payment, SARs granted in tandem with an Option shall terminate to the
extent that the related Option is exercised, and the related Option
shall terminate to the extent that the tandem SARs are exercised.
Subject to this Section 7(b) and to such rules as the Committee may, in
its discretion and for any reason whatsoever, impose, an SAR granted in
connection with an Option will be excercisable at such time or times,
and only to the extent, that a related Option is exercisable, and shall
not be transferable except to the extent that such related Option may be
transferable.
(c) The Committee may impose such additional conditions or
limitations on the exercise of an SAR as it may deem necessary or
desirable to secure for Participants the benefits of Rule 16b-3
promulgated under Section 16(b) of the Act, or any successor provision
in effect at the time of grant or exercise of an SAR.
- - 23 -
<PAGE>
The Commerce Group, Inc.
Item 4. Submission of Matters to a Vote of Security Holders
- CONTINUED
(d) An SAR related to an Option which can be exercised only during
limited periods following a change in control of the Company may entitle
the Participant to receive an amount based upon the highest price paid
or offered for Common Stock in any transaction relating to the change in
control or paid during the thirty-day period immediately preceding the
occurrence of the change in control in any transaction reported in the
stock market in which the Common Stock is normally traded.
(e) Notwithstanding that an Option at the time of exercise shall
not be accompanied by a related Stock Appreciation Right, if the market
price of the shares subject to such Option exceeds the exercise price of
such Option at the time of its exercise, the Committee may, in its
discretion, cancel such Option, in which event the Company shall pay to
the person exercising such Option an amount equal to the difference
between the Fair Market Value of the Common Stock to have been purchased
pursuant to such exercise of such Option (determined on the date the
Option is canceled) and the aggregate consideration to have been paid by
such person upon such exercise. Such payment shall be by check, bank
draft or in Common Stock having a Fair Market Value (determined on the
date the payment is to be made) equal to the amount of such payments or
any combination thereof, as determined by the Committee. The Committee
may exercise its discretion under the first sentence of this paragraph
(e) only in the event of a written request of the person exercising the
option, which request shall not be binding on the Committee.
Section 8. Book Value Awards
(a) A Book Value Award is an Award entitling the Participant to
receive an amount in cash or shares of Common Stock or a combination
thereof having a value equal to (or if the Committee shall so determine
at time of grant, less than) the excess of the Book Value of a share of
Common Stock on a date selected by the Committee over the Book Value of
a share of Common Stock on a previous date selected by the Committee
multiplied by the number of Book Value Award Units granted.
(b) There may be more than one Performance Cycle in existence at
any one time for Book Value Awards, and the duration of Performance
Cycles may differ from each other.
(c) During any Performance Cycle, the Committee may adjust the
performance goals for such Performance Cycle as it deems equitable in
recognition of unusual or non-recurring events affecting the Company,
changes in applicable tax laws or accounting principles, or such other
factors as the Committee may determine, provided, however, that the
Committee may specify at the time an Award is made that the performance
goals applicable thereto may not be reduced during the term of the
Award.
- - 24 -
<PAGE>
The Commerce Group, Inc.
Item 4. Submission of Matters to a Vote of Security Holders
- CONTINUED
(d) As soon as practicable after the end of a Performance Cycle,
the Committee shall determine the value of the compensation to which the
Participant is entitled on the basis of the terms of the Book Value
Award. The payment values of Book Value Awards shall be distributed to
the Participant as soon as practicable thereafter. The Committee shall
determine, at or after the time of grant of Book Value Awards, whether
payment values will be settled in whole or in part in cash or other
property, including Common Stock or Awards.
Section 9. Performance Stock Units
(a) A Performance Stock Unit is an Award entitling the Participant
to acquire shares of Common Stock upon the attainment of specified
performance goals. Subject to the provisions of the Plan, the Committee
may award Performance Stock Units and determine the performance goals
applicable to each such Award, the number of such shares for each
Performance Cycle, the duration of each Performance Cycle and all other
limitations and conditions applicable to the awarded Performance Stock
Units. There may be more than one Performance Cycle in existence at any
one time, and the duration of Performance Cycles may differ from each
other. The payment value of each Performance Stock Unit shall be equal
to the Fair Market Value of one share of Common Stock on the date the
Performance Stock Unit is earned or, in the desecration of the
Committee, on the date the Committee determines that the Performance
Stock Unit has been earned.
(b) During any Performance Cycle, the Committee may adjust the
Performance goals for such Performance Cycle as it deems equitable in
recognition of unusual or non-recurring events affecting the Company,
changes in applicable tax laws or accounting principles, or such other
factors as the Committee may determine, provided, however, that the
Committee may specify at the time an Award is made that the performance
goals applicable thereto may not be reduced during the term of the
Award.
(c) As soon as practicable after the end of a Performance Cycle,
the Committee shall determine the number of Performance Stock Units
which have been earned by the Participant on the basis of performance in
relation to the established performance goals. The payment values of
earned Performance Stock Units shall be distributed to the Participant
as soon as practicable thereafter. The Committee shall determine, at or
after the time of award, whether payment values will be settled in whole
or in part in cash or other property, including Common Stock or Awards.
- - 25 -
<PAGE>
The Commerce Group, Inc.
Item 4. Submission of Matters to a Vote of Security Holders
- CONTINUED
Section 10. Restricted Stock
(a) A Restricted Stock Award is an Award entitling the Participant
to acquire shares of Common Stock for a purchase price equal to or
greater than their par value, subject to such conditions and
restrictions, including, without limitation, a Company right during a
specified period or periods to repurchase such shares at their original
purchase price (or to require forfeiture of such shares) upon the
Participant's termination of employment, as the Committee shall
determine.
(b) Subject to the provisions of the Plan, the Committee may award
shares of Restricted Stock and determine the purchase price (if any)
therefor, the duration of the Restricted Period during which, and the
conditions under which, the shares may be forfeited to or repurchased by
the Company and the other terms and conditions of such Awards. Shares
of Restricted Stock may be issued for no cash consideration or such
minimum consideration as may be required by applicable law.
(c) Shares of Restricted Stock may not be sold, assigned,
transferred, pledged or otherwise encumbered, except as permitted by the
Committee, during the Restricted Period. Shares of Restricted Stock
shall be evidenced in such manner as the Committee may determine. Any
certificates issued in respect of shares of Restricted Stock shall be
registered in the name of the Participant and, unless otherwise
determined by the Committee, deposited by the Participant, together with
a stock power endorsed in blank, with the Company. At the expiration of
the Restricted Period, the Company shall deliver such certificates to
the Participant.
(d) A Participant shall have all the rights of a stockholder with
respect to the Restricted Stock including voting and dividend rights,
subject to restrictions on transferability and Company repurchase of
forfeiture rights described in this Section and subject to any other
conditions determined by the Committee and contained in the Award.
Section 11. Stock Units
(a) Subject to the provisions of the Plan, the Committee may award
Stock Units subject to such terms, restrictions, conditions, performance
criteria, vesting requirements and payment rules as the Committee shall
determine.
(b) Shares of Common Stock awarded in connection with a Stock Unit
shall be issued for no cash consideration or such minimum consideration
as may be required by applicable law.
- - 26 -
<PAGE>
The Commerce Group, Inc.
Item 4. Submission of Matters to a Vote of Security Holders
- CONTINUED
Section 12. General Provisions Applicable to Awards
(a) Notwithstanding any other provision of the Plan, in order to
qualify for the exemption provided by Rule 16b-3 under the Act, and any
successor provision, (i) any Common Stock or other equity security
offered under the Plan to a Participant subject to Section 16 of the Act
(a "Section 16 Participant") other than pursuant to an Option may not be
sold for six months after acquisition; any Common Stock or other equity
security acquired by a Section 16 Participant upon exercise of an Option
may not be sold for six months after the date of grant of the Option;
and any SAR granted to a Section 16 Participant may not be exercised for
six months after the date of grant; and (ii) any Option , SAR or other
similar right related to an equity security issued under the Plan shall
not be transferable other than by will or the laws of decent and
distribution. The Committee shall have no authority to take any action
if the authority to take such action, or the taking of such action,
would disqualify the Plan or any Award from the exemption provided by
Rule 16b-3 under the Act, and any successor provision.
(b) Each Award under the Plan shall be evidenced by a writing
delivered to the Participant specifying the terms and conditions thereof
and containing such other terms and conditions not inconsistent with the
provisions of the Plan as the Committee considers necessary or advisable
to achieve the purposes of the Plan or comply with applicable tax and
regulatory laws and accounting principles.
(c) Each Award may be made alone, in addition to or in relation to
any other Award. The terms of each Award need not be identical, and the
Committee need not treat Participants uniformly. Except as otherwise
provided by the Plan or a particular Award, any determination with
respect to an Award may be made by the Committee at the time of award or
at any time thereafter.
(d) The Committee shall determine whether Awards to Participants
are settled in whole or in part in cash, Common Stock, other securities
of the Company, Awards or other property. The Committee may permit a
Participant to defer all or any portion of a payment under the Plan,
including the crediting of interest on deferred amounts denominated in
cash and dividend equivalents on amounts denominated in Common Stock.
(e) In the discretion of the Committee, any Award to a Participant
under the Plan may provide the Participant with (i) dividends or
dividend equivalents payable currently or deferred with or without
interest and (ii) cash payments in lieu of or in addition to an Award.
- - 27 -
<PAGE>
The Commerce Group, Inc.
Item 4. Submission of Matters to a Vote of Security Holders
- CONTINUED
(f) The Committee shall determine the effect on an Award of the
disability, death, retirement or other termination of employment of a
Participant and the extent to which, and the period during which, the
Participant's legal representative, guardian or designated beneficiary
may receive payment of an Award or exercise rights thereunder.
(g) In order to preserve the rights of a Participant under an Award
in the event of a change in control of the Company, the Committee in its
discretion may, at the time an Award is made or at any time thereafter,
take one or more of the following actions with respect to any such
change of control: (i) provide for the acceleration of any time period
relating to the exercise or realization of the Award,(ii) provide for
the purchase of the Award upon the Participant's request for an amount
of cash or other property that could have been received upon the
exercise or realization of the Award had the Award been currently
exercisable or payable, (iii) adjust the terms of the Award in a manner
determined by the Committee, (iv) cause the Award to be assumed, or new
rights substituted therefor, by another entity, or (v) make such other
provision as the Committee may consider equitable and in the best
interests of the Company.
(h) The Participant shall pay to the Company, or make provision
satisfactory to the Committee for payment of, any taxes required by law
to be withheld in respect of Awards under the Plan no later than the
date of the event creating the tax liability. In the Committee's
discretion, such tax obligations may be paid, in whole or in part, in
shares of Common Stock, including shares retained from the Award
creating the tax obligation, valued at their Fair Market Value on the
date of delivery, provided, however, that with respect to any Section 16
Participant, any such retention of Shares shall be made in compliance
with any applicable requirements of Rule 16b-3(e) or any successor Rule
under the Act. The Company may, to the extent permitted by law, deduct
any such tax obligations from any payment of any kind otherwise due to
the Participant.
(i) For purposes of the Plan, the following events shall not be
deemed a termination of employment of a Participant:
(i) a transfer to the employment of the Company from a subsidiary
or from the Company to a subsidiary, or from one subsidiary to another,
or
(ii) an approved leave of absence for military service or sickness,
or for any other purpose approved by the Company, if the Participant's
right to reemployment is guaranteed either by a statute or by contract
or under the policy pursuant to which the leave of absence was granted
or if the Committee otherwise so provides in writing.
- - 28 -
<PAGE>
The Commerce Group, Inc.
Item 4. Submission of Matters to a Vote of Security Holders
- CONTINUED
For purposes of the Plan, employees of a subsidiary of the Company shall
be deemed to have terminated their employment on the date on which such
subsidiary ceases to be a subsidiary of the Company.
(j) The Committee may amend, modify or terminate any outstanding
Award held by a Participant, including substituting therefor another
Award of the same or a different type, changing the date of exercise or
realization, converting an Incentive Stock Option to a Non-Qualified
Stock Option, and modifying or waiving the restrictions with respect to
any Restricted Stock, provided that the Participant's consent to such
action shall be required unless the Committee determines that the
action, taking into account any related action, would not materially and
adversely affect the Participant.
Section 13. Miscellaneous
(a) No person shall have any claim or right to be granted an Award,
and the grant of an Award shall not be construed as giving a Participant
the right to continued employment. The Company expressly reserves the
right at any time to dismiss a Participant free from any liability or
claim under the Plan, except as expressly provided in the applicable
Award.
(b) Nothing contained in the Plan shall prevent the Company from
adopting other or additional compensation arrangements for its
employees.
(c) Subject to the provisions of the applicable Award, no
Participant shall have any rights as a stockholder with respect to any
shares of Common Stock to be distributed under the Plan until he or she
becomes the holder thereof. A Participant to whom shares of Common
Stock are awarded shall be considered the holder of the Shares at the
time of the Award except as otherwise provided in the applicable Award.
(d) Subject to the approval of the stockholders of the Company, the
Plan shall be effective an March 18, 1994. Prior to such approval,
Awards may be made under the Plan expressly subject to such approval.
(e) The Board may amend, suspend or terminate the Plan or any
portion thereof at any time, provided, however, that no amendment shall
be made without stockholder approval if such approval is necessary to
comply with any applicable tax or regulatory requirement, including any
requirements for exemptive relief under Section 16(b) of the Act, or any
successor provision.
(f) Awards may not be made under the Plan after ten years from its
effective date, but then outstanding Awards may extend beyond such date.
- - 29 -
<PAGE>
The Commerce Group, Inc.
PART II - OTHER INFORmation
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Form 8-K - none filed during the third quarter of 1997.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
THE COMMERCE GROUP, INC.
RANDALL V. BECKER
Randall V. Becker
Treasurer and Chief Accounting Officer
- - 30 -
<PAGE>
The Commerce Group, Inc.
PART II - OTHER INFORmation
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Form 8-K - none filed during the third quarter of 1997.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
THE COMMERCE GROUP, INC.
Randall V. Becker
Treasurer and Chief Accounting Officer
- - 30 -
<PAGE>
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