S&P Assigns ‘A’ Rating to Commerce Group Mass. Subs

Standard & Poor’s Ratings Services announced that it has 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 Massachusetts-based subsidiaries of The Commerce Group Inc. (CGI), a publicly traded holding company.

“The ratings reflect the Commerce group’s excellent franchise in the Massachusetts private passenger auto market, extremely strong capitalization, and historically strong earnings,” said S&P. “Partially offsetting these strengths is the group’s high concentration in the highly regulated Massachusetts market and limited product breadth.”

S&P noted that “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 said it believes the “Commerce Group will 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.”

S&P indicated that in the long term it “expects the nonrated insurance companies to become an integral part of the over all organization under CGI. Operating performance of these two 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.” It also expects that Massachusetts will remain the group’s core market over the long term.

“Standard & Poor’s expects Commerce Group, along with its nonrated subsidiaries will produce year-end 2003 underwriting and earnings measures in line with its historical five-year averages with a combined ratio at or less than 100%, ROR of 12.5%, and ROA of 6.5%,” said the bulletin.

S&P listed the following as “Major Rating Factors:”
— Strong operating history. In the past fifteen-year period, Commerce Group has never experienced an unprofitable year, and has consistently produced a combined ratio each year of less than 100%. The company is at or near the top of Standard & Poor’s interactively rated peer group for the past five-year period producing RORs and ROAs averaging 12.5% and 6.5%, respectively. Strong control of loss costs and expense continues to be the company’s major advantage in producing solid underwriting and earnings measures.
— Sound business position. A low cost structure and strong affinity alliances through the American Automobile Assoc. (AAA) aid the company in marketing to a clientele with a favorable risk profile in Massachusetts as well as in other expansion states. As the No. 1 private passenger carrier in the state of Massachusetts with a 27% market share, Standard & Poor’s believes the company will continue to be a significant and entrenched player in that market.
— Extremely strong capitalization. As of year-end 2002, consolidated capitalization is a cornerstone of the company’s strength. As measured by Standard & Poor’s model, capital adequacy is considered extremely strong at about 230%.
— Geographically Concentrated. Heavily concentrated, CIC generates more than 80% of direct writings for the group as the leading private passenger automobile writer in Massachusetts. Standard & Poor’s considers concentration in Massachusetts to be challenging because of a history of tight legislation and regulation that is not always amiable to personal lines insurers; however, CIC has benefited and prospered from this as other larger and more geographically diversified carriers might regard this environment as too demanding to operate in.
— High dividend payout. CIC and Citation have historically paid out a significant dividend to their ultimate parent company, CGI, averaging about 40% 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.”