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, 1997

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 the 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 1, 1998, was approximately 
$802,587,321.

	As of March 1, 1998, the number of shares outstanding of the 
registrant's common stock (exclusive of treasury shares) was 36,042,652.

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, 1997 (the "1997 Annual Report").  The 
1997 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 
special meeting in lieu of the 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, 1997 are incorporated by 
reference into Part III hereof as provided therein.
<page





TABLE OF CONTENTS
<TABLE>
<CAPTION>
												
		    Page

Glossary of Selected Insurance 
Terms................................................	 3

Part I
<S>         <C>   <C>                                                                     
<C>
Item 1.
	Business..........................................................
 ......	 7
		A.
	General...........................................................
	10
		B.	Commonwealth Automobile 
Reinsurers................................	12
		C.
	Marketing.........................................................
	14
		D.
	Underwriting......................................................
	16
		E.
	Reinsurance.......................................................
	18
		F.	Settlement of 
Claims..............................................	19
		G.	Loss and Loss Adjustment Expense 
Reserves.........................	20
		H.	Operating 
Ratios..................................................	23
		I.
	Investments.......................................................
	24
		J.
	Regulation........................................................
	26
		K.
	Competition.......................................................
	31
		L.	Other 
Matters.....................................................	32
Item 2.
	Properties........................................................
 ......	32
Item 3.	Legal 
Proceedings.......................................................
	32
Item 4.	Submission of Matters to a Vote of Security 
Holders.....................	33
Item 4A.	Executive Officers of the 
Registrant....................................	33

Part II

Item 5.	Market for Registrant's Common Stock and Related Stockholder 
Matters....	35
Item 6.	Selected Financial 
Data.................................................	35
Item 7.	Management's Discussion and Analysis of Financial Condition 
and
		 Results of 
Operations..................................................	35
Item 8.	Financial Statements and Supplementary 
Data.............................	36
Item 9.	Changes in and Disagreements with Independent Auditors on 
Accounting
		 and Financial 
Disclosure...............................................	36

Part III

Item 10.	Directors and Executive Officers of the 
Registrant......................	36
Item 11.	Executive 
Compensation..................................................	36
Item 12.	Security Ownership of Certain Beneficial Owners and 
Management..........	36
Item 13.	Certain Relationships and Related 
Transactions..........................	36

Part IV

Item 14.	Exhibits, Financial Statement Schedules and Reports on Form 
8-K.........	37
	
	Signatures........................................................
 ......	38
		Index to Financial Statement 
Schedules..................................	40
		Index to 
Exhibits.......................................................	52
</TABLE>







2
<page


GLOSSARY OF SELECTED INSURANCE TERMS

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

Best's............................. 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. The 
Company is aware of at least one 
domestic insurer that has not 
submitted data to Best's and 
therefore may not be reflected in 
Best's market share statistics.

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 
therefrom.

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 (41 in 1997) 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.

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 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.






3
<page


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.

Group marketing program............ A "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, a group marketing 
program contemplates the issuance of 
such insurance through other than 
standard policies that preclude 
individual underwriting, 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 modification of 
rates based upon the experience of 
the insured group.

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
("IBNR") reserves.................. 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.

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  expense of  settling  claims,  
including  legal and
other fees and the portion of 
general 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 and  
loss adjustment ex-
penses, net of reinsurance 
recoveries, to earned premiums.







4
<page


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. credits 
for voluntarily writing less 
desirable 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 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 state law  
that  encourages safe
driving by rewarding drivers who do 
not cause an accident, or incur a 
traffic law violation and by making 
sure that high-risk drivers pay a 
greater share of insurance costs.  
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 and 
incur surcharge points up to SDIP 
Step 35, the highest step.

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.


5
<page



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 auto-
mobile regulatory system under which 
all insurers are required to 
underwrite 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.




























6
<page


PART I

ITEM 1. BUSINESS

	The Commerce Group, Inc. (the "Company"), was incorporated in 
1976. The Company is engaged principally in providing personal and 
commercial property and casualty insurance in Massachusetts primarily 
through it's subsidiary, The Commerce Insurance Company ("Commerce"), 
which was incorporated in 1971.  The Company's principal insurance line 
is motor vehicle insurance, primarily covering 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 the state of California through 
Western Pioneer Insurance Company ("Western Pioneer"), a personal 
automobile insurer located in Pleasanton, California, which was acquired 
on August 31, 1995.  In addition, the Company originates residential and 
commercial mortgages on a limited basis within Massachusetts and 
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.  Presently, the 
Company has over 771,000 policies in force, 747,000 of which are in 
force throughout the Commonwealth of Massachusetts.  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 1997 and 1996, 
the Company's Massachusetts private passenger automobile market share 
was 21.8% and 20.8%, respectively.  The Company is also one of the 
leading writers of commercial automobile insurance in the Commonwealth.  
During 1997, 97.9% of the Company's $768,649,000 in direct premiums 
written were derived from personal automobile (including Western 
Pioneer's direct premiums written of $27,486,000), commercial automobile 
and homeowners insurance, its three core lines of business.  These lines 
represented $661,077,000 , $37,072,000 and $54,256,000, or 86.0%, 4.8% 
and 7.1%, respectively, of the Company's direct premiums written.

	While the Company's business strategy remains focused on 
activities primarily related to personal automobile insurance in the 
states of Massachusetts and California, the Company is newly licensed in 
the states of Connecticut, Maine, New Hampshire, Rhode Island and 
Vermont.  The Company began writing in Rhode Island in January 1998 and 
is gearing internal operating systems to accommodate the remaining New 
England states in the future.

	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, advanced 
information systems, an extensive underwriting data base and beginning 
in 1995, the ability to compete in a 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.  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.





7
<page



	The Company's focus on automobile and homeowners insurance 
primarily in Massachusetts has also been a factor in its success.  The 
terms, conditions and rates of personal automobile insurance are subject 
to extensive regulation by the Massachusetts Commissioner of Insurance 
("Commissioner").  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 
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.

	Beginning in the latter part of 1995, the Company began to 
actively pursue group marketing programs.  The primary purpose of group 
marketing programs is to provide participating groups with a convenient 
means of purchasing automobile insurance through associations and 
employee groups.  Billing is primarily through direct billing with 
payroll deduction available.  Emphasis is placed on writing larger 
groups, although accounts with as few as 25 participants are considered.  
Groups are eligible for rate discounts which must be filed annually with 
the Division of Insurance.  In general, the Company looks for 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 at 
the insured's option.

	During the latter part of 1995, Commerce signed group marketing 
agreements with the five American Automobile Association Clubs of 
Massachusetts ("AAA clubs") offering a 10% discount on automobile 
insurance to the clubs' members who reside in Massachusetts.  In 1997, 
two AAA clubs were consolidated, therefore leaving only four clubs.  
Primarily, as a result of the fourth consecutive private passenger rate 
reduction, a 6.0% percent AAA club discount was approved for policies 
effective as of January 1, 1998.  Previously, a 10% discount had been 
effective since the latter part of 1995.  Membership in these clubs is 
estimated to represent approximately one-third of the Massachusetts 
motoring public, and has been the primary reason for a 40.6% increase in 
the number of personal automobile exposures written by Commerce since 
the groups' inception.  The Company expects this increase to level off 
in 1998 as evidenced by an 8.3% increase in personal automobile 
exposures in 1997 as compared to an 29.8% increase in 1996.  In 1997, 
total direct premiums written attributable to the AAA group business 
were $422,074,000 or 54.9% of the Company's total direct premiums 
written (66.6% of total Massachusetts personal automobile premiums 
written), an increase of 22.6% over 1996.  Total exposures attributable 
to the AAA clubs group business were 522,098 or 65.8% of total personal 
automobile exposures in 1997, an increase of 102,445 or 24.4% over 1996.  
Of this amount, approximately 10% was written through insurance agencies 
owned by the AAA clubs.  The remaining 90% was written through the 
Company's network of independent agents.

	Initially, the Massachusetts statute governing group marketing 
programs required that 35% of the eligible members must participate in a 
group marketing program within the first year.  Accordingly, Commerce 
and the AAA clubs aggressively pursued AAA members for the AAA Group 
Marketing Program.  At December 31, 1996, Commerce had achieved the 
objective of writing more than 35% of the AAA members within the first 
year, as over 300,000 AAA members joined the program.  The particular 
portion of the statute, dealing with achieving the 35% penetration level 
in one year, was amended by the Massachusetts Legislature in early 1997 
to allow two years to reach the required penetration level.  In December 
1997, a bill was passed in the Massachusetts Legislature to further 
waive for an additional year the requirement that 35% of a group's 
members purchase insurance through the group in order for the group to 
be renewed during 1998.

	Commerce and the AAA clubs have agreed that Commerce shall be 
their exclusive underwriter of Massachusetts personal automobile group 
programs.  This contract may be terminated by the AAA clubs upon written 
notice to Commerce, whose termination shall take effect at a minimum of 
three years from notice of termination.

	In March 1997, the Company was granted approval, for the 1997 
calendar year, to offer its customers safe driver deviations of 10 
percent to drivers with SDIP classifications of either Step 9 or 10.  
These 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.  For drivers that 
qualified, the Company's group automobile discounts and SDIP deviations 
could be combined for up to a 19% reduction from the state mandated 
rates.  In February 1998, approval of SDIP deviations of 15% for Step 9 
and 4% for Step 10 SDIP classifications were granted for the 1998 
calendar year.  For drivers that qualify, the Company's group automobile 
discounts and SDIP deviations can be combined for up to a 20.1% 
reduction from the state mandated rates.

8
<page



	In November 1997, the Company received state regulatory approval 
to implement an installment fee of $3.00 on each invoice following the 
down payment, for all private passenger automobile policies effective 
January 1, 1998.  The $3.00 installment fee also replaced the 1.25% 
finance charge calculation for homeowner and dwelling policies paid on a 
10 payment installment basis.  Previously, for 1996 and 1997, the 
Company eliminated interest based finance fees on personal automobile 
insurance policies.

	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 15.4% of 
the voluntary commercial automobile premium produced by its voluntary 
agents in 1997 was 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 1998 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 its market share 
by adding 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 the Massachusetts personal automobile 
market.

	The Company continues to monitor acquisition opportunities with 
regard to smaller automobile insurance companies that are in need of 
capital, have established management in place and present significant 
growth opportunities in their market areas.  On August 31, 1995, the 
Company completed the acquisition of Western Pioneer, a personal 
automobile insurer, located in Pleasanton, California.

	The Company's long-term growth objective is to expand its writings 
outside of Massachusetts.  In continued pursuit of this objective, the 
Company became licensed in the states of Connecticut and Rhode Island 
during 1996 and in the states of Vermont and New Hampshire in 1997.  
License approval in the state of Maine was received in February 1998.  
Concurrent with the filings submitted for these licenses, the Company 
entered into an agreement with Policy Management Services Corporation, 
Inc. ("PMSC") and purchased software which allow for the development of 
internal operating systems which will enable the Company to process 
policies in states outside of Massachusetts.  To facilitate this 
development and, at the same time, address the year 2000 processing 
issue facing computer system users, the Company has established the Team 
2000 and Century Change projects which are corporate-wide efforts to 
prepare the Company's systems for the next millennium.  These projects 
involve internal staff costs as well as consulting expenses to prepare 
the systems for the year 2000.  Costs to date for the Century Change 
project have been approximately $1.1 million (all of which relate to 
1997).  Administration, programming, testing and implementation of 
system applications related to Century Change are expected to cost an 
additional $6 million over the next 24 months.  Approximately $4 million 
is expected to be expensed during 1998 with the remainder through the 
end of 1999.

	The Company is utilizing both internal and external resources on 
the Century Change Project.  The Company has a formal plan to address 
the Century Change issue and is progressing in accordance with that 
plan.  Programming changes dealing with policy issuance and maintenance 
of same is expected to be completed by year-end 1998.  Other internal 
changes are scheduled to be completed in accordance with specified 
delivery dates as outlined in the plan.  The Company's plan has been 
designed to, and is proceeding so as to, avoid any adverse business 
production issues.

	The Company has reviewed the Century Change status of vendors who 
perform outside processing for the Company or whose software the Company 
uses for internal processing.  This review has determined that the 
related software used by or provided by these vendors either is 
currently century ready or will be ready without any adverse impact on 
the Company.





9
<page



	Upon completion of the Century Change project, the Company expects 
to focus its efforts on the Team 2000 project which will eventually 
replace the Company's existing internal computer systems for 
Massachusetts business utilizing software purchased from PMSC.  Costs to 
date for the Team 2000 effort have been approximately $28 million.  
Costs applicable to 1997 were approximately $17 million, of which $15.6 
million was expensed during the year.  Total Team 2000 project costs 
over the next 5 to 7 years have been estimated at approximately $60 
million including funds expended to date.  This amount includes the 
purchase of a main frame computer, license fees and the costs associated 
with programming, implementation and training.  Systems enabling the 
Company to process policies in Rhode Island have been in place since 
January 1998.  Other states will be brought on-line in the future.

	In the past, 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 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 97% 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.  Because the Company emphasizes its commitment to 
enhancing and expanding the role of its information systems, it also 
recognizes that current systems may not provide the distinct competitive 
advantage when looking outside of Massachusetts.  The Team 2000 project 
will enable the Company to produce management and agency information 
necessary to establish similar competitive advantages as it expands.


A. General

Insurance Lines

	Commerce and Citation, the Company's Massachusetts property and 
casualty insurance subsidiaries, currently have a combined Best's rating 
of A (Excellent).  Western Pioneer, the Company's California property 
and casualty subsidiary, currently has a Best's rating of A- 
(Excellent).  According to Best's, an insurer with an Excellent rating 
has demonstrated, in Best's opinion, excellent overall performance when 
compared to standards developed by Best's.

	Direct premiums written totalled approximately $768,649,000 in 
1997, of which motor vehicle insurance accounted for approximately 
$698,149,000, homeowners insurance accounted for approximately 
$54,256,000 and commercial multi-peril insurance accounted for 
approximately $8,726,000.  Western Pioneer produced approximately 
$27,486,000 or 3.6% of the Company's total direct premiums written in 
1997 of which motor vehicle insurance accounted for approximately 
$27,397,000.  During 1996, direct premiums written totalled 
approximately $731,823,000, of which motor vehicle insurance accounted 
for approximately $663,290,000, homeowners insurance accounted for 
approximately $52,377,000 and commercial multi-peril insurance accounted 
for approximately $9,244,000.  Western Pioneer produced approximately 
$27,384,000 or 3.7% of the Company's total direct premiums written in 
1996 of which motor vehicle insurance accounted for $27,282,000.  Earned 
premiums are included in total revenues of the Company and represent the 
net earned premiums remaining after assumed and ceded reinsurance.  In 
1997 and 1996, total revenues included insurance premiums earned of 
approximately $730,497,000 and $668,716,000, respectively.  Motor 
vehicle insurance accounted for approximately 94.6% and 94.6%, 
homeowners insurance accounted for approximately 4.0% and 4.0% and 
commercial multi-peril insurance accounted for approximately 0.9% and 
1.0% of total earned premiums, in 1997 and 1996, respectively.

	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, property damage liability 
coverage and physical damage coverage, including fire, theft and other 
hazards specified in the policy.  Policies are usually written for one-
year terms.  The Company's published liability limits are $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.

10
<page



	Personal automobile insurance is heavily regulated in 
Massachusetts and California.  Marketing and underwriting strategies for 
companies operating in Massachusetts continue to be dominated by 
automobile premium rates and commission levels which are mandated by the 
Massachusetts Division of Insurance and by current and prospective 
legislation affecting the industry.  Automobile premium rates in 
Massachusetts are among the highest in the nation as a direct result of 
high costs incurred by companies which provide this type of protection.  
Claims, the costs associated with the processing and settling of claims, 
assessments required to subsidize the involuntary market mechanism, 
accident rates, bodily injury claims and medical care costs remain among 
the highest in the nation.  Additionally, traffic density, as defined by 
vehicle miles divided by highway miles, is among the highest in the 
nation.

	During the three-year period from 1995 to 1997, Massachusetts 
personal automobile insurance premium rates decreased an average of 5.6% 
per year.  The Commissioner approved an average 4.0% decrease in 
personal automobile premiums for 1998, the fourth decrease in as many 
years.  Average rates decreased by 6.2%, 4.5% and 6.1% in 1997, 1996 and 
1995, respectively.  Coinciding with the 1998 rate decrease, the 
Commissioner also approved a 7.4% decrease in commission rates to agents 
selling private passenger automobile insurance for 1998.  The decision 
slightly offsets the financial impact of the average 4.0% decrease in 
personal automobile premiums for 1998.

	Although personal automobile premium rates decreased an average of 
6.2% in 1997, the impact upon the Company resulted in only a 1.8% 
decrease in the average personal automobile premium per exposure.  The 
1.8% decrease for the Company is significantly less than the average 
rate decrease of 6.2% 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 1997 and 1998 rate decreases were partially driven by 
corrections for an industry error that had impacted prior year rate 
decisions.  The industry error, estimated at $200 million, resulted from 
a miscalculation of industry expense allowances that had the effect of 
overstating rates from 1991 through 1996.  Rates for 1997 were adjusted 
to recoup an estimated $50 million from the industry.  Rates for 1998 
and 1999 have and will be adjusted to recoup the remaining amount 
estimated to be $150 million.

	Additionally, 1997 and 1998 rates were decreased as a result of 
the reconciliation of the Safe Driver Insurance Plan ("SDIP") which is 
designed to be revenue neutral.  In most recent past years, the SDIP 
reconciliation resulted in a deficit which was then added into the rates 
for the subsequent years.  The 1996 SDIP reconciliation, however, 
resulted in a surplus.

	The Company had performed an analysis of the 1997 rate decision in 
early 1997.  The Company estimated the impact of the above two items on 
its results assuming its market share remained the same as it was at the 
end of 1997.  The Company's share of the Massachusetts personal 
automobile market increased from 20.8% at the end of 1996 to 21.8% at 
the end of 1997.  The earned premium impact of the above two items has 
been re-estimated at approximately $16.0 million for 1997, $24.1 million 
for 1998 and $14.1 million for 1999.  The earnings per share after-tax 
impact resulting from lower earned premiums was $0.29 for 1997, and is 
estimated to be $0.43 and $0.24 for 1998 and 1999, respectively.  If the 
Company's future market share increases (decreases), a larger (smaller) 
financial impact would result.

	In June 1997, the Massachusetts Supreme Judicial Court ("Court") 
rejected an appeal filed by the Automobile Insurers Bureau of 
Massachusetts ("AIB") that challenged the Commissioner's decision to 
prospectively decrease future rates for the miscalculation of the 
industry expense allowance.  (The SDIP reconciliation component was not 
challenged.)  The AIB's argument was that, according to statute, there 
is a prohibition against retroactive rate making in Massachusetts which 
effectively bars the examination of past year's data once all involved 
parties have agreed to the rate decision.  The Court ruled that 
retroactive rate making was indeed illegal, but indicated that special 
circumstances permitted returning the money in the form of rate 
reductions.  In a related challenge, the Court rejected on technical 
grounds, one insurers claim of an unfair adverse impact related to the 
prospective nature of the rate reduction.








11
<page



	The 1998 rate decision also included a 7.4% reduction in agents' 
commission rates from the 1997 commission rates.  Again, as in 1997, 
companies will calculate commissions on business subject to safe driver 
deviations, net of the deviation.  After the 1997 rate decision, a suit 
was filed by the Massachusetts Association of Insurance Agents ("MAIA") 
challenging this method of calculation.  In July 1997, the Court upheld 
the Commissioner's ruling that agents' commissions on 1997 premiums, 
subject to safe driver deviations, would be based on net premium 
amounts.  The 1996 commissions were based on premium amounts net of 
group discounts but gross of safe driver deviations.  The Commissioner's 
ruling resulted in agents receiving fewer commission dollars on a per 
policy basis.

	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 contents 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 $600,000, 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 $140,000, 
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 
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 for homeowners policies requiring certain specified 
underwriting coverages which are reinsured through American Reinsurance 
Corporation.

	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.

Mortgage Operations

	Insurance companies are authorized to invest in mortgages and the 
Company formed Bay Finance Company, Inc. ("Bay Finance") to originate 
and service residential and commercial mortgages in Massachusetts and 
Connecticut.  During fiscal 1997, 1996 and 1995 the mortgage operations 
accounted for approximately $4,448,000, or 0.5%, $4,249,000, or 0.6% and 
$3,804,000, 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 1997, 1996 and 1995, Clark-Prout's 
revenues amounted to $840,000 , or 0.1%, $930,000, or 0.1% and 
$1,203,000, or 0.2% of the Company's consolidated total revenues, 
respectively.  The decrease in Clark-Prout's revenue is due to a change 
in how its customers are billed.

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 
approximately 40 other writers of automobile insurance in Massachusetts 
("Servicing Carriers") to reinsure any undesirable 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 
undesirable 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.






12
<page



	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. for the reduced 
premium resulting from affinity group marketing discounts.  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.  At year end 1997 and 1996, the Company's 
Massachusetts private passenger automobile market share was 21.8% and 
20.8%, respectively.  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 underpriced classes and territories.  An 
insurer's participation ratio will be favorably affected if its relative 
use of credits exceeds the Massachusetts industry's.

	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, 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 analysis systems to develop for each risk a 
projected underwriting loss ratio.  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 the optimum balance between voluntary and ceded 
writings.  In 1997, the Company ceded approximately $63,301,000 or 
approximately 10.0% of the Company's Massachusetts personal automobile 
direct premiums written, a decrease of 10.2% from 1996.  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.  As a result, credits impacting the utilization 
formula have favorably affected the Company's participation ratio.  As 
of December 31, 1997, the Company estimates its personal automobile 
participation ratio to be approximately 18.0% which is several 
percentage points below the Company's estimated 21.8% share of the 
Massachusetts personal automobile market.  Significant changes in the 
industry-wide private passenger cession percentage are not expected for 
1998.


13
<page



	A phase-in of a utilization-based participation formula was 
implemented in the Massachusetts commercial automobile market.  The 
phase-in began in 1992 and ended in 1995.  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 1997, the Company ceded approximately $8,515,000 or 
23.0% of the Company's Massachusetts commercial automobile direct 
premiums written, a decrease of 31.3% from 1996.

	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 
692 licensed independent agencies, 541 throughout Massachusetts (of 
which 151 are ERPs) and 151 are in California.  These 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.

	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 1997, each agency representing the Company in Massachusetts produced 
an average of approximately $1,338,000 of Company direct premiums 
written.  Also in Massachusetts during 1997, 180 agencies produced in 
excess of $1.0 million of direct premiums written, an additional 53 
agencies produced over $2.0 million, an additional 21 agencies produced 
over $3.0 million and lastly, an additional 11 agencies produced over 
$4.0 million.  The Company's three largest agencies produced 
approximately $29.9, $13.5 and $11.2 million of the Company's direct 
premiums written, respectively, or approximately 3.9%, 1.8% and 1.5% in 
1997.  Total direct premiums written attributable to the AAA group 
business was $422,074,000 or 54.9% of the Company's total direct 
premiums written.  Total exposures attributable to the AAA clubs group 
business were 522,098 or 65.8% of total personal automobile exposures in 
1997, an increase of 102,445 or 24.4% over 1996.  Of this amount, 10% 
was written through the AAA clubs and 90% was written through insurance 
agencies owned by the Company's network of independent agents.

	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.




















14
<page



	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 1997 was 13.9%.  With respect to policies reinsured through 
C.A.R., the maximum amount of commissions that C.A.R. will reimburse the 
Company is fixed at that prescribed rate.  Consequently, there is an 
incentive for insurers not to permit their direct commission rate to 
vary materially from the prescribed rate.  The Company's contingent 
commissions are tied to the underwriting profit on policies written by 
an agency based upon a rolling three year experience methodology.  The 
Company generally pays up to 45% of the underwriting profit attributable 
to the agency's business.  The profit sharing plan is a three year 
rolling plan, with one third of the current and two prior years profit 
years profit or loss, summed to a single payment.  To qualify for profit 
sharing, a three-year average loss ratio of 50 to 55% is required.  CAR 
credits for voluntary business written in urban area 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 1997, 
total commissions paid by the Company to its agencies amounted to 14.6% 
of direct premiums written, of which direct commissions and contingent 
commissions constituted 14.3% and 0.3%, respectively versus 15.6%, 14.4% 
and 1.2% in 1996, respectively.  Direct commissions paid are higher than 
the personal automobile rates primarily due to higher commission rates 
paid on other lines of business.  In September 1996, the Company 
announced a reduction to 20%, from a maximum of 25%, for the commission 
paid on homeowner insurance.  This reduction is for policies effective 
March 1, 1998 and subsequent.  In 1997, the Company's expense for 
contingent commissions was $2.2 million versus $9.0 million in 1996.  
The Company also occasionally sponsors incentive award programs to 
encourage and reward agency profitability and growth.  The last such 
program occurred during 1996 with trips taking place during the first 
few months of 1997.  The Company ran such a program resulting in 315 
agents earning incentives at a total cost of approximately $4.3 million.  
Much of the success of this program was attributable to group marketing 
programs.

	The Company's information systems enable it to provide extensive 
support to its agencies.  This support includes a direct billing system, 
which covers over 97% of the Company's 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 will continue to explore new options in light of the Team 2000 
project.

	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.

	During the latter part of 1995, Commerce signed group marketing 
agreements with the five American Automobile Association Clubs of 
Massachusetts ("AAA clubs") offering a 10% discount on automobile 
insurance to the clubs' members who reside in Massachusetts.  In 1997, 
two AAA clubs were consolidated, therefore leaving only four clubs.  
Primarily, as a result of the fourth consecutive private passenger rate 
reduction, a 6.0% percent AAA club discount was approved for policies 
effective as of January 1, 1998.  Previously, a 10% discount had been 
effective since the latter part of 1995.  Membership in these clubs is 
estimated to represent approximately one-third of the Massachusetts 
motoring public, and has been the primary reason for a 40.6% increase in 
the number of personal automobile exposures written by Commerce since 
the groups inception.  The Company expects this increase to level off in 
1998 as evidenced by an 8.3% increase in personal automobile exposures 
in 1997 as compared to an 29.8% increase in 1996.  In 19970, total 
direct premiums written attributable to the AAA group business were 
$422,074,000 or 54.9% of the Company's total direct premiums written, an 
increase of 22.6% over 1996.  Total exposures attributable to the AAA 
clubs group business was 522,098 or 65.8% of total personal automobile 
exposures in 1997, an increase of 102,445 or 24.4% over 1996.  Of this 
amount, approximately 10% was written through insurance agencies owned 
by the AAA clubs.  The remaining 90% was written through the Company's 
network of independent agents.






15
<page



	Initially, the Massachusetts statute governing group marketing 
programs required that 35% of the eligible members must participate in a 
group marketing program within the first year.  Accordingly, Commerce 
and the AAA clubs aggressively pursued AAA members for the AAA Group 
Marketing Program.  At December 31, 1996, Commerce had achieved the 
objective of writing more than 35% of the AAA members within the first 
year, as over 300,000 AAA members joined the program.  The particular 
portion of the statute, dealing with achieving the 35% penetration level 
in one year, was amended by the Massachusetts Legislature in early 1997 
to allow two years to reach the required penetration level.  In December 
1997, a bill was passed by the Massachusetts Legislature to further 
waive for an additional year, the requirement that 35% of a group's 
members purchase insurance through the group in order for the group to 
be renewed during 1998.

	Commerce and the AAA clubs have agreed that Commerce shall be 
their exclusive underwriter of Massachusetts personal automobile group 
programs.  This contract may be terminated by the AAA clubs upon written 
notice to Commerce, whose termination shall take effect at a minimum of 
three years from notice of termination.

	In March 1997, the Company was granted approval, for the 1997 
calendar year, to offer their customers safe driver deviations of 10 
percent to drivers with SDIP classifications of either Step 9 or 10.  
These 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.  For drivers that 
qualified, the Company's group automobile discounts and SDIP deviations 
could be combined for up to a 19% reduction from the state mandated 
rates.  In February 1998, approval of SDIP deviations of 15% for Step 9 
and 4% for Step 10 SDIP classifications was granted for the 1998 
calendar year.  For drivers that qualify, the Company's group automobile 
discounts and SDIP deviations can be combined for up to a 20.1% 
reduction from the state mandated rates.

	In November 1997, the Company received state regulatory approval 
to implement an installment fee of $3.00 on each invoice following the 
down payment, for all private passenger automobile policies effective 
January 1, 1998.  The same $3.00 installment fee also replaced the 1.25% 
finance charge calculation for homeowner and dwelling policies paid on a 
10-payment installment basis.  Previously, for 1996 and 1997, the 
Company eliminated interest based finance fees on personal automobile 
insurance policies.


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 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 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.

	The Company and each of the approximately 40 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 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 Massachusetts personal automobile insurance market which 
became more competitive in late 1995 continued throughout 1996 and 1997 
with the advent of group marketing programs and safe driver rate 
deviations.


16
<page



	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.

	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 is 
being added to the Businessowners Program.  With regard to the exclusion 
described in (iii), policy holders 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 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.

	The Company's long-term growth objective is to expand its writings 
outside of Massachusetts.  In continued pursuit of this objective, the 
Company purchased Western Pioneer Insurance Company, a personal 
automobile insurer, located in Pleasanton, California in 1995.  In 
addition, the Company became licensed in the states of Connecticut and 
Rhode Island during 1996 and in the states of Vermont and New Hampshire 
in 1997.  License approval in the state of Maine was received in 
February 1998.  Concurrent with the filings submitted for these 
licenses, the Company entered into an agreement with PMSC and purchased 
software which allow for the development of internal operating systems 
which will enable the Company to process policies in these five states 
and Massachusetts.  To facilitate this development and, at the same 
time, address the year 2000 processing issue facing computer system 
users, the Company established the Team 2000 and Century Change projects 
which are corporate-wide efforts to prepare the Company's systems for 
the next millennium.  These projects involve internal staff costs as 
well as consulting expenses to prepare the systems for the year 2000.  
Costs to date for the Century Change project have been approximately 
$1.1 million (all of which relate to 1997).  Administration, 
programming, testing and implementation of system applications related 
to Century Change are expected to cost an additional $6 million over the 
next 24 months.  Approximately $4 million is expected to be expensed 
during 1998 with the remainder through the end of 1999.

	The Company is utilizing both internal and external resources on 
the Century Change Project.  The Company has a formal plan to address 
the Century Change issue and is progressing in accordance with that 
plan.  Programming changes dealing with policy issuance and maintenance 
of same is expected to be completed by year-end 1998.  Other internal 
changes are scheduled to be completed in accordance with specified 
delivery dates as outlined in the plan.  The Company's plan has been 
designed to, and is proceeding so as to, avoid any adverse business 
production issues.


17
<Page



	The Company has reviewed the Century Change status of vendors who 
perform outside processing for the Company or whose software the Company 
uses for internal processing.  This review has determined that the 
related software used by or provided by these vendors are century ready.

	Upon completion of the Century Change project, the Company expects 
to focus its efforts on the Team 2000 project which will eventually 
replace the Company's existing internal computer systems for 
Massachusetts business utilizing software purchased from Policy 
Management Services Corporation, Inc. ("PMSC").  Costs to date for the 
Team 2000 effort have been approximately $28 million.  Costs applicable 
to 1997 were approximately $17 million, of which $15.6 million was 
expensed during the year.  Total Team 2000 project costs over the next 5 
to 7 years have been estimated at approximately $60 million including 
funds expended to date.  This amount includes the purchase of a main 
frame computer, license fees and the costs associated with programming, 
implementation and training.  Systems enabling the Company to process 
policies in Rhode Island have been in place since January 1998.  Other 
states will be brought on-line in the future.


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 above.


Property and Catastrophe Reinsurance

	From the inception, on September 30, 1993, through the third 
quarter of 1995, the Company's combined property quota share and excess 
loss reinsurance contract was written with five domestic reinsurance 
companies.  Under the quota share portion of the arrangements, the 
reinsurers indemnified the Company for 36% of the loss and LAE, and paid 
a commission allowance based on the ratio of losses incurred to premiums 
earned.  In exchange, the Company paid to the reinsurers 40% of the net 
premium pertaining to the related business.  The maximum per occurrence 
loss reimbursement was $40.0 million and the maximum annual aggregate 
occurrence loss reimbursement was $60.0 million.  Under the excess loss 
reinsurance portion of the arrangements, the Company reinsured each 
risk, retaining $125,000 and reinsuring 100% of the next $875,000.

	Effective September 30, 1995, the Company increased its coverage 
under the combined property quota share and excess loss reinsurance 
contract.  The contract is now written with six domestic reinsurance 
companies.  Under the quota share portion of the arrangements, the 
reinsurers indemnify the Company for 45% of the loss and LAE, and pay a 
commission allowance based on the ratio of losses incurred to premiums 
earned.  In exchange, the Company pays to the reinsurers 49% of the net 
premium pertaining to the related business.  The maximum per occurrence 
loss reimbursement is $50.0 million and the maximum annual aggregate 
occurrence loss reimbursement is $75.0 million.  Under the excess loss 
reinsurance portion of the arrangements, the Company reinsures each 
risk, retaining $125,000 and reinsuring 100% of the next $875,000.  This 
reinsurance contract is continuous through September 30, 1998, but 
cancelable quarterly with ninety days notice.  Written premiums ceded in 
1997, 1996 and 1995 under the property quota share and excess loss 
reinsurance contract were $27.5 million, $26.6 million and $21.5 
million, respectively.

	Effective March 1, 1995, through February 29, 1996, the Company 
had catastrophe reinsurance coverage for that portion of the loss not 
covered under the property quota share arrangement.  Catastrophe 
reinsurance coverage was in force for approximately 88.0% of the amounts 
incurred for all property claims arising from a single event or 
occurrence up to a maximum loss of $100.0 million, after first 
subtracting property quota share losses.  Coverage under the catastrophe 
program was as follows: a net retention of $5.0 million; 50.0% of the 
next $5.0 million; and, 95.0% of the next $90.0 million.  Including the 
Company's retention, total catastrophe coverage was $100.0 million.  
This coverage was placed with a number of reinsurers, both foreign and 
domestic.

18
<page



	Effective March 1, 1996, through February 28, 1998, the Company's 
catastrophe reinsurance program was tailored in conjunction with the 
property quota share arrangement to provide catastrophe reinsurance 
protection at varying levels of losses.  The Company's two separate 
catastrophe only programs provide a maximum amount of protection of $18 
million and $42 million.  These two programs expire on March 1, 1998 and 
May 1, 1998, respectively.  The table below provides information 
depicting the approximate combined recoveries of all property 
reinsurance programs (catastrophe and quota share) at various loss 
scenarios if a catastrophe were to strike:
<TABLE>
<CAPTION>

										 Net Loss
				    Total		Reinsurance		Retained by
				    Loss 		 Recovery  		the Company
                        <S>               <C>               <C>
				$ 25,000,000	$ 11,300,000	$13,700,000
				  50,000,000	  35,000,000	 15,000,000
				  75,000,000	  58,800,000	 16,200,000
				 100,000,000	  82,500,000	 17,500,000
				 125,000,000	 105,000,000	 20,000,000
				 150,000,000	 110,000,000	 40,000,000
</TABLE>
	Under the above scenario the Company had no reinsurance recoveries 
for total loss amounts in excess of $150.0 million.  The Company is 
currently negotiating with several of its existing quota-share/excess 
loss reinsurance providers to expand the quota share portion of the 
program.  A 75% quota-share reinsurance program is contemplated, 
covering all non-automobile property and liability business except 
umbrella policies.  The excess loss portion of the program would be 
reduced on July 1, 1998 and completely eliminated on September 30, 1998.  
The Company intends to incept this expanded program on July 1, 1998.  
Based on this, the Company's catastrophe reinsurance program will 
consist solely of the current quota-share/excess loss reinsurance 
contract for a period of time between May 1, 1998 and June 30, 1998.

Casualty Reinsurance

	Through December 31, 1996, casualty reinsurance was on an excess 
of loss basis for any one event or occurrence with a maximum recovery of 
$4.0 million over a net retention of $1.0 million.  Effective January 1, 
1997, casualty reinsurance is on an excess 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, formerly North American Reinsurance 
Corporation (rated A by A.M. Best).

	Effective January 1, 1995, 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 and $500,000 or more.  
Effective January 1, 1996, the Company added personal liability umbrella 
reinsurance coverage for policies with underlying automobile coverage of 
$100,000 and $300,000, on a 65% quota share basis in regards 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 Munich American Reinsurance Corporation (rated A+ by A.M. Best).

	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, 1997.

F. Settlement of Claims

	Claims under insurance policies written by the Company are 
investigated and settled primarily by claims adjusters employed by the 
Company.  The Company employs a staff of 712 people at its claims 
department, located in Webster, Massachusetts.  In addition to these 
individuals, the Company utilizes the services of approximately 36 
independent appraisal firms and 9 independent property adjusting 
companies who are strategically located throughout the state.  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.


19
<page



	The Company believes that through its claims staff of experienced 
adjusters, appraisers, managers, and administrative staff, it has 
achieved lower LAE than the industry average and 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") prohibits insurers from engaging in certain claim settlement 
practices, including 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 violation of any of 
these obligations expressly violates 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.

	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 by C.A.R. in any 
particular instance involving a Chapter 93A claim.

	In March of 1996, the Company began providing a twenty-four (24) 
hour claim reporting service 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 January 1, 1998, there were 165 agents who 
have signed up for this claim reporting methodology; these agents 
represent 42.4% of total claim volume.  The Company anticipates growth 
in this program as it continues to discuss this service with those 
agencies who have not yet been solicited to participate.

	As the Company expands into the remaining New England states, it 
will investigate and settle claims similar to the way it does in 
Massachusetts.  The claims office staff will work closely with agents 
and claimants with a goal of settling claims fairly, rapidly and cost 
effectively while trying to achieve higher customer satisfaction than 
many of their competitors.

G. Loss and Loss Adjustment Expense Reserves

	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.  The Company's reserving policy is intended to result in 
a small redundancy.  Quarterly, the Company reviews these reserves 
internally.  Regulations of the Division of Insurance require the 
Company to obtain annually a certification from either a qualified 
actuary or an approved loss reserve specialist that its loss and LAE 
reserves are reasonable.





20
<page



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

	In accordance with industry practice, the Company also maintains 
reserves for estimated losses incurred but not yet reported ("IBNR").  
IBNR reserves are determined on the basis of historical information and 
the experience of the Company.  Adjustments to IBNR 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 reserves, the Company analyzes historical data and 
estimates the impact of various factors such as (i) per claim 
information, (ii) the historical loss experience of the Company and 
industry and (iii) legislative enactments, judicial decisions, legal 
developments in the imposition of damages, changes and trends in general 
economic conditions, including the effects of inflation.  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 the provision for 
losses and LAE at December 31, 1997 is adequate to cover the ultimate 
net cost of losses and claims incurred as of that date.  The ultimate 
liability may be greater or lower than reserves.  Establishment of 
appropriate reserves is an inherently uncertain process, and there can 
be no certainty that currently established reserves will prove adequate 
in light of subsequent actual experience.  The Company does not discount 
to present value that portion of its loss reserves expected to be paid 
in future periods.  The Company's loss and LAE reserves also includes 
its share of the aggregate loss and LAE reserves of all Servicing 
Carriers.

	For a reconciliation of beginning and ending reserves for losses 
and LAE, net of reinsurance, see Note E to the Company's 1997 
Consolidated Financial Statements, which is incorporated herein by 
reference from pages 34 through 36 of the Company's 1997 Annual Report.

	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 and lead paint.  
Reserves have been established to cover these claims for both known and 
unknown 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.  Loss 
reserves on environmental related claims amounted to $6,924,000 and 
$8,783,000 in 1997 and 1996, respectively.

	The following table represents the development of reserves, net of 
reinsurance, for 1987 through 1997.  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 with respect to that year's current reserve 
liability expressed as a percentage.  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 
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, 1997.







21
<page



	In evaluating the cumulative information in the table, it should 
be noted that each year's amount includes the 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.
<TABLE>
              						Year ended December 31,	
							
                   1997       1996      1995      1994      1993      
1992      1991      1990      1989       1988      1987
                                                     ($ in thousands)
<CAPTION>
<S>                <C>       <C>       <C>       <C>       <C>       <C>       
<C>       <C>       <C>        <C>        <C>
Reserves for
 losses and loss
 adjustment
 expenses........  $530,077  $533,980  $493,911  $455,460  $422,224  
$316,261  $228,657  $177,657  $138,456   $100,882   $70,457

Paid (cumulative)
 as a percentage
 of current re-
 serves as of:
  One year later..               46.0      45.8      46.2      51.8      
50.8      46.2      46.2      46.7      41.7      40.4
  Two years later.                         66.3      66.2      70.5      
76.4      71.1      68.4      69.2      67.8      59.9
  Three years
   later..........                                   78.2      80.7      
85.5      87.2      84.6      81.7      82.2      80.4
  Four years
   later..........                                             86.8      
90.6      91.1      95.7      90.1      89.1      88.8
  Five years later                                                       
93.5      93.3      96.3      98.0      92.3      92.2
  Six years later.                                                                 
94.8      95.7      97.9      99.4      93.4
  Seven years
   later..........                                                                           
96.7      96.8      99.7     101.3
  Eight years
   later..........                                                                                     
97.5      97.6     101.7
  Nine years 
   later..........                                                                                               
98.1      98.6
  Ten years later.                                                                                                         
99.0

Reserves re-estimated
 as a percentage of
 initial reserves as of:
  One year later..               84.3      82.2      83.6      83.9      
87.2      82.3      84.5      92.7      96.9      99.4
  Two years later.                         74.1      73.2      75.9      
78.6      82.8      74.6      82.8      87.7      98.9
  Three years 
   later..........                                   68.9      69.4      
73.0      77.1      75.1      76.7      80.5      90.1
  Four years later                                             67.3      
68.8      72.2      71.7      78.3      76.3      86.2
  Five years later                                                       
67.0      68.7      68.2      75.6      80.2      83.9
  Six years later.                                                                 
67.8      65.5      74.0      78.0      90.8
  Seven years
    later.........                                                                           
64.6      71.8      77.3      88.5
  Eight years
    later.........                                                                                     
71.3      75.4      87.9
  Nine years later                                                                                               
75.5      85.2
  Ten years later.                                                                                                         
85.3

Redundancy expressed as a
 percent of yearend
 reserves.........               15.7      25.9      31.1      32.7      
33.0      32.2      35.4      28.7      24.5      14.7
</TABLE>
<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 premiums earned 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 ratio and LAE, 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 automobiles 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.
<TABLE>
<CAPTION>
									Year Ended 
December 31,			
						 1997		 1996		 1995		 
1994		 1993

<S>                                 <C>         <C>         <C>         
<C>         <C>
Company Statutory Ratios (unaudited):
  Loss and LAE Ratio..............	 71.4%	 70.9%	 62.0%	 
64.6%	 68.0%
  Underwriting Expense Ratio......	 25.1		 27.1		 29.0		 
27.1		 25.7
   Combined Ratio.................	 96.5%	 98.0%	 91.0%	 
91.7%	 93.7%

   Industry combined ratio
   (all writers)(1)...............	101.8%	103.1%	102.5%
	103.0%	102.9%
</TABLE>
					
(1) Source:  Best's Review (January, 1998), as reported by A.M. Best for 
all property and casualty insurance companies and weighted to reflect 
the Company's product mix. The 1997 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>
									Year Ended 
December 31,			
						 1997		 1996		 1995		 
1994		 1993
									(dollars in 
thousands)
<S>                                 <C>         <C>         <C>         
<C>         <C>
Net premiums written by the
 Company...........................	$741,501	$711,570	$603,421
	$589,197	$563,416
Policyholders' surplus of the
 Company...........................	 516,598	 464,739	 440,110	 
349,775	 284,631
The Company's ratio................	   143.3%	   153.1%	   137.1%	   
168.5%	   197.9%
Industry ratio(1)..................	    90.0%	   110.0%	   110.0%	   
130.0%	   130.0%
</TABLE>
__________________________________
(1) Source:  Best's Review (January, 1998), for all property and 
casualty insurance companies.  The 1997 industry information is 
estimated by A.M. Best.



23
<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 is to maintain 
high quality diversified fixed maturity investments structured to 
maximize after-tax investment income while minimizing risk.  See 
"Management's Discussion and Analysis of Financial Condition and Results 
of Operations" incorporated herein by reference from pages 4 through 18 
of the Company's 1997 Annual Report.

	The Company's investment portfolio carried at market value as of 
December 31, 1997, was $1,242,695,000.  Of that amount, 47.5% was 
invested in fixed maturities, 12.0% was invested in preferred stocks, 
14.3% was invested in common stocks, 17.2% was invested in short-term 
investments and 7.0% was invested in mortgage loans and other 
investments.  Cash and cash equivalents accounted for the remaining 
2.0%.

	Investments in fixed maturities, which include taxable and non-
taxable bonds, non-redeemable preferred stocks, common stocks and 
preferred stock mutual funds, are carried at fair market value.  
Unrealized investment gains and losses on stocks and fixed maturities, 
to the extent that there is no permanent impairment of value, are 
credited or charged directly to stockholders' equity, net of any tax 
effect.  When investment securities are sold, the realized gain or loss 
is determined based on sales proceeds less book value.

	The Company's bond portfolio is comprised of Government National 
Mortgage Association ("GNMA") mortgage backed bonds (30.7%) and 
municipal bonds (69.3%).  Of the Company's bonds, 100.0% are rated in 
the two highest quality categories provided by the NAIC.

	The Company's investment policy, determined in accordance with 
guidelines established by the Company's Board of Directors, emphasizes 
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) and the income 
thereon for the five years ended December 31, 1997.
<TABLE>
<CAPTION>
									Year Ended 
December 31,			
						  1997        1996       1995         
1994       1993
									(dollars in 
thousands)
	
<S>                               <C>          <C>        <C>           
<C>        <C>
Average net investments.......... $1,181,181   $1,131,760 $1,033,439    
$893,628   $766,938
Net realized gains (losses) on 
  investments....................     22,770       (7,574)       712      
45,612      7,506
Unrealized gains (losses) on 
  fixed maturities...............     23,813       16,191     13,969     
(56,366)    27,477
Unrealized gains (losses) on 
  preferred stocks...............        364         (801)      (377)    
(10,500)      (336)
Unrealized gains (losses) on
  common stocks..................     17,718       20,116     11,799       
1,613     41,136
Net investment income............     80,794       77,402     71,313      
62,901     53,068
Net investment income as a
  percentage of total average
  investments....................       6.84%       6.84%       6.90%       
7.03%      6.92%
Net investment income after-tax
  as a percentage of total
  average investments............       5.53%       5.61%       5.74%       
5.27%      5.70%
</TABLE>





24
<page



	The following table sets forth an analysis of the fair market 
value by the type of investment at December 31, 1993 through 1997:
<TABLE>
<CAPTION>
									Year Ended 
December 31,		      	
						   1997        1996        1995       
1994       1993
									(dollars in 
thousands)
<S>                                <C>         <C>         <C>         
<C>        <C>
Type of Investment
  GNMA mortgage-backed bonds...... $  181,069  $  225,552  $  221,373  $ 
233,287  $ 202,403
  Tax exempt state and municipal
   bonds..........................    409,528     491,150     593,904    
511,723    447,088
      Total fixed maturities......    590,597     716,702     815,277    
745,010    649,491

  Non-redeemable preferred stocks.    148,499     147,680     111,220     
85,574     80,058

  Preferred stock mutual funds....     58,650      29,087         -          
-          -
  Common stocks...................    119,439      56,954      40,359      
9,656     65,863
      Total common stocks.........    178,089      86,041      40,359      
9,656     65,863

  Short-term investments..........    213,442         -           -          
-          -
  Mortgages and collateral loans
   (net of allowance for possible
   loan losses)...................     82,839      74,586      75,609     
58,590     63,301
  Cash and cash equivalents.......     25,446     140,535      52,665      
5,485     13,217
  Other investments...............      3,783       2,127       1,648        
716      1,304
      Total investments........... $1,242,695  $1,167,671  $1,096,778  $ 
905,031  $ 873,234
</TABLE>
	The table below sets forth as of December 31, 1997 the composition 
of the Company's fixed maturity investments, excluding short-term 
investments, by time to maturity at the dates indicated:
<TABLE>
<CAPTION>
												
	 Percent
												
	   of
											Amount
	Portfolio
										
	(dollars in thousands)
            <S>                                                  <C>             
<C>
		Period from December 31, 1997 to maturity:
		  One year or less.................................  $    -             
- %
		  More than one year to five years.................     
2,200          0.4
		  More than five years to ten years................     
1,324          0.2
		  More than ten years..............................   
587,073         99.4
										     
$590,597        100.0%
</TABLE>














25
<page



	At December 31, 1997, the Company's fixed income portfolio, which 
represented 47.5% of the Company's total invested assets, had an average 
stated maturity of approximately 24.1 years.  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, 1997, the 
Company's fixed income portfolio had a weighted average duration of 4.8 
years.  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 paydown 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 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 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 and California.  In Massachusetts the Commissioner who 
is appointed by the Governor of Massachusetts, 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 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.

	During the three-year period from 1995 to 1997, Massachusetts 
personal automobile insurance premium rates decreased an average of 5.6% 
per year.  The Commissioner approved an average 4.0% decrease in 
personal automobile premiums for 1998, the fourth decrease in as many 
years, as rates were cut by 6.2%, 4.5% and 6.1% in 1997, 1996 and 1995, 
respectively.  Coinciding with the 1998 rate decrease, the Commissioner 
also approved a 7.4% decrease in commission rates to agents selling 
private passenger automobile insurance  for 1998.  The decision slightly 
offsets the financial impact of the average 4.0% decrease in personal 
automobile premiums for 1998.

	Although personal automobile premium rates decreased on average by 
6.2% in 1997, the impact upon the Company resulted in only a 1.8% 
decrease in the average personal automobile premium per exposure (each 
vehicle insured).  The 1.8% decrease for the Company is significantly 
less than the average rate decrease of 6.2% due to the fact that the 
rate decision did not anticipate purchases of new automobiles in the 
year to which the rate decision applies and, secondly, the Company's mix 
of personal automobile business differs from that of the industry.

	The 1997 and 1998 decreases were partially driven by corrections 
for an industry error that had impacted prior year rate decisions.  The 
industry error, estimated at $200 million, resulted from a 
miscalculation of industry expense allowances that had the effect of 
overstating rates for 1991 through 1996.  Rates for 1997 were adjusted 
to recoup an estimated $50 million from the industry.  Rates for 1998 
and 1999 have and will be adjusted to recoup the remaining amount 
estimated to be at $150 million.


26
<page



	Additionally, 1997 and 1998 rates were decreased as a result of 
the reconciliation of the Safe Driver Insurance Plan ("SDIP") which is 
designed to be revenue neutral.  In most recent past years, the SDIP 
reconciliation resulted in a deficit which was then added into the rates 
for the subsequent years.  The 1996 SDIP reconciliation, however, 
resulted in a surplus.  Fifty percent of this surplus was being used to 
decrease rates in 1997 and fifty percents is being used in 1998.

	The Company had performed an analysis of the 1997 rate decision in 
early 1997.  The Company estimated the impact of the above two items on 
its results assuming its market share remained the same as it was at the 
end of 1997.  The Company's share of the Massachusetts personal 
automobile market increased from 20.8% at the end of 1996 to 21.8% at 
the end of 1997.  The earned premium impact of the above two items has 
been re-estimated at approximately $16.0 million in 1997, $24.1 million 
for 1998 and $14.1 million for 1999.  The earnings per share after-tax 
impact resulting from lower earned premiums was $0.29 for 1997 and is 
estimated to be $0.43 and $0.24 for 1998 and 1999, respectively.  If the 
Company's future market share increases (decreases), a larger (smaller) 
financial impact will result.

	In June 1997, the Massachusetts Supreme Judicial Court ("Court") 
rejected an appeal filed by the Automobile Insurers Bureau of 
Massachusetts ("AIB") that challenged the Commissioner's decision to 
prospectively decrease future rates for the miscalculation of the 
industry expense allowance.  (The SDIP reconciliation component was not 
challenged.)  The AIB's argument was that, according to statute, there 
is a prohibition against retroactive rate making in Massachusetts which 
effectively bars the examination of past year's data once all involved 
parties have agreed to the rate decision.  The Court ruled that 
retroactive rate making was indeed illegal, but indicated that special 
circumstances permitted returning the money in the form of rate 
reductions.  In a related challenge, the Court rejected on technical 
grounds, one insurers claim of an unfair adverse impact related to the 
prospective nature of the rate reduction.

	The 1998 rate decision also included a 7.4% reduction in agents' 
commission rates.  Again, as in 1997, companies will calculate 
commissions on business subject to safe driver deviations, net of the 
deviations.  After the 1997 rate decision, a suit was filed by the 
Massachusetts Association of Insurance Agents ("MAIA") challenging this 
method of calculation.  In July 1997, the Court upheld the 
Commissioner's ruling that agents' commissions on 1997 premiums, subject 
to safe driver deviations, would be based on net premium amounts. The 
1996 commissions were based on premium amounts net of group discounts 
but gross of safe driver deviations.  The Commissioner's ruling resulted 
in agents receiving fewer commission dollars on a per policy basis.

	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, 
1993.  Western Pioneer is currently undergoing examination by the 
California Division of Insurance for the 5 year period ending December 
31, 1996.  Western Pioneer was last examined for the three year period 
ended December 31, 1991.  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.

Automobile Insurance Regulation Overview

	Massachusetts has required compulsory automobile insurance 
coverage since 1925.  Under current law, all 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 group 
insurance risks) through C.A.R.



27
<page



	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.  
Group insurance programs and rate deviations must be 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 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.

	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 1997 was 13.9%.  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 underpriced 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 undesirable risks to an 
industry pool.

Commonwealth Automobile Reinsurers

	General. C.A.R. is a 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 (approximately 41, 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.




28
<page



	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.

	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 they 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 therefrom.

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.




29
<page



	As Massachusetts domestic insurance companies, neither Commerce 
nor Citation may pay an extraordinary dividend or distribution unless 
the insurer gives the Commissioner at least 30 days' prior notice of the 
declaration and the Commissioner does not disapprove of the plan of 
payment prior to the date of such payment.  An extraordinary dividend or 
distribution is one whose fair market value, together with that of other 
dividends or distributions within the preceding twelve-month period 
(excluding pro rata distribution of any class of the insurer's own 
securities) exceeds the greater of (i) ten percent of the insurer's 
statutory surplus as of the preceding December 31 or (ii) the statutory 
net income for the twelve-month period ending on the preceding December 
31.  See "Market for Registrant's Common Stock and Related Stockholder 
Matters."


Protection Against Insurer Insolvency

	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 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 
increases.

	Consistent with industry practice in Massachusetts, it is the 
Company's policy to expense all assessments when they are assessed.  
M.I.I.F. refunded assessments to Commerce and Citation in the aggregate 
amount of $283,000 in 1997.  M.I.I.F. assessed Commerce and Citation an 
aggregate of $742,000 in 1996 and $338,000 in 1995.  The Company 
anticipates that there will be additional assessments.  By statute, no 
insurer may be assessed in any year an amount greater than two percent 
of that insurer's net direct written premiums for the calendar year 
preceding the assessment.  The Company believes that any such additional 
assessments should not have a material adverse effect on the 
consolidated financial position of the Company, although the timing and 
amounts of any such assessments cannot be presently ascertained.

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, 1997, the Company's 
consolidated property and casualty operations had no ratios outside the 
"normal" range.

	Risk-Based Capital ("RBC"). In order to enhance the regulation of 
insurer insolvency, the NAIC developed a formula and model law to 
implement RBC requirements for property and casualty insurance companies 
which 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.

30
<page



	The Company's subsidiaries, Commerce, Citation, and Western 
Pioneer have RBC amounts at December 31, 1997 of $56 million, $2 
million, and $3 million, respectively, and they have statutory surplus 
of approximately $433 million, $83 million and $24 million, 
respectively.  The statutory surplus of Commerce, Citation and Western 
Pioneer at December 31, 1997 exceeded the RBC Company Action Levels of 
$112 million, $5 million and $6 million, respectively, by approximately 
$321 million, $78 million and $18 million, respectively.  The RBC model 
formula proposes four levels of regulatory action.  The extent of 
regulatory intervention and action increases as the level of surplus to 
RBC falls.  The first level, the Company Action Level, 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.

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.  Some sell insurance directly to policyholders rather than 
through independent agents.

	In 1995, several insurers within the Massachusetts Insurance 
Industry began pursuing group marketing as a means of shifting market 
share.  Arising from this pursuit, additional programs such as safe 
driver deviations and the elimination of finance fees have followed.  In 
March 1997, Commerce was granted approval, for the 1997 calendar year, 
to offer safe driver deviations of 10% to customers with SDIP 
classifications of either Step 9 or 10.  These are the two best SDIP 
driver classifications in Massachusetts representing drivers with no at 
fault accidents and not more than one minor moving vehicle violation in 
the last six years.  For drivers that qualified, the Company's 
automobile discounts and SDIP deviations could be combined with group 
discounts for up to a 19% reduction from the state mandated rates.  In 
February 1998, approval of SDIP deviations was granted for the 1998 
calendar year.  However, these discounts are substantially different 
from those previously approved.  Drivers classified as step 9, the very 
best drivers, will receive a discount of 15% in 1998.  Those drivers 
classified as step 10 will receive a 4% discount.  These discounts can 
be combined with group discounts for a total discount of up to 23.5% for 
some groups in which the general public cannot participate.  For the  
AAA clubs, the largest group written available to the general public, 
the discounts combine to 20.1% for drivers classified as step 9 and 
nearly 10% for step 10 drivers.

	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 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.



31
<page



	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.


L. Other Matters

Human Resources

	As of December 31, 1997, the Company and its subsidiaries employed 
1,525 people.  The Company is not a party to any collective bargaining 
agreements and believes its relationship with employees to be 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 industry and geographically within 
Central Massachusetts.  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 employees since 1986.  
Commerce was one of the first businesses in the region to offer this 
benefit.  The child care center can currently accommodate over 130 
children of our employees with expansion plans to be completed for use 
in 1998.

	The Company maintains an Employee Stock Ownership Plan 
("E.S.O.P."), for the benefit of all employees and former employees 
still participating in the E.S.O.P.  There were a total of 1,541 
participants at December 31, 1997.

ITEM 2. PROPERTIES

	The Company conducts its operations from approximately 277,000 
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 is presently 
constructing a 20,000 square foot child care center located on a 
separate 7-acre site in Webster, Massachusetts.  The child care center 
will enable the Company to serve 200 children of employees.  Western 
Pioneer currently leases approximately 12,000 square feet of office 
space in Pleasanton, California.  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 1997 Consolidated 
Financial Statements, which is incorporated herein by reference from 
page 34 of the Company's 1997 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.  See "Business - Settlement of Claims".  These proceedings 
are considered to be ordinary and incidental 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.







32
<page



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 1997.

ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT

	The Company's executive officers are as follows:
<TABLE>
<CAPTION>
		Name				Age			Position with 
Company
      <S>                           <C>         <C>
	Arthur J. Remillard, Jr.	 67		Chief Executive Officer, 
Director

	Gerald Fels				 55		Executive Vice 
President,
                                                Chief Financial Officer, 
Director

	Arthur J. Remillard, III	 42		Senior Vice President--
Policyholder
                                                Benefits, Assistant 
Clerk, Director

	Regan P. Remillard		 34		Senior Vice President--
General Counsel, 
                                                President of Western 
Pioneer, Director

	David H. Cochrane			 44		Senior Vice President--
Underwriting 
                                                of Commerce and Citation

	Peter J. Dignan			 46		Senior Vice President--
Marketing
                                                of Commerce and Citation

	Mary M. Fontaine			 41		Senior Vice President--
Human Resources

	Joyce B. Virostek			 55		Senior Vice President--
Management
                                                Information Systems of 
Commerce and Citation
</TABLE>

	Arthur J. Remillard, Jr. has been the President, Chief Executive 
Officer and Chairman of the Board of the Company since 1972 and has been 
in the insurance business for more than 30 years.  Mr. Remillard, Jr. is 
also a member of the Governing Committee, Chairman of the Actuarial 
Committee, Vice Chairman of the Governing Committee Review Panel, and is 
a member of the Budget and Personnel Committees of C.A.R.

	Gerald Fels, a certified public accountant, was elected Executive 
Vice President of the Company in 1989.  From 1981 to 1989, Mr. Fels had 
been Senior Vice President of the Company.  Mr. Fels was the Treasurer 
of the Company from 1975 to 1995.  Mr. Fels has also been Chief 
Financial Officer since 1975.  Mr. Fels also serves on the C.A.R. Audit 
Committee.

	Arthur J. Remillard, III was elected Senior Vice President--
Policyholder Benefits in 1988. 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 January, 1991, the C.A.R. Claims Advisory 
Committee since June 1990 and the A.I.B. Claims Committee since April 
1991.

	Regan P. Remillard was elected President of Western Pioneer 
Insurance Company in 1996.  Mr. Remillard was elected Senior Vice 
President--General Counsel in 1995.  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.


33
<page



	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 elected the Senior Vice President--Marketing 
of Commerce and Citation in 1997.  From 1989 to 1997, Mr. Dignan was 
Vice President--Financial Operations of Commerce and Citation.  From 
1987 to 1989 Mr. Dignan was Assistant Vice President--Financial 
Operations of Commerce and Citation.  Mr. Dignan also serves on the 
C.A.R. Defaulted Brokers Committee.

	Mary M. Fontaine has been the Senior Vice President--Human 
Resources of the Company since 1988.  From 1982 to 1988, Ms. Fontaine 
was Assistant Vice President--Human Resources of Commerce and Citation.

	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.

	The executive officers are elected to hold office until their 
successors are elected and qualify.

	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.





































34
<page



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 of the Company's 
common stock for 1997 and 1996 were as follows:
<TABLE>
<CAPTION>
					             1997            	                
1996         	
					    High     Low      Close		 High     
Low     Close
      <S>                         <C>     <C>      <C>            <C>     
<C>      <C>
	First Quarter...........    $29     $22-7/8  $23-1/4        $20-
3/4 $17-3/4  $19-3/4
	Second Quarter..........     24-3/4  21-3/8   24-5/8         22-
1/2  18-1/2   20-7/8
	Third Quarter...........     33-3/8  23-7/8   30-7/8         22-
1/4  20-1/2   22    
	Fourth Quarter..........     36      30       32-5/8         25-
3/4  22       25-1/4
</TABLE>
	As of March 1, 1998, there were 1,375 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 $1.03 per share 
and $0.81 per share in 1997 and 1996, respectively.  On May 30, 1997, 
the Board voted to increase the quarterly stockholder dividend from 
$0.25 to $0.26 per share to stockholders of record as of June 6, 1997.  
Prior to that declaration, the Company had paid quarterly dividends of 
$0.25 per share dating back to May 17, 1996 when the Board voted to 
increase the dividend from $0.06 to $0.25 per share.

	The purchase of Treasury Stock under the stock buyback program 
increased by 20,000 shares during 1997 to 1,957,348 shares at December 
31, 1997.  The stock buyback program, authorized by the Board in May 
1995, enables the Company to purchase up to three million shares of the 
Company's common stock.  The program is now approximately two-thirds 
complete.

	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 45 of the Company's 1997 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 4 through 18 of the Company's 1997 Annual 
Report is incorporated herein by reference.










35
<page



ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

	The Company's Consolidated Financial Statements for the years 
ended December 31, 1997, 1996 and 1995 and the report of its independent 
auditors on pages 20 through 44 of the Company's 1997 Annual Report are 
incorporated herein by reference.


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

	The disclosure called for by this paragraph was previously 
reported (as that term is defined in Rule 126-2 under the Securities 
Exchange Act of 1934) in a Form 8-K/A filed by the Company with the 
Securities and Exchange Commission on June 11, 1997.


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, 1997 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, 1997 
and such information is incorporated herein by reference.


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, 1997 
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, 1997 
and such information is incorporated herein by reference.










36
<PAGE>


PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
<TABLE>
<CAPTION>
												
	      Page
      <S><C> <C>                                                                    
<C>

	A. (1) The following financial statements have been incorporated 
herein by reference 
		 from the pages indicated below of the Company's 1997 Annual 
Report:

		  Report of Independent 
Auditors...................................      20
		  Consolidated Balance Sheets as of December 31, 1997 and 
1996.....      21
		  Consolidated Statements of Earnings for the years ended
		   December 31, 1997, 1996 and 
1995................................      22
		  Consolidated Statements of Stockholders' Equity for the 
years
		   ended December 31, 1997, 1996 and 
1995..........................      23
		  Consolidated Statements of Cash Flows for the years ended
		   December 31, 1997, 1996 and 
1995................................      24
		  Consolidated Statements of Cash Flows - Reconciliation of 
Net 
		   Income to Net Cash provided by Operating Activities for 
the 
		   years ended December 31, 1997, 1996 and 
1995....................      25
		  Notes to Consolidated Financial 
Statements.......................      26

	   (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.     During the quarter ended June 30, 1997, the Company filed a 
Form 8-K/A dated June 11, 1997 reporting a change in the 
Company's independent auditors.  Effective on that date, 
the Company engaged the auditing firm Ernst & Young LLP as 
independent auditors for the fiscal year ending December 
31, 1997.  The responsibilities of Coopers & Lybrand 
L.L.P. were terminated effective June 11, 1997.
</TABLE>




























37
<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 27, 1998
								THE COMMERCE GROUP, INC.

								By
									 ARTHUR J. 
REMILLARD, JR.
									 (Arthur J. 
Remillard, Jr.)
							(President, Chief Executive 
Officer 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 dates indicated.
<TABLE>
<CAPTION>
		Signature							Title
      <S>                                       <C>
	ARTHUR J. REMILLARD, JR.			President, Chief 
Executive Officer and 		(Arthur J. Remillard, Jr.)		
	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 -- 
General Counsel, 	(Regan P. Remillard)				President of 
Western Pioneer and Director


	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)


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


								Director
	(Eric G. Butler)


	HENRY J. CAMOSSE					Director
	(Henry J. Camosse)



38
<PAGE>




	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)


								Director
	(Roger E. Lavoie)


	NORMAND R. MAROIS					Director
	(Normand R. Marois)


	SURYAKANT M. PATEL				Director
	(Suryakant M. Patel)


	ANTRANIG A. SAHAGIAN				Director
	(Antranig A. Sahagian)


	GURBACHAN SINGH					Director
	(Gurbachan Singh)
</TABLE>





















39
<page



THE COMMERCE GROUP, INC. AND SUBSIDIARIES

INDEX TO FINANCIAL STATEMENT SCHEDULES*
<TABLE>
<CAPTION>
												
	      Page

<S>                                                                                  
<C>
  Ernst & Young LLP Consent of Independent Auditors on Financial 
   Statement 
Schedules.........................................................      
41

  Coopers & Lybrand, L.L.P. Report of Independent Accountants on 
   Financial Statement 
Schedules...............................................      42
</TABLE>

Schedules
<TABLE>
<CAPTION>
   <S>      <C>                                                                      
<C>
   II		Condensed Financial Information of the Registrant as of and 
for the
		 years ended December 31, 1997, 1996 and 
1995......................      43

  III		Supplementary Insurance Information for the years ended
		 December 31, 1997, 1996 and 
1995..................................      48

   IV		Reinsurance for the years ended December 31, 1997, 1996 and 
1995...      49

    V		Valuation and Qualifying Accounts for the years ended
		 December 31, 1997, 1996 and 
1995..................................      50

    X		Supplemental Information Concerning Property-Casualty 
Insurance
		 Operations for the years ended December 31, 1997, 1996 and 
1995...      51
</TABLE>


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




























40
<page



CONSENT OF INDEPENDENT AUDITORS
ON FINANCIAL STATEMENT SCHEDULES


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 23, 1998, 
included in the 1997 Annual Report of Stockholders of The Commerce 
Group, Inc.

Our audit also included the 1997 financial statement schedules of The 
Commerce Group, Inc. listed in Item 14.  The accompanying financial 
statement schedules for each of the two years in the period ended 
December 31, 1996, were audited by other auditors whose report dated 
January 24, 1997, expressed an unqualified opinion on those schedules.  
These schedules are the responsibility of the Company's management.  Our 
responsibility is to express an opinion based on our audit.  In our 
opinion, the 1997 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.



ERNST & YOUNG LLP

Boston, Massachusetts
January 23, 1998


























41
<page



REPORT OF INDEPENDENT ACCOUNTANTS
ON FINANCIAL STATEMENT SCHEDULES


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

	Our report on the consolidated financial statements of The 
Commerce Group, Inc. and Subsidiaries as of December 31, 1996, and for 
each of the two years in the period ended December 31, 1996, has been 
incorporated by reference in this Form 10-K from Page 18 of the 1996 
Annual Report to Stockholders of The Commerce Group, Inc.  In connection 
with our audits of such financial statements, we have also audited the 
related financial statement schedules as of December 31, 1996  and for 
each of the two years in the period ended December 31, 1996, listed in 
the index on Page 40 of this Form 10-K.

	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 required to be included therein.


COOPERS & LYBRAND L.L.P.

Boston, Massachusetts
January 24, 1997



























42
<page



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)

										  1997	  
1996	  1995
ASSETS
<TABLE>
<CAPTION>
<S>                                                         <C>         
<C>         <C>
Investments:
  Investment in Commerce Holdings, Inc...................	$610,854
	$551,490	$513,966
  Investment in Bay Finance Company, Inc.................	  23,750	  
33,061	  30,932
  Investment in the Clark-Prout Insurance Agency, Inc....	     566	   
1,282	   1,156
  Other investments......................................	     -  	   
2,000	   1,300
      Total investments..................................	 635,170	 
587,833	 547,354

Cash and cash equivalents................................	       2	       
2	       6
Property and equipment, net of accumulated depreciation..	   1,368	   
1,345	   1,465
Receivable from affiliates...............................	  30,395	   
3,767	   5,746
Current income taxes.....................................	   7,682	   
3,468	   1,459
Other assets.............................................	   4,628	   
2,411	   1,811
      Total assets.......................................	$679,245
	$598,826	$557,841

LIABILITIES AND STOCKHOLDERS' EQUITY

Liabilities:
  Accounts payable and accrued expenses..................	$ 23,428
	$  9,506	$  5,096
  Deferred income taxes..................................	   4,691	   
1,831	     752
  Other liabilities......................................	   1,330         
450	   2,279
      Total liabilities..................................	  29,449	  
11,787	   8,127

Stockholders' equity:
  Capital stock:
    Common stock.........................................	  19,000	  
19,000	  19,000
  Paid-in capital........................................	  29,621	  
29,621	  29,621
  Retained earnings......................................	 639,862	 
576,618	 525,452
										 688,483	 
625,239	 574,073
  Treasury stock, 1,957,348, 1,937,348 and 1,263,433
  shares in 1997, 1996 and 1995, at cost.................	 (38,687)	 
(38,200)	 (24,359)


      Total stockholders' equity.........................	 649,796	 
587,039	 549,714

      Total liabilities and stockholders' equity.........	$679,245
	$598,826	$557,841
</TABLE>



The accompanying notes are an integral part of these condensed financial 
statements.



43
<page



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)

										 1997		 
1996		 1995
<TABLE>
<CAPTION>
<S>                                                         <C>         
<C>        <C>
Revenues
  Dividends received from subsidiaries...................	$ 47,105
	$ 43,470   $ 34,650
  Rent income............................................	     397	     
357        287
  Investment income......................................	     -  	       
8         11
     Total revenues......................................	  47,502	  
43,835     34,948

Expenses
  Depreciation...........................................	     242	     
257        157
  Administrative expenses................................	  11,933	   
5,698      3,571
     Total expenses......................................	  12,175	   
5,955      3,728

Earnings before income tax benefits and equity in
 net earnings of subsidiaries over amounts distributed...	  35,327	  
37,880     31,220
Income tax benefits......................................	  (5,063)	  
(2,880)    (1,211)

Earnings before equity in net earnings of subsidiaries
 over amounts distributed................................	  40,390	  
40,760     32,431

Equity in net earnings of subsidiaries over amounts
 distributed.............................................	  55,825      
33,204     77,770
     Net earnings........................................	$ 96,215    
$ 73,964   $110,201
</TABLE>




















The accompanying notes are an integral part of these condensed financial 
statements.

44
<page



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)

										  1997	  
1996	  1995
<TABLE>
<CAPTION>
<S>                                                        <C>          
<C>         <C>
Cash flows from operating activities:
  Net earnings............................................ $  96,215    
$ 73,964    $110,201
  Adjustments to reconcile net earnings to net cash
   provided by operating activities:
    Dividends received from consolidated subsidiaries.....    47,105      
43,470      34,650
    Equity in earnings of consolidated subsidiaries.......  (102,930)    
(76,674)   (112,420)
    Depreciation and amortization.........................       242         
257         157 
    Other liabilities and accrued expenses................    25,226       
1,281       1,990 
    Balances with affiliates..............................   (26,628)      
1,979        (361)
    Income taxes benefits.................................    (1,354)       
(930)     (1,187)
    Other--net............................................       (49)        
(83)       (185)
      Net cash provided by operating activities...........    37,827      
43,264      32,845

Cash flows from investing activities:
  Purchase of property and equipment for company use......      (344)       
(186)       (285)
  Proceeds from sale of property and equipment............       128         
132         298
      Net cash provided by (used in) investing activities.      (216)        
(54)         13

Cash flows from financing activities:
  Dividends paid to stockholders..........................   (37,124)    
(29,373)     (8,635)
  Purchase of treasury stock..............................      (487)    
(13,841)    (24,359)
      Net cash used in financing activities...............   (37,611)    
(43,214)    (32,994)

Decrease in cash and cash equivalents.....................       -            
(4)       (136)
Cash and cash equivalents at beginning of year............         2           
6         142
Cash and cash equivalents at end of year.................. $       2    
$      2    $      6
</TABLE>














The accompanying notes are an integral part of these condensed financial 
statements.

45
<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>

										 1997		 
1996		 1995
      <S>                                                   <C>         
<C>         <C>
	Consolidated insurance subsidiaries.................	$47,105
	$43,470	$34,650
</TABLE>

	See Note K 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, as approved by the Board of Directors, 
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.














46
<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)

NOTE C--Consolidated Financial Statements

	In preparing the consolidated financial statements of the Company 
and its subsidiaries, the following amounts have been eliminated:
<TABLE>
<CAPTION>
								At December 31,
Balance Sheet				    1997		1996		 1995
<S>                                  <C>           <C>          <C>
Investment in subsidiaries.........	 $635,170      $585,833     $546,054
Receivable from affiliates.........	   30,395         3,767        5,746


							  Years Ended December 31,
Statement of Earnings			    1997		1996		 1995

Dividends from subsidiaries........	 $ 47,105      $ 43,470     $ 34,650
Rent income........................	      397           357          287
</TABLE>






























47
<page



THE COMMERCE GROUP, INC. AND SUBSIDIARIES

SCHEDULE III

SUPPLEMENTARY INSURANCE INFORMATION
Years Ended December 31, 1997, 1996 and 1995
(Thousands of Dollars)


<TABLE>
<CAPTION>
							      Future
							      Policy		      
Other				 Benefits,   Amortization
						 Deferred    Benefits,		      
Policy				  Claims,    of Deferred
						  Policy    Claims and		    
Claims and		      Net	Losses and     Policy      Other       Net
						Acquisition    Loss     Unearned   
Benefits   Premium  Investment  Settlement   Acquisition  Operating  
Premiums
		Segment				   Costs     Expenses   
Premiums    Payable   Revenue   Income(1)   Expenses       Costs     
Expenses   Written 	
<S>                                          <C>          <C>         
<C>         <C>    <C>         <C>          <C>         <C>           
<C>      <C>
1997
  Property and casualty insurance..........  $ 85,264     $649,473    
$379,599    None    $730,497   $ 72,963     $526,127    $187,491      
NONE     $741,501
  Real estate and commercial lending.......       -            -           
-                   -        4,448          -           -                      
-  
  Corporate and other......................       -            -           
-                   -        3,383          -           -                      
-  	
        Total..............................  $ 85,264     $649,473    
$379,599            $730,497   $ 80,794     $526,127    $187,491               
$741,501

1996
  Property and casualty insurance..........  $ 82,968     $662,832    
$367,991    None    $668,716   $ 69,852     $475,231    $181,013      
NONE     $711,570
  Real estate and commercial lending.......       -            -           
-                   -        4,249          -           -                      
-  
  Corporate and other......................       -            -           
-                   -        3,301          -           -                      
-  	
        Total..............................  $ 82,968     $662,832    
$367,991            $668,716   $ 77,402     $475,231    $181,013               
$711,570	

1995
  Property and casualty insurance..........  $ 67,160     $626,029    
$330,454    None	$592,590   $ 64,495     $367,552    $166,741      NONE     
$603,421
  Real estate and commercial lending.......       -            -           
-                   -        3,804          -           -                      
-  
  Corporate and other......................       -            -           
-                   -        3,014          -                                  
-  	
        Total..............................  $ 67,160     $626,029    
$330,454            $592,590   $ 71,313     $367,552    $166,741               
$603,421	
</TABLE>




(1)  The allocation of net investment income is based upon the specific 
identification of activity within the various segments.















<page



THE COMMERCE GROUP, INC. AND SUBSIDIARIES

SCHEDULE IV

REINSURANCE
Years Ended December 31, 1997, 1996 and 1995
(Thousands of Dollars)
<TABLE>
<CAPTION>
										 Assumed	
		Percentage
								Ceded to	  From	
			of Amount
						 Gross		  Other	  
Other	  Net		 Assumed
	Insurance Premiums Earned		 Amount	Companies
	Companies	 Amount	 to Net   	
<S>                                    <C>          <C>          <C>          
<C>             <C>
1997
  Property and casualty insurance.. $753,184    $105,824    $ 83,137    
$730,497      11.4%

1996
  Property and casualty insurance.. $698,290    $122,238    $ 92,664    
$668,716      13.9%

1995
  Property and casualty insurance.. $622,455    $120,720    $ 90,855    
$592,590      15.3%
</TABLE>






































49
<page



THE COMMERCE GROUP, INC. AND SUBSIDIARIES

SCHEDULE V

VALUATION AND QUALIFYING ACCOUNTS
Years Ended December 31, 1997, 1996 and 1995
(Thousands of Dollars)
<TABLE>
<CAPTION>
									   Net   
									 addition
									(reduction)
							 Balance	charged to		
	   Balance
							beginning	costs and		
	   at end
							 of year 	 expenses   
Deductions(1)  of year

<S>                                         <C>         <C>         <C>          
<C>
1997
  Allowance for losses on mortgage loans
   and collateral notes receivable........  $2,760	  $   52 	  $   
-   	   $2,812	

  Allowance for doubtful premium
   receivables............................  $1,500	  $1,645	  
$(1,694)	   $1,451	

1996
  Allowance for losses on mortgage loans
   and collateral notes receivable........  $3,173	  $ (413)	  $   
-   	   $2,760	

  Allowance for doubtful premium
   receivables............................  $1,103	  $1,942	  
$(1,545)	   $1,500	

1995
  Allowance for losses on mortgage loans
   and collateral notes receivable........  $3,324	  $ (151)	  $   
-   	   $3,173	

  Allowance for doubtful premium
   receivables............................  $1,120	  $  136	  $  
(153)	   $1,103	
</TABLE>


						
(1) Deductions represent net write-offs of amounts determined to be 
uncollectible.















50
<page




THE COMMERCE GROUP, INC. AND SUBSIDIARIES

SCHEDULE X

SUPPLEMENTAL INFORMATION CONCERNING
PROPERTY-CASUALTY INSURANCE OPERATIONS
Years Ended December 31, 1997, 1996 and 1995
(Thousands of Dollars)


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

<S>                                             <C>        <C>          
<C>
1997
  Consolidated property-casualty entities...... $609,930   $(83,803)    
$530,030

1996
  Consolidated property-casualty entities...... $562,997   $(87,766)    
$435,162

1995
  Consolidated property-casualty entities...... $442,027   $(74,475)    
$329,101
</TABLE>

























51
<PAGE>




THE COMMERCE GROUP, INC. AND SUBSIDIARIES

INDEX TO EXHIBITS(A)

Exhibit
Number 						Title


  3.1		Articles of Organization, as amended(B)

  3.2		By-Laws(B)

  4		Stock Certificate(B)

 10.1		Loan Agreement, Mortgage and Assignment and Trust Agreement 
dated February 20,
		1981 between Town of Webster, The Commerce Insurance Company 
and Mechanics Bank,
		as Trustee(B)

 10.2		First Supplemental Loan Agreement, Mortgage, Assignment and 
Trust Agreement
		dated as of August 1, 1984 between Town of Webster, The 
Commerce Insurance
		Company and Mechanics Bank as Trustee(B)

 10.3		Second Supplemental Loan Agreement, Mortgage, Assignment and 
Trust Agreement
		dated as of October 1, 1985 between Town of Webster, The 
Commerce Insurance 
		Company and Mechanics Bank as Trustee(B)

 10.4		Loan Agreement dated December 4, 1985 among Bay Finance 
Company, Inc., The 
		Commerce Group, Inc. and The First National Bank of Boston, 
as modified by 
		Modification No. 1 dated December 18, 1986(B)

 10.4A	Loan Agreement dated December 4, 1985 among Bay Finance 
Company, Inc., The 
		Commerce Group, Inc. and The First National Bank of Boston, 
as modified by 
		Modification No. 2 dated March 18, 1988(C)

 10.5		Loan Agreement dated December 18, 1986 between The Commerce 
Group, Inc. and 
		The First National Bank of Boston(B)

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

 10.7*	1996 Stock-Appreciation Right and Book Value Award Agreement 
as amended. (G)

 10.8*	1994 Management Incentive Plan(F)

 10.9		Property Combination Reinsurance Agreement(F)

 10.10	Owner-Contractor Agreement dated April 20, 1988 between The 
Commerce Group, 
		Inc. and Lauring Construction Co., Inc.(D)

 10.11	Asset Transfer Agreement between Commerce Insurance and 
Providence Washington 
		Insurance Company dated December 23, 1991.(E)

 10.12	Asset and Liability Transfer Agreement between Commerce 
Insurance and 
		American Hardware Mutual Insurance Company and American 
Merchants Casualty 
		Company dated November 8, 1991.(E)

 10.13	Asset Transfer Agreement between Commerce Insurance and The 
Continental 
		Insurance Company dated October 24, 1991.(E)

52
<page


 10.14	Asset Transfer Agreement between Commerce Insurance and Home 
Insurance 
		Company dated October 3, 1991.(E)

 10.15	Asset and Liability Transfer Agreement between Commerce 
Insurance and New 
		Hampshire Insurance Company dated August 12, 1991.(E)

 10.16	Asset Transfer Agreement between Commerce Insurance, Utica 
Mutual Insurance 
		Company and Graphic Arts Mutual Insurance Company dated June 
24, 1991.(E)

 13.1		Annual Report for the year ended December 31, 1997 to 
Security Holders.

 22.1		Subsidiaries of the Registrant filed herewith.

 24.1		Power of Attorney(B)



					
(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 Registration Statement on Form 8-A.

(D) 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, 1988.

(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, 1993.

(F) 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.

(G) 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.

* Denotes management contract or compensation plan or arrangement.





















53
<page








1997
annual
report
















The
CGI

The Commerce Group, Inc.
211 Main Street, Webster, Massachusetts 01570

<PAGE




INDEX TO 1997 ANNUAL REPORT
<TABLE>
<CAPTION>
												
	   Page
<S>                                                                  <C>
Financial Highlights............................................     1

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

Management's Discussion and Analysis of Financial Condition
 and Results of Operations......................................     4

Common Stock Price and Dividend Information.....................    17

Report of Management............................................    19

Report of Independent Auditors..................................    20

Consolidated Balance Sheets at December 31, 1997 and 1996.......    21

Consolidated Statements of Earnings for the Years Ended
 December 31, 1997, 1996 and 1995...............................    22

Consolidated Statements of Stockholders' Equity for the Years
 Ended December 31, 1997, 1996 and 1995.........................    23

Consolidated Statements of Cash Flows for the Years Ended
 December 31, 1997, 1996 and 1995...............................    24

Consolidated Statements of Cash Flows - Reconciliation of Net
 Income to Net Cash Provided by Operating Activities for the
 years ended December 31, 1997, 1996 and 1995...................    25

Notes to Consolidated Financial Statements......................    26

Selected Consolidated Financial Data............................    45

Management's Discussion of Supplemental Information on
 Insurance Operations...........................................    46

Directors.......................................................    51

Officers........................................................    53

Stockholder Information.........................................    54
</TABLE>









<PAGE




FINANCIAL HIGHLIGHTS
(Dollars in Thousands, Except Per Share Amounts)

<TABLE>
<CAPTION>
								    1997		1996	
	    1995


<S>                                              <C>           <C>             
<C>
Net premiums written............................ $  741,501    $  
711,570      $  603,421

Earned premiums................................. $  730,497    $  
668,716      $  592,590
Net investment income...........................     80,794        
77,402          71,313
Premium finance fees............................      7,074         
9,713          19,420
Net realized investment gains (losses)..........     22,770        
(7,574)            712
	Total revenues............................ $  841,135    $  
748,257      $  684,035

Earnings before income taxes.................... $  127,517    $   
92,013      $  149,742
Income taxes....................................     31,302        
18,049          39,541
	Net earnings.............................. $   96,215    $   
73,964      $  110,201

Basic and diluted net earnings per common share. $     2.67    $     
2.04      $     2.93

Cash dividends paid per share................... $     1.03    $     
0.81      $     0.23

Weighted average number of common shares
  outstanding................................... 36,044,679    
36,311,887      37,632,236

Total investments at market value............... $1,242,695    
$1,167,671	 $1,096,778
Total assets....................................  1,754,753     
1,676,799	  1,564,175
Total liabilities...............................  1,104,957     
1,089,760	  1,014,461
Total stockholders' equity......................    649,796       
587,039	    549,714
Total stockholders' equity per share............      18.03         
16.28	      14.96

Certain Statutory Financial Ratios (Unaudited):
  Loss and LAE ratio............................       71.4%         
70.9%	       62.0%
  Underwriting expense ratio....................       25.1          
27.1	       29.0
	Combined ratio............................       96.5%         
98.0%	       91.0%

  Net premiums written to policyholders'
    surplus.....................................      143.3%        
153.1%	      137.1%
</TABLE>




















1
<PAGE


THE COMMERCE GROUP, INC.


												   
March 27, 1998

To Our Stockholders:

	In 1997, your Company experienced satisfactory financial results 
for the 22nd consecutive year.  From the very first day the funding of 
The Commerce Insurance Company was accomplished (April 3, 1972) through 
December 31, 1997, we have achieved underwriting profit of $228.5 
million on total premiums written of $6.0 billion.  This underwriting 
profit represents 3.8% of total premiums written.  These results stand 
out in a year that continued to witness changes in the nature and source 
of competition within the insurance marketplace.

	In 1998, the Massachusetts personal automobile insurance industry 
saw state-mandated auto insurance rates drop again for the fourth 
consecutive year this past January. Coupled with affinity group 
marketing programs and safe driver rate deviations, the Massachusetts 
marketplace continues in a highly competitive mode.  Through these 
evolving conditions, your Company saw its share of the Massachusetts 
personal automobile market increase to 21.8% in 1997 versus 20.8% at the 
end of 1996.

	In California, Western Pioneer Insurance Company has completed its 
second full year as a subsidiary of The Commerce Insurance Company with 
improved profitability and a bright future.  Plans have been implemented 
to strengthen the agency force along with establishing an attractive and 
competitive rate structure.

	As we look to the future, your Company has begun writing insurance 
in the state of Rhode Island in January 1998 and maintains licenses to 
operate in the states of Connecticut, Maine, New Hampshire and Vermont.  
With the use of new technologies, upgraded internal operating systems 
and the continued monitoring of acquisition opportunities, we are 
realizing our vision of expansion.

	Through it all, your Company has continued to grow and prosper.  
The Commerce Insurance Company continues to be the largest writer of 
Massachusetts private passenger automobile insurance, as well as the 
second largest writer of Massachusetts homeowners insurance.  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, both in 
Massachusetts and California:  Our Policyholders (represented by over 
771,000 policies in force); Agents (692); Employees (1,495); Officers 
(31); Directors (19); and of course, our Stockholders (over 4,300, not 
including our Employee Stock Ownership Plan participants who now number 
1,541).

	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.

	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 creativity, 
energy and professionalism will continue to serve our shareholders 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

Caring in everything we do.

2
<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 on December 31, over the most recent fifteen year period.  The X 
axis lists the years beginning with 1983 through 1997.  The Y axis lists 
the dollar values starting at $0.00 and increasing in one dollar 
increments to $21.00.  The graph depicts a total stockholders' equity 
per share value in 1983 of $0.50; 1984 of $0.67, 1985 of $0.81, 1986 of 
$0.95, 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 and 1997 of $18.03.  The graph also depicts the total 
stockholders' equity per share value including cumulative dividends paid 
per share in 1984 of $0.67, 1985 of $0.81, 1986 of $0.95, 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 
and 1997 of $20.25.










































3
<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 industry has been and remains highly 
cyclical in nature.  The financial results of property and casualty 
insurance companies are impacted by many forces unique to the market.  
Market forces include competition, frequency and severity of losses 
resulting from weather conditions, the state of the economy and the 
general regulatory environment in those states in which the insurer 
operates.  During 1997, the industry experienced strong underwriting 
results, despite slower premium growth as compared to 1996.  The strong 
underwriting results were attributable to the absence of severe weather, 
improved cost management, safer cars and highways and increased drunk 
driver awareness.  The improved industry results have intensified 
competition among insurers, which when coupled with lower rates, 
emphasizes the advantages of operating efficiently.  The Commerce Group, 
Inc. ("Company") is well positioned to both lead in this environment and 
to respond to these prevailing conditions in the market.

	The Company, incorporated in 1976, is a regional property and 
casualty insurer which, through its subsidiaries, offers predominantly 
motor vehicle insurance, covering personal automobiles, in addition to a 
broad range of other property and casualty insurance products.  These 
products are marketed to 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").  The Company also writes insurance 
in the state of California through Western Pioneer Insurance Company 
("Western Pioneer"), a wholly-owned subsidiary of Commerce.

	The Company's business strategy remains focused on activities 
primarily related to personal automobile insurance in the states of 
Massachusetts and California.  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 in 1997 to approximately 21.8% from 20.8% in 1996.  In 
addition to Massachusetts and California, the Company is newly licensed 
in the states of Connecticut, Maine, New Hampshire, Rhode Island and 
Vermont.  The Company began writing in Rhode Island in January 1998 and 
is gearing internal operating systems to accommodate the remaining New 
England states in the future.

	During 1997, direct premiums written totalled $768,649, a 5.0% 
increase over 1996.  Direct premiums written in Massachusetts, written 
through Commerce and Citation amounted to $741,163.  Direct premiums 
written in California, through Western Pioneer, amounted to $27,486.  Of 
the total direct premiums written, direct personal automobile premiums 
written during 1997 totalled $661,077, an increase of 6.1% over 1996, 
and direct homeowners insurance premiums written totalled $54,256, an 
increase of 3.6% over 1996.  The Company is also the fourth largest 
writer of commercial automobile insurance in Massachusetts based on 
direct premiums written.  During 1997, direct commercial automobile 
premiums written totalled $37,075, an 8.3% decrease compared to 1996.

	Personal automobile insurance is subject to extensive regulation 
in Massachusetts and California.  Every owner of a registered automobile 
is required to maintain certain minimum automobile insurance coverages.  
In Massachusetts, with very limited exceptions, automobile insurers are 
required by law to issue a policy to any applicant seeking to obtain 
such coverages.  Marketing and underwriting strategies for companies 
operating in Massachusetts are limited by maximum automobile premium 
rates and minimum agency commission levels for personal automobile 
insurance 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.





4
<PAGE



	During the three-year period from 1995 to 1997, Massachusetts 
personal automobile insurance premium rates decreased an average of 5.6% 
per year.  The Commissioner approved an average 4.0% decrease in 
personal automobile premiums for 1998, the fourth decrease in as many 
years.  Rates decreased 6.2%, 4.5% and 6.1% in 1997, 1996 and 1995, 
respectively.  Coinciding with the 1998 rate decrease, the Commissioner 
also approved a 7.4% decrease in the commissions agents receive from 
selling private passenger automobile insurance for 1998.  The decision 
slightly offsets the financial impact of the average 4.0% decrease in 
personal automobile premiums for 1998.

	Although personal automobile premium rates decreased an average of 
6.2% in 1997, the impact upon the Company resulted in only a 1.8% 
decrease in the average personal automobile premium per exposure (each 
vehicle insured).  The 1.8% decrease for the Company is significantly 
less than the average rate decrease of 6.2% 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 1997 and 1998 decreases were 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 overstating rates for 1991 through 
1996.  Rates for 1997 were adjusted to recoup an estimated $50 million 
from the industry.  Rates for 1998 and 1999 have and will be adjusted to 
recoup the remaining amount estimated to be $150 million.

	Additionally, 1997 and 1998 rates were decreased as a result of 
the reconciliation of the Safe Driver Insurance Plan ("SDIP"), which is 
designed to be revenue neutral.  In most recent past years, the SDIP 
reconciliation resulted in a deficit which was then added into the rates 
for the subsequent years.  The 1996 SDIP reconciliation, however, 
resulted in a surplus.

	The Company had performed an analysis of the 1997 rate decision in 
early 1997.  The Company estimated the impact of the above two items on 
its results assuming its market share remained the same as it was at the 
end of 1997.  The Company's share of the Massachusetts personal 
automobile market increased from 20.8% at the end of 1996 to 21.8% at 
the end of 1997.  The earned premium impact of the above two items has 
been re-estimated at approximately $16.0 million for 1997, $24.1 million 
for 1998 and $14.1 million for 1999.  The earnings per share after-tax 
impact resulting from lower earned premiums was $0.29 for 1997, and is 
estimated to be $0.43 and $0.24 for 1998 and 1999, respectively.  If the 
Company's future market share increases (decreases), a larger (smaller) 
financial impact will result.

	In June 1997, the Massachusetts Supreme Judicial Court ("Court") 
rejected an appeal filed by the Automobile Insurers Bureau of 
Massachusetts ("AIB") that challenged the Commissioner's decision to 
prospectively decrease future rates for the miscalculation of the 
industry expense allowance.  (The SDIP reconciliation component was not 
challenged.)  The AIB's argument was that, according to statute, there 
is a prohibition against retroactive rate making in Massachusetts which 
effectively bars the examination of past year's data once all involved 
parties have agreed to the rate decision.  The Court ruled that 
retroactive rate making was indeed illegal, but indicated that special 
circumstances permitted returning the money in the form of rate 
reductions.  In a related challenge, the Court rejected on technical 
grounds, one insurers claim of an unfair adverse impact related to the 
prospective nature of the rate reduction.

	The 1998 rate decision also included a 7.4% reduction in agents' 
commission rates.  Again, as in 1997, companies will calculate 
commissions on business subject to safe driver deviations, net of the 
deviations.  After the 1997 rate decision, a suit was filed by the 
Massachusetts Association of Insurance Agents ("MAIA") challenging this 
method of calculation.  In July 1997, the Court upheld the 
Commissioner's ruling that agents' commissions on 1997 premiums, subject 
to safe driver deviations, would be based on net premium amounts. The 
1996 commissions were based on premium amounts net of group discounts 
but gross of safe driver deviations.  The Commissioner's ruling resulted 
in agents receiving fewer commission dollars on a per policy basis.


5
<PAGE



	The Company's performance in its personal and commercial 
automobile insurance lines is integrally tied to its participation in 
the Commonwealth Automobile Reinsurers ("C.A.R.").  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 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. 
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 1998.  Various C.A.R. 
participation formula changes have been fully implemented since 1993 
with only minor changes since then.  The Company's 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.  As a result, the credits impacting the utilization 
formula have favorably affected the Company's participation ratio.  As 
of December 31, 1997, the Company estimates it's private passenger 
automobile participation ratio to be approximately 18.0% which is 
several percentage points below the Company's estimated 21.8% share of 
the Massachusetts personal automobile market.  The Company continues to 
expect the marketplace to make minor yearly adjustments to find the 
optimum balance between voluntary and ceded writings.

	Starting in 1991, and concluding in 1995, reforms were implemented 
into the C.A.R. commercial automobile pooling mechanism.  The primary 
change was the gradual phase-in of a C.A.R. commercial utilization-based 
participation formula, so as to reduce the percentage of commercial 
business being ceded to C.A.R.  The percentage of commercial premiums 
ceded to C.A.R. by the industry has  decreased from approximately 56% in 
1990 to approximately 26% in 1997, (as estimated by the Company).  This 
also resulted in significant decreases in the percentage of commercial 
automobile business ceded to C.A.R. by the Company, from approximately 
68% in 1990 to approximately 24% in 1997.  Continued industry-wide 
gradual decreases in the percentage of ceded commercial premiums are 
expected for 1998, as companies continue to look to increase their 
voluntary retention levels.  Finally, C.A.R. depopulation, coupled with 
C.A.R. rate increases for ceded commercial business, has led to a 
reduction in the size of the annual commercial deficits.

	The Company intends to continue to respond to the incentives and 
disincentives provided by C.A.R. rules, by further adjusting the 
percentage of personal and commercial business ceded to C.A.R. in 1998.

	The Company provides a separate rating tier for preferred 
commercial automobile business through Citation.  Approximately 22% of 
the commercial automobile premiums produced by its voluntary agents in 
1997 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 1998 and beyond.

	Beginning in the latter part of 1995, the Company began to 
actively pursue group marketing programs.  The primary purpose of group 
marketing programs is to provide participating groups with a convenient 
means of purchasing private passenger automobile insurance through 
associations and employee groups.  Emphasis is placed on writing larger 
groups, although accounts with as few as 25 participants are considered.  
Groups are eligible for rate discounts which must be filed annually with 
the Division of Insurance.  In general, the Company looks for 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 at 
the insured's option.



6
<PAGE



	During the latter part of 1995, Commerce signed group marketing 
agreements with the five American Automobile Association Clubs of 
Massachusetts ("AAA clubs") offering a 10% discount on private passenger 
automobile insurance to the clubs' members who reside in Massachusetts.  
In 1997, two AAA clubs were consolidated, therefore leaving only four 
clubs.  Primarily as a result of the fourth consecutive private 
passenger rate reduction, a 6.0% percent AAA club discount was approved 
for policies effective as of January 1, 1998.  Previously, a 10% 
discount had been effective since the latter part of 1995.  Membership 
in these clubs is estimated to represent approximately one-third of the 
Massachusetts motoring public, and has been the primary reason for a 
40.6% increase in the number of personal automobile exposures written by 
Commerce since the groups inception.  The Company expects this increase 
to level off in 1998 as evidenced by an 8.3% increase in personal 
automobile exposures in 1997 as compared to a 29.8% increase in 1996.  
In 1998, total direct premiums written attributable to the AAA group 
business were $422,074 or 54.9% of the Company's total direct premiums 
written (66.6% of total Massachusetts personal automobile premium), an 
increase of 22.6% over 1996.  Total exposures attributable to the AAA 
clubs group business were 522,098 or 65.8% of total personal automobile 
exposures in 1997, an increase of 102,445 or 24.4% over 1996.  Of this 
amount, approximately 10% was written through insurance agencies owned 
by the AAA clubs.  The remaining 90% was written through the Company's 
network of independent agents.

	Initially, the Massachusetts statute governing group marketing 
programs required that 35% of the eligible members must participate in a 
group marketing program within the first year.  Accordingly, Commerce 
and the AAA clubs aggressively pursued AAA members for the AAA Group 
Marketing Program.  At December 31, 1996, Commerce had achieved the 
objective of writing more than 35% of the AAA members within the first 
year, as over 300,000 AAA members joined the program.  The particular 
portion of the statute, dealing with achieving the 35% penetration level 
in one year, was amended by the Massachusetts Legislature in early 1997 
to allow two years to reach the required penetration level.  In December 
1997, a bill was passed in the Massachusetts Legislature to further 
waive, for an additional year, the requirement that 35% of a group's 
members purchase insurance through the group in order for the group to 
be renewed for 1998.

	Commerce and the AAA clubs have agreed that Commerce shall be 
their exclusive underwriter of Massachusetts personal automobile group 
programs.  This contract may be terminated by the AAA clubs upon written 
notice to Commerce, whose termination shall take effect at a minimum of 
three years from notice of termination.

	During 1996 and 1997, the Company was granted licenses in the 
states of Connecticut, New Hampshire, Rhode Island, and Vermont.  
License approval in the state of Maine was received in February 1998.  
Concurrent with the filings submitted for these licenses, the Company 
entered into an agreement with Policy Management Services Corporation 
("PMSC") and  purchased software which will allow for the development of 
internal operating systems which will enable the Company to process 
policies in states outside of Massachusetts.  Additionally, a 
significant investment in new computer hardware was made to support this 
effort.  These systems are in place and the Company began writing 
insurance in the state of Rhode Island during January 1998.

	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, 1997, the property and casualty 
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 102.6% in 1993 to a high of 104.2% in 1997 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 as low as 91.0% in 1995 to a 
high of 98.0% in 1996.  On an average basis, the Company's combined 
ratio was 94.2% for the five year period ended December 31, 1997 
compared to a weighted industry average of 103.2%.

	The Company's total revenues were supplemented in fiscal 1997, 
1996 and 1995 by net investment income of $80,794, $77,402 and $71,313, 
respectively.  Additionally, the Company had realized investment gains 
(losses) of $22,770, ($7,574) and $712 in 1997, 1996 and 1995, 
respectively.


7
<PAGE



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.  The 
Company is unable to predict whether or in what form initiatives will be 
implemented and what the possible effects on the Company would be.

	In May 1996, state legislation was passed offering insurers 
incentives to write more inner city and coastal homeowners insurance.  
The legislation, which arose over concerns of availability and 
allegations of redlining, expands coverages and provides various credits 
under the Massachusetts Property Insurance Underwriting Association 
("Massachusetts Fair Plan").

	In December 1996, a United States District Court, acting on a suit 
filed in October 1996, ordered the Massachusetts Division of Insurance 
to disregard the existing ban on bank sales of life, health and accident 
insurance.  The decision cited U.S. Supreme Court decisions in the 
Barnett and VALIC cases that essentially pre-empt the State of 
Massachusetts ban on the licensing of bank-owned insurance agencies.  
Also, in December 1996, a bill was filed in the Massachusetts 
Legislature that would allow banks to become licensed agents of an 
insurance company or brokers of insurance, permitting such things as the 
sale of insurance products in distinctly designated bank branch areas 
separate and apart from retail deposit areas.  The Company is unable to 
predict the possible impacts of these issues at this time.

	Various forms of automobile insurance reform are continuously 
debated in the Massachusetts Legislature.  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 
4.

	As previously mentioned, beginning in 1995, the Company received 
approval for group 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 writings by 6.3% in 1997 
primarily as a result of this program, ending the year with 
approximately 21.8% of the Massachusetts private passenger automobile 
market as compared to 20.8% in 1996.

Personal Automobile Insurance

	In March 1997, the Company was granted approval, for the 1997 
calendar year, to offer their customers safe driver deviations of 10 
percent to drivers with SDIP classifications of either Step 9 or 10.  
These 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.  For drivers that 
qualified, the Company's group automobile discounts and SDIP deviations 
could be combined for up to a 19% reduction from the state mandated 
rates.  In February 1998, approval of SDIP deviations of 15% for Step 9 
and 4% for Step 10 SDIP classifications was granted for the 1998 
calendar year.  For drivers that qualify, the Company's group automobile 
discounts and SDIP deviations can be combined for up to a 20.1% 
reduction from the state mandated rates.

	In November 1997, the Company received state regulatory approval 
to implement an installment fee of $3.00 on each invoice following the 
down payment, for all private passenger automobile policies effective 
January 1, 1998.  The same $3.00 installment fee also replaced the 1.25% 
finance charge calculation for homeowner and dwelling policies paid on a 
10-payment installment basis.  Previously, for 1996 and 1997, the 
Company eliminated interest based finance fees on personal automobile 
insurance policies.


8
<PAGE



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 implement Risk-Based Capital ("RBC") 
requirements for property and casualty insurance companies which 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 level 
of surplus to RBC falls.  The first level, the Company Action Level, 
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.  The Company's subsidiaries, Commerce, 
Citation and Western Pioneer, have RBC amounts at December 31, 1997 of 
$56 million, $2 million and $3 million, respectively, and they have 
statutory surplus of approximately $433 million, $83 million and $24 
million, respectively.  The statutory surplus of Commerce, Citation and 
Western Pioneer at December 31, 1997 exceeded the RBC Company Action 
Levels of $112 million, $5 million and $6 million, respectively, by 
approximately $321 million, $78 million and $18 million, respectively.

Year Ended December 31, 1997 Compared to Year Ended December 31, 1996

	Direct premiums written during 1997 increased $36,826, or 5.0% to 
$768,649 as compared to 1996.  The increase was primarily attributable 
to a $38,223, or 6.1% increase in direct premiums written for personal 
automobile insurance to $661,077.  This increase was the result of a 
$38,109 increase in direct premiums written for Massachusetts personal 
automobile insurance and an increase of $114 which was derived from the 
Company's California subsidiary, Western Pioneer.  The increase in 
Massachusetts personal automobile direct premiums written resulted 
primarily from an increase of 8.3% in the number of personal automobile 
exposures written, offset by a 1.8% decrease in the average personal 
automobile premiums written per exposure (each vehicle insured).  This 
was primarily the result of the Company's affinity group marketing 
programs, safe driver rate deviations and the effect of the 1997 state 
mandated average rate decrease of 6.2%.  In 1997, the Company offered 
their customers safe driver deviations of 10% to drivers with SDIP 
classifications of either Step 9 or 10.  For drivers who qualify, the 
Company's group discount and safe driver deviations can be combined for 
up to a 20.1% reduction from state mandated rates.  Direct premiums 
written for commercial automobile insurance decreased by $3,363 or 8.3%, 
due primarily to a decrease of approximately 6.7% in the number of 
policies written, with the remainder due to a decrease in the average 
commercial automobile premium per policy.  Direct premiums written for 
homeowners insurance (excluding the Massachusetts Fair Plan) increased 
by $2,088, or 4.2% due primarily to an increase in the number of 
policies written.

	Net premiums written during 1997 increased $29,931, or 4.2% as 
compared to 1996.  The increase in net premiums written was due to the 
growth in direct premiums written as described above, offset by the 
effects of reinsurance.  Written premiums assumed from C.A.R. decreased 
$17,172, or 18.3% and written premiums ceded to C.A.R. decreased $11,045 
or 13.3% as compared to 1996, both as a result of changes in the 
industry's and the Company's utilization of C.A.R. reinsurance.  
Premiums ceded to reinsurers other than C.A.R. increased $768 or 2.5% as 
compared to 1996.


9
<PAGE



	Earned premiums increased $61,781 or 9.2% during 1997 as compared 
to 1996.  The increase in earned premiums was primarily due to changes 
in 1997 and 1996 direct and net premiums written including the increase 
in direct premiums written attributable to group marketing programs 
during the latter part of 1996 and in 1997, as previously mentioned.  
Earned premiums assumed from C.A.R. decreased $9,602 or 10.4% during 
1997 compared to 1996.  Earned premiums ceded to C.A.R. decreased 
$14,000 or 16.3% during 1997 compared to 1996.  Earned premiums 
attributable to Western Pioneer increased $531 to $28,159 for 1997 
compared to 1996.

	Net investment income increased $3,392 or 4.4%, compared to 1996, 
principally as a result of an increase in average invested assets (at 
cost).  Net investment income as a percentage of total average 
investments was 6.8% in both 1997 and 1996.  Net investment income after 
tax as a percentage of total average investments was 5.5% in 1997 
compared to 5.6% in 1996.

	Premium finance fees decreased $2,639 or 27.2% during 1997.  The 
decrease was primarily attributable to a change from interest based 
finance fees to a "late payment" based system for personal automobile 
policies with effective dates of January 1, 1997 and forward.  The 
change was initiated in direct response to competitive forces that 
occurred in the Massachusetts marketplace.  In 1997, the Company 
received state regulatory approval to charge a $3.00 installment on each 
invoice following the down payment for all private passenger automobile 
and homeowner policies with effective dates on or after January 1, 1998.

	The market value of the Company's investment portfolio totaled 
$1,242,695, at December 31, 1997 compared to $1,167,671 at December 31, 
1996.  Management's investment philosophy is to emphasize investment 
yield while maintaining investment quality.  Fixed maturities comprised 
47.5% of the portfolio at December 31, 1997 compared to 61.4% at 
December 31, 1996.  Equity investments comprised 26.3% at December 31, 
1997 compared to 20.0% at December 31, 1996.  Cash and short-term 
investments comprised 19.2% at December 31, 1997 compared to 12.0% at 
December 31, 1996.  The decrease in fixed maturities was the result of 
the maturities and sales of fixed maturities with proceeds redeployed to 
cash and short-term investments.  The shift in the mix of investments 
was partially driven by the current low interest rate environment and by 
the Company's previously announced change in investment strategy.  The 
Company is seeking greater flexibility to provide for enhanced potential 
future capital appreciation.  The Company's strategy is to acquire 
equity investments, including potential acquisitions, which forgo 
current investment yield in favor of potential higher yielding capital 
appreciation in the future.

	The market value of the fixed maturities, which totaled $590,597 
at December 31, 1997, is comprised of 69.3% tax-exempt and 30.7% taxable 
investments as compared to total fixed maturities of $716,702, comprised 
of 68.5% tax-exempt and 31.5% taxable investments at December 31, 1996.  
The market value of equity investments, which totaled $326,588 at 
December 31, 1997, is comprised of 45.5% preferred stocks and 54.5% 
common stocks as compared to total equity investments of $233,721, 
comprised of 63.2% preferred stocks and 36.8% common stocks at December 
31, 1996.  The increase in equity investments and decrease in fixed 
maturities at December 31, 1997 compared to December 31, 1996 was 
primarily attributable to a change in the mix of investments from 
municipal and government bonds and Government National Mortgage 
Association ("GNMA") mortgage-backed bonds to higher yielding preferred 
stock mutual funds which are classified as common stocks.  Of the common 
stock portfolio approximately two-thirds of the balance is comprised of 
preferred stock mutual funds versus pure common stocks.












10
<PAGE



	Gross realized gains and losses on fixed maturity investments 
amounted to $4,306 and $2,887, respectively, for the year ended December 
31, 1997 compared to gross realized gains and losses on fixed maturity 
investments of $487 and $7,851, respectively, for the year ended 
December 31, 1996.  Gross realized investment gains and losses on 
preferred stocks amounted to $2,688 and $2,682, respectively, for the 
year ended December 31, 1997 compared to gross realized gains and losses 
on preferred stocks of $22 and $371, respectively, for the year ended 
December 31, 1996.  Gross realized gains on common stocks amounted to 
$21,440 for the year ended December 31, 1997 compared to gross realized 
gains on common stocks of $456 for the year ended December 31, 1996.  
Net realized investment gains totalled $22,770 during 1997 as compared 
to net realized investment losses of $7,574 for 1996.  A significant 
portion of the realized gains in 1997 was primarily the result of a 
merger of a major New England financial corporation and its property and 
casualty subsidiary.  The merger election and exchange of stock resulted 
in realized investment gains of $15,178.  Subsequent post merger sales 
of this corporation's common stock resulted in additional realized 
investment gains of $3,790.  The remainder of the realized investment 
gains were primarily the result of sales of non-taxable bonds offset by 
minimal realized investment losses in the sales of GNMA's and preferred 
stocks.  Also included were realized losses on mortgage activity of $95 
in 1997 compared to $317 in 1996.

	Gross unrealized gains and losses on fixed maturity investments 
totalled $24,189 and $376, respectively, at December 31, 1997 compared 
to $17,890 and $1,699, respectively, at December 31, 1996.  The 
unrealized gains on fixed maturities increased, despite fewer fixed 
maturity holdings, as a result of the favorable bond market in 1997.  
Gross unrealized gains and losses on preferred stocks totaled $1,599 and 
$1,235, respectively, at December 31, 1997 compared to $2,034 and 
$2,837, respectively, at December 31, 1996.  Gross unrealized gains and 
losses on common stocks totaled $17,888 and $170, respectively, at 
December 31, 1997 compared to $20,305 and $187, respectively, at 
December 31, 1996.

	Losses and loss adjustment expenses ("LAE") incurred as a 
percentage of insurance premiums earned ("loss and  LAE ratio") was 
71.4% in 1997 compared to 70.9% in 1996.  The ratio of net incurred 
losses, excluding LAE, to premiums earned ("pure loss ratio") on 
personal automobile decreased to 61.3% in 1997 compared to 63.9% in 
1996.  The commercial automobile pure loss ratio decreased to 45.4% in 
1997 compared to 46.7% in 1996.  For homeowners, the pure loss ratio 
decreased to 48.9% in 1997 compared to 72.4% in 1996.  The overall 
decrease to the homeowner pure loss ratio for 1997 was due to more 
normal weather conditions during 1997 as compared to the severe weather 
experienced during the first half of 1996, coupled with favorable 
development in the homeowners liability area.

	Policy acquisition costs expensed increased by 3.6% in 1997, 
compared to 8.6% in 1996.  The increase in policy acquisition costs was 
primarily due to higher volumes of business written during 1997 and 
fewer acquisition costs being deferred as compared to 1996.  This was 
due to a higher rate of growth in 1996 primarily from affinity groups.  
As a percentage of net premiums written, underwriting expenses for the 
insurance companies (on a statutory basis) were 25.1% during 1997 as 
compared to 27.1% for 1996.  On a consolidated financial statement 
basis, 1997 and 1996 policy acquisition costs, as a percentage of net 
written premiums, were approximately equal.  This occurred because lower 
commission and contingent commission expenses in 1997 were offset by 
higher management incentive compensation expenses and computer service 
expenses.  The higher management compensation expense was the direct 
result of the increase in the average three month share price of the 
Company's common stock during 1997 as compared to 1996.

	The Company's effective tax rate was 24.5% and 19.6% for the years 
ended December 31, 1997 and 1996, 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 deduction.  The 
higher 1997 effective tax rate was primarily due to tax exempt interest 
comprising a lesser percentage of net income before taxes and more 
realized gains in 1997 than in 1996.

	Net earnings increased $22,251 or 30.1% to $96,215, during 1997 as 
compared to net earnings of $73,964 in 1996, as a result of the factors 
previously mentioned.




11
<PAGE




Year Ended December 31, 1996 Compared to Year Ended December 31, 1995

	Direct premiums written during 1996 increased $105,157, or 16.8% 
to $731,823 as compared to 1995.  The increase was primarily 
attributable to a $108,212, or 21.0% increase in direct premiums written 
for personal automobile insurance to $622,849.  This increase was the 
result of an $88,527 increase in direct premiums written for 
Massachusetts personal automobile insurance and an increase of $19,685 
which was derived from the Company's California subsidiary, Western 
Pioneer, which was acquired August 31, 1995.  The increase in 
Massachusetts personal automobile direct premiums written resulted 
primarily from an increase of 29.8% in the number of personal automobile 
exposures written, offset by a 9.2% decrease in the average personal 
automobile premiums written per exposure (each vehicle insured).  This 
was primarily the result of the Company's affinity group marketing 
programs, safe driver rate deviations and the effect of the 1996 state 
mandated average rate decrease of 4.5%.  In January 1996, the Company 
was granted approval to offer its customers safe driver deviations of 
10%.  For drivers who qualify, the Company's group discount and safe 
driver deviations can be combined for up to a 19% reduction from state 
mandated rates.  Direct premiums written for commercial automobile 
insurance decreased by $4,763, or 10.5%, due primarily to a decrease of 
approximately 5.6% in the number of policies written, with the remainder 
due to a decrease in the average commercial automobile premium per 
policy.  Direct premiums written for homeowners insurance (excluding the 
Massachusetts Fair Plan) increased by $1,926, or 4.0%, due primarily to 
an increase in the number of policies written.

	Net premiums written during 1996 increased $108,149, or 17.9% as 
compared to 1995.  The increase in net premiums written was due to the 
growth in direct premiums written as described above, as well as to the 
effects of reinsurance.  Written premiums assumed from C.A.R. increased 
$1,454, or 1.6% and written premiums ceded to C.A.R. increased $47 as 
compared to 1995, both as a result of changes in the industry's and the 
Company's utilization of C.A.R. reinsurance.  Premiums ceded to 
reinsurers other than C.A.R. decreased $1,602 or 4.9% as compared to 
1995.

	Earned premiums increased $76,126 or 12.8% during 1996 as compared 
to 1995.  The increase in earned premiums was primarily due to changes 
in direct premiums written and net premiums written as described above.  
Earned premiums assumed from C.A.R. increased $1,860 or 2.1% during 1996 
compared to 1995.  Earned premiums attributable to Western Pioneer 
increased $18,794 to $27,628 for 1996 compared to $8,834 for the four 
months ended December 31, 1995.  The Company acquired Western Pioneer on 
August 31, 1995.

	Net investment income increased $6,089, or 8.5%, compared to 1995, 
principally as a result of an increase in average invested assets (at 
cost) of 9.5% when compared to the year ended 1995.  Net investment 
income as a percentage of total average investments was 6.8% in 1996 
compared to 6.9% in 1995.  Net investment income after tax as a 
percentage of total average investments was 5.6% in 1996 compared to 
5.7% in 1995.

	Premium finance fees decreased $9,707 or 50.0% during 1996.  The 
decrease was primarily attributable to a change from interest based 
finance fees to a "late payment" based system for personal automobile 
policies with effective dates of January 1, 1996 and forward.  The 
change was initiated in direct response to competitive forces that 
occurred in the Massachusetts marketplace.

	The market value of the Company's investment portfolio totaled 
$1,167,671, at December 31, 1996 compared to $1,096,778 at December 31, 
1995.  Management's investment philosophy is to emphasize investment 
yield while maintaining investment quality.  Fixed maturities comprised 
61.4% of the portfolio at December 31, 1996 compared to 74.3% at 
December 31, 1995.  Equity investments comprised 20.0% at December 31, 
1996 compared to 13.8% at December 31, 1995.







12
<PAGE



	The market value of the fixed maturities, which totaled $716,702 
at December 31, 1996, is comprised of 68.5% tax-exempt and 31.5% taxable 
investments as compared to total fixed maturities of $815,277, comprised 
of 72.8% tax-exempt and 27.2% taxable investments at December 31, 1995.  
The market value of equity investments, which totaled $233,721 at 
December 31, 1996, is comprised of 63.2% preferred stocks and 36.8% 
common stocks as compared to total equity investments of $151,579, 
comprised of 73.4% preferred stocks and 26.6% common stocks at December 
31, 1995.  The increase in equity investments and decrease in fixed 
maturities at December 31, 1996 compared to December 31, 1995 is 
primarily attributable to a change in the mix of investments from 
municipal bonds to higher yielding preferred stocks and preferred stock 
mutual funds which are classified as common stocks.

	Gross realized gains and losses on fixed maturity investments 
amounted to $487 and $7,851, respectively, for the year ended December 
31, 1996 compared to $2,389 and $1,912, respectively, for the year ended 
December 31, 1995.  Gross realized gains and losses on preferred stocks 
amounted to $22 and $371, respectively, for the year ended December 31, 
1996 compared to $937 and $47, respectively, for the year ended December 
31, 1995.  Gross realized gains and losses on common stocks amounted to 
$456 and $0, respectively, for the year ended December 31, 1996 compared 
to $47 and $532, respectively, for the year ended December 31, 1995.  
Net realized investment losses totalled $7,574 during 1996 as compared 
to net realized investment gains of $712 for 1995. The realized gains in 
1996 were primarily the result of sales of municipal bonds and common 
stocks, offset by realized losses on sales of Government National 
Mortgage Association ("GNMA") mortgage backed bonds, municipal bonds and 
preferred stocks.  Also included were realized losses on mortgage 
activity of $317 in 1996 compared to $215 in 1995.

	Gross unrealized gains and losses on fixed maturity investments 
totalled $17,890 and $1,699, respectively, at December 31, 1996 compared 
to $18,626 and $4,657, respectively, at December 31, 1995.  The 
unrealized gain on fixed maturities remained fairly consistent with 1995 
as a result of stable interest rates during 1996.  Gross unrealized 
gains and losses on preferred stocks totaled $2,034 and $2,837, 
respectively, at December 31, 1996 compared to $1,629 and $2,005, 
respectively, at December 31, 1995.  Gross unrealized gains and losses 
on common stocks totaled $20,305 and $187, respectively, at December 31, 
1996 compared to $11,801 and $3, respectively, at December 31, 1995.  
The increase in unrealized gain on equity investments was primarily due 
to the increase in equity investments, as described earlier, and the 
performance of the stock market during 1996 favorably impacting the 
market values of common stocks.

	Losses and loss adjustment expenses ("LAE") incurred as a 
percentage of insurance premiums earned ("loss and LAE ratio") was 70.9% 
in 1996 compared to 62.0% in 1995.  The ratio of net incurred losses, 
excluding LAE, to premiums earned ("pure loss ratio") on personal 
automobile increased to 63.9% in 1996 compared to 56.6% in 1995.  This 
increase was primarily due to the adverse impact of severe weather 
conditions experienced in the northeast during the first half of 1996, 
adverse loss experience on personal automobile business assumed from 
C.A.R. and a decrease in the personal automobile average earned premium 
per exposure of approximately 7.9%.  This decrease was due to the 
effects of affinity group marketing programs, safe driver rate 
deviations and the 1996 state mandated average rate decrease of 4.5%.  
These factors were offset by improved loss development during 1996.  The 
commercial automobile pure loss ratio decreased to 46.7% in 1996 
compared to 57.4% in 1995.  This decrease was primarily due to improved 
loss experience on commercial automobile business assumed from C.A.R. 
and better loss development on voluntary business.  For homeowners, the 
pure loss ratio increased to 72.4% in 1996 compared to 49.6% in 1995.  
This increase was due primarily to the severe weather during the first 
half of 1996, compared to the mild weather experienced during 1995.











13
<PAGE



	Policy acquisition costs increased by 8.6% in 1996, compared to 
5.9% in 1995.  This increase was primarily due to the increase in net 
premiums written as described previously, offset by a decrease of $9.5 
million in the agents profit sharing compensation resulting from the 
impact of adverse weather conditions on the Company's loss and LAE ratio 
and the impact of affinity group marketing service fee income.  Agents' 
profit sharing compensation is based, in part, on the underwriting 
profits of agency business written with the Company.  As a percentage of 
net premiums written, underwriting expenses (on a statutory basis) were 
27.1% for 1996, compared to 29.0% in 1995.  This decrease was primarily 
attributable to the reasons as mentioned above.

	The Company's effective tax rate was 19.6% and 26.4% for the years 
ended December 31, 1996 and 1995, respectively.  In both years the 
effective rate was lower than the statutory rate of 35% primarily due to 
tax-exempt interest income.  The lower 1996 effective tax rate was 
primarily due to tax-exempt interest income comprising a higher 
percentage of net income before taxes, the dividends received deduction 
and lower capital gains in 1996 versus 1995.

	Net earnings decreased $36,237 to $73,964 or 32.9%, during 1996, 
as compared to net earnings of $110,201 in 1995, 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 20 and the Consolidated 
Statements of Cash Flows on pages 24 and 25.  Stockholders' equity 
increased by $62,757, or 10.7%, in 1997 as compared to 1996.  Growth 
stemmed from $96,215 in net earnings combined with the change in net 
unrealized gains, net of income taxes, on fixed maturities and preferred 
and common stocks of $4,153, partially offset by dividends paid to 
stockholders of $37,124 and Treasury Stock purchased of $487.  Total 
assets at December 31, 1997 increased by $77,954, or 4.6%, to $1,754,753 
as compared to total assets of $1,676,799 at December 31, 1996.  The 
majority of this growth was reflected in an increase of invested assets 
of $75,024, or 6.4%, an increase in premiums receivable of $11,634, or 
7.4%, offset by a decrease in all other assets of $8,704 or 2.5% as 
compared to December 31, 1996.  The increase in invested assets was 
primarily attributable to the Company's growth during 1997.  The change 
in the mix of the Company's investments is attributable to the 
previously announced change in investment strategy.  The Company is 
seeking greater flexibility to provide the potential for enhanced future 
capital appreciation.  The Company's strategy is to acquire equity 
investments, which can include potential acquisitions, which forgo 
current investment yield in favor of potentially higher yielding capital 
appreciation.  As a result, the Company is carrying $238,888, or 19.2%, 
of the investment portfolio in cash and short-term investments which is 
an increase of $98,353, or 70.0%, as compared to December 31, 1996.  The 
increase in premiums receivable was primarily attributable to the 
increase in personal automobile business.

	The Company's fixed maturity portfolio is comprised of GNMAs 
(30.7%) and municipal bonds (69.3%).  Of the Company's bonds, 100.0% are 
rated in either of the two highest quality categories provided by the 
NAIC.

	The Company's liabilities totalled $1,104,957 at December 31, 1997 
as compared to $1,089,760 at December 31, 1996.  Loss and loss 
adjustment expense reserves comprised 58.8% of the Company's liabilities 
at December 31, 1997 compared with 60.8% at December 31, 1996.  Unearned 
premiums comprised 34.4% of the Company's liabilities at December 31, 
1997 compared with 33.8% at December 31, 1996.  All other liabilities 
comprised 6.8% of the Company's liabilities at December 31, 1997 
compared with 5.4% at December 31, 1996.  The $15,197, or 1.4%, increase 
in liabilities was primarily due to a decrease of $13,359 or 2.0% , in 
losses and loss adjustment expense reserves and $11,851 or 46.1% in 
contingent commissions, offset by increases of $11,608, or 3.2%, in 
unearned premiums, $11,705 or 266.4% to income tax liabilities and 
$5,243 or 9.6%, to all other liabilities.

	The primary sources of the Company's liquidity are funds generated 
from insurance premiums, premium finance fees, net investment income and 
the maturing and sales of investments as reflected in the Consolidated 
Statements of Cash Flows on pages 24 and 25.



14
<PAGE



	The Company's operating activities provided cash of $80,006 in 
1997 as compared to $118,252 in 1996.  These cash flows were primarily 
impacted by the fact that while premiums collected increased 7.7% in 
1997 as compared to 15.9% in 1996, losses and LAE paid increased 20.4% 
in 1997 as compared to 30.0% in 1996 and policy acquisition costs paid 
decreased 1.4% in 1997 as compared to an increase of 21.6% in 1996.  The 
increases were primarily the result of a decrease in the personal 
automobile premium rate.  The average rate decrease was due to the 
effects of group marketing programs, safe driver rate deviations and the 
1997 state mandated rate decrease of 6.2%.  Net loss payments in the 
direct personal automobile lines of business increased approximately 
21.5% or $71,300 which were offset by a decrease in payments for other 
than automobile lines of business of approximately $16,200, compared to 
1996.  The decrease in other than automobile loss payments was primarily 
the result of more normal weather in 1997 versus the severe weather 
experienced in 1996.  The increase in automobile loss payments was 
primarily attributable to three factors:  increased payments for 
collision coverages; increased payments for bodily injury claims and 
increased payments for property damage liability claims.  Bodily injury 
payments were higher primarily due to increased business writings 
coupled with initiatives in the claims department to accelerate the 
claims settlement process in an effort to reduce the overall cost of 
bodily injury claims in the long run, as well as to reduce the overall 
number of open bodily injury claims.

	The cash flows used in investing activities were primarily the 
result of proceeds from the maturities and sales of fixed maturities 
offset by the purchases of fixed maturities, preferred and common stocks 
and short-term investments.  Investing and financing activities were 
funded by the cash provided by operating activities.

	Cash flows used in financing activities totalled $37,611 in 1997 
compared to $45,115 in 1996.  The decease was primarily attributable to 
a decrease in Treasury Stock purchases of $15,255 offset by an increase 
in dividends paid to stockholders of $7,751.

	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) of total 
investments at December 31, 1997 was $1,242,695.  At December 31, 1997, 
the Company held cash and cash equivalents of $25,446 and short-term 
investments of $213,442.  These funds provide sufficient liquidity for 
the payment of claims and other short-term cash needs.  The Company 
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 must file a report with the 
Commissioner.  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 1997, 1996 and 
1995.

	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.

	The Company continues to monitor acquisition opportunities 
consistent with a long-term growth strategy to expand outside 
Massachusetts through acquisitions of smaller automobile insurance 
companies that are in need of capital, have established management in 
place and present significant growth opportunities in their market 
areas.  On August 31, 1995, the Company completed the acquisition of 
Western Pioneer Insurance Company, a personal automobile insurer, 
located in Pleasanton, California.



15
<PAGE



	The Company's long-term growth objective is to expand its writings 
outside of Massachusetts.  In continued pursuit of this objective, the 
Company became licensed in the states of Connecticut and Rhode Island 
during 1996 and in the states of Vermont and New Hampshire in 1997.  
License approval in the state of Maine was received in February 1998.  
Concurrent with the filings submitted for these licenses, the Company 
entered into an agreement with PMSC and purchased software which allows 
for the development of internal operating systems which will enable the 
Company to process policies in states outside of Massachusetts.  To 
facilitate this development and, at the same time, address the year 2000 
processing issue facing computer system users, the Company established 
the Team 2000 and Century Change projects which are corporate-wide 
efforts to prepare the Company's systems for the next millennium.  These 
projects involve internal staff costs as well as consulting expenses to 
prepare the systems for the year 2000.  Costs to date for the Century 
Change project have been approximately $1.1 million (all of which relate 
to 1997).  Administration, programming, testing and implementation of 
system applications related to Century Change are expected to cost an 
additional $6 million over the next 24 months.  Approximately $4 million 
is expected to be expensed during 1998 with the remainder through the 
end of 1999.

	The Company is utilizing both internal and external resources on 
the Century Change Project.  The Company has a formal plan to address 
the Century Change issue and is progressing in accordance with that 
plan.  Programming changes dealing with policy issuance and maintenance 
of same is expected to be completed by year-end 1998.  Other internal 
changes are scheduled to be completed in accordance with specified 
delivery dates as outlined in the plan.  The Company's plan has been 
designed to, and is proceeding so as to, avoid any adverse business 
production issues.

	The Company has reviewed the Century Change status of vendors who 
perform outside processing for the Company or whose software the Company 
uses for internal processing.  This review has determined that the 
related software used by or provided by these vendors either is 
currently century ready or will be ready without any adverse impact on 
the Company.

	Upon completion of the Century Change project, the Company expects 
to focus its efforts on the Team 2000 project which will eventually 
replace the Company's existing internal computer systems for 
Massachusetts business utilizing software purchased from PMSC.  Costs to 
date for the Team 2000 effort have been approximately $28 million.  
Costs applicable to 1997 were approximately $17 million, of which $15.6 
million was expensed during the year.  Total Team 2000 project costs 
over the next 5 to 7 years have been estimated at approximately 
$60,000,000 including funds expended to date.  This amount includes the 
purchase of a main frame computer, license fees and the costs associated 
with programming, implementation and training.  Systems enabling the 
Company to process policies in Rhode Island have been in place since 
January 1998.  Other states will be brought on-line 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 1.43 to 1.00 and 1.53 to 1.00 
for the years ended December 31, 1997 and 1996, respectively.

Recent Accounting Developments

	In February 1997, the Financial Accounting Standards Board 
("FASB") issued Statement of Financial Accounting Standards No. 128, 
"Earnings Per Share".  This statement is effective for financial 
statements issued for periods ending after December 15, 1997, (including 
interim periods) with earlier application not permitted.  The statement 
specifies the computation, presentation and disclosure requirements for 
earnings per share.  The adoption of this statement has not had a 
material impact on the Consolidated Financial Statements.








16
<PAGE



	In June 1997, the FASB issued Statement of Financial Accounting 
Standards No. 130, "Reporting Comprehensive Income" ("FAS 130") 
effective for financial statements issued for periods beginning after 
December 15, 1997.  FAS 130 requires that a public company report 
changes in equity during a period except those resulting from investment 
by owners and distributions by owners.  The financial information to be 
reported includes foreign currency transactions, minimum pension 
liability adjustments and unrealized gains and losses on certain 
investments in debt and equity securities (i.e. available for sale 
securities).  The Company believes that the adoption of this statement 
will not have a material impact on the consolidated financial 
statements.

	In June 1997, the FASB issued Statement of Financial Accounting 
Standards No. 131, "Disclosures about Segments of an Enterprise and 
Related Information" ("FAS 131"), effective for financial statements 
issued for periods beginning after December 15, 1997.  FAS 131 requires 
that a public company report financial and descriptive information about 
its reportable operating segments pursuant to criteria that differ from 
current accounting practice.  The financial information to be reported 
includes segment profit or loss, certain revenue and expense items and 
segment assets and reconciliations to corresponding amounts in the 
general purpose financial statements.  The Company believes that the 
adoption of this statement will not have a material impact on the 
Consolidated Financial Statements.


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.  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 will also have an impact upon the Company, primarily through 
the policyholder's election to decrease non-compulsory coverages 
afforded by the policy and decreased 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 of the Company's 
Common Stock for 1997 and 1996 were as follows:
<TABLE>

		             1997            	                1996         
<CAPTION>
					     High     Low     Close		 High     
Low     Close
      <S>                         <C>     <C>      <C>            <C>     
<C>      <C>
	First Quarter...........    $29     $22-7/8  $23-1/4        $20-
3/4 $17-3/4  $19-3/4
	Second Quarter..........     24-3/4  21-3/8   24-5/8         22-
1/2  18-1/2   20-7/8
	Third Quarter...........     33-3/8  23-7/8   30-7/8         22-
1/4  20-1/2   22    
	Fourth Quarter..........     36      30       32-5/8         25-
3/4  22       25-1/4
</TABLE>

	As of March 1, 1998, there were 1,375 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.").




17
<PAGE




	The Board of Directors of the Company voted to declare four 
quarterly dividends to stockholders of record totaling $1.03 per share 
and $0.81 per share in 1997 and 1996, respectively.  On May 30, 1997, 
the Board voted to increase the quarterly stockholder dividend from 
$0.25 to $0.26 per share to stockholders of record as of June 6, 1997.  
Prior to that declaration, the Company had paid quarterly dividends of 
$0.25 per share dating back to May 17, 1996 when the Board voted to 
increase the dividend from $0.06 to $0.25 per share.

	Treasury Stock purchased under the stock buyback program increased 
by 20,000 shares during 1997 to 1,957,348 shares at December 31, 1997.  
The stock buyback program, authorized by the Board in May 1995, enables 
the Company to purchase up to three million shares of the Company's 
common stock.  The program is approximately two-thirds complete.




















































18
<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 
generally accepted accounting principles 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.  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 1997 consolidated financial statements were audited by the 
Company's independent auditors, Ernst & Young LLP, in accordance with 
generally accepted auditing standards.  Management has made available to 
Ernst & Young LLP, all the Company's financial records and related data, 
as well as the minutes of stockholders' and directors' meetings.  
Furthermore, management believes that all representations made to Ernst 
& Young LLP, during its audit were valid and appropriate.

































19
<PAGE



REPORT OF INDEPENDENT AUDITORS


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

	We have audited the accompanying consolidated balance sheet of The 
Commerce Group, Inc. and Subsidiaries as of December 31, 1997, and the 
related consolidated statements of earnings, stockholders' equity and 
cash flows for the year then ended.  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 audit.  
The accompanying consolidated financial statements of the Company for 
each of the two years in the period ended December 31, 1996, were 
audited by other auditors whose report dated January 24, 1997, expressed 
an unqualified opinion on those statements.

	We conducted our audit in accordance with generally accepted 
auditing standards.  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 our audit provides a reasonable basis for our 
opinion.

	In our opinion, the 1997 financial statements referred to above 
present fairly, in all material respects, the consolidated financial 
position of The Commerce Group, Inc. and Subsidiaries as of December 31, 
1997, and the consolidated results of their operations and their cash 
flows for the year ended in conformity with generally accepted 
accounting principles.



										ERNST & 
YOUNG LLP




Boston, Massachusetts
January 23, 1998


























20
<PAGE>


THE COMMERCE GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
December 31,
(Thousands of Dollars Except Per Share Data)
<TABLE>
												  
1997	  1996
ASSETS
<CAPTION>
<S>                                                                   
<C>         <C>
Investments (notes A2, A3, A4 and B)
  Fixed maturities, at market (cost: $566,784 in 1997 and $700,511
   in 1996).......................................................... $  
590,597  $  716,702
  Preferred stocks, at market (cost: $148,135 in 1997 and $148,481
   in 1996)..........................................................    
148,499     147,680
  Common stocks, at market (cost: $160,371 in 1997 and $65,925 in 
   1996).............................................................    
178,089      86,041
  Mortgage loans on real estate and collateral notes receivable 
   (less allowance for possible loan losses of $2,812 in 1997
   and $2,760 in 1996)...............................................     
82,839      74,586
  Short-term investments.............................................    
213,442         -
  Cash and cash equivalents..........................................     
25,446     140,535
  Other investments..................................................      
3,783       2,127
      Total investments..............................................  
1,242,695   1,167,671

Accrued investment income............................................     
12,237      12,819
Premiums receivable (less allowance for doubtful receivables of
  $1,451 in 1997 and $1,500 in 1996).................................    
169,469     157,835
Deferred policy acquisition costs (notes A5 and C)...................     
85,264      82,968
Property and equipment, net of accumulated depreciation
  (notes A6 and D)...................................................     
36,280      32,100
Residual market receivable (note F)
  Losses and loss adjustment expenses................................    
129,137     145,726
  Unearned premiums..................................................     
51,662      49,487
Due from reinsurers (note F).........................................     
18,170      19,659
Other assets.........................................................      
9,839       8,534
      Total assets................................................... 
$1,754,753  $1,676,799

LIABILITIES AND STOCKHOLDERS' EQUITY

Liabilities
  Losses and loss adjustment expenses (notes A7, E and F)............ $  
649,473  $  662,832
  Unearned premiums (note A8)........................................    
379,599     367,991
  Current income taxes (notes A9 and G)..............................      
2,656         171
  Deferred income taxes (notes A9 and G).............................     
13,443       4,223
  Deferred income (notes A10 and F)..................................      
7,271       7,974
  Contingent commissions accrued.....................................     
13,861      25,712
  Payable to securities broker.......................................     
11,500         -
  Other liabilities and accrued expenses.............................     
27,154      20,857
      Total liabilities..............................................  
1,104,957   1,089,760

Stockholders' Equity (notes B, J, K and L)
  Preferred stock, authorized 5,000,000 shares at $1.00 par value;
   none issued in 1997 and 1996......................................        
-           -  
  Common stock, authorized 100,000,000 shares at $.50 par value;
   issued and outstanding 38,000,000 shares in 1997 and 1996.........     
19,000      19,000
  Paid-in capital....................................................     
29,621      29,621
  Net unrealized gains on fixed maturities and stocks, 
   net of income taxes of $14,663 in 1997 and $12,427 in 1996........     
27,232      23,079
  Retained earnings..................................................    
612,630     553,539
                                                                         
688,483     625,239
  Treasury Stock, 1,957,348 shares in 1997 and 1,937,348 shares in
   1996, at cost (note A12)..........................................    
(38,687)    (38,200)
      Total stockholders' equity.....................................    
649,796     587,039

      Total liabilities and stockholders' equity..................... 
$1,754,753  $1,676,799
</TABLE>
The accompanying notes are an integral part of these consolidated 
financial statements.

21
<PAGE


THE COMMERCE GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF EARNINGS
For the years ended December 31,
(Thousands of Dollars Except Per Share Data)
<TABLE>
										 1997		 
1996 	 1995
<CAPTION>
<S>                                                      <C>         <C>         
<C>
Revenues
  Earned premiums (notes A8 and F).....................  $  730,497  $  
668,716  $  592,590
  Net investment income (note B).......................      80,794      
77,402      71,313
  Premium finance fees.................................       7,074       
9,713      19,420
  Net realized investment gains (losses) (note B)......      22,770      
(7,574)        712
       Total revenues..................................     841,135     
748,257     684,035

Expenses
  Losses and loss adjustment expenses 
   (notes A7, E and F).................................     526,127     
475,231     367,552
  Policy acquisition costs (notes A5 and C)............     187,491     
181,013     166,741
       Total expenses..................................     713,618     
656,244     534,293

       Earnings before income taxes....................     127,517      
92,013     149,742

Income taxes (notes A9 and G)..........................      31,302      
18,049      39,541

       NET EARNINGS....................................  $   96,215  $   
73,964  $  110,201

       BASIC AND DILUTED NET EARNINGS PER COMMON SHARE
        (note A11).....................................  $     2.67  $     
2.04  $     2.93

       CASH DIVIDENDS PAID PER SHARE...................  $     1.03  $     
0.81  $     0.23

       WEIGHTED AVERAGE NUMBER OF COMMON
        SHARES OUTSTANDING.............................  36,044,679  
36,311,887  37,632,236
</TABLE>



























The accompanying notes are an integral part of these consolidated 
financial statements.

22
<PAGE>



THE COMMERCE GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the years ended December 31,
(Thousands of Dollars)

<TABLE>
					                      Net
					 Common  Paid-in   Unrealized     Retained   
Treasury
					 Stock   Capital  Gains/(Losses)  Earnings    
Stock     Total
<CAPTION>
<S>                           <C>      <C>        <C>           <C>       
<C>       <C>
Balance January 1, 1995...... $19,000  $29,621    $(42,414)     $407,382  
$    -    $413,589

 Net earnings................                                    110,201             
110,201
 Change in unrealized gains
  (losses) net of taxes......                       58,918                            
58,918
 Stockholder dividends.......                                     
(8,635)             (8,635)
 Treasury stock purchased....                                              
(24,359)  (24,359)

Balance December 31, 1995....  19,000   29,621      16,504       508,948   
(24,359)  549,714

 Net earnings................                                     73,964              
73,964
 Change in unrealized gains
  net of taxes...............                        6,575                             
6,575
 Stockholder dividends.......                                    
(29,373)            (29,373)
 Treasury stock purchased....                                              
(13,841)  (13,841)

Balance December 31, 1996....  19,000   29,621      23,079       553,539   
(38,200)  587,039

 Net earnings................                                     96,215              
96,215
 Change in unrealized gains
  net of taxes...............                        4,153                             
4,153
 Stockholder dividends.......                                    
(37,124)            (37,124)
 Treasury stock purchased....                                                 
(487)     (487)

Balance December 31, 1997.... $19,000  $29,621    $ 27,232      $612,630  
$(38,687) $649,796
</TABLE>
























The accompanying notes are an integral part of these consolidated 
financial statements.

23
<PAGE


THE COMMERCE GROUP, INC. AND SUBSIDIARIES

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

<TABLE>
                                                              1997        
1996        1995


<CAPTION>
<S>                                                       <C>         
<C>         <C>
Cash flows from operating activities
  Premiums collected..................................... $ 727,530   $ 
675,683   $ 583,230
  Net investment income received.........................    81,376      
79,269      70,067
  Premium finance fees received..........................     7,074       
9,713      19,420 
  Losses and loss adjustment expenses paid...............  (516,130)   
(428,541)   (329,728)
  Policy acquisition costs paid..........................  (198,011)   
(200,922)   (165,281)
  Federal income tax payments............................   (21,833)    
(16,950)    (43,527)
      Net cash provided by operating activities..........    80,006     
118,252     134,181

Cash flows from investing activities
  Proceeds from maturity of fixed maturities.............   108,592     
170,646      28,479
  Proceeds from sale of fixed maturities.................   124,653     
122,431      72,287
  Proceeds from sale of equity securities................   224,059      
11,326      14,784
  Purchase of fixed maturities...........................   (98,098)   
(200,113)   (100,689)
  Purchase of equity securities..........................  (296,714)    
(85,480)    (50,418)
  Purchase of other investments..........................    (1,752)       
(700)       (800)
  Net increase in short-term investments, net of 
    payable to securities broker.........................  (201,942)        
-           -  
  Payments received on mortgage loans and collateral
    notes receivable.....................................    11,386       
8,311       9,892
  Mortgage loans and collateral notes originated.........   (19,816)     
(7,446)    (28,667)
  Purchase of property and equipment.....................    (8,133)     
(4,477)     (3,664)
  Other proceeds from investing activities...............       281         
235       2,888
      Net cash provided by (used in) investing activities  (157,484)     
14,733     (55,908)

Cash flows from financing activities
  Dividends paid to stockholders.........................   (37,124)    
(29,373)     (8,635)
  Purchase of treasury stock.............................      (487)    
(15,742)    (22,458)
      Net cash used in financing activities..............   (37,611)    
(45,115)    (31,093)

Increase (decrease) in cash and cash equivalents.........  (115,089)     
87,870      47,180
Cash and cash equivalents at beginning of year...........   140,535      
52,665       5,485
Cash and cash equivalents at end of year................. $  25,446   $ 
140,535   $  52,665
</TABLE>

















The accompanying notes are an integral part of these consolidated 
financial statements.

24
<PAGE


THE COMMERCE GROUP, INC. AND SUBSIDIARIES

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

<TABLE>
                                                              1997        
1996        1995


<CAPTION>
<S>                                                       <C>         
<C>         <C>
Cash flows from operating activities
  Net Earnings........................................... $  96,215   $  
73,964   $ 110,201
  Adjustments to reconcile net earnings to net cash
   provided by operating activities:
    Premiums receivable..................................   (11,634)    
(30,788)    (24,615)
    Deferred policy acquisition costs....................    (2,296)    
(15,808)     (8,094)
    Residual market receivable...........................    14,414       
4,911      14,694 
    Due to/from reinsurers...............................     1,489       
2,238      (5,005)

  Losses and loss adjustment expenses....................   (13,359)     
36,803      26,527
  Unearned premiums......................................    11,608      
37,537      15,735
  Current income taxes...................................     2,485      
(1,009)     (8,637)
  Deferred income taxes..................................     6,984       
2,098       4,650 
  Deferred income........................................      (703)       
(980)     (1,497)
  Contingent commissions.................................   (11,851)     
(6,838)      8,100 
  Other assets, liabilities and accrued expenses.........     4,992       
3,017       1,755
  Net realized investment (gains) losses.................   (22,770)      
7,574        (712)
  Other - net............................................     4,432       
5,533       1,079

       Net cash provided by operating activities......... $  80,006   $ 
118,252   $ 134,181
</TABLE>





























The accompanying notes are an integral part of these consolidated 
financial statements.

25
<PAGE



THE COMMERCE GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996 and 1995
(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 generally accepted 
accounting principles ("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.  Western 
Pioneer Insurance Company ("Western Pioneer") is a wholly-owned 
subsidiary of Commerce.  All intercompany transactions and balances have 
been eliminated in consolidation. Certain prior year account balances 
have been reclassified to conform to 1997 presentation.

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

	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 counterparty may default on an obligation to the Company.  Credit 
risk is a consequence of carrying investment positions. The financial 
instruments that potentially subject the Company to credit risk consist 
primarily of cash and cash equivalents, premium receivables, investments 
and mortgage loans on real estate.  Concentrations of credit risk with 
respect to premiums receivable result from the fact that the Company's 
policyholders are concentrated primarily in one geographic area, as the 
Company, the largest writer of personal automobile insurance in the 
state of Massachusetts, writes primarily in Massachusetts.  To manage 
credit risk, the Company focuses on higher quality fixed-income 
securities, reviews the credit strength of all companies which it 
invests in, limits its exposure in any one investment and monitors the 
portfolio quality, taking into account credit ratings assigned by 
recognized statistical rating organizations.

	Investments in fixed maturities, which include taxable and non-
taxable bonds, and investments in common and non-redeemable preferred 
stocks, are carried at fair market value and are classified as available 
for sale.  Unrealized investment gains and losses on common and non-
redeemable preferred stocks and fixed maturities, to the extent that 
there is no permanent impairment of value, are credited or charged to a 
separate component of stockholders' equity until realized, net of any 
tax effect.  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 non-redeemable preferred stocks 
is 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 7% in fixed maturities of any one 
state or political subdivision.







26
<PAGE


THE COMMERCE GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996 and 1995
(Thousands of Dollars)

NOTE A-Summary of Significant Accounting Policies - (continued)

	The Company originates and holds mortgage loans on real estate 
primarily 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 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 nonaccrual status, all unpaid interest previously 
accrued is reversed against current period earnings.


3.   Short-Term Investments

	Short-term investments which consist of Commercial Paper, Auction 
Rate Preferred Stocks and Variable Rate Municipal Bonds, are carried at 
cost, which approximates market value.


4.   Cash and Cash Equivalents

	Cash and cash equivalents include cash currently on hand to cover 
operating expenses.  In 1997, the Company held $17,051 in a U.S. 
Government Repurchase Agreement at The Bank of New York.  In 1996, the 
Company held $118,015 in a U.S. Government Repurchase Agreement at The 
First National Bank of Boston.  When the Company enters into a 
repurchase agreement through its custodian, it receives delivery of the 
underlying collateral.  The amount of collateral, at the time of 
purchase and each subsequent business day, is required to be maintained 
at such a level that market value is equal to 102% of the resale price.

5.   Deferred Policy Acquisition Costs

	Policy acquisition costs relating to unearned premiums, consisting 
of commissions, premium taxes and other underwriting expenses incurred 
at the policy issuance, 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 1997, 1996 and 
1995. In determining whether a premium deficiency exists, the Company 
considers anticipated investment income on unearned premiums.




27
<PAGE>


THE COMMERCE GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996 and 1995
(Thousands of Dollars)

NOTE A-Summary of Significant Accounting Policies - (continued)

6.   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:
<TABLE>
											 
Percent
Asset Classification						Per 
Annum
<CAPTION>
<S>                                                     
<C>
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
</TABLE>
	Maintenance and repairs are charged to operations; betterments are 
capitalized.  The cost of property sold or otherwise disposed of and the 
accumulated depreciation thereon are eliminated from the related 
property and accumulated depreciation accounts and any resulting gain or 
loss is credited or charged to income.

7.   Losses and Loss Adjustment Expenses

	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.  Assumed losses and LAE are recorded as reported by the 
ceding organization with additional adjustments for IBNR.  The liability 
for losses and LAE is intended to cover the ultimate net cost of all 
losses and loss adjustment expenses 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.

8.   Premiums

	Insurance premiums are recognized as income ratably over the terms 
of the policies.  Unearned premiums are determined by prorating policy 
premiums on a daily basis over the terms of the policies.  A significant 
portion of the Company's premiums written is derived through the 
American Automobile Association Clubs of Massachusetts ("AAA clubs") 
group marketing program.  Of the Company's total direct premiums 
written, the portion attributable to the AAA group business was $422,074 
or 55% in 1997 as compared to $344,297 or 47% in 1996.  Of these 
amounts, 10% and 9% were written through insurance agencies owned by the 
AAA clubs and 90% and 91% were written through the Company's network of 
independent agents in 1997 and 1996, respectively.

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.

10.  Deferred Income

	Income consisting of group marketing service fees and 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 note F).


28
<PAGE


THE COMMERCE GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996 and 1995
(Thousands of Dollars)

NOTE A-Summary of Significant Accounting Policies - (continued)

11.  Net Earnings Per Common Share

	In 1997, the Financial Accounting Standards Board issued Statement 
No. 128, Earnings per Share.  Statement 128 replaced the calculation of 
primary and fully diluted earnings per share with basic and diluted 
earnings per share.  The adoption of this new standard had no effect on 
the calculation of earnings per share for any period presented in these 
financial statements.

	Net earnings per common share is computed by dividing net earnings 
by the weighted average number of common shares outstanding.  The 
weighted average number of common shares outstanding for the years ended 
December 31, 1997, 1996 and 1995 was 36,044,679, 36,311,887 and 
37,632,236, respectively.

12.  Treasury Stock

	On May 19, 1995, the Board of Directors of the Company, announced 
the approval of a stock buyback program of up to three million shares.  
Through December 31, 1997, the Company purchased 1,957,348 shares of 
Treasury Stock under this program.


NOTE B-Investments and Investment Income

1.   Fixed Maturities

	The amortized cost and estimated fair market values of investments 
in fixed maturities are as follows:
<TABLE>
								        Gross         
Gross       Estimated
						     Amortized    Unrealized    
Unrealized   Fair Market
						        Cost         Gains        
Losses        Value  	
<CAPTION>
<S>                                      <C>           <C>           <C>          
<C>
At December 31, 1997:
  GNMA mortgage-backed bonds...........  $175,788      $  5,292      $    
(11)    $181,069
  Obligations of states and 
   political subdivisions..............   390,996        18,898          
(366)     409,528
       Totals..........................  $566,784      $ 24,190      $   
(377)    $590,597

At December 31, 1996:
  GNMA mortgage-backed bonds...........  $223,590      $  2,589      $   
(627)    $225,552
  Obligations of states and 
   political subdivisions..............   476,921        15,301        
(1,072)     491,150
       Totals..........................  $700,511      $ 17,890      $ 
(1,699)    $716,702
</TABLE>













29
<PAGE>


THE COMMERCE GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996 and 1995
(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>
									 Proceeds	    
Gross	     Gross
									   From	   
Realized	    Realized
									  Sales  	    
Gains  	     Losses
<CAPTION>
<S>                                                    <C>           <C>          
<C>
For the year ended December 31, 1997:
  GNMA mortgage-backed bonds.........................  $    -        $    
-       $    -  
  Obligations of states and political subdivisions...   124,653         
3,994         (390)
       Totals........................................  $124,653      $  
3,994     $   (390)

For the year ended December 31, 1996:
  GNMA mortgage-backed bonds.........................  $    -        $    
-       $    -  
  Obligations of states and political subdivisions...   122,431           
367       (3,685)
       Totals........................................  $122,431      $    
367     $ (3,685)

For the year ended December 31, 1995:
  GNMA mortgage-backed bonds.........................  $    -        $    
-       $    -  
  Obligations of states and political subdivisions...    72,287         
2,340         (695)
       Totals........................................  $ 72,287      $  
2,340     $   (695)
</TABLE>


	The amortized cost and approximate fair market value of fixed 
maturities at December 31, 1997 and 1996, by contractual maturity, are 
as follows:
<TABLE>
								          1997         	       
1996         	
								                 Fair                 
Fair
								    Amortized   Market   
Amortized   Market
								      Cost       Value      
Cost      Value 	
<CAPTION>
<S>                                                <C>        <C>        
<C>       <C>
Obligations of states and political subdivisions:
Due in one year or less..........................  $    -     $    -     
$    508  $    517
Due after one year through five years............     2,083      2,200         
94       102
Due after five years through ten years...........     1,321      1,324      
1,669     1,681
Due after ten years..............................   387,592    406,004    
474,648   488,847
								    390,996    409,528    
476,919   491,147

GNMA mortgage-backed bonds.......................   175,788    181,069    
223,592   225,555
Total fixed maturities...........................  $566,784   $590,597   
$700,511  $716,702
</TABLE>
	Expected maturities may differ from contractual maturities because 
issuers may have the right to call or prepay obligations.
















30
<PAGE


THE COMMERCE GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996 and 1995
(Thousands of Dollars)

NOTE B-Investments and Investment Income - (continued)

2. Common Stocks

	The cost and approximate fair market value of common stocks at 
December 31, 1997 and 1996, are as follows:
<TABLE>
								          1997       	         
1996      	
								                Fair	
	        Fair
								               Market	
	       Market
								     Cost       Value 	   
Cost       Value 	

<CAPTION>
<S>                                                <C>        <C>        
<C>       <C>
Preferred stock mutual funds................	   $115,943   $119,439   
$ 28,553  $  29,087
Common stocks...............................	     44,428     58,650     
37,372     56,954
								   $160,371   $178,089   
$ 65,925  $  86,041
</TABLE>
3. Mortgage Loans on Real Estate and Collateral Notes Receivable

	At December 31, 1997 and 1996, mortgage loans on real estate and 
collateral notes receivable consisted of the following:
<TABLE>
										
	December 31,	
										  1997	
	1996
<CAPTION>
                  <S>                                       <C>             
<C>
                  Residential (1st Mortgages)............   $58,430         
$58,263
                  Residential (2nd Mortgages)............       523           
1,077
                  Commercial (1st Mortgages).............    14,755          
15,805
                  Commercial (2nd Mortgages).............       172             
196
                                                             73,880          
75,341
                  Collateral notes receivable............    11,771           
2,005
                                                             85,651          
77,346
                  Allowance for possible loan losses.....    (2,812)         
(2,760)
                    Mortgage loans on real estate and
                       collateral notes receivable.......   $82,839         
$74,586
</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 fair value of 
mortgage loans on real estate and collateral notes receivable at 
December 31, 1997 and 1996, prior to the allowance for possible loan 
losses, was $87,867 and $78,920, respectively, which was estimated by 
discounting the future cash flows of the mortgages.

	At December 31, 1997 and 1996, mortgage loans which were on 
nonaccrual status were 
$2,021 and $2,095, respectively.  The reduction in interest income 
associated with nonaccrual loans was $207, $152 and $287 for the years 
ended December 31, 1997, 1996 and 1995, respectively.

	The Company originates and services residential and commercial 
mortgages primarily in Massachusetts and generally its exposure is 80% 
or less of the appraised value of any collateralized real property.  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.


31
<PAGE>


THE COMMERCE GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996 and 1995
(Thousands of Dollars)

NOTE B-Investments and Investment Income - (continued)

	A summary of the changes in the allowance for possible loan losses 
follows:
<TABLE>
                                                                    Year 
ended December 31,
                                                                       
1997          1996
<CAPTION>
            <S>                                                     <C>           
<C>
            Balance, beginning of year........................      $  
2,760      $  3,173
              Increase (decrease) in provision for possible
                loan losses...................................            
52          (413)
              Loans charged off...............................           
-             -   	
            Balance, end of year..............................      $  
2,812      $  2,760
</TABLE>

	The following table describes mortgage principal balances by 
maturity and discloses over 90 days past due and foreclosure 
information:
<TABLE>
                                                                       
1997          1996
<CAPTION>
            <S>                                                     <C>           
<C>
            Fixed Rate Mortgages Maturing:
              One year or less................................      $      
4      $    632
              More than one year to five years................         
2,062         2,248
              More than five years to ten years...............         
4,608         4,700
              Over ten years..................................        
46,868        42,902
                   Total Fixed Mortgages......................      $ 
53,542      $ 50,482

            Adjustable Rate Mortgages Maturing:
              One year or less................................      $    
-        $    -  
              More than one year to five years................           
-              43
              More than five years to ten years...............           
498           569
              Over ten years..................................        
19,840        24,247
                   Total Adjustable Mortgages.................      $ 
20,338      $ 24,859

            Past due over 90 days.............................      $  
2,021      $  2,095

            Mortgages in Foreclosure..........................      $  
1,459      $    938
</TABLE>

4. Net Investment Income

The components of net investment income were as follows:
<TABLE>
										Year ended 
December 31,       	
									   1997	     
1996	       1995
<CAPTION>
      <S>                                             <C>           <C>           
<C>
      Interest on fixed maturities..................  $ 46,449      $ 
56,034      $ 56,467
      Dividends on common and preferred stocks......    19,799        
12,765         8,486
      Interest on cash and short-term investments...    10,544         
4,022         2,466
      Interest on mortgage loans....................     6,578         
6,737         6,141
      Other.........................................       122           
105           478
               Total investment income..............    83,492        
79,663        74,038
      Investment expenses...........................     2,698         
2,261         2,725
               Net investment income................  $ 80,794      $ 
77,402      $ 71,313
</TABLE>







32
<PAGE


THE COMMERCE GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996 and 1995
(Thousands of Dollars)

NOTE B-Investments and Investment Income - (continued)

5. Net Realized and Unrealized Investment Gains (Losses)

	Net realized investment gains and the net increases (decreases) in 
unrealized investment gains or losses, less applicable income tax 
expense, were as follows:
<TABLE>
										Year ended 
December 31,	   	
									  1997	   
1996	   1995
<CAPTION>
<S>                                                 <C>           <C>         
<C>
Net realized investment gains (losses):
  Fixed maturities................................. $   1,419     $ 
(7,364)   $    477
  Preferred stocks.................................         6         
(349)        890
  Common stocks....................................    21,440          
456        (485)
  Other............................................       (95)        
(317)       (170)
      Total........................................ $  22,770     $ 
(7,574)   $    712

Net increase (decrease) in unrealized gains (losses):
  Fixed maturities................................. $   7,622     $  
2,222    $ 70,335
  Preferred stocks.................................     1,165         
(424)     10,123
  Common stocks....................................    (2,398)       
8,317      10,185
  Related tax benefit (expense)....................    (2,236)      
(3,540)    (31,725)
      Total........................................ $   4,153     $  
6,575    $ 58,918
</TABLE>
	A summary of accumulated unrealized gains and losses on stocks and 
fixed maturity investments in 1997, 1996 and 1995 follows:
<TABLE>
										Year ended 
December 31,    	
									  1997	   
1996	   1995
<CAPTION>
            <S>                                     <C>           <C>         
<C>
            Unrealized gains....................... $  43,675     $ 
40,227    $ 32,056
            Unrealized losses......................    (1,780)      
(4,721)     (6,665)
            Tax benefit (expense)..................   (14,663)     
(12,427)     (8,887)
                  Net unrealized gains
                   (losses)........................ $  27,232     $ 
23,079    $ 16,504
</TABLE>
NOTE C-Deferred Policy Acquisition Costs

	Policy acquisition costs incurred and amortized to income are as 
follows:
<TABLE>
										Year ended 
December 31,	  	
									  1997	   
1996	   1995
<CAPTION>
            <S>                                     <C>           <C>         
<C>
            Balance, beginning of year............. $  82,968     $ 
67,160    $ 59,066
            Costs deferred during the year.........   189,787      
196,821     174,835
            Amortization charged to expense........  (187,491)    
(181,013)   (166,741)
            Balance, end of year................... $  85,264     $ 
82,968    $ 67,160
</TABLE>














33
<PAGE>


THE COMMERCE GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996 and 1995
(Thousands of Dollars)

NOTE D-Property and Equipment

	A summary of property and equipment at December 31, is as follows:
<TABLE>
											 1997	       
1996
<CAPTION>
                  <S>                                           <C>         
<C>
			Buildings.................................    $ 27,873    
$ 27,506
			Equipment and office furniture............      30,286      
24,993
			Building improvements.....................         828         
811
										      58,987      
53,310
				Less accumulated depreciation.......     
(25,081)    (22,015)
										      33,906      
31,295
			Land......................................         934         
805
			Construction in progress..................       1,440          
-  	
										    $ 36,280    
$ 32,100
</TABLE>
	Depreciation expense incurred was $4,213, $3,202 and $3,151 for 
the years ended December 31, 1997, 1996 and 1995, respectively.  
Depreciation expense is allocated between losses and loss adjustment 
expenses and policy acquisition costs.

NOTE E-Losses and Loss Adjustment Expenses

	Liabilities for unpaid losses and loss adjustment expenses at 
December 31, consist of:
<TABLE>
											1997	
	1996
<CAPTION>
                  <S>                                           <C>         
<C>
			Unpaid loss and LAE reserves..............    $725,886    
$718,593
			Salvage and subrogation recoverable.......     
(76,413)    (55,761)
										    $649,473    
$662,832
</TABLE>
	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 obtain annually 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, its claims personnel 
establish a "case reserve" for the estimated amount of the ultimate 
payment.  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.  The estimate 
reflects the informed judgment of such personnel based on general 
insurance reserving practices and on the experience and knowledge of the 
claims person.  During the loss adjustment period, these estimates are 
revised as deemed necessary by the Company's claims department based on 
subsequent developments and periodic reviews of the cases.

	In accordance with industry practice, the Company also maintains 
reserves for estimated IBNR.  IBNR reserves are determined on the basis 
of historical information and the experience of the Company.  
Adjustments to IBNR 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.






34
<PAGE>


THE COMMERCE GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996 and 1995
(Thousands of Dollars)

NOTE E-Losses and Loss Adjustment Expenses - (continued)

	When reviewing reserves, the Company analyzes historical data and 
estimates the impact of various factors such as (i) per claim 
information, (ii) the historical loss experience of the Company and 
industry and (iii) legislative enactments, judicial decisions, legal 
developments in the imposition of damages, changes and trends in general 
economic conditions, including the effects of inflation.  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 the provision for 
losses and LAE at December 31, 1997 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 reserves.  
Establishment of appropriate reserves is an inherently uncertain 
process, and there can be no certainty that currently established 
reserves will prove adequate in light of subsequent actual expeience.  
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 and lead paint.  
Reserves have been established to cover these claims for both known and 
unknown 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 
$6,924, $8,783 and $10,708 in 1997, 1996 and 1995, respectively.

	The following table sets forth a reconciliation of beginning and 
ending reserves for losses and loss adjustment expenses, 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>
										Year ended 
December 31,	    	
									  1997	     
1996	      1995
<CAPTION>
<S>                                                   <C>           <C>          
<C>
Reserves for losses and loss adjustment
 expenses, beginning of year......................... $533,980      
$493,911     $455,460

Incurred losses and loss adjustment expenses:
   Provision for insured events of the current year..  609,930       
562,997      442,027 
   Decrease in provision for insured events of
    prior years......................................  (83,803)      
(87,766)     (74,475)
     Total incurred losses and loss adjustment
      expenses.......................................  526,127       
475,231      367,552

Payments:
   Losses and loss adjustment expenses attributable
    to insured events of the current year............  322,882       
267,653      184,073 
   Losses and loss adjustment expenses attributable
    to insured events of prior years.................  207,148       
167,509      145,028
     Total payments..................................  530,030       
435,162      329,101

   Loss and loss adjustment expense reserves prior to
    effect of ceded reinsurance recoverable..........  530,077       
533,980      493,911 
   Ceded reinsurance recoverable.....................  119,396       
128,852      132,118
Reserves for losses and loss adjustment expenses
 at the end of year per financial statements.........	$649,473      
$662,832     $626,029
</TABLE>

35
<PAGE>


THE COMMERCE GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996, 1995 and 1994
(Thousands of Dollars)

NOTE E-Losses and Loss Adjustment Expenses - (continued)

	The provision for loss and LAE reserves relating to prior years 
decreased by $83,803, $87,766 and $74,475 in 1997, 1996 and 1995, 
respectively due to favorable loss development experienced in both the 
voluntary and involuntary private passenger auto business.

	The increases in payments and incurred losses primarily resulted 
from increases in total loss and loss adjustment expense payments on the 
direct personal automobile lines of business of approximately 20.4%.  
Net loss payments in the direct personal automobile lines of business 
increased approximately 21.5% or $71,300 which were offset by a decrease 
in payments for other than automobile lines of business of approximately 
$16,200, compared to 1996.  The decrease in other than automobile loss 
payments was primarily the result of more normal weather in 1997 versus 
the severe weather experienced in 1996.  The increase in automobile loss 
payments was attributable primarily to three factors:  increased 
payments for collision coverages;  increased payments for bodily injury 
claims; and increased payments for property damage liability claims.  
Bodily injury payments were higher primarily due to increased business 
writings coupled with initiatives in the claims department to accelerate 
the claims settlement process in an effort to reduce the overall cost of 
bodily injury claims in the long run as well as to reduce the overall 
number of open bodily injury claims.

	The Company's loss and LAE reserves reflect its share of the 
aggregate loss and LAE reserves of all 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 and 
incidental 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 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 combined 
quota share and excess loss reinsurance contract on its other than 
automobile property business.

Property and Catastrophe Reinsurance

	From the inception, on September 30, 1993, through the third 
quarter of 1995, the Company's combined property quota share and excess 
loss reinsurance contract was written with five domestic reinsurance 
companies.  Under the quota share portion of the arrangements, the 
reinsurers indemnified the Company for 36% of the loss and LAE, and paid 
a commission allowance based on the ratio of losses incurred to premiums 
earned.  In exchange, the Company paid to the reinsurers 40% of the net 
premium pertaining to the related business.  The maximum per occurrence 
loss reimbursement was $40.0 million and the maximum annual aggregate 
occurrence loss reimbursement was $60.0 million.  Under the excess loss 
reinsurance portion of the arrangements, the Company reinsured each 
risk, retaining $125 and reinsuring 100% of the next $875.

	Effective September 30, 1995, the Company increased its coverage 
under the combined property quota share and excess loss reinsurance 
contract.  The contract is now written with six domestic reinsurance 
companies.  Under the quota share portion of the arrangements, the 
reinsurers indemnify the Company for 45% of the loss and LAE, and pay a 
commission allowance based on the ratio of losses incurred to premiums 
earned.  In exchange, the Company pays to the reinsurers 49% of the net 
premium pertaining to the related business.  The maximum per occurrence 
loss reimbursement is $50.0 million and the maximum annual aggregate 
occurrence loss reimbursement is $75.0 million.  Under the excess loss 
reinsurance portion of the arrangements, the Company reinsures each 
risk, retaining $125 and reinsuring 100% of the next $875.  This 
reinsurance contract is continuous through September 30, 1998, but 
cancelable quarterly with ninety days notice.  Written premiums ceded in 
1997, 1996 and 1995 under the property quota share and excess loss 
reinsurance contract were $27.5 million, $26.6 million and $21.5 
million, respectively.
36
<PAGE>


THE COMMERCE GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996 and 1995
(Thousands of Dollars)

NOTE F-Reinsurance Activity - (continued)

	Effective March 1, 1995, through February 29, 1996, the Company 
had catastrophe reinsurance coverage for that portion of the loss not 
covered under the property quota share arrangement.  Catastrophe 
reinsurance coverage was in force for approximately 88.0% of the amounts 
incurred for all property claims arising from a single event or 
occurrence up to a maximum loss of $100.0 million, after first 
subtracting property quota share losses.  Coverage under the catastrophe 
program was as follows: a net retention of $5.0 million; 50.0% of the 
next $5.0 million; and, 95.0% of the next $90.0 million.  Including the 
Company's retention, total catastrophe coverage was $100.0 million.  
This coverage was placed with a number of reinsurers, both foreign and 
domestic.

	Effective March 1, 1996, through February 28, 1998, the Company's 
catastrophe reinsurance program was tailored in conjunction with the 
property quota share arrangement to provide catastrophe reinsurance 
protection at varying levels of losses.  The Company's two separate 
catastrophe only programs provide a maximum amount of protection of $18 
million and $42 million.  These two programs expire on March 1, 1998 and 
May 1, 1998, respectively.  The table below provides information 
depicting the approximate combined recoveries of all property 
reinsurance programs (catastrophe and quota share) at various loss 
scenarios if a catastrophe were to strike:
<TABLE>
										 Net Loss
				  Total		Reinsurance		Retained by
				  Loss 		 Recovery  		the Company
<CAPTION>
                        <S>                 <C>               <C>
				$ 25,000		  $ 11,300		  $13,700
				  50,000		    35,000		   15,000
				  75,000		    58,800		   16,200
				 100,000		    82,500		   17,500
				 125,000		   105,000		   20,000
				 150,000		   110,000		   40,000
</TABLE>
	Under the above scenario, the Company had no reinsurance 
recoveries for total loss amounts in excess of $150.0 million.  The 
Company is currently negotiating with several of its existing quota-
share and excess loss reinsurance providers to expand the quota share 
portion of the program.  A 75% quota-share reinsurance program is 
contemplated, covering all non-automobile property and liability 
business except umbrella policies.  The excess loss portion of the 
program would be reduced on July 1, 1998 and completely eliminated on 
September 30, 1998.  The Company intends to incept this expanded program 
on July 1, 1998.  Based on this, the Company's catastrophe reinsurance 
program will consist solely of the current quota-share and excess loss 
reinsurance contract for a period of time between May 1, 1998 and June 
30, 1998.

Casualty Reinsurance

	Through December 31, 1996, casualty reinsurance was on an excess 
of loss basis for any one event or occurrence with a maximum recovery of 
$4.0 million over a net retention of $1.0 million.  Effective January 1, 
1997, 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, formerly North American Reinsurance 
Corporation (rated A by A.M. Best).

	Effective January 1, 1995, 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.  Effective January 
1, 1996, the Company added 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 Munich American 
Reinsurance Corporation (rated A+ by A.M. Best).
37
<PAGE>



THE COMMERCE GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996 and 1995
(Thousands of Dollars)

NOTE F-Reinsurance Activity - (continued)

C.A.R.

	C.A.R., a state-mandated reinsurance mechanism, enables the 
Company and approximately 40 other writers of automobile insurance in 
Massachusetts ("Servicing Carriers") to reinsure any automobile risk 
that the insurer perceives to be underpriced at the premium level 
permitted by the Massachusetts Insurance Commissioner (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 undesirable business with C.A.R.

	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, 1997, 
1996 and 1995, these servicing fees amounted to $17,333, $17,127 and 
$21,669, respectively.

	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.  During 1997, 1996 and 1995, the Company's 
net participation in the C.A.R. personal automobile pool approximated 
18.0%, 19.0% and 16.0%, respectively.

	Written premiums, earned premiums, losses incurred and the 
liabilities for unearned premiums, unpaid losses ceded to and assumed 
from C.A.R. and were as follows:
<TABLE>
			    				Year ended December 31,		  
			
			    	     1997              	     1996        	             
1995    	
			     Ceded      Assumed	     Ceded      Assumed	     
Ceded       Assumed
<CAPTION>
<S>                  <C>         <C>         <C>         <C>         <C>         
<C>
Income Statement
 Written premiums... $ 71,816    $ 76,530    $ 82,861    $ 93,703    $ 
82,814    $ 92,249
 Earned premiums....   71,977      82,866      85,977      92,469      
92,664      90,609
 Losses incurred....   83,240      89,081      84,074      93,278      
75,475      87,786


Balance Sheet
 Unearned premiums.. $ 51,662    $ 40,345    $ 49,487    $ 46,681    $ 
47,045    $ 45,446
 Unpaid losses......  129,137     102,819     145,726     117,237     
153,079     110,003
</TABLE>
	In accordance with Statement of Financial Accounting Standards No. 
113, "Accounting and Reporting for Reinsurance of Short-Duration and 
Long-Duration Contracts", 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 1997, 
1996 and 1995 the Company's amount of personal automobile risks it 
reinsured through C.A.R. approximated 6.6%, 8.0% and 11.0%, 
respectively.



38
<PAGE>



THE COMMERCE GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996 and 1995
(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>
										Year ended 
December 31,       	
								            1997         
1996        1995
<CAPTION>
  <S>                                                    <C>          
<C>         <C>
  Earned premiums ceded.............................     $ 33,847     $ 
36,261    $ 28,056
  Losses and loss adjustment expenses ceded.........       10,616       
22,453      21,454
</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.

NOTE G-Income Taxes

	The Company and its subsidiaries file a consolidated federal 
income tax return.

	The Federal income tax expense consisted of the following:
<TABLE>
									      Year ended 
December 31,       	
									      1997         
1996        1995
<CAPTION>
                  <S>                                    <C>          
<C>         <C>
			Current............................    $ 24,318     $ 
15,951    $ 34,891
			Deferred...........................       6,984        
2,098       4,650
									   $ 31,302     $ 
18,049    $ 39,541
</TABLE>
	Deferred taxes arise from temporary differences in the bases of 
assets and liabilities for tax and financial statement purposes.  The 
sources of these differences and the related tax effects consisted of 
the following:
<TABLE>
									        Year ended 
December 31,       	
									      1997         
1996         1995
<CAPTION>
  <S>                                                    <C>          
<C>         <C>
  Unearned premiums..................................    $   (769)    $ 
(3,695)   $ (1,469)
  Discounting of loss reserves.......................       2,421       
(2,954)       (370)
  Bad debt expense...................................         129          
131          92
  Deferred policy acquisition costs..................       1,297        
6,022       5,087
  Salvage and subrogation recoverable................        (406)         
425         151
  Tax depreciation in excess of book depreciation....         151          
192         205
  Book value rights/book value awards/stock
   appreciation rights...............................       4,912        
1,686         334
  Deferred items not included above..................        (751)         
291         620
        Deferred income tax..........................       6,984        
2,098       4,650
  Change in unrealized gains.........................       2,236        
3,540      31,726
        Change in deferred tax liability.............    $  9,220     $  
5,638    $ 36,376
</TABLE>











39
<PAGE>



THE COMMERCE GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996 and 1995
(Thousands of Dollars Except Per Share Data)

NOTE G-Income Taxes - (continued)

	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 are reduced.  Deferred tax 
liabilities (assets) were comprised of the following components at 
December 31, 1997 and 1996:
<TABLE>
                                                                      
1997         1996
<CAPTION>
<S>                                                                <C>          
<C>
Unearned premiums................................................  
$(20,608)    $(19,839)
Discounting of loss reserves.....................................   
(21,379)     (23,800)
Bad debt allowances..............................................      
(772)        (901)
      Deferred tax assets........................................   
(42,759)     (44,540)

Deferred policy acquisition costs................................    
25,832       24,535
Salvage and subrogation recoverable..............................     
2,001        2,407
Tax depreciation in excess of book depreciation..................     
2,856        2,705
Book value rights/book value awards/stock appreciation rights....     
8,199        3,287
Unrealized gains.................................................    
14,663       12,427
Deferred items not included above................................     
2,651        3,402
      Deferred tax liabilities...................................    
56,202       48,763

      Net deferred tax liability.................................  $ 
13,443     $  4,223
</TABLE>


	Federal income tax on income is less than the amount computed by 
applying the statutory rate of 35% for the years ended 1997, 1996 and 
1995 for the following reasons:
<TABLE>
								Year ended December 31,	
	  			
					   1997            	   1996        	            
1995   	
<CAPTION>
<S>                      <C>          <C>         <C>          <C>            
<C>        <C>
Tax at statutory rate..  $ 44,631     35.0%       $32,205       35.0%         
$52,410    35.0%
Tax exempt interest....    (8,036)    (6.3)       (10,062)     (10.9)         
(11,067)   (7.4)
Dividends paid to ESOP
  participants.........      (782)    (0.6)        (1,169)      (1.3)             
-        -
Dividends received
  deduction............    (4,567)    (3.6)        (3,167)      (3.4)          
(2,038)   (1.4)
Other..................        56      0.0            242        0.2              
236     0.2	
Tax at effective rate..  $ 31,302     24.5%       $18,049       19.6%         
$39,541    26.4%
</TABLE>

NOTE H-Related-Party Transactions

	The Company has made loans to insurance agencies and other 
organizations with which the Company transacts business on a regular 
basis.  At December 31, 1997, seven of these loans which had an 
aggregate outstanding principal balance of $12,161 were collateralized 
by the assets of the agencies.  At December 31, 1996, eleven of these 
loans which had an aggregate outstanding principal balance of $2,384 
were collateralized by the assets of the agencies.  Mortgage loans to 
agents collateralized by real estate had an aggregate outstanding 
balance of $317 at December 31, 1996.  There were no such mortgage loans 
outstanding at December 31, 1997.






40
<PAGE>



THE COMMERCE GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996 and 1995
(Thousands of Dollars)

NOTE H-Related-Party Transactions (continued)

	During 1992, the Company insured a mortgage note in the principal 
amount of $28,750 issued by a corporation to a bank.  Two directors of 
the Company, were, with others, guarantors of this note.  The Company's 
liability under this insurance policy, which expired on October 15, 
1995, was $12,000.  For this insurance, the Company received the full 
premium of $1,080 in 1992, which was earned pro-rata through the 
expiration date of the policy.

	One Director of the Company, is the Chairman Emeritus and 
Assistant Clerk of an insurance agency which is one of the Company's 
independent insurance agencies.  This Director sold his ownership 
interest in that agency in 1994, although he remains associated with it 
in the above stated capacity.  This Director also continues to receive 
payments under non-competition and loan agreements.  This Director 
receives no direct or indirect compensation based on the commissions 
paid to the agency by the Company.  During the years ended December 31, 
1997, 1996 and 1995 the agency received from the Company commissions of 
$834, $906 and $885, respectively, in the aggregate, for policies 
written.  The Company also purchased certain insurance coverages through 
the agency and paid premiums for these policies of $367, $360 and $218 
in 1997, 1996 and 1995, respectively.

NOTE I-Employee Stock Ownership Plan

	The Company offers an Employee Stock Ownership 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 Plan for any length of time, and may completely 
discontinue or terminate the Plan at any time without liability.

	Contributions by the Company and subsidiaries to the Plan for the 
years ending December 31, 1997, 1996 and 1995 were $4,841, $6,216 and 
$5,729, respectively.

NOTE J-Stockholders' Equity

Book Value Rights, Book Value Awards and Stock Appreciation Rights 
Program

	The Board of Directors authorized a Book Value Rights Program 
which provided for the payment of awards in cash to key employees based 
upon increases in the book value of the Company at the end of the 
program period, which is December 31st of the third year after the 
rights have been granted.  The Board of Directors authorized advance 
payments of $1,888 in December, 1995 applicable to Book Value Rights 
maturing in 1996.  Expenses relating to this Book Value Rights Program 
were $234 and $3,738 in 1996 and 1995, respectively.

	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.  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 totalled 453,488, 468,381 and 606,088 in 1997, 1996 and 1995, 
respectively.  Stock appreciation rights issued also relating to this 
Plan totalled 493,492, 520,625 and 672,358 in 1997, 1996 and 1995, 
respectively.  The outstanding book value awards and stock appreciation 
rights entitle the holders to cash payments based upon the extent to 
which, if at all, the per share book value or market value, as 
applicable, of the common stock exceeds certain thresholds set at the 
time the award was granted.  Expenses relating to book value awards were 
$3,068, $2,140 and $714 in 1997, 1996 and 1995.  Expenses relating to 
stock appreciation rights were $15,657, $6,224 and $366 in 1997, 1996 
and 1995.

41
<PAGE>



THE COMMERCE GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996 and 1995
(Thousands of Dollars)

NOTE K-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 must file a report with the Commissioner.  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 1997, 1996 and 1995.

	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 1997 Commerce and Citation paid 
$39,375 and $7,040 in dividends, respectively, to CHI; CHI then paid $ 
46,305 to the Company in March 1997.  During 1996, Commerce and Citation 
paid $58,630 and $6,600 in dividends, respectively, to CHI; CHI then 
paid $43,470 to the Company in March 1996.

	The Board of Directors of the Company voted to declare four 
quarterly dividends to stockholders of record totaling $1.03 per share 
and $0.81 per share in 1997 and 1996, respectively.  On May 30, 1997, 
the Board voted to increase the quarterly stockholder dividend from 
$0.25 to $0.26 per share to stockholders of record as of June 6, 1997.  
Prior to that declaration, the Company had paid quarterly dividends of 
$0.25 per share dating back to May 17, 1996 when the Board voted to 
increase the dividend from $0.06 to $0.25 per share.

	Treasury Stock purchased under the stock buyback program increased 
by 20,000 shares during 1997 to 1,957,348 shares at December 31, 1997.  
The stock buyback program, authorized by the Board in May 1995, enables 
the Company to purchase up to three million shares of the Company's 
common stock.  The program is approximately two-thirds complete.



























42
<PAGE>



THE COMMERCE GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996 and 1995
(Thousands of Dollars)

NOTE L-Statutory Balances

	Following is a GAAP to Statutory reconciliation for both earnings 
and policyholders surplus for the combined operations of Commerce, 
Citation and effective August 31, 1995, Western Pioneer:
<TABLE>
					     	      1997          	   1996                
1995       	
					    Earnings  Equity     Earnings   Equity   
Earnings    Equity
<CAPTION>
<S>                               <C>       <C>       <C>        <C>       
<C>        <C>
GAAP............................  $101,528  $609,416   $ 74,432  
$550,151  $110,450   $512,875
Deferred income taxes...........     4,039     8,352        929     
2,165     4,152     (2,650)
Deferred acquisition costs......    (2,296)  (85,264)   (15,808)  
(82,968)   (8,094)   (67,160)
Bonds-book versus market........       -     (23,812)       -     
(16,194)      -      (14,432)
Preferred stock-market versus
 book...........................       -        (429)       -        
(331)      -       (1,607)
Deferred income.................      (697)    7,071       (963)    
7,768    (1,496)     6,766
Deferred service fee income.....     1,784     3,139      1,538     
1,538       -          -
Deferred reinsurance
 commissions....................    (1,267)    4,424      2,082     
5,796     2,060      5,614
Statutory reserve over statement
 reserves.......................       -      (8,567)       -      
(5,397)      -       (1,940)
Goodwill in subsidiary..........      (291)    2,226       (270)    
2,515       (97)     2,806
Difference in GAAP to statutory
 net income in subsidiary.......        57       -          416       -         
(74)       -   
Other...........................       -          42          4      
(304)       (4)      (162)
     Total adjustments..........     1,329   (92,818)   (12,072)  
(85,412)   (3,553)   (72,765)
Statutory.......................   102,857   516,598     62,360   
464,739   106,897    440,110

Add back subsidiary net loss
 from January 1, 1995 through
 August 30, 1995................       -         -          -         -         
429        -  	

Adjusted statutory..............  $102,857  $516,598   $ 62,360  
$464,739  $107,326   $440,110
</TABLE>

NOTE M-Segment Information

Selected information by industry segment for 1997, 1996 and 1995 is 
summarized as follows:
<TABLE>
										Earnings 
Before	Identifiable
								Revenue	  Income 
Taxes 	   Assets   	
<CAPTION>
<S>                                             <C>             <C>            
<C>
1997
  Property and casualty insurance............   $833,304        $132,544       
$1,659,374
  Real estate and commercial lending.........      4,448           4,448           
83,420
  Corporate and other........................      3,383          
(9,475)          11,959	
	Consolidated...........................   $841,135        $127,517       
$1,754,753	

1996
  Property and casualty insurance............   $740,707        $ 91,242       
$1,590,695
  Real estate and commercial lending.........      4,249           4,249           
75,255
  Corporate and other........................      3,301          
(3,478)          10,849
	Consolidated...........................   $748,257        $ 92,013       
$1,676,799

1995
  Property and casualty insurance............   $677,217	    $147,378
	 $1,479,898
  Real estate and commercial lending.........      3,804	       3,804
	     76,642
  Corporate and other........................      3,014 	      
(1,440)	      7,635
	Consolidated...........................   $684,035	    $149,742
	 $1,564,175
</TABLE>

43
<PAGE>



THE COMMERCE GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996 and 1995
(Thousands of Dollars)

NOTE N-Supplement to Consolidated Statements of Cash Flows

	During the years ended December 31, 1996 and 1995, the Company 
acquired property through foreclosure of mortgages held with remaining 
principle balances at the time of foreclosure of $245 and $641, 
respectively.  No such property was acquired in 1997.

NOTE O-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 its inception, on August 2, 1972 
through December 31, 1997, the M.I.I.F. has approved assessments 
totaling $133,474, of which the Company's share was approximately 
$7,540.  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 net direct written premiums for the calendar year 
preceding the assessment.  Although the timing and amounts of any such 
assessments are not known, Management is of the opinion that such 
assessments will not have a material effect on the consolidated 
financial position of the Company.  The Company's policy is to expense 
these assessments as assessed.  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.  The Company's policy is to expense the 
recovery of the assessed amounts as received.  Refund of assessments by 
the M.I.I.F. for the year ended December 31, 1997 was $283.  Assessments 
by the M.I.I.F. for the years ended December 31, 1996 and 1995 were $742 
and $338, respectively.


NOTE P-Quarterly Results of Operations (Unaudited)

An unaudited summary of the Company's 1997 and 1996 quarterly 
performance is as follows:

<TABLE>
1997								   FIRST      SECOND       
THIRD     FOURTH
								  QUARTER     QUARTER     
QUARTER    QUARTER
<CAPTION>
<S>                                              <C>         <C>         
<C>        <C>
Total revenues.................................  $199,069    $205,561    
$225,082   $211,423
Net earnings...................................    16,638      19,971      
35,012     24,594
Net earnings per weighted average common
  share (basic and diluted)....................      0.46        0.56        
0.97       0.68
Cash dividends paid per share..................      0.25        0.26        
0.26       0.26


1996
Total revenues.................................  $173,802    $186,448    
$192,333   $195,674
Net earnings...................................    14,593      16,265      
21,436     21,670
Net earnings per weighted average common
  share (basic and diluted)....................      0.40        0.45        
0.59       0.60
Cash dividends paid per share..................      0.06        0.25        
0.25       0.25
</TABLE>

NOTE Q-Subsequent Events

	The Company was notified in February 1998 that its application for 
a license in the State of Maine was approved.







44
<PAGE>



SELECTED CONSOLIDATED FINANCIAL DATA

	The selected consolidated financial data presented below should be 
read in conjunction with the consolidated financial statements of the 
Company and the notes thereto.  This financial data has been extracted 
from financial statements audited by Ernst & Young, LLP in 1997 and by 
other auditors in 1993 through 1996.  All dollar amounts set forth in 
the following tables are in thousands except per share data.
<TABLE>
									Year ended 
December 31,				
						    1997         1996        1995        
1994        1993
<CAPTION>
<S>                                 <C>          <C>         <C>         
<C>         <C>
Statement of Earnings Data:
  Net premiums written...........	$  741,501   $  711,570  $  603,421  
$  589,197  $  563,416
  Increase in unearned premiums..	   (11,004)     (42,854)    (10,831)    
(17,144)    (14,856)
  Earned premiums................	   730,497      668,716     592,590     
572,053     548,560
  Net investment income..........	    80,794       77,402      71,313      
62,901      53,068
  Premium finance fees...........	     7,074        9,713      19,420      
18,497      16,666
  Net realized investment gains
   (losses)......................	    22,770       (7,574)        712      
45,612       7,506
       Total revenues............	   841,135      748,257     684,035     
699,063     625,800

  Losses and loss adjustment 
   expenses......................	   526,127      475,231     367,552     
369,660     373,959
  Policy acquisition costs.......	   187,491      181,013     166,741     
157,415     150,195
       Total expenses............	   713,618      656,244     534,293     
527,075     524,154

  Earnings before income taxes...	   127,517       92,013     149,742     
171,988     101,646
  Income taxes...................	    31,302       18,049      39,541      
49,405      26,330
       Net earnings..............	$   96,215   $   73,964  $  110,201  
$  122,583  $   75,316

Per Share Data:
       Basic and diluted
         net earnings per share..   $     2.67   $     2.04  $     2.93  
$     3.23  $     1.98

       Cash dividends paid per
         share...................   $     1.03   $     0.81  $     0.23  
$     0.15  $      -  	

Weighted average number of
 shares outstanding..............   36,044,679   36,311,887  37,632,236  
38,000,000  38,000,000
</TABLE>
<TABLE>
									Year ended 
December 31,				
						    1997	     1996	     1995	     
1994	     1993
<CAPTION>
<S>                                 <C>          <C>         <C>         
<C>         <C>
Balance Sheet Data:
  Total investments..............   $1,242,695   $1,167,671  $1,096,778  
$  905,031  $  873,234
  Premiums receivable............      169,469      157,835     127,047     
102,432      95,103
  Total assets...................    1,754,753    1,676,799   1,564,175   
1,382,226   1,298,371
  Unpaid losses and loss 
   adjustment expenses...........      649,473      662,832     626,029     
599,502     574,049
  Unearned premiums..............      379,599      367,991     330,454     
314,719     283,526
  Stockholders' equity...........      649,796      587,039     549,714     
413,589     383,348
  Stockholders' equity per share.        18.03        16.28       14.96       
10.88       10.09
</TABLE>









45
<PAGE



MANAGEMENT'S DISCUSSION OF THE SUPPLEMENTAL INFORMATION
ON INSURANCE OPERATIONS
(Thousands of Dollars)

	The following exhibits 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 $4,783,113.  During this 
period, the average statutory financial ratios were 67.7% for losses and 
loss expenses and 26.8% for underwriting expenses resulting in an 
average combined ratio of 94.5%.  Total net investment income amounted 
to $515,735 or 10.8% of net premiums written.  Net realized gains were 
$87,868.  Stockholders' equity was $11,693 at the beginning of 1983 and 
$609,416, at the end of 1997, resulting in an average annual increase in 
excess of 30%.  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>
											5-Year 
Period		

									  1993-97	    
1988-92	    1983-87
<CAPTION>
<S>                                                   <C>           <C>          
<C>
Direct premiums written............................	$3,353,450	  
$2,029,313   $526,055

Net premiums written...............................	 3,209,105	   
1,305,018    268,990

Net investment income..............................	   345,079	     
135,579     35,077

Net realized gains.................................	    60,831	      
22,887      4,150

Stockholders' equity at end of period..............	   609,416	     
265,616     46,081

Statutory Financial Ratios (Unaudited)
  Losses and loss expenses to premiums earned......	      67.7%	        
65.6%      76.7%

  Underwriting expenses to net premiums written....	      26.7	        
27.6       24.8
	Combined ratio...............................	      94.4%         
93.2%     101.5%

Increase in Stockholders' Equity...................	     129.4%	       
476.4%     294.1%
</TABLE>
						

The insurance operations of the Company include the operating results of 
Commerce, its subsidiary company Western Pioneer and Citation.  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.  Capital stock, paid-in capital and retained 
earnings of Commerce and Citation as of January 1, 1989 were combined 
due to the effect of the transfer in ownership of Citation to The 
Commerce Group, Inc. on December 31, 1989.  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 
Western Pioneer are included since its acquisition by Commerce on August 
31, 1995.  The combined balance sheets of these insurance subsidiaries 
appear on pages 47 and 48.  The combined statements of earnings of 
insurance operations appear on pages 49 and 50.













46
<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>
                                         1997       1996         1995        
1994        1993



ASSETS
<CAPTION>
<S>                                 <C>         <C>         <C>         
<C>         <C>
Cash and short-term investments.... $  238,685  $  140,102  $   52,308  
$    4,560  $   12,615
Bonds, at market (at amortized cost
 prior to 1993)....................    590,597     716,702     815,277     
745,010     649,491
Preferred stocks, at market (at
 amortized cost prior to 1993).....    148,499     147,680     111,220      
85,574      80,059
Common stocks, at market...........    178,089      86,041      40,359       
9,656      47,462
Mortgage loans on real estate......     57,425      45,398      31,404      
35,715      42,042
Other investments..................      3,783         127         -           
-           -
Premium balances receivable........    169,311     157,673     126,090     
101,529      94,333
Investment income receivable.......     12,103      12,655      14,440      
13,285      10,205
Residual market receivable.........    180,799     195,213     200,124     
214,818     220,312
Reinsurance receivable.............     18,170      19,659      21,897      
16,892      12,868
Deferred acquisition costs.........     85,264      82,968      67,160      
59,066      53,647
Current income taxes...............        -           -           -           
-           -
Deferred income taxes..............        -           -         2,100      
38,180         -  
Real estate, furniture and equipment    29,060      26,011      24,642      
25,246      22,371

	 Total assets................ $1,711,785  $1,630,229  $1,507,021  
$1,349,531  $1,245,405

LIABILITIES

Unpaid losses and loss expenses.... $  637,094  $  657,854  $  618,791  
$  592,373  $  567,797
Unearned premiums..................    379,599     367,991     330,454     
314,719     283,526
Notes payable......................        -           -           -           
-           -
Deferred income....................      7,271       7,974       8,954      
10,451       7,351
Accounts payable, accrued and other
 liabilities.......................     60,332      41,368      34,351      
43,433      16,564
Current income taxes...............      9,635       2,726       1,596      
10,254       4,867
Deferred income taxes..............      8,438       2,165         -           
-        13,669
	 Total liabilities...........  1,102,369   1,080,078     994,146     
971,230     893,774

STOCKHOLDERS' EQUITY

Capital stock......................      3,600       3,600       3,450       
3,450       3,450
Paid-in capital....................     45,050      45,050      23,700      
23,700       8,700
Retained earnings
  Balance, January 1...............    501,501     485,725     351,151     
339,481     253,466
  Net earnings.....................    101,528      74,432     110,450     
113,892      79,837
  Unrealized gains (losses) on
   investments.....................      4,152       6,574      58,919     
(77,622)     21,928
  Dividends paid...................    (46,415)    (65,230)    (34,795)    
(24,600)    (15,750)
Balance, December 31...............    560,766     501,501     485,725     
351,151     339,481
	 Total stockholders' equity..    609,416     550,151     512,875     
378,301     351,631
	 Total liabilities and
	   stockholders' equity...... $1,711,785  $1,630,229  $1,507,021  
$1,349,531  $1,245,405
</TABLE>



47
<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>
    1992      1991     1990      1989    1988     1987     1986      
1985     1984     1983



ASSETS
<CAPTION>
<S>        <C>       <C>      <C>      <C>      <C>      <C>       <C>      
<C>       <C>
$   25,809 $ 11,190  $ 38,654 $ 84,308 $ 60,885 $ 21,051 $ 10,048  $ 
11,802 $  7,953  $ 3,864

   505,565  329,935   242,735  153,621  133,867  116,220   88,755    
56,985   34,422   22,352

     2,261      869     1,010    1,324    1,606    2,295    6,755     
9,956   10,837    7,986
    43,545   30,055     4,869    2,900    1,921    1,438      149       
134    1,494    1,540
    60,697   66,122    56,124   52,244   42,882   15,931      -         
-      7,825    5,860
    67,876   55,510    57,733   56,713   33,727   19,329   11,817     
8,194    6,028    5,430
       -        -         -        -        -        -        -         
-        -        -
     9,710    6,063     4,235    3,093    2,889    2,370    2,485     
1,722    1,286      887
   274,426  277,196   290,440  268,951  198,177  132,725   87,178    
50,327   29,187   20,513
       365      -         -        -         -        -        -         
-       -        -  
    55,442   33,981    27,273   22,702   15,699   10,898    7,129     
5,417    3,968    3,057
       -        -         -        341      266      -      2,209     
1,294      -        -
       -        883     1,666      -        -        -        -         
-        -        -  
    23,183   24,163    25,046   23,118    9,684    8,356    7,370     
5,648    3,136    2,799

$1,068,879 $835,967  $749,785 $669,315 $501,603 $330,613 $223,895  
$151,479 $106,136  $74,288

LIABILITIES

$  495,800 $439,551  $403,752 $345,020 $270,628 $169,539 $113,513  $ 
71,525 $ 44,425  $32,860
   264,567  192,785   175,334  174,345  118,079   84,876   55,378    
36,024   23,585   14,190
       -        -       1,662    1,837    2,013    2,204    3,772     
4,140    2,858    1,313
     8,384   12,918    20,264   23,689   23,307   11,058    7,503     
4,208    3,173    1,658

    20,863    7,677    21,065   27,513   19,350   14,532    8,532     
4,162    4,479    2,482
     9,249    5,811     3,542      -        -        470      -         
-        418    1,487
     4,400      -         -      1,623    1,021    1,853    3,736     
3,623    2,610    2,079
   803,263  658,742   625,619  574,027  434,398  284,532  192,434   
123,682   81,548   56,069

STOCKHOLDERS' EQUITY

     3,450    3,450     3,450    3,450    2,350    2,350    2,350     
2,350    2,350    2,250
     8,700    8,700     8,700    8,700    6,500    6,500    6,500     
6,500    6,500    5,500

   165,075  112,016    83,138   62,877   37,231   22,611   18,947    
15,738   10,469    5,693
    91,980   55,214    32,414   21,966   21,837   15,614    4,362     
4,025    6,033    5,213

     9,811    2,545       (86)     645      321      (54)       7      
(158)    (179)      63
   (13,400)  (4,700)   (3,450)  (2,350)  (1,034)    (940)    (705)     
(658)    (585)    (500)
   253,466  165,075   112,016   83,138   58,355   37,231   22,611    
18,947   15,738   10,469
   265,616  177,225   124,166   95,288   67,205   46,081   31,461    
27,797   24,588   18,219

$1,068,879 $835,967  $749,785 $669,315 $501,603 $330,613 $223,895  
$151,479 $106,136  $74,288
</TABLE>



48
<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
Year Ended December 31,
(Thousands of Dollars)
<TABLE>
							   1997      1996      1995      
1994     1993
<CAPTION>
<S>                                       <C>       <C>       <C>       
<C>       <C>
Underwriting
  Direct premiums written..............	$768,649  $731,823  $626,666  
$625,023  $601,289

  Net premiums written.................	$741,501  $711,570  $603,421  
$589,197  $563,416
  Increase in unearned premiums........	  11,004    42,854    10,831    
17,144    14,856
	Earned premiums..................	 730,497   668,716   592,590   
572,053   548,560

Expenses
  Losses and loss expenses.............	 521,775   474,173   367,258   
369,764   373,243
  Underwriting expenses................	 185,146   194,873   171,892   
162,446   147,290
  (Increase) decrease in deferred 
   acquisition costs...................	  (2,296)  (15,809)   (5,723)   
(5,420)    1,796
	Total expenses...................	 704,625   653,237   533,427   
526,790   522,329
Underwriting income (loss).............	  25,872    15,479    59,163    
45,263    26,231
Net investment income..................	  81,218    76,867    71,007    
63,119    52,868
Premium finance fees...................	   7,056     9,666    19,246    
18,315    16,486
Net realized investment gains (losses).	  22,909    (7,863)      720    
32,025    13,040
	Earnings before Federal income 
	taxes and withdrawing companies'
	settlements......................	 137,055    94,149   150,136   
158,722   108,625

Other income
  Withdrawing companies' settlements...	     -         -         -         
-         - 	
Earnings before Federal income taxes...	 137,055    94,149   150,136   
158,722   108,625
Federal income taxes (benefits)........	  35,527    19,717    39,686    
44,830    28,788
Earnings before cumulative effect of
 change in accounting principle........	 101,528    74,432   110,450   
113,892    79,837
Cumulative effect on prior years (to 
 December 31, 1986) of changing to 
 different method of accounting for
 income taxes..........................	     -         -         -         
-         -  	
	NET EARNINGS.....................	$101,528  $ 74,432  $110,450  
$113,892  $ 79,837

Statutory Financial Ratios (Unaudited)
  Losses and loss expenses to 
   premiums earned.....................	  71.4%     70.9%     62.0%     
64.6%     68.0%  
  Underwriting expenses to net 
   premiums written....................	  25.1      27.1      29.0      
27.1      25.7  
	Combined ratio...................	  96.5%     98.0%     91.0%     
91.7%     93.7%  
	Underwriting profit (loss).......	   3.5%      2.0%      9.0%      
8.3%      6.3%  
</TABLE>










49
<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
Year Ended December 31,
(Thousands of Dollars)
<TABLE>
   1992      1991      1990      1989     1988      1987     1986     
1985     1984      1983

<CAPTION>
<S>       <C>       <C>       <C>      <C>       <C>      <C>       <C>      
<C>      <C>
$525,495  $429,780  $401,077  $366,492 $306,469  $206,231 $131,807  
$85,000  $65,699  $37,318

$508,847  $310,999  $219,936  $140,313 $124,923  $ 99,193 $ 60,808  
$49,229  $33,943  $25,817
  98,353    30,193    34,692    12,655    9,678    13,428    6,775    
6,392    2,137    2,258
 410,494   280,806   185,244   127,658  115,245    85,765   54,033   
42,837   31,806   23,559


 271,848   173,901   125,219    88,564   80,203    65,299   44,205   
33,548   19,567   15,242
 138,669    85,655    55,551    44,181   33,115    25,882   18,460   
15,177   11,241    6,532

 (21,462)   (6,708)   (4,571)   (7,003)  (4,801)   (3,769)  (1,712)  
(1,448)    (911)  (1,327)
 389,055   252,848   176,199   125,742  108,517    87,412   60,953   
47,277   29,897   20,447
  21,439    27,958     9,045     1,916    6,728    (1,647)  (6,920)  
(4,440)   1,909    3,112
  39,685    32,661    25,978    21,256   15,999    10,896    7,554    
6,835    5,684    4,108
  13,734    11,165    10,074     8,095    4,592     3,021    1,436      
531      324       39
  12,368     7,529        74       618    2,298     3,423      185      
336     (108)     314


  87,226    79,313    45,171    31,885   29,617    15,693    2,255    
3,262    7,809    7,573


  43,168       -         -         -        -         -        -        
-        -        -  	
 130,394    79,313    45,171    31,885   29,617    15,693    2,255    
3,262    7,809    7,573
  38,414    24,099    12,757     9,919    7,780     2,987   (2,107)    
(763)   1,776    2,360

  91,980    55,214    32,414    21,966   21,837    12,706    4,362    
4,025    6,033    5,213



     -         -         -         -        -       2,908      -        
-        -        -  	

$ 91,980  $ 55,214  $ 32,414  $ 21,966 $ 21,837  $ 15,614 $  4,362  $ 
4,025  $ 6,033  $ 5,213



  66.2%     61.9%     65.7%     68.0%     69.5%     79.4%    83.5%    
79.7%    63.6%    63.8%

  28.1      30.0      26.7      26.3      22.0      22.5     24.4     
28.1     27.8     23.9
  94.3%     91.9%     92.4%     94.3%     91.5%    101.9%   107.9%   
107.8%    91.4%    87.7%
   5.7%      8.1%      7.6%      5.7%      8.5%     (1.9%)   (7.9%)   
(7.8%)    8.6%    12.3%
</TABLE>










50
<PAGE>


THE COMMERCE GROUP, INC.

DIRECTORS
<TABLE>
<CAPTION>
<S>                                       <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-
General Claims Manager of 						
	Commerce and Citation

Henry J. Camosse.........................	Retired President, Henry 
Camosse & Son Co., Inc., 							a 
building and masonry supplies company

Gerald Fels..............................	Executive Vice President and 
Chief Financial 								Officer of 
the Company

David R. Grenon..........................	Chairman Emeritus and 
Assistant Clerk of The
							Protector Group Insurance 
Agency, Inc., a property
							and casualty insurance 
agency

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

Roger E. Lavoie..........................	Retired President and 
Treasurer, Lavoie Toyota-							
	Dodge, Inc.

Normand R. Marois........................	Retired Chairman of the 
Board, Marois Bros., Inc., 
							a contracting firm

Suryakant M. Patel.......................	Physician specializing 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 - 
General Counsel
							of the Company, President 
and Secretary of 
							Western Pioneer Insurance 
Company

Antranig Sahagian........................	Retired Owner, A. Sahagian 
Service Center

Gurbachan Singh..........................	Physician specializing in 
general surgery

John W. Spillane.........................	Clerk of the Company and 
practicing attorney
</TABLE>








51
<PAGE>



                               DIRECTORS OF
                               COMMERCE HOLDINGS, INC.
The Commerce Insurance Company
Western Pioneer Insurance Company
Citation Insurance Company
<TABLE>
<CAPTION>
<S>                                       <C>
Arthur J. Remillard, Jr................	President, Chief Executive 
Officer and Chairman
of the Board

Gerald Fels............................	Executive Vice President and 
Chief Financial Officer

Arthur J. Remillard, III (1)...........	Senior Vice President and 
Clerk

Regan P. Remillard.....................	Senior Vice President - 
General Counsel, President 
and Secretary of Western 
Pioneer Insurance Company


David R. Grenon (1)....................	Chairman Emeritus and 
Assistant Clerk of The 
Protector Group Insurance 
Agency

John M. Nelson (1).....................	Chairman and Chief Executive 
Officer of Wyman-
Gordon Company

Suryakant M. Patel (1).................	Physician specializing in 
internal medicine

William G. Pike (1)....................	Executive Vice President and 
Chief Financial Officer of 
Granite State Bankshares, 
Inc.


                               DIRECTORS OF
                               BAY FINANCE COMPANY, INC.

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...............	Assistant Clerk

Regan P. Remillard.....................	Senior Vice President


                               DIRECTORS OF
                               CLARK-PROUT INSURANCE AGENCY, INC.

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...............	Assistant Clerk

Elizabeth M. Edwards...................	Vice President
</TABLE>

					
(1) Commerce Holdings, Inc., The Commerce Insurance Company and 
Citation Insurance Company
    only.

52
<PAGE>



THE COMMERCE GROUP, INC.

Commerce Holdings, Inc.
The Commerce Insurance Company
Western Pioneer Insurance Company
Citation Insurance Company
Bay Finance Company, Inc.
Clark-Prout Insurance Agency, Inc.

OFFICERS OF THE COMMERCE GROUP, INC.
<TABLE>
<CAPTION>
<S>                                                               <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 and General Counsel......................
	Regan P. Remillard
Senior Vice President..........................................	Mary 
M. Fontaine
Clerk..........................................................	John 
W. Spillane
Treasurer and Chief Accounting Officer.........................
	Randall V. Becker
Assistant Treasurer............................................
	Thomas A. Gaylord
Assistant Vice President.......................................
	Robert E. McKenna

* Officers of Subsidiaries

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

Executive Vice President and Chief Financial Officer...........
	Gerald Fels

Senior Vice Presidents.........................................
	David H. Cochrane
										
	Peter J. Dignan
											Mary 
M. Fontaine
										
	Arthur J. Remillard, III
										
	Joyce B. Virostek

Senior Vice President and General Counsel......................
	Regan P. Remillard

Vice Presidents................................................
	Elizabeth M. Edwards
										
	Michael J. Richards
										
	Angelos Spetseris
										
	Henry R. Whittier, Jr.

Assistant Vice Presidents..............Robert M. Blackmer	
	Ronald J. Lareau
						   Stephen R. Clark	
	Karen A. Lussier
						   Raymond J. DeSantis	
	Donald G. MacLean
						   Warren S. Ehrlich	
	Robert E. McKenna
						   John V. Kelly		
	Robert L. Mooney
										
	Kenneth E. Morrison

Treasurer and Chief Accounting Officer.........................
	Randall V. Becker

Assistant Treasurer............................................
	Thomas A. Gaylord

Officers of Western Pioneer Insurance Company

President and Secretary........................................
	Regan P. Remillard
Chief Financial Officer........................................
	Albert E. Peters
Vice President.................................................
	Howard M. Dreyfus
Assistant Vice Presidents......................................
	Michael J. Berryessa
										
	Robert M. Keppel
Treasurer and Controller.......................................	Joan 
M. Kelly
</TABLE>
* Officers often hold positions with several operating subsidiaries.  
The titles listed
  represent their primary office as of March 1, 1998.


53
<PAGE




Stockholder Information


Annual Meeting

The Annual meeting of stockholders will be held at 9:00 a.m. on Friday, 
May 15, 1998 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 BANKBOSTON, NA
    Boston EquiServe, L.P.
P.O. Box 8040
Boston, MA 02266-8040
(781) 575-3100

Executive Offices

211 Main Street
Webster, MA 01570
(508) 943-9000

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

















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