UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 OR 15(d) of the Securities Exchange Act of 1934
Date of Report
(Date of earliest event reported)
October 22, 2004
THE COMMERCE GROUP, INC.
(Exact name of registrant as specified in its charter)
Massachusetts 001-13672 04-2599931
(State or other (Commission File (IRS Employer
jurisdiction Number) 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
Check the appropriate box below if the Form 8-K filing is
intended to simultaneously satisfy the filing obligation of the
registrant under any of the following provisions (see General
Instruction A.2 below):
[ ] Written communications pursuant to Rule 425 under the
Securities Act (17 CFR 230.425)
[ ] Soliciting material pursuant to Rule 14a-12 under the
Exchange Act (17 CFR 240.14a-12)
[ ] Pre-commencement communications pursuant to Rule 14d-2(b)
under the Exchange Act (17 CFR 240.14d-2(b))
[ ] Pre-commencement communications pursuant to Rule 13e-4(c)
under the Exchange Act (17 CFR 240.14e-4(c))
Page 1 of 9
The Commerce Group, Inc.
Form 8-K
October 22, 2004
Section 2. Financial Information
Item 2.02 Results of Operations and Financial
Condition
The following information is being furnished under Item 2.02
- Results of Operations and Financial Condition. Such
information, including the exhibit attached hereto, shall not be
deemed "filed" for purposes of Section 18 of the Securities
Exchange Act of 1934, as amended, or otherwise subject to the
liability of that section.
On October 21, 2004, The Commerce Group, Inc. (the
"Company") issued a press release announcing its results for the
quarter ended September 30, 2004. A copy of the press release is
attached as Exhibit 99.1 to this Form 8-K.
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 hereunto duly authorized.
THE COMMERCE GROUP, INC.
October 22, 2004
/s/ Randall V. Becker
Randall V. Becker
Treasurer and Accounting Officer
Page 2 of 9
Exhibit 99.1
Press Release
RELEASE: Immediate (October 21, 2004)
CONTACT: Randall V. Becker
Treasurer
(508) 949-4129
The Commerce Group, Inc.
Announces 2004 Third Quarter Results
and Comparison to 2003
WEBSTER, Mass., October 21, 2004 -- The Commerce Group, Inc.
(NYSE:CGI) today reported 2004 third quarter results. Net earnings
were $54.3 million, or $1.64 per diluted share, compared to net
earnings of $22.9 million or $0.71 per diluted share for 2003.
During the third quarter of 2004, the Company had net realized
investment losses of $2.2 million or $0.04 per diluted share, compared
to gains of $2.6 million or $0.05 per diluted share in the third
quarter of 2003. A complete breakdown of this information is included
in the attached tables.
Earned premiums were $413.8 million for the third quarter of 2004,
compared to $372.7 million for 2003. A schedule of direct written
premiums to earned premiums is included in the attached tables.
The third quarter GAAP consolidated operating combined ratio was
88.6%, compared to 99.6% for 2003. The decrease in the combined ratio
was the result of a decrease in the loss ratio partially offset by an
increase in the underwriting ratio. The Company's GAAP consolidated
loss ratio for the third quarter of 2004 decreased to 57.5% from 75.1%
during the same period last year. The improvement was the result of
several factors, including: (1) an increase in average earned premium
revenue per automobile; (2) a decrease in the current year personal
automobile physical damage claim frequency; (3) more favorable loss
reserve development compared to the third quarter of last year; and,
(4) improved results from Commonwealth Automobile Reinsurers (C.A.R.)
due to a decrease in our estimate of the overall C.A.R. deficit. The
Company's GAAP consolidated underwriting ratio increased to 31.1%, as
compared to 24.5% for last year's third quarter, primarily as a net
result of significantly higher accrued agents' profit sharing
partially offset by lower 2004 policy year mandated Massachusetts
personal automobile commission rates. The higher agents' profit
sharing is the result of substantially better underwriting results for
the third quarter of 2004 versus last year's third quarter.
Cumulative September 30, 2004 Results
Net earnings for the first nine months of 2004 were $142.7 million, or
$4.35 per diluted share, compared to net earnings of $107.3 million or
$3.33 per diluted share for the 2003 period.
During the first nine months of 2004, the Company had net realized
investment gains of $9.6 million or $0.19 per diluted share, compared
to gains of $62.7 million or $1.39 per diluted share in the same
period of 2003. A complete breakdown of this information is included
in the attached tables.
MORE
Page 3 of 9
CGI 3Q'04 Earnings Release (page 2 of 7)
Earned premiums were $1,213.8 million for the first nine months of
2004, compared to $1,061.0 million for 2003. A schedule of direct
written premiums to earned premiums is included in the attached
tables.
The 2004 nine-month GAAP consolidated operating combined ratio was
91.0%, compared to 100.1% for 2003. The decrease in the combined
ratio was the result of a decrease in the loss ratio, partially offset
by an increase in the underwriting ratio. The Company's GAAP
consolidated loss ratio for the first nine months of 2004 decreased to
65.6% from 77.6% during the same period last year. The improvement
was the result of several factors, including: (1) an increase in
average earned premium revenue per automobile; (2) a decrease in the
current year personal automobile physical damage claim frequency; (3)
more favorable loss reserve development compared to the third quarter
of last year; and, (4) improved results from C.A.R. due to a decrease
in our estimate of the overall C.A.R. deficit. The Company's GAAP
consolidated underwriting ratio increased to 25.4%, as compared to
22.5% for last year's third quarter, primarily as a net result of
significantly higher accrued agents' profit sharing, partially offset
by lower 2004 policy year mandated Massachusetts personal automobile
commission rates. The higher agents' profit sharing is the result of
substantially better underwriting results for the nine months of 2004
versus last year's nine months.
A complete presentation of September 30, 2004 and 2003 financial
statement information, including a breakdown of the components of the
combined ratio and realized investment gains and losses, is included
in the financial statements attached to this press release.
Additional supplemental financial information will be available on
October 22nd on the Company's website at www.commerceinsurance.com,
under the "Links" section of the "News and Investor Information" area.
At September 30, 2004, the Company had authority to purchase
approximately 858,000 additional shares of common stock under the
current Board of Directors' stock re-purchase authorization, which
excludes treasury stock acquired as a result of officer stock option
exercises. During the third quarter, the Company issued approximately
247,000 shares of common stock related to all option exercises.
All quarterly figures are unaudited and all results are reported in
accordance with accounting principles generally accepted in the United
States (GAAP).
About The Commerce Group, Inc.
The Commerce Group, Inc. is headquartered in Webster, Massachusetts.
Property and casualty insurance subsidiaries include The Commerce
Insurance Company and Citation Insurance Company in Massachusetts,
Commerce West Insurance Company in California, and American Commerce
Insurance Company in Ohio. Through its subsidiaries' combined
insurance activities, the Company is ranked as the 20th largest
personal automobile insurance group in the country by A. M. Best
Company, based on 2003 direct written premium information.
MORE
Page 4 of 9
CGI 3Q'04 Earnings Release (page 3 of 7)
Forward Looking Statements
This press release may contain statements that are not historical fact
and constitute "forward-looking statements" within the meaning of
Section 27A of the Securities Act and Section 21E of the Securities
Exchange Act.
Statements about our expectations, beliefs, plans, objectives,
assumptions or future events or performance are not historical facts
and may be forward-looking. These statements are often, but not
always, made through the use of words or phrases such as
"anticipates," "estimates," "plans," "projects," "continuing,"
"ongoing," "expects," "may," "should," "management believes," "we
believe," "we intend," and similar words or phrases.
These statements may address, among other things, our strategy for
growth, business development, regulatory approvals, market position,
expenditures, financial results and reserves. Accordingly, these
statements involve estimates, assumptions and uncertainties that could
cause actual results to differ materially from those expressed in
them. All forward-looking statements are qualified in their entirety
by reference to the factors discussed throughout this press release
and in our Forms 10-K and 10-Q, and other documents filed with the
SEC. Among the key factors that could cause actual results to differ
materially from forward-looking statements:
* the possibility of severe weather and adverse catastrophe
experiences;
* adverse trends in claim severity or frequency;
* adverse state and federal regulations and legislation;
* adverse judicial decisions;
* adverse changes to the laws, regulations and rules governing the
residual market system in Massachusetts;
* interest rate risk;
* rate making decisions for private passenger automobile policies
in Massachusetts;
* potential rate filings;
* heightened competition;
* concentration of business within Massachusetts;
* market disruption in Massachusetts, if competitors exited the
market or become insolvent;
* dependence on our executive officers; and,
* the economic, market or regulatory conditions and risks
associated with entry into new markets and diversification.
You should not place undue reliance on any forward-looking statement.
The risk factors referred to above could cause actual results or
outcomes to differ materially from those expressed in any forward-
looking statement made by us or on our behalf. Further, any forward-
looking statement speaks only as of the date on which it is made, and
we undertake no obligation to update any forward-looking statement to
reflect events or circumstances after the date on which the statement
is made or to reflect the occurrence of unanticipated events. New
factors emerge from time to time, and it is not possible for us to
predict which factors will arise. In addition, we cannot assess the
impact of each factor on our business or the extent to which any
factor, or combination of factors, may cause actual results to differ
materially from those contained in any forward-looking statements.
(Tables Follow)
Page 5 of 9
CGI 3Q '04 Earnings Release (page 4 of 7)
THE COMMERCE GROUP, INC. (NYSE - CGI)
CONSOLIDATED BALANCE SHEETS
September 30, 2004 and 2003
(Thousands of Dollars, Except Per Share Data)
Unaudited
Sept. 30, Sept. 30,
2004 2003
Assets
Investments
Fixed maturities, at market $ 1,672,827 $ 1,114,094
Preferred stocks, at market $ 421,373 $ 302,901
Common stocks, at market $ 96,725 $ 94,558
Preferred stock mutual funds, at equity $ 56,051 $ 129,666
Mortgage loans and collateral notes receivable $ 14,390 $ 17,278
Cash and cash equivalents $ 107,224 $ 128,519
Other investments $ 35,791 $ 24,190
Total investments $ 2,404,381 $ 1,811,206
Accrued investment income $ 19,511 $ 14,543
Premiums receivable $ 458,605 $ 407,204
Deferred policy acquisition costs $ 175,555 $ 161,828
Property and equipment, net $ 51,529 $ 50,930
Due from reinsurers $ 135,687 $ 113,302
Residual market receivable $ 214,069 $ 190,744
Current income taxes $ 3,153 $ -
Deferred income taxes $ 39,690 $ 40,250
Receivable for securities sold $ 521 $ 576
Other assets $ 18,757 $ 18,131
Total assets $ 3,521,458 $ 2,808,714
Liabilities
Unpaid losses and LAE $ 1,012,871 $ 953,371
Unearned premiums $ 958,979 $ 852,740
Bonds payable $ 298,135 $ -
Current income taxes $ - $ 5,724
Deferred income $ 10,537 $ 8,082
Accrued agents' profit sharing $ 77,264 $ 27,760
Payable for securities purchased $ 221 $ 7,982
Outstanding checks payable $ 38,800 $ 31,736
Other liabilities $ 74,367 $ 60,296
Total liabilities $ 2,471,174 $ 1,947,691
Minority interest $ 4,872 $ 4,199
Stockholders' equity
Preferred stock - -
Common stock $ 20,258 $ 19,182
Paid-in capital $ 127,159 $ 42,420
Net accumulated other comprehensive income $ 11,788 $ 20,331
Retained earnings $ 1,108,298 $ 954,180
Stockholders' equity before treasury stock $ 1,267,503 $ 1,036,113
Treasury stock $ (222,091) $ (179,289)
Total stockholders' equity $ 1,045,412 $ 856,824
Total liabilities, minority interest and stockholders' equity $ 3,521,458 $ 2,808,714
Common shares outstanding 33,159,981 31,962,952
Stockholders' equity per share $ 31.53 $ 26.81
Page 6 of 9
CGI 3Q '04 Earnings Release (page 5 of 7)
THE COMMERCE GROUP, INC. (NYSE - CGI)
CONSOLIDATED STATEMENTS OF EARNINGS
Three and Nine Months Ended September 30, 2004 and 2003
(Thousands of Dollars, Except Per Share Data)
Unaudited
Three Months Ended Nine Months Ended
Sept. 30, Sept. 30,
2004 2003 2004 2003
Revenues:
Earned premiums $ 413,751 $ 372,710 $ 1,213,830 $ 1,060,966
Net investment income $ 30,021 $ 23,318 $ 85,730 $ 69,130
Premium finance and service fees $ 7,312 $ 6,962 $ 21,377 $ 20,207
Net realized investment gains (losses) $ (2,247) $ 2,630 $ 9,610 $ 62,650
Other income $ 2 $ - $ 115 $ -
TOTAL REVENUES $ 448,839 $ 405,620 $ 1,330,662 $ 1,212,953
Expenses:
Losses and LAE $ 237,918 $ 280,006 $ 796,606 $ 823,611
Policy acquisition costs $ 128,457 $ 93,588 $ 318,881 $ 249,358
Interest expense & amortization of bond fees $ 4,608 $ - $ 13,703 $ -
TOTAL EXPENSES $ 370,983 $ 373,594 $ 1,129,190 $ 1,072,969
Earnings before income taxes and minority interest $ 77,856 $ 32,026 $ 201,472 $ 139,984
Income taxes $ 23,329 $ 9,113 $ 58,233 $ 32,598
Earnings before minority interest $ 54,527 $ 22,913 $ 143,239 $ 107,386
Less the income in minority interest in subsidiary $ (213) $ (49) $ (495) $ (129)
NET EARNINGS $ 54,314 $ 22,864 $ 142,744 $ 107,257
COMPREHENSIVE INCOME $ 87,923 $ 10,842 $ 125,449 $ 102,324
EARNINGS PER COMMON SHARE:
BASIC $ 1.65 $ 0.72 $ 4.37 $ 3.35
DILUTED $ 1.64 $ 0.71 $ 4.35 $ 3.33
Cash dividends paid per common share $ 0.33 $ 0.32 $ 0.98 $ 0.95
Weighted average shares outstanding:
BASIC 32,984,958 31,962,952 32,652,594 31,978,794
DILUTED 33,196,077 32,263,706 32,808,858 32,200,681
Page 7 of 9
CGI 3Q '04 Earnings Release (page 6 of 7)
THE COMMERCE GROUP, INC. (NYSE - CGI)
ADDITIONAL EARNINGS INFORMATION
Three and Nine Months Ended September 30, 2004 and 2003
(Thousands of Dollars, Except Per Share Data)
Unaudited
Three Months Ended Nine Months Ended
Sept. 30, Sept. 30,
2004 2003 2004 2003
ADDITIONAL EARNINGS INFORMATION:
Direct written premiums to earned premiums reconciliation:
Direct written premiums $ 466,612 $ 422,814 $ 1,433,185 $ 1,287,395
Assumed premiums $ 24,799 $ 30,771 $ 102,369 $ 88,523
Ceded premiums $ (75,239) $ (52,570) $ (195,949) $ (162,393)
Net written premiums $ 416,172 $ 401,015 $ 1,339,605 $ 1,213,525
Increase in unearned premiums $ (2,421) $ (28,305) $ (125,775) $ (152,559)
Earned premiums $ 413,751 $ 372,710 $ 1,213,830 $ 1,060,966
GAAP consolidated operating ratios: (1)
Loss ratio 57.5% 75.1% 65.6% 77.6%
Underwriting ratio 31.1% 24.5% 25.4% 22.5%
Combined ratio 88.6% 99.6% 91.0% 100.1%
GAAP operating ratios for combined insurance subsidiaries only: (2)
Loss ratio 57.3% 74.9% 64.9% 77.4%
Underwriting ratio 30.8% 24.2% 24.8% 22.2%
Combined ratio 88.1% 99.1% 89.7% 99.6%
Breakdown of net realized investment gains (losses)
Fixed maturities $ (635) $ 2,044 $ 2,636 $ 18,069
Preferred stocks $ 4,109 $ 2,720 $ 11,309 $ 11,832
Common stocks $ 227 $ 2,269 $ 5,171 $ 16,021
Due to increase (decrease) in NAV $ 3,153 $ (6,596) $ 7 $ 33,151
Due to sales $ 47 $ 3,469 $ 85 $ 1,903
Venture capital fund investments $ 3,258 $ 541 $ 4,773 $ (510)
Other $ (7) $ (150) $ (204) $ (200)
Other than temporary writedowns $ (12,399) $ (1,667) $ (14,167) $ (17,616)
Net realized investment gains (losses) before tax $ (2,247) $ 2,630 $ 9,610 $ 62,650
Income tax (benefit) at 35% $ (786) $ 920 $ 3,364 $ 21,927
Net realized investment gains (losses) after tax and before
impact of tax valuation allowance $ (1,461) $ 1,710 $ 6,246 $ 40,723
Impact of tax valuation allowance $ - $ - $ - $ 3,936
Net realized investment gains (losses) after tax and after
impact of tax valuation allowance $ (1,461) $ 1,710 $ 6,246 $ 44,659
Per diluted share net realized gains (losses) after tax and
after impact of tax valuation allowance $ (0.04) $ 0.05 $ 0.19 $ 1.39
Page 8 of 9
CGI 3Q '04 Earnings Release (page 7 of 7) - Continued
THE COMMERCE GROUP, INC. (NYSE - CGI)
ADDITIONAL EARNINGS INFORMATION
Three Months and Nine Months September 30, 2004 and 2003
(Thousands of Dollars, Except Per Share Data)
Unaudited
(1) GAAP consolidated operating ratios are calculated as in (2) below using
the combined insurance subsidiaries' loss and underwriting results,
adding to them the expenses of the holding companies (corporate
expenses) in order to equal the loss and underwriting expense amounts
on the income statement. For purposes of the U/W ratio, underwriting
expenses are grossed-up for the increase in deferred acquisition costs
of $1,179 and $4,582 for the three months ended and $21,948 and $23,587
for the nine months ended September 30, 2004 and 2003, respectively.
(2) GAAP operating ratios for combined insurance subsidiaries are calculated
as follows:
(a) The loss ratio represents losses and LAE divided by earned
premiums; and,
(b) The underwriting ratio represents underwriting expenses
(excluding changes in deferred acquisition costs), divided by
net premiums written. No corporate expenses are included in
the calculations.
Page 9 of 9