Maintaining the status quo: at Commerce Group, success and growth come from keeping things the same.

Key Points

* Commerce Group, the largest auto and homeowners insurer in Massachusetts, recently changed leadership after 40 years.

* Commerce has been leading opposition in the state to revamp the auto insurance industry, saying the current system works just fine.

* Commerce has embarked on an expansion strategy that includes New Jersey as a new auto market.

If Commerce Group Inc. were say, an Old West Pony Express outfit, rather than the leading auto and homeowners carrier in Massachusetts, they'd likely be the type of equestrians who would never switch horses midstream. For at this growth-oriented insurer, business as usual is the secret of its long-term success.

Not that the Webster-based company doesn't make a few waves now and then; but when Commerce does ripple the waters, it's usually part of its effort to maintain the status quo in the state's auto insurance market.

So when the company's original leader of 40 years, Arthur J. Remillard Jr., retired from his post as chairman, president and chief executive officer in July (he remains a director), it was little wonder he would handpick a replacement of like mind: Gerald Fels, the company's long-time chief financial officer and executive vice president.

Is It Broken?

Fels, who is a certified public accountant and also was president of Commerce Insurance Co., "pretty much" intends to keep things at Commerce Group the way they've always been; that also goes for efforts to maintain the current fixed-rate Massachusetts auto insurance market as is, against ongoing efforts to revamp it.

"There's really no reason to change policy. It's worked very well for us in the past and we see that it will work for us in the future," Fels said. "We had a very successful strategy and certainly we're going to continue that because I've been an integral part of the system for 31 years. The biggest challenge is you really don't want to change things for change sake."

"We intend to maintain our leading market share in Massachusetts and primarily in the personal lines area," Fels said. "Secondarily, we're going to focus on expanding our auto business outside of Massachusetts." The company is looking at New Jersey in particular, "to expand our presence countrywide. Primarily our strategy is one policy at a time, keeping the bottom line, and making sure we're successful underwriters."

Commerce has had a "very stable environment" over the years, Fels said. Many of the company's original investors are still invested in the company, and most of them still serve on the board. It's been a big part of Commerce's success.

"It's always that way when you have people who have a substantial financial stake in the company," Fels said. The company's board of directors owns 19.3% of its stock; employees own another 8.3%. "That's the right combination. Everybody who works for the company certainly has a vested interest in the company to do well."

Expansion Strategy

In 1975 when Fels joined the company, Commerce was producing some $3 million in annual business. It has been listed on the New York Stock Exchange since March 1995 under the trading symbol CGI. The company had $1.87 billion in direct premiums written in 2005, of which 83% was from its personal auto business.

Commerce has grown steadily over the years, generating the occasional milestone, such as when it achieved $85 million worth of premiums in 1985, or more recently, when it came close to hitting $4 billion in assets, Fels said. Then there's the group's lucrative partnership with AAA Southern New England, which launched in 1996 and "really caused the company to grow significantly."

As part of its expansion strategy over the years, Commerce acquired Western Pioneer Insurance Co. of Pleasanton, Calif., renaming it Commerce West. In January 1999, Commerce entered into a joint venture with AAA Southern New England to form the Automobile Club Insurance Co. of Columbus, Ohio, changing its name to American Commerce Insurance Co. And in March 2001, Commerce began writing private-passenger auto insurance, homeowners and umbrella insurance in New Hampshire.

The company's further expansion plans include targeting AAA members through American Commerce Insurance Co.'s affiliated agency force, according to an A.M. Best Co. report. Commerce currently offers a 5% discount on private-passenger auto insurance to the club's members who reside in Massachusetts, and the Group plans to increase penetration among the existing AAA clubs in the state.

"It's hard to say something bad about their success," noted Frank Mancini, president and chief executive officer of the Massachusetts Association of Insurance Agents. "They've been very successful in this state. They stepped into this market when other players were leaving this state."

Commerce was a small, growing company for a number of years, Mancini said. "Then in the mid-'80s when the national companies were leaving Massachusetts, we had a number of domestic companies really step in and pick up the business that we were losing. So when agents were losing markets--the national markets--the domestics were stepping in and Commerce was one of them. It's hard to argue with success."

Independent Streak

Massachusetts is the only state in which the insurance commissioner sets the auto insurance rates for the entire statewide industry. The market includes a take-all-comers requirement with mandatory offer limits of up to $500,000 per policy.

"Most agents that represent [Commerce] will find them to be a good market, particularly for their personal lines," Mancini said. "We don't have a competitive automobile system here, so it's not that they're competing with other companies on rates. But they're certainly competing with other companies on service and commissions and so forth; there are other aspects of competition, not just rates."

Independent agent Nancy Bender has represented Commerce for just the past few years but already finds them to be a stand-out brand.

"They're good to work with," said Bender, whose Nancy Bender Insurance Agency in downtown Boston's financial district pulls in about $10 million in personal lines annually. "They're one of the most efficient companies I do business with; they're very, very efficient. If everyone could take a tour of the company ... it's just incredible how they process things from their system.

"Years ago, they did not have that reputation," Bender added. "But they've worked very hard at being a very efficient company."

Reduced Claims

It was possible to lower rates last year due to a "sharp falloff" in both the number and severity of claims being filed in the state, and that was due to a new focus on fighting fraud, said Daniel Johnston, president of the Automobile Insurers Bureau of Massachusetts, who also heads the state Insurance Fraud Bureau. The original seven communities involved in the fraud investigation represented only 11% of the state's population, but saw some 55% of the state's reduction in injury claims, he said.

Fels said the state has seen roughly $4 billion in savings from its anti-fraud directives, which have translated into rate decreases for the consumer. "We're looking at real substantial savings right now, well over $200 a year savings [on premiums]. This year we're talking probably a double-digit rate decrease. To a great degree, that is because of the fraud-fighting efforts going on."

Massachusetts ranks sixth-highest in auto insurance premiums--the statewide average premium is $995--but it's all relative, Fels said. "You have to compare no-fault states to no-fault states. They have a much higher schedule of benefits, only you have to pay a little more premium for that. When you compare the no-fault states--there are only about a dozen of them in the country--things don't look that bad."

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Commerce Group

Headquarters: Webster, Mass.

Commerce Insurance Co. incorporated on Sept. 15, 1971

No. of Employees: 2,166

Chairman, President and Chief Executive Officer: Gerald Fels

NYSE Stock Listing: CGI

National Ranking: 19th-largest personal auto insurer

Distribution Channel: Independent agents

2005 Direct Premiums Written by State (%)

Massachusetts            87.3
California                2.7
Washington                2
Arizona                   1.7
Oklahoma                  1.4
19 other jurisdictions    4.9

Source: A.M. Best company reports

2005 Business Production and Profitability

($ Thousands)

                                   Net    % of
                              Premiums   Total
Product Line                   Written     NPW

Priv. Passenger Auto Liab.     993,390    57.2
Auto Physical                  595,307    34.3
Commercial Auto Liab.           83,763     4.8
Homeowners                      52,753     3.0
All Other                       10,978     0.6
Totals                       1,736,192   100.0

Source: A.M. Best company report

Top Writers, Private-Passenger Auto, Mass.--2005

Market share based on direct premiums written (%)

Commerce                         30
Safety Group                   11.5
Arbell Insurance Group            9
Liberty Mutual Insurance Co.    7.6
MetLife Auto & Home Group       7.2

Source: A.M. Best Co. state/line database

Learn More

American Commerce Insurance Co.

A.M. Best Company # 02065

Distribution: Independent agents

Citation Insurance Co. (MA)

A.M. Best Company # 02851

Distribution: Independent agents

Commerce Group Inc.

A.M. Best Company # 02966

Distribution: Independent agents

Commerce Insurance Co.

A.M. But Company # 04663

Distribution: Independent agents

Commerce West Insurance Co.

A.M. Best Company # 03131

Distribution: Independent agents

For ratings and other financial strength information about these companies, visit www.ambest.com.

RELATED ARTICLE: Dealing with regulation.

If Commerce wasn't already well known for its status as the state's largest auto and homeowners insurer, it likely would be just as notable for its public policy stance. The company often has used its influence as the state's leading auto insurance provider to protest any proposed changes to the system.

Commerce belongs to the Massachusetts Coalition for Affordable Auto Insurance for All, which opposes Governor Mitt Romney's attempts to "fix" the highly regulated Massachusetts auto-insurance system. Romney's proposal would change the state's current fixed-and-established rate system to a more competitive system with flex rating, like that of most other states.

Commerce, however, likes the system the way it is: "We feel it does the right thing for most of the consumers in this state; that's the important thing," President, Chief Executive Officer and Chairman Gerald Eels said. The current private-passenger auto insurance rating system has been in place for 34 years, he said, not counting a short venture into competitive rating in 1977, "which lasted about four months. Then the outcries were very high among the consumers and the legislature decided to go back to the way it was established, and it's been that way ever since."

Romney's proposal--which died in the House Ways and Means Committee at the end of the legislative session in July, but could be brought back to the table in early 2007--would allow for flexible rating but would cap increases for liability coverage at 15% annually (flex rating would begin at 5% the first year of the transition, ending at 15% the year after the five-year transition period ends). Romney has the support of numerous national insurers doing business in the state.

The state's insurance division and supporters of the auto market both say the state's regulations have driven insurers away. In 1999 there were 53 auto insurers in Massachusetts; today there are 19, although opponents count as many as 36 auto insurers, since subsidiaries are not counted as separate companies.

Romney's proposed bill also would abolish Commonwealth Automobile Reinsurers, which manages the residual (involuntary) market in Massachusetts, replacing it with an assigned-risk plan.

Commerce has come out strongly against other attempts by the state insurance department or commissioner to revamp the auto insurance industry. In August, the Massachusetts Supreme Judicial Court overturned on appeal an earlier Supreme Court decision that would have prevented Insurance Commissioner Julianne Bowler from instituting a reinsurance pool to cover the state's riskiest drivers.

Bowler now has the go-ahead to proceed with her original plan, but said in August that her department would re-evaluate the transition plan to see if it still makes sense under the current market conditions. The auto rate for 2007 will be released in December.

Hearings on the auto rate begin formally in September but insurers, trade groups and consumer groups begin making recommendations soon after New Year's, said Daniel Johnston, president of the Automobile Insurers Bureau of Massachusetts, an actuarial bureau that represents the state's auto insurers. It is one of three parties that make filings to the insurance commissioner on rate suggestions; the others are the state attorney general and the State Rating Bureau, an actuarial arm of the Division of Insurance.

For the first time, Massachusetts' auto insurance rate will be effective April 1, 2007, and run through March 31, 2008, due to legislation passed last year (it normally runs January-December). The longer lead time will allow companies to better get their policies in effect with the new rate each year, Johnston said.