UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 8-K CURRENT REPORT Pursuant to Section 13 OR 15(d) of the Securities Exchange Act of 1934 Date of Report (Date of earliest event reported) October 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 October 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 October 27, 2005, The Commerce Group, Inc. (the "Company") issued a press release announcing its results for the quarter ended September 30, 2005. 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. October 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 (October 27, 2005) CONTACT: Randall V. Becker, Treasurer Treasurer (508) 949-4129 The Commerce Group, Inc. Announces 2005 Third Quarter Results and Comparison to 2004 WEBSTER, Mass., October 27, 2005 -- The Commerce Group, Inc. (NYSE:CGI) today reported 2005 third quarter results. Net earnings were $59.8 million, or $1.77 per diluted share, compared to net earnings of $54.3 million or $1.64 per diluted share for 2004. During the third quarter of 2005, the Company had net realized investment gains of $0.2 million with no reportable per share effect, compared to net realized investment losses of $2.2 million or $0.04 per diluted share in the third quarter of 2004. A complete breakdown of this information is included in the attached tables. Earned premiums were $428.3 million for the third quarter of 2005, compared to $413.8 million for 2004. A schedule of direct premiums written to earned premiums is included in the attached tables. The third quarter GAAP consolidated combined ratio was 88.1%, compared to 88.6% for 2004. 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 third quarter of 2005 decreased to 56.1% from 57.5% during the same period last year. The improvement was the result of several factors, including: (1) improved current year results and continued favorable prior years' loss development from Commonwealth Automobile Reinsurers (CAR); (2) an increase in average earned premium revenue per automobile; and, (3) a decline in the current year personal and commercial automobile bodily injury claim frequency, coupled with a decrease in personal automobile physical damage claim frequency, offset by a reduced amount of favorable voluntary loss reserve development compared to the third quarter of last year. The Company's GAAP consolidated underwriting ratio increased to 32.0%, as compared to 31.1% for last year's third quarter, primarily as a result of higher accrued agents' profit sharing and slightly higher 2005 policy year mandated Massachusetts personal automobile commission rates. Cumulative September 30, 2005 Results Net earnings for the first nine months of 2005 were $180.4 million, or $5.33 per diluted share, compared to net earnings of $142.7 million or $4.35 per diluted share for 2004. During the first nine months of 2005, the Company had net realized investment gains of $20.8 million or $0.40 per diluted share, compared to net realized investment gains of $9.6 million or $0.19 per diluted share in the same period of 2004. A complete breakdown of this information is included in the attached tables. MORE Page 3 of 9 CGI 3Q'05 Earnings Release (page 2 of 6) Earned premiums were $1,279.3 million for the first nine months of 2005, compared to $1,213.8 million for 2004. A schedule of direct premiums written to earned premiums is included in the attached tables. The 2005 nine-month GAAP consolidated combined ratio was 88.8%, compared to 91.0% for 2004. 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 first nine months of 2005 decreased to 61.8% from 65.6% 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) improved results from CAR; (3) a decrease in the current year personal and commercial automobile bodily injury claim frequency, partially offset by an increase in physical damage claim frequency and a reduced amount of favorable voluntary loss reserve development compared to 2004. The Company's GAAP consolidated underwriting ratio increased to 27.0% for the first nine months of 2005, as compared to 25.4% for the same period of 2004, primarily as a result of significantly higher accrued agents' profit sharing and slightly higher 2005 policy year mandated Massachusetts personal automobile commission rates. The higher accrued agents' profit sharing is an outcome of substantially better underwriting results for the first nine months of 2005 versus the comparable period in 2004. A complete presentation of September 30, 2005 and 2004 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 by Friday morning on the Company's website at www.commerceinsurance.com, under the "Links" section of the "News and Investor Information" area. At September 30, 2005, the Company had authority to purchase approximately 858,000 additional shares of common stock under the current Board of Directors' stock re-purchase authorization. All quarterly figures are unaudited and all results are reported in accordance with accounting principles generally accepted in the United States (GAAP). 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 19th largest personal automobile insurance group in the country by A. M. Best Company, based on 2004 direct written premium information. The Company and its insurance subsidiaries are rated A+ (Superior) by A. M. Best. 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. MORE Page 4 of 9 CGI 3Q'05 Earnings Release (page 3 of 6) Forward Looking Statements (continued) 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 3Q '05 Earnings Release (page 4 of 6) THE COMMERCE GROUP, INC. (NYSE - CGI) CONSOLIDATED BALANCE SHEETS September 30, 2005 and 2004 (Thousands of Dollars, Except Per Share Data) Unaudited Sept. 30, Sept. 30, 2005 2004 Assets: Investments Fixed maturities, at market $ 1,991,574 $ 1,672,827 Preferred stocks, at market $ 446,036 $ 421,373 Common stocks, at market $ 116,776 $ 96,725 Preferred stock mutual fund, at equity $ 71,330 $ 56,051 Mortgage loans and collateral notes receivable $ 17,296 $ 14,390 Cash and cash equivalents $ 27,662 $ 107,224 Other investments, at equity $ 29,090 $ 35,791 Total investments $ 2,699,764 $ 2,404,381 Accrued investment income $ 22,076 $ 19,511 Premiums receivable $ 508,192 $ 486,480 Deferred policy acquisition costs $ 185,195 $ 175,555 Property and equipment, net $ 59,397 $ 51,529 Due from reinsurers $ 145,832 $ 135,687 Residual market receivable $ 202,865 $ 214,069 Deferred income taxes $ 51,431 $ 43,876 Current income taxes $ 6,517 $ - Receivable for securities sold $ 10 $ 521 Other assets $ 20,058 $ 18,757 Total assets $ 3,901,337 $ 3,550,366 Liabilities: Unpaid losses and LAE $ 1,000,997 $ 1,012,871 Unearned premiums $ 1,002,710 $ 958,979 Bonds payable $ 298,337 $ 298,135 Current income taxes $ - $ 1,031 Deferred income $ 9,845 $ 10,537 Accrued agents' profit sharing $ 153,561 $ 77,264 Payable for securities purchased $ 12,392 $ 221 Outstanding checks payable $ 42,117 $ 38,800 Advance premiums and commissions payable $ 29,407 $ 27,875 Other liabilities $ 86,719 $ 74,369 Total liabilities $ 2,636,085 $ 2,500,082 Minority interest $ 5,742 $ 4,872 Stockholders' equity: Preferred stock $ - $ - Common stock $ 20,458 $ 20,258 Paid-in capital $ 148,130 $ 127,159 Net accumulated other comprehensive income (loss) $ (1,676) $ 11,788 Retained earnings $ 1,312,814 $ 1,108,298 Stockholders' equity before treasury stock $ 1,479,726 $ 1,267,503 Treasury stock $ (220,216) $ (222,091) Total stockholders' equity $ 1,259,510 $ 1,045,412 Total liabilities, minority interest and stockholders' equity $ 3,901,337 $ 3,550,366 Common shares outstanding 33,653,202 33,159,981 Stockholders' equity per share $ 37.43 $ 31.53 Page 6 of 9 CGI 3Q '05 Earnings Release (page 5 of 6) THE COMMERCE GROUP, INC. (NYSE - CGI) CONSOLIDATED STATEMENTS OF EARNINGS AND COMPRESHENSIVE INCOME Three and Nine Months Ended September 30, 2005 and 2004 (Thousands of Dollars, Except Per Share Data) Unaudited Three Months Ended Six Months Ended September 30, September 30, 2005 2004 2005 2004 Revenues: Earned premiums $ 428,297 $ 413,751 $ 1,279,291 $ 1,213,830 Net investment income $ 30,040 $ 30,021 $ 90,360 $ 85,730 Premium finance and service fees $ 7,210 $ 7,312 $ 21,455 $ 21,377 Net realized investment gains (losses) $ 196 $ (2,247) $ 20,800 $ 9,610 Other income (loss) $ (11) $ 2 $ 4 $ 115 TOTAL REVENUES $ 465,732 $ 448,839 $ 1,411,910 $ 1,330,662 Expenses: Losses and LAE $ 240,279 $ 237,918 $ 790,174 $ 796,606 Policy acquisition costs $ 134,715 $ 128,457 $ 346,766 $ 318,881 Interest expense & amortization of bond fees $ 4,584 $ 4,608 $ 13,711 $ 13,703 TOTAL EXPENSES $ 379,578 $ 370,983 $ 1,150,651 $ 1,129,190 Earnings before income taxes and minority interest $ 86,154 $ 77,856 $ 261,259 $ 201,472 Income taxes $ 26,084 $ 23,329 $ 80,146 $ 58,233 Earnings before minority interest $ 60,070 $ 54,527 $ 181,113 $ 143,239 Minority interest in net earnings of subsidiary $ (240) $ (213) $ (683) $ (495) NET EARNINGS $ 59,830 $ 54,314 $ 180,430 $ 142,744 COMPREHENSIVE INCOME $ 45,029 $ 87,923 $ 162,351 $ 125,449 EARNINGS PER COMMON SHARE: BASIC $ 1.78 $ 1.65 $ 5.38 $ 4.37 DILUTED $ 1.77 $ 1.64 $ 5.33 $ 4.35 Cash dividends paid per common share $ 0.38 $ 0.33 $ 1.09 $ 0.98 Weighted average shares outstanding: BASIC 33,631,090 32,984,958 33,563,163 32,652,594 DILUTED 33,875,796 33,196,077 33,843,042 32,808,858 Page 7 of 9 CGI 3Q '05 Earnings Release (page 6 of 6) THE COMMERCE GROUP, INC. (NYSE - CGI) ADDITIONAL EARNINGS INFORMATION Three and Nine Months September 30, 2005 and 2004 (Thousands of Dollars, Except Per Share Data) Unaudited Three Months Ended Six Months Ended September 30, September 30, 2005 2004 2005 2004 ADDITIONAL EARNINGS INFORMATION: Direct premiums written to earned premiums reconciliation: Direct premiums written $ 479,076 $ 466,612 $ 1,470,088 $ 1,433,185 Assumed premiums $ 18,435 $ 24,799 $ 107,679 $ 102,369 Ceded premiums $ (76,084) $ (75,239) $ (211,347) $ (195,949) Net written premiums $ 421,427 $ 416,172 $ 1,366,420 $ 1,339,605 Decrease (increase) in unearned premiums $ 6,870 $ (2,421) $ (87,129) $ (125,775) Earned premiums $ 428,297 $ 413,751 $ 1,279,291 $ 1,213,830 GAAP consolidated operating ratios: (1) Loss ratio 56.1% 57.5% 61.8% 65.6% Underwriting ratio 32.0% 31.1% 27.0% 25.4% Combined ratio 88.1% 88.6% 88.8% 91.0% GAAP operating ratios for combined insurance subsidiaries only: (2) Loss ratio 55.5% 57.3% 61.1% 64.9% Underwriting ratio 31.4% 30.8% 26.4% 24.8% Combined ratio 86.9% 88.1% 87.5% 89.7% Breakdown of net realized investment gains (losses): Fixed maturities $ 1,882 $ (635) $ 19,899 $ 2,636 Preferred stocks $ 1,176 $ 4,109 $ 2,182 $ 11,309 Common stocks $ (53) $ 227 $ 911 $ 5,171 Preferred stock mutual funds: Due to increase (decrease) in NAV $ (1,411) $ 3,153 $ 1,230 $ 7 Due to sales $ - $ 47 $ - $ 85 Venture capital fund investments $ 217 $ 3,258 $ 1,826 $ 4,773 Other $ (726) $ (7) $ (396) $ (204) Other than temporary writedowns $ (889) $ (12,399) $ (4,852) $ (14,167) Net realized investment gains (losses) before tax $ 196 $ (2,247) $ 20,800 $ 9,610 Income tax expense (benefit) at 35% $ 69 $ (786) $ 7,280 $ 3,364 Net realized investment gains (losses) after tax $ 127 $ (1,461) $ 13,520 $ 6,246 Per diluted share net realized gains (losses) after tax $ 0.00 $ (0.04) $ 0.40 $ 0.19 Page 8 of 9 CGI 3Q '05 Earnings Release (page 6 of 6) Continued THE COMMERCE GROUP, INC. (NYSE - CGI) CONSOLIDATED STATEMENTS OF EARNINGS AND COMPRESHENSIVE INCOME Three and Nine Months Ended September 30, 2005 and 2004 (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 in deferred acquisition costs of $216 and $1,179 for the three months ended and $21,550 and $21,948 for the nine months ended September 30, for 2005 and 2004, 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