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, 2000 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, 2000, the number of shares outstanding of the
registrant's common stock (excluding Treasury Shares) was
34,191,052
Page 1 of 23
<PAGE>
The Commerce Group, Inc.
Table of Contents
<TABLE>
<CAPTION>
Page No.
<S> <C>
Part I - Financial Information
Consolidated Balance Sheets at
March 31, 2000 (Unaudited) and December 31, 1999.............. 3
Consolidated Statements of Earnings for the
Three Months Ended March 31, 2000 and 1999 (Unaudited)........ 4
Consolidated Statements of Cash Flows for the
Three Months Ended March 31, 2000 and 1999 (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, 2000 and 1999 (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.............................. 23
Signature ........................................................ 23
</TABLE>
- - 2 -
<PAGE>
THE COMMERCE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Thousands of Dollars)
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
(Unaudited)
ASSETS
<S> <C> <C>
Investments:
Fixed maturities, at market (cost: $660,238 in 2000 and $661,445 in 1999)............. $ 651,668 $ 647,338
Preferred stocks, at market (cost: $230,575 in 2000 and $230,934 in 1999)............. 210,077 211,049
Common stocks, at market (cost: $379,800 in 2000 and $351,940 in 1999)................ 330,836 301,467
Mortgage loans on real estate and collateral notes receivable (less allowance for
possible loan losses of $1,620 in 2000 and $2,127 in 1999)........................... 73,814 72,451
Cash and short-term investments........................................................ 12,173 22,535
Other investments (cost: $18,453 in 2000 and $13,130 in 1999).......................... 19,780 14,139
Total investments.................................................................. 1,298,348 1,268,979
Accrued investment income................................................................ 15,331 14,697
Premiums receivable (less allowance for doubtful receivables of $1,446 in 2000 and
$1,452 in 1999)........................................................................ 244,450 195,160
Deferred policy acquisition costs........................................................ 106,393 98,500
Property and equipment, net of accumulated depreciation.................................. 34,518 34,802
Residual market receivable
Losses and loss adjustment expenses.................................................... 114,181 106,576
Unearned premiums...................................................................... 40,598 50,084
Due from reinsurers...................................................................... 53,527 48,365
Deferred income taxes.................................................................... 42,283 43,051
Non-compete agreement.................................................................... 3,092 3,179
Other assets............................................................................. 9,232 8,079
Total assets....................................................................... $1,961,953 $1,871,472
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Losses and loss adjustment expenses.................................................... $ 683,154 $ 675,188
Unearned premiums...................................................................... 525,909 457,095
Current income taxes................................................................... 5,700 10,839
Deferred income........................................................................ 8,076 7,464
Contingent commissions accrued......................................................... 36,611 33,468
Payable for securities purchased....................................................... 6,306 1,953
Excess of book value of subsidiary interest over cost.................................. 10,465 10,758
Other liabilities and accrued expenses................................................. 26,151 26,885
Total liabilities.................................................................. 1,302,372 1,223,650
Minority interest........................................................................ 1,529 1,188
Stockholders' equity
Preferred stock, authorized 5,000,000 shares at $1.00 par value; none issued in
2000 and 1999........................................................................ - -
Common stock, authorized 100,000,000 shares at $.50 par value;
38,000,000 shares issued in 2000 and 1999............................................ 19,000 19,000
Paid-in capital........................................................................ 29,621 29,621
Net accumulated other comprehensive loss, net of income tax benefits of
$26,217 in 2000 and $28,467 in 1999.................................................. (48,689) (52,867)
Retained earnings...................................................................... 746,037 734,488
745,969 730,242
Treasury stock 3,808,948 shares in 2000 and 3,640,448 shares in 1999................... (87,917) (83,608)
Total stockholders' equity......................................................... 658,052 646,634
Total liabilities, minority interest and stockholders' equity...................... $1,961,953 $1,871,472
</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 Months Ended March 31, 2000 and 1999
(Thousands of Dollars Except Share and Per Share Data)
(Unaudited)
<TABLE>
<CAPTION>
2000 1999
<S> <C> <C>
Revenues
Direct premiums written.............................................. $ 306,456 $ 279,952
Assumed premiums..................................................... 22,519 22,677
Ceded premiums....................................................... (37,041) (28,110)
Net premiums written............................................... 291,934 274,519
Increase in unearned premiums........................................ (64,627) (71,537)
Earned premiums ..................................................... 227,307 202,982
Net investment income................................................ 22,832 20,810
Premium finance and service fees..................................... 3,792 3,860
Amortization of excess of book value of subsidiary interest
over cost.......................................................... 848 514
Net realized investment gains (losses)............................... 714 (420)
Total revenues.............................................. 255,493 227,746
Expenses
Losses and loss adjustment expenses.................................. 172,429 154,415
Policy acquisition costs............................................. 58,204 55,876
Total expenses.............................................. 230,633 210,291
Earnings before income taxes and minority interest.......... 24,860 17,455
Income taxes........................................................... 3,624 2,762
Net earnings before minority interest....................... 21,236 14,693
Minority interest in net earnings of subsidiary........................ (114) (12)
NET EARNINGS................................................ $ 21,122 $ 14,681
COMPREHENSIVE INCOME (L OSS)................................. $ 25,300 $ (5,030)
BASIC AND DILUTED NET EARNINGS PER COMMON SHARE............. $ 0.62 $ 0.41
CASH DIVIDENDS PAID PER COMMON SHARE........................ $ 0.28 $ 0.27
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING........ 34,246,014 35,600,233
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
- - 4 -
<PAGE>
THE COMMERCE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended March 31, 2000 and 1999
(Thousands of Dollars)
(Unaudited)
<TABLE>
<CAPTION>
2000 1999
<S> <C> <C>
Cash flows from operating activities:
Premiums collected.................................................... $ 252,752 $ 219,451
Net investment income................................................. 22,198 21,042
Premium finance and service fees received............................. 3,792 3,860
Losses and loss adjustment expenses paid.............................. (173,460) (149,587)
Policy acquisition costs paid......................................... (62,749) (61,438)
Federal income tax payments........................................... (10,245) (4,421)
Net cash provided by operating activities......................... 32,288 28,907
Cash flows from investing activities:
Proceeds from maturity of fixed maturities............................ 5,455 19,619
Proceeds from sale of fixed maturities................................ 20,700 32,065
Proceeds from sale of equity securities............................... 6,208 12,020
Purchase of fixed maturities.......................................... (20,531) (24,166)
Purchase of equity securities......................................... (33,878) (16,375)
Purchase of other investments......................................... (5,323) (2,177)
Purchase of subsidiary, net of cash acquired.......................... - (77,056)
Payments received on mortgage loans and collateral notes receivable... 3,447 5,187
Mortgage loans and collateral notes originated........................ (4,303) (2,283)
Purchase of property and equipment.................................... (953) (911)
Other proceeds from investing activities.............................. 410 118
Net cash used in investing activities............................. (28,768) (53,959)
Cash flows from financing activities:
Dividends paid to stockholders........................................ (9,573) (9,232)
Purchase of treasury stock............................................ (4,309) (32,607)
Net cash used in financing activities............................. (13,882) (41,839)
Decrease in cash and short-term investments........................... (10,362) (66,891)
Cash and short-term investments at beginning of period................ 22,535 75,912
Cash and short-term investments at the end of period.............. $ 12,173 $ 9,021
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
- - 5 -
<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, 2000 and 1999
(Thousands of Dollars)
(Unaudited)
<TABLE>
<CAPTION>
2000 1999
<S> <C> <C>
Cash flows from operating activities:
Net Earnings........................................................... $ 21,122 $ 14,681
Adjustments to reconcile net earnings to net cash provided by
operating activities:
Premiums receivable................................................. (49,290) (51,436)
Deferred policy acquisition costs................................... (7,893) (11,206)
Residual market receivable.......................................... 1,881 485
Due to/from reinsurers.............................................. (5,162) (3,975)
Losses and loss adjustment expenses................................. 7,966 8,312
Unearned premiums................................................... 68,814 68,412
Current income taxes................................................ (5,139) (1,503)
Deferred income taxes............................................... (1,483) (157)
Deferred income..................................................... 612 440
Contingent commissions.............................................. 3,143 6,550
Other assets, liabilities and accrued expenses...................... (1,752) (3,749)
Net realized investment (gains) losses.............................. (714) 420
Other - net......................................................... 183 1,633
Net cash provided by operating activities.................... $ 32,288 $ 28,907
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
- - 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, 1999. 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 previously reported 1999 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 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, 2000 nor
comparison with the corresponding three months ended March 31, 1999
should be considered indicative of the results which may be expected for
the year ending December 31, 2000.
6 The Company purchased 168,500 shares of Treasury stock under the buyback
program during the first quarter of 2000 increasing the total shares of
Treasury Stock to 3,808,948 at March 31, 2000. The Company began a
stock buyback program during the second quarter of 1995. That 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. In May 1999, the Board of Directors approved an
additional stock buy-back program of up to 2 million shares. At March
31, 2000, the Company has authority to purchase approximately 1.3
million additional shares.
- - 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. In the first quarter of 2000, the Company entered into a Limited
Partnership Agreement with Conning Partners VI, L.P., a Delaware limited
partnership. This partnership agreement requires a commitment by the
Company to invest $50,000 into the partnership throughout the next five
years as determined by the General Partner. To date the Company has
invested $6,250 ($3,750 through March 31, 2000) into the partnership
leaving a balance of funds still committed but not paid into the
partnership of $43,750. The Partnership was formed to operate as an
investment fund principally for the purpose of making investments
primarily in equity, equity-related and other securities issued in
expansion financing, start-ups, buy-outs, and recapitalization
transactions relating to companies in the areas of insurance, financial
services, e-commerce, healthcare and related businesses, in order to
realize long-term capital returns, all as determined and managed by the
General Partner for the benefit of the Partners.
8. On February 10, 2000 the Massachusetts Division of Insurance placed
Trust Insurance Company ("Trust") in rehabilitation. At December 31,
1999, Trust was the ninth largest writer of private passenger automobile
insurance in Massachusetts, with an approximate 5% market share. On May
10, 2000, the Massachusetts Commissioner of Insurance ("Commissioner")
filed a "Motion for order approving cancellation of policies" with the
Supreme Judicial Court for Suffolk County. This motion indicates that
"there is substantial risk that Trust Insurance may be insolvent" and
further asks the court that Trust's "insurance exposures be promptly
terminated, their liabilities runoff and their true financial condition
thereby determined". Based on this motion, which the court will act
upon at some future date, all of Trust's remaining 36,000 homeowner
policies and 99,300 personal automobile policies are proposed to be
cancelled effective August 1, 2000 and October 1, 2000, respectively.
The Company is unable to determine the overall effect that this event
may have on the consolidated operating and financial position of the
Company.
9. Disclosure of Statement of Financial Accounting Standards No. 130 -
Reporting Comprehensive Income:
<TABLE>
<CAPTION>
Three Months Ended
March 31,
2000 1999
<S> <C> <C>
Net earnings..................................... $ 21,122 $ 14,681
Other comprehensive income (loss), net of taxes
(tax benefits):
Change in unrealized gains (losses), net of
income taxes (benefits) of $2,339 in 2000
and ($10,268) in 1999......................... 4,343 (19,069)
Reclassification adjustment, net of income tax
benefits of $89 in 2000 and $345 in 1999...... (165) (642)
Other comprehensive income (loss)................ 4,178 (19,711)
Comprehensive income (loss)...................... $ 25,300 $ (5,030)
</TABLE>
- - 8 -
<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 Statement of Financial Accounting Standards No. 131
- - Disclosures about Segments of an Enterprise and Related Information:
<TABLE>
<CAPTION>
Earnings Before
Income Taxes and Identifiable
Revenue Minority Interest Assets
Three Months Ended March 31, 2000
<S> <C> <C> <C>
Property and casualty insurance
Massachusetts...................... $223,602 $ 20,527 $ 1,645,440
Other than Massachusetts........... 29,689 4,223 234,192
Real estate and commercial lending... 1,550 1,550 74,229
Corporate and other.................. 652 (1,440) 8,092
Consolidated...................... $255,493 $ 24,860 $ 1,961,953
</TABLE>
<TABLE>
Three Months Ended March 31, 1999
<S> <C> <C> <C>
Property and casualty insurance
Massachusetts...................... $203,215 $ 12,152 $ 1,570,423
Other than Massachusetts........... 22,580 2,011 246,721
Real estate and commercial lending... 1,091 1,091 71,232
Corporate and other.................. 860 2,201 9,266
Consolidated...................... $227,746 $ 17,455 $ 1,897,642
</TABLE>
The acquisition of American Commerce Insurance Company ("American
Commerce"), on January 29, 1999, resulted in an additional property and
casualty insurance segment entitled "Other than Massachusetts" beginning
with the first quarter ended March 31, 1999. The 1999 "Other than
Massachusetts" numbers include two month results of American Commerce.
- - 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)
11. Disclosure of Supplemental Information:
OTHER INFORMATION:
<TABLE>
<CAPTION>
March 31,
2000 1999
<S> <C> <C>
Massachusetts policies in force
Private passenger automobile......................... 616,276 606,555
Homeowners........................................... 123,119 121,233
Commercial automobile................................ 14,698 14,620
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended
March 31,
2000 1999
<S> <C> <C>
OTHER EARNINGS STATEMENT INFORMATION:
Premiums earned by Massachusetts subsidiaries
Private passenger automobile......................... $ 186,686 $ 168,614
Homeowners........................................... $ 4,309 $ 4,151
Commercial automobile................................ $ 9,203 $ 9,176
Other lines.......................................... $ 911 $ 853
Premiums earned by subsidiaries in other states........ $ 26,198 $ 20,188*
Total........................................... $ 227,307 $ 202,982
Net investment income, after tax....................... $ 18,964 $ 17,307
Pure loss ratios of Massachusetts subsidiaries
Private passenger automobile......................... 68.4% 69.3%
Homeowners (gross of reinsurance).................... 40.5% 46.6%
Commercial automobile................................ 65.4% 75.2%
Pure loss ratios of subsidiaries in other states...... 60.0% 55.8%*
Massachusetts private passenger automobile
exposures written..................................... 279,448 276,720
Massachusetts private passenger automobile
premiums written..................................... $ 245,920 $ 228,550
</TABLE>
* Includes two month results of American Commerce since the January 29, 1999
acquisition.
12. Common Stocks
The cost and approximate fair market value of common stocks at March 31,
2000 and December 31, 1999, were as follows:
<TABLE>
<CAPTION>
March 31, 2000 December 31, 1999
Fair Market Fair Market
Cost Value Cost Value
<S> <C> <C> <C> <C>
Investments in closed-end
preferred stock mutual funds..... $ 298,257 $ 255,140 $ 267,956 $ 224,120
Investments in other equities...... 81,543 75,696 83,984 77,347
Total common stocks.. $ 379,800 $ 330,836 $ 351,940 $ 301,467
</TABLE>
- - 10 -
<PAGE>
The Commerce Group, Inc. and Subsidiaries
MANAGEMENT'S DISCUSSION AND ANALYSIS
Three months ended March 31, 2000 compared to
three months ended March 31, 1999
Premiums
The following table compares direct premiums written, net premiums
written and earned premiums for the three months ended March 31, 2000 and
1999:
<TABLE>
<CAPTION>
(Dollars in thousands)
Three Months Ended March 31,
2000 1999 Change % Change
<S> <C> <C> <C> <C>
Direct Premiums Written:
Personal Automobile in Massachusetts........ $248,791 $230,985 $ 17,806 7.7%
Personal Automobile in All Other States..... 26,569 19,514* 7,055 36.2
Commercial Automobile in Massachusetts...... 11,814 11,867 (53) (0.4)
Homeowners in Massachusetts................. 12,208 12,056 152 1.3
Homeowners in All Other States.............. 3,619 2,302* 1,317 57.2
Other Lines in Massachusetts................ 3,342 3,162 180 5.7)
Other Lines in All Other States............. 113 66* 47 71.2
Total Direct Premiums Written............ $306,456 $279,952 $ 26,504 9.5%
Net Premiums Written:
Direct Premiums............................. $306,456 $279,952* $ 26,504 9.5%
Assumed Premiums from C.A.R................. 22,519 22,677 (158) (0.7)
Ceded Premiums to C.A.R..................... (17,583) (16,420) (1,163) (7.1)
Ceded Premiums to Other than C.A.R.......... (19,458) (11,690) (7,768) (66.4)
Total Net Premiums Written............... $291,934 $274,519 $ 17,415 6.3%
Earned Premiums:
Personal Automobile in Massachusetts........ $168,351 $151,769 $ 16,582 10.9%
Personal Automobile in All Other States..... 24,962 18,041* 6,921 38.4
Commercial Automobile....................... 7,448 7,193 255 3.5
Homeowners in Massachusetts................. 4,312 4,151 161 3.9
Homeowners in All Other States.............. 1,214 2,147* (933) (43.5)
Other Lines in Massachusetts................ 842 800 42 5.3
Other Lines in All Other States............. 22 - 22 N/A
Assumed Premiums from C.A.R................. 20,087 18,827 1,260 6.7
Assumed Premiums from Other than C.A.R...... 69 54 15 27.8
Total Earned Premiums.................... $227,307 $202,982 $ 24,325 12.0%
Earned Premiums in Massachusetts............ $180,953 $163,913 $ 17,040 10.4%
Earned Premiums-Assumed..................... 20,156 18,881 1,275 6.8
Earned Premiums in All Other States......... 26,198 20,188* 6,010 29.8
Total Earned Premiums.................... $227,307 $202,982 $ 24,325 12.0%
</TABLE>
* Includes two month results of American Commerce since the January 29,
1999 acquisition.
- - 11 -
<PAGE>
The Commerce Group, Inc. and Subsidiaries
MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued)
The $17,806 or 7.7% increase in Massachusetts personal automobile direct
premiums written resulted primarily from increases of 1.0% and 2.7%, in the
number of Massachusetts personal automobile exposures for liability and
physical damage coverage, respectively, coupled with increases of 7.5% and
3.1% in the average premium rate per exposure for Massachusetts personal
automobile liability and physical damage exposures, respectively. The
components of these 1999 changes were as follows:
<TABLE>
<CAPTION>
% of Company Direct
Coverage Type Premiums Written (1) Rate Change (2)
<S> <C> <C>
Liability:
Bodily Injury................. 36.2% 1.0%
Personal Injury Protection.... 6.8 6.3
Property Damage to Others..... 21.0 21.4
Total Liability........... 64.0 7.5
Physical Damage:
Collision..................... 23.5 2.9
Comprehensive................. 12.5 3.4
Total Physical Damage..... 36.0 3.1
Total..................... 100.0% 6.5%
</TABLE>
(1) Represents the percentage of the Company's total direct private
passenger automobile premiums written in Massachusetts through March
31, 2000.
(2) Represents the change in the 2000 three month average rate per
exposure from the 1999 three month average rate charged by the Company
for Massachusetts private passenger automobile premiums through March
31 of each year.
The above percentage changes for the first quarter of 2000 were
primarily the result of rate modifications in the individual coverage
components in the 2000 state mandated average rate increase, combined with
changes in the Company's safe driver rate deviations. The combination of
these factors resulted in a 6.5% increase in the average personal automobile
premium per exposure for the first quarter of 2000 as compared to 8.7% during
the first quarter of 1999. Despite the 2000 state mandated average rate
increase of only 0.7%, the Company's increase in the average personal
automobile premium per exposure was primarily due to the above noted changes
coupled with the fact that the rate decision does not anticipate purchases of
new automobiles in the year in which the rate decision applies and the
Company's mix of personal automobile business differs from that of the
industry. In 2000, the Company offered its customers safe driver deviations
of 6.0% to drivers with SDIP classifications of Step 9 and 2.0% for Step 10
(8.0% for Step 9 and 3.0% for Step 10 in 1999).
The AAA affinity group discount for 2000 was established at 6.0% which
was unchanged from 1999. In 2000, for drivers who qualify, the Company's AAA
affinity group discount and safe driver deviations can be combined for up to
an 11.6% reduction (13.5% in 1999) from state mandated rates.
- - 12 -
<PAGE>
The Commerce Group, Inc. and Subsidiaries
MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued)
The $7,055 or 36.2% increase in other states personal automobile direct
premiums written was primarily attributable to American Commerce, located in
Columbus, Ohio, which was acquired January 29, 1999, and whose 2000 results
reflect a full three month quarter as compared to a two month quarter in 1999.
Personal automobile direct premiums written by American Commerce for the first
three months of 2000 were $20,238 as compared to $13,533 for the two month
period ended March 31, 1999. Personal automobile direct premiums written for
Commerce West Insurance Company ("Commerce West"), located in Pleasanton,
California, increased $350 or 5.9% to $6,331 during the first quarter of 2000
as compared to $5,981 during the same period a year ago. . Both American
Commerce and Commerce West write predominantly personal automobile insurance.
American Commerce writes personal automobile insurance in 25 states while
Commerce West writes personal automobile insurance in the state of California.
Both companies target preferred insurance risks.
Direct premiums written for Massachusetts commercial automobile
insurance decreased slightly by $53 or 0.4%, due primarily to an increase of
approximately 2.1% in the number of policies written, offset by a 2.5%
decrease in the average commercial automobile premium per policy.
Direct premiums written for Massachusetts homeowners insurance
(excluding the Massachusetts FAIR Plan) increased by $152, or 1.3% due
primarily to a 6.1% increase in the number of policies written offset by a
4.6% decrease in the average premium per policy. The $1,317 increase in other
state homeowners insurance was primarily the result of a the three month first
quarter in 2000 versus a two month first quarter in 1999 for American Commerce
described earlier.
The $17,415 or 6.3% increase in net premiums written was due to the
growth in direct premiums written as described above offset primarily by an
increase to premiums ceded to reinsurers other than the Commonwealth
Automobile Reinsurers ("C.A.R."). Premiums ceded to reinsurers other than
C.A.R. during the first quarter of 2000 increased $7,768 or 66.4% as compared
to the first quarter of 1999 as a result of American Commerce joining the
quota-share reinsurance program effective January 1, 2000. An unearned
premium transfer of approximately $6.0 million occurred effective January,
2000.
The $24,325 or 12.0% increase in earned premiums during the first
quarter of 2000 as compared to the first quarter of 1999 was primarily
attributable to increases to the average rates per exposure for Massachusetts
personal automobile liability and physical damage, mentioned previously. This
resulted in a $17,040 or 10.4%, increase for Massachusetts earned premiums.
The remaining increases were attributable to a $1,260 or 6.7% increase in
earned premiums assumed from C.A.R., a $15 or 27.8% increase in earned
premiums assumed from ANI and Fair Plan and a $6,263 or 43.0% increase
attributable to American Commerce. The increases were offset by a decrease of
$253 or 4.5% in earned premiums from Commerce West. The increase in earned
premiums for American Commerce is primarily attributable to the three month
first quarter of 2000 versus the two month first quarter in 1999.
- - 13 -
<PAGE>
The Commerce Group, Inc. and Subsidiaries
MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued)
Investment Income
Net investment income is affected primarily by the composition of the
Company's investment portfolio. The following table summarizes the
composition of the Company's investment portfolio, at cost, at March 31, 2000
and 1999:
<TABLE>
<CAPTION>
Investments, at cost March 31,
(Dollars in thousands) % of % of
2000 Invest. 1999 Invest.
<S> <C> <C> <C> <C>
Fixed maturities (GNMA & FNMA mortgage-
backed bonds, Corporate bonds, U.S.
Treasury bonds and notes and Tax-
exempt state and municipal bonds).... $ 660,238 48.0% $ 720,952 55.9%
Preferred stocks....................... 230,575 16.8 195,159 15.2
Investments in closed-end
preferred stock mutual funds......... 298,257 21.7 177,161 13.7
Other equity securities................ 81,543 5.9 106,000 8.2
Total common stocks................ 379,800 27.6 283,161 21.9
Total equities..................... 610,375 44.4 478,320 37.1
Mortgages and collateral loans (net of
allowance for possible loan losses).. 73,814 5.4 70,700 5.5
Cash and short-term investments........ 12,173 0.9 9,021 0.7
Other investments...................... 18,453 1.3 9,627 0.8
Total investments.................. $1,375,053 100.0% $1,288,620 100.0%
</TABLE>
The Company's investment strategy is to maximize after-tax investment
income through high quality securities coupled with acquiring equity
investments which may forgo current investment yield in favor of potential
higher yielding future capital appreciation.
As depicted in the accompanying table, first quarter 2000 net investment
income increased $2,022 or 9.7%, compared to the same period in 1999,
principally as a result of an increase in average invested assets (at cost).
Net investment income as a percentage of total average investments was 6.5% in
both the first quarter of 2000 and 1999. Net investment income after tax as a
percentage of total average investments was 5.4% in both the first quarter of
2000 and 1999.
<TABLE>
<CAPTION>
Investment Return At March 31,
(Dollars in thousands) 2000 1999
<S> <C> <C>
Average month-end investments (at cost)... $1,405,815 $1,271,955
Net investment income..................... 22,832 20,810
Net investment income after-tax........... 18,964 17,307
Net investment income as a percentage
of average net investments (at cost).... 6.5% 6.5%
Net investment income after-tax as a
percentage of average net
investments (at cost)................... 5.4% 5.4%
</TABLE>
- - 14 -
<PAGE>
The Commerce Group, Inc. and Subsidiaries
MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued)
Premium Finance and Service Fees
Premium finance and service fees decreased $68 or 1.8% during the first
quarter of 2000 as compared to the same period in 1999. The decrease for the
first quarter of 2000 as compared to the first quarter of 1999 was the result
of fewer billing invoices mailed to insureds primarily due to increased
utilization of direct deposit payments and earlier payment premiums.
Amortization of Excess of Book Value of Subsidiary Interest over Cost
As a result of the acquisition of American Commerce, the amount
representing the excess of the fair value of the net assets acquired over the
purchase price at January 29, 1999 was $16,465. The amount is being amortized
into revenue on a straight-line basis over a five-year period. The amount
amortized into revenue increased $334 or 65.0% in the first quarter of 2000 to
$848 as compared to the same period in 1999. The increase is primarily
attributable to the three months of amortization during the first quarter of
2000 versus the two months of amortization during the first quarter of 1999.
Investment Gains and Losses
Net realized investment gains totaled $714 during the first quarter of
2000 as compared to net realized investment losses of $420 during the same
period in 1999. A significant portion of the net realized gains in 2000 was
the result of sales of common stocks, preferred stocks, non-taxable bonds and
mortgage activity partially offset by net realized losses on the maturity of
Government National Mortgage Association ("GNMA") mortgage backed bonds. Net
realized losses during the first quarter of 1999 were primarily the result of
the maturity of GNMAs and sales of non-taxable bonds, preferred stocks and
common stocks offset by net realized gains on the sales of short-term
investments.
Loss and Loss Adjustment Expenses
Losses and loss adjustment expenses ("LAE") incurred increased $18,014
or 11.7% during the first three months of 2000 as compared to the same period
a year ago. The increase was attributable to higher incurred losses on
Massachusetts business, which was the direct result of the increased personal
automobile direct premiums written discussed earlier, and losses and LAE
assumed from C.A.R. offset by a decrease in unpaid loss adjustment expenses.
Losses and LAE incurred (on a statutory basis) as a percentage of insurance
premiums earned ("loss ratio") decreased to 75.8% for the first three months
of 2000 compared to 76.6% for the first three months of 1999. The slight
decrease in the loss ratio was primarily due to 12.0% increase in earned
premiums as described earlier. The ratio of net incurred losses, excluding
LAE, to premiums earned ("pure loss ratio") on Massachusetts personal
automobile was 68.4% for the first three months of 2000 compared to 69.3% for
the same period a year ago. The commercial automobile pure loss ratio
decreased to 65.4% during the first three months of 2000 as compared to 75.2%
for the same period a year ago. This decrease was primarily due to better
loss experience during this period. For homeowners (gross of reinsurance),
the pure loss ratio was 40.5% during the first three months of 2000 as
compared to 46.6% for the same period a year ago. This decrease was also
primarily the result of better loss experience during this period.
- - 15 -
<PAGE>
The Commerce Group, Inc. and Subsidiaries
MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued)
Pure loss ratios of subsidiaries in other states increased to 60.0% during the
first three months of 2000 as compared to 55.8% for the same period a year
ago. The pure loss ratio was also impacted by increases to total expenses
related to the Company's management incentive compensation plan and the
American Commerce agency stock option plan. Total expenses for these plans
were $1,937 higher during the first three months of 2000 as compared to the
same period a year ago. The increase was partially driven by increases,
during the first three months of 2000, in the market price of the Company's
common stock and by the 1999 implementation of the American Commerce agency
stock option plan which resulted in an additional $207 in expenses during the
first three months of 2000 as compared to the same period a year ago. These
management incentive and agency stock option expenses are directly impacted by
the market price of the Company's common stock.
Policy Acquisition Costs
Policy acquisition costs expensed increased by $2,328, or 4.2% during
the first three months of 2000 as compared to the same period a year ago. As
a percentage of net premiums written, underwriting expenses for the insurance
companies (on statutory basis) decreased to 22.6% for the first three months
of 2000 as compared to 25.3% for the same period a year ago. The decrease was
primarily attributable to lower direct commission expense, as a percentage of
net premiums written and a $3,500 decrease in the provision for accrued
contingent commissions for the first three months of 2000 as compared to the
same period a year ago. Total expenses related to the Company's management
incentive compensation plan and the American Commerce agency stock option plan
included in policy acquisition costs were $1,670 higher during the first three
months of 2000 as compared to the same period a year ago. The increase was
partially driven by increases, during the first three months of 2000, in the
market price of the Company's common stock and by the 1999 implementation of
the American Commerce agency stock option plan which resulted in an additional
$169 in expenses during the first three months of 2000 as compared to the same
period a year ago. These management incentive and agency stock option
expenses are directly impacted by the market price of the Company's common
stock.
Income Taxes
The Company's effective tax rate was 14.6% for the first three months of
2000 as compared to 15.8% for the same period a year ago. In both years the
effective rate was lower than the statutory rate of 35% primarily due to tax-
exempt interest income and the corporate dividends received deduction. The
lower effective tax rate for the first three months of 2000 was the result of
the tax exempt interest and the dividends received deduction comprising a
greater portion of earnings before taxes.
Minority Interest
As a result of the joint venture with AAA Southern New England ("AAA
SNE") and the acquisition of American Commerce, the Company's interest in ACIC
Holding Co., Inc., through Commerce, a wholly-owned subsidiary of Commerce
Holdings, Inc. ("Commerce Holdings"), is represented by ownership of 80% of
the outstanding shares of common stock at March 31, 2000. AAA SNE maintains a
20% common stock ownership. The minority interest of $114 included in these
consolidated financial statements for the first quarter of 2000 represents
20% of the net earnings for ACIC Holding Co., Inc. which is calculated after
the $2,250 preferred stock dividend paid to Commerce.
- - 16 -
<PAGE>
The Commerce Group, Inc. and Subsidiaries
MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued)
Net Earnings
Net earnings increased $6,441, or 43.9% to $21,122, during the first
three months of 2000 as compared to $14,681 for the same period a year ago.
Operating earnings, which exclude the after-tax impact of net realized
investment gains, increased $5,806, or 39.1% to $20,658 during the first three
months of 2000 as compared to $14,954 for the same period a year ago, both as
a result of the factors previously mentioned.
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 increased by $11,418, or 1.8%,
during the first three months of 2000 as compared to the same period a year
ago. The increase resulted from $21,122 in net earnings and by changes in
other comprehensive income, net of income taxes, on fixed maturities and
preferred and common stocks of $4,178, offset by dividends paid to
stockholders of $9,573 and Treasury Stock purchased of $4,309. Total assets
at March 31, 2000 increased $90,481, or 4.8% to $1,961,953 as compared to
total assets of $1,871,472 at December 31, 1999. The majority of this growth
is reflected in an increase of invested assets, at market value, of $29,369 or
2.3%, of $49,290 or 25.3% in premiums receivable, a $7,893 or 8.0% increase in
deferred policy acquisition costs, a $5,162 or 10.7% increase in receivable
from reinsurers offset by a $1,233 or 0.5% decrease in all other assets
combined. The increase to premiums receivable is attributable to the
seasonality of the policy effective dates of the Company's business. The
increase in invested assets is attributable to increases to the Company's
holdings of closed-end preferred stock mutual funds as shown in the table
below.
The Company's investment portfolio, at market, is shown on the following
table as of March 31, 2000 and December 31, 1999 (for investments, at cost,
refer to the table found on page 14):
<TABLE>
<CAPTION>
March 31, December 31,
Investments, at market % of % of
(Dollars in thousands) 2000 Invest. 1999 Invest.
<S> <C> <C> <C> <C>
Fixed maturities (GNMA & FNMA mortgage-
backed bonds Corporate bonds, U.S.
Treasury bonds and notes Tax-
exempt state and municipal bonds).... $ 651,668 50.2% $ 647,338 51.0%
Preferred stocks....................... 210,077 16.2 211,049 16.6
Investment in closed-end
preferred stock mutual funds......... 255,140 19.7 224,120 17.7
Other equity securities................ 75,696 5.8 77,347 6.1
Total common stocks................ 330,836 25.5 301,467 23.8
Total equities..................... 540,913 41.7 512,516 40.4
Mortgages and collateral loans (net of
allowance for possible loan losses).. 73,814 5.7 72,451 5.7
Cash and short-term investments........ 12,173 0.9 22,535 1.8
Other investments...................... 19,780 1.5 14,139 1.1
Total investments.................. $1,298,348 100.0% $1,268,979 100.0%
</TABLE>
- - 17 -
<PAGE>
The Commerce Group, Inc. and Subsidiaries
MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued)
The Company's fixed maturity portfolio is comprised of GNMAs and FNMA
mortgage backed bonds (13.0%), municipal bonds (80.1%), corporate bonds (6.4%)
and U.S. Treasury bonds (0.5%). As of March 31, 2000, the book value of the
Company's fixed maturity portfolio exceeded its market value by $8,570 ($5,570
after taxes, or $0.16 per share). The cost of the Company's preferred stocks
exceeded market value by $20,498 ($13,324 after taxes, or $0.39 per share).
The cost of the Company's common stocks exceeded market value by $48,964
($31,827 after taxes, or $0.93 per share).
Preferred stocks decreased $972, or 0.5% and common stocks (primarily
composed of closed-end preferred stock mutual funds) increased $29,369, or
9.7%, during the first three months of 2000 primarily as a result of the
Company's investment strategy which included the joint-venture acquisition of
American Commerce on January 29, 1999. The Company's strategy is to maximize
after-tax investment income through high quality securities coupled with
acquiring equity investments which may forego current investment yield in
favor of potential higher yielding capital appreciation in the future.
The Company's liabilities totaled $1,302,372 at March 31, 2000 as
compared to $1,223,650 at December 31, 1999. The $78,722 or 6.4% increase was
comprised of an increase of $7,966 or 1.2% in loss and loss adjustment expense
reserves, an increase of $68,814 or 15.1% in unearned premiums, an increase of
$3,143 or 9.4% in contingent commissions accrued offset by a decrease of $293,
or 2.7% in excess of book value of subsidiary interest over cost (formerly
referred to as Negative Goodwill) associated with the January 29, 1999
acquisition of American Commerce. The net effect of all other liabilities
decreased $908 or 1.9%. The significant increase to the Company's unearned
premiums was attributable to the seasonality of the policy effective dates of
the Company's business coupled with higher average premiums per exposure for
Massachusetts auto business as described earlier.
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 sale of investments as reflected in the Consolidated
Statements of Cash Flows on pages 5 and 6.
The Company's operating activities provided cash of $32,288 in the first
three months of 2000, as compared to $28,907 during the same period a year
ago. These cash flows were primarily impacted by the fact that while premiums
collected increased $33,301, or 15.2% in the first three months of 2000,
losses and LAE paid increased $23,873, or 16.0% and federal income tax
payments increased $5,824 or 131.7% in the first three months of 2000 as
compared to the same period a year ago. The increase in premiums was
primarily the result of the slight increases to both liability (1.0%) and
physical damage (2.7%) exposures combined with an average overall rate
increase in premium per exposure of 6.5%.
The increase in net losses and LAE paid, which includes the change in
the losses and LAE liability of $7,966, increased $23,873 or 16.0%. This
increase resulted primarily from the previously mentioned increase in the
losses and LAE liability, an increase of $11,242 in incurred losses on
Massachusetts business and $4,937 on Other than Massachusetts business. The
increase in incurred losses on Massachusetts business is primarily
attributable to higher private passenger automobile collision payments. The
increase in incurred losses on Other than Massachusetts business is primarily
attributable to three months of activity for the quarter ended March 31, 2000
versus two months of activity for the quarter ended March 31, 1999 for
American Commerce.
- - 18 -
<PAGE>
The Commerce Group, Inc. and Subsidiaries
MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued)
The net cash flows used in investing activities were primarily the
result of purchases of fixed maturities and equity securities (predominantly
closed-end preferred stock mutual funds), which were offset by proceeds from
the sale and maturity of fixed maturities and equity securities (predominantly
common stocks and preferred stocks). Investing activities were funded by
accumulated cash and cash provided by operating activities during 2000 and
1999.
Cash flows used in financing activities totaled $13,882 during the first
three months of 2000 compared to $41,839 during the same period a year ago.
The 2000 cash flows used in financing activities consisted of $9,573 in
dividends paid to stockholders and $4,309 used to purchase 168,500 shares of
Treasury Stock under the Company's stock buyback programs. The 1999 cash
flows used in financing activities consisted of dividends paid to stockholders
of $9,232 and $32,607 used to purchase 1,185,900 shares of Treasury Stock.
The Company's funds are generally invested in securities with maturities
intended to provide adequate funds to pay claims without the forced sale of
investments. The carrying value (at market) of total investments at March 31,
2000 was $1,298,348. At March 31, 2000, the Company held cash and short-term
investments of $12,173. 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. Every
Massachusetts insurance company seeking to make any dividend or other
distributions to its stockholders may, within certain limitations, pay such
dividends and then file a report with the Commissioner. Dividends in excess
of these limitations are called extraordinary dividends. An extraordinary
dividend is any dividend or other property, whose fair value together with
other dividends or distributions made within the preceding twelve months
exceeds the greater of ten percent of the insurer's surplus as regards to
policyholders as of the end of the preceding year, or the net income of a non-
life insurance company for the preceding year. No pro-rata distribution of
any class of the insurer's own securities is to be included. No Massachusetts
insurance company shall pay an extraordinary dividend or other extraordinary
distribution until thirty days after the Commissioner has received notice of
the intended distribution and has not objected. No extraordinary dividends
were paid in 2000 and 1999.
Periodically, sales have been made from the Company's fixed maturity
investment portfolio to actively manage portfolio risks, including credit-
related concerns, to optimize tax planning and to realize gains. This
practice will continue in the future.
Industry and regulatory guidelines suggest that the ratio of a property
and casualty insurer's annual net premiums written to statutory policyholders'
surplus should not exceed 3.00 to 1.00. The Company's statutory premiums to
surplus ratio was 1.94 to 1.00 and 1.60 to 1.00 for the three months ended
March 31, 2000 and 1999, respectively.
In keeping with the Company's long-term growth objective to expand
outside Massachusetts, in 1995 the Company acquired Commerce West, a personal
automobile insurer, located in Pleasanton, California. Most recently, the
Company formed a joint venture (ACIC Holding Co., Inc.) in November 1998, and
acquired, American Commerce located in Columbus, Ohio, in January 1999.
American Commerce writes automobile and homeowners insurance solely through 34
AAA independent insurance agencies in 25 states.
- - 19 -
<PAGE>
The Commerce Group, Inc. and Subsidiaries
MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued)
In early 1999, Commerce, a subsidiary of the Company, invested $90,800
in the joint venture (ACIC Holding Co., Inc.) to fund the American Commerce
acquisition and to capitalize the joint venture that is owned together with
AAA SNE. Of this $90,800, Commerce invested $90,000 in the form of preferred
stock and an additional $800 representing its 80% common stock ownership. The
terms of the preferred stock call for quarterly cash dividends at the rate of
10% per annum. In the event cash dividends cannot be paid, additional
preferred stock will be issued. AAA SNE invested $200 representing its 20%
common stock ownership. Commerce consolidates ACIC Holding Co., Inc. and it's
wholly-owned subsidiary, American Commerce, for financial reporting and tax
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 existed 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 have failed and produced
erroneous results. The impact of this could have lead to a material adverse
impact upon the Company's business including policy and claims processing. As
a result, considerable effort took 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 initiated the Century Change
project to address all internal/external systems, software, agents, third
parties and vendors in dealing with year 2000 compliance. No processing
problems have been encountered to date during the year 2000, regarding any of
these areas.
The Company's Executive Committee, as well as all departments in the
Company, reviewed issues dealing with identifying possible year 2000 worst
case scenarios and developed contingency plans to respond to the likelihood of
these scenarios. Contingency plans were developed, where deemed appropriate,
for all material systems and relationships during 1999. Previously,
contingency plans had been developed for the continuation of policy and claim
processing in the event that the Company's computer systems were not available
due to a year 2000 related failure. No problems (worst case or otherwise)
have been encountered during the year 2000, and it has not been necessary to
activate any contingency plans.
The project, which involved internal staff costs as well as consulting
expenses to prepare the systems for the year 2000 was completed prior to
December 31, 1999. No additional costs have been incurred in 2000 as a result
of this project.
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.
- - 20 -
<PAGE>
The Commerce Group, Inc. and Subsidiaries
MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued)
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 market risk by focusing on higher quality equity
and fixed income investments, by periodically monitoring the credit strength
of 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.
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. For 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,
2000 and 1999, the Company's estimated market exposure for a 200 basis point
increase (decrease) in interest rates was calculated. A 200 basis point
increase results in a decrease in the market value of the fixed maturities and
preferred stocks of $86,863 and $73,710, respectively. A 200 basis point
decrease results in an increase in the market value of the same securities of
$47,157 and $46,975, respectively. The equity price risk impact at March 31,
2000 and 1999, based upon a 10% increase in the fair value of common stocks,
would be an increase of $33,084 and $28,050, respectively. Based upon a 10%
decrease, common stocks would decrease $33,084 and $28,050, respectively.
This analysis was further exemplified during 1999 as the Company experienced a
decline in the market value of investments, net of taxes, of $78,162 primarily
as evidenced by an increase in long-term interest rates during this period.
Long-term interest rates (30-year Treasury Bond) increased to 6.48% at
December 31, 1999 from 5.08% at December 31, 1998. Long-term interest rates
(30-year Treasury Bond) were 5.85% at March 31, 2000 and 5.62% at March 31,
1999.
Stock Buyback and Dividends
The Company purchased 168,500 shares of Treasury Stock under the stock
buyback program during the first quarter of 2000 increasing total shares of
Treasury Stock to 3,808,948 at March 31, 2000. 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, 2000,
the Company completed its share purchases under that program. At March 31,
2000, the Company has authority to purchase approximately 1.3 million
additional shares.
- - 21 -
<PAGE>
The Commerce Group, Inc. and Subsidiaries
MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued)
The Company's Employee Stock Ownership Plan has purchased more than
1,150,000 shares in open market transactions since the May, 1995 buyback
program was announced. No shares were purchased during the first three months
of 2000 as compared to 171,750 shares for $5,024,000 during the same period in
1999.
On March 17, 2000, the Company paid a quarterly dividend of $0.28 to
stockholders of record as of March 3, 2000. The Company increased its
quarterly dividend to stockholders from $0.27 to $0.28 during the second
quarter of 1999.
Recent Accounting Developments
During 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities" ("FASB 133") effective for
financial statements issued for fiscal years beginning after June 15, 1999.
Subsequently, during 1999, FASB issued Financial Accounting Standards No. 137
"Deferral of the Effective Date of FASB Statement 133" ("FASB 137"). The
adoption date was delayed to fiscal years beginning after June 15, 2000. The
Company had no derivative or hedging activity the first quarter of 2000.
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
PART II - OTHER INFORmation
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Form 8-K - none filed during the first quarter of 2000.
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
- - 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 2000.
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
- - 23 -
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 7
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 12-MOS
<FISCAL-YEAR-END> DEC-31-2000 DEC-31-1999
<PERIOD-END> MAR-31-2000 DEC-31-1999
<DEBT-HELD-FOR-SALE> 0 0
<DEBT-CARRYING-VALUE> 660,238 661,445
<DEBT-MARKET-VALUE> 651,668 647,338
<EQUITIES> 330,836 512,516
<MORTGAGE> 73,814 72,451
<REAL-ESTATE> 0 0
<TOTAL-INVEST> 1,298,348 1,268,979
<CASH> 12,173 22,535
<RECOVER-REINSURE> 53,527 48,365
<DEFERRED-ACQUISITION> 106,393 98,500
<TOTAL-ASSETS> 1,961,953 1,871,472
<POLICY-LOSSES> 683,154 675,188
<UNEARNED-PREMIUMS> 525,909 457,095
<POLICY-OTHER> 0 0
<POLICY-HOLDER-FUNDS> 0 0
<NOTES-PAYABLE> 0 0
0 0
0 0
<COMMON> 19,000 19,000
<OTHER-SE> 639,052 627,634
<TOTAL-LIABILITY-AND-EQUITY> 1,961,953 1,871,472
227,307 871,830
<INVESTMENT-INCOME> 22,832 89,787
<INVESTMENT-GAINS> 714 8,130
<OTHER-INCOME> 4,640 17,793
<BENEFITS> 172,429 625,090
<UNDERWRITING-AMORTIZATION> 58,204 233,660
<UNDERWRITING-OTHER> 0 0
<INCOME-PRETAX> 24,860 128,790
<INCOME-TAX> 3,624 27,154
<INCOME-CONTINUING> 21,236 101,636
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> (114) 952
<NET-INCOME> 21,122 102,588
<EPS-BASIC> 0.62 2.94
<EPS-DILUTED> 0.62 2.94
<RESERVE-OPEN> 0 498,829
<PROVISION-CURRENT> 0 664,978
<PROVISION-PRIOR> 0 (39,888)
<PAYMENTS-CURRENT> 0 383,707
<PAYMENTS-PRIOR> 0 243,496
<RESERVE-CLOSE> 0 675,188
<CUMULATIVE-DEFICIENCY> 0 0
</TABLE>
