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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from to .
Commission file number 0-16882
The Commerce Group, Inc.
(Exact name of registrant as specified in its charter)
Massachusetts 04-2599931
(State or other jurisdiction (IRS Employer Identification No.)
of incorporation)
211 Main Street 01570
Webster, Massachusetts (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code: (508) 943-9000
Securities registered pursuant to Section 12(b) of the Act:
Name of each Exchange
Title of each Class on Which Registered
Common Stock, $.50 Par Value Per Share New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
None
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 [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
The aggregate market value of the voting stock held by non-affiliates
of the registrant as of March 23, 2001, was approximately $673,669,748.
As of March 23, 2001, the number of shares outstanding of the
registrant's common stock (exclusive of treasury shares) was 33,753,352.
DOCUMENTS INCORPORATED BY REFERENCE
Parts I and II of this Form 10-K incorporate by reference information
from the registrant's annual report to stockholders for the fiscal year ended
December 31, 2000 (the "2000 Annual Report"). The 2000 Annual Report, except
for portions thereof, which have been specifically incorporated by reference,
shall not be deemed "filed" as part of this Form 10-K.
Portions of the registrant's definitive Proxy Statement for its annual
meeting of stockholders, which the Company intends to file within 120 days
after the end of the registrant's fiscal year ended December 31, 2000, are
incorporated by reference into Part III hereof as provided therein.
1
TABLE OF CONTENTS
Page
Glossary of Selected Insurance Terms................................................ 3
Part I
Item 1. Business................................................................ 7
A. General........................................................... 11
B. Commonwealth Automobile Reinsurers................................ 14
C. Marketing......................................................... 16
D. Underwriting...................................................... 17
E. Reinsurance....................................................... 19
F. Settlement of Claims.............................................. 21
G. Loss and Loss Adjustment Expense Reserves......................... 22
H. Operating Ratios.................................................. 25
I. Investments....................................................... 26
J. Regulation........................................................ 28
K. Competition....................................................... 33
L. Other Matters..................................................... 34
Item 2. Properties.............................................................. 35
Item 3. Legal Proceedings....................................................... 35
Item 4. Submission of Matters to a Vote of Security Holders..................... 35
Item 4A. Executive Officers of the Registrant.................................... 35
Part II
Item 5. Market for Registrant's Common Stock and Related Stockholder Matters.... 37
Item 6. Selected Financial Data................................................. 38
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.................................................. 38
Item 7a. Qualitative and Quantitative Disclosures about Market Risk.............. 38
Item 8. Financial Statements and Supplementary Data............................. 38
Item 9. Changes in and Disagreements with Independent Auditors on Accounting
and Financial Disclosure............................................... 38
Part III
Item 10. Directors and Executive Officers of the Registrant...................... 38
Item 11. Executive Compensation.................................................. 38
Item 12. Security Ownership of Certain Beneficial Owners and Management.......... 39
Item 13. Certain Relationships and Related Transactions.......................... 39
Part IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K......... 39
Signatures.............................................................. 40
Index to Financial Statement Schedules.................................. 43
Index to Exhibits....................................................... 54
2
GLOSSARY OF SELECTED INSURANCE TERMS
Affinity group marketing program... An "affinity group marketing program" is any system,
design or plan whereby motor vehicle or homeowner
insurance is afforded to employees of an employer or to
members of a trade union, association or organization in
accordance with those provisions of M.G.L. c. 175, s.
193R, distinguishing such plans from a "mass-
merchandising plan".
Specifically, an affinity group marketing program
contemplates the issuance of such insurance through
other than standard policies that preclude individual
underwriting, contains an option to continue coverage by
a standard policy upon termination of employment or
membership, restricts cancellation, requires the
continuance of certain participation in ways not
applicable to standard policies, and provides for the
downward modification of rates based upon the experience
of the insured group.
Assumed premiums................... Premiums acquired or allocated to an insurer other than
through its independent agencies.
Best's............................. A.M. Best Company, Inc. is a rating agency reporting on
the financial condition of insurance companies. A.M.
Best's statistics cited in this Form 10-K are based upon
information voluntarily submitted to it by insurers. The
Company is aware of at least one former Massachusetts
domestic insurer that has not submitted data to Best's
and therefore may not be reflected in Best's market
share statistics.
Casualty insurance................. Insurance which is primarily concerned with the losses
of the insured due to injuries to other persons and to
the property of others, and the legal liability imposed
on the insured resulting therefrom.
Catastrophe, catastrophic loss..... A severe loss, usually involving many risks such as
conflagration, earthquake, windstorm, explosion and
other similar events.
Combined ratio..................... A combination of the underwriting expense ratio and the
loss and LAE ratio determined in accordance with
Statutory Accounting Practices ("SAP"). The underwriting
expense ratio measures the ratio of underwriting
expenses to net premiums written, determined in
accordance with SAP. The loss and LAE ratio measures
the ratio of incurred losses and LAE to earned premiums,
determined in accordance with SAP.
Commissioner....................... The Commissioner of the Division of Insurance of the
Commonwealth of Massachusetts.
Commonwealth Automobile
Reinsurers ("C.A.R.").............. C.A.R. is a Massachusetts mandated reinsurance mechanism,
under which all premiums, expenses and losses on ceded
business are shared by all insurers. It is similar to a
joint underwriting association because a number of
insurers (43 in 2000) act as Servicing Carriers for the
risks it insures.
3
Direct............................. Refers to premiums, losses, LAE and expenses on policies
which a company writes before accounting for business
ceded and assumed through reinsurance.
Direct loss ratio.................. The ratio of direct incurred losses and LAE to direct
earned premiums.
Direct premiums written............ Total premiums for insurance sold to insureds, as
opposed to, and not including, reinsurance premiums.
Domestic insurer................... An insurance company that operates in the state in which
it is licensed.
Earned premiums.................... The portion of net premiums written that is equal to the
expired portion of policies recognized for accounting
purposes as income during a period. Also known as
premiums earned.
Excess of loss reinsurance......... Reinsurance which indemnifies the reinsured against all
or a specified portion of losses under reinsured
policies in excess of a specific dollar amount or
"retention".
Exclusive representative
producer ("ERP")................... A Massachusetts automobile insurance agency which does
not have a voluntary agency automobile insurance
relationship with an insurer, and which is assigned by
C.A.R. to an insurer who is a Servicing Carrier.
Exposure........................... An insurable unit defined as an automobile.
Hard market........................ An insurance market in which the demand for insurance
exceeds the readily available supply and premiums are
relatively high.
Incurred but not reported
("IBNR") reserves.................. Reserves for estimated losses which have been incurred
by insureds but not yet reported to the insurer.
Incurred losses.................... The total losses sustained by an insurance company under
a policy or policies, whether paid or unpaid. Incurred
losses include a provision for IBNR.
Inland marine insurance............ As used by the Company, insurance that provides protec-
tion for specific types of personal property, such as
jewelry, coins and fine arts, over the limits covered in
a standard homeowners insurance policy.
Loss adjustment expenses ("LAE")... The expenses relating to settling claims, including
legal and other fees and the portion of general expenses
allocated to claim settlement costs.
LAE ratio.......................... The ratio of LAE, net of reinsurance recoveries, to
earned premiums.
Loss and LAE ratio................. The ratio of incurred losses and loss adjustment ex-
penses, net of reinsurance recoveries, to earned
premiums.
4
Loss reserves...................... Liabilities established by insurers to reflect the esti-
mated cost of claims payments and the related expenses
that the insurer will ultimately be required to pay in
respect of insurance it has written. Reserves are
established for losses and for LAE.
Net premiums written............... Direct premiums written for a given period less premiums
ceded to reinsurers during such period plus premiums
assumed during such period.
Participation ratio................ A Massachusetts insurer's share of the C.A.R. deficit
based upon the insurer's market share of automobile
risks not reinsured through C.A.R., adjusted for
utilization of C.A.R. and credits for voluntarily
writing less desirable business and ceded exclusions.
Premium-to-surplus ratio........... The ratio of net premiums written to policyholders'
surplus.
Property insurance................. Insurance that indemnifies a person with an insurable
interest in tangible property for loss related to damage
to or loss of use of the subject property.
Pure loss ratio.................... The ratio of net incurred losses, excluding LAE, to pre-
miums earned.
Quota share reinsurance............ Reinsurance in which the reinsured shares a proportion
of the original premiums and losses under the reinsured
policy. Also known as pro rata reinsurance.
Rate deviation..................... A specific state approved departure from an otherwise
applicable state set rate level provided to safe
drivers.
Rate discount...................... A specific state approved discount from an otherwise
applicable state set rate level provided to members of
affinity group marketing programs.
Reinsurance........................ The acceptance by one or more insurers, called rein-
surers, of all or a portion of the risk underwritten by
another insurer who has directly written the coverage.
However, the legal rights of the insured generally are
not affected by the reinsurance transaction and the
insurance company issuing the insurance policy remains
liable to the insured for payment of policy benefits.
Safe Driver Insurance Plan ("SDIP") A program mandated by Massachusetts state law that
encourages safe driving by rewarding drivers who do not
cause an accident, or incur a traffic law violation and
by charging high risk drivers a greater amount of
premiums. Under SDIP, drivers incur surcharge points
for traffic violations and at-fault accidents. Drivers
also earn credit points for each incident free year.
Drivers begin at a starting or neutral SDIP Step 15.
Drivers can earn credits down to SDIP Step 9, the lowest
step for good drivers, and incur surcharge points up to
SDIP Step 35, the highest step for bad drivers. The
SDIP is set to be revenue neutral industry-wide, wherein
credits received by good drivers are offset with
surcharges paid by bad drivers.
5
Servicing Carrier.................. An automobile insurer writing business in Massachusetts
which can reinsure risks through C.A.R. while remaining
responsible for servicing the related policies and which
must provide a market for ERPs assigned to it by C.A.R.
Soft market........................ An insurance market in which the supply of insurance
exceeds the current demand and premiums are relatively
low.
Statutory accounting practices
("SAP").......................... Recording transactions and preparing financial state-
ments in accordance with the rules and procedures
prescribed or permitted by an insurer's state insurance
regulatory authority for the purposes of financial
reporting to regulators, which in general reflect a
liquidating, rather than going concern, concept of
accounting.
Statutory surplus.................. The excess of admitted assets over total liabilities
(including loss reserves), determined in accordance with
SAP.
Take-all-comers.................... A phrase used to characterize the Massachusetts auto-
mobile regulatory system under which all insurers are
required to underwrite virtually all risks submitted to
them.
Underwriting....................... The insurer's process of reviewing applications submit-
ted for insurance coverage, deciding whether to accept
all or part of the coverage requested and determining
the applicable premiums.
Underwriting expenses.............. The aggregate of policy acquisition costs, including
commissions, and the portion of administrative, general
and other expenses attributable to underwriting
operations.
Underwriting expense ratio......... The ratio of underwriting expenses to net premiums writ-
ten determined in accordance with SAP.
Unearned premiums.................. The portion of a premium representing the unexpired
amount of the contract term as of a certain date.
6
PART I
ITEM 1. BUSINESS
The Commerce Group, Inc. (the "Company"), was incorporated in 1976. The
Company is engaged in providing personal and commercial property and casualty
insurance primarily in Massachusetts through it's principal subsidiary, The
Commerce Insurance Company ("Commerce"), which was incorporated in 1971. The
Company's predominant insurance line is motor vehicle insurance, primarily
covering personal automobiles. The Company also offers commercial automobile,
homeowners, inland marine, fire, general liability and commercial multi-peril
insurance. The Company also writes insurance in California and Oregon through
Commerce West Insurance Company ("Commerce West"), a personal automobile
insurer located in Pleasanton, California, which was acquired on August 31,
1995. Additionally, the Company writes insurance through American Commerce
Insurance Company ("American Commerce"), which it acquired on January 29,
1999. Located in Columbus, Ohio, American Commerce, is a wholly-owned
subsidiary of ACIC Holding Co., Inc. with policies in 25 states and licenses
in several others. In November of 1998, Commerce formed ACIC Holding Co.,
Inc., in a joint venture with AAA Southern New England ("AAA SNE") and
invested $90,800,000 to fund the acquisition of the Automobile Club Insurance
Company whose name was changed to American Commerce upon completion of the
acquisition. Commerce invested $90,000,000 in the form of preferred stock and
an additional $800,000 representing an 80% common stock ownership. AAA SNE
invested $200,000 representing a 20% common stock ownership. The terms of the
preferred stock call for Commerce to receive quarterly cash dividends at the
rate of 10% per annum from ACIC Holding, Co., Inc. In the event cash
dividends cannot be paid, additional preferred stock will be issued. 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 a licensed insurance agent of Commerce since 1985. In addition
to the property and casualty insurance business, the Company originates
residential and commercial mortgages, within Massachusetts and on a limited
basis, Connecticut and operates an insurance agency dealing in a full line of
insurance products, including those of the Company.
The Company's business strategy is to focus its insurance activities
primarily on the personal automobile market. The Company has over 968,000
polices in force, over 825,000 throughout the Commonwealth of Massachusetts
and over 143,000 in the 26 states served by Commerce West and American
Commerce. The Company, through Commerce and Citation Insurance Company
("Citation"), wholly-owned subsidiaries of Commerce Holdings, Inc. ("CHI"),
which is a wholly-owned subsidiary of the Company, has been the largest writer
of personal property and casualty insurance in Massachusetts in terms of
market share of direct premiums written since 1990. At year end 2000, the
Company's Massachusetts private passenger automobile market share was 22.3% up
from 21.3% in 1999. The Company is also one of the leading writers of
commercial automobile insurance in the Commonwealth and the second largest
writer of Massachusetts homeowners insurance. In addition, the Company's
combined insurance companies were also ranked the 27th largest personal
automobile insurance group in the country by A.M. Best Co., based on the most
recently available direct premium written information. The accompanying table
lists direct premiums written for the years ended December 31, 2000 and 1999
for Massachusetts and other states business:
Direct Premiums Written, Year Ended December 31, 2000 (Dollars in thousands)
Massachusetts All Other States Total % of Total
Personal Automobile...... $827,180 $103,600 $ 930,780 86.9%
Commercial Automobile.... 43,243 - 43,243 4.0
Homeowners............... 65,662 16,498 82,160 7.7
Other Lines.............. 14,860 606 15,466 1.4
Total........... $950,945 $120,704 $1,071,649 100.0%
Direct Premiums Written, Year Ended December 31, 1999 (Dollars in thousands)
Massachusetts All Other States Total % of Total
Personal Automobile...... $731,329 $ 92,297 $ 823,626 86.9%
Commercial Automobile.... 36,616 - 36,616 3.9
Homeowners............... 59,981 14,378 74,359 7.8
Other Lines.............. 13,027 521 13,548 1.4
Total........... $840,953 $107,196 $ 948,149 100.0%
7
The Company attributes its success primarily to its strong relationships
with professional independent agencies that provide quality business for the
Company. Other factors that have been important to its success include an in-
depth understanding of the Massachusetts regulatory and underwriting
environments, advanced information systems, an extensive underwriting database
and, beginning in 1995, the ability to compete in an affinity group marketing
environment.
Because the Company offers its product lines only through independent
agencies, its relationships with those agencies are critical to its continued
success. The Company believes that it is the preferred provider for most of
its agencies and that, as a result of such position, it has gained access to
policyholders with average or above-average underwriting profit
characteristics in its personal and commercial automobile insurance lines.
The Company carefully selects and retains agencies whose premium growth and
loss ratio experience meet the Company's agency criteria, and devotes
substantial resources to fostering and maintaining strong relationships with
its existing agencies. The Company pays its agencies significant compensation
in the form of profit sharing, which is based in part on the underwriting
profits of the agency's business written with the Company. In addition, the
Company occasionally sponsors incentive award trips to encourage agent
profitability and growth. (Refer to Part I Item 1C - Marketing for the
details.) Based upon agency surveys conducted several times a year, the
Company believes it is attentive to the needs and requirements of its
agencies. The Company emphasizes its commitment to the Massachusetts
insurance market, its responsiveness in servicing claims and its internal
support for agency operations, including direct billing of insureds, direct
claim reporting, on-line inquiry systems for its agents and by providing
competitively priced automobile insurance programs and products.
Massachusetts Business
The Company's focus on automobile and homeowners insurance primarily in
Massachusetts (over 85% of total direct premiums written) has also been a
factor in its success. The terms, conditions and mandated rates of personal
automobile insurance are subject to extensive regulation. Because the Company
has primarily served the Massachusetts market, it has both an in-depth
understanding of this market and the ability to respond effectively to shifts
in the state's regulatory and underwriting environments. Currently, the
Company is required to accept virtually all automobile insurance business
submitted to it by its agencies. The Company's ability to underwrite this
business profitably, however, depends on its understanding of the risks in the
business as well as its management of reinsurance through C.A.R.
The Company has actively pursued affinity group marketing programs since
1995. The primary purpose of affinity group marketing programs is to provide
participating groups with a convenient means of purchasing private passenger
automobile insurance through associations and employer groups. Emphasis is
placed on writing larger affinity groups, although accounts with as few as 25
participants are considered. Affinity groups are eligible for rate discounts,
which must be filed annually with the Division of Insurance. In general, the
Company looks for affinity groups with mature/stable membership, favorable
driving records and below average turnover ratios. Participants who leave the
sponsoring group during the term of the policy are allowed to maintain the
policy until expiration. At expiration, a regular Commerce policy may be
issued at the insured's option.
Since the latter part of 1995, Commerce has been a leader in affinity
group marketing through agreements with the four American Automobile
Association Clubs of Massachusetts ("AAA clubs") offering discounts on private
passenger automobile insurance to the clubs' members who reside in
Massachusetts. A 6% discount was approved for policies effective January 1,
2001, which is the same as the discount for 2000. The AAA clubs discount can
be combined with safe driver deviations for up to a 7.9% reduction from the
2001 state mandated rates. Membership in these clubs is estimated to
represent approximately one-third of the Massachusetts motoring public, and
has been the primary reason for a 53.7% increase in the number of personal
automobile exposures written by Commerce since year-end 1995 (the AAA affinity
group program incepted in October of 1995). In 2000, total direct premiums
written attributable to the AAA group business were $535,766,000 or 50.0% of
the Company's total direct premiums written (64.8% of the Company's total
Massachusetts personal automobile premium), an increase of 8.0% over 1999.
Total exposures attributable to the AAA clubs group business were 559,696 or
64.5% of total Massachusetts's personal automobile exposures in 2000, as
compared to 547,009 or 67.1% in 1999. Of the total Massachusetts automobile
exposures written through the AAA affinity group program by the Company,
approximately 12.2% were written through insurance agencies owned by the AAA
clubs (8.3% of total Massachusetts automobile exposures). The remaining 87.8%
of the AAA group program were written through the Company's network of
independent agents (91.7% of total Massachusetts automobile exposures).
8
In regulatory group marketing programs, Massachusetts law allows two
years to reach the required penetration level of 35%. Commerce has continued
to maintain AAA member participation in excess of 35% through December 31,
2000, when it was estimated at 42.8%. This two year requirement was waived by
the Massachusetts Legislature for 1999 and 2000. Waiving the penetration
requirements allows insurance companies to continue offering group discounts
without reaching the 35% level. There can be no assurance that Commerce's AAA
penetration will not fall below 35% or, if it did, that Massachusetts would
continue to waive the penetration requirement.
Commerce and the AAA clubs have agreed that Commerce shall be their
exclusive underwriter of Massachusetts personal automobile group programs.
Commerce and the AAA clubs have signed a rolling three year contract which
renews automatically and may be terminated upon a minimum of three years
written notice to either party.
Since 1996, the Company has offered its Massachusetts customers safe
driver deviations to drivers with SDIP classifications of either Steps 9 or
10. Safe driver deviations are rate discounts based on the customer's driving
record and resulting SDIP classification and must be approved annually by the
Commissioner. Steps 9 and 10 are the two best driver SDIP classifications in
Massachusetts, representing drivers with no at fault accidents and not more
than one minor moving vehicle violation in the last six years. In response to
the average personal automobile rate decisions over the last several years,
the Company filed for and ultimately received approval to offer a SDIP Step 9
deviation of 2%. No deviation for Step 10 business for policies incepting in
the 2001 calendar year was requested. During 2000, 55.1% and 14.0% of the
Company's exposures were eligible for Step 9 and Step 10 deviations,
respectively, versus 54.6% and 14.0%, respectively during 1999.
The Company's other than personal automobile products tend to be derived
from its other two core product lines and therefore have had relatively
predictable risk profiles. The Company offers a preferred risk homeowners
product through Citation, which has an alternative pricing schedule for
selected insured's meeting more restrictive underwriting guidelines. Citation
also provides a separate rating tier for preferred commercial automobile
business. Approximately 18% of the voluntary commercial automobile premium
produced by its voluntary agents in 2000 was written by Citation. Citation
also produced 45.9% of Massachusetts homeowner business based on direct
written premium. The Company expects that these secondary rating tiers will
continue to assist the Company in retaining its better commercial automobile
and homeowner accounts. The Company also expects to further increase the
percentage of commercial automobile business that can be retained voluntarily
by the Company in 2001 and beyond.
The Company's long-term commitment to providing consistent markets for
Massachusetts independent agencies, coupled with the withdrawal by several
national companies from the Massachusetts personal automobile market, which
occurred during the years 1987 through 1991, has been a significant factor in
enabling the Company to increase and maintain its market share by contracting
with agencies, which meet its agency criteria. The Company believes that
Massachusetts's agencies are more likely to seek to develop and expand
relationships with domestic insurers, which, like the Company, have a long-
term commitment to the Massachusetts personal automobile market.
During the past few years, the Company has devoted substantial time and
resources to the development of its current information systems, which
enhanced both its underwriting and its agency support. Through the use of
several customized software programs, the Company has the ability to analyze
its internal historical underwriting data and use such information in making,
in the Company's belief, more informed underwriting decisions. In particular,
the Company believes that the amount and extent of detail data accumulated as
a result of its share of the Massachusetts personal automobile market gives
the Company a competitive advantage in determining which automobile risks to
reinsure through C.A.R. The Company's information systems also enable it to
provide extensive support to its agencies. This support includes a direct
billing system, which covers over 98% of the Company's policyholders, an on-
line inquiry system, which allows agencies to ascertain the status of pending
claims and direct bill information and a system which allows Company agencies
to quote premiums for the Company's three core product lines directly to
policyholders. The Company has developed claims and direct bill inquiry,
along with providing agents access to correspondence, manuals and reports via
the Internet. During 2000, approximately 200 agents had access to this
service and it is anticipated that this service will be available to all
agents during 2001.
9
Other States Business
Direct premiums written in states other than Massachusetts by Commerce
West and American Commerce increased $13,508,000 or 12.6%. This increase was
primarily attributable to American Commerce whose year to date 2000 results
reflect a full twelve months as compared to eleven months in 1999, coupled
with an approximate increase of $4,000,000 in direct premiums written by
Commerce West. The growth from Commerce West is primarily attributable to
non-standard automobile business. Commerce West began writing in this segment
of the market in late 1999. American Commerce, which writes business in 25
states, wrote approximately 74% of its business in seven states. Commerce
West's state writings and the seven states with the highest percentages of
premiums written by American Commerce are shown in the following table:
% of Direct Premiums
Company State Written by State
2000 1999
Commerce West California.............. 99.1% 100.0%
Oregon.................. 0.9% -
Total.............. 100.0% 100.0%
American Commerce Arizona................. 21.5% 21.5%
Ohio.................... 11.6% 9.8%
Rhode Island............ 10.8% 9.0%
Oregon.................. 10.2% 9.9%
Washington.............. 8.1% 8.7%
Oklahoma................ 6.4% 6.3%
Kentucky................ 5.8% 5.6%
Other states............ 25.6% 29.2%
Total.............. 100.0% 100.0%
The decrease in other states for American Commerce is primarily
attributable to business in several states being moved to other insurance
companies affiliated with the ownership of the agencies representing that
business. This was especially noteworthy in Texas and New Mexico, where
California State Automobile Association Inter-Insurance Bureau owned the
agencies and decided to move the business to its wholly-owned insurance
company subsidiary from American Commerce. These and some future moves were
anticipated at the time the Company negotiated the acquisition of American
Commerce.
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 continues
to focus on maximizing after-tax investment income through investing in high
quality diversified investments structured to maximize after-tax investment
income while minimizing risk. The Company's funds are generally invested in
securities with maturities intended to provide adequate funds to pay claims
and meet other operating needs without the forced sale of investments.
Periodically, sales have been made from the Company's fixed maturity portfolio
to actively manage portfolio risks, including credit-related concerns, to
optimize tax planning and to realize gains. This practice will continue in
the future.
In conducting investing activities, the Company is subject to, and
assumes, market risk. Market risk is the risk of an adverse financial impact
from changes in interest rates and market prices. The level of risk assumed
by the Company is a function of the Company's overall objectives, liquidity
needs and market volatility.
The Company manages its 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.
Although the Company has significant holdings of various closed-end preferred
stock mutual funds, these funds are comprised primarily of preferred stocks
traded on national stock exchanges, thus limiting exposure to any one
investment.
10
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. 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 December 31, 2000, 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 an
$86,081,000 decrease in the market value of the fixed maturities and preferred
stocks. A 200 basis point decrease results in a $55,235,000 increase in the
market value of the same securities. The equity price risk impact at December
31, 2000, based upon a 10% increase in the fair value of common stocks and
preferred stock mutual funds, would be an increase of $11,583,000 and
$35,242,000, respectively. Based upon a 10% decrease, common stocks and
preferred stock mutual funds would decrease $11,583,000 and $35,242,000,
respectively. This analysis was further exemplified during 2000 as the
Company experienced an increase in the market value of investments, net of
taxes, of $36,490,000 reflected in the change in net accumulated other
comprehensive income. Additionally, the Company had a $10,775,000 increase in
investment income, net of taxes, due to an increase in value of the underlying
securities in closed-end preferred stock mutual funds. In accordance with the
equity method of accounting, the change in market value of the underlying
preferred stocks held by the preferred stock mutual funds is recorded through
the income statement. Long-term interest rates (30-year Treasury Bond)
decreased to 5.46% at December 31, 2000 from 6.48% at December 31, 1999. The
preceding sensitivity analysis does not represent a forecast and should not be
relied upon as being indicative of expected operating results. These
hypothetical estimates are based upon numerous assumptions such as the nature
and timing of interest rate levels including the yield curve shape,
prepayments on loans and securities, reinvestment and replacement of asset and
liability cash flows and others. While assumptions are developed based upon
current economic conditions, the Company cannot provide any assurance as to
the predictive nature of these assumptions. Also, as market conditions vary
from those assumed in the sensitivity analysis, actual results will also
differ due to prepayment and refinancing levels likely deviating from those
assumed and other internal and external variables. Furthermore, the
sensitivity analysis does not reflect actions that management might take in
responding to or anticipating changes in interest rates.
A. General
Insurance Lines
Commerce and Citation, the Company's Massachusetts property and casualty
insurance subsidiaries, currently have a combined Best's rating of A+
(Superior). Commerce West, and American Commerce currently have Best's
ratings of A (Excellent). According to Best's, an insurer with a Superior
rating has achieved superior overall performance and has shown the strongest
ability to meet their policyholder and other contractual obligations when
compared to the norms of the property and casualty insurance industry. An
insurer with an Excellent rating has demonstrated, in Best's opinion,
excellent overall performance when compared to standards developed by Best's.
11
The following table compares direct premiums written, net premiums written and
earned premiums for the years ended December 31, 2000 and 1999:
(Dollars in thousands)
Years Ended December 31,
2000 1999 $ Change % Change
Direct Premiums Written:
Personal Automobile in Massachusetts........$ 827,180 $731,329 $ 95,851 13.1%
Personal Automobile in All Other States..... 103,600 92,297* 11,303 12.2%
Commercial Automobile in Massachusetts...... 43,243 36,616 6,627 18.1%
Homeowners in Massachusetts................. 65,662 59,981 5,681 9.5%
Homeowners in All Other States.............. 16,498 14,378* 2,120 14.7%
Other Lines in Massachusetts................ 14,860 13,027 1,833 14.1%
Other Lines in All Other States............. 606 521* 85 16.3%
Total Direct Premiums Written............$1,071,649 $948,149 $123,500 13.0%
Net Premiums Written:
Direct Premiums.............................$1,071,649 $948,149* $123,500 13.0%
Assumed Premiums from C.A.R................. 81,659 87,241 (5,582) (6.4%)
Ceded Premiums to C.A.R..................... (67,451) (68,740) 1,289 (1.9%)
Ceded Premiums to Other than C.A.R.......... (76,946) (54,657)* (22,289) 40.8%
Total Net Premiums Written...............$1,008,911 $911,993 $ 96,918 10.6%
Earned Premiums:
Personal Automobile in Massachusetts........$ 714,972 $633,746 $ 81,226 12.8%
Personal Automobile in All Other States..... 100,116 91,357* 8,759 9.6%
Commercial Automobile in Massachusetts ... 32,548 29,219 3,329 11.4%
Homeowners in Massachusetts................. 17,364 16,830 534 3.2%
Homeowners in All Other States.............. 4,186 12,032* (7,846) (65.2%)
Other Lines in Massachusetts................ 3,434 3,190 244 7.6%
Other Lines in All Other States............. 166 755* (589) (78.0%)
Assumed Premiums from C.A.R................. 81,300 84,356 (3,056) (3.6%)
Assumed Premiums from Other than C.A.R...... 397 345 52 15.1%
Total Earned Premiums....................$ 954,483 $871,830 $ 82,653 9.5%
Earned Premiums in Massachusetts............$ 768,301 $682,985 $ 85,316 12.5%
Earned Premiums-Assumed..................... 81,697 84,701 (3,004) (3.5%)
Earned Premiums in All Other States......... 104,485 104,144* 341 0.3%
Total Earned Premiums....................$ 954,483 $871,830 $ 82,653 9.5%
*Includes eleven month results of American Commerce since the January 29, 1999
acquisition.
The Company's principal insurance line is personal automobile insurance.
The Company offers automobile policyholders the following types of coverage:
bodily injury liability coverage, including underinsured and uninsured
motorist coverage, personal injury protection coverage, property damage
liability coverage and physical damage coverage, including fire, theft and
other hazards specified in the policy. Policies are usually written for one-
year terms. The Company's published liability limits for Massachusetts
business written by Commerce is $500,000 per person for bodily injury,
$1,000,000 per accident and $100,000 for property damage. Liability limits of
$100,000 per person injured, $300,000 per accident and $100,000 for property
damage are the limits most commonly purchased from the Company in
Massachusetts. For California business written by Commerce West, liability
limits of $15,000 per person injured and $30,000 per accident are most
commonly purchased. For business written by American Commerce, liability
limits of $100,000 per person injured and $300,000 per accident are most
commonly purchased.
12
In Massachusetts, private passenger automobile insurance is subject to
extensive regulation. Owners of registered automobiles are generally required
to maintain certain minimum automobile insurance coverages. With very limited
exceptions, automobile insurers are required by law to issue a policy to any
applicant seeking to obtain such coverages. Companies in Massachusetts are
also assigned agents, known as Exclusive Representative Producers ("ERPs"),
based on market share, that have been unable to obtain a voluntary contract
with an insurance carrier. Marketing and underwriting strategies for
companies operating in Massachusetts are limited by maximum premium rates and
minimum agency commission levels for personal automobile insurance, which are
mandated by the Massachusetts Commissioner of Insurance ("Commissioner"). In
Massachusetts, accident rates, bodily injury claims, and medical care costs
continue to be among the highest in the nation. According to A.M. Best,
Massachusetts "has higher than average medical costs and liability claims
involving attorneys." Massachusetts personal automobile premium per policy,
based on latest available premium information, was 10th highest in the nation.
During the three-year period from 1998 to 2000, average mandated
Massachusetts personal automobile insurance premium rates decreased an average
of 0.9% per year. The Commissioner approved an average 8.3% decrease in
personal automobile premiums for 2001, as compared to an average rate increase
of 0.7% in 2000. During the period from 1996 through 1999 average rates
decreased in three out of four of those years as depicted in the following
table. Coinciding with the 2001 rate decrease, the Commissioner also approved
an increase in the commission rate agents receive for selling private
passenger automobile insurance from 11.8% in 2000 to 12.3% in 2001.
State Mandated Commerce Average
Average Rate Change
Year Rate Change Per Exposure
2001 (8.3%) (1.0%)(Estimated)
2000 0.7% 6.2%
1999 0.7% 9.1%
1998 (4.0%) 2.6%
1997 (6.2%) (1.8%)
1996 (4.5%) (9.2%)
Although average mandated personal automobile premium rates increased
only 0.7% in 2000, the Company's average rate increased 6.2% per exposure.
The 6.2% increase for 2000 was primarily the result of decreases in the Safe
Driver Insurance Plan ("SDIP") deviations for Step 9 and Step 10 drivers, the
two best driver SDIP classifications in Massachusetts. The increase was also
due to the fact that the rate decision did not anticipate purchases of new
automobiles in the year to which the rate decision applied and, secondly, the
Company's mix of personal automobile business differs from that of the
industry.
The 1997, 1998 and 1999 average rate decisions were partially driven by
corrections for an industry error that had impacted prior year rate decisions.
The industry error resulted from a miscalculation of industry expense
allowances that had the effect of overstating rates for 1991 through 1996.
Mandated rates for 1997, 1998 and 1999 included an adjustment to recoup $176
million from the industry. The adjustment included in the rate decision to
recoup the error was phased in at 40%, 40% and 20% in 1997, 1998 and 1999,
respectively. The earned premium impact of this, coupled with the impact of a
previous year imbalance in the SDIP, was approximately $15.3 million for 1997,
$23.9 million for 1998 and $14.0 million for 1999. The earnings per share
after-tax impact resulting from lower earned premiums have been estimated at
$0.28 for 1997, $0.43 for 1998 and $0.26 for 1999.
The Company also offers homeowners insurance in Massachusetts, including
a very limited amount of policies in designated coastal areas. The Company's
standard homeowners policy is an all risk, replacement cost insurance policy
covering a dwelling and the content contained therein. The Company's
published limits of liability for property damage to a dwelling are a minimum
coverage of $60,000 and a maximum coverage of $600,000, although some policies
over this amount are written on an exception basis. For personal liability,
the minimum coverage is $100,000 and the maximum coverage is $1,000,000. The
average dwelling coverage amount per policy is approximately $150,000, and
generally, the average amount of contents coverage is 70% of the amount of
coverage for the dwelling, with limitations on the amount of coverage per item
placed on securities, cash, jewelry, furs, silverware, computer equipment and
firearms. However, additional coverage for such items can be purchased on a
scheduled personal property basis. The Company also offers $1,000,000,
$2,000,000 and $3,000,000 personal liability umbrella coverage for homeowners
policies requiring certain specified underwriting coverages which are
reinsured through American Reinsurance Corporation. Similar coverages are
offered by American Commerce as part of its homeowner business.
13
The Company offers a preferred homeowners product through Citation,
which has higher policy limits and a lower premium structure and is designed
primarily for homes with above-average market values. The Company also
applies more stringent underwriting criteria by, among other things, limiting
the product to homes with modern electrical systems.
The Company also offers inland marine, fire, general liability and
commercial multi-peril insurance in Massachusetts. Commerce West
predominantly writes private passenger automobile insurance in California and
Oregon through 337 independent insurance agencies and brokers. All business
is underwritten at the company's headquarters located in Pleasanton,
California. Although primarily writing preferred business, Commerce West
began writing non-standard business in late 1999. American Commerce
predominantly writes private passenger automobile and homeowners insurance in
25 states exclusively through 36 AAA independent insurance agencies. Products
are similar to those offered by Commerce and Citation. All business is
underwritten at the company's headquarters located in Columbus, Ohio. Both
companies target preferred insurance risks.
Mortgage Operations
Insurance companies are authorized to invest in mortgages. The Company
formed Bay Finance Company, Inc. ("Bay Finance") to originate and service
residential and commercial mortgages in Massachusetts and, on a limited basis,
in Connecticut. During fiscal 2000, 1999 and 1998 the mortgage operations
accounted for approximately $5,407,000, or 0.5%, $5,429,000, or 0.6% and
$6,407,000, or 0.8% of the Company's consolidated total revenues,
respectively.
Insurance Agency
Clark-Prout Insurance Agency, Inc. ("Clark-Prout") is a wholly-owned
insurance agency that writes both for the Company and for other insurance
companies. During fiscal 2000, 1999 and 1998, Clark-Prout's revenues amounted
to $717,000, or 0.1%, $803,000, or 0.1% and $785,000, or 0.1% of the Company's
consolidated total revenues, respectively.
Segment Information
The information in Note O in the Company's 2000 Annual Report is
incorporated herein by reference.
B. Commonwealth Automobile Reinsurers
A significant aspect of the Company's automobile insurance business
relates to its interaction with C.A.R. C.A.R. is a state-mandated reinsurance
mechanism, which enables the Company and the Servicing Carriers to reinsure
any undesirable automobile risk. Servicing Carriers, which are responsible
for over 99.0% of total direct premiums written for personal automobile
insurance in Massachusetts, are required to offer automobile insurance
coverage to all eligible applicants pursuant to "take-all-comers" regulations,
but may reinsure undesirable business with C.A.R. In addition, Servicing
Carriers are obligated to accept involuntary agencies, known as ERPs, from
C.A.R. and to provide an automobile insurance market in Massachusetts for
those agencies.
C.A.R. maintains separate pools for liability and physical damage
coverage in personal and commercial automobile risks. All companies writing
automobile insurance in Massachusetts share in the underwriting results of
C.A.R. business for their respective product line or lines, whether or not
they are Servicing Carriers. Since its inception, C.A.R. has annually
generated multi-million dollar underwriting losses in both the personal and
commercial pools. Accordingly, each automobile insurer attempts to develop
and implement underwriting strategies that will minimize its relative share of
the C.A.R. deficit while maintaining acceptable loss ratios on risks not
reinsured through C.A.R.
In general, the C.A.R. reinsurance mechanism operates as follows.
Within established time frames, a Servicing Carrier must identify which
policies it wishes to retain and which policies it wishes to cede to C.A.R. A
Servicing Carrier pays to C.A.R. all of the premiums generated by the policies
it has ceded and also reimburses C.A.R. the difference between standard rates
and the reduced premium resulting from affinity group marketing discounts on
policies ceded to C.A.R. C.A.R. reimburses Servicing Carriers for all losses
incurred on account of ceded policies, although, as with reinsurance
generally, reinsurance of a policy through C.A.R. does not legally discharge
the Servicing Carrier from its liability to the policyholder for the full
amount of the policy. In addition, Servicing Carriers also receive fees for
servicing ceded policies based upon the expense structure established by
C.A.R.
14
An insurer's proportionate share of the C.A.R. deficit is allocated on
the basis of a formula called a participation ratio, which can vary
significantly between the personal and commercial pools, and between different
policy years. Under current regulations, an insurer's share of the C.A.R.
deficit is based upon its market share for retained automobile risks for the
particular pool, adjusted by a utilization formula, such that, in general, its
participation ratio is disproportionately and adversely affected if its
relative use of C.A.R. reinsurance exceeds that of the Massachusetts industry
and favorably affected if its relative use of C.A.R. reinsurance is less than
that of the Massachusetts industry. The current formula also contains a
provision whereby certain high risk business, if reinsured through C.A.R., is
excluded in determining an insurer's participation ratio. Finally, for the
personal automobile C.A.R. pool, an insurer's participation ratio may be
affected by credits received for not reinsuring through C.A.R. automobile
risks in selected under priced classes and territories. An insurer's
participation ratio will be favorably affected if its relative use of credits
exceeds that of the Massachusetts industry.
Company Private Passenger Participation Ratio for C.A.R. versus Market Share
Company Participation Company
Year Ratio in C.A.R. Market Share
2000* 16.9% 22.3%
1999 16.5% 21.3%
1998 16.7% 21.8%
1997 18.0% 21.8%
1996 19.0% 20.8%
*Estimated
The Company's objective is to develop and implement underwriting
strategies to obtain the optimum balance between its C.A.R. participation
ratio and the loss ratios on automobile risks not reinsured through C.A.R.
For each automobile risk and certain risk categories, the Company makes a
judgment as to whether the projected impact on the Company's profitability
from retaining the risk outweighs the incremental cost of reinsuring the risk
through C.A.R. In determining the incremental cost of reinsuring a risk
through C.A.R., the Company estimates its participation ratio for a given
period by modeling the anticipated Massachusetts industry-wide C.A.R. trends.
Once the Company estimates its participation ratio, it is then able to compare
the incremental effect on the Company's share of the C.A.R. deficit of either
reinsuring or retaining the particular automobile risks. Finally, the Company
utilizes its internal underwriting database and internally-developed actuarial
reporting and decision support systems to develop a projected underwriting
loss ratio for each risk. It then compares the impact of the automobile risk
on the Company's participation ratio in order to estimate whether, after
taking all C.A.R. and other factors into account, the Company's profitability
will be enhanced by reinsuring or retaining such risk. The Company believes
that, because of its leading share of the Massachusetts automobile insurance
market, it can utilize statistically credible data for a greater array of
underwriting factors than its competitors, which in turn gives it a
competitive advantage in deciding which automobile risks to reinsure through
C.A.R.
The C.A.R. utilization-based participation ratio has been in place since
1993, and individual companies in the marketplace make minor yearly changes to
find their optimum balance between voluntary and ceded writings. In 2000, the
Company ceded approximately $60,038,000 or 7.3% of the Company's Massachusetts
personal automobile direct premiums written, compared to $59,497,000, or 8.1%
in 1999. The Company's strategy has been to voluntarily retain more of the
types of personal automobile business that are factored as credits favorably
impacting the utilization formula. These credits result from voluntarily
writing business in under-priced territories and for under-priced risks. As a
result of increased voluntary retention in excess of the industry, the credits
impacting the utilization formula have favorably affected the Company's
participation ratio. As indicated in the above table, this ratio is several
percentage points below the Company's estimated 22.3% share of the
Massachusetts personal automobile market.
Although commercial automobile insurance is a relatively smaller portion
of the Company's total insurance writings, the related commercial automobile
risk selection decisions remain an important element in determining
profitability. In 2000, the Company ceded approximately $7,414,000 or 17.1%
of its Massachusetts commercial automobile direct premiums written, an
increase of $733,000 or 11.0% from 1999.
15
C.A.R. rule changes occur, as C.A.R. adjusts the operations of the
personal and commercial reinsurance mechanisms to address the needs of the
Massachusetts automobile insurance market. Any material change to the C.A.R.
rules in the future will affect the Company. The Company is not currently
aware of any likely future rule changes that could have a material impact on
the Company, but there can be no assurance that such rule changes will not
occur.
C. Marketing
The Company markets its insurance products through a network of licensed
independent agencies, 534 throughout Massachusetts (of which 124 are ERPs),
574 in California and Oregon for Commerce West, and 36 for American Commerce.
The non-ERP independent agencies may also represent other insurance companies,
some of which may compete directly with the Company. The independent
insurance agencies are under contract with the Company's subsidiaries and must
conduct their business according to the provisions of their contract.
Contracts for Massachusetts's agencies may be terminated by the Company upon
180 days' notice to the agency or at will by the agency.
Massachusetts Business
The Company seeks to establish long-term relationships with agencies
that can generate a sizable volume of business with profitable underwriting
characteristics and for which the Company will be among the top two or three
preferred writers of its core products. The Company also assesses whether the
mix of a prospective agency's business will expand the Company's presence in
one or more of its core product lines. In 2000, each agency representing the
Company in Massachusetts produced an average of approximately $1,815,000 of
Company direct premiums written or a 12.5% increase as compared to 1999. Also
in Massachusetts during 2000, 189 agencies produced in excess of $1.0 million
of direct premiums written, an additional 59 agencies produced over $2.0
million, an additional 42 agencies produced over $3.0 million and lastly, an
additional 33 agencies produced over $4.0 million. The Company's three
largest agencies produced approximately $62.4, $16.7 and $11.3 million of the
Company's Massachusetts direct premiums written, respectively, or
approximately 6.6%, 1.8% and 1.2% in 2000.
Once appointed, each agency's performance is carefully monitored. An
Agency Evaluation Committee, comprised of representatives of the Company's
Marketing, Underwriting and Premium Accounting departments, utilizes a host of
pre-established criterion (loss ratio, premium volume, etc.) to continuously
evaluate agencies. Generally, the Company will counsel an agency on how to
improve its underwriting and profitability before any agency will be
terminated.
Company agencies receive commissions on policies written for the Company
and are eligible to receive contingent commissions through a profit sharing
arrangement. The Commissioner annually establishes a minimum average direct
commission for personal automobile insurance, which in 2000 was 11.8%. The
Company's contingent commissions are tied to the underwriting profit on
policies written by an agency based upon a rolling three year experience
methodology. The Company generally pays up to 45% of the underwriting profit
attributable to the agency's business. The profit sharing plan is a three
year rolling plan, with one third of each of the current and the two prior
years profit or loss calculations, summed to a single amount. This amount, if
positive, is multiplied by the profit sharing commission rate and paid to the
agent. To qualify for profit sharing, a three-year average loss ratio of 50%
to 55% or better is generally required. C.A.R. credits for voluntary business
written in urban area or credits for writing youthful operators on a voluntary
basis increase the loss ratio eligibility for profit sharing up to 55% from
50%. Books of business with no available credits must achieve a lower loss
ratio. In 2000, total commission expensed by the Company to its agencies
amounted to 16.2% of direct premiums written, of which direct commissions and
contingent commissions constituted 14.1% and 2.1%, respectively, versus total
commission expensed of 17.3%, of which 14.1% was direct and 3.2% was
contingent in 1999. Direct commissions are higher than the personal
automobile rates primarily due to higher commission rates on SDIP Step 9 and
10 business coupled with higher commissions on other lines of business. In
2000, the Company's expense for contingent commissions was $19.5 million
versus $27.0 million in 1999.
The Company also occasionally sponsors incentive award trips to
encourage and reward agency profitability and growth. In 1998, the Company
initiated the T2000 Sales Incentive Contest. One part of the measurement
period concluded on December 31, 1999 and the other concluded on May 31, 2000
with agents earning incentive trips, which took place in April and September
of 2000, respectively. The estimated total cost was approximately $1.3
million of which approximately $45,000 was expensed in 2000 and $571,000 in
1999.
16
The Company's information systems enable it to provide extensive support
to its agencies. This support includes a direct billing system, which covers
over 98% of the Company's Massachusetts policyholders, an on-line inquiry
system which allows agents to ascertain quickly the status of pending claims
or direct bill information and a system which allows Company agents to quote
many premiums directly to policyholders. The Company also emphasizes its
commitment to enhancing and expanding the role of its information systems.
The Company has provided agencies with the ability to generate personal
automobile policies from their own offices and continuously explores new
options on an ongoing basis. The Company has also developed Internet
connectivity for its independent agents.
The Company believes that, because of its compensation arrangements and
by providing a consistent market with emphasis on service, an increasing
number of the Company's agencies will rely on it as their principal supplier
of insurance products. The Company believes that it is the preferred provider
for most of its agencies. Although the Company believes, based on annual
surveys of its agencies, that its relationships with its independent agencies
are excellent, any disruption in these relationships could adversely affect
the Company's business.
Since the latter part of 1995, Commerce has been a leader in affinity
group marketing through agreements with the four American Automobile
Association Clubs of Massachusetts ("AAA clubs") offering discounts on private
passenger automobile insurance to the clubs' members who reside in
Massachusetts. A 6% discount was approved for policies effective January 1,
2001, which is the same as the discount for 2000. The AAA clubs discount can
be combined with safe driver deviations for up to a 7.9% reduction from the
2001 state mandated rates. Membership in these clubs is estimated to
represent approximately one-third of the Massachusetts motoring public, and
has been the primary reason for a 53.7% increase in the number of personal
automobile exposures written by Commerce since year-end 1995 (the AAA affinity
group program incepted in October of 1995). In 2000, total direct premiums
written attributable to the AAA group business were $535,766,000 or 50.0% of
the Company's total direct premiums written (64.8% of the Company's total
Massachusetts personal automobile premium), an increase of 8.0% over 1999.
Total exposures attributable to the AAA clubs group business were 559,696 or
64.5% of total Massachusetts's personal automobile exposures in 2000, as
compared to 547,009 or 67.1% in 1999. Of the total Massachusetts automobile
exposures written through the AAA affinity group program by the Company,
approximately 12.2% were written through insurance agencies owned by the AAA
clubs (8.3% of total Massachusetts automobile exposures). The remaining 87.8%
of the AAA group program were written through the Company's network of
independent agents (91.7% of total Massachusetts automobile exposures). For
additional details, refer to the following table.
AAA Affinity Group Discount and SDIP Deviations 2001* 2000 1999 1998 1997
AAA Affinity Group Discount................... 6% 6% 6% 6% 10%
SDIP Step 9 Deviation......................... 2% 6% 8% 15% 10%
SDIP Step 10 Deviation........................ 0% 2% 3% 4% 10%
Combined AAA Affinity Group Discount and
Step 9 Deviation............................ 7.9% 11.6% 13.5% 20.1% 19.0%
Combined AAA Affinity Group Discount and
Step 10 Deviation........................... 6.0% 7.9% 8.8% 9.8% 19.0%
*For policies with effective dates as of January 1, 2001 or
thereafter.
Other States
Commerce West predominantly writes private passenger automobile
insurance in California and Oregon through 574 independent insurance agencies
and brokers. All business is underwritten at the company's headquarters
located in Pleasanton, California. Although primarily writing preferred
business, Commerce West began writing non-standard business in late 1999.
American Commerce predominantly writes private passenger automobile and
homeowners insurance in 25 states exclusively through 36 AAA independent
insurance agencies. All business is underwritten at the company's
headquarters located in Columbus, Ohio. Both companies target preferred
insurance risks.
D. Underwriting
The Company seeks to achieve an underwriting profit, as measured by a
statutory combined ratio of less than 100%, in each of its three core product
lines, personal automobile, commercial automobile and homeowners insurance,
in both hard and soft markets. The strategy is designed to achieve
consistent profitability with substantial growth in net premiums written
during hard markets and more modest growth during soft markets. All of the
Company's policies have been written on a "claims incurred basis," meaning
that the Company covers claims based on occurrences that take place during
the policy period.
17
Agencies are authorized to bind the Company on risks as limited by the
Company's written underwriting rules and practices, which set forth
eligibility rules for various policies and coverages, unacceptable risks, and
maximum and minimum limits of liability. With respect to non-automobile
policies, other than certain umbrella policies, the Company's agencies have
the ability to bind the Company for a limited period, typically 60 days,
during which time the Company reviews all risks to determine whether it will
accept or reject the policy. During this review period, the Company is
obligated to pay any claim, which would be covered under the policy.
Violation of the Company's underwriting rules and practices is grounds for
termination of the agency's contract with the Company.
Massachusetts Business
The Company and each of the approximately 42 other Servicing Carriers
must write all automobile risks submitted to them. Massachusetts's personal
automobile insurance rates are fixed annually by the Commissioner. All
companies writing personal automobile policies are required to use such
mandated rates, unless they have received prior approval from the
Commissioner to offer a lower rate. The actual premium paid by a particular
policyholder, however, is adjusted, either up or down, based upon the SDIP
record of the insured operator. Moving violations and accidents for which
the insured was at fault within the most recent six year period are used to
determine each operator's SDIP surcharge or credit. The competitive nature
of the Massachusetts personal automobile insurance market, which began in
1995 continued through 2000 and into 2001.
Prices for Massachusetts' commercial automobile insurance policies that
are not reinsured through C.A.R. are set competitively subject to the
Commissioner's authority to disapprove such prices. The rate for commercial
automobile risks reinsured through C.A.R. is mandated by the Commissioner,
except for private passenger type non-fleet business. The Company's rates
for other product lines, including homeowners and commercial lines of general
liability and property insurance, are based in part on loss cost data from
the Insurance Services Office ("ISO"), which is an industry bureau providing
policy forms and rate making data, and in part, on the Company's own
experience and industry price levels.
The Company is not obligated by statute to accept every homeowners risk
submitted to it. Accordingly, risks meeting the Company's underwriting
guidelines are accepted, and all other risks are declined or not renewed.
The Company has established an independent rate level for its homeowner's
product line, based on its own loss experience and recognizing the price
levels available in the competitive marketplace. The Company uses ISO policy
forms and has added special coverage features to meet its product needs.
Rates and forms are filed with the Commissioner.
Under Massachusetts' law, residential property owners are strictly
liable for damages caused by lead poisoning in children under age six
residing in the premises, unless the property owner has a Letter of
Compliance or a Letter of Interim Control (i.e. has taken or is taking
specific measures to prevent lead poisoning). The Company has reduced its
exposure to lead poisoning by (i) excluding from coverage all intra-familial
claims for bodily injury or medical expenses brought by minors living in an
insured's household, (ii) revising its underwriting standards for new and
renewal business to avoid insuring properties with lead poisoning hazards and
(iii) excluding from homeowners and dwelling fire liability coverage all lead
poisoning perils to children under the age of six on policies for properties
built prior to 1978 that contain rental units and where strict liability for
lead poisoning would otherwise apply. Effective on March 1, 1998 a similar
exclusion was added to the Business Owners Program. With regard to the
exclusion described in (iii), policyholders may buy a reinstatement of the
excluded coverage through a policy endorsement for an additional premium, but
very few such endorsements have been written. As a result of these remedial
steps and its historical claims experience, the Company does not believe that
its exposure to lead poisoning claims is material. The Company held reserves
in the amount of $1,525,000 and $2,175,000 for lead paint related claims at
December 31, 2000 and 1999, respectively.
The Company believes that its information systems give it a competitive
advantage in making underwriting decisions, particularly in deciding which
personal automobile risks should be reinsured through C.A.R. Utilizing data
the Company accumulates as a result of its major market presence in the
Massachusetts personal automobile line, the Company believes that its
information systems allow it to make informed risk assessments and to respond
effectively to shifts in the automobile insurance markets and regulatory
environment.
18
Other States
In keeping with the Company's long-term growth objective to expand
outside Massachusetts, the Company, in 1995, acquired Commerce West, a
personal automobile insurer, located in Pleasanton, California. The Company
formed a joint-venture (ACIC Holding Co., Inc.) in November 1998, and
acquired in January 1999, American Commerce, located in Columbus, Ohio.
Commerce West predominantly writes private passenger automobile insurance in
California and Oregon through 574 independent insurance agencies and brokers.
All business is underwritten at the company's headquarters located in
Pleasanton, California. Although primarily writing preferred business,
Commerce West began writing non-standard business in late 1999. American
Commerce predominantly writes private passenger automobile and homeowners
insurance in 25 states exclusively through 36 AAA independent insurance
agencies. All business is underwritten at the company's headquarters located
in Columbus, Ohio. Both companies target preferred insurance risks.
E. Reinsurance
In addition to participating in C.A.R., the Company reinsures with
other insurance companies on a claims incurred basis, a portion of its
potential liability under the policies it has written, protecting itself
against severe loss under individual policies, or catastrophic occurrences
where a number of claims can produce an extraordinary aggregate loss.
Reinsurance does not legally discharge the Company from its primary liability
to the insured for the full amount of the policies, but it does make the
reinsurer liable to the Company to the extent of the reinsured portion of any
loss ultimately suffered. The Company seeks to utilize reinsurers, which it
considers adequately capitalized and financially able to meet their
respective obligations under reinsurance agreements with the Company. The
Company utilizes a variety of reinsurance mechanisms to protect itself
against loss as described below.
Property, Catastrophe and Quota Share Reinsurance
Effective July 1, 1998 through June 30, 2000, the Company expanded the
quota share program. A 75% quota-share reinsurance program was incepted,
covering all non-automobile property and liability business, except umbrella
policies. The excess loss portion of the previous program was reduced on
July 1, 1998 and completely eliminated on September 30, 1998. The expanded
program was split between American Re-Insurance Company, Employers
Reinsurance Corporation, Hartford Fire Insurance Company and Swiss
Reinsurance America Corporation. The maximum per occurrence loss
reimbursement was the higher of 350% of premium ceded under the program or
$175.9 million. The maximum annual aggregate occurrence loss reimbursement
was the higher of 450% of premium ceded under the program or $226.1 million.
A sliding scale commission, based on loss ratio, is utilized under this
program. This program provides the Company with sufficient protection for
catastrophe coverage so as to enable the Company to forego pure catastrophe
reinsurance coverage, which was previously tailored in conjunction with the
former quota share arrangement.
Through December 31, 1999, American Commerce utilized a separate
catastrophe reinsurance program. Effective January 1, 2000, this program
expired and American Commerce joined the quota-share reinsurance program
described above.
The table below provides information depicting the approximate recovery
under the quota share contract (described below) at various loss scenarios,
if a single catastrophe were to strike (in thousands):
Net Loss
Total Reinsurance Retained by
Loss Recovery the Company
$ 50,000 $ 37,500 $12,500
100,000 75,000 25,000
150,000 112,500 37,500
200,000 150,000 50,000
250,000 167,500 82,500
19
Effective July 1, 2000, the Company changed its annual occurrence and
aggregate annual reinsurance recovery limits on its quota share reinsurance
treaty, from 350%/450% of ceded quota share premiums, respectively, to
250%/350% of ceded quota share premiums. This change was made after
consultation with the Company's reinsurers and based upon recent catastrophe
modeling performed on the Company's risks. The modeling indicated that a
lower threshold was warranted. Based on this change, the Company has no
reinsurance recoveries for a single event catastrophe in excess of a total
loss of approximately $223.3 million. Prior to the change this figure was
$297.5 million. The level of reinsurance protection increases (decreases)
when the company cedes more (less) premium to the reinsurers. The Company's
estimated total loss on its other than automobile business for 100 and 250
year storms (including American Commerce) is approximately $131.7 million and
$204.2 million, respectively. The Company estimates were derived through the
services of Swiss Reinsurance America Corporation who utilized the RMS (Risk
Management Solutions) IRAS risk assessment system.
Written premiums ceded in 2000, 1999 and 1998 under the above referenced
programs were $69.4 million, $51.5 million and $54.0 million, respectively.
The 34.8% increase in written premiums ceded in 2000 versus 1999 in this
program was a result of American Commerce joining the quota-share reinsurance
program effective January 1, 2000 and increases in Massachusetts homeowners
premiums. An unearned premium transfer from American Commerce of
approximately $6.0 million occurred effective January 1, 2000. Ceding
commission income is calculated on a ceded earned premium basis.
Casualty Reinsurance
Casualty reinsurance is on an excess of loss basis for any one event or
occurrence with a maximum recovery of $9.0 million over a net retention of
$1.0 million. This coverage is placed with Swiss Reinsurance America
Corporation (rated A++ by A.M. Best).
Personal and commercial liability umbrella policies are reinsured on a
95% quota share basis in regard to limits up to $1.0 million and 100% quota
share basis for limits in excess of $1.0 million but not exceeding $5.0
million for policies with underlying automobile coverage of $250,000/$500,000
or more. The Company also has personal liability umbrella reinsurance
coverage for policies with underlying automobile coverage of
$100,000/$300,000, on a 65% quota share basis in regard to limits up to $1.0
million and 100% quota share basis for limits in excess of $1.0 million but
not exceeding $3.0 million. These coverages are placed with American Re-
Insurance Company (rated A++ by A.M. Best).
Earned premiums and losses and loss adjustment expenses are stated in
the accompanying consolidated financial statements after deductions for ceded
reinsurance. Those deductions for reinsurance other than C.A.R. are as
follows (in thousands):
Years ended December 31,
2000 1999 1998
Income Statement
Written premiums ceded............................ $76,946 $54,657 $ 56,019
Earned premiums ceded............................. 73,354 55,557 43,518
Losses and loss adjustment expenses ceded......... 30,797 24,240 16,568
Balance Sheet
Unpaid losses and loss adjustment expenses........ 24,726 21,552 9,337
Unearned premiums................................. 36,828 26,813 27,350
The Company, as primary insurer, would be required to pay losses in
their entirety in the event that the reinsurers were unable to discharge their
obligations under the reinsurance agreements.
The Company believes that the terms of its reinsurance contracts are
consistent with industry practice in that they contain standard terms with
respect to lines of business covered, limits, retentions, arbitration and
occurrence. Based on its review of its reinsurers' financial statements and
their reputations in the reinsurance marketplace, the Company believes that
its reinsurers are financially sound. The Company had no amount of
reinsurance receivables more than 90 days past due at December 31, 2000.
20
F. Settlement of Claims
Claims under insurance policies written by the Company are investigated
and settled primarily by claims adjusters employed by the Company. In
Massachusetts, the Company employs a staff of 713 people at its claims
department, located in Webster, Massachusetts. In addition to these
individuals, the Company utilizes the services of approximately 33 independent
appraisal firms and 9 independent property adjusting companies who are
strategically located throughout the state. The Company also has a special
unit, which investigates suspected insurance fraud and abuse. If a claim or
loss cannot be settled and results in litigation, the Company retains outside
counsel to represent it. American Commerce employees a staff of 90 people
that settle claims at four regional claims offices strategically located
throughout the country. In addition to these individuals, American Commerce
utilizes the services of approximately 195 independent appraisal firms and 176
independent property adjusting companies who are also strategically located
throughout the country. Commerce West settles claims at their home office
employing a staff of 23 in the claims department. In addition, Commerce West
utilizes the services of approximately 25 independent appraisal firms
strategically located in California.
The Company believes that through its claims staff of experienced
adjusters, appraisers, managers, and administrative staff, it has higher
customer satisfaction than many of its competitors. All claims office staff
members work closely with agents, insureds and claimants with a goal of
settling claims fairly, rapidly and cost effectively.
Certain of the Company's Massachusetts agencies have settlement
authority for claims for other than automobile property losses, which are less
than $2,500. The settlement authority of agencies under automobile policies
is limited to claims for towing.
The Massachusetts Unfair Claims Settlement Practices Act ("Chapter
176D"), and other similar provisions in states in which the Company does
business, prohibits insurers from engaging in certain claim settlement
practices. These include failing to acknowledge and act reasonably promptly
upon communications with respect to claims arising under insurance policies,
refusing to pay claims without conducting a reasonable investigation based
upon all available information, failing to effectuate prompt, fair and
equitable settlements of claims in which liability has become reasonably
clear, and compelling insureds to institute litigation to recover amounts due
under an insurance policy by offering substantially less than the amounts
ultimately recovered in actions brought by such insureds. An insurer's
violation of any of these obligations expressly violates a number of state
laws including the Massachusetts Consumer Protection Act ("Chapter 93A"). Any
party, including claimants and insureds, whose rights are affected by an
insurer's violation of Chapter 176D, is entitled to bring a claim against the
insurer under Chapter 93A. Similar provisions exist in other states where the
company does business.
The damages available under Chapter 93A may not necessarily be related
to the harm caused by the insurer's violation of Chapter 176D. Chapter 93A
provides in effect that the party bringing the Chapter 93A claim will be
entitled, at a minimum, to the amount of the judgment on all claims arising
out of the same underlying occurrence, regardless of the limits of the policy
issued by insurer. Moreover, Chapter 93A permits the court to double or
triple the party's damages if the insurer's violation of Chapter 176D was
willful or knowing. If the underlying policy risk was ceded to C.A.R., the
Company may seek reimbursement from C.A.R. for the damages it will be
obligated to pay if it is found liable under Chapter 93A or amounts paid in
settlement of such claim. Such reimbursement is discretionary and C.A.R. may
not reimburse an insurer if C.A.R. determines that the insurer was negligent
in the handling of such claim and such negligence was the cause of Chapter 93A
liability. Additionally, certain time notification restrictions apply to
these judgments, which if not met, could preclude an insurer from seeking
reimbursement from C.A.R. Accordingly, there can be no assurance that the
Company will be reimbursed in any particular instance involving a Chapter 93A
C.A.R. reinsured claim.
Since 1996, the Company has been expanding a twenty-four (24) hour claim
reporting service in Massachusetts to third-party claimants and insureds of
interested agencies. This service allows customers to report their first
notice of a loss at anytime of the night or day; 365 days a year, including
weekends and holidays. This reporting methodology allows the Company to
improve customer satisfaction by making the initial claim handling much faster
and ultimately reducing indemnity payments such as rental and storage. As of
December 31, 2000, there were 377 agents who signed up for this claim
reporting methodology; these agents represent approximately 77% of total claim
volume. This represents an increase from 346 agents and 74% of the claim
volume as of December 31, 1999. The Company anticipates growth in this
program as it continues to discuss this service with those agencies who have
not yet been solicited to participate.
21
G. Loss and Loss Adjustment Expense Reserves
Significant periods of time can elapse between the occurrence of an
insured loss, the reporting of the loss to the insurer and the insurer's
payment of that loss. To recognize liabilities for unpaid losses, insurers
establish reserves as balance sheet liabilities representing estimates of
amounts needed to pay reported and unreported losses and LAE. The Company's
reserving policy is intended to result in a small redundancy. Quarterly, the
Company reviews these reserves internally. Regulations of the Division of
Insurance require the Company to annually obtain a certification from either a
qualified actuary or an approved loss reserve specialist that its loss and LAE
reserves are reasonable.
When a claim is reported to the Company, claims personnel establish a
"case reserve" for the estimated amount of the ultimate payment. The amount
of the reserve is primarily based upon an evaluation of the type of claim
involved, the circumstances surrounding each claim and the policy provisions
relating to the loss. The estimate reflects informed judgment of such
personnel based on general insurance reserving practices and on the experience
and knowledge of the claims person. During the loss adjustment period, these
estimates are revised as deemed necessary by the Company's claims department
based on subsequent developments and periodic reviews of the cases.
In accordance with industry practice, the Company also maintains
reserves for estimated losses incurred but not yet reported ("IBNR"). IBNR
reserves are determined on the basis of historical information and the
experience of the Company. Adjustments to IBNR are made periodically to take
into account changes in the volume of business written, claims frequency and
severity, the mix of business, claims processing and other items that can be
expected to affect the Company's liability for losses and LAE over time.
When reviewing reserves, the Company analyzes historical data and
estimates the impact of various factors such as (i) per claim information,
(ii) the historical loss experience of the Company and industry and (iii)
Legislative enactments, judicial decisions, legal developments in the
imposition of damages, changes and trends in general economic conditions,
including the effects of inflation. This process assumes that past
experience, adjusted for the effects of current developments and anticipated
trends, is an appropriate basis for predicting future events. There is no
precise method, however, for subsequently evaluating the impact of any
specific factor on the adequacy of reserves, because the eventual development
of reserves is affected by many factors. By using both individual estimates
of reported claims and generally accepted actuarial reserving techniques, the
Company estimates the ultimate net liability for losses and LAE. After taking
into account all relevant factors, management believes that the provision for
unpaid losses and LAE at December 31, 2000 is adequate to cover the ultimate
net cost of losses and claims incurred as of that date. The ultimate
liability may be greater or lower than reserves. Establishment of appropriate
reserves is an inherently uncertain process, and there can be no certainty
that currently established reserves will prove adequate in light of subsequent
actual experience. The Company does not discount to present value that
portion of its loss reserves expected to be paid in future periods. The
Company's loss and LAE reserves also include its share of the aggregate loss
and LAE reserves of all Servicing Carriers.
For a reconciliation of beginning and ending reserves for losses and
LAE, gross and net of reinsurance, see Note E to the Company's 2000
Consolidated Financial Statements, which is incorporated herein by reference
from pages 49 through 51 of the Company's 2000 Annual Report
Included in the loss reserve methodologies described above, are
liabilities for unpaid claims and claim adjustment expenses for environmental
related claims such as oil spills and lead paint. Reserves have been
established to cover these claims for both known and unknown losses. Because
of the Company's limited exposure to these types of claims, Management
believes they will not have a material impact on the consolidated financial
position of the Company. Loss reserves on environmental related claims
amounted to $3,712,000 and $4,185,000 at 2000 and 1999, respectively.
22
The following table represents the development of reserves, net of
reinsurance, for 1990 through 2000. The top line of the table shows the
reserves at the balance sheet date for each of the indicated years. This
represents the estimated amounts of losses and LAE for claims arising in all
years that were unpaid at the balance sheet date, including losses that had
been incurred but not yet reported to the Company. The upper portion of the
table shows the cumulative amounts paid as of successive years expressed as a
percentage with respect to that year's current reserve liability. The lower
portion of the table shows the re-estimated amount as a percentage of the
previously recorded reserves based on experience as of the end of each
succeeding year, including cumulative payments made since the end of the
respective year. The estimate changes as more information becomes known about
the payments, frequency and severity of claims for individual years.
Favorable loss development exists when the original reserve estimate is
greater than the re-estimated reserves at December 31, 2000.
23
In evaluating the cumulative information in the table, it should be noted that each year's amount includes the
cumulative effects of all changes in amounts for prior periods. This table does not present accident or policy year
development data. Conditions and trends that have affected development of the liability in the past may not necessarily occur
in the future. Accordingly, it is not appropriate to extrapolate future development based on this table.
Year ended December 31,
2000 1999 1998(1) 1997 1996 1995 1994 1993 1992 1991 1990
(Dollars in thousands)
Reserves for
losses and loss
adjustment
expenses........ $585,867 $558,779 $561,239 $529,765 $533,980 $493,910 $455,460 $422,224 $316,264 $228,659 $177,657
Paid (cumulative)
as a percentage
of current re-
serves as of:
One year later.. 49.8 47.2 50.5 50.2 48.2 47.6 52.6 51.1 46.2 46.2
Two years later. 69.7 73.4 72.0 69.8 68.2 71.7 76.9 71.2 68.4
Three years
later......... 87.5 84.2 83.5 80.5 82.1 86.1 87.3 84.6
Four years
later........... 92.4 90.1 89.3 88.3 91.2 91.2 95.7
Five years later 95.2 92.6 93.0 94.1 93.4 96.3
Six years later. 95.6 94.2 96.8 94.9 95.7
Seven years
later......... 96.2 97.2 97.0 96.7
Eight years
later......... 98.6 97.2 98.0
Nine years
later......... 98.5 98.2
Ten years later. 99.0
Reserves re-estimated
as a percentage of
initial reserves as of:
One year later.. 92.4 92.9 88.4 84.3 82.2 83.6 83.9 87.2 82.3 84.5
Two years later. 91.9 85.6 79.3 74.1 73.2 75.9 78.6 82.8 74.6
Three years
later.......... 85.1 77.4 71.5 68.9 69.4 73.0 77.1 75.1
Four years later 77.3 69.7 67.8 67.3 68.8 72.2 71.7
Five years later 70.4 66.3 66.4 67.0 68.7 68.2
Six years later. 66.9 65.7 66.7 67.8 65.5
Seven years
later......... 66.2 65.9 67.6 64.6
Eight years
later......... 66.5 67.2 64.6
Nine years later 67.7 64.4
Ten years later. 64.7
Redundancy expressed as a
percent of yearend
reserves......... 7.6 8.1 14.9 22.7 29.6 33.1 33.8 33.5 32.3 35.3
(1) The 1998 amount includes an adjustment to add $63,112 in loss and LAE reserves for American Commerce at January 29,1999.
24
H. Operating Ratios
Loss and Underwriting Expense Ratios
Loss and underwriting expense ratios are used to interpret the
underwriting experience of property and casualty insurance companies. Losses
and LAE are stated as a percentage of premiums earned because losses may occur
over the life of a policy. Underwriting expenses on a statutory basis are
stated as a percentage of net premiums written rather than premiums earned
because most underwriting expenses are incurred when policies are written and
are not spread over the policy period. Underwriting profit margins are
reflected by the extent to which the combined loss and underwriting expense
ratios, the combined ratio, is less than 100%. The combined ratio is
considered the best simple index of current underwriting performance of an
insurer. The Company's loss and LAE ratio, underwriting expense ratio and
combined ratio, and the industry combined ratio, on a statutory basis, are
shown in the following table. The Company's ratios include lines of insurance
other than automobile as do the industry combined ratios for all writers.
Data for the property and casualty industry generally may not be directly
comparable to Company data. This is due to the fact that the Company conducts
its business primarily in Massachusetts.
Years Ended December 31,
Company Statutory Ratios 2000 1999 1998 1997 1996
(unaudited)
Loss and LAE Ratio................. 71.7% 72.0% 71.6% 71.4% 70.9%
Underwriting Expense Ratio......... 25.1 26.5 26.5 25.1 27.1
Combined Ratio..................... 96.8% 98.5% 98.1% 96.5% 98.0%
Industry Combined Ratio
(all writers)(1)................... 104.0% 104.4% 102.2% 100.1% 102.9%
(1) Source: Best's Review Preview (2001), as reported by A.M. Best for all
property and casualty insurance companies and weighted to reflect the
Company's product mix. The 2000 industry information is estimated by A.M.
Best.
Premiums to Surplus Ratio
The following table shows, for the periods indicated, the Company's and
the industry's statutory ratios of net premiums written to policyholders'
surplus. While there is no statutory requirement applicable to the Company
which establishes a permissible net premiums to surplus ratio, guidelines
established by the National Association of Insurance Commissioners ("NAIC")
provide that this ratio should be no greater than 300%.
Years Ended December 31,
2000 1999 1998 1997 1996
(dollars in thousands)
Net premiums written by the
Company..........................$1,008,911 $911,993 $745,048 $741,501 $711,570
Policyholders' surplus of the
Company's insurance subsidiaries. 660,962 518,974 563,503 516,598 464,739
The Company's ratio............... 152.6% 175.7% 132.2% 143.3% 153.1%
Industry ratio(1)................. 90.0% 90.0% 80.0% 90.0% 110.0%
(1) Source: Best's Review Preview (2001), for all property and casualty
insurance companies. The 2000 industry information is estimated by A.M.
Best.
25
I. Investments
Investment income is an important source of revenue for the Company and
the return on its investment portfolio has a material effect on its net
earnings. The Company's investment objective continues to focus on maximizing
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 capital appreciation in the future. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" incorporated herein by reference from pages 5 through 29 of the
Company's 2000 Annual Report.
The Company's investment portfolio carried at market value, except for
the closed-end preferred stock mutual funds which are carried at equity value,
as of December 31, 2000, was $1,472,561,000. Of that amount, 45.5% was
invested in fixed maturities, 13.6% was invested in preferred stocks, 7.9% was
invested in common stocks, 22.9% was invested in closed-end preferred stock
mutual funds, and 5.3% was invested in mortgage loans and other investments.
Cash and cash equivalents accounted for the remaining 4.8%.
Investments in fixed maturities, which include taxable and non-taxable
bonds, preferred stocks and common stocks are carried at fair market value.
Unrealized investment gains and losses on stocks and fixed maturities, to the
extent that there is no other than temporary impairment of value, are credited
or charged directly to stockholders' equity, net of any tax effect, through
other comprehensive income. When investment securities are sold, the realized
gain or loss is determined based on sales proceeds less book value.
The Company's bond portfolio is comprised of Government National
Mortgage Association ("GNMA") and Federal National Mortgage Association
("FNMA") mortgage backed bonds (10.0%), municipal bonds (70.6%), corporate
bonds (18.9%) and U.S. Treasury bonds (0.5%). Of the Company's bonds, 99.4%
are rated in the two highest quality categories provided by the NAIC.
During the fourth quarter of 2000, the Company changed its policy in
regard to its investments in certain closed-end preferred stock mutual funds,
as reflected in recent S.E.C. filings. On a forward going basis, the Company
intends to take a proactive posture to affect the overall investment
performance of these funds. This posture may involve discussing, among other
things, the performance, trading prices, investment strategy, portfolio
securities, and extraordinary transactions such as a merger, reorganization or
liquidation of one or more funds with fund management, shareholders, or
others. The Company's ownership position of these various funds at December
31, 2000 ranges from 23% to 48% of outstanding shares. The level of ownership
and new investment policy requires the Company to account for these
investments on an equity basis. The equity method requires that the
investments are to be valued at original cost plus the cumulative equity in
the earnings and losses of the funds and adjusted over time by the premium or
discount at the time of purchase to the applicable underlying net asset value
of the funds. Prior to the policy change, the Company reported the income on
a cash basis, valued the investments at quoted market prices and recorded the
change in quoted market prices through Comprehensive Income. The Company has
restated the results of prior accounting periods that were affected by the
policy change. Included in this year's net investment income figure is income
from the funds, excluding dividends received, of $26.5 million as compared to
a loss of $22.4 million in 1999 and income of $2.7 million in 1998.
Additionally, the Company had net realized investment gains of $2,976,000,
$6,023,000, and $4,458,000 in 2000, 1999 and 1998, respectively.
The Company's investment policy, determined in accordance with
guidelines established by the Company's Board of Directors, emphasizes
investment yield while maintaining investment quality. The Board of Directors
reviews and ratifies management's investment decisions on a quarterly basis.
State insurance laws also impose restrictions on the nature and extent of
investments by the Company.
26
The table below sets forth investments (at cost), net realized gains
(losses), net accumulated other comprehensive income (loss) and the net
investment income thereon for the five years ended December 31, 2000.
Years Ended December 31,
2000 1999 1998 1997 1996
(dollars in thousands)
Average net investments.......... $1,395,159 $1,326,098 $1,242,633 $1,181,181 $1,131,760
Net realized gains (losses) on
investments.................... 2,976 6,023 4,458 22,179 (7,574)
Net accumulated other
comprehensive income (loss):
on fixed maturities.......... 4,054 (14,107) 18,785 23,813 16,191
on preferred stocks.......... (15,740) (19,885) (2,845) 364 (801)
on common stocks............. 28,123 (6,636) 19,515 14,224 19,847
Net investment income before-tax. 123,404 67,388 89,193 88,755 77,514
Net investment income after-tax.. 100,061 62,277 74,368 70,859 63,621
Net investment income as a
percentage of total average net
investments (at cost).......... 8.8% 5.1% 7.1% 7.5% 6.8%
Net investment income after-tax
as a percentage of total
average net investments
(at cost)...................... 7.2% 4.7% 6.0% 6.0% 5.6%
The following table sets forth an analysis of the fair market value
(except mortgages and collateral loans which are at cost and closed-end
preferred stock mutual funds which are at equity) by the type of investment at
December 31, 1996 through 2000:
December 31,
2000 1999 1998 1997 1996
(dollars in thousands)
Type of Investment
GNMA & FNMA mortgage-backed
bonds........................ $ 67,261 $ 82,613 $ 112,588 $ 181,069 $ 225,552
Corporate bonds............... 126,255 42,532 - - -
U.S. Treasury bonds and notes. 3,377 3,315 - - -
Tax exempt state and
municipal bonds.............. 473,042 518,878 506,679 409,528 491,150
Total fixed maturities.... 669,935 647,338 619,267 590,597 716,702
Preferred stocks.............. 200,083 211,049 197,425 148,499 147,680
Common stocks................. 115,827 77,348 111,482 62,146 63,156
Closed-end preferred
stock mutual funds.......... 337,733 251,135 177,079 119,752 22,727
Total equity securities....... 653,643 539,532 485,986 330,397 233,563
Mortgages and collateral
loans (net of allowance
for possible loan losses).... 51,661 72,451 73,510 82,839 74,586
Cash and cash equivalents..... 70,521 22,535 72,243 106,188 140,535
Short-term investments........ - - 3,669 132,700 -
Other investments............. 26,802 14,139 7,825 3,783 2,127
Total investments......... $1,472,562 $1,295,995 $1,262,500 $1,246,504 $1,167,513
27
The table below sets forth as of December 31, 2000 the composition of
the Company's fixed maturity investments, excluding short-term investments,
at market, by time to maturity at the dates indicated:
Percent of
Fixed
Maturity
Amount Portfolio
Period from December 31, 2000 to maturity: (dollars in thousands)
One year or less................................. $ 1,214 0.2%
More than one year to five years................. 7,882 1.2
More than five years to ten years................ 9,431 1.4
More than ten years.............................. 651,408 97.2
$669,935 100.0%
At December 31, 2000, the Company's fixed income portfolio, which
represented 45.5% of the Company's total invested assets, had a weighted
average stated maturity of approximately 26.1 years versus 23.9 years at
December 31, 1999. The calculation of average stated maturity utilizes the
dollar weighted average of the actual maturity date for a security. In
contrast, the Company's weighted average duration can be significantly less.
At December 31, 2000 the Company's fixed income portfolio had a weighted
average duration of 5.1 years versus 5.7 years at December 31, 1999. The
"duration" of a security is the time-weighted present value of the security's
expected cash flows and is used to measure a security's price sensitivity to
changes in interest rates. The weighted average duration is short compared to
the average stated maturity because of the relatively large percentage of GNMA
and municipal housing bonds in the fixed maturity portfolio. The duration
reflects industry prepayment assumptions. The municipal housing bonds are
similar in nature to GNMAs in that they paydown principal during the life of
the bond. For these types of bonds, investors are compensated primarily for
reinvestment risk rather than credit quality risk. During periods of
significant interest rate volatility, the underlying mortgages may prepay more
quickly or more slowly than anticipated. If the repayment of principal occurs
earlier than anticipated during periods of declining interest rates,
investment income may decline due to the reinvestment of these funds at the
lower current market rates. In regards to municipal bonds, the Bloomberg
Financial System, which was used to calculate the above duration data,
utilizes optional call dates, sinking fund requirements and assumes a non-
static prepayment pattern in deriving these averages.
J. Regulation
General
The Company's primary business is subject to extensive regulation. In
Massachusetts, the Commissioner is appointed by the Governor of Massachusetts
and has broad authority to fix and establish maximum policy rates and minimum
agent commission levels on personal automobile insurance. In addition, the
Commissioner grants and revokes licenses to write insurance, approves policy
forms, sets reserve requirements, determines the form and content of statutory
financial statements and establishes the type and character of portfolio
investments. The Commissioner also approves company submissions regarding
group insurance programs and corresponding discounts along with SDIP
deviations. Consequently, the policies and regulations set by the
Commissioner are an important element of writing insurance in Massachusetts.
In states outside of Massachusetts, premium rates generally must be filed
with, and approved by the Commissioner of Insurance in that particular state.
In general, minimum commissions to agents are not set by the other states
commissioners.
28
The State Divisions of Insurance are responsible for conducting periodic
examinations of insurance companies. Both Commerce and Citation were last
examined for the five year period ended December 31, 1998. Commerce West was
last examined in 1997 by the California Division of Insurance for the five
year period ended December 31, 1996. American Commerce was examined in 1999
by the Ohio Division of Insurance for the three year period ending December
31, 1997. The concluded examinations produced no material findings.
Massachusetts Division of Insurance regulations provide that insurance
companies will be examined every five years or more frequently as deemed
prudent by the Commissioner. California Division of Insurance regulations
provide that insurance companies will be examined every three years. Ohio
Division of Insurance regulations provide that insurance companies will be
examined at least every five years.
Automobile Insurance Regulation Overview
Massachusetts has required compulsory automobile insurance coverage
since 1925. States outside of Massachusetts generally have varying levels of
minimum compulsory insurance. Under current law, all Massachusetts motorists
are required to carry certain minimum coverages mandated by the State. The
Commissioner fixes and establishes, among other things, the maximum rates
insurers may charge for the compulsory personal automobile coverages. With
very limited exceptions, each insurer writing automobile insurance in
Massachusetts must accept all risks submitted to it for the compulsory
coverage, but is permitted to reinsure these risks (including affinity group
marketing insurance risks) through C.A.R.
Compulsory Coverage. Compulsory coverage includes no-fault coverage,
limited bodily injury coverage, property damage coverage and coverage against
uninsured or hit and run motorists. The Massachusetts no-fault statute
provides for personal injury protection ("PIP") coverage, which entitles a
party to be reimbursed directly by the party's own insurer for certain medical
expenses, lost wages and other defined expenses arising from an automobile
accident, up to a specific amount, even if another party caused the accident.
Rates and Commissions. All Massachusetts personal automobile insurance
rates are fixed and established annually by the Commissioner. Affinity group
marketing insurance programs and safe driver rate deviations must be annually
approved by the Commissioner. For Massachusetts commercial automobile
insurance, the rates for the voluntary market are competitive, with insurers
filing rates for review by the Commissioner based on their own experience.
The rates for the Massachusetts commercial automobile risks reinsured through
C.A.R. are fixed and established by the Commissioner except for non-fleet,
private passenger-type automobiles. See Section A-General for additional
information.
In fixing classifications of risks and establishing rates, the
Commissioner must consider numerous factors including driver and automobile
characteristics and the claim rate in the state's designated geographical
territories. These factors are based upon data which are two or more years
old. The insurer adjusts the premiums it charges to a policyholder based upon
the SDIP record of the operator. Moving violations and at-fault accidents
affect each driver's SDIP record. In addition, the Extra Risk Rating
regulations permit insurers to deny or charge surcharged rates for physical
damage coverage to both high risk vehicles and insureds with excessive prior
loss or violation activity.
The Commissioner sets an average minimum direct agency commission rate
for personal automobile insurance, which in 2000 was 11.8%. With respect to
risks reinsured through C.A.R., the maximum amount of commissions that C.A.R.
will reimburse is fixed at that prescribed rate.
Mandatory Underwriting. Massachusetts law specifies that all individuals
holding a valid driver's license are entitled to purchase the mandatory
automobile insurance coverages regardless of their driving experience or
accident record. The Massachusetts Legislature has also placed certain
restraints on insurers' discretion to refuse to renew automobile insurance
policies. Policyholders are entitled to renew except in cases of fraud,
material misrepresentation, revocation or suspension of an operator's license
or nonpayment of premiums. With very limited exceptions, Servicing Carriers
writing automobile insurance in Massachusetts must accept every automobile
risk submitted to them.
29
Under the Massachusetts system of rate regulation, it is intended that
some personal automobile insurance risks are under priced at the maximum rate
permitted by the Commissioner, and therefore, absent state-intervention,
insurers would not ordinarily choose to write those risks. The C.A.R.
reinsurance program described below is intended to mitigate the burden imposed
by the Massachusetts take-all-comers system by allowing insurers to transfer
the exposure for undesirable risks to an industry pool.
Commonwealth Automobile Reinsurers
General. C.A.R. is a Massachusetts state-mandated reinsurance mechanism,
under which all premiums, expenses and losses on ceded business are shared by
all insurers. It is similar to a joint underwriting association because a
number of insurers (43, including the Company) act as Servicing Carriers for
the risks it insures.
Agencies. In general, agencies licensed to issue automobile insurance
policies are entitled to be assigned to at least one Servicing Carrier. There
are two categories of agencies: those who have voluntary agreements with one
or more Servicing Carriers and those who do not. The latter are assigned by
C.A.R. to a single Servicing Carrier and are known as ERPs.
C.A.R. Operations. All companies writing automobile insurance in
Massachusetts share in the underwriting results of the C.A.R. business for
their respective product line or lines, whether or not they are Servicing
Carriers. An insurer's share of the C.A.R. deficit is allocated on the basis
of a formula called a participation ratio, which can vary significantly
between the personal and commercial pools, and between different policy years.
See "Business-Commonwealth Automobile Reinsurers" for a detailed discussion of
the method of calculating the participation ratio.
An insurer may terminate its participation in C.A.R. as of the close of
C.A.R.'s fiscal year by surrendering its license to write automobile policies
in Massachusetts. Termination does not discharge or otherwise affect
liability of an insurer incurred prior to termination. A withdrawing insurer
is assessed a share of C.A.R.'s projected deficits for future years based on
the insurer's prior years' participation in C.A.R. The assessment paid by the
withdrawing insurer is redistributed to the remaining insurers based upon
their participation ratios.
An insurer can transfer its obligations for its personal insurance
policies to another insurer who formally agrees to assume these obligations.
The transferring insurer is thereby relieved of future C.A.R. obligations
which otherwise would have arisen as a consequence of the business
transferred. See "Business-Commonwealth Automobile Reinsurers."
Insurance Holding Company Structure
As an insurance holding company, the Company is subject to regulation
under the insurance holding company statutes of the states in which any of its
subsidiary insurance companies are domiciled. Because the Company's
subsidiaries are members of an insurance holding company system, they are
required to register with their respective Divisions of Insurance and to
submit reports describing the capital structure, general financial condition,
ownership and management of each insurer and any person or entity controlling
the insurer, the identity of every member of the insurance holding company
system and the material outstanding transactions between the insurer and its
affiliates.
Each member of the insurance holding company system must keep current
the information required to be disclosed by reporting all material changes or
additions within 15 days of the end of the month in which it learns of such
change or addition.
Massachusetts law prohibits a party, which is not a domestic insurer
from acquiring "control" of a domestic insurer or of a company controlling a
domestic insurer without prior approval of the Commissioner. Control is
presumed to exist if a party directly or indirectly holds, owns or controls
more than ten percent of the voting stock of another party, but may be
rebutted by a showing that control does not exist.
30
In the event of the insolvency, liquidation or other reorganization of
any of the Company's insurance subsidiaries, the creditors and stockholders of
the Company will have no right to proceed against the assets of those
subsidiaries, or to cause the liquidation or bankruptcy of any company under
federal or state bankruptcy laws. State laws govern such liquidation or
rehabilitation proceedings and the Division of Insurance would act as receiver
for the particular company. Creditors and policyholders of the insurance
subsidiaries would be entitled to payment in full from such assets before the
Company, as a stockholder, would be entitled to receive any distribution
therefrom.
Payment of Dividends
Under Massachusetts' law, insurers may pay cash dividends only from
earnings and statutory surplus, and the insurer's remaining surplus must be
both reasonable in relation to its outstanding liabilities and adequate to its
financial needs.
The Company 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, 1999 and 1998. Similar laws exist
in California and Ohio. No dividends were paid by American Commerce or
Commerce West since their respective acquisitions.
Protection Against Insurer Insolvency
Massachusetts
All of the insurers writing the types of insurance covered by the
Massachusetts Insurers Insolvency Fund ("M.I.I.F.") are M.I.I.F. members.
M.I.I.F. is obligated to pay any unpaid claim, up to $300,000, against an
insolvent insurer if the claim existed prior to the declaration of insolvency
or arose within 60 days thereafter. M.I.I.F. assesses members the amounts it
deems necessary to pay both its obligations and the expenses of handling
covered claims. Subject to certain limitations, assessments are made in the
proportion that each member's net written premiums for the preceding calendar
year for all property and casualty lines of business bore to the corresponding
net written premiums for all members for the same period. The statute that
established M.I.I.F. also provides for the recoupment by insurers of amounts
paid to M.I.I.F. Historically, the Commissioner has allowed insurers to recoup
the amounts they paid M.I.I.F. through rate adjustments.
As provided in the statutes, insurance companies, which write business
in Massachusetts, are assessed for losses attributable to the insolvency of
other insurance companies by the Massachusetts Insurers Insolvency Fund
("M.I.I.F."). From its inception, on August 2, 1972 through December 31,
2000, the M.I.I.F. has approved assessments totaling $163,071,000, of which
the Company's share was approximately $12,575,000. It is anticipated that
there will be additional assessments from time to time relating to various
insolvencies. By statute, no insurer may be assessed in any year an amount
greater than two percent of that insurer's direct written premiums for the
calendar year preceding the assessment. Although the timing and amounts of
any such assessments are not known, Management is of the opinion that such
assessments will not have a material effect on the consolidated financial
position of the Company. According to statute, the assessed insurance
companies have the right to recoup amounts paid to the M.I.I.F., over a
reasonable length of time, through premium rates approved by the Commissioner.
The Company's policy has been to recognize the recovery of the assessed
amounts as assessed. M.I.I.F. assessed the Company $5,306,000 during 2000
after having no activity for the year ended December 31, 1999 and a refund of
$271,000 for the year ended December 31, 1998. The assessment for 2000 was
primarily the result of two insolvencies, The Trust Insurance Company and New
England
31
Fidelity Insurance Company, which accounted for assessment amounts of
$4,939,000 and $1,205,000, respectively, offset by refunds for assessments on
numerous insurers from prior years assessments.
Other States
Commerce West, domiciled in California, is covered by the California
Insurance Guarantee Association ("C.I.G.A."). American Commerce, domiciled in
Ohio, is covered by the Ohio Guarantee Association ("O.G.A."). Both Company's
are also covered by similar Associations in the states where they do business.
These Associations operate similarly to the M.I.I.F. described earlier. No
payments were made to these Associations for insolvency assessments during
2000 and 1999.
NAIC Guidelines
Insurance Regulatory Information System Ratios. The NAIC Insurance
Regulatory Information System ("IRIS") was developed by a committee of state
insurance regulators and is intended primarily to assist state insurance
regulators in executing their statutory mandates to oversee the financial
condition of insurance companies operating in their respective states. IRIS
identifies eleven industry ratios and specifies "usual values" for each ratio.
Departure from the usual values on four or more of the ratios can lead to
inquiries from individual state insurance commissioners as to certain aspects
of an insurer's business. For the year ended December 31, 2000, the Company's
consolidated property and casualty operations had no ratios outside the
"normal" range.
Risk-Based Capital ("RBC"). In order to enhance the regulation of
insurer insolvency, the NAIC developed a formula and model law to provide for
RBC requirements for property and casualty insurance companies. RBC
requirements are designed to assess capital adequacy and to raise the level of
protection, that statutory surplus provides for policyholder obligations. The
RBC model for property and casualty insurance companies measures three major
areas of risk facing property and casualty insurers: (i) underwriting, which
encompasses the risk of adverse loss development and inadequate pricing; (ii)
declines in asset values arising from credit risk; and, (iii) other business
risks from investments. Insurers having less statutory surplus than required
by the RBC calculation will be subject to varying degrees of regulatory
action, depending on the level of capital inadequacy.
The RBC model formula proposes four levels of regulatory action. The
extent of regulatory intervention and action increases as the percentage of
surplus to RBC falls. The first level, the Company Action Level, requires an
insurer to submit a plan of corrective actions to the regulator if surplus
falls below 200% of the RBC amount. The Regulatory Action Level (as defined
by the NAIC) requires an insurer to submit a plan containing corrective
actions and permits the Commissioner to perform an examination or other
analysis and issue a corrective order if surplus falls below 150% of the RBC
amount. The Authorized Control Level (as defined by the NAIC) allows the
regulator to rehabilitate or liquidate an insurer in addition to the
aforementioned actions if surplus falls below 100% of the RBC amount. The
fourth action level is the Mandatory Control Level (as defined by the NAIC),
which requires the regulator to rehabilitate or liquidate the insurer if
surplus falls below 70% of the RBC amount. The Company's insurance
subsidiaries, Commerce, Citation, Commerce West, and American Commerce are
listed in the accompanying table, which provides the key RBC information:
Commerce American
(Dollars in millions) Commerce Citation West Commerce
At December 31, 2000
Statutory surplus............. $ 552 $ 109 $ 28 $ 93
200% RBC Company action level. 197 4 6 19
Statutory surplus in excess
of RBC Company action level. $ 355 $ 105 $ 22 $ 74
RBC amounts................... $ 98 $ 2 $ 3 $ 9
% of surplus to RBC amounts... 563.3% 5,450.0% 933.3% 1,033.3%
32
K. Competition
The property and casualty insurance industry is highly cyclical,
characterized by periods of increasing premium rates and limited underwriting
capacity, followed by periods of intensive price competition and abundant
underwriting capacity. This industry also is highly competitive, with a large
number of companies, many of which operate in more than one state, offering
automobile, homeowners, commercial property and other lines of insurance.
Some of the Company's competitors have larger volumes of business and greater
financial resources and some sell insurance directly to policyholders rather
than through independent agents.
Massachusetts
In 1995, several insurers, including the Company, within the
Massachusetts Insurance Industry began pursuing group marketing as a means of
shifting market share. Arising from this pursuit, additional programs such as
safe driver deviations and the elimination of finance fees have followed. In
2001, in response to the average personal automobile rate decision over the
last several years, the Company filed for and ultimately received approval to
offer a SDIP Step 9 deviation of 2%. No deviation for Step 10 business for
policies incepting in the 2001 calendar year was requested. In 2000, the
Company offered deviations for SDIP Steps 9 and 10 of 6% and 2%, respectively.
At year-end 2000, 55.1% and 14.0% of the Company's exposures were eligible for
Step 9 and Step 10 deviations, respectively, versus 54.6% and 14.0%,
respectively during 1999.
Because the Company's insurance products are marketed exclusively
through independent agencies, most of whom represent more than one company,
the Company faces competition within each agency. The Company competes for
business within independent agencies by offering a more attractively priced
product to the consumer and by paying agents significant compensation in the
form of commissions and profit sharing, which are based in part on the
underwriting profits of the agency business written with the Company. The
Company also provides a consistent market, the prompt servicing of
policyholder claims and agency support services. Although the Company
believes, based upon regular surveys of its agencies, its relationships with
its independent agencies are excellent, any disruption in these relationships
could adversely affect the Company's business.
The Company believes the Massachusetts regulatory environment, which
fixes maximum personal automobile insurance rates, apportions losses incurred
by C.A.R. and establishes minimum agency commissions, has discouraged certain
companies with more diverse geographic markets and interests from establishing
a presence or expanding their market share in Massachusetts. Any material
change in this situation could adversely affect the Company's business.
Other States
Both Commerce West and American Commerce file and receive approval for
premium rates with the respective divisions of insurance in the states they do
business. Commerce West competes for business by utilizing 574 independent
insurance agencies and brokers that offer competitively priced products and
provide quality service. Agents and brokers are offered compensation in the
form of commissions and profit sharing, which are based in part on the
underwriting profits of the agency business written with Commerce West.
American Commerce competes for business by utilizing 36 AAA owned and operated
independent agencies that offer competitively priced products and provide
quality service. The AAA owned independent agencies are offered compensation
in the form of commission and profit sharing, based in part on their
underwriting profits, as well as stock options on the agency business written
with American Commerce.
33
L. Other Matters
Human Resources
As of December 31, 2000, the Company and its subsidiaries employed 1,719
people. Commerce employed 1,446 people; Commerce West employed 70 people;
American Commerce employed 203 people. The Company is not a party to any
collective bargaining agreements and believes its relationship with employees
to be very good.
The Company offers benefits, compensation and employee relations
programs to assure a productive and positive working environment. The Company
monitors job grades and salary scales of peer companies to assure that its
compensation levels and benefits are competitive both within the property and
casualty insurance industry and geographically in the areas its subsidiaries
operate. The Company has been recognized for its progressive programs
designed to meet the needs of a modern-day workforce. On-site child care has
been offered to Massachusetts employees since 1986 making Commerce one of the
first businesses in the region to offer this benefit. A newly constructed
child care center can currently accommodate up to 200 children of our
employees. In addition, alternative work schedules, casual dress, and free
parking are also provided.
The Company offers an Employee Stock Ownership Plan ("E.S.O.P.") and
401(k) Plan for the benefit of substantially all employees, including those of
the Company's subsidiaries, as discussed in Note I of the Company's Annual
Report. The E.S.O.P. is noncontributory on the part of participants and
contributions are made at the discretion of the Board of Directors. The
Company is under no obligation to make contributions or maintain the E.S.O.P.
for any length of time, and may completely discontinue or terminate the
E.S.O.P. at any time without liability. Contributions by the Company and
subsidiaries to the E.S.O.P. for the years ending December 31, 2000, 1999 and
1998 were $5,702,000, $5,748,000 and $5,412,000, respectively. The E.S.O.P.
owned 3,143,076 and 3,447,486 shares of the Company's common stock at December
31, 2000 and 1999, respectively. E.S.O.P. Participants who are current
employees of the Company or its subsidiaries and who are 100% vested in their
E.S.O.P. accounts can annually elect to transfer out of the E.S.O.P. up to
100% of their allocated Company stock in the form of an eligible rollover
distribution into another eligible retirement plan, such as a qualified
individual retirement arrangement. Approximately 2,248,000 shares owned by
the E.S.O.P. at December 31, 2000 are allocated to the E.S.O.P. accounts of
these individuals. E.S.O.P. Participants who are former employees of the
Company may generally elect to withdraw from the E.S.O.P. the shares allocated
to their accounts at any time. Approximately 666,000 shares owned by the
E.S.O.P. at December 31, 2000 are allocated to the E.S.O.P. accounts of these
individuals. The remaining approximately 220,000 shares owned by the E.S.O.P.
at December 31, 2000 are allocated to the E.S.O.P. accounts of Participants
who have not yet reached 100% vesting in their account balances. Disposition
of these unvested shares is restricted under the E.S.O.P. Effective January
1, 2001 a "K.S.O.P." feature was added to the E.S.O.P. which allows employees
to make tax deferred contributions from their pay which are invested in
Company stock. Maximum contribution limitations are calculated in conjunction
with the 401(K).
The 401(k) Plan, implemented in September 1998, enables eligible
employees to contribute up to 15% of eligible compensation on a pre-tax basis
up to the annual maximum limits under federal tax law. The Company incurs no
expenses in the form of matching contributions but does pay for administration
of the Plan.
In 2000, the Directors of American Commerce voted to terminate the
American Commerce noncontributory defined benefit pension plan (the "pension
plan") effective June 1, 2000 and transition after 2000 to the E.S.O.P. The
payment of the termination liability to participants from previously funded
assets of the pension plan amounted to $4,558,000 in 2000. All participants
of the pension plan were eligible to retire with full retirement benefits upon
attainment of age 65 with 5 years of participation. Retirement benefits were
payable for the life of the participant with guaranteed payments for 10 years.
All retirees had taken lump-sum payments. American Commerce made
contributions to a deposit administration contract, which provided the pension
plan with assets sufficient to fund pension benefits to pension plan
participants. The deposit administration contract was carried at contract
value, which represented the cost of contributions plus interest and
experience refunds. The pension plan was subject to and exceeded the minimum
funding requirements of ERISA.
34
American Commerce maintained a separate 401(k) Plan for the benefit of
substantially all of its employees. American Commerce matched 50% of all
employee contributions up to 6% of pay. Both American Commerce and its
employees shared in administration expenses of the plan. In 2000, the
Directors of American Commerce voted to merge the 401(k) plan with the
Company's Plan on January 1, 2001.
American Commerce maintains a noncontributory post-retirement benefit
plan (the "post-retirement plan") for retirees that includes medical, dental
and life insurance coverages. All participants of the post-retirement plan
are eligible upon attainment of age 55 with 10 years of service or age 65 with
5 years of service. Dental coverage ceases at age 65 and life insurance
coverage decreases based upon the age of the retiree until the attainment of
age 70, at which time retirees are provided a nominal amount of coverage from
age 70 and thereafter. Participant's spouses are also covered under the post-
retirement plan. The cost of post-retirement medical, dental and life
insurance benefits is accrued over the active service periods of employees to
the date they attain full eligibility for such benefits. It is the policy of
American Commerce to pay for post-retirement benefits as incurred.
ITEM 2. PROPERTIES
The Company conducts its Massachusetts operations from approximately
300,000 square feet of space in several buildings, which it owns in Webster,
Massachusetts, which is located approximately 50 miles southwest of Boston.
The Company's principal administrative offices in Webster consist of recently
rehabilitated and newly constructed buildings. Its data processing and
operational departments are housed in modern office buildings on a separate
nine acre site. In 1998, the Company completed the construction of a 20,000
square foot child care center located on a separate seven acre site in
Webster, Massachusetts. The Company operated child care center can provide
care for up to 200 children of employees. Commerce West currently leases
approximately 12,000 square feet of office space in Pleasanton, California.
American Commerce conducts its operations from approximately 40,000 square
feet of space in a building located on a two acre site in Columbus, Ohio.
American Commerce also leases property at its four district claims offices.
The Company considers that its properties are in good condition, are well
maintained, and are generally suitable to carry on the Company's business.
For additional information concerning property, see Note D to the Company's
2000 Consolidated Financial Statements, which is incorporated herein by
reference from page 49 of the Company's 2000 Annual Report.
ITEM 3. LEGAL PROCEEDINGS
As is common with property and casualty insurance companies, the Company
is a defendant in various legal actions arising from the normal course of its
business, including claims based on Chapter 176D and Chapter 93A. See
"Business - Settlement of Claims". These proceedings are considered to be
ordinary to operations or without foundation in fact. Management is of the
opinion that these actions will not have a material adverse effect on the
consolidated financial position of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders during the
fourth quarter of 2000.
ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT
The Company's executive officers are as follows:
Name Age Position with Company
Arthur J. Remillard, Jr. 70 President, Chief Executive Officer, Chairman
of the Board
Gerald Fels 58 Executive Vice President,
Chief Financial Officer, Director
35
Regan P. Remillard 37 Senior Vice President, Vice-Chairman of the
Board, President of Commerce West, Chief
Executive Officer of American Commerce,
Director
Arthur J. Remillard, III 45 Senior Vice President--Policyholder
Benefits, Assistant Clerk, Director
David H. Cochrane 47 Senior Vice President--Underwriting
of Commerce and Citation
Peter J. Dignan 49 Senior Vice President--Marketing
of Commerce and Citation
Mary M. Fontaine 44 Senior Vice President--Human Resources
Joyce B. Virostek 58 Senior Vice President--Management
Information Systems of Commerce and Citation
James A. Ermilio 38 Vice President and General Counsel
Randall V. Becker 40 Treasurer and Chief Accounting Officer
Arthur J. Remillard, Jr. has been the President, Chief Executive Officer
and Chairman of the Board of the Company since 1976 and of Commerce since
1972. Mr. Remillard, Jr. has been in the insurance business for more than 30
years. Mr. Remillard, Jr. is also the Vice Chairman of the Governing
Committee, Chairman of the Actuarial Committee, a member of the Governing
Committee Review Panel, Chairman of the Budget Committee and a member of the
Personnel Committee of C.A.R. Mr. Remillard, Jr. is also Chairman of the
Governing Committee and a member of the Budget Committee, Executive Committee
and Nominating Committee of the A.I.B.
Gerald Fels, a certified public accountant, was appointed Executive
Vice President of the Company in 1989. From 1981 to 1989, Mr. Fels was Senior
Vice President of the Company. Mr. Fels was the Treasurer of the Company from
1976 to 1995 and of Commerce from 1975 to 1995. Mr. Fels has also been Chief
Financial Officer of the Company since 1976 and of Commerce since 1975. Mr.
Fels is a Director of American Nuclear Insurers and serves on the Advisory
Board of Conning Capital Funds.
Regan P. Remillard was appointed President of ACIC Holding Co., Inc. in
1998 and Vice Chairman of the Board and Chief Executive Officer of American
Commerce Insurance Company in 1999. Mr. Remillard has been President of
Commerce West Insurance Company since 1996. Mr. Remillard has been a Senior
Vice President of the Company since 1995. From 1995 to February 2000 Mr.
Remillard was General Counsel of the Company. From 1994 to 1995, Mr.
Remillard was a practicing attorney at Hutchins, Wheeler & Dittmar, a
Massachusetts law firm specializing in corporate law and litigation. From
1989 to 1993, Mr. Remillard was Government Affairs Monitor of the Company.
Mr. Remillard is a member of the Massachusetts Bar.
Arthur J. Remillard, III was appointed Senior Vice President--
Policyholder Benefits in 1988 and has been Assistant Clerk of the Company
since 1982. From 1981 to 1988, Mr. Remillard, III had been Vice President--
Mortgage Operations. In addition, Mr. Remillard, III has also served on the
Board of Governors of the Insurance Fraud Bureau of the A.I.B. since 1991, the
C.A.R. Claims Advisory Committee since 1990 and the A.I.B. Claims Committee
since 1991.
David H. Cochrane has been the Senior Vice President--Underwriting of
Commerce and Citation since 1988. For approximately four years prior to that,
Mr. Cochrane was the Vice President of Financial Services of C.A.R. Mr.
Cochrane has also served on the C.A.R. Market Review Committee since 1988.
36
Peter J. Dignan was appointed the Senior Vice President--Marketing of
Commerce and Citation in 1997. From 1989 to 1997, Mr. Dignan was Vice
President--Financial Operations of Commerce and Citation. From 1987 to 1989
Mr. Dignan was Assistant Vice President--Financial Operations of Commerce and
Citation.
Mary M. Fontaine has been the Senior Vice President--Human Resources of
the Company since 1988. From 1982 to 1988, Ms. Fontaine was Assistant Vice
President--Human Resources of Commerce and Citation.
Joyce B. Virostek has been the Senior Vice President--Management
Information Systems of Commerce and Citation since 1988. From 1981 to 1988,
Ms. Virostek had been Vice President of Commerce and Citation in charge of
data processing.
James A. Ermilio was appointed General Counsel of the Company in
February 2000 and has been a Vice President of the Company since November
1998. Mr. Ermilio is also Chief Legal Officer and Secretary of American
Commerce Insurance Company and Secretary of ACIC Holding Co., Inc. Mr.
Ermilio had been the Associate General Counsel of the Company since September
1998. Mr. Ermilio was Counsel for Glaxo Wellcome, Inc. (subsequently renamed
Glaxo Smith Kline, Inc.) from 1993 to September 1998. Prior to 1993, Mr.
Ermilio was an Associate with the law firm of Bingham Dana. Mr. Ermilio is a
member of the Massachusetts and District of D.C. Bars.
Randall V. Becker, a certified public accountant, has been Treasurer and
Chief Accounting Officer of the Company since 1994. From 1990 to 1994, Mr.
Becker was Assistant Treasurer and Comptroller of the Company. From 1986 to
1990, Mr. Becker was the Director of Internal Audit for the Company.
The only family relationship among the executive officers is that Arthur
J. Remillard, III and Regan P. Remillard are the sons of Arthur J. Remillard,
Jr.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
The Company's common stock trades on the NYSE under the symbol "CGI".
The high, low and close prices for shares as quoted in the Wall Street
Journal, of the Company's common stock for 2000 and 1999 were as follows:
2000 1999
High Low Close High Low Close
First Quarter...... $31.0000 $23.0000 $29.5000 $31.0625 $23.4375 $24.5625
Second Quarter..... 30.8750 26.1250 29.5000 25.1250 21.5625 24.3750
Third Quarter...... 29.4375 25.0625 28.9375 26.8750 21.5000 23.0000
Fourth Quarter..... 29.2500 22.8750 27.1800 28.1250 20.7500 26.1250
As of March 1, 2001 there were 1,093 stockholders of record of the
Company's Common Stock, not including stock held in "Street Name" or held in
accounts for participants of the Company's E.S.O.P.
The Board of Directors of the Company voted to declare four quarterly
dividends to stockholders of record totaling $1.15 per share and $1.11 per
share in 2000 and 1999, respectively. On May 19, 2000, the Board voted to
increase the quarterly stockholder dividend from $0.28 to $0.29 per share to
stockholders of record as of June 4, 2000. Prior to that declaration, the
Company had paid quarterly dividends of $0.28 per share dating back to May 15,
1999 when the Board voted to increase the dividend from $0.27 to $0.28 per
share.
The Company purchased 606,200 shares of Treasury Stock under the stock
buyback program during 2000, at an average price of $25.56, increasing the
total shares of Treasury Stock to 4,246,648 at December 31, 2000. Through
March 31, 2000, the Company completed its share purchases under the previously
approved buyback programs. In May 1999, the Board of Directors approved an
additional stock buy-back program of up to 2 million shares. At December 31,
2000, the Company has authority to purchase approximately 900,000 additional
shares.
37
A portion of the Company's cash flow consists of dividends received from
CHI, which receives dividends from Commerce and Citation. The payment of any
cash dividends to holders of common stock by the Company therefore depends on
the receipt of dividend payments from CHI. To the extent Commerce and
Citation are restricted from paying dividends to CHI, CHI will be limited in
its ability to pay dividends to the Company. The payment of dividends by
Commerce and Citation is subject to limitations imposed by Massachusetts law,
as discussed under the caption "Payment of Dividends" in Item 1J of this
report.
ITEM 6. SELECTED FINANCIAL DATA
The five-year financial information under the caption "Selected
Consolidated Financial Data" on page 65 of the Company's 2000 Annual Report is
incorporated herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The information on pages 5 through 30 of the Company's 2000 Annual
Report is incorporated herein by reference.
ITEM 7A. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
The information on pages 27 and 28 of the Company's 2000 Annual Report
is incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Company's Consolidated Financial Statements for the years ended
December 31, 2000, 1999 and 1998 and the report of its independent auditors on
pages 32 through 64 of the Company's 2000 Annual Report are incorporated
herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH INDEPENDENT AUDITORS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information called for by this Item and not provided in Item 4A will
be contained in the Company's Proxy Statement, which the Company intends to
file within 120 days after the end of the Company's fiscal year ended December
31, 2000, and such information is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information called for by this Item will be contained in the
Company's Proxy Statement, which the Company intends to file within 120 days
after the end of the Company's fiscal year ended December 31, 2000 and such
information is incorporated herein by reference.
38
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information called for by this Item will be contained in the
Company's Proxy Statement, which the Company intends to file within 120 days
after the end of the Company's fiscal year ended December 31, 2000 and such
information is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information called for by this Item will be contained in the
Company's Proxy Statement, which the Company intends to file within 120 days
after the end of the Company's fiscal year ended December 31, 2000 and such
information is incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
A. (1) The following financial statements have been incorporated herein
by reference from the pages indicated below of the Company's
2000 Annual Report:
Page
Report of Independent Auditors................................... 31
Consolidated Balance Sheets as of December 31, 2000 and 1999..... 32
Consolidated Statements of Earnings for the years ended
December 31, 2000, 1999 and 1998................................ 33
Consolidated Statements of Stockholders' Equity for the years
ended December 31, 2000, 1999 and 1998.......................... 34
Consolidated Statements of Cash Flows for the years ended
December 31, 2000, 1999 and 1998................................ 35
Consolidated Statements of Cash Flows - Reconciliation of Net
Earnings to Net Cash provided by Operating Activities for the
years ended December 31, 2000, 1999 and 1998................... 36
Notes to Consolidated Financial Statements....................... 37
(2) The financial statement schedules are listed in the Index to
Consolidated Financial Statement Schedules.
(3) The exhibits are listed in the Index to Exhibits.
B. No reports on Form 8-K were filed during the quarter ended
December 31, 2000.
39
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
Dated: February 18, 2001
THE COMMERCE GROUP, INC.
By
ARTHUR J. REMILLARD, JR.
(Arthur J. Remillard, Jr.)
(President, Chief Executive Officer, Chairman
of the Board and Director)
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed by the following persons on behalf of the
registrant and in the capacities and on the date indicated.
Signature Title
ARTHUR J. REMILLARD, JR. President, Chief Executive Officer, Chairman
(Arthur J. Remillard, Jr.) of the Board and Director
GERALD FELS Executive Vice President, Chief Financial
(Gerald Fels) Officer and Director
ARTHUR J. REMILLARD, III Senior Vice President--Policyholder
(Arthur J. Remillard, III) Benefits, Assistant Clerk and Director
REGAN P. REMILLARD Senior Vice President of the Company,
(Regan P. Remillard) President of Commerce West, Chief Executive
Officer of American Commerce Insurance
Company and Director
JOHN W. SPILLANE Clerk and Director
(John W. Spillane)
40
Signature Title
RANDALL V. BECKER Treasurer and Chief Accounting Officer
(Randall V. Becker)
HERMAN F. BECKER Director
(Herman F. Becker)
JOSEPH A. BORSKI, JR. Director
(Joseph A. Borski, Jr.)
ERIC G. BUTLER Director
(Eric G. Butler)
HENRY J. CAMOSSE Director
(Henry J. Camosse)
DAVID R. GRENON Director
(David R. Grenon)
ROBERT W. HARRIS Director
(Robert W. Harris)
ROBERT S. HOWLAND Director
(Robert W. Howland)
JOHN J. KUNKEL Director
(John J. Kunkel)
RAYMOND J. LAURING Director
(Raymond J. Lauring)
ROGER E. LAVOIE Director
(Roger E. Lavoie)
41
Signature Title
NORMAND R. MAROIS Director
(Normand R. Marois)
SURYAKANT M. PATEL Director
(Suryakant M. Patel)
GURBACHAN SINGH Director
(Gurbachan Singh)
42
THE COMMERCE GROUP, INC. AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENT SCHEDULES*
Page
Ernst & Young LLP Consent of Independent Auditors............................ 44
Schedules
II Condensed Financial Information of the Registrant as of and for the
years ended December 31, 2000, 1999 and 1998...................... 45
III Supplementary Insurance Information for the years ended
December 31, 2000, 1999 and 1998 ................................. 50
IV Reinsurance for the years ended December 31, 2000, 1999 and 1998... 51
V Valuation and Qualifying Accounts for the years ended
December 31, 2000, 1999 and 1998.................................. 52
X Supplemental Information Concerning Property-Casualty Insurance
Operations for the years ended December 31, 2000, 1999 and 1998.... 53
* Financial statement schedules other than those listed are omitted because
they are not required, not applicable or the required information has been
included elsewhere.
43
CONSENT OF INDEPENDENT AUDITORS
To the Board of Directors and Stockholders of
The Commerce Group, Inc.
We consent to the incorporation by reference in this Annual Report (Form
10-K) of The Commerce Group, Inc. of our report dated January 26, 2001,
included in the 2000 Annual Report to Stockholders of The Commerce
Group, Inc.
Our audits also included the financial statement schedules of The
Commerce Group, Inc. listed in Item 14(a). These schedules are the
responsibility of the Company's management. Our responsibility is to
express an opinion based on our audits. In our opinion, the financial
statement schedules referred to above, when considered in relation to
the basic financial statements taken as a whole, present fairly in all
material respects the information set forth therein.
We also consent to the incorporation by reference in the Registration
Statement (Form S-8 No. 333-62367) pertaining to The Commerce Group,
Inc. 401(k) Plan of our report dated January 26, 2001, with respect to
the consolidated financial statements incorporated herein by reference,
and our report included in the preceding paragraph with respect to the
financial statement schedules included in this Annual Report (Form 10-K)
of The Commerce Group, Inc.
ERNST & YOUNG LLP
Boston, Massachusetts
March 28, 2001
44
THE COMMERCE GROUP, INC. AND SUBSIDIARIES
SCHEDULE II
CONDENSED FINANCIAL INFORMATION
THE COMMERCE GROUP, INC.
(Parent Company Only)
BALANCE SHEETS
December 31,
(Thousands of Dollars)
2000 1999 1998
ASSETS
Investments:
Investment in Commerce Holdings, Inc.................. $758,968 $637,725 $656,514
Investment in Bay Finance Company, Inc................ 28,531 27,312 25,558
Investment in the Clark-Prout Insurance Agency, Inc... 562 488 313
Total investments................................. 788,061 665,525 682,385
Cash and cash equivalents............................... 11 7 2
Property and equipment, net of accumulated depreciation. 1,257 1,374 1,219
Receivable from affiliates.............................. - - 37,077
Current income taxes.................................... 2,861 2,007 -
Deferred income taxes................................... 882 37 1,706
Other assets............................................ 1,329 3,536 3,626
Total assets...................................... $794,401 $672,486 $726,015
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Accounts payable and accrued expenses................. $ 8,552 $ 986 $ 9,609
Payable to affiliates................................. 3,914 3,437 -
Current income taxes.................................. - - 5,519
Other liabilities..................................... 54 58 35
Total liabilities................................. 12,520 4,481 15,163
Stockholders' equity:
Capital stock:
Common stock........................................ 19,000 19,000 19,000
Paid-in capital....................................... 29,621 29,621 29,621
Net accumulated other comprehensive income (loss),
net of income taxes (benefits) of $6,372 in 2000,
($13,277) in 1999 and $12,540 in 1998............... 11,833 (24,657) 23,289
Retained earnings..................................... 820,528 727,649 677,629
880,982 751,613 749,539
Treasury stock, 4,246,648, 3,640,448 and 1,957,348
shares in 2000, 1999 and 1998, at cost.............. (99,101) (83,608) (38,687)
Total stockholders' equity........................ 781,881 668,005 710,852
Total liabilities and stockholders' equity........ $794,401 $672,486 $726,015
The accompanying notes are an integral part of these condensed
financial statements.
45
THE COMMERCE GROUP, INC. AND SUBSIDIARIES
SCHEDULE II
(continued)
CONDENSED FINANCIAL INFORMATION
THE COMMERCE GROUP, INC.
(Parent Company Only)
STATEMENTS OF EARNINGS
Years ended December 31,
(Thousands of Dollars)
2000 1999 1998
Revenues
Dividends received from subsidiaries................. $ 51,660 $ 56,070 $ 51,745
Rent income.......................................... 492 513 461
Total revenues.................................... 52,152 56,583 52,206
Expenses
Depreciation......................................... 246 228 298
Administrative expenses.............................. 9,667 (897) 492
Total expenses.................................... 9,913 (669) 790
Earnings before income tax benefits and equity in
net earnings of subsidiaries over amounts distributed. 42,239 57,252 51,416
Income tax benefits.................................... (3,795) (338) (991)
Earnings before equity in net earnings of subsidiaries
over amounts distributed.............................. 46,034 57,590 52,407
Equity in net earnings of subsidiaries over amounts
distributed........................................... 86,046 31,086 45,858
Net earnings...................................... $132,080 $ 88,676 $ 98,265
The accompanying notes are an integral part of these condensed
financial statements.
46
THE COMMERCE GROUP, INC. AND SUBSIDIARIES
SCHEDULE II
(continued)
CONDENSED FINANCIAL INFORMATION
THE COMMERCE GROUP, INC.
(Parent Company Only)
STATEMENTS OF CASH FLOWS
Years ended December 31,
(Thousands of Dollars)
2000 1999 1998
Cash flows from operating activities:
Net earnings............................................ $ 132,080 $ 88,676 $ 98,265
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Dividends received from consolidated subsidiaries..... 51,660 56,070 51,745
Equity in earnings of consolidated subsidiaries....... (137,706) (87,156) (97,603)
Depreciation and amortization......................... 246 228 298
Other assets, other liabilities and accrued expenses.. 9,717 (8,609) (14,159)
Balances with affiliates.............................. 477 40,514 (6,682)
Income taxes (benefits)............................... (1,699) (5,857) 6,804
Other--net............................................ 94 (141) (55)
Net cash provided by operating activities........... 54,869 83,725 38,613
Cash flows from investing activities:
Purchase of property and equipment for company use...... (366) (487) (196)
Proceeds from sale of property and equipment............ 195 344 149
Net cash used in investing activities............... (171) (143) (47)
Cash flows from financing activities:
Dividends paid to stockholders.......................... (39,201) (38,656) (38,566)
Purchase of treasury stock.............................. (15,493) (44,921) -
Net cash used in financing activities............... (54,694) (83,577) (38,566)
Increase in cash and cash equivalents..................... 4 5 -
Cash and cash equivalents at beginning of year............ 7 2 2
Cash and cash equivalents at end of year.................. $ 11 $ 7 $ 2
The accompanying notes are an integral part of these condensed
financial statements.
47
THE COMMERCE GROUP, INC. AND SUBSIDIARIES
SCHEDULE II
(continued)
CONDENSED FINANCIAL INFORMATION
THE COMMERCE GROUP, INC.
(Parent Company Only)
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Thousands of Dollars)
The accompanying condensed financial statements should be read in
conjunction with the Consolidated Financial Statements and the accompanying
notes thereto in the Annual Report.
NOTE A--Dividends
The amounts of cash dividends paid to The Commerce Group, Inc. (Parent
only) were as follows:
2000 1999 1998
Consolidated insurance subsidiaries................. $51,660 $56,070 $51,745
See Note M to the Consolidated Financial Statements in the Annual Report
for a description of dividend restrictions applicable to the Company's
subsidiaries.
NOTE B--Federal Income Tax Allocation
As a member of a consolidated group for tax purposes, the Company and
its subsidiaries (said parties constituting an "Affiliated Group" as defined
in and for purposes of the Internal Revenue Code) are jointly and severally
liable for federal income taxes of the Affiliated Group and have entered into
an agreement establishing an allocation of tax liability and for compensation
of the respective members of the Affiliated Group for use of their tax losses
and credits.
The method of allocation calls for current taxes to be allocated among
all affiliated companies based on a written tax-sharing agreement. Under this
agreement, allocation is made primarily on a separate return basis with
current payment for losses and other tax items utilized in the consolidated
return. However, to the extent that a payor member of the group has future
net operating losses, which it cannot absorb in the year incurred, other
members within the group will refund payments to the payor.
48
THE COMMERCE GROUP, INC. AND SUBSIDIARIES
SCHEDULE II
(continued)
CONDENSED FINANCIAL INFORMATION
THE COMMERCE GROUP, INC.
(Parent Company Only)
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Thousands of Dollars)
NOTE C--Consolidated Financial Statements
In preparing the consolidated financial statements of the Company and
its subsidiaries, the following amounts have been eliminated:
At December 31,
Balance Sheet 2000 1999 1998
Investment in subsidiaries......... $788,061 $665,525 $682,385
Receivable from affiliates......... - - 37,077
Payable to affiliates.............. 3,914 3,437 -
Years Ended December 31,
Statement of Earnings 2000 1999 1998
Dividends from subsidiaries........ $ 51,660 $ 56,070 $ 51,745
Rent income........................ 492 513 461
NOTE D--Reclassification of Prior Year Balances
Certain prior year balances have been reclassified to conform to the
2000 presentation.
During the fourth quarter of 2000, the Company changed its policy in
regard to its investments in certain closed-end preferred stock mutual funds.
On a forward going basis, the Company will take a proactive posture to affect
the overall investment performance of these funds. This posture may involve
discussing, among other things, the performance, trading prices, investment
strategy, portfolio securities, and extraordinary transactions such as a
merger, reorganization or liquidation of one or more funds with management,
shareholders, or others. The Company's ownership position of these various
funds at December 31, 2000 ranges from 23% to 48% of outstanding shares. The
level of ownership and new investment policy requires the Company to account
for these investments on an equity basis. The equity method requires that the
investments are to be valued at original cost plus the cumulative equity in
the earnings and losses of the funds and adjusted over time by the premium or
discount at the time of purchase to the applicable underlying net asset value
of the funds. Until now, the Company has reported the income on a cash basis,
valued the investments at quoted market prices and recorded the change in
quoted market prices through Comprehensive Income. The results of prior
accounting periods impacted by this change have been restated.
49
THE COMMERCE GROUP, INC. AND SUBSIDIARIES
SCHEDULE III
SUPPLEMENTARY INSURANCE INFORMATION
Years Ended December 31, 2000, 1999 and 1998
(Thousands of Dollars)
Future
Policy Other
Deferred Benefits, Policy
Policy Claims and Claims and Net
Acquisition Loss Unearned Benefits Premium Investment
Segment Costs Expenses Premiums Payable Revenue Income(1)
2000
Massachusetts's property and casualty
insurance.............................$ 102,026 $ 611,566 $481,669 $849,998 $ 97,537
Other states property and casualty
insurance............................. 9,279 62,574 38,216 None 104,485 17,039
Real estate and commercial lending..... - - - - 5,407
Corporate and other.................... - - - - 3,421
Total............................$ 111,305 $ 674,140 $519,885 $954,483 $ 123,404
1999
Massachusetts's property and casualty
insurance.............................$ 90,360 $ 595,817 $423,173 $767,686 $ 48,140
Other states property and casualty
insurance............................. 8,140 64,024 33,922 None 104,144 10,445
Real estate and commercial lending..... - - - - 5,429
Corporate and other.................... - - - - 3,374
Total............................$ 98,500 $ 659,841 $457,095 $871,830 $ 67,388
1998
Massachusetts's property and casualty
insurance.............................$ 87,170 $ 576,923 $385,067 $720,939 $ 79,441
Other states property and casualty
insurance............................. 1,589 7,073 6,357 None 24,681 3,345
Real estate and commercial lending..... - - - - 6,407
Corporate and other.................... - - - - -
Total............................$ 88,759 $ 583,996 $391,424 $745,620 $ 89,193
Benefits, Amortization
Claims, of Deferred
Losses and Policy Other Net
Settlement Acquisition Operating Premiums
Segment Expenses Costs Expenses Written
2000
Massachusetts's property and casualty
insurance.............................$ 603,029 $ 212,472 $ 906,601
Other states property and casualty
insurance............................. 83,128 30,785 None 102,310
Real estate and commercial lending..... - - -
Corporate and other.................... - - -
Total............................$ 686,157 $ 243,257 $1,008,911
1999
Massachusetts's property and casualty
insurance.............................$ 547,004 $ 199,296 $ 806,491
Other states property and casualty
insurance............................. 78,086 34,364 None 105,502
Real estate and commercial lending..... - - -
Corporate and other.................... - - -
Total............................$ 625,090 $ 233,660 $ 911,993
1998
Massachusetts's property and casualty
insurance.............................$ 516,884 $ 187,372 $ 721,663
Other states property and casualty
insurance............................. 14,545 9,062 None 23,385
Real estate and commercial lending..... - - -
Corporate and other.................... - - -
Total............................$ 531,429 $ 196,434 $ 745,048
(1) The allocation of net investment income is based upon the specific
identification of activity within the various segments.
50
THE COMMERCE GROUP, INC. AND SUBSIDIARIES
SCHEDULE IV
REINSURANCE
Years Ended December 31, 2000, 1999 and 1998
(Thousands of Dollars)
Assumed Percentage
Ceded to From of Amount
Gross Other Other Net Assumed
Insurance Premiums Earned Amount Companies Companies Amount to Net
2000
Property and casualty insurance..$1,015,260 $142,474 $ 81,697 $954,483 8.6%
1999
Property and casualty insurance..$ 911,588 $124,459 $ 84,701 $871,830 9.7%
1998
Property and casualty insurance..$ 781,464 $111,901 $ 76,057 $745,620 10.2%
51
THE COMMERCE GROUP, INC. AND SUBSIDIARIES
SCHEDULE V
VALUATION AND QUALIFYING ACCOUNTS
Years Ended December 31, 2000, 1999 and 1998
(Thousands of Dollars)
Net
addition
(reduction)
Balance charged to Balance
beginning costs and at end
of year expenses Deductions(1) of year
2000
Allowance for losses on mortgage loans
and collateral notes receivable........ $2,127 $(1,269) $ - $ 858
Allowance for doubtful premium
receivables............................ $1,452 $ 985 $ (950) $1,487
1999
Allowance for losses on mortgage loans
and collateral notes receivable........ $2,301 $ (174) $ - $2,127
Allowance for doubtful premium
receivables............................ $1,450 $ 1,249 $(1,247) $1,452
1998
Allowance for losses on mortgage loans
and collateral notes receivable........ $2,812 $ (511) $ - $2,301
Allowance for doubtful premium
receivables............................ $1,451 $ 1,297 $(1,298) $1,450
(1) Deductions represent net write-offs of amounts determined to be
uncollectible.
52
THE COMMERCE GROUP, INC. AND SUBSIDIARIES
SCHEDULE X
SUPPLEMENTAL INFORMATION CONCERNING
PROPERTY-CASUALTY INSURANCE OPERATIONS
Years Ended December 31, 2000, 1999 and 1998
(Thousands of Dollars)
Claims and Claim Paid American
Adjustment Expenses Claims Commerce
Affiliation Incurred Related to and Claim losses and
with Current Prior Adjustment LAE reserves
Registrant Year Years Expenses at 1/29/99
2000
Consolidated property-casualty
entities.......................... $728,582 $(42,425) $659,069 $ -
1999
Consolidated property-casualty
entities.......................... $664,978 $(39,888) $627,550 $63,112
1998
Consolidated property-casualty
entities.......................... $592,796 $(61,367) $563,067 $ -
53
THE COMMERCE GROUP, INC. AND SUBSIDIARIES
INDEX TO EXHIBITS(A)
Exhibit
Number Title
3.1 Articles of Organization, as amended(B)
3.2 By-Laws(B)
4 Stock Certificate(B)
10.6* Form of Stock-Appreciation Right Agreement(B)
10.7* Form of Stock-Appreciation Right and Book Value Award Agreement as amended (C)
10.8* 1994 Management Incentive Plan as amended (D)
10.18* Form of Non-Qualified Stock Option Agreement
10.19* Form of Incentive Stock Option Agreement
10.20* Form of Non-Qualified Stock Option Agreement
10.21* Form of Stock Option Agreement
10.22 Conning Capital Partners VI, L.P., Limited Partnership Agreement (E)
13.1 Annual Report for the year ended December 31, 2000 to Security Holders
22.1 Subsidiaries of the Registrant filed herewith
(A) Exhibits other than those listed are omitted because they are not required
or are not applicable. Copies of exhibits are available without charge
by writing to the Assistant to the President at 211 Main Street, Webster,
MA 01570.
(B) Incorporated herein by reference to the exhibit with the same exhibit
number, filed as an exhibit to the Registrant's Registration Statement on
Form S-18 (No. 33-12533-B).
(C) Incorporated herein by reference to the exhibit with the same exhibit
number, filed as an exhibit to the Registrant's Form 10-K for the year
ended December 31, 1994.
(D) Incorporated herein by reference to the exhibit with the same exhibit
number, filed as an exhibit to the Registrant's Form 10-Q for the period
ended September 30, 1997.
(E) Incorporated herein by reference to the exhibit with the same exhibit
number, filed as an exhibit to the Registrant's Form 10-K for the year
ended December 31, 1999.
* Denotes management contract or compensation plan or arrangement.
54
2000
annual
report
The
CGI
The Commerce Group, Inc.
211 Main Street, Webster, Massachusetts 01570
INDEX TO 2000 ANNUAL REPORT
Page
Financial Highlights............................................ 1
Letter to Stockholders.......................................... 2
Management's Discussion and Analysis of Financial Condition
and Results of Operations...................................... 5
Common Stock Price and Dividend Information..................... 29
Report of Management............................................ 31
Report of Independent Auditors.................................. 32
Consolidated Balance Sheets at December 31, 2000 and 1999....... 33
Consolidated Statements of Earnings for the Years Ended
December 31, 2000, 1999 and 1998............................... 34
Consolidated Statements of Stockholders' Equity for the Years
Ended December 31, 2000, 1999 and 1998......................... 35
Consolidated Statements of Cash Flows for the Years Ended
December 31, 2000, 1999 and 1998............................... 36
Consolidated Statements of Cash Flows - Reconciliation of Net
Earnings to Net Cash Provided by Operating Activities for the
Years Ended December 31, 2000, 1999 and 1998................... 37
Notes to Consolidated Financial Statements...................... 38
Selected Consolidated Financial Data............................ 65
Management's Discussion of the Supplemental Information on
Insurance Operations........................................... 66
Directors....................................................... 71
Officers........................................................ 75
Stockholder Information......................................... 77
FINANCIAL HIGHLIGHTS
(Dollars in Thousands, Except Per Share Amounts)
2000 1999 1998
Direct premiums written......................... $1,071,649 $ 948,149 $ 796,858
Net premiums written............................ $1,008,911 $ 911,993 $ 745,048
Earned premiums................................. $ 954,483 $ 871,830 $ 745,620
Net investment income........................... 123,404 67,388 89,193
Premium finance and service fees................ 15,227 14,774 13,440
Amortization of excess of book value of
subsidiary interest over cost................. 3,390 3,019 -
Net realized investment gains................... 2,976 6,023 4,458
Total revenues............................ $1,099,480 $ 963,034 $ 852,711
Earnings before income taxes and minority
interest...................................... $ 170,066 $ 104,284 $ 124,848
Income taxes.................................... 38,306 16,667 26,583
Net earnings before minority interest........... 131,760 87,617 98,265
Minority interest............................... 320 1,059 -
Net earnings.............................. $ 132,080 $ 88,676 $ 98,265
Comprehensive income............................ $ 168,570 $ 40,730 $ 96,594
Basic and diluted net earnings per common share. $ 3.87 $ 2.54 $ 2.73
Net earnings excluding the after-tax impact of
net realized investment gains (1)............. $ 130,146 $ 84,761 $ 95,367
Basic and diluted net earnings per common
share excluding the after-tax impact of net
realized investment gains (1)................. $ 3.81 $ 2.43 $ 2.65
Cash dividends paid per share................... $ 1.15 $ 1.11 $ 1.07
Weighted average number of common shares
outstanding................................... 34,121,047 34,940,074 36,042,652
Total investments at market value
and equity value.............................. $1,472,562 $1,295,995 $1,262,500
Total assets.................................... 2,075,614 1,878,019 1,747,583
Total liabilities............................... 1,292,665 1,208,650 1,036,731
Minority interest............................... 1,068 1,364 -
Total stockholders' equity...................... 781,881 668,005 710,852
Total stockholders' equity per share............ 23.16 19.44 19.72
Certain statutory financial ratios (unaudited):
Loss and LAE ratio............................ 71.7% 72.0% 71.6%
Underwriting expense ratio.................... 25.1 26.5 26.5
Combined ratio............................ 96.8% 98.5% 98.1%
Net premiums written to policyholders'
surplus..................................... 152.6% 175.7% 132.2%
(1) The above figures are presented to provide information to the
reader due to the amount of, and fluctuations in, net realized
gains and losses. The amounts noted, commonly known as Operating
Income, are important measures of corporate performance.
1
THE COMMERCE GROUP, INC.
March 23, 2001
To Our Stockholders:
In 2000, your Company experienced satisfactory financial
results for the 25th consecutive year. From the very first day the
funding of The Commerce Insurance Company was accomplished (April 3,
1972) through December 31, 2000, we have achieved underwriting profit
of $285.0 million on total premiums written of $8.8 billion. This
underwriting profit represents 3.2% of total premiums written.
In December 2000, the 2001 personal automobile insurance rates
were announced by the Massachusetts Insurance Commissioner. Despite
the industry's request for a 0.7% increase, 2001 rates were decreased
on average by 8.3%. Although most companies, including yours,
continued to modify safe driver deviations in response to the 2001
rates, the Massachusetts marketplace remains highly competitive.
Throughout these ongoing competitive times, your Company's share of
the Massachusetts personal automobile market has continued to grow,
and at year-end, our market share was 22.3% up from 21.3% in 1999.
We have entered the new millennium with optimism and have
reached significant milestones during 2000. Your Company surpassed
$2 billion in total assets and wrote over $1 billion in both direct
and net premiums for the first time in its history. It is worth
noting that we wrote over $750 million in premiums for the first time
in 1997, over $500 million for the first time in 1992 and over $250
million for the first time in 1988. Your Company will continue to
pursue the goals of growing and expanding geographically beyond the
borders of Massachusetts. In furtherance of this goal, direct
premiums written outside of Massachusetts now represents 11.3% of our
total business.
During the fourth quarter of 2000 your Company changed its
policy in regard to investments in certain closed-end preferred stock
mutual funds ("funds") as reflected in recent S.E.C. filings. On a
forward going basis, your Company intends to take a proactive posture
to affect the overall investment performance of these funds. Your
Company's year-end ownership position of these various funds ranges
from 23% to 48% of outstanding shares. The level of ownership and
new investment policy requires your Company to account for these
investments on an equity basis. Net earnings per share for 2000 were
increased by $0.60 per share and for 1999 were decreased by $0.40 per
share as a result of this change. The results of prior accounting
periods impacted by this change have been restated.
Your Company has continued to grow and prosper. The Commerce
Insurance Company continues to be the largest writer of Massachusetts
private passenger automobile insurance, as well as the second largest
writer of Massachusetts homeowners insurance. The combined insurance
companies were also ranked as the 27th largest personal automobile
insurance group in the country by A.M. Best Co., based on the most
recently available direct premium written information. Additionally,
I am very pleased to report that your Company again received a group
rating of A+ (Superior) from A.M. Best Co.
Net earnings, written premiums, earned premiums, investment
income, total assets, total stockholders' equity and total
stockholders' equity per share, as illustrated in the bar graph on
the facing page, are all at new highs. For those of you who are
interested in the details, I draw your attention to the pages in this
report labeled "Management's Discussion and Analysis of Financial
Condition and Results of Operations". Behind these numbers are an
extremely dedicated group of people: Our policyholders (represented
by over 968,000 policies in force); Agents (1,122); Employees
(1,677); Officers (42); Commerce Group Directors (18); and, of
course, our Stockholders (over 4,000, not including our Employee
Stock Ownership Plan participants who now number 1,630).
Property-liability insurance remains a good business to be in-
and The Commerce Group, Inc. will continue its efforts to be one of
the most profitable long-term players. Your Company's management
continues to believe that owners' interests are its primary
constituency.
2
Our sincere thanks to those who have helped in this building process-
especially our Agents, Employees, Officers and Board of Directors. This
diverse force of committed, ethical and hard working people will continue to
build on our past successes and look to the future with excitement and
opportunity. Their individual creativity, energy and professionalism will
continue to serve our stockholders well.
Your comments or questions regarding this report, or The
Commerce Group, Inc. affairs in general, are solicited as always, at
any time.
Arthur J. Remillard, Jr.
President, Chief Executive Officer
and Chairman of the Board
Caring in everything we do.
3
The bar graph on page 3 illustrates the Company's annual total
stockholders' equity per share value and annual total stockholders'
equity per share value including cumulative cash dividends paid per
share through each December 31, year-end, over the most recent
fifteen year period. The X-axis lists the years beginning with 1986
through 2000. The Y-axis lists the dollar values starting at $0.00
and increasing in one-dollar increments to $30.00. The graph depicts
a total stockholders' equity per share value in 1986 of $0.95, 1987
of $1.40, 1988 of $1.95, 1989 of $2.53, 1990 of $3.36, 1991 of $4.80,
1992 of $7.42, 1993 of $10.09, 1994 of $10.88, 1995 of $14.96, 1996
of $16.28, 1997 of $18.03, 1998 of $19.58, 1999 of $18.82, and 2000
of $23.16. The graph also depicts the total stockholders' equity per
share value adjusted for cumulative dividends paid per share in 1986
of $0.95, 1987 of $1.40, 1988 of $1.95, 1989 of $2.53, 1990 of $3.36,
1991 of $4.80, 1992 of $7.42, 1993 of $10.09, 1994 of $11.03, 1995 of
$15.34, 1996 of $17.47, 1997 of $20.33, 1998 of $23.01, 1999 of
$23.84, and 2000 of $28.71.
4
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Thousands of Dollars Except Per Share Data)
General
The property and casualty insurance industry continues to remain
highly competitive and inherently volatile in nature. Property and casualty
insurance company results have traditionally been impacted by the typical
forces unique to the industry such as competition, frequency and severity of
losses, the overall economy and the general regulatory environment in those
states in which the insurer operates. Additional forces are impacting the
industry in the form of deregulation, on-line commerce, price competition,
empowered customers and technological advancement. As a whole, the industry
continued to experience slightly deteriorating underwriting results during
2000, and A.M. Best Co. ("A.M. Best") "expects little improvement in the
industry's results in 2001 as prior-year losses dampen poor operating
earnings and weak cash flows. This continued weakness would warrant further
commercial and personal lines price firming through 2002." In fact, in many
segments, A.M. Best "expects incremental rate increases to be taken in 2002,
as the industry attempts to price for increasing loss-cost trends,
particularly with the personal auto lines. Companies without a solid
balance sheet position will be consumed with shoring up their financial
strength at a time when their market viability is already questionable."
Although price competition is quite heavy in many areas of the country, it
has improved in 2000 among independent agency companies in Massachusetts.
Beyond Massachusetts, industry-underwriting results are expected to continue
to deteriorate in the near future which further emphasizes the competitive
advantages gained by affinity marketing and efficient operations. With
these issues on the forefront, The Commerce Group, Inc. ("Company")
continues to position itself to respond to the prevailing forces and
conditions in the market. The Company has utilized its strong agency
relationships, a low-cost structure, affinity group alliances and a 1999
joint-venture acquisition all in an effort to keep the Company responsive in
today's competitive environment.
The Company, incorporated in 1976, is a holding company for several
property and casualty insurers, which, through these insurance subsidiaries,
offers predominantly private passenger motor vehicle insurance along with a
broad range of other property and casualty insurance products. These
products are marketed to affinity groups, individuals, families and
businesses through the Company's strong relationships with professional
independent insurance agencies. The Company writes insurance primarily in
the State of Massachusetts through The Commerce Insurance Company
("Commerce") and Citation Insurance Company ("Citation"), both wholly-owned
subsidiaries of Commerce Holdings, Inc. ("CHI").
Additionally, the Company writes insurance in the States of California
and Oregon through Commerce West Insurance Company ("Commerce West"), a
wholly owned subsidiary of Commerce, located in Pleasanton, California. The
Company also writes insurance through American Commerce Insurance Company
("American Commerce"), which it acquired in January 1999. Located in
Columbus, Ohio, American Commerce is a wholly owned subsidiary of ACIC
Holding Co., Inc., with policies in 25 states and licenses in several
others.
In November 1998, Commerce formed ACIC Holding Co., Inc., in a joint
venture with AAA Southern New England ("AAA SNE") and invested $90,800 to
fund the January 29, 1999 acquisition of the Automobile Club Insurance
Company whose name was changed to American Commerce upon completion of the
acquisition. Commerce invested $90,000 in the form of preferred stock and an
additional $800 representing an 80% common stock ownership. AAA SNE
invested $200 representing a 20% common stock ownership. The terms of the
preferred stock call for Commerce to receive quarterly cash dividends at the
rate of 10% per annum from ACIC Holding Co., Inc. In the event cash
dividends cannot be paid, additional preferred stock will be issued. Since
the January 29, 1999 acquisition, ACIC Holding Co., Inc. and American
Commerce's results have been consolidated into the Company's financial
statements. 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 a licensed insurance agent of Commerce since
1985.
5
The Company's business strategy remains focused on activities
primarily related to personal automobile insurance. The Company has
been the largest writer of personal property and casualty insurance
in the State of Massachusetts in terms of market share of direct
premiums written since 1990. The Company's share of the
Massachusetts personal automobile market increased to 22.3% in 2000,
as exhibited in the table below, exceeding our nearest competitor,
which maintains an 11.7% market share.
Growth of Massachusetts Personal Automobile
Insured Vehicles
Commerce Year-End
Year Industry Commerce Market Share
2000 1.9% 6.5% 22.3%
1999 2.0% 0.6% 21.3%
1998 2.7% 1.9% 21.8%
1997 2.1% 6.8% 21.8%
1996 3.3% 30.9% 20.8%
As mentioned, the Company predominantly writes private passenger
automobile insurance. The following tables indicate that direct premiums
written for private passenger automobile, commercial automobile and
homeowners represented 86.9%, 4.0% and 7.7%, respectively, of the Company's
total direct premiums written in 2000, as compared to 86.9%, 3.9% and 7.8%,
respectively, in 1999. Total direct premiums written increased $123,500 or
13.0% in 2000 over 1999. The 2000 increase was primarily attributable to a
$95,851 or 13.1% increase in Massachusetts private passenger automobile
direct premiums written. This was the result of a 6.2% increase in average
premiums per exposure and a 6.4% increase in written exposures. The
increase in Massachusetts' personal automobile exposures is primarily
attributable to increased business resulting from the insolvency of Trust
Insurance Company ("Trust"), a former Massachusetts personal automobile
insurance writer that was placed in receivership in 2000. Private passenger
premiums written for all other states increased $11,303 or 12.2%, primarily
attributable to American Commerce whose year to date 2000 results reflect a
full twelve months as compared to eleven months in 1999, coupled with
approximately $4,000 of additional premiums from Commerce West.
Direct Premiums Written, Year Ended December 31, 2000
Massachusetts All Other States Total % of Total
Personal Automobile...... $827,180 $103,600 $ 930,780 86.9%
Commercial Automobile.... 43,243 - 43,243 4.0
Homeowners............... 65,662 16,498 82,160 7.7
Other Lines.............. 14,860 606 15,466 1.4
Total........... $950,945 $120,704 $1,071,649 100.0%
Direct Premiums Written, Year Ended December 31, 1999
Massachusetts All Other States Total % of Total
Personal Automobile...... $731,329 $ 92,297 $823,626 86.9%
Commercial Automobile.... 36,616 - 36,616 3.9
Homeowners............... 59,981 14,378 74,359 7.8
Other Lines.............. 13,027 521 13,548 1.4
Total........... $840,953 $107,196 $948,149 100.0%
6
Massachusetts Automobile Business
In Massachusetts, private passenger automobile insurance is subject to
extensive regulation. Owners of registered automobiles are generally
required to maintain certain minimum automobile insurance coverages. With
very limited exceptions, automobile insurers are required by law to issue a
policy to any applicant seeking to obtain such coverages. Companies in
Massachusetts are also assigned agents, known as Exclusive Representative
Producers ("ERPs"), based on market share, that have been unable to obtain a
voluntary contract with an insurance carrier. Marketing and underwriting
strategies for companies operating in Massachusetts are limited by maximum
premium rates and minimum agency commission levels for personal automobile
insurance, which are mandated by the Massachusetts Commissioner of Insurance
("Commissioner"). In Massachusetts, accident rates, bodily injury claims,
and medical care costs continue to be among the highest in the nation.
According to A.M. Best, Massachusetts "has higher than average medical costs
and liability claims involving attorneys." Massachusetts personal
automobile premium per policy, based on latest available premium
information, was 9th highest in the nation.
During the three-year period from 1998 to 2000, average mandated
Massachusetts' personal automobile insurance premium rates decreased an
average of 0.9% per year. The Commissioner approved an average 8.3%
decrease in personal automobile premiums for 2001, as compared to an average
rate increase of 0.7% in 2000. During the period from 1996 through 1999
average rates decreased in three out of four of those years as depicted in
the following table. Coinciding with the 2001 rate decrease, the
Commissioner also approved an increase in the commission rate agents receive
for selling private passenger automobile insurance from 11.8% in 2000 to
12.3% in 2001.
State Mandated Commerce Average
Average Rate Change
Year Rate Change Per Exposure
2001 (8.3%) (1.0%)(Estimated)
2000 0.7% 6.2%
1999 0.7% 9.1%
1998 (4.0%) 2.6%
1997 (6.2%) (1.8%)
1996 (4.5%) (9.2%)
Although average mandated personal automobile premium rates increased
only 0.7% in 2000, the Company's average rate increased 6.2% per exposure.
The 6.2% increase for 2000 was primarily the result of decreases in the Safe
Driver Insurance Plan ("SDIP") deviations for Step 9 and Step 10 drivers,
the two best driver SDIP classifications in Massachusetts. The increase was
also due to the facts that the rate decision did not anticipate purchases of
new automobiles in the year to which the rate decision applied and,
secondly, the Company's mix of personal automobile business differs from
that of the industry.
The 1997, 1998 and 1999 average rate decisions were partially driven
by corrections for an industry error that had impacted prior year rate
decisions. The industry error resulted from a miscalculation of industry
expense allowances that had the effect of overstating rates for 1991 through
1996. Mandated rates for 1997, 1998 and 1999 included an adjustment to
recoup $176 million from the industry. The adjustment included in the rate
decision to recoup the error was phased in at 40%, 40% and 20% in 1997, 1998
and 1999, respectively. The earned premium impact of this, coupled with the
impact of a previous year imbalance in the SDIP, was approximately $15.3
million for 1997, $23.9 million for 1998 and $14.0 million for 1999. The
earnings per share after-tax impact resulting from lower earned premiums
have been estimated at $0.28 for 1997, $0.43 for 1998 and $0.26 for 1999.
7
The Company's performance in its personal and commercial
automobile insurance lines is integrally tied to its participation in
Commonwealth Automobile Reinsurers ("C.A.R."), a state-mandated
reinsurance mechanism, which permits the Company and most other
writers of automobile insurance in Massachusetts to reinsure any
automobile risk that the insurer perceives to be under-priced at the
premium level permitted by the Commissioner. All companies writing
automobile insurance in Massachusetts share in the underwriting
results of C.A.R. business for their respective product line or
lines. Since its inception, C.A.R. has annually generated multi-
million dollar underwriting losses in both its personal and
commercial automobile pools. A company's proportionate share of the
C.A.R. personal or commercial deficit (its participation ratio) is
based upon its market share of the automobile risks for the
particular pool, adjusted by a utilization formula such that, in
general, its participation ratio is disproportionately and adversely
affected if its relative use of C.A.R. exceeds that of the industry,
and favorably affected if its relative use of C.A.R. is less than
that of the industry. Automobile insurers attempt to develop and
implement underwriting strategies that will minimize their relative
share of the C.A.R. deficit while maintaining acceptable loss ratios
on risks not insured through C.A.R.
Significant changes in the utilization of the C.A.R. private passenger
pooling mechanism are not expected for 2001. Various C.A.R. participation
formula changes have been fully implemented since 1993 with only minor
changes since then. The Company's strategy has been to voluntarily retain
more of the types of private passenger automobile business that are factored
as credits favorably impacting the utilization formula. These credits
result from voluntarily writing business in under-priced territories and for
under-priced risks. As a result of increased voluntary retention in excess
of the industry, the credits impacting the utilization formula have
favorably affected the Company's participation ratio. As indicated in the
accompanying table, this ratio is several percentage points below the
Company's estimated 22.3% share of the Massachusetts personal automobile
market. The Company continues to expect the marketplace to make minor
annual adjustments to find the optimum balance between voluntary and ceded
writings.
Company Private Passenger Participation Ratio for C.A.R. versus
Market Share
Company Participation Company
Year Ratio in C.A.R. Market Share
2000* 16.9% 22.3%
1999 16.5% 21.3%
1998 16.7% 21.8%
1997 18.0% 21.8%
1996 19.0% 20.8%
*Estimated
The percentage of commercial automobile premiums ceded to C.A.R. by
the industry has decreased to a Company estimate of 19% in 2000. The
percentage of commercial automobile business ceded to C.A.R. by the Company
was approximately 18.3%. C.A.R. depopulation, coupled with C.A.R. rate
increases for ceded commercial business, have led to a reduction in the size
of the annual commercial automobile deficits. The Company intends to
continue to respond to the incentives and disincentives provided by C.A.R.
rules as deemed necessary and appropriate.
The Company provides a separate rating tier for preferred commercial
automobile business through Citation. Approximately 18% of the commercial
automobile premiums produced by its voluntary agents in 2000 were written by
Citation. The Company expects that this secondary rating tier will continue
to assist the Company in retaining its better commercial automobile
accounts, while also further increasing the percentage of commercial
automobile business that can be retained voluntarily by the Company in 2001
and beyond.
8
The Company has actively pursued affinity group marketing programs
since 1995. The primary purpose of affinity group marketing programs is to
provide participating groups with a convenient means of purchasing private
passenger automobile insurance through associations and employer groups.
Emphasis is placed on writing larger affinity groups, although accounts with
as few as 25 participants are considered. Affinity groups are eligible for
rate discounts, which must be filed annually with the Division of Insurance.
In general, the Company looks for affinity groups with mature/stable
membership, favorable driving records and below average turnover ratios.
Participants who leave the sponsoring group during the term of the policy
are allowed to maintain the policy until expiration. At expiration, a
regular Commerce policy may be issued at the insured's option.
Since the latter part of 1995, Commerce has been a leader in affinity
group marketing through agreements with the four American Automobile
Association Clubs of Massachusetts ("AAA clubs") offering discounts on
private passenger automobile insurance to the clubs' members who reside in
Massachusetts. A 6% discount was approved for policies effective January 1,
2001, which is the same as the discount for 2000. The AAA clubs discount
can be combined with safe driver deviations for up to a 7.9% reduction from
the 2001 state mandated rates. Membership in these clubs is estimated to
represent approximately one-third of the Massachusetts motoring public, and
has been the primary reason for a 53.7% increase in the number of personal
automobile exposures written by Commerce since year-end 1995 (the AAA
affinity group program incepted in October of 1995). In 2000, total direct
premiums written attributable to the AAA group business were $535,766 or
50.0% of the Company's total direct premiums written (64.8% of the Company's
total Massachusetts personal automobile premium), an increase of 8.0% over
1999. Total exposures attributable to the AAA clubs group business were
559,696 or 64.5% of total Massachusetts personal automobile exposures in
2000, as compared to 547,009 or 67.1% in 1999. Of the total Massachusetts
automobile exposures written through the AAA affinity group program by the
Company, approximately 12.2% were written through insurance agencies owned
by the AAA clubs (8.3% of total Massachusetts automobile exposures). The
remaining 87.8% of the AAA group program were written through the Company's
network of independent agents (91.7% of total Massachusetts automobile
exposures). For additional details, refer to the table found on page 12
entitled "AAA Affinity Group Discount and SDIP Deviations".
Massachusetts law allows two years to reach the required penetration
level of 35%. Commerce has continued to maintain AAA member participation
in excess of 35% through December 31, 2000, when it was estimated at 42.8%.
The two-year requirement was waived by the Massachusetts Legislature for
1999 and 2000. Waiving the penetration requirements allows insurance
companies to continue offering group discounts without reaching the 35%
level. The waiver of penetration requirements cannot be predicted for years
beyond 2000.
Commerce and the AAA clubs have agreed that Commerce shall be their
exclusive underwriter of Massachusetts personal automobile group programs.
This rolling three-year contract renews automatically and may be terminated
upon a minimum of three years written notice to either party.
Other States Business
Direct premiums written in states other than Massachusetts by Commerce
West and American Commerce, increased $13,508 or 12.6%. This increase was
primarily attributable to American Commerce whose year to date 2000 results
reflect a full twelve months as compared to eleven months in 1999, coupled
with an approximate increase of $4,000 in direct premiums written by
Commerce West. The growth from Commerce West is primarily attributable to
non-standard automobile business. Commerce West began writing in this
segment of the market in late 1999. American Commerce, which writes
business in 25 states, wrote approximately 74% of its business in seven
states.
9
The seven states with the highest percentages of premiums written by
American Commerce are shown in the following table:
% of Direct Premiums
Company State Written by State
2000 1999
Commerce West California.............. 99.1% 100.0%
Oregon.................. 0.9% -
Total.............. 100.0% 100.0%
American Commerce Arizona................. 21.5% 21.5%
Ohio.................... 11.6% 9.8%
Rhode Island............ 10.8% 9.0%
Oregon.................. 10.2% 9.9%
Washington.............. 8.1% 8.7%
Oklahoma................ 6.4% 6.3%
Kentucky................ 5.8% 5.6%
Other states............ 25.6% 29.2%
Total.............. 100.0% 100.0%
The decrease in other states for American Commerce is primarily
attributable to business in several states being moved to other insurance
companies affiliated with the ownership of the agencies representing that
business. This was especially noteworthy in Texas and New Mexico, where
California State Automobile Association Inter-Insurance Bureau owned the
agencies and decided to move the business to its wholly-owned insurance
company subsidiary from American Commerce. These and some future moves were
anticipated at the time the Company negotiated the acquisition of American
Commerce.
Insurance Ratios
Underwriting profit margins are reflected by the extent to
which the combined ratio is less than 100%. This ratio is considered
the best simple index of current underwriting performance of an
insurer. During the five-year period ended December 31, 2000, the
property and casualty insurance industry's combined ratio, as
reported by A.M. Best and weighted to reflect the Company's product
mix ("weighted industry average"), has ranged from a low of 100.1% in
1997 to a high of 104.4% in 1999 on a statutory accounting principles
basis. During this same period of time, the Company's combined ratio
has consistently remained below the weighted industry average,
ranging from a low of 96.5% in 1997 to a high of 98.5% in 1999. On
an average basis, the Company's combined ratio was 97.1% for the
five-year period ended December 31, 2000 compared to a weighted
industry average of 102.7%.
Year Ended December 31,
Company Statutory Ratios 2000 1999 1998 1997 1996
(unaudited)
Loss and LAE Ratio................. 71.7% 72.0% 71.6% 71.4% 70.9%
Underwriting Expense Ratio......... 25.1 26.5 26.5 25.1 27.1
Combined Ratio..................... 96.8% 98.5% 98.1% 96.5% 98.0%
Industry Combined Ratio
(all writers)(1)................... 104.0% 104.4% 102.2% 100.1% 102.9%
(1) Source: Best's Review Preview (2001), as reported by A.M. Best
for all property and casualty insurance companies and weighted to
reflect the Company's product mix. The 2000 industry information is
estimated by A.M. Best.
10
Investment Income and Net Realized Investment Gains
The Company's total revenues were supplemented in fiscal 2000, 1999
and 1998 by net investment income of $123,404, $67,388 and $89,193,
respectively. During the fourth quarter of 2000, the Company changed its
policy in regard to its investments in certain closed-end preferred stock
mutual funds, as reflected in recent S.E.C. filings. On a forward going
basis, the Company intends to take a proactive posture to affect the overall
investment performance of these funds. This posture may involve discussing,
among other things, the performance, trading prices, investment strategy,
portfolio securities, and extraordinary transactions such as a merger,
reorganization or liquidation of one or more funds with fund management,
shareholders, or others. The Company's ownership position of these various
funds at December 31, 2000 ranges from 23% to 48% of outstanding shares.
The level of ownership and new investment policy requires the Company to
account for these investments on an equity basis. The equity method
requires that the investments are to be valued at original cost plus the
cumulative equity in the earnings and losses of the funds and adjusted over
time by the premium or discount at the time of purchase to the applicable
underlying net asset value of the funds. Prior to the policy change, the
Company reported the income on a cash basis, valued the investments at
quoted market prices and recorded the change in quoted market prices through
Comprehensive Income. The Company has restated the results of prior
accounting periods that were affected by the policy change. Included in net
investment income for 2000 was income from the funds, excluding dividends
received, of $26.6 million as compared to a loss of $22.4 million in 1999
and income of $2.7 million in 1998. Additionally, the Company had net
realized investment gains of $2,976, $6,023 and $4,458 in 2000, 1999 and
1998, respectively.
Regulatory Matters
General
Although the U.S. federal government does not directly regulate the
insurance industry, federal initiatives often have an impact on the
business. Congress and certain federal agencies continue to investigate the
current condition of the insurance industry (encompassing both life and
health and property and casualty insurance) in the United States in order to
decide whether some form of federal role in the regulation of insurance
companies would be appropriate. Congress conducts hearings relating, in
general, to the solvency of insurers and has proposed federal legislation
from time to time on this and other subjects.
In November 1999, the Gramm-Leach-Bliley Act was signed into law. The
Act (1) repealed the Glass-Steagall Act of 1933, which had prohibited the
merger of banks and securities firms, and (2) substantially modified the
Bank Holding Company Act of 1956, which had the effect of separating banking
and insurance underwriting business. The law contains provisions that
govern competition, created safe-harbor protections for specific state laws
and established consumer protections that govern bank-insurance sales.
At the state level, various forms of automobile insurance reform are
continuously debated. New regulations and legislation are often proposed
with the goal of reducing the need for premium increases. For further
details, please refer to the general discussion on insurance regulation and
premium rates beginning on page 5.
Personal Automobile Insurance
As previously mentioned, since 1995, the Company has been a leader in
affinity group marketing through discounts to members of the AAA clubs.
Membership in these clubs is estimated to represent approximately one-third
of the Massachusetts motoring public. The Company increased its
Massachusetts private passenger automobile insurance exposures by 6.4%,
ending the year with approximately 22.3% of the Massachusetts private
passenger automobile market. The increase in Massachusetts personal
automobile exposures is primarily attributable to increased business
resulting from the insolvency of Trust, a former Massachusetts personal
automobile insurance writer.
11
Since 1996, the Company has offered its Massachusetts customers safe
driver deviations to drivers with SDIP classifications of either Steps 9 or
10. Safe driver deviations are rate discounts based on the customer's
driving record and resulting SDIP classification and must be approved
annually by the Commissioner. Steps 9 and 10 are the two best driver SDIP
classifications in Massachusetts, representing drivers with no at fault
accidents and not more than one minor moving vehicle violation in the last
six years. The accompanying table depicts the AAA Affinity Group Discount,
SDIP Deviations and their combined reduction from Massachusetts average
mandated rates:
AAA Affinity Group Discount and SDIP Deviations 2001* 2000 1999 1998 1997
AAA Affinity Group Discount................... 6% 6% 6% 6% 10%
SDIP Step 9 Deviation......................... 2% 6% 8% 15% 10%
SDIP Step 10 Deviation........................ 0% 2% 3% 4% 10%
Combined AAA Affinity Group Discount and
Step 9 Deviation............................ 7.9% 11.6% 13.5% 20.1% 19.0%
Combined AAA Affinity Group Discount and
Step 10 Deviation........................... 6.0% 7.9% 8.8% 9.8% 19.0%
*For policies with effective dates as of January 1, 2001 or thereafter.
In 2001, in response to the average personal automobile rate decisions
over the last several years, the Company filed for and ultimately received
approval to offer a SDIP Step 9 deviation of 2%. No deviation for Step 10
business for policies incepting in the 2001 calendar year was requested.
During 2000, 55.1% and 14.0% of the Company's exposures were eligible for
Step 9 and Step 10 deviations, respectively, versus 54.6% and 14.0%,
respectively during 1999.
Risk-Based Capital
In order to enhance the regulation of insurer insolvency, the National
Association of Insurance Commissioners ("NAIC") developed a formula and
model law to provide for Risk-Based Capital ("RBC") requirements for
property and casualty insurance companies. RBC requirements are designed to
assess capital adequacy and to raise the level of protection that statutory
surplus provides for policyholder obligations. The RBC model for property
and casualty insurance companies measures three major areas of risk facing
property and casualty insurers: (i) underwriting, which encompasses the risk
of adverse loss development and inadequate pricing; (ii) declines in asset
values arising from credit risk; and, (iii) other business risks from
investments. Insurers having less statutory surplus than required by the
RBC calculation will be subject to varying degrees of regulatory action,
depending on the level of capital inadequacy.
The RBC model formula proposes four levels of regulatory action. The
extent of regulatory intervention and action increases as the percentage of
surplus to RBC falls. The first level, the Company Action Level, requires
an insurer to submit a plan of corrective actions to the regulator if
surplus falls below 200% of the RBC amount. The Regulatory Action Level (as
defined by the NAIC) requires an insurer to submit a plan containing
corrective actions and permits the Commissioner to perform an examination or
other analysis and issue a corrective order if surplus falls below 150% of
the RBC amount. The Authorized Control Level (as defined by the NAIC)
allows the regulator to rehabilitate or liquidate an insurer in addition to
the aforementioned actions if surplus falls below 100% of the RBC amount.
The fourth action level is the Mandatory Control Level (as defined by the
NAIC), which requires the regulator to rehabilitate or liquidate the insurer
if surplus falls below 70% of the RBC amount.
12
The Company's insurance subsidiaries, Commerce, Citation, Commerce
West, and American Commerce are listed in the accompanying table, which
provides the key RBC information:
Commerce American
(Dollars in millions) Commerce Citation West Commerce
At December 31, 2000
Statutory surplus............. $ 552 $ 109 $ 28 $ 93
200% RBC Company action level. 197 4 6 19
Statutory surplus in excess
of RBC Company action level. $ 355 $ 105 $ 22 $ 74
RBC amounts................... $ 98 $ 2 $ 3 $ 9
% of surplus to RBC amounts... 563.3% 5,450.0% 933.3% 1,033.3%
Year Ended December 31, 2000 Compared to Year Ended December 31, 1999
Premiums
The following table compares direct premiums written, net
premiums written and earned premiums for the years ended December 31,
2000 and 1999:
(Dollars in thousands)
Years Ended December 31,
2000 1999 $ Change % Change
Direct Premiums Written:
Personal Automobile in Massachusetts........$ 827,180 $731,329 $ 95,851 13.1%
Personal Automobile in All Other States..... 103,600 92,297* 11,303 12.2%
Commercial Automobile in Massachusetts...... 43,243 36,616 6,627 18.1%
Homeowners in Massachusetts................. 65,662 59,981 5,681 9.5%
Homeowners in All Other States.............. 16,498 14,378* 2,120 14.7%
Other Lines in Massachusetts................ 14,860 13,027 1,833 14.1%
Other Lines in All Other States............. 606 521* 85 16.3%
Total Direct Premiums Written............$1,071,649 $948,149 $123,500 13.0%
Net Premiums Written:
Direct Premiums.............................$1,071,649 $948,149* $123,500 13.0%
Assumed Premiums from C.A.R................. 81,659 87,241 (5,582) (6.4%)
Ceded Premiums to C.A.R..................... (67,451) (68,740) 1,289 (1.9%)
Ceded Premiums to Other than C.A.R.......... (76,946) (54,657)* (22,289) 40.8%
Total Net Premiums Written...............$1,008,911 $911,993 $ 96,918 10.6%
Earned Premiums:
Personal Automobile in Massachusetts........$ 714,972 $633,746 $ 81,226 12.8%
Personal Automobile in All Other States..... 100,116 91,357* 8,759 9.6%
Commercial Automobile in Massachusetts ... 32,548 29,219 3,329 11.4%
Homeowners in Massachusetts................. 17,364 16,830 534 3.2%
Homeowners in All Other States.............. 4,186 12,032* (7,846) (65.2%)
Other Lines in Massachusetts................ 3,434 3,190 244 7.6%
Other Lines in All Other States............. 166 755* (589) (78.0%)
Assumed Premiums from C.A.R................. 81,300 84,356 (3,056) (3.6%)
Assumed Premiums from Other than C.A.R...... 397 345 52 15.1%
Total Earned Premiums....................$ 954,483 $871,830 $ 82,653 9.5%
Earned Premiums in Massachusetts............$ 768,301 $682,985 $ 85,316 12.5%
Earned Premiums-Assumed..................... 81,697 84,701 (3,004) (3.5%)
Earned Premiums in All Other States......... 104,485 104,144* 341 0.3%
Total Earned Premiums....................$ 954,483 $871,830 $ 82,653 9.5%
*Includes eleven-month results of American Commerce since the January
29, 1999 acquisition.
13
The $95,851 or 13.1% increase in Massachusetts personal automobile
direct premiums written resulted primarily from increases of 6.4% and 8.5%,
in the number of Massachusetts personal automobile exposures for liability
and physical damage coverage, respectively, coupled with increases of 7.5%
and 1.9% in the average premium rate per exposure for Massachusetts personal
automobile liability and physical damage exposures, respectively. The
increase in Massachusetts personal automobile exposures is primarily
attributable to increased business resulting from the insolvency of Trust, a
former Massachusetts personal automobile insurance writer. The components
of these 2000 changes were as follows:
% of Direct
Coverage Type Premiums Written (1) Rate Change (2)
Liability:
Bodily Injury................. 35.3% 1.0%
Personal Injury Protection.... 6.8 6.4
Property Damage to Others..... 21.1 20.8
Total Liability........... 63.2 7.5
Physical Damage:
Collision..................... 24.4 1.7
Comprehensive................. 12.4 2.4
Total Physical Damage..... 36.8 1.9
Total..................... 100.0% 6.2%
(1) Represents the Company's percentage of total direct private
passenger automobile premiums written in Massachusetts.
(2) Represents change in the 2000 average rate per exposure from
the 1999 average rate by the Company for Massachusetts
private passenger automobile premiums.
The above percentage changes 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 6.2%
increase in the average personal automobile premium per exposure in 2000.
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
to 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).
As shown in the table found on page 12, the AAA affinity group
discount for 2000 was established at 6.0%, which was unchanged from 1999.
In 2000, for drivers who qualified, the Company's AAA affinity group
discount and safe driver deviations could be combined for up to an 11.6%
reduction (13.5% in 1999) from state mandated rates.
Direct premiums written for commercial automobile insurance increased
by $6,627 or 18.1%, due primarily to an increase of approximately 10.1% in
the number of policies written, combined with a 6.9% increase in the average
commercial automobile premium per policy. The increased business was
attributable to the Company's intention to expand writings coupled with
increased business due to the previously mentioned Trust insolvency. Direct
premiums written for homeowners insurance increased by $7,801 or 10.5% due
primarily to a 13.5% increase in the number of Massachusetts policies
written offset by a 3.0% decrease in the average Massachusetts premium per
policy, coupled with an additional months premium from American Commerce.
The increased business was primarily attributable to the previously
mentioned Trust insolvency.
The $96,918 or 10.6% increase in net premiums written was due to the
growth in direct premiums written as described above, offset by a decrease
of premiums assumed from C.A.R. The decrease in premiums assumed from C.A.R.
was the result of fewer premiums ceded to C.A.R. by the servicing carriers
in 2000 as compared to 1999. Premiums ceded to reinsurers other than C.A.R.
increased $22,289 or 40.8% as compared to 1999 as a result of American
Commerce joining the quota-share reinsurance program effective January 1,
2000 and increases in Massachusetts homeowner's premiums.
14
The $82,653 or 9.5% increase in earned premiums during 2000 as
compared to 1999 was primarily due to increases to the average rates per
exposure for Massachusetts personal automobile liability and physical
damage, and the increased business due to the insolvency of Trust mentioned
previously. This resulted in an $85,316 or 12.5%, increase for
Massachusetts earned premiums. The remaining changes were attributable to a
$3,004 or 3.5% decrease in earned premiums assumed from C.A.R. offset by
$341, or 0.3% increase in earned premiums from all other states, primarily
attributable to American Commerce whose year to date 2000 results reflect a
full twelve months as compared to eleven months in 1999, offset by the
effect of ceded earned premium to the quota share treaty.
Investment Income
Net investment income is affected primarily by the composition of the
Company's investment portfolio and yield thereon. The following table
summarizes the composition of the Company's investment portfolio, at cost,
at December 31, 2000 and 1999:
Investments, at cost December 31,
(Dollars in thousands) % of % of
2000 Invest. 1999 Invest.
GNMA & FNMA mortgage-backed bonds...... $ 67,274 4.7% $ 82,349 6.1%
Corporate bonds........................ 130,775 9.1 45,147 3.3
U.S.Treasury bonds and notes........... 3,428 0.2 3,616 0.3
Tax exempt state and municipal bonds... 464,404 32.1 530,333 39.2
Total fixed maturities............. 665,881 46.1 661,445 48.9
Preferred stocks....................... 215,823 14.9 230,934 17.1
Common stocks.......................... 87,704 6.1 83,984 6.2
Closed-end preferred stock mutual funds 327,980 22.7 267,956 19.8
Mortgages and collateral loans (net of
allowance for possible loan losses).. 51,661 3.6 72,451 5.4
Cash and cash equivalents.............. 70,521 4.9 22,535 1.7
Other investments...................... 25,475 1.7 13,130 0.9
Total investments.................. $1,445,045 100.0% $1,352,435 100.0%
During the fourth quarter of 2000, the Company changed its policy in
regard to its investments in certain closed-end preferred stock mutual
funds. On a forward going basis, the Company intends to take a proactive
posture to affect the overall investment performance of these funds. The
Company's ownership position of these various funds at December 31, 2000
ranges from 23% to 48% of outstanding shares. The level of ownership and
new investment policy requires the Company to account for these investments
on an equity basis. The equity method requires that the investments are to
be valued at original cost plus the cumulative equity in the earnings and
losses of the funds and adjusted over time by the premium or discount at the
time of purchase to the applicable underlying net asset value of the funds.
Prior to the policy change, the Company reported the income on a cash basis,
valued the investments at quoted market prices and recorded the change in
quoted market prices through Comprehensive Income. The results of prior
accounting periods impacted by this change have been restated.
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 capital appreciation in the future.
15
As depicted in the accompanying table, net investment income before
taxes increased $56,016 or 83.1%, compared to 1999, principally as a result
of the change in accounting to the equity method for closed-end preferred
stock mutual funds and an increase in average invested assets (at cost). As
a result of the accounting change, included in 2000 net investment income is
income from the funds, excluding dividends received, of $26.5 million ($20.5
million after taxes) as compared to a loss of $22.4 million ($12.6 million
after taxes) in 1999. Net investment income as a percentage of total
average investments was 8.8% in 2000 compared to 5.1% in 1999. Net
investment income after tax as a percentage of total average investments was
7.2% in 2000 and 4.7% in 1999.
Investment Return Years Ended December 31,
(Dollars in thousands) 2000 1999
Average month-end investments (at cost)... $1,395,159 $1,326,098
Net investment income before tax.......... 123,404 67,388
Net investment income after-tax........... 100,061 62,277
Net investment income as a percentage
of average net investments (at cost).... 8.8% 5.1%
Net investment income after-tax as a
percentage of average net
investments (at cost)................... 7.2% 4.7%
Premium Finance and Service Fees
Premium finance and service fees increased $453 or 3.1% during 2000.
Amortization of Excess of Book Value of Subsidiary Interest over Cost
As a result of the acquisition of American Commerce (see "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
General" and "Notes to Consolidated Financial Statements - NOTES A12 and
A17"), the amount representing the excess of the fair value of the net
assets acquired over the purchase price at January 29, 1999 was $16,947.
This amount is being amortized into revenue on a straight-line basis over a
five-year period. The amount amortized into revenue in 2000 was $3,390,
compared to $3,019 in 1999.
Investment Gains and Losses
Gross realized gains and losses for the years ended December 31, 2000 and
December 31, 1999 were as follows:
2000 1999
Gross Gross Gross Gross
Realized Realized Realized Realized
Gains Losses Gains Losses
Fixed maturities........................$ 223 $ (3,995) $ 458 $ (6,449)
Preferred stocks........................ 1,748 (462) 207 (451)
Common stocks........................... 4,370 - 16,080 (5,057)
Other investments....................... 1,092 - 1,235 -
Total.............................$ 7,433 $ (4,457) $ 17,980 $(11,957)
Net realized investment gains totaled $2,976 during 2000 as compared
to $6,023 for 1999. A significant portion of the net realized gains in 2000
were the result of sales of common and preferred stocks, partially offset by
net realized losses in the sales of non-taxable bonds, and in the maturity
of GNMAs. The primary sources of the realized gains for other investments
were realized gains on mortgage activity of $310 in 2000 compared to $196 in
1999, coupled with the realized gains on the Conning Insurance Limited
Partnership, of $460 in 2000 compared with $888 in 1999.
16
Gross accumulated other comprehensive income and losses at December 31, 2000
and December 31, 1999 were as follows:
December 31, 2000 December 31, 1999
Gross Gross Gross Gross
Accumulated Accumulated Accumulated Accumulated
Other Other Other Other
Comprehensive Comprehensive Comprehensive Comprehensive
Income Losses Income Losses
Fixed maturities........$ 16,247 $ (12,193)$ 5,221 $ (19,328)
Preferred stocks........ 999 (16,739) 782 (20,667)
Common stocks........... 28,126 (3) 1,305 (7,941)
Other investments....... 1,327 - 1,009 -
Total.............$ 46,699 $ (28,935)$ 8,317 $ (47,936)
The accumulated other comprehensive income on fixed maturities
increased significantly as a result of the favorable performance in the bond
market due to lower interest rates in 2000. Long-term interest rates (30-
year Treasury Bond) decreased to 5.46% at December 31, 2000 from 6.48% at
December 31, 1999.
Loss and Loss Adjustment Expenses
Losses and loss adjustment expenses ("LAE") incurred increased $61,067
or 9.8% in 2000. As a percentage of premiums earned, losses and LAE
incurred for 2000 was 71.7% compared to 72.0% in 1999. The Company
experienced higher assumed residual market losses during 2000, which were
offset by improved voluntary loss ratios in Massachusetts. Additionally in
2000, the loss ratio was adversely impacted by approximately $8,000 of
expense (0.8% of the loss ratio) attributable to the Trust insolvency. Also
included in the 2000 increase in incurred expense is approximately $6,300 in
higher corporate expenses which are allocated to losses and LAE for book
value appreciation rights, director retirement compensation and state income
taxes on non-insurance subsidiaries. The ratio of net incurred losses,
excluding LAE, to premiums earned ("pure loss ratio") on personal automobile
was 63.2% in 2000 compared to 65.1% in 1999. The decrease to the personal
automobile pure loss ratio was primarily due to an increase in redundancies
arising from prior accident years, and decreases in the cost of adjusting
losses. The commercial automobile pure loss ratio decreased to 59.7% in
2000 compared to 60.3% in 1999. For homeowners, the pure loss ratio was
40.0% in 2000 compared to 35.9% in 1999. The increase was primarily due to
fewer liability redundancies in 2000 compared to 1999. The loss ratio (on a
statutory basis) for Commerce West was 69.3% for 2000 as compared to 71.2%
in 1999. The loss ratio (on a statutory basis) for American Commerce was
84.5% for 2000 as compared to its eleven-month loss ratio of 75.8% in 1999.
17
Policy Acquisition Costs
Policy acquisition costs expensed increased by $9,597 or 4.1% in 2000.
As a percentage of net premiums written, the Company's statutory
underwriting expense ratio for 2000 was 25.1% compared to 26.5% in 1999.
The decreased 2000 underwriting expense ratio resulted primarily from lower
Massachusetts direct automobile commissions associated with a decrease in
the state mandated minimum commissions, a lower provision for accrued
contingent commissions, and lower expenses due to the continued effects of
certain cost reduction programs, partially offset by the Trust insolvency
assessment. The 2000 underwriting ratio includes a $4,900 charge (0.5% of
the underwriting expense ratio) representing the Company's allocation from
the Massachusetts Insurers Insolvency Fund for this insolvency. Also
included in the 2000 increase in policy acquisition costs expensed is
approximately $5,800 in higher corporate expenses which are allocated to
policy acquisition costs for book value appreciation rights, director
retirement compensation and state income taxes on non-insurance
subsidiaries. The underwriting expense ratio (on a statutory basis) for
Commerce West was 35.8% for 2000 as compared to 40.9% for 1999. The
underwriting expense ratio (on a statutory basis) for American Commerce, was
29.3% for 2000 compared to its eleven-month expense ratio of 31.4% for 1999.
Income Taxes
The Company's effective tax rate was 22.5% and 16.0% for the years
ended December 31, 2000 and 1999, respectively. 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 higher
effective tax rate for 2000 was the result of both the tax-exempt interest
and the dividends received deduction comprising a lesser portion of earnings
before taxes.
Minority Interest
As a result of the joint venture with AAA SNE and acquisition of
American Commerce (see "Management's Discussion and Analysis of Financial
Condition and Results of Operations - General" and "Notes to Consolidated
Financial Statements - NOTES A13 and A17"), the Company's interest in ACIC
Holding Co., Inc., through Commerce, a wholly-owned subsidiary of CHI, is
represented by ownership of 80% of the outstanding shares of common stock at
December 31, 2000. AAA SNE maintains a 20% common stock ownership. The
minority interest of $320 included in these consolidated financial
statements for 2000 represents 20% of the net loss for ACIC Holding Co.,
Inc. which is calculated after the $9,178 preferred stock dividend paid to
Commerce. This compares to $1,059 minority interest after $8,300 in
preferred stock dividends paid to Commerce in 1999.
Net Earnings
Net earnings increased $43,404 or 48.9% to $132,080 during 2000 as
compared to $88,676 in 1999. The net earnings for 2000 were increased by
$20,514, or $0.60 per share and decreased in 1999 by $14,020, or $0.40 per
share as a result of the Company's change in its policy in regard to its
investment in closed-end preferred stock mutual funds mentioned previously.
Operating earnings, which exclude the after-tax impact of net realized
investment gains, increased $45,385 or 53.5% to $130,146 during 2000 as
compared to $84,761 in 1999, as a result of the factors previously
mentioned.
18
Year Ended December 31, 1999 Compared to Year Ended December 31, 1998
Premiums
The following table compares direct premiums, net premiums written and
earned premiums for the years ended December 31, 1999 and 1998:
<
(Dollars in thousands)
Years Ended December 31,
1999 1998 Change % Change
Direct Premiums Written:
Personal Automobile in Massachusetts........ $731,329 $663,920 $ 67,409 10.2%
Personal Automobile in All Other States..... 92,297* 23,312 68,985 295.9%
Commercial Automobile in Massachusetts...... 36,616 36,299 317 0.9%
Homeowners in Massachusetts................. 59,981 59,761 220 0.4%
Homeowners in All Other States.............. 14,378* - 14,378 N/A
Other Lines in Massachusetts................ 13,027 13,483 (456) (3.4%)
Other Lines in All Other States............. 521* 83 438 527.7%
Total Direct Premiums Written............ $948,149 $796,858 $151,291 19.0%
Net Premiums Written:
Direct Premiums............................. $948,149* $796,858 $151,291 19.0%
Assumed Premiums from C.A.R................. 87,241 74,644 12,597 16.9%
Ceded Premiums to C.A.R..................... (68,740) (70,435) 1,695 (2.4%)
Ceded Premiums from Other than C.A.R........ (54,657)* (56,019) 1,362 (2.4%)
Total Net Premiums Written............... $911,993 $745,048 $166,945 22.4%
Earned Premiums:
Personal Automobile in Massachusetts........ $633,746 $587,072 $ 46,674 8.0%
Personal Automobile in All Other States..... 91,357* 24,681 66,676 270.2%
Commercial Automobile in Massachusetts...... 29,219 28,858 361 1.3%
Homeowners in Massachusetts................. 16,830 23,235 (6,405) (27.6%)
Homeowners in All Other States.............. 12,032* - 12,032 N/A
Other Lines in Massachusetts................ 3,190 5,717 (2,527) (44.2%)
Other Lines in All Other States............. 755* - 755 N/A
Assumed Premiums from C.A.R................. 84,356 75,718 8,638 11.4%
Assumed Premiums from Other than C.A.R...... 345 339 6 1.8%
Total Earned Premiums.................... $871,830 $745,620 $126,210 16.9%
Earned Premiums in Massachusetts............ $682,985 $644,882 $ 38,103 5.9%
Earned Premiums-Assumed..................... 84,701 76,057 8,644 11.4%
Earned Premiums in All Other States......... 104,144* 24,681 79,463 322.0%
Total Earned Premiums.................... $871,830 $745,620 $126,210 16.9%
*Includes eleven-month results of American Commerce since the January 29,
1999 acquisition.
19
The $67,409 or 10.2% increase in Massachusetts personal automobile
direct premiums written resulted primarily from increases of 0.9% and 2.5%
in the number of Massachusetts personal automobile exposures for liability
and physical damage coverage, respectively, coupled with increases of 2.5%
and 20.4% 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:
% of Direct
Coverage Type Premiums Written (1) Rate Change (2)
Liability:
Bodily Injury................. 37.0% (1.9%)
Personal Injury Protection.... 6.8 11.0
Property Damage to Others..... 18.6 9.1
Total Liability........... 62.4 2.5
Physical Damage:
Collision..................... 25.0 25.2
Comprehensive................. 12.6 11.7
Total Physical Damage..... 37.6 20.4
Total..................... 100.0% 9.1%
(1) Represents the Company's percentage of total direct private
passenger automobile premiums written in Massachusetts.
(2) Represents change in 1999 average rate per exposure from the
1998 average rate charged by the Company for Massachusetts
private passenger automobile premiums.
The above percentage changes were primarily the result of rate
modifications in the individual coverage components in the 1999 state
mandated average rate increase, combined with changes in the Company's safe
driver rate deviations. The combination of these factors resulted in a 9.1%
increase in the average personal automobile premium per exposure in 1999.
Despite the 1999 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
to which the rate decision applies and the Company's mix of personal
automobile business differs from that of the industry. In 1999, the Company
offered its customers safe driver deviations of 8.0% to drivers with SDIP
classifications of Step 9 and 3.0% for Step 10 (15.0% for Step 9 and 4.0%
for Step 10 in 1998).
As shown in the table found on page 12, the AAA affinity group
discount for 1999 was established at 6.0%, which was unchanged from 1998.
In 1999, for drivers who qualified, the Company's AAA affinity group
discount and safe driver deviations could be combined for up to a 13.5%
reduction (20.1% in 1998) from state mandated rates.
The increases in other states personal automobile direct premiums
written resulted primarily from the joint-venture acquisition of American
Commerce, whose eleven month results were reflected in the above table.
American Commerce contributed $85,676 in direct premiums written in 26
states.
Direct premiums written for Massachusetts commercial automobile
insurance increased by $317 or 0.9%, due primarily to a decrease of
approximately 2.6% in the number of policies written, offset by a 3.7%
increase in the average commercial automobile premium per policy. Direct
premiums written for Massachusetts homeowners insurance increased by $14,598
or 24.4% due primarily to the joint-venture acquisition of American
Commerce.
The $166,945 or 22.4% increase in net premiums written was due to the
growth in direct premiums written as described above and by premiums assumed
from C.A.R. The increase in premiums assumed from C.A.R. was the result of
more premiums ceded to C.A.R. by the servicing carriers in 1999 as compared
to 1998. Premiums ceded to reinsurers other than C.A.R. decreased $1,362,
or 2.4%, as compared to 1998 as a result of changes to non-automobile
reinsurance.
20
The $126,210 or 16.9% increase in earned premiums during 1999 as
compared to 1998 was primarily due to the joint-venture acquisition of
American Commerce. Earned premiums for American Commerce was $82,582 for
the eleven months of 1999. The remaining amounts were primarily
attributable to increases to the average rates per exposure for
Massachusetts personal automobile liability and physical damage, mentioned
previously. This resulted in a $38,103 or 5.9%, increase for Massachusetts
earned premiums. The remaining increases were attributable to an $8,638 or
11.4% increase in earned premiums assumed from C.A.R. The increases were
offset by a decrease of $3,119 or 9.0% in earned premiums from Commerce
West.
Investment Income
Net investment income is affected primarily by the composition of the
Company's investment portfolio and yield thereon. The following table
summarizes the composition of the Company's investment portfolio, at cost,
at December 31, 1999 and 1998:
Investments, at cost December 31,
(Dollars in thousands) % of % of
1999 Invest. 1998 Invest.
GNMA & FNMA mortgage-backed bonds...... $ 82,349 6.1% $ 109,624 9.0%
Corporate bonds........................ 45,147 3.3 - -
U.S.Treasury bonds and notes........... 3,616 0.3 - -
Tax exempt state and municipal bonds... 530,333 39.2 490,858 40.4
Total fixed maturities............. 661,445 48.9 600,482 49.4
Preferred stocks....................... 230,934 17.1 200,270 16.4
Common stocks.......................... 83,984 6.2 91,966 7.5
Closed-end preferred stock mutual funds 267,956 19.8 169,394 13.9
Mortgages and collateral loans (net of
allowance for possible loan losses).. 72,451 5.4 73,510 6.0
Cash and cash equivalents.............. 22,535 1.7 72,243 5.9
Short-term investments................. - - 3,669 0.3
Other investments...................... 13,130 0.9 7,450 0.6
Total investments.................. $1,352,435 100.0% $1,218,984 100.0%
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 capital appreciation in the future.
21
As depicted in the accompanying table, net investment income before
taxes decreased $21,805 or 24.4%, compared to 1998, principally as a result
of a change in accounting, to the equity method, for preferred stock mutual
funds and an increase in average invested assets (at cost). As a result of
the accounting change, included in net investment income are losses from the
funds, excluding dividends received, of $22.4 million ($12.6 million loss
after taxes) in 1999 as compared to income of $2.7 million ($3.3 million
income after taxes) in 1998. Net investment income as a percentage of total
average investments was 5.1% in 1999 compared to 7.2% in 1998. Net
investment income after tax as a percentage of total average investments was
4.7% in 1999 and 6.0% in 1998.
Investment Return Years Ended December 31,
(Dollars in thousands) 1999 1998
Average month-end investments (at cost)... $1,326,098 $1,242,633
Net investment income before tax.......... 67,388 89,193
Net investment income after-tax........... 62,277 74,368
Net investment income as a percentage
of average net investments (at cost).... 5.1% 7.2%
Net investment income after-tax as a
percentage of average net
investments (at cost)................... 4.7% 6.0%
Premium Finance and Service Fees
Premium finance and service fees increased $1,334, or 9.9% during
1999. The increase was significantly less than the 90.0% increase
experienced in 1998. This reduction resulted from the completion of the
second full year of implementing a $3.00 installment on each invoice. The
Company had previously received state regulatory approval to charge a $3.00
installment on each invoice following the down payment for all personal
lines policies with effective dates beginning January 1, 1998 and beyond.
Previously, in 1997, the Company had utilized a "late fee" system.
Amortization of Excess of Book Value of Subsidiary Interest over Cost
As a result of the acquisition of American Commerce (see "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
General" and "Notes to Consolidated Financial Statements - NOTES A12 and
A17"), 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 revenues on a straight-line basis over a
five-year period. The amount amortized into revenues in 1999 was $3,019.
Investment Gains and Losses
Gross realized gains and losses for the years ended December 31, 1999 and
December 31, 1998 were as follows:
1999 1998
Gross Gross Gross Gross
Realized Realized Realized Realized
Gains Losses Gains Losses
Fixed maturities........................$ 458 $ (6,449) $ 99 $ (2,903)
Preferred stocks........................ 207 (451) 369 (1,096)
Common stocks........................... 16,080 (5,057) 7,002 -
Other investments....................... 1,235 - 1,308 (321)
Total.............................$ 17,980 $(11,957) $ 8,778 $ (4,320)
22
Net realized investment gains totaled $6,023 during 1999 as compared
to $4,458 for 1998. A significant portion of the net realized gains in 1999
were the result of sales of common stocks, partially offset by net realized
losses in the sales of non-taxable bonds, preferred stocks and in the
maturity of GNMAs. The primary sources of the realized gains for other
investments were realized gains on mortgage activity of $196 in 1999
compared to realized losses of $321 in 1998, coupled with the realized gains
on the Conning Insurance Limited Partnership, of $888 in 1999 compared with
$666 in 1998. The 1999 and 1998 numbers were restated in accordance with
the closed-end preferred stock mutual fund accounting change.
Gross accumulated other comprehensive income and losses for December 31,
1999 and December 31, 1998 were as follows:
December 31, 1999 December 31, 1998
Gross Gross Gross Gross
Accumulated Accumulated Accumulated Accumulated
Other Other Other Other
Comprehensive Comprehensive Comprehensive Comprehensive
Income Losses Income Losses
Fixed maturities..............$ 5,221 $ (19,328) $ 21,381 $ (2,596)
Preferred stocks.............. 782 (20,667) 2,706 (5,551)
Common stocks................. 1,305 (7,941) 19,516 (1)
Other investments............. 1,009 - 375 -
Total...................$ 8,317 $ (47,936) $ 43,978 $ (8,148)
The accumulated other comprehensive income on fixed maturities
decreased significantly despite increased fixed maturity holdings, as a
result of the poor performance in the bond market due to rising interest
rates in 1999. The accumulated other comprehensive losses on preferred and
common stocks were primarily attributable to rising interest rates in 1999.
Long-term interest rates (30-year Treasury Bond) increased to 6.48% at
December 31, 1999 from 5.08% at December 31, 1998.
Loss and Loss Adjustment Expenses
Losses and loss adjustment expenses ("LAE") incurred increased $93,661
or 17.6% in 1999, compared to an increase of $5,302 or 1.0% in 1998. The
increase in losses and LAE was primarily attributable to the acquisition of
American Commerce, which accounted for $62,731 of the increase. The
remaining 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. partially offset by lower computer services
expenses and higher reinsurance recoveries. Losses and LAE incurred (on a
statutory basis) as a percentage of insurance premiums earned ("loss ratio")
was 72.0% in 1999 as compared to 71.6% in 1998. The ratio of net incurred
losses, excluding LAE, to premiums earned ("pure loss ratio") on personal
automobile was 65.1% in 1999 compared to 61.4% in 1998. The increase to the
personal automobile pure loss ratio was primarily due to a continued
decrease in redundancies arising from prior accident years, and increases in
the cost of adjusting losses. The commercial automobile pure loss ratio
increased to 60.3% in 1999 compared to 52.3% in 1998. This increase was
primarily the result of fewer prior year liability redundancies in the 1999
figure. For homeowners, the pure loss ratio was 35.9% in 1999 compared to
31.8% in 1998. Offsetting the overall increase in pure loss ratio, total
expenses related to the Company's management incentive compensation plan and
the American Commerce agency stock option plan included in losses and loss
adjustment expenses were $397 lower in 1999 as compared to 1998. The
decrease was primarily driven by decreases, during 1999, in the market price
of the Company's common stock and offset by the 1999 implementation of the
American Commerce agency stock option plan, which resulted in an additional
$954 in expenses during 1999. These management incentive and agency stock
option expenses are directly impacted by the market price of the Company's
common stock. The loss ratio was favorably impacted by 0.4% due to a
reduction in expenses related to the termination of a contract for software
development with an outside vendor during the second quarter of 1999. The
loss ratio was also favorably impacted by additional reductions in computer
services expenses paid to this vendor as compared to last year. The loss
ratio (on a statutory basis) for Commerce West was 71.2% for 1999 as
compared to 58.8% in 1998. The eleven-month loss ratio (on a statutory
basis) for the Company's new acquisition, American Commerce, was 75.8% for
1999.
23
Policy Acquisition Costs
Policy acquisition costs expensed increased by $37,226 or 19.0% in
1999, compared to an increase of $8,943, or 4.8% in 1998. The increase in
policy acquisition costs was primarily attributable to the acquisition of
American Commerce, which accounted for $26,659 of the increase. The
remaining increase was attributable to higher contingent commission accruals
and higher underwriting expenses assumed from C.A.R. offset by lower
computer services expenses. As a percentage of net premiums written,
underwriting expenses for the insurance companies (on statutory basis)
remained constant at 26.5% for both 1999 and 1998. As mentioned, a portion
of the computer services expense decrease resulted from the termination,
during the second quarter, of a contract for software development with an
outside vendor, which favorably impacted the underwriting expense ratio by
0.3% and through reduced computer services expenses paid to this vendor as
compared to last year. 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 $219 lower in 1999 as
compared to 1998. The decrease was primarily driven by decreases, during
1999, in the market price of the Company's common stock and offset by the
1999 implementation of the American Commerce agency stock option plan, which
resulted in an additional $954 in expense during 1999. The underwriting
expense ratio (on a statutory basis) for Commerce West was 40.9% for 1999 as
compared to 38.6% for 1998. The eleven-month underwriting expense ratio (on
a statutory basis) for the Company's new acquisition, American Commerce, was
31.4% for 1999.
Income Taxes
The Company's effective tax rate was 16.0% and 21.3% for the years
ended December 31, 1999 and 1998, respectively. 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 1999 was primarily the result of both 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 SNE and acquisition of
American Commerce (see "Management's Discussion and Analysis of Financial
Condition and Results of Operations - General" and "Notes to Consolidated
Financial Statements - NOTES A13 and A17"), the Company's interest in ACIC
Holding Co., Inc., through Commerce, a wholly-owned subsidiary of CHI, is
represented by ownership of 80% of the outstanding shares of common stock at
December 31, 1999. AAA SNE maintains a 20% common stock ownership. The
minority interest of $1,059 included in these consolidated financial
statements for 1999 represents 20% of the net loss for ACIC Holding Co.,
Inc. which is calculated after the $8,300 preferred stock dividend paid to
Commerce.
Net Earnings
Net earnings decreased $9,589 or 9.8% to $88,676 during 1999 as
compared to $98,265 in 1998. The net earnings for 1999 were decreased by
$14,020, or $0.40 per share and increased $381, or $0.01 per share in 1998
as a result of the Company's change in its policy in regard to its
investment in closed-end preferred stock mutual funds mentioned previously.
Operating earnings, which exclude the after-tax impact of net realized
investment gains, decreased $10,606 or 11.1% to $84,761 during 1999 as
compared to $95,367 in 1998 both as a result of the factors previously
mentioned.
24
Liquidity and Capital Resources
The focus of the discussion of liquidity and capital resources
is on the Consolidated Balance Sheets on page 33 and the Consolidated
Statements of Cash Flows on pages 36 and 37. Stockholders' equity
increased by $113,876, or 17.0%, in 2000 as compared to 1999. The
increase resulted from $132,080 in net earnings, and by changes in
other comprehensive income, net of income tax benefits, on fixed
maturities and preferred and common stocks of $36,490, offset by
dividends paid to stockholders of $39,201 and Treasury Stock
purchased of $15,493. Total assets at December 31, 2000 increased
$197,595, or 10.5% to $2,075,614 as compared to total assets of
$1,878,019 at December 31, 1999. Invested assets, at market value
and equity, increased $176,567 or 13.6%. Premiums receivable
increased $35,420 or 18.1%. The increase in premiums receivable from
December 31, 1999, was primarily attributable to increases in
Massachusetts automobile business. The number of Massachusetts
automobile policies increased 7.4% along with a 5.5% increase in the
average premium per policy, compared to 1999. Deferred policy
acquisition costs increased $12,805 or 13.0%, due primarily to
increases in Massachusetts automobile business. Receivable from
reinsurers increased $13,189 or 27.3%, primarily attributable to the
addition of American Commerce to the Company's quota share agreement,
coupled with the increase in other than automobile business
previously discussed. The deferred income tax asset decreased
$25,541, mainly as a result of the restatement of investments in
closed-end preferred stock mutual funds mentioned earlier, with the
remainder primarily the result of the increase of the market value in
the investment portfolio. All other remaining assets decreased
$14,845 or 7.3%.
The Company's investment portfolio, at market, except for the
preferred stock mutual funds, which are shown at equity value, is shown on
the following table as of December 31, 2000 and 1999 (for investments, at
cost, refer to the table found on page 15):
December 31,
Investments, at market and equity % of % of
(Dollars in thousands) 2000 Invest. 1999 Invest.
GNMA & FNMA mortgage-backed bonds...... $ 67,261 4.6% $ 82,613 6.4%
Corporate bonds........................ 126,255 8.6 42,532 3.3
U.S.Treasury bonds and notes........... 3,377 0.2 3,315 0.2
Tax exempt state and municipal bonds... 473,042 32.1 518,878 40.0
Total fixed maturities............. 669,935 45.5 647,338 49.9
Preferred stocks....................... 200,083 13.6 211,049 16.3
Common stocks.......................... 115,827 7.9 77,348 6.0
Equity in closed-end preferred stock
mutual funds......................... 337,733 22.9 251,135 19.4
Mortgages and collateral loans (net of
allowance for possible loan losses).. 51,661 3.5 72,451 5.6
Cash and cash equivalents.............. 70,521 4.8 22,535 1.7
Other investments...................... 26,802 1.8 14,139 1.1
Total investments.................. $1,472,562 100.0% $1,295,995 100.0%
The Company's fixed maturity portfolio is comprised of GNMAs and FNMA
mortgage backed bonds (10.0%), municipal bonds (70.6%), corporate bonds
(18.9%) and U.S. Treasury bonds (0.5%). Of the Company's bonds, 99.4% are
rated in either of the two highest quality categories provided by the NAIC.
As of December 31, 2000, the market value of the Company's fixed maturity
portfolio exceeded its book value by $4,054 ($2,635 after taxes, or $0.08
per share). As of December 31, 1999 the book value of the Company's fixed
maturity portfolio exceeded its market value by $14,107 ($9,170 after taxes,
or $0.27 per share). At December 31, 2000, the cost of the Company's
preferred stocks exceeded market value by $15,740 ($10,231 after taxes, or
$0.30 per share). At December 31, 1999, the cost of the Company's preferred
stocks exceeded market value by $19,885 ($12,925 after taxes, or $0.38 per
share). At December 31, 2000, the market value of the Company's common
stocks exceeded book value by $28,123 ($18,280 after taxes, or $0.54 per
share). At December 31, 1999, the book value of the Company's common stocks
exceeded market value by $6,636 ($4,313 after taxes, or $0.13 per share).
25
Preferred stocks decreased $10,966, or 5.2% and common stocks
increased $38,479, or 49.7%, during 2000. In conjunction with the Company's
goals of seeking higher yielding capital appreciation, the Company's
investments in two publicly traded insurance companies increased
significantly in market value in 2000. During the fourth quarter of 2000,
the Company changed its policy in regard to its investments in certain
closed-end preferred stock mutual funds. On a forward going basis, the
Company intends to take a proactive posture to affect the overall investment
performance of these funds. The Company's ownership position of these
various funds at December 31, 2000 ranges from 23% to 48% of outstanding
shares. The level of ownership and new investment policy requires the
Company to account for these investments on an equity basis. The equity
method requires that the investments are to be valued at original cost plus
the cumulative equity in the earnings and losses of the funds and adjusted
over time by the premium or discount at the time of purchase to the
applicable underlying net asset value of the funds. Prior to the policy
change, the Company reported the income on a cash basis, valued the
investments at quoted market prices and recorded the change in quoted market
prices through Comprehensive Income. The results of prior accounting
periods impacted by this change have been restated. Preferred stock mutual
funds at equity, increased $86,598 or 34.5% in 2000 compared to 1999. The
Company's strategy continues to focus on maximizing after-tax investment
income through investing in 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 increased $84,015 or 7.0% to $1,292,665 at
December 31, 2000 as compared to $1,208,650 at December 31, 1999. Loss and
loss adjustment expense reserves comprised 52.2% of the Company's
liabilities at December 31, 2000 compared with 54.6% at December 31, 1999.
Unearned premiums comprised 40.2% of the Company's liabilities at December
31, 2000 compared with 37.8% at December 31, 1999. All other liabilities
comprised 7.6% of the Company's liabilities at December 31, 2000 compared
with 7.6% at December 31, 1999. Loss and loss adjustment expense reserves
increased $14,299 or 2.2%. The increase in the liability for loss and loss
adjustment expense reserves is attributed primarily to increased reported
losses on Massachusetts business, which includes the business attained due
to the Trust insolvency previously mentioned, coupled with higher assumed
losses from C.A.R. Unearned premiums increased $62,790 or 13.7%, primarily
as a result of increased exposures coupled with higher average premiums per
exposure for Massachusetts automobile business. The net effect of all other
liabilities increased $6,926 or 7.6%.
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 36 and 37. The discussion of
these items can be found under "Year Ended December 31, 2000 Compared to
Year Ended December 31, 1999", herein.
The Company's operating activities provided cash of $147,906 in
2000, as compared to $124,677 in 1999, representing an increase of
$23,229 or 18.6% in 2000. The primary reason for this increase is
that the increase in premiums collected outpaced increases in
operating expenses paid. The net cash flow from insurance
operations, calculated by taking premiums collected and subtracting
both losses and LAE paid and policy acquisition costs paid, amounted
to $68,981 in 2000 compared to $44,749 in 1999. Federal income tax
payments increased $3,860, or 15.2% in 2000. Net investment income
received and premium and service fees received increased 2.7% and
3.1%, respectively.
The net cash flows used in investing activities were primarily
the result of purchases of fixed maturities, equity securities and
preferred stock mutual funds offset by proceeds from the sale and
maturity of fixed maturities, coupled with equity securities and
mortgages sold without recourse. Investing activities were funded by
accumulated cash and cash provided by operating activities during
2000 and 1999.
Cash flows used in financing activities totaled $54,694 during 2000
compared to $83,577 during 1999. The 2000 cash flows used in financing
activities consisted of $39,201 in dividends paid to stockholders and
$15,493 used to purchase 606,200 shares of Treasury Stock. The 1999 cash
flows used in financing activities consisted of $38,656 in dividends paid to
stockholders and $44,921 used to purchase 1,683,100 shares of Treasury
Stock.
26
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 and
equity) of total investments at December 31, 2000 was $1,472,526. At
December 31, 2000, the Company held cash and cash equivalents of
$70,521. 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, 1999 or 1998. Similar laws exist in
California and Ohio. No dividends were paid by American Commerce or
Commerce West since their respective acquisitions.
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 1.53 to 1.00, 1.76 to 1.00, and 1.32
to 1.00 for the years ended December 31, 2000, 1999 and 1998, 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. More
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 36 AAA independent insurance agencies in 25 states.
In early 1999, Commerce, 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.
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
continues to focus on maximizing after-tax investment income through
investing in 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.
27
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. Although the Company has significant holdings of various
closed-end preferred stock mutual funds, these funds are comprised primarily
of preferred stocks traded on national stock exchanges, thus limiting
exposure to any one investment.
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. At December 31, 2000, 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 December 31, 2000, 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 an $86,081 decrease in
the market value of the fixed maturities and preferred stocks. A 200 basis
point decrease results in a $55,235 increase in the market value of the same
securities. The equity price risk impact at December 31, 2000, based upon a
10% increase in the fair value of common stocks and preferred stock mutual
funds, would be an increase of $11,583 and $35,242, respectively. Based
upon a 10% decrease, common stocks and preferred stock mutual funds would
decrease $11,583 and $35,242, respectively. This analysis was further
exemplified during 2000 as the Company experienced an increase in the market
value of investments, net of taxes, of $36,490 reflected in the change in
net accumulated other comprehensive income. Additionally, the Company had a
$10,775 increase in investment income, net of taxes, due to an increase in
value of the underlying securities in closed-end preferred stock mutual
funds. In accordance with the equity method of accounting, the change in
market value of the underlying preferred stocks held by the preferred stock
mutual funds is recorded through the income statement. Long-term interest
rates (30-year Treasury Bond) decreased to 5.46% at December 31, 2000 from
6.48% at December 31, 1999. The preceding sensitivity analysis does not
represent a forecast and should not be relied upon as being indicative of
expected operating results. These hypothetical estimates are based upon
numerous assumptions such as the nature and timing of interest rate levels
including the yield curve shape, prepayments on loans and securities,
reinvestment and replacement of asset and liability cash flows and others.
While assumptions are developed based upon current economic conditions, the
Company cannot provide any assurance as to the predictive nature of these
assumptions. Also, as market conditions vary from those assumed in the
sensitivity analysis, actual results will also differ due to prepayment and
refinancing levels likely deviating from those assumed and other internal
and external variables. Furthermore, the sensitivity analysis does not
reflect actions that management might take in responding to or anticipating
changes in interest rates.
Recent Accounting Developments
The NAIC revised the Accounting Practices and Procedures Manual
in a process referred to as Codification. The revised manual became
effective January 1, 2001 for all insurance companies. The
domiciliary states of the Company's insurance subsidiaries have
adopted the provisions of the revised manual. The revised manual has
changed certain prescribed statutory accounting practices and will
result in changes to the accounting practices that the Company's
insurance subsidiaries use to prepare their statutory-basis financial
statements. Management believes the impact of these changes to the
Company's insurance subsidiaries statutory-basis capital and surplus
as of January 1, 2001 will not be significant.
28
In June 1998, the FASB issued Statement of Financial Accounting
Standards No. 133 ("SFAS 133"), "Accounting for Certain Derivative
Instruments and Hedging Activities," as amended in June 2000 by Statement of
Financial Accounting Standards No. 138 ("SFAS 138"), "Accounting for Certain
Derivative Instruments and Certain Hedging Activities," which requires
companies to recognize all derivatives as either assets or liabilities in
the balance sheet and measure such instruments at fair value. SFAS 138
amended Statement of Financial Accounting Standards No. 137 ("SFAS 137"),
"Accounting for Derivative Instruments and Hedging Activities- Deferral of
the Effective Date of FASB Statement No. 133." The provisions of SFAS 133
will require adoption for fiscal years beginning after June 15, 2000. The
Company had no derivative or hedging activity in 2000, 1999, or 1998.
In September 2000, the FASB issued Statement of Financial
Accounting Standards No. 140 ("SFAS 140"), "Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of
Liabilities," which replaces Statement of Financial Accounting
Standards No. 125 ("SFAS 125"), "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities."
The Statement provides accounting and reporting standards for
transfers and servicing of financial assets and extinguishments of
liabilities. Those standards are based on consistent application of
a "financial components" approach that focuses on control. Under
that approach, after a transfer of financial assets, a company
recognizes the financial and servicing assets it controls and the
liabilities it has incurred, does not recognize financial assets when
control has been surrendered, and does not recognize liabilities when
extinguished. The Statement provides consistent standards for
distinguishing transfers of financial assets that are sales from
transfers that are secured borrowings. The Statement is effective
for transfers and servicing of financial assets and extinguishments
of liabilities occurring after March 31, 2001. Adoption of SFAS 140
is not expected to have a material impact on the Company's
consolidated financial statements.
Effects of Inflation and Recession
The Company generally is unable to recover the costs of inflation in
its personal automobile insurance line since the premiums it charges are
subject to state regulation. Additionally, the premium rates charged by the
Company for personal automobile insurance are adjusted by the Commissioner
only at annual intervals. Such annual adjustments in 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.
COMMON STOCK PRICE AND DIVIDEND INFORMATION
The Company's common stock trades on the NYSE under the symbol
"CGI". The high, low and close prices for shares, as quoted in the
Wall Street Journal, of the Company's Common Stock for 2000 and 1999
were as follows:
2000 1999
High Low Close High Low Close
First Quarter...... $31.0000 $23.0000 $29.5000 $31.0625 $23.4375 $24.5625
Second Quarter..... 30.8750 26.1250 29.5000 25.1250 21.5625 24.3750
Third Quarter...... 29.4375 25.0625 28.9375 26.8750 21.5000 23.0000
Fourth Quarter..... 29.2500 22.8750 27.1800 28.1250 20.7500 26.1250
As of March 1, 2001, there were 1,093 stockholders of record of the
Company's Common Stock, not including stock held in "Street Name" or held in
accounts for participants of the Company's Employee Stock Ownership Plan
("E.S.O.P.").
29
The Board of Directors of the Company voted to declare four quarterly
dividends to stockholders of record totaling $1.15 per share and $1.11 per
share in 2000 and 1999, respectively. On May 19, 2000, the Board voted to
increase the quarterly stockholder dividend from $0.28 to $0.29 per share to
stockholders of record as of June 4, 2000. Prior to that declaration, the
Company had paid quarterly dividends of $0.28 per share dating back to May
15, 1999 when the Board voted to increase the dividend from $0.27 to $0.28
per share.
The Company purchased 606,200 shares of Treasury Stock under the stock
buyback program during 2000, at an average price of $25.56, increasing the
total shares of Treasury Stock to 4,246,648 at December 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 5 million shares of Treasury Stock.
Through March 31, 2000, 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 December 31, 2000, the
Company has authority to purchase approximately 900,000 additional shares.
30
REPORT OF MANAGEMENT
The management of the Company is responsible for the consolidated
financial statements and all other information presented in this Annual
Report. The financial statements have been prepared in conformity with
generally accepted accounting principles determined by management to be
appropriate in the circumstances and include amounts based on management's
informed estimates and judgments. Financial information presented elsewhere
in this Annual Report is consistent with the financial statements. The
appropriateness of data underlying such financial information is monitored
through internal accounting controls, an internal audit department,
independent auditors and the Board of Directors through its audit committee.
The Company maintains a system of internal accounting controls
designed to provide reasonable assurance to management and the Board of
Directors that assets are safeguarded and that transactions are executed in
accordance with management's authorization and recorded properly. The
system of internal accounting controls is supported by the selection and
training of qualified personnel combined with the appropriate division of
responsibilities.
Management recognizes its responsibility for fostering a strong
ethical climate so that the Company's affairs are conducted according to the
highest standards of personal and corporate conduct. The Board of Directors
has adopted a formal code of conduct and Corporate Compliance Program
governing employees and directors. Management encourages open communication
within the Company and requires the confidential treatment of proprietary
information and compliance with all domestic laws, including those relating
to financial disclosure.
The 2000 consolidated financial statements were audited by the
Company's independent auditors, Ernst & Young LLP, in accordance with
auditing standards generally accepted in the United States. In addition,
Ernst & Young LLP performs reviews of the unaudited quarterly financial
statements, prior to the announcement of quarterly earnings. Management has
made available to Ernst & Young LLP all of the Company's financial records
and related data, as well as the minutes of stockholders' and directors'
meetings. Furthermore, management believes that all representations made to
Ernst & Young LLP were valid and appropriate.
31
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Stockholders of
The Commerce Group, Inc.
We have audited the accompanying consolidated balance sheets of The
Commerce Group, Inc. and Subsidiaries as of December 31, 2000 and 1999, and
the related consolidated statements of earnings, stockholders' equity and
cash flows for each of the three years in the period ended December 31,
2000. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of The
Commerce Group, Inc. and Subsidiaries at December 31, 2000 and 1999, and
the consolidated results of their operations and their cash flows for each
of the three years in the period ended December 31, 2000, in conformity
with accounting principles generally accepted in the United States.
ERNST & YOUNG LLP
Boston, Massachusetts
January 26, 2001
32
THE COMMERCE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31,
(Thousands of Dollars)
2000 1999
ASSETS
Investments (notes A2, A3, and B)
Fixed maturities, at market (cost: $665,881 in 2000 and $661,445
in 1999).......................................................... $ 669,935 $ 647,338
Preferred stocks, at market (cost: $215,823 in 2000 and $230,934
in 1999).......................................................... 200,083 211,049
Common stocks, at market (cost: $ 87,704 in 2000 and $ 83,984 in
1999)............................................................. 115,827 77,348
Preferred stock mutual funds, at equity (cost: $327,980 in 2000 and
$267,956 in 1999)................................................. 337,733 251,135
Mortgage loans on real estate and collateral notes receivable
(less allowance for possible loan losses of $858 in 2000
and $2,127 in 1999)............................................... 51,661 72,451
Cash and cash equivalents.......................................... 70,521 22,535
Other investments (cost: $25,475 in 2000 and $13,130 in 1999)...... 26,802 14,139
Total investments.............................................. 1,472,562 1,295,995
Accrued investment income............................................ 18,218 14,697
Premiums receivable (less allowance for doubtful receivables of
$1,487 in 2000 and $1,452 in 1999)................................. 230,580 195,160
Deferred policy acquisition costs (notes A4 and C)................... 111,305 98,500
Property and equipment, net of accumulated depreciation
(notes A5 and D)................................................... 34,823 34,802
Residual market receivable (note F)
Losses and loss adjustment expenses................................ 82,450 91,576
Unearned premiums.................................................. 44,791 50,084
Due from reinsurers (note F)......................................... 61,554 48,365
Deferred income taxes (notes A9 and G)............................... 12,041 37,582
Non-compete agreement, net of accumulated amortization (note A6)..... 2,829 3,179
Other assets......................................................... 4,461 8,079
Total assets................................................... $ 2,075,614 $1,878,019
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Unpaid losses and loss adjustment expenses (notes A7, E and F)..... $ 674,140 $ 659,841
Unearned premiums (note A8)........................................ 519,885 457,095
Current income taxes (notes A9 and G)............................. 13,988 10,839
Deferred income (notes A10 and F).................................. 7,703 7,464
Contingent commissions accrued (note A11).......................... 35,346 33,468
Payable for securities purchased................................... 524 1,953
Excess of book value of subsidiary interest over cost (note A12)... 8,431 10,758
Other liabilities and accrued expenses............................. 32,648 27,232
Total liabilities.............................................. 1,292,665 1,208,650
Minority interest (note A13)......................................... 1,068 1,364
Stockholders' Equity (notes B, L, M and N)
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 income (loss), net of income
taxes (benefits) of $6,371 in 2000 and ($13,277) in 1999......... 11,833 (24,657)
Retained earnings.................................................. 820,528 727,649
880,982 751,613
Treasury stock, 4,246,648 shares in 2000 and 3,640,448 shares in
1999, at cost (note A14).......................................... (99,101) (83,608)
Total stockholders' equity..................................... 781,881 668,005
Total liabilities, minority interest and stockholders' equity.. $ 2,075,614 $1,878,019
The accompanying notes are an integral part of these consolidated
financial statements.
33
THE COMMERCE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
For the years ended December 31,
(Thousands of Dollars Except Per Share Data)
2000 1999 1998
Revenues
Earned premiums (notes A8 and F)..................... $ 954,483 $ 871,830 $ 745,620
Net investment income (note B)....................... 123,404 67,388 89,193
Premium finance and service fees..................... 15,227 14,774 13,440
Amortization of excess of book value of subsidiary
interest over cost (note A12)...................... 3,390 3,019 -
Net realized investment gains (note B)............... 2,976 6,023 4,458
Total revenues.................................. 1,099,480 963,034 852,711
Expenses
Losses and loss adjustment expenses
(notes A7, E and F)................................. 686,157 625,090 531,429
Policy acquisition costs (notes A4 and C)............ 243,257 233,660 196,434
Total expenses.................................. 929,414 858,750 727,863
Earnings before income taxes and minority
interest...................................... 170,066 104,284 124,848
Income taxes (notes A9 and G)......................... 38,306 16,667 26,583
Net earnings before minority interest........... 131,760 87,617 98,265
Minority interest in net loss of subsidiary (note A13). 320 1,059 -
NET EARNINGS.................................... $ 132,080 $ 88,676 $ 98,265
COMPREHENSIVE INCOME............................ $ 168,570 $ 40,730 $ 96,594
BASIC AND DILUTED NET EARNINGS PER COMMON SHARE
(note A15)..................................... $ 3.87 $ 2.54 $ 2.73
CASH DIVIDENDS PAID PER SHARE................... $ 1.15 $ 1.11 $ 1.07
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING............................. 34,121,047 34,940,074 36,042,652
The accompanying notes are an integral part of these consolidated
financial statements.
34
THE COMMERCE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the years ended December 31,
(Thousands of Dollars)
Net
Accumulated
Other
Common Paid-in Comprehensive Retained Treasury
Stock Capital Income/(Loss) Earnings Stock Total
Balance January 1, 1998...... $19,000 $29,621 $ 24,960 $617,930 $(38,687) $652,824
Net earnings................ 98,265 98,265
Other comprehensive income:
Unrealized holding gains
arising during the period
net of taxes of $1,548... 2,968 2,968
Reclassification adjustment
net of tax benefits of
$2,498.................... (4,639) (4,639)
Other comprehensive loss... (1,671) (1,671)
Comprehensive income........ 96,594
Stockholder dividends....... (38,566) (38,566)
Balance December 31, 1998.... 19,000 29,621 23,289 677,629 (38,687) 710,852
Net earnings................ 88,676 88,676
Other comprehensive income
(loss):
Unrealized holding losses
arising during the period,
net of tax benefits of
$18,833.................. (34,976) (34,976)
Reclassification adjustment
net of tax benefits of
$6,984.................... (12,970) (12,970)
Other comprehensive loss... (47,946) (47,946)
Comprehensive income........ 40,730
Stockholder dividends....... (38,656) (38,656)
Treasury Stock purchased.... (44,921) (44,921)
Balance December 31, 1999... 19,000 29,621 (24,657) 727,649 (83,608) 668,005
Net earnings............... 132,080 132,080
Other comprehensive income
Unrealized holding gains
arising during the period,
net of income taxes of
$18,218................... 33,833 33,833
Reclassification adjustment
net of income taxes of
$1,431.................... 2,657 2,657
Other comprehensive income. 36,490 36,490
Comprehensive income........ 168,570
Stockholder dividends....... (39,201) (39,201)
Treasury Stock purchased.... (15,493) (15,493)
Balance December 31, 2000.... $19,000 $29,621 $ 11,833 $820,528 $(99,101) $781,881
The accompanying notes are an integral part of these consolidated
financial statements.
35
THE COMMERCE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended December 31,
(Thousands of Dollars)
2000 1999 1998
Cash flows from operating activities
Premiums collected.................................. $ 977,413 $ 881,472 $ 761,539
Net investment income received...................... 92,962 90,558 87,768
Premium finance and service fees received........... 15,227 14,774 13,440
Losses and loss adjustment expenses paid............ (660,665) (611,136) (574,212)
Policy acquisition costs paid....................... (247,767) (225,587) (188,420)
Federal income tax payments......................... (29,264) (25,404) (34,791)
Net cash provided by operating activities......... 147,906 124,677 65,324
Cash flows from investing activities
Proceeds from maturity of fixed maturities.......... 20,805 46,565 64,004
Proceeds from sale of fixed maturities.............. 97,180 142,562 34,034
Proceeds from sale of equity securities............. 45,604 76,485 80,420
Proceeds from sale of mortgages..................... 20,042 - -
Purchase of fixed maturities........................ (125,844) (107,664) (134,540)
Purchase of equity securities....................... (29,987) (72,536) (171,063)
Purchase of preferred stock mutual funds............ (60,024) (98,564) (53,833)
Purchase of other investments....................... (11,885) (4,875) (3,616)
Purchase of subsidiary, net of cash acquired........ - (77,056) -
Net increase in short-term investments,
net of payable for securities purchased............ - - (11,500)
Payments received on mortgage loans and collateral
notes receivable................................... 9,141 11,800 26,788
Mortgage loans and collateral notes originated...... (7,896) (10,911) (16,450)
Purchase of property and equipment.................. (3,416) (2,910) (4,293)
Other proceeds from investing activities............ 1,054 2,627 315
Net cash used in investing activities............. (45,226) (94,477) (189,734)
Cash flows from financing activities
Dividends paid to stockholders...................... (39,201) (38,656) (38,566)
Purchase of treasury stock.......................... (15,493) (44,921) -
Net cash used in financing activities............. (54,694) (83,577) (38,566)
Increase (decrease) in cash and cash equivalents...... 47,986 (53,377) (162,976)
Cash and cash equivalents at beginning of year........ 22,535 75,912 238,888
Cash and cash equivalents at end of year.............. $ 70,521 $ 22,535 $ 75,912
The accompanying notes are an integral part of these consolidated
financial statements.
36
THE COMMERCE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Reconciliation of Net Earnings to Net Cash Provided by
Operating Activities
For the years ended December 31,
(Thousands of Dollars)
2000 1999 1998
Cash flows from operating activities
Net earnings......................................... $ 132,080 $ 88,676 $ 98,265
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Premiums receivable................................ (35,420) (22,399) 6,591
Deferred policy acquisition costs.................. (12,805) (3,374) (3,495)
Residual market receivable......................... 14,419 (1,440) 21,579
Due from reinsurers................................ (13,189) (4,116) (18,517)
Losses and loss adjustment expenses................ 14,299 12,733 (46,477)
Unearned premiums.................................. 62,790 38,796 11,825
Current income taxes............................... 3,149 6,909 1,405
Deferred income taxes.............................. 5,893 (15,647) (9,614)
Deferred income.................................... 239 516 (323)
Contingent commissions............................. 1,878 11,401 8,206
Other assets, liabilities and accrued expenses..... 6,708 (8,273) 533
Net realized investment gains...................... (2,976) (6,023) (4,458)
Impact of change to equity method of accounting for
preferred stock mutual funds..................... (26,574) 22,401 (2,692)
Other - net........................................ (2,585) 4,517 2,496
Net cash provided by operating activities....... $ 147,906 $ 124,677 $ 65,324
The accompanying notes are an integral part of these consolidated
financial statements.
37
THE COMMERCE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2000, 1999 and 1998
(Thousands of Dollars)
NOTE A-Summary of Significant Accounting Policies
1. Basis of Presentation
The consolidated financial statements of The Commerce Group, Inc. (the
"Company") have been prepared in accordance with accounting principles
generally accepted in the United States ("GAAP").
The consolidated financial statements include The Commerce Group, Inc.
and its wholly-owned subsidiaries, Bay Finance Company, Inc., Clark-Prout
Insurance Agency, Inc. and Commerce Holdings, Inc. ("CHI"). The Commerce
Insurance Company ("Commerce") and Citation Insurance Company ("Citation")
are wholly-owned subsidiaries of CHI. Commerce West Insurance Company
("Commerce West") is a wholly-owned subsidiary of Commerce. American
Commerce Insurance Company ("American Commerce") is a wholly-owned
subsidiary of ACIC Holding Co., Inc. ACIC Holding Co., Inc. is owned
jointly with AAA Southern New England ("AAA SNE") with Commerce maintaining
an 80% common stock interest and AAA SNE maintaining a 20% common stock
interest (see note A17). All inter-company transactions and balances have
been eliminated in consolidation. Certain prior year account balances have
been reclassified to conform to the 2000 presentation. During the fourth
quarter of 2000, the Company changed its policy in regard to its investments
in certain closed-end preferred stock mutual funds. The level of ownership
and new investment policy requires the Company to account for these
investments on an equity basis. The results of prior accounting periods
impacted by this change have been restated.
The insurance subsidiaries, Commerce, Citation, Commerce West and
American Commerce, prepare statutory financial statements in accordance with
accounting practices prescribed by the National Association of Insurance
Commissioners ("NAIC"), the Commonwealth of Massachusetts, the State of
California, and the State of Ohio.
The preparation of financial statements in conformity with GAAP
requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
2. Investments
All investment transactions have credit exposure to the extent that a
counter party may default on an obligation to the Company. Credit risk is a
consequence of carrying investment positions. To manage credit risk, the
Company focuses on higher quality fixed-income securities and preferred
stocks, reviews the credit strength of all companies in which it invests,
limits its exposure in any one investment category and monitors the
portfolio quality, taking into account credit ratings assigned by recognized
statistical rating organizations.
38
THE COMMERCE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2000, 1999 and 1998
(Thousands of Dollars Except for Per Share Data)
NOTE A-Summary of Significant Accounting Policies (continued)
Investments in fixed maturities, which include taxable and non-taxable
bonds, and investments in common and preferred stocks, are carried at fair
market value and are classified as available for sale. Unrealized
investment gains and losses on common and preferred stocks and fixed
maturities, to the extent that there is no other than temporary impairment
of value, are credited or charged to a separate component of stockholders'
equity, known as "net accumulated other comprehensive income (loss)", until
realized, net of any tax effect. When investment securities are sold, the
realized gain or loss is determined based upon specific identification.
Fair market value of fixed maturities and common and preferred stocks are
based on quoted market prices. For other securities held as investments,
fair market value equals quoted market price, if available. If a quoted
market price is not available, fair market value is estimated using quoted
market prices for similar securities. The Company has not invested more
than 5% of fixed maturities in any one state or political subdivision.
During the fourth quarter of 2000, the Company changed its policy in
regard to its investments in certain closed-end preferred stock mutual
funds. On a forward going basis, the Company intends to take a proactive
posture to affect the overall investment performance of these funds. This
posture may involve discussing, among other things, the performance, trading
prices, investment strategy, portfolio securities, and extraordinary
transactions such as a merger, reorganization or liquidation of one or more
funds with management, shareholders, or others. The Company's ownership
position of these various funds at December 31, 2000 ranges from 23% to 48%
of outstanding shares. The level of ownership and new investment policy
requires the Company to account for these investments on an equity basis.
The equity method requires that the investments are to be valued at original
cost plus the cumulative equity in the earnings and losses of the funds and
adjusted over time by the premium or discount at the time of purchase to the
applicable underlying net asset value of the funds. Prior to the policy
change, the Company reported the income on a cash basis, valued the
investments at quoted market prices and recorded the change in quoted market
prices through Comprehensive Income. The results of prior accounting
periods impacted by this change have been restated. The net earnings per
share for 2000 were increased by $0.60 per share and for 1999 were decreased
by $0.40 per share as a result of this change.
The Company originates and holds mortgage loans on real estate on
properties located in the Commonwealth of Massachusetts and the State of
Connecticut. The Company controls credit risk through credit approvals,
credit limits and monitoring procedures. The Company performs in-depth
credit evaluations on all new mortgage customers. Bad debt expenses have
not been material in recent years.
Mortgage loans on real estate and collateral notes receivable are
stated at the amount of unpaid principal, less an allowance for possible
loan losses. The adequacy of the allowance for possible loan losses is
evaluated on a regular basis by management. Factors considered in evaluating
the adequacy of the allowance include previous loss experience, current
economic conditions and their effect on borrowers and the performance of
individual loans in relation to contract terms. The provision for possible
loan losses charged to operating expenses is based upon management's
judgment of the amount necessary to maintain the allowance at a level
adequate to absorb possible losses. During 2000, management reassessed its
philosophy for establishing the allowance for possible loan losses. Based
on this and a review of historical loan loss data, management decreased the
allowance to its current level at December 31, 2000. Loan losses are
charged against the allowance when management believes the collectibility of
the principal is unlikely and recoveries are credited to the allowance when
received.
Interest on mortgage loans is included in income as earned based upon
rates applied to principal amounts outstanding. Accrual of interest on
mortgage loans is discontinued either when reasonable doubt exists as to the
full, timely collection of interest or principal, or when a loan becomes
contractually past due more than ninety days. When a loan is placed on
nonaccrual status, all unpaid interest previously accrued is reversed
against current period earnings.
39
THE COMMERCE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2000, 1999 and 1998
(Thousands of Dollars)
NOTE A-Summary of Significant Accounting Policies (continued)
3. Cash and Cash Equivalents
Cash and cash equivalents includes cash currently on hand to cover
operating expenses. The Company held $13,775 and $18,655 in U.S. Government
Repurchase Agreements at various financial institutions in 2000 and 1999,
respectively. The amount of collateral, maintained by the seller, at the
time of purchase and each subsequent business day, is required to have a
market value that is equal to 102% of the resale price.
4. Deferred Policy Acquisition Costs
Policy acquisition costs relating to unearned premiums, consisting of
commissions, premium taxes and other underwriting expenses incurred at the
policy issuance, are deferred and amortized over the period in which the
related premiums are earned, the amount being reduced by any potential
premium deficiency. If any potential premium deficiency exists, it
represents future estimated losses, loss adjustment expenses and
amortization of deferred acquisition costs in excess of the related unearned
premiums. There was no premium deficiency in 2000, 1999 and 1998. In
determining whether a premium deficiency exists, the Company considers
anticipated investment income on unearned premiums.
5. Property and Equipment
Property and equipment are stated at cost and are depreciated on the
straight line method over the estimated useful lives of the assets using the
following rates:
Percent
Asset Classification Per Annum
Buildings....................................... 2.5
Building improvements (prior to 1992)........... 2.5
Building improvements (1992 and subsequent)..... 5.0
Equipment and office furniture.................. 10.0
EDP equipment and copiers....................... 20.0
Automobiles..................................... 33.3
Maintenance and repairs are charged to operations; betterments are
capitalized. The cost of property sold or otherwise disposed of and the
accumulated depreciation thereon is eliminated from the related property
and accumulated depreciation accounts and any resulting gain or loss is
credited or charged to income.
6. Non-Compete Agreement
The non-compete agreement of $2,829 represents the unamortized
portion of the purchase price associated with the acquisition of American
Commerce allocated to the arrangement whereby the American Automobile
Association, Inc. ("AAA National") agreed not to compete with American
Commerce prior to February 2009. The cost of $3,500 is being amortized on
a straight-line basis over the term of the arrangement. The amount of
accumulated amortization at December 31, 2000 and 1999 was $671 and $321,
respectively.
7. Unpaid Loss and Loss Adjustment Expenses
The liability for unpaid losses and loss adjustment expenses ("LAE")
represents the accumulation of individual case estimates for reported
losses and estimates for incurred but not reported ("IBNR") losses and LAE.
Assumed losses and LAE are recorded as reported by the ceding organization
with additional adjustments for IBNR. The liability for losses and LAE is
intended to cover the ultimate net cost of all losses and loss adjustment
expenses incurred through the balance sheet date. Liability estimates are
continually reviewed and updated, and therefore, the ultimate liability may
be more or less than the current estimate. The effects of changes in the
estimates are included in the results of operations in the period in which
the estimates are revised.
40
THE COMMERCE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2000, 1999 and 1998
(Thousands of Dollars)
NOTE A-Summary of Significant Accounting Policies (continued)
8. Premiums
Insurance premiums are recognized as income ratably over the terms of
the policies. Unearned premiums are determined by prorating policy
premiums on a daily basis over the terms of the policies. A significant
portion of the Company's Massachusetts premiums written is derived through
the American Automobile Association Clubs of Massachusetts ("AAA clubs")
affinity group marketing program. Of the Company's total direct premiums
written, the portion attributable to the AAA affinity group marketing
program in Massachusetts was $535,766 or 50.0% in 2000, $495,962 or 52.3%
in 1999 and $457,430 or 57.3% in 1998. Of these amounts, 12.2% were
written through insurance agencies owned by the AAA clubs and 87.8% were
written through the Company's network of independent agents in 2000.
9. Income Taxes
The Company uses an asset and liability approach that requires the
recognition of deferred tax assets and liabilities for the expected future
tax consequences of events that have been recognized in the Company's
financial statements or tax returns. In estimating future tax
consequences, the Company generally considers all expected future events
other than changes in the tax law or rates, unless enacted. Valuation
allowances are established when necessary to reduce deferred tax assets to
the amount expected to be realized. No valuation allowance was established
in 2000 and 1999.
10. Deferred Income
Income consisting of expense reimbursements, which include servicing
carrier fees from Commonwealth Automobile Reinsurers ("C.A.R."), a state-
mandated reinsurance mechanism, on policies written for C.A.R., are
deferred and amortized over the term of the related insurance policies (see
note F).
11. Contingent Commissions
In addition to state mandated minimum and other commissions on
policies written, the Company pays certain of its agencies compensation in
the form of profit sharing. This is based, in part, on the underwriting
profits of an individual agent's business written with the Company. The
arrangement for Massachusetts business utilizes a three-year rolling plan,
with one third of each of the current and the two prior years profit or
loss calculations summed to a single amount. This amount, if positive, is
multiplied by the profit sharing commission rate and paid to the agent.
Outside of Massachusetts, Commerce West and American Commerce each have
contingent commission plans tailored to their specific markets.
12. 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 the January 29, 1999 acquisition date was $16,947.
The amount is being amortized into revenue on the straight line basis over
a five year period. The amount amortized into income in 2000 and 1999 was
$3,390 and $3,019, respectively. The amount shown on the Balance Sheet
represents the Company's 80% share of the net excess of book value of
subsidiary interest over cost less accumulated amortization.
13. Minority Interest
The Company's interest in ACIC Holding Co., Inc. through Commerce, a
wholly owned subsidiary of CHI, is represented by an 80% ownership of the
outstanding shares of common stock at December 31, 2000 and 1999. AAA SNE
maintains a 20% common stock ownership. The minority interest of $320 for
2000 and of $1,059 for 1999 represents 20% of the net loss of ACIC Holding
Co., Inc., after the preferred stock dividends, which is included in these
consolidated financial statements.
41
THE COMMERCE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2000, 1999 and 1998
(Thousands of Dollars)
NOTE A-Summary of Significant Accounting Policies (continued)
14. Treasury Stock
In May 1999, the Board of Directors of the Company authorized a stock
buy-back program of up to 2,000,000 shares of common stock of the Company.
During the period from January 1, 2000 through December 31, 2000, the
Company purchased 606,200 shares of its own common stock. During 1999, the
Company purchased 497,200 shares of its own common stock under the May 1999
buy-back program. At December 31, 2000, the Company had authority to
purchase 896,600 additional shares of its common stock under the May 1999
buy-back program. As of December 31, 2000, the Company holds a total of
4,246,648 shares of treasury stock.
15. Net Earnings Per Common Share
Net earnings per common share is computed by dividing net earnings by
the weighted average number of common shares outstanding. The weighted
average number of common shares outstanding for the years ended December
31, 2000, 1999 and 1998 were 34,121,047, 34,940,074, and 36,042,652,
respectively. Weighted average number of common shares outstanding is
determined by taking the average of the following calculation for a
specified period of time: The daily amount of (1) the total issued
outstanding common shares minus (2) the total Treasury Stock purchased.
16. New Accounting Pronouncements
The NAIC revised the Accounting Practices and Procedures
Manual in a process referred to as Codification. The revised manual
became effective January 1, 2001 for all insurance companies. The
domiciliary states of the Company's insurance subsidiaries have
adopted the provisions of the revised manual. The revised manual
has changed certain prescribed statutory accounting practices and
will result in changes to the accounting practices that the
Company's insurance subsidiaries use to prepare their statutory-
basis financial statements. Management believes the impact of these
changes to the Company's insurance subsidiaries statutory-basis
capital and surplus as of January 1, 2001 will not be significant.
In June 1998, the FASB issued Statement of Financial
Accounting Standards No. 133 ("SFAS 133"), "Accounting for Certain
Derivative Instruments and Hedging Activities," as amended in June
2000 by Statement of Financial Accounting Standards No. 138 ("SFAS
138"), "Accounting for Certain Derivative Instruments and Certain
Hedging Activities," which requires companies to recognize all
derivatives as either assets or liabilities in the balance sheet and
measure such instruments at fair value. SFAS 138 amended Statement
of Financial Accounting Standards No. 137 ("SFAS 137"), "Accounting
for Derivative Instruments and Hedging Activities- Deferral of the
Effective Date of FASB Statement No. 133." The provisions of SFAS
133 will require adoption for fiscal years beginning after June 15,
2000. The Company had no derivative or hedging activity in 2000,
1999, or 1998.
In September 2000, the FASB issued Statement of Financial
Accounting Standards No. 140 ("SFAS 140"), "Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of
Liabilities," which replaces Statement of Financial Accounting
Standards No. 125 ("SFAS 125"), "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities."
The Statement provides accounting and reporting standards for
transfers and servicing of financial assets and extinguishments of
liabilities. Those standards are based on consistent application of
a "financial components" approach that focuses on control. Under
that approach, after a transfer of financial assets,
42
THE COMMERCE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2000, 1999 and 1998
(Thousands of Dollars)
NOTE A-Summary of Significant Accounting Policies (continued)
a company recognizes the financial and servicing assets it controls and the
liabilities it has incurred, does not recognize financial assets when
control has been surrendered, and does not recognize liabilities when
extinguished. The Statement provides consistent standards for
distinguishing transfers of financial assets that are sales from transfers
that are secured borrowings. The Statement is effective for transfers and
servicing of financial assets and extinguishments of liabilities occurring
after March 31, 2001. Adoption of SFAS 140 is not expected to have a
material impact on the Company's consolidated financial statements.
17. Acquisition
In November 1998, Commerce formed ACIC Holding Co., Inc., in a joint
venture with AAA SNE and invested $90,800 to fund the January 29, 1999
acquisition of the Automobile Club Insurance Company, whose name was changed
to American Commerce upon completion of the acquisition. Commerce invested
$90,000 in the form of preferred stock and an additional $800 representing
an 80% common stock ownership. AAA SNE invested $200 representing a 20%
common stock ownership. The terms of the preferred stock call for Commerce
to receive quarterly cash dividends at the rate of 10% per annum from ACIC
Holding, Co., Inc. In the event cash dividends cannot be paid, additional
preferred stock will be issued. During 2000, 19 shares of Class A and 693
shares of Class B preferred stock were issued in lieu of the cash payment of
dividends. The acquisition was accounted for as a purchase. Since the
January 29, 1999 acquisition, American Commerce's results have been
consolidated into the Company's financial statements. Since 1995, Commerce
has maintained an exclusive affinity group marketing relationship with AAA
Insurance Agency, Inc., a subsidiary of AAA SNE. AAA Insurance Agency, Inc.
has been a licensed insurance agent of Commerce since 1985.
NOTE B-Investments and Investment Income
1. Fixed Maturities
The amortized cost and estimated fair market value of investments in
fixed maturities are as follows:
Gross Gross
Accumulated Accumulated
Other Other Estimated
Amortized Comprehensive Comprehensive Fair Market
Cost Income Losses Value
At December 31, 2000:
Corporate bonds...................... $ 130,775 $ 1,263 $ (5,783) $ 126,255
U.S. Treasury bonds and notes........ 3,428 86 (137) 3,377
GNMA & FNMA mortgage-backed bonds.... 67,274 444 (457) 67,261
Obligations of states and
political subdivisions.............. 464,404 14,454 (5,816) 473,042
Totals.......................... $ 665,881 $ 16,247 $ (12,193) $ 669,935
At December 31, 1999:
Corporate Bonds...................... $ 45,147 $ 87 $ (2,702) $ 42,532
U.S. Treasury bonds and notes........ 3,616 19 (320) 3,315
GNMA & FNMA mortgage-backed bonds.... 82,349 753 (489) 82,613
Obligations of states and
political subdivisions.............. 530,333 4,362 (15,817) 518,878
Totals.......................... $ 661,445 $ 5,221 $ (19,328) $ 647,338
43
THE COMMERCE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2000, 1999 and 1998
(Thousands of Dollars)
NOTE B-Investments and Investment Income (continued)
Proceeds from sales of investments in fixed maturities, gross gains
and gross losses realized on those sales were as follows:
Proceeds Gross Gross
From Realized Realized
Sales Gains Losses
For the year ended December 31, 2000:
Corporate bonds.................................... $ 1,167 $ - $ -
U.S. Treasury bonds and notes...................... - - -
GNMA mortgage-backed bonds......................... - - -
Obligations of states and political subdivisions... 96,013 198 (2,749)
Totals........................................ $ 97,180 $ 198 $ (2,749)
For the year ended December 31, 1999:
Corporate bonds.................................... $ 17,516 $ 102 $ (941)
U.S. Treasury bonds and notes...................... 27,096 8 (842)
GNMA mortgage-backed bonds......................... - - -
Obligations of states and political subdivisions... 97,950 298 (2,606)
Totals........................................ $142,562 $ 408 $ (4,389)
For the year ended December 31, 1998:
GNMA mortgage-backed bonds......................... $ - $ - $ -
Obligations of states and political subdivisions... 34,034 25 (435)
Totals........................................ $ 34,034 $ 25 $ (435)
The amortized cost and approximate fair market value of fixed
maturities at December 31, 2000 and 1999, by contractual maturity, are as
follows:
2000 1999
Fair Fair
Amortized Market Amortized Market
Cost Value Cost Value
Obligations of states, political subdivisions,
corporate bonds and U.S. Treasury bonds and
notes:
Due in one year or less.................... $ 1,201 $ 1,214 $ 2,780 $ 2,793
Due after one year through five years...... 7,650 7,882 1,738 1,665
Due after five years through ten years..... 9,162 9,431 18,201 16,761
Due after ten years........................ 580,594 584,147 556,377 543,506
598,607 602,674 579,096 564,725
GNMA & FMNA mortgage-backed bonds.......... 67,274 67,261 82,349 82,613
Total fixed maturities.............. $665,881 $669,935 $661,445 $647,338
Expected maturities may differ from contractual maturities because
issuers may have the right to call or prepay obligations.
44
THE COMMERCE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2000, 1999 and 1998
(Thousands of Dollars)
NOTE B-Investments and Investment Income (continued)
2. Closed-end Preferred Stock Mutual Funds
The following table reflects the shares held, percentage of ownership,
carrying value at equity, book value, market value, and value of shares at
net asset value, by fund at December 31, 2000 and 1999:
(Dollars in Thousands, Except Share Amounts)
December 31, 2000
Fund Carrying Quoted Value of
Fund Shares % of Value Book Market Shares at Net
Symbol(1) Held Ownership at Equity Value Value Asset Value
PGD 1,877,300 22.5% $ 23,478 $ 19,666 $ 22,528 $ 26,695
PPF 2,352,900 32.4% 28,322 26,048 25,882 30,470
PDF 4,638,800 31.0% 46,003 41,966 40,589 47,594
PDT 4,925,100 32.8% 60,453 53,144 52,021 63,091
DIV 3,080,500 31.2% 46,314 42,500 40,239 48,918
PDI 5,253,400 48.5% 52,207 52,583 52,534 54,110
PFD 2,981,500 30.3% 39,834 44,803 36,151 40,012
PFO 3,892,543 34.9% 41,122 47,270 40,385 41,533
Total $337,733 $327,980 $310,329 $352,423
December 31, 1999
Fund Carrying Quoted Value of
Fund Shares % of Value Book Market Shares at Net
Symbol(1) Held Ownership at Equity Value Value Asset Value
PGD - - $ - $ - $ - $ -
PPF 1,602,800 22.1% 17,072 18,315 15,828 19,041
PDF 4,215,400 28.1% 37,310 38,598 32,669 39,035
PDT 4,341,600 28.9% 45,437 47,721 38,260 48,582
DIV 2,532,300 25.6% 33,378 35,788 29,438 36,161
PDI 4,369,600 40.4% 45,506 44,207 39,873 47,891
PFD 2,629,600 26.7% 35,716 40,471 32,212 36,131
PFO 3,433,643 30.8% 36,716 42,856 35,839 37,152
Total $251,135 $267,956 $224,119 $263,993
(1) John Hancock Patriot Global Dividend Fund ("PGD"), John Hancock
Patriot Preferred Dividend Fund, ("PPF"), John Hancock Patriot
Premium Dividend I Fund ("PDF"), John Hancock Patriot Premium
Dividend II Fund ("PDT"), John Hancock Patriot Select Dividend Fund
("DIV"), Putnam Dividend Income Fund ("PDI"), Preferred Income Fund
('PFD"), Preferred Income Opportunity Fund ("PFO").
The difference between the carrying value at equity and the value of
shares at net asset value is negative goodwill created at the time of the
purchase of the shares. Negative goodwill is being amortized into
investment income over various periods ranging from 1.25 years to 4 years
based on the turnover ratios of the funds.
45
THE COMMERCE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2000, 1999 and 1998
(Thousands of Dollars)
NOTE B-Investments and Investment Income (continued)
3. Mortgage Loans on Real Estate and Collateral Notes Receivable
At December 31, 2000 and 1999, mortgage loans on real estate and
collateral notes receivable consisted of the following:
December 31,
2000 1999
Residential (1st Mortgages)............ $36,496 $58,506
Residential (2nd Mortgages)............ 209 227
Commercial (1st Mortgages)............. 12,542 13,881
Commercial (2nd Mortgages)............. 50 67
49,297 72,681
Collateral notes receivable............ 3,222 1,897
52,519 74,578
Allowance for possible loan losses..... (858) (2,127)
Mortgage loans on real estate and
collateral notes receivable....... $51,661 $72,451
Fair value of the Company's mortgage loans on real estate and
collateral notes receivable is estimated by discounting the future cash
flows using the current rates at which similar loans would be made to
borrowers with similar credit and for the same remaining maturities. The
future cash flows associated with certain non-performing loans are estimated
based on expected payments from borrowers either through work out
arrangements or the disposition of collateral. The estimated fair value of
mortgage loans on real estate and collateral notes receivable at December
31, 2000 and 1999, prior to the allowance for possible loan losses, was
$54,141 and $75,221, respectively, which was calculated by discounting the
future cash flows.
At December 31, 2000 and 1999 mortgage loans which were on non-accrual
status amounted to $1,357 and $1,259, respectively. The reduction in
interest income associated with non-accrual loans was $118, $129 and $205
for the years ended December 31, 2000, 1999 and 1998, respectively.
The Company originates and services residential and commercial
mortgages in Massachusetts and Connecticut. The Company's exposure is
generally 80% or less of the appraised value of any collateralized real
property at the time of the loan origination. The ability and willingness
of residential and commercial borrowers to honor their repayment commitments
is generally dependent upon the level of overall economic activity and real
estate values. The Company sold $20,042 of residential mortgages in 2000
without recourse to an unrelated third party.
A summary of the changes in the allowance for possible loan losses follows:
Years ended December 31,
2000 1999
Balance, beginning of year......................... $ 2,127 $ 2,301
Decrease in provision for possible loan losses... (1,269) (174)
Balance, end of year............................... $ 858 $ 2,127
During 2000, management reassessed its philosophy for establishing the
allowance for possible loan losses. Based on this and a review of
historical loan loss data, management decreased the allowance to its current
level at December 31, 2000.
46
THE COMMERCE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2000, 1999 and 1998
(Thousands of Dollars)
NOTE B-Investments and Investment Income (continued)
The following table describes mortgage principal balances by maturity,
total mortgages over 90 days past due and total mortgages in foreclosure:
2000 1999
Fixed rate mortgages maturing:
One year or less................................ $ 141 $ 82
More than one year to five years................ 742 1,388
More than five years to ten years............... 5,331 8,286
Over ten years.................................. 31,810 49,629
Total fixed mortgages...................... $ 38,024 $ 59,385
Adjustable rate mortgages maturing:
One year or less................................ $ - $ -
More than one year to five years................ 61 123
More than five years to ten years............... 283 275
Over ten years.................................. 10,929 12,898
Total adjustable mortgages................. $ 11,273 $ 13,296
Past due over 90 days............................. $ 1,357 $ 1,259
Mortgages in foreclosure, included in past due
over 90 days.................................... $ 808 $ 737
4. Net Investment Income
The components of net investment income were as follows:
Years ended December 31,
2000 1999 1998
Interest on fixed maturities.................. $ 44,766 $ 45,957 $ 41,368
Dividends on common and preferred stocks...... 23,177 23,148 20,879
Dividends on preferred stock mutual funds..... 22,158 15,483 11,266
Equity in earnings (losses) of preferred stock
mutual funds (excluding dividends received). 26,575 (22,399) 2,692
Interest on cash and cash equivalents......... 3,555 2,596 8,683
Interest on mortgage loans.................... 5,677 5,908 6,604
Other......................................... 83 116 119
Total investment income.............. 125,991 70,809 91,611
Investment expenses........................... 2,587 3,421 2,418
Net investment income................ $123,404 $ 67,388 $ 89,193
5. Net Realized Investment Gains (Losses)
Net realized investment gains (losses) were as follows:
Years ended December 31,
2000 1999 1998
Net realized investment gains (losses):
Fixed maturities...................................$ (3,772) $ (5,991) $ (2,804)
Preferred Stocks................................... 1,286 (244) (727)
Common Stocks...................................... 4,370 11,023 7,002
Other.............................................. 1,092 1,235 987
Total..........................................$ 2,976 $ 6,023 $ 4,458
47
THE COMMERCE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2000, 1999 and 1998
(Thousands of Dollars)
NOTE B-Investments and Investment Income (continued)
6. Other Comprehensive Income (Loss)
Net increases (decreases) in other comprehensive income (loss)
less applicable income tax (expense) benefit were as follows:
Years ended December 31,
2000 1999 1998
Other comprehensive income (loss):
Fixed maturities................................ $ 18,161 $(32,892) $ (5,028)
Preferred stocks................................ 4,145 (17,040) (3,209)
Common stocks................................... 34,759 (26,587) 5,292
Other........................................... 318 634 231
Impact of minority interest..................... (1,244) 2,122 -
Total....................................... 56,139 (73,763) (2,714)
Tax benefit (expense)........................... (19,495) 26,560 1,043
Impact of minority interest..................... (154) (743) -
Total tax benefit (expense)................. (19,649) 25,817 1,043
Total other comprehensive income (loss)..... $ 36,490 $(47,946) $ (1,671)
A summary of net accumulated other comprehensive income (loss) on
stocks and fixed maturity investments in 2000, 1999 and 1998 follows:
Years ended December 31,
2000 1999 1998
Accumulated other comprehensive income......... $ 46,699 $ 8,317 $ 43,978
Accumulated other comprehensive losses......... (28,935) (47,936) (8,148)
Impact of minority interest.................... 440 1,685 -
Total unrealized gains (losses)........... 18,204 (37,934) 35,830
Tax benefit (expense).......................... (6,217) 13,867 (12,541)
Impact of minority interest.................... (154) (590) -
Total benefit (expense)................... (6,371) 13,277 (12,541)
Total..................................... $ 11,833 $(24,657) $ 23,289
NOTE C-Deferred Policy Acquisition Costs
Policy acquisition costs incurred and amortized to income are as
follows:
Years ended December 31,
2000 1999 1998
Balance, beginning of year.......... $ 98,500 $ 88,759 $ 85,264
Costs deferred during the year...... 256,062 243,401 199,929
Amortization charged to expense..... (243,257) (233,660) (196,434)
Balance, end of year................ $111,305 $ 98,500 $ 88,759
48
THE COMMERCE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2000, 1999 and 1998
(Thousands of Dollars)
NOTE D-Property and Equipment
A summary of property and equipment at December 31, is as follows:
2000 1999
Buildings................................. $ 32,916 $ 31,017
Equipment and office furniture............ 35,185 33,128
Building improvements..................... 850 791
68,951 64,936
Less accumulated depreciation....... (35,456) (32,246)
33,495 32,690
Land...................................... 1,253 1,251
Construction in progress.................. 75 861
$ 34,823 $ 34,802
Depreciation expense was $4,270, $4,243 and $4,706 for the years ended
December 31, 2000, 1999 and 1998, respectively. Depreciation expense is
allocated evenly between losses and loss adjustment expenses and policy
acquisition costs.
NOTE E-Unpaid losses and Loss Adjustment Expenses
Liabilities for unpaid losses and loss adjustment expenses at December
31, consist of:
2000 1999
Net voluntary unpaid loss and LAE reserves.................. $544,585 $519,724
Voluntary salvage and subrogation recoverable............... (65,505) (61,625)
Assumed unpaid loss and LAE reserves from C.A.R............. 127,631 120,389
Assumed salvage and subrogation recoverable from C.A.R...... (20,844) (19,709)
Total voluntary and assumed unpaid loss and LAE reserves.. 585,867 558,779
Adjustment for ceded unpaid loss and LAE reserves........... 97,273 101,062
Adjustment for ceded salvage and subrogation recoverable.... (9,000) -
Total unpaid loss and LAE reserves........................ $674,140 $659,841
Significant periods of time can elapse between the occurrence of an
insured loss, the reporting of the loss to the insurer and the insurer's
payment of that loss. To recognize liabilities for unpaid losses, insurers
establish reserves as balance sheet liabilities representing estimates of
amounts needed to pay reported and unreported losses and LAE. Quarterly,
the Company reviews these reserves internally. Regulations of the Division
of Insurance require the Company to annually obtain a certification from
either a qualified actuary or an approved loss reserve specialist that its
loss and LAE reserves are reasonable.
When a claim is reported to the Company, claims personnel establish a
"case reserve" for the estimated amount of the ultimate payment. The amount
of the reserve is primarily based upon an evaluation of the type of claim
involved, the circumstances surrounding the claim and the policy provisions
relating to the loss. The estimate reflects the informed judgment of such
personnel based on general insurance reserving practices and on the
experience and knowledge of the claims person. During the loss adjustment
period, these estimates are revised as deemed necessary by the Company's
claims department based on subsequent developments and periodic reviews of
the cases.
49
THE COMMERCE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2000, 1999 and 1998
(Thousands of Dollars)
NOTE E-Unpaid losses and Loss Adjustment Expenses (continued)
In accordance with industry practice, the Company also maintains
reserves for estimated IBNR. IBNR reserves are determined on the basis of
historical information and the experience of the Company. Adjustments to
IBNR are made periodically to take into account changes in the volume of
business written, claims frequency and severity, the mix of business, claims
processing and other items that can be expected to affect the Company's
liability for losses and LAE over time.
When reviewing reserves, the Company analyzes historical data and
estimates the impact of various factors such as (i) per claim information,
(ii) the historical loss experience of the Company and industry and (iii)
legislative enactments, judicial decisions, legal developments in the
imposition of damages, changes and trends in general economic conditions,
including the effects of inflation. This process assumes that past
experience, adjusted for the effects of current developments and anticipated
trends, is an appropriate basis for predicting future events. There is no
precise method, however, for subsequently evaluating the impact of any
specific factor on the adequacy of reserves, because the eventual
development of reserves is affected by many factors.
By using both individual estimates of reported claims and generally
accepted actuarial reserving techniques, the Company estimates the ultimate
net liability for losses and LAE. After taking into account all relevant
factors, management believes that the provision for losses and LAE at
December 31, 2000 is adequate to cover the ultimate net cost of losses and
claims incurred as of that date. The ultimate liability, however, may be
greater or lower than reserves. Establishment of appropriate reserves is an
inherently uncertain process, and there can be no certainty that currently
established reserves will prove adequate in light of subsequent actual
experience. The Company does not discount to present value that portion of
its loss reserves expected to be paid in future periods.
Included in the loss reserve methodologies described above, are
liabilities for unpaid claims and claim adjustment expenses for
environmental related claims such as oil spills and lead paint. Reserves
have been established to cover these claims for both known and unknown
losses. Because of the Company's limited exposure to these types of claims,
management believes they will not have a material impact on the consolidated
financial position of the Company in the future. Loss reserves on
environmental related claims amounted to $3,712 and $4,185 at December 31,
2000 and 1999, respectively.
50
THE COMMERCE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2000, 1999 and 1998
(Thousands of Dollars)
NOTE E-Unpaid losses and Loss Adjustment Expenses (continued)
The following table sets forth a reconciliation of beginning and
ending reserves for losses and loss adjustment expense, net of reinsurance
deductions from all reinsurers including C.A.R., as shown in the Company's
consolidated financial statements for the periods indicated.
Years ended December 31,
2000 1999 1998
Loss and loss adjustment expense reserves,
beginning of year, prior to effect of ceded
reinsurance recoverable............................. $558,779 $498,127 $529,765
January 29, 1999 American Commerce loss and
loss adjustment expense reserves.................. - 63,112 -
Incurred losses and loss adjustment expenses:
Provision for insured events of the current year.. 728,582 664,978 592,796
Decrease in provision for insured events of
prior years...................................... (42,425) (39,888) (61,367)
Total incurred losses and loss adjustment
expenses....................................... 686,157 625,090 531,429
Payments:
Losses and loss adjustment expenses attributable
to insured events of the current year............ 402,040 383,707 335,047
Losses and loss adjustment expenses attributable
to insured events of prior years................. 257,029 243,843 228,020
Total payments.................................. 659,069 627,550 563,067
Loss and loss adjustment expense reserves prior to
effect of ceded reinsurance recoverable.......... 585,867 558,779 498,127
Ceded reinsurance recoverable..................... 88,273 101,062 85,869
Reserves for losses and loss adjustment expenses
at the end of year per financial statements......... $674,140 $659,841 $583,996
The increase in the provision for insured events of the current
year was attributable to higher incurred losses on Massachusetts
business, which was primarily the result of the increased personal
automobile earned premiums. Additionally it was impacted by higher
assumed residual market losses during 2000, which were partially
offset by improved voluntary loss ratios in Massachusetts. Also in
2000, the incurred losses were adversely impacted by approximately
$8,000 of expense related to the Trust insolvency. Also included in
the 2000 increase in incurred expense is approximately $6,300 in
higher corporate expenses which are allocated to losses and LAE for
book value appreciation rights, director retirement compensation and
state income taxes on non-insurance subsidiaries. Although the line
labeled decrease in provision for insured events of prior years
increased in 2000, it remained stable as a percentage of beginning
year reserves. This was because redundancies on automobile bodily
injury claims, the primary component of this number, were realized on
a fairly consistent basis with the prior year.
The Company's loss and LAE reserves reflect its share of the
aggregate C.A.R. loss and LAE reserves of the Company and the 42
other writers of automobile insurance in Massachusetts that
participate in C.A.R. ("Servicing Carriers"). The Company is a
defendant in various legal actions arising from the normal course of
its business. These proceedings are considered to be ordinary to
operations or without foundation in fact. Management is of the
opinion that these actions will not have a material adverse effect on
the consolidated financial statements of the Company.
51
THE COMMERCE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2000, 1999 and 1998
(Thousands of Dollars)
NOTE F-Reinsurance Activity
The Company has reinsurance contracts for casualty and
catastrophe coverages. These reinsurance arrangements minimize the
Company's losses arising from large risks and protect the Company
against numerous losses from a single occurrence or event. The
Company also has a quota share reinsurance contract on its other than
automobile business.
Property, Catastrophe and Quota Share Reinsurance
Effective July 1, 1998 through June 30, 2000, the Company
expanded the quota share program. A 75% quota-share reinsurance
program was incepted, covering all non-automobile property and
liability business, except umbrella policies. The excess loss
portion of the previous program was reduced on July 1, 1998 and
completely eliminated on September 30, 1998. The expanded program
was split between American Re-Insurance Company, Employers
Reinsurance Corporation, Hartford Fire Insurance Company and Swiss
Reinsurance America Corporation. The maximum per occurrence loss
reimbursement was the higher of 350% of premium ceded under the
program or $175.9 million. The maximum annual aggregate occurrence
loss reimbursement was the higher of 450% of premium ceded under the
program or $226.1 million. A sliding scale commission, based on loss
ratio, is utilized under this program. This program provides the
Company with sufficient protection for catastrophe coverage so as to
enable the Company to forego pure catastrophe reinsurance coverage,
which was previously tailored in conjunction with the former quota
share arrangement.
Through December 31, 1999, American Commerce utilized a
separate catastrophe reinsurance program. Effective January 1, 2000,
that program expired and American Commerce joined the quota-share
reinsurance program described above.
The table below provides information depicting the approximate
recovery under the quota share contract (described below) at various
loss scenarios, if a single catastrophe were to strike:
Net Loss
Total Reinsurance Retained by
Loss Recovery the Company
$ 50,000 $ 37,500 $12,500
100,000 75,000 25,000
150,000 112,500 37,500
200,000 150,000 50,000
250,000 167,500 82,500
Effective July 1, 2000, the Company changed its annual
occurrence and aggregate annual reinsurance recovery limits on its
quota share reinsurance treaty, from 350%/450% of ceded quota share
premiums, respectively, to 250%/350% of ceded quota share premiums.
This change was made after consultation with the Company's reinsurers
and based upon recent catastrophe modeling performed on the Company's
risks. The modeling indicated that a lower threshold was warranted.
Based on this change, the Company has no reinsurance recoveries for a
single event catastrophe in excess of a total loss of approximately
$223.3 million. Prior to the change this figure was $297.5 million.
The level of reinsurance protection increases (decreases) when the
company cedes more (less) premium to the reinsurers. The Company's
estimated total loss on its other than automobile business for 100
and 250-year storms (including American Commerce) are approximately
$131.7 million and $204.2 million, respectively. The Company
estimates were derived through the services of Swiss Reinsurance
America Corporation who utilized the RMS (Risk Management Solutions)
IRAS risk assessment system.
Written premiums ceded in 2000, 1999 and 1998 under the above
referenced programs were $69.4 million, $51.5 million and $54.0 million,
respectively. The 34.8% increase in written premiums ceded in 2000 versus
1999 in this program was a result of American Commerce joining the quota-
share reinsurance program effective January 1, 2000 and increases in
Massachusetts homeowners premiums. An unearned premium transfer from
American Commerce of approximately $6.0 million occurred effective January
1, 2000. Ceding commission income is calculated on a ceded earned premium
basis.
52
THE COMMERCE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2000, 1999 and 1998
(Thousands of Dollars)
NOTE F-Reinsurance Activity (continued)
Casualty Reinsurance
Casualty reinsurance is on an excess of loss basis for any one
event or occurrence with a maximum recovery of $9.0 million over a
net retention of $1.0 million. This coverage is placed with Swiss
Reinsurance America Corporation (rated A++ by A.M. Best).
Personal and commercial liability umbrella policies are
reinsured on a 95% quota share basis in regard to limits up to $1.0
million and 100% quota share basis for limits in excess of $1.0
million but not exceeding $5.0 million for policies with underlying
automobile coverage of $250/$500 or more. The Company also has
personal liability umbrella reinsurance coverage for policies with
underlying automobile coverage of $100/$300, on a 65% quota share
basis in regard to limits up to $1.0 million and 100% quota share
basis for limits in excess of $1.0 million but not exceeding $3.0
million. These coverages are placed with American Re-Insurance
Company (rated A++ by A.M. Best).
Earned premiums and losses and loss adjustment expenses are
stated in the accompanying consolidated financial statements after
deductions for ceded reinsurance. Those deductions for reinsurance
other than C.A.R. are as follows:
Years ended December 31,
2000 1999 1998
Income Statement
Written premiums ceded............................ $76,946 $54,657 $ 56,019
Earned premiums ceded............................. 73,354 55,557 43,518
Losses and loss adjustment expenses ceded......... 30,797 24,240 16,568
Balance Sheet
Unpaid losses and loss adjustment expenses........ 24,726 21,552 9,337
Unearned premiums................................. 36,828 26,813 27,350
The Company, as primary insurer, would be required to pay
losses in their entirety in the event that the reinsurers were unable
to discharge their obligations under the reinsurance agreements.
C.A.R.
C.A.R., a state-mandated reinsurance mechanism, enables the
Company and the other Servicing Carriers to reinsure any automobile
risk that the insurer perceives to be under priced at the premium
level permitted by the Commissioner. Servicing Carriers, who are
responsible for over 99.0% of total direct premiums written for
personal automobile insurance in Massachusetts, are required to offer
automobile insurance coverage to all eligible applicants pursuant to
"take-all-comers" regulations, but may reinsure undesirable business
with C.A.R.
53
THE COMMERCE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2000 1999 and 1998
(Thousands of Dollars)
NOTE F-Reinsurance Activity (continued)
Since its inception, C.A.R. has annually generated multi-
million dollar underwriting losses in both the personal and
commercial pools. The Company is required to share in the
underwriting results of C.A.R. business for its respective product
lines. Under current regulations, the Company's share of the C.A.R.
personal or commercial deficit is based upon its market share for
retained automobile risks for the particular pool, adjusted by a
"utilization" concept, such that, in general, the Company is
disproportionately and adversely affected if its relative use of
C.A.R. reinsurance exceeds that of the industry, and favorably
affected if its relative use of C.A.R. reinsurance is less than that
of the industry. The Company's strategy has been to voluntarily
retain more types of private passenger automobile business that are
factored as credits, thereby favorably impacting the utilization
formula. These credits result from voluntarily writing business in
under-priced territories and for under-priced risks. As a result of
increased voluntary retention, in excess of the industry, the credits
impacting the utilization formula have favorably affected the
Company's participation ratio compared to its market share. During
2000, 1999 and 1998, the Company's net participation in the C.A.R.
personal automobile pool approximated 16.9%, 16.5% and 16.7%,
respectively, as reported by C.A.R., compared to the Company's
estimated market share in those years of 22.3%, 21.3% and 21.8%.
Written premiums, earned premiums, losses incurred,
underwriting expenses incurred and the liabilities for unearned
premiums, unpaid losses ceded to and assumed from C.A.R. were as
follows:
Years ended December 31,
2000 1999 1998
Ceded Assumed Ceded Assumed Ceded Assumed
Income Statement
Written premiums... $ 67,451 $ 81,659 $ 68,740 $ 87,241 $ 70,435 $ 74,644
Earned premiums.... 69,120 81,300 68,902 84,356 68,383 75,718
Losses incurred.... 67,987 109,788 81,853 104,273 64,784 95,937
Underwriting
expenses......... - 28,753 - 28,569 - 24,296
Balance Sheet
Unearned premiums.. 44,791 42,515 50,084 42,156 41,436 39,271
Unpaid losses...... 82,450 106,787 91,576 100,680 98,784 99,427
The Company pays to C.A.R. all of the premiums generated by the
policies it has ceded and C.A.R. reimburses the Company for all losses
incurred on account of ceded policies. In addition, the Company receives a
fee for servicing ceded policies based on the expense structure established
by C.A.R. For the years ended December 31, 2000, 1999 and 1998, these
servicing fees amounted to $16,783, $17,235 and $15,574, respectively.
The Company presents assets and liabilities gross of
reinsurance. The Residual Market Receivable represents the gross
amount of reinsurance recoverable from C.A.R. including unpaid
losses, unearned premiums, paid losses recoverable and unpaid ceded
and assumed premiums.
The current C.A.R. utilization-based participation ratio has
been in place for the personal automobile market since 1993. During
2000, 1999 and 1998 the Company's amount of personal automobile
exposures it reinsured through C.A.R. approximated 4.9%, 5.6% and
6.4%, respectively, as compared to industry averages of 8.4%, 9.6%
and 10.0%, respectively.
NOTE G-Income Taxes
The Company and its subsidiaries file a consolidated federal
income tax return.
54
THE COMMERCE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2000, 1999 and 1998
(Thousands of Dollars)
NOTE G-Income Taxes (continued)
The federal income tax expense consisted of the following:
Years ended December 31,
2000 1999 1998
Current............................ $ 32,849 $ 26,481 $ 36,607
Deferred........................... 5,457 (9,814) (10,024)
$ 38,306 $ 16,667 $ 26,583
Deferred taxes arise from temporary differences in the basis of
assets and liabilities for tax and financial statement purposes. The
sources of these differences and the related tax effects consisted of
the following:
Years ended December 31,
2000 1999 1998
Unearned premiums.................................. $ (3,835) $ (2,785) $ 39
Discounting of loss reserves....................... (381) (928) 2,782
Bad debt expense................................... 249 (99) (17)
Deferred policy acquisition costs.................. 4,015 1,251 (782)
Director's retirement compensation................. (827) - -
Salvage and subrogation recoverable................ (116) 272 (233)
Tax depreciation in excess of book depreciation.... 239 639 109
Book value awards/stock
appreciation rights.............................. (319) 2,825 (11,056)
Pension and post-retirement benefits liability..... 721 (320) -
Equity in earnings (losses) of preferred stock
mutual funds..................................... 6,060 (10,487) (1,392)
Deferred items not included above.................. (349) (182) 526
Deferred income tax.......................... 5,457 (9,814) (10,024)
Other comprehensive income (loss).................. 20,084 (26,407) (898)
Deferred taxes at acquisition of American Commerce. - (4,662) -
Change in deferred tax asset................. $ 25,541 $(40,883) $(10,922)
Realization of a deferred tax asset is dependent on generating
sufficient taxable income in future years. Although realization is
not assured, management believes it is more likely than not that all
of the deferred tax assets will be realized. The amount of the
deferred tax asset considered realizable, however, could be reduced in
the near term if estimates of future taxable income or unrealized
gains are reduced.
55
THE COMMERCE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2000, 1999 and 1998
(Thousands of Dollars)
NOTE G-Income Taxes (continued)
Deferred tax liabilities (assets) were comprised of the
following at December 31, 2000 and 1999:
2000 1999
Unearned premiums............................................... $(29,049) $(25,214)
Discounting of loss reserves.................................... (21,659) (21,278)
Net accumulated comprehensive loss.............................. - (13,866)
Equity in losses of preferred stock mutual funds................ (3,815) (9,875)
Book value awards/stock appreciation rights..................... (351) (32)
Pension and post-retirement benefits liability of American
Commerce...................................................... (1,021) (1,742)
Director's retirement compensation.............................. (827) -
Bad debt allowances............................................. (639) (888)
Deferred tax assets....................................... (57,361) (72,895)
Deferred policy acquisition costs............................... 32,544 28,529
Salvage and subrogation recoverable............................. 2,028 2,144
Tax depreciation in excess of book depreciation................. 1,977 1,738
Net accumulated comprehensive income............................ 6,218 -
Deferred items not included above............................... 2,553 2,902
Deferred tax liabilities.................................. 45,320 35,313
Net deferred tax asset.................................... $(12,041) $(37,582)
Federal income tax on income is less than the amount computed
by applying the statutory rate of 35% for the years ended 2000, 1999
and 1998 for the following reasons:
Years ended December 31,
2000 1999 1998
Tax at statutory rate.. $ 59,523 35.0% $ 36,499 35.0% $ 43,697 35.0%
Tax exempt interest.... (8,314) (4.9) (9,157) (8.8) (8,429) (6.8)
Dividends paid to ESOP
participants......... (899) (0.5) (785) (0.8) (762) (0.6)
Dividends received
deduction............ (8,123) (4.8) (7,560) (7.2) (6,152) (4.9)
Amortization of excess
of book value of
preferred stock mutual
funds over cost...... (3,242) (1.9) (1,909) (1.8) (1,526) (1.2)
Other.................. (639) (0.4) (421) (0.4) (245) (0.2)
Tax at effective rate.. $ 38,306 22.5% $ 16,667 16.0% $ 26,583 21.3%
NOTE H-Related-Party Transactions
The Company has made loans to insurance agencies with which
Commerce transacts business on a regular basis. At December 31,
2000, ten of these loans with an aggregate outstanding principal
balance of $3,556, were collateralized by the assets of the agencies,
one of these loans with an outstanding balance of $328 was
collateralized by real estate as the primary collateral and the
assets of the agency as secondary collateral. There were no loans to
insurance agencies collateralized solely by real estate. At December
31, 1999, six of these loans with an aggregate outstanding balance of
$2,297 were collateralized by the assets of the agencies and one of
these loans with an outstanding balance of $341 was collateralized by
real estate as the primary collateral and the assets of the agency as
secondary collateral.
56
THE COMMERCE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2000, 1999 and 1998
(Thousands of Dollars)
NOTE H-Related-Party Transactions (continued)
One Director of the Company is the Chairman Emeritus and
Assistant Clerk of an insurance agency, which is one of the Company's
independent insurance agencies. This Director sold his ownership
interest in that agency in 1994, although he remains associated with
it in the above stated capacity. This Director also continued to
receive payments under non-competition and loan agreements through
1998. This Director receives no direct or indirect compensation
based on the commissions paid to the agency by the Company. During
the year ended December 31, 1998, the agency received from the
Company commissions of $940 for policies written. The Company also
purchased certain insurance coverage's through the agency and paid
premiums for these policies of $520 in 1998.
The immediate family of one Director of the Company owns more
than a 10% equity interest in a construction company. This
construction company provided construction and construction
management services in connection with the construction of a new
addition to an office building beginning in 1999. Terms of the
contract provided for a fee of $111 for supervision and management of
the project. Payments to the construction company including the
management fee and for additional construction work performed on this
project in 2000 and 1999 were $222 and $245, respectively.
NOTE I-Employee Stock Ownership Plan and 401(k) Plan
The Company offers an Employee Stock Ownership Plan
("E.S.O.P.") and 401(k) Plan for the benefit of substantially all
employees, including those of the Company's subsidiaries, with the
exception of American Commerce as discussed in Note J. The E.S.O.P.
is noncontributory on the part of participants and contributions are
made at the discretion of the Board of Directors. The Company is
under no obligation to make contributions or maintain the E.S.O.P.
for any length of time, and may completely discontinue or terminate
the E.S.O.P. at any time without liability. Contributions by the
Company and subsidiaries to the E.S.O.P. for the years ended December
31, 2000, 1999 and 1998 were $5,702, $5,744 and $5,412, respectively.
The E.S.O.P. owned 3,143,076 and 3,447,486 shares of the Company's
common stock at December 31, 2000 and 1999, respectively. E.S.O.P.
Participants who are current employees of the Company or its
subsidiaries and who are 100% vested in their E.S.O.P. accounts can
annually elect to transfer out of the E.S.O.P. up to 100% of their
allocated Company stock in the form of an eligible rollover
distribution into another eligible retirement plan, such as a
qualified individual retirement arrangement. Approximately 2,248,000
shares owned by the E.S.O.P. at December 31, 2000 are allocated to
the E.S.O.P. accounts of these individuals. E.S.O.P. Participants
who are former employees of the Company may generally elect to
withdraw from the E.S.O.P. the shares allocated to their accounts at
any time. Approximately 666,000 shares owned by the E.S.O.P. at
December 31, 2000 are allocated to the E.S.O.P. accounts of these
individuals. The remaining approximately 220,000 shares owned by the
E.S.O.P. at December 31, 2000 are allocated to the E.S.O.P. accounts
of Participants who have not yet reached 100% vesting in their
account balances. Disposition of these unvested shares is restricted
under the E.S.O.P.
The 401(k) Plan, implemented in September 1998, enables
eligible employees to contribute up to 15% of eligible compensation
on a pre-tax basis up to the annual maximum limits under federal tax
law. The Company incurs no expenses in the form of matching
contributions but does pay for administration of the Plan.
57
THE COMMERCE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2000, 1999 and 1998
(Thousands of Dollars)
NOTE J-American Commerce Pension and Post-Retirement Benefits
Subsequent to December 31, 1999, the Directors of American
Commerce voted to terminate the American Commerce noncontributory
defined benefit pension plan (the "pension plan") effective June 1,
2000 and transition in 2000 to the E.S.O.P. The payment of the
termination liability to participants from previously funded assets
of the pension plan amounted to $4,558 in 2000. All participants of
the pension plan were eligible to retire with full retirement
benefits upon attainment of age 65 with 5 years of participation.
Retirement benefits were payable for the life of the participant with
guaranteed payments for 10 years. All retirees had taken lump-sum
payments. American Commerce made contributions to a deposit
administration contract, which provided the pension plan with assets
sufficient to fund pension benefits to pension plan participants.
The deposit administration contract was carried at contract value,
which represented the cost of contributions plus interest and
experience refunds. The pension plan was subject to and exceeded the
minimum funding requirements of ERISA.
American Commerce maintained a separate 401(k) Plan for the
benefit of substantially all of its employees. American Commerce
matched 50% of all employee contributions up to 6% of pay. Both
American Commerce and its employees shared in administration expenses
of the plan. Subsequent to December 31, 1999, the Directors of
American Commerce voted to merge the 401(k) plan with the Company's
Plan on January 1, 2001.
American Commerce maintains a noncontributory post-retirement
benefit plan (the "post-retirement plan") for retirees that includes
medical, dental and life insurance coverage's. All participants of
the post-retirement plan are eligible upon attainment of age 55 with
10 years of service or age 65 with 5 years of service. Dental
coverage ceases at age 65 and life insurance coverage decreases based
upon the age of the retiree until the attainment of age 70, at which
time retirees are provided a nominal amount of coverage from age 70
and thereafter. Participant's spouses are also covered under the
post-retirement plan. The cost of post-retirement medical, dental
and life insurance benefits is accrued over the active service
periods of employees to the date they attain full eligibility for
such benefits. It is the policy of American Commerce to pay for
post-retirement benefits as incurred.
The following table shows, as of December 31, 2000 and 1999,
the American Commerce plans' funded status reconciled with amounts
reported in the consolidated balance sheet and the assumptions used
in determining the actuarial present value of the benefit obligation:
Post-
Pension Retirement
Plan Plan
2000 1999 2000 1999
Plan assets at fair value............................ $ - $ 3,048 $ - $ -
Accumulated benefit obligation:
Vested............................................. - 3,438 - -
Non-vested......................................... - 135 - -
Retirees........................................... - - 1,168 1,219
Active participants, fully eligible................ - - 893 889
Active participants, not eligible.................. - - 2,225 1,844
Accumulated benefit obligation....................... - 3,573 4,286 3,952
Additional benefits based on future salary levels.. - 2,337 - -
Projected benefit obligation..................... - 5,910 4,286 3,952
Unfunded status of plan.............................. - (2,862) (4,286) (3,952)
Unrecognized prior service costs..................... - 324 (20) (23)
Unrecognized net transition obligation............... - 161 1,186 1,285
Unrecognized net loss................................ - 1,569 20 143
Accrued benefit cost........................... $ - $ (808) $(3,100)$(2,547)
Assumptions:
Weighted average discount rate..................... - 7.1% 7.0% 7.0%
Weighted average rate of compensation increase..... - 5.0% - -
58
THE COMMERCE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2000, 1999 and 1998
(Thousands of Dollars)
NOTE J-American Commerce Pension and Post-Retirement Benefits
(continued)
Net periodic cost of the American Commerce pension and post-
retirement plans for the period ended December 31, 2000 and 1999
includes the following components:
Post-
Pension Retirement
Plan Plan
2000 1999 2000 1999
Service cost-benefits earned........................... $ - $ 497 $ 246 $ 238
Interest cost on projected benefit obligation.......... - 453 265 246
Actual return on plan assets........................... - (168) - -
Amortization of unrecognized net transition
obligation........................................... - 41 99 99
Amortization of unrecognized prior service cost........ - 83 (3) (3)
Amortization of unrecognized loss...................... - 74 - -
Net asset loss deferred for later recognition.......... - (109) - -
Net periodic cost.................................... $ - $ 871 $ 607 $ 580
The assumed health care cost trend rate for 2000 was 9.0% and
7.5% for medical and dental, respectively. These rates grade down
until the final trend rates of 6.0% and 5.0% for medical and dental,
respectively, are reached in 2010. A one percentage point increase
in the assumed health and dental cost trend rates increases the sum
of the service and interest costs components of the 2000 and 1999
periodic post-retirement benefit cost by 20.4% and 13.0%,
respectively, and the accumulated post-retirement benefit obligation
as of December 31, 2000 and 1999 by 18.0% and 14.0%, respectively.
NOTE K-Directors' Retirement Compensation Plan
During 2000, the Company's Directors approved a Directors'
Retirement Compensation Plan (the "Retirement Plan"). The Retirement
Plan becomes effective for each Company Director upon terminating
service on the Company's Board of Directors (the "Board") providing
that such termination was not made under conditions adverse to the
Company's interest. Effective with the annual meeting wherein the
Director is not reappointed to the Board, and provided benefits are
not paid until such time as the Director has attained the age of 65,
the Company will pay an annual retirement benefit equal to 50% of the
average annual total compensation disclosed on Form 1099 of the
Director for the immediately preceding three full years "three year
average compensation". The annual retirement benefit of 50% of the
three year average compensation vests at the rate of 4.0% for each
year of Board service up to a maximum of 100% vesting through
termination of service. Payments continue for a maximum of ten years
over the remaining life of the terminated Director, or his or her
then spouse, if the Director pre-deceases the spouse. No payments
are to be made after the death of the Director and spouse. Expenses
related to the Retirement Plan in 2000 amounted to $2,364 and a total
of $19 was paid under the Retirement Plan.
NOTE L-Stockholders' Equity
Book Value Awards, Stock Appreciation Rights and Stock Options
Program
The Management Incentive Plan approved by the Company's
stockholders in May, 1994 provides for the award of incentive stock
options, non-qualified stock options, book value awards, stock
appreciation rights, restricted stock and performance stock units.
Up to 2,500,000 shares of common stock (subject to increase for anti-
dilution adjustments) may be issued under the Plan, including shares
that may be issued pursuant to awards of restricted stock or upon the
exercise of common stock equivalent awards such as stock options and
stock appreciation rights payable in the form of common stock (not in
the form of cash). All directors, officers and other senior
management employees of the Company or any of its subsidiaries are
eligible to participate in this Management Incentive Plan.
59
THE COMMERCE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2000, 1999 and 1998
(Thousands of Dollars Except for Per Share Data)
NOTE L-Stockholder's Equity (continued)
Book value awards issued relating to this Plan totaled 517,598,
478,248 and 482,215 in 2000, 1999, and 1998, respectively. Expenses
relating to book value awards were $3,081, $438 and $470 in 2000,
1999 and 1998, respectively. Stock appreciation rights issued also
relating to this Plan totaled 509,872 in 1998. Expenses (income)
relating to stock appreciation rights were $760, ($3,159) and ($656)
in 2000, 1999 and 1998, respectively. The outstanding book value
awards and stock appreciation rights entitle the holders to cash
payments based upon the extent to which, if at all, the per share
book value or market value, as applicable, of the common stock
exceeds certain thresholds set at the time the award was granted.
During 2000 and 1999, the Company granted stock options
("options") totaling 644,520 and 700,179, respectively. The
outstanding options entitle the recipient to purchase the Company's
common stock based upon the extent to which, if at all, the per share
market value of the common stock exceeds certain thresholds set at
the time the option was granted. Unexercised options terminate not
later than eight years after the date of grant (not later than ten
years after the date of grant for those options granted to officers
of American Commerce).
Aggregate liabilities for the combined programs were $2,972 and
$986 at December 31, 2000 and 1999, respectively.
The following is a summary of the changes in options
outstanding under the Plan:
Year Ended Year Ended
December 31, 2000 December 31, 1999
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
Options outstanding, beginning of year.. 700,179 $ 33.06 - -
Granted January 29, 1999............... - - 50,000 $ 36.32
Granted April 30, 1999................. - - 650,179 32.81
Granted April 5, 2000.................. 644,520 31.59 - -
Exercised.............................. - - - -
Terminated............................. (5,888) 32.81 - -
Options outstanding, end of year........1,338,811 $ 32.35 700,179 $ 33.06
Options exercisable, end of year........ - $ - - $ -
The estimated weighted average fair value per share of the
options was $4.16 in 2000 and $3.78 in 1999. Under the provisions of
APB Opinion 25, no expense was recognized for these options in 2000
or 1999. No options were granted prior to 1999. Had the Company
recognized such expense, net earnings and earnings per share would
have been reduced by $1,900 ($0.06 per share) in 2000 and by $1,720
($0.05 per share) in 1999.
Additionally, during 1999, the Company granted 1,872,380
options to certain agents of American Commerce (the "American
Commerce Agents' Plan"). The right of the recipient to exercise
these options is contingent upon the average volume of other-than-
Massachusetts private passenger automobile and homeowners direct
written premiums placed and maintained with American Commerce for the
five year period ending December 31, 2003. If qualified, the
recipient may purchase the Company's common stock at a price of
$36.32, the exercise price, on or after January 29, 2004, the
confirmation date, up to and until January 29, 2009, the expiration
date. In conjunction with meeting specified premium growth levels
over the term of the options, the Company has provided "put rights"
to the option holders. These put rights permit the option holders to
require the Company to purchase the options at the difference between
$40.00 less the exercise price, at any time from and after the
confirmation date through and including the expiration date.
Expenses related to these options, determined in accordance with the
fair value accounting provisions of SFAS No. 123, "Accounting for
Stock-Based Compensation", amounted to $1,307 in 2000 and $1,909 in
1999.
60
THE COMMERCE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2000, 1999 and 1998
(Thousands of Dollars Except for Per Share Data)
NOTE L-Stockholder's Equity (continued)
The following is a summary of the changes in options
outstanding under the American Commerce Agents' Plan:
Year Ended Year Ended
December 31, 2000 December 31, 1999
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
Options outstanding, beginning of year.. 1,872,380 $ 36.32 - -
Granted................................ - - 1,872,380 $ 36.32
Exercised.............................. - - - -
Terminated............................. - - - -
Options outstanding, end of year........ 1,872,380 $ 36.32 1,872,380 $ 36.32
Options exercisable, end of year........ - $ - - $ -
The fair value of each option granted in 1999 under the
American Commerce Agents' Plan was estimated on the date of grant
using the Black-Scholes option-pricing model, with the following
weighted average assumptions:
December 31,
2000 1999
Dividend yield.................................... 4.47% 4.43%
Volatility........................................ 27.10% 28.20%
Risk-free interest rate........................... 5.10% 6.25%
Expected option life in years..................... 7 7
The estimated weighted average fair value per share of the
options under the American Commerce Agents' Plan was $4.48 and $5.28
at December 31, 2000 and 1999, respectively.
NOTE M-Net Capital Requirements
The insurance companies included in the consolidated financial
statements are subject to the financial capacity guidelines
established by their respective state Divisions of Insurance. 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
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, 1999 and 1998. California and Ohio have
similar regulations.
To the extent Commerce and Citation are restricted from paying
dividends to CHI, CHI will be limited in its ability to pay dividends
to the Company. On this basis, the Company's ability to pay
dividends to its stockholders is limited. During 2000 Commerce and
Citation paid $41,000 and $10,780 in dividends, respectively to CHI;
CHI then paid $51,660 to the Company in March 2000. During 1999
Commerce and Citation paid $47,000 and $9,306 in dividends,
respectively, to CHI; CHI then paid $56,070 to the Company in March
1999. Commerce West and American Commerce did not pay dividends on
their common stock in 2000 and 1999.
61
THE COMMERCE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2000, 1999 and 1998
(Thousands of Dollars Except for Per Share Data)
NOTE M-Net Capital Requirements (continued)
The Board of Directors of the Company voted to declare four
quarterly dividends to stockholders of record totaling $1.15 per
share and $1.11 per share in 2000 and 1999, respectively. On May 19,
2000, the Board voted to increase the quarterly stockholder dividend
from $0.28 to $0.29 per share to stockholders of record as of June 4,
2000. Prior to that declaration, the Company paid quarterly
dividends of $0.28 per share dating back to May 21, 1999 when the
Board voted to increase the dividend from $0.27 to $0.28 per share.
NOTE N-Statutory Balances
Following is a GAAP to Statutory reconciliation for both
earnings and policyholders surplus for the combined operations of
Commerce, Citation, Commerce West and American Commerce:
2000 1999 1998
Earnings Equity Earnings Equity Earnings Equity
GAAP............................. $136,425 $756,922 $ 85,242 $635,787 $ 95,661 $654,819
Deferred income taxes (benefits). 6,077 (9,227) (944) (40,634) (1,971) 5,423
Deferred acquisition costs....... (12,805) (111,305) (3,373) (98,499) (3,495) (88,759)
Bonds-book versus market......... - (5,726) - 11,400 - (18,786)
Preferred stock-market versus
book............................ - 1,506 - (528) - (1,307)
Deferred income.................. 231 7,493 518 7,380 (326) 6,744
Deferred service fee income
(expense)...................... 412 1,698 (804) 2,611 91 3,411
Deferred reinsurance
commissions..................... 1,896 13,276 (201) 10,054 5,728 10,253
Statutory reserve over statement
reserves........................ - (1,042) - (3,053) - (4,072)
Goodwill in subsidiary........... (290) 1,355 (291) 1,645 (291) 1,936
Pension and post-retirement
benefit......................... (2,072) 1,875 - 3,408 - -
Non-admitted assets.............. - (4,308) - - - -
Adjustment for non-insurance
company subsidiary.............. 6,021 8,324 8,651 11,727 - -
Equity in earnings (losses) of
preferred stock mutual funds
reflected in GAAP earnings...... (26,575) - - - - -
Difference in GAAP to statutory
net income in subsidiary........ (578) - 329 - 80 -
GAAP restatement of preferred
stock mutual funds.............. - - 13,913 (21,371) (1,773) (5,068)
Other............................ - 121 - (953) - (1,091)
Total adjustments........... (27,683) (95,960) 17,798 (116,813) (1,957) (91,316)
Statutory........................ $108,742 $660,962 $103,040 $518,974 $ 93,704 $563,503
NOTE O-Segment Information
The Company has four reportable segments: (1) property and
casualty insurance - Massachusetts; (2) property and casualty
insurance - other than Massachusetts; (3) real estate and commercial
lending; and, (4) corporate and other. The Company's property and
casualty insurance operations are written through Commerce, Citation,
Commerce West, and American Commerce and are marketed to affinity
groups, individuals, families and businesses through the Company's
relationships with professional independent insurance agencies. The
Company's real estate and commercial lending operations are a result
of insurance companies having the authorization to invest in
mortgages. The Company's wholly-owned subsidiary, Bay Finance
Company, Inc., originates and services residential and commercial
mortgages in Massachusetts and Connecticut. The corporate and other
segment represents the remainder of the Company's activities,
including those of the parent company.
62
THE COMMERCE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2000, 1999 and 1998
(Thousands of Dollars)
NOTE O-Segment Information (continued)
The Company evaluates performance and allocates resources based
primarily on the property and casualty insurance segment, which
represents 99.0% of the Company's total revenue for the past three
years. The accounting policies of the reportable segments are the
same as those described in Note A - Summary of Significant Accounting
Polices.
Selected information by industry segment for 2000, 1999 and 1998 is
summarized as follows:
Earnings Before Identifiable
Revenue Income Taxes Assets
2000
Property and casualty insurance
Massachusetts............................. $ 969,624 $164,237 $1,780,724
Other than Massachusetts.................. 121,028 7,115 236,240
Real estate and commercial lending......... 5,407 5,407 52,327
Corporate and other........................ 3,421 (6,693) 6,323
Consolidated........................... $1,099,480 $170,066 $2,075,614
1999
Property and casualty insurance
Massachusetts............................. $ 844,052 $ 97,304 $1,562,975
Other than Massachusetts.................. 110,179 3,998 224,017
Real estate and commercial lending......... 5,429 5,429 78,755
Corporate and other........................ 3,374 (2,447) 12,272
Consolidated........................... $ 963,034 $104,284 $1,878,019
1998
Property and casualty insurance
Massachusetts............................. $ 818,511 $114,969 $1,614,387
Other than Massachusetts.................. 27,793 3,862 45,759
Real estate and commercial lending......... 6,407 6,407 80,884
Corporate and other........................ - (390) 6,553
Consolidated........................... $ 852,711 $124,848 $1,747,583
NOTE P-Supplement to Consolidated Statements of Cash Flows
During the years ended December 31, 2000 and 1999, the Company
did not acquire any property through foreclosure of mortgages.
NOTE Q-Insolvency Fund Assessments
As provided in the statutes, insurance companies, which write
business in Massachusetts, are assessed for losses attributable to
the insolvency of other insurance companies by the Massachusetts
Insurers Insolvency Fund ("M.I.I.F."). From its inception, on August
2, 1972 through December 31, 2000, the M.I.I.F. has approved
assessments totaling $163,071, of which the Company's share was
approximately $12,575. It is anticipated that there will be
additional assessments from time to time relating to various
insolvencies. By statute, no insurer may be assessed in any year an
amount greater than two percent of that insurer's direct written
premiums for the calendar year preceding the assessment. Although
the timing and amounts of any such assessments are not known,
Management is of the opinion that such assessments will not have a
material effect on the consolidated financial position of the
Company. According to statute, the assessed insurance companies have
the right to recoup amounts paid to the M.I.I.F., over a reasonable
length of time, through premium rates approved by the Commissioner.
The Company's policy has been to recognize the recovery of the
assessed amounts as assessed. M.I.I.F. assessed the Company $5,306
during 2000 after having no activity for the year ended December 31,
1999 and a refund of $271 for the year ended December 31, 1998. The
assessment for 2000 was primarily the result of two insolvencies, The
Trust Insurance Company and New England Fidelity Insurance Company,
which accounted for assessment amounts of $4,939 and $1,205,
respectively, offset by refunds for prior year assessments on
numerous insurers' insolvencies.
63
THE COMMERCE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2000, 1999 and 1998
(Thousands of Dollars Except for Per Share Data)
NOTE R-Quarterly Results of Operations (Unaudited)
An unaudited summary of the Company's 2000 and 1999 quarterly
performance is as follows:
2000 First Second Third Fourth
Quarter(1) Quarter(1) Quarter(1) Quarter
Total revenues................................. $261,898 $251,274 $295,780 $290,528
Net earnings................................... 25,964 14,646 35,974 55,496
Comprehensive income........................... 29,681 19,028 44,921 74,940
Net earnings excluding the after-tax impact
of net realized investment gains (losses)(2).. 25,500 14,898 34,400 55,348
Net earnings per weighted average common
share (basic and diluted).................... 0.76 0.43 1.05 1.63
Basic and diluted net earnings per common
share excluding the after-tax impact of net
realized investment gains (losses)(2)........ 0.75 0.43 1.01 1.62
Cash dividends paid per share.................. 0.28 0.29 0.29 0.29
1999 First Second Third Fourth
Quarter(1) Quarter(1) Quarter(1) Quarter(1)
Total revenues................................. $225,347 $249,928 $244,452 $243,307
Net earnings................................... 13,785 22,326 23,117 29,448
Comprehensive income........................... 1,170 18,514 8,442 12,604
Net earnings excluding the after-tax impact
of net realized investment gains (losses)(2).. 14,058 18,059 22,021 30,623
Net earnings per weighted average common
share (basic and diluted).................... 0.39 0.64 0.66 0.85
Basic and diluted net earnings per common
share excluding the after-tax impact of net
realized investment gains (losses)(2)........ 0.40 0.52 0.62 0.89
Cash dividends paid per share.................. 0.27 0.28 0.28 0.28
(1) During the fourth quarter of 2000 certain amounts were restated
due to the change in accounting for closed-end preferred stock
mutual funds to the equity method.
(2) The above figures are presented to provide information to the
reader due to the amount of, and fluctuations in, net realized
gains and losses. The amounts noted, commonly known as
Operating Income, are important measures of corporate
performance.
64
SELECTED CONSOLIDATED FINANCIAL DATA
The data below should be read in conjunction with the consolidated
financial statements, related footnotes, and other financial information
included herein. The financial statements for the four years ended December
31, 2000 have been audited by Ernst & Young LLP. The financial statements
for the year ended December 31, 1996 were audited by other independent
auditors. During the fourth quarter of 2000 certain amounts prior to 2000
were restated due to the change in accounting for closed-end preferred stock
mutual funds to the equity method. All dollar amounts set forth in the
following tables are in thousands, except per share data:
Years ended December 31,
2000 1999 1998 1997 1996
Statement of Earnings Data:
Net premiums written.......... $1,008,911 $ 911,993 $ 745,048 $ 741,501 $ 711,570
(Increase) decrease in
unearned premiums............ (54,428) (40,163) 572 (11,004) (42,854)
Earned premiums............... 954,483 871,830 745,620 730,497 668,716
Net investment income......... 123,404 67,388 89,193 88,755 77,514
Premium finance and service
fees......................... 15,227 14,774 13,440 7,074 9,713
Amortization of excess of
book value of subsidiary
interest over cost........... 3,390 3,019 - - -
Net realized investment gains
(losses)...................... 2,976 6,023 4,458 22,179 (7,574)
Total revenues........... 1,099,480 963,034 852,711 848,505 748,369
Losses and loss adjustment
expenses..................... 686,157 625,090 531,429 526,127 475,231
Policy acquisition costs...... 243,257 233,660 196,434 187,491 181,013
Total expenses........... 929,414 858,750 727,863 713,618 656,244
Earnings before income taxes
and minority interest........ 170,066 104,284 124,848 134,887 92,125
Income taxes.................. 38,306 16,667 26,583 33,483 18,049
Net earnings before minority
interest..................... 131,760 87,617 98,265 101,404 74,076
Minority interest............. 320 1,059 - - -
Net earnings............. $ 132,080 $ 88,676 $ 98,265 $ 101,404 $ 74,076
Comprehensive income..... $ 168,570 $ 40,730 $ 96,594 $ 103,460 $ 80,475
Per Share Data:
Basic and diluted net
earnings per share...... $ 3.87 $ 2.54 $ 2.73 $ 2.81 $ 2.04
Cash dividends paid per
share................... $ 1.15 $ 1.11 $ 1.07 $ 1.03 $ 0.81
Weighted average number of
shares outstanding............. 34,121,047 34,940,074 36,042,652 36,044,679 36,311,887
December 31,
2000 1999 1998 1997 1996
Balance Sheet Data:
Total investments........... $1,472,562 $1,295,995 $1,262,500 $1,246,504 $1,167,513
Premiums receivable......... 230,580 195,160 162,878 169,469 157,835
Total assets................ 2,075,614 1,878,019 1,747,583 1,739,562 1,663,324
Unpaid losses and loss
adjustment expenses........ 674,140 659,841 583,996 630,473 649,832
Unearned premiums........... 519,885 457,095 391,424 379,599 367,991
Stockholders' equity........ 781,881 668,005 710,852 652,824 586,975
Stockholders' equity
per share ................. 23.16 19.44 19.72 18.11 16.28
65
MANAGEMENT'S DISCUSSION OF THE SUPPLEMENTAL INFORMATION
ON INSURANCE OPERATIONS
(Thousands of Dollars)
The following tables depict the progress of the insurance operations
of the Company over the past fifteen years. For these years of operation,
net premiums written amounted to $7,340,076. During this period, the
aggregate statutory financial ratios were 69.1% for losses and loss expenses
and 26.5% for underwriting expenses resulting in an aggregate combined ratio
of 95.6%. Total net investment income amounted to $787,509 or 10.7% of net
premiums written. Net realized gains were $99,919. Stockholders' equity
was $27,797 at the beginning of 1986 and $756,922, at the end of 2000,
resulting in an average annual increase in excess of 24.6%. The progress of
the insurance operations during the most recent five year period, compared
to the two previous five year periods, can best be illustrated by the
following comparison:
5-Year Period
1996-00 1991-95 1986-90
Direct premiums written.......................... $4,317,128 $2,808,253 $1,412,076
Net premiums written............................. 4,119,023 2,575,880 645,173
Net investment income............................ 446,486 259,340 81,683
Net realized gains............................... 27,639 65,682 6,598
Stockholders' equity at end of period............ 756,922 512,875 124,166
Statutory Financial Ratios (Unaudited)
Losses and loss expenses to premiums earned.... 71.6% 64.7% 70.8%
Underwriting expenses to net premiums written.. 26.0 27.8 24.8
Combined ratio............................. 97.6% 92.5% 95.6%
Increase in Stockholders' Equity................. 47.6% 313.1% 346.7%
The insurance operations of the Company include the operating
results of Commerce and Citation, along with Commerce's subsidiary
companies, Commerce West and American Commerce. Citation commenced
business in 1981 as a wholly-owned subsidiary of Commerce. On
December 31, 1989, the ownership of Citation was transferred to The
Commerce Group, Inc. In September 1993, ownership of both Commerce
and Citation was transferred from The Commerce Group, Inc. to CHI,
a subsidiary of The Commerce Group, Inc. Results of Commerce West
are included since its acquisition by Commerce on August 31, 1995.
Results of American Commerce are included since its acquisition by
Commerce on January 29, 1999. The combined balance sheets of these
insurance subsidiaries appear on pages 67 and 68. The combined
statements of earnings of insurance operations appear on pages 69
and 70. During the fourth quarter of 2000 certain amounts for
years 1996 through 1999 were restated due to the change in
accounting for closed-end preferred stock mutual funds to the
equity method.
66
MANAGEMENT'S DISCUSSION OF THE SUPPLEMENTAL INFORMATION
ON INSURANCE OPERATIONS (continued)
THE COMMERCE GROUP, INC. AND SUBSIDIARIES
COMBINED BALANCE SHEETS OF INSURANCE SUBSIDIARIES
December 31,
(Thousands of Dollars)
2000 1999 1998 1997 1996
ASSETS
Cash and short-term investments..... $ 70,392 $ 22,410 $ 75,655 $ 238,685 $ 140,102
Bonds, at market (at amortized cost
prior to 1993)..................... 669,935 647,338 619,267 590,597 716,702
Preferred stocks, at market (at
amortized cost prior to 1993)...... 200,083 211,049 197,425 148,499 147,680
Common stocks, at market............ 115,827 77,348 111,482 58,652 63,156
Preferred stock mutual funds........ 337,733 251,135 177,079 123,246 22,727
Mortgage loans on real estate....... 35,340 42,479 46,573 57,425 45,398
Other investments................... 26,802 14,139 7,825 3,783 127
Premium balances receivable......... 230,450 195,047 162,704 169,311 157,673
Investment income receivable........ 18,118 14,531 13,544 12,103 12,655
Residual market receivable.......... 127,241 141,660 140,220 161,799 182,213
Reinsurance receivable.............. 61,554 48,365 36,687 18,170 19,659
Deferred acquisition costs.......... 111,305 98,500 88,759 85,264 82,968
Current income taxes................ - - 2,773 - -
Deferred income taxes............... 10,901 37,612 - - -
Non-compete agreement............... 2,829 3,179 - - -
Real estate, furniture and equipment 33,498 27,321 27,885 29,060 26,011
Total assets................ $2,052,008 $1,832,113 $1,707,878 $1,696,594 $1,617,071
LIABILITIES
Unpaid losses and loss expenses..... $ 669,837 $ 659,319 $ 579,174 $ 618,094 $ 644,854
Unearned premiums................... 519,885 457,095 391,424 379,599 367,991
Excess of book value of subsidiary
interest over cost................. 8,431 10,758 - - -
Notes payable....................... - - - - -
Deferred income..................... 7,703 7,464 6,948 7,271 7,974
Accounts payable, accrued and other
liabilities........................ 72,333 48,505 70,558 60,332 41,368
Current income taxes................ 15,829 11,821 - 9,635 2,726
Deferred income taxes............... - - 4,955 9,218 2,071
Total liabilities........... 1,294,018 1,194,962 1,053,059 1,084,149 1,066,984
Minority interest................... 1,068 1,364 - - -
STOCKHOLDERS' EQUITY
Capital stock....................... 3,600 3,600 3,620 3,600 3,600
Paid-in capital..................... 45,050 45,050 45,050 45,050 45,050
Retained earnings
Balance, January 1................ 587,137 606,149 563,795 501,437 485,725
Net earnings...................... 136,425 85,242 95,661 106,718 74,543
Other comprehensive income (loss). 36,490 (47,948) (1,669) 2,055 6,399
Dividends paid.................... (51,780) (56,306) (51,638) (46,415) (65,230)
Balance, December 31................ 708,272 587,137 606,149 563,795 501,437
Total stockholders' equity.. 756,922 635,787 654,819 612,445 550,087
Total liabilities and
stockholders' equity...... $2,052,008 $1,832,113 $1,707,878 $1,696,594 $1,617,071
67
MANAGEMENT'S DISCUSSION OF THE SUPPLEMENTAL INFORMATION
ON INSURANCE OPERATIONS (continued)
THE COMMERCE GROUP, INC. AND SUBSIDIARIES
COMBINED BALANCE SHEETS OF INSURANCE SUBSIDIARIES
December 31,
(Thousands of Dollars)
1995 1994 1993 1992 1991 1990 1989 1988 1987 1986
ASSETS
$ 52,308 $ 4,560 $ 12,615 $ 25,809 $ 11,190 $ 38,654 $ 84,308 $ 60,885 $ 21,051 $ 10,048
815,277 745,010 649,491 505,565 329,935 242,735 153,621 133,867 116,220 88,755
111,220 85,574 80,059 2,261 869 1,010 1,324 1,606 2,295 6,755
40,359 9,656 47,462 43,545 30,055 4,869 2,900 1,921 1,438 149
- - - - - - - - - -
31,404 35,715 42,042 60,697 66,122 56,124 52,244 42,882 15,931 -
- - - 67,876 55,510 57,733 56,713 33,727 19,329 11,817
126,090 101,529 94,333 - - - - - - -
14,440 13,285 10,205 9,710 6,063 4,235 3,093 2,889 2,370 2,485
187,124 198,818 203,312 253,426 254,196 266,440 246,951 184,177 123,725 81,178
21,897 16,892 12,868 365 - - - - - -
67,160 59,066 53,647 55,442 33,981 27,273 22,702 15,699 10,898 7,129
- - - - - - 341 266 - 2,209
2,100 38,180 - - 883 1,666 - - - -
- - - - - - - - - -
24,642 25,246 22,371 23,183 24,163 25,046 23,118 9,684 8,356 7,370
$1,494,021 $1,333,531 $1,228,405 $1,047,879 $812,967 $725,785 $647,315 $487,603 $321,613 $217,895
LIABILITIES
$ 605,791 $ 576,373 $ 550,797 $ 474,800 $416,551 $379,752 $323,020 $256,628 $160,539 $107,513
330,454 314,719 283,526 264,567 192,785 175,334 174,345 118,079 84,876 55,378
- - - - - - - - - -
- - - - - 1,662 1,837 2,013 2,204 3,772
8,954 10,451 7,351 8,384 12,918 20,264 23,689 23,307 11,058 7,503
34,351 43,433 16,564 20,863 7,677 21,065 27,513 19,350 14,532 8,532
1,596 10,254 4,867 9,249 5,811 3,542 - - 470 -
- - 13,669 4,400 - - 1,623 1,021 1,853 3,736
981,146 955,230 876,774 782,263 635,742 601,619 552,027 420,398 275,532 186,434
- - - - - - - - - -
STOCKHOLDERS' EQUITY
3,450 3,450 3,450 3,450 3,450 3,450 3,450 2,350 2,350 2,350
23,700 23,700 8,700 8,700 8,700 8,700 8,700 6,500 6,500 6,500
351,151 339,481 253,466 165,075 112,016 83,138 62,877 37,231 22,611 18,947
110,450 113,892 79,837 91,980 55,214 32,414 21,966 21,837 15,614 4,362
58,919 (77,622) 21,928 9,811 2,545 (86) 645 321 (54) 7
(34,795) (24,600) (15,750) (13,400) (4,700) (3,450) (2,350) (1,034) (940) (705)
485,725 351,151 339,481 253,466 165,075 112,016 83,138 58,355 37,231 22,611
512,875 378,301 351,631 265,616 177,225 124,166 95,288 67,205 46,081 31,461
$1,494,021 $1,333,531 $1,228,405 $1,047,879 $812,967 $725,785 $647,315 $487,603 $321,613 $217,895
68
MANAGEMENT'S DISCUSSION OF THE SUPPLEMENTAL INFORMATION
ON INSURANCE OPERATIONS (continued)
THE COMMERCE GROUP, INC. AND SUBSIDIARIES
COMBINED STATEMENTS OF EARNINGS OF INSURANCE OPERATIONS
Years Ended December 31,
(Thousands of Dollars)
2000 1999 1998 1997 1996
Underwriting
Direct premiums written...................$1,071,649 $948,149 $796,858 $768,649 $731,823
Net premiums written......................$1,008,911 $911,993 $745,048 $741,501 $711,570
Increase (decrease) in unearned
premiums................................. 54,428 40,163 (572) 11,004 42,854
Earned premiums....................... 954,483 871,830 745,620 730,497 668,716
Expenses
Losses and loss expenses.................. 682,805 628,087 533,523 521,775 474,173
Underwriting expenses..................... 251,697 238,458 200,525 185,146 194,873
(Increase) decrease in deferred
acquisition costs........................ (12,805) (3,374) (3,495) (2,296) (15,809)
Total expenses........................ 921,697 863,171 730,553 704,625 653,237
Underwriting income (loss).................. 32,786 8,659 15,067 25,872 15,479
Net investment income....................... 123,330 67,642 89,356 89,180 76,978
Premium finance fees........................ 15,221 14,768 13,426 7,056 9,666
Amortization of excess of book value
of subsidiary interest over cost........... 3,390 3,019 - - -
Net realized investment gains (losses)...... 2,789 6,061 4,334 22,318 (7,863)
Earnings before Federal income taxes,
withdrawing companies' settlements
and minority interest................. 177,516 100,149 122,183 144,426 94,260
Other income
Withdrawing companies' settlements........ - - - - -
Earnings before Federal income taxes
and minority interest...................... 177,516 100,149 122,183 144,426 94,260
Federal income taxes (benefits)............. 41,411 15,966 26,522 37,708 19,717
Earnings before cumulative effect of
change in accounting principle and
minority interest.......................... 136,105 84,183 95,661 106,718 74,543
Cumulative effect on prior years (to
December 31, 1986) of changing to
different method of accounting for
income taxes............................... - - - - -
Minority interest........................... 320 1,059 - - -
NET EARNINGS..........................$ 136,425 $ 85,242 $ 95,661 $106,718 $ 74,543
Statutory Financial Ratios (Unaudited)
Losses and loss expenses to
premiums earned.......................... 71.7% 72.0% 71.6% 71.4% 70.9%
Underwriting expenses to net
premiums written......................... 25.1 26.5 26.5 25.1 27.1
Combined ratio........................ 96.8% 98.5% 98.1% 96.5% 98.0%
Underwriting profit (loss)............ 3.2% 1.5% 1.9% 3.5% 2.0%
69
MANAGEMENT'S DISCUSSION OF THE SUPPLEMENTAL INFORMATION
ON INSURANCE OPERATIONS (continued)
THE COMMERCE GROUP, INC. AND SUBSIDIARIES
COMBINED STATEMENTS OF EARNINGS OF INSURANCE OPERATIONS
Years Ended December 31,
(Thousands of Dollars)
1995 1994 1993 1992 1991 1990 1989 1988 1987 1986
$626,666 $625,023 $ 601,289 $525,495 $429,780 $401,077 $366,492 $306,469 $206,231 $131,807
$603,421 $589,197 $ 563,416 $508,847 $310,999 $219,936 $140,313 $124,923 $ 99,193 $ 60,808
10,831 17,144 14,856 98,353 30,193 34,692 12,655 9,678 13,428 6,775
592,590 572,053 548,560 410,494 280,806 185,244 127,658 115,245 85,765 54,033
367,258 369,764 373,243 271,848 173,901 125,219 88,564 80,203 65,299 44,205
171,892 162,446 147,290 138,669 85,655 55,551 44,181 33,115 25,882 18,460
(5,723) (5,420) 1,796 (21,462) (6,708) (4,571) (7,003) (4,801) (3,769) (1,712)
533,427 526,790 522,329 389,055 252,848 176,199 125,742 108,517 87,412 60,953
59,163 45,263 26,231 21,439 27,958 9,045 1,916 6,728 (1,647) (6,920)
71,007 63,119 52,868 39,685 32,661 25,978 21,256 15,999 10,896 7,554
19,246 18,315 16,486 13,734 11,165 10,074 8,095 4,592 3,021 1,436
- - - - - - - - - -
720 32,025 13,040 12,368 7,529 74 618 2,298 3,423 185
150,136 158,722 108,625 87,226 79,313 45,171 31,885 29,617 15,693 2,255
- - - 43,168 - - - - - -
150,136 158,722 108,625 130,394 79,313 45,171 31,885 29,617 15,693 2,255
39,686 44,830 28,788 38,414 24,099 12,757 9,919 7,780 2,987 (2,107)
110,450 113,892 79,837 91,980 55,214 32,414 21,966 21,837 12,706 4,362
- - - - - - - - 2,908 -
- - - - - - - - - -
$110,450 $113,892 $ 79,837 $ 91,980 $ 55,214 $ 32,414 $ 21,966 $ 21,837 $ 15,614 $ 4,362
62.0% 64.6% 68.0% 66.2% 61.9% 65.7% 68.0% 69.5% 79.4% 83.5%
29.0 27.1 25.7 28.1 30.0 26.7 26.3 22.0 22.5 24.4
91.0% 91.7% 93.7% 94.3% 91.9% 92.4% 94.3% 91.5% 101.9% 107.9%
9.0% 8.3% 6.3% 5.7% 8.1% 7.6% 5.7% 8.5% (1.9)% (7.9)%
70
THE COMMERCE GROUP, INC.
DIRECTORS
Herman F. Becker......................... Owner of Sterling Realty and Huguenot
Development Corporation
Joseph A. Borski, Jr..................... Self-employed Certified Public Accountant
Eric G. Butler........................... Retired Vice President and General Claims Manager
of Commerce and Citation
Henry J. Camosse......................... Retired President, Henry Camosse & Sons Co., Inc.,
a building and masonry supplies company
Gerald Fels.............................. Executive Vice President and Chief Financial
Officer of the Company
David R. Grenon.......................... Chairman Emeritus and Assistant Clerk of The
Protector Group Insurance Agency, Inc.
Robert W. Harris......................... Retired Treasurer, H.C. Bartlett Insurance Agency,
Inc.
Robert S. Howland........................ Retired Clerk, H.C. Bartlett Insurance Agency,
Inc.
John J. Kunkel........................... President and Treasurer, Kunkel Buick and GMC
Truck; Treasurer, Kunkel Bus Company
Raymond J. Lauring....................... Retired President, Lauring Construction Company
Roger E. Lavoie.......................... Retired President and Treasurer, Lavoie Toyota-
Dodge, Inc.
Normand R. Marois........................ Retired Chairman of the Board, Marois Bros., Inc.,
a contracting firm
Suryakant M. Patel....................... Retired physician who specialized in internal
medicine
Arthur J. Remillard, Jr.................. President, Chief Executive Officer and Chairman
of the Board of the Company
Arthur J. Remillard, III................. Senior Vice President and Assistant Clerk of
the Company; Senior Vice President of Commerce
and Citation in charge of Policyholder Benefits
Regan P. Remillard....................... Senior Vice President of the Company; President
and Secretary of Commerce West Insurance Company;
President of ACIC Holding Co., Inc.; Vice Chairman
of the Board and Chief Executive Officer of
American Commerce Insurance Company
Gurbachan Singh.......................... Retired physician who specialized in general
surgery
John W. Spillane......................... Clerk of the Company and practicing attorney
71
DIRECTORS OF
COMMERCE HOLDINGS, INC.
The Commerce Insurance Company
Commerce West Insurance Company
Citation Insurance Company
Arthur J. Remillard, Jr........... President, Chief Executive Officer and Chairman of
the Board
Gerald Fels....................... Executive Vice President and Chief Financial Officer;
Treasurer, Commerce Holdings, Inc.
Arthur J. Remillard, III (1)...... Senior Vice President and Clerk
Regan P. Remillard................ Senior Vice President; President and Secretary of
Commerce West Insurance Company
James A. Ermilio (1).............. Vice President and General Counsel
David R. Grenon (1)............... Chairman Emeritus and Assistant Clerk of The
Protector Group Insurance Agency
John M. Nelson (1)................ Chairman of Brown & Sharpe Mfg., Co.
Suryakant M. Patel (1)............ Retired physician who specialized in internal
medicine
William G. Pike (1)............... Executive Vice President and Chief Financial Officer
of Granite State Bankshares, Inc.
H. Thomas Rowles (1).............. Chairman of the Board of ACIC Holding Co., Inc.;
Chairman of the Board of American Commerce Insurance
Company; President, Chief Executive Officer and
Director of AAA Southern New England
Mark A. Shaw (1).................. Treasurer of ACIC Holding Co., Inc.; Executive Vice
President and Chief Operating Officer of AAA Southern
New England
(1) Commerce Holdings, Inc., The Commerce Insurance Company and Citation
Insurance Company only.
72
DIRECTORS OF
ACIC HOLDING CO., INC.(1)
American Commerce Insurance Company
H. Thomas Rowles.................. Chairman of the Board of ACIC Holding Co., Inc.;
Chairman of the Board of American Commerce Insurance
Company; President, Chief Executive Officer and
Director of AAA Southern New England
Regan P. Remillard................ President of ACIC Holding Co., Inc.; Vice Chairman of
the Board and Chief Executive Officer of American
Commerce Insurance Company; Senior Vice President of
The Commerce Group, Inc.; President and Secretary of
Commerce West Insurance Company
Mark A. Shaw...................... Treasurer of ACIC Holding Co., Inc.; Executive Vice
President and Chief Operating Officer of AAA Southern
New England
Gerald Fels....................... Executive Vice President and Chief Financial Officer
of The Commerce Group, Inc.
Patrick W. Doherty (2)............ President and Chief Executive Officer of AAA Oklahoma
Terry R. Farias (2)............... President and Chief Executive Officer of AAA Hoosier
Motor Club
Roger L. Graybeal (2)............. President and Secretary of AAA Oregon/Idaho
Richard S. Hamilton (2)........... President of AAA West Pennsylvania/West
Virginia/South Central Ohio
Gerald P. Hogan (2)............... President and Chief Operating Officer of American
Commerce Insurance Company
Charles B. Liekweg (2)............ President and Chief Executive Officer of AAA
Washington
D. James McDowell (2)............. President and Chief Executive Officer of AAA Arizona
Peter C. Ohlheiser (2)............ President of Ohio Motorists Association
(1) Incorporated in November, 1998. 80% owned by The Commerce Insurance
Company and 20% owned by AAA Southern New England.
(2) American Commerce Insurance Company only, which was acquired in January
1999.
73
DIRECTORS OF
BAY FINANCE COMPANY, INC.
Arthur J. Remillard, Jr................ President and Chairman of the Board
Gerald Fels............................ Executive Vice President and Chief Financial
Officer
John W. Spillane....................... Clerk and Practicing Attorney
Arthur J. Remillard, III............... Senior Vice President and Assistant Clerk
Regan P. Remillard..................... Senior Vice President
DIRECTORS OF
CLARK-PROUT INSURANCE AGENCY, INC.
Arthur J. Remillard, Jr................ President and Chairman of the Board
Gerald Fels............................ Executive Vice President and Chief Financial
Officer
John W. Spillane....................... Clerk and Practicing Attorney
Arthur J. Remillard, III............... Senior Vice President and Assistant Clerk
Elizabeth M. Edwards................... Vice President
74
THE COMMERCE GROUP, INC.
Commerce Holdings, Inc.
The Commerce Insurance Company
Commerce West Insurance Company
ACIC Holding Co., Inc. (1)
American Commerce Insurance Company (2)
Citation Insurance Company
Bay Finance Company, Inc.
Clark-Prout Insurance Agency, Inc.
OFFICERS OF THE COMMERCE GROUP, INC.
President, Chief Executive Officer and Chairman of the Board..... Arthur J. Remillard, Jr.
Executive Vice President and Chief Financial Officer............. Gerald Fels
Senior Vice President and Assistant Clerk........................ Arthur J. Remillard, III
Senior Vice President............................................ Regan P. Remillard
Senior Vice President............................................ Mary M. Fontaine
Vice President and General Counsel............................... James A. Ermilio
Clerk............................................................ John W. Spillane
Treasurer and Chief Accounting Officer........................... Randall V. Becker
Assistant Treasurer.............................................. Thomas A. Gaylord
Assistant Vice President......................................... Robert E. McKenna
OFFICERS OF MASSACHUSETTS SUBSIDIARIES (3)
President, Chief Executive Officer and Chairman of the Board..... Arthur J. Remillard, Jr.
Executive Vice President and Chief Financial Officer............. Gerald Fels
Senior Vice President and Secretary.............................. Arthur J. Remillard, III
Senior Vice Presidents........................................... David H. Cochrane
Peter J. Dignan
Mary M. Fontaine
Regan P. Remillard
Joyce B. Virostek
Vice Presidents.................................................. Elizabeth M. Edwards
Karen A. Lussier
Michael J. Richards
Angelos Spetseris
Henry R. Whittier, Jr.
Vice President and General Counsel............................... James A. Ermilio
Assistant Vice Presidents...................... David P. Antocci Susan A. Horan
Robert M. Blackmer John V. Kelly
Stephen R. Clark Ronald J. Lareau
Raymond J. DeSantis Donald G. MacLean
Warren S. Ehrlich Robert E. McKenna
Richard W. Goodus Robert L. Mooney
James E. Gow Emile E. Riendeau
Treasurer and Chief Accounting Officer........................... Randall V. Becker
Assistant Treasurer.............................................. Thomas A. Gaylord
(1) Incorporated in November, 1998, and the common stock of which is
80% owned by The Commerce Insurance Company and 20% owned by AAA
Southern New England.
(2) Acquired by ACIC Holding Co., Inc. in January, 1999.
(3) Massachusetts subsidiaries include Commerce Holdings, Inc., The
Commerce Insurance Company, Citation Insurance Company, Bay
Finance Company, Inc. and Clark-Prout Insurance Agency. Officers
often hold positions with several operating subsidiaries. The
titles listed represent their primary office as of March 1, 2001.
75
Officers of ACIC Holding Co., Inc.
Chairman of the Board........................................... H. Thomas Rowles
President....................................................... Regan P. Remillard
Treasurer....................................................... Mark A. Shaw
Secretary....................................................... James A. Ermilio
Officers of American Commerce Insurance Company
Chairman of the Board........................................... H. Thomas Rowles
Vice Chairman of the Board and Chief Executive Officer.......... Regan P. Remillard
President and Chief Operating Officer........................... Gerald P. Hogan
Senior Vice President and Chief Financial Officer............... Michael V. Vrban
Senior Vice President........................................... Carol R. Blaine
Treasurer....................................................... Richard B. O'Hara
Chief Legal Officer and Secretary............................... James A. Ermilio
Assistant Vice President........................................ Gregory S. Clark
Assistant Vice President, General Counsel, and
Assistant Secretary........................................... Julie Deley-Shimer
Officers of Commerce West Insurance Company
Chairman of the Board........................................... Arthur J. Remillard, Jr.
President and Secretary......................................... Regan P. Remillard
Treasurer and Chief Financial Officer .......................... Michael V. Vrban
Chief Accounting Officer......................................... Albert E. Peters
Investment Officer.............................................. Gerald Fels
Vice Presidents................................................. Michael J. Berryessa
Albert R. Harris
76
Stockholder Information
Annual Meeting
The Annual meeting of stockholders will be held at 9:00 a.m. on Friday, May
18, 2001 at the Company's Underwriting Building, 11 Gore Road (Route 16),
Webster, MA.
Form 10-K
Stockholders interested in the detailed information contained in the Company's
annual report on Form 10-K, as filed with the Securities and Exchange
Commission, may obtain a copy without charge, by writing to the Assistant to
the President at 211 Main Street, Webster, MA 01570.
Transfer Agent
The Commerce Group, Inc.
c/o FLEET NATIONAL BANK
EquiServe, L.P.
P.O. Box 43010
Providence, RI 02940-3010
(781) 575-3100 or (800) 733-5001
http://www.equiserve.com
Executive Offices
211 Main Street
Webster, MA 01570
(508) 943-9000
Company Websites
http://www.commerceinsurance.com
http://www.bayfinance.com
http://www.acilink.com
Trading of Common Stock
The Company's Common Stock trades on the NYSE under the symbol "CGI".
Independent Auditors
Ernst & Young LLP
200 Clarendon Street
Boston, MA 02116
(617) 266-2000
http://www.ey.com
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