UNITED STATES
                          SECURITIES AND EXCHANGE COMMISSION
                                  Washington, D.C. 20549
                                       FORM 10-K
(Mark One)
[X]  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
     OF THE SECURITIES EXCHANGE ACT OF 1934
     For the fiscal year ended December 31, 2001

                        OR

[  ]  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
      OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
      For the transition period from          to            .

            Commission file number 0-16882

                         The Commerce Group, Inc.
               (Exact name of registrant as specified in its charter)

       Massachusetts                                 04-2599931
(State or other jurisdiction              (IRS Employer Identification No.)
      of incorporation)

    211 Main Street                                  01570
    Webster, Massachusetts                        (Zip Code)
 (Address of principal executive offices)

      Registrant's telephone number, including area code: (508) 943-9000
      Securities registered pursuant to Section 12(b) of the Act:

                                           Name of each Exchange
Title of each Class                        on Which Registered
Common Stock, $.50 Par Value Per Share      New York Stock Exchange

   Securities registered pursuant to Section 12(g) of the Act:
                              None

     Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.    Yes  [X]    No  [ ]

      Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-
K or any amendment to this Form 10-K. [ ]

     The aggregate market value of the voting stock held by non-affiliates of
the registrant as of March 22, 2002, was approximately $868,663,536.

     As of March 22, 2002, the number of shares outstanding of the
registrant's common stock (exclusive of treasury shares) was 32,950,452.

                          DOCUMENTS INCORPORATED BY REFERENCE

     Parts I and II of this Form 10-K incorporate by reference information
from the registrant's annual report to stockholders for the fiscal year ended
December 31, 2001 (the "2001 Annual Report").  The 2001 Annual Report, except
for portions thereof, which have been specifically incorporated by reference,
shall not be deemed "filed" as part of this Form 10-K.

     Portions of the registrant's definitive Proxy Statement for its annual
meeting of stockholders, which the Company intends to file within 120 days
after the end of the registrant's fiscal year ended December 31, 2001, are
incorporated by reference into Part III hereof as provided therein.
1
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                                     TABLE OF CONTENTS
<table>
<caption>
                                                                                      Page

                                                                                    <c>
Glossary of Selected Insurance Terms..............................................      3

Part I

Item 1.   Business................................................................      7
          A.    General...........................................................     12
          B.    Commonwealth Automobile Reinsurers................................     16
          C.    Marketing.........................................................     17
          D.    Underwriting......................................................     20
          E.    Reinsurance.......................................................     21
          F.    Settlement of Claims..............................................     23
          G.    Loss and Loss Adjustment Expense Reserves.........................     24
          H.    Operating Ratios..................................................     28
          I.    Investments.......................................................     29
          J.    Regulation........................................................     32
          K.    Competition.......................................................     36
          L.    Other Matters.....................................................     37
Item 2.   Properties..............................................................     38
Item 3.   Legal Proceedings.......................................................     39
Item 4.   Submission of Matters to a Vote of Security Holders.....................     39
Item 4A.  Executive Officers of the Registrant....................................     39

Part II

Item 5.   Market for Registrant's Common Stock and Related Stockholder Matters....     41
Item 6.   Selected Financial Data.................................................     42
Item 7.   Management's Discussion and Analysis of Financial Condition and
           Results of Operations..................................................     42
Item 7A.  Qualitative and Quantitative Disclosures about Market Risk..............     42
Item 8.   Financial Statements and Supplementary Data.............................     42
Item 9.   Changes in and Disagreements with Independent Auditors on Accounting
           and Financial Disclosure...............................................     42

Part III

Item 10.  Directors and Executive Officers of the Registrant......................     42
Item 11.  Executive Compensation..................................................     42
Item 12.  Security Ownership of Certain Beneficial Owners and Management..........     43
Item 13.  Certain Relationships and Related Transactions..........................     43

Part IV

Item 14.  Exhibits, Financial Statement Schedules and Reports on Form 8-K.........     43
          Signatures..............................................................     44
          Index to Financial Statement Schedules..................................     46
          Index to Exhibits.......................................................     57
</table>
2
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                     GLOSSARY OF SELECTED INSURANCE TERMS
<table>
<caption>

                                 <c>
Affinity group marketing program... In Massachusetts, an "affinity group marketing program"
                                    is any system, design or plan whereby motor vehicle or
                                    homeowner insurance is afforded to employees of an
                                    employer or to members of a trade union, association or
                                    organization in accordance with those provisions of
                                    M.G.L. c. 175, s. 193R, distinguishing such plans from a
                                    "mass-merchandising plan".

                                    Specifically, an affinity group marketing program
                                    contemplates the issuance of such insurance through
                                    other than standard policies that generally preclude
                                    individual underwriting, generally contains an option to
                                    continue coverage by a standard policy upon termination
                                    of employment or membership, restricts cancellation,
                                    requires the continuance of certain participation in
                                    ways not applicable to standard policies, and provides
                                    for the downward modification of rates based upon the
                                    experience of the insured group.

Assumed premiums................... Premiums acquired or allocated to an insurer other than
                                    through its independent agencies.

A.M. Best.......................... A.M. Best Company, Inc. is a rating agency reporting on
                                    the financial condition of insurance companies.  A.M.
                                    Best's statistics cited in this Form 10-K are based upon
                                    information voluntarily submitted to it by insurers.

Casualty insurance................. Insurance which is primarily concerned with the losses
                                    of the insured due to injuries to other persons and to
                                    the property of others, and the legal liability imposed
                                    on the insured resulting there from.

Catastrophe, catastrophic loss..... A severe loss, usually involving many risks such as
                                    conflagration, earthquake, windstorm, explosion and
                                    other similar events.

Combined ratio..................... A combination of the underwriting expense ratio and the
                                    loss and LAE ratio determined in accordance with
                                    Statutory Accounting Practices ("SAP"). The underwriting
                                    expense ratio measures the ratio of underwriting
                                    expenses to net premiums written, determined in
                                    accordance with SAP.  The loss and LAE ratio measures
                                    the ratio of incurred losses and LAE to earned premiums,
                                    determined in accordance with SAP.

Commissioner....................... The Commissioner of the Division of Insurance of
                                    the Commonwealth of Massachusetts.

Commonwealth Automobile
Reinsurers ("C.A.R.").............. C.A.R. is a Massachusetts mandated reinsurance
                                    mechanism, under which all premiums, expenses and losses
                                    on ceded business are shared by all insurers. It is
                                    similar to a joint underwriting association because a
                                    number of insurers (39 in 2001) act as Servicing
                                    Carriers for the risks it insures.

Direct............................. Refers to premiums, losses, LAE and expenses on policies
                                    which a company writes before accounting for business
                                    ceded and assumed through reinsurance.
</table>
3
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<table>
<caption>

                                 <c>
Direct loss ratio.................. The ratio of direct incurred losses and LAE to direct
                                    earned premiums.

Direct premiums written............ Total premiums for insurance sold to insureds, as
                                    opposed to, and not including, reinsurance premiums.

Domestic insurer................... An insurance company that operates in the state in which
                                    it is licensed.

Earned premiums.................... The portion of net premiums written that is equal to the
                                    expired portion of policies recognized for accounting
                                    purposes as income during a period. Also known as
                                    premiums earned.

Excess of loss reinsurance......... Reinsurance which indemnifies the reinsured against all
                                    or a specified portion of losses under reinsured
                                    policies in excess of a specific dollar amount or
                                    "retention".

Exclusive representative
producer ("ERP")................... A Massachusetts automobile insurance agency which does
                                    not have a voluntary agency automobile insurance
                                    relationship with an insurer, and which is assigned by
                                    C.A.R. to an insurer who is a Servicing Carrier.

Exposure........................... An insurable unit defined as an automobile.

Hard market........................ An insurance market in which the demand for insurance
                                    exceeds the readily available supply and premiums are
                                    relatively high.

Incurred but not reported
reserves ("IBNR").................. Reserves for estimated losses which have been incurred
                                    by insureds but not yet reported to the insurer.

Incurred losses.................... The total losses sustained by an insurance company under
                                    a policy or policies, whether paid or unpaid. Incurred
                                    losses include a provision for IBNR and Salvage and
                                    Subrogation.

Inland marine insurance............ As used by the Company, insurance that provides protec-
                                    tion for specific types of personal property, such as
                                    jewelry, coins and fine arts, over the limits covered in
                                    a standard homeowners insurance policy.

Loss adjustment expenses ("LAE")... The expenses relating to settling claims, including
                                    legal and other fees and the portion of general company
                                    expenses allocated to claim settlement costs.

LAE ratio.......................... The ratio of LAE, net of reinsurance recoveries, to
                                    earned premiums.

Loss and LAE ratio................. The ratio of incurred losses plus LAE, net of
                                    reinsurance recoveries, to earned premiums.
</table>
4
<page>


<table>
<caption>

                                 <c>
Loss reserves...................... Liabilities established by insurers to reflect the esti-
                                    mated cost of claims payments and the related expenses
                                    that the insurer will ultimately be required to pay in
                                    respect of insurance it has written. Reserves are
                                    established for losses and for LAE.

Net premiums written............... Direct premiums written for a given period less premiums
                                    ceded to reinsurers during such period plus premiums
                                    assumed during such period.

Participation ratio................ A Massachusetts insurer's share of the C.A.R. deficit
                                    based upon the insurer's market share of automobile
                                    risks not reinsured through C.A.R., adjusted for
                                    utilization of C.A.R. and credits for voluntarily
                                    writing less desirable under priced business and ceded
                                    exclusions.

Premium-to-surplus ratio........... The ratio of net premiums written to policyholders'
                                    surplus.

Property insurance................. Insurance that indemnifies a person with an insurable
                                    interest in tangible property for loss related to damage
                                    to or loss of use of the subject property.

Pure loss ratio.................... The ratio of net incurred losses, excluding LAE, to pre-
                                    miums earned.

Quota share reinsurance............ Reinsurance in which the reinsured shares a proportion
                                    of the original premiums and losses under the reinsured
                                    policy. Also known as pro rata reinsurance.

Rate deviation..................... A specific state approved departure from an otherwise
                                    applicable state set rate level provided to safe
                                    drivers.

Rate discount...................... A specific state approved discount from an otherwise
                                    applicable state set rate level provided to members of
                                    affinity group marketing programs.

Reinsurance........................ The acceptance by one or more insurers, called rein-
                                    surers, of all or a portion of the risk underwritten by
                                    another insurer who has directly written the coverage.
                                    However, the legal rights of the insured generally are
                                    not affected by the reinsurance transaction and the
                                    insurance company issuing the insurance policy remains
                                    liable to the insured for payment of policy benefits.

Safe Driver Insurance Plan
("SDIP")                            A program mandated by Massachusetts state law that
                                    encourages safe driving by rewarding drivers who do not
                                    cause an accident, or incur a traffic law violation and
                                    by charging high risk drivers a greater amount of
                                    premiums.  Under SDIP, drivers incur surcharge points
                                    for traffic violations and at-fault accidents.  Drivers
                                    also earn credit points for each incident free year.
                                    Drivers begin at a starting or neutral SDIP Step 15.
                                    Drivers can earn credits down to SDIP Step 9, the lowest
                                    step for good drivers, and incur surcharge points up to
                                    SDIP Step 35, the highest step for bad drivers.  The
                                    SDIP is set to be revenue neutral industry-wide, wherein
                                    credits received by good drivers are offset with
                                    surcharges paid by bad drivers.
</table>
5
<page>


<table>
<caption>

                                 <c>
Servicing Carrier.................  An automobile insurer writing business in Massachusetts
                                    which can reinsure risks through C.A.R. while remaining
                                    responsible for servicing the related policies and which
                                    must provide a market for ERPs assigned to it by C.A.R.

Soft market........................ An insurance market in which the supply of insurance
                                    exceeds the current demand and premiums are relatively
                                    low.

Statutory accounting practices      Recording transactions and preparing financial state-
                                    ments in accordance with the rules and procedures
                                    prescribed or permitted by an insurer's state insurance
                                    regulatory authority for the purposes of financial
                                    reporting to regulators, which in general reflect a
                                    liquidating, rather than going concern, concept of
                                    accounting.

Statutory surplus.................. The excess of admitted assets over total liabilities
                                    (including loss reserves), determined in accordance with
                                    SAP.

Take-all-comers.................... A phrase used to characterize the Massachusetts personal
                                    automobile insurance system under which all insurers
                                    are required to underwrite and accept virtually all
                                    risks submitted to them.

Underwriting....................... The insurer's process of reviewing applications submit-
                                    ted for insurance coverage, deciding whether to accept
                                    all or part of the coverage requested and determining
                                    the applicable premiums.

Underwriting expenses.............. The aggregate of policy acquisition costs, including
                                    commissions, and the portion of administrative, general
                                    and other expenses attributable to underwriting
                                    operations.

Underwriting expense ratio......... The ratio of underwriting expenses to net premiums writ-
                                    ten determined in accordance with SAP.

Unearned premiums.................. The portion of a premium representing the unexpired
                                    amount of the contract term as of a certain date.
</table>
6
<page>


                                     PART I

ITEM 1. BUSINESS

     The Commerce Group, Inc. (the "Company"), was incorporated in 1976. The
Company is engaged in providing personal and commercial property and
casualty insurance primarily in Massachusetts through its principal
subsidiary, The Commerce Insurance Company ("Commerce"), which was
incorporated in 1971 and began writing business in 1972.  The Company's
predominant insurance line is motor vehicle insurance, primarily covering
Massachusetts personal automobiles.  The Company also offers commercial
automobile, homeowners, inland marine, fire, general liability and
commercial multi-peril insurance.  The Company also writes insurance in
California and Oregon through Commerce West Insurance Company ("Commerce
West"), primarily a personal automobile insurer located in Pleasanton,
California.  Additionally, the Company writes insurance through American
Commerce Insurance Company ("American Commerce"), which it acquired on
January 29, 1999.  Located in Columbus, Ohio, American Commerce, is a
wholly-owned subsidiary of ACIC Holding Co., Inc. with policies in 26 states
and licenses in several others.  In November of 1998, Commerce formed ACIC
Holding Co., Inc., in a joint venture with AAA Southern New England ("AAA
SNE") and invested $90,800,000 to fund the acquisition of the Automobile
Club Insurance Company whose name was changed to American Commerce upon
completion of the acquisition. Commerce invested $90,000,000 in the form of
preferred stock and an additional $800,000 representing an 80% common stock
ownership.  AAA SNE invested $200,000 representing a 20% common stock
ownership.  The terms of the preferred stock call for Commerce to receive
quarterly cash dividends at the rate of 10% per annum from ACIC Holding,
Co., Inc.  In the event cash dividends cannot be paid, additional preferred
stock will be issued.  Since 1995, Commerce has maintained an affinity group
marketing relationship with AAA Insurance Agency, Inc., a subsidiary of AAA
SNE.  AAA Insurance Agency, Inc. has been a licensed insurance agent of
Commerce since 1985.  In addition to the property and casualty insurance
business, the Company originates residential and commercial mortgages,
within Massachusetts and on a limited basis in Connecticut and operates an
insurance agency dealing in a full line of insurance products, including
those of the Company.

     The Company's business strategy is to focus its insurance activities
primarily on the personal automobile market.  The Company has over 1,042,000
polices in force, over 875,000 throughout the Commonwealth of Massachusetts
and over 167,000 in the 27 states served by Commerce West and American
Commerce.  The Company, through Commerce and Citation Insurance Company
("Citation"), wholly-owned subsidiaries of Commerce Holdings, Inc. ("CHI"),
which is a wholly-owned subsidiary of the Company, has been the largest
writer of personal property and casualty insurance in Massachusetts in terms
of market share of direct premiums written since 1990.  At year end 2001,
the Company's Massachusetts private passenger automobile market share was
23.3%, up from 22.3% in 2000.  The Company is the second largest writer of
Massachusetts homeowners insurance and the third largest writer of
commercial automobile insurance in the Commonwealth.  In addition, the
Company's combined insurance companies were also ranked the 26th largest
personal automobile insurance group in the country by A.M. Best, based on
the most recently available direct premium written information.

7
<page>



The accompanying table lists direct premiums written for the years ended
December 31, 2001 and 2000 for Massachusetts and other states business:

<table>
<caption>
Direct Premiums Written, Year Ended December 31, 2001 (Dollars in thousands)

                         Massachusetts  All Other States     Total      % of Total

                       <c>              <c>           <c>            <c>
Personal Automobile...... $  859,922       $122,320      $  982,242       85.2%
Homeowners...............     73,254         18,710          91,964        8.0
Commercial Automobile....     58,088          1,514          59,602        5.2
Other Lines..............     17,885            714          18,599        1.6
         Total........... $1,009,149       $143,258      $1,152,407      100.0%

<caption>
Direct Premiums Written, Year Ended December 31, 2000 (Dollars in thousands)

                         Massachusetts  All Other States     Total      % of Total

                         <c>            <c>           <c>             <c>
Personal Automobile...... $  827,180       $103,496      $  930,676       86.9%
Homeowners...............     65,662         16,498          82,160        7.7
Commercial Automobile....     43,243            104          43,347        4.0
Other Lines..............     14,860            606          15,466        1.4
         Total........... $  950,945       $120,704      $1,071,649      100.0%
</table>

     The Company attributes its success primarily to its strong
relationships with professional independent agencies that provide quality
business for the Company.  Other factors that have been important to its
success include an in-depth understanding of the Massachusetts regulatory
and underwriting environments, an ability to operate efficiently with
economies of scale, advanced information systems, an extensive underwriting
database and, beginning in 1995, the ability to compete in an affinity group
marketing environment.

     Because the Company offers its product lines only through independent
agencies, its relationships with those agencies are critical to its
continued success.  The Company believes that it is the preferred provider
for most of its agencies and that, as a result of such position, it has
gained access to policyholders with average or above-average underwriting
profit characteristics in its personal and commercial automobile insurance
lines.  The Company carefully selects and retains agencies whose premium
growth and loss ratio experience meet the Company's agency criteria, and
devotes substantial resources to fostering and maintaining strong
relationships with its existing agencies.  The Company pays its agencies
significant compensation in the form of profit sharing, which is based in
part on the underwriting profits of the agency's business written with the
Company.  In addition, the Company occasionally sponsors incentive award
trips to encourage agent profitability and growth.  Refer to "Part I Item 1C
- Marketing" for the details.  Based upon agency surveys conducted several
times a year, the Company believes it is attentive to the needs and
requirements of its agencies.  The Company emphasizes its commitment to the
Massachusetts insurance market, its responsiveness in servicing claims and
its internal support for agency operations, including direct billing of
insureds, direct claim reporting, on-line inquiry systems for its agents and
by providing competitively priced automobile insurance programs and
products.

Massachusetts Business

     The Company's focus on automobile and homeowners insurance primarily in
Massachusetts (over 86% of total direct premiums written) has also been a
factor in its success.  The terms, conditions and mandated rates of personal
automobile insurance are subject to extensive regulation.  Because the
Company has primarily served the Massachusetts market, it has both an in-
depth understanding of this market and the ability to respond effectively to
shifts in the state's regulatory and underwriting environments.  Currently,
the Company is
8
<page>


required to accept virtually all automobile insurance business submitted to
it by its agencies.  The Company's ability to underwrite this business
profitably, however, depends on its understanding of the risks in the
business as well as its management of reinsurance through C.A.R.

     The Company has actively pursued affinity group marketing programs
since 1995.  The primary purpose of affinity group marketing programs is to
provide participating groups with a convenient means of purchasing private
passenger automobile insurance through associations and employer groups.
Emphasis is placed on writing larger affinity groups, although accounts with
as few as 25 participants are considered.  Affinity groups are eligible for
rate discounts, which must be filed annually with the Division of Insurance.
In general, the Company looks for affinity groups with mature/stable
membership, favorable driving records and below average turnover ratios.
Participants who leave the sponsoring group during the term of the policy
are allowed to maintain the policy until expiration.  At expiration, a
regular Commerce policy may be issued through the agency at the insured's
option.

     Since the latter part of 1995, Commerce has been a leader in affinity
group marketing through agreements with the four American Automobile
Association Clubs of Massachusetts ("AAA clubs") offering discounts on
private passenger automobile insurance to the clubs' members who reside in
Massachusetts.  A 6% discount was approved for policies effective January 1,
2002, which is the same as the discount for 2001.  Membership in these clubs
is estimated to represent approximately one-third of the Massachusetts
motoring public, and has been the primary reason for a 62.6% increase in the
number of personal automobile exposures written by Commerce since year-end
1995 (the AAA affinity group program incepted in October of 1995).  In 2001,
total direct premiums written attributable to the AAA group business were
$545,496 or 47.3% of the Company's total direct premiums written (63.4% of
the Company's total Massachusetts personal automobile premium), an increase
of 1.8% over 2000.  Total exposures attributable to the AAA clubs group
business were 581,455 or 63.3% of total Massachusetts personal automobile
exposures in 2001, as compared to 559,696 or 64.5% in 2000.  Of the total
Massachusetts automobile exposures written through the AAA affinity group
program by the Company, approximately 13.0% were written through insurance
agencies owned by the AAA clubs (8.7% of total Massachusetts automobile
exposures).  The remaining 87.0% of the AAA group program was written
through the Company's network of independent agents (91.3% of total
Massachusetts automobile exposures).

     Massachusetts law allows two years to reach the required group
penetration level of 35%.  Commerce has continued to maintain AAA member
participation in excess of 35% through December 31, 2001, when it was
estimated at approximately 40%.  The two-year penetration requirement was
waived by the Massachusetts Legislature for 2000, 2001 and 2002.  Waiving
the penetration requirements allows insurance companies to continue offering
group discounts without reaching the 35% level.

     Commerce and the AAA clubs have agreed that Commerce shall be their
exclusive under-writer of Massachusetts personal automobile group programs.
A rolling three-year contract exists between Commerce and the AAA clubs
which renews automatically and may be terminated upon a minimum of three
years written notice to either party.

     Through 2000, the Company has offered its Massachusetts customers safe
driver deviations to drivers with SDIP classifications of either Steps 9 or
10 and to only Step 9 drivers in 2001.  Safe driver deviations are rate
discounts based on the customer's driving record and resulting SDIP
classification and must be approved annually by the Commissioner.  Steps 9
and 10 are the two best driver SDIP classifications in Massachusetts,
representing drivers with no at fault accidents and not more than one minor
moving vehicle violation in the last six years.  In 2002, in response to the
average personal automobile rate decisions over the last several years, the
Company did not file for SDIP Step 9 or Step 10 deviations, for policies
incepting in the 2002 calendar year.  During 2001, 55.0% of the Company's
exposures were eligible for Step 9 deviations, versus 55.1% and 14.0%,
eligible for Step 9 and Step 10 deviations in 2000.

9
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     The Company's other than personal automobile products tend to be
derived from its other two core product lines and therefore have had
relatively predictable risk profiles.  The Company offers a preferred risk
homeowners product through Citation, which has an alternative pricing
schedule for selected insureds meeting more restrictive underwriting
guidelines.  Citation also provides a separate rating tier for preferred
commercial automobile business.  Approximately 17% of the voluntary
commercial automobile premium produced by its voluntary agents in 2001 was
written by Citation.  Citation also produced 49.0% of Massachusetts
homeowner business based on direct premiums written.  The Company expects
that these secondary rating tiers will continue to assist the Company in
retaining its better commercial automobile and homeowner accounts.  The
Company also expects to further increase the percentage of commercial
automobile business that can be retained voluntarily by the Company in 2002
and beyond.

     The Company's long-term commitment to providing consistent markets for
Massachusetts independent agencies, coupled with the withdrawal by several
national companies from the Massachusetts personal automobile market, which
occurred during the years 1987 through 1991, has been a significant factor
in enabling the Company to increase and maintain its market share by
contracting with agencies, which meet its agency criteria.  The Company
believes that Massachusetts agencies are more likely to seek to develop and
expand relationships with domestic insurers, which, like the Company, have a
long-term commitment to and focus on the Massachusetts personal automobile
market.

     During the past few years, the Company has devoted substantial time and
resources to the development of its current information systems, which
enhanced both its underwriting and its agency support.  Through the use of
several customized software programs, the Company has the ability to analyze
its internal historical underwriting data and use such information in
making, in the Company's belief, more informed underwriting decisions.  In
particular, the Company believes that the amount and extent of detail data
accumulated as a result of its share of the Massachusetts personal
automobile market gives the Company a competitive advantage in determining
which automobile risks to reinsure through C.A.R.  The Company's information
systems also enable it to provide extensive support to its agencies.  This
support includes a direct billing system, which covers over 98% of the
Company's policyholders, an on-line inquiry system, which allows agencies to
ascertain the status of pending claims and direct bill information and a
system which allows Company agencies to quote premiums for the Company's
three core product lines directly to policyholders.  The Company has
developed claims and direct bill inquiry, along with providing agents access
to correspondence, manuals and reports via the Internet.  This service is
available to all agents.  During 2001, approximately 504 agents had access
to this service, which represents over 90% of all Massachusetts agents.

Other States Business

     Direct premiums written in states other than Massachusetts by Commerce
West and American Commerce, increased $22,554,000 or 18.7%.  Roughly half of
this growth resulted from an increase of $11,505,000 or 44.5% in personal
automobile direct premiums written by Commerce West.  The growth from
Commerce West is primarily attributable to non-standard automobile business.
Commerce West began writing in this segment of the market in late 1999.
Commerce West also began writing commercial automobile in late 2000,
resulting in writings of $1,514,000 in 2001.  American Commerce direct
premiums written increased $9,655,000 or 10.2%, primarily due to an increase
in personal automobile premiums of $7,319,000 or 9.4%.  American Commerce
also experienced a 13.4% increase in homeowners premiums written.  American
Commerce, which writes business in 26 states, wrote greater than 90% of its
business in eleven states.
10
<page>




     Commerce West premiums and the eleven states with the highest
percentages of premiums written by American Commerce are shown in the
following table:
<table>
<caption>
                                                           % of Direct Premiums
            Company                 State                     Written by State
                                                              2001       2000
            
                     <c>                      <c>        <c>
            Commerce West           California............    89.8%      99.1%
                                    Oregon................    10.2%       0.9%
                                         Total............   100.0%     100.0%
            American Commerce       Arizona...............    20.9%      21.5%
                                    Rhode Island..........    14.3%      10.8%
                                    Ohio..................    12.6%      11.6%
                                    Oregon................    10.5%      10.2%
                                    Washington............     8.0%       8.1%
                                    Oklahoma..............     7.7%       6.4%
                                    Kentucky..............     5.9%       5.8%
                                    Indiana...............     4.6%       3.5%
                                    West Virginia.........     2.5%       2.7%
                                    Idaho.................     2.5%       2.4%
                                    Tennessee.............     2.4%       2.2%
                                    Other states..........     8.1%      14.8%

                                         Total............   100.0%     100.0%
</table>
     The decrease in other states for American Commerce is primarily
attributable to business in several states being moved to other insurance
companies affiliated with the ownership of the agencies representing that
business.  These and some future moves for business in other states were
anticipated at the time the Company negotiated the acquisition of American
Commerce.

Market Risk:  Interest Rate Sensitivity and Equity Price Risk

     The Company's investment strategy emphasizes investment yield while
maintaining investment quality.  The Company's investment objective
continues to focus on maximizing after-tax investment income through
investing in high quality diversified investments structured to maximize
after-tax investment income while minimizing risk.  The Company's funds are
generally invested in securities with maturities intended to provide
adequate funds to pay claims and meet other operating needs without the
forced sale of investments.  Periodically, sales have been made from the
Company's fixed maturity portfolio to actively manage portfolio risks,
including credit-related concerns, to optimize tax planning and to realize
gains.  This practice will continue in the future.

     In conducting investing activities, the Company is subject to, and
assumes, market risk.  Market risk is the risk of an adverse financial
impact from changes in interest rates and market prices.  The level of risk
assumed by the Company is a function of the Company's overall objectives,
liquidity needs and market volatility.

     The Company manages its market risk by focusing on higher quality
equity and fixed income investments, by periodically monitoring the credit
strength of companies in which investments are made, by limiting exposure in
any one investment and by monitoring the quality of the investment portfolio
by taking into account credit ratings assigned by recognized rating
organizations.  Of the Company's bonds, 97.9% are rated in either of the two
highest qualities categories provided by the NAIC.  Although the Company has
significant holdings of various closed-end preferred stock mutual funds,
these funds are comprised primarily of preferred stocks traded on national
stock exchanges, thus limiting exposure to any one investment.
11
<page>




     As part of its investing activities, the Company assumes positions in
fixed maturity, equity, short-term and cash equivalents markets.  The
Company is, therefore, exposed to the impacts of interest rate changes in
the market value of investments.  At December 31, 2001, the Company's
exposure to interest rate changes and equity price risk has been estimated
using sensitivity analysis. The interest rate impact is defined as the
effect of a hypothetical interest rate change of plus-or-minus 200 basis
points on the market value of fixed maturities and preferred stocks.  The
equity price risk is defined as a hypothetical change of plus-or-minus 10%
in the fair value of common stocks.  Changes in interest rates would result
in unrealized gains or losses in the market value of the fixed maturity and
preferred stock portfolio due to differences between current market rates
and the stated rates for these investments.  Based on the results of the
sensitivity analysis at December 31, 2001, the Company's estimated market
exposure for a 200 basis point increase (decrease) in interest rates was
calculated.  A 200 basis point increase results in a $83,611,000 decrease in
the market value of the fixed maturities and preferred stocks.  A 200 basis
point decrease results in a $47,436,000 increase in the market value of the
same securities.  The equity price risk impact at December 31, 2001, based
upon a 10% increase in the fair value of common stocks and preferred stock
mutual funds, would be an increase of $10,746,000 and $31,567,000,
respectively.  Based upon a 10% decrease, common stocks and preferred stock
mutual funds would decrease $10,746,000 and $31,567,000, respectively.
Long-term interest rates (30-year Treasury Bond) increased slightly to 5.47%
at December 31, 2001 from 5.46% at December 31, 2000.  The preceding
sensitivity analysis does not represent a forecast and should not be relied
upon as being indicative of expected operating results.  These hypothetical
estimates are based upon numerous assumptions such as the nature and timing
of interest rate levels including the yield curve shape, prepayments on
loans and securities, reinvestment and replacement of asset and liability
cash flows and others.  While assumptions are developed based upon current
economic conditions, the Company cannot provide any assurance as to the
predictive nature of these assumptions.  Also, as market conditions vary
from those assumed in the sensitivity analysis, actual results will also
differ due to prepayment and refinancing levels likely deviating from those
assumed and other internal and external variables.  Furthermore, the
sensitivity analysis does not reflect actions that management might take in
responding to or anticipating changes in interest rates.


A. General

Insurance Lines

     Commerce and Citation, the Company's Massachusetts property and
casualty insurance subsidiaries, currently have a combined A.M. Best's
rating of A+ (Superior).  Commerce West, and American Commerce currently
have A.M. Best's ratings of A (Excellent).  According to Best's, an insurer
with a Superior rating has achieved superior overall performance and has
shown the strongest ability to meet their policyholder and other contractual
obligations when compared to the norms of the property and casualty
insurance industry.  An insurer with an Excellent rating has demonstrated,
in A.M. Best's opinion, excellent overall performance when compared to
standards developed by A.M. Best.
12
<page>




     The following table compares direct premiums written, net premiums
written and earned premiums for the years ended December 31, 2001 and 2000:


<table>
<caption>
(Dollars in thousands)                                 Years Ended December 31,

                                                  2001       2000     $ Change  % Change

                                           <c>         <c>         <c>      <c>
Direct Premiums Written:
  Personal Automobile in Massachusetts......  $  859,922  $  827,180  $ 32,742      4.0%
  Personal Automobile in All Other States...     122,320     103,496    18,824     18.2%
  Commercial Automobile in Massachusetts....      58,088      43,243    14,845     34.3%
  Commercial Automobile in All Other States.       1,514         104     1,410        *
  Homeowners in Massachusetts...............      73,254      65,662     7,592     11.6%
  Homeowners in All Other States............      18,710      16,498     2,212     13.4%
  Other Lines in Massachusetts..............      17,885      14,860     3,025     20.4%
  Other Lines in All Other States...........         714         606       108     17.8%

     Total Direct Premiums Written..........  $1,152,407  $1,071,649  $ 80,758      7.5%

Net Premiums Written:
  Personal Automobile in Massachusetts......  $  864,900  $  839,394  $ 25,506      3.0%
  Personal Automobile in All Other States...     122,256     103,719    18,537     17.9%
  Commercial Automobile in Massachusetts....      60,986      44,848    16,138     36.0%
  Commercial Automobile in All Other States.       1,477         104     1,373        *
  Homeowners in Massachusetts...............      20,364      17,547     2,817     16.1%
  Homeowners in All Other States............       4,576      (1,658)    6,234        *
  Other Lines in Massachusetts..............       4,236       4,916      (680)   (13.8%)
  Other Lines in All Other States...........         172          41       131    319.5%

     Total Net Premiums Written.............  $1,078,967  $1,008,911  $ 70,056      6.9%

Earned Premiums:
  Personal Automobile in Massachusetts......  $  776,552  $  714,972  $ 61,580      8.6%
  Personal Automobile in All Other States...     116,479     100,101    16,378     16.4%
  Commercial Automobile in Massachusetts.....     43,008      32,548    10,460     32.1%
  Commercial Automobile in All Other States.         711          19       692        *
  Homeowners in Massachusetts...............      19,119      17,364     1,755     10.1%
  Homeowners in All Other States............       3,731       4,186      (455)   (10.9%)
  Other Lines in Massachusetts..............       3,290       3,434      (144)    (4.2%)
  Other Lines in All Other States...........         158         162        (4)    (2.5%)
  Assumed Premiums from C.A.R...............      80,176      81,300    (1,124)    (1.4%)
  Assumed Premiums from Other than C.A.R....         428         397        31      7.8%

     Total Earned Premiums..................  $1,043,652  $  954,483  $ 89,169      9.3%

  Earned Premiums in Massachusetts..........  $  841,969  $  768,318  $ 73,651      9.6%
  Earned Premiums-Assumed...................      80,604      81,697    (1,093)    (1.3%)
  Earned Premiums in All Other States.......     121,079     104,468    16,611     15.9%

     Total Earned Premiums..................  $1,043,652  $  954,483  $ 89,169      9.3%
</table>
*Calculation is not meaningful.
13
<page>


     The Company's principal insurance line is personal automobile
insurance. The Company offers automobile policyholders the following types
of coverage: bodily injury liability coverage, including underinsured and
uninsured motorist coverage, personal injury protection coverage, property
damage liability coverage and physical damage coverage, including fire,
theft and other hazards specified in the policy.  In Massachusetts,
policies are written for one-year terms.  Personal automobile policies
written by Commerce West and American Commerce outside of Massachusetts
are primarily written for a policy term of six months.  The Company's
published liability limits for Massachusetts business written by Commerce
is $500,000 per person for bodily injury, $1,000,000 per accident and
$100,000 for property damage.  Liability limits of $100,000 per person
injured, $300,000 per accident and $100,000 for property damage are the
limits most commonly purchased from the Company in Massachusetts.  For
California business written by Commerce West, liability limits of $15,000
per person injured and $30,000 per accident are most commonly purchased.
For Oregon business written by Commerce West, liability limits of $25,000
per person insured and $50,000 per accident are most commonly purchased.
For business written by American Commerce, liability limits of $100,000
per person injured and $300,000 per accident are most commonly purchased.

Massachusetts Automobile Business

     In Massachusetts, private passenger automobile insurance is subject
to extensive regulation.  Owners of registered automobiles are generally
required to maintain certain minimum automobile insurance coverages.  With
very limited exceptions, automobile insurers are required by law to issue
a policy to any applicant seeking to obtain such coverages.  Companies in
Massachusetts are also assigned agents, known as Exclusive Representative
Producers ("ERPs"), based primarily on market share, that have been unable
to obtain a voluntary contract with an insurance carrier.  Marketing and
underwriting strategies for companies operating in Massachusetts are
limited by maximum premium rates and minimum agency commission levels for
personal automobile insurance, both of which are mandated by the
Massachusetts Commissioner of Insurance ("Commissioner").  In
Massachusetts, accident rates, bodily injury claims, and medical care
costs continue to be among the highest in the nation.  According to the
Automobile Insurers Bureau of Massachusetts ("A.I.B."), Massachusetts "has
higher than average medical costs and liability claims involving
attorneys".  According to the A.I.B., Massachusetts personal automobile
premium per policy, based upon on the latest available premium information
from 1999, was 5th highest in the nation.

     During the three-year period from 1999 to 2001, average mandated
Massachusetts personal automobile insurance premium rates decreased an
average of 2.3% per year.  The Commissioner approved no rate change in
personal automobile premiums for 2002, as compared to an average rate
decrease of 8.3% in 2001.  Coinciding with the 2002 rate decision, the
Commissioner also approved no change in the commission rate agents receive
for selling private passenger automobile insurance from 12.3% in 2001.


                               State Mandated
                                 Average     Commerce Average Rate
                    Year       Rate Change    Change Per Exposure
                    2002          0.0%               5.0%(Estimated)
                    2001         (8.3%)             (1.9%)
                    2000          0.7%               6.2%
                    1999          0.7%               9.1%

     Although average mandated personal automobile premium rates were
decreased by 8.3% in 2001, the Company's average rate decreased 1.9% per
exposure.  The 1.9% decrease for 2001 was primarily the result of the
state mandated average rate decrease offset by decreases in the SDIP
deviations for Step 9 and Step 10 drivers, the two best driver SDIP
classifications in Massachusetts.  The Company decrease was also due to
the facts that the rate decision did not anticipate purchases of new
automobiles in the year to which the rate decision applied and, secondly,
the Company's mix of personal automobile business differs from that of the
industry.

14
<page>


     The 1999 average rate decision was partially driven by corrections
for an industry error that had impacted prior year rate decisions.  The
industry error resulted from a miscalculation of industry expense
allowances that had the effect of over-stating rates for 1991 through
1996.  Mandated rates for 1997, 1998 and 1999 included an adjustment to
recoup the effects of this error from the industry.  The adjustment
included in the rate decision to recoup the error was phased in during
1997, 1998 and 1999.  The earned premium impact of this, coupled with the
impact of a previous year imbalance in the SDIP, was approximately $14.0
million for 1999.  The earnings per share after-tax impact resulting from
lower earned premiums were estimated at $0.26 for 1999.

     The Company also offers homeowners insurance in Massachusetts,
including a very limited amount of policies in designated coastal areas.
The Company's standard homeowners policy is an all risk, replacement cost
insurance policy covering a dwelling and the content contained therein.
The Company's published limits of liability for property damage to a
dwelling are a minimum coverage of $60,000 and a maximum coverage of
$750,000, although some policies over this amount are written on an
exception basis.  For personal liability, the minimum coverage is $100,000
and the maximum coverage is $1,000,000.  The average dwelling coverage
amount per policy is approximately $175,000, and generally, the average
amount of contents coverage is 70% of the amount of coverage for the
dwelling, with limitations on the amount of coverage per item placed on
securities, cash, jewelry, furs, silverware, computer equipment and
firearms.  However, additional coverage for such items can be purchased on
a scheduled personal property basis.  The Company also offers $1,000,000,
$2,000,000 and $3,000,000 personal liability umbrella coverage which is
reinsured through American Reinsurance Corporation.  Similar coverages are
offered by American Commerce as part of its homeowner business.

     The Company offers a preferred homeowners product through Citation,
which has higher policy limits and a lower premium structure and is
designed primarily for homes with above-average market values.  The
Company also applies more stringent underwriting criteria by, among other
things, limiting the product to homes with modern electrical systems.

     The Company also offers inland marine, fire, general liability and
commercial multi-peril insurance in Massachusetts.  Commerce West
predominantly writes private passenger automobile insurance in California
and Oregon through 617 independent insurance agencies and brokers.  All
business is underwritten at the Company's headquarters located in
Pleasanton, California.  Although primarily writing preferred business,
Commerce West began writing non-standard business in late 1999.  American
Commerce predominantly writes private passenger automobile and homeowners
insurance in 26 states exclusively through 36 AAA independent insurance
agencies.  Products are similar to those offered by Commerce and Citation.
All business is underwritten at the Company's headquarters located in
Columbus, Ohio.  Both Companies target preferred insurance risks.

Mortgage Operations

     Insurance companies are authorized to invest in mortgages.  The
Company formed Bay Finance Company, Inc. ("Bay Finance") to originate and
service residential and commercial mortgages in Massachusetts and, on a
limited basis, in Connecticut.  During fiscal 2001, 2000 and 1999 the
mortgage operations accounted for approximately $3,640,000, or 0.3%,
$5,407,000, or 0.5% and $5,429,000, or 0.6% of the Company's consolidated
total revenues, respectively.

Insurance Agency

     Clark-Prout Insurance Agency, Inc. ("Clark-Prout") is a wholly-owned
insurance agency that writes both for the Company and for other insurance
companies.  During fiscal 2001, 2000 and 1999, Clark-Prout's revenues
amounted to $629,000, or 0.1%, $717,000, or 0.1% and $803,000, or 0.1% of
the Company's consolidated total revenues, respectively.
15
<page>


Segment Information

     The information in NOTE O in the Company's 2001 Annual Report is
incorporated herein by reference.

B. Commonwealth Automobile Reinsurers

     A significant aspect of the Company's automobile insurance business
relates to its interaction with C.A.R.  C.A.R. is a state-mandated
reinsurance mechanism, which enables the Company and the Servicing
Carriers to reinsure any under priced automobile risk.  Servicing
Carriers, which are responsible for over 99.0% of total direct premiums
written for personal automobile insurance in Massachusetts, are required
to offer automobile insurance coverage to all eligible applicants pursuant
to "take-all-comers" regulations, but may reinsure under priced business
with C.A.R.  In addition, Servicing Carriers are obligated to accept
involuntary agencies, known as ERPs, from C.A.R. and to provide an
automobile insurance market in Massachusetts for those agencies.

     C.A.R. maintains separate pools for liability and physical damage
coverage in personal and commercial automobile risks.  All companies
writing automobile insurance in Massachusetts share in the underwriting
results of C.A.R. business for their respective product line or lines,
whether or not they are Servicing Carriers.  Since its inception, C.A.R.
has annually generated multi-million dollar underwriting losses in both
the personal and commercial pools.  Accordingly, each automobile insurer
attempts to develop and implement underwriting strategies that will
minimize its relative share of the C.A.R. deficit while maintaining
acceptable loss ratios on risks not reinsured through C.A.R.

     In general, the C.A.R. reinsurance mechanism operates as follows.
Within established time frames, a Servicing Carrier must identify which
policies it wishes to retain and which policies it wishes to cede to
C.A.R.  A Servicing Carrier pays to C.A.R. all of the premiums generated
by the policies it has ceded and also reimburses C.A.R. the difference
between standard rates and the reduced premium resulting from affinity
group marketing discounts on policies ceded to C.A.R.  C.A.R. reimburses
Servicing Carriers for all losses incurred on account of ceded policies,
although, as with reinsurance generally, reinsurance of a policy through
C.A.R. does not legally discharge the Servicing Carrier from its liability
to the policyholder for the full amount of the policy.  In addition,
Servicing Carriers also receive fees for servicing ceded policies based
upon the expense structure established by C.A.R.

     An insurer's proportionate share of the C.A.R. deficit is allocated
on the basis of a formula called a participation ratio, which can vary
significantly between the personal and commercial pools, and between
different policy years.  Under current regulations, an insurer's share of
the C.A.R. deficit is based upon its market share for retained automobile
risks for the particular pool, adjusted by a utilization formula, such
that, in general, its participation ratio is disproportionately and
adversely affected if its relative use of C.A.R. reinsurance exceeds that
of the Massachusetts industry and favorably affected if its relative use
of C.A.R. reinsurance is less than that of the Massachusetts industry.
The current formula also contains a provision whereby certain high risk
business, if reinsured through C.A.R., is excluded in determining an
insurer's participation ratio.  Finally, for the personal automobile
C.A.R. pool, an insurer's participation ratio may be affected by credits
received for not reinsuring through C.A.R. automobile risks in selected
under priced classes and territories.  An insurer's participation ratio
will be favorably affected if its relative use of credits exceeds that of
the Massachusetts industry.

Company Private Passenger Participation Ratio for C.A.R. versus Market
Share

                               Company Participation         Company
               Year               Ratio in C.A.R.          Market Share
               2001*                   16.8%                   23.3%
               2000                    16.9%                   22.3%
               1999                    16.5%                   21.3%
            *Estimated
16
<page>


     The Company's objective is to develop and implement underwriting
strategies to obtain the optimum balance between its C.A.R. participation
ratio and the loss ratios on automobile risks not reinsured through C.A.R.
For each automobile risk and certain risk categories, the Company makes a
judgment as to whether the projected impact on the Company's profitability
from retaining the risk outweighs the incremental cost of reinsuring the
risk through C.A.R.  In determining the incremental cost of reinsuring a
risk through C.A.R., the Company estimates its participation ratio for a
given period by modeling the anticipated Massachusetts industry-wide
C.A.R. trends.  Once the Company estimates its participation ratio, it is
then able to compare the incremental effect on the Company's share of the
C.A.R. deficit of either reinsuring or retaining the particular automobile
risks.  Finally, the Company utilizes its internal underwriting database
and internally-developed actuarial reporting and decision support systems
to develop a projected underwriting loss ratio for each risk.  It then
compares the impact of the automobile risk on the Company's participation
ratio in order to estimate whether, after taking all C.A.R. and other
factors into account, the Company's profitability will be enhanced by
reinsuring or retaining such risk.  The Company believes that, because of
its leading share of the Massachusetts automobile insurance market, it can
utilize statistically credible data for a greater array of underwriting
factors than its competitors, which in turn gives it a competitive
advantage in deciding which automobile risks to reinsure through C.A.R.

     The C.A.R. utilization-based participation ratio has been in place
since 1993, and individual companies in the marketplace make minor yearly
changes to find their optimum balance between voluntary and ceded
writings.  In 2001, the Company ceded approximately $60,277,000 or 7.0% of
the Company's Massachusetts personal automobile direct premiums written,
compared to $60,038,000, or 7.3% in 2000.  The Company's strategy has been
to voluntarily retain more of the types of personal automobile business
that are factored as credits favorably impacting the utilization formula.
These credits result from voluntarily writing business in under-priced
territories and for under-priced risks.  As a result of increased
voluntary retention in excess of the industry, the credits impacting the
utilization formula have favorably affected the Company's participation
ratio.  As indicated in the above table, this ratio is several percentage
points below the Company's estimated 23.3% share of the Massachusetts
personal automobile market.

     Although commercial automobile insurance is a relatively smaller
portion of the Company's total insurance writings, the related commercial
automobile risk selection decisions remain an important element in
determining profitability.  In 2001, the Company ceded approximately
$9,062,000 or 15.6% of its Massachusetts commercial automobile direct
premiums written, as compared to $7,414,000 or 17.1% in 2000.

     C.A.R. rule changes occur, as C.A.R. adjusts the operations of the
personal and commercial reinsurance mechanisms to address the needs of the
Massachusetts automobile insurance market.  Any material change to the
C.A.R. rules in the future will affect the Company.  The Company is not
currently aware of any likely future rule changes that could have a
material impact on the Company, but there can be no assurance that such
rule changes will not occur.


C. Marketing

     The Company markets its insurance products through a network of
licensed independent agencies, 539 throughout Massachusetts (of which 131
are ERPs), 617 in California and Oregon for Commerce West, and 36 for
American Commerce.  The non-ERP independent agencies may also represent
other insurance companies, some of which may compete directly with the
Company.  The independent insurance agencies are under contract with the
Company's subsidiaries and must conduct their business according to the
provisions of their contract.  Contracts for Massachusetts agencies may be
terminated by the Company upon 180 days' notice to the agency or at will
by the agency.

17
<page>


Massachusetts Business

     The Company seeks to establish long-term relationships with agencies
that can generate a sizable volume of business with profitable
underwriting characteristics and for which the Company will be among the
top two or three preferred writers of its core products.  The Company also
assesses whether the mix of a prospective agency's business will expand
the Company's presence in one or more of its core product lines.  In 2001,
each agency representing the Company in Massachusetts produced an average
of approximately $1,893,000 of Company direct premiums written or a 4.3%
increase as compared to 2000.  Also in Massachusetts during 2001, 201
agencies produced between $1.0 million and $2.0 million of direct premiums
written, an additional 58 agencies produced between $2.0 million and $3.0
million, an additional 42 agencies produced between $3.0 million and $4.0
million and lastly, an additional 39 agencies produced over $4.0 million.
The Company's three largest agencies produced approximately $67.5, $17.0
and $14.5 million of the Company's Massachusetts direct premiums written,
respectively, or approximately 6.7%, 1.7% and 1.4% in 2001.

     Once appointed, each agency's performance is carefully monitored.  An
Agency Evaluation Committee, comprised of representatives of the Company's
Marketing, Underwriting and Premium Accounting departments, utilizes a
host of pre-established criterion (loss ratio, premium volume, etc.) to
continuously evaluate agencies.  Generally, the Company will counsel an
agency on how to improve its underwriting and profitability before any
agency will be terminated.

     Company agencies receive commissions on policies written for the
Company and are eligible to receive contingent commissions through a
profit sharing arrangement.  The Commissioner annually establishes a
minimum average direct commission for personal automobile insurance, which
in 2001 was 12.3%.  The Company's contingent commissions are tied to the
underwriting profit on policies written by an agency.  The Company
generally pays up to 45% of the underwriting profit attributable to the
agency's business.  The arrangement for Massachusetts business utilizes a
three year rolling plan, with one third of each of the current and the two
prior years profit or loss calculations, summed to a single amount.  This
amount, if positive, is multiplied by the profit sharing rate and paid to
the agent.  To qualify for profit sharing, a three-year average loss ratio
of 50% to 55% or better is generally required.  C.A.R. credits for
voluntary business written in urban areas or credits for writing youthful
operators on a voluntary basis increase the loss ratio eligibility for
profit sharing up to 55% from 50%.  Books of business with no available
credits must achieve a lower loss ratio.  In 2001, total commission
expensed by the Company to its agencies amounted to 15.5% of direct
premiums written, of which direct commissions and contingent commissions
constituted 14.1% and 1.4%, respectively, versus total commission expensed
of 16.2%, of which 14.1% was direct and 2.1% was contingent in 2000.
Direct commissions are higher than the personal automobile minimum
commission rates primarily due to higher commission rates on SDIP Step 9
business coupled with higher commissions on other lines of business.  In
2001, the Company's expense for contingent commissions was $14.0 million
versus $19.5 million in 2000.

     The Company also occasionally sponsors incentive award trips to
encourage and reward agency profitability and growth.  In 1998, the
Company initiated the T2000 Sales Incentive Contest.  One part of the
measurement period concluded on December 31, 1999 and the other concluded
on May 31, 2000 with agents earning incentive trips, which took place in
April and September of 2000, respectively.  The estimated total cost was
approximately $1.3 million of which approximately $45,000 was expensed in
2000 and $571,000 in 1999.

     The Company's information systems enable it to provide extensive
support to its agencies.  This support includes a direct billing system,
which covers over 98% of the Company's Massachusetts policyholders, an on-
line inquiry system which allows agents to ascertain quickly the status of
pending claims or direct bill information and a system which allows
Company agents to quote many premiums directly to policyholders.  The
Company also emphasizes its commitment to enhancing and expanding the role
of its information systems.  The Company has provided agencies with the
ability to generate personal automobile policies from their own offices
and continuously explores new options on an ongoing basis.  The Company
has also developed Internet connectivity for its independent agents.
18
<page>


     The Company believes that, because of its compensation arrangements
and by providing a consistent market with emphasis on service, an
increasing number of the Company's agencies will rely on it as their
principal supplier of insurance products.  The Company believes that it is
the preferred provider for most of its agencies.  Although the Company
believes, based on annual surveys of its agencies, that its relationships
with its independent agencies are excellent, any disruption in these
relationships could adversely affect the Company's business.

     Since the latter part of 1995, Commerce has been a leader in affinity
group marketing through agreements with the four American Automobile
Association Clubs of Massachusetts ("AAA clubs") offering discounts on
private passenger automobile insurance to the AAA clubs' members who
reside in Massachusetts.  A 6% discount was approved for policies
effective January 1, 2002, which is the same as the discount for 2001.
Membership in these AAA clubs is estimated to represent approximately one-
third of the Massachusetts motoring public, and has been the primary
reason for a 62.6% increase in the number of personal automobile exposures
written by Commerce since year-end 1995 (the AAA affinity group program
incepted in October of 1995).  In 2001, total direct premiums written
attributable to the AAA group business were $545,496 or 47.3% of the
Company's total direct premiums written (63.4% of the Company's total
Massachusetts personal automobile premium), an increase of 1.8% over 2000.
Total exposures attributable to the AAA clubs' group business were 581,455
or 63.3% of total Massachusetts personal automobile exposures in 2001, as
compared to 559,696 or 64.5% in 2000.  Of the total Massachusetts personal
automobile exposures written through the AAA affinity group program by the
Company, approximately 13.0% were written through insurance agencies owned
by the AAA clubs (8.7% of total Massachusetts automobile exposures).  The
remaining 87.0% of the AAA group program was written through the Company's
network of independent agents (91.3% of total Massachusetts automobile
exposures).  For additional details, refer to the following table on
discounts and deviations.
<table>
<caption>
AAA Affinity Group Discount and SDIP Deviations     2002*   2001    2000    1999
   
                                             <c>    <c>      <c>     <c>
   AAA Affinity Group Discount.................      6.0%    6.0%    6.0%    6.0%
   SDIP Step 9 Deviation.......................      0.0%    2.0%    6.0%    8.0%
   SDIP Step 10 Deviation......................      0.0%    0.0%    2.0%    3.0%

   Combined AAA Affinity Group Discount and
     Step 9 Deviation..........................      6.0%    7.9%   11.6%   13.5%
   Combined AAA Affinity Group Discount and
     Step 10 Deviation.........................      6.0%    6.0%    7.9%    8.8%
</table>
   *For policies with effective dates as of January 1, 2002 or thereafter.

Agreements for the Transfer of Massachusetts Business from Other Companies
in 2002

     The Company entered into an agreement on September 28, 2001, with
Berkshire Mutual Insurance Company ("Berkshire") for the transfer of
Massachusetts personal automobile business written by Berkshire to The
Commerce Insurance Company, effective January 1, 2002.  Under terms of the
agreement, Commerce agreed to offer agency contracts to independent agencies
that represent Berkshire for personal automobile insurance in Massachusetts.
This will allow agents of Berkshire the opportunity to offer Commerce
automobile insurance policies to their customers whose policies renew in
2002.  Commerce will assume all of Berkshire's obligations for future policy
years beyond 2001 under the Massachusetts residual market system, (commonly
known as C.A.R.), including assignment of Berkshire's involuntary agents.
The Company received a cash payment of $7,000,000 from Berkshire in early
January, 2002.

     The Company announced the formation of a marketing alliance with Horace
Mann Educators Corporation on October 18, 2001.  Under the terms of an
agency agreement between Commerce and Horace Mann Service Corporation
("HMSC"), a licensed brokerage agency in the State of Massachusetts, HMSC
will provide its personal automobile customers with Commerce policies.  New
personal automobile policies sold by HMSC will be insured with Commerce,
beginning no later than January 1, 2002 at the policyholder's option.  All
personal auto policies currently written by HMSC will convert to Commerce
policies upon renewal in 2002.
19
<page>



Other States

     Commerce West predominantly writes private passenger automobile
insurance in California and Oregon through 617 independent insurance
agencies and brokers.  All business is underwritten at the Company's
headquarters located in Pleasanton, California.  Although primarily writing
preferred business, Commerce West began writing non-standard business in
late 1999.  American Commerce predominantly writes private passenger
automobile and homeowners insurance in 26 states exclusively through 36 AAA
independent insurance agencies. All business is underwritten at the
Company's headquarters located in Columbus, Ohio.  Both Companies target
preferred insurance risks.

D. Underwriting

     The Company seeks to achieve an underwriting profit, as measured by a
statutory combined ratio of less than 100%, in each of its three core
product lines, personal automobile, commercial automobile and homeowners
insurance, in both hard and soft markets.  The strategy is designed to
achieve consistent profitability with substantial growth in net premiums
written during hard markets and more modest growth during soft markets.  All
of the Company's policies have been written on a "claims incurred basis,"
meaning that the Company covers claims based on occurrences that take place
during the policy period.

     Agencies are authorized to bind the Company on risks as limited by the
Company's written underwriting rules and practices, which set forth
eligibility rules for various policies and coverages, unacceptable risks,
and maximum and minimum limits of liability.  With respect to non-automobile
policies, other than certain umbrella policies, the Company's agencies have
the ability to bind the Company for a limited period, typically 60 days,
during which time the Company reviews all risks to determine whether it will
accept or reject the policy.  During this review period, the Company is
obligated to pay any claim, which would be covered under the policy.
Violation of the Company's underwriting rules and practices is grounds for
termination of the agency's contract with the Company.

Massachusetts Business

     The Company and each of the approximately 38 other Servicing Carriers
must write all automobile risks submitted to them.  Massachusetts personal
automobile insurance rates are fixed annually by the Commissioner.  All
companies writing personal automobile policies are required to use such
mandated rates, unless they have received prior approval from the
Commissioner to offer a lower rate.  The actual premium paid by a particular
policyholder, however, is adjusted, either up or down, based upon the SDIP
record of the insured operator.  Moving violations and accidents for which
the insured was at fault within the most recent six year period are used to
determine each operator's SDIP surcharge or credit.  The competitive nature
of the Massachusetts personal automobile insurance market, which began in
1995, continued through 2001.

     Prices for Massachusetts commercial automobile insurance policies that
are not reinsured through C.A.R. are set competitively subject to the
Commissioner's authority to disapprove such prices.  The rate for commercial
automobile risks reinsured through C.A.R. is mandated by the Commissioner,
except for private passenger type non-fleet business.  The Company's rates
for other product lines, including homeowners and commercial lines of
general liability and property insurance, are based in part on loss cost
data from the Insurance Services Office ("ISO"), which is an industry bureau
providing policy forms and rate making data, and in part, on the Company's
own experience and industry price levels.

    The Company is not obligated by statute to accept every homeowners risk
submitted to it.  Accordingly, risks meeting the Company's underwriting
guidelines are accepted, and all other risks are declined or not renewed.
The Company has established an independent rate level for its homeowners
product line, based on its own loss experience and recognizing the price
levels available in the competitive marketplace.  The Company uses ISO
policy forms and has added special coverage features to meet its product
needs. Rates and forms are filed with the Commissioner.
20
<page>



     Under Massachusetts law, residential property owners are strictly
liable for damages caused by lead poisoning in children under age six
residing in the premises, unless the property owner has a Letter of
Compliance or a Letter of Interim Control (i.e. has taken or is taking
specific measures to prevent lead poisoning).  The Company has reduced its
exposure to lead poisoning by (i) excluding from coverage all intra-familial
claims for bodily injury or medical expenses brought by minors living in an
insured's household, (ii) revising its underwriting standards for new and
renewal business to avoid insuring properties with lead poisoning hazards
and (iii) excluding from homeowners and dwelling fire liability coverage all
lead poisoning perils to children under the age of six on policies for
properties built prior to 1978 that contain rental units and where strict
liability for lead poisoning would otherwise apply.  Effective on March 1,
1998 a similar exclusion was added to the Business Owners Program.  With
regard to the exclusion described in (iii), policyholders may buy a
reinstatement of the excluded coverage through a policy endorsement for an
additional premium, but very few such endorsements have been written.  As a
result of these remedial steps and its historical claims experience, the
Company does not believe that its exposure to lead poisoning claims is
material.  The Company held reserves in the amount of $1,600,000 and
$1,525,000 for lead paint related claims at December 31, 2001 and 2000,
respectively.

     The Company believes that its information systems give it a competitive
advantage in making underwriting decisions, particularly in deciding which
personal automobile risks should be reinsured through C.A.R.  Utilizing data
the Company accumulates as a result of its major market presence in the
Massachusetts personal automobile line, the Company believes that its
information systems allow it to make informed risk assessments and to
respond effectively to shifts in the automobile insurance markets and
regulatory environment.


Other States

     In keeping with the Company's long-term growth objective to expand
outside Massachusetts, the Company, in 1995, acquired Commerce West, a
personal automobile insurer, located in Pleasanton, California.  The Company
formed a joint-venture (ACIC Holding Co., Inc.) in November 1998, and
acquired in January 1999, American Commerce, located in Columbus, Ohio.
Commerce West predominantly writes private passenger automobile insurance in
California and Oregon through 617 independent insurance agencies and
brokers.  All business is underwritten at the Company's headquarters located
in Pleasanton, California.  Although primarily writing preferred business,
Commerce West began writing non-standard business in late 1999.  American
Commerce predominantly writes private passenger automobile and homeowners
insurance in 26 states exclusively through 36 AAA independent insurance
agencies.  All business is underwritten at the Company's headquarters
located in Columbus, Ohio.  Both Companies target preferred insurance risks.


E. Reinsurance

     In addition to participating in C.A.R., the Company reinsures with
other insurance companies on a claims incurred basis, a portion of its
potential liability under the policies it has written, protecting itself
against severe loss under individual policies, or catastrophic occurrences
where a number of claims can produce an extraordinary aggregate loss.
Reinsurance does not legally discharge the Company from its primary
liability to the insured for the full amount of the policies, but it does
make the reinsurer liable to the Company to the extent of the reinsured
portion of any loss ultimately suffered.  The Company seeks to utilize
reinsurers, which it considers adequately capitalized and financially able
to meet their respective obligations under reinsurance agreements with the
Company.  The Company utilizes a variety of reinsurance mechanisms to
protect itself against loss as described below.
21
<page>



Property, Catastrophe and Quota Share Reinsurance

     The Company maintains a 75% quota-share reinsurance program, covering
all non-automobile property and liability business, except umbrella
policies.  The program is split between American Re-Insurance Company,
Employers Reinsurance Corporation, Hartford Fire Insurance Company and Swiss
Reinsurance America Corporation.  The maximum per occurrence dollar recovery
is equal to 250% of the net premiums ceded to the quota share arrangement in
a contract year.  The maximum aggregate per year dollar recovery under the
quota share contract is equal to 350% of the net premium ceded to the quota
share arrangement in a contract year.  A sliding scale commission, based on
loss ratio, is utilized under this program.  This program provides the
Company with sufficient protection for catastrophe coverage so as to enable
the Company to forego pure catastrophe reinsurance coverage, which was
previously tailored in conjunction with the former quota share arrangement.

     The table below provides information depicting the approximate recovery
under the quota share contract (described below) at various loss scenarios,
if a single catastrophe were to strike (in thousands):

                                                              Net Loss
                          Total           Reinsurance       Retained by
                          Loss             Recovery         the Company

                        $ 50,000            $ 37,500         $12,500
                         100,000              75,000          25,000
                         150,000             112,500          37,500
                         200,000             150,000          50,000
                         250,000             187,500          62,500

     Under the above scenario and based on the business subject to the
quota-share reinsurance contract for 2001, the Company has no reinsurance
recoveries for a single event catastrophe in excess of a total loss of
approximately $262.0 million.  The level of reinsurance protection increases
(decreases) when the company cedes more (less) premium to the reinsurers.
The Company's estimated total losses on its other than automobile business
for 100 and 250-year hurricanes (including American Commerce) are
approximately $176.0 million and $295.8 million, respectively.  The Company
estimates were derived through the services of Swiss Reinsurance America
Corporation who utilized the RMS (Risk Management Solutions) IRAS risk
assessment system.  Most property and casualty insurance companies establish
their catastrophe reinsurance programs up to the 100 year storm estimate.

     Written premiums ceded in 2001, 2000 and 1999 under the above
referenced program were $78.6 million, $69.4 million and $51.5 million,
respectively.  The 13.3% increase in written premiums ceded in 2001 versus
2000 in this program was primarily the result of a $7,592 or 11.6% increase
in Massachusetts homeowner direct premiums written, coupled with a $2,212 or
13.4% increase in direct homeowner writings in states other than
Massachusetts, as previously mentioned.  Ceding commission income is
calculated on a ceded earned premium basis.

Casualty Reinsurance

     Casualty reinsurance is on an excess of loss basis for any one event or
occurrence with a maximum recovery of $9.0 million over a net retention of
$1.0 million.  This coverage is placed with Swiss Reinsurance America
Corporation (rated A++ by A.M. Best).

     Personal and commercial liability umbrella policies are reinsured on a
95% quota share basis in regard to limits up to $1.0 million and 100% quota
share basis for limits in excess of $1.0 million but not exceeding $5.0
million for policies with underlying automobile coverage of
$250,000/$500,000 or more.  The Company also has personal liability umbrella
reinsurance coverage for policies with underlying automobile coverage of
$100,000/$300,000, on a 65% quota share basis in regard to limits up to $1.0
million and 100% quota share basis for limits in excess of $1.0 million but
not exceeding $3.0 million.  These coverages are placed with American Re-
Insurance Company (rated A++ by A.M. Best).
22
<page>


     Earned premiums and losses and loss adjustment expenses are stated in
the accompanying consolidated financial statements after deductions for
ceded reinsurance.  Those deductions for reinsurance other than C.A.R. are
as follows (in thousands):
<table>
<caption>
                                                               Years ended December 31,
                                                            2001         2000        1999
  
                                                     <c>          <c>        <c>
  Income Statement
  Written premiums ceded............................      $81,827      $76,946    $ 54,657
  Earned premiums ceded.............................       77,226       73,354      55,557
  Losses and loss adjustment expenses ceded.........       40,514       30,797      24,240

  Balance Sheet
  Unpaid losses and loss adjustment expenses........       28,192       24,726      21,552
  Unearned premiums.................................       42,258       36,828      26,813
</table>

     The Company, as primary insurer, would be required to pay losses in
their entirety in the event that the reinsurers were unable to discharge
their obligations under the reinsurance agreements.

     The Company believes that the terms of its reinsurance contracts are
consistent with industry practice in that they contain standard terms with
respect to lines of business covered, limits, retentions, arbitration and
occurrence.  Based on its review of its reinsurers' financial statements and
their reputations in the reinsurance marketplace, the Company believes that
its reinsurers are financially sound.  The Company had no amount of
reinsurance receivables more than 90 days past due at December 31, 2001.

F. Settlement of Claims

     Claims under insurance policies written by the Company are investigated
and settled primarily by claims adjusters employed by the Company.  In
Massachusetts, the Company employs a staff of 814 people at its claims
department, located in Webster, Massachusetts.  In addition to these
individuals, the Company utilizes the services of approximately 37
independent appraisal firms and 11 independent property adjusting companies
who are strategically located throughout the states of Massachusetts and New
Hampshire.  The Company also has a special unit, which investigates
suspected insurance fraud and abuse.  If a claim or loss cannot be settled
and results in litigation, the Company retains outside counsel to represent
it.  American Commerce employs a staff of 57 people that settle claims at
four regional claims offices strategically located throughout the country.
In addition to these individuals, American Commerce utilizes the services of
approximately 331 independent appraisal firms and 166 independent property
adjusting companies who are also strategically located throughout the
country.  Commerce West settles claims at their home office employing a
staff of 31 in the claims department.  In addition, Commerce West utilizes
the services of approximately 14 independent appraisal firms strategically
located in California and Oregon.

     The Company believes that through its claims staff of experienced
adjusters, appraisers, managers, and administrative staff, it has higher
customer satisfaction than many of its competitors.  All claims office staff
members work closely with agents, insureds and claimants with a goal of
settling claims fairly, rapidly and cost effectively.

     Certain of the Company's Massachusetts agencies have settlement
authority for claims for other than automobile property losses, which are
less than $2,500.  The settlement authority of agencies under automobile
policies is limited to claims for towing.

     The Massachusetts Unfair Claims Settlement Practices Act ("Chapter
176D"), and other similar provisions in states in which the Company does
business, prohibits insurers from engaging in certain claim settlement
practices.  These include failing to acknowledge and act reasonably promptly
upon communications with respect to claims arising under insurance policies,
refusing to pay claims without conducting a reasonable investigation based
upon all available information, failing to effectuate prompt, fair and
equitable settlements of claims in which liability has become reasonably
clear, and compelling insureds to institute litigation to recover amounts
due under an insurance policy by offering substantially less than the
amounts ultimately recovered in actions brought by such insureds.  An
insurer's
23
<page>


violation of any of these obligations expressly violates a number of state
laws including the Massachusetts Consumer Protection Act ("Chapter 93A").
Any party, including claimants and insureds, whose rights are affected by an
insurer's violation of Chapter 176D, is entitled to bring a claim against
the insurer under Chapter 93A.  Similar provisions exist in other states
where the Company does business.

     The damages available under Chapter 93A may not necessarily be related
to the harm caused by the insurer's violation of Chapter 176D.  Chapter 93A
provides in effect that the party bringing the Chapter 93A claim will be
entitled, at a minimum, to the amount of the judgment on all claims arising
out of the same underlying occurrence, regardless of the limits of the
policy issued by insurer.  Moreover, Chapter 93A permits the court to double
or triple the party's damages if the insurer's violation of Chapter 176D was
willful or knowing.  If the underlying policy risk was ceded to C.A.R., the
Company may seek reimbursement from C.A.R. for the damages it will be
obligated to pay if it is found liable under Chapter 93A or amounts paid in
settlement of such claim.  Such reimbursement is discretionary and C.A.R.
may not reimburse an insurer if C.A.R. determines that the insurer was
negligent in the handling of such claim and such negligence was the cause of
Chapter 93A liability.  Additionally, certain time notification restrictions
apply to these judgments, which if not met, could preclude an insurer from
seeking reimbursement from C.A.R.  Accordingly, there can be no assurance
that the Company will be reimbursed in any particular instance involving a
Chapter 93A C.A.R. reinsured claim.

     Since 1996, the Company has been expanding a twenty-four (24) hour
claim reporting service in Massachusetts to third-party claimants and
insureds of interested agencies.  This service allows customers to report
their first notice of a loss at anytime of the night or day; 365 days a
year, including weekends and holidays.  This reporting methodology allows
the Company to improve customer satisfaction by making the initial claim
handling much faster and ultimately reducing indemnity payments such as
rental and storage.  As of December 31, 2001, there were 390 Massachusetts
agents who signed up for this claim reporting methodology.  This compares to
377 agents as of December 31, 2000.  This service is available to all agents
and their use of the service fluctuates on an ongoing basis.

G. Loss and Loss Adjustment Expense Reserves

          Unpaid Loss and LAE by their nature are inherently uncertain as to
the ultimate outcome of the estimated amounts.  The liability for unpaid
losses and LAE represents Management's best estimate of the ultimate net
cost of all losses and LAE incurred through the balance sheet date.  The
estimate for ultimate net cost of all losses incurred through the balance
sheet date includes the adjusted case estimates for losses, incurred but not
reported ("IBNR") losses, salvage and subrogation recoverable and a reserve
for LAE.  In arriving at its best estimate, management begins with the
aggregate of individual case reserves and then makes adjustments to these
amounts on a line of business basis.  These adjustments to the aggregate
case reserves by line of business are made based on analysis performed by
Management as further described below.  The entire liability for unpaid
losses and LAE is also reviewed quarterly and annually by the Company's
Actuarial Department.  Liability estimates are continually analyzed and
updated, and therefore, the ultimate liability may be more or less than the
current estimate.  The effects of changes in the estimates are included in
the results of operations in the period in which the estimates are revised.

     Significant periods of time can elapse between the occurrence of an
insured loss, the reporting of the loss to the insurer and the insurer's
payment of that loss.  To recognize liabilities for unpaid losses, insurers
establish reserves as balance sheet liabilities representing estimates of
amounts needed to pay reported and unreported losses and LAE.  Quarterly,
the Company reviews these reserves internally.  Regulations of the Division
of Insurance require the Company to annually obtain a certification from
either a qualified actuary or an approved loss reserve specialist that its
loss and LAE reserves are reasonable.
24
<page>


2.  Unpaid Loss and Loss Adjustment Expenses ("LAE")

     Unpaid Loss and LAE by their nature are inherently uncertain as to the
ultimate outcome of the estimated amounts.  The liability for unpaid losses
and LAE represents Management's best estimate of the ultimate net cost of
all losses and LAE incurred through the balance sheet date.  The estimate
for ultimate net cost of all losses incurred through the balance sheet date
includes the adjusted case estimates for losses, incurred but not reported
("IBNR") losses, salvage and subrogation recoverable and a reserve for LAE.
In arriving at its best estimate, management begins with the aggregate of
individual case reserves and then makes adjustments to these amounts on a
line of business basis.  These adjustments to the aggregate case reserves by
line of business are made based on analysis performed by Management as
further described below.  The entire liability for unpaid losses and LAE is
also reviewed quarterly and annually by the Company's Actuarial Department.
Liability estimates are continually analyzed and updated, and therefore, the
ultimate liability may be more or less than the current estimate.  The
effects of changes in the estimates are included in the results of
operations in the period in which the estimates are revised.

     The claim cycle begins when a claim is reported to the Company and
claims personnel establish a "case reserve" for the estimated amount of the
ultimate exposure to the Company.  The amount of the reserve is primarily
based upon an evaluation of the type of claim involved, the circumstances
surrounding the claim and the policy provisions relating to the loss.  This
estimate reflects the informed judgment of such personnel based on general
insurance reserving practices and on the experience and knowledge of the
claims personnel adjusting the claim.  During the loss adjustment period,
these case basis estimates are revised as deemed necessary by the Company's
claims department personnel based on subsequent developments and periodic
reviews of the claim.

     In accordance with industry practice, the Company also maintains
reserves for estimated IBNR, salvage and subrogation recoverable and LAE.
These reserves are determined on the basis of historical information and the
experience of the Company.  Adjustments to these reserves are made
periodically to take into account changes in the volume of business written,
claims frequency and severity, the mix of business, claims processing and
other items that can be expected to affect the Company's liability for
losses and LAE over time.

     When reviewing the liability for unpaid losses and LAE, the Company
analyzes historical data and estimates the impact of various factors such
as:  (i) payment trends; (ii) loss expense per exposure; (iii) the
historical loss experience of the Company and industry; (iv) frequency and
severity trends; and, (v) legislative enactments, judicial decisions, legal
developments in the imposition of damages, changes and trends in general
economic conditions, including the effects of inflation and recession.  This
process assumes that past experience, adjusted for the effects of current
developments and anticipated trends, is an appropriate basis for predicting
future events.  There is no precise method, however, for subsequently
evaluating the impact of any specific factor on the adequacy of reserves,
because the eventual development of reserves is affected by many factors.

     By using individual estimates of reported claims adjusted for
managements best estimate by line of business and generally accepted
actuarial reserving techniques, the Company estimates the ultimate net
liability for losses and LAE.  After taking into account all relevant
factors, management believes that, based on existing information, the
provision for losses and LAE at December 31, 2001 is adequate to cover the
ultimate net cost of losses and claims incurred as of that date.  The
ultimate liability, however, may be greater or lower than established
reserves.  If the ultimate exposure is greater than (or less than)
management's estimated liability for losses and LAE, based on any of the
factors noted previously, the Company will incur additional expense (income)
which may have a material impact.

     For a reconciliation of beginning and ending reserves for losses and
LAE, gross and net of reinsurance, see Note E to the Company's 2001
Consolidated Financial Statements, which is incorporated herein by reference
from pages 52 through 54 of the Company's 2001 Annual Report.
25
<page>



     Included in the loss reserve methodologies described above, are
liabilities for unpaid claims and claim adjustment expenses for
environmental related claims such as oil spills, mold and lead paint.
Reserves have been established to cover these claims for known losses.
Because of the Company's limited exposure to these types of claims,
management believes they will not have a material impact on the consolidated
financial position of the Company in the future.  Loss reserves on
environmental related claims amounted to $4,281,000 and $3,712,000 at
December 31, 2001 and 2000, respectively.

     The following table represents the development of reserves, net of
reinsurance, for 1991 through 2001.  The top line of the table shows the
reserves at the balance sheet date for each of the indicated years.  This
represents the estimated amounts of losses and LAE for claims arising in all
years that were unpaid at the balance sheet date, including losses that had
been incurred but not yet reported to the Company.  The upper portion of the
table shows the cumulative amounts paid as of successive years expressed as
a percentage with respect to that year's current reserve liability.  The
lower portion of the table shows the re-estimated amount as a percentage of
the previously recorded reserves based on experience as of the end of each
succeeding year, including cumulative payments made since the end of the
respective year.  The estimate changes as more information becomes known
about the payments, frequency and severity of claims for individual years.
Favorable loss development exists when the original reserve estimate is
greater than the re-estimated reserves at December 31, 2001.
26
<page>


<table>
<caption>
     In evaluating the cumulative information in the table, it should be noted that each year's amount includes the
cumulative effects of all changes in amounts for prior periods.  This table does not present accident or policy year
development data.  Conditions and trends that have affected development of the liability in the past may not
necessarily occur in the future.  Accordingly, it is not appropriate to extrapolate future development based on this
table.
                                                              Year ended December 31,
                     2001     2000       1999      1998(1)   1997      1996      1995      1994      1993       1992     1991
                                                              (Dollars in thousands)

                <c>      <c>        <c>       <c>       <c>       <c>       <c>       <c>       <c>        <c>       <c>
Reserves for
  losses and loss
  adjustment
  expenses........ $590,334 $585,867   $558,779  $561,239  $529,765  $533,980  $493,910  $455,460  $422,224   $316,264  $228,659
Paid (cumulative)
  as a percentage
  of current re-
  serves as of:
   One year later..             51.8       50.9      47.5      50.7      50.3      48.4      47.6      52.7       51.2      46.3
   Two years later.                        72.4      70.2      73.7      72.2      70.1      68.2      71.9       77.0      71.4
   Three years
    later.........                                   81.4      88.0      84.5      83.9      80.6      82.2       86.2      87.4
   Four years
    later.........                                             93.9      92.7      90.5      89.4      88.4       91.3      91.4
   Five years later                                                      95.5      95.6      92.6      93.2       94.2      93.6
   Six years later.                                                                96.5      95.7      94.3       96.9      95.1
   Seven years
    later.........                                                                           96.1      96.3       97.3      97.2
   Eight years
    later.........                                                                                     96.4       98.7      97.4
   Nine years
    later.........                                                                                                98.8      98.6
   Ten years later.                                                                                                         98.7
Reserves re-estimated
 as a percentage of
 initial reserves as of:
   One year later..            94.0        92.4      92.9      88.4      84.3      82.2      83.6      83.9       87.2      82.3
   Two years later.                        90.3      91.9      85.6      79.3      74.1      73.2      75.9       78.6      82.8
   Three years
    later..........                                  91.3      85.1      77.4      71.5      68.9      69.4       73.0      77.1
   Four years later                                            84.7      77.3      69.7      67.8      67.3       68.8      72.2
   Five years later                                                      77.1      70.4      66.3      66.4       67.0      68.7
   Six years later.                                                                70.1      66.9      65.7       66.7      67.8
   Seven years
    later.........                                                                           66.8      66.2       65.9      67.6
   Eight years
    later.........                                                                                     66.1       66.5      67.2
   Nine years later                                                                                               66.4      67.7
   Ten years later.                                                                                                         67.5
Redundancy expressed as a
percent of yearend
   reserves.........            6.0         9.7       8.7      15.3      22.9      29.9      33.2      33.9       33.6      32.5
    (1)   The 1998 amount includes an adjustment to add $63,112 in loss and LAE reserves for American Commerce at January 29,1999.
</table>
27
<page>



H. Operating Ratios

Loss and Underwriting Expense Ratios

     Loss and underwriting expense ratios are used to interpret the
underwriting experience of property and casualty insurance companies.
Losses and LAE are stated as a percentage of premiums earned because losses
may occur over the life of a policy.  Underwriting expenses on a statutory
basis are stated as a percentage of net premiums written rather than earned
premiums because most underwriting expenses are incurred when policies are
written and are not spread over the policy period.  Underwriting profit
margins are reflected by the extent to which the combined loss and
underwriting expense ratios, the combined ratio, is less than 100%.  The
combined ratio is considered the best simple index of current underwriting
performance of an insurer.  The Company's loss and LAE ratio, underwriting
expense ratio and combined ratio, and the industry combined ratio, on a
statutory basis, are shown in the following table.  The Company's ratios
include lines of insurance other than automobile as do the industry combined
ratios for all writers.  Data for the property and casualty industry
generally may not be directly comparable to Company data.  This is due to
the fact that the Company conducts its business primarily in Massachusetts
where approximately 87.6% of direct premiums are written.
<table>
<caption>
                                                     Years Ended December 31,

    Company Statutory Ratios                  2001     2000     1999     1998     1997
       (unaudited)
      
                                   <c>      <c>      <c>      <c>      <c>
      Loss and LAE Ratio.................     74.7%    71.7%    72.0%    71.6%    71.4%
      Underwriting Expense Ratio.........     24.4     25.1     26.5     26.5     25.1
      Combined Ratio.....................     99.1%    96.8%    98.5%    98.1%    96.5%

    Industry Combined Ratio
      (all writers)(1)...................    108.9%   109.7%   104.4%   102.2%   100.1%

</table>
(1) Source:  A.M. Best's Review Preview (2002), as reported by A.M. Best for
all property and casualty insurance companies and weighted to reflect the
Company's product mix.  The 2001 industry information is estimated by A.M.
Best.

Premiums to Surplus Ratio

     The following table shows, for the periods indicated, the Company's and
the industry's statutory ratios of net premiums written to policyholders'
surplus.  While there is no statutory requirement applicable to the Company
which establishes a permissible net premiums to surplus ratio, guidelines
established by the National Association of Insurance Commissioners ("NAIC")
provide that this ratio should be no greater than 300%.
<table>
<caption>
                                                     Years Ended December 31,
                                     2001         2000        1999       1998       1997
                                                      (Dollars in thousands)

                                 <c>         <c>         <c>       <c>       <c>
Net premiums written by the
 Company..........................  $1,078,967  $1,008,911  $911,993  $745,048  $741,501
Policyholders' surplus of the
 Company's insurance subsidiaries.  $  715,932  $  660,962  $518,974  $563,503  $516,598
The Company's ratio...............       150.7%      152.6%    175.7%    132.2%    143.5%
Industry ratio(1).................       120.0%       90.0%     90.0%     80.0%     90.0%
__________________________________

(1) Source:  A.M. Best's Review Preview (2002), for all property and casualty insurance
    companies.  The 2001 industry information is estimated by A.M. Best.
</table>
28
<page>



I. Investments

     Investment income is an important source of revenue for the Company and
the return on its investment portfolio has a material effect on its net
earnings.  The Company's investment objective continues to focus on
maximizing after-tax investment income through investing in high quality
securities coupled with acquiring equity investments, which may forgo
current investment yield in favor of potential higher yielding capital
appreciation in the future.  See "Management's Discussion and Analysis of
Financial Condition and Results of Operations" incorporated herein by
reference from pages 5 through 29 of the Company's 2001 Annual Report.

     The Company's investment portfolio is carried at market value, except
for the closed-end preferred stock mutual funds and other investments which
are carried at equity value.  At December 31, 2001, the carrying value of
total investments was $1,498,201,000.  Of that amount, 41.8% was invested in
fixed maturities, 16.6% was invested in preferred stocks, 7.2% was invested
in common stocks, 20.6% was invested in closed-end preferred stock mutual
funds, 2.6% was invested in mortgage loans and 1.3% in other investments.
Cash and cash equivalents accounted for the remaining 9.9%.

     The focus of management's judgments and estimates relating to
investments involves the potential impairment of investments for other than
temporary declines in market values.  Carrying value of investments in fixed
maturities, which include taxable and non-taxable bonds, and investments in
common and preferred stocks, are derived from market prices supplied by the
Company's investment custodian.  Unrealized investment gains and losses on
common and preferred stocks and fixed maturities, to the extent that there
is no other than temporary impairment of value, are credited or charged to a
separate component of stockholders' equity, known as "net accumulated other
comprehensive income (loss)", until realized, net of any tax effect.  An
impairment in an investment is deemed to be other than temporary when a
security's market value has diminished to less than 75% of cost for two
consecutive quarters.  If the contractual terms of the security are being
complied with, management performs a cash flow valuation to determine the
potential impairment of the security.  If the security is deemed impaired,
the company adjusts the security's cost to market value through realized
loss based on publicly available information or in the absence of such, to a
value based on cash flow modeling.  During 2001, the Company wrote down
$2,665,000 in bonds and preferred stock investments with impairment as
determined by management to be other than temporary.  Given the makeup and
quality of the Company's investments, management does not believe that a
more stringent policy would have a material effect on the carrying value of
its investments.  When investment securities are sold, the realized gain or
loss is determined based upon specific identification.  Fair market value of
fixed maturities and common and preferred stocks are based on quoted market
prices.  For other securities held as investments, fair market value equals
quoted market price, if available.  If a quoted market price is not
available, fair market value is estimated using quoted market prices for
similar securities.  The Company has not invested more than 5% of fixed
maturities in any one state or political subdivision.

     The Company's bond portfolio at cost is comprised of Government
National Mortgage Association ("GNMA") and Federal National Mortgage
Association ("FNMA") mortgage backed bonds (15.9%), municipal bonds (62.5%),
corporate bonds (21.6%) and U.S. Treasury bonds (0.0%).  Of the Company's
bonds, 97.9% are rated in the two highest quality categories provided by the
NAIC.

     During 2001, as required by the Emerging Issues Task Force ("EITF") D-
46, the Company amended its policy in regard to venture capital fund
investments. EITF D-46 requires companies who own more than a 5% share of a
limited partnership to account for these investments on an equity basis.
The operating results of these venture capital fund investments have been
reflected in realized gains and losses.  Prior to this change, the operating
results were not material and were therefore reflected in accumulated other
comprehensive income and loss.
29
<page>



     Beginning in the first quarter of 2001, the Company, in 2001 and prior
years' results, classified its undistributed equity in the earnings and
losses on investments in closed-end preferred stock mutual funds in net
realized investment gains and losses.  For the year ended 2000, the
undistributed equity in the earnings and losses of these funds was reported
in net investment income.  The Company believes the current year
presentation provides a more appropriate classification for analysis of
ongoing operations of the Company.  These investments are valued at original
cost plus the cumulative undistributed equity in earnings and losses of the
funds and adjusted over time by the premium or discount at the time of
purchase to the applicable underlying net asset value of the funds.

     The Company's investment policy, determined in accordance with
guidelines established by the Company's Board of Directors, emphasizes
after-tax investment yield while maintaining investment quality.  The Board
of Directors reviews and ratifies management's investment decisions on a
quarterly basis.  State insurance laws also impose restrictions on the
nature and extent of investments by the Company.

     The table below sets forth investments (at cost), net realized gains
(losses), net accumulated other comprehensive income (loss) and the net
investment income and yield thereon for the three years ended December 31,
2001.
<table>
<caption>
                                                         Years Ended December 31,
                                                       2001         2000       1999

(Dollars in thousands)

                                                 <c>         <c>        <c>
Average net investments...........................  $1,506,485  $1,395,159 $1,326,098
Net realized gains (losses) on
  investments.....................................     (10,633)     29,550    (16,378)
Net accumulated other
  comprehensive income (loss):
    on fixed maturities...........................       7,707       4,054    (14,107)
    on preferred stocks...........................      (8,481)    (15,740)   (19,885)
    on common stocks..............................      19,754      28,123     (6,636)
Net investment income before-tax..................      99,611      96,830     89,789
Net investment income after-tax...................      79,172      79,547     74,970
Net investment income as a
  percentage of total average net
  investments (at cost)...........................         6.6%        6.9%       6.8%
Net investment income after-tax
  as a percentage of total
  average net investments
  (at cost).......................................         5.3%        5.7%       5.7%
</table>
30
<page>


<table>
<caption>
     The following table sets forth an analysis of the fair market value (except mortgages
and collateral loans which are at cost and closed-end preferred stock mutual funds and other
investments which are at equity) by the type of investment at December 31, 1999 through
2001:
                                                                December 31,
                                                       2001        2000        1999
                                                          (Dollars in thousands)

                                                 <c>        <c>         <c>
Type of Investment
  GNMA & FNMA mortgage-backed
   bonds..........................................  $   98,985 $   67,261  $   82,613
  Corporate bonds.................................     136,506    126,255      42,532
  U.S. Treasury bonds and notes...................         105      3,377       3,315
  Tax exempt state and
   municipal bonds................................     390,886    473,042     518,878
      Total fixed maturities......................     626,482    669,935     647,338

  Preferred stocks................................     248,101    200,083     211,049
  Common stocks...................................     107,458    115,827      77,348
  Closed-end preferred
    stock mutual funds............................     309,282    337,733     251,135
  Total equity securities.........................     664,841    653,643     539,532

  Mortgages and collateral
   loans (net of allowance
   for possible loan losses)......................      39,505     51,661      72,451
  Cash and cash equivalents.......................     148,630     70,521      22,535
  Short-term investments..........................        -          -           -
  Other investments...............................      18,743     26,802      14,139
      Total investments...........................  $1,498,201 $1,472,562  $1,295,995

<caption>
     The table below sets forth as of December 31, 2001 the composition of the Company's
fixed maturity investments, excluding short-term investments, at market, by time to maturity
at the dates indicated:
                                                                               Percent of
                                                                                  Fixed
                                                                                Maturity
                                                                  Amount        Portfolio
Period from December 31, 2001 to maturity:                       (dollars in thousands)
              
                                                <c>             <c>
              One year or less...............................    $  1,417          0.2%
              More than one year to five years...............       3,001          0.5
              More than five years to ten years..............       5,378          0.9
              More than ten years............................     616,686         98.4
                                                                 $626,482        100.0%
</table>
     At December 31, 2001, the Company's fixed income portfolio, which
represented 41.8% of the Company's total invested assets, had a weighted
average stated maturity of approximately 27.3 years versus 26.1 years at
December 31, 2000.  The calculation of average stated maturity utilizes the
dollar weighted average of the actual maturity date for a security.  In
contrast, the Company's weighted average duration can be significantly less.
At December 31, 2001 the Company's fixed income portfolio had a weighted
average duration of 5.7 years versus 5.1 years at December 31, 2000.  The
"duration" of a security is the time-weighted present value of the
security's expected cash flows and is used to measure a security's price
sensitivity to changes in interest rates.  The weighted average duration is
short compared to the average stated maturity because of the relatively
large percentage of GNMA and municipal housing bonds in the fixed maturity
portfolio.  The duration reflects industry prepayment assumptions.  The
municipal housing bonds are similar in nature to GNMAs in that they pay down
principal during the life of the bond.  For these types of bonds, investors
are compensated primarily for reinvestment risk rather than credit quality
risk.  During periods of significant interest rate volatility, the
underlying mortgages may prepay more quickly or more slowly than
anticipated.  If the repayment of principal occurs earlier than
31
<page>


anticipated during periods of declining interest rates, investment income
may decline due to the reinvestment of these funds at the lower current
market rates. In regards to municipal bonds, the Bloomberg Financial System,
which was used to calculate the above duration data, utilizes optional call
dates, sinking fund requirements and assumes a non-static prepayment pattern
in deriving these averages.


J. Regulation

General

     The Company's primary business is subject to extensive regulation.  In
Massachusetts, the Commissioner is appointed by the Governor of
Massachusetts and has broad authority to fix and establish maximum policy
rates and minimum agent commission levels on personal automobile insurance.
In addition, the Commissioner grants and revokes licenses to write
insurance, approves policy forms, sets reserve requirements, determines the
form and content of statutory financial statements and establishes the type
and character of portfolio investments.  The Commissioner also approves
company submissions regarding affinity group insurance programs and
corresponding discounts along with SDIP deviations.  Consequently, the
policies and regulations set by the Commissioner are an important element of
writing insurance in Massachusetts.  In states outside of Massachusetts,
premium rates generally must be filed with, and approved by the Commissioner
of Insurance in that particular state.  In general, minimum commissions to
agents are not set by the other states commissioners.

     The State Divisions of Insurance are responsible for conducting
periodic examinations of insurance companies.  Both Commerce and Citation
were last examined for the five year period ended December 31, 1998.
Commerce West was last examined in 2001 by the California Division of
Insurance for the three year period ended December 31, 1999.  American
Commerce was examined in 1999 by the Ohio Division of Insurance for the
three year period ending December 31, 1997.  The concluded examinations
produced no material findings.  Massachusetts Division of Insurance
regulations provide that insurance companies will be examined every five
years or more frequently as deemed prudent by the Commissioner.  California
Division of Insurance regulations provide that insurance companies will be
examined every three years.  Ohio Division of Insurance regulations provide
that insurance companies will be examined at least every five years.

Automobile Insurance Regulation Overview

     Massachusetts has required compulsory automobile insurance coverage
since 1925.  States outside of Massachusetts generally have varying levels
of minimum compulsory insurance.  Under current law, all Massachusetts
motorists are required to carry certain minimum coverages mandated by the
State.  The Commissioner fixes and establishes, among other things, the
maximum rates insurers may charge for the compulsory personal automobile
coverages.  With very limited exceptions, each insurer writing automobile
insurance in Massachusetts must accept all risks submitted to it for the
compulsory coverage, but is permitted to reinsure these risks (including
affinity group marketing insurance risks) through C.A.R.

     Compulsory Coverage. Compulsory coverage includes no-fault coverage,
limited bodily injury coverage, property damage coverage and coverage
against uninsured or hit and run motorists.  The Massachusetts no-fault
statute provides for personal injury protection ("PIP") coverage, which
entitles a party to be reimbursed directly by the party's own insurer for
certain medical expenses, lost wages and other defined expenses arising from
an automobile accident, up to a specific amount, even if another party
caused the accident.

     Rates and Commissions. All Massachusetts personal automobile insurance
rates are fixed and established annually by the Commissioner.  Affinity
group marketing insurance programs and safe driver rate deviations must be
annually approved by the Commissioner.  For Massachusetts commercial
automobile insurance, the rates for the voluntary market are competitive,
with insurers filing rates for review by the Commissioner based on their own

32
<page>


experience.  The rates for the Massachusetts commercial automobile risks
reinsured through C.A.R. are fixed and established by the Commissioner
except for non-fleet, private passenger-type automobiles.  See Section A-
General for additional information.

     In fixing classifications of risks and establishing rates, the
Commissioner must consider numerous factors including driver and automobile
characteristics and the claim rate in the state's designated geographical
territories.  These factors are based upon data which are two or more years
old.  The insurer adjusts the premiums it charges to a policyholder based
upon the SDIP record of the operator.  Moving violations and at-fault
accidents affect each driver's SDIP record.  In addition, the Extra Risk
Rating regulations permit insurers to deny or charge surcharged rates for
physical damage coverage to both high risk vehicles and insureds with
excessive prior loss or violation activity.

     The Commissioner sets an average minimum direct agency commission rate
for personal automobile insurance, which in 2001 was 12.3%.  With respect to
risks reinsured through C.A.R., the maximum amount of commissions that
C.A.R. will reimburse is fixed at that prescribed rate.

     Mandatory Underwriting. Massachusetts law specifies that all
individuals holding a valid driver's license are entitled to purchase the
mandatory automobile insurance coverages regardless of their driving
experience or accident record.  The Massachusetts Legislature has also
placed certain restraints on insurers' discretion to refuse to renew
automobile insurance policies.  Policyholders are entitled to renew except
in cases of fraud, material misrepresentation, revocation or suspension of
an operator's license or nonpayment of premiums.  With very limited
exceptions, Servicing Carriers writing automobile insurance in Massachusetts
must accept every automobile risk submitted to them.

     Under the Massachusetts system of rate regulation, it is intended that
some personal automobile insurance risks are under priced at the maximum
rate permitted by the Commissioner, and therefore, absent state-
intervention, insurers would not ordinarily choose to write those risks.
The C.A.R. reinsurance program described below is intended to mitigate the
burden imposed by the Massachusetts take-all-comers system by allowing
insurers to transfer the exposure for under priced risks to an industry
pool.

Commonwealth Automobile Reinsurers

     General. C.A.R. is a Massachusetts state-mandated reinsurance
mechanism, under which all premiums, expenses and losses on ceded business
are shared by all insurers.  It is similar to a joint underwriting
association because a number of insurers (39, including the Company) act as
Servicing Carriers for the risks it insures.

     Agencies. In general, agencies licensed to issue automobile insurance
policies are entitled to be assigned to at least one Servicing Carrier.
There are two categories of agencies: those who have voluntary agreements
with one or more Servicing Carriers and those who do not.  The latter are
assigned by C.A.R. to a single Servicing Carrier and are known as ERPs.

     C.A.R. Operations. All companies writing automobile insurance in
Massachusetts share in the underwriting results of the C.A.R. business for
their respective product line or lines, whether or not they are Servicing
Carriers.  An insurer's share of the C.A.R. deficit is allocated on the
basis of a formula called a participation ratio, which can vary
significantly between the personal and commercial pools, and between
different policy years.  See "Business-Commonwealth Automobile Reinsurers"
for a detailed discussion of the method of calculating the participation
ratio.

     An insurer may terminate its participation in C.A.R. as of the close of
C.A.R.'s fiscal year by surrendering its license to write automobile
policies in Massachusetts.  Termination does not discharge or otherwise
affect liability of an insurer incurred prior to termination.  A withdrawing
insurer is assessed a share of C.A.R.'s projected deficits for future years
based on the insurer's prior years' participation in C.A.R.  The assessment
paid by the withdrawing insurer is redistributed to the remaining insurers
based upon their participation ratios.
33
<page>


     An insurer can transfer its obligations for its personal insurance
policies to another insurer who formally agrees to assume these obligations.
The transferring insurer is thereby relieved of future C.A.R. obligations
which otherwise would have arisen as a consequence of the business
transferred. See "Business-Commonwealth Automobile Reinsurers."

Insurance Holding Company Structure

     As an insurance holding company, the Company is subject to regulation
under the insurance holding company statutes of the states in which any of
its subsidiary insurance companies are domiciled.  Because the Company's
subsidiaries are members of an insurance holding company system, they are
required to register with their respective Divisions of Insurance and to
submit reports describing the capital structure, general financial
condition, ownership and management of each insurer and any person or entity
controlling the insurer, the identity of every member of the insurance
holding company system and the material outstanding transactions between the
insurer and its affiliates.

      Each member of the insurance holding company system must keep current
the information required to be disclosed by reporting all material changes
or additions within 15 days of the end of the month in which it learns of
such change or addition.

     Massachusetts law prohibits a party, which is not a domestic insurer
from acquiring "control" of a domestic insurer or of a company controlling a
domestic insurer without prior approval of the Commissioner.  Control is
presumed to exist if a party directly or indirectly holds, owns or controls
more than ten percent of the voting stock of another party, but may be
rebutted by a showing that control does not exist.

     In the event of the insolvency, liquidation or other reorganization of
any of the Company's insurance subsidiaries, the creditors and stockholders
of the Company will have no right to proceed against the assets of those
subsidiaries, or to cause the liquidation or bankruptcy of any company under
federal or state bankruptcy laws.  State laws govern such liquidation or
rehabilitation proceedings and the Division of Insurance would act as
receiver for the particular company.  Creditors and policyholders of the
insurance subsidiaries would be entitled to payment in full from such assets
before the Company, as a stockholder, would be entitled to receive any
distribution there from.

Payment of Dividends

     Under Massachusetts' law, insurers may pay cash dividends only from
earnings and statutory surplus, and the insurer's remaining surplus must be
both reasonable in relation to its outstanding liabilities and adequate to
its financial needs.

Protection Against Insurer Insolvency-Massachusetts

     All of the insurers writing the types of insurance covered by the
Massachusetts Insurers Insolvency Fund ("M.I.I.F.") are M.I.I.F. members.
M.I.I.F. is obligated to pay any unpaid claim, up to $300,000, against an
insolvent insurer if the claim existed prior to the declaration of
insolvency or arose within 60 days thereafter.  M.I.I.F. assesses members
the amounts it deems necessary to pay both its obligations and the expenses
of handling covered claims.  Subject to certain limitations, assessments are
made in the proportion that each member's net written premiums for the
preceding calendar year for all property and casualty lines of business bore
to the corresponding net written premiums for all members for the same
period.  The statute that established M.I.I.F. also provides for the
recoupment by insurers of amounts paid to M.I.I.F. Historically, the
Commissioner has allowed insurers to recoup the amounts they paid M.I.I.F.
through rate adjustments.

     As provided in the statutes, insurance companies which write business
in Massachusetts are assessed for losses attributable to the insolvency of
other insurance companies by the Massachusetts Insurers Insolvency Fund.
From M.I.I.F.'s inception, on August 2, 1972 through December 31, 2001, the
M.I.I.F. has approved assessments totaling $188,071,000,
34
<page>


of which the Company's share was approximately $15,686,000.  It is
anticipated that there will be additional assessments from time to time
relating to various insolvencies.  By statute, no insurer may be assessed in
any year an amount greater than two percent of that insurer's direct
premiums written for the calendar year preceding the assessment.  Although
the timing and amounts of any such assessments are not known, based on
existing knowledge, management is of the opinion that such assessments will
not have a material effect on the consolidated financial position of the
Company.  According to statute, the assessed insurance companies have the
right to recoup amounts paid to the M.I.I.F., over a reasonable length of
time, through premium rates approved by the Commissioner.  M.I.I.F. assessed
the Company $3,111,000 during 2001 and $5,306,000 for the year ended
December 31, 2000 after having no activity for the year ended December 31,
1999.  The assessment for 2001 was the result of two insolvencies, The Trust
Insurance Company and Reliance Insurance Company, which accounted for
assessment amounts of $1,244,000 and $1,867,000, respectively.  The
assessment for 2000 was primarily the result of two insolvencies, The Trust
Insurance Company and New England Fidelity Insurance Company, which
accounted for assessment amounts of $4,939,000 and $1,205,000, respectively,
offset by refunds for prior year assessments on numerous insurers'
insolvencies.

Protection Against Insurer Insolvency-Other States

     Commerce West, domiciled in California, is covered by the California
Insurance Guarantee Association ("C.I.G.A.").  American Commerce, domiciled
in Ohio, is covered by the Ohio Guarantee Association ("O.G.A.").  Both
companies are also covered by similar Associations in the states where they
do business.  These Associations operate similarly to the M.I.I.F. described
earlier.  Payments made by American Commerce to the associations that they
are covered under were $125,000 in 2001 and $36,000 in 2000.  No payments
were made to these Associations for insolvency assessments by Commerce West
in 2001 and 2000.

Protection Against Insurer Insolvency-NAIC Guidelines

     Insurance Regulatory Information System Ratios.  The NAIC Insurance
Regulatory Information System ("IRIS") was developed by a committee of state
insurance regulators and is intended primarily to assist state insurance
regulators in executing their statutory mandates to oversee the financial
condition of insurance companies operating in their respective states.  IRIS
identifies eleven industry ratios and specifies "usual values" for each
ratio. Departure from the usual values on four or more of the ratios can
lead to inquiries from individual state insurance commissioners as to
certain aspects of an insurer's business.  For the year ended December 31,
2001, the Company's consolidated property and casualty operations had no
ratios outside the "usual values".

     Risk-Based Capital ("RBC"). In order to enhance the regulation of
insurer insolvency, the NAIC developed a formula and model law to provide
for RBC requirements for property and casualty insurance companies.  RBC
requirements are designed to assess capital adequacy and to raise the level
of protection, that statutory surplus provides for policyholder obligations.
The RBC model for property and casualty insurance companies measures three
major areas of risk facing property and casualty insurers: (i) underwriting,
which encompasses the risk of adverse loss development and inadequate
pricing; (ii) declines in asset values arising from credit risk; and, (iii)
other business risks from investments.  Insurers having less statutory
surplus than required by the RBC calculation will be subject to varying
degrees of regulatory action, depending on the level of capital inadequacy.

     The RBC model formula proposes four levels of regulatory action.  The
extent of regulatory intervention and action increases as the percentage of
surplus to RBC falls.  The first level, the Company Action Level (as defined
by the NAIC), requires an insurer to submit a plan of corrective actions to
the regulator if surplus falls below 200% of the RBC amount.  The Regulatory
Action Level (as defined by the NAIC) requires an insurer to submit a plan
containing corrective actions and permits the Commissioner to perform an
examination or other analysis and issue a corrective order if surplus falls
below 150% of the RBC amount.  The Authorized Control Level (as defined by
the NAIC) allows the regulator to rehabilitate or liquidate an insurer in
addition to the aforementioned actions if surplus falls below 100% of the
RBC amount.  The fourth action level is the Mandatory Control Level
35
<page>


(as defined by the NAIC), which requires the regulator to rehabilitate or
liquidate the insurer if surplus falls below 70% of the RBC amount.

     The following table provides the key RBC information for the Company's
insurance subsidiaries, Commerce, Citation, Commerce West, and American
Commerce:
<table>
<caption>
                                                              Commerce    American
      (Dollars in millions)           Commerce    Citation      West      Commerce
      At December 31, 2001
      
                               <c>        <c>          <c>        <c>
      Statutory surplus.............    $ 609      $   107      $  28      $    84
      200% RBC Company action level.      184            4          7           20
      Statutory surplus in excess
        of RBC Company action level.    $ 425      $   103      $  21      $    64
      RBC amounts...................    $  92      $     2      $   4      $    10
      % of surplus to RBC amounts...    662.0%     5,350.0%     700.0%       840.0%
</table>

K. Competition

     The property and casualty insurance industry is highly cyclical,
characterized by periods of increasing premium rates and limited
underwriting capacity, followed by periods of intensive price competition
and abundant underwriting capacity.  This industry also is highly
competitive, with a large number of companies, many of which operate in more
than one state, offering automobile, homeowners, commercial property and
other lines of insurance.  Some of the Company's competitors have larger
volumes of business and greater financial resources and some sell insurance
directly to policyholders rather than through independent agents.

Massachusetts

     In 2002, in response to the average personal automobile rate decisions
over the last several years, the Company did not file for SDIP Step 9 or
Step 10 deviations, for policies incepting in the 2002 calendar year.
During 2001, 55.0% of the Company's exposures were eligible for Step 9
deviations, versus 55.1% and 14.0%, eligible for Step 9 and Step 10
deviations in 2000.

     Because the Company's insurance products are marketed exclusively
through independent agencies, most of whom represent more than one company,
the Company faces competition within each agency.  The Company competes for
business within independent agencies by offering a more attractively priced
product to the consumer and by paying agents significant compensation in the
form of commissions and profit sharing, which are based in part on the
underwriting profits or losses of the agency business written with the
Company.  The Company also provides a consistent market, the prompt
servicing of policyholder claims and agency support services.  Although the
Company believes, based upon regular surveys of its agencies, its
relationships with its independent agencies are excellent, any disruption in
these relationships could adversely affect the Company's business.

     The Company believes the Massachusetts regulatory environment, which
fixes maximum personal automobile insurance rates, apportions losses
incurred by C.A.R. and establishes minimum agency commissions, has
discouraged certain companies with more diverse geographic markets and
interests from establishing a presence or expanding their market share in
Massachusetts.  Any material change in this situation could adversely affect
the Company's business.
36
<page>


Other States

     Both Commerce West and American Commerce file and receive approval for
premium rates with the respective divisions of insurance in the states they
do business.  Commerce West competes for business by utilizing 617
independent insurance agencies and brokers that offer competitively priced
products and provide quality service.  Agents and brokers are offered
compensation in the form of commissions and profit sharing, which are based
in part on the underwriting profits and losses of the agency business
written with Commerce West.  American Commerce competes for business by
utilizing 36 AAA owned and operated independent agencies that offer
competitively priced products and provide quality service.  The AAA owned
independent agencies are offered compensation in the form of commission and
profit sharing, based primarily on loss ratios, as well as stock options
based on the volume of agency business written with American Commerce.

L. Other Matters

Human Resources

     As of December 31, 2001, the Company and its subsidiaries employed
1,780 people.  Commerce employed 1,574 people; Commerce West employed 77
people; American Commerce employed 169 people. The Company is not a party to
any collective bargaining agreements and believes its relationship with
employees to be very good.

     The Company offers benefits, compensation and employee relations
programs to assure a productive and positive working environment.  The
Company monitors job grades and salary scales of peer companies to assure
that its compensation levels and benefits are competitive both within the
property and casualty insurance industry and geographically in the areas its
subsidiaries operate.  The Company has been recognized for its progressive
programs designed to meet the needs of a modern-day workforce.  On-site
child care has been offered to Massachusetts employees since 1986 making
Commerce one of the first businesses in the region to offer this benefit.  A
newly constructed child care center can currently accommodate up to 200
children of our employees.  In addition, alternative work schedules, casual
dress, and free parking are also provided.

     The Company offers an Employee Stock Ownership Plan ("E.S.O.P.") and
401(k) Plan for the benefit of substantially all employees, including those
of the Company's subsidiaries as discussed in Note I of the Company's Annual
Report.  The E.S.O.P. is noncontributory on the part of Participants and
contributions are made at the discretion of the Board of Directors.  The
Company is under no obligation to make contributions or maintain the
E.S.O.P. for any length of time, and may completely discontinue or terminate
the E.S.O.P. at any time without liability.  Contributions by the Company
and subsidiaries to the E.S.O.P. for the years ended December 31, 2001, 2000
and 1999 were $7,502,000, $5,702,000 and $5,744,000, respectively.  The
increase in the contribution in 2001 over 2000 was due primarily to the
inclusion of American Commerce employees into the plan.  The E.S.O.P. held
2,989,046 and 3,143,076 shares of the Company's common stock at December 31,
2001 and 2000, respectively.  E.S.O.P. participants who are current
employees of the Company or its subsidiaries and who are 100% vested in
their E.S.O.P. accounts can annually elect to transfer out of the E.S.O.P.
up to 100% of their allocated Company stock in the form of an eligible
rollover distribution into another eligible retirement plan, such as a
qualified individual retirement arrangement.  Approximately 2,191,000 shares
owned by Participants in the E.S.O.P. at December 31, 2001 are allocated to
the E.S.O.P. accounts of these individuals.  E.S.O.P. Participants who are
former employees of the Company may generally elect to withdraw from the
E.S.O.P. the total amount of shares allocated to their accounts at any time.
Approximately 580,000 shares held by the E.S.O.P. at December 31, 2001 are
allocated to the E.S.O.P. accounts of these individuals.  The remaining
approximately 219,000 shares held by the E.S.O.P. at December 31, 2001 are
allocated to the E.S.O.P. accounts of Participants who have not yet reached
100% vesting in their account balances.  Disposition of these unvested
shares is restricted under the E.S.O.P.  The Company pays for administration
of the plan.
37
<page>


     The 401(k) Plan, implemented in September 1998, enables eligible
employees to contribute up to 15% of eligible compensation on a pre-tax
basis up to the annual maximum limits under federal tax law.  The Company
incurs no expenses in the form of matching contributions but does pay for
administration of the Plan.  Effective June 1, 2000, the Directors of
American Commerce voted to terminate the American Commerce noncontributory
defined benefit pension plan (the "pension plan") and transition on January
1, 2001 to the E.S.O.P.  The payment of the termination liability to
participants from previously funded assets of the pension plan amounted to
$4,558,000 in 2000.  All participants of the pension plan were eligible to
retire with full retirement benefits upon attainment of age 65 with 5 years
of participation.  Retirement benefits were payable for the life of the
participant with guaranteed payments for 10 years.  All retirees had taken
lump-sum payments.  American Commerce made contributions to a deposit
administration contract, which provided the pension plan with assets
sufficient to fund pension benefits to pension plan participants.  The
deposit administration contract was carried at contract value, which
represented the cost of contributions plus interest and experience refunds.
The pension plan was subject to and exceeded the minimum funding
requirements of ERISA.

     Effective January 1, 2001, the Directors of American Commerce voted to
merge the 401(k) plan with the Company's 401(k) Plan.  Previously, American
Commerce maintained a separate 401(k) Plan for the benefit of substantially
all of its employees.  American Commerce matched 50% of all employee
contributions up to 6% of pay.  Both American Commerce and its employees
shared in administration expenses of the plan.  American Commerce
contributed $181,000 and $165,000 to the plan in 2000 and 1999,
respectively.

     American Commerce maintains a noncontributory post-retirement benefit
plan (the "post-retirement plan") for retirees that includes medical, dental
and life insurance coverages.  All participants of the post-retirement plan
are eligible upon attainment of age 55 with 10 years of service or age 65
with 5 years of service.  Dental coverage ceases at age 65 and life
insurance coverage decreases based upon the age of the retiree until the
attainment of age 70, at which time retirees are provided a nominal amount
of coverage from age 70 and thereafter.  Participant's spouses are also
covered under the post-retirement plan.  The cost of post-retirement
medical, dental and life insurance benefits is accrued over the active
service periods of employees to the date they attain full eligibility for
such benefits.  It is the policy of American Commerce to pay for post-
retirement benefits as incurred.  American Commerce did not contribute to
the plan in 2001 due to the aforementioned merger.

     Subsequent to December 31, 2001, the Directors of American Commerce
voted to terminate that portion of the post-retirement plan applicable to
future retirees of American Commerce.  Termination will be effective May 1,
2002.  Current retirees and employees who retire prior to May 1, 2002 will
remain eligible for post-retirement benefits.

Additional Information

     The information called for by this Item and not otherwise provided is
contained in the following pages of the Company's Annual Report which
disclosure is incorporated herein by reference:  Pages 42 and 51 for
Deferred Policy Acquisition Costs, pages 57 through 59 for 59 for Deferred
Tax Assets and page 66 for Segment Information.


ITEM 2. PROPERTIES

     The Company conducts its Massachusetts operations from approximately
300,000 square feet of space in several buildings, which it owns in Webster,
Massachusetts, which is located approximately 50 miles southwest of Boston.
The Company's principal administrative offices in Webster consist of
recently rehabilitated and newly constructed buildings.  Its data processing
and operational departments are housed in modern office buildings on a
separate nine acre site.  The Company has a 20,000 square foot child care
center located on a separate seven acre site in Webster, Massachusetts.  The
Company operated child care center can provide care for up to 200 children
of employees.  During 2001, Commerce purchased a 160,000 square foot
building.  Commerce expects to expend approximately $13 million renovating
the building primarily in 2002.  Commerce West currently leases
approximately 12,000 square feet of office space in Pleasanton, California.
Commerce West
38
<page>


anticipates it will relocate within the next three to four years.  Land in
Stockton, California was purchased on June 26, 2001 at an approximate cost
of $1,125,000 as part of this relocation plan.  American Commerce conducts
its operations from approximately 40,000 square feet of space in a building
located on a two acre site in Columbus, Ohio.  American Commerce also leases
property at three of its four district claims offices.  The Company
considers that its properties are in good condition, are well maintained,
and are generally suitable to carry on the Company's business.  For
additional information concerning property, see NOTE D to the Company's 2001
Consolidated Financial Statements, which is incorporated herein by reference
from page 52 of the Company's 2001 Annual Report.

ITEM 3. LEGAL PROCEEDINGS

     As is common with property and casualty insurance companies, the
Company is a defendant in various legal actions arising from the normal
course of its business, including claims based on Chapter 176D and Chapter
93A.  These proceedings are considered to be ordinary to operations or
without foundation in fact.  Management is of the opinion that these actions
will not have a material adverse effect on the consolidated financial
position of the Company.  In addition to the normal course of business legal
actions noted above, the Company is named as defendant in a purported class
action lawsuit alleging damages as a result of the alleged diminution of
value to vehicles that are involved in accidents.  The "diminution of value"
theory asserts that the market value of any vehicle involved in an accident
inevitably and irreparably declines as a result of such accident, even if
all physical damage appears to be repaired completely.  This case, entitled
"Elena Given, individually and as a representative of all persons similarly
situated v. The Commerce Insurance Company," filed in 2001, in the Bristol
Superior Court in Massachusetts.  The plaintiff has not sought certification
of class action status.  The Company is vigorously contesting this suit, but
is currently unable to estimate the potential exposure.  The Company and its
outside legal counsel are of the opinion that the Company will prevail in
this case.  Another Superior Court judge in Massachusetts ruled, in a
similar case brought by the same plaintiff counsel against another insurer,
that claims for diminution of value are not covered by the Massachusetts
automobile insurance policy.  Other insurance companies face similar suits
in cases outside of Massachusetts.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

     There were no matters submitted to a vote of security holders during
the fourth quarter of 2001.

ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT

      The Company's executive officers are as follows:
<table>
<caption>
            Name                     Age               Position with Company
      
                            <c>        <c>
      Arthur J. Remillard, Jr.       71         President, Chief Executive Officer, Chairman
                                                of the Board

      Gerald Fels                    59         Executive Vice President,
                                                Chief Financial Officer, Director

      Regan P. Remillard             38         Senior Vice President and Director

      Arthur J. Remillard, III       46         Senior Vice President--Policyholder
                                                Benefits, Assistant Clerk, Director

      David H. Cochrane              48         Senior Vice President--Underwriting
                                                of Commerce and Citation

      Peter J. Dignan                50         Senior Vice President--Marketing and Premium
                                                Accounting of Commerce and Citation

      James A. Ermilio               39         Senior Vice President and General Counsel

      Joyce B. Virostek              59         Senior Vice President--Management
                                                Information Systems of Commerce and Citation

      Joseph J. Staffieri            55         Vice President--Human Resources

      Randall V. Becker              41         Treasurer and Chief Accounting Officer
</table>
39
<page>



     Arthur J. Remillard, Jr. has been the President, Chief Executive
Officer and Chairman of the Board of the Company since 1976.  Mr. Remillard,
Jr. has been Chief Executive Officer and Chairman of the Board of The
Commerce Insurance Company ("Commerce") since 1972 and President of Commerce
from 1972 to November, 2001.  Mr. Remillard, Jr. is also Vice Chairman of
the Governing Committee Review Panel, Chairman of the Budget Committee and a
member of the Personnel Committee of the Commonwealth Automobile Reinsurers
("C.A.R.").  Mr. Remillard, Jr. is also Chairman of the Governing Committee
and a member of the Budget Committee, Executive Committee and Nominating
Committee of the Automobile Insurers Bureau of Massachusetts ("A.I.B.").

     Gerald Fels, a Certified Public Accountant, was appointed President and
Chief Operating Officer of Commerce in November 2001, and Executive Vice
President of the Company in November, 1989.  From 1981 to November, 1989,
Mr. Fels was Senior Vice President of the Company.  Mr. Fels was the
Treasurer of the Company from 1976 to 1995 and of Commerce from 1975 to
1995.  Mr. Fels has also been Chief Financial Officer of the Company since
1976 and of Commerce since 1975.  Mr. Fels is also Treasurer and a director
of American Nuclear Insurers and an Advisory Committee Member of several
investment funds managed by Conning Capital Partners.

     Regan P. Remillard was appointed President of American Commerce
Insurance Company in 2001, President of ACIC Holding Co., Inc. in 1998 and
Vice Chairman of the Board and Chief Executive Officer of American Commerce
Insurance Company in 1999.  Mr. Remillard has been President of Commerce
West Insurance Company since 1996.  Mr. Remillard has been a Senior Vice
President of the Company since 1995.  From 1995 to February 2000, Mr.
Remillard was General Counsel of the Company.  From 1994 to 1995, Mr.
Remillard was a practicing attorney at Hutchins, Wheeler & Dittmar, a
Massachusetts law firm specializing in corporate law and litigation.  From
1989 to 1993, Mr. Remillard was Government Affairs Monitor of the Company.
Mr. Remillard is a member of the Massachusetts Bar.

     Arthur J. Remillard, III was appointed Senior Vice President-
Policyholder Benefits in 1988 and has been Assistant Clerk of the Company
since 1982. From 1981 to 1988, Mr. Remillard, III had been Vice President-
Mortgage Operations.  In addition, Mr. Remillard, III has also served on the
Board of Governors of the Insurance Fraud Bureau of the A.I.B. since 1991,
the C.A.R. Claims Advisory Committee since 1990 and the A.I.B. Claims
Committee since 1991.

     David H. Cochrane has been the Senior Vice President-Underwriting of
Commerce and Citation since 1988.  For approximately four years prior to
that, Mr. Cochrane was the Vice President of Financial Services of C.A.R.
Mr. Cochrane has also served on the C.A.R. Market Review Committee since
1988.

     Peter J. Dignan was appointed the Senior Vice President-Marketing and
Premium Accounting of Commerce and Citation in 1997.  From 1989 to 1997, Mr.
Dignan was Vice President-Premium Accounting Commerce and Citation.  From
1987 to 1989 Mr. Dignan was Assistant Vice President-Premiums Accounting of
Commerce and Citation.

     Joseph Staffieri has been Vice President of Human Resources of
Commerce Since May of 2001.  From May of 1997 through April of 2001, Mr.
Staffieri was the Vice President of Human Resources for Ames Department
Stores.
40
<page>


     Joyce B. Virostek has been the Senior Vice President--Management
Information Systems of Commerce and Citation since 1988.  From 1981 to 1988,
Ms. Virostek had been Vice President of Commerce and Citation in charge of
data processing.

     James A. Ermilio was appointed as Senior Vice President of the Company
in May 2001.  Mr. Ermilio was also appointed General Counsel of the Company
in February 2000 and was a Vice President of the Company from November 1998
to May 2001.  Mr. Ermilio is also Chief Legal Officer and Secretary of
American Commerce Insurance Company and Secretary of ACIC Holding Co., Inc.
Mr. Ermilio had been the Associate General Counsel of the Company since
September 1998.  Mr. Ermilio was Counsel for Glaxo Wellcome, Inc.
(subsequently renamed Glaxo Smith Kline, Inc.) from 1993 to September 1998.
Prior to 1993, Mr. Ermilio was an Associate with the law firm of Bingham
Dana.  Mr. Ermilio is a member of the Massachusetts and District of Columbia
Bars.

     Randall V. Becker, a Certified Public Accountant, has been Treasurer
and Chief Accounting Officer of the Company since 1994.  From 1990 to 1994,
Mr. Becker was Assistant Treasurer and Comptroller of the Company.  From
1986 to 1990, Mr. Becker was the Director of Internal Audit for the Company.

     The only family relationship among the executive officers is that
Arthur J. Remillard, III and Regan P. Remillard are the sons of Arthur J.
Remillard, Jr.


                                    PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS

     The Company's common stock trades on the NYSE under the symbol "CGI".
The high, low and close prices for shares as quoted in The Boston Globe, of
the Company's common stock for 2001 and 2000 were as follows:
<table>
<caption>
                                         2001                            2000
                                High     Low        Close        High     Low      Close
     
                     <c>       <c>        <c>          <c>      <c>       <c>
      First Quarter......    $32.1000  $24.5500   $32.0000     $31.0000 $23.0000  $29.5000
      Second Quarter.....     36.9900   30.7500    36.7900      30.8750  26.1250   29.5000
      Third Quarter......     38.3500   33.5500    38.0000      29.4375  25.0625   28.9375
      Fourth Quarter.....     40.3500   35.8000    37.6900      29.2500  22.8750   27.1800
</table>
     As of March 1, 2002 there were 1,053 stockholders of record of the
Company's Common Stock, not including stock held in "Street Name" or held
in accounts for participants of the Company's E.S.O.P.

     The Board of Directors of the Company voted to declare four quarterly
dividends to stockholders of record totaling $1.19 per share and $1.15 per
share in 2001 and 2000, respectively.  On May 19, 2001, the Board voted to
increase the quarterly stockholder dividend from $0.29 to $0.30 per share
to stockholders of record as of June 4, 2000.  Prior to that declaration,
the Company had paid quarterly dividends of $0.29 per share dating back to
May 15, 2000 when the Board voted to increase the dividend from $0.28 to
$0.29 per share.

     In May 1999, the Board of Directors of the Company authorized a stock
buy-back program of up to 2,000,000 shares of common stock of the Company.
At December 31, 2001, there are 273,700 shares of common stock authorized
to be purchased under this program.  In November 2001, the Board of
Directors approved another stock buy-back program authorizing the purchase
of up to an additional 2,000,000 shares.  During the period from January
1, 2001 through December 31, 2001, the Company purchased 622,900 shares of
its own common stock.  During 2000, the Company purchased 606,200 shares
of its own common stock under the May 1999 buy-back program.  At December
31, 2001, the Company had authority to purchase a total of 2,273,700
additional shares of its common stock under the May 1999 and November 2001
buy-back programs.  As of December 31, 2001, the Company holds a total of
4,869,548 shares of treasury stock.
41
<page>


     A portion of the Company's cash flow consists of dividends received
from CHI, which receives dividends from Commerce and Citation.  The
payment of any cash dividends to holders of common stock by the Company
therefore depends on the receipt of dividend payments from CHI.  To the
extent Commerce and Citation are restricted from paying dividends to CHI,
CHI will be limited in its ability to pay dividends to the Company.  The
payment of dividends by Commerce and Citation is subject to limitations
imposed by Massachusetts law, as discussed under the caption "Payment of
Dividends" in Item 1J of this report.

ITEM 6. SELECTED FINANCIAL DATA

     The five-year financial information under the caption "Selected
Consolidated Financial Data" on page 69 of the Company's 2001 Annual
Report is incorporated herein by reference.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
        RESULTS OF OPERATIONS

     The information on pages 5 through 32 of the Company's 2001 Annual
Report is incorporated herein by reference.

ITEM 7A. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK

     The information on pages 28 and 29 of the Company's 2001 Annual
Report is incorporated herein by reference.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

     The Company's Consolidated Financial Statements for the years ended
December 31, 2001, 2000 and 1999 and the report of its independent
auditors on pages 34 through 68 of the Company's 2001 Annual Report are
incorporated herein by reference.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH INDEPENDENT AUDITORS ON
         ACCOUNTING AND FINANCIAL DISCLOSURE

     None.


                                  PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

     The information called for by this Item and not provided in Item 4A
will be contained in the Company's Proxy Statement, which the Company
intends to file within 120 days after the end of the Company's fiscal year
ended December 31, 2001, and such information is incorporated herein by
reference.

ITEM 11. EXECUTIVE COMPENSATION

     The information called for by this Item will be contained in the
Company's Proxy Statement, which the Company intends to file within 120
days after the end of the Company's fiscal year ended December 31, 2001
and such information is incorporated herein by reference.
42
<page>


ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

     The information called for by this Item will be contained in the
Company's Proxy Statement, which the Company intends to file within 120
days after the end of the Company's fiscal year ended December 31, 2001
and such information is incorporated herein by reference.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

     The information called for by this Item will be contained in the
Company's Proxy Statement, which the Company intends to file within 120
days after the end of the Company's fiscal year ended December 31, 2001
and such information is incorporated herein by reference.


                                   PART IV


ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

     A. (1)  The following financial statements have been incorporated
             herein by reference from the pages indicated below of the
             Company's 2001 Annual Report:
<table>
<caption>
                                                                                   Page
             
                                                                    <c>
             Report of Independent Auditors...................................      34
             Consolidated Balance Sheets as of December 31, 2001 and 2000.....      35
             Consolidated Statements of Earnings for the years ended
              December 31, 2001, 2000 and 1999................................      36
             Consolidated Statements of Stockholders' Equity for the years
              ended December 31, 2001, 2000 and 1999..........................      37
             Consolidated Statements of Cash Flows for the years ended
              December 31, 2001, 2000 and 1999................................      38
             Consolidated Statements of Cash Flows - Reconciliation of Net
              Earnings to Net Cash provided by Operating Activities for the
              years ended December 31, 2001, 2000 and 1999....................      39
             Notes to Consolidated Financial Statements.......................      40

        (2)  The financial statement schedules are listed in the Index to Consolidated
              Financial Statement Schedules.

        (3)  The exhibits are listed in the Index to Exhibits.

     B.      No reports on Form 8-K were filed during the quarter ended December 31,
              2001.
</table>
43
<page>


                                SIGNATURES

     Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.

Dated: March 26, 2002

                                  THE COMMERCE GROUP, INC.


                                       By
                                         ARTHUR J. REMILLARD, JR.
                                         (Arthur J. Remillard, Jr.)
                                              (President, Chief Executive
                                               Officer, Chairman
                                               of the Board and Director)



     Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed by the following persons on behalf of the
registrant and in the capacities and on the date indicated.

<table>
<caption>
            Signature                                      Title

      
                                       <c>
      ARTHUR J. REMILLARD, JR.                  President, Chief Executive Officer, Chairman
      (Arthur J. Remillard, Jr.)                of the Board and Director



      GERALD FELS                               Executive Vice President, Chief Financial
      (Gerald Fels)                             Officer and Director



      ARTHUR J. REMILLARD, III                  Senior Vice President-Policyholder
      (Arthur J. Remillard, III)                Benefits, Assistant Clerk and Director



      REGAN P. REMILLARD                        Senior Vice President and Director
      (Regan P. Remillard)



      JOHN W. SPILLANE                          Clerk and Director
      (John W. Spillane)



      RANDALL V. BECKER                         Treasurer and Chief Accounting Officer
      (Randall V. Becker)



      HERMAN F. BECKER                          Director
      (Herman F. Becker)
44
<page>


<caption>
            Signature                            Title


      
                                       <c>
      JOSEPH A. BORSKI, JR.                     Director
      (Joseph A. Borski, Jr.)



      ERIC G. BUTLER                            Director
      (Eric G. Butler)



      HENRY J. CAMOSSE                          Director
      (Henry J. Camosse)



      DAVID R. GRENON                           Director
      (David R. Grenon)



      ROBERT W. HARRIS                          Director
      (Robert W. Harris)



      ROBERT S. HOWLAND                         Director
      (Robert W. Howland)



      JOHN J. KUNKEL                            Director
      (John J. Kunkel)



      RAYMOND J. LAURING                        Director
      (Raymond J. Lauring)



      NORMAND R. MAROIS                         Director
      (Normand R. Marois)



      SURYAKANT M. PATEL                        Director
      (Suryakant M. Patel)



      GURBACHAN SINGH                           Director
      (Gurbachan Singh)
</table>
45
<page>


<table>
<caption>
                 THE COMMERCE GROUP, INC. AND SUBSIDIARIES

                  INDEX TO FINANCIAL STATEMENT SCHEDULES*

                                                                                    Page

  
                                                                                <c>
  Ernst & Young LLP Consent of Independent Auditors............................      47

<caption>
Schedules
   
      <c>                                                                      <c>
   II       Condensed Financial Information of the Registrant as of and for the
             years ended December 31, 2001, 2000 and 1999......................      48

   III      Supplementary Insurance Information for the years ended
             December 31, 2001, 2000 and 1999 .................................      53

   IV       Reinsurance for the years ended December 31, 2001, 2000 and 1999...      54

    V       Valuation and Qualifying Accounts for the years ended
             December 31, 2001, 2000 and 1999..................................      55

    X       Supplemental Information Concerning Property-Casualty Insurance
            Operations for the years ended December 31, 2001, 2000 and 1999....      56




* Financial statement schedules other than those listed are omitted because they are not
  required, not applicable or the required information has been included elsewhere.
</table>
46
<page>


                       CONSENT OF INDEPENDENT AUDITORS


     To the Board of Directors and Stockholders of
     The Commerce Group, Inc.

     We consent to the incorporation by reference in this Annual Report
(Form 10-K) of The Commerce Group, Inc. of our report dated January 29,
2002, included in the 2001 Annual Report to Stockholders of The Commerce
Group, Inc.

     Our audits also included the financial statement schedules of The
Commerce Group, Inc. listed in Item 14(a).  These schedules are the
responsibility of the Company's management.  Our responsibility is to
express an opinion based on our audits.  In our opinion, the financial
statement schedules referred to above, when considered in relation to the
basic financial statements taken as a whole, present fairly in all material
respects the information set forth therein.

     We also consent to the incorporation by reference in the Registration
Statement (Form S-8 No. 333-62367) pertaining to The Commerce Group, Inc.
401(k) Plan of our report dated January 29, 2001, with respect to the
consolidated financial statements incorporated herein by reference, and our
report included in the preceding paragraph with respect to the financial
statement schedules included in this Annual Report (Form 10-K) of The
Commerce Group, Inc.


                                                ERNST & YOUNG LLP

     Boston, Massachusetts
     March 28, 2002
47
<page>


<table>
<caption>
                 THE COMMERCE GROUP, INC. AND SUBSIDIARIES

                                SCHEDULE II

                      CONDENSED FINANCIAL INFORMATION

                          THE COMMERCE GROUP, INC.
                            (Parent Company Only)

                               BALANCE SHEETS
                                December 31,
                           (Thousands of Dollars)

                                                             2001        2000        1999
                                           ASSETS

                                                        <c>         <c>        <c>
Investments:
  Investment in Commerce Holdings, Inc..................   $789,437    $758,968   $637,725
  Investment in Bay Finance Company, Inc................     29,179      28,531     27,312
  Investment in the Clark-Prout Insurance Agency, Inc...        581         562        488
      Total investments.................................    819,197     788,061    665,525

Cash and cash equivalents...............................         11          11          7
Property and equipment, net of accumulated depreciation.      1,182       1,257      1,374
Current income taxes....................................      1,410       2,861      2,007
Deferred income taxes...................................        972         882         37
Other assets............................................      1,047       1,329      3,536
      Total assets......................................   $823,819    $794,401   $672,486
<caption>
                            LIABILITIES AND STOCKHOLDERS' EQUITY

                                                        <c>         <c>        <c>
Liabilities:
  Accounts payable and accrued expenses.................   $ 11,234    $  8,552   $    986
  Payable to affiliates.................................        254       3,914      3,437
  Other liabilities.....................................         57          54         58
      Total liabilities.................................     11,545      12,520      4,481

Stockholders' equity:
  Capital stock:
    Common stock........................................     19,000      19,000     19,000
  Paid-in capital.......................................     29,621      29,621     29,621
  Net accumulated other comprehensive income (loss),
    net of income taxes (benefits) of $6,674 in 2001,
    $6,372 in 2000 and ($13,277) in 1999................     12,394      11,833    (24,657)
  Retained earnings.....................................    873,671     820,528    727,649
                                                            934,686     880,982    751,613
  Treasury stock, 4,869,548, 4,246,648 and 3,640,448
    shares in 2001, 2000 and 1999, at cost..............   (122,412)    (99,101)   (83,608)


      Total stockholders' equity........................    812,274     781,881    668,005

      Total liabilities and stockholders' equity........   $823,819    $794,401   $672,486

    The accompanying notes are an integral part of these condensed financial statements.
</table>
48
<page>


<table>
<caption>                 THE COMMERCE GROUP, INC. AND SUBSIDIARIES

                                SCHEDULE II
                                 (continued)

                      CONDENSED FINANCIAL INFORMATION

                          THE COMMERCE GROUP, INC.
                           (Parent Company Only)

                           STATEMENTS OF EARNINGS
                          Years ended December 31,
                           (Thousands of Dollars)

                                                            2001        2000       1999

                                                       <c>         <c>        <c>
Revenues
  Dividends received from subsidiaries.................   $ 65,835    $ 51,660   $ 56,070
  Rent income..........................................        471         492        513
     Total revenues....................................     66,306      52,152     56,583

Expenses
  Depreciation.........................................        241         246        228
  Administrative expenses..............................      5,095       9,667       (897)
     Total expenses....................................      5,336       9,913       (669)

Earnings before income tax benefits and equity in
 net earnings of subsidiaries over amounts distributed.     60,970      42,239     57,252
Income tax benefits....................................     (1,549)     (3,795)      (338)

Earnings before equity in net earnings of subsidiaries
 over amounts distributed..............................     62,519      46,034     57,590

Equity in net earnings of subsidiaries over amounts
 distributed...........................................     30,575      86,046     31,086
     Net earnings......................................   $ 93,094    $132,080   $ 88,676
















    The accompanying notes are an integral part of these condensed financial statements.
</table>
49
<page>


<table>
<caption>
                 THE COMMERCE GROUP, INC. AND SUBSIDIARIES

                                 SCHEDULE II
                                 (continued)

                      CONDENSED FINANCIAL INFORMATION

                          THE COMMERCE GROUP, INC.
                            (Parent Company Only)

                          STATEMENTS OF CASH FLOWS
                          Years ended December 31,
                           (Thousands of Dollars)

                                                              2001        2000        1999

                                                        <c>          <c>         <c>
Cash flows from operating activities:
  Net earnings...........................................  $  93,094    $132,080    $ 88,676
  Adjustments to reconcile net earnings to net cash
   provided by operating activities:
    Dividends received from consolidated subsidiaries....     65,835      51,660      56,070
    Equity in earnings of consolidated subsidiaries......    (96,410)   (137,706)    (87,156)
    Depreciation and amortization........................        241         246         228
    Other assets, other liabilities and accrued expenses.      2,948       9,717      (8,609)
    Balances with affiliates.............................     (3,660)        477      40,514
    Income taxes (benefits)..............................      1,361      (1,699)     (5,857)
    Other--net...........................................       (113)         94        (141)
      Net cash provided by operating activities..........     63,296      54,869      83,725

Cash flows from investing activities:
  Purchase of property and equipment for company use.....       (218)       (366)       (487)
  Proceeds from sale of property and equipment...........        184         195         344
      Net cash used in investing activities..............        (34)       (171)       (143)

Cash flows from financing activities:
  Dividends paid to stockholders.........................    (39,951)    (39,201)    (38,656)
  Purchase of treasury stock.............................    (23,311)    (15,493)    (44,921)
      Net cash used in financing activities..............    (63,262)    (54,694)    (83,577)

Increase in cash and cash equivalents....................       -              4           5
Cash and cash equivalents at beginning of year...........         11           7           2
Cash and cash equivalents at end of year.................  $      11    $     11    $      7


   The accompanying notes are an integral part of these condensed financial statements.
</table>
50
<page>


                 THE COMMERCE GROUP, INC. AND SUBSIDIARIES

                                SCHEDULE II
                                (continued)

                      CONDENSED FINANCIAL INFORMATION

                          THE COMMERCE GROUP, INC.
                           (Parent Company Only)

                  NOTES TO CONDENSED FINANCIAL STATEMENTS
                           (Thousands of Dollars)

     The accompanying condensed financial statements should be read in
conjunction with the Consolidated Financial Statements and the accompanying
notes thereto in the Annual Report.

NOTE A--Dividends

     The amounts of cash dividends paid to The Commerce Group, Inc. (Parent
only) were as follows:
<table>
<caption>
                                                              2001        2000        1999
      
                                                   <c>         <c>         <c>
      Consolidated insurance subsidiaries..............     $65,835     $51,660     $56,070
</table>

     See Note M to the Consolidated Financial Statements in the Annual
Report for a description of dividend restrictions applicable to the
Company's subsidiaries.

NOTE B--Federal Income Tax Allocation

     As a member of a consolidated group for tax purposes, the Company and
its subsidiaries (said parties constituting an "Affiliated Group" as defined
in and for purposes of the Internal Revenue Code) are jointly and severally
liable for federal income taxes of the Affiliated Group and have entered
into an agreement establishing an allocation of tax liability and for
compensation of the respective members of the Affiliated Group for use of
their tax losses and credits.

     The method of allocation calls for current taxes to be allocated among
all affiliated companies based on a written tax-sharing agreement.  Under
this agreement, allocation is made primarily on a separate return basis with
current payment for losses and other tax items utilized in the consolidated
return.  However, to the extent that a payor member of the group has future
net operating losses, which it cannot absorb in the year incurred, other
members within the group will refund payments to the payor.
51
<page>


<table>
<caption>
                 THE COMMERCE GROUP, INC. AND SUBSIDIARIES

                                SCHEDULE II
                                (continued)

                      CONDENSED FINANCIAL INFORMATION

                          THE COMMERCE GROUP, INC.
                           (Parent Company Only)

                 NOTES TO CONDENSED FINANCIAL STATEMENTS
                           (Thousands of Dollars)

NOTE C--Consolidated Financial Statements

     In preparing the consolidated financial statements of the Company and its subsidiaries,
the following amounts have been eliminated:

                                               At December 31,
Balance Sheet                          2001          2000         1999

                                  <c>           <c>          <c>
Investment in subsidiaries........   $819,197      $788,061     $665,525
Payable to affiliates.............        254         3,914        3,437

<caption>
                                            Years Ended December 31,
Statement of Earnings                  2001          2000         1999

Dividends from subsidiaries.......   $ 65,835      $ 51,660     $ 56,070
Rent income.......................        471           492          513
</table>

NOTE D--Reclassification of Prior Year Balances

     Certain prior year balances have been reclassified to conform to the
2001 presentation.

     Beginning in the first quarter of 2001, the Company, in the 2001 and
prior years' results, classified its undistributed equity in the earnings
and losses on investments in closed-end preferred stock mutual funds in net
realized investment gains and losses.  For the year ended 2000, the
undistributed equity in the earnings and losses of these funds was reported
in net investment income.  The Company believes the current year
presentation provides a more appropriate classification for analysis of the
on-going operations of the Company.  Prior period results previously
reflected in investment income, have been reclassified to realized gains and
losses to conform with current period presentation.  For the years ended
December 31, 2001, 2000, and 1999 the Company reflected realized gains
(losses) of $4.6 million, $26.6 million and ($22.4) million, respectively,
as a result of this change.  These investments are valued at original cost
plus the cumulative undistributed equity in earnings and losses of the funds
and adjusted over time by the premium or discount at the time of purchase to
the applicable underlying net asset value of the funds.

52
<page>


<table>
<caption>
                                                                THE COMMERCE GROUP, INC. AND SUBSIDIARIES

                                                                             SCHEDULE III

                                                                  SUPPLEMENTARY INSURANCE INFORMATION
                                                              Years Ended December 31, 2001, 2000 and 1999
                                                                        (Thousands of Dollars)


                                                        Future
                                                        Policy               Other
                                          Deferred     Benefits,             Policy
                                           Policy     Claims and           Claims and               Net
                                         Acquisition     Loss     Unearned  Benefits    Premium  Investment
               Segment                      Costs      Expenses   Premiums   Payable    Revenue   Income(1)

                                      <c>          <c>         <c>         <c>     <c>         <c>
2001
  Massachusetts's property and
   casualty insurance.................   $   105,553  $  615,495  $516,779            $  922,573  $  79,544
  Other states property and
   casualty insurance.................        11,004      66,129    46,677    None       121,079     13,030
  Real estate and commercial lending..          -           -         -                     -         3,640
  Corporate and other.................          -           -         -                     -         3,397
        Total.........................   $   116,557  $  681,624  $563,456            $1,043,652  $  99,611

                                      <c>          <c>         <c>         <c>     <c>         <c>
2000
  Massachusetts's property and
   casualty insurance.................   $   102,026  $  615,869  $481,669            $  849,998  $  74,544
  Other states property and casualty
   insurance..........................         9,279      58,271    38,216    None       104,485     13,458
  Real estate and commercial lending..          -           -         -                     -         5,407
  Corporate and other.................          -           -         -                     -         3,421
        Total.........................   $   111,305  $  674,140  $519,885            $  954,483  $  96,830

                                      <c>          <c>         <c>         <c>     <c>         <c>
1999
  Massachusetts's property and
   casualty insurance.................   $    90,360  $  596,339  $423,173            $  767,686  $  69,627
  Other states property and casualty
   insurance..........................         8,140      63,502    33,922    None       104,144     11,359
  Real estate and commercial lending..          -           -         -                     -         5,429
  Corporate and other.................          -           -         -                     -         3,374
        Total.........................   $    98,500  $  659,841  $457,095            $  871,830  $  89,789


     (1)  The allocation of net investment income is based upon the specific identification of activity within
          the various segments.
</table>
53A
<page>


<table>
<caption>
                                                                THE COMMERCE GROUP, INC. AND SUBSIDIARIES

                                                                             SCHEDULE III

                                                                  SUPPLEMENTARY INSURANCE INFORMATION (Continued)
                                                              Years Ended December 31, 2001, 2000 and 1999
                                                                        (Thousands of Dollars)



                                          Benefits,  Amortization
                                           Claims,    of Deferred
                                         Losses and     Policy     Other       Net
                                         Settlement  Acquisition Operating   Premiums
               Segment                    Expenses      Costs     Expenses    Written
2001

                                      <c>        <c>            <c>     <c>
  Massachusetts's property and
   casualty insurance.................   $675,036   $   220,635            $  950,486
  Other states property and
   casualty insurance.................    102,507        40,235    None       128,481
  Real estate and commercial lending..       -             ,                     -
  Corporate and other.................       -             -                     -
        Total.........................   $777,543   $   260,870            $1,078,967

2000

                                      <c>        <c>            <c>     <c>
  Massachusetts's property and
   casualty insurance.................   $602,789   $    212,009           $  906,705
  Other states property and casualty
   insurance..........................     83,368         31,248   None       102,206
  Real estate and commercial lending..       -              -                    -
  Corporate and other.................       -              -                    -
        Total.........................   $686,157   $    243,257           $1,008,911
1999

                                      <c>        <c>            <c>     <c>
  Massachusetts's property and
   casualty insurance.................   $547,004   $    199,296           $  806,491
  Other states property and casualty
   insurance..........................     78,086         34,364   None       105,502
  Real estate and commercial lending..       -              -                    -
  Corporate and other.................       -              -                    -
        Total.........................   $625,090   $    233,660           $  911,993
</table>
53B
<page>


<table>
<caption>
                 THE COMMERCE GROUP, INC. AND SUBSIDIARIES

                                 SCHEDULE IV

                                 REINSURANCE
                Years Ended December 31, 2001, 2000 and 1999
                            (Thousands of Dollars)

                                                                      Assumed                Percentage
                                                        Ceded to       From                  of Amount
                                           Gross         Other         Other         Net       Assumed
       Insurance Premiums Earned           Amount       Companies    Companies      Amount     to Net


2001
  
                                <c>          <c>         <c>        <c>           <c>
  Property and casualty insurance..  $1,112,922   $149,874    $ 80,604   $1,043,652     7.7%

2000
  Property and casualty insurance..  $1,015,260   $142,474    $ 81,697   $  954,483     8.6%

1999
  Property and casualty insurance..  $  911,588   $124,459    $ 84,701   $  871,830     9.7%
</table>







54
<page>


<table>
<caption>
                 THE COMMERCE GROUP, INC. AND SUBSIDIARIES

                                 SCHEDULE V

                     VALUATION AND QUALIFYING ACCOUNTS
                Years Ended December 31, 2001, 2000 and 1999
                           (Thousands of Dollars)

                                                          Net
                                                        addition
                                                       (reduction)
                                            Balance     charged to                Balance
                                           beginning    costs and                 at end
                                            of year      expenses   Deductions(1)  of year

                                         <c>          <c>           <c>         <c>
2001
  Allowance for losses on mortgage loans
   and collateral notes receivable........  $  858       $  (198)      $  -         $  660

  Allowance for doubtful premium
   receivables............................  $1,487       $ 1,079       $(1,001)     $1,565

2000
  Allowance for losses on mortgage loans
   and collateral notes receivable........  $2,127       $(1,269)      $  -         $  858

  Allowance for doubtful premium
   receivables............................  $1,452       $   985       $  (950)     $1,487

1999
  Allowance for losses on mortgage loans
   and collateral notes receivable........  $2,301       $  (174)      $  -         $2,127

  Allowance for doubtful premium
   receivables............................  $1,450       $ 1,249       $(1,247)     $1,452




(1) Deductions represent net write-offs of amounts determined to be uncollectible.
</table>
55
<page>


<table>
<caption>
                 THE COMMERCE GROUP, INC. AND SUBSIDIARIES

                                 SCHEDULE X

                    SUPPLEMENTAL INFORMATION CONCERNING
                   PROPERTY-CASUALTY INSURANCE OPERATIONS
                Years Ended December 31, 2001, 2000 and 1999
                           (Thousands of Dollars)



                                               Claims and Claim         Paid
                                              Adjustment Expenses      Claims
            Affiliation                       Incurred Related to     and Claim
               with                           Current      Prior      Adjustment
            Registrant                         Year        Years       Expenses


                                           <c>        <c>           <c>
2001
  Consolidated property-casualty
   entities..........................         $812,863   $(35,320)     $773,076

2000
  Consolidated property-casualty
   entities..........................         $728,582   $(42,425)     $659,069

1999
  Consolidated property-casualty
   entities..........................         $664,978   $(39,888)     $627,550
</table>
56
<page>


<table>
<caption>
                 THE COMMERCE GROUP, INC. AND SUBSIDIARIES

                           INDEX TO EXHIBITS(A)

Exhibit
Number                                    Title
  
       <c>
  3.1       Articles of Organization, as amended (B)

  3.2       By-Laws(B)

  4         Stock Certificate(B)

 10.6*      Form of Stock-Appreciation Right Agreement (B)

 10.7*      Form of Stock-Appreciation Right and Book Value Award Agreement as amended (C)

 10.8*      1994 Management Incentive Plan as amended (D)

 10.18*     Form of Non-Qualified Stock Option Agreement (E)

 10.19*     Form of Incentive Stock Option Agreement (E)

 10.20*     Form of Non-Qualified Stock Option Agreement (E)

 10.21*     Form of Stock Option Agreement (E)

 10.22      Conning Capital Partners VI, L.P., Limited Partnership Agreement (E)

 13.1       Annual Report for the year ended December 31, 2001 to Security Holders

 22.1       Subsidiaries of the Registrant filed herewith


(A) Exhibits other than those listed are omitted because they are not required or are not
    applicable.  Copies of exhibits are available without charge by writing to the Assistant
    to the President at 211 Main Street, Webster, MA 01570.

(B) Incorporated herein by reference to the exhibit with the same exhibit number, filed as
    an exhibit to the Registrant's Registration Statement on Form S-18 (No. 33-12533-B).

(C) Incorporated herein by reference to the exhibit with the same exhibit number, filed as
    an exhibit to the Registrant's Form 10-K for the year ended December 31, 1994.

(D) Incorporated herein by reference to the exhibit with the same exhibit number, filed as
    an exhibit to the Registrant's Form 10-Q for the period ended September 30, 1997.

(E) Incorporated herein by reference to the exhibit with the same exhibit number, filed as
    an exhibit to the Registrant's Form 10-K for the year ended December 31, 1999.



* Denotes management contract or compensation plan or arrangement.
</table>
57
<page>











                           2001
                         annual
                         report
















The
CGI

The Commerce Group, Inc.
211 Main Street, Webster, Massachusetts 01570
64
<page>


<table>
<caption>

                          INDEX TO 2001 ANNUAL REPORT

                                                                   Page

                                                                 <c>
Financial Highlights............................................     1

Letter to Stockholders..........................................     2

Management's Discussion and Analysis of Financial Condition
 and Results of Operations......................................     5

Common Stock Price and Dividend Information.....................    32

Report of Management............................................    33

Report of Independent Auditors..................................    34

Consolidated Balance Sheets at December 31, 2001 and 2000.......    35

Consolidated Statements of Earnings for the Years Ended
 December 31, 2001, 2000 and 1999...............................    36

Consolidated Statements of Stockholders' Equity for the Years
 Ended December 31, 2001, 2000 and 1999.........................    37

Consolidated Statements of Cash Flows for the Years Ended
 December 31, 2001, 2000 and 1999...............................    38

Consolidated Statements of Cash Flows - Reconciliation of Net
 Earnings to Net Cash Provided by Operating Activities for the
 Years Ended December 31, 2001, 2000 and 1999...................    39

Notes to Consolidated Financial Statements......................    40

Selected Consolidated Financial Data............................    69

Management's Discussion of the Supplemental Information on
 Insurance Operations...........................................    70

Directors.......................................................    76

Officers........................................................    80

Stockholder Information.........................................    82
</table>





<page>


<table>
<caption>
                             FINANCIAL HIGHLIGHTS
                 (Dollars in Thousands, Except Per Share Amounts)

                                                      2001          2000            1999

                                                <c>           <c>             <c>
Direct premiums written.........................   $1,152,407    $1,071,649      $  948,149

Net premiums written............................   $1,078,967    $1,008,911      $  911,993

Earned premiums.................................   $1,043,652    $  954,483      $  871,830
Net investment income...........................       99,611        96,830          89,789
Premium finance and service fees................       17,819        15,227          14,774
Amortization of excess of book value of
  subsidiary interest over cost.................        3,389         3,390           3,019
Net realized investment gains (losses)..........      (10,633)       29,550         (16,378)
     Total revenues.............................   $1,153,838    $1,099,480      $  963,034

Earnings before income taxes and minority
  interest......................................   $  115,425    $  170,066      $  104,284
Income taxes....................................       23,194        38,306          16,667

Net earnings before minority interest...........       92,231       131,760          87,617
Minority interest in net loss of subsidiary.....          863           320           1,059
     Net earnings...............................   $   93,094    $  132,080      $   88,676

Comprehensive income............................   $   93,655    $  168,570      $   40,730

Net earnings per common share:
  Basic.........................................   $     2.77    $     3.87      $     2.54
  Diluted.......................................   $     2.75    $     3.87      $     2.54

Operating earnings (1)..........................   $   98,880    $  109,631      $   97,411

Operating earnings per share (1)
  Basic.........................................   $     2.94    $     3.21      $     2.79
  Diluted.......................................   $     2.93    $     3.21      $     2.79

Cash dividends paid per share...................   $     1.19    $     1.15      $     1.11

Weighted average number of common shares
  outstanding:
    Basic.......................................   33,608,804    34,121,047      34,940,074
    Diluted.....................................   33,794,938    34,121,047      34,940,074

Total investments at market value
  and equity value..............................   $1,498,201    $1,472,562      $1,295,995
Total assets....................................   $2,140,082    $2,075,614      $1,878,019
Total liabilities...............................   $1,327,808    $1,292,665      $1,208,650
Minority interest...............................         -       $    1,068      $    1,364
Total stockholders' equity......................   $  812,274    $  781,881      $  668,005
Total stockholders' equity per share............   $    24.52    $    23.16      $    19.44

Certain statutory financial ratios (unaudited):
  Loss and LAE ratio............................         74.7%         71.7%           72.0%
  Underwriting expense ratio....................         24.4          25.1            26.5
     Combined ratio.............................         99.1%         96.8%           98.5%

  Net premiums written to policyholders'
    surplus.....................................        150.7%        152.6%          175.7%

(1) The above figures are presented to provide information to the reader due to the amount
    of, and fluctuations in, net realized gains and (losses).  The amounts noted, which
    exclude the after-tax impact of net realized investment gains (losses), are important
    measures of corporate performance.
</table>
1
<page>




                                 THE COMMERCE GROUP, INC.


                                                           March 23, 2002

To Our Stockholders:

     In 2001, your Company experienced satisfactory financial results for
the 26th consecutive year.  From the very first day the funding of The
Commerce Insurance Company was accomplished (April 3, 1972) through
December 31, 2001, we have achieved underwriting profit of $293.4 million
on total premiums written of $10.0 billion.  This underwriting profit
represents 2.9% of total premiums written.

     In October 2001, the 2002 personal automobile insurance rate decision
was announced by the Massachusetts Insurance Commissioner.  Despite the
industry's request for a 7.8% increase, 2002 rates are to remain unchanged
from 2001 rates.  Although most companies, including yours, continued to
modify safe driver deviations in response to the 2002 rate decision, the
Massachusetts marketplace remains highly competitive.  Throughout these
ongoing competitive times, your Company's share of the Massachusetts
personal automobile market has continued to grow, and at year-end, our
market share was 23.3% up from 22.3% in 2000.

     In 2001, direct premiums written in Massachusetts and earned premiums
countrywide surpassed $1 billion for the first time in our history.  Your
Company will continue to pursue the goals of growing and expanding
geographically beyond the borders of Massachusetts.  In furtherance of
this goal, direct premiums written outside of Massachusetts now represents
12.4% of our total business as compared to 11.3% in 2000.

     Your Company has continued to grow and prosper.  The Commerce
Insurance Company continues to be the largest writer of Massachusetts
private passenger automobile insurance, the second largest writer of
Massachusetts homeowners insurance, as well as the third largest writer of
Massachusetts commercial automobile insurance.  The combined insurance
companies were also ranked as the 26th largest personal automobile
insurance group in the country by A.M. Best Co., based on the most
recently available direct premium written information.  Additionally, I am
very pleased to report that your Company again received a group rating of
A+ (Superior) from A.M. Best Co.

     Net earnings, written premiums, earned premiums, investment income,
total assets, total stockholders' equity and total stockholders' equity
per share, as illustrated in the bar graph on the facing page, are all at
new highs.  For those of you who are interested in the details, I draw
your attention to the pages in this report labeled "Management's
Discussion and Analysis of Financial Condition and Results of Operations".
Behind these numbers are an extremely dedicated group of people:  Our
policyholders (represented by over 1,042,000 policies in force); Agents
(1,236); Employees (1,780); Officers (43); Commerce Group Directors (17);
and, of course, our Stockholders (over 5,000, including our Employee Stock
Ownership Plan Participants who now number 1,904).

     Property-liability insurance remains a good business to be in and The
Commerce Group, Inc. will continue its efforts to be one of the most
profitable long-term players.  Your Company's management continues to
believe that owners' interests are its primary constituency.
2
<page>



     Our sincere thanks to those who have helped in this building process
especially our Agents, Employees, Officers and Board of Directors.  This
diverse force of committed, ethical and hard working people will continue
to build on our past successes and look to the future with excitement and
opportunity.  Their individual ingenuity, enthusiasm, dedication and
professionalism will continue to serve our stockholders well.

     Your comments or questions regarding this report, or The Commerce
Group, Inc. affairs in general, are solicited as always, at any time.



















                                   Arthur J. Remillard, Jr.
                                   President, Chief Executive Officer
                                   and Chairman of the Board





















            Caring in everything we do.

3
<page>




The bar graph on page 3 illustrates the Company's annual total
stockholders' equity per share value and annual total stockholders' equity
per share value including cumulative cash dividends paid per share through
each December 31, year-end, over the most recent fifteen year period.  The
X-axis lists the years beginning with 1987 through 2001.  The Y-axis lists
the dollar values starting at $0.00 and increasing in one-dollar
increments to $32.00.  The graph depicts a total stockholders' equity per
share value in 1987 of $1.40, 1988 of $1.95, 1989 of $2.53, 1990 of $3.36,
1991 of $4.80, 1992 of $7.42, 1993 of $10.09, 1994 of $10.88, 1995 of
$14.96, 1996 of $16.28, 1997 of $18.11, 1998 of $19.72, 1999 of $19.44,
2000 of $23.16, and 2001 of $24.52.  The graph also depicts the total
stockholders' equity per share value adjusted to include cumulative
dividends paid per share.  The total of these amount to the per share
value in 1987 of $1.40, 1988 of $1.95, 1989 of $2.53, 1990 of $3.36, 1991
of $4.80, 1992 of $7.42, 1993 of $10.09, 1994 of $11.03, 1995 of $15.34,
1996 of $17.47, 1997 of $20.33, 1998 of $23.01, 1999 of $23.84, 2000 of
$28.71, and 2001 of $31.26.
































4
<page>



                    MANAGEMENT'S DISCUSSION AND ANALYSIS OF
                  FINANCIAL CONDITION AND RESULTS OF OPERATIONS
                   (Thousands of Dollars Except Per Share Data)


General

     The property and casualty insurance industry continues to remain
highly competitive and inherently volatile in nature.  Property and
casualty insurance company results have traditionally been impacted by the
typical forces unique to the industry such as competition, frequency and
severity of losses, the overall economy and the general regulatory
environment in those states in which the insurer operates.  Additional
forces are impacting the industry in the form of deregulation, on-line
commerce, price competition, empowered customers and technological
advancement.  The terrorists' attacks of September 11 have had a
significant impact on the insurance industry.  According to A.M. Best Co.
("A.M. Best"), "the unprecedented events of September 11 have forever
changed the way the insurance industry defines risk.  Both property and
liability lines have been exposed to catastrophic risks that cannot be
priced using traditional actuarial methods".  A.M. Best goes on to state,
"Against the backdrop of weak financial trends, this new risk environment
has accelerated the hardening of the U.S. property/casualty market".
Given this increased risk environment, A.M. Best "expects to see a renewed
flight to quality that will benefit financially strong insurers".  The
financial losses due to this tragedy were significant to the insurance
industry, however, due to the limited exposure that the Company has
outside of Massachusetts, management believes the direct financial impact
to the Company will not be material.  Additionally, price competition
remains quite heavy in many areas of the country, although it has improved
in 2001 among independent agency companies in Massachusetts.  Beyond
Massachusetts, industry-underwriting results are expected to continue to
deteriorate in the near future which further emphasizes the importance of
competitive advantages gained by affinity marketing and efficient
operations.  With these issues on the forefront, The Commerce Group, Inc.
("Company") continues to position itself to respond to the prevailing
forces and conditions in the market.  The Company has utilized its strong
agency relationships, a low-cost structure, affinity group alliances and a
1999 joint-venture acquisition all in an effort to keep the Company
responsive in today's competitive environment.

     The Company, incorporated in 1976, is a holding company for several
property and casualty insurers, which, through these insurance
subsidiaries, offers predominantly private passenger motor vehicle
insurance along with a broad range of other property and casualty
insurance products.  These products are marketed to affinity groups,
individuals, families and businesses through the Company's strong
relationships with professional independent insurance agencies.  The
Company writes insurance primarily in the State of Massachusetts through
The Commerce Insurance Company ("Commerce") and Citation Insurance Company
("Citation"), both wholly-owned subsidiaries of Commerce Holdings, Inc.
("CHI").

     Additionally, the Company writes insurance in the States of
California and Oregon through Commerce West Insurance Company ("Commerce
West"), a wholly-owned subsidiary of Commerce, located in Pleasanton,
California.  The Company also writes insurance through American Commerce
Insurance Company ("American Commerce"), which it acquired in January
1999.  Located in Columbus, Ohio, American Commerce is a wholly-owned
subsidiary of ACIC Holding Co., Inc., with policies in 26 states and
licenses in several others.

     In November 1998, Commerce formed ACIC Holding Co., Inc., in a joint
venture with AAA Southern New England ("AAA SNE") and invested $90,800 to
fund the January 29, 1999 acquisition of the Automobile Club Insurance
Company whose name was changed to American Commerce upon completion of the
acquisition. Commerce invested $90,000 in the form of preferred stock and
an additional $800 representing an 80% common stock ownership.  AAA SNE
invested $200 representing a 20% common stock ownership.  The terms of the
preferred stock call for Commerce to receive quarterly cash dividends at
the rate of 10% per annum from ACIC Holding Co., Inc.  In the event cash
dividends cannot be paid, additional preferred stock will be issued.
Since the January 29, 1999 acquisition, ACIC Holding Co., Inc. and
American Commerce's results have been consolidated into the Company's
financial statements.  Since 1995, Commerce has maintained an affinity
group marketing relationship with AAA Insurance Agency, Inc., a subsidiary
of AAA SNE.  AAA Insurance Agency, Inc. has been a licensed insurance
agent of Commerce since 1985.
5
<page>


     The Company's business strategy remains focused on activities
primarily related to personal automobile insurance.  The Company has been
the largest writer of personal property and casualty insurance in the
State of Massachusetts in terms of market share of direct premiums written
since 1990.  The Company's share of the Massachusetts personal automobile
market increased to 23.3% in 2001, as exhibited in the table below,
exceeding our nearest competitor, which maintains a 10.8% market share.
<table>
<caption>
                         Growth of Massachusetts Personal Automobile
                                      Insured Vehicles

                                                                    Commerce Year-End
                  Year             Industry          Commerce          Market Share

               <c>                <c>                <c>                <c>
                  2001               1.7%               6.1%               23.3%
                  2000               1.9%               6.5%               22.3%
                  1999               2.0%               0.6%               21.3%
</table>

     As mentioned, the Company predominantly writes private passenger
automobile insurance.  The following tables indicate that direct premiums
written for private passenger automobile, commercial automobile and
homeowners represented 85.2%, 5.2% and 8.0%, respectively, of the
Company's total direct premiums written in 2001, as compared to 86.9%,
4.0% and 7.7%, respectively, in 2000.  Total direct premiums written
increased $80,758 or 7.5% in 2001 over 2000.  The 2001 increase was
primarily attributable to a $32,742 or 4.0% increase in Massachusetts
private passenger automobile direct premiums written.  This was the result
of a 5.8% increase in written exposures offset by a decrease of 1.9% in
average premiums per exposure.  Private passenger premiums written for all
other states increased $18,824 or 18.2%, primarily attributable to an
increase in American Commerce premiums of $7,319 or 9.4%, coupled with an
increase of $11,505 or 44.5% additional premiums from Commerce West.

<table>
<caption>
Direct Premiums Written, Year Ended December 31, 2001

                         Massachusetts  All Other States     Total      % of Total

                        <c>            <c>             <c>              <c>
Personal Automobile......  $  859,922     $  122,320      $  982,242        85.2%
Commercial Automobile....      58,088          1,514          59,602         5.2
Homeowners...............      73,254         18,710          91,964         8.0
Other Lines..............      17,885            714          18,599         1.6

         Total...........  $1,009,149     $  143,258      $1,152,407       100.0%

<caption>
Direct Premiums Written, Year Ended December 31, 2000

                         Massachusetts All Other States     Total      % of Total

                        <c>            <c>             <c>              <c>
Personal Automobile......  $  827,180     $  103,496      $  930,676        86.9%
Commercial Automobile....      43,243            104          43,347         4.0
Homeowners...............      65,662         16,498          82,160         7.7
Other Lines..............      14,860            606          15,466         1.4

         Total...........  $  950,945     $  120,704      $1,071,649       100.0%

</table>


Massachusetts Automobile Business

     In Massachusetts, private passenger automobile insurance is subject to
extensive regulation.  Owners of registered automobiles are generally required
to maintain certain minimum automobile insurance coverages.  With very limited
exceptions, automobile insurers are required by law to issue a policy to any
applicant seeking to obtain such coverages.  Companies in Massachusetts are
also assigned agents, known as Exclusive Representative Producers ("ERPs"),
based primarily on market share, that have been unable to obtain a voluntary
contract with an insurance carrier.  Marketing and underwriting strategies for
companies operating in Massachusetts are limited by maximum premium rates and
minimum agency commission levels for personal automobile insurance, both of
which are mandated by the
6
<page>


Massachusetts Commissioner of Insurance ("Commissioner").  In Massachusetts,
accident rates, bodily injury claims, and medical care costs continue to be
among the highest in the nation.  According to the Automobile Insurers Bureau
of Massachusetts ("A.I.B"), Massachusetts "has higher than average medical
costs and liability claims involving attorneys".  According to the A.I.B.,
Massachusetts personal automobile premium per policy, based on 1999 premium
information, was 5th highest in the nation.

     During the three-year period from 1999 to 2001, average mandated
Massachusetts personal automobile insurance premium rates decreased an average
of 2.3% per year.  The Commissioner approved no rate change in personal
automobile premiums for 2002, as compared to an average rate decrease of 8.3%
in 2001.  Coinciding with the 2002 rate decision, the Commissioner also
approved no change in the commission rate agents receive for selling private
passenger automobile insurance from 12.3% in 2001.

                                    State Mandated
                                       Average     Commerce Average Rate
                          Year       Rate Change    Change Per Exposure
                          2002          0.0%               5.0%(Estimated)
                          2001         (8.3%)             (1.9%)
                          2000          0.7%               6.2
                          1999          0.7%               9.1%

     Although average mandated personal automobile premium rates decreased
8.3% in 2001, the Company's average rate decreased 1.9% per exposure.  The
1.9% decrease for 2001 was primarily the result of the state mandated average
rate decrease offset by decreases in the Safe Driver Insurance Plan ("SDIP")
deviations for Step 9 and Step 10 drivers, the two best driver SDIP
classifications in Massachusetts.  The smaller Company decrease was also due
to the facts that the rate decision did not anticipate purchases of new
automobiles in the year to which the rate decision applied and, secondly, the
Company's mix of personal automobile business differs from that of the
industry.

     The 1999 average rate decision was partially driven by corrections for an
industry error that had impacted prior year rate decisions.  The industry
error resulted from a miscalculation of industry expense allowances that had
the effect of over-stating rates for 1991 through 1996.  Mandated rates for
1997, 1998 and 1999 included an adjustment to recoup the effects of this error
from the industry.  The adjustment included in the rate decision to recoup the
error was phased in during 1997, 1998 and 1999.  The earned premium impact of
this, coupled with the impact of a previous year imbalance in the SDIP, was
approximately $14.0 million for 1999.  The earnings per share after-tax impact
resulting from lower earned premiums were estimated at $0.26 for 1999.

     The Company's performance in its personal and commercial automobile
insurance lines is integrally tied to its participation in Commonwealth
Automobile Reinsurers ("C.A.R."), a state-mandated reinsurance mechanism,
which permits the Company and most other writers of automobile insurance in
Massachusetts to reinsure any automobile risk that the insurer perceives to be
under-priced at the premium level permitted by the Commissioner.  All
companies writing automobile insurance in Massachusetts share in the
underwriting results of C.A.R. business for their respective product line or
lines.  Since its inception, C.A.R. has annually generated multi-million
dollar underwriting losses in both its personal and commercial automobile
pools.  A company's proportionate share of the C.A.R. personal or commercial
deficit (its participation ratio) is based upon its market share of the auto-
mobile risks for the particular pool, adjusted by a utilization formula such
that, in general, its participation ratio is disproportionately and adversely
affected if its relative use of C.A.R. exceeds that of the industry, and
favorably affected if its relative use of C.A.R. is less than that of the
industry.  Automobile insurers attempt to develop and implement underwriting
strategies that will minimize their relative share of the C.A.R. deficit while
maintaining acceptable loss ratios on risks not insured through C.A.R.

     Significant changes in the utilization of the C.A.R. private passenger
pooling mechanism are not expected for 2002.  Various C.A.R. participation
formula changes have been fully implemented since 1993 with only minor changes
since then.  The Company's ERP strategy has been to voluntarily retain more of
the types of private passenger automobile business that are factored as
credits favorably impacting the utilization formula.  These credits primarily
result from voluntarily writing business in under-priced territories and for
under-priced risks.  As a result of increased voluntary retention in excess of
the industry, the credits impacting the utilization formula have favorably

7
page>


affected the Company's participation ratio.  As indicated in the accompanying
table, this ratio is several percentage points below the Company's estimated
23.3% share of the Massachusetts personal automobile market.  The Company
continues to expect the marketplace to make minor annual adjustments to find
the optimum balance between voluntary and ceded writings.


Company Private Passenger Participation Ratio for C.A.R. versus Market Share

                               Company Participation         Company
               Year               Ratio in C.A.R.          Market Share

               2001*                   16.8%                   23.3%
               2000                    16.9%                   22.3%
               1999                    16.5%                   21.3%

            *Estimated


     The percentage of commercial automobile premiums ceded to C.A.R. by the
industry was estimated by the Company to be 24% in 2001.  The percentage of
commercial automobile business ceded to C.A.R. by the Company was
approximately 16.0%.  C.A.R. depopulation over the last several years,
coupled with C.A.R. rate increases for ceded commercial business, have led to
a reduction in the size of the annual commercial automobile deficits.  The
Company intends to continue to respond to the incentives and disincentives
provided by C.A.R. rules as deemed necessary and appropriate.

     The Company provides a separate rating tier for preferred Massachusetts
commercial automobile business through Citation.  Approximately 17% of the
Massachusetts commercial automobile premiums produced by voluntary agents in
2001 were written by Citation.  The Company expects that this secondary rating
tier will continue to assist the Company in retaining its better commercial
automobile accounts, while also further increasing the percentage of
commercial automobile business that can be retained voluntarily by the Company
in 2002 and beyond.

     The Company has actively pursued affinity group marketing programs since
1995.  The primary purpose of affinity group marketing programs is to provide
participating groups with a convenient means of purchasing private passenger
automobile insurance through associations and employer groups.  Emphasis is
placed on writing larger affinity groups, although accounts with as few as 25
participants are considered.  Affinity groups are eligible for rate discounts,
which must be filed annually with the Division of Insurance.  In general, the
Company looks for affinity groups with mature/stable membership, favorable
driving records and below average turnover ratios.  Participants who leave
the sponsoring group during the term of the policy are allowed to maintain the
policy until expiration.  At expiration, a regular Commerce policy may be
issued through the agency at the insured's option.

     Since the latter part of 1995, Commerce has been a leader in affinity
group marketing through agreements with the four American Automobile
Association Clubs of Massachusetts ("AAA clubs") offering discounts on
private passenger automobile insurance to the clubs' members who reside in
Massachusetts.  A 6% discount was approved for policies effective January 1,
2002, which is the same as the discount for 2001.  Membership in these clubs
is estimated to represent approximately one-third of the Massachusetts
motoring public, and has been the primary reason for a 62.6% increase in the
number of personal automobile exposures written by Commerce since year-end
1995 (the AAA affinity group program incepted in October of 1995).  In 2001,
total direct premiums written attributable to the AAA group business were
$545,496 or 47.3% of the Company's total direct premiums written (63.4% of the
Company's total Massachusetts personal automobile premium), an increase of
1.8% over 2000.  Total exposures attributable to the AAA clubs group business
were 581,455 or 63.3% of total Massachusetts personal automobile exposures in
2001, as compared to 559,696 or 64.5% in 2000.  Of the total Massachusetts
automobile exposures written through the AAA affinity group program by the
Company, approximately 13.0% were written through insurance agencies owned by
the AAA clubs (8.7% of total Massachusetts automobile exposures).  The
remaining 87.0% of the AAA group program was written through the Company's
network of independent agents (91.3% of total Massachusetts automobile
exposures).  For additional details, refer to the table found on page 12
entitled "AAA Affinity Group Discount and SDIP Deviations".

8
page>




     Massachusetts law allows two years to reach the required group
penetration level of 35%.  Commerce has continued to maintain AAA member
participation in excess of 35% through December 31, 2001, when it was
estimated at approximately 40%.  The two-year penetration requirement was
waived by the Massachusetts Legislature for 2000, 2001 and 1999.  Waiving the
penetration requirements allows insurance companies to continue offering
group discounts without reaching the 35% level.

     Commerce and the AAA clubs have agreed that Commerce shall be their
exclusive under-writer of Massachusetts personal automobile group programs.
A rolling three-year contract exists between Commerce and the AAA clubs which
renews automatically and may be terminated upon a minimum of three years
written notice to either party.


Agreements for the Transfer of Massachusetts Business from Other Companies in
2002

     The Company entered into an agreement on September 28, 2001, with
Berkshire Mutual Insurance Company ("Berkshire") for the transfer of
Massachusetts personal automobile business written by Berkshire to The
Commerce Insurance Company, effective January 1, 2002.  Under terms of the
agreement, Commerce Insurance agreed to offer agency contracts to independent
agencies that represent Berkshire for personal automobile insurance in
Massachusetts.  This will allow agents of Berkshire the opportunity to offer
Commerce automobile insurance policies to their customers whose policies renew
in 2002.  Commerce will assume all of Berkshire's obligations for future
policy years beyond 2001 under the Massachusetts residual market system,
(commonly known as C.A.R.), including assignment of Berkshire's involuntary
agents.  The Company received a cash payment of $7,000 from Berkshire in
early January, 2002.

     The Company announced the formation of a marketing alliance with Horace
Mann Educators Corporation on October 18, 2001.  Under the terms of an agency
agreement between Commerce and Horace Mann Service Corporation ("HMSC"), a
licensed brokerage agency in the State of Massachusetts, HMSC will provide its
personal automobile customers with Commerce policies.  New personal automobile
policies sold by HMSC will be insured with Commerce, beginning no later than
January 1, 2002.  At the policyholders option, Massachusetts personal auto
policies currently written by HMSC will convert to Commerce policies upon
renewal in 2002.


Other States Business

     Direct premiums written in states other than Massachusetts by Commerce
West and American Commerce, increased $22,554 or 18.7%.  Roughly half of this
growth resulted from an increase of $11,505 or 44.5% in personal automobile
direct premiums written by Commerce West.  The growth from Commerce West is
primarily attributable to non-standard automobile business.  Commerce West
began writing in this segment of the market in late 1999.  Commerce West also
began writing commercial automobile in late 2000, resulting in writings of
$1,514 in 2001.  American Commerce direct premiums written increased $9,655
 or 10.2%, primarily due to an increase in personal automobile premiums of
$7,319 or 9.4%.  American Commerce also experienced a 13.4% increase in
homeowners business.  American Commerce, which writes business in 26 states,
wrote greater than 90% of its business in eleven states.


9
<page>


<table>
<caption>
     Commerce West premiums and the eleven states with the highest percentages of premiums
written by American Commerce are shown in the following table:


                                                           % of Direct Premiums
            Company                 State                     Written by State
                                                              2001       2000
            
                     <c>                      <c>        <c>
            Commerce West           California............    89.8%      99.1%
                                    Oregon................    10.2%       0.9
                                         Total............   100.0%     100.0%

            American Commerce       Arizona...............    20.9%      21.5%
                                    Rhode Island..........    14.3%      10.8%
                                    Ohio..................    12.6%      11.6%
                                    Oregon................    10.5%      10.2%
                                    Washington............     8.0%       8.1%
                                    Oklahoma..............     7.7%       6.4%
                                    Kentucky..............     5.9%       5.8%
                                    Indiana...............     4.6%       3.5%
                                    West Virginia.........     2.5%       2.7%
                                    Idaho.................     2.5%       2.4%
                                    Tennessee.............     2.4%       2.2%
                                    Other states..........     8.1%      14.8%

                                         Total............   100.0%     100.0%
</table>

     The decrease in other states for American Commerce is primarily
attributable to business in several states being moved to other insurance
companies affiliated with the ownership of the agencies representing that
business.  These and some future moves for business in other states were
anticipated at the time the Company negotiated the acquisition of American
Commerce.


Insurance Ratios

     Underwriting profit margins are reflected by the extent to which the
combined ratio is less than 100%.  This ratio is considered the best
simple index of current underwriting performance of an insurer.  During
the five-year period ended December 31, 2001, the property and casualty
insurance industry's combined ratio, as reported by A.M. Best and weighted
to reflect the Company's product mix ("weighted industry average"), has
ranged from a low of 100.1% in 1997 to a high of 109.7% in 2000 on a
statutory accounting principles basis.  During this same period of time,
the Company's combined ratio has consistently remained below the weighted
industry average, ranging from a low of 96.5% in 1997 to a high of 99.1%
in 2001.  On an average basis, the Company's combined ratio was 97.8% for
the five-year period ended December 31, 2001 compared to a weighted
industry average of 105.1%.

<table>
<caption>
                                                      Year Ended December 31,
    Company Statutory Ratios                 2001     2000     1999     1998     1997
       (unaudited)
      
                                   <c>      <c>      <c>      <c>      <c>
      Loss and LAE Ratio.................     74.7%    71.7%    72.0%    71.6%    71.4%
      Underwriting Expense Ratio.........     24.4     25.1     26.5     26.5     25.1
      Combined Ratio.....................     99.1%    96.8%    98.5%    98.1%    96.5%

    Industry Combined Ratio
      (all writers)(1)...................    108.9%   109.7%   104.4%   102.2%   100.1%


(1) Source:  Best's Review Preview (2002), as reported by A.M. Best for all property and
    casualty insurance companies and weighted to reflect the Company's product mix.
    The 2001 industry information is estimated by A.M. Best.
</table>
10
<page>



Investment Income and Net Realized Investment Gains and Losses

     The Company's total revenues were supplemented in fiscal 2001, 2000
and 1999 by net investment income of $99,611, $96,830 and $89,789,
respectively.  Beginning in the first quarter of 2001, the Company, in the
2001 and prior years' results, classified its undistributed equity in the
earnings and losses on investments in closed-end preferred stock mutual
funds in net realized investment gains and losses.  For the year ended
2000, the undistributed equity in the earnings and losses of these funds
was reported in net investment income.  The Company believes the current
year presentation provides a more appropriate classification for analysis
of the on-going operations of the Company.  Prior period results
previously reflected in investment income, have been reclassified to
realized gains and losses to conform with current period presentation.
For the years ended December 31, 2001, 2000, and 1999 the Company
reflected realized gains (losses) of $4.6 million, $26.6 million and
($22.4) million, respectively, as a result of this change.  These
investments are valued at original cost plus the cumulative undistributed
equity in earnings and losses of the funds and adjusted over time by the
premium or discount at the time of purchase to the applicable underlying
net asset value of the funds.  Also in 2001, the Company began to account
for venture capital fund investments on an equity basis. The equity in the
operating results of these funds has been reflected in realized gains and
losses.  Prior to this change, the operating results were not material and
were therefore reflected in accumulated other comprehensive income and
loss.  For 2001, the Company had a net realized loss of $10.6 million, of
which the largest component, $9.1 million, was attributable to venture
capital fund investments.

Regulatory Matters

General

     Although the U.S. federal government does not directly regulate the
insurance industry, federal initiatives often have an impact on the
business.  Congress and certain federal agencies continue to investigate
the current condition of the insurance industry (encompassing both life
and health and property and casualty insurance) in the United States in
order to decide whether some form of federal role in the regulation of
insurance companies would be appropriate.  Congress conducts hearings
relating, in general, to the solvency of insurers and has proposed federal
legislation from time to time on this and other subjects.

     In November 1999, the Gramm-Leach-Bliley Act was signed into law. The
Act (1) repealed the Glass-Steagall Act of 1933, which had prohibited the
merger of banks and securities firms, and (2) substantially modified the
Bank Holding Company Act of 1956, which had the effect of separating
banking and insurance underwriting business.  The law contains pro-visions
that govern competition, created safe-harbor protections for specific
state laws and established consumer protections that govern bank-insurance
sales.

     At the state level, various forms of automobile insurance reform are
continuously debated.  New regulations and legislation are often proposed
with the goal of reducing the need for premium increases.  For further
details, please refer to the general discussion on insurance regulation
and premium rates beginning on page 5.

Personal Automobile Insurance

     As previously mentioned, since 1995, the Company has been a leader in
affinity group marketing in Massachusetts by providing discounts to
members of the AAA clubs.  Membership in these clubs is estimated to
represent approximately one-third of the Massachusetts motoring public.
The Company increased its Massachusetts private passenger automobile
insurance exposures by 5.8%, ending the year with approximately 23.3% of
the Massachusetts private passenger automobile market.

11
<page>



     Through 2000, the Company offered its Massachusetts customers safe
driver deviations to drivers with SDIP classifications of either Steps 9
or 10 and to only Step 9 drivers in 2001.  Safe driver deviations are rate
discounts based on the customer's driving record and resulting SDIP
classification and must be approved annually by the Commissioner.  Steps 9
and 10 are the two best driver SDIP classifications in Massachusetts,
representing drivers with no at-fault accidents and not more than one
minor moving vehicle violation in the last six years.  The accompanying
table depicts the AAA Affinity Group Discount, SDIP Deviations and their
combined reduction from Massachusetts average mandated rates:

<table>
<caption>
AAA Affinity Group Discount and SDIP Deviations   2002*   2001    2000    1999

                                               <c>     <c>     <c>     <c>
AAA Affinity Group Discount.................      6.0%    6.0%    6.0%    6.0%
SDIP Step 9 Deviation.......................      0.0%    2.0%    6.0%    8.0%
SDIP Step 10 Deviation......................      0.0%    0.0%    2.0%    3.0%

Combined AAA Affinity Group Discount and
  Step 9 Deviation..........................      6.0%    7.9%   11.6%   13.5%
Combined AAA Affinity Group Discount and
  Step 10 Deviation.........................      6.0%    6.0%    7.9%    8.8%

   *For policies with effective dates as of January 1, 2002 or thereafter.
</table>

     In 2002, in response to the average personal automobile rate
decisions over the last several years, the Company did not file for SDIP
Step 9 or Step 10 deviations, for policies incepting in the 2002 calendar
year.  During 2001, 55.0% of the Company's exposures were eligible for
Step 9 deviations, versus 55.1% and 14.0%, eligible for Step 9 and Step
10 deviations in 2000.


Risk-Based Capital

     In order to enhance the regulation of insurer insolvency, the
National Association of Insurance Commissioners ("NAIC") developed a
formula and model law to provide for Risk-Based Capital ("RBC")
requirements for property and casualty insurance companies.  RBC
requirements are designed to assess capital adequacy and to raise the
level of protection that statutory surplus provides for policyholder
obligations.  The RBC model for property and casualty insurance companies
measures three major areas of risk facing property and casualty insurers:
(i) underwriting, which encompasses the risk of adverse loss development
and inadequate pricing; (ii) declines in asset values arising from credit
risk; and, (iii) other business risks from investments.  Insurers having
less statutory surplus than required by the RBC calculation will be
subject to varying degrees of regulatory action, depending on the level
of capital inadequacy.

     The RBC model formula proposes four levels of regulatory action.
The extent of regulatory intervention and action increases as the
percentage of surplus to RBC falls.  The first level, the Company Action
Level (as defined by the NAIC), requires an insurer to submit a plan of
corrective actions to the regulator if surplus falls below 200% of the
RBC amount.  The Regulatory Action Level (as defined by the NAIC)
requires an insurer to submit a plan containing corrective actions and
permits the Commissioner to perform an examination or other analysis and
issue a corrective order if surplus falls below 150% of the RBC amount.
The Authorized Control Level (as defined by the NAIC) allows the
regulator to rehabilitate or liquidate an insurer in addition to the
aforementioned actions if surplus falls below 100% of the RBC amount.
The fourth action level is the Mandatory Control Level (as defined by the
NAIC), which requires the regulator to rehabilitate or liquidate the
insurer if surplus falls below 70% of the RBC amount.

12
<page>


     The following table provides the key RBC information for the
Company's insurance subsidiaries, Commerce, Citation, Commerce West, and
American Commerce:
<table>
<caption>
                                                           Commerce    American
  (Dollars in millions)           Commerce    Citation      West      Commerce
  At December 31, 2001
  
                               <c>        <c>          <c>        <c>
  Statutory surplus.............    $ 609      $   107      $  28      $    84
  200% RBC Company action level.      184            4          7           20
  Statutory surplus in excess
    of RBC Company action level.    $ 425      $   103      $  21      $    64
  RBC amounts...................    $  92      $     2      $   4      $    10
  % of surplus to RBC amounts...    662.0%     5,350.0%     700.0%       840.0%
</table>
Year Ended December 31, 2001 Compared to Year Ended December 31, 2000

Premiums

     The following table compares direct premiums written, net premiums
written and earned premiums for the years ended December 31, 2001 and 2000:
<table>
<caption>
                                                       Years Ended December 31,
                                                  2001       2000     $ Change  % Change
Direct Premiums Written:
  
                                         <c>         <c>         <c>          <c>
  Personal Automobile in Massachusetts......  $  859,922  $  827,180  $ 32,742      4.0%
  Personal Automobile in All Other States...     122,320     103,496    18,824     18.2%
  Commercial Automobile in Massachusetts....      58,088      43,243    14,845     34.3%
  Commercial Automobile in All Other States.       1,514         104     1,410        *
  Homeowners in Massachusetts...............      73,254      65,662     7,592     11.6%
  Homeowners in All Other States............      18,710      16,498     2,212     13.4%
  Other Lines in Massachusetts..............      17,885      14,860     3,025     20.4%
  Other Lines in All Other States...........         714         606       108     17.8%

     Total Direct Premiums Written..........  $1,152,407  $1,071,649  $ 80,758      7.5%

Net Premiums Written:
  Personal Automobile in Massachusetts......  $  864,900  $  839,394  $ 25,506      3.0%
  Personal Automobile in All Other States...     122,256     103,719    18,537     17.9%
  Commercial Automobile in Massachusetts....      60,986      44,848    16,138     36.0%
  Commercial Automobile in All Other States.       1,477         104     1,373        *
  Homeowners in Massachusetts...............      20,364      17,547     2,817     16.1%
  Homeowners in All Other States............       4,576      (1,658)    6,234        *
  Other Lines in Massachusetts..............       4,236       4,916      (680)   (13.8%)
  Other Lines in All Other States...........         172          41       131    319.5%

     Total Net Premiums Written.............  $1,078,967  $1,008,911  $ 70,056      6.9%

Earned Premiums:
  Personal Automobile in Massachusetts......  $  776,552  $  714,972  $ 61,580      8.6%
  Personal Automobile in All Other States...     116,479     100,101    16,378     16.4%
  Commercial Automobile in Massachusetts   .      43,008      32,548    10,460     32.1%
  Commercial Automobile in All Other States.         711          19       692        *
  Homeowners in Massachusetts...............      19,119      17,364     1,755     10.1%
  Homeowners in All Other States............       3,731       4,186      (455)   (10.9%)
  Other Lines in Massachusetts..............       3,290       3,434      (144)    (4.2%)
  Other Lines in All Other States...........         158         162        (4)    (2.5%)
  Assumed Premiums from C.A.R...............      80,176      81,300    (1,124)    (1.4%)
  Assumed Premiums from Other than C.A.R....         428         397        31      7.8%

     Total Earned Premiums..................  $1,043,652  $  954,483  $ 89,169      9.3%

  Earned Premiums in Massachusetts..........  $  841,969  $  768,318  $ 73,651      9.6%
  Earned Premiums-Assumed...................      80,604      81,697    (1,093)    (1.3%)
  Earned Premiums in All Other States.......     121,079     104,468    16,611     15.9%

     Total Earned Premiums..................  $1,043,652  $  954,483  $ 89,169      9.3%
</table>

*Calculation is not meaningful.

13
<page>



     The $32,742 or 4.0% increase in Massachusetts personal automobile
direct premiums written resulted primarily from increases of 5.8% and 7.1%
in the number of Massachusetts personal automobile exposures for liability
and physical damage coverage, respectively, offset in 2001 by decreases in
rates for the coverage types noted below.  The components of these changes
from the previous year for 2001 and 2000 were as follows:

<table>
<caption>
                                              2001                       2000
     Coverage Type                      Rate Change (1)            Rate Change (1)
     
                                    <c>                         <c>
     Liability:
       Bodily Injury.................        (2.1%)                      1.0%
       Personal Injury Protection....       (12.9%)                      6.4%
       Property Damage to Others.....         1.0%                      20.8%

     Physical Damage:
       Collision.....................        (0.1%)                      1.7%
       Comprehensive.................        (7.6%)                      2.4%

           Total (2).................        (1.9%)                      6.2%

   (1)  Represents change in the Company's average rate per exposure from the Company's
        prior year average rate for Massachusetts private passenger automobile premiums.
   (2)  The total rate change depicted is the result of the weighted average of premiums
        written for all coverages divided by liability exposures only, due to the fact that
        all exposures are required to carry liability coverage.
</table>

     The above percentage changes were primarily the result of rate
modifications in the individual coverage components in the 2001 state
mandated rates, offset by changes in the Company's safe driver rate
deviations.  The combination of these factors resulted in a 1.9% decrease
in the average personal automobile premium per exposure in 2001.  Despite
the 2001 state mandated average rate decrease of 8.3%, the smaller Company
decrease in the average personal automobile premium per exposure was
primarily due to the above noted changes coupled with the fact that the
rate decision does not anticipate purchases of new auto-mobiles in the
year to which the rate decision applies and the Company's mix of personal
automobile business differs from that of the industry.  In 2001, the
Company offered its customers safe driver deviations of 2.0% to drivers
with SDIP classifications of Step 9 and 0.0% for Step 10 (6.0% for Step 9
and 2.0% for Step 10 in 2000).

     As shown in the table found on page 12, the AAA affinity group
discount for 2001 was established at 6.0%, which was unchanged from 2000.
In 2001, for drivers who qualified, the Company's AAA affinity group
discount and safe driver deviations could be combined for up to a 7.9%
reduction (11.6% in 2000) from state mandated rates.

     Other states personal automobile direct premiums written increased
$18,824 or 18.2%, however, an overall depressed rate environment resulted
in diminished underwriting profits.  The Company continues to evaluate a
number of its other than Massachusetts state rating structures, has filed
for increases in several states and will seek additional rate increases
where appropriate.  Personal automobile direct premiums written by
American Commerce increased $7,319 or 9.4% to $85,124 as compared to
$77,805 due primarily to book rollovers of business from existing agents,
partially offset by decreases in states where the Company is not actively
pursuing writings.  Personal automobile direct premiums written from
Commerce West increased $11,505 or 44.5% to $37,196 as compared to
$25,691.  Both companies target preferred insurance risks, however
Commerce West's recent growth is attributable to the introduction of a
non-standard auto product in late 2000.  Both American Commerce and
Commerce West write predominantly personal automobile insurance.  American
Commerce writes personal automobile insurance in 26 states while Commerce
West writes personal automobile insurance in the states of California and
Oregon.  Personal automobile policies for both companies are written
primarily for a policy term of six months.  Homeowner and other policies
in all states are written primarily for a policy term of one year.

14
<page>


     Direct premiums written for Massachusetts commercial automobile
insurance increased by $14,845 or 34.3%, due primarily to an increase of
approximately 9.0% in the number of policies written, combined with a
23.5% increase in the average commercial automobile premium per policy.
The increase in premium per policy was attributable to a hardening of the
commercial automobile market, primarily in larger commercial accounts.
The Company experienced an increase of approximately $3,700 from policies
in excess of $50.  In addition, rates for other voluntary commercial
automobile policies have increased moderately, combined with an
approximate 10% increase in rates for policies written through C.A.R.  The
increased business was attributable to the Company's initiative to expand
writings.

     Direct premiums written for Massachusetts homeowners insurance
increased by $7,592 or 11.6% due primarily to a 6.4% increase in the
number of Massachusetts policies written coupled with a 5.0% increase in
the average Massachusetts premium per policy.  The increase in business
was primarily attributable to existing and newly appointed agents.  Other
states homeowners insurance written by American Commerce increased $2,212
or 13.4% to $18,710 due primarily to book rollovers of business from
existing agents.

     The $70,056 or 6.9% increase in net premiums written was primarily
due to the growth in direct premiums written as described above offset by
an increase in premiums ceded to C.A.R. coupled with an increase in
premiums ceded to reinsurers other than C.A.R.  Net premiums written for
homeowners in all other states increased $6,234, with net premiums written
of $4,576 in 2001, as compared to ($1,658) in 2000.  The reason for
negative written premium in 2000 was due to American Commerce joining the
quota share reinsurance agreement effective January 1, 2000.  An unearned
premium transfer of $6,033 occurred effective January 1, 2000, which has a
direct impact to net written premium.

     The $89,169 or 9.3% increase in earned premiums during 2001, as
compared to 2000, was primarily due to increases in written exposures for
Massachusetts personal automobile liability and physical damage, coupled
with an increase in earned premium per exposure.  The increase in earned
premium per exposure occurs (versus a decrease in written premium per
exposure) because of the time lag in earning the premium once it is
written.  This resulted in a $61,580 or 8.6% increase for Massachusetts
personal automobile earned premium.

Investment Income

     Net investment income is affected primarily by the composition of the
Company's investment portfolio and yield thereon.  The following table
summarizes the composition of the Company's investment portfolio, at cost,
at December 31, 2001 and 2000 (the Company's investment portfolio, at
market and equity is shown in the table on page 25):

<table>
<caption>
Investments, at cost                                         December 31,

                                                            % of                 % of
                                                 2001      Invest.     2000     Invest.
   
                                        <c>           <c>     <c>           <c>
   GNMA & FNMA mortgage-backed bonds......    $   98,198     6.7%   $   67,274     4.7%
   Corporate bonds........................       133,506     9.1       130,775     9.1
   U.S.Treasury bonds and notes...........           104      -          3,428     0.2
   Tax exempt state and municipal bonds...       386,967    26.2       464,404    32.1
       Total fixed maturities.............       618,775    42.0       665,881    46.1

   Preferred stocks.......................       256,582    17.4       215,823    14.9

   Common stocks..........................        87,704     5.9        87,704     6.1

   Closed-end preferred stock mutual funds       294,948    20.0       327,980    22.7

   Mortgages and collateral loans (net of
     allowance for possible loan losses)..        39,505     2.7        51,661     3.6
   Cash and cash equivalents..............       148,630    10.1        70,521     4.9
   Other investments......................        28,291     1.9        25,475     1.7

       Total investments..................    $1,474,435   100.0%   $1,445,045   100.0%
</table>

15
<page>


     The Company's investment strategy is to maximize after-tax investment
income through investing in high quality securities coupled with acquiring
equity investments, which may forgo current investment yield in favor of
potential higher yielding capital appreciation in the future.

     As depicted in the following table, 2001 net investment income
increased $2,781 or 2.9%, compared to 2000, principally as a result of an
increase in average invested assets (at cost), offset by a decrease in
yield.  The decrease in yield is primarily due to lower short-term yields
on larger cash and cash equivalent balances, coupled with an environment
of higher yielding fixed maturities being called.  The Company continues
to monitor interest rates on long-term securities and intends to maintain
its high cash position until such time as the Company believes long-term
rates have appropriately firmed.  Net investment income as a percentage of
total average investments was 6.6% in 2001 compared to 6.9% for 2000.  Net
investment income after tax as a percentage of total average investments
was 5.3% and 5.7% for 2001 and 2000, respectively.

<table>
<caption>
Investment Return                                    Years Ended December 31,
                                                    2001                  2000
   
                                           <c>                  <c>
   Average month-end investments (at cost)...    $1,506,485           $1,395,159
   Net investment income before tax..........        99,611               96,830
   Net investment income after-tax...........        79,172               79,547
   Net investment income as a percentage
     of average net investments (at cost)....           6.6%                 6.9%
   Net investment income after-tax as a
     percentage of average net
     investments (at cost)...................           5.3%                 5.7%
</table>

Premium Finance and Service Fees

     Premium finance and service fees increased $2,592 or 17.0% during
2001, as a result of increased premiums as discussed earlier.


Amortization of Excess of Book Value of Subsidiary Interest over Cost

     As a result of the acquisition of American Commerce (see
"Management's Discussion and Analysis of Financial Condition and Results
of Operations - General" and "Notes to Consolidated Financial Statements -
NOTES A12 and A17"), the amount representing the excess of the fair value
of the net assets acquired over the purchase price at January 29, 1999 was
$16,947.  This amount is being amortized into revenue on a straight-line
basis over a five-year period.  The amount amortized into revenue in 2001
was $3,389, compared to $3,390 in 2000.


Investment Gains and Losses

     Net realized investment losses totaled $10,633 during 2001 as
compared to gains of $29,550 in 2000.  Of the net realized losses during
2001, $9,071 was a result of the Company's venture capital fund
investments.  These investments primarily provide seed capital for start-
up companies with emerging high technology initiatives in the financial
services industry.  These investments are made in limited partnerships and
the Company's exposure to loss is limited to its actual investment.  In
2001, the Company began to account for these investments on an equity
basis.  The equity in the operating results of these funds has been
reflected in realized gains and losses.  Prior to this change, the
operating results were not material and were therefore reflected in
accumulated other comprehensive income and loss.

     Also during 2001, the undistributed operating results of closed-end
preferred stock mutual funds have been reflected in realized gains and
losses.
  Year-end December 31, 2000 period results previously reflected in
investment income, have been reclassified to realized gains and losses to
conform with current period presentation.  During 2001 and 2000, the
Company reflected realized gains of $4,582 and $26,575, respectively, as a
result of this change.
16
<page>



     Gross realized gains and losses for the years ended December 31, 2001
and December 31, 2000 were as follows:
<table>
<caption>
                                       2001                          2000

                                Gross         Gross          Gross         Gross
                               Realized      Realized       Realized      Realized
                                Gains         Losses         Gains         Losses

                         <c>           <c>            <c>           <c>
Fixed maturities.........   $         957 $      (3,773) $         223 $      (3,995)
Preferred stocks.........             128        (3,820)         1,748          (462)
Common stocks............           1,526          (923)         4,370          -
Closed-end preferred
  stock mutual funds*....           5,197          (615)        26,641           (66)
Venture capital fund
  investments............            -           (9,071)           460          -
Other investments........            -             (239)           631          -

     Total...............   $       7,808 $     (18,441) $      34,073 $      (4,523)

*   Includes $3,215 in 2001 and $9,260 in 2000, respectively, relating to the amortization
of the net discount, at the time of purchase, of these securities.
<caption>

     Gross accumulated other comprehensive income and losses at December 31, 2001 and
December 31, 2000 were as follows:

                                December 31, 2001            December 31, 2000

                                 Gross         Gross         Gross         Gross
                              Accumulated   Accumulated   Accumulated   Accumulated
                                 Other         Other         Other         Other
                             Comprehensive Comprehensive Comprehensive Comprehensive
                                Income        Losses         Income        Losses

                         <c>           <c>            <c>           <c>
Fixed maturities.........   $      17,994 $     (10,287) $      16,247 $     (12,193)
Preferred stocks.........           6,289       (14,770)           999       (16,739)
Common stocks............          21,590        (1,836)        28,126            (3)
Other investments........            -             -             1,327          -


     Total...............   $      45,873 $     (26,893) $      46,699 $     (28,935)
</table>

Loss and Loss Adjustment Expenses

     Losses and loss adjustment expenses ("LAE") incurred increased
$91,386 or 13.3% in 2001.  Massachusetts operations experienced declining
underwriting results primarily due to increased losses in the homeowners
property business and in comprehensive personal automobile, due to more
adverse weather conditions compared to last year.  The ratio of net
incurred losses, excluding LAE, to premiums earned ("pure loss ratio") on
Massachusetts personal automobile was 65.4% in 2001 compared to 63.1% in
2000.  The commercial automobile pure loss ratio increased to 61.8% in
2001 compared to 59.7% in 2000.  This increase was primarily due to higher
bodily injury losses and to higher physical damage losses coupled with
worse experience in the business assumed from C.A.R. during this period.
For Massachusetts homeowners (gross of reinsurance), the pure loss ratio
was 47.6% in 2001 compared to 40.0% in 2000.  This increase was the result
of more claims for Massachusetts homeowner business due to less favorable
weather conditions, as compared to last year, primarily during the first
six months of 2001.  Pure loss ratios of subsidiaries in other states
increased to 67.5% in 2001 compared to 62.9% in 2000.  The loss ratio (on
a statutory basis) for Commerce West and American Commerce was 85.1% and
84.4%, respectively, in 2001, compared to 69.3% and 84.5% respectively, in
2000.  The increase in the loss ratio for Commerce West was primarily
attributable to a substantial increase in non-standard automobile writings
with loss ratios that are significantly higher than their regular
business.

17
<page>



Policy Acquisition Costs

     Policy acquisition costs expensed increased by $17,613 or 7.2% in
2001.  As a percentage of net premiums written, the Company's statutory
underwriting expense ratio for 2001 was 24.4% compared to 25.1% in 2000.
The decreased 2001 underwriting expense ratio resulted primarily from a
lower provision for accrued contingent commissions, lower insolvency
assessments and lower expenses due to the continued effects of certain
cost reduction programs.  The 2000 underwriting ratio includes a $4,900
charge versus $1,244 in 2001, representing the Company's allocation from
the Massachusetts Insurers Insolvency Fund.  The underwriting expense
ratio (on a statutory basis) for Commerce West was 32.7% for 2001 as
compared to 35.8% for 2000.  The underwriting expense ratio (on a
statutory basis) for American Commerce, was 32.6% for 2001 compared to
29.3% for 2000.


Income Taxes

     The Company's effective tax rate was 20.1% and 22.5% for the years
ended December 31, 2001 and 2000, respectively.  In both years the
effective rate was lower than the statutory rate of 35% primarily due to
tax-exempt interest income and the corporate dividends received deduction.


Minority Interest in Net Loss of Subsidiary

     As a result of the joint venture with AAA SNE and acquisition of
American Commerce (see "Management's Discussion and Analysis of Financial
Condition and Results of Operations - General" and "Notes to Consolidated
Financial Statements - NOTES A13 and A17"), the Company's interest in ACIC
Holding Co., Inc., through Commerce, a wholly-owned subsidiary of CHI, is
represented by ownership of 80% of the outstanding shares of common stock
at December 31, 2001.  AAA SNE maintains a 20% common stock ownership.
The minority interest of $863 included in the consolidated statement of
earnings for 2001 represents 20% of the net loss for ACIC Holding Co.,
Inc., calculated after the $9,582 preferred stock dividend paid to
Commerce, to the extent of the minority interest.  This compares to $320
minority interest in net loss of subsidiary after $9,178 in preferred
stock dividends paid to Commerce in 2000.  During the third quarter of
2001, the net losses of ACIC Holding Co., Inc. exceeded the minority
interest balance sheet component.


Net Earnings

     Net earnings decreased $38,986 or 29.5% to $93,094 during 2001 as
compared to $132,080 in 2000.  Operating earnings, which exclude the
after-tax impact of net realized investment gains and losses, decreased
$10,751 or 9.8% to $98,880 ($2.94 per share basic and $2.93 per share
diluted) during 2001 as compared to $109,631 ($3.21 per share basic and
diluted) in 2000, as a result of the factors previously mentioned.





18
<page>




Year Ended December 31, 2000 Compared to Year Ended December 31, 1999

Premiums

     The following table compares direct premiums, net premiums written
and earned premiums for the years ended December 31, 2000 and 1999:

<table>
<caption>

                                                          Years Ended December 31,

                                                  2000       1999      Change    % Change

                                           
          <c>        <c>         <c>
Direct Premiums Written:
  Personal Automobile in Massachusetts......  $  827,180   $731,329   $ 95,851      13.1%
  Personal Automobile in All Other States...     103,496     92,297*    11,199      12.1%
  Commercial Automobile in Massachusetts....      43,243     36,616      6,627      18.1%
  Commercial Automobile in All Other States.         104       -           104        -
  Homeowners in Massachusetts...............      65,662     59,981      5,681       9.5%
  Homeowners in All Other States............      16,498     14,378*     2,120      14.7%
  Other Lines in Massachusetts..............      14,860     13,027      1,833      14.1%
  Other Lines in All Other States...........         606        521*        85      16.3%

     Total Direct Premiums Written..........  $1,071,649   $948,149   $123,500      13.0%

Net Premiums Written:
  Personal Automobile in Massachusetts......  $  839,394   $747,402   $ 91,992      12.3%
  Personal Automobile in All Other States...     103,719     91,640*    12,079      13.2%
  Commercial Automobile in Massachusetts....      44,848     38,593      6,255      16.2%
  Commercial Automobile in All Other States.         104       -           104        -
  Homeowners in Massachusetts...............      17,547     16,304      1,243       7.6%
  Homeowners in All Other States............      (1,658)    13,543*   (15,201)   (112.2%)
  Other Lines in Massachusetts..............       4,916      4,193        723      17.2%
  Other Lines in All Other States...........          41        318*      (277)    (87.1%)

     Total Net Premiums Written.............  $1,008,911   $911,993   $ 96,918      10.6%

Earned Premiums:
  Personal Automobile in Massachusetts......  $  714,972   $633,746   $ 81,226      12.8%
  Personal Automobile in All Other States...     100,101     91,357*     8,744       9.6%
  Commercial Automobile in Massachusetts....      32,548     29,219      3,329      11.4%
  Commercial Automobile in All Other States.          19       -            19        -
  Homeowners in Massachusetts...............      17,364     16,830        534       3.2%
  Homeowners in All Other States............       4,186     12,032*    (7,846)    (65.2%)
  Other Lines in Massachusetts..............       3,434      3,190        244       7.6%)
  Other Lines in All Other States...........         162        755*      (593)    (78.5%)
  Assumed Premiums from C.A.R...............      81,300     84,356     (3,056)     (3.6%)
  Assumed Premiums from Other than C.A.R....         397        345         52      15.1%

     Total Earned Premiums..................  $  954,483   $871,830   $ 82,653       9.5%

  Earned Premiums in Massachusetts..........  $  768,301   $682,985   $ 85,316      12.5%
  Earned Premiums-Assumed...................      81,697     84,701     (3,004)     (3.5%)
  Earned Premiums in All Other States.......     104,485    104,144*       341       0.3%

     Total Earned Premiums..................  $  954,483   $871,830   $ 82,653       9.5%

*Includes eleven-month results of American Commerce since the January 29, 1999 acquisition.

</table>
19
<page>



     The $95,851 or 13.1% increase in Massachusetts personal automobile
direct premiums written resulted primarily from increases of 6.4% and 8.5%
in the number of Massachusetts personal automobile exposures for liability
and physical damage coverage, respectively, coupled in 2000 with increases
in rates for the coverage types noted below.  The components of these
changes from the previous year for 2000 and 1999 were as follows:

<table>
<caption>
                                             2000                    1999
     Coverage Type                      Rate Change (1)         Rate Change (1)
     
                                     <c>                     <c>
     Liability:
       Bodily Injury.................         1.0%                   (1.9%)
       Personal Injury Protection....         6.4%                   11.0%
       Property Damage to Others.....        20.8%                    9.1%

     Physical Damage:
       Collision.....................         1.7%                   25.2%
       Comprehensive.................         2.4%                   11.7%

           Total (2).................         6.2%                    9.1%

   (1)  Represents change in the Company's average rate per exposure from the Company's
        prior year average rate charged for Massachusetts private passenger automobile
        premiums.
   (2)  The total rate change depicted is the result of the weighted average of premiums
        written for all coverages divided by liability exposures only, due to the fact that
        all exposures are required to carry liability coverage.
</table>

     The above percentage changes were primarily the result of rate
modifications in the individual coverage components in the 2000 state
mandated average rate increase, combined with changes in the Company's
safe driver rate deviations.  The combination of these factors resulted in
a 6.2% increase in the average personal automobile premium per exposure in
2000.  Despite the 2000 state mandated average rate increase of only 0.7%,
the Company's increase in the average personal automobile premium per
exposure was primarily due to the above noted changes coupled with the
fact that the rate decision does not anticipate purchases of new
automobiles in the year to which the rate decision applies and the
Company's mix of personal automobile business differs from that of the
industry.  In 2000, the Company offered its customers safe driver
deviations of 6.0% to drivers with SDIP classifications of Step 9 and 2.0%
for Step 10 (8.0% for Step 9 and 3.0% for Step 10 in 1999).

     As shown in the table found on page 12, the AAA affinity group
discount for 2000 was established at 6.0%, which was unchanged from 1999.
In 2000, for drivers who qualified, the Company's AAA affinity group
discount and safe driver deviations could be combined for up to a 11.6%
reduction (13.5% in 1999) from state mandated rates.

     Direct premiums written for commercial automobile insurance increased
by $6,627 or 18.1%, due primarily to an increase of approximately 10.1% in
the number of policies written, combined with a 6.9% increase in the
average commercial automobile premium per policy.  The increased business
was attributable to the Company's intention to expand writings coupled
with increased business due to the insolvency of Trust Insurance Company
("Trust"), a former Massachusetts insurance company that was placed in
receivership in 2000.  Direct premiums written for homeowners insurance
increased by $7,801 or 10.5% due primarily to a 13.5% increase in the
number of Massachusetts policies written offset by a 3.0% decrease in the
average Massachusetts premium per policy, coupled with an additional month
premium from American Commerce.  The increased business was primarily
attributable to the previously mentioned Trust insolvency.

     The $96,918 or 10.6% increase in net premiums written was due to the
growth in direct premiums written as described above, offset by a decrease
of premiums assumed from C.A.R.  The decrease in premiums assumed from
C.A.R. was the result of fewer premiums ceded to C.A.R. by the servicing
carriers in 2000 as compared to 1999.  Premiums ceded to reinsurers other
than C.A.R. increased $22,289 or 40.8% as compared to 1999 as a result of
American Commerce joining the quota-share reinsurance program effective
January 1, 2000 and increases in Massachusetts homeowners premiums.

20
<page>



     The $82,653 or 9.5% increase in earned premiums during 2000 as
compared to 1999 was primarily due to increases to the average rates per
exposure for Massachusetts personal automobile liability and physical
damage, and the increased business due to the insolvency of Trust
mentioned previously.  This resulted in an $85,316 or 12.5% increase for
Massachusetts earned premiums.  The remaining changes were attributable to
a $3,004 or 3.5% decrease in earned premiums assumed from C.A.R. offset by
$341, or 0.3% increase in earned premiums from all other states, primarily
attributable to American Commerce whose year to date 2000 results reflect
a full twelve months as compared to eleven months in 1999, offset by the
effect of ceded earned premium to the quota share treaty.


Investment Income

     Net investment income is affected primarily by the composition of the
Company's investment portfolio and yield thereon.  The following table
summarizes the composition of the Company's investment portfolio, at cost,
at December 31, 2000 and 1999:
<table>
<caption>

Investments, at cost                                         December 31,
                                                            % of                  % of
                                                 2000      Invest.     1999      Invest.
   
                                        <c>           <c>     <c>            <c>
   GNMA & FNMA mortgage-backed bonds......    $   67,274       4.7% $   82,349       6.1%
   Corporate bonds........................       130,775       9.1      45,147       3.3
   U.S.Treasury bonds and notes...........         3,428       0.2       3,616       0.3
   Tax exempt state and municipal bonds...       464,404      32.1     530,333      39.2
       Total fixed maturities.............       665,881      46.1     661,445      48.9

   Preferred stocks.......................       215,823      14.9     230,934      17.1

   Common stocks..........................        87,704       6.1      83,984       6.2

   Closed-end preferred stock mutual funds       327,980      22.7     267,956      19.8

   Mortgages and collateral loans (net of
     allowance for possible loan losses)..        51,661       3.6      72,451       5.4
   Cash and cash equivalents..............        70,521       4.9      22,535       1.7
   Other investments......................        25,475       1.7      13,130       0.9
       Total investments..................    $1,445,045     100.0% $1,352,435     100.0%
</table>

     The Company's investment strategy is to maximize after-tax investment
income through high quality securities coupled with acquiring equity
investments, which may forgo current investment yield in favor of
potential higher yielding capital appreciation in the future.

     As depicted in the accompanying table, net investment income before
taxes increased $7,041 or 7.8%, compared to 1999, principally as a result
of an increase in average invested assets (at cost).  Net investment
income as a percentage of total average investments was 6.9% in 2000
compared to 6.8% in 1999.  Net investment income after tax as a percentage
of total average investments was 5.6% in 2000 and 6.3% in 1999.
<table>
<caption>
Investment Return                                    Years Ended December 31,
                                                    2000                  1999
   
                                           <c>                   <c>
   Average month-end investments (at cost)...    $1,395,159            $1,326,098
   Net investment income before tax..........        96,830                89,789
   Net investment income after-tax...........        79,547                74,970
   Net investment income as a percentage
     of average net investments (at cost)....           6.9%                  6.8%
   Net investment income after-tax as a
     percentage of average net
     investments (at cost)...................           5.7%                  5.7%
</table>

Premium Finance and Service Fees

     Premium finance and service fees increased $453 or 3.1% during 2000.
21
<page>



Amortization of Excess of Book Value of Subsidiary Interest over Cost

     As a result of the acquisition of American Commerce (see
"Management's Discussion and Analysis of Financial Condition and Results
of Operations - General" and "Notes to Consolidated Financial Statements -
NOTES A12 and A17"), the amount representing the excess of the fair value
of the net assets acquired over the purchase price at January 29, 1999 was
$16,947.  The amount is being amortized into revenues on a straight-line
basis over a five-year period.  The amount amortized into revenues in 2000
was $3,390, compared to $3,019 in 1999.


Investment Gains and Losses

     During the fourth quarter of 2000, the Company changed its policy in
regard to its investments in certain closed-end preferred stock mutual
funds.  On a forward going basis, the Company intends to take a proactive
posture to affect the overall investment performance of these funds.  The
Company's ownership position of these various funds at December 31, 2000
range from 23% to 48% of outstanding shares.  The level of ownership and
new investment policy requires the company to account for these
investments on an equity basis.  The equity method requires that the
investments are to be valued at original cost plus the cumulative equity
in the earnings and losses of the funds and adjusted over time by the
premium or discount at the time of purchase to the applicable underlying
net asset value of the funds.  Prior to the policy change, the Company
reported the income on a cash basis, valued the investments at quoted
market prices and recorded the change in quoted market prices through
comprehensive income.  The results of prior accounting periods impacted by
this change have been restated.

     During 2001, the undistributed operating results of closed-end
preferred stock mutual funds have been reflected in realized gains and
losses.  Year-end December 31, 2000 period results previously reflected in
investment income, have been reclassified to realized gains and losses to
conform with current period presentation.  During 2000 the Company
reflected a realized gain of $26,575 versus a loss in 1999 of $22,401, as
a result of this change.

     Gross realized gains and losses for the years ended December 31, 2000
and December 31, 1999 were as follows:

<table>
<caption>
                                                 2000                         1999

                                          Gross        Gross           Gross        Gross
                                        Realized     Realized        Realized     Realized
                                          Gains       Losses           Gains       Losses

                                     <c>          <c>             <c>          <c>
Fixed maturities....................    $    223     $ (3,995)       $    458     $ (6,449)
Preferred stocks....................       1,748         (462)            207         (451)
Closed-end preferred stock mutual
  funds.............................      26,641          (66)          1,900      (24,301)
Common stocks.......................       4,370         -             16,080       (5,057)
Venture capital fund investments....         460         -                888         -
Other investments...................         631         -                347         -


     Total..........................    $ 34,073     $ (4,523)       $ 19,880     $(36,258)

</table>

22
<page>


<table>
<caption>
     Gross accumulated other comprehensive income and losses for December 31, 2000 and
December 31, 1999 were as follows:

                                   December 31, 2000              December 31, 1999
                                  Gross          Gross           Gross           Gross
                               Accumulated    Accumulated     Accumulated     Accumulated
                                  Other          Other          Other           Other
                              Comprehensive  Comprehensive   Comprehensive  Comprehensive
                                 Income          Losses         Income          Losses

                           <c>            <c>             <c>            <c>
Fixed maturities..........    $      16,247  $     (12,193)  $       5,221  $     (19,328)
Preferred stocks..........              999        (16,739)            782        (20,667)
Common stocks.............           28,126             (3)          1,305         (7,941)
Other investments.........            1,327           -              1,009           -


Total.....................    $      46,699  $     (28,935)  $       8,317  $     (47,936)

</table>
     The accumulated other comprehensive income on fixed maturities
increased significantly as a result of the favorable performance in the
bond market due to lower interest rates in 2000.  Long-term interest rates
(30-year Treasury Bond) decreased to 5.46% at December 31, 2000 from 6.48%
at December 31, 1999.

Loss and Loss Adjustment Expenses

     Losses and loss adjustment expenses ("LAE") incurred increased
$61,067 or 9.8% in 2000.  As a percentage of premiums earned, losses and
LAE incurred for 2000 was 71.7% compared to 72.0% in 1999.  The Company
experienced higher assumed residual market losses during 2000, which were
offset by improved voluntary loss ratios in Massachusetts.  Additionally
in 2000, the loss ratio was adversely impacted by approximately $8,000 of
expense (0.8% of the loss ratio) attributable to the Trust insolvency.
Also included in the 2000 increase in incurred expense is approximately
$6,300 in higher corporate expenses which are allocated to losses and LAE
for book value appreciation rights, director retirement compensation and
state income taxes on non-insurance subsidiaries.  The ratio of net
incurred losses, excluding LAE, to premiums earned ("pure loss ratio") on
personal automobile was 63.2% in 2000 compared to 65.1% in 1999.  The
decrease to the personal automobile pure loss ratio was primarily due to
an increase in redundancies arising from prior accident years, and
decreases in the cost of adjusting losses.  The commercial automobile pure
loss ratio decreased to 59.7% in 2000 compared to 60.3% in 1999.  For
homeowners, the pure loss ratio was 40.0% in 2000 compared to 35.9% in
1999.  The increase was primarily due to fewer liability redundancies in
2000 compared to 1999.  The loss ratio (on a statutory basis) for Commerce
West was 69.3% for 2000 as compared to 71.2% in 1999.  The loss ratio (on
a statutory basis) for American Commerce was 84.5% for 2000 as compared to
its eleven-month loss ratio of 75.8% in 1999.

Policy Acquisition Costs

     Policy acquisition costs expensed increased by $9,597 or 4.1% in
2000.  As a percentage of net premiums written, the Company's statutory
underwriting expense ratio for 2000 was 25.1% compared to 26.5% in 1999.
The decreased 2000 underwriting expense ratio resulted primarily from
lower Massachusetts direct automobile commissions associated with a
decrease in the state mandated minimum commissions, a lower provision for
accrued contingent commissions, and lower expenses due to the continued
effects of certain cost reduction programs, partially offset by the Trust
insolvency assessment.  The 2000 underwriting ratio includes a $4,900
charge (0.5% of the underwriting expense ratio) representing the Company's
allocation from the Massachusetts Insurers Insolvency Fund for this
insolvency.  Also included in the 2000 increase in policy acquisition
costs expensed is approximately $5,800 in higher corporate expenses which
are allocated to policy acquisition costs for book value appreciation
rights, director retirement compensation and state income taxes on non-
insurance subsidiaries.  The underwriting expense ratio (on a statutory
basis) for Commerce West was 35.8% for 2000 as compared to 40.9% for 1999.
The underwriting expense ratio (on a statutory basis) for American
Commerce, was 29.3% for 2000 compared to its eleven-month expense ratio of
31.4% for 1999.
23
<page>



Income Taxes

     The Company's effective tax rate was 22.5% and 16.0% for the years
ended December 31, 2000 and 1999, respectively.  In both years the
effective rate was lower than the statutory rate of 35% primarily due to
tax-exempt interest income and the corporate dividends received deduction.
The higher effective tax rate for 2000 was the result of both the tax-
exempt interest and the dividends received deduction comprising a lesser
portion of earnings before taxes.


Minority Interest in Net Loss of Subsidiary

     As a result of the joint venture with AAA SNE and acquisition of
American Commerce (see "Management's Discussion and Analysis of Financial
Condition and Results of Operations - General" and "Notes to Consolidated
Financial Statements - NOTES A13 and A17"), the Company's interest in ACIC
Holding Co., Inc., through Commerce, a wholly-owned subsidiary of CHI, is
represented by ownership of 80% of the outstanding shares of common stock
at December 31, 2000.  AAA SNE maintains a 20% common stock ownership.
The minority interest in net loss of subsidiary of $320 included in the
consolidated statement of earnings for 2000 represents 20% of the net loss
for ACIC Holding Co., Inc. calculated after the $9,178 preferred stock
dividend paid to Commerce.  This compares to $1,059 minority interest in
net loss of subsidiary after $8,300 in preferred stock dividends paid to
Commerce in 1999.


Net Earnings

      Net earnings increased $43,404 or 48.9% to $132,080 during 2000 as
compared to $88,676 in 1999.  The net earnings for 2000 were increased by
$20,514, or $0.60 per share and decreased $14,020 or $0.40 per share in
1999 as a result of the Company's change in its policy in regard to its
investment in closed-end preferred stock mutual funds mentioned
previously.  Operating earnings, which exclude the after-tax impact of net
realized investment gains, increased $12,220 or 12.5% to $109,631 ($3.21
per share basic and diluted) during 2000 as compared to $97,411 ($2.79 per
share basic and diluted) in 1999, as a result of the factors previously
mentioned.


Liquidity and Capital Resources

     The focus of the discussion of liquidity and capital resources is on
the Consolidated Balance Sheets on page 35 and the Consolidated Statements
of Cash Flows on pages 38 and 39.  Stockholders' equity increased by
$30,393, or 3.9%, in 2001 as compared to 2000.  The increase resulted from
$93,094 in net earnings, and by net increases in other comprehensive
income, net of income tax benefits, on fixed maturities and preferred and
common stocks of $561, offset by dividends paid to stockholders of $39,951
and Treasury Stock purchased of $23,311.  Total assets at December 31,
2001 increased $64,468, or 3.1% to $2,140,082 as compared to total assets
of $2,075,614 at December 31, 2000.  Invested assets, at market value and
equity, increased $25,639 or 1.7%.  Premiums receivable increased $15,641
or 6.8%.  The increase in premiums receivable from December 31, 2000, was
primarily attributable to increases in Massachusetts automobile business.
Deferred policy acquisition costs increased $5,252 or 4.7%.  Receivable
from reinsurers increased $8,896 or 14.5%, primarily attributable to the
increase in other than automobile business previously discussed.  The
deferred income tax asset increased $4,952, mainly as a result of
accounting for certain investments on an equity basis.  All other
remaining assets increased $4,088 or 2.2%.


24
<page>


<table>
<caption>
     The Company's investment portfolio, at market and equity, is shown on the following
table as of December 31, 2001 and 2000 (for investments, at cost, refer to the table found
on page 15):
                                                             December 31,
Investments, at market and equity                          % of                  % of
                                                 2001      Invest.     2000      Invest.
   
                                        <c>            <c>    <c>            <c>
   GNMA & FNMA mortgage-backed bonds......    $   98,985       6.6% $   67,261       4.6%
   Corporate bonds........................       136,506       9.1     126,255       8.6
   U.S. Treasury bonds and notes..........           105        -        3,377       0.2
   Tax exempt state and municipal bonds...       390,886      26.1     473,042      32.1
       Total fixed maturities.............       626,482      41.8     669,935      45.5

   Preferred stocks.......................       248,101      16.6     200,083      13.6

   Common stocks..........................       107,458       7.2     115,827       7.9

   Closed-end preferred stock
     mutual funds at equity...............       309,282      20.6     337,733      22.9

   Mortgages and collateral loans (net of
     allowance for possible loan losses)..        39,505       2.6      51,661       3.5
   Cash and cash equivalents..............       148,630       9.9      70,521       4.8
   Other investments......................        18,743       1.3      26,802       1.8
       Total investments..................    $1,498,201     100.0% $1,472,562     100.0%

<caption>
    Comparison of Cost/Market Value of Fixed Maturities for the years ended December 31,

                                                               2001
                                                                               % of Total
                                            Market      Cost     Difference   Based on Cost

                                      <c>         <c>         <c>             <c>
GNMA & FNMA mortgage-backed bonds.....   $   98,985  $   98,198  $      787       15.9%
Corporate bonds.......................      136,506     133,506       3,000       21.6%
U.S. Treasury bonds and notes.........          105         104           1        0.0%
Tax exempt state and municipal bonds..      390,886     386,967       3,919       62.5%
  Total fixed maturities..............   $  626,482  $  618,775  $    7,707      100.0%
<caption>
                                                             2000
                                                                               % of Total
                                            Market      Cost     Difference   Based on Cost

                                      <c>         <c>         <c>             <c>
GNMA & FNMA mortgage-backed bonds.....   $   67,261  $   67,274  $      (13)      10.0%
Corporate bonds.......................      126,255     130,775      (4,520)      20.0%
U.S. Treasury bonds and notes.........        3,377       3,428         (51)       1.0%
Tax exempt state and municipal bonds..      473,042     464,404       8,638       70.0%
  Total fixed maturities..............   $  669,935  $  665,881  $    4,054      100.0%


     Of the Company's bonds, 97.9% are rated in either of the two highest
quality categories provided by the NAIC.

<caption>
             Comparison of Carrying Value for the years ended December 31,

                                            2001          2000
                                       Market/Equity  Market/Equity                 % of
                                           Value          Value       Variance    Variance

                                     <c>            <c>           <c>           <c>
Fixed maturities......................  $  626,482     $  669,935    $  (43,453)    (6.5%)
Preferred stocks......................     248,101        200,083        48,018     24.0%
Common stocks.........................     107,458        115,827        (8,369)    (7.2%)
Closed-end preferred stock
  mutual funds at equity..............     309,282        337,733       (28,451)    (8.4%)
Mortgages and collateral loans
  (net of allowance for possible
    loan losses)......................      39,505         51,661       (12,156)   (23.5%)
Cash and cash equivalents.............     148,630         70,521        78,109    110.8%
Other investments.....................      18,743         26,802        (8,059)   (30.1%)
  Total investments...................  $1,498,201     $1,472,562    $   25,639      1.7%
</table>
25

<page>



     Preferred stocks increased $48,018, or 24.0% and common stocks decreased
$8,369, or 7.2%, during 2001.  Preferred stock mutual funds at equity,
decreased $28,541 or 8.4% in 2001 compared to 2000.  The majority of the
increase in preferred stocks and the corresponding decrease in preferred
stock mutual funds was primarily the result of a newly created trust fund.
In 2001, the trustees of Putnam Dividend Income Fund ("PDI") liquidated the
fund.  The Company's pro-rata share of the portfolio securities and cash of
PDI was transferred to a new fund created by the PDI trustees whose ownership
was conveyed to the Company.  At December 31, 2001 the fund was consolidated
into the Company's financial statements, totaling $60,869.  The majority of
the fund represents investments valued at $59,019 and is included in
preferred stocks and $1,332 in cash and cash equivalents.  Other investments
at equity, comprised of venture capital fund investments, decreased $8,059 or
30.1% during 2001 as a result of equity accounting changes mentioned
previously.  The Company's strategy continues to focus on maximizing after-
tax investment income through investing in high quality securities coupled
with acquiring equity investments, which may forgo current investment yield
in favor of potential higher yielding capital appreciation in the future.
The Company continues to monitor interest rates on long-term securities and
intends to maintain its high cash position until such time as the Company
believes the long-term rates have appropriately firmed.

     The Company's liabilities increased $35,143 or 2.7% to $1,327,808 at
December 31, 2001 as compared to $1,292,665 at December 31, 2000.  Loss and
loss adjustment expense reserves comprised 51.3% of the Company's liabilities
at December 31, 2001 compared with 52.2% at December 31, 2000.  Unearned
premiums comprised 42.4% of the Company's liabilities at December 31, 2001
compared with 40.2% at December 31, 2000.  All other liabilities comprised
6.3% of the Company's liabilities at December 31, 2001, compared with 7.6% at
December 31, 2000.  Loss and loss adjustment expense reserves increased
$7,484 or 1.1%.  Unearned premiums increased $43,571 or 8.4%, due primarily
to increased business in 2001.  Current income taxes decreased $13,988 or
80.4%.  The net effect of all other liabilities decreased $4,659 or 5.5%.

<table>
<caption>
     Liabilities for unpaid losses and loss adjustment expenses at December 31, 2001 and 2000 consist
of:
                                                                  2001        2000
  
                                                           <c>         <c>
  Net voluntary unpaid loss and LAE reserves................    $558,635    $544,585
  Voluntary salvage and subrogation recoverable.............     (73,393)    (65,505)
  Assumed unpaid loss and LAE reserves from C.A.R...........     125,787     127,631
  Assumed salvage and subrogation recoverable from C.A.R....     (20,695)    (20,844)

    Total voluntary and assumed unpaid loss and LAE reserves     590,334     585,867

  Adjustment for ceded unpaid loss and LAE reserves.........     100,290      97,273
  Adjustment for ceded salvage and subrogation recoverable..      (9,000)     (9,000)

    Total unpaid loss and LAE reserves......................    $681,624    $674,140
</table>

     The primary sources of the Company's liquidity are funds generated
from insurance premiums, net investment income, premium finance and
service fees and the maturing and sale of investments as reflected in the
Consolidated Statements of Cash Flows on pages 38 and 39.  The discussion
of these items can be found under "Year Ended December 31, 2001 Compared
to Year Ended December 31, 2000", herein.

     The Company's operating activities provided cash of $106,172 in 2001,
as compared to $147,906 in 2000, representing a decrease of $41,734 or
28.2% in 2000.  The primary reason for this decrease is that the increase
in premiums collected was outpaced by the increase in losses and LAE paid.
Federal income tax payments increased $10,439 or 35.7% in 2001.  Of the
$39,703 in federal tax payments in 2001, $13,985 related to 2000, due to
significant income in the fourth quarter of 2000.  Net investment income
received and premium and service fees received increased 8.9% and 17.0%,
respectively.
26
<page>


     For 2001 net cash flows from investing activities provided cash of
$35,199, as compared to net cash flows used in investing activities of
$45,226 in 2000.  The majority of the $80,425 difference was a $54,142
decrease in purchases of fixed maturities, a $38,824 decrease in the
purchase of preferred stock mutual funds, a $5,164 increase from proceeds
from sale of equity securities, a $3,811 decrease in purchases of other
assets, and a $4,974 increase in proceeds from maturity of fixed
maturities.  These were offset by a $12,787 increase in the purchase of
equity securities coupled with a $6,790 increase in the purchase of
property and equipment.  Investing activities were funded by accumulated
cash and cash provided by operating activities in 2001 and 2000.  The
decreased purchases of longer term investments coupled with the
significant increase in cash and cash equivalents were primarily the
result of the low interest rate environment in 2001.

     During 2001, Commerce purchased a 160,000 square foot building.
Costs for this building including the land and improvements to date at
December 31, 2001, are $4,932.  The Company anticipates expending an
additional $13 million renovating this building, primarily in 2002.

     Cash flows used in financing activities totaled $63,262 during 2001
compared to $54,694 during 2000.  The 2001 cash flows used in financing
activities consisted of $39,951 in dividends paid to stockholders and
$23,311 used to purchase 622,900 shares of Treasury Stock.  The 2000 cash
flows used in financing activities consisted of $39,201 in dividends paid
to stockholders and $15,493 used to purchase 606,200 shares of Treasury
Stock.

     The Company's funds are generally invested in securities with
maturities intended to provide adequate funds to pay claims without the
forced sale of investments.  The carrying value (at market and equity) of
total investments at December 31, 2001 was $1,498,201.  At December 31,
2001, the Company held cash and cash equivalents of $148,630.  These funds
provide sufficient liquidity for the payment of claims and other short-
term cash needs.  The Company continues to monitor interest rates on long-
term securities and intends to maintain its high cash position until such
time as the Company believes long-term rates have appropriately firmed.
The Company also relies upon dividends from its subsidiaries for its cash
requirements.  Every Massachusetts insurance company seeking to make any
dividend or other distributions to its stockholders may, within certain
limitations, pay such dividends and then file a report with the
Commissioner.  Dividends in excess of these limitations are called
extraordinary dividends.  An extraordinary dividend is any dividend or
other property, whose fair value together with other dividends or
distributions made within the preceding twelve months exceeds the greater
of ten percent of the insurer's surplus as regards to policyholders as of
the end of the preceding year, or the net income of a non-life insurance
company for the preceding year.  No pro-rata distribution of any class of
the insurer's own securities is to be included.  No Massachusetts
insurance company shall pay an extraordinary dividend or other
extraordinary distribution until thirty days after the Commissioner has
received notice of the intended distribution and has not objected.  No
extraordinary dividends were paid in 2001, 2000 or 1999.  Similar laws
exist in California and Ohio.  No extraordinary dividend was paid by
American Commerce in 2001 or 2000 and no dividends were paid by Commerce
West since its acquisition.

     Periodically, sales have been made from the Company's fixed maturity
investment portfolio to actively manage portfolio risks, including credit-
related concerns, to optimize tax planning and to realize gains.  This
practice will continue in the future.

     Industry and regulatory guidelines suggest that the ratio of a
property and casualty insurer's annual net premiums written to statutory
policyholders' surplus should not exceed 3.00 to 1.00.  The Company's
statutory premiums to surplus ratio was 1.51 to 1.00, 1.53 to 1.00, and
1.76 to 1.00 for the years ended December 31, 2001, 2000 and 1999,
respectively.
27
<page>



     In early 1999, Commerce, invested $90,800 in the joint venture (ACIC
Holding Co., Inc.) to fund the American Commerce acquisition and to
capitalize the joint venture that is owned together with AAA SNE.  Of this
$90,800, Commerce invested $90,000 in the form of preferred stock and an
additional $800 representing its 80% common stock ownership.  The terms of
the preferred stock call for quarterly cash dividends at the rate of 10%
per annum.  In the event cash dividends cannot be paid, additional
preferred stock will be issued.  AAA SNE invested $200 representing its
20% common stock ownership.  Commerce consolidates ACIC Holding Co., Inc.
and its wholly-owned subsidiary, American Commerce, for financial
reporting and tax purposes.  Since 1995, Commerce has maintained an
affinity group marketing relationship with AAA Insurance Agency, Inc., a
subsidiary of AAA SNE.  AAA Insurance Agency, Inc. has been an agent of
Commerce since 1985.

     In addition to the real estate commitment mentioned earlier, Commerce
has commitments in two venture capital fund investments.  These
investments are made in limited partnerships and the Company's exposure to
loss is limited to its actual investment.

     In 2000, Commerce entered into a Limited Partnership Agreement with
Conning Partners VI, L.P., a Delaware Limited Partnership.  This
partnership agreement required a commitment by the Company to invest up to
$50,000 into the partnership.  To date the Company has invested $15,091
into the partnership leaving a balance for funds still committed but not
paid into the partnership of $34,909.  The partnership was formed to
operate as an investment fund principally for the purpose of making
investments primarily in equity, equity-related and other securities
issued in expansion financing, start-ups, buy-outs and recapitalization
transactions relating to companies in the areas of insurance, financial
services, e-commerce, healthcare, and related businesses, including,
without limitation, service and technology enterprises supporting such
businesses, in order to realize long-term capital returns, all as
determined and managed by the General Partner for the benefit of the
Partners.

     Also in 2000, Commerce entered into a Limited Partnership Agreement
with Distribution Partners Investment Capital, L.P. a Delaware Limited
Partnership.  This partnership agreement required a commitment by the
Company to invest up to $3,500 into the partnership.  To date the Company
has invested $2,258 into the partnership leaving a balance of $1,242 for
funds still committed.  The partnership was formed to operate as an
investment fund principally for the purpose of making investments
primarily in equity and equity-related securities of companies operating
in the area of insurance distribution and distribution related activities,
all as determined and managed by the General Partner for the benefit of
the Partners.


Market Risk:  Interest Rate Sensitivity and Equity Price Risk

     The Company's investment strategy emphasizes investment yield while
maintaining investment quality.  The Company's investment objective
continues to focus on maximizing after-tax investment income through
investing in high quality diversified investments structured to maximize
after-tax investment income while minimizing risk.  The Company's funds
are generally invested in securities with maturities intended to provide
adequate funds to pay claims and meet other operating needs without the
forced sale of investments.  Periodically, sales have been made from the
Company's fixed maturity portfolio to actively manage portfolio risks,
including credit-related concerns, to optimize tax planning and to realize
gains.  This practice will continue in the future.

     In conducting investing activities, the Company is subject to, and
assumes, market risk.  Market risk is the risk of an adverse financial
impact from changes in interest rates and market prices.  The level of
risk assumed by the Company is a function of the Company's overall
objectives, liquidity needs and market volatility.

     The Company manages its market risk by focusing on higher quality
equity and fixed income investments, by periodically monitoring the credit
strength of companies in which investments are made, by limiting exposure
in any one investment and by monitoring the quality of the investment
portfolio by taking into account credit ratings assigned by recognized
rating organizations.  Although the Company has significant holdings of
various closed-end preferred stock mutual funds, these funds are comprised
primarily of preferred stocks traded on national stock exchanges, thus
limiting exposure to any one investment.
28
<page>


     As part of its investing activities, the Company assumes positions in
fixed maturity, equity, short-term and cash equivalents markets.  The
Company is, therefore, exposed to the impacts of interest rate changes in
the market value of investments.  At December 31, 2001, the Company's
exposure to interest rate changes and equity price risk has been estimated
using sensitivity analysis. The interest rate impact is defined as the
effect of a hypothetical interest rate change of plus-or-minus 200 basis
points on the market value of fixed maturities and preferred stocks.  The
equity price risk is defined as a hypothetical change of plus-or-minus 10%
in the fair value of common stocks.  Changes in interest rates would
result in unrealized gains or losses in the market value of the fixed
maturity and preferred stock portfolio due to differences between current
market rates and the stated rates for these investments.  Based on the
results of the sensitivity analysis at December 31, 2001, the Company's
estimated market exposure for a 200 basis point increase (decrease) in
interest rates was calculated.  A 200 basis point increase results in an
$83,611 decrease in the market value of the fixed maturities and preferred
stocks.  A 200 basis point decrease results in a $47,436 increase in the
market value of the same securities.  The equity price risk impact at
December 31, 2001, based upon a 10% increase in the fair value of common
stocks and preferred stock mutual funds, would be an increase of $10,746
and $31,567, respectively.  Based upon a 10% decrease, common stocks and
preferred stock mutual funds would decrease $10,746 and $31,567,
respectively.  Long-term interest rates (30-year Treasury Bond) increased
slightly to 5.47% at December 31, 2001 from 5.46% at December 31, 2000.
The preceding sensitivity analysis does not represent a forecast and
should not be relied upon as being indicative of expected operating
results.  These hypothetical estimates are based upon numerous assumptions
such as the nature and timing of interest rate levels including the yield
curve shape, prepayments on loans and securities, reinvestment and
replacement of asset and liability cash flows and others.  While
assumptions are developed based upon current economic conditions, the
Company cannot provide any assurance as to the predictive nature of these
assumptions.  Also, as market conditions vary from those assumed in the
sensitivity analysis, actual results will also differ due to prepayment
and refinancing levels likely deviating from those assumed and other
internal and external variables.  Furthermore, the sensitivity analysis
does not reflect actions that management might take in responding to or
anticipating changes in interest rates.

Recent Accounting Developments

     The NAIC revised the Accounting Practices and Procedures Manual in a
process referred to as Codification.  The revised manual became effective
January 1, 2001 for all insurance companies.  The domiciliary states of
the Company's insurance subsidiaries have adopted the provisions of the
revised manual.  The revised manual has changed certain prescribed
statutory accounting practices and has resulted in changes to the
accounting practices that the Company's insurance subsidiaries use to
prepare their statutory-basis financial statements.  The impact of these
changes to the Company's insurance subsidiaries statutory-basis capital
and surplus as of January 1, 2001 had a significant beneficial effect of
approximately $38,737 primarily due to the inclusion of deferred taxes as
an admitted asset.  The codification changes had no impact on the
Company's GAAP financial statements.

     In June 1998, the FASB issued Statement of Financial Accounting
Standards No. 133 ("SFAS 133"), "Accounting for Certain Derivative
Instruments and Hedging Activities", as amended in June 2000 by Statement
of Financial Accounting Standards No. 138 ("SFAS 138"), "Accounting for
Certain Derivative Instruments and Certain Hedging Activities", which
requires companies to recognize all derivatives as either assets or
liabilities in the balance sheet and measure such instruments at fair
value.  SFAS 138 also amended Statement of Financial Accounting Standards
No. 137 ("SFAS 137"), "Accounting for Derivative Instruments and Hedging
Activities - Deferral of the Effective Date of FASB Statement No. 133".
The provisions of SFAS 133 require adoption for fiscal year beginning
after June 15, 2000.  The Company had no derivative or hedging activity in
2001, 2000, or 1999.  The adoption of these FASBs had no material impact
on the Company's consolidated financial statements.

     In September 2000, the FASB issued Statement of Financial Accounting
Standards No. 140 ("SFAS 140"), "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities", which replaced
Statement of Financial Accounting Standards No. 125 ("SFAS 125"),
"Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities".  The Statement provides accounting and
reporting standards for transfers and servicing of financial assets and
extinguishments of liabilities.  Those standards are based on consistent
application of a "financial components" approach that focuses on control.
Under that approach, after a transfer of financial assets, a company
recognizes the financial and servicing assets it controls and the
liabilities it has
29
<page>


incurred, does not recognize financial assets when control has been
surrendered, and does not recognize liabilities when extinguished.  The
Statement provides consistent standards for distinguishing transfers of
financial assets that are sales from transfers that are secured
borrowings.  The Statement is effective for transfers and servicing of
financial assets and extinguishments of liabilities occurring after March
31, 2001.  Adoption of SFAS 140 did not have a material impact on the
Company's consolidated financial statements.

     In July 2001, the FASB issued Statements of Financial Accounting
Standards No. 141, "Business Combinations", and No. 142, "Goodwill and
Other Intangible Assets".  SFAS No. 141, effective for business
combinations initiated after June 30, 2001, requires that all business
combinations be accounted for under a single method - the purchase method.
Use of the pooling-of-interests method is no longer permitted.  SFAS No.
141 also clarifies the criteria to recognize intangible assets separately
from goodwill.  SFAS No. 142 requires that goodwill and intangible assets
deemed to have indefinite lives no longer be amortized to earnings, but
instead be reviewed at least annually for impairment.  Other intangible
assets will continue to be amortized over their useful lives.  SFAS No.
142 will be effective January 1, 2002.

     The Company has evaluated the impact of adopting the provisions of
SFAS No. 142 on earnings and financial position for the year ended
December 31, 2002.  Effective January 1, 2002, in accordance with SFAS No.
142, the Company will cease amortizing the balance sheet item "excess of
book value of subsidiary interest over cost" which is $5.7 million at year
end 2001.  The 2001 impact of the amortization of this resulted in
approximately $0.10 per share of annual operating earnings.  Additionally,
the Company will no longer amortize the negative goodwill resulting from
the purchase of preferred stock mutual funds effective January 1, 2002.
The amount of unamortized negative goodwill at year-end is $6.4 million.
The 2001 impact of the amortization of this was $0.10 per share of
earnings classified as capital gains.  Both the excess of book value of
subsidiary interest over cost and the negative goodwill on preferred stock
mutual funds will be recognized as income in the first quarter of 2002 and
classified as an extraordinary item.  The estimated per share income
impact of this change is $0.34 per share.


Critical Accounting Policies

     The preparation of financial statements in conformity with GAAP
requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.  The following
accounting policies, which are derived based on management's judgments and
estimates, are considered critical to the preparation of the Company's
financial statements.


1.  Investments

     The focus of management's judgments and estimates relating to
investments involves the potential impairment of investments for other
than temporary declines in market values.  The carrying value of
investments in fixed maturities, which include taxable and non-taxable
bonds, and investments in common and preferred stocks, are derived from
market prices supplied by the Company's investment custodian.  Unrealized
investment gains and losses on common and preferred stocks and fixed
maturities, to the extent that there is no other than temporary impairment
of value, are credited or charged to a separate component of stockholders'
equity, known as "net accumulated other comprehensive income (loss)",
until realized, net of any tax effect.  An impairment in an investment is
deemed to be other than temporary, when a security's market value has
diminished to less than 75% of cost for two consecutive quarters.  If the
security is deemed impaired the Company adjusts the securities cost to
market value through realized loss based on publicly available or, in the
absence of such, to a value based on cash flow modeling.  During 2001, the
Company wrote down $2,665 in bonds and preferred stock investments with
impairment as determined by management to be other than temporary.  Given
the makeup and quality of the Company's investments, management does not
believe that a more stringent policy would have a material effect on the
carrying value of its investments.
30
<page>


2.  Unpaid Loss and Loss Adjustment Expenses ("LAE")

     Unpaid Loss and LAE by their nature are inherently uncertain as to
the ultimate outcome of the estimated amounts.  The liability for unpaid
losses and LAE represents Management's best estimate of the ultimate net
cost of all losses and LAE incurred through the balance sheet date.  The
estimate for ultimate net cost of all losses incurred through the balance
sheet date includes the adjusted case estimates for losses, incurred but
not reported ("IBNR") losses, salvage and subrogation recoverable and a
reserve for LAE.  In arriving at its best estimate, management begins with
the aggregate of individual case reserves and then makes adjustments to
these amounts on a line of business basis.  These adjustments to the
aggregate case reserves by line of business are made based on analysis
performed by Management as further described below.  The entire liability
for unpaid losses and LAE is also reviewed quarterly and annually by the
Company's Actuarial Department.  Liability estimates are continually
analyzed and updated, and therefore, the ultimate liability may be more or
less than the current estimate.  The effects of changes in the estimates
are included in the results of operations in the period in which the
estimates are revised.

     The claim cycle begins when a claim is reported to the Company and
claims personnel establish a "case reserve" for the estimated amount of
the ultimate exposure to the Company.  The amount of the reserve is
primarily based upon an evaluation of the type of claim involved, the
circumstances surrounding the claim and the policy provisions relating to
the loss.  This estimate reflects the informed judgment of such personnel
based on general insurance reserving practices and on the experience and
knowledge of the claims personnel adjusting the claim.  During the loss
adjustment period, these case basis estimates are revised as deemed
necessary by the Company's claims department personnel based on subsequent
developments and periodic reviews of the claim.

     In accordance with industry practice, the Company also maintains
reserves for estimated IBNR, salvage and subrogation recoverable and LAE.
These reserves are determined on the basis of historical information and
the experience of the Company.  Adjustments to these reserves are made
periodically to take into account changes in the volume of business
written, claims frequency and severity, the mix of business, claims
processing and other items that can be expected to affect the Company's
liability for losses and LAE over time.

     When reviewing the liability for unpaid losses and LAE, the Company
analyzes historical data and estimates the impact of various factors such
as:  (i) payment trends; (ii) loss expense per exposure; (iii) the
historical loss experience of the Company and industry; (iv) frequency and
severity trends; and, (v) legislative enactments, judicial decisions,
legal developments in the imposition of damages, changes and trends in
general economic conditions, including the effects of inflation and
recession.  This process assumes that past experience, adjusted for the
effects of current developments and anticipated trends, is an appropriate
basis for predicting future events.  There is no precise method, however,
for subsequently evaluating the impact of any specific factor on the
adequacy of reserves, because the eventual development of reserves is
affected by many factors.

     By using individual estimates of reported claims adjusted for
managements best estimate by line of business and generally accepted
actuarial reserving techniques, the Company estimates the ultimate net
liability for losses and LAE.  After taking into account all relevant
factors, management believes that, based on existing information, the
provision for losses and LAE at December 31, 2001 is adequate to cover the
ultimate net cost of losses and claims incurred as of that date.  The
ultimate liability, however, may be greater or lower than established
reserves.  If the ultimate exposure is greater than (or less than)
management's estimated liability for losses and LAE, based on any of the
factors noted previously, the Company will incur additional expense
(income) which may have a material impact.

Forward - Looking Statements

     This annual report contains some statements that are not historical
facts and are considered "forward-looking statements" as defined in the
Private Securities Litigation Reform Act of 1995.  Such forward-looking
statements involve opinions, assumptions and predictions, and no assurance
can be given that the future results will be achieved since events or
results may differ materially as a result of risks facing the Company.
These include, but are not limited to, those risks and uncertainties in
our business, some of which are beyond the control of the Company, that
are described in the Company's Forms 10-K and 10-Q, Schedules 13D and 13G,
and other documents filed with the SEC, including the
31
<page>


possibility of adverse catastrophe experience and severe weather, adverse
trends in claim severity or frequency, adverse state and federal
regulation and legislation, adverse state judicial decisions, litigation
risks, interest rate risk, rate making decisions for private passenger
automobile policies in Massachusetts, potential rate filings outside of
Massachusetts, adverse impacts related to consolidation activities,
heightened competition, as well as the economic, market or regulatory
conditions and risks associated with entry into new markets and
diversification.

Effects of Inflation and Recession

     The Company generally is unable to recover the costs of inflation in
its personal automobile insurance line since the premiums it charges are
subject to state regulation.  Additionally, the premium rates charged by
the Company for personal automobile insurance are adjusted by the
Commissioner only at annual intervals.  Such annual adjustments in premium
rates may lag behind related cost increases.  Economic recessions can have
an impact upon the Company, primarily through the policyholder's election
to decrease non-compulsory coverages afforded by the policy and increased
driving, each of which tends to decrease claims.

     To the extent inflation and economic recession influence yields on
investments, the Company is also affected.  As each of these environments
affect current market rates of return, previously committed investments
may rise or decline in value depending on the type and maturity of
investment.

     Inflation and recession must also be considered by the Company in the
creation and review of loss and LAE reserves since portions of these
reserves are expected to be paid over extended periods of time.  The
anticipated effect of economic conditions is implicitly considered when
estimating liabilities for losses and LAE.  The importance of continually
adjusting reserves is even more pronounced in periods of changing economic
circumstances.

COMMON STOCK PRICE AND DIVIDEND INFORMATION

     The Company's common stock trades on the NYSE under the symbol "CGI".
The high, low and close prices for shares, as quoted in The Boston Globe,
of the Company's Common Stock for 2001 and 2000 were as follows:
<table>
<caption>
                                         2001                             2000
                                High      Low      Close         High      Low      Close
      
                    <c>       <c>       <c>          <c>       <c>       <c>
      First Quarter......    $32.1000  $24.5500  $32.0000     $31.0000  $23.0000  $29.5000
      Second Quarter.....     36.9900   30.7500   36.7900      30.8750   26.1250   29.5000
      Third Quarter......     38.3500   33.5500   38.0000      29.4375   25.0625   28.9375
      Fourth Quarter.....     40.3500   35.8000   37.6900      29.2500   22.8750   27.1800
</table>
     As of March 1, 2002, there were 1,053 stockholders of record of the
Company's Common Stock, not including stock held in "Street Name" or held
in accounts for participants of the Company's Employee Stock Ownership
Plan ("E.S.O.P.").

     The Board of Directors of the Company voted to declare four quarterly
dividends to stockholders of record totaling $1.19 per share and $1.15 per
share in 2001 and 2000, respectively.  On May 19, 2001, the Board voted to
increase the quarterly stockholder dividend from $0.29 to $0.30 per share
to stockholders of record as of June 4, 2000.  Prior to that declaration,
the Company had paid quarterly dividends of $0.29 per share dating back to
May 15, 2000 when the Board voted to increase the dividend from $0.28 to
$0.29 per share.

     In May 1999, the Board of Directors of the Company authorized a stock
buy-back program of up to 2,000,000 shares of common stock of the Company.
At December 31, 2001, there are 273,700 shares of common stock authorized
to be purchased under this program.  In November 2001, the Board of
Directors approved another stock buy-back program authorizing the purchase
of up to an additional 2,000,000 shares.  During the period from January
1, 2001 through December 31, 2001, the Company purchased 622,900 shares of
its own common stock.  During 2000, the Company purchased 606,200 shares
of its own common stock under the May 1999 buy-back program.  At December
31, 2001, the Company had authority to purchase a total of 2,273,700
additional shares of its common stock under the May 1999 and November 2001
buy-back programs.  As of December 31, 2001, the Company holds a total of
4,869,548 shares of treasury stock.

32
<page>




                                    REPORT OF MANAGEMENT

     The management of the Company is responsible for the consolidated
financial statements and all other information presented in this Annual
Report.  The financial statements have been prepared in conformity with
accounting principles generally accepted in the United States
determined by management to be appropriate in the circumstances and
include amounts based on management's informed estimates and judgments.
Financial information presented elsewhere in this Annual Report is
consistent with the financial statements.  The appropriateness of data
underlying such financial information is monitored through internal
accounting controls, an internal audit department, independent auditors
and the Board of Directors through its audit committee.

     The Company maintains a system of internal accounting controls
designed to provide reasonable assurance to management and the Board of
Directors that assets are safeguarded and that transactions are
executed in accordance with management's authorization and recorded
properly.  The system of internal accounting controls is supported by
the selection and training of qualified personnel combined with the
appropriate division of responsibilities.

     Management recognizes its responsibility for fostering a strong
ethical climate so that the Company's affairs are conducted according
to the highest standards of personal and corporate conduct.  The Board
of Directors has adopted a formal Code of Conduct and Corporate
Compliance Program governing employees and directors.  Management
encourages open communication within the Company and requires the
confidential treatment of proprietary information and compliance with
all domestic laws, including those relating to financial disclosure.

     The 2001 consolidated financial statements were audited by the
Company's independent auditors, Ernst & Young LLP, in accordance with
auditing standards generally accepted in the United States.  In
addition, Ernst & Young LLP performs reviews of the unaudited quarterly
financial statements, prior to the announcement of quarterly earnings.
Management has made available to Ernst & Young LLP all of the Company's
financial records and related data, including reports prepared by the
Internal Audit Department as well as the minutes of stockholders' and
directors' meetings.  Furthermore, management believes that all
representations made to Ernst & Young LLP were valid and appropriate.


















33
<page>



                         REPORT OF INDEPENDENT AUDITORS


To the Board of Directors and Stockholders of
The Commerce Group, Inc.

     We have audited the accompanying consolidated balance sheets of The
Commerce Group, Inc. and Subsidiaries as of December 31, 2001 and 2000,
and the related consolidated statements of earnings, stockholders' equity
and cash flows for each of the three years in the period ended December
31, 2001.  These financial statements are the responsibility of the
Company's management.  Our responsibility is to express an opinion on
these financial statements based on our audits.

     We conducted our audits in accordance with auditing standards
generally accepted in the United States.  Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement.  An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements.  An audit also includes assessing
the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement
presentation.  We believe that our audits provide a reasonable basis for
our opinion.

     In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
The Commerce Group, Inc. and Subsidiaries at December 31, 2001 and 2000,
and the consolidated results of their operations and their cash flows for
each of the three years in the period ended December 31, 2001, in
conformity with accounting principles generally accepted in the United
States.



                                            ERNST & YOUNG LLP




Boston, Massachusetts
January 29, 2002



















34
<page>


<table>
<caption>
                          THE COMMERCE GROUP, INC. AND SUBSIDIARIES
                                 CONSOLIDATED BALANCE SHEETS
                                         December 31,
                                    (Thousands of Dollars)
                                                                          2001        2000
                                          ASSETS

                                                                   <c>         <c>
Investments (notes A2, A3, and B)
  Fixed maturities, at market (cost: $618,775 in 2001 and $665,881
   in 2000).......................................................... $  626,482  $  669,935
  Preferred stocks, at market (cost: $256,582 in 2001 and $215,823
   in 2000)..........................................................    248,101     200,083
  Common stocks, at market (cost: $87,704 in 2001 and 2000)..........    107,458     115,827
  Preferred stock mutual funds, at equity (cost: $294,948 in 2001 and
   $327,980 in 2000).................................................    309,282     337,733
  Mortgage loans on real estate and collateral notes receivable
   (less allowance for possible loan losses of $660 in 2001
   and $858 in 2000).................................................     39,505      51,661
  Cash and cash equivalents..........................................    148,630      70,521
  Other investments (cost: $28,291 in 2001 and $25,475 in 2000)......     18,743      26,802
      Total investments..............................................  1,498,201   1,472,562

Accrued investment income............................................     15,539      18,218
Premiums receivable (less allowance for doubtful receivables of
  $1,565 in 2001 and $1,487 in 2000).................................    246,221     230,580
Deferred policy acquisition costs (notes A4 and C)...................    116,557     111,305
Property and equipment, net of accumulated depreciation
  (notes A5 and D)...................................................     40,014      34,823
Residual market receivable (note F)
  Losses and loss adjustment expenses................................     81,433      82,450
  Unearned premiums..................................................     44,399      44,791
Due from reinsurers (note F).........................................     70,450      61,554
Deferred income taxes (notes A9 and G)...............................     16,993      12,041
Receivable for investments sold......................................        838        -
Non-compete agreement, net of accumulated amortization (note A6).....      2,479       2,829
Other assets.........................................................      6,958       4,461
      Total assets................................................... $2,140,082  $2,075,614
<caption>

                           LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities

                                                                   <c>         <c>
  Unpaid losses and loss adjustment expenses (notes A7, E and F)..... $  681,624  $  674,140
  Unearned premiums (note A8)........................................    563,456     519,885
  Current income taxes (notes A9 and G)..............................      2,735      13,988
  Deferred income (notes A10 and F)..................................      7,015       7,703
  Contingent commissions accrued (note A11)..........................     29,724      35,346
  Payable for securities purchased...................................       -            524
  Excess of book value of subsidiary interest over cost (note A12)...      5,719       8,431
  Other liabilities and accrued expenses.............................     37,535      32,648
      Total liabilities..............................................  1,327,808   1,292,665

Minority interest (note A13).........................................       -          1,068

Stockholders' Equity (notes B, L, M and N)
  Preferred stock, authorized 5,000,000 shares at $1.00 par value;
   none issued in 2001 and 2000......................................       -           -
  Common stock, authorized 100,000,000 shares at $.50 par value;
   38,000,000 shares issued in 2001 and 2000.........................     19,000      19,000
  Paid-in capital....................................................     29,621      29,621
  Net accumulated other comprehensive income, net of income
   taxes of $6,674 in 2001 and $6,371 in 2000........................     12,394      11,833
  Retained earnings..................................................    873,671     820,528
                                                                         934,686     880,982
  Treasury stock, 4,869,548 shares in 2001 and 4,246,648 shares in
   2000, at cost (note A14)..........................................   (122,412)
(99,101)
      Total stockholders' equity.....................................    812,274     781,881
      Total liabilities, minority interest and stockholders' equity.. $2,140,082  $2,075,614

     The accompanying notes are an integral part of these consolidated financial statements.
</table>

35
<page>


<table>
<caption>
                          THE COMMERCE GROUP, INC. AND SUBSIDIARIES

                             CONSOLIDATED STATEMENTS OF EARNINGS
                               For the years ended December 31,
                        (Thousands of Dollars Except Per Share Data)

                                                             2001        2000        1999

                                                      <c>         <c>         <c>
Revenues
  Earned premiums (notes A8 and F).....................  $1,043,652  $  954,483  $  871,830
  Net investment income (note B).......................      99,611      96,830      89,789
  Premium finance and service fees.....................      17,819      15,227      14,774
  Amortization of excess of book value of subsidiary
    interest over cost (note A12)......................       3,389       3,390       3,019
  Net realized investment gains (losses) (note B)......     (10,633)     29,550     (16,378)
       Total revenues..................................   1,153,838   1,099,480     963,034

Expenses
  Losses and loss adjustment expenses
   (notes A7, E and F).................................     777,543     686,157     625,090
  Policy acquisition costs (notes A4 and C)............     260,870     243,257     233,660
       Total expenses..................................   1,038,413     929,414     858,750

       Earnings before income taxes and minority
         interest......................................     115,425     170,066     104,284

Income taxes (notes A9 and G)..........................      23,194      38,306      16,667

       Net earnings before minority interest...........      92,231     131,760      87,617

Minority interest in net loss of subsidiary (note A13).         863         320       1,059

       NET EARNINGS....................................  $   93,094  $  132,080  $   88,676

       COMPREHENSIVE INCOME............................  $   93,655  $  168,570  $   40,730

       NET EARNINGS PER COMMON SHARE:  (note A15)
         BASIC.........................................  $     2.77  $     3.87  $     2.54
         DILUTED.......................................  $     2.75  $     3.87  $     2.54

       CASH DIVIDENDS PAID PER SHARE...................  $     1.19  $     1.15  $     1.11

       WEIGHTED AVERAGE NUMBER OF COMMON
        SHARES OUTSTANDING:
          BASIC........................................  33,608,804  34,121,047  34,940,074
          DILUTED......................................  33,794,938  34,121,047  34,940,074









     The accompanying notes are an integral part of these consolidated financial statements.
</table>
36
<page>


                           THE COMMERCE GROUP, INC. AND SUBSIDIARIES

                       CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                               For the years ended December 31,
                                    (Thousands of Dollars)
<table>
<caption>
                                                    Net
                                                 Accumulated
                                                    Other
                               Common  Paid-in  Comprehensive  Retained   Treasury
                               Stock   Capital  Income/(Loss)  Earnings    Stock     Total

                           <c>      <c>        <c>         <c>       <c>        <c>
Balance January 1, 1999...... $19,000  $29,621    $ 23,289    $677,629  $ (38,687) $710,852

 Net earnings................                                   88,676               88,676
 Other comprehensive income
  (loss):
   Unrealized holding losses
    arising during the period,
    net of tax benefits of
    $18,833..................                      (34,976)                         (34,976)
  Reclassification adjustment,
   net of tax benefits of
   $6,984....................                      (12,970)                         (12,970)
  Other comprehensive(loss)..                      (47,946)                         (47,946)
 Comprehensive income........                                                        40,730
 Stockholder dividends.......                                  (38,656)             (38,656)
 Treasury stock purchased....                                             (44,921)  (44,921)

Balance December 31, 1999....  19,000   29,621     (24,657)    727,649    (83,608)  668,005

 Net earnings................                                  132,080              132,080
 Other comprehensive income:
  Unrealized holding gains
   arising during the period,
    net of taxes of $18,218..                       33,833                           33,833
  Reclassification adjustment,
   net of taxes of $1,431....                        2,657                            2,657
  Other comprehensive income.                       36,490                           36,490
 Comprehensive income........                                                       168,570
 Stockholder dividends.......                                  (39,201)             (39,201)
 Treasury stock purchased....                                             (15,493)  (15,493)

Balance December 31, 2000....  19,000   29,621      11,833     820,528    (99,101)  781,881

 Net earnings................                                   93,094               93,094
 Other comprehensive income
  (loss):
   Unrealized holding losses
    arising during the period,
    net of tax benefits of
    $634.....................                       (1,178)                          (1,178)
  Reclassification adjustment,
   net of taxes of $936......                        1,739                            1,739
  Other comprehensive income.                          561                              561
 Comprehensive income........                                                        93,655
 Stockholder dividends.......                                  (39,951)             (39,951)
 Treasury stock purchased....                                             (23,311)  (23,311)

Balance December 31, 2001.... $19,000  $29,621    $ 12,394    $873,671  $(122,412) $812,274


    The accompanying notes are an integral part of these consolidated financial statements.
</table>
37
<page>


                           THE COMMERCE GROUP, INC. AND SUBSIDIARIES

                            CONSOLIDATED STATEMENTS OF CASH FLOWS
                             For the years ended December 31,
                                    (Thousands of Dollars)
<table>
<caption>

                                                            2001        2000        1999



                                                     <c>          <c>         <c>
Cash flows from operating activities
  Premiums collected..................................  $1,066,544   $ 977,413   $ 881,472
  Net investment income received......................     101,216      92,962      90,558
  Premium finance and service fees received...........      17,819      15,227      14,774
  Losses and loss adjustment expenses paid............    (770,841)   (660,665)   (611,136)
  Policy acquisition costs paid.......................    (268,863)   (247,767)   (225,587)
  Federal income tax payments.........................     (39,703)    (29,264)    (25,404)
    Net cash provided by operating activities.........     106,172     147,906     124,677

Cash flows from investing activities
  Proceeds from maturity of fixed maturities..........      25,779      20,805      46,565
  Proceeds from sale of fixed maturities..............      89,712      97,180     142,562
  Proceeds from sale of equity securities.............      50,768      45,604      76,485
  Proceeds from sale of preferred stock mutual funds..       2,945        -           -
  Proceeds from sale of other investments.............       5,735        -           -
  Proceeds from sale of mortgages.....................        -         20,042        -
  Purchase of fixed maturities........................     (71,702)   (125,844)   (107,664)
  Purchase of equity securities.......................     (42,774)    (29,987)    (72,536)
  Purchase of preferred stock mutual funds............     (21,200)    (60,024)    (98,564)
  Purchase of other investments.......................      (8,074)    (11,885)     (4,875)
  Purchase of subsidiary, net of cash acquired........        -           -        (77,056)
  Payments received on mortgage loans and collateral
   notes receivable...................................      14,506       9,141      11,800
  Mortgage loans and collateral notes originated......      (2,152)     (7,896)    (10,911)
  Purchase of property and equipment..................     (10,206)     (3,416)     (2,910)
  Other proceeds from investing activities............       1,862       1,054       2,627
    Net cash provided by (used in) investing
      activities......................................      35,199     (45,226)    (94,477)

Cash flows from financing activities
  Dividends paid to stockholders......................     (39,951)    (39,201)    (38,656)
  Purchase of treasury stock..........................     (23,311)    (15,493)    (44,921)
    Net cash used in financing activities.............     (63,262)    (54,694)    (83,577)

Increase (decrease) in cash and cash equivalents......      78,109      47,986     (53,377)
Cash and cash equivalents at beginning of year........      70,521      22,535      75,912
Cash and cash equivalents at end of year..............  $  148,630   $  70,521   $  22,535











     The accompanying notes are an integral part of these consolidated financial statements.
</table>
38
<page>


                          THE COMMERCE GROUP, INC. AND SUBSIDIARIES
<table>
<caption>

                            CONSOLIDATED STATEMENTS OF CASH FLOWS
          Reconciliation of Net Earnings to Net Cash Provided by Operating Activities
                              For the years ended December 31,
                                    (Thousands of Dollars)

                                                              2001        2000        1999



                                                       <c>         <c>         <c>
Cash flows from operating activities
  Net earnings.........................................   $  93,094   $ 132,080   $  88,676
  Adjustments to reconcile net earnings to net cash
   provided by operating activities:
    Premiums receivable................................     (15,641)    (35,420)    (22,399)
    Deferred policy acquisition costs..................      (5,252)    (12,805)     (3,374)
    Residual market receivable.........................       1,409      14,419      (1,440)
    Due from reinsurers................................      (8,896)    (13,189)     (4,116)
    Losses and loss adjustment expenses................       7,484      14,299      12,733
    Unearned premiums..................................      43,571      62,790      38,796
    Current income taxes...............................     (11,253)      3,149       6,909
    Deferred income taxes..............................      (5,255)      5,893     (15,647)
    Deferred income....................................        (688)        239         516
    Contingent commissions.............................      (5,622)      1,878      11,401
    Other assets, liabilities and accrued expenses.....        (323)      6,708      (8,273)
    Net realized investment (gains) losses.............      10,633     (29,550)     16,378
    Other - net........................................       2,911      (2,585)      4,517

       Net cash provided by operating activities.......   $ 106,172   $ 147,906   $ 124,677



























     The accompanying notes are an integral part of these consolidated financial statements.
</table>
39
<page>


                           THE COMMERCE GROUP, INC. AND SUBSIDIARIES
                         NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                               December 31, 2001, 2000 and 1999
                                    (Thousands of Dollars)

NOTE A - Summary of Significant Accounting Policies

1.   Basis of Presentation

     The consolidated financial statements of The Commerce Group, Inc.
(the "Company") have been prepared in accordance with accounting
principles generally accepted in the United States ("GAAP").

     The consolidated financial statements include The Commerce Group,
Inc. and its wholly-owned subsidiaries, Bay Finance Company, Inc., Clark-
Prout Insurance Agency, Inc. and Commerce Holdings, Inc. ("CHI"). The
Commerce Insurance Company ("Commerce") and Citation Insurance Company
("Citation") are wholly-owned subsidiaries of CHI.  Commerce West
Insurance Company ("Commerce West") is a wholly-owned subsidiary of
Commerce.  American Commerce Insurance Company ("American Commerce") is a
wholly-owned subsidiary of ACIC Holding Co., Inc.  ACIC Holding Co., Inc.
is owned jointly with AAA Southern New England ("AAA SNE") with Commerce
maintaining an 80% common stock interest and AAA SNE maintaining a 20%
common stock interest (see NOTE A17).  All inter-company transactions and
balances have been eliminated in consolidation. Certain prior year account
balances have been reclassified to conform to the 2001 presentation.
During the fourth quarter of 2000, the Company changed its policy in
regard to its investments in certain closed-end preferred stock mutual
funds.  The level of ownership and new investment policy requires the
Company to account for these investments on an equity basis.  The results
of prior accounting periods impacted by this change have been restated.

     The insurance subsidiaries, Commerce, Citation, Commerce West and
American Commerce, prepare statutory financial statements in accordance
with accounting practices prescribed by the National Association of
Insurance Commissioners ("NAIC"), the Commonwealth of Massachusetts, the
State of California, and the State of Ohio.

     The preparation of financial statements in conformity with GAAP
requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.

2.   Investments

     All investment transactions have credit exposure to the extent that a
counter party may default on an obligation to the Company.  Credit risk is
a consequence of carrying investment positions.  To manage credit risk,
the Company focuses on higher quality fixed-income securities and
preferred stocks, reviews the credit strength of all companies in which it
invests, limits its exposure in any one investment category and monitors
the portfolio quality, taking into account credit ratings assigned by
recognized statistical rating organizations.

     The focus of management's judgments and estimates relating to
investments involves the potential impairment of investments for other
than temporary declines in market values.  Carrying values of investments
in fixed maturities, which include taxable and non-taxable bonds, and
investments in common and preferred stocks, are derived from market prices
supplied by the Company's investment custodian.  Unrealized investment
gains and losses on common and preferred stocks and fixed maturities, to
the extent that there is no other than temporary impairment of value, are
credited or charged to a separate component of stockholders' equity, known
as "net accumulated other comprehensive income (loss)", until realized,
net of any tax effect.  An impairment in an investment is deemed to be
other than temporary when a security's market value has diminished to less
than 75% of cost for two consecutive quarters.  If the contractual terms
of the security are being complied with, management performs a cash flow
valuation to determine the potential impairment of the security.  If the
security is deemed impaired the Company adjusts the securities cost to
market value through realized loss based on publicly available or, in the
absence of such, to a value based on cash flow modeling.  During 2001, the
Company wrote down $2,665 in bonds and preferred stock investments with
impairment as determined by management to be other than temporary.  Given
the makeup and quality of the Company's investments, management does not
40
<page>


                           THE COMMERCE GROUP, INC. AND SUBSIDIARIES
                          NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                              December 31, 2001, 2000 and 1999
                                 (Thousands of Dollars)


NOTE A - Summary of Significant Accounting Policies   (continued)

believe that a more stringent policy would have a material effect on the
carrying value of its investments.  When investment securities are sold,
the realized gain or loss is determined based upon specific
identification.  Fair market value of fixed maturities and common and
preferred stocks are based on quoted market prices.  For other securities
held as investments, fair market value equals quoted market price, if
available.  If a quoted market price is not available, fair market value
is estimated using quoted market prices for similar securities.  The
Company has not invested more than 5% of fixed maturities in any one state
or political subdivision.

     During 2001, as required by the Emerging Issues Task Force ("EITF")
D-46, the Company began accounting for venture capital fund investments in
which it owns more than a 5% interest on the equity method.  The operating
results of these venture capital fund investments have been reflected in
realized gains and losses.  Prior to this change, the operating results
were not material and were therefore reflected in accumulated other
comprehensive income and loss.

     During the fourth quarter of 2000 the Company changed its policy in
regard to investments in certain closed-end preferred stock mutual funds.
From that point forward the Company intends to take a proactive posture to
affect the overall investment performance of these funds.  The Company's
level of ownership and new investment policy required the Company to
account for these investments from that point forward on the equity
method.  Under the equity method the Company recorded it's share of the
changes in the mutual funds' undistributed net assets in net investment
income.  Prior to the fourth quarter of 2000 these investments were
recorded at their fair market value with the changes in value reflected in
accumulated other comprehensive income.  With the adoption of the equity
method in the fourth quarter of 2000 all prior periods were restated to
reflect equity method accounting.  Beginning in the first quarter of 2001
the Company began recording their equity in the changes in net assets of
closed-end preferred stock mutual funds as a component of realized gains
and losses.  All prior periods have been reclassified to permit comparison
with the current year presentation.  The Company believes the current year
presentation provides a more appropriate classification for analysis of
ongoing operations of the Company.  These investments are valued at
original cost plus the cumulative undistributed equity in earnings and
losses of the funds and adjusted over time by the premium or discount at
the time of purchase to the applicable underlying net asset value of the
funds.

     The Company originates and holds mortgage loans on real estate on
properties located in the Commonwealth of Massachusetts and the State of
Connecticut.  The Company controls credit risk through credit approvals,
credit limits and monitoring procedures.  The Company performs in-depth
credit evaluations on all new mortgage customers.  Bad debt expenses have
not been material in recent years.

     Mortgage loans on real estate and collateral notes receivable are
stated at the amount of unpaid principal, less an allowance for possible
loan losses.  The adequacy of the allowance for possible loan losses is
evaluated on a regular basis by management. Factors considered in
evaluating the adequacy of the allowance include previous loss experience,
current economic conditions and their effect on borrowers and the
performance of individual loans in relation to contract terms.  The
provision for possible loan losses charged to operating expenses is based
upon management's judgment of the amount necessary to maintain the
allowance at a level adequate to absorb possible losses.  Loan losses are
charged against the allowance when management believes the collectibility
of the principal is unlikely and recoveries are credited to the allowance
when received.

     Interest on mortgage loans is included in income as earned based upon
rates applied to principal amounts outstanding.  Accrual of interest on
mortgage loans is discontinued either when reasonable doubt exists as to
the full, timely collection of interest or principal, or when a loan
becomes contractually past due more than ninety days.  When a loan is
placed on non-accrual status, all unpaid interest previously accrued is
reversed against current period earnings.
41
<page>


                           THE COMMERCE GROUP, INC. AND SUBSIDIARIES
                          NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                               December 31, 2001, 2000 and 1999
                                    (Thousands of Dollars)

NOTE A - Summary of Significant Accounting Policies   (continued)

3.   Cash and Cash Equivalents

     Cash and cash equivalents includes cash currently on hand to cover
operating expenses.  The Company invested $82,856 with Fidelity Investment
Government Fund and $59,281 with Provident Institutional Fund.  These are
short-term money market investments in government backed securities.
Money is invested on a daily basis.  The Company held $17,210 and $13,775
in U.S. Government Repurchase Agreements at various financial institutions
in 2001 and 2000, respectively.  The amount of collateral, maintained by
the seller, at the time of purchase and each subsequent business day, is
required to have a market value that is equal to 102% of the resale price.

4.   Deferred Policy Acquisition Costs

     Policy acquisition costs are calculated by line of business as a
percentage of unearned premiums by multiplying the sum of current
commission rates plus current premium tax rates plus an estimate of the
percentage of other underwriting expenses incurred at the policy issuance.
These costs are deferred and amortized over the period in which the
related premiums are earned, the amount being reduced by any potential
premium deficiency.  If any potential premium deficiency exists, it
represents future estimated losses, loss adjustment expenses and
amortization of deferred acquisition costs in excess of the related
unearned premiums.  There was no premium deficiency in 2001, 2000 and
1999. In determining whether a premium deficiency exists, the Company
considers anticipated investment income.

5.   Property and Equipment

     Property and equipment are stated at cost and are depreciated on the
straight line method over the estimated useful lives of the assets using
the following rates:
                                                                   Percent
               Asset Classification                               Per
Annum
               Buildings.....................................         2.5
               Building improvements (prior to 1992).........         2.5
               Building improvements (1992 and subsequent)...         5.0
               Equipment and office furniture................        10.0
               EDP equipment and copiers.....................        20.0
               Automobiles...................................        33.3

     Maintenance and repairs are charged to operations; betterments are
capitalized.  The cost of property sold or otherwise disposed of and the
accumulated depreciation thereon is eliminated from the related property
and accumulated depreciation accounts and any resulting gain or loss is
credited or charged to income.

6.   Non-Compete Agreement

     The non-compete agreement of $2,479 represents the unamortized
portion of the purchase price associated with the acquisition of American
Commerce allocated to the arrangement whereby the American Automobile
Association, Inc. ("AAA National") agreed not to compete with American
Commerce prior to February 2009.  The cost of $3,500 is being amortized on
a straightline basis over the term of the arrangement.  The amount of
accumulated amortization at December 31, 2001 and 2000 was $1,021 and
$671, respectively.

7.   Unpaid Loss and Loss Adjustment Expenses

     Loss and LAE reserves by their nature are inherently uncertain as to
the ultimate outcome of the estimated amounts.  The liability for unpaid
losses and loss adjustment expenses ("LAE") represents the accumulation of
individual case estimates for reported losses and estimates for incurred
but not reported ("IBNR") losses and LAE net of, salvage and subrogation
recoverable.  The liability for losses and LAE is intended to cover the
ultimate net cost of all losses and LAE incurred through the balance sheet
date.  Liability estimates are continually reviewed and updated, and
therefore, the ultimate liability may be
more or less than the current estimate.  The effects of changes in the
estimates are included in the results of operations in the period in which
the estimates are revised.
42
<page>


                           THE COMMERCE GROUP, INC. AND SUBSIDIARIES
                          NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                               December 31, 2001, 2000 and 1999
                                    (Thousands of Dollars)

NOTE A - Summary of Significant Accounting Policies   (continued)

8.   Premiums

     Insurance premiums are recognized as income ratably over the terms of
the policies.  Unearned premiums are determined by prorating written
premiums on a daily basis over the terms of the policies.  A significant
portion of the Company's Massachusetts premiums written is derived through
the American Automobile Association Clubs of Massachusetts ("AAA clubs")
affinity group marketing program.  Of the Company's total direct premiums
written, the portion attributable to the AAA affinity group marketing
program in Massachusetts was $545,496 or 47.3% in 2001, $535,766 or 50.0%
in 2000 and $495,962 or 52.3% in 1999.  Of these amounts, 13.0% were
written through insurance agencies owned by the AAA clubs and 87.0% were
written through the Company's network of independent agents in 2001.

9.   Income Taxes

     The Company uses an asset and liability approach that requires the
recognition of deferred tax assets and liabilities for the expected future
tax consequences of events that have been recognized in the Company's
financial statements or tax returns.  In estimating future tax
consequences, the Company generally considers all expected future events
other than changes in the tax law or rates, unless enacted.  Valuation
allowances are established when necessary to reduce deferred tax assets to
the amount expected to be realized.  No valuation allowance was
established in 2001, 2000 or 1999.

10.  Deferred Income

     Income consisting of expense reimbursements, which include servicing
carrier fees from Commonwealth Automobile Reinsurers ("C.A.R."), a state-
mandated reinsurance mechanism, on policies written for C.A.R., are
deferred and amortized over the term of the related insurance policies
(see "Notes to Consolidated Financial Statements - NOTE F").

11.  Contingent Commissions

     In addition to state mandated minimum and other commissions on
policies written, the Company pays certain of its agencies compensation in
the form of profit sharing.  This is based, in part, on the underwriting
profits of an individual agent's business written with the Company.  The
arrangement for Massachusetts business utilizes a three-year rolling plan,
with one third of the agent's profit or loss for each of the current and
the two prior years' calculations summed to a single amount.  This amount,
if positive, is multiplied by the profit sharing commission rate and paid
to the agent.  Outside of Massachusetts, Commerce West and American
Commerce each have contingent commission plans tailored to their specific
markets.

12.  Excess of Book Value of Subsidiary Interest Over Cost

     As a result of the acquisition of American Commerce, the amount
representing the excess of the fair value of the net assets acquired over
the purchase price at the January 29, 1999 acquisition date was $16,947.
The amount is being amortized into revenue on the straight line basis over
a five year period.  The amount amortized into income in 2001, 2000 and
1999 was $3,389, $3,390 and $3,019, respectively.  See "Notes to
Consolidated Financial Statements - NOTE A17" for treatment of excess of
book value of subsidiary interest over cost ("negative goodwill")
subsequent to December 31, 2001.
43
<page>


                           THE COMMERCE GROUP, INC. AND SUBSIDIARIES
                          NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                              December 31, 2001, 2000 and 1999
                                   (Thousands of Dollars)

NOTE A - Summary of Significant Accounting Policies   (continued)


13.  Minority Interest in Net Loss of Subsidiary

     As a result of the joint venture with AAA SNE and acquisition of
American Commerce, the Company's interest in ACIC Holding Co., Inc.,
through Commerce, a wholly-owned subsidiary of CHI, is represented by
ownership of 80% of the outstanding shares of common stock at December 31,
2001.  AAA SNE maintains a 20% common stock ownership.  The minority
interest of $863 included in the consolidated statement of earnings for
2001 represents 20% of the net loss for ACIC Holding Co., Inc., calculated
after the $9,582 preferred stock dividend paid to Commerce, to the extent
of the minority interest.  This compares to $320 minority interest in the
net loss of ACIC Holding Co., Inc. after $9,178 in preferred stock
dividends paid to Commerce in 2000.  During the third quarter of 2001, the
net losses of ACIC Holding Co., Inc. exceeded the minority interest
balance sheet component.


14.  Treasury Stock

     In May 1999, the Board of Directors of the Company authorized a stock
buy-back program of up to 2,000,000 shares of common stock of the Company.
At December 31, 2001, there are 273,700 shares of common stock authorized
to be purchased under this program.  In November 2001, the Board of
Directors approved another stock buy-back program authorizing the purchase
of up to an additional 2,000,000 shares.  During the period from January
1, 2001 through December 31, 2001, the Company purchased 622,900 shares of
its own common stock.  During 2000, the Company purchased 606,200 shares
of its own common stock under the May 1999 buy-back program.  At December
31, 2001, the Company had authority to purchase a total of 2,273,700
additional shares of its common stock under the May 1999 and November 2001
buy-back programs.  As of December 31, 2001, the Company holds a total of
4,869,548 shares of treasury stock.


15.  Net Earnings Per Common Share

     Net earnings per basic common share is computed by dividing net
earnings by the weighted average number of basic common shares
outstanding.  The weighted average number of basic common shares
outstanding for the years ended December 31, 2001, 2000 and 1999 were
33,608,804, 34,121,047, and 34,940,074, respectively.  Weighted average
number of basic common shares outstanding is determined by taking the
average of the following calculation for a specified period of time:  The
daily amount of (1) the total issued outstanding common shares minus (2)
the total Treasury Stock purchased.

     Earnings per diluted common share is based on the weighted average
number of diluted common shares outstanding during each period.  The
weighted average number of diluted common shares outstanding for the years
ended December 31, 2001, 2000 and 1999 were 33,794,938, 34,121,047 and
34,940,074, respectively.  The Company's only potentially dilutive
instruments are stock options outstanding and dilution from these is not
significant.


16.  New Accounting Pronouncements

     The NAIC revised the Accounting Practices and Procedures Manual in a
process referred to as Codification.  The revised manual became effective
January 1, 2001 for all insurance companies.  The domiciliary states of
the Company's insurance subsidiaries have adopted the provisions of the
revised manual.  The revised manual has changed certain prescribed
statutory accounting practices and has resulted in changes to the
accounting practices that the Company's insurance subsidiaries use to
prepare their statutory-basis financial statements.  The impact of these
changes to the Company's insurance subsidiaries statutory-basis capital
and surplus as of January 1, 2001 had a significant beneficial effect of
approximately $38,737 primarily due to the inclusion of deferred taxes as
an admitted asset.  The codification changes had no impact on the
Company's GAAP financial statements.
44
<page>


                           THE COMMERCE GROUP, INC. AND SUBSIDIARIES
                           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                               December 31, 2001, 2000 and 1999
                        (Thousands of Dollars Except for Per Share Data)


NOTE A - Summary of Significant Accounting Policies   (continued)

     In June 1998, the FASB issued Statement of Financial Accounting
Standards No. 133 ("SFAS 133"), "Accounting for Certain Derivative
Instruments and Hedging Activities", as amended in June 2000 by Statement
of Financial Accounting Standards No. 138 ("SFAS 138"), "Accounting for
Certain Derivative Instruments and Certain Hedging Activities", which
requires companies to recognize all derivatives as either assets or
liabilities in the balance sheet and measure such instruments at fair
value.  SFAS 138 also amended Statement of Financial Accounting Standards
No. 137 ("SFAS 137"), "Accounting for Derivative Instruments and Hedging
Activities - Deferral of the Effective Date of FASB Statement No. 133".
The provisions of SFAS 133 require adoption for fiscal years beginning
after June 15, 2000.  The Company had no derivative or hedging activity in
2001, 2000 or 1999.  The adoption of these SFASs had no material impact on
the Company's consolidated financial statements.

     In September 2000, the FASB issued Statement of Financial Accounting
Standards No. 140 ("SFAS 140"), "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities", which replaced
Statement of Financial Accounting Standards No. 125 ("SFAS 125"),
"Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities".  The Statement provides accounting and
reporting standards for transfers and servicing of financial assets and
extinguishments of liabilities.  Those standards are based on consistent
application of a "financial components" approach that focuses on control.
Under that approach, after a transfer of financial assets, a company
recognizes the financial and servicing assets it controls and the
liabilities it has incurred, does not recognize financial assets when
control has been surrendered, and does not recognize liabilities when
extinguished.  The Statement provides consistent standards for
distinguishing transfers of financial assets that are sales from transfers
that are secured borrowings.  The Statement is effective for transfers and
servicing of financial assets and extinguishments of liabilities occurring
after March 31, 2001.  Adoption of SFAS 140 did not have a material impact
on the Company's consolidated financial statements.

     In July 2001, the FASB issued Statements of Financial Accounting
Standards No. 141, "Business Combinations", and No. 142, "Goodwill and
Other Intangible Assets".  SFAS No. 141, effective for business
combinations initiated after June 30, 2001, requires that all business
combinations be accounted for under a single method - the purchase method.
Use of the pooling-of-interests method is no longer permitted.  SFAS No.
141 also clarifies the criteria to recognize intangible assets separately
from goodwill.  SFAS No. 142 requires that goodwill and intangible assets
deemed to have indefinite lives no longer be amortized to earnings, but
instead be reviewed at least annually for impairment.  Other intangible
assets will continue to be amortized over their useful lives.  SFAS No.
142 will be effective January 1, 2002.

     The Company has evaluated the impact of adopting the provisions of
SFAS No. 142 on earnings and financial position for the year ended
December 31, 2002.  Effective January 1, 2002, in accordance with SFAS No.
142, the Company will cease amortizing the balance sheet item "excess of
book value of subsidiary interest over cost" which is $5.7 million at year
end 2001.  The 2001 impact of the amortization of this resulted in
approximately $0.10 per share of annual operating earnings.  Additionally,
the Company will no longer amortize the negative goodwill resulting from
the purchase of preferred stock mutual funds effective January 1, 2002.
The amount of unamortized negative goodwill at year-end is $6.4 million.
The 2001 impact of the amortization of this was $0.10 per share of
earnings classified as capital gains.  Both the excess of book value of
subsidiary interest over cost and the negative goodwill on preferred stock
mutual funds will be recognized as income in the first quarter of 2002 and
classified as an extraordinary item.  The estimated per share income
impact for this change is $0.34 per share.

45
<page>


                          THE COMMERCE GROUP, INC. AND SUBSIDIARIES

                          NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                               December 31, 2001, 2000 and 1999
                                    (Thousands of Dollars)


17.  Acquisition

     In November 1998, Commerce formed ACIC Holding Co., Inc., in a joint
venture with AAA SNE and invested $90,800 to fund the January 29, 1999
acquisition of the Automobile Club Insurance Company, whose name was
changed to American Commerce upon completion of the acquisition. Commerce
invested $90,000 in the form of preferred stock and an additional $800
representing an 80% common stock ownership.  AAA SNE invested $200
representing a 20% common stock ownership.  The terms of the preferred
stock call for Commerce to receive quarterly cash dividends at the rate of
10% per annum from ACIC Holding, Co., Inc.  In the event cash dividends
cannot be paid, additional preferred stock will be issued.  During 2001,
96 shares of Class B preferred stock were issued in lieu of the cash
payment of dividends.  The acquisition was accounted for as a purchase.
Since the January 29, 1999 acquisition, American Commerce's results have
been consolidated into the Company's financial statements.  Since 1995,
Commerce has maintained an exclusive affinity group marketing relationship
with AAA Insurance Agency, Inc., a subsidiary of AAA SNE.  AAA Insurance
Agency, Inc. has been a licensed insurance agent of Commerce since 1985.


NOTE B - Investments and Investment Income

1.   Fixed Maturities
<table>
<caption>
     The amortized cost and estimated fair market value of investments in fixed maturities are as
follows:
                                                       Gross          Gross
                                                     Accumulated   Accumulated
                                                       Other          Other       Estimated
                                         Amortized  Comprehensive Comprehensive  Fair Market
                                            Cost       Income        Losses         Value

                                      <c>        <c>           <c>            <c>
At December 31, 2001:
  Corporate bonds.....................   $ 133,506  $       7,497 $      (4,497) $   136,506
  U.S. Treasury bonds and notes.......         104              1          -             105
  GNMA & FNMA mortgage-backed bonds...      98,198          1,602          (815)      98,985
  Obligations of states and
   political subdivisions.............     386,967          8,890        (4,971)     390,886
       Total..........................   $ 618,775  $      17,990 $     (10,283) $   626,482

At December 31, 2000:
  Corporate Bonds.....................   $ 130,775  $       1,263 $      (5,783) $   126,255
  U.S. Treasury bonds and notes.......       3,428             86          (137)       3,377
  GNMA & FNMA mortgage-backed bonds...      67,274            444          (457)      67,261
  Obligations of states and
   political subdivisions.............     464,404         14,454        (5,816)     473,042
       Total..........................   $ 665,881  $      16,247 $     (12,193) $   669,935
</table>





46
<page>



                          THE COMMERCE GROUP, INC. AND SUBSIDIARIES

                          NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                               December 31, 2001, 2000 and 1999
                                    (Thousands of Dollars)


NOTE B - Investments and Investment Income   (continued)

     Proceeds from sales of investments in fixed maturities, gross
gains and gross losses realized on those sales were as follows:
<table>
<caption>
                                                       Proceeds       Gross         Gross
                                                         From        Realized      Realized
                                                        Sales         Gains         Losses

                                                    <c>           <c>          <c>
For the year ended December 31, 2001:
  Corporate bonds...................................   $  7,343      $    129     $   (151)
  U.S. Treasury bonds and notes.....................       -             -            -
  GNMA mortgage-backed bonds........................       -             -            -
  Obligations of states and political subdivisions..     82,369           694       (1,820)
       Total .......................................   $ 89,712      $    823     $ (1,971)

For the year ended December 31, 2000:
  Corporate bonds...................................   $  1,167      $   -        $   -
  U.S. Treasury bonds and notes.....................       -             -            -
  GNMA mortgage-backed bonds........................       -             -            -
  Obligations of states and political subdivisions..     96,013           198       (2,749)
       Total .......................................   $ 97,180      $    198     $ (2,749)

For the year ended December 31, 1999:
  Corporate bonds...................................   $ 17,516      $    102     $   (941)
  U.S. Treasury bonds and notes.....................     27,096             8         (842)
  GNMA mortgage-backed bonds........................       -             -            -
  Obligations of states and political subdivisions..     97,950           298       (2,606)
       Total .......................................   $142,562      $    408     $ (4,389)

<caption>
      The amortized cost and approximate fair market value of fixed maturities at December
31, 2001 and 2000, by contractual maturity, are as follows:

                                                           2001                 2000
                                                                 Fair                 Fair
                                                    Amortized   Market   Amortized   Market
                                                      Cost       Value      Cost      Value

Obligations of states, political subdivisions,
  corporate bonds and U.S. Treasury bonds and
  notes:

                                                <c>        <c>        <c>       <c>
Due in one year or less....................        $  1,398   $  1,417   $  1,201  $  1,214
Due after one year through five years......           2,860      3,001      7,650     7,882
Due after five years through ten years.....           5,256      5,378      9,162     9,431
Due after ten years........................         511,063    517,701    580,594   584,147
                                                    520,577    527,497    598,607   602,674

GNMA & FNMA mortgage-backed bonds..........          98,198     98,985     67,274    67,261
       Total fixed maturities..............        $618,775   $626,482   $665,881  $669,935


      Expected maturities may differ from contractual maturities because issuers may have
the right to call or prepay obligations.
</table>
47
<page>


                          THE COMMERCE GROUP, INC. AND SUBSIDIARIES
                          NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                              December 31, 2001, 2000 and 1999
                                    (Thousands of Dollars)

NOTE B - Investments and Investment Income   (continued)

2.  Closed-end Preferred Stock Mutual Funds

     The following table reflects the shares held, percentage of
ownership, carrying value at equity, book value, market value, and value
of shares at net asset value, by fund at December 31, 2001 and 2000:
<table>
<caption>
                                  December 31, 2001

             Fund              Carrying                   Quoted      Value of
   Fund     Shares     % of      Value        Book        Market   Shares at Net
 Symbol(1)   Held   Ownership  at Equity      Value       Value      Asset Value
   
     <c>         <c>      <c>         <c>         <c>           <c>
   PGD     2,361,500   28.3%    $ 30,225    $ 25,713    $ 29,873      $ 32,258
   PPF     2,370,400   32.7%      30,168      26,256      29,275        31,076
   PDF     4,685,500   31.3%      44,900      42,400      45,121        45,731
   PDT     5,289,700   35.3%      63,035      57,175      58,451        64,111
   DIV     3,579,500   36.2%      51,991      49,687      52,798        53,335
   PFD     2,981,500   30.3%      42,904      44,803      43,828        42,904
   PFO     4,050,043   36.3%      46,059      48,914      47,993        46,251

          Total                 $309,282    $294,948    $307,339      $315,666

<caption>
                                  December 31, 2000

             Fund              Carrying                   Quoted      Value of
   Fund     Shares     % of      Value        Book        Market   Shares at Net
 Symbol(1)   Held   Ownership  at Equity      Value       Value      Asset Value
   
     <c>         <c>      <c>         <c>         <c>           <c>
   PGD     1,877,300   22.5%    $ 23,478    $ 19,666    $ 22,528      $ 26,695
   PPF     2,352,900   32.4%      28,322      26,048      25,882        30,470
   PDF     4,638,800   31.0%      46,003      41,966      40,589        47,594
   PDT     4,925,100   32.8%      60,453      53,144      52,021        63,091
   DIV     3,080,500   31.2%      46,314      42,500      40,239        48,918
   PDI(2)  5,253,400   48.5%      52,207      52,583      52,534        54,110
   PFD     2,981,500   30.3%      39,834      44,803      36,151        40,012
   PFO     3,892,543   34.9%      41,122      47,270      40,385        41,533

          Total                 $337,733    $327,980    $310,329      $352,423

(1) John Hancock Patriot Global Dividend Fund ("PGD"), John Hancock Patriot Preferred Dividend Fund ("PPF"),
    John Hancock Patriot Premium Dividend I Fund ("PDF"), John Hancock Patriot Premium Dividend II Fund ("PDT"),
    John Hancock Patriot Select Dividend Fund ("DIV"), Putnam Dividend Income Fund ("PDI"), Preferred Income Fund
   ("PFD"), Preferred Income Opportunity Fund ("PFO").

(2) In 2001, the Trustees of PDI liquidated the fund.  The Company's pro-rata share of the portfolio securities and
    cash of PDI was transferred to a new fund created by the PDI Trustees whose ownership was conveyed to the
    Company.  At December 31, 2001 the fund, totaling $60,869, was consolidated into the Company's financial
    statements.  The majority of the fund represents investments valued at $59,019 and is included in preferred
    stocks and $1,332 in cash and cash equivalents.
</table>

     The difference between the carrying value at equity and the value of
shares at net asset value is negative goodwill created at the time of the
purchase of the shares.  SFAS 141, which was implemented on July 1, 2001,
specifically addresses the manner in which to account for negative
goodwill.  For purchases prior to July 1, 2001, that created negative
goodwill, the Company continued to amortize the negative goodwill on these
securities through the end of 2001.  This negative goodwill was amortized
into realized gains over various periods ranging from 1.25 years to 4
years based on the turnover ratios of the funds.  In accordance with SFAS
141, for purchases subsequent to June 30, 2001, the difference between the
cost and net asset value at the time of purchase was recognized as a
realized gain, totaling $614 for 2001.
48
<page>


                           THE COMMERCE GROUP, INC. AND SUBSIDIARIES

                         NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                               December 31, 2001, 2000 and 1999
                                   (Thousands of Dollars)


NOTE B - Investments and Investment Income   (continued)

3. Mortgage Loans on Real Estate and Collateral Notes Receivable

     At December 31, 2001 and 2000, mortgage loans on real estate and
collateral notes receivable consisted of the following:
<TABLE>
<caption>
                                                                  December 31,
                                                              2001            2000
                  
                                       <c>             <c>
                  Residential (1st Mortgages)............   $28,696         $36,496
                  Residential (2nd Mortgages)............        83             209
                  Commercial (1st Mortgages).............     8,210          12,542
                  Commercial (2nd Mortgages).............        33              50
                                                             37,022          49,297
                  Collateral notes receivable............     3,143           3,222
                                                             40,165          52,519
                  Allowance for possible loan losses.....      (660)           (858)
                    Mortgage loans on real estate and
                       collateral notes receivable.......   $39,505         $51,661
</table>
     Fair value of the Company's mortgage loans on real estate and
collateral notes receivable is estimated by discounting the future cash
flows using the current rates at which similar loans would be made to
borrowers with similar credit and for the same remaining maturities.  The
future cash flows associated with certain non-performing loans are
estimated based on expected payments from borrowers either through work
out arrangements or the disposition of collateral.  The estimated fair
value of mortgage loans on real estate and collateral notes receivable at
December 31, 2001 and 2000, prior to the allowance for possible loan
losses, was $41,391 and $54,141, respectively.

     At December 31, 2001 and 2000 mortgage loans which were on non-
accrual status amounted to $1,118 and $1,357, respectively.  The reduction
in interest income associated with non-accrual loans was $99, $118 and
$129 for the years ended December 31, 2001, 2000 and 1999, respectively.

     The Company originates and services residential and commercial
mortgages in Massachusetts and Connecticut.  The Company's exposure is
generally 80% or less of the appraised value of any collateralized real
property at the time of the loan origination.  The ability and willingness
of residential and commercial borrowers to honor their repayment
commitments is generally dependent upon the level of overall economic
activity and real estate values.  The Company sold $20,042 of residential
mortgages in 2000 without recourse to an unrelated third party.

     A summary of the changes in the allowance for possible loan losses
follows:
<table>
<caption>
                                                                  Years ended December 31,
                                                                    2001            2000
            
                                                   <c>             <c>
            Balance, beginning of year.........................   $    858        $  2,127
              Decrease in provision for possible loan losses...       (198)         (1,269)
            Balance, end of year...............................   $    660        $    858
</table>

49
<page>


                           THE COMMERCE GROUP, INC. AND SUBSIDIARIES

                          NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                               December 31, 2001, 2000 and 1999
                                    (Thousands of Dollars)


NOTE B - Investments and Investment Income   (continued)


     The following table describes mortgage principal balances by maturity,
total mortgages over 90 days past due and total mortgages in foreclosure:
<table>
<caption>
                                                                       2001           2000
            Fixed rate mortgages maturing:
              
                                                   <c>            <c>
              One year or less................................      $     90       $    141
              More than one year to five years................           861            742
              More than five years to ten years...............         3,366          5,331
              Over ten years..................................        23,375         31,810
                   Total fixed mortgages......................      $ 27,692       $ 38,024

            Adjustable rate mortgages maturing:
              One year or less................................      $   -          $   -
              More than one year to five years................            87             61
              More than five years to ten years...............           419            283
              Over ten years..................................         8,824         10,929
                   Total adjustable mortgages.................      $  9,330       $ 11,273

            Past due over 90 days.............................      $  1,118       $  1,357

            Mortgages in foreclosure, included in past due
              over 90 days....................................      $    184       $    808
</table>

4. Net Investment Income

     The components of net investment income were as follows:
<table>
<caption>
                                                             Years ended December 31,
                                                           2001        2000          1999
      
                                                <c>         <c>           <c>
      Interest on fixed maturities...................    $ 45,542    $ 44,766      $ 45,957
      Dividends on common and preferred stocks.......      23,768      23,177        23,148
      Dividends on preferred stock mutual funds......      23,165      22,158        15,483
      Interest on cash and cash equivalents..........       5,729       3,555         2,596
      Interest on mortgage loans.....................       4,026       5,677         5,908
      Other..........................................         356          84           118
               Total investment income...............     102,586      99,417        93,210
      Investment expenses............................       2,975       2,587         3,421
               Net investment income.................    $ 99,611    $ 96,830      $ 89,789
</table>

5. Net Realized Investment Gains (Losses)

     Net realized investment gains (losses) were as follows:
<table>
<caption>
                                                            Years ended December 31,
                                                         2001          2000          1999
Net realized investment gains (losses):
  
                                                <c>           <c>           <c>
  Fixed maturities................................   $ (2,816)     $ (3,772)     $ (5,991)
  Preferred stocks................................     (3,692)        1,286          (244)
  Common stocks...................................        603         4,370        11,023
  Closed-end preferred stock mutual funds*........      4,582        26,575       (22,401)
  Venture capital fund investments................     (9,071)          460           888
  Other...........................................       (239)          631           347
      Total.......................................   $(10,633)     $ 29,550      $(16,378)

*Includes $3,215 in 2001 and $9,260 in 2000, respectively, relating to the amortization of
 negative goodwill, at the time of purchase, of these securities.
</table>
50
<page>


                           THE COMMERCE GROUP, INC. AND SUBSIDIARIES

                           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                December 31, 2001, 2000 and 1999
                                   (Thousands of Dollars)


NOTE B - Investments and Investment Income   (continued)


6. Other Comprehensive Income (Loss)

     Net increases (decreases) in other comprehensive income (loss), less
applicable income tax (expense) benefit, were as follows:
<table>
<caption>
                                                            Years ended December 31,
                                                         2001          2000          1999
Other comprehensive income (loss):
  
                                                <c>           <c>           <c>
  Fixed maturities................................   $  3,653      $ 18,161      $(32,892)
  Preferred stocks................................      7,259         4,145       (17,040)
  Common stocks...................................     (8,369)       34,759       (26,587)
  Other...........................................     (1,327)          318           634
  Impact of minority interest.....................       (352)       (1,244)        2,122
      Total.......................................        864        56,139       (73,763)

  Tax benefit (expense)...........................       (272)      (19,495)       26,560
  Impact of minority interest.....................        (31)         (154)         (743)
      Total tax benefit (expense).................       (303)      (19,649)       25,817
      Total other comprehensive income (loss).....   $    561      $ 36,490      $(47,946)
<caption>
     A summary of net accumulated other comprehensive income (loss) on stocks and fixed
maturity investments in 2001, 2000 and 1999 follows:

                                                           Years ended December 31,
                                                         2001          2000          1999
   
                                               <c>           <c>           <c>
   Accumulated other comprehensive income.........   $ 45,873      $ 46,699      $  8,317
   Accumulated other comprehensive losses.........    (26,893)      (28,935)      (47,936)
   Impact of minority interest....................         88           440         1,685
        Total unrealized gains (losses)...........     19,068        18,204       (37,934)

   Tax benefit (expense)..........................     (6,643)       (6,217)       13,867
   Impact of minority interest....................        (31)         (154)         (590)
        Total benefit (expense)...................     (6,674)       (6,371)       13,277
        Total.....................................   $ 12,394      $ 11,833      $(24,657)
</table>

NOTE C - Deferred Policy Acquisition Costs

     Policy acquisition costs incurred and amortized to income are as
follows:
<table>
<caption>
                                                           Years ended December 31,
                                                         2001          2000          1999
            
                                         <c>          <c>           <c>
            Balance, beginning of year.............     $111,305     $ 98,500      $ 88,759
            Costs deferred during the year.........      266,122      256,062       243,401
            Amortization charged to expense........     (260,870)    (243,257)     (233,660)
            Balance, end of year...................     $116,557     $111,305      $ 98,500
</table>
51
<page>


                           THE COMMERCE GROUP, INC. AND SUBSIDIARIES

                           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                 December 31, 2001, 2000 and 1999
                                    (Thousands of Dollars)


NOTE D - Property and Equipment

     A summary of property and equipment at December 31, is as follows:
<table>
<caption>
                                                                  2001        2000
                  
                                           <c>         <c>
                  Buildings.................................    $ 33,013    $ 32,916
                  Equipment and office furniture............      36,609      35,185
                  Building improvements.....................         850         850
                                                                  70,472      68,951
                        Less accumulated depreciation.......     (38,473)    (35,456)
                                                                  31,999      33,495
                  Land......................................       3,476       1,253
                  Construction in progress..................       4,539          75

                                                                $ 40,014    $ 34,823
</table>
     Depreciation expense was $4,280, $4,270 and $4,243 for the years
ended December 31, 2001, 2000 and 1999, respectively.  Depreciation
expense is allocated evenly between losses and loss adjustment expenses
and policy acquisition costs.


NOTE E - Unpaid Losses and Loss Adjustment Expenses

     Liabilities for unpaid losses and loss adjustment expenses at December
31, consist of:
<table>
<caption>
                                                                  2001        2000
  
                                                           <c>         <c>
  Net voluntary unpaid loss and LAE reserves................    $558,635    $544,585
  Voluntary salvage and subrogation recoverable.............     (73,393)    (65,505)
  Assumed unpaid loss and LAE reserves from C.A.R...........     125,787     127,631
  Assumed salvage and subrogation recoverable from C.A.R....     (20,695)    (20,844)

    Total voluntary and assumed unpaid loss and LAE reserves     590,334     585,867

  Adjustment for ceded unpaid loss and LAE reserves.........     100,290      97,273
  Adjustment for ceded salvage and subrogation recoverable..      (9,000)     (9,000)

    Total unpaid loss and LAE reserves......................    $681,624    $674,140
</table>
          Unpaid Loss and LAE by their nature are inherently uncertain as to
the ultimate outcome of the estimated amounts.  The liability for unpaid
losses and LAE represents Management's best estimate of the ultimate net cost
of all losses and LAE incurred through the balance sheet date.  The estimate
for ultimate net cost of all losses incurred through the balance sheet date
includes the adjusted case estimates for losses, incurred but not reported
("IBNR") losses, salvage and subrogation recoverable and a reserve for LAE.
In arriving at its best estimate, management begins with the aggregate of
individual case reserves and then makes adjustments to these amounts on a
line of business basis.  These adjustments to the aggregate case reserves by
line of business are made based on analysis performed by Management as
further described below.  The entire liability for unpaid losses and LAE is
also reviewed quarterly and annually by the Company's Actuarial Department.
Liability estimates are continually analyzed and updated, and therefore, the
ultimate liability may be more or less than the current estimate.  The
effects of changes in the estimates are included in the results of operations
in the period in which the estimates are revised.

52
<page>


                          THE COMMERCE GROUP, INC. AND SUBSIDIARIES

                          NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                               December 31, 2001, 2000 and 1999
                                   (Thousands of Dollars)

NOTE E - Unpaid losses and Loss Adjustment Expenses (continued)

     Significant periods of time can elapse between the occurrence of an
insured loss, the reporting of the loss to the insurer and the insurer's
payment of that loss.  To recognize liabilities for unpaid losses, insurers
establish reserves as balance sheet liabilities representing estimates of
amounts needed to pay reported and unreported losses and LAE.  Quarterly, the
Company reviews these reserves internally.  Regulations of the Division of
Insurance require the Company to annually obtain a certification from either
a qualified actuary or an approved loss reserve specialist that its loss and
LAE reserves are reasonable.

     When a claim is reported to the Company, claims personnel establish a
"case reserve" for the estimated amount of the ultimate exposure to the
Company.  The amount of the reserve is primarily based upon an evaluation of
the type of claim involved, the circumstances surrounding the claim and the
policy provisions relating to the loss.  This estimate reflects the informed
judgment of such personnel based on general insurance reserving practices and
on the experience and knowledge of the claims personnel adjusting the claim.
During the loss adjustment period, these estimates are revised as deemed
necessary by the Company's claims department personnel based on subsequent
developments and periodic reviews of the cases.

     In accordance with industry practice, the Company also maintains
reserves for estimated IBNR and LAE net of salvage and subrogation
recoverable.  These reserves are determined on the basis of historical
information and the experience of the Company.  Adjustments to these reserves
are made periodically to take into account changes in the volume of business
written, claims frequency and severity, the mix of business, claims
processing and other items that can be expected to affect the Company's
liability for losses and LAE over time.

     When reviewing the liability for unpaid losses and LAE, the Company
analyzes historical data and estimates the impact of various factors such as
(i) payment trends; (ii) loss expense per exposure; (iii) the historical loss
experience of the Company and industry; (iv) frequency and security trends;
and, (v) legislative enactments, judicial decisions, legal developments in
the imposition of damages, changes and trends in general economic conditions,
including the effects of inflation and recession.  This process assumes that
past experience, adjusted for the effects of current developments and
anticipated trends, is an appropriate basis for predicting future events.
There is no precise method, however, for subsequently evaluating the impact
of any specific factor on the adequacy of reserves, because the eventual
development of reserves is affected by many factors.

     By using both individual estimates of reported claims and generally
accepted actuarial reserving techniques, the Company estimates the ultimate
net liability for losses and LAE.  After taking into account all relevant
factors, management believes that, based on existing information, the
provision for losses and LAE at December 31, 2001 is adequate to cover the
ultimate net cost of losses and claims incurred as of that date.  The
ultimate liability, however, may be greater or lower than established
reserves.  If the ultimate exposure is greater than (or less than)
management's estimated liability for losses and LAE, based on any of the
factors noted previously, the Company will incur additional expense (income)
which may have a material impact.  The Company does not discount to present
value that portion of its loss reserves expected to be paid in future
periods.

     Included in the loss reserve methodologies described above, are
liabilities for unpaid claims and claim adjustment expenses for environmental
related claims such as oil spills, mold and lead paint.  Reserves have been
established to cover these claims for known losses.  Because of the Company's
limited exposure to these types of claims, management believes they will not
have a material impact on the consolidated financial position of the Company
in the future.  Loss reserves on environmental related claims amounted to
$4,281 and $3,712 at December 31, 2001 and 2000, respectively.

53
<page>



                             THE COMMERCE GROUP, INC. AND SUBSIDIARIES

                          NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                December 31, 2001, 2000 and 1999
                                     (Thousands of Dollars)


NOTE E - Unpaid losses and Loss Adjustment Expenses   (continued)

     The following table sets forth a reconciliation of beginning and
ending reserves for losses and loss adjustment expense, net of reinsurance
deductions from all reinsurers including C.A.R., as shown in the Company's
consolidated financial statements for the periods indicated.
<table>
<caption>
                                                           Years ended December 31,

                                                          2001          2000         1999

                                                     <c>           <c>          <c>
Loss and loss adjustment expense reserves,
 beginning of year, prior to effect of ceded
 reinsurance recoverable.............................   $585,867      $558,779     $498,127

January 29, 1999 American Commerce loss and
   loss adjustment expense reserves..................       -             -          63,112

Incurred losses and loss adjustment expenses:
   Provision for insured events of the current year..    812,863       728,582      664,978
   Decrease in provision for insured events of
    prior years......................................    (35,320)      (42,425)     (39,888)
     Total incurred losses and loss adjustment
      expenses.......................................    777,543       686,157      625,090

Payments:
   Losses and loss adjustment expenses attributable
    to insured events of the current year............    487,918       402,040      383,707
   Losses and loss adjustment expenses attributable
    to insured events of prior years.................    285,158       257,029      243,843
     Total payments..................................    773,076       659,069      627,550

   Loss and loss adjustment expense reserves prior to
    effect of ceded reinsurance recoverable..........    590,334       585,867      558,779
   Ceded reinsurance recoverable.....................     91,290        88,273      101,062
Reserves for losses and loss adjustment expenses
 at the end of year per financial statements.........   $681,624      $674,140     $659,841
</table>

     The decrease in provision for insured events of prior years represents
redundancies for reserves established for prior year.  This decrease in
provision was principally the result of re-estimation of unpaid losses and
loss adjustment expenses principally on the personal automobile, commercial
automobile and homeowners lines of business.

     The Company's loss and LAE reserves reflect its share of the aggregate
C.A.R. loss and LAE reserves of the Company and the 38 other writers of
automobile insurance in Massachusetts that participate in C.A.R. ("Servicing
Carriers").  The Company is a defendant in various legal actions arising from
the normal course of its business.  These proceedings are considered to be
ordinary to operations or without foundation in fact.  Management is of the
opinion that these actions will not have a materially adverse effect on the
consolidated financial statements of the Company.

NOTE F - Reinsurance Activity

     The Company has reinsurance contracts for casualty and catastrophe
coverages.  These reinsurance arrangements minimize the Company's losses
arising from large risks and protect the Company against numerous losses from
a single occurrence or event.  The Company also has a quota share reinsurance
contract on its other than automobile business.

54
<page>


                           THE COMMERCE GROUP, INC. AND SUBSIDIARIES
                           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                               December 31, 2001, 2000 and 1999
                                    (Thousands of Dollars)

Property, Catastrophe and Quota Share Reinsurance

     The Company maintains a 75% quota share reinsurance program, covering
all non-automobile property and liability business, except umbrella policies.
The program is split between American Re-Insurance Company, Employers
Reinsurance Corporation, Hartford Fire Insurance Company and Swiss
Reinsurance America Corporation.  The maximum per occurrence dollar recovery
is equal to 250% of the net premiums ceded to the quota share arrangement in
a contract year.  The maximum aggregate per year dollar recovery under the
quota share contract is equal to 350% of the net premium ceded to the quota
share arrangement in a contract year.  A sliding scale commission, based on
loss ratio, is utilized under this program.  This program provides the
Company with sufficient protection for catastrophe coverage so as to enable
the Company to forego pure catastrophe reinsurance coverage, which was
previously tailored in conjunction with the former quota share arrangement.

     The table below provides information depicting the approximate recovery
under the quota share contract (described below) at various loss scenarios,
if a single catastrophe were to strike:
<table>
<caption>
                                                              Net Loss
                          Total           Reinsurance       Retained by
                          Loss             Recovery         the Company
                        
                 <c>              <c>
                        $ 50,000            $ 37,500         $12,500
                         100,000              75,000          25,000
                         150,000             112,500          37,500
                         200,000             150,000          50,000
                         250,000             187,500          62,500
</table>
     Under the above scenario and based on the business subject to the quota-
share reinsurance contract for 2001, the Company has no reinsurance
recoveries for a single event catastrophe in excess of a total loss of
approximately $262.0 million.  The level of reinsurance protection increases
(decreases) when the company cedes more (less) premium to the reinsurers.
The Company's estimated total losses on its other than automobile business
for 100 and 250-year hurricanes (including American Commerce) are
approximately $176.0 million and $295.8 million, respectively.  The Company
estimates were derived through the services of Swiss Reinsurance America
Corporation who utilized the RMS (Risk Management Solutions) IRAS risk
assessment system.  Most property and casualty insurance companies establish
their catastrophe reinsurance programs up to the 100 year storm estimate.

     Written premiums ceded in 2001, 2000 and 1999 under the above referenced
program were $78.6 million, $69.4 million and $51.5 million, respectively.
The 13.3% increase in written premiums ceded in 2001 versus 2000 in this
program was primarily the result of a $7,592 or 11.6% increase in
Massachusetts homeowner direct written premium, coupled with a $2,212 or
13.4% increase in direct homeowner writings in states other than
Massachusetts, as previously mentioned.  Ceding commission income is
calculated on a ceded earned premium basis.

Casualty Reinsurance

     Casualty reinsurance is on an excess of loss basis for any one event or
occurrence with a maximum recovery of $9.0 million over a net retention of
$1.0 million.  This coverage is placed with Swiss Reinsurance America
Corporation (rated A++ by A.M. Best).

     Personal and commercial liability umbrella policies are reinsured on a
95% quota share basis in regard to limits up to $1.0 million and 100% quota
share basis for limits in excess of $1.0 million but not exceeding $5.0
million for policies with underlying automobile coverage of $250/$500 or
more.  The Company also has personal liability umbrella reinsurance coverage
for policies with underlying automobile coverage of $100/$300, on a 65% quota
share basis in regard to limits up to $1.0 million and 100% quota share basis
for limits in excess of $1.0 million but not exceeding $3.0 million.  These
coverages are placed with American Re-Insurance Company (rated A++ by A.M.
Best).

55
<page>


                          THE COMMERCE GROUP, INC. AND SUBSIDIARIES

                          NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                               December 31, 2001, 2000 and 1999
                                    (Thousands of Dollars)

NOTE F - Reinsurance Activity   (continued)

     Earned premiums and losses and loss adjustment expenses are stated in
the accompanying consolidated financial statements after deductions for ceded
reinsurance.  Those deductions for reinsurance other than C.A.R. are as
follows:
<table>
<caption>

                                                               Years ended December 31,
                                                            2001         2000        1999

                                                       <c>          <c>        <c>
Income Statement
  Written premiums ceded............................      $81,827      $76,946    $ 54,657
  Earned premiums ceded.............................       77,226       73,354      55,557
  Losses and loss adjustment expenses ceded.........       40,514       30,797      24,240

Balance Sheet
  Unpaid losses and loss adjustment expenses........       28,192       24,726      21,552
  Unearned premiums.................................       42,258       36,828      26,813
</table>

     The Company, as primary insurer, would be required to pay losses in
their entirety in the event that the reinsurers were unable to discharge
their obligations under the reinsurance agreements.

C.A.R.

     C.A.R., a state-mandated reinsurance mechanism, enables the Company and
the other Servicing Carriers to reinsure any automobile risk that the insurer
perceives to be under priced at the premium level permitted by the
Commissioner.  Servicing Carriers, who are responsible for over 99.0% of
total direct premiums written for personal automobile insurance in
Massachusetts, are required to offer automobile insurance coverage to all
eligible applicants pursuant to "take-all-comers" regulations, but may
reinsure business with C.A.R.

     Since its inception, C.A.R. has annually generated multi-million dollar
underwriting losses in both the personal and commercial pools.  The Company
is required to share in the underwriting results of C.A.R. business for its
respective product lines.  Under current regulations, the Company's share of
the C.A.R. personal or commercial deficit is based upon its market share for
retained automobile risks for the particular pool, adjusted by a
"utilization" concept, such that, in general, the Company is
disproportionately and adversely affected if its relative use of C.A.R.
reinsurance exceeds that of the industry, and favorably affected if its
relative use of C.A.R. reinsurance is less than that of the industry.  The
Company's strategy has been to voluntarily retain more types of private
passenger automobile business that are factored as credits, thereby favorably
impacting the utilization formula.  These credits result from voluntarily
writing business in underpriced territories and for underpriced risks.  As a
result of increased voluntary retention, in excess of the industry, the
credits impacting the utilization formula have favorably affected the
Company's participation ratio compared to its market share.  During 2001,
2000 and 1999, the Company's net participation in the C.A.R. personal
automobile pool approximated 16.8%, 16.9% and 16.5%, respectively, as
reported by C.A.R., compared to the Company's estimated market share in those
years of 23.3%, 22.3% and 21.3%.
56
<page>


                         THE COMMERCE GROUP, INC. AND SUBSIDIARIES

                         NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                               December 31, 2001, 2000 and 1999
                                    (Thousands of Dollars)



     Written premiums, earned premiums, losses and LAE incurred, underwriting
expenses incurred and the liabilities for unearned premiums, unpaid losses
and LAE ceded to and assumed from C.A.R. were as follows:
<table>
<caption>
                                         Years ended December 31,
                             2001                    2000                    1999
                      Ceded      Assumed      Ceded      Assumed      Ceded      Assumed

                  <c>         <c>         <c>         <c>         <c>         <c>
Income Statement
 Written premiums... $ 70,973    $ 79,360    $ 67,451    $ 81,659    $ 68,740    $ 87,241
 Earned premiums....   72,648      80,176      69,120      81,300      68,902      84,356
 Losses and LAE.
   incurred.........   80,053     108,353      67,987     109,788      81,853     104,273
 Underwriting
   expenses.........     -         28,270        -         28,753        -         28,569

Balance Sheet
 Unearned premiums..   44,399      41,699      44,791      42,515      50,084      42,156
 Unpaid losses and
   LAE..............   81,433     105,092      82,450     106,787      91,576     100,680
</table>
     The Company pays to C.A.R. all of the premiums generated by the policies
it has ceded and C.A.R. reimburses the Company for all losses incurred on
account of ceded policies.  In addition, the Company receives a fee for
servicing ceded policies based on the expense structure established by C.A.R.
For the years ended December 31, 2001, 2000 and 1999, these servicing fees
amounted to $17,161, $16,783 and $17,235, respectively.

     The Company presents assets and liabilities gross of reinsurance.  The
Residual Market Receivable represents the gross amount of reinsurance
recoverable from C.A.R. including unpaid losses, unearned premiums, paid
losses recoverable and unpaid ceded and assumed premiums.

     The current C.A.R. utilization-based participation ratio has been in
place for the personal automobile market since 1993. During 2001, 2000 and
1999 the Company's amount of personal automobile exposures it reinsured
through C.A.R. approximated 4.9%, 4.9% and 5.6%, respectively, as compared to
industry averages of 7.7%, 8.4% and 9.6%, respectively.


NOTE G - Income Taxes

     The Company and its subsidiaries file a consolidated federal income tax
return.

     The federal income tax expense (benefit) consisted of the following:
<table>
<caption>
                                                             Years ended December 31,
                                                             2001         2000        1999
                  
                                    <c>          <c>         <c>
                  Current............................    $ 28,571     $ 32,849    $ 26,481
                  Deferred...........................      (5,377)       5,457      (9,814)
                                                         $ 23,194     $ 38,306    $ 16,667
</table>
57
<page>


                           THE COMMERCE GROUP, INC. AND SUBSIDIARIES

                           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                               December 31, 2001, 2000 and 1999
                                    (Thousands of Dollars)


NOTE G - Income Taxes (continued)

     Deferred taxes arise from temporary differences in the basis of assets
and liabilities for tax and financial statement purposes.  The sources of
these differences and the related tax effects of the activities that occurred
consisted of the following:
<table>
<caption>
                                                              Years ended December 31,
                                                             2001         2000        1999
  
                                                    <c>          <c>         <c>
  Unearned premiums..................................    $ (2,428)    $ (3,835)   $ (2,785)
  Discounting of loss reserves.......................         809         (381)       (928)
  Deferred policy acquisition costs..................       1,303        4,015       1,251
  Salvage and subrogation recoverable................          81         (116)        272
  Tax depreciation in excess of book depreciation....         180          239         639
  Pension liability..................................        -           1,145        (440)
  Post-retirement benefits liability.................        (246)        (424)        120
  Equity in earnings (losses) of preferred stock
    mutual funds.....................................         264        6,060     (10,487)
  Equity in losses of venture capital fund
    investments......................................      (3,342)        -           -
  Other..............................................      (1,998)      (1,246)      2,544
        Deferred income tax..........................      (5,377)       5,457      (9,814)
  Other comprehensive income (loss)..................         425       20,084     (26,407)
  Deferred taxes at acquisition of American Commerce.        -            -         (4,662)
        Change in deferred tax asset.................    $ (4,952)    $ 25,541    $(40,883)
</table>

     Realization of a deferred tax asset is dependent on generating
sufficient taxable income in future years.  Although realization is not
assured, management believes it is more likely than not that all of the
deferred tax assets will be realized.  The amount of the deferred tax asset
considered realizable, however, could be reduced in the near term if
estimates of future taxable income or unrealized gains are reduced.

     Deferred tax liabilities (assets) were comprised of the following at
December 31, 2001 and 2000:
<table>
<caption>
                                                                     2001        2000

                                                               <c>         <c>
Unearned premiums...............................................  $(31,477)   $(29,049)
Discounting of loss reserves....................................   (20,850)    (21,659)
Equity in losses of preferred stock mutual funds................    (3,551)     (3,815)
Equity in losses of venture capital fund investments............    (3,342)       -
Post-retirement benefits liability of American Commerce.........    (1,267)     (1,021)
Other...........................................................    (4,915)     (3,355)
      Deferred tax assets.......................................   (65,402)    (58,899)

Deferred policy acquisition costs...............................    33,847      32,544
Salvage and subrogation recoverable.............................     2,109       2,028
Tax depreciation in excess of book depreciation.................     2,157       1,977
Net accumulated comprehensive income............................     6,643       6,217
Other...........................................................     3,653       4,092
      Deferred tax liabilities..................................    48,409      46,858

      Net deferred tax asset....................................  $(16,993)   $(12,041)
</table>
58
<page>


                           THE COMMERCE GROUP, INC. AND SUBSIDIARIES

                           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                               December 31, 2001, 2000 and 1999
                                    (Thousands of Dollars)

NOTE G - Income Taxes   (continued)

     Federal income tax on income is less than the amount computed by
applying the statutory rate of 35% for the years ended 2001, 2000 and 1999
for the following reasons:
<table>
<caption>
                                         Years ended December 31,
                               2001                 2000                1999

                      <c>         <c>      <c>        <c>      <c>         <c>
Tax at statutory rate..  $ 40,399    35.0%    $ 59,523   35.0%    $ 36,499    35.0%
Tax exempt interest....    (7,123)   (6.2)      (8,314)  (4.9)      (9,157)   (8.8)
Dividends paid to ESOP
  participants.........      (848)   (0.7)        (899)  (0.5)        (785)   (0.8)
Dividends received
  deduction............    (7,510)   (6.5)      (8,123)  (4.8)      (7,560)   (7.2)
Amortization of
  preferred stock
  mutual fund negative
  goodwill.............    (1,043)   (0.9)      (3,242)  (1.9)      (1,909)   (1.8)
Other..................      (681)   (0.6)        (639)  (0.4)        (421)   (0.4)
Tax at effective rate..  $ 23,194    20.1%    $ 38,306   22.5%    $ 16,667    16.0%
</table>

NOTE H - Related-Party Transactions

     The Company has made loans to insurance agencies with which Commerce
transacts business on a regular basis.  At December 31, 2001, eleven loans
with an aggregate outstanding principal balance of $3,476, were
collateralized by the assets of the agencies, one of these loans with an
outstanding balance of $313 was collateralized by real estate as the primary
collateral and the assets of the agency as secondary collateral.  There were
no loans to insurance agencies collateralized solely by real estate.  At
December 31, 2000, ten loans with an aggregate outstanding balance of $3,556
were collateralized by the assets of the agencies and one of these loans with
an outstanding balance of $328 was collateralized by real estate as the
primary collateral and the assets of the agency as secondary collateral.

     The immediate family of Raymond J. Lauring, a Director of the Company,
owns more than a 10% equity interest in Lauring Construction Company.  Mr.
Lauring has no ownership interest in Lauring Construction Company.  During
2001, Lauring Construction Company provided construction and construction
management services in connection with a contract for the estimated $13
million renovation of a 160,000 square foot building purchased by the
Company.  Terms of the contract provide for a fixed fee of $650 for
supervision and management of the project over the term of the contract.
There were no payments made on the supervision or management services portion
of the contract in 2001.  Payments to Lauring Construction Company in 2001
for actual materials used and construction work performed on this project
were $405 and payments for other work unrelated to the project were $31.

NOTE I - Employee Stock Ownership Plan and 401(k) Plan

     The Company offers an Employee Stock Ownership Plan ("E.S.O.P.") and
401(k) Plan for the benefit of substantially all employees, including those
of the Company's subsidiaries.  The E.S.O.P. is noncontributory on the part
of Participants and contributions are made at the discretion of the Board of
Directors.  The company is under no obligation to make contributions or
maintain the E.S.O.P. for any length of time, and may completely discontinue
or terminate the E.S.O.P. at any time without liability.  Contributions by
the Company and subsidiaries to the E.S.O.P. for the years ended December 31,
2001, 2000 and 1999 were $7,502, $5,702 and $5,744, respectively.  The
increase in the contribution in 2001 over 2000 was primarily due to the
inclusion of American Commerce employees into the plan.  The E.S.O.P. held
2,989,046 and 3,143,076 shares of the Company's common stock at December 31,
2001 and 2000, respectively.  E.S.O.P. Participants who are current employees
of the Company or its subsidiaries and who are 100% vested in their E.S.O.P.
accounts can annually elect to transfer
59
<page>


                          THE COMMERCE GROUP, INC. AND SUBSIDIARIES

                           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                               December 31, 2001, 2000 and 1999
                                   (Thousands of Dollars)

NOTE I - Employee Stock Ownership Plan and 401(k) Plan (continued)

out of the E.S.O.P. up to 100% of their allocated Company stock in the form
of an eligible rollover distribution into another eligible retirement plan,
such as a qualified individual retirement arrangement.  Approximately
2,191,000 shares owned by Participants in the E.S.O.P. at December 31, 2001
are allocated to the E.S.O.P. accounts of these individuals.  E.S.O.P.
Participants who are former employees of the Company may generally elect to
withdraw from the E.S.O.P. the total amount of shares allocated to their
accounts at any time.  Approximately 580,000 shares held by the E.S.O.P. at
December 31, 2001 are allocated to the E.S.O.P. accounts of these
individuals.  The remaining approximately 219,000 shares held by the E.S.O.P.
at December 31, 2001 are allocated to the E.S.O.P. accounts of Participants
who have not yet reached 100% vesting in their account balances.  Disposition
of these unvested shares is restricted under the E.S.O.P.  The Company pays
for administration of the E.S.O.P.

     The 401(k) Plan, implemented in September 1998, enables eligible
employees to contribute up to 15% of eligible compensation on a pre-tax basis
up to the annual maximum limits under federal tax law.  The Company incurs no
expenses in the form of matching contributions but does pay for
administration of the Plan.

NOTE J - American Commerce Pension and Post-Retirement Benefits

     Effective June 1, 2000, the Directors of American Commerce voted to
terminate the American Commerce noncontributory defined benefit pension plan
(the "pension plan") and transition on January 1, 2001 to the E.S.O.P.  The
payment of the termination liability to participants from previously funded
assets of the pension plan amounted to $4,558 in 2000.  All participants of
the pension plan were eligible to retire with full retirement benefits upon
attainment of age 65 with 5 years of participation.  Retirement benefits were
payable for the life of the participant with guaranteed payments for 10
years.  All retirees had taken lump-sum payments.  American Commerce made
contributions to a deposit administration contract, which provided the
pension plan with assets sufficient to fund pension benefits to pension plan
participants.  The deposit administration contract was carried at contract
value, which represented the cost of contributions plus interest and
experience refunds.  The pension plan was subject to and exceeded the minimum
funding requirements of ERISA.

     Effective January 1, 2001, the Directors of American Commerce voted to
merge the 401(k) Plan with the Company's Plan.  Previously, American Commerce
maintained a separate 401(k) Plan for the benefit of substantially all of its
employees.  American Commerce matched 50% of all employee contributions up to
6% of pay.  Both American Commerce and its employees shared in administration
expenses of the plan.  American Commerce did not contribute to the plan in
2001 due to the aforementioned merger.  Commerce contributed $181 and $165 to
the plan in 2000 and 1999, respectively.

     American Commerce maintains a noncontributory post-retirement benefit
plan (the "post-retirement plan") for retirees that includes medical, dental
and life insurance coverages.  All participants of the post-retirement plan
are eligible upon attainment of age 55 with 10 years of service or age 65
with 5 years of service.  Dental coverage ceases at age 65 and life insurance
coverage decreases based upon the age of the retiree until the attainment of
age 70, at which time retirees are provided a nominal amount of coverage from
age 70 and thereafter.  Participants' spouses are also covered under the
post-retirement plan.  The cost of post-retirement medical, dental and life
insurance benefits is accrued over the active service periods of employees to
the date they attain full eligibility for such benefits.  It is the policy of
American Commerce to pay for post-retirement benefits as incurred.
60
<page>


                           THE COMMERCE GROUP, INC. AND SUBSIDIARIES

                           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                               December 31, 2001, 2000 and 1999
                                    (Thousands of Dollars)

NOTE J - American Commerce Pension and Post-Retirement Benefits (continued)

     The following table shows, as of December 31, 2001 and 2000, the
American Commerce post-retirement benefit plan funded status reconciled with
amounts reported in the consolidated balance sheet and the assumptions used
in determining the actuarial present value of the benefit obligation:
<table>
<caption>

                                                                 2001    2000

                                                            <c>     <c>
Plan assets at fair value...........................           $  -    $  -
Accumulated benefit obligation:
  Retirees..........................................             1,448   1,168
  Active participants, fully eligible...............               790     893
  Active participants, not eligible.................             1,812   2,225
Projected benefit obligation........................             4,050   4,286
Unfunded status of plan.............................            (4,050) (4,286)
Unrecognized prior service costs....................               (17)    (20)
Unrecognized net transition obligation..............             1,087   1,186
Unrecognized net loss (gain)........................              (641)     20
      Accrued benefit cost..........................           $(3,621)$(3,100)
Assumptions:
  Weighted average discount rate....................               7.0%    7.0%
</table>

     Net periodic cost of the American Commerce post-retirement benefit plan
for the period ended December 31, 2001, 2000 and 1999 includes the following
components:

<table>
<caption>
                                                               2001    2000    1999

                                                           
     <c>     <c>
Service cost-benefits earned........................          $  250  $  246  $  238
Interest cost on projected benefit obligation.......             248     265     246
Actual return on plan assets........................            -       -       -
Amortization of unrecognized net transition
  obligation........................................              99      99      99
Amortization of unrecognized prior service cost.....              (3)     (3)     (3)
Amortization of unrecognized loss (gain)............             (25)   -       -
Net asset loss deferred for later recognition.......            -       -       -
  Net periodic cost.................................          $  569  $  607  $  580
</table>
     The assumed health care cost trend rate for 2001 was 8.5% and 7.25% for
medical and dental, respectively.  These rates grade down until the final
trend rates of 6.0% and 5.0% for medical and dental, respectively, are
reached in 2010.  A one percentage point increase in the assumed health and
dental cost trend rates increases the sum of the service and interest costs
components of the 2001, 2000 and 1999 periodic post-retirement benefit cost
by 16.3%, 20.4% and 13.0% respectively, and the accumulated post-retirement
benefit obligation as of December 31, 2001, 2000 and 1999 by 16.6%, 17.7% and
14.0%, respectively.

     Subsequent to December 31, 2001, the Directors of American Commerce
voted to terminate that portion of the post-retirement plan applicable to
future retirees of American Commerce.  Termination will be effective May 1,
2002.  Current retirees and employees who retire prior to May 1, 2002 will
remain eligible for post-retirement benefits.
61
<page>


                          THE COMMERCE GROUP, INC. AND SUBSIDIARIES

                          NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                               December 31, 2001, 2000 and 1999
                                    (Thousands of Dollars)


NOTE K - Directors' Retirement Compensation Plan

     During 2000, the Company's Directors approved a Directors' Retirement
Compensation Plan (the "Retirement Plan").  The Retirement Plan becomes
effective for each Company Director upon terminating service on the Company's
Board of Directors (the "Board") providing that such termination was not made
under conditions adverse to the Company's interest.  Effective with the
annual meeting wherein the Director is not reappointed to the Board, and
provided benefits are not paid until such time as the Director has attained
the age of 65, the Company will pay an annual retirement benefit equal to 50%
of the average annual total compensation of the Director for the immediately
preceding three full years ("the three year average compensation").  The
annual retirement benefit of 50% of the three year average compensation vests
at the rate of 4.0% for each year of Board (or subsidiary) service up to a
maximum of 100% vesting through termination of service.  Payments continue
for a maximum of ten years over the remaining life of the terminated
Director, or his or her then spouse, if the Director pre-deceases the spouse.
No payments are to be made after the death of the Director and spouse.
Expenses related to the Retirement Plan in 2001 and 2000 amounted to $178 and
$2,364, respectively.  A total of $19 was paid under the Retirement Plan in
2001 and 2000.

NOTE L - Stockholders' Equity

Book Value Awards, Stock Appreciation Rights and Stock Options Program

     The Management Incentive Plan approved by the Company's stockholders in
May, 1994 provides for the award of incentive stock options, non-qualified
stock options, book value awards, stock appreciation rights, restricted stock
and performance stock units.  Up to 2,500,000 shares of common stock (subject
to increase for anti-dilution adjustments) may be issued under the Plan,
including shares that may be issued pursuant to awards of restricted stock or
upon the exercise of common stock equivalent awards such as stock options and
stock appreciation rights payable in the form of common stock (not in the
form of cash).  At the discretion of the compensation committee all
directors, officers and other senior management employees of the Company or
any of its subsidiaries are eligible to participate in this Management
Incentive Plan.

     Book value awards issued relating to this Plan totaled 474,541, 496,685
and 447,185 in 2001, 2000 and 1999, respectively.  Expenses relating to book
value awards were $1,577, $3,081 and $438 in 2001, 2000 and 1999,
respectively.  Grants under the SAR plan ceased in 1999 and were replaced
with the stock option program.  No SARs were outstanding at December 31,
2001.  Expenses (income) relating to stock appreciation rights were $0, $760
and ($3,159) in 2001, 2000 and 1999, respectively.  The outstanding book
value awards entitle the holders to cash payments based upon the extent to
which, if at all, the per share book value exceeds certain thresholds set at
the time the award was granted.

     During 2001, 2000 and 1999, the Company granted stock options
("options") totaling 1,184,343, 644,520 and 700,179, respectively, including
the issuance of options previously terminated.  The outstanding options
entitle the recipient to purchase the Company's common stock based upon the
extent to which, if at all, the per share market value of the common stock
exceeds certain thresholds set at the time the option was granted.
Unexercised options terminate not later than eight years after the date of
grant.
62
<page>



                          THE COMMERCE GROUP, INC. AND SUBSIDIARIES

                          NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                December 31, 2001, 2000 and 1999
                        (Thousands of Dollars Except for Per Share Data)


NOTE L - Stockholder's Equity (continued)

     Aggregate liabilities for the combined programs were $2,614 and $2,972
at December 31, 2001 and 2000, respectively.

     The following is a summary of the changes in options outstanding under
the Plan:
<table>
<caption>
                                                               Weighted
                                                                Average
                                                               Exercise
                                                      Shares    Price
      
                                           <c>        <c>
      Options outstanding at January 1, 1999....         -     $    -
         Granted January 29, 1999...............       50,000     36.32
         Granted April 30, 1999.................      650,179     32.81
      Options outstanding at December 31, 1999..      700,179     33.06
         Granted April 5, 2000..................      644,520     31.59
         Terminated.............................       (5,888)    32.81
      Options outstanding at December 31, 2000..    1,338,811     32.35
         Granted April 6, 2001..................    1,184,343     30.80
         Terminated.............................      (80,818)    34.74
      Options outstanding at December 31, 2001..    2,442,336  $  31.52
</table>
     No options were exercisable at December 31, 2001, 2000 and 1999.

     The estimated weighted average fair value per share of the options was
$5.26 in 2001, $4.16 in 2000 and $3.78 in 1999.  Under the provisions of APB
Opinion 25, no expense was recognized for these options in 2001, 2000 or
1999.  No options were granted prior to 1999.  Had the Company recognized
such expense, the Company's net earnings and earnings per share would have
approximated the pro forma amounts indicated below:
<table>
<caption>
                                                    2001         2000         1999

                                               <c>          <c>          <c>
Net earnings:
  As reported                                     $ 93,094     $132,080     $ 88,676
  Pro forma                                       $ 88,363     $130,180     $ 86,956

Basic earnings per share:
  As reported                                     $   2.77     $   3.87     $   2.54
  Pro forma                                       $   2.63     $   3.81     $   2.49

Diluted earnings per share:
  As reported                                     $   2.75     $   3.87     $   2.54
  Pro forma                                       $   2.61     $   3.81     $   2.49
</table>
     Additionally, the Company granted 250,000 and 1,872,380 options to
certain agents of American Commerce (the "American Commerce Agents' Plan")
in 2001 and 1999, respectively.  The right of the recipient to exercise
these options is contingent upon the average volume of other-than-
Massachusetts private passenger automobile and homeowners direct written
premiums placed and maintained with American Commerce for a five year
period specified in the option agreement.  If qualified, the recipient may
purchase the Company's common stock at the exercise price for a period of
five years beginning five years after the date of the grant ("the
confirmation date").  Unexercised options terminate not later than ten
years after the date of the grant ("the expiration date").  In conjunction
with meeting specified premium growth levels over the term of the options,
the Company provided "put rights" to the holders of the options granted in
1999.  These put rights permit the option holders to require the Company
to purchase the options at the difference between $40.00 less the exercise
price, at any time from and after the confirmation date through and
including the expiration date.  Expenses related to these options,
determined in accordance with the fair value accounting provisions of SFAS
No. 123, "Accounting for Stock-Based Compensation", amounted to $2,862 in
2001, $1,307 in 2000 and $1,909 in 1999.
63
<page>


                           THE COMMERCE GROUP, INC. AND SUBSIDIARIES
                           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                               December 31, 2001, 2000 and 1999
                       (Thousands of Dollars Except for Per Share Data)

NOTE L - Stockholder's Equity   (continued)

     The following is a summary of the changes in options outstanding under
the American Commerce Agents' Plan:
<table>
<caption>
                                                               Weighted
                                                                Average
                                                               Exercise
                                                      Shares    Price
      
                                           <c>       <c>
      Options outstanding at January 1, 1999....         -     $    -
         Granted................................    1,872,380     36.32
      Options outstanding at December 31, 1999..    1,872,380     36.32
         Granted................................         -          -
      Options outstanding at December 31, 2000..    1,872,380     36.32
         Granted................................      250,000     41.97
      Options outstanding at December 31, 2001..    2,122,380  $  36.99
</table>
     No options were exercisable at December 31, 2001, 2000 and 1999.

     The fair value of each option granted under the American Commerce
Agents' Plan was estimated on the date of grant using the Black-Scholes
option-pricing model, with the following weighted average assumptions:
<table>
<caption>
                                                                    December 31,
                                                                 2001         2000
        
                                                     <c>          <c>
        Dividend yield....................................       3.16%        4.47%
        Volatility........................................      28.30%       27.10%
        Risk-free interest rate...........................       4.04%        5.10%
        Expected option life in years.....................          7            7
</table>
     The estimated weighted average fair value per share of the options
under the American Commerce Agents' Plan was $5.63, $4.48 and $5.28 at
December 31, 2001, 2000 and 1999, respectively.

NOTE M - Net Capital Requirements

     The insurance companies included in the consolidated financial
statements are subject to the financial capacity guidelines established by
their respective state Divisions of Insurance.  Every Massachusetts
insurance company seeking to make any dividend or other distributions to
its stockholders may, within certain limitations, pay such dividends and
then file a report with the Commissioner.  Dividends in excess of these
limitations are called extraordinary dividends.  An extraordinary dividend
is any dividend or other property, whose fair value together with other
dividends or distributions made within the preceding twelve months exceeds
the greater of ten percent of the insurer's surplus as regards
policyholders as of the end of the preceding year, or the net income of a
non-life insurance company for the preceding year.  No pro-rata
distribution of any class of the insurer's own securities is to be
included.  No Massachusetts insurance company shall pay an extraordinary
dividend or other extraordinary distribution until thirty days after the
Commissioner has received notice of the intended distribution and has not
objected.  No extraordinary dividends were paid in 2001, 2000 and 1999.
California and Ohio have similar regulations.  No extraordinary dividend
was paid by American Commerce in 2001, 2000 and 1999 and no dividends were
paid by Commerce West since its acquisition.

     To the extent Commerce and Citation are restricted from paying
dividends to CHI, CHI will be limited in its ability to pay dividends to
the Company.  On this basis, the Company's ability to pay dividends to its
stockholders is limited.  During 2001, Commerce and Citation paid $55,200
and $10,868 in dividends, respectively to CHI; CHI then paid $65,835 to
the Company in March 2001.  During 2000, Commerce and Citation paid
$41,000 and $10,780 in dividends, respectively, to CHI; CHI then paid
$51,660 to the Company in March 2000.  Commerce West did not pay dividends
on their common stock in 2001 and 2000.  American Commerce paid ACIC
Holding Co., Inc. a dividend of $9,281 in 2001, no dividend was paid in
2000.  ACIC Holding Co., Inc. paid Commerce dividends of $9,582 and $9,178
in 2001 and 2000, respectively, on its outstanding preferred stock.
64
<page>


                           THE COMMERCE GROUP, INC. AND SUBSIDIARIES

                           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                December 31, 2001, 2000 and 1999
                         (Thousands of Dollars Except for Per Share Data)

NOTE M - Net Capital Requirements   (continued)

     The Board of Directors of the Company voted to declare four quarterly
dividends to stockholders of record totaling $1.19 per share and $1.15 per
share in 2001 and 2000, respectively.  On May 19, 2001, the Board voted to
increase the quarterly stockholder dividend from $0.29 to $0.30 per share
to stockholders of record as of June 4, 2001.  Prior to that declaration,
the Company paid quarterly dividends of $0.29 per share dating back to May
21, 2000 when the Board voted to increase the dividend from $0.28 to $0.29
per share.


NOTE N - Statutory Balances

     Following is a GAAP to Statutory reconciliation for both earnings and
policyholders surplus for the combined operations of Commerce, Citation,
Commerce West and American Commerce:
<table>
<caption>
                                           2001               2000                1999

                                   Earnings  Equity     Earnings   Equity   Earnings   Equity

                                <c>       <c>        <c>       <c>       <c>       <c>
GAAP.............................  $ 95,758  $787,172   $136,425  $756,922  $ 85,242  $635,787
Deferred income taxes (benefits).    (5,540)   34,518      6,077    (9,227)     (944)  (40,634)
Deferred acquisition costs.......    (5,252) (116,557)   (12,805) (111,305)   (3,373)  (98,499)
Bonds-book versus market.........      -      (11,578)      -       (5,726)     -       11,400
Preferred stock-market versus
 book............................      -          467       -        1,506      -         (528)
Deferred income..................      (692)    6,802        231     7,493       518     7,380
Deferred service fee income
  (expense)......................     1,067     2,765        412     1,698      (804)    2,611
Deferred reinsurance
 commissions.....................     1,560    14,834      1,896    13,276      (201)   10,054
Statutory reserve over statement
 reserves........................      -         (115)      -       (1,042)     -       (3,053)
Goodwill in subsidiary...........      (290)    1,065       (290)    1,355      (291)    1,645
Pension and post-retirement
 benefit.........................        55     1,929     (2,072)    1,875      -        3,408
Yield to worst amortization......      (201)   (3,803)      -         -         -         -
Non-admitted assets..............      -       (8,682)      -       (4,308)     -         -
Adjustment for non-insurance
 company subsidiary..............     6,014     6,840      6,021     8,324     8,651    11,727
Equity in earnings (losses) of
 preferred stock mutual funds
 reflected in GAAP earnings......    (4,583)     -       (26,575)     -         -         -
Equity in earnings (losses) of
 venture capital funds reflected
 in GAAP earnings................     9,548      -          -         -         -         -
Equity in earnings (losses) of
 Liquidation Special Trust
 reflected in GAAP earnings......    (2,561)     -          -         -         -         -
GAAP restatement of preferred
 stock mutual funds..............      -         -          -         -       13,913   (21,371)
Other............................       135       275       (578)      121       329      (953)
     Total adjustments...........      (740)  (71,240)   (27,683)  (95,960)   17,798  (116,813)
Statutory........................  $ 95,018  $715,932   $108,742  $660,962  $103,040  $518,974
</table>
65
<page>


                          THE COMMERCE GROUP, INC. AND SUBSIDIARIES

                          NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                               December 31, 2001, 2000 and 1999
                                      (Thousands of Dollars)


NOTE O - Segment Information (continued)

     The Company has four reportable segments:  (1) property and casualty
insurance - Massachusetts; (2) property and casualty insurance - other
than Massachusetts; (3) real estate and commercial lending; and, (4)
corporate and other.  The Company's property and casualty insurance
operations are written through Commerce, Citation, Commerce West, and
American Commerce and are marketed to affinity groups, individuals,
families and businesses through the Company's relationships with
professional independent insurance agencies.  The Company's real estate
and commercial lending operations are a result of insurance companies
having the authority to invest in mortgages.  The Company's wholly-owned
subsidiary, Bay Finance Company, Inc., originates and services residential
and commercial mortgages in Massachusetts and Connecticut.  The corporate
and other segment represents the remainder of the Company's activities,
including those of the parent company.

     The Company evaluates performance and allocates resources based
primarily on the property and casualty insurance segments, which
represents 99.2% of the Company's total revenue for the past three years.
The accounting policies of the reportable segments are the same as those
described in NOTE A - Summary of Significant Accounting Policies.

     Selected information by industry segment for 2001, 2000 and 1999 is
summarized as follows:
<table>
<caption>
                                                            Earnings (Losses)
                                                                 Before       Identifiable
                                               Revenue        Income Taxes       Assets

                                           <c>               <c>            <c>
2001
  Property and casualty insurance
   Massachusetts..........................    $1,011,318        $120,855       $1,848,333
   Other than Massachusetts...............       135,483          (6,730)         245,397
  Real estate and commercial lending......         3,640           3,640           40,466
  Corporate and other.....................         3,397          (2,340)           5,886
      Consolidated........................    $1,153,838        $115,425       $2,140,082

2000
  Property and casualty insurance
   Massachusetts..........................    $  969,624        $164,237       $1,780,724
   Other than Massachusetts...............       121,028           7,115          236,240
  Real estate and commercial lending......         5,407           5,407           52,327
  Corporate and other.....................         3,421          (6,693)           6,323
      Consolidated........................    $1,099,480        $170,066       $2,075,614

1999
  Property and casualty insurance
   Massachusetts..........................    $  844,052        $ 97,304       $1,562,975
   Other than Massachusetts...............       110,179           3,998          224,017
  Real estate and commercial lending......         5,429           5,429           78,755
  Corporate and other.....................         3,374          (2,447)          12,272
      Consolidated........................    $  963,034        $104,284       $1,878,019
</table>

NOTE P - Supplement to Consolidated Statements of Cash Flows

     During the years ended December 31, 2001 and 2000, the Company did
not acquire any property through foreclosure of mortgages.
66
<page>


                          THE COMMERCE GROUP, INC. AND SUBSIDIARIES
                          NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                               December 31, 2001, 2000 and 1999
                        (Thousands of Dollars Except for Per Share Data)

NOTE Q - Insolvency Fund Assessments

     As provided in the statutes, insurance companies which write business
in Massachusetts are assessed for losses attributable to the insolvency of
other insurance companies by the Massachusetts Insurers Insolvency Fund
("M.I.I.F.").  From M.I.I.F.'s inception, on August 2, 1972 through
December 31, 2001, the M.I.I.F. has approved assessments totaling
$188,071, of which the Company's share was approximately $15,686.  It is
anticipated that there will be additional assessments from time to time
relating to various insolvencies.  By statute, no insurer may be assessed
in any year an amount greater than two percent of that insurer's direct
written premiums for the calendar year preceding the assessment.  Although
the timing and amounts of any such assessments are not known, based on
existing knowledge, management is of the opinion that such assessments
will not have a material effect on the consolidated financial position of
the Company.  According to statute, the assessed insurance companies have
the right to recoup amounts paid to the M.I.I.F., over a reasonable length
of time, through premium rates approved by the Commissioner.  M.I.I.F.
assessed the Company $3,111 during 2001 and $5,306 for the year ended
December 31, 2000 after having no activity for the year ended December 31,
1999.  The assessment for 2001 was the result of two insolvencies, The
Trust Insurance Company and Reliance Insurance Company, which accounted
for assessment amounts of $1,244 and $1,867, respectively.  The assessment
for 2000 was primarily the result of two insolvencies, The Trust Insurance
Company and New England Fidelity Insurance Company, which accounted for
assessment amounts of $4,939 and $1,205, respectively, offset by refunds
for prior year assessments on numerous insurers' insolvencies.

NOTE R - Commitments

     In 2000, Commerce entered into a Limited Partnership Agreement with
Conning Partners VI, L.P., a Delaware Limited Partnership.  This
partnership agreement required a commitment by the Company to invest up to
$50,000 into the partnership.  To date the Company has invested $15,091
into the partnership leaving a balance for funds still committed but not
paid into the partnership of $34,909.  The partnership was formed to
operate as an investment fund principally for the purpose of making
investments primarily in equity, equity-related and other securities
issued in expansion financing, start-ups, buy-outs and recapitalization
transactions relating to companies in the areas of insurance, financial
services, e-commerce, healthcare, and related businesses, including,
without limitation, service and technology enterprises supporting such
businesses, in order to realize long-term capital returns, all as
determined and managed by the General Partner for the benefit of the
Partners.

     Also in 2000, Commerce entered into a Limited Partnership Agreement
with Distribution Partners Investment Capital, L.P. a Delaware Limited
Partnership.  This partnership agreement required a commitment by the
Company to invest up to $3,500 into the partnership.  To date the Company
has invested $2,258 into the partnership leaving a balance of $1,242 for
funds still committed.  The partnership was formed to operate as an
investment fund principally for the purpose of making investments
primarily in equity and equity-related securities of companies operating
in the area of insurance distribution and distribution related activities,
all as determined and managed by the General Partner for the benefit of
the Partners.

NOTE S - Legal Proceedings

     As is common with property and casualty insurance companies, the
Company is a defendant in various legal actions arising from the normal
course of its business, including claims based on Chapter 176D and Chapter
93A.  These proceedings are considered to be ordinary to operations or
without foundation in fact.  Management is of the opinion that these
actions will not have a material adverse effect on the consolidated
financial position of the Company. In addition to the normal course of
business legal actions noted above, the Company is named as defendant in a
purported class action lawsuit alleging damages as a result of the alleged
diminution of value to vehicles that are involved in accidents.  The
"diminution of value" theory asserts that the market value of any vehicle
involved in an accident inevitably and irreparably declines as a result of
such accident, even if all physical damage appears to be repaired
completely.  This case, entitled "Elena Given, individually and as a
representative of all persons similarly situated v. The Commerce Insurance
Company", filed in 2001, in the Bristol Superior Court in Massachusetts.
The plaintiff has not sought certification of class
67
<page>



                          THE COMMERCE GROUP, INC. AND SUBSIDIARIES
                          NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                               December 31, 2001, 2000 and 1999
                        (Thousands of Dollars Except for Per Share Data)


NOTE S - Legal Proceedings (continued)

action status.  The Company is vigorously contesting this
suit, but is currently unable to estimate the potential
exposure.  The Company and its outside legal counsel are of the
opinion that the Company will prevail in this case.  Another Superior
Court judge in Massachusetts ruled, in a similar case brought by the same
plaintiff counsel against another insurer, that claims for diminution of
value are not covered by the Massachusetts automobile insurance policy.
Other insurance companies face similar suits in cases outside of
Massachusetts.


NOTE T - Quarterly Results of Operations (Unaudited)

     An unaudited summary of the Company's 2001 and 2000 quarterly
performance is as follows:
<table>
<caption>
2001                                              First     Second      Third     Fourth
                                                 Quarter    Quarter    Quarter    Quarter

                                             <c>        <c>        <c>        <c>
Total revenues................................. $273,428   $289,316   $294,642   $296,452
Net earnings...................................   14,622     28,200     22,139     28,133
Comprehensive income...........................    9,019     39,508     19,823     25,305
Operating earnings (1).........................   20,480     26,580     23,420     28,400
Net earnings per common share
  Basic........................................     0.43       0.84       0.66       0.85
  Diluted......................................     0.43       0.83       0.65       0.84
Operating earnings per share (1)
  Basic........................................     0.60       0.79       0.70       0.85
  Diluted......................................     0.60       0.78       0.69       0.85
Cash dividends paid per share..................     0.29       0.30       0.30       0.30

<caption>

2000                                              First     Second      Third     Fourth
                                                 Quarter(2) Quarter(2) Quarter(2) Quarter(2)

                                             <c>        <c>        <c>        <c>
Total revenues................................. $261,898   $251,274   $295,780   $290,528
Net earnings...................................   25,964     14,646     35,974     55,496
Comprehensive income...........................   29,681     19,028     44,921     74,940
Operating earnings (1).........................   20,554     20,415     17,469     51,193
Net earnings per common share
  Basic........................................     0.76       0.43       1.05       1.63
  Diluted......................................     0.76       0.43       1.05       1.63
Operating earnings per share (1)
  Basic........................................     0.60       0.60       0.51       1.50
  Diluted......................................     0.60       0.60       0.51       1.50
Cash dividends paid per share..................     0.28       0.29       0.29       0.29

 (1) The above figures are presented to provide information to the reader due to the amount
     of, and fluctuations in, net realized gains and losses.  The amounts noted, which
     exclude the after-tax impact of net realized investment gains (losses), are important
     measures of corporate performance.  Operating earnings per share, basic and diluted, are
     calculated identically to net earnings per common, basic and diluted, (see NOTE A15),
     with the exception that the number divided by the weighted shares would be operating
     earnings.

 (2) During 2001 certain amounts were restated due to the change in accounting for closed-end
     preferred stock mutual funds to the equity method.
</table>
68
<page>


                   SELECTED CONSOLIDATED FINANCIAL DATA

     The data below should be read in conjunction with the consolidated
financial statements, related footnotes, and other financial information
included herein.  The financial statements for the five years ended
December 31, 2001 have been audited by Ernst & Young LLP.  All dollar
amounts set forth in the following tables are in thousands, except per
share data:
<table>
<caption>
                                                    Years ended December 31,
                                       2001         2000        1999        1998        1997

                                <c>          <c>         <c>         <c>        <c>
Statement of Earnings Data:
  Net premiums written..........   $1,078,967   $1,008,911  $  911,993  $  745,048 $  741,501
  (Increase) decrease in
   unearned premiums............      (35,315)     (54,428)    (40,163)        572    (11,004)
  Earned premiums...............    1,043,652      954,483     871,830     745,620    730,497
  Net investment income.........       99,611       96,830      89,789      86,501     80,971
  Premium finance and service
   fees.........................       17,819       15,227      14,774      13,440      7,074
  Amortization of excess of
   book value of subsidiary
   interest over cost...........        3,389        3,390       3,019        -          -
  Net realized investment gains
  (losses)......................      (10,633)      29,550     (16,378)      7,150     29,963
       Total revenues...........    1,153,838    1,099,480     963,034     852,711    848,505

  Losses and loss adjustment
   expenses.....................      777,543      686,157     625,090     531,429    526,127
  Policy acquisition costs......      260,870      243,257     233,660     196,434    187,491
       Total expenses...........    1,038,413      929,414     858,750     727,863    713,618

  Earnings before income taxes
   and minority interest........      115,425      170,066     104,284     124,848    134,887

  Income taxes..................       23,194       38,306      16,667      26,583     33,483
  Net earnings before minority
   interest.....................       92,231      131,760      87,617      98,265    101,404
  Minority interest in net loss
    of subsidiary...............          863          320       1,059         -          -

       Net earnings.............   $   93,094   $  132,080  $   88,676  $   98,265 $  101,404

       Comprehensive income.....   $   93,655   $  168,570  $   40,730  $   96,594 $  103,460

Earnings Per Share Data:
       Basic....................   $     2.77   $     3.87  $     2.54  $     2.73 $     2.81
       Diluted..................   $     2.75   $     3.87  $     2.54  $     2.73 $     2.81

       Cash dividends paid per
        share...................   $     1.19   $     1.15  $     1.11  $     1.07 $     1.03

Weighted average number of
 shares outstanding:
  Basic.........................   33,608,804   34,121,047  34,940,074  36,042,652 36,044,679
  Diluted.......................   33,794,938   34,121,047  34,940,074  36,042,652 36,044,679

<caption>
                                                             December 31,
                                       2001         2000        1999        1998        1997

                                <c>          <c>         <c>         <c>         <c>
Balance Sheet Data:
  Total investments.............   $1,498,201   $1,472,562  $1,295,995  $1,262,500  $1,246,504
  Premiums receivable...........      246,221      230,580     195,160     162,878     169,469
  Total assets..................    2,140,082    2,075,614   1,878,019   1,747,583   1,739,562
  Unpaid losses and loss
   adjustment expenses..........      681,624      674,140     659,841     583,996     630,473
  Unearned premiums.............      563,456      519,885     457,095     391,424     379,599
  Stockholders' equity..........      812,274      781,881     668,005     710,852     652,824
  Stockholders' equity
   per share ...................        24.52        23.16       19.44       19.72       18.11
</table>
69
<page>


                   MANAGEMENT'S DISCUSSION OF THE SUPPLEMENTAL INFORMATION
                                  ON INSURANCE OPERATIONS
                                    (Thousands of Dollars)


     The following tables depict the progress of the insurance operations
of the Company over the past fifteen years.  For these years of operation,
net premiums written amounted to $8,358,235.  During this period, the
aggregate statutory financial ratios were 68.6% for losses and loss
expenses and 26.1% for underwriting expenses resulting in an aggregate
combined ratio of 94.7%.  Total net investment income amounted to $876,134
or 10.5% of net premiums written.  Net realized gains were $93,201.
Stockholders' equity was $31,461 at the beginning of 1987 and $787,172, at
the end of 2001, resulting in an average annual increase in excess of
23.9%, excluding dividends.  This figure including dividends paid would
have been 26.1%.  The progress of the insurance operations during the most
recent five year period, compared to the two previous five year periods,
can best be illustrated by the following comparison:
<table>
<caption>
                                                                  5-Year Period

                                                        1997-01        1992-96    1987-91

                                                  <c>            <c>          <c>
Direct premiums written..........................    $4,737,712     $3,110,296   $1,710,049

Net premiums written.............................     4,486,420      2,976,451      895,364

Net investment income............................       465,687        303,657      106,790

Net realized gains...............................        28,969         50,290       13,942

Stockholders' equity at end of period............       787,172        550,087      177,225

Statutory Financial Ratios (Unaudited)
  Losses and loss expenses to premiums earned....          70.2%          66.5%        66.8%

  Underwriting expenses to net premiums written..          25.2           27.4         26.6
      Combined ratio.............................          95.4%          93.9%        93.4%

Increase in Stockholders' Equity.................          43.1%         210.4%       463.3%
</table>


     The insurance operations of the Company include the operating results
of Commerce and Citation, along with Commerce's subsidiary companies,
Commerce West and American Commerce.  Citation commenced business in 1981
as a wholly-owned subsidiary of Commerce.  On December 31, 1989, the
ownership of Citation was transferred to The Commerce Group, Inc.  In
September 1993, ownership of both Commerce and Citation was transferred
from The Commerce Group, Inc. to CHI, a subsidiary of The Commerce Group,
Inc.  Results of Commerce West are included since its acquisition by
Commerce on August 31, 1995.  Results of American Commerce are included
since its acquisition by Commerce on January 29, 1999.  The combined
balance sheets of these insurance subsidiaries appear on pages 71 and 72.
The combined statements of earnings of insurance operations appear on
pages 73 and 74.  During 2001 certain amounts for years 1996 through 2000
were restated due to the change in accounting for closed-end preferred
stock mutual funds to the equity method, reflected as realized gains or
losses.


70
<page>


                      MANAGEMENT'S DISCUSSION OF THE SUPPLEMENTAL INFORMATION
                                ON INSURANCE OPERATIONS (continued)

                             THE COMMERCE GROUP, INC. AND SUBSIDIARIES
                         COMBINED BALANCE SHEETS OF INSURANCE SUBSIDIARIES
                                           December 31,
                                      (Thousands of Dollars)
<table>
<caption>
                                         2001        2000        1999        1998        1997




                                                  ASSETS

                                  <c>         <c>         <c>         <c>         <c>
Cash and short-term investments..... $  148,418  $   70,392  $   22,410  $   75,655  $  238,685
Bonds, at market (at amortized cost
 prior to 1993).....................    626,482     669,935     647,338     619,267     590,597
Preferred stocks, at market (at
 amortized cost prior to 1993)......    248,101     200,083     211,049     197,425     148,499
Common stocks, at market............    107,458     115,827      77,348     111,482      58,652
Preferred stock mutual funds........    309,282     337,733     251,135     177,079     123,246
Mortgage loans on real estate.......     26,237      35,340      42,479      46,573      57,425
Other investments...................     18,743      26,802      14,139       7,825       3,783
Premium balances receivable.........    246,095     230,450     195,047     162,704     169,311
Investment income receivable........     15,460      18,118      14,531      13,544      12,103
Residual market receivable..........    125,832     127,241     141,660     140,220     161,799
Reinsurance receivable..............     70,450      61,554      48,365      36,687      18,170
Deferred acquisition costs..........    116,557     111,305      98,500      88,759      85,264
Current income taxes................       -           -           -          2,773        -
Deferred income taxes...............     15,797      10,901      37,612        -           -
Non-compete agreement...............      2,479       2,829       3,179        -           -
Real estate, furniture and equipment     38,764      33,498      27,321      27,885      29,060

        Total assets................ $2,116,155  $2,052,008  $1,832,113  $1,707,878  $1,696,594
<caption>
                                                 LIABILITIES

                                  <c>         <c>         <c>         <c>         <c>
Unpaid losses and loss expenses..... $  675,978  $  669,837  $  659,319  $  579,174  $  618,094
Unearned premiums...................    563,456     519,885     457,095     391,424     379,599
Excess of book value of subsidiary
 interest over cost.................      5,719       8,431      10,758        -           -
Notes payable.......................       -           -           -           -           -
Deferred income.....................      7,015       7,703       7,464       6,948       7,271
Accounts payable, accrued and other
 liabilities........................     72,998      72,333      48,505      70,558      60,332
Current income taxes................      3,817      15,829      11,821        -          9,635
Deferred income taxes...............        -          -           -          4,955       9,218
        Total liabilities...........  1,328,983   1,294,018   1,194,962   1,053,059   1,084,149

Minority interest...................       -          1,068       1,364        -           -
<caption>
                                             STOCKHOLDERS' EQUITY

                                 <c>          <c>         <C>         <C>         <C>
Capital stock.......................      3,600       3,600       3,600       3,620       3,600
Paid-in capital.....................     45,050      45,050      45,050      45,050      45,050
Retained earnings
  Balance, January 1................    708,272     587,137     606,149     563,795     501,437
  Net earnings......................     95,758     136,425      85,242      95,661     106,718
  Other comprehensive income (loss).        560      36,490     (47,948)     (1,669)      2,055
  Dividends paid....................    (66,068)    (51,780)    (56,306)    (51,638)    (46,415)
Balance, December 31................    738,522     708,272     587,137     606,149     563,795
        Total stockholders' equity..    787,172     756,922     635,787     654,819     612,445
Total liabilities and
          stockholders' equity...... $2,116,155  $2,052,008  $1,832,113  $1,707,878  $1,696,594
</TABLE>
71
<page>


                    MANAGEMENT'S DISCUSSION OF THE SUPPLEMENTAL INFORMATION
                                  ON INSURANCE OPERATIONS (continued)

                               THE COMMERCE GROUP, INC. AND SUBSIDIARIES
                          COMBINED BALANCE SHEETS OF INSURANCE SUBSIDIARIES
                                             December 31,
                                        (Thousands of Dollars)
<table>
<caption>
     1996       1995       1994       1993       1992     1991     1990     1989     1988     1987




                                                   ASSETS

        <c>        <c>        <c>        <c>        <c>      <c>      <c>      <c>      <c>
$  140,102 $   52,308 $    4,560 $   12,615 $   25,809 $ 11,190 $ 38,654 $ 84,308 $ 60,885 $ 21,051

   716,702    815,277    745,010    649,491    505,565  329,935  242,735  153,621  133,867  116,220

   147,680    111,220     85,574     80,059      2,261      869    1,010    1,324    1,606    2,295
    63,156     40,359      9,656     47,462     43,545   30,055    4,869    2,900    1,921    1,438
    22,727       -          -          -          -        -        -        -        -        -
    45,398     31,404     35,715     42,042     60,697   66,122   56,124   52,244   42,882   15,931
       127       -          -          -        67,876   55,510   57,733   56,713   33,727   19,329
   157,673    126,090    101,529     94,333       -        -        -        -        -        -
    12,655     14,440     13,285     10,205      9,710    6,063    4,235    3,093    2,889    2,370
   182,213    187,124    198,818    203,312    253,426  254,196  266,440  246,951  184,177  123,725
    19,659     21,897     16,892     12,868        365     -        -        -        -        -
    82,968     67,160     59,066     53,647     55,442   33,981   27,273   22,702   15,699   10,898
      -          -          -          -          -        -        -         341      266     -
      -         2,100     38,180       -          -         883    1,666     -        -        -
      -          -          -          -          -        -        -        -        -        -
    26,011     24,642     25,246     22,371     23,183   24,163   25,046   23,118    9,684    8,356

$1,617,071 $1,494,021 $1,333,531 $1,228,405 $1,047,879 $812,967 $725,785 $647,315 $487,603 $321,613
<caption>
                                                  LIABILITIES

        <c>        <c>        <c>        <c>        <c>      <c>      <c>      <c>      <c>
$  644,854 $  605,791 $  576,373 $  550,797 $  474,800 $416,551 $379,752 $323,020 $256,628 $160,539
   367,991    330,454    314,719    283,526    264,567  192,785  175,334  174,345  118,079   84,876

      -          -          -          -          -        -        -        -        -        -
      -          -          -          -          -        -       1,662    1,837    2,013    2,204
     7,974      8,954     10,451      7,351      8,384   12,918   20,264   23,689   23,307   11,058

    41,368     34,351     43,433     16,564     20,863    7,677   21,065   27,513   19,350   14,532
     2,726      1,596     10,254      4,867      9,249    5,811    3,542     -        -         470
     2,071       -          -        13,669      4,400     -        -       1,623    1,021    1,853
 1,066,984    981,146    955,230    876,774    782,263  635,742  601,619  552,027  420,398  275,532

      -          -          -          -          -        -        -        -        -        -
<caption>
                                              STOCKHOLDERS' EQUITY

        <c>       <c>         <c>        <c>        <c>      <c>      <c>      <c>      <c>
     3,600      3,450      3,450      3,450      3,450    3,450    3,450    3,450    2,350    2,350
    45,050     23,700     23,700      8,700      8,700    8,700    8,700    8,700    6,500    6,500

   485,725    351,151    339,481    253,466    165,075  112,016   83,138   62,877   37,231   22,611
    74,543    110,450    113,892     79,837     91,980   55,214   32,414   21,966   21,837   15,614
     6,399     58,919    (77,622)    21,928      9,811    2,545      (86)     645      321      (54)
   (65,230)   (34,795)   (24,600)   (15,750)   (13,400)  (4,700)  (3,450)  (2,350)  (1,034)    (940)
   501,437    485,725    351,151    339,481    253,466  165,075  112,016   83,138   58,355   37,231
   550,087    512,875    378,301    351,631    265,616  177,225  124,166   95,288   67,205   46,081

$1,617,071 $1,494,021 $1,333,531 $1,228,405 $1,047,879 $812,967 $725,785 $647,315 $487,603 $321,613
</table>


72
<page>



                    MANAGEMENT'S DISCUSSION OF THE SUPPLEMENTAL INFORMATION
                              ON INSURANCE OPERATIONS (continued)

                           THE COMMERCE GROUP, INC. AND SUBSIDIARIES
                    COMBINED STATEMENTS OF EARNINGS OF INSURANCE OPERATIONS
                                   Years Ended December 31,
                                    (Thousands of Dollars)
<table>
<caption>
                                                2001       2000       1999      1998      1997

                                         <c>         <c>         <c>       <c>      <c>
Underwriting
  Direct premiums written...................$1,152,407  $1,071,649  $948,149  $796,858  $768,649

  Net premiums written......................$1,078,967  $1,008,911  $911,993  $745,048  $741,501
  Increase (decrease) in unearned
   premiums.................................    35,315      54,428    40,163      (572)   11,004
      Earned premiums....................... 1,043,652     954,483   871,830   745,620   730,497

Expenses
  Losses and loss expenses..................   776,709     682,805   628,087   533,523   521,775
  Underwriting expenses.....................   263,766     251,697   238,458   200,525   185,146
  (Increase) decrease in deferred
   acquisition costs........................    (5,252)    (12,805)   (3,374)   (3,495)   (2,296)
      Total expenses........................ 1,035,223     921,697   863,171   730,553   704,625
Underwriting income (loss)..................     8,429      32,786     8,659    15,067    25,872
Net investment income.......................   100,384      96,739    90,028    89,356    89,180
Premium finance fees........................    17,814      15,221    14,768    13,426     7,056
Amortization of excess of book value
 of subsidiary interest over cost...........     3,389       3,390     3,019      -         -
Net realized investment gains (losses)......   (10,738)     29,380   (16,325)    4,334    22,318
      Earnings before Federal income taxes,
      withdrawing companies' settlements
      and minority interest.................   119,278     177,516   100,149   122,183   144,426

Other income
  Withdrawing companies' settlements........      -           -         -         -         -
Earnings before Federal income taxes
 and minority interest......................   119,278     177,516   100,149   122,183   144,426
Federal income taxes........................    24,383      41,411    15,966    26,522    37,708
Earnings before cumulative effect of
 change in accounting principle and
 minority interest..........................    94,895     136,105    84,183    95,661   106,718
Cumulative effect on prior years (to
 December 31, 1986) of changing to
 different method of accounting for
 income taxes...............................      -           -         -         -         -
Minority interest in net loss of subsidiary.       863         320     1,059      -         -
      NET EARNINGS..........................$   95,758  $  136,425  $ 85,242  $ 95,661  $106,718

Statutory Financial Ratios (Unaudited)
  Losses and loss expenses to
   premiums earned..........................      74.7%       71.7%     72.0%     71.6%     71.4%
  Underwriting expenses to net
   premiums written.........................      24.4        25.1      26.5      26.5      25.1
      Combined ratio........................      99.1%       96.8%     98.5%     98.1%     96.5%
      Underwriting profit (loss)............       0.9%        3.2%      1.5%      1.9%      3.5%
</table>







73
<page>



                    MANAGEMENT'S DISCUSSION OF THE SUPPLEMENTAL INFORMATION
                             ON INSURANCE OPERATIONS (continued)

                           THE COMMERCE GROUP, INC. AND SUBSIDIARIES
                   COMBINED STATEMENTS OF EARNINGS OF INSURANCE OPERATIONS
                                   Years Ended December 31,
                                    (Thousands of Dollars)
<table>
<caption>
   1996      1995        1994      1993      1992      1991      1990      1989     1988      1987


       <c>        <c>        <c>       <c>       <c>       <c>       <c>       <c>       <c>
$731,823  $626,666   $ 625,023  $601,289  $525,495  $429,780  $401,077  $366,492  $304,469  $206,231

$711,570  $603,421   $ 589,197  $563,416  $508,847  $310,999  $219,936  $140,313  $124,923  $ 99,193

  42,854    10,831      17,144    14,856    98,353    30,193    34,692    12,655     9,678    13,428
 668,716   592,590     572,053   548,560   410,494   280,806   185,244   127,658   115,245    85,765


 474,173   367,258     369,764   373,243   271,848   173,901   125,219    88,564    80,203    65,299
 194,873   171,892     162,446   147,290   138,669    85,655    55,551    44,181    33,115    25,882

 (15,809)   (5,723)     (5,420)    1,796   (21,462)   (6,708)   (4,571)   (7,003)   (4,801)   (3,769)
 653,237   533,427     526,790   522,329   389,055   252,848   176,199   125,742   108,517    87,412
  15,479    59,163      45,263    26,231    21,439    27,958     9,045     1,916     6,728    (1,647)
  76,978    71,007      63,119    52,868    39,685    32,661    25,978    21,256    15,999    10,896
   9,666    19,246      18,315    16,486    13,734    11,165    10,074     8,095     4,592     3,021

    -         -           -         -         -         -         -         -         -         -
  (7,863)      720      32,025    13,040    12,368     7,529        74       618     2,298     3,423


  94,260   150,136     158,722   108,625    87,226    79,313    45,171    31,885    29,617    15,693


    -         -           -         -       43,168      -         -         -         -         -

  94,260   150,136     158,722   108,625   130,394    79,313    45,171    31,885    29,617    15,693
  19,717    39,686      44,830    28,788    38,414    24,099    12,757     9,919     7,780     2,987


  74,543   110,450     113,892    79,837    91,980    55,214    32,414    21,966    21,837    12,706



    -         -           -         -         -         -         -         -         -        2,908
    -         -           -         -         -         -         -         -         -         -
$ 74,543  $110,450   $ 113,892  $ 79,837  $ 91,980  $ 55,214  $ 32,414  $ 21,966  $ 21,837  $ 15,614



    70.9%    62.0%       64.6%     68.0%      66.2%     61.9%     65.7%     68.0%     69.5%     79.4%

    27.1     29.0        27.1      25.7       28.1      30.0      26.7      26.3      22.0      22.5
    98.0%    91.0%       91.7%     93.7%      94.3%     91.9%     92.4%     94.3%     91.5%    101.9%
     2.0%     9.0%        8.3%      6.3%       5.7%      8.1%      7.6%      5.7%      8.5%     (1.9%)
</table>










74
<page>


<table>
<caption>
                               ORGANIZATIONAL CHART



                            <c>
                               --------------------------
                               |The Commerce Group, Inc.|
                               |A Massachusetts Corp.   |
                               --------------------------
                                           |
                                           |
            -------------------------------------------------------------------
            |                              |                                  |
            |                              |                                  |
---------------------------     --------------------------     ------------------------------
|Bay Finance Company, Inc.|     |Commerce Holdings, Inc. |     |Clark-Prout Insurance Agency|
|A Massachusetts Corp.    |     |A Massachusetts Corp.   |     |A Massachusetts Corp.       |
|A wholly-owned subsidiary|     |A wholly-owned insurance|     |A wholly-owned subsidiary   |
---------------------------     |holding company         |     ------------------------------
                                --------------------------
                                         |
                                         |
                   ---------------------------------------------------
                   |                                                 |
                   |                                                 |
    --------------------------------               ----------------------------
    |The Commerce Insurance Company|               |Citation Insurance Company|
    |A Massachusetts Corp.         |               |A Massachusetts Corp.     |
    |A wholly-owned subsidiary     |               |A wholly-owned subsidiary |
    --------------------------------               ----------------------------
                   |
                   |
            ------------------------------------------
            |                                        |
  --------------------------       ---------------------------------
  |ACIC Holding, Inc.      |       |Commerce West Insurance Company|
  |A Rhode Island Corp.    |       |A California Corp.             |
  |An 80% owned holding co.|       |A wholly-owned subsidiary      |
  --------------------------       ---------------------------------
                   |
                   |
     -------------------------------------
     |American Commerce Insurance Company|
     |An Ohio Corp.                      |
     |A wholly-owned subsidiary          |
     -------------------------------------
</table>
75
<page>


<table>
<caption>

                                   THE COMMERCE GROUP, INC.

                                          DIRECTORS

                                       <c>
Herman F. Becker......................... President and owner, Sterling Realty and Huguenot
                                          Development Corporation

Joseph A. Borski, Jr..................... Self-employed Certified Public Accountant

Eric G. Butler........................... Retired Vice President and General Claims Manager
                                          of Commerce and Citation

Henry J. Camosse......................... Retired President, Henry Camosse & Sons Co., Inc.,
                                          a building and masonry supplies company

Gerald Fels.............................. Executive Vice President and Chief Financial
                                          Officer of the Company; President and Chief
                                          Operating Officer of Commerce and Citation

David R. Grenon.......................... Retired CEO, President and Chairman Emeritus of
                                          The Protector Group Insurance Agency, Inc.;
                                          President E-C Realty Corporation

Robert W. Harris......................... Retired Treasurer, H.C. Bartlett Insurance Agency,
                                          Inc.

Robert S. Howland........................ Retired Clerk, H.C. Bartlett Insurance Agency,
                                          Inc.

John J. Kunkel........................... President and Treasurer, Kunkel Buick and GMC
                                          Truck; Treasurer, Kunkel Bus Company

Raymond J. Lauring....................... Retired President, Lauring Construction Company

Normand R. Marois........................ Retired Chairman of the Board, Marois Bros., Inc.,
                                          a contracting firm

Suryakant M. Patel....................... Retired physician who specialized in internal
                                          medicine

Arthur J. Remillard, Jr.................. President, Chief Executive Officer and Chairman
                                          of the Board of the Company

Arthur J. Remillard, III................. Senior Vice President and Assistant Clerk of
                                          the Company; Senior Vice President of Commerce
                                          and Citation in charge of Policyholder Benefits

Regan P. Remillard....................... Senior Vice President of the Company; President
                                          and Secretary of Commerce West Insurance Company;
                                          President of ACIC Holding Co., Inc.; President,
                                          Vice Chairman of the Board and Chief Executive
                                          Officer of American Commerce Insurance Company

Gurbachan Singh.......................... Retired physician who specialized in general
                                          surgery

John W. Spillane......................... Clerk of the Company and practicing attorney
</table>

76
<page>


<table>
<caption>


                               DIRECTORS OF
                               COMMERCE HOLDINGS, INC.
                                  The Commerce Insurance Company
                                    Commerce West Insurance Company
                                  Citation Insurance Company




                                    <c>
Arthur J. Remillard, Jr...........     President and Chairman of the Board of Commerce
                                       Holdings, Inc.; Chief Executive Officer and Chairman
                                       of the Board of The Commerce Insurance Company, Inc.;
                                       Chairman of the Board Commerce West Insurance Company

Gerald Fels.......................     President, Chief Operating Officer and Chief
                                       Financial Officer of The Commerce Insurance Company
                                       and Citation Insurance Company; Treasurer, Commerce
                                       Holdings, Inc.; Investment Officer of Commerce West
                                       Insurance Company

Arthur J. Remillard, III (1)......     Senior Vice President and Clerk

Regan P. Remillard................     Senior Vice President; President and Secretary of
                                       Commerce West Insurance Company

James A. Ermilio (1)..............     Senior Vice President and General Counsel

David R. Grenon (1)...............     Retired CEO, President and Chairman Emeritus of
                                       The Protector Group Insurance Agency, Inc.;
                                       President E-C Realty Corporation

John M. Nelson (1)................     Chairman of Commonwealth National Bank

Suryakant M. Patel (1)............     Retired physician who specialized in internal
                                       medicine

William G. Pike (1)...............     Executive Vice President and Chief Financial Officer
                                       of Granite State Bankshares, Inc.

H. Thomas Rowles (1)..............     Chairman of the Board of ACIC Holding Co., Inc.;
                                       Chairman of the Board of American Commerce Insurance
                                       Company; Director of AAA Southern New England

Mark A. Shaw (1)..................     Treasurer of ACIC Holding Co., Inc.; President, Chief
                                       Executive Officer and Director of AAA Southern New
                                       England




(1) Commerce Holdings, Inc., The Commerce Insurance Company and Citation Insurance Company
    only.
</table>




77
<page>


<table>
<caption>
                               DIRECTORS OF
                               ACIC Holding Co., Inc.(1)
                                  American Commerce Insurance Company


                                    <c>
H. Thomas Rowles..................     Chairman of the Board of ACIC Holding Co., Inc.;
                                       Chairman of the Board of American Commerce Insurance
                                       Company; Director of AAA Southern New England

Regan P. Remillard................     President of ACIC Holding Co., Inc.; President, Vice
                                       Chairman of the Board and Chief Executive Officer of
                                       American Commerce Insurance Company; Senior Vice
                                       President of The Commerce Group, Inc.; President and
                                       Secretary of Commerce West Insurance Company

Mark A. Shaw......................     Treasurer of ACIC Holding Co., Inc.; President,
                                       Chief Executive Officer and Director of AAA Southern
                                       New England

Gerald Fels.......................     Executive Vice President and Chief Financial Officer
                                       of The Commerce Group, Inc.

Patrick W. Doherty (2)............     President and Chief Executive Officer of AAA Oklahoma

Terry R. Farias (2)...............     President and Chief Executive Officer of AAA Hoosier
                                       Motor Club

Richard S. Hamilton (2)...........     President of AAA West Pennsylvania/West
                                       Virginia/South Central Ohio

Charles B. Liekweg (2)............     President and Chief Executive Officer of AAA
                                       Washington

D. James McDowell (2).............     President and Chief Executive Officer of AAA Arizona

Peter C. Ohlheiser (2)............     President of Ohio Motorists Association

Otto T. Wright (2)................     President and Chief Executive Officer of East
                                       Tennessee Automobile Club, Inc.




 (1) Incorporated in November, 1998.  80% owned by The Commerce Insurance Company and 20%
     owned by AAA Southern New England.
 (2) American Commerce Insurance Company only, which was acquired in January 1999.
</table>









78
<page>


<table>
<caption>

                               DIRECTORS OF
                               BAY FINANCE COMPANY, INC.


                                     <c>
Arthur J. Remillard, Jr..............   President and Chairman of the Board

Gerald Fels..........................   Executive Vice President and Chief Financial Officer

John W. Spillane.....................   Clerk and Practicing Attorney

Arthur J. Remillard, III.............   Senior Vice President and Assistant Clerk

Regan P. Remillard...................   Senior Vice President





<caption>

                               DIRECTORS OF
                               CLARK-PROUT INSURANCE AGENCY, INC.


                                     <c>
Arthur J. Remillard, Jr..............   President and Chairman of the Board

Gerald Fels..........................   Executive Vice President and Chief Financial Officer

John W. Spillane.....................   Clerk and Practicing Attorney

Arthur J. Remillard, III.............   Senior Vice President and Assistant Clerk

Elizabeth M. Edwards.................   Vice President
</table>






















79
<page>


<table>
<caption>
                                  THE COMMERCE GROUP, INC.
                                    Commerce Holdings, Inc.
                                      The Commerce Insurance Company
                                        Commerce West Insurance Company
                                        ACIC Holding Co., Inc. (1)
                                          American Commerce Insurance Company (2)
                                      Citation Insurance Company
                                    Bay Finance Company, Inc.
                                    Clark-Prout Insurance Agency, Inc.

                           OFFICERS OF THE COMMERCE GROUP, INC.

                                                                   <c>
President, Chief Executive Officer and Chairman of the Board.....     Arthur J. Remillard, Jr.
Executive Vice President and Chief Financial Officer.............     Gerald Fels
Senior Vice President and Assistant Clerk........................     Arthur J. Remillard, III
Senior Vice President............................................     Regan P. Remillard
Senior Vice President and General Counsel........................     James A. Ermilio
Vice President...................................................     Joseph J. Staffieri
Clerk............................................................     John W. Spillane
Treasurer and Chief Accounting Officer...........................     Randall V. Becker
Vice President and Corporate Compliance Officer..................     Robert E. McKenna
Assistant Vice President and Assistant General Counsel...........     Thomas D. Jungeberg
Assistant Treasurer..............................................     Thomas A. Gaylord
<caption>
                              Officers of Massachusetts Subsidiaries (3)

                                                                   <c>
Chief Executive Officer and Chairman of the Board................     Arthur J. Remillard, Jr.

President, Chief Operating Officer and Chief Financial Officer...     Gerald Fels

Senior Vice President and Secretary..............................     Arthur J. Remillard, III

Senior Vice President and General Counsel........................     James A. Ermilio

Senior Vice Presidents...........................................     David H. Cochrane
                                                                      Peter J. Dignan
                                                                      Regan P. Remillard
                                                                      Joyce B. Virostek

Vice Presidents..................................................     Elizabeth M. Edwards
                                                                      Karen A. Lussier
                                                                      Robert E. McKenna
                                                                      Michael J. Richards
                                                                      Angelos Spetseris
                                                                      Joseph J. Staffieri
                                                                      Henry R. Whittier, Jr.

Assistant Vice President and Assistant General Counsel...........     Thomas D. Jungeberg

Assistant Vice Presidents......................  David P. Antocci     James E. Gow
                                                 Robert M. Blackmer   Susan A. Horan
                                                 Stephen R. Clark     John V. Kelly
                                                 Raymond J. DeSantis  Donald G. MacLean
                                                 Warren S. Ehrlich    Patrick J. McDonald
                                                 Richard W. Goodus    Robert L. Mooney
                                                                      Emile E. Riendeau

Treasurer and Chief Accounting Officer...........................     Randall V. Becker

Assistant Treasurer..............................................     Thomas A. Gaylord

(1) Incorporated in November, 1998, the common stock of which is 80% owned by The Commerce
    Insurance Company and 20% owned by AAA Southern New England.
(2) Acquired by ACIC Holding Co., Inc. in January, 1999.
(3) Massachusetts subsidiaries include Commerce Holdings, Inc., The Commerce Insurance Company,
    Citation Insurance Company, Bay Finance Company, Inc. and Clark-Prout Insurance Agency.
    Officers often hold positions with several operating subsidiaries.  The titles listed
    represent their primary office as of March 1, 2002.
</table>
80
<page>


<table>
<caption>

                                Officers of ACIC Holding Co., Inc.

                                                                    <c>
Chairman of the Board................................................  H. Thomas Rowles
President............................................................  Regan P. Remillard
Treasurer............................................................  Mark A. Shaw
Secretary............................................................  James A. Ermilio



<caption>

                          Officers of American Commerce Insurance Company


                                                                    <c>
Chairman of the Board................................................  H. Thomas Rowles
President, Vice Chairman of the Board and Chief Executive Officer....  Regan P. Remillard
Senior Vice President and Chief Financial Officer....................  Michael V. Vrban
General Counsel and Secretary........................................  James A. Ermilio
Treasurer............................................................  Richard B. O'Hara
Vice President.......................................................  Gregory S. Clark
Vice President.......................................................  Joseph B. Phillips, Jr.
Assistant Vice President.............................................  William J. Hafer
Assistant Vice President.............................................  Jeffrey B. Alexander
Assistant General Counsel and Assistant Secretary....................  Thomas D. Jungeberg



<caption>

                           Officers of Commerce West Insurance Company


                                                                    <c>
Chairman of the Board................................................  Arthur J. Remillard, Jr.
President and Secretary..............................................  Regan P. Remillard
Treasurer and Chief Financial Officer ...............................  Michael V. Vrban
Chief Accounting Officer.............................................  Albert E. Peters
Investment Officer...................................................  Gerald Fels
Vice Presidents......................................................  Michael J. Berryessa
                                                                       Albert R. Harris
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                                   Stockholder Information


Annual Meeting

The Annual meeting of stockholders will be held at 9:00 a.m. on Friday, May
17, 2002 at the Company's Underwriting Building, 11 Gore Road (Route 16),
Webster, MA.

Form 10-K

Stockholders interested in the detailed information contained in the
Company's annual report on Form 10-K, as filed with the Securities and
Exchange Commission, may obtain a copy without charge, by writing to the
Assistant to the President at 211 Main Street, Webster, MA 01570.

Transfer Agent

The Commerce Group, Inc.
c/o Equiserve Trust Company, N.A.
P.O. Box 43010
Providence, RI 02940-3010
(781) 575-3100 or (800) 733-5001
http://www.equiserve.com


Executive Offices

211 Main Street
Webster, MA 01570
(508) 943-9000

Company Websites

The Commerce Insurance Company              http://www.commerceinsurance.com
American Commerce Insurance Company         http://www.acilink.com
Bay Finance Company, Inc.                   http://www.bayfinance.com


Trading of Common Stock

The Company's Common Stock trades on the NYSE under the symbol "CGI".

Independent Auditors

Ernst & Young LLP
200 Clarendon Street
Boston, MA 02116
(617) 266-2000
http://www.ey.com





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