EX-99.1 2 a5324302ex99_1.htm EXHIBIT 99.1 Exhibit 99.1
Exhibit 99.1
 
 

RELEASE:
Immediate (February 1, 2007)
   
   
CONTACT:
Randall V. Becker, Chief Financial Officer
 
The Commerce Group, Inc.
 
(508) 949-4129
 

The Commerce Group, Inc.
Announces 2006 Fourth Quarter Results
and Comparison to 2005


WEBSTER, MA, February 1, 2007 -- The Commerce Group, Inc. (NYSE:CGI) today reported 2006 fourth quarter results. Net earnings were $59.4 million, or $0.87 per diluted share, compared to net earnings of $63.5 million or $0.94 per diluted share for 2005.

Included in the 2006 fourth quarter results are net realized investment gains of $9.0 million, or $0.09 per diluted share, compared to gains of $2.1 million, or $0.02 per diluted share, in the fourth quarter of 2005. A complete breakdown of this information is included in the attached tables.

Earned premiums were $457.8 million for the fourth quarter of 2006, compared to $430.6 million for the fourth quarter of 2005. A schedule of direct written premiums to earned premiums is included in the attached tables.

The fourth quarter GAAP consolidated combined ratio was 95.1%, compared to 89.0% for 2005. The increase in the combined ratio was the result of increases in both the loss ratio and the underwriting ratio. The Company’s GAAP consolidated loss ratio for the fourth quarter of 2006 increased to 63.2% from 60.4% during the same period last year. The loss ratio increase was the result of several factors, including reduced favorable loss reserve development compared to the fourth quarter of last year, decreased earned premium per earned exposure as a result of the 2006 mandated premium rate decrease in Massachusetts, coupled with less reinsurance recoveries as a result of the termination of our other-than-automobile quota share agreement. These factors were partially offset by decreases in the current year automobile bodily injury and physical damage claim frequencies compared to the same period last year. The Company’s GAAP consolidated underwriting ratio increased to 31.9%, as compared to 28.6% for last year’s fourth quarter. This increase results principally from reduced ceded reinsurance commissions. The reduction in ceded reinsurance commissions resulted from the termination of our other-than-automobile quota share agreement. Our Massachusetts written premium per automobile decreased approximately 5.2% in the fourth quarter compared to last year.

In the fourth quarter, net investment income increased 20.2% over the same period last year to $39.5 million resulting from an increase in both invested assets and investment yields.
 

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CGI 4Q’06 Earnings Release (page 2 of 7)

Cumulative December 31, 2006 Results

Net earnings for 2006 were $241.5 million, or $3.55 per diluted share, compared to net earnings of $243.9 million or $3.60 per diluted share for 2005.

During 2006, the Company had net realized investment gains of $16.6 million, or $0.16 per diluted share, compared to gains of $22.9 million, or $0.22 per diluted share in 2005. A complete breakdown of this information is included in the attached tables.

Earned premiums were $1,760.7 million for 2006, compared to $1,709.9 million for 2005. A schedule of direct written premiums to earned premiums is included in the attached tables.

The 2006 GAAP consolidated combined ratio was 89.2%, compared to 88.7% for 2005. The increase in the combined ratio was the result of an increase in the underwriting ratio, partially offset by a decline in the loss ratio. The Company’s GAAP consolidated loss ratio for 2006 decreased to 60.7% from 61.4% during last year. The improvement was the result of decreases in the current year automobile bodily injury and physical damage claim frequencies compared to the same period last year; and, continued improvement in the results from C.A.R. due to fewer industry-wide cessions to C.A.R. coupled with lower loss ratios on that business and more favorable C.A.R. reserve development. These items were partially offset by reduced favorable voluntary reserve development compared to 2005. The Company’s GAAP consolidated underwriting ratio increased to 28.5% for 2006, compared to 27.3% for 2005 for the same reason as mentioned for the fourth quarter. Our Massachusetts written premium per automobile decreased approximately 5.6% in 2006 compared to last year.

A complete presentation of December 31, 2006 and 2005 financial statement information is included in the financial statements attached to this press release.

Additional supplemental financial information will be available by Friday on the Company’s website at www.commerceinsurance.com, at the “Investors” tab under the “Financial Reports” link.

During the fourth quarter of 2006, the Company repurchased 1,058,289 shares of common stock at an average cost of $29.90 per share. Since year end and through January 31, 2007, the Company repurchased an additional 594,968 shares at an average cost of $29.51 per share. At February 1, 2007, the Company had authority to repurchase an additional 3,589,475 shares of common stock under the current Board of Directors’ stock repurchase authorization.

All quarterly figures are unaudited and all results are reported in accordance with accounting principles generally accepted in the United States of America (GAAP). Per share data for 2006 and 2005 reflect the impact of the June 9, 2006 two-for-one split of our common stock.


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CGI 4Q’06 Earnings Release (page 3 of 7)


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 2005 direct written premium information. The Company and its insurance subsidiaries’ A.M. Best ratings of A+ (Superior) were affirmed during the second quarter.

During the fourth quarter, the Company announced that it has entered into an agreement through which it expects to enter the New York personal lines insurance market in 2007. Under the terms of the agreement, ACIC Holding Company, Inc., a subsidiary of the Company, will acquire SWICO Enterprises, Ltd., the holding company for Hempstead, New York-based property and casualty insurer State-Wide Insurance Company, in a transaction valued at $52 million. The transaction is expected to close by early second quarter of 2007.

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,” “will,” “could,” “likely,” “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, terrorism and other adverse catastrophic experiences;
 
·
adverse trends in claim severity or frequency and the uncertainties in estimating property and casualty losses;
 
·
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;

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CGI 4Q’06 Earnings Release (page 4 of 7)
 
 
·
fluctuations in interest rates and the performance of the financial markets in relation to the composition of our investment portfolio;
 
·
premium rate making decisions for private passenger automobile policies in Massachusetts;
 
·
potential rate filings;
 
·
heightened competition;
 
·
our concentration of business within Massachusetts and within the personal automobile line of business;
 
·
market disruption in Massachusetts, if competitors exited the market or become insolvent;
 
·
the cost and availability of reinsurance;
 
·
our ability to collect on reinsurance and the solvency of our reinsurers;
 
·
the effectiveness of our reinsurance strategies;
 
·
telecommunication and information systems problems, including failures to implement information technology projects timely and within budget;
 
·
our ability to maintain favorable ratings from rating agencies, including A.M. Best, S&P, Moody’s and Fitch;
 
·
our ability to attract and retain independent agents;
 
·
our ability to retain our affinity relationships with AAA clubs, especially in Massachusetts;
 
·
our dependence on a key third party service vendor for our automobile business in Massachusetts;
 
·
our 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)
 
 
CGI 4Q '06 Earnings Release (page 5 of 7)
 
THE COMMERCE GROUP, INC. (NYSE - CGI)
CONSOLIDATED BALANCE SHEET
December 31, 2006 and 2005
(Thousands of Dollars, Except Per Share Data)
Unaudited
 
   
Dec. 31
  
Dec. 31
  
   
2006
  
2005
  
Assets:
          
Investments and cash:
              
Fixed maturities, at market
  
$
1,993,106
  
$
2,029,173
  
Preferred stocks, at market
    
606,222
   
393,681
 
Common stocks, at market
    
109,752
   
102,344
 
Preferred stock mutual funds, at equity
    
141,654
   
96,332
 
Mortgage loans and collateral notes receivable
    
19,417
   
17,746
 
Cash and cash equivalents
    
141,367
   
97,942
 
Short-term investments
    
13,414
   
-
 
Other investments
    
45,910
   
28,111
 
Total investments and cash
    
3,070,842
   
2,765,329
 
               
Accrued investment income
    
23,094
   
22,267
 
Premiums receivable
    
480,605
   
475,112
 
Deferred policy acquisition costs
    
177,852
   
174,415
 
Property and equipment, net
    
68,383
   
61,625
 
Residual market receivable
    
157,227
   
191,309
 
Due from reinsurers
    
53,679
   
142,923
 
Deferred income taxes
    
31,420
   
68,926
 
Current income taxes
    
7,796
   
-
 
Other assets
    
39,971
   
25,104
 
Total assets
  
$
4,110,869
  
$
3,927,010
  
               
Liabilities:
              
Unpaid losses and LAE
  
$
971,949
  
$
989,196
  
Unearned premiums
    
935,385
   
933,160
 
Bonds payable
    
298,589
   
298,388
 
Current income taxes payable
    
-
   
9,601
 
Deferred income
    
10,913
   
8,757
 
Accrued agents' profit sharing
    
232,440
   
187,760
 
Other liabilities and accrued expenses
    
151,363
   
189,122
 
Total liabilities
    
2,600,639
   
2,615,984
 
               
Minority interest
    
6,959
   
5,957
 
               
Stockholders' equity:
              
Preferred stock
    
-
   
-
 
Common stock
    
40,964
   
20,458
 
Paid-in capital
    
135,033
   
148,130
 
Net accumulated other comprehensive income (loss)
    
34,273
   
(6,810
)
Retained earnings
    
1,539,056
   
1,363,507
 
Stockholders' equity before treasury stock
    
1,749,326
   
1,525,285
 
Treasury stock
    
(246,055
)
  
(220,216
)
Total stockholders' equity
    
1,503,271
   
1,305,069
 
Total liabilities, minority interest and stockholders' equity
  
$
4,110,869
  
$
3,927,010
  
Common shares outstanding
    
66,727,479
   
67,306,404
 
Stockholders' equity per share
  
$
22.53
  
$
19.39
  
 
 
CGI 4Q '06 Earnings Release (page 6 of 7)
 
THE COMMERCE GROUP, INC. (NYSE - CGI)
CONSOLIDATED STATEMENT OF EARNINGS
Three and Twelve Months Ended December 31, 2006 and 2005
(Thousands of Dollars, Except Per Share Data)
Unaudited
 
   
Three Months Ended
Deccember 31,
  
Twelve Months Ended
Deccember 31,
  
   
2006
  
2005
  
2006
  
2005
  
Revenues:
                  
Earned premiums
  
$
457,811
  
$
430,633
  
$
1,760,700
  
$
1,709,924
  
Net investment income
    
39,498
   
32,851
   
143,563
   
123,211
 
Premium finance and service fees
    
7,210
   
6,880
   
28,563
   
28,339
 
Net realized investment gains
    
8,978
   
2,107
   
16,643
   
22,907
 
                           
TOTAL REVENUES
    
513,497
   
472,471
   
1,949,469
   
1,884,381
 
                           
Expenses:
                          
Losses and LAE
    
289,562
   
260,012
   
1,068,414
   
1,050,186
 
Policy acquisition costs
    
134,813
   
116,531
   
516,307
   
463,297
 
Interest expense & amortization of bond fees
    
4,582
   
4,582
   
18,328
   
18,293
 
                           
TOTAL EXPENSES
    
428,957
   
381,125
   
1,603,049
   
1,531,776
 
                           
Earnings before income taxes and minority interest
   
84,540
   
91,346
   
346,420
   
352,605
 
                           
Income taxes
    
24,906
   
27,622
   
103,994
   
107,768
 
                           
Earnings before minority interest
    
59,634
   
63,724
   
242,426
   
244,837
 
                           
Minority interest in net earnings of subsidiary
    
(208
)
  
(242
)
  
(891
)
  
(925
)
                           
NET EARNINGS
  
$
59,426
  
$
63,482
  
$
241,535
  
$
243,912
  
                           
COMPREHENSIVE INCOME
  
$
74,850
  
$
58,348
  
$
282,618
  
$
220,699
  
                           
EARNINGS PER COMMON SHARE:
                          
Basic
  
$
0.88
  
$
0.94
  
$
3.57
  
$
3.63
  
Diluted
  
$
0.87
  
$
0.94
  
$
3.55
  
$
3.60
  
                           
Cash dividends paid per common share
  
$
0.25
  
$
0.19
  
$
0.975
  
$
0.735
  
                           
Weighted average shares outstanding:
                          
Basic
    
67,495,997
   
67,306,402
   
67,630,367
   
67,171,716
 
Diluted
    
67,958,676
   
67,728,064
   
68,012,769
   
67,695,330
 
 

CGI 4Q '06 Earnings Release (page 7 of 7)

THE COMMERCE GROUP, INC. (NYSE - CGI)
ADDITIONAL EARNINGS INFORMATION
Three and Twelve Months Ended December 31, 2006 and 2005
(Thousands of Dollars, Except Per Share Data)
Unaudited
 
   
Three Months Ended
December 31, 
  
Twelve Months Ended
December 31, 
  
ADDITIONAL EARNINGS INFORMATION:
  
2006
  
2005
  
2006
  
2005
  
                   
Direct written premiums to earned premiums reconciliation:
                  
Direct written premiums
  
$
419,197
  
$
404,143
  
$
1,864,153
  
$
1,874,231
  
Assumed premiums
    
20,638
   
24,419
   
99,015
   
132,098
 
Ceded premiums
   
(43,174
)
  
(58,791
)
  
(137,890
)
  
(270,138
)
                           
Net written premiums (1)
    
396,661
   
369,771
   
1,825,278
   
1,736,191
 
Decrease (increase) in unearned premiums
    
61,150
   
60,862
   
(64,578
)
  
(26,267
)
                           
Earned premiums (1)
  
$
457,811
  
$
430,633
  
$
1,760,700
  
$
1,709,924
  
                           
GAAP consolidated operating ratios: (2)
                          
Loss ratio
    
63.2
%
  
60.4
%
  
60.7
%
  
61.4
%
Underwriting ratio
    
31.9
%
  
28.6
%
  
28.5
%
  
27.3
%
Combined ratio
    
95.1
%
  
89.0
%
  
89.2
%
  
88.7
%
                           
GAAP operating ratios for combined insurance subsidiaries only: (3)
                        
Loss ratio
    
62.5
%
  
59.5
%
  
59.8
%
  
60.7
%
Underwriting ratio
    
31.0
%
  
27.7
%
  
27.7
%
  
26.6
%
Combined ratio
    
93.5
%
  
87.2
%
  
87.5
%
  
87.3
%
                           
Breakdown of net realized investment gains (losses):
                          
Fixed maturities
  
$
374
  
$
1,236
  
$
(943
)
$
21,135
  
Preferred stocks
    
223
   
1,371
   
(1,109
)
  
3,553
 
Common stocks
    
(8
)
  
-
   
253
   
911
 
Preferred stock mutual funds:
                          
Due to increase (decrease) in net asset value
    
6,456
   
(534
)
  
13,192
   
696
 
Venture capital funds
    
3,172
   
(989
)
  
9,415
   
837
 
Other
    
26
   
1,023
   
42
   
627
 
Other than temporary impairment writedowns
    
(1,265
)
  
-
   
(4,207
)
  
(4,852
)
                           
Net realized investment gains before tax
  
$
8,978
  
$
2,107
  
$
16,643
  
$
22,907
  
Income taxes at 35%
    
3,142
   
737
   
5,825
   
8,017
 
                           
Net realized investment gains after tax
  
$
5,836
  
$
1,370
  
$
10,818
  
$
14,890
  
                           
Per diluted share net realized gains after tax
  
$
0.09
  
$
0.02
  
$
0.16
  
$
0.22
  
 
 
(1)
Net written premiums were favorably impacted by the July 1, 2006 termination of our 75%
   
other-than-automobile quota share agreement and the resulting return of ceded unearned premium
   
of $77.7 million. The impact on earned premiums for the fourth quarter and year is estimated at
   
$23.3 million and $56.7 million, respectively.
     
 
(2)
GAAP consolidated operating ratios are calculated as in (3) 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 $(8,180) and $(10,780) for the three months ended and $3,438 and $10,770
   
for the twelve months ended December 31, 2006 and 2005, respectively.
     
 
(3)
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.