UNITED STATES
SECURITIES AND EXCHANGE
COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report
(Date of earliest event reported)
July 25, 2003
THE COMMERCE GROUP, INC.
(Exact name of registrant as specified in its charter)
Massachusetts 001-13672 04-2599931
(State or other (Commission File (IRS Employer
jurisdiction Number) Identification
of Incorporation) No.)
211 Main Street, Webster, Massachusetts 01570
(Address of principal executive offices) (Zip Code)
Registrants telephone number, including area code:
(508) 943-9000
Page 1 of 11
The Commerce Group, Inc.
Form 8-K
July 28, 2003
Item 9. REGULATION FD DISCLOSURE
The following information, including the text of the press
release attached as an Exhibit to this Form 8-K, is furnished
pursuant to Item 9, "Regulation FD Disclosure" and Item 12,
"Disclosure of Results of Operations and Financial Condition".
On July 25, 2003, The Commerce Group, Inc. (the "Company")
issued a press release announcing its results for the quarter
ended June 30, 2003. A copy of the press release is attached as
Exhibit 99.1 to this Form 8-K.
In its press release, the Company presents "operating
earnings" and "operating earnings per diluted share", non-GAAP
financial measures, as well as net earnings and net earnings per
diluted share. As further described in the press release,
operating earnings is the measure utilized by the Company in
managing corporate operating performance. A reconciliation of
net earnings to operating earnings is provided in the tables that
are included in the press release. Statutory ratios are
presented in accordance with principles prescribed by insurance
regulatory authorities.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of
1934, as amended, the Registrant has duly caused this report to
be signed on its behalf by the undersigned thereunto duly
authorized.
THE COMMERCE GROUP, INC.
July 28, 2003
/s/ Randall V. Becker
Randall V. Becker
Treasurer and Chief Accounting Officer
Page 2 of 11
Exhibit 99.1
Press Release
RELEASE: Immediate (July 25, 2003)
CONTACT: Randall V. Becker
Treasurer
(508) 949-4129
The Commerce Group, Inc.
Announces 2003 Second Quarter Results
and Comparison to Second Quarter 2002 (as restated)
WEBSTER, Mass., July 25, 2003 -- The Commerce Group, Inc. (NYSE:CGI)
today reported 2003 second quarter results. Net earnings were $71.5
million, or $2.22 per diluted share, compared to a net loss of $1.3
million or $0.04 per diluted share for 2002 (as restated).
Operating earnings, a non-GAAP financial measure, were $22.3 million
for the second quarter of 2003, or $0.69 per diluted share, compared
to $21.7 million or $0.65 per diluted share for 2002 (as restated).
Operating earnings consist of net earnings (loss) adjusted to exclude:
(1) the after-tax impact of net realized investment gains and losses;
and, (2) for 2002 only, the after-tax effect of a required change in
accounting principle. The Company believes that operating earnings
are a more appropriate measure of an insurance entity's performance
because the realization investment of gains and losses tends to
distort the analysis of insurance operating results and trends as they
are discretionary as to timing as well as impacted by interest rate
fluctuations. Previously, the Company excluded the impact of variable
stock option treatment in determining operating earnings. Operating
earnings, as defined by the Company, may not be comparable to
similarly captioned measurements utilized by other property and
casualty companies. A reconciliation of net earnings to operating
earnings is provided in the tables that follow.
Earned premiums were $350.3 million for the second quarter of 2003
compared to $296.4 million for 2002. A schedule of direct written
premiums to earned premiums is included in the attached tables.
MORE
Page 3 of 11
CGI 2Q'03 earnings
Net realized investment gains were $65.9 million, or $1.53 per diluted
share, compared to net realized investment losses of $31.5 million or
$0.69 per diluted share for 2002. During the second quarter the
Company shortened the overall duration of its investment portfolio by
reducing its holdings in certain long term fixed income instruments,
equities and closed end mutual funds. This change in strategy resulted
in the realization of significant investment gains with a minimal
adverse impact on future investment income. If market conditions
warrant, the Company will continue to reduce the duration of the
investment portfolio in order to continue to protect itself from
anticipated future increases in overall interest rates. A complete
breakdown of this information is included in the attached tables.
The second quarter statutory combined ratio for property and casualty
operations was 98.8% compared to 98.9% for 2002. The slight decrease
in the combined ratio was primarily the result of an increase in the
loss ratio, offset by a decrease in the underwriting ratio. The
Company's loss ratio for the second quarter of 2003 increased to 76.1%
from 74.7% during the same period last year. The increase was the
result of less favorable loss reserve development compared to the
second quarter of last year offset by a slight decrease in claim
frequency for bodily injury and collision claims.
The Company's statutory underwriting ratio improved to 22.7%, as
compared to 24.2% for last year's second quarter, primarily as a
result of decreased expenses assumed from the Massachusetts residual
market mechanism, commonly know as C.A.R., and higher ceding
commissions received on the Company's other than automobile quota-
share reinsurance agreement.
As disclosed in the Company's 2002 Form 10-K, in the fourth quarter of
2002, the Company changed its method of accounting for employee stock
options and began applying variable accounting treatment for employee
stock options issued in 1999 and 2000. Accordingly, the Company
restated its 2002 quarterly results. The impact of the restatement
for the three months ended June 30, 2002 resulted in a decrease to net
earnings of $1.1 million or $0.03 per diluted share. The comparable
amount for the three months ended June 30, 2003 resulted in a decrease
to net earnings of $1.0 million or $0.03 per diluted share.
Cumulative June 30, 2003 Results
Net earnings were $84.4 million, or $2.62 per diluted share, compared
to $32.7 million or $0.98 per diluted share for 2002 (as restated).
Operating earnings were $41.4 million for the first six months of
2003, or $1.29 per diluted share, compared to $46.7 million or $1.40
per diluted share for 2002 (as restated). As previously noted, a
reconciliation of net earnings to operating earnings is provided in
the tables that follow.
Earned premiums were $688.3 million compared to $577.2 million for
2002. A schedule of direct written premiums to earned premiums is
included in the attached tables.
MORE
Page 4 of 11
CGI 2Q'03 earnings
The Company had realized gains on investments of $60.0 million, or
$1.33 per diluted share, compared to losses of $35.0 million, or $0.76
per diluted share for 2002. A complete breakdown of this information
is included in the attached tables.
The statutory combined ratio for property and casualty operations was
100.0% for the first six months of 2003 compared to 98.4% for 2002.
The increase in the combined ratio was primarily the result of an
increase in the loss ratio, offset by a decrease in the underwriting
ratio. The Company's loss ratio for the first six months of 2003
increased to 78.7% from 75.8% during the same period last year. The
increase was primarily driven by increased claim frequency in the
first quarter of this year as a result of the severe winter. The
Company's statutory underwriting ratio improved to 21.3%, as compared
to 22.6% for 2002, primarily from reduced accrued contingent
commissions as a result of the higher loss ratio mentioned previously,
decreased expenses assumed from C.A.R., coupled with premium growth
exceeding growth in underwriting expenses.
As previously mentioned, in the fourth quarter of 2002 the Company
changed its method of accounting for employee stock options and began
applying variable accounting treatment for employee stock options
issued in 1999 and 2000. The impact of the restatement for the six
months ended June 30, 2002 resulted in a decrease to net earnings of
$2.5 million or $0.07 per diluted share. The comparable amount for
the six months ended June 30, 2003 resulted in an increase to net
earnings of $0.6 million or $0.02 per diluted share.
A complete presentation of June 30, 2003 and 2002 financial statement
information, including a breakdown of the components of the combined
ratio and realized investment gains and losses, is included in the
financial statements attached to this press release.
Additional supplemental financial information will be available on the
Company's website at www.commerceinsurance.com, under the "Links"
section of the "News and Investor Information" area.
At June 30, 2003, the Company had authority to purchase approximately
741,000 additional shares of common stock under the current Board of
Directors' stock re-purchase authorization. During the past twelve
months, the Company purchased 1,093,600 shares of treasury stock at an
average price of $36.27 per share.
All quarterly figures are unaudited and all results are reported in
accordance with accounting principles generally accepted in the United
States (GAAP) with the exception of operating earnings and statutory
operating ratios.
MORE
Page 5 of 11
CGI 2Q'03 earnings
About The Commerce Group, Inc.
The Commerce Group, Inc. is headquartered in Webster, Massachusetts.
Property and casualty insurance subsidiaries include The Commerce
Insurance Company and Citation Insurance Company in Massachusetts,
Commerce West Insurance Company in California, and American Commerce
Insurance Company in Ohio. Through its subsidiaries' combined
insurance activities, the Company is ranked as the 22nd largest
personal automobile insurance group in the country by Risk
Information, Inc., based on 2002 direct written premium information.
Forward Looking Statements
This press release contains some statements that are not historical
facts and are considered "forward-looking statements" as defined in
the Private Securities Litigation Reform Act of 1995. Such forward-
looking statements involve opinions, assumptions and predictions, and
no assurance can be given that the future results will be achieved
since events or results may differ materially as a result of risks
facing the Company. These include, but are not limited to, those
risks and uncertainties in our business, some of which are beyond the
control of the Company, that are described in the Company's Forms 10-K
and 10-Q, Schedules 13D and 13G, and other documents filed with the
SEC, including the possibility of adverse catastrophe experience and
severe weather, adverse trends in claim severity or frequency, adverse
state and federal regulation and legislation, adverse state judicial
decisions, litigation risks, interest rate risk, rate making decisions
for private passenger automobile policies in Massachusetts, potential
rate filings outside of Massachusetts, adverse impacts related to
consolidation activities, heightened competition, concentration of
business within Massachusetts, dependence on certain principal
employees, as well as the economic, market or regulatory conditions
and risks associated with entry into new markets and diversification.
The Commerce Group, Inc. is not under any obligation to (and expressly
disclaims any such obligations to) update or alter its forward-looking
statements, whether as a result of new information, future events or
otherwise.
(Tables Follow)
Page 6 of 11
CGI 2Q '03 earnings
THE COMMERCE GROUP, INC. (NYSE: CGI - news)
CONSOLIDATED BALANCE SHEETS
June 30, 2003 and 2002
(Thousands of Dollars, Except Per Share Data)
Unaudited
June 30, June 30
ASSETS 2003 2002
(Restated)
Investments
Fixed maturities, at market $ 918,793 $ 641,593
Preferred stocks, at market $ 349,075 $ 288,413
Common stocks, at market $ 69,454 $ 114,208
Preferred stock mutual funds, at equity $ 259,403 $ 298,493
Mortgage loans $ 19,135 $ 34,422
Cash and short-term investments $ 111,040 $ 147,981
Other investments $ 24,749 $ 22,855
Total investments $ 1,751,649 $ 1,547,965
Accrued investment income $ 15,820 $ 16,321
Premiums receivable $ 392,743 $ 331,317
Deferred policy acquisition costs $ 157,247 $ 137,476
Property and equipment $ 51,552 $ 45,822
Due from reinsurers $ 111,679 $ 84,978
Residual market receivable $ 179,628 $ 156,022
Current income taxes $ - $ 2,324
Deferred income taxes $ 34,912 $ 27,221
Receivable for securities sold $ 21,505 $ -
Other assets $ 12,647 $ 13,687
Total assets $ 2,729,382 $ 2,363,133
Liabilities
Losses and LAE $ 893,248 $ 754,893
Unearned premiums $ 822,727 $ 698,411
Current income taxes $ 15,270 $ -
Deferred income $ 7,730 $ 8,034
Contingent commissions accrued $ 21,192 $ 23,332
Payable for securities purchased $ 52,361 $ 1,577
Other liabilities $ 56,700 $ 46,186
Total liabilities $ 1,869,228 $ 1,532,433
Minority interest $ 4,228 $ 4,449
Stockholders' equity
Preferred stock - -
Common stock $ 19,178 $ 19,108
Paid-in capital $ 42,140 $ 37,371
Net accumulated other comprehensive income $ 32,353 $ 26,060
Retained earnings $ 941,544 $ 883,335
$ 1,035,215 $ 965,874
Treasury stock $ (179,289) $ (139,623)
Total stockholders' equity $ 855,926 $ 826,251
Total liabilities, minority interest and stockholders' equity $ 2,729,382 $ 2,363,133
Common shares outstanding 31,955,030 32,909,423
Stockholders' equity per share $ 26.79 $ 25.11
Page 7 of 11
CGI 2Q '03 earnings
THE COMMERCE GROUP, INC. (NYSE: CGI - news)
CONSOLIDATED STATEMENTS OF EARNINGS
Three and Six Months Ended June 30, 2003 and 2002
(Thousands of Dollars, Except Per Share Data)
Unaudited
Three Months Ended Six Months Ended
June 30, June 30,
2003 2002 2003 2002
(Restated) (Restated)
Revenues:
Earned premiums $ 350,269 $ 296,410 $ 688,256 $ 577,174
Net investment income $ 23,108 $ 24,858 $ 45,812 $ 47,762
Premium finance and service fees $ 6,915 $ 5,065 $ 13,245 $ 9,997
Net realized investment gains (losses) $ 65,864 $ (31,545) $ 60,020 $ (34,992)
Other income $ - $ - $ - $ 7,000
TOTAL REVENUES $ 446,156 $ 294,788 $ 807,333 $ 606,941
Expenses:
Losses and LAE $ 269,211 $ 222,975 $ 543,605 $ 439,551
Policy acquisition costs $ 86,268 $ 77,053 $ 155,770 $ 142,072
TOTAL EXPENSES $ 355,479 $ 300,028 $ 699,375 $ 581,623
Earnings (loss) before income taxes (benefits),
change in accounting principle and minority interest $ 90,677 $ (5,240) $ 107,958 $ 25,318
Income taxes (benefit) $ 19,080 $ (3,787) $ 23,485 $ 4,048
Change in accounting principle, net of taxes $ - $ - $ - $ 11,237
Earnings (loss) before minority interest $ 71,597 $ (1,453) $ 84,473 $ 32,507
(Less) plus the (income) loss in minority interest in subsidiary $ (124) $ 153 $ (80) $ 163
NET EARNINGS (LOSS) $ 71,473 $ (1,300) $ 84,393 $ 32,670
COMPREHENSIVE INCOME $ 75,057 $ 8,242 $ 91,482 $ 46,336
EARNINGS (LOSS) PER COMMON SHARE:
BASIC $ 2.24 $ (0.04) $ 2.64 $ 0.99
DILUTED $ 2.22 $ (0.04) $ 2.62 $ 0.98
Page 8 of 11
CGI 2Q '03 earnings
THE COMMERCE GROUP, INC. (NYSE: CGI - news) (Continued)
CONSOLIDATED STATEMENTS OF EARNINGS
Three and Six Months Ended June 30, 2003 and 2002
(Thousands of Dollars, Except Per Share Data)
Unaudited
Three Months Ended Six Months Ended
June 30, June 30,
2003 2002 2003 2002
(Restated) (Restated)
Net earnings per share excluding the after-tax impact of net
realized investment gains (losses) and change in accounting
principle:
BASIC $ 0.70 $ 0.66 $ 1.30 $ 1.41
DILUTED $ 0.69 $ 0.65 $ 1.29 $ 1.40
Weighted average shares outstanding:
BASIC 31,930,507 32,968,368 31,986,847 33,025,426
DILUTED 32,156,738 33,334,199 32,187,013 33,355,669
Page 9 of 11
CGI 2Q '03 earnings
THE COMMERCE GROUP, INC. (NYSE: CGI - news)
ADDITIONAL EARNINGS INFORMATION
Three and Six Months Ended June 30, 2003 and 2002
(Thousands of Dollars, Except Per Share Data)
Unaudited
Three Months Ended Six Months Ended
June 30, June 30,
2003 2002 2003 2002
(Restated) (Restated)
ADDITIONAL EARNINGS INFORMATION:
Direct written premiums to earned premiums reconciliation:
Direct written premiums $ 415,787 $ 348,212 $ 864,581 $ 731,929
Assumed premiums $ 29,769 $ 34,898 $ 57,752 $ 59,053
Ceded premiums $ (60,081) $ (48,614) $ (109,823) $ (88,945)
Net written premiums $ 385,475 $ 334,496 $ 812,510 $ 702,037
Increase in unearned premiums $ (35,206) $ (38,086) $ (124,254) $ (124,863)
Earned premiums $ 350,269 $ 296,410 $ 688,256 $ 577,174
Statutory operating ratios for insurance subsidiaries:
Loss ratio 76.1% 74.7% 78.7% 75.8%
Underwriting ratio 22.7% 24.2% 21.3% 22.6%
Combined ratio 98.8% 98.9% 100.0% 98.4%
Reconciliation of net earnings (loss) to operating earnings:
Net earnings (loss) $ 71,473 $ (1,300) $ 84,393 $ 32,670
Plus net realized losses, minus net realized gains, net of tax $ (49,128) $ 23,007 $ (42,949) $ 25,248
Less SFAS 142 change in accounting principle, net of tax $ - $ - $ - $ (11,237)
Operating earnings $ 22,345 $ 21,707 $ 41,444 $ 46,681
Reconciliation of net earnings to operating earnings per diluted share:
Net earnings (loss) per diluted share $ 2.22 $ (0.04) $ 2.62 $ 0.98
Plus net realized losses, minus net realized gains, net of tax $ (1.53) $ 0.69 $ (1.33) $ 0.76
Less SFAS 142 change in accounting principle, net of tax $ - $ - $ - $ (0.34)
Operating earnings per diluted share $ 0.69 $ 0.65 $ 1.29 $ 1.40
Breakdown of net realized investment gains (losses)
Fixed maturities $ 12,652 $ (760) $ 16,025 $ (955)
Preferred stocks $ 8,131 $ (4) $ 9,112 $ (51)
Common stocks $ 13,485 $ (158) $ 13,752 $ (167)
Page 10 of 11
CGI 2Q '03 earnings
THE COMMERCE GROUP, INC. (NYSE: CGI - news) (Continued)
ADDITIONAL EARNINGS INFORMATION
Three and Six Months Ended June 30, 2003 and 2002
(Thousands of Dollars, Except Per Share Data)
Unaudited
Three Months Ended Six Months Ended
June 30, June 30,
2003 2002 2003 2002
(Restated) (Restated)
Preferred stock mutual funds:
Due to increase (decrease) in NAV $ 34,136 $ (18,085) $ 39,747 $ (19,361)
Due to sales $ (1,524) $ 308 $ (1,566) $ 336
Venture capital fund investments $ (463) $ (1,043) $ (1,051) $ (2,974)
Other $ (60) $ (69) $ (50) $ (86)
Other than temporary writedowns $ (493) $ (11,734) $ (15,949) $ (11,734)
Net realized investment gains (losses) before tax $ 65,864 $ (31,545) $ 60,020 $ (34,992)
Income tax (benefit) at 35% $ 23,052 $ (11,041) $ 21,007 $ (12,247)
Net realized investment gains (losses) after tax and before
impact of valuation allowance $ 42,812 $ (20,504) $ 39,013 $ (22,745)
Impact of valuation allowance $ 6,316 $ (2,503) $ 3,936 $ (2,503)
Net realized investment gains (losses) after tax and after
tax impact of valuation allowance $ 49,128 $ (23,007) $ 42,949 $ (25,248)
Per diluted share net realized gains (losses) after tax and
after tax impact of valuation allowance $ 1.53 $ (0.69) $ 1.33 $ (0.76)
Page 11 of 11