Commerce Insurance Reports Earnings Decline for 4Q, 2007

February 4, 2008

The Commerce Group, Inc. reported 2007 fourth quarter net earnings were $19.6 million, or $0.32 per diluted share, compared to net earnings of $59.4 million or $0.87 per diluted share for 2006.

Commerce is in the process of being acquired by Spain’s largest insurer, Mapfre, S.A.

Included in the 2007 fourth quarter results are net realized investment losses of $55.3 million, or $0.59 per diluted share, as compared to net gains of $9.0 million, or $0.09 per diluted share, in the prior year fourth quarter. As a result of the severe credit market that emerged in the fourth quarter, approximately $45.2 million of the losses were realized from sales and other than temporary impairment writedowns on several preferred stocks, primarily in the housing, mortgage and financial markets.

Earned premiums were $453.4 million for the fourth quarter of 2007, compared to $457.8 million for the fourth quarter of 2006. Direct written premiums were $409.9 million for the fourth quarter of 2007, compared to $419.2 million for the fourth quarter of 2006.

Massachusetts written premium per vehicle decreased approximately 8.9 percent in the fourth quarter compared to last year, while the number of insured vehicles increased 1.0 percent. The decline in written premium per vehicle resulted from the state mandated personal automobile premium rate decrease which was effective April 1, 2007.

The fourth quarter GAAP consolidated combined ratio was 94.1, compared to 95.2 for 2006. The decrease in the combined ratio was principally the result of a decrease in the underwriting ratio. The company’s GAAP consolidated loss ratio for the fourth quarter of 2007 remained consistent at 63.1 as compared to 63.3 for the same period last year.

Decreases in private passenger automobile bodily injury losses were offset by increased private passenger automobile physical damage frequency and a decline in earned premium per earned exposure for private passenger automobiles. The decrease in earned premium per exposure for private passenger automobiles was 5.2 percent in Massachusetts, due to state mandated rate decreases, and 2.7 percent outside of Massachusetts, as a result of increased competition.

The company’s GAAP consolidated underwriting ratio decreased to 31.0, as compared to 31.9 for last year’s fourth quarter. The decrease in the underwriting ratio was principally due to lower agents’ profit sharing expense during the current year fourth quarter, partially offset by increased commissions expense.

Also impacting the combined ratio were higher expenses related to the American Commerce Insurance Co. agent stock option program, primarily as a result of the increase in stock price at Dec. 31, 2007, as compared to Sept. 30, 2007. This item resulted in expense of $10.9 million for the current year fourth quarter versus $1.6 million for the previous year’s fourth quarter.

Cumulative 2007 Results

Net earnings for the year 2007 were $190.9 million, or $2.97 per diluted share, compared to net earnings of $241.5 million or $3.55 per diluted share for 2006.

During 2007, the company had net realized investment losses of $26.3 million, or $0.27 per diluted share, compared to gains of $16.6 million, or $0.16 per diluted share, in 2006.

Earned premiums were $1,817.0 million for the year of 2007, compared to $1,760.7 million for the year 2006. Written premiums were $1,857.7 million for the year 2007, compared to $1,864.2 million for the year 2006. Massachusetts written premium per vehicle decreased approximately 5.7 percent in the year 2007 compared to last year, while the number of insured vehicles increased 1.7 percent.

The 2007 GAAP consolidated combined ratio was 94.0, compared to 89.2 for 2006. The increase in the combined ratio was the result of increases in both the loss and underwriting ratios. The company’s GAAP consolidated loss ratio for the year 2007 increased to 64.5 from 60.7 for 2006.

Commerce said that the increase in the loss ratio resulted from several factors including decreased earned premium per earned exposure for private passenger automobiles; additional reserves of $10.3 million during the second quarter of 2007 at State-Wide Insurance Co., its second quarter acquisition; and an increase in private passenger automobile physical damage frequency that was partially offset by a decrease in private passenger bodily injury losses.

The company’s GAAP consolidated underwriting ratio increased to 29.5, as compared to 28.5 for the prior year’s ratio. This increase was principally due to reduced ceded reinsurance commissions resulting from the termination of an other-than-automobile quota share agreement effective July 1, 2006 and increased agent commissions as a percentage of written premium due to the April 1, 2007 Massachusetts state mandated rate decrease, partially offset by a decline in agents’ profit sharing expense.

In 2007, net investment income increased 11.3 percent over last year to $159.8 million as a result of increases in both average invested assets and investment yields.

As previously reported, in October the company agreed to merge with Mapfre, S.A., the leading insurer in Spain. The merger is subject to shareholder approval and other conditions including regulatory approvals. Commerce shareholders will vote on the merger proposal at a special meeting being held Feb. 14, 2008. At present, the companys aid it anticipates that the merger will close late in the first quarter or early in the second quarter of 2008.

The Commerce Group, Inc. is headquartered in Webster, Mass. Property and casualty insurance subsidiaries include The Commerce Insurance Co. and Citation Insurance Co. in Massachusetts, Commerce West Insurance Co. in California, American Commerce Insurance Co. in Ohio, and State-Wide Insurance Co. in New York.

Source: The Commerce Group, Inc.
www.commerceinsurance.com

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