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 24, 2003
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
Page 1 of 10
The Commerce Group, Inc.
Form 8-K
October 24, 2003
Item 9. REGULATION FD DISCLOSURE
The following information, including the text of the press
release attached as an Exhibit to this Form 8-K, is furnished
pursuant to Item 9, "Regulation FD Disclosure" and Item 12,
"Disclosure of Results of Operations and Financial Condition".
On October 23, 2003, The Commerce Group, Inc. (the
"Company") issued a press release announcing its results for the
quarter ended September 30, 2003. A copy of the press release is
attached as Exhibit 99.1 to this Form 8-K.
In its press release, the Company presents non-GAAP
financial measures, as well as net earnings and net earnings per
diluted share. Statutory ratios are presented in accordance with
principles prescribed by insurance regulatory authorities.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of
1934, as amended, the Registrant has duly caused this report to
be signed on its behalf by the undersigned thereunto duly
authorized.
THE COMMERCE GROUP, INC.
October 24, 2003
/s/ Randall V. Becker
Randall V. Becker
Treasurer and Chief Accounting Officer
Page 2 of 10
Exhibit 99.1
Press Release
RELEASE: Immediate (October 23, 2003)
CONTACT: Randall V. Becker
Treasurer
(508) 949-4129
The Commerce Group, Inc.
Announces 2003 Third Quarter Results
and Comparison to Third Quarter 2002 (as restated)
WEBSTER, Mass., October 23, 2003 -- The Commerce Group, Inc.
(NYSE:CGI) today reported 2003 third quarter results. Net earnings
were $22.9 million, or $0.71 per diluted share, compared to net
earnings of $12.6 million or $0.38 per diluted share for 2002 (as
restated).
During the third quarter of 2003, the Company had net realized
investment gains of $2.6 million or $0.05 per diluted share compared
to losses of $13.4 million or $0.52 per diluted share in the third
quarter of 2002. The 2002 per diluted share amount was impacted by an
increase in the Company's tax valuation allowance related to a
deferred tax asset previously established for realized investment
losses. A complete breakdown of this information is included in the
attached tables. As further explained in this release, the Company
also incurred a charge of $6.0 million or $0.12 per diluted share for
an estimated assessment from the Massachusetts Insurance Insolvency
Fund (MIIF) compared to no charge in the third quarter of 2002. The
Company however incurred a charge in the fourth quarter of 2002 for a
MIIF assessment in the amount of $4.5 million. As of September 30,
2002, the Company was unable to reasonably estimate this assessment.
Lastly, the Company had employee stock option expenses of $1.5 million
or $0.03 per diluted share in the third quarter of this year compared
to income of $5.7 million or $0.11 per diluted share for the same
period last year.
Earned premiums were $372.7 million for the third quarter of 2003
compared to $309.1 million for 2002. A schedule of direct written
premiums to earned premiums is included in the attached tables.
The third quarter statutory combined ratio for property and casualty
operations was 98.9% compared to 99.4% for 2002. The decrease in the
combined ratio was primarily the result of a decrease in the loss
ratio, offset by an increase in the underwriting ratio. The Company's
loss ratio for the third quarter of 2003 decreased to 74.9% from 76.0%
during the same period last year. The decrease was primarily the
result of more favorable experience in the current year personal
automobile line of business offset by slightly less favorable loss
reserve development compared to the third quarter of last year.
MORE
CGI 3Q'03 earnings (page 4 of 10)
The Company's statutory underwriting ratio increased to 24.0%, as
compared to 23.4% for last year's third quarter, primarily as a result
of a charge for an anticipated assessment from the MIIF offset by
lower 2003 policy year mandated Massachusetts personal automobile
commission rates. Although the Company has not received an assessment
for 2003, which, if an assessment is to be made, is usually sent out
by MIIF in November, the Company is aware that an assessment is being
contemplated by MIIF and its Board of Governors. Accordingly, we have
accrued for a $6.0 million assessment, which represents the Company's
best estimate of the potential assessment at this point in time. This
accrual negatively impacted the underwriting ratio by approximately
1.5 percentage points.
As disclosed in the Company's 2002 Form 10-K, in the fourth quarter of
2002, the Company changed its method of accounting for employee stock
options and began applying variable accounting treatment for employee
stock options issued in 1999 and 2000. Accordingly, the Company
restated its 2002 quarterly results. The impact of the restatement
for the three months ended September 30, 2002 resulted in an increase
to net earnings of $5.7 million or $0.11 per diluted share.
Cumulative September 30, 2003 Results
Net earnings were $107.3 million, or $3.33 per diluted share, compared
to $45.3 million or $1.36 per diluted share for 2002 (as restated).
Earned premiums were $1,061.0 million compared to $886.3 million for
2002. A schedule of direct written premiums to earned premiums is
included in the attached tables.
The Company had realized gains on investments of $62.7 million, or
$1.39 per diluted share, compared to losses of $48.4 million, or $1.28
per diluted share for 2002. The 2002 per diluted share amount was
impacted by an increase in the Company's tax valuation allowance
related to a deferred tax asset previously established for realized
investment losses. A complete breakdown of this information is
included in the attached tables. During the first nine months of this
year the Company shortened the overall duration of its investment
portfolio by reducing its holdings in certain long term fixed income
instruments, equities and closed end preferred stock mutual funds.
This change in strategy resulted in the realization of investment
gains, primarily in the second quarter, with a minimal adverse impact
on future investment income. If market conditions warrant, the Company
will continue to reduce the duration of the investment portfolio in
order to continue to protect itself from the effect of anticipated
future increases in overall interest rates.
MORE
CGI 3Q'03 earnings (page 5 of 10)
The statutory combined ratio for property and casualty operations was
99.6% for the first nine months of 2003 compared to 98.7% for 2002.
The increase in the combined ratio was primarily the result of an
increase in the loss ratio, offset by a decrease in the underwriting
ratio. The Company's loss ratio for the first nine months of 2003
increased to 77.4% from 75.8% during the same period last year. The
increase was primarily driven by increased claim frequency in the
first quarter of this year as a result of the severe winter. The
Company's statutory underwriting ratio improved to 22.2%, as compared
to 22.9% for 2002, primarily from reduced accrued contingent
commissions as a result of the higher loss ratio mentioned previously
and lower 2003 policy year mandated Massachusetts personal automobile
commission rates offset by the third quarter MIIF assessment.
As previously mentioned, in the fourth quarter of 2002, the Company
changed its method of accounting for employee stock options and began
applying variable accounting treatment for employee stock options
issued in 1999 and 2000. The impact of the restatement for the nine
months ended September 30, 2002 resulted in an increase to net
earnings of $1.9 million or $0.04 per diluted share. The comparable
amount for the nine months ended September 30, 2003 resulted in a
decrease to net earnings of $1.0 million or $0.02 per diluted share.
A complete presentation of September 30, 2003 and 2002 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 the
Company's website at www.commerceinsurance.com, under the "Links"
section of the "News and Investor Information" area.
At September 30, 2003, the Company had authority to purchase
approximately 741,000 additional shares of common stock under the
current Board of Directors' stock re-purchase authorization. No re-
purchases of stock occurred during the second or third quarters.
During the past twelve months, the Company purchased 616,800 shares of
treasury stock at an average price of $35.02 per share.
All quarterly figures are unaudited and all results are reported in
accordance with accounting principles generally accepted in the United
States (GAAP) with the exception of statutory operating ratios.
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 22nd largest
personal automobile insurance group in the country by A.M. Best, based
on 2002 direct written premium information.
MORE
CGI 3Q'03 earnings (page 6 of 10)
Forward Looking Statements
This press release contains some statements that are not historical
facts and are considered "forward-looking statements" as defined in
the Private Securities Litigation Reform Act of 1995. Such forward-
looking statements involve opinions, assumptions and predictions, and
no assurance can be given that the future results will be achieved
since events or results may differ materially as a result of risks
facing the Company. These include, but are not limited to, those risks
and uncertainties in the Company's business, some of which are beyond
the control of the Company, that are described in the Company's
recently filed registration statement on Form S-3, its Forms 10-K and
10-Q, and other documents filed with the SEC, including the
possibility of adverse catastrophe experience and severe weather,
adverse trends in claim severity or frequency, adverse state and
federal regulation and legislation, adverse judicial decisions,
litigation risks, interest rate risk, rate making decisions for
private passenger automobile policies in Massachusetts, potential rate
filings outside of Massachusetts, heightened competition,
concentration of business within Massachusetts, dependence on certain
principal employees, as well as the economic, market or regulatory
conditions and risks associated with entry into new markets and
diversification. The Commerce Group, Inc. is not under any obligation
to (and expressly disclaims any such obligations to) update or alter
its forward-looking statements, whether as a result of new
information, future events or otherwise.
(Tables Follow)
CGI 3Q '03 earnings (page 7 of 10)
THE COMMERCE GROUP, INC. (NYSE: CGI - news)
CONSOLIDATED BALANCE SHEETS
September 30, 2003 and 2002
(Thousands of Dollars, Except Per Share Data)
Unaudited
Sept. 30, Sept. 30,
ASSETS 2003 2002
(Restated)
Investments
Fixed maturities, at market $ 1,114,094 $ 726,169
Preferred stocks, at market $ 302,901 $ 305,782
Common stocks, at market $ 94,558 $ 92,219
Preferred stock mutual funds, at equity $ 129,666 $ 282,257
Mortgage loans $ 17,278 $ 31,586
Cash and short-term investments $ 96,783 $ 80,829
Other investments $ 24,190 $ 24,937
Total investments $ 1,779,470 $ 1,543,779
Accrued investment income $ 14,543 $ 14,426
Premiums receivable $ 407,204 $ 341,050
Deferred policy acquisition costs $ 161,828 $ 142,627
Property and equipment $ 50,930 $ 50,282
Due from reinsurers $ 113,302 $ 94,173
Residual market receivable $ 190,744 $ 159,549
Current income taxes $ - $ 3,942
Deferred income taxes $ 40,250 $ 29,807
Receivable for securities sold $ 576 $ 627
Other assets $ 18,131 $ 14,085
Total assets $ 2,776,978 $ 2,394,347
Liabilities
Losses and LAE $ 953,371 $ 788,360
Unearned premiums $ 852,740 $ 722,056
Current income taxes $ 5,724 $ -
Deferred income $ 8,082 $ 8,271
Contingent commissions accrued $ 27,760 $ 29,104
Payable for securities purchased $ 7,982 $ -
Other liabilities $ 60,296 $ 45,169
Total liabilities $ 1,915,955 $ 1,592,960
Minority interest $ 4,199 $ 4,385
Stockholders' equity
Preferred stock - -
Common stock $ 19,182 $ 19,128
Paid-in capital $ 42,420 $ 38,703
Net accumulated other comprehensive income $ 20,331 $ 11,007
Retained earnings $ 954,180 $ 885,855
$ 1,036,113 $ 954,693
Treasury stock $ (179,289) $ (157,691)
Total stockholders' equity $ 856,824 $ 797,002
Total liabilities, minority interest and stockholders' equity $ 2,776,978 $ 2,394,347
Common shares outstanding 31,962,952 32,470,721
Stockholders' equity per share $ 26.81 $ 24.55
CGI 3Q '03 earnings (page 8 of 10)
THE COMMERCE GROUP, INC. (NYSE: CGI - news)
CONSOLIDATED STATEMENTS OF EARNINGS
Three and Nine Months Ended September 30, 2003 and 2002
(Thousands of Dollars, Except Per Share Data)
Unaudited
Three Months Ended Nine Months Ended
September 30, September 30,
2003 2002 2003 2002
(Restated) (Restated)
Revenues:
Earned premiums $ 372,710 $ 309,085 $ 1,060,966 $ 886,259
Net investment income $ 23,318 $ 23,893 $ 69,130 $ 71,655
Premium finance and service fees $ 6,962 $ 5,722 $ 20,207 $ 15,719
Net realized investment gains (losses) $ 2,630 $ (13,430) $ 62,650 $ (48,422)
Other income $ - $ 2,500 $ - $ 9,500
TOTAL REVENUES $ 405,620 $ 327,770 $ 1,212,953 $ 934,711
Expenses:
Losses and LAE $ 280,006 $ 231,520 $ 823,611 $ 671,071
Policy acquisition costs $ 93,588 $ 71,000 $ 249,358 $ 213,072
TOTAL EXPENSES $ 373,594 $ 302,520 $ 1,072,969 $ 884,143
Earnings before income taxes, minority interest
and change in accounting principle $ 32,026 $ 25,250 $ 139,984 $ 50,568
Income taxes $ 9,113 $ 12,621 $ 32,598 $ 16,669
Earnings before minority interest and change
in accounting principle $ 22,913 $ 12,629 $ 107,386 $ 33,899
(Less) plus the (income) loss in minority interest in subsidiary $ (49) $ (1) $ (129) $ 162
Earnings before change in accounting principle $ 22,864 $ 12,628 $ 107,257 $ 34,061
Change in accounting principle, net of taxes $ - $ - $ - $ 11,237
NET EARNINGS $ 22,864 $ 12,628 $ 107,257 $ 45,298
COMPREHENSIVE INCOME (LOSS) $ 10,842 $ (2,425) $ 102,324 $ 43,911
Net earnings per common share before cumulative effect
of change in accounting principle:
BASIC $ 0.72 $ 0.39 $ 3.35 $ 1.04
DILUTED $ 0.71 $ 0.38 $ 3.33 $ 1.02
CGI 3Q '03 earnings (page 9 of 10)
THE COMMERCE GROUP, INC. (NYSE: CGI - news) (Continued)
CONSOLIDATED STATEMENTS OF EARNINGS
Three and Nine Months Ended September 30, 2003 and 2002
(Thousands of Dollars, Except Per Share Data)
Unaudited
Three Months Ended Nine Months Ended
September 30, September 30,
2003 2002 2003 2002
(Restated) (Restated)
Net earnings per common share from the cumulative effect
of change in accounting principle:
BASIC $ - $ - $ - $ 0.34
DILUTED $ - $ - $ - $ 0.34
EARNINGS PER COMMON SHARE:
BASIC $ 0.72 $ 0.39 $ 3.35 $ 1.38
DILUTED $ 0.71 $ 0.38 $ 3.33 $ 1.36
Cash dividends paid per common share: $ 0.32 $ 0.31 $ 0.95 $ 0.92
Weighted average shares outstanding:
BASIC 31,962,952 32,732,502 31,978,794 32,926,712
DILUTED 32,263,706 32,983,276 32,200,681 33,228,089
CGI 3Q '03 earnings (page 10 of 10)
THE COMMERCE GROUP, INC. (NYSE: CGI - news)
ADDITIONAL EARNINGS INFORMATION
Three and Nine Months Ended September 30, 2003 and 2002
(Thousands of Dollars, Except Per Share Data)
Unaudited
Three Months Ended Nine Months Ended
Septemer 30, September 30,
2003 2002 2003 2002
(Restated) (Restated)
ADDITIONAL EARNINGS INFORMATION:
Direct written premiums to earned premiums reconciliation:
Direct written premiums $ 422,814 $ 356,483 $ 1,287,395 $ 1,088,412
Assumed premiums $ 30,771 $ 19,985 $ 88,523 $ 79,038
Ceded premiums $ (52,570) $ (52,275) $ (162,393) $ (141,220)
Net written premiums $ 401,015 $ 324,193 $ 1,213,525 $ 1,026,230
Increase in unearned premiums $ (28,305) $ (15,108) $ (152,559) $ (139,971)
Earned premiums $ 372,710 $ 309,085 $ 1,060,966 $ 886,259
Statutory operating ratios for insurance subsidiaries:
Loss ratio 74.9% 76.0% 77.4% 75.8%
Underwriting ratio 24.0% 23.4% 22.2% 22.9%
Combined ratio 98.9% 99.4% 99.6% 98.7%
Breakdown of net realized investment gains (losses)
Fixed maturities $ 2,044 $ (405) $ 18,069 $ (1,360)
Preferred stocks $ 2,720 $ (6) $ 11,832 $ (57)
Common stocks $ 2,269 $ (139) $ 16,021 $ (306)
Preferred stock mutual funds:
Due to increase (decrease) in NAV $ (6,596) $ (13,996) $ 33,151 $ (33,357)
Due to sales $ 3,469 $ 483 $ 1,903 $ 819
Venture capital fund investments $ 541 $ 807 $ (510) $ (2,167)
Other $ (150) $ (174) $ (200) $ (260)
Other than temporary writedowns $ (1,667) $ - $ (17,616) $ (11,734)
Net realized investment gains (losses) before tax $ 2,630 $ (13,430) $ 62,650 $ (48,422)
Income tax (benefit) at 35 $ 920 $ (4,700) $ 21,927 $ (16,947)
Net realized investment gains (losses) after tax and before
impact of valuation allowance $ 1,710 $ (8,730) $ 40,723 $ (31,475)
Impact of tax valuation allowance $ - $ (8,372) $ 3,936 $ (10,875)
Net realized investment gains (losses) after tax and after
tax impact of valuation allowance $ 1,710 $ (17,102) $ 44,659 $ (42,350)
Per diluted share net realized gains (losses) after tax and
after tax impact of valuation allowance $ 0.05 $ (0.52) $ 1.39 $ (1.28)