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)
January 27, 2005
THE COMMERCE GROUP, INC.
(Exact name of registrant as specified in its charter)
Massachusetts 001-13672 04-2599931
(State or other (Commission File (IRS Employer
jurisdiction Number) Identification
of incorporation) No.)
211 Main Street, Webster, Massachusetts 01570
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (508) 943-9000
Check the appropriate box below if the Form 8-K filing is intended to
simultaneously satisfy the filing obligation of the registrant under
any of the following provisions (see General Instruction A.2 below):
[ ] Written communications pursuant to Rule 425 under the Securities
Act (17 CFR 230.425)
[ ] Soliciting material pursuant to Rule 14a-12 under the Exchange
Act (17 CFR 240.14a-12)
[ ] Pre-commencement communications pursuant to Rule 14d-2(b) under
the Exchange Act (17 CFR 240.14d-2(b))
[ ] Pre-commencement communications pursuant to Rule 13e-4(c) under
the Exchange Act (17 CFR 240.14e-4(c))
Page 1 of 9
The Commerce Group, Inc.
Form 8-K
January 27, 2005
Section 2. Financial Information
Item 2.02 Results of Operations and Financial Condition
The following information is being furnished under Item 2.02 -
Results of Operations and Financial Condition. Such information,
including the exhibit attached hereto, shall not be deemed "filed" for
purposes of Section 18 of the Securities Exchange Act of 1934, as
amended, or otherwise subject to the liability of that section.
On January 27, 2005, The Commerce Group, Inc. (the "Company")
issued a press release announcing its results for the quarter ended
December 31, 2004. A copy of the press release is attached as Exhibit
99.1 to this Form 8-K.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf
by the undersigned hereunto duly authorized.
THE COMMERCE GROUP, INC.
January 27, 2005
/s/ Randall V. Becker
Randall V. Becker
Treasurer and Chief Accounting Officer
Page 2 of 9
Exhibit 99.1
Press Release
RELEASE: Immediate (January 27, 2005)
CONTACT: Randall V. Becker
Treasurer
(508) 949-4129
The Commerce Group, Inc.
Announces 2004 Fourth Quarter Results
and Comparison to 2003
WEBSTER, Mass., January 27, 2005 -- The Commerce Group, Inc.
(NYSE:CGI) today reported 2004 fourth quarter results. Net earnings
were $71.7 million, or $2.14 per diluted share, compared to net
earnings of $53.7 million or $1.65 per diluted share for 2003.
During the fourth quarter of 2004, the Company had net realized
investment gains of $14.0 million or $0.27 per diluted share, compared
to gains of $13.5 million or $0.27 per diluted share in the fourth
quarter of 2003. A complete breakdown of this information is included
in the attached tables.
Earned premiums were $425.0 million for the fourth quarter of 2004,
compared to $384.7 million for 2003. A schedule of direct written
premiums to earned premiums is included in the attached tables.
The fourth quarter GAAP consolidated operating combined ratio was
87.5%, compared to 91.2% for 2003. The decrease in the combined ratio
was the result of a decrease in the loss ratio partially offset by an
increase in the underwriting ratio. The Company's GAAP consolidated
loss ratio for the fourth quarter of 2004 decreased to 58.4% from
64.1% during the same period last year. The improvement was the
result of several factors, including: (1) an increase in average
earned premium revenue per automobile; (2) decreases in the current
year personal automobile physical damage and bodily injury claim
frequencies; (3) improved results from Commonwealth Automobile
Reinsurers (C.A.R.); and, (4) a partial offset from a decline in the
amount of favorable loss reserve development compared to the fourth
quarter of last year. The Company's GAAP consolidated underwriting
ratio increased to 29.1%, as compared to 27.1% for last year's fourth
quarter, primarily as a net result of significantly higher accrued
agents' profit sharing partially offset by lower 2004 policy year
mandated Massachusetts personal automobile commission rates. The
higher accrued agents' profit sharing is an outcome of substantially
better underwriting results for the fourth quarter of 2004 versus last
year's fourth quarter.
Cumulative December 31, 2004 Results
Net earnings for 2004 were $214.4 million, or $6.51 per diluted share,
compared to net earnings of $160.9 million or $4.99 per diluted share
for 2003.
During 2004, the Company had net realized investment gains of $23.6
million or $0.47 per diluted share, compared to gains of $76.1 million
or $1.66 per diluted share in 2003. A complete breakdown of this
information is included in the attached tables.
MORE
Page 3 of 9
CGI 4Q'04 Earnings Release (page 2 of 6)
Earned premiums were $1,638.8 million for 2004, compared to $1,445.6
million for 2003. A schedule of direct written premiums to earned
premiums is included in the attached tables.
The 2004 GAAP consolidated operating combined ratio was 90.0%,
compared to 97.5% for 2003. The decrease in the combined ratio was
the result of a decrease in the loss ratio, partially offset by an
increase in the underwriting ratio. The Company's GAAP consolidated
loss ratio for 2004 decreased to 63.8% from 74.0% last year. The
improvement was the result of several factors, including: (1) an
increase in average earned premium revenue per automobile; (2) a
decrease in the current year personal automobile physical damage claim
frequency; (3) more favorable loss reserve development; and, (4)
improved results from C.A.R. The Company's GAAP consolidated
underwriting ratio increased to 26.2%, as compared to 23.5% last year,
primarily as a net result of significantly higher accrued agents'
profit sharing, partially offset by lower 2004 policy year mandated
Massachusetts personal automobile commission rates. The higher
accrued agents' profit sharing is the outcome of substantially better
underwriting results in 2004 versus last year.
A complete presentation of December 31, 2004 and 2003 financial
statement information is included in the financial statements attached
to this press release.
Additional supplemental financial information will be available on
January 28th on the Company's website at www.commerceinsurance.com,
under the "Links" section of the "News and Investor Information" area.
At December 31, 2004, the Company had authority to purchase
approximately 858,000 additional shares of common stock under the
current Board of Directors' stock re-purchase authorization, which
excludes treasury stock acquired as a result of officer stock option
exercises. During the fourth quarter, the Company issued
approximately 212,000 shares of common stock related to all option
exercises. During 2004, the Company issued approximately 2,100,000
shares of common stock related to all option exercises.
All quarterly figures are unaudited and all results are reported in
accordance with accounting principles generally accepted in the United
States (GAAP).
The Company is analyzing the financial impact of the Massachusetts
residual market reform, as approved by the Commissioner of Insurance
on December 31, 2004. This reform differs significantly from the
proposed changes discussed in our October 22, 2004 press release on
this topic. The Company will release the analysis of the financial
impact of this reform when it deems appropriate.
About The Commerce Group, Inc.
The Commerce Group, Inc. is headquartered in Webster, Massachusetts.
Property and casualty insurance subsidiaries include The Commerce
Insurance Company and Citation Insurance Company in Massachusetts,
Commerce West Insurance Company in California, and American Commerce
Insurance Company in Ohio. Through its subsidiaries' combined
insurance activities, the Company is ranked as the 20th largest
personal automobile insurance group in the country by A. M. Best
Company, based on 2003 direct written premium information.
MORE
Page 4 of 9
CGI 4Q'04 Earnings Release (page 3 of 6)
Forward Looking Statements
This press release may contain statements that are not historical fact
and constitute "forward-looking statements" within the meaning of
Section 27A of the Securities Act and Section 21E of the Securities
Exchange Act.
Statements about our expectations, beliefs, plans, objectives,
assumptions or future events or performance are not historical facts
and may be forward- looking. These statements are often, but not
always, made through the use of words or phrases such as
"anticipates," "estimates," "plans," "projects," "continuing,"
"ongoing," "expects," "may," "should," "management believes," "we
believe," "we intend," and similar words or phrases.
These statements may address, among other things, our strategy for
growth, business development, regulatory approvals, market position,
expenditures, financial results and reserves. Accordingly, these
statements involve estimates, assumptions and uncertainties that could
cause actual results to differ materially from those expressed in
them. All forward-looking statements are qualified in their entirety
by reference to the factors discussed throughout this press release
and in our Forms 10-K and 10-Q, and other documents filed with the
SEC. Among the key factors that could cause actual results to differ
materially from forward-looking statements:
* the possibility of severe weather and adverse catastrophe
experiences;
* adverse trends in claim severity or frequency;
* adverse state and federal regulations and legislation;
* adverse judicial decisions;
* adverse changes to the laws, regulations and rules governing
the residual market system in Massachusetts;
* interest rate risk;
* rate making decisions for private passenger automobile policies
in Massachusetts;
* potential rate filings;
* heightened competition;
* concentration of business within Massachusetts;
* market disruption in Massachusetts, if competitors exited the
market or become insolvent;
* dependence on our executive officers; and,
* the economic, market or regulatory conditions and risks
associated with entry into new markets and diversification.
You should not place undue reliance on any forward-looking statement.
The risk factors referred to above could cause actual results or
outcomes to differ materially from those expressed in any forward-
looking statement made by us or on our behalf. Further, any forward-
looking statement speaks only as of the date on which it is made, and
we undertake no obligation to update any forward-looking statement to
reflect events or circumstances after the date on which the statement
is made or to reflect the occurrence of unanticipated events. New
factors emerge from time to time, and it is not possible for us to
predict which factors will arise. In addition, we cannot assess the
impact of each factor on our business or the extent to which any
factor, or combination of factors, may cause actual results to differ
materially from those contained in any forward-looking statements.
(Tables Follow)
Page 5 of 9
CGI 4Q '04 Earnings Release (page 4 of 6)
THE COMMERCE GROUP, INC. (NYSE - CGI)
CONSOLIDATED BALANCE SHEETS
December 31, 2004 and 2003
(Thousands of Dollars, Except Per Share Data)
Unaudited
Dec. 31, Dec. 31,
2004 2003
Assets
Investments
Fixed maturities, at market $ 1,692,523 $ 1,497,731
Preferred stocks, at market $ 422,344 $ 298,721
Common stocks, at market $ 81,433 $ 105,523
Preferred stock mutual funds, at equity $ 61,429 $ 54,274
Mortgage loans and collateral notes receivable $ 14,735 $ 16,395
Cash and cash equivalents $ 220,988 $ 215,541
Other investments $ 34,281 $ 22,914
Total investments $ 2,527,733 $ 2,211,099
Accrued investment income $ 18,643 $ 19,308
Premiums receivable $ 457,928 $ 408,894
Deferred policy acquisition costs $ 163,645 $ 153,605
Property and equipment, net $ 53,757 $ 52,997
Due from reinsurers $ 133,328 $ 117,786
Residual market receivable $ 193,618 $ 192,743
Deferred income taxes $ 43,372 $ 33,240
Receivable for securities sold $ 10 $ 6,972
Other assets $ 18,362 $ 14,642
Total assets $ 3,610,396 $ 3,211,286
Liabilities
Unpaid losses and LAE $ 990,260 $ 957,353
Unearned premiums $ 902,566 $ 810,462
Bonds payable $ 298,186 $ 297,984
Current income taxes $ 5,115 $ 15,091
Deferred income $ 9,906 $ 7,946
Accrued agents' profit sharing $ 109,432 $ 37,887
Payable for securities purchased $ 11,871 $ 13,610
Outstanding checks payable $ 39,356 $ 39,479
Advance premiums and commissions payable $ 48,343 $ 47,055
Other liabilities $ 74,079 $ 67,818
Total liabilities $ 2,489,114 $ 2,294,685
Minority interest $ 5,126 $ 4,390
Stockholders' equity
Preferred stock - -
Common stock $ 20,364 $ 19,315
Paid-in capital $ 134,943 $ 52,090
Net accumulated other comprehensive income $ 16,403 $ 29,083
Retained earnings $ 1,169,009 $ 997,610
Stockholders' equity before treasury stock $ 1,340,719 $ 1,098,098
Treasury stock $ (224,563) $ (185,887)
Total stockholders' equity $ 1,116,156 $ 912,211
Total liabilities, minority interest and stockholders' equity $ 3,610,396 $ 3,211,286
Common shares outstanding 33,322,748 32,060,700
Stockholders' equity per share $ 33.50 $ 28.45
Page 6 of 9
CGI 4Q '05 Earnings Release (page 5 of 6)
THE COMMERCE GROUP, INC. (NYSE - CGI)
CONSOLIDATED STATEMENTS OF EARNINGS
Three and Twelve Months Ended December 31, 2004 and 2003
(Thousands of Dollars, Except Per Share Data)
Unaudited
Three Months Ended Twelve Months Ended
Dec. 31, Dec. 31,
2004 2003 2004 2003
Revenues:
Earned premiums $ 425,003 $ 384,662 $ 1,638,833 $ 1,445,628
Net investment income $ 29,981 $ 23,053 $ 115,711 $ 92,183
Premium finance and service fees $ 6,904 $ 6,701 $ 28,281 $ 26,908
Net realized investment gains $ 14,018 $ 13,453 $ 23,628 $ 76,103
Other income $ 3 $ - $ 118 $ -
TOTAL REVENUES $ 475,909 $ 427,869 $ 1,806,571 $ 1,640,822
Expenses:
Losses and LAE $ 248,234 $ 246,536 $ 1,044,840 $ 1,070,147
Policy acquisition costs $ 120,351 $ 100,892 $ 439,232 $ 350,250
Interest expense & amortization of bond fees $ 4,610 $ 1,120 $ 18,313 $ 1,120
TOTAL EXPENSES $ 373,195 $ 348,548 $ 1,502,385 $ 1,421,517
Earnings before income taxes and minority interest $ 102,714 $ 79,321 $ 304,186 $ 219,305
Income taxes $ 30,770 $ 25,470 $ 89,003 $ 58,068
Earnings before minority interest $ 71,944 $ 53,851 $ 215,183 $ 161,237
Less the income in minority interest in subsidiary $ (257) $ (165) $ (752) $ (294)
NET EARNINGS $ 71,687 $ 53,686 $ 214,431 $ 160,943
COMPREHENSIVE INCOME $ 76,302 $ 62,438 $ 201,751 $ 164,762
EARNINGS PER COMMON SHARE:
BASIC $ 2.16 $ 1.67 $ 6.54 $ 5.03
DILUTED $ 2.14 $ 1.65 $ 6.51 $ 4.99
Cash dividends paid per common share $ 0.33 $ 0.32 $ 1.31 $ 1.27
Weighted average shares outstanding:
BASIC 33,247,064 32,063,797 32,802,023 32,000,220
DILUTED 33,558,547 32,470,528 32,952,714 32,254,663
Page 7 of 9
CGI 4Q '04 Earnings Release (page 6 of 6)
THE COMMERCE GROUP, INC. (NYSE - CGI)
ADDITIONAL EARNINGS INFORMATION
Three and Twelve Months Ended December 31, 2004 and 2003
(Thousands of Dollars, Except Per Share Data)
Unaudited
Three Months Ended Twelve Months Ended
Dec. 31, Dec. 31,
2004 2003 2004 2003
ADDITIONAL EARNINGS INFORMATION:
Direct written premiums to earned premiums reconciliation:
Direct written premiums $ 405,056 $ 371,574 $ 1,838,241 $ 1,658,969
Assumed premiums $ 25,783 $ 24,024 $ 128,152 $ 112,547
Ceded premiums $ (57,901) $ (53,624) $ (253,850) $ (216,017)
Net written premiums $ 372,938 $ 341,974 $ 1,712,543 $ 1,555,499
Increase in unearned premiums $ 52,065 $ 42,688 $ (73,710) $ (109,871)
Earned premiums $ 425,003 $ 384,662 $ 1,638,833 $ 1,445,628
GAAP consolidated operating ratios: (1)
Loss ratio 58.4% 64.1% 63.8% 74.0%
Underwriting ratio 29.1% 27.1% 26.2% 23.5%
Combined ratio 87.5% 91.2% 90.0% 97.5%
GAAP operating ratios for combined insurance subsidiaries only: (2)
Loss ratio 56.9% 62.3% 62.8% 73.3%
Underwriting ratio 27.4% 25.3% 25.4% 23.0%
Combined ratio 84.3% 87.6% 88.2% 96.3%
Breakdown of net realized investment gains:
Fixed maturities $ 10,097 $ 4,731 $ 12,733 $ 22,800
Preferred stocks $ 1,148 $ 2,452 $ 12,457 $ 14,284
Common stocks $ 1,457 $ 2,578 $ 6,628 $ 18,599
Preferred stock mutual funds:
Due to increase in NAV $ 3,289 $ 4,544 $ 3,296 $ 37,695
Due to sales $ (85) $ (1,261) $ - $ 642
Venture capital fund investments $ (1,105) $ 542 $ 3,668 $ 32
Other $ (1) $ (133) $ (205) $ (333)
Other than temporary writedowns $ (782) $ - $ (14,949) $ (17,616)
Net realized investment gains before tax $ 14,018 $ 13,453 $ 23,628 $ 76,103
Income tax at 35% $ 4,906 $ 4,709 $ 8,270 $ 26,636
Net realized investment gains after tax and before
impact of tax valuation allowance $ 9,112 $ 8,744 $ 15,358 $ 49,467
Impact of tax valuation allowance $ - $ - $ - $ 3,936
Net realized investment gains after tax and after
impact of tax valuation allowance $ 9,112 $ 8,744 $ 15,358 $ 53,403
Per diluted share net realized gains after tax and
after impact of tax valuation allowance $ 0.27 $ 0.27 $ 0.47 $ 1.66
Page 8 of 9
CGI 4Q '04 Earnings Release (page 6 of 6) - Continued
THE COMMERCE GROUP, INC. (NYSE - CGI)
ADDITIONAL EARNINGS INFORMATION
Three and Twelve Months Ended December 31, 2004 and 2003
(Thousands of Dollars, Except Per Share Data)
Unaudited
(1) GAAP consolidated operating ratios are calculated as in (2) below
using the combined insurance subsidiaries' loss and underwriting
results, adding to them the expenses of the holding companies
(corporate expenses) in order to equal the loss and underwriting
expense amounts on the income statement. For purposes of the
U/W ratio, underwriting expenses are grossed-up for the increase
(decrease) in deferred acquisition costs of ($11,911) and ($8,223)
for the three months ended and $10,037 and $15,364 for the years
ended December 31, 2004 and 2003, respectively.
(2) GAAP operating ratios for combined insurance subsidiaries are
calculated as follows:
(a) The loss ratio represents losses and LAE divided by earned
premiums; and,
(b) The underwriting ratio represents underwriting expenses
(excluding changes in deferred acquisition costs), divided
by net premiums written. No corporate expenses are
included in the calculations.
Page 9 of 9