‘A’ FSR to Commerce Group Mass. Subs

Standard & Poor’s (S&P) Ratings Services assigned its “A” counterparty credit and financial strength ratings with a “stable” outlook to Commerce Insurance Co. (CIC) and Citation Insurance Co. Both companies are Mass.-based subsidiaries of The Commerce Group Inc. (CGI), a publicly traded holding company.

S&P said the ratings reflect the Commerce group’s excellent franchise in the Massachusetts private passenger auto market, extremely strong capitalization, and historically strong earnings. Partially offsetting these strengths is the group’s high concentration in the highly regulated Massachusetts market and limited product breadth. Concentration is expected to improve over the long term as the organization’s subsidiaries expand their presence in various states to achieve a greater balance of risk, and the Commerce Group should continue to make progress in expanding its presence outside Massachusetts through American Commerce Insurance Co. (not rated) and Commerce West Insurance Co. (not rated), diversifying its revenue stream by way of product and geography. It is expected the non-rated insurance companies will become an integral part of the over all organization under CGI. Operating performance of these companies have been weaker than the performance of the two rated companies and is expected to add a few points to the consolidated organization’s combined ratio. Massachusetts is expected to remain the group’s core market over the long term.

The Commerce Group, along with its nonrated subsidiaries, should produce year-end 2003 underwriting and earnings measured in line with its historical five-year averages with a combined ratio at or less than 100 percent, ROR of 12.5 percent, and ROA of 6.5 percent. Major rating factors are strong operating history, sound business position, extremely strong capitalization, geographical concentration and high dividend payout.

In the past 15-year period, Commerce Group has never experienced an unprofitable year, and has consistently produced a combined ratio each year of less than 100 percent. The company is at or near the top of S&P’s interactively rated peer group for the past five-year period producing RORs and ROAs averaging 12.5 percent and 6.5 percent, respectively. Strong control of loss costs and expense continues to be the company’s major advantage in producing solid underwriting and earnings measures.

A low-cost structure and strong affinity alliances through the American Automobile Association (AAA) aid the company in marketing to clientele with favorable risk profiles in Massachusetts as well as in other states. As the No. 1 private passenger carrier in Massachusetts with a 27 percent market share, the company should continue to be a significant player in that market. As of year-end 2002, consolidated capitalization is a cornerstone of the company’s strength. Capital adequacy is considered extremely strong at about 230 percent.

CIC and Citation have historically paid out a significant dividend to their ultimate parent company, CGI, averaging about 40 percent of net income. The historically strong earnings have allowed such large payouts and it is expected that the companies will continue to pay comparably high dividends.

Topics Massachusetts