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 25, 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))
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The Commerce Group, Inc.
Form 8-K
October 25, 2004
Section 8. Other Events
Item 8.01 Other Events
On October 22, 2004, The Commerce Group, Inc. announced a
pro forma impact of the latest Massachusetts automobile residual
market reform proposal. The press release is filed as Exhibit 99.1
hereto.
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 25, 2004
/s/ Randall V. Becker
Randall V. Becker
Treasurer and Accounting Officer
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Exhibit 99.1
Press Release
RELEASE: Immediate (October 22, 2004)
CONTACT: Randall V. Becker
Treasurer, The Commerce Group, Inc.
(508) 949-4129
The Commerce Insurance Company Estimates Pro Forma Impact of the
Latest Massachusetts Residual Market Reform Proposal
The Commerce Insurance Company, a wholly owned subsidiary of The
Commerce Group, Inc. (NYSE: CGI), is updating its estimate of the
financial impact of the proposed reform of the residual market system
for personal automobile insurance in Massachusetts to reflect changes
in the rules being proposed.
Background of Regulatory Reform; Prior Commerce Disclosure
As we described in our Quarterly Report on Form 10-Q filed for the
second quarter of 2004, the Massachusetts Commissioner of Insurance
(the "Commissioner") issued a letter in April instructing Commonwealth
Automobile Reinsurers ("CAR") to develop and submit to her rules for
the reform of the residual market system. On June 29, 2004, CAR
proposed to the Commissioner a set of changes to the CAR Rules of
Operations (the "Initial Reform Proposal"). Under the Initial
Proposal, the first phase of the reform would have been effective for
the period from July 1, 2004 through December 31, 2004. Commerce
estimated, as we disclosed in our Quarterly Report on Form 10-Q for
the period ended June 30, 2004, that we would have incurred additional
expenses for the final six months of 2004 of approximately $2.4
million before taxes, and an additional expense in 2005 of
approximately $1.2 million before taxes, all attributable to the first
phase of the reform, if the Commissioner had adopted all of the rule
amendments entirely as proposed by CAR for that phase. At that time,
we were unable to estimate the financial impact of the Initial Reform
Proposal with respect to the rules proposed for 2005 and beyond. The
Commissioner, however, did not approve the Initial Reform Proposal.
Revised Reform Proposal
On August 27, 2004, the Commissioner directed CAR to submit to her a
revised proposal for the reform of the residual market system. CAR
submitted its revised proposal on September 24 and amended it on
October 8, 2004 (together, the "Revised Reform Proposal"). The
Commissioner has scheduled a public hearing to be held at the Division
of Insurance ("DOI") on October 29, 2004, to hear testimony regarding
the Revised Reform Proposal. We cannot predict whether the
Commissioner will approve the Revised Reform Proposal in substantially
the form as recommended by CAR.
MORE
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Residual Market Reform
Elimination of All or a Substantial Portion of 2004 Transition. The
Revised Reform Proposal does not include an initial transition phase
for the period from July 1, 2004 through December 31, 2004, but the
rules in the Revised Reform Proposal may apply for the month of
December of 2004 if, during the month of November, the Commissioner
approves the rules as proposed.
Accordingly, we now estimate that the proposed reform of the residual
market will not result in our incurring $3.6 million of additional
total expense before taxes for the eighteen month period ended
December 31, 2005, as previously disclosed. Rather, if during
November the Commissioner approves the Revised Reform Proposal
entirely as recommended by CAR effective December 1, 2004, we
estimate that our additional expense, if any, for the next 15 months
would be approximately $600,000 before taxes.
Overview of Revised Reform Proposal. The Revised Reform Proposal
would call for the current residual market pool to be divided into
two components - the first comprising high loss ratio exclusive
representative producers or "ERPs" and the second comprising other
than high loss ratio ERP business and business ceded to the residual
market from voluntary agents. We expect that all insurers would be
required to cede to CAR all business written by the high loss ratio
ERPs, including business currently able to be retained voluntarily,
although the Proposal does not address this point specifically. CAR
would apportion the underwriting results of the high loss ratio ERP
pool among all insurers based on each insurer's voluntary agent
market share for the previous year. The CAR residual market deficit
from other than high loss ratio ERPs and business ceded to the
residual market from voluntary agents will result in a smaller pool
and be shared by insurers in substantially the same manner as is
currently in effect for the total residual market pool. While CAR
has proposed different utilization formulas and credit values going
forward, we expect that those changes will have no material net
impact on Commerce's overall participation ratio for this second
pool. For a complete description as to how participation ratios are
currently calculated, please refer to our 2003 Annual Report filed on
Form 10-K under the CAR section of Part 1, Item 1.
The Revised Reform Proposal would also require, for the period
beginning January 1, 2005, that each company with a 2003 market share
of 7% or more service the business written by high loss ratio ERPs.
In exchange, those servicing carriers would receive an increased
expense reimbursement fee and an opportunity to earn bonuses for
improvements in the loss ratio of those ERPs. CAR estimates that
Commerce's share of the high loss ratio ERP pool will be
approximately 39.8%, given that Commerce and five other insurers will
service the 2005 business of high loss ratio ERPs. Companies with
less than 7% total market share may become servicing carriers if they
so request and are approved by the Commissioner. If there are more
than six carriers servicing the high loss ratio ERP business, the
percentage of this pool that we service will be reduced. Lastly, the
Revised Reform Proposal contemplates the introduction of an assigned
risk plan beginning in 2006 for a segment of the business and for all
business by 2008.
MORE
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Residual Market Reform
Pro Forma Impact of Revised Reform Proposal on 2003 Results
We believe that it is premature to estimate the impact of the Revised
Reform Proposal on our future financial results because of uncertainties
relating to the rates that the Commissioner will approve for personal
automobile insurance for 2005, and our inability at this time to predict
reasonably the strategies that Commerce and other companies may pursue in
the proposed residual market system that could have a material impact on
the residual market deficit, the voluntary agent marketplace, insurers'
participation ratios, and other important factors.
CAR, however, has provided some guidance as to what effect the Revised
Reform Proposal would have had if it had been in effect for the 2003 policy
year, which is the most recent policy year for which substantially complete
CAR data is available. Based on information made available by CAR, if we
apply, to our 2003 policy year results, the revised residual market rules
entirely as recommended in the Revised Reform Proposal for January 1, 2005
and beyond, we estimate that we would have realized a favorable impact in
the amount of $3 million before taxes for our fiscal year ended December
31, 2003.
Based on the information made available by CAR in their filing with the
Commissioner, our estimate is based on CAR's calculation that, had the
Revised Reform Proposal been in effect for the 2003 policy year, the total
CAR deficit would have been approximately $424 million, of which $295
million would have been attributable to high loss ratio ERPs. CAR's
current projected policy year 2003 deficit is $322 million. The increase
in the pro forma deficit is caused by both the expected mandatory cession
of all high loss ratio ERP business and an increase in the expense
allowance for servicing this business, as further noted below. Using our
year end 2002 voluntary agent market share of 26.4%, we estimate that our
share of the total pro forma 2003 CAR deficit of $424 million would
increase to $105 million versus our actual share of the CAR deficit, which
amounted to $67 million. Approximately $78 million of that $105 million
would be attributable to our share of the proposed high loss ratio pool,
and the remainder would represent our participation in the non-high loss
ratio pool's deficit.
We estimate that Commerce's increased share of the residual market deficit
would be more than offset by a few other components of the Revised Reform
Proposal. First, CAR proposes to increase the expense allowance for
servicing the high loss ratio ERPs from 28.8% to 46.2%, which would have
generated an estimated additional $10 million income before taxes for the
high loss ratio ERPs that we serviced in 2003, plus an estimated additional
$19 million, after incremental costs and before taxes, for servicing
additional high loss ratio ERPs that would be assigned to us as one of the
six proposed designated servicing carriers. Second, we would have realized
in the 2003 policy year an estimated additional savings of $12 million
before taxes as a result of the expected requirement that we cede all
business written by high loss ratio ERPs, as compared to writing that
business voluntarily.
MORE
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Page 4
Residual Market Reform
For the reasons described previously, the actual impact that the Revised
Reform Proposal may have on our operating results in 2005 or any future
year may differ significantly from the pro forma impact on our 2003
results. We intend to review and, if necessary, revise our business
strategies in response to these initiatives as they are implemented. We
cannot predict whether our efforts will be successful or whether the
initiatives as implemented will affect our competitive position or
financial performance other than as described above.
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;
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Page 5
Residual Market Reform
* 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.
END
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