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 March 31, 1999 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 May 1, 1999, the number of shares outstanding of the
registrant's common stock (excluding Treasury Shares) was
34,856,752
Page 1 of 24
<page
The Commerce Group, Inc.
Table of Contents
<TABLE>
<CAPTION>
Page No.
Part I - Financial Information
<S> <C>
Consolidated Balance Sheets at
March 31, 1999 (Unaudited) and December 31,
1998.................................................. 3
Consolidated Statements of Earnings for the
Three Months Ended March 31, 1999 and 1998
(Unaudited)........................................ 4
Consolidated Statements of Cash Flows for the
Three Months Ended March 31, 1999 and 1998
(Unaudited)........................................ 5
Consolidated Statements of Cash Flows - Reconciliation of Net Earnings to Net Cash
Provided by Operating Activities for the Three Months Ended March 31, 1999
and 1998
(Unaudited)......................................................................................
........... 6
Notes to Unaudited Consolidated Financial
Statements.................................................... 7
Management's Discussion and
Analysis........................................................................... 11
Part II - Other Information
Item 6
Exhibits and Reports on Form 8-
K............................................................................. 24
Signature
.................................................................................................
..................... 24
</TABLE>
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<page
THE COMMERCE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Thousands of Dollars)
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
(Unaudited)
ASSETS
<S>
<C> <C>
Investments:
Fixed maturities, at market (cost: $720,952 in 1999 and $600,482 in
1998)....................... $ 735,146 $ 619,267
Preferred stocks, at market (cost: $195,159 in 1999 and $200,270 in
1998)....................... 191,450 197,425
Common stocks, at market (cost: $283,161 in 1999 and $261,360 in
1998).......................... 280,503 283,961
Mortgage loans on real estate and collateral notes receivable (less allowance for possible
loan
losses of $2,225 in 1999 and $2,301 in
1998)................................................... 70,700 73,510
Cash and cash
equivalents........................................................................ 9,021
75,912
Other investments (cost: $9,627 in 1999 and $7,450 in
1998)..................................... 10,002 7,825
Total
investments............................................................................
1,296,822 1,257,900
Accrued investment
income.......................................................................... 15,234
13,662
Premiums receivable (less allowance for doubtful receivables of $1,450 in 1999 and
1998)........... 224,197 162,878
Deferred policy acquisition
costs.................................................................. 106,332 88,759
Property and equipment, net of accumulated
depreciation............................................ 35,636 35,854
Residual market receivable
Losses and loss adjustment
expenses.............................................................. 112,171 111,784
Unearned
premiums................................................................................
40,564 41,436
Due from
reinsurers................................................................................
48,224 36,687
Deferred income
taxes.............................................................................. 6,421
- -
Non compete
agreement..............................................................................
3,442 -
Other
assets.......................................................................................
8,599 7,023
Total
assets.................................................................................
$1,897,642 $1,755,983
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Losses and loss adjustment
expenses.............................................................. $ 668,420 $ 596,996
Unearned
premiums................................................................................
486,711 391,424
Current income
taxes............................................................................. 2,427
4,061
Deferred income
taxes............................................................................ -
3,769
Deferred
income..................................................................................
7,388 6,948
Contingent commissions
accrued................................................................... 28,617
22,067
Payable for securities
purchased................................................................. 503
62
Negative
goodwill................................................................................
11,965 -
Other liabilities and accrued
expenses........................................................... 29,755 24,871
Total
liabilities............................................................................
1,235,786 1,050,198
Minority
interest..................................................................................
2,940 -
Stockholders' equity
Preferred stock, authorized 5,000,000 shares at $1.00 par value; none issued in 1999 and
1998.... - -
Common stock, authorized 100,000,000 shares at $.50 par value;
issued and outstanding 38,000,000 shares in 1999 and
1998...................................... 19,000 19,000
Paid-in
capital..................................................................................
29,621 29,621
Net accumulated other comprehensive income, net of income taxes of $3,007 in 1999 and
$13,621 in
1998................................................................................. 5,584
25,295
Retained
earnings................................................................................
676,005 670,556
730,210
744,472
Treasury stock 3,143,248 shares in 1999 and 1,957,348 share in
1998............................. (71,294) (38,687)
Total stockholders'
equity................................................................... 658,916
705,785
Total liabilities and stockholders'
equity................................................... $1,897,642 $1,755,983
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
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<page
THE COMMERCE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
Three Months Ended March 31, 1999 and 1998
(Thousands of Dollars Except Share and Per Share Data)
(Unaudited)
<TABLE>
<CAPTION>
1999
1998
<S> <C>
<C>
Revenues
Direct premiums written......................................... $ 279,952
$ 248,303
Assumed premiums................................................ 22,677
26,494
Ceded premiums.................................................. (28,110)
(24,244)
Net premiums written.......................................... 274,519
250,553
Increase in unearned premiums................................... (71,537)
(63,502)
Earned premiums ................................................ 202,982
187,051
Net investment income........................................... 20,810
20,830
Premium finance and service fees................................ 3,860
2,591
Net realized investment gains (losses).......................... (420)
3,801
Total revenues......................................... 227,232
214,273
Expenses
Losses and loss adjustment expenses............................. 154,158
129,226
Policy acquisition costs........................................ 55,619
52,204
Total expenses......................................... 209,777
181,430
Earnings before income taxes and minority interest..... 17,455
32,843
Income taxes...................................................... 2,762
7,608
Earnings before minority interest...................... 14,693
25,235
Minority interest................................................. (12)
- -
NET EARNINGS........................................... $ 14,681
$ 25,235
COMPREHENSIVE INCOME (LOSS)............................ $ (5,030)
$ 23,953
BASIC AND DILUTED NET EARNINGS PER COMMON SHARE........ $ 0.41
$ 0.70
CASH DIVIDENDS PAID PER COMMON SHARE................... $ 0.27
$ 0.26
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING... 35,600,233
36,042,652
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
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<page
THE COMMERCE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended March 31, 1999 and 1998
(Thousands of Dollars)
(Unaudited)
<TABLE>
<CAPTION>
1999 1998
<S>
<C> <C>
Cash flows from operating activities:
Premiums collected................................................................
$219,451 $217,588
Net investment income.............................................................
21,042 20,582
Premium finance and service fees..................................................
3,860 2,591
Losses and loss adjustment expenses paid..........................................
(149,587) (147,989)
Policy acquisition costs paid.....................................................
(61,438) (64,625)
Federal income tax payments.......................................................
(4,421) (3,534)
Net cash provided by operating activities................................
28,907 24,613
Cash flows from investing activities:
Proceeds from maturity of fixed maturities.......................................
19,619 15,885
Proceeds from sale of fixed maturities............................................
32,065 9,510
Proceeds from sale of equity securities...........................................
12,020 21,324
Purchase of fixed maturities......................................................
(24,166) (7,105)
Purchase of equity securities.....................................................
(16,375) (87,287)
Purchase of other investments.....................................................
(2,177) (283)
Purchase of subsidiary, net of cash acquired......................................
(77,056) -
Payments received on mortgage loans and collateral notes receivable...............
5,187 3,034
Mortgage loans and collateral notes originated....................................
(2,283) (4,722)
Purchase of property and equipment................................................
(911) (1,469)
Other proceeds (uses) from investing activities...................................
118 (28)
Net cash used in investing activities....................................
(53,959) (51,141)
Cash flows from financing activities:
Dividends paid to stockholders....................................................
(9,232) (9,371)
Purchase of treasury stock........................................................
(32,607) -
Net cash used in financing activities....................................
(41,839) (9,371)
Decrease in cash and short-term investments.........................................
(66,891) (35,899)
Cash and cash equivalents at beginning of period....................................
75,912 238,888
Cash and cash equivalents at the end of period...........................
$ 9,021 $202,989
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
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<page
THE COMMERCE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Reconciliation of Net Earnings to Net Cash Provided by Operating Activities
Three Months Ended March 31, 1999 and 1998
(Thousands of Dollars)
(Unaudited)
<TABLE>
<CAPTION>
1999 1998
<S>
<C> <C>
Cash flows from operating activities:
Net Earnings..........................................................................
$ 14,681 $ 25,235
Adjustments to reconcile net earnings to net cash provided by operating activities:
Premiums receivable.................................................................
(51,436) (39,956)
Deferred policy acquisition costs...................................................
(11,206) (12,225)
Residual market receivable..........................................................
485 8,790
Due to/from reinsurers..............................................................
(3,975) 1,934
Losses and loss adjustment expenses.................................................
8,312 (16,125)
Unearned premiums...................................................................
68,412 62,106
Current income taxes................................................................
(1,503) 3,339
Deferred income taxes...............................................................
(157) 735
Deferred income.....................................................................
440 (213)
Contingent commissions..............................................................
6,550 5,924
Other assets, liabilities and accrued expenses......................................
(3,749) (11,985)
Net realized investment (gains) losses..............................................
420 (3,801)
Other - net.........................................................................
1,633 855
Net cash provided by operating activities....................................
$ 28,907 $ 24,613
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
- - 6 -
<page
The Commerce Group, Inc. and Subsidiaries
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Thousands of Dollars Except Share, Per Share Data, Ratios and Other
Information)
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, 1998. 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 1998 account balances have been
reclassified to conform to the current period's presentation.
3. This Form 10-Q contains some statements that are not historical facts
and are considered "forward-looking statements". Such forward-looking
statements involve opinions and predictions, and no assurance can be
given that the future results will be achieved since events or results
may differ as a result of risks facing the Company. These include, but
are not limited to, economic, market or regulatory conditions as well as
risks associated with the Company's expansion into additional states,
entry into new markets, diversification, and catastrophic events.
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 three months ended March 31, 1999 nor
comparison with the corresponding three months ended March 31, 1998
should be considered indicative of the results which may be expected for
the year ending December 31, 1999.
6. The Company, as part of a joint venture with AAA Southern New England
("AAA SNE"), completed the acquisition of Automobile Club Insurance
Company on January 29, 1999. Located in Columbus, Ohio, Automobile Club
Insurance Company, whose name was changed to American Commerce Insurance
Company ("ACIC"), writes personal automobile and homeowners business in
twenty eight states and is licensed in several others. The acquisition,
which was accounted for as a purchase, resulted in the new balance sheet
items: Non compete agreement, Negative goodwill and Minority interest.
- - 7 -
<PAGE>
The Commerce Group, Inc. and Subsidiaries
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Thousands of Dollars Except Share, Per Share Data, Ratios and Other
Information)
(continued)
7. The Company purchased 1,042,652 shares of Treasury stock during the
three month period ended March 31, 1999, completing purchases under the
May 19, 1995 Board of Directors approved stock buy back program of up to
3 million shares of the Company's common stock. Additionally, under
prior Board of Directors authorizations, the Company purchased 143,248
shares of the Company's common stock bringing the total purchases of
Treasury Stock to 3,143,248 shares as of March 31, 1999.
8. Disclosure of Statement of Financial Accounting Standards No. 130 -
Reporting Comprehensive Income:
<TABLE>
<CAPTION>
Three Months
Ended
March
31,
1999
1998
<S> <C>
<C>
Net earnings..................................... $ 14,681
$ 25,235
Other comprehensive income (loss), net of taxes
(tax benefits):
Change in unrealized gains,
net of income taxes (benefits) of $(10,268)
in 1999 and $856 in 1998..................... (19,069)
1,591
Reclassification adjustment, net of
income tax benefits of ($345) in 1999
and ($1,546) in 1998......................... (642)
(2,873)
Other comprehensive loss......................... (19,711)
(1,282)
Comprehensive income (loss)...................... $ (5,030)
$ 23,953
</TABLE>
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<PAGE>
The Commerce Group, Inc. and Subsidiaries
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Thousands of Dollars Except Share, Per Share Data, Ratios and Other
Information)
(continued)
9. Disclosure of Statement of Financial Accounting Standards No. 131 -
Disclosures about Segments of an Enterprise and Related Information:
<TABLE>
<CAPTION>
Earnings Before
Identifiable
Revenue Income Taxes
Assets
Three Months Ended March 31, 1999
<S> <C> <C>
<C>
Property and casualty insurance
Massachusetts............................ $204,647 $ 13,587
$1,575,317
Other than Massachusetts................. 20,516 458
241,827
Real estate and commercial lending......... 1,209 1,209
71,232
Corporate and other........................ 860 2,201
9,266
Consolidated............................ $227,232 $ 17,455
$1,897,642
Three Months Ended March 31, 1998
Property and casualty insurance
Massachusetts............................ $204,151 $ 32,000
$1,756,729
Other than Massachusetts................. 7,955 1,244
46,858
Real estate and commercial lending......... 1,287 1,287
84,920
Corporate and other........................ 880 (1,688)
12,744
Consolidated............................ $214,273 $ 32,843
$1,846,380
</TABLE>
The acquisition of ACIC, on January 29,1999, resulted in an additional
Property and casualty insurance segment entitled "Other than
Massachusetts" for the first quarter ended March 31, 1999.
- - 9 -
<PAGE>
The Commerce Group, Inc. and Subsidiaries
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Thousands of Dollars Except Share, Per Share Data, Ratios and Other
Information)
(continued)
10. Disclosure of Supplemental Information:
<TABLE>
<CAPTION>
March 31,
1999 1998
OTHER BALANCE SHEET INFORMATION:
<S> <C> <C>
Fixed maturities, at cost.......................... $ 720,952 $
576,151
Statutory surplus.................................. $ 480,276 $
477,677
OTHER INFORMATION:
Massachusetts policies in force
Private passenger automobile..................... 606,555
598,841
Homeowners....................................... 121,233
118,237
Commercial automobile............................ 14,620
14,758
Three Months Ended
March 31,
1999 1998
OTHER EARNINGS STATEMENT INFORMATION:
Premiums earned of Massachusetts subsidiaries
Private passenger automobile..................... $ 168,614 $
159,703
Homeowners....................................... $ 4,151 $
7,887
Commercial automobile............................ $ 9,176 $
10,605
Net investment income, after tax................... $ 17,689 $
17,153
Pure loss ratios of Massachusetts subsidiaries
Private passenger automobile..................... 69.3%
62.7%
Homeowners (gross of reinsurance)................ 46.6%
15.2%
Commercial automobile............................ 75.2%
49.5%
Massachusetts private passenger automobile
exposures written................................. 276,720
281,107
Massachusetts private passenger automobile
premiums written................................. $ 228,550 $
213,591
</TABLE>
- - 10 -
<PAGE>
The Commerce Group, Inc. and Subsidiaries
MANAGEMENT'S DISCUSSION AND ANALYSIS
Three months ended March 31, 1999 compared to
three months ended March 31, 1998
Direct premiums written during the first quarter of 1999, increased
$31,649,000 or 12.7% to $279,952,000, as compared to the same period in 1998.
The increase was primarily attributable to a $16,854,000, or 7.0% increase in
Massachusetts direct premiums written and a $14,795,000 or 208.8% increase in
direct premiums written in states outside of Massachusetts. The increase in
Massachusetts direct premiums written was primarily attributable to a
$15,954,000 or 7.4% increase for Massachusetts personal automobile insurance,
a $1,004,000, or 9.1% increase to Massachusetts homeowners insurance offset by
a net decrease of $36,000 or 0.2% in all other Massachusetts lines combined.
The increase in direct premiums written in states outside of Massachusetts was
primarily attributable to the Company's January 29, 1999 acquisition of
Automobile Club Insurance Company as part of a joint venture with AAA Southern
New England ("AAA SNE"). Located in Columbus, Ohio, Automobile Club Insurance
Company, whose name was changed to American Commerce Insurance Company
("ACIC") following the acquisition, is a property and casualty insurer with
policies written in 28 states and licenses in several others. ACIC direct
premiums written of $15,881,000 are included in the first quarter of 1999
results, which represents two months premium since the acquisition. For
further details refer to the liquidity section of this 10-Q's Management's
Discussion and Analysis.
The increase in Massachusetts personal automobile direct premiums written
resulted primarily from changes to the Company's safe driver deviations which
were effective at the beginning of 1999 and the 1999 state mandated average
rate increase of 0.7%. Although the state mandated average rate increased
only 0.7%, the impact of this and the safe driver deviation changes resulted
in an 8.7% increase in the average personal automobile premium per exposure
(each vehicle insured) for the first quarter of 1999 as compared to the first
quarter of 1998. This was offset by a 1.6% decrease in personal automobile
exposures. The 8.7% increase in average premium per exposure was due to the
facts that the rate decision does not anticipate purchases of new automobiles
in the year which the rate decision applies, and secondly, the Company's mix
of personal automobile business differs from that of the industry.
Additionally, in January 1999, the Company was granted, for the 1999 calendar
year, approval to offer its customers safe driver deviations of 8.0% for Step
9 (15% in 1998) and 3.0% for Step 10 (4% in 1998). Companies must re-apply
annually, after the state sets rates, to offer safe driver deviations. The
Company's affinity group discount for 1999 policies remained unchanged at 6%.
For drivers who qualify, the Company's group discount and safe driver
deviations can be combined for up to a 13.5% (20.1% in 1998) reduction from
state mandated rates. Two-thirds of the 1.6% decrease in personal automobile
exposures occurred from business received through the Company's Exclusive
Representative Producer ("ERP") agencies. The remaining one-third decrease
came from the Company's voluntary agencies. These decreases were primarily
due to certain ERPs being offered voluntary contracts with other carriers and
to sales of agencies to other agencies that did not represent the Company.
The increase in Massachusetts homeowners direct premiums written during the
first quarter of 1999 resulted primarily from a 6.8% increase in the number of
policies as compared to the first quarter of 1998.
- - 11 -
<PAGE>
The Commerce Group, Inc. and Subsidiaries
MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued)
Net premiums written during the first quarter of 1999 increased $23,966,000,
or 9.6% as compared to the first quarter of 1998, of which $15,255,000 were
derived from the acquisition of ACIC. The remaining increase in net premiums
written was primarily due to changes in direct premiums written as described
above offset by increased levels of coverage provided through non-automobile
reinsurance treaties resulting in an increase of ceded premiums. Primarily as
a result of these changes to the reinsurance treaties, which went into effect
during the third quarter of 1998, written premiums ceded (excluding those
ceded to the Commonwealth Automobile Reinsurers ("C.A.R.")) increased
$5,296,000, or 82.8% as compared to the first quarter of 1998. Written
premiums assumed from C.A.R. decreased $3,817,000, or 14.4% and written
premiums ceded to C.A.R. decreased $1,430,000, or 8.0% as compared to the
first quarter of 1998, as a result of changes in the industry's and the
Company's utilization of C.A.R. reinsurance.
Earned premiums increased $15,931,000, or 8.5% during the first quarter of
1999 as compared to the same period in 1998. The increase in earned premiums
was primarily the result of the acquisition of ACIC which produced $14,550,000
in earned premiums coupled with the changes in direct premiums written as
described above offset by the increased levels of coverage provided by non-
automobile reinsurance treaties also described above. Earned premiums assumed
from C.A.R. decreased $510,000 or 2.6% and earned premiums ceded to C.A.R.
increased $5,430,000, or 25.8% as compared to the first quarter of 1998.
Direct premiums earned for Massachusetts personal automobile insurance
increased $9,875,000, or 6.3% compared to the same period in 1998.
Commercial automobile insurance net premiums earned decreased $286,000, or
3.0%, and homeowners net premiums earned decreased $2,434,000, or 27.4%, as
compared to the first quarter of 1998. The decrease in homeowners net
premiums earned is attributable to an increase of $2,302,000 from ACIC, offset
by increased levels of coverage provided through the other than automobile
quota share reinsurance treaty that resulted in increased ceded earned
premiums.
Net investment income decreased slightly by $20,000 or 0.1%, compared to the
first quarter of 1998. Net investment income as a percentage of total average
investments at cost was 6.5% in the first quarter of 1999 as compared to 6.7%
during the same period in 1998. Mitigating the decline in yield during the
first quarter of 1999, net invested assets at cost increased $69,261,000
primarily as the result of the acquisition of ACIC. Net investment income was
also impacted by the purchase of 1,185,900 shares of Treasury Stock for
$32,607,000. Net investment income after tax as a percentage of total average
investments, at cost, remained at 5.6% in the first quarter of 1999 as
compared to the same period in 1998. As previously announced the Company is
seeking greater flexibility to provide for enhanced potential future capital
appreciation. The Company's continuing 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. On January 29, 1999, in a joint venture with AAA Southern New
England, the Company completed the acquisition of ACIC, located in Columbus,
Ohio.
- - 12 -
<PAGE>
The Commerce Group, Inc. and Subsidiaries
MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued)
Premium finance and service fees increased $1,269,000 or 49.0% during the
first quarter of 1999 as compared to the same period in 1998. The increase
for the first quarter of 1999 versus 1998 was primarily attributable to the
impact of implementing a $3.00 installment on each invoice following the down
payment, for personal lines policies with effective dates of
January 1, 1998 and beyond. This program is now into its second year since
implementation. Previously, for 1996 and 1997, the Company had utilized a
"late fee" system.
Net realized investment losses totaled $420,000 during the first quarter of
1999 as compared to net realized investment gains of $3,801,000 for the same
period in 1998. The net realized investment losses for the first quarter of
1999 were primarily the result of the maturity of Government National Mortgage
Association ("GNMA") mortgage backed bonds and sales of non-taxable bonds,
preferred stocks and common stocks offset by net realized gains on the sales
of short-term investments. Net realized investment gains during the first
quarter of 1998 were the result of sales of the common stock of a major
international insurance company resulting in net realized gains of $5,054,000
which was partially offset by realized investment losses in the sales of non-
taxable bonds, preferred stocks and the maturity of GNMA mortgage backed
bonds.
Losses and loss adjustment expenses ("LAE") incurred (on a statutory basis) as
a percentage of insurance premiums earned ("loss ratio") increased to 76.7%
for the first quarter of 1999 as compared to 68.7% for the same period in
1998. The ratio of net incurred losses, excluding LAE, to premiums earned
("pure loss ratio") on personal automobile increased to 67.8% compared to
62.0% in the first quarter of 1998. The increase in the loss ratio was
primarily due to a 6.0% increase in reported losses coupled with continued
increases in the cost of settling physical damage claims and a decrease in
redundancies arising from prior accident years. The commercial automobile
pure loss ratio increased to 75.2% compared to 49.5% during the first quarter
of 1998 primarily due to a decrease in redundancies arising from prior
accident years. For homeowners, the pure loss ratio, gross of reinsurance,
increased to 46.6% compared to 15.2% during the first quarter of 1998. The
increase was the result or more normal property losses in 1999 compared with
significant prior year liability redundancies in the 1998 figure. Offsetting
these, total expenses related to the Company's management incentive
compensation plan included in losses and loss adjustment expenses were
$3,158,000 lower in the first quarter of 1999 as compared to the same period
in 1998. Of this decrease, approximately $937,000 benefited the insurance
companies with the remainder benefiting corporate expenses. The decrease was
primarily driven by decreases, during the quarter, in the market price of the
Company's common stock. The expenses related to the management incentive
compensation plan are directly impacted by the average market price of the
Company's common stock. Lastly, expenses related to computer services were
$1,525,000 lower during the first quarter of 1999 as compared to the same
period in 1998, primarily due to the Company's previously announced
discontinuance of development efforts on the PMSC Series III system.
- - 13 -
<PAGE>
The Commerce Group, Inc. and Subsidiaries
MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued)
Policy acquisition costs increased $3,415,000 or 6.5% during the first quarter
of 1999 compared to the same period in 1998. As a percentage of net premiums
written, underwriting expenses for the insurance companies (on a statutory
basis) were 25.3% during the first quarter of 1999 as compared to 25.9% for
the same period in 1998. This decrease in policy acquisition costs, as a
percentage of net premiums written, was primarily impacted by lower expenses
related to the Company's management incentive plan which were offset by higher
contingent commission accruals. Specifically, total expenses related to the
Company's management incentive compensation plan included in policy
acquisition costs were $2,736,000 lower in the first quarter of 1999 as
compared to the same period in 1998. Of this decrease, approximately $918,000
benefited the insurance companies with the remainder benefiting corporate
expenses. The decrease was primarily driven by decreases, during the quarter,
in the market price of the Company's common stock. The expenses related to
the management incentive compensation plan are directly impacted by the
average market price of the Company's common stock. Lastly, expenses related
to computer services were $1,735,000 lower during the first quarter of 1999 as
compared to the same period in 1998 primarily due to the Company's previously
announced discontinuance of development efforts on the PMSC Series III system.
The Company's effective tax rate was 15.8% for the first quarter of 1999 as
compared to 23.2% for the same period in 1998. 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 deduction. The lower
effective tax rate for the first quarter of 1999 was the result of the tax
exempt interest and the dividends received deduction comprising a greater
portion of net earnings before taxes and less realized capital gains during
the first quarter of 1999 as compared to the same period in 1998. The
combination of these factors resulted in additional taxes being provided for
through alternative minimum tax rules for 1999.
- - 14 -
<PAGE>
The Commerce Group, Inc. and Subsidiaries
MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued)
Liquidity and Capital Resources
The focus of the discussion of liquidity and capital resources is on the
Consolidated Balance Sheets on page 3 and the Consolidated Statements of Cash
Flows on pages 5 and 6. Stockholders' equity decreased by $46,869,000 or
6.6%, during the first three months of 1999. This decrease was the result of
net earnings of $14,681,000, offset by other comprehensive loss (formerly
known as net unrealized losses), net of income tax benefits, on fixed
maturities, equity securities and other investments of $19,711,000, dividends
paid to stockholders of $9,232,000 and Treasury Stock purchased of
$32,607,000. Total assets at March 31, 1999 increased by $141,659,000 or
8.1%, to $1,897,642,000 as compared to total assets of $1,755,983,000 at
December 31, 1998, most of which resulted from the acquisition of ACIC.
Invested assets increased $38,922,000 or 3.1% primarily as a result of the
addition of $159,590,000 of invested assets from ACIC, offset by the initial
$90,800,000 investment in the joint venture and treasury stock purchases.
Premiums receivable increased $61,319,000 or 37.6%, $9,422,000 attributable to
ACIC. Deferred policy acquisition costs increased $17,573,000 or 19.8%,
$6,519,000 attributable to ACIC. Receivable from reinsurers increased
$11,537,000 or 31.4%, $7,431,000 attributable to ACIC. All other remaining
assets increased $12,308,000 or 5.9%, $3,378,000 attributable to ACIC. The
increase in premiums receivable was primarily attributable to the seasonality
of the policy effective dates of the Company's business.
As of March 31, 1999, the market value of the Company's fixed maturity
portfolio exceeded its book value by $14,194,000 ($9,226,000 after taxes, or
$0.26 per share). At December 31, 1998 the market value of the Company's
fixed maturity portfolio exceeded its book value by $18,785,000 ($12,210,000
after taxes, or $0.34 per share). The cost of the Company's preferred stocks
exceeded market value by $3,709,000 ($2,411,000 after taxes, or $0.07 per
share). At December 31, 1998 the cost of preferred stocks exceeded market
value by $2,845,000 ($1,849,000 after taxes, or $0.05 per share). At March
31, 1999 the cost of the Company's common stocks exceeded market value by
$2,658,000 ($1,728,000 after taxes, or $0.05 per share). At December 31, 1998
the market value of common stocks exceeded cost by $22,601,000 ($14,691,000
after taxes, or $0.41 per share).
Preferred stocks decreased $5,975,000 or 3.0% and common stocks (primarily
composed of closed-end preferred stock mutual funds) decreased $3,458,000 or
1.2%, during the first three months of 1999 primarily as a result of changes
in interest rates and the related impact on market value. 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. On January 29, 1999, in a joint venture with
AAA Southern New England, the Company completed the acquisition of ACIC,
located in Columbus, Ohio.
- - 15 -
<PAGE>
The Commerce Group, Inc. and Subsidiaries
MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued)
The Company's liabilities totalled $1,235,786,000, at March 31, 1999 as
compared to $1,050,198,000 at December 31, 1998. The $185,588,000 or 17.7%
increase resulted primarily from the acquisition of ACIC. Losses and loss
adjustment expenses increased $71,424,000 or 12.0%, $60,647,000 attributable
to ACIC. Unearned premiums increased $95,287,000 or 24.3%, $27,594,000
attributable to ACIC. Contingent commissions accrued increased $6,550,000 or
29.7%. Negative goodwill associated with the January 29, 1999 acquisition of
ACIC was $11,965,000. The net effect of all other liabilities increased
$362,000 or 0.9%, $6,258,000 attributable to ACIC. The increase in the
liability for loss and loss adjustment expenses is attributed primarily to the
acquisition of ACIC as mentioned, coupled with increased reported losses, as
described below for Massachusetts business, during the first three months of
1999. The remaining change in unearned premiums primarily resulted from the
increase in Massachusetts personal automobile direct premiums written and the
expected seasonality impact of policy effective dates previously mentioned.
The primary sources of the Company's liquidity are funds generated from
insurance premiums, net investment income, premium finance and service fees
and the maturing and sales of investments as reflected in the Consolidated
Statements of Cash Flows on pages 5 and 6. In November 1997, the Company
received state regulatory approval to implement an installment fee of $3.00 on
each invoice following the down payment, for personal lines policies with
January 1, 1998 effective dates. This program is now into its second year
since implementation. Previously, for 1997 and 1996, the Company utilized a
"late fee" system. The impact of this change through the first quarter of
1999 has resulted in a 49.0% increase in combined premium finance and service
fees as compared to the same period in 1998.
The Company's operating activities provided cash of $28,907,000 in the first
three months of 1999 as compared to $24,613,000 in 1998. These cash flows
were primarily impacted during the first three month of 1999 by premiums
collected which increased $1,863,000, or 0.9%, premium finance and service
fees which increased $1,269,000, or 49.0% and policy acquisition costs paid
which decreased $3,187,000, or 4.9%.
Net losses and LAE paid, which includes the change in the losses and LAE
liability, increased $1,598,000, or 1.1%. This amount resulted primarily from
an increase in the loss and loss adjustment expense liability. Additionally,
for Massachusetts business, net payments on automobile liability claims
increased $4,275,000 or 6.4% and net payments on collision losses increased
$4,485,000 or 16.3%. The remaining amount is primarily the result of
decreased payments for the management incentive compensation plan. Offsetting
this, claim payments for other than automobile lines of business, after
reinsurance, decreased in the first three months of 1999 versus 1998.
- - 16 -
<PAGE>
The Commerce Group, Inc. and Subsidiaries
MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued)
The increase in Massachusetts automobile liability loss payments was primarily
attributable to two factors: increased payments for bodily injury claims and
increased payments for property damage liability claims. The bodily injury
payments were higher primarily due to increases in reported losses, coupled
with continued efforts in the claims department to accelerate the claims
settlement process in an effort to reduce the overall cost and potential
build-up of bodily injury claims in the long run, as well as to reduce the
overall number of open liability claims. The increase in property damage
liability and collision payments was primarily due to increases in reported
losses and continued increases in the cost of settling physical damage claims.
The net cash flows used in investing activities were primarily the result of
purchases of fixed maturities and equity securities and by the acquisition of
ACIC, net of cash acquired 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 1999 and
1998.
Cash flows used in financing activities totaled $41,839,000 during the first
three months of 1999 compared to $9,371,000 during the same period in 1998.
The 1998 cash flows used in financing activities consisted exclusively of
dividends paid to stockholders. The 1999 cash flows used in financing
activities consisted of $9,232,000 in dividends paid to stockholders and
$32,607,000 used to purchase 1,185,900 shares of Treasury Stock under the
Company's stock buyback programs.
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 March 31, 1999, the Company held cash and short-term
investments of approximately $9,021,000. These funds 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.
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 1.60 to 1.00 and 1.55 to 1.00 for the three months ended
March 31, 1999 and 1998, respectively.
The Company's long-term growth objective has been to expand its writings
outside of Massachusetts. In continued pursuit of this objective The Commerce
Insurance Company ("Commerce") is licensed in the states of Connecticut, Rhode
Island, Vermont, New Hampshire and Maine.
- - 17 -
<PAGE>
The Commerce Group, Inc. and Subsidiaries
MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued)
In keeping with the Company's long-term growth objective to expand outside
Massachusetts, the Company has also monitored potential acquisition
opportunities 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. This objective has been exemplified by
the 1995 acquisition of Commerce West Insurance Company ("Commerce West"), a
personal automobile insurer, located in Pleasanton, California and, most
recently, by the Company's formation of a joint venture (ACIC Holding Co.,
Inc.) in November 1998, and the subsequent acquisition, in January 1999, of
ACIC, located in Columbus, Ohio.
ACIC writes automobile and homeowners insurance solely through 38 AAA
automobile clubs. Commerce and AAA SNE intend that ACIC will retain its
management team and staff and continue to have its principle office in
Columbus, Ohio.
In early 1999, Commerce, a subsidiary of the Company, invested $90.8 million
in the joint venture (ACIC Holding Co., Inc.) to fund the ACIC acquisition and
to capitalize the joint venture that is owned together with AAA SNE. Of this
$90.8 million, Commerce invested $90 million in the form of preferred stock
and an additional $800,000 representing its 80% common stock ownership. The
terms of the preferred stock call for quarterly cash dividends at the rate of
10% per annum. AAA SNE invested $200,000 representing its 20% common stock
ownership. Commerce consolidates ACIC Holding Co., Inc. and it's wholly-owned
subsidiary, ACIC, for financial reporting purposes. Since 1995, Commerce has
maintained an affinity group marketing relationship with AAA Insurance Agency,
Inc., a subsidiary of AAA SNE. AAA Insurance Agency, Inc. has been an agent
of Commerce since 1985.
Year 2000 Compliance
The year 2000 issue exists primarily because most computer programs were
originally coded to recognize only the last two digits in the date field. If
not addressed and corrected, many systems could fail and produce erroneous
results. The impact of this could lead to a material adverse impact upon the
Company's business including policy and claims processing. As a result,
considerable effort has taken place to assess the impact and determine whether
to replace and/or reprogram the systems in order for the systems to
distinguish the intended year. The Company subsequently initiated the Century
Change project to address all internal/external systems, software, agents,
third parties and vendors in dealing with year 2000 compliance.
- - 18 -
<PAGE>
The Commerce Group, Inc. and Subsidiaries
MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued)
The Century Change project, enlisting both a redeployment of internal
resources and additional external consultant resources, involved the
development of a formal plan to address the Year 2000 problem and has
progressed in accordance with that plan. The Company's plan, which was
designed to, and is proceeding so as to, avoid any material adverse business
production issues, organized corporate systems into four sub-categories: Data
Exchange, AS400 Systems/Programs, PC Applications and PC Based Vendor
Purchased Application Software. Different sub-plans were established for each
category with the same Year 2000 objective in mind. As a result of this
effort, the majority of the programming changes dealing with policy issuance,
claims processing and maintenance have been completed as of October 1998.
Other internal changes are expected to be completed in accordance with
specified delivery dates as outlined in the plan. Looking forward, the
project has and will continue to move into the testing phases of the plan
which will primarily conclude at the end of second quarter 1999.
The Company has reviewed the Century Change status of vendors who perform
outside processing, those whose software the Company uses for internal
processing and those third parties with whom the Company does significant
business. Accordingly, the Company has recognized that year 2000 non-
compliance could materially adversely affect the financial position, results
of operations and cash flows of the Company.
As a result, the Company has contacted all significant related third parties
in an effort to determine year 2000 compliance. This program includes sending
out questionnaires to our major business partners, including our agents,
regarding their year 2000 readiness. Based on the responses received to date,
the Company does not anticipate any material impact on its operations or
financial condition. If there are instances where the Company ascertains a
potential non-compliance, the Company will seek alternative year 2000
compliant third parties. This process is on-going and the Company has started
to conduct system testing, as needed, with such third parties, which will
conclude in 1999. While the Company is taking what it believes are the
appropriate safeguards, there can be no assurances that the failure of such
third parties to be year 2000 compliant will not have a material adverse
impact on the Company.
The Company expects that the implementation of the contingency plans, if
necessary, will not have a material adverse effect on the Company's ability to
conduct its business or on its operating results or financial condition.
- - 19 -
<PAGE>
The Commerce Group, Inc. and Subsidiaries
MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued)
The Company's Executive Committee, as well as all departments in the Company,
are currently reviewing issues dealing with identifying possible year 2000
worst case scenarios and the development of contingency plans to respond to
the likelihood of these scenarios. Contingency Plans will be discussed and
developed, where deemed appropriate, for all material systems and
relationships during the first half of 1999. At a minimum, contingency plans
will be developed for the continuation of policy and claim processing in the
event that the Company's computer systems are not available due to a year 2000
related failure.
The project to date has involved internal staff costs as well as consulting
expenses to prepare the systems for the year 2000. Total costs to date for
the Century Change project have been approximately $5.7 million ($0.8 million
which relates to 1999). Administration, programming, testing and
implementation of system applications relating to the Century Change project
are expected to cost an additional $1.5 million in 1999.
Market Risk: Interest Rate Sensitivity and Equity Price Risk
The Company's investment strategy emphasizes investment yield while
maintaining investment quality. The Company's investment objective is to
maintain high quality diversified investments structured to maximize after-tax
investment income while minimizing risk. The Company's funds are generally
invested in securities with maturities intended to provide adequate funds to
pay claims and meet other operating needs without the forced sale of
investments. Periodically sales have been made from the Company's fixed
maturity 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 conducting investing activities, the Company is subject to, and assumes,
market risk. Market risk is the risk of an adverse financial impact from
changes in interest rates and market prices. The level of risk assumed by the
Company is a function of the Company's overall objectives, liquidity needs and
market volatility.
The Company manages its overall market risk by focusing on higher quality
equity and fixed income investments, by continuously monitoring the credit
strength of all companies in which investments are made, by limiting exposure
in any one investment and by monitoring the quality of the investment
portfolio by taking into account credit ratings assigned by recognized rating
organizations.
- - 20 -
<PAGE>
The Commerce Group, Inc. and Subsidiaries
MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued)
As part of its investing activities, the Company assumes positions in fixed
maturity, equity, short-term and cash equivalents markets. The Company is,
therefore, exposed to the impacts of interest rate changes in the market value
of investments. As of March 31, 1999, the Company's exposure to interest rate
changes and equity price risk has been estimated using sensitivity analysis.
The interest rate impact is defined as the effect of a hypothetical interest
rate change of plus-or-minus 200 basis points on the market value of fixed
maturities and preferred stocks. The equity price risk is defined as a
hypothetical change of plus-or-minus 10% in the fair value of common stocks.
Changes in interest rates would result in unrealized gains or losses in the
market value of the fixed maturity and preferred stock portfolio due to
differences between current market rates and the stated rates for these
investments. Based on the results of the sensitivity analysis at March 31,
1999, the Company's estimated market exposure for a 200 basis point increase
(decrease) in interest rates was calculated. A 200 basis point increase would
result in a $73,710,000 decrease in the market value of the fixed maturities
and preferred stocks. A 200 basis point decrease would result in a
$46,975,000 increase in the market value of the same securities. The equity
price risk impact at March 31, 1999, based upon a 10% increase in the fair
value of common stocks, would be an increase of $28,050,000. Based upon a 10%
decrease, common stocks would decrease $28,050,000. This analysis was
exemplified during the first quarter of 1999 as the Company experienced a
decline in the market value of investments of $19,711,000 primarily as
evidenced by an increase in long term interest rates during this period.
Stock Buyback and Dividends
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,
authorized the Company to purchase up to 3 million shares of Treasury Stock.
Through March 31, 1999, the Company completed its share purchases under that
program. Under prior Board of Director authorizations, the Company purchased
an additional 143,248 shares during the first quarter of 1999, bringing total
purchases of Treasury Stock to 3,143,248 shares as of March 31, 1999.
The Company's Employee Stock Ownership Plan has purchased more than 926,000
shares in open market transactions since the buyback program was announced, of
which 171,750 shares were purchased during the first three months of 1999 for
$5,024,000 as compared to 90,000 shares for $3,017,000 during the same period
in 1998.
On March 19, 1999, the Company paid a quarterly dividend of $0.27 to
stockholders of record as of March 5, 1999. The Company increased its
quarterly dividend to stockholders from $0.26 to $0.27 during the second
quarter of 1998.
- - 21 -
<PAGE>
The Commerce Group, Inc. and Subsidiaries
MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued)
Recent Accounting Developments
In 1997, the Accounting Standards Executive Committee ("AcSEC") issued
Statement of Position 97-3 Accounting by Insurance and Other Enterprises for
Insurance-Related Assessments ("SOP 97-3") effective for financial statements
issued for periods ending after December 31, 1998. This statement provides
guidance on accounting by insurance companies on the timing of recognition,
the methods of measurement, and the required disclosures for guaranty fund and
other related assessments. The Company initially adopted SOP 97-3 in the
quarter ended March 31, 1999, which resulted in no material impact on the
Consolidated Financial Statements.
In 1998, the AcSEC issued Statement of Position 98-1, Accounting for Costs of
Computer Software Developed or Obtained for Internal Use ("SOP 98-1")
effective for financial statements issued for periods beginning after December
15, 1998. This statement establishes guidance on accounting for the costs
incurred related to internal use software. The Company initially adopted SOP
98-1 in the quarter ended March 31, 1999 and such adoption had no 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
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.
- - 22 -
<PAGE>
The Commerce Group, Inc. and Subsidiaries
MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued)
Subsequent Event
As mentioned in the 1998 Annual Report, the Company stopped all work on the
development of the PMSC Series III system and was in negotiation with PMSC as
to the future continuation of the system. In early May 1999, the Company
completed negotiations with PMSC as to this matter.
The PMSC project began in 1996 and the Company's policy has been to fully
expense development costs as paid. As part of this project, the Company
developed a company-wide PC network, costing $4.5 million, which will continue
to be utilized. Costs to acquire a mainframe were $5.0 million, 90% of which
has been expensed to date. Internal and external software development costs
expensed to date, exclusive of PMSC, were $5.2 million and $9.7 million,
respectively. Initial license fees paid to PMSC of $4.4 million have been
fully amortized. Total software development costs paid to PMSC since
inception of the project amounted to $18.2 million.
Based on the resolution of negotiations with PMSC, net costs incurred for the
PMSC software development component noted above will be $11.2 million. This
will therefore result in a reduction in expenses in the Company's 1999 second
quarter of $7.0 million or $0.13 per share after taxes.
- - 23 -
<PAGE>
The Commerce Group, Inc. and Subsidiaries
PART II - OTHER INFORmation
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Form 8-K - none filed during the first quarter of 1999.
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
- - 24 -
<PAGE>
The Commerce Group, Inc. and Subsidiaries
PART II - OTHER INFORmation
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Form 8-K - none filed during the first quarter of 1999.
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
- - 24 -
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 7
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 12-MOS
<FISCAL-YEAR-END> MAR-31-1999 DEC-31-1998
<PERIOD-END> MAR-31-1999 DEC-31-1998
<DEBT-HELD-FOR-SALE> 0 0
<DEBT-CARRYING-VALUE> 720,952 600,482
<DEBT-MARKET-VALUE> 735,146 619,267
<EQUITIES> 471,953 481,386
<MORTGAGE> 70,700 73,510
<REAL-ESTATE> 0 0
<TOTAL-INVEST> 1,296,822 1,257,900
<CASH> 9,021 75,912
<RECOVER-REINSURE> 48,224 36,687
<DEFERRED-ACQUISITION> 106,332 88,759
<TOTAL-ASSETS> 1,897,642 1,755,983
<POLICY-LOSSES> 668,420 596,996
<UNEARNED-PREMIUMS> 486,711 391,424
<POLICY-OTHER> 0 0
<POLICY-HOLDER-FUNDS> 0 0
<NOTES-PAYABLE> 0 0
0 0
0 0
<COMMON> 19,000 19,000
<OTHER-SE> 639,916 686,785
<TOTAL-LIABILITY-AND-EQUITY> 1,897,642 1,755,983
202,982 745,620
<INVESTMENT-INCOME> 20,810 86,501
<INVESTMENT-GAINS> 3,860 6,769
<OTHER-INCOME> (420) 13,440
<BENEFITS> 154,158 531,429
<UNDERWRITING-AMORTIZATION> 55,619 196,434
<UNDERWRITING-OTHER> 0 0
<INCOME-PRETAX> 17,455 124,467
<INCOME-TAX> 2,762 27,975
<INCOME-CONTINUING> 0 96,492
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 14,681 96,492
<EPS-PRIMARY> 0.41 2.68
<EPS-DILUTED> 0.41 2.68
<RESERVE-OPEN> 0 530,077
<PROVISION-CURRENT> 0 592,796
<PROVISION-PRIOR> 0 (61,367)
<PAYMENTS-CURRENT> 0 335,047
<PAYMENTS-PRIOR> 0 227,630
<RESERVE-CLOSE> 0 596,996
<CUMULATIVE-DEFICIENCY> 0 0<F1>
<FN>
<F1>The Company, as part of a joint venture with AAA Southern New England ("AAA
SNE"), completed the acquisition of Automobile Club Insurance Company on
January 29, 1999. Located in Columbus, Ohio, Automobile Club
Insurance Company, whose name was changed to American Commerce Insurance
Company ("ACIC"), writes personal automobile and homeowners business in twenty
eight states and is licensed in several others. The acquisition, which was
accounted for as a purchase, resulted in the new balance sheet and statements
of earnings items:
Balance Sheet:
Non compete agreement $ 3,442
Negative goodwill 11,965
Minority interest 2,940
Statements of Earnings:
Minority interest (12)
</FN>
</TABLE>
