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, 1998

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, 1999, was approximately 
$611,511,853.

	As of March 1, 1999, the number of shares outstanding of the 
registrant's common stock (exclusive of treasury shares) was 35,217,852.

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, 1998 (the "1998 Annual Report").  The 
1998 Annual Report, except for portions thereof which have been 
specifically incorporated by reference, shall not be deemed "filed" as 
part of this Form 10-K.

	Portions of the registrant's definitive Proxy Statement for its 
annual meeting of stockholders which the Company intends to file within 
120 days after the end of the registrant's fiscal year ended December 
31, 1998 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...........................................................
	11
		B.	Commonwealth Automobile 
Reinsurers................................	13
		C.
	Marketing.........................................................
	15
		D.
	Underwriting......................................................
	17
		E.
	Reinsurance.......................................................
	18
		F.	Settlement of 
Claims..............................................	20
		G.	Loss and Loss Adjustment Expense 
Reserves.........................	21
		H.	Operating 
Ratios..................................................	24
		I.
	Investments.......................................................
	25
		J.
	Regulation........................................................
	27
		K.
	Competition.......................................................
	32
		L.	Other 
Matters.....................................................	32
Item 2.
	Properties........................................................
 ......	33
Item 3.	Legal 
Proceedings.......................................................
	33
Item 4.	Submission of Matters to a Vote of Security 
Holders.....................	33
Item 4A.	Executive Officers of the 
Registrant....................................	34

Part II

Item 5.	Market for Registrant's Common Stock and Related Stockholder 
Matters....	36
Item 6.	Selected Financial 
Data.................................................	36
Item 7.	Management's Discussion and Analysis of Financial Condition 
and
		 Results of 
Operations..................................................	36
Item 7a.	Qualitative and Quantitative Disclosures about Market 
Risk..............	36
Item 8.	Financial Statements and Supplementary 
Data.............................	37
Item 9.	Changes in and Disagreements with Independent Auditors on 
Accounting
		 and Financial 
Disclosure...............................................	37

Part III

Item 10.	Directors and Executive Officers of the 
Registrant......................	37
Item 11.	Executive 
Compensation..................................................	37
Item 12.	Security Ownership of Certain Beneficial Owners and 
Management..........	37
Item 13.	Certain Relationships and Related 
Transactions..........................	37

Part IV

Item 14.	Exhibits, Financial Statement Schedules and Reports on Form 
8-K.........	38
	
	Signatures........................................................
 ......	39
		Index to Financial Statement 
Schedules..................................	41
		Index to 
Exhibits.......................................................	54
</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 
Massachusetts 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 (46 in 1998) 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 in which it is 
licensed.

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





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  
Massachusetts 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
  ("SAP").......................... 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 
Commerce West Insurance Company ("Commerce West") formerly Western 
Pioneer Insurance Company, a personal automobile insurer located in 
Pleasanton, California, which was acquired on August 31, 1995.  In 
November 1998, Commerce formed a joint venture (ACIC Holding Co., Inc.), 
with AAA Southern New England ("AAA SNE") to purchase Automobile Club 
Insurance Company, located in Columbus, Ohio, a property and casualty 
insurer with policies in twenty-eight states and licensed in several 
others.  In conjunction with this acquisition, which was completed on 
January 29, 1999, the newly acquired company's name was changed to 
American Commerce Insurance Company ("ACIC").  In addition to the 
property and casualty insurance businesses, 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.  The Company has 
over, 757,000 polices 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 1998 and 1997, the Company's Massachusetts private 
passenger automobile market share was 21.6% and 21.8%, respectively.  
The Company is also one of the leading writers of commercial automobile 
insurance in the Commonwealth.  During 1998, 98.3% of the Company's 
$796,858,000 in direct premiums written were derived from personal 
automobile, commercial automobile and homeowners insurance, its three 
core lines of business.  These lines represented $687,232,000, 
$36,299,000 and $59,761,000, or 86.2%, 4.6% and 7.5%, respectively, of 
the Company's direct premiums written.

	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 an affinity group marketing 
environment.

	Because the Company offers its product lines only through 
independent agencies, its relationships with those agencies are critical 
to its continued success.  The Company believes that it is the preferred 
provider for most of its agencies and that, as a result of such 
position, it has gained access to policyholders with average or above-
average underwriting profit characteristics in its personal and 
commercial automobile insurance lines.  The Company carefully selects 
and retains agencies whose premium growth and loss ratio experience meet 
the Company's agency criteria, and devotes substantial resources to 
fostering and maintaining strong relationships with its existing 
agencies.  The Company pays its agencies significant compensation in the 
form of profit sharing which is based in part on the underwriting 
profits of the agency's business written with the Company.  In addition, 
the Company occasionally sponsors incentive award programs to encourage 
agent profitability and growth.  (Refer to Part I Item 1C - Marketing 
for current program details.)










7
<PAGE>



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.

	The Company's focus on automobile and homeowners insurance 
primarily in Massachusetts has also been a factor in its success.  The 
terms, conditions and mandated rates of personal automobile insurance 
are subject to extensive regulation.  Because the Company has primarily 
served the Massachusetts market, it has both an in-depth understanding 
of this market and the ability to respond effectively to shifts in the 
state's regulatory and underwriting environments.  Currently, the 
Company is 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 affinity group marketing programs.  The primary purpose 
of affinity group marketing programs is to provide participating groups 
with a convenient means of purchasing private passenger automobile 
insurance through associations and employee groups.  Emphasis is placed 
on writing larger affinity groups, although accounts with as few as 25 
participants are considered.  Affinity groups are eligible for rate 
discounts which must be filed annually with the Division of Insurance.  
In general, the Company looks for affinity groups with mature/stable 
membership, favorable driving records and below average turnover ratios.  
Participants who leave the sponsoring group during the term of the 
policy are allowed to maintain the policy until expiration.  At 
expiration, a regular Commerce policy may be issued at the insured's 
option.

	During the latter part of 1995, Commerce signed affinity 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.  In 1998, primarily as a result of four 
consecutive private passenger rate reductions, the Company reduced the 
AAA clubs discount from 10% to 6%.  In 1999, the same 6% percent AAA 
club discount was approved for policies effective as of January 1, 1999.  
The AAA clubs discount can be combined with safe driver deviations for 
up to a 13.5% reduction from the 1999 state mandated rates.  Membership 
in these clubs is estimated to represent approximately one-third of the 
Massachusetts motoring public, and has been the primary reason for a 
43.2% increase in the number of personal automobile exposures written by 
Commerce since year-end 1995.  As expected, this increase leveled off in 
1998 as evidenced by the 1.9% increase in personal automobile exposures 
as compared to increases of 8.3% in 1997 and 29.8% in 1996.  In 1998, 
total direct premiums written attributable to the AAA group business 
were $457,430,000 or 57.3% of the Company's total direct premiums 
written (68.7% of the Company's total Massachusetts personal automobile 
premium), an increase of 8.1% over 1997.  Total exposures attributable 
to the AAA clubs group business were 547,100 or 67.6% of total 
Massachusetts personal automobile exposures in 1998, an increase of 
25,002 or 4.8% over 1997.  Of the total Massachusetts automobile 
exposures written by the Company, approximately 11% were written through 
insurance agencies owned by the AAA clubs.  The remaining 89% were 
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 one year.  Accordingly, Commerce, in 
coordination with the AAA clubs, aggressively pursued AAA members for 
the AAA Affinity 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.  This requirement has subsequently been waived by the 
Massachusetts Legislature for 1998 and 1999.  Waiving the penetration 
requirements allows insurance companies to continue offering group 
discounts without reaching the 35% level.  The waiver of penetration 
requirements cannot be predicted for years beyond 1999.

	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.


8
<PAGE>



	Since 1996, the Company has been granted approval to offer its 
Massachusetts customers safe driver deviations to drivers with Safe 
Driver Insurance Plan ("SDIP") classifications of either Steps 9 or 10.  
Safe driver deviations are rate discounts based on the customers driving 
record and resulting SDIP classification.  Steps 9 and 10 are the two 
best driver SDIP classifications in Massachusetts, representing drivers 
with no at fault accidents and not more than one minor moving vehicle 
violation in the last six years.  In January 1999, in response to the 
average personal automobile rate decisions over the last several years, 
the Company filed for and ultimately received approval to offer SDIP 
deviations of 8% for Step 9 and 3% for Step 10 for the 1999 calendar 
year.  At December 31, 1998, 67.8% of the Company's exposures were 
eligible for either Step 9 or Step 10 deviations.  For drivers that 
qualify, the Company's 1999 affinity group automobile discounts and SDIP 
deviations can be combined for up to a 13.5% (Step 9) and 9.8% (Step 10) 
reduction from the state mandated rates.  This can be compared to the 
SDIP deviations of 15% for Step 9 and 4% for Step 10 SDIP 
classifications for the 1998 calendar year.  For drivers that qualified, 
the Company's 1998 group automobile discounts and SDIP deviations could 
have been combined for up to a 20.1% (Step 9) and 9.8% (Step 10) 
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 personal lines policies with effective dates of 
January 1, 1998 and beyond.  As a result of this change, premium finance 
and service fees increased $6,366,000 or 90.0% in 1998.  Previously, for 
1997 and 1996, the Company had utilized a "late fee" system.

	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 22.0% of 
the voluntary commercial automobile premium produced by its voluntary 
agents in 1998 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 1999 and beyond.

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

	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 Massachusetts personal automobile market gives the Company a 
competitive advantage in determining which automobile risks to reinsure 
through C.A.R.  The Company's information systems also enable it to 
provide extensive support to its agencies.  This support includes a 
direct billing system, which covers over 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.












9
<PAGE>



Internal Software Development Project with PMSC

	The Company previously announced that it had entered into an 
agreement with, and purchased software known as Series III from, Policy 
Management Services Corporation ("PMSC") to allow for development of 
internal operating systems to enable the Company to first process 
policies in states outside of Massachusetts and eventually to replace 
the Company's systems for Massachusetts business.  Although the Company 
began writing business in Rhode Island in early 1998 on the Series III 
system, in early 1999 the Company stopped work on all development.  The 
Company is currently in the process of negotiating with PMSC as to the 
future continuation of the Series III system.  Costs to date for this 
effort have been approximately $47.0 million, of which $18.4 million is 
applicable to 1998.  Funds expended to date included the purchase of a 
main frame computer, license fees and the costs associated with 
programming, implementation and training.  The vast majority of these 
costs were expensed as incurred.


Year 2000 Compliance

	The year 2000 issue exists primarily because most computer 
programs were originally coded to recognize only the last two digits in 
the date field.  If not addressed and corrected, many systems could fail 
and produce erroneous results.  The impact of this could lead to a 
material adverse impact upon the Company's business including policy and 
claims processing.  As a result, considerable effort has taken place to 
assess the impact and determine whether to replace and/or reprogram the 
systems in order for the systems to distinguish the intended year.  The 
Company subsequently initiated the Century Change project to address all 
internal/external systems, software, agents, third parties and vendors 
in dealing with year 2000 compliance.

	The Century Change project, enlisting both a redeployment of 
internal resources and additional external consultant resources, 
involved the development of a formal plan to address the Year 2000 
problem and has progressed in accordance with that plan.  The Company's 
plan, which was designed to, and is proceeding so as to, avoid any 
material adverse business production issues, organized corporate systems 
into four sub-categories:  Data Exchange, AS400 Systems/Programs, PC 
Applications and PC Based Vendor Purchased Application Software. 
Different sub-plans were established for each category with the same 
Year 2000 objective in mind.  As a result of this effort, the majority 
of the programming changes dealing with policy issuance, claims 
processing  and maintenance have been completed as of October 1998.   
Other internal changes are expected to be completed in accordance with 
specified delivery dates as outlined in the plan.  Looking forward, the 
project has and will continue to move into the testing phases of the 
plan which will primarily conclude at the end of the second quarter 
1999.

	The Company has reviewed the Century Change status of  vendors who 
perform outside processing, those whose software the Company uses for 
internal processing and those third parties with whom the Company does 
significant business.  Accordingly, the Company has recognized that year 
2000 non-compliance could materially adversely affect the financial 
position, results of operations and cash flows of the Company.  As a 
result, the Company has contacted all significant related third parties 
in an effort to determine year 2000 compliance.  This program includes 
sending out questionnaires to our major business partners, including our 
agents, regarding their year 2000 readiness.  Based on the responses 
received to date, the Company does not any anticipate any potential 
impact on it's operations or financial condition.  If there are 
instances where the Company ascertains a potential non-compliance, the 
Company will seek alternative year 2000 compliant third parties.  This 
process is on-going and the Company has started to conduct system 
testing, as needed, with such third parties, which will conclude in 
1999.  While the Company is taking what it believes are the appropriate 
safeguards, there can be no assurances that the failure of such third 
parties to be year 2000 compliant will not have a material adverse 
impact on the Company.  The Company expects that the implementation of 
the contingency plans, if necessary, will not have a material adverse 
effect on the Company's ability to conduct its business or on its 
operating results or financial condition.

	The Company's Executive Committee, as well as all departments in 
the Company, are currently reviewing issues dealing with identifying 
possible year 2000 worst case scenarios and the development of 
contingency plans to respond to the likelihood of these scenarios. 
Contingency Plans will be discussed and developed, where deemed 
appropriate, for all material systems and relationships during the first 
half of 1999.  At a minimum, contingency plans will be developed for the 
continuation of policy and claim processing in the event that the 
Company's computer systems are not available due to a year 2000 related 
failure.




10
<PAGE>



	The project to date has involved internal staff costs as well as 
consulting expenses to prepare the systems for the year 2000.  Total 
costs to date for the Century Change project have been approximately 
$4.9 million ($3.6 million of which relate to 1998).  Costs to date 
applicable to internal staff and external consulting have been 
approximately $1.6 million and $3.3 million, respectively ($1.1 million 
and $2.5 million, respectively, relate to 1998).  Administration, 
programming, testing and implementation of system applications relating 
to the Century Change project are expected to cost an additional $1.9 
million in 1999. 


Market Risk:  Interest Rate Sensitivity and Equity Price Risk

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

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

	The Company manages its overall market risk by focusing on higher 
quality equity and fixed income investments,  by continuously reviewing 
the credit strength of all companies in which investments are made, by 
limiting exposure in any one investment and by monitoring the quality of 
the investment portfolio by taking into account credit ratings assigned 
by recognized rating organizations.

	As part of its investing activities, the Company assumes positions 
in fixed maturity,  equity, short-term and cash equivalents markets.  
The Company is, therefore, exposed to the impacts of interest rate 
changes in the market value of investments.  For 1998, the Company's 
exposure to interest rate changes and equity price risk has been 
estimated using sensitivity analysis. The interest rate impact is 
defined as the effect of a hypothetical interest rate change of plus-or-
minus 200 basis points on the market value of fixed maturities and 
preferred stocks.  The equity price risk is defined as a hypothetical 
change of plus-or-minus 10% in the fair value of common stocks.  Changes 
in interest rates would result in unrealized gains or losses in the 
market value of the fixed maturity and preferred stock portfolio due to 
differences between current market rates and the stated rates for these 
investments.  Based on the results of the sensitivity analysis at 
December 31, 1998, the Company's estimated market exposure for a 200 
basis point increase (decrease) in interest rates was calculated.  A 200 
basis point increase results in a $42,665 decrease in the market value 
of the fixed maturities and preferred stocks.  A 200 basis point 
decrease results in a $46,732 increase in the market value of the same 
securities.  The equity price risk at December 31, 1998,  based upon a 
10% increase in the fair value of common stocks would increase $28,396.  
Based upon a 10% decrease, common stocks would decrease $28,396.


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).  Commerce West, the Company's California property and 
casualty subsidiary, currently has a Best's rating of A- (Excellent).  
The Company's new acquisition ACIC 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.







11
<PAGE>



	Direct premiums written totalled approximately $796,858,000 in 
1998, of which motor vehicle insurance accounted for approximately 
$723,531,000, homeowners insurance accounted for approximately 
$59,761,000 and commercial multi-peril insurance accounted for 
approximately $8,216,000.  During 1997, direct premiums written totalled 
approximately $768,649,000, of which motor vehicle insurance accounted 
for approximately $698,149,000, homeowners insurance accounted for 
approximately $56,681,000 and commercial multi-peril insurance accounted 
for approximately $8,726,000.  Earned premiums are included in total 
revenues of the Company and represent the net earned premiums remaining 
after assumed and ceded reinsurance.  In 1998 and 1997, total revenues 
included insurance premiums earned of approximately $745,620,000 and 
$730,497,000, respectively.  Motor vehicle insurance accounted for 
approximately 96.1% and 94.6%, homeowners insurance accounted for 
approximately 3.1% and 4.2% and commercial multi-peril insurance 
accounted for approximately 0.5% and 0.9% of total earned premiums, in 
1998 and 1997, 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.

	Personal automobile insurance is subject to extensive regulation.  
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 1996 to 1998, Massachusetts 
personal automobile insurance premium rates decreased an average of 4.9% 
per year.  The Commissioner approved an average 0.7% increase in 
personal automobile premiums for 1999, the first increase since 1994.  
Average mandated rates decreased by 4.0%, 6.2% and 4.5% in 1998, 1997 
and 1996, respectively.  Coinciding with the 1999 rate increase, the 
Commissioner also approved a 1.0% increase in commission rates to agents 
selling private passenger automobile insurance for 1999.  The decision 
slightly offsets the financial impact of the average 0.7% increase in 
personal automobile premiums for 1999.

	Although average mandated personal automobile premium rates 
decreased 4.0% in 1998, the impact upon the Company resulted in a 2.6% 
increase in the average personal automobile premium per exposure.  The 
2.6% increase for the Company was 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, 1998 and 1999 average rate decisions 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.  Mandated rates for 1997, 1998 and 1999 include an 
adjustment to recoup $176 million from the industry.  The adjustment 
included in the rate decision to recoup the error was phased in at 40%, 
40% and 20% in 1997, 1998 and 1999.

	The estimated earned premium impact of the above item was 
approximately $15.3 million for 1997, $23.9 million for 1998 and is 
expected to be approximately $14.0 million for 1999.  The earnings per 
share after-tax impact resulting from lower earned premiums has been 
estimated at $0.28 for 1997, $0.43 for 1998, and is estimated to be 
$0.24 for 1999.  If the Company's 1999 market share increases 
(decreases), a larger (smaller) financial impact will result.








12
<PAGE>



	Also factored into the 1999 rate decision were two sanctions 
levied by the Commissioner against the Massachusetts personal automobile 
insurance industry.  One fine, amounting to $6 million, was imposed as a 
result of the industry's alleged failure to show that it adhered to 
adequate cost containment efforts as identified by the Commissioner.  A 
second fine of $3 million was allegedly the result of what the 
Commissioner termed "incomplete compliance" on the part of the 
Automobile Insurers Bureau of Massachusetts ("AIB") with a discovery 
order concerning disclosure of certain information as identified by the 
Commissioner.  The industry and several insurance carriers, including 
Commerce, are appealing one or both of the sanctions.

	In August 1998, then Acting Massachusetts Governor, Paul Cellucci 
("Governor"), signed legislation granting Massachusetts-based insurers, 
that choose to participate, $48 million a year in total tax relief in 
exchange for a, total industry wide, $200 million investment commitment 
to low income communities over a five-year period.  The legislation 
amounts to a gradual elimination of the 1.0% gross investment tax for 
those insurers choosing to commit funds to these community investments.  
The legislation effectively taxes Massachusetts based insurers at rates 
levied equal with out-of-state insurers.  Prior to the legislation, 
Massachusetts was the only state in the nation to tax domestic insurers 
at higher rates than charged to non-domestic insurers.  If the overall 
$200 million goal is attained, all domestic insurers will benefit from 
the lower tax rate.  The Company is currently analyzing the potential 
benefits of participating in this program.

	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 $150,000, 
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 1998, 1997 and 1996 the mortgage operations 
accounted for approximately $5,049,000, or 0.6%, $4,448,000, or 0.5% and 
$4,249,000, 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 1998, 1997 and 1996, Clark-Prout's 
revenues amounted to $785,000, or 0.1%, $840,000, or 0.1% and $930,000, 
or 0.1% 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.

Segment Information

	The information in Note M in the Company's 1998 Annual Report is 
incorporated herein by reference.



13
<PAGE>



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 45 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.

	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 1998 and 1997, the Company's 
Massachusetts private passenger automobile market share was 21.6% and 
21.8%, 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.


14
<PAGE>



	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 1998, the Company ceded approximately $63,268,000 or 
approximately 8.2% of the Company's Massachusetts personal automobile 
direct premiums written, which was approximately the same as in 1997.  
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 of the credits impacting 
the utilization formula, the Company estimates its personal automobile 
participation ratio in C.A.R. to be approximately 16.7% at December 31, 
1998.  This ratio is several percentage points below the Company's 
estimated 21.6% share of the Massachusetts personal automobile market.  
Significant changes in the industry-wide private passenger cession 
percentage are not expected for 1999.

	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 1998, the Company ceded 
approximately $7,167,000 or 24.1% of the Company's Massachusetts 
commercial automobile direct premiums written, a decrease of $1,348,000 
or 15.8% from 1997.

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

C. Marketing

	The Company markets its insurance products through a network of 
licensed independent agencies, 534 throughout Massachusetts (of which 
142 are ERPs), 219 in California and an additional 38 as a result of the 
recent acquisition of ACIC.  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 1998, each agency representing the Company in Massachusetts produced 
an average of approximately $1,422,000 of Company direct premiums 
written or a 6.5% increase as compared to 1997.  Also in Massachusetts 
during 1998, 193 agencies produced in excess of $1.0 million of direct 
premiums written, an additional 53 agencies produced over $2.0 million, 
an additional 25 agencies produced over $3.0 million and lastly, an 
additional 12 agencies produced over $4.0 million.  The Company's three 
largest agencies produced approximately $46.5, $13.9 and $9.4 million of 
the Company's direct premiums written, respectively, or approximately 
5.8%, 1.7% and 1.2% in 1998.  Total direct premiums written attributable 
to the AAA group business were $457,230,000 or 57.3% of the Company's 
total direct premiums written.  Total exposures attributable to the AAA 
clubs group business were 547,100 or 67.6% of total personal automobile 
exposures in 1998, an increase of 25,002 or 4.8% over 1997.  Of this 
amount, 11% was written through insurance agencies owned by the AAA 
clubs and 89% was written 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.









15
<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 1998 was 12.9%.  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.  This amount, if 
positive, is multiplied by the profit sharing commission rate and paid 
to the agent.  To qualify for profit sharing, a three-year average loss 
ratio of 50% to 55% or better is generally required.  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 1998, total commission 
expensed by the Company to its agencies amounted to 16.8% of direct 
premiums written, of which direct commissions and contingent commissions 
constituted 14.3% and 2.5%, respectively versus total commission 
expensed of 14.6%, of which 14.3% were direct and 0.3% were contingent 
in 1997.  Direct commissions are higher than the personal automobile 
rates primarily due to higher commission rates 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, 1997 and subsequent.  
In 1998, the Company's expense for contingent commissions was $20.0 
million versus $2.2 million in 1997.

	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.  This program resulted in 315 agents earning 
incentives at a total cost of approximately $4.3 million.  Much of the 
success of these programs was attributable to group marketing programs.  
In 1998, the Company initiated the T2000 Sales Incentive Contest.  One 
part of the contest will conclude on December 31, 1999, the other will 
conclude on May 31, 2000 with agents earning incentive trips taking 
place in 2000.  The estimated total cost is approximately $1.8 million 
of which approximately $678,000 was expensed in 1998.

	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 continuously explores new options on an ongoing basis.

	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 affinity 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.  In 1998, primarily as a result of four 
consecutive private passenger rate reductions, the Company reduced the 
AAA clubs discount from 10% to 6%.  In 1999, the same 6% percent AAA 
club discount was approved for policies effective as of January 1, 1999.  
The AAA clubs discount can be combined with safe driver deviations for 
up to a 13.5% reduction of the state mandated rates.  Membership in 
these clubs is estimated to represent approximately one-third of the 
Massachusetts motoring public, and has been the primary reason for a 
43.2% increase in the number of personal automobile exposures written by 
Commerce since year-end 1995.  As expected, this increase leveled off in 
1998 as evidenced by the 1.9% increase in personal automobile exposures 
as compared to increases of 8.3% in 1997 and 29.8% in 1996.  In 1998, 
total direct premiums written attributable to the AAA group business 
were $457,430,000 or 57.3% of the Company's total direct premiums 
written (68.7% of the Company's total Massachusetts personal automobile 
premium), an increase of 8.1% over 1997.

16
<PAGE>



Total exposures attributable to the AAA clubs group business were 
547,100 or 67.6% of total Massachusetts personal automobile exposures in 
1998, an increase of 25,002 or 4.8% over 1997.  Of the total 
Massachusetts automobile exposures written by the Company approximately 
11% were written through insurance agencies owned by the AAA clubs.  The 
remaining 89% were 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 one year.  Accordingly, Commerce, in 
coordination with 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.  This requirement has subsequently been waived by the 
Massachusetts Legislature for 1998 and 1999.  Waiving the penetration 
requirements allows insurance companies to continue offering group 
discounts without reaching the 35% level.  The waiver of penetration 
requirement cannot be predicted for years beyond 1999.

	Commerce and the AAA clubs have agreed that Commerce shall be its 
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.

	Since 1996, the Company has been granted approval to offer its 
Massachusetts customers safe driver deviations to drivers with Safe 
Driver Insurance Plan ("SDIP") classifications of either Steps 9 or 10.  
Safe driver deviations are rate discounts based on the customers driving 
record and resulting SDIP classification.  Steps 9 and 10 are the two 
best driver SDIP classifications in Massachusetts, representing drivers 
with no at fault accidents and not more than one minor moving vehicle 
violation in the last six years.  In January 1999, in response to the 
average personal automobile rate decisions over the last several years, 
the Company filed for and ultimately received approval to offer SDIP 
deviations of 8% for Step 9 and 3% for Step 10 for the 1999 calendar 
year.  At December 31, 1998, 68.7% of the Company's exposures were 
eligible for either Step 9 or Step 10 deviations.  For drivers that 
qualify, the Company's 1999 affinity group automobile discounts and SDIP 
deviations can be combined for up to a 13.5% (Step 9) and 9.8% (Step 10) 
reduction from the state mandated rates.  This can be compared to the 
SDIP deviations of 15% for Step 9 and 4% for Step 10 SDIP 
classifications for the 1998 calendar year.  For drivers that qualified, 
the Company's 1998 affinity group automobile discounts and SDIP 
deviations could be combined for up to a 20.1% (Step 9) and 9.8% (Step 
10) 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 personal lines automobile policies with effective 
dates of January 1, 1998 and beyond.  As a result of this change, 
premium finance and service fees increased $6,366,000 or 90.0% in 1998.  
Previously, for 1997 and 1996, the Company had utilized a "late fee" 
system.


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.


17
<PAGE>



	The Company and each of the approximately 45 other Servicing 
Carriers must write all automobile risks submitted to them.  
Massachusetts personal automobile insurance rates are fixed annually by 
the Commissioner.  All companies writing personal automobile policies 
are required to use such mandated rates, unless they have received prior 
approval from the Commissioner to offer a lower rate.  The actual 
premium paid by a particular policyholder, however, is adjusted, either 
up or down, based upon the SDIP record of the insured operator.  Moving 
violations and accidents for which the insured was at fault within the 
most recent six year period are used to determine each operator's SDIP 
surcharge or credit.  The competitive nature of the Massachusetts 
personal automobile insurance market which began in 1995 continued 
through 1998 and into 1999.

	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 was 
added to the Business Owners 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.

	In keeping with the Company's long-term growth objective to expand 
outside Massachusetts, the Company has also monitored potential 
acquisition opportunities 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.  This objective 
has been exemplified by the 1995 acquisition of Commerce West, a 
personal automobile insurer, located in Pleasanton, California and, most 
recently, in January 1999, by the acquisition of ACIC, located in 
Columbus, Ohio.











18
<PAGE>



	ACIC writes personal automobile and homeowners insurance solely 
through 38 independent agents affiliated with AAA automobile clubs.  
Commerce and AAA SNE intend that ACIC will retain its management team 
and staff and continue to have its principle office in Columbus, Ohio.

	Commerce, a subsidiary of the Company, invested $90.8 million in 
the joint venture (ACIC Holding Co., Inc.) to fund the ACIC acquisition 
and to capitalize the joint venture that is owned together with AAA SNE.  
Of this $90.8 million, Commerce invested $90 million in the form of 
preferred stock and an additional $800 representing its 80% common stock 
ownership.  The terms of the preferred stock call for quarterly cash 
dividends at the rate of 10% per annum.  AAA SNE invested $200 
representing its 20% common stock ownership.  Commerce intends to 
consolidate ACIC Holdings Co., Inc. and its wholly-owned subsidiary ACIC 
for financial reporting purposes.  Since 1995, Commerce has maintained 
an affinity group marketing relationship with AAA Insurance Agency, 
Inc., a subsidiary of AAA SNE.  AAA Insurance Agency, Inc. has been an 
agent of Commerce since 1985.


E. Reinsurance

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

Property and Catastrophe Reinsurance

	From September 30, 1995 through June 30, 1998, the Company had a 
combined property quota share and excess loss reinsurance contract which 
was written with six reinsurance companies.  Under the quota share 
portion of the arrangement, the reinsurers indemnified the Company for 
45% 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 49% of the net premium pertaining to the related 
business.  The maximum per occurrence loss reimbursement was $50.0 
million and the maximum annual aggregate occurrence loss reimbursement 
was $75.0 million.  Under the excess loss reinsurance portion of the 
arrangement, the Company reinsured each risk, retaining $125,000 and 
reinsuring 100% of the next $875,000.

	Various catastrophe only reinsurance programs were utilized from 
1996 through May, 1998 in conjunction with the quota share and excess 
loss program noted above.  

	Effective July 1, 1998, the Company expanded the quota share 
portion of the program.  A 75% quota-share reinsurance program was 
incepted, covering all non-automobile property and liability business, 
except umbrella policies.  The excess loss portion of the program was 
reduced on July 1, 1998 and completely eliminated on September 30, 1998.  
The expanded program is split between Employers Reinsurance Corporation, 
American Re-Insurance Company, Nationwide Mutual Insurance Company and 
Swiss Reinsurance America Corporation.  The maximum per occurrence loss 
reimbursement is the higher of 350% of premium ceded under the program 
or $175.9 million.  The maximum annual aggregate occurrence loss 
reimbursement is the higher of 450% of premium ceded under the program 
or $226.1 million.  A sliding scale commission, based on loss ratio, is 
utilized under this program.  This program provides the Company with 
sufficient protection for catastrophe coverage so as to enable the 
Company to forego pure catastrophe reinsurance coverage, which was 
previously tailored in conjunction with the former quota share 
arrangement.











19
<PAGE>



	The table below provides information depicting the approximate 
recovery under the expanded quota share contract at various loss 
scenarios, if a single catastrophe were to strike (in thousands):
<TABLE>
<CAPTION>
										 Net Loss
				  Total		Reinsurance		Retained by
				  Loss 		 Recovery  		the Company
                        <S>                 <C>               <C>
				$ 50,000		  $ 37,500		  $12,500
				 100,000		    75,000		   25,000
				 150,000		   112,500		   37,500
				 200,000		   150,000		   50,000
				 250,000		   175,875		   74,125
</TABLE>

	Under the above scenario, the Company has no reinsurance 
recoveries for a single event catastrophe in excess of a total loss of 
approximately $234.5 million.  The Company's estimated total loss on its 
other than automobile business for 100 and 250 year storms is $108.6 
million and $184.2 million, respectively.  The Company estimates were 
derived through the services of Swiss Reinsurance America Corporation 
who utilized the CLASIC model provided by Applied Insurance Research.

Written premiums ceded in 1998, 1997 and 1996 under the above mentioned 
programs were $54.0 million, $27.5 million and $26.6 million, 
respectively.  Ceding commission income is calculated on a ceded earned 
premium basis.

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 (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/$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/$300,000 on a 65% quota share basis in regard to limits up to 
$1.0 million and 100% quota share basis for limits in excess of $1.0 
million but not exceeding $3.0 million.  These coverages are placed with 
American Re-Insurance Company (rated A+ by A.M. Best).

	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, 1998.

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 715 people at its claims 
department, located in Webster, Massachusetts.  In addition to these 
individuals, the Company utilizes the services of approximately 31 
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.





20
<PAGE>



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

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

	The Massachusetts Unfair Claims Settlement Practices Act ("Chapter 
176D") 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.

	Since 1996, the Company has been expanding 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 December 31, 1998, there were 230 agents who 
have signed up for this claim reporting methodology; these agents 
represent approximately 55% 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.


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 annually obtain a certification from either a qualified 
actuary or an approved loss reserve specialist that its loss and LAE 
reserves are reasonable.










21
<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, 1998 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 include 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 38 through 41 of the Company's 1998 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 $5,687,000 and 
$6,924,000 in 1998 and 1997, respectively.

	The following table represents the development of reserves, net of 
reinsurance, for 1988 through 1998.  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, 1998.







22
<PAGE>


<TABLE>
<CAPTION>
	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.
						Year ended December 31,			
					
                   1998       1997      1996      1995      1994      
1993      1992      1991      1990      1989      1988
                                                     ($ in thousands)
<S>                <C>       <C>       <C>       <C>       <C>       
<C>       <C>       <C>       <C>      <C>      <C>
Reserves for
 losses and loss
 adjustment
 expenses(1).....  $498,829  $530,077  $533,980  $493,911  $455,460  
$422,224  $316,261  $228,657  $177,657 $138,456 $100,882

Paid (cumulative)
 as a percentage
 of current re-
 serves as of:
  One year later..               48.6      48.9      47.4      47.0      
52.4      51.0      46.3      46.2     46.8     41.5
  Two years later.                         70.2      68.7      67.3      
71.5      76.7      71.3      68.5     69.3     67.5
  Three years
   later..........                                   82.2      79.5      
81.7      85.8      87.4      84.6     81.8     81.9
  Four years
   later..........                                             88.1      
87.9      90.9      91.4      95.8     90.3     88.8
  Five years later                                                       
92.6      93.8      93.6      96.3     98.1     92.0
  Six years later.                                                                 
96.6      95.1      95.8     98.1     99.0
  Seven years
   later..........                                                                           
97.1      96.7     97.0     99.3
  Eight years
   later..........                                                                                     
98.1     97.7     97.2
  Nine years 
   later..........                                                                                              
98.4     97.7
  Ten years later.                                                                                                       
98.2

Reserves re-estimated
 as a percentage of
 initial reserves as of:
  One year later..               88.4      84.3      82.2      83.6      
83.9      87.2      82.3      84.5     92.7     96.9
  Two years later.                         79.3      74.1      73.2      
75.9      78.6      82.8      74.6     82.8     87.7
  Three years 
   later..........                                   71.5      68.9      
69.4      73.0      77.1      75.1     76.7     80.5
  Four years later                                             67.8      
67.3      68.8      72.2      71.7     78.3     76.3
  Five years later                                                       
66.4      67.0      68.7      68.2     75.6     80.2
  Six years later.                                                                 
66.7      67.8      65.5     74.0     78.0
  Seven years
    later.........                                                                           
67.6      64.6     71.8     77.3
  Eight years
    later.........                                                                                     
64.6     71.3     75.4
  Nine years later                                                                                              
71.2     75.5
  Ten years later.                                                                                                       
75.8

Redundancy expressed as a
 percent of yearend
 reserves.........               11.6      20.7      28.5      32.2      
33.6      33.3      32.4      35.4     28.8     24.2
</TABLE>
(1) Prior to effect of ceded reinsurance recoverable.
<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 and LAE ratio, underwriting expense ratio and combined 
ratio, and the industry combined ratio, on a statutory basis, are shown 
in the following table.  The Company's ratios include lines of insurance 
other than automobile as do the industry combined ratios for all 
writers.  Data for the property and casualty industry generally may not 
be directly comparable to Company data.  This is due to the fact that 
the Company conducts its business primarily in Massachusetts.
<TABLE>
<CAPTION>
									Year Ended 
December 31,			
						 1998		 1997		 1996		 
1995		 1994

<S>                                 <C>         <C>         <C>         
<C>         <C>
Company Statutory Ratios (unaudited):
  Loss and LAE Ratio..............	 71.6%	 71.4%	 70.9%	 
62.0%	 64.6%
  Underwriting Expense Ratio......	 26.5		 25.1		 27.1		 
29.0		 27.1
   Combined Ratio.................	 98.1%	 96.5%	 98.0%	 
91.0%	 91.7%

   Industry combined ratio
   (all writers)(1)...............	101.2%	100.1%	102.9%
	102.8%	103.0%
</TABLE>
					
(1) Source:  Best's Review (January, 1999), as reported by A.M. Best for 
all property and casualty insurance companies and weighted to reflect 
the Company's product mix. The 1998 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,			
						 1998		 1997		 1996		 
1995		 1994
									(dollars in 
thousands)
<S>                                 <C>         <C>         <C>         
<C>         <C>
Net premiums written by the
 Company...........................	$745,620	$741,501	$711,570
	$603,421	$589,197
Policyholders' surplus of the
 Company...........................	 563,503	 516,598	 464,739	 
440,110	 349,775
The Company's ratio................	   132.2%	   143.3%	   153.1%	   
137.1%	   168.5%
Industry ratio(1)..................	    80.0%	    90.0%	   110.0%	   
110.0%	   130.0%
</TABLE>
__________________________________
(1) Source:  Best's Review (January, 1999), for all property and 
casualty insurance companies.  The 1998 industry information is 
estimated by A.M. Best.



24
<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 and preferred stock 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 22 of the Company's 1998 Annual Report.

	The Company's investment portfolio carried at market value as of 
December 31, 1998, was $1,257,900,000.  Of that amount, 49.2% was 
invested in fixed maturities, 15.7% was invested in preferred stocks, 
22.6% was invested in common stocks, 0.3% was invested in short-term 
investments and 6.5% was invested in mortgage loans and other 
investments.  Cash and cash equivalents accounted for the remaining 
5.7%.

	Investments in fixed maturities, which include taxable and non-
taxable bonds, 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, through other 
comprehensive income.  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 (18.2%) and 
municipal bonds (81.8%).  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, 1998.
<TABLE>
<CAPTION>
									Year Ended 
December 31,			
						  1998        1997       1996         
1995       1994
									(dollars in 
thousands)
	
<S>                               <C>          <C>        <C>         
<C>          <C>
Average net investments.......... $1,242,633   $1,181,181 $1,131,760  
$1,033,439   $893,628
Net realized gains (losses) on 
  investments....................      6,769       22,770     (7,574)        
712     45,612
Net accumulated other
  comprehensive income (loss):
    on fixed maturities..........     18,785       23,813     16,191      
13,969    (56,366)
    on preferred stocks..........     (2,845)         364       (801)       
(377)   (10,500)
    on common stocks.............     22,601       17,718     20,116      
11,799      1,613
Net investment income............     86,501       80,794     77,402      
71,313     62,901
Net investment income as a
  percentage of total average
  investments....................       6.96%       6.84%       6.84%       
6.90%      7.03%
Net investment income after-tax
  as a percentage of total
  average investments............       5.72%       5.53%       5.61%       
5.74%      5.27%
</TABLE>




25
<PAGE>



	The following table sets forth an analysis of the fair market 
value (except mortgages and collateral loans which are at cost) by the 
type of investment at December 31, 1994 through 1998:
<TABLE>
<CAPTION>
								     Year Ended  
December 31,		      	
						   1998        1997        1996       
1995       1994
									(dollars in 
thousands)
<S>                                <C>         <C>         <C>         
<C>         <C>
Type of Investment
  GNMA mortgage-backed bonds...... $  112,588  $  181,069  $  225,552  $  
221,373  $ 233,287
  Tax exempt state and municipal
   bonds..........................    506,679     409,528     491,150     
593,904    511,723
      Total fixed maturities......    619,267     590,597     716,702     
815,277    745,010

  Preferred stocks................    197,425     148,499     147,680     
111,220     85,574

  Preferred stock mutual funds....    172,455     119,439      29,087         
-          -
  Common stocks...................    111,506      58,650      56,954      
40,359      9,656
      Total common stocks.........    283,961     178,089      86,041      
40,359      9,656

  Short-term investments..........      3,669     132,700         -           
-          -
  Mortgages and collateral loans
   (net of allowance for possible
   loan losses)...................     73,510      82,839      74,586      
75,609     58,590
  Cash and cash equivalents.......     72,243     106,188     140,535      
52,665      5,485
  Other investments...............      7,825       3,783       2,127       
1,648        716
      Total investments........... $1,257,900  $1,242,695  $1,167,671  
$1,096,778  $ 905,031
</TABLE>



	The table below sets forth as of December 31, 1998 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
												          
Fixed
												        
Maturity
											Amount        
Portfolio
										
	(dollars in thousands)
            <S>                                                  <C>             
<C>
		Period from December 31, 1998 to maturity:
		  One year or less.................................  $    -             
- %
		  More than one year to five years.................     
2,177          0.3
		  More than five years to ten years................     
1,740          0.3
		  More than ten years..............................   
615,350         99.4
										     
$619,267        100.0%
</TABLE>









26
<PAGE>



	At December 31, 1998, the Company's fixed income portfolio, which 
represented 49.2% of the Company's total invested assets, had an 
average stated maturity of approximately 22.2 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, 
1998, the Company's fixed income portfolio had a weighted average 
duration of 4.2 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, which was used to calculate the above maturity data, 
utilizes optional call dates, sinking fund requirements and assumes a 
non-static prepayment pattern in deriving these averages.

J. Regulation

General

	The Company's primary business is subject to extensive 
regulation.  In Massachusetts the Commissioner 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 1996 to 1998 Massachusetts 
personal automobile insurance premium rates decreased an average of 
4.9% per year.  The Commissioner approved an average 0.7% increase in 
personal automobile premiums for 1999, the first increase since 1994.  
Average mandated rates decreased 4.0%, 6.2% and 4.5% in 1998, 1997 and 
1996, respectively.  Coinciding with the 1999 rate increase, the 
Commissioner also approved a 1.0% increase in commission rates to 
agents selling private passenger automobile insurance  for 1999.  The 
decision slightly offsets the financial benefit of the average 0.7% 
increase in personal automobile premiums for 1999.

	Although personal automobile premium rates decreased on average 
by 4.9% in 1998, the impact upon the Company resulted in a 2.6% 
increase in the average personal automobile premium per exposure (each 
vehicle insured).  The 2.6% increase for the Company was 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 differed 
from that of the industry.

	The 1997, 1998 and 1999 average rate decisions 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.  Mandated rates for 1997, 1998 and 1999 include 
an adjustment to recoup $176 million from the industry.  The adjustment 
included in the rate decision to recoup the error was phased in at 40%, 
40% and 20% in 1997, 1998 and 1999.


27
<PAGE>


	The estimated earned premium impact of the above item, coupled 
with the impact of a previous year imbalance in the SDIP, approximately 
$15.3 million for 1997, $23.9 million for 1998 and $14.0 million for 
1999.  The earnings per share after-tax impact resulting from lower 
earned premiums has been estimated at $0.28 for 1997, $0.43 for 1998, 
and is estimated to be $0.24 for 1999.  If the Company's future market 
share increases (decreases), a larger (smaller) financial impact will 
result.

	Also factored into the 1999 rate decision were two sanctions 
levied by the Commissioner against the Massachusetts personal 
automobile insurance industry.  One fine, amounting to $6 million, was 
imposed as a result of the industry's alleged failure to show that it 
adhered to adequate cost containment efforts as identified by the 
Commissioner.  A second fine of $3 million was allegedly the result of 
what the Commissioner termed "incomplete compliance" on the part of the 
Automobile Insurers Bureau of Massachusetts ("AIB") with a discovery 
order concerning disclosure of certain information as identified by the 
Commissioner.  The industry and several insurance carriers, including 
Commerce, are appealing one or both of the sanctions.

	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 and are scheduled for the five year period ended December 31, 1998 
during 1999.  Commerce West was last examined in 1997 by the California 
Division of Insurance for the five year period ended December 31, 1996.  
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.  ACIC was examined in 1999 by the Ohio Division of 
Insurance for the three year period ending December 31, 1997.  The 
final impact has yet to be issued.

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.

	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.
28
<PAGE>



	The Commissioner sets an average minimum direct agency commission 
rate for personal automobile insurance, which in 1998 was 12.9%.  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 (46, including the Company) act as 
Servicing Carriers for the risks it insures.

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

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

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

	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."







29
<PAGE>



Insurance Holding Company Structure

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

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

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

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

	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 may, 
within certain limitations, pay such dividends and then file a report 
with the Commissioner.  Dividends in excess of these limitations are 
called extraordinary dividends.  An extraordinary dividend is any 
dividend or other property, whose fair value together with other 
dividends or distributions made within the preceding twelve months 
exceeds the greater of ten percent of the insurer's surplus as regards 
to policyholders as of the end of the preceding year, or the net income 
of a non-life insurance company for the preceding year.  No pro-rata 
distribution of any class of the insurer's own securities is to be 
included.  No Massachusetts insurance company shall pay an 
extraordinary dividend or other extraordinary distribution until thirty 
days after the Commissioner has received notice of the intended 
distribution and has not objected.  No extraordinary dividends were 
paid in 1998, 1997 and 1996.












30
<PAGE>


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 has been 
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 $271,000 in 1998 and $283,000 in 1997.  M.I.I.F. assessed 
Commerce and Citation an aggregate of $742,000 in 1996.  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, 1998, 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.

	The Company's subsidiaries, Commerce, Citation, and Commerce West 
have RBC amounts at December 31, 1998 of $71 million, $2 million, and 
$3 million, respectively, and they have statutory surplus of 
approximately $470 million, $93 million and $25 million, respectively.  
The statutory surplus of Commerce, Citation and Commerce West at 
December 31, 1998 exceeded the RBC Company Action Levels of $142 
million, $4 million and $6 million, respectively, by approximately $328 
million, $89 million and $19 million, respectively.  The Company's new 
acquisition, ACIC, has RBC amounts at December 31, 1998 of $15 million 
and they have statutory surplus of approximately $90 million.  The 
statutory surplus of ACIC, at December 31, 1998, exceeded the RBC 
company action levels of $30 million by approximately $60 million.  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.  
31
<PAGE>



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, including the Company, 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 January 1999, in response to the average 
personal automobile rate decisions over the last several years, the 
Company received approval to offer SDIP deviations of 8% for Step 9 and 
3% for Step 10 for the 1999 calendar year.  For drivers that qualify, 
the Company's 1999 affinity group automobile discounts and SDIP 
deviations can be combined for up to 13.5% (Step 9) and 9.8% (Step 10) 
reduction of the state mandated rates.  This can be compared to the 
SDIP deviations of 15% for Step 9 and 4% for Step 10 SDIP 
classifications for the 1998 calendar year.  For drivers that 
qualified, the Company's 1998 affinity group automobile discounts and 
SDIP deviations then could have been combined for up to a 20.1% (Step 
9) and 9.8% (Step 10) reduction from the state mandated rates.

	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.

	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, 1998, the Company and its subsidiaries 
employed 1,533 people.  The Company is not a party to any collective 
bargaining agreements and believes its relationship with employees to 
be good.  ACIC, which was acquired in January 1999, employed another 
209 people.

32
<PAGE>



	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.  In addition to alternative work schedules and casual dress, 
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.  A 
newly constructed child care center can currently accommodate up to 200 
children of our employees.

	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 1,662 
participants at December 31, 1998.

	In September 1998, the Company implemented a 401(k) Plan enabling 
eligible employees to contribute up to 15% of eligible compensation on 
a pre-tax basis up to the annual maximum limits under federal tax law.  
The Company incurs no expenses in the form of matching contributions 
but does pay for administration of The Plan.


ITEM 2. PROPERTIES

	The Company conducts its Massachusetts operations from 
approximately 297,000 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.  In 
1998, the Company completed the construction of a 20,000 square foot 
child care center located on a separate seven acre site in Webster, 
Massachusetts.  The child care center enables the Company to care for 
up to 200 children of employees.  Commerce West currently leases 
approximately 12,000 square feet of office space in Pleasanton, 
California.  The Company's new acquisition, ACIC, conducts its 
operations from approximately 39,000 square feet of space in a building 
located on a two acre site in Columbus, Ohio.  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 1998 
Consolidated Financial Statements, which is incorporated herein by 
reference from page 38 of the Company's 1998 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 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.


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 1998.







33
<PAGE>



ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT

	The Company's executive officers are as follows:
<TABLE>
<cation>
		Name				Age			Position with 
Company
      <S>                           <C>         <C>
	Arthur J. Remillard, Jr.	 68		Chief Executive 
Officer, Director

	Gerald Fels				 56		Executive Vice 
President,
                                                Chief Financial 
Officer, Director

	Arthur J. Remillard, III	 43		Senior Vice President--
Policyholder
                                                Benefits, Assistant 
Clerk, Director

	Regan P. Remillard		 35		Senior Vice President--
General Counsel, 
                                                President of Commerce 
West, Chief Executive 
                                                Officer of ACIC, 
Director

	David H. Cochrane			 45		Senior Vice President--
Underwriting 
                                                of Commerce and 
Citation

	Peter J. Dignan			 47		Senior Vice President--
Marketing
                                                of Commerce and 
Citation

	Mary M. Fontaine			 42		Senior Vice President--
Human Resources

	Joyce B. Virostek			 56		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 1976 and 
Commerce since 1972.  Mr Remillard, Jr. has been in the insurance 
business for more than 30 years.  Mr. Remillard, Jr. is Chairman of the 
Automobile Insurers Bureau of Massachusetts.  Mr. Remillard, Jr. is 
also a member of the Governing Committee, Chairman of the Actuarial 
Committee, a member of the Governing Committee Review Panel, Chairman 
of the Budget Committee and a member of the Personnel Committee of 
C.A.R.

	Gerald Fels, a certified public accountant, was appointed 
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 1976 to 1995 and Commerce from 1975 
to 1995.  Mr. Fels has also been Chief Financial Officer of the Company 
since 1976 and Commerce since 1975.  Mr. Fels also serves on the C.A.R. 
Audit Committee.

	Arthur J. Remillard, III was appointed Senior Vice President--
Policyholder Benefits in 1988 and has been Assistant Clerk of the 
Company since 1982. From 1981 to 1988, Mr. Remillard, III had been Vice 
President--Mortgage Operations.  In addition, Mr. Remillard, III has 
also served on the Board of Governors of the Insurance Fraud Bureau of 
the A.I.B. since 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 appointed Chief Executive Officer of 
American Commerce Insurance Company in 1999.  Mr. Remillard has been 
President of Commerce West Insurance Company since 1996.  Mr. Remillard 
has been Senior Vice President--General Counsel since 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.



34
<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 appointed 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 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.








































35
<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 1998 and 1997 were as follows:
<TABLE>
<CAPTION>
					             1998            	                
1997         	
					    High     Low      Close		 High     
Low     Close
      <S>                         <C>     <C>      <C>            <C>     
<C>      <C> 
	First Quarter...........    $37-3/8 $31-3/4  $35-1/4        $29     
$22-7/8  $23-1/4
	Second Quarter..........     39-5/8  34-3/8   38-3/4         24-
3/4  21-3/8   24-5/8
	Third Quarter...........     39      24-7/8   27-5/8         33-
3/8  23-7/8   30-7/8
	Fourth Quarter..........     36-1/2  22-11/16 35-7/16        36      
30       32-5/8
</TABLE>
	As of March 1, 1999, there were 1,241 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 $1.07 per share 
and $1.03 per share in 1998 and 1997, respectively.  On May 15, 1998, 
the Board voted to increase the quarterly stockholder dividend from 
$0.26 to $0.27 per share to stockholders of record as of June 5, 1998.  
Prior to that declaration, the Company had paid quarterly dividends of 
$0.26 per share dating back to May 30, 1997 when the Board voted to 
increase the dividend from $0.25 to $0.26 per share.

	The Company purchased no additional Treasury Stock under the 
stock buyback program during 1998.  The stock buyback program, 
authorized by the Board on May 19, 1995, enables the Company to 
purchase up to 3,000,000 shares of the Company's common stock.  As of 
December 31, 1998, 1,957,348 shares of Treasury Stock were purchased 
under the program.  Since December 31, 1998, the Company completed its 
share purchases under that program.  Additionally, under prior Board of 
Director authorizations, the Company purchased 143,248 shares through 
March 19, 1999.

	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 50 of the Company's 1998 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 22 of the Company's 1998 
Annual Report is incorporated herein by reference.

ITEM 7a. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK

	The information on page 4 through page 22 of the Company's 1998 
Annual Report is incorporated herein by reference.

36
<PAGE>



ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

	The Company's Consolidated Financial Statements for the years 
ended December 31, 1998, 1997 and 1996 and the report of its 
independent auditors on pages 24 through 49 of the Company's 1998 
Annual Report are incorporated herein by reference.


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

	None.


PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

	The information called for by this Item and not provided in Item 
4A will be contained in the Company's Proxy Statement which the Company 
intends to file within 120 days after the end of the Company's fiscal 
year ended December 31, 1998 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, 1998 
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, 1998 
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, 1998 
and such information is incorporated herein by reference.












37
<PAGE>


PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-
K
<TABLE>
<CAPTION>
    <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 1998 
Annual Report:
											
		      Page

              Report of Independent 
Auditors...................................      24
              Consolidated Balance Sheets as of December 31, 1998 and 
1997.....      25
              Consolidated Statements of Earnings for the years ended
               December 31, 1998, 1997 and 
1996................................      26
              Consolidated Statements of Stockholders' Equity for the 
years
               ended December 31, 1998, 1997 and 
1996..........................      27
              Consolidated Statements of Cash Flows for the years ended
               December 31, 1998, 1997 and 
1996................................      28
              Consolidated Statements of Cash Flows - Reconciliation of 
Net 
               Earnings to Net Cash provided by Operating Activities 
for the 
                years ended December 31, 1998, 1997 and 
1996...................      29
              Notes to Consolidated Financial 
Statements.......................      30

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

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

     B.      No reports on Form 8-K were filed during the quarter ended 
December 31,
 1998
</TABLE>
































38
<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: February 19, 1999
								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 Commerce 
West, Chief Executive 
                                                Officer of American 
Commerce Insurance 
                                                Company 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)
</TABLE>

39
<PAGE>



<TABLE>
<CAPTION>
      <S>                                       <C>
      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)


      ROGER E. LAVOIE                           Director
      (Roger E. Lavoie)


      NORMAND R. MAROIS                         Director
      (Normand R. Marois)


      SURYAKANT M. PATEL                        Director
      (Suryakant M. Patel)


                                                Director
      (Antranig A. Sahagian)


      GURBACHAN SINGH                           Director
      (Gurbachan Singh)
</TABLE>





















40
<PAGE>



THE COMMERCE GROUP, INC. AND SUBSIDIARIES

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

  <S>                                                                                
<C>
  Ernst & Young LLP Consent of Independent 
Auditors............................      42

  Coopers & Lybrand, L.L.P. Report of Independent Accountants on 
   Financial Statement 
Schedules...............................................      43

  Coopers & Lybrand, L.L.P. Consent of Independent 
Accountants.................      44
</TABLE>

Schedules
<TABLE>
<CAPTION>
   <S>                                                                               
<C>
   II		Condensed Financial Information of the Registrant as of and 
for the
		 years ended December 31, 1998, 1997 and 
1996......................      45

   III	Supplementary Insurance Information for the years ended
		 December 31, 1998, 1997 and 1996 
 .................................      50

   IV		Reinsurance for the years ended December 31, 1998, 1997 and 
1996...      51

    V		Valuation and Qualifying Accounts for the years ended
		 December 31, 1998, 1997 and 
1996..................................      52

    X		Supplemental Information Concerning Property-Casualty 
Insurance
		 Operations for the years ended December 31, 1998, 1997 and 
1996...      53
</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.





























41
<PAGE>



CONSENT OF INDEPENDENT AUDITORS


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

We consent to the incorporation by reference in this Annual Report (Form 
10-K) of The Commerce Group, Inc. of our report dated January 22, 1999, 
included in the 1998 Annual Report to Stockholders of The Commerce 
Group, Inc.

Our audits also included the 1998 and 1997 financial statement schedules 
of The Commerce Group, Inc. listed in Item 14(a).  The accompanying 
financial statement schedules for the year 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 audits.  In our opinion, the 1998 and 
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.

We also consent to the incorporation by reference in the Registration 
Statement (Form S-8 No. 333-62367) pertaining to The Commerce Group, 
Inc. 401(k) Plan of our report dated January 22, 1999, with respect to 
the consolidated financial statements incorporated herein by reference, 
and our report included in the preceding paragraph with respect to the 
financial statement schedules included in this Annual Report (Form 10-K) 
of The Commerce Group, Inc.


ERNST & YOUNG LLP

Boston, Massachusetts
March 29, 1999




















42
<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 
the year then ended, 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 audit of such financial statements, 
we have also audited the related financial statement schedules as of 
December 31, 1996 and for the year then ended, listed in the index on 
Page 41 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

































43
<PAGE>





CONSENT OF INDEPENDENT ACCOUNTANTS





We consent to the incorporation by reference in the Registration 
Statement of The Commerce Group, Inc. on Form S-8 (File No. 333-62367) 
of our report dated January 24, on our audit of the consolidated 
financial statements and consolidated financial statement schedules of 
The Commerce Group, Inc., as of and for the year ended December 31, 
1996, which report is incorporated by reference in this Annual Report on 
Form 10-K.






COOPERS & LYBRAND L.L.P.



Boston, Massachusetts
March 25, 1999




























44




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)

										  1998	  
1997	  1996
ASSETS
<TABLE>
<CAPTION>
<S>                                                         <C>         
<C>         <C>
Investments:
  Investment in Commerce Holdings, Inc...................	$651,447
	$610,854	$551,490
  Investment in Bay Finance Company, Inc.................	  25,558	  
23,750	  33,061
  Investment in the Clark-Prout Insurance Agency, Inc....	     313	     
566	   1,282
  Other investments......................................	     -  	     
-  	   2,000
      Total investments..................................	 677,318	 
635,170	 587,833

Cash and cash equivalents................................	       2	       
2	       2
Property and equipment, net of accumulated depreciation..	   1,219	   
1,368	   1,345
Receivable from affiliates...............................	  37,077	  
30,395	   3,767
Current income taxes.....................................	     -  	   
7,682	   3,468
Deferred income taxes....................................	   1,706	     
-           -  
Other assets.............................................	   3,626	   
4,628	   2,411
      Total assets.......................................	$720,948
	$679,245	$598,826

LIABILITIES AND STOCKHOLDERS' EQUITY

Liabilities:
  Accounts payable and accrued expenses..................	$  9,609
	$ 23,428	$  9,506
  Deferred income taxes..................................	     -  	   
4,691	   1,831
  Current income taxes...................................	   5,519         
-           -  
  Other liabilities......................................	      35       
1,330	     450
      Total liabilities..................................	  15,163	  
29,449	  11,787

Stockholders' equity:
  Capital stock:
    Common stock.........................................	  19,000	  
19,000	  19,000
  Paid-in capital........................................	  29,621	  
29,621	  29,621
  Retained earnings......................................	 695,851	 
639,862	 576,618
										 744,472	 
688,483	 625,239
  Treasury stock, 1,957,348, 1,957,348 and 1,937,348
  shares in 1998, 1997 and 1996, at cost.................	 (38,687)	 
(38,687)	 (38,200)


      Total stockholders' equity.........................	 705,785	 
649,796	 587,039

      Total liabilities and stockholders' equity.........	$720,948
	$679,245	$598,826
</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)

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

										 1998		 
1997		 1996
<TABLE>
<CAPTION> 
<S>                                                         <C>         
<C>        <C>
Revenues
  Dividends received from subsidiaries...................	$ 51,745
	$ 47,105   $ 43,470
  Rent income............................................	     461	     
397        357
  Investment income......................................	     -  	     
-            8
     Total revenues......................................	  52,206	  
47,502     43,835

Expenses
  Depreciation...........................................	     298	     
242        257
  Administrative expenses................................	     492	  
11,933      5,698
     Total expenses......................................	     790	  
12,175      5,955

Earnings before income tax benefits and equity in
 net earnings of subsidiaries over amounts distributed...	  51,416	  
35,327     37,880
Income tax benefits......................................	    (991)	  
(5,063)    (2,880)

Earnings before equity in net earnings of subsidiaries
 over amounts distributed................................	  52,407	  
40,390     40,760

Equity in net earnings of subsidiaries over amounts
 distributed.............................................	  44,085      
55,825     33,204
     Net earnings........................................	$ 96,492    
$ 96,215   $ 73,964
</TABLE>




















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

46
<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)

										  1998	  
1997	  1996
<TABLE>
<CAPTION>
<S>                                                        <C>          
<C>         <C>
Cash flows from operating activities:
  Net earnings............................................ $  96,492    
$ 96,215    $ 73,964
  Adjustments to reconcile net earnings to net cash
   provided by operating activities:
    Dividends received from consolidated subsidiaries.....    51,745      
47,105      43,470
    Equity in earnings of consolidated subsidiaries.......   (95,830)   
(102,930)    (76,674)
    Depreciation and amortization.........................       298         
242         257 
    Other liabilities and accrued expenses................   (14,112)     
25,226       1,281 
    Balances with affiliates..............................    (6,682)    
(26,628)      1,979
    Income taxes (benefits)...............................     6,804      
(1,354)       (930)
    Other--net............................................       102         
(49)        (83)
      Net cash provided by operating activities...........    38,613      
37,827      43,264

Cash flows from investing activities:
  Purchase of property and equipment for company use......      (196)       
(344)       (186)
  Proceeds from sale of property and equipment............       149         
128         132
      Net cash used in investing activities...............       (47)       
(216)        (54)

Cash flows from financing activities:
  Dividends paid to stockholders..........................   (38,566)    
(37,124)    (29,373)
  Purchase of treasury stock..............................       -          
(487)    (13,841)
      Net cash used in financing activities...............   (38,566)    
(37,611)    (43,214)

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














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

47
<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:

										 1998		 
1997		 1996
<TABLE>
<CAPTION>
      <S>                                                   <C>         
<C>         <C>
	Consolidated insurance subsidiaries.................	$51,745
	$47,105	$43,470
</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 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.














48
<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				    1998		1997		 1996
<S>                                  <C>           <C>          <C>
Investment in subsidiaries.........	 $677,318      $635,170     $585,833
Receivable from affiliates.........	   37,077        30,395        3,767
</TABLE>
<TABLE>
<CAPTION>
							  Years Ended December 31,
Statement of Earnings			    1998		1997		 1996
<S>                                  <C>           <C>          <C>
Dividends from subsidiaries........	 $ 51,745      $ 47,105     $ 43,470
Rent income........................	      461           397          357
</TABLE>






























49
<PAGE>




THE COMMERCE GROUP, INC. AND SUBSIDIARIES

SCHEDULE III

SUPPLEMENTARY INSURANCE INFORMATION
Years Ended December 31, 1998, 1997 and 1996
(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>
1998
  Property and casualty insurance..........  $ 88,759     $596,996    $391,424    None	$745,620   $ 
77,969     $531,429    $196,434      None     $745,048
  Real estate and commercial lending.......       -            -           -                   -        
5,049          -           -                      -  
  Corporate and other......................       -            -           -                   -        
3,483          -           -                      -  	
        Total..............................  $ 88,759     $596,996    $391,424            $745,620   $ 
86,501     $531,429    $196,434               $745,048	

1997
  Property and casualty insurance..........  $ 85,264     $649,473    $379,599    None    $730,497   $ 
73,141     $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   $ 
80,972     $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	
</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, 1998, 1997 and 1996
(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>
1998
  Property and casualty insurance.. $781,464    $111,901    $ 76,057    
$745,620      10.2%

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%
</TABLE>





































51
<PAGE>



THE COMMERCE GROUP, INC. AND SUBSIDIARIES

SCHEDULE V

VALUATION AND QUALIFYING ACCOUNTS
Years Ended December 31, 1998, 1997 and 1996
(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>
1998
  Allowance for losses on mortgage loans
   and collateral notes receivable........  $2,812	  $ (511)	  $   
-   	   $2,301	

  Allowance for doubtful premium
   receivables............................  $1,451	  $1,297	  
$(1,298)	   $1,450	

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	
</TABLE>

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















52
<PAGE>




THE COMMERCE GROUP, INC. AND SUBSIDIARIES

SCHEDULE X

SUPPLEMENTAL INFORMATION CONCERNING
PROPERTY-CASUALTY INSURANCE OPERATIONS
Years Ended December 31, 1998, 1997 and 1996
(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>
1998
  Consolidated property-casualty entities...... $592,796   $(61,367)    
$562,677

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

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
























53
<PAGE>



THE COMMERCE GROUP, INC. AND SUBSIDIARIES

INDEX TO EXHIBITS(A)

<TABLE>
<CAPTION>
Exhibit
Number 						Title
  <S>       <C>
  2         Share and Note Purchase Agreement dated November 2, 1998 by 
an among ACIC 
            Holding Company, Inc., The American Automobile Association 
(Incorporated), 
            California State Automobile Association Inter-Insurance 
Bureau and Automobile 
            Club Insurance Company.

  3.1       Articles of Organization, as amended(B)

  3.2       By-Laws(B)

  4         Stock Certificate(B)

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

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

 10.8*      1994 Management Incentive Plan as amended (D)

 10.17      Multiple Line Quota Share Reinsurance Agreement No. TM666A 
between Commerce 
            Insurance and Citation Insurance with Swiss Reinsurance 
America Corporation 
            dated July 1, 1998.

 13.1       Annual Report for the year ended December 31, 1998 to 
Security Holders.

 22.1       Subsidiaries of the Registrant filed herewith.
</TABLE>

					

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

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

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

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

* Denotes management contract or compensation plan or arrangement.











54
<PAGE>


SHARE AND NOTE PURCHASE AGREEMENT


AMONG

ACIC HOLDING CO., INC.,

CALIFORNIA STATE AUTOMOBILE ASSOCIATION
INTER-INSURANCE BUREAU,

AUTOMOBILE CLUB INSURANCE COMPANY 

AND


THE AMERICAN AUTOMOBILE ASSOCIATION, (INCORPORATED)

<PAGE>


TABLE OF CONTENTS
<TABLE>
<CAPTION>
											
	Page

<S>   <C>       <C>                                                        
<C>
ARTICLE I - SALE AND 
PURCHASE..........................................................
 .........1
1.1       Transfer of the ACIC Shares and the ACIC 
Note..............1
1.2       Purchase 
Price.............................................2

ARTICLE II - REPRESENTATIONS AND WARRANTIES OF 
BUYER.......................2
2.1       Corporate 
Organization.....................................2
2.2       
Authorization..............................................2
2.3       Consents and 
Approvals.....................................2
2.4       Investment 
Intent..........................................3
2.5       
Litigation.................................................3
2.6       No 
Conflicts...............................................3
2.7       Transaction 
Financing......................................3

ARTICLE III - REPRESENTATIONS AND WARRANTIES 
OF............................4
3.1      Corporate 
Organization......................................4
3.2      
Authorization...............................................
4
3.3      Share Ownership and 
Authority...............................4
3.4      Note Ownership, Authority and 
Validity......................4
3.5      No 
Conflicts................................................5
3.6      
Litigation..................................................
5
3.7      Representations and Warranties of 
Company...................5
3.8      Close Corporation Agreement and Shareholder's 
Agreement.....5
3.9      Full 
Disclosure.............................................5
3.10    AAA 
Marks....................................................6

ARTICLE IV - REPRESENTATIONS AND WARRANTIES OF 
CSAAIIB.....................6
4.1      Corporate 
Organization......................................6
4.2      
Authorization...............................................
6
4.3      Share Ownership and 
Authority...............................6
4.4      
Litigation..................................................
6
4.5      Close Corporation Agreement and Shareholders' 
Agreement.....7
4.6      No Further Representations and 
Warranties...................7
<PAGE>



ARTICLE V - REPRESENTATIONS AND WARRANTIES OF THE 
COMPANY..................7
5.1      Corporate Organization; 
Subsidiaries........................7
5.2      
Authorization...............................................
7
5.3      Capitalization and Security 
Holders.........................8
5.4      
Litigation..................................................
8
5.5      No 
Conflicts................................................8
5.6      
Taxes.......................................................
9
5.7      Financial 
Statements........................................10
5.8      
Reports.....................................................
10
5.9      Insurance; 
Reinsurance......................................10
5.10     Regulatory 
Agreements.......................................12
5.11     Absence of 
Changes..........................................12
5.12     Absence of Undisclosed 
Liabilities..........................12
5.13    Insurance Coverage 
Reserves..................................12
5.14    Operating Permits/Compliance with 
Law........................13
5.15    Personal and Real 
Property...................................13
5.16    Intellectual 
Property........................................13
5.17    Year 
2000....................................................14
5.18     Labor 
Relations.............................................14
5.19     Benefit Plans and 
Agreements................................15
5.20     Environmental 
Matters.......................................16
5.21     Full 
Disclosure.............................................17

ARTICLE VI - CONDITIONS PRECEDENT TO 
OBLIGATIONS...........................17
6.1      Conditions to Obligations of 
Buyer..........................17
6.2      Conditions to Obligations of 
Sellers........................17

ARTICLE VII - 
CLOSING...........................................................
 .........21
7.1      The 
Closing.................................................21
7.2      Deliveries of AAA at 
Closing................................21
7.3      Deliveries of CSAAIIB at 
Closing............................21
7.4      Deliveries of the Company at 
Closing........................21
7.5      Deliveries of Buyer at 
Closing..............................21
<PAGE>



ARTICLE VIII - 
COVENANTS.........................................................
 .........23
8.1      Covenant Not to 
Compete.....................................23
8.2      Conduct of Business of the Company Prior to the 
Closing.....24
8.3      No 
Negotiations.............................................25
8.4      Access to 
Records...........................................26
8.5      Hart-Scott-Rodino Act 
Filings...............................27
8.6      Insurance License 
Filings...................................27
8.7      Insurance Holding Company 
Filings...........................27
8.8      Additional Financial 
Statements.............................27
8.9      Welfare Plans and Other Benefit 
Plans.......................27
8.10     Severance 
Pay...............................................28
8.11     Certain Tax 
Matters.........................................28
8.12     Insurance 
Coverage..........................................30
8.13     Sun Bank 
Guaranty...........................................30

ARTICLE IX - INTELLECTUAL 
PROPERTY..........................................................
 ..........30
9.1       Use of Certain Intellectual 
Property........................30
9.2       Change of Company's 
Name....................................31
9.3       Dividend of Name and 
Mark...................................31
9.4       Specific 
Performance........................................31
9.5       
Enforcement.................................................
31

ARTICLE X - 
TERMINATION.....................................................32
10.1     Termination of 
Agreement.....................................32
10.2     Effect of 
Termination........................................33
10.3     Right of First 
Refusal.......................................33

ARTICLE XI - 
INDEMNIFICATION...................................................
 ..........34
11.1     Survival of Representations, Warranties and 
Agreements.......34
11.2     
Indemnification.............................................
 .34
11.3     Limitations on 
Indemnification...............................36
11.4     Procedure for 
Indemnification................................37

ARTICLE XII - MISCELLANEOUS 
PROVISIONS........................................................
 ..........39
12.1     
Notice......................................................
 .39
<PAGE>


12.2     Entire 
Agreement.............................................40
12.3     Binding Effect; 
Assignment...................................41
12.4     No Third-Party 
Beneficiaries.................................41
12.5     
Counterparts................................................
 .41
12.6     
Captions....................................................
 .41
12.7     Expenses and 
Transactions....................................41
12.8     Waiver; 
Consent..............................................41
12.9     Other and Further 
Covenants..................................41
12.10   
Construction................................................
 ..41
12.11   Governing 
Law.................................................42
12.12   Public 
Announcements..........................................42
12.13   Certain 
Definitions...........................................42

SCHEDULES.........................................................
 ..........55

EXHIBITS..........................................................
 ..........56
</TABLE>


<page


SHARE AND NOTE PURCHASE AGREEMENT

	THIS SHARE AND NOTE PURCHASE AGREEMENT (this "Agreement") is made 
and entered into as of the 2nd day of November 1998, by and among ACIC 
HOLDING CO., INC., a Rhode Island corporation ("Buyer"), THE AMERICAN 
AUTOMOBILE ASSOCIATION, (INCORPORATED), a Connecticut non-stock 
corporation ("AAA"), CALIFORNIA STATE AUTOMOBILE ASSOCIATION 
INTER-INSURANCE BUREAU, a California reciprocal insurer ("CSAAIIB") (AAA 
and CSAAIIB each a "Seller", together the "Sellers") and AUTOMOBILE CLUB 
INSURANCE COMPANY, an Ohio corporation (the "Company").


W I T N E S S E T H:

	WHEREAS, AAA is the record and beneficial owner of 98,769 of the 
outstanding common shares (the "AAA Shares") of  the Company and capital 
surplus note of the Company with a principal balance of $24,500,000 (the 
"ACIC Note"); 

	WHEREAS, CSAAIIB is the record and beneficial owner of 8,769 of 
the outstanding common shares of the Company (the "CSAAIIB Shares"; the 
AAA Shares and the CSAAIIB Shares together the "ACIC Shares");

	WHEREAS, the Company has the right to use (through agreements with 
various agencies which are affiliated with AAA Affiliated Clubs) AAA's 
service mark (e.g., the AAA oval) in marketing its insurance products 
through certain of the agencies which are affiliated with AAA-affiliated 
automobile clubs;

	WHEREAS, Buyer desires to purchase from Sellers, and Sellers 
desire to sell to Buyer, the ACIC Shares on the terms and subject to the 
conditions hereinafter set forth; and

	WHEREAS, Buyer desires to purchase from AAA, and AAA desires to 
sell to Buyer, the ACIC Note on the terms and subject to the conditions 
hereinafter set forth;

	NOW, THEREFORE, in consideration of the premises and the mutual 
promises herein contained, and for other good and valuable 
consideration, the receipt and sufficiency of which are hereby 
acknowledged, the parties hereto agree as follows:


ARTICLE I

SALE AND PURCHASE

	1.1	Transfer of the ACIC Shares and the ACIC Note.  Upon the 
terms and subject to the conditions set forth in this Agreement, at the 
Closing (as defined in Section 5.1), each Seller shall sell, assign, 
transfer and deliver to Buyer its respective ACIC Shares and AAA shall 
sell, assign, transfer and deliver to Buyer the ACIC Note.  
<PAGE>


	1.2	Purchase Price.  

	(a)	In consideration of the delivery to Buyer in accordance with 
this Agreement of certificates representing the ACIC Shares and the ACIC 
Note, at the Closing, Buyer shall pay to Sellers an aggregate purchase 
price (the "Purchase Price") of Seventy Eight Million Five Hundred 
Thousand Dollars ($78,500,000), which Purchase Price shall be allocated 
between AAA and CSAAIIB in accordance with Section 1.2(c).

	(b)	The Purchase Price shall be payable at the Closing by 
delivery to Sellers by wire transfer of immediately available funds to a 
bank account or accounts designated by Sellers prior to the Closing.

	(c)	The Purchase Price shall be allocated as follows:  (i) 
$24,500,000 shall be payable to AAA for the ACIC Note, (ii) $3,500,000 
shall be payable to AAA for the Covenant Not to Compete (as defined in 
Section 8.1), and (iii) the balance shall be allocated to the ACIC 
Shares.  The portion of the Purchase Price allocated to the ACIC Shares 
shall be allocated between the AAA Shares and the CSAAIIB Shares in 
accordance with Schedule 1.2(c).


ARTICLE II

REPRESENTATIONS AND WARRANTIES OF BUYER

	Buyer hereby represents and warrants to Seller as of the date of 
this Agreement and as of the Closing that:

	2.1	Corporate Organization.  Buyer is a corporation duly 
organized, validly existing and in good standing under the laws of the 
State of Rhode Island, and has all requisite power and authority 
(corporate and other) to enter into this Agreement, perform its 
obligations hereunder and consummate the transactions contemplated 
hereby.

	2.2	Authorization.  All necessary and appropriate corporate 
action has been taken by Buyer with respect to the execution and 
delivery of this Agreement and the performance of its obligations 
hereunder, and this Agreement constitutes a valid and binding obligation 
of Buyer enforceable against it in accordance with its terms, except as 
such enforceability may be limited by: (i) bankruptcy, insolvency, 
reorganization, moratorium or similar laws now or hereafter in effect 
relating to creditor's rights generally, and (ii) the remedy of specific 
performance and injunctive and other forms of equitable relief which may 
be subject to equitable defenses and to the discretion of the court 
before which any proceeding therefor may be instituted.   

	2.3	Consents and Approvals.  No consent, approval, order or 
authorization of, or registration, declaration or filing with, any 
governmental authority is required in connection with Buyer's execution 
and delivery of this Agreement or its performance of the terms hereof, 
other than filings with and approvals of state insurance regulatory 
authorities and the filing of a pre-merger notification report by Buyer 
under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as 
amended (the "HSR Act").

<PAGE>



	2.4	Investment Intent.  Buyer is acquiring the ACIC Shares and 
the ACIC Note for the purpose of investment only and not with a view to, 
or for sale in connection with, the distribution thereof within the 
meaning of the Securities Act.

	2.5	Litigation.  There is no claim, litigation, action, suit, 
proceeding, investigation or inquiry, administrative or judicial, 
pending or, to the best knowledge of Buyer, threatened against Buyer, at 
law or in equity, before any federal, state or local court or regulatory 
agency, or other governmental authority, which, individually or in the 
aggregate, is reasonably likely to have a Material Adverse Effect on 
Buyer or materially affect its ability to consummate the transactions 
contemplated hereby, or seeks to prohibit, enjoin or otherwise challenge 
the consummation by Buyer of the transactions contemplated hereby.

	2.6	No Conflicts.  Neither the execution and delivery of this 
Agreement by Buyer, nor the consummation by Buyer of the transactions 
contemplated hereby will (i) conflict with or result in a breach of any 
provision of the Articles of Incorporation or By-Laws of Buyer, (ii) 
violate, conflict with or result in a breach of any provision of, or 
constitute a default (or an event which, with the giving of notice, the 
passage of time or otherwise, would constitute a default) under, or 
entitle any party (with the giving of notice, the passage of time or 
otherwise) to terminate, accelerate or cause a default under, or result 
in the creation of any lien, security interest, charge or encumbrance 
upon any of the properties or assets of Buyer under any of the terms, 
conditions or provisions of any agreement, indenture, instrument, order, 
judgment or decree binding on Buyer or its properties or assets, except 
for such violations, conflicts, breaches, defaults, terminations, 
accelerations, liens, security interests, charges or encumbrances which 
would not have a Material Adverse Effect on Buyer, (iii) violate any 
judgment, order, decree, stipulation, injunction or charge of any court, 
administrative agency or commission or other governmental authority or 
instrumentality by which Buyer is bound, except for such violations 
which would not have a Material Adverse Effect on Buyer, or (iv) require 
any consent, approval, declaration, order or authorization of, or 
registration or filing with, any third party, court or governmental body 
or other agency, instrumentality or authority by or with respect to 
Buyer in connection with the execution and delivery of this Agreement or 
the consummation of the transactions contemplated hereby, other than 
filings with and approvals of state insurance regulatory Authorities, 
and other than the filing of a pre-merger notification report by Buyer 
under the HSR Act, except where the failure to obtain any such consent, 
approval, declaration, order or authorization or to make any such 
registration or filing would not have a Material Adverse Effect on Buyer 
or materially affect its ability to consummate the transactions 
contemplated hereby.

	2.7	Transaction Financing.  Buyer has binding investment 
commitments from its Affiliates in an amount sufficient to enable it to 
purchase the ACIC Shares and ACIC Note as provided in Section 1.2.
<PAGE>



ARTICLE III

REPRESENTATIONS AND WARRANTIES OF AAA

	AAA represents and warrants to Buyer, as of the date of this 
Agreement and as of the Closing that:

	3.1	Corporate Organization.  AAA is a non-stock corporation duly 
organized, validly existing and in good standing under the laws of the 
State of Connecticut.  AAA has all requisite power and authority 
(corporate and other) and licenses necessary to own, lease and operate 
its properties and conduct its business as presently conducted.  AAA has 
previously delivered to Buyer true, correct and complete copies of the 
Articles of Incorporation of AAA and the AAA Bylaws. 

	3.2	Authorization.  All necessary and appropriate corporate 
action has been taken by AAA with respect to the execution and delivery 
of this Agreement and the performance of AAA's obligations hereunder.  
This Agreement has been duly and validly executed and delivered by AAA 
and constitutes the legal, valid and binding obligations of AAA, 
enforceable against AAA in accordance with its terms, except as such 
enforceability may be limited by:  (i) bankruptcy, insolvency, 
reorganization, moratorium or similar laws now or hereafter in effect 
relating to creditor's rights generally, and (ii) the remedy of specific 
performance and injunctive and other forms of equitable relief which may 
be subject to equitable defenses and to the discretion of the court 
before which any proceeding therefor may be instituted.

	3.3	Share Ownership and Authority.  AAA is the sole beneficial 
and record owner of the AAA Shares.  To AAA's knowledge, together the 
AAA Shares and the CSAAIIB Shares constitute all the issued and 
outstanding shares of capital stock of the Company, and (except for the 
Close Corporation Agreement and the Shareholders' Agreement as defined 
in Section 3.8) AAA has the full and unrestricted power to sell, assign, 
transfer and deliver the AAA Shares to Buyer in accordance with the 
terms of this Agreement.  At the Closing, AAA shall transfer and convey 
to Buyer, and Buyer will acquire, good, valid and marketable title to 
the AAA Shares, free and clear of any and all rights, title, interest 
and claims of others, including without limitation liens, security 
interests, encumbrances, pledges, charges, claims, voting trusts and 
restrictions on transfer of any nature whatsoever and without the 
consent of any third party other than the consent of CSAAIIB pursuant to 
Section 4.5 and the consent of any state insurance regulatory 
authorities, except as set forth on Schedule 3.3, and except for 
restrictions on transfer imposed by or pursuant to the securities laws 
of the United States.

	3.4	Note Ownership, Authority and Validity.  AAA is the sole 
beneficial and  record owner of the ACIC Note which constitutes the only 
capital surplus note issued by the Company, and AAA has the full and 
unrestricted power to sell, assign, transfer and deliver the ACIC Note 
to Buyer in accordance with the terms of this Agreement.  At the 
Closing, AAA shall transfer and convey to Buyer, and Buyer will acquire, 
good, valid and marketable title to the ACIC Note, free and clear of any 
and all rights, title, interest and claims of others, including without 
limitation liens, security interests, encumbrances, pledges, charges, 
claims, and restrictions on transfer of any nature whatsoever and 
without the consent of any third party, except as set forth on Schedule 
3.4 
<PAGE>



and except for restrictions on transfer imposed by or pursuant to the 
securities laws of the United States.  The ACIC Note has been validly 
issued by the Company and is the binding obligation of the Company, 
enforceable against it in accordance with its terms, except as such 
enforceability may be limited by:  (i) bankruptcy, insolvency, 
reorganization, moratorium or similar laws now or hereafter in effect 
relating to creditor's rights generally, and (ii) the remedy of specific 
performance and injunctive and other forms of equitable relief which may 
be subject to equitable defenses and to the discretion of the court 
before which any proceeding therefor may be instituted.

	3.5	No Conflicts.  Except as set forth on Schedule 3.5 and 
except for the Close Corporation Agreement and the Shareholders' 
Agreement, neither the execution and delivery of this Agreement by AAA, 
nor the consummation by AAA of the transactions contemplated hereby will 
(i) conflict with or result in a breach of any provision of the Articles 
of Incorporation of AAA or the AAA bylaws (ii) require any consent, 
approval, declaration, order or authorization of, or registration or 
filing with, any third party, court or governmental body or other 
agency, instrumentality or authority by or with respect to AAA in 
connection with the execution and delivery of this Agreement or the 
consummation of the transactions contemplated hereby, other than filings 
with and approvals of any state insurance regulatory authorities and 
other than the filing of a pre-merger notification report by AAA and 
Buyer under the HSR Act, except where the failure to obtain any such 
consent, approval, declaration, order or authorization or to make any 
such registration or filing would not have a Material Adverse Effect on 
AAA or materially affect AAA's ability to consummate the transactions 
contemplated hereby.

	3.6	Litigation.  There is no claim, litigation, action, suit or 
proceeding, pending or, to the best knowledge of AAA, threatened, that 
questions the validity of this Agreement or seeks to prohibit, enjoin, 
or otherwise challenge the consummation by AAA of the transactions 
contemplated hereby.

	3.7	Representations and Warranties of Company.  To the best 
knowledge of AAA, the representations and warranties of the Company set 
forth in Article V are true and accurate.

	3.8	Close Corporation Agreement and Shareholder's Agreement.  
AAA acknowledges that it is a party to (a) the Close Corporation 
Agreement effective December 21, 1988 among it, CSAAIIB, the Company and 
each party who becomes a party to such Close Corporation Agreement 
pursuant to Section 5.06 thereof (the "Close Corporation Agreement").  
and to (b) the Amended Shareholders' Agreement dated July 1, 1990 
between AAA and CSAAIIB (the "Shareholders' Agreement").  
Notwithstanding the terms of the Close Corporation Agreement and the 
Shareholders Agreement, AAA consents to the execution of this Agreement 
by CSAAIIB and CSAIIB's performance of its obligations hereunder and 
waives any claim that such execution or performance constitutes a 
violation of either the Close Corporation Agreement or the Shareholders 
Agreement.  AAA further acknowledges and agrees that the Close 
Corporation Agreement and the Shareholders Agreement shall terminate as 
of the Closing, and neither Buyer nor the Company shall have any 
liability thereunder.
<PAGE>



	3.9	Full Disclosure.  Each statement of fact set forth in any 
Schedule referenced in this Article III is true and accurate and does 
not omit to state any material fact necessary in order to make the 
statements made or information disclosed, in light of the circumstances 
under which they were made or disclosed, not misleading.

	3.10 	AAA Marks.  AAA owns the AAA Marks.  Each AAA Affiliated 
Club that is a AAA Organization (as defined in the AAA Bylaws) member in 
good standing has the right to use the AAA Marks in the Service Area of 
such AAA Affiliated Club in accordance with the Emblem Regulations, 
which Emblem Regulations may be amended, supplemented or superceded at 
any time in the sole discretion of AAA.


ARTICLE IV

REPRESENTATIONS AND WARRANTIES OF CSAAIIB

	CSAIIB represents and warrants to Buyer, as of the date of this 
Agreement and as of the Closing that:

	4.1	Corporate Organization.  CSAAIIB is a reciprocal insurer 
duly organized, validly existing and in good standing under the laws of 
the State of  California.  CSAAIIB has all requisite power and authority 
and licenses necessary to own, lease and operate its properties and 
conduct its business as presently conducted.

	4.2	Authorization.  All necessary and appropriate action has 
been taken by CSAAIIB with respect to the execution and delivery of this 
Agreement and the performance of CSAAIIB's obligations hereunder.  This 
Agreement has been duly and validly executed and delivered by CSAAIIB 
and constitutes the legal, valid and binding obligations of CSAAIIB, 
enforceable against CSAAIIB in accordance with its terms, except as such 
enforceability may be limited by:  (i) bankruptcy, insolvency, 
reorganization, moratorium or similar laws now or hereafter in effect 
relating to creditor's rights generally, and (ii) the remedy of specific 
performance and injunctive and other forms of equitable relief which may 
be subject to equitable defenses and to the discretion of the court 
before which any proceeding therefor may be instituted.  Neither the 
execution and delivery of this Agreement by CSAAIIB nor the consummation 
by CSAAIIB of the transactions contemplated hereby will conflict with or 
result in a breach of any provision of CSAAIIB's rules and regulations.

	4.3	Share Ownership and Authority.  CSAAIIB is the sole 
beneficial and record owner of the CSAAIIB Shares.  To CSAAIIB's 
knowledge, together the CSAAIIB Shares and the AAA Shares constitute all 
the issued and outstanding shares of capital stock of the Company and, 
except as provided in the Close Corporation Agreement and the 
Shareholders' Agreement, CSAAIIB has the full and unrestricted power to 
sell, assign, transfer and deliver the CSAAIIB 
<PAGE>



Shares to Buyer in accordance with the terms of this Agreement. At the 
Closing, CSAAIIB shall transfer and convey to Buyer, and Buyer will 
acquire, good, valid and marketable title to the CSAAIIB Shares, free 
and clear of any and all rights, title, interest and claims of others, 
including without limitation liens, security interests, encumbrances, 
pledges, charges, claims, voting trusts and restrictions on transfer of 
any nature whatsoever and without the consent of any third party other 
than the consent of AAA pursuant to Section 3.8 and the consent of any 
state insurance regulatory authorities, except as set forth on Schedule 
4.3, and except for restrictions on transfer imposed by or pursuant to 
the securities laws of the United States.

	4.4	Litigation. There is no claim, litigation, action, suit or 
proceeding, pending or, to the best knowledge of CSAAIIB, threatened, 
that questions the validity of this Agreement or seeks to prohibit, 
enjoin, or otherwise challenge the consummation by CSAAIIB of the 
transactions contemplated hereby.

	4.5	Close Corporation Agreement and Shareholders' Agreement.  
CSAAIIB acknowledges that it is a party to each of the Close Corporation 
Agreement and the Shareholders' Agreement.  Notwithstanding the terms of 
the Close Corporation Agreement and the Shareholders Agreement, CSAAIIB 
consents to the execution of this Agreement by AAA and AAA's performance 
of its obligations hereunder and waives any claim that such execution or 
performance constitutes a violation by AAA of either the Close 
Corporation Agreement or the Shareholders' Agreement.  CSAAIIB further 
acknowledges and agrees that the Close Corporation Agreement and the 
Shareholders Agreement shall terminate as of the Closing, and neither 
Buyer nor the Company shall have any liability thereunder.

	4.6	No Further Representations and Warranties.  CSAAIIB 
disclaims any and all other warranties, express or implied, including, 
without limitation, those of the Company and AAA.

ARTICLE V

REPRESENTATIONS AND WARRANTIES OF THE COMPANY
		The Company represents and warrants to Buyer that:

	5.1	Corporate Organization; Subsidiaries. 

	(a)	The Company is a corporation duly organized, validly 
existing and in good standing under the laws of the State of Ohio.  The 
Company has previously delivered to Buyer true, correct and complete 
copies of its Articles of Incorporation, By-Laws and Code of 
Regulations.  The Company has no Subsidiaries (defined as a corporation 
or other entity controlled by the Company).  

	(b)	The Company is duly qualified to do business and is in good 
standing in each jurisdiction listed on Schedule 5.1, is not qualified 
to do business in any other jurisdiction, and neither the nature of the 
business conducted by it nor the property it owns, leases or operates 
requires it to qualify to do business as a foreign corporation in any 
other jurisdiction.  The Company has all requisite power and authority 
(corporate and other) and licenses necessary to own, lease and operate 
its properties and conduct its business as presently conducted.
<PAGE>



	5.2	Authorization.  All necessary corporate action has been 
taken by the Company with respect to the execution and delivery of this 
Agreement and the performance of its obligations hereunder.  This 
Agreement has been duly and validly executed and delivered by the 
Company and constitutes the legal, valid and binding obligations of the 
Company, enforceable against the Company in accordance with its terms, 
except as such enforceability may be limited by:  (i) bankruptcy, 
insolvency, reorganization, moratorium or similar laws now or hereafter 
in effect relating to creditor's rights generally, and (ii) the remedy 
of specific performance and injunctive and other forms of equitable 
relief which may be subject to equitable defenses and to the discretion 
of the court before which any proceeding therefor may be instituted.

	5.3	Capitalization and Security Holders.  The authorized capital 
stock of the Company consists solely of one million (1,000,000) shares 
of common stock, of which the 107,538 ACIC Shares are the only issued 
and outstanding shares.  All outstanding shares of common stock of the 
Company have been validly issued and are fully paid and nonassessable.  
Except as set forth on Schedule 5.3, (i) there are no outstanding 
subscriptions, options, warrants, puts, calls, agreements, 
understandings, or other commitments or rights of any type relating to 
the issuance, sale or transfer by the Company of any securities of the 
Company, (ii) there are no outstanding securities which are convertible 
into or exchangeable for any shares of capital stock of the Company; and 
(iii) the Company has no obligation of any kind to issue any additional 
securities.  None of the shares of Company capital stock outstanding was 
issued in violation of the preemptive rights of any person.

	5.4	Litigation. Except as set forth on Schedule 5.4, and except 
for all reported, and all incurred but unreported, claims incurred in 
the ordinary course under insurance policy obligations, there is no 
claim, litigation, action, suit, proceeding, investigation or inquiry, 
administrative or judicial, pending or, to the best knowledge of the 
Company, threatened against the Company, at law or in equity, before any 
federal, state or local court or regulatory agency, or other 
governmental authority.  Without limiting the scope of the immediately 
preceding sentence, except as set forth on Schedule 5.4, there is no 
claim, litigation, action, suit, proceeding, investigation or inquiry 
pending or, to the best knowledge of the Company, threatened that 
alleges that the Company has committed fraud or acted in bad faith in 
contesting a claim under one or more insurance policies issued by the 
Company.  There is no claim, litigation, action, suit, proceeding, 
investigation or inquiry pending or, to the best knowledge of the 
Company, threatened, that questions the validity of this Agreement or 
seeks to prohibit, enjoin or otherwise challenge the consummation of the 
transactions contemplated hereby.

	5.5	No Conflicts.  Except as set forth on Schedule 5.5, neither 
the execution and delivery of this Agreement by the Company, nor the 
consummation by the Company of the transactions contemplated hereby will 
(i) conflict with or result in a breach of any provision of the Articles 
of Incorporation or Code of Regulations of the Company, (ii) violate, 
conflict with or result in a breach of any provision of, or constitute a 
default (or an event which, with the giving of notice, the passage of 
time or otherwise, would constitute a default) under, or entitle any 
party (with the giving of notice, the passage of time or otherwise) to 
terminate, accelerate or cause a default under, or result in the 
creation of any lien, security interest, charge or encumbrance upon any 
of the properties or assets of the Company, under any of the terms, 
conditions or provisions of any agreement, indenture, instrument, order, 
judgment or decree binding on the Company or its 
<PAGE>



properties or assets, (iii) violate any judgment, order, decree, 
stipulation, injunction or charge of any court, administrative agency or 
commission or other governmental authority or instrumentality by which 
the Company or any of the Company's assets is bound, or (iv) require any 
consent, approval, declaration, order or authorization of, or 
registration or filing with, any third party, court or governmental body 
or other agency, instrumentality or authority by or with respect to the 
Company in connection with the execution and delivery of this Agreement 
or the consummation of the transactions contemplated hereby, other than 
filings with and approvals of any state insurance regulatory authority 
and other than the filing of a pre-merger notification report under the 
HSR Act.  The Company has received a letter from International Business 
Machines Corporation ("IBM"), the successor entity to Integrated Systems 
Solutions Corporation ("ISSC"), to the effect that the purchase of the 
ACIC Shares and the ACIC Note by Buyer in accordance with the terms 
herein will not be deemed by IBM to constitute an assignment in 
violation of Section 16.13 of that certain Agreement for Information 
Technology Services dated as of January 10, 1996 by and between Buyer 
and ISSC, a copy of which letter is included with Schedule 5.5.

	5.6	Taxes.

	(a)	Except as set forth on Schedule 5.6, for all taxable years 
ending on or after January 1, 1995, the Company and any affiliated, 
combined or unitary group of which the Company is or was a member has 
(i) correctly prepared and timely filed all returns, declarations, 
estimates, reports, claims for refund, information returns and 
statements, (collectively "Returns") required to be filed with respect 
to all federal, state, local and foreign income (gross or net) taxes, 
customs, premium tax (other than premium taxes not in excess of $1,000 
in any instance), duties, fees, together with any interest, penalties or 
other additions ("Taxes"), (ii) timely and properly paid all Taxes due 
and payable, and (iii) established on its books and records reserves 
that are adequate for the payment of all Taxes accrued but not yet due 
and payable.

	(b)	Except as set forth on Schedule 5.6, there are no actual or 
proposed Tax deficiencies, assessments, or adjustments for Taxes with 
respect to the Company or any assets, property or operations of the 
Company.  Except as set forth in Schedule 5.6, (i) there are no liens 
for Taxes upon the assets of the Company, (ii) there has been no 
extension of time within which to file any Return which has not since 
been filed, (iii) there are no waivers or consents regarding the 
application of the statute of limitations with respect to any Taxes or 
Returns and (iv) no federal, state, local or foreign audits or other 
administrative proceedings or court proceedings are pending with regard 
to any Taxes or Returns.

	(c)	The Company has not made any election under Section 341(f) 
of the Code or any corresponding provision of state, local or foreign 
Tax Law.  The Company is not required to include in income any 
adjustment pursuant to Section 481(a) of the Code by reason of a 
voluntary change in accounting method nor does the Company have any 
knowledge that the Internal Revenue Service has proposed any such 
adjustment or change in accounting method.  The Company, as a result of 
any "closing agreement" as defined in Section 7121 of the Code (or any 
corresponding provisions of any state, local or foreign Tax Law), is not 
required to include any item of income in or exclude any item of 
deduction from taxable income.  The Company, as a result of any deferred 
intercompany gain or any excess loss account, described in Section 
1.1502 
<PAGE>



of the Treasury Department Regulations concerning consolidated returns, 
is not required to include any item of income in taxable income.  The 
Company has not been at any time during the past ten (10) years a member 
of an affiliated group, as defined in Section 1504 of the Code, other 
than one of which AAA was the common parent, or filed or been included 
in a combined, consolidated or unitary income tax return other than one 
filed by AAA.

	(d)	The Company has not made any payments and is not obligated 
under any contract to make any payments that will be nondeductible, in 
whole or in part, under Section 280G or 162(m) of the Code.

	(e)	There are no deficiencies, assessments or adjustments for 
the Taxes of any Person other than the Company for which the Company 
would have liability under Reg.  1.1502-6 (or any similar provision of 
state, local or foreign law), whether as a transferee or successor, by 
contract or otherwise.

	(f)	Attached as Schedule 5.6(f) is a copy of the Tax Sharing 
Agreement (the "Tax Sharing Agreement") to which the Company currently 
is a party.  The Company has not been a party to any other tax sharing 
agreement with AAA.

	5.7	Financial Statements.  The statutory financial statements 
(including the notes thereto) of the Company as of and for the years 
ended December 31, 1996 and December 31, 1997 (the "Annual Statement") 
have been prepared in conformity with SAP applied on a consistent basis 
and present fairly, in all material respects, the admitted assets, 
liabilities and capital and surplus of the Company at the dates stated 
therein on the basis of such accounting practices and the results of 
operations for the periods then ended.  The Quarterly Statement for the 
quarter ended June 30, 1998 (the "Quarterly Statement") has been 
prepared in conformity with SAP (except for lack of footnotes and normal 
year-end adjustments as described on Schedule 5.7) and presents fairly, 
in all material respects, the admitted assets, liabilities and capital 
and surplus of the Company at the dates stated therein and the results 
of its operations for their periods then ended on the basis of such 
practices.  The books and records of the Company have been and are being 
maintained in conformity with SAP.

	5.8	Reports.  Since December 31, 1994, the Company has filed all 
reports, registrations and statements, together with any amendments 
required to be made with respect thereto, that were required to be filed 
with:  (i) the Ohio Superintendent of Insurance; and (ii) any applicable 
state or foreign insurance or licensing authorities (all such reports 
and statements are collectively referred to herein as the "Company 
Reports").  As of their respective dates, the Company Reports complied 
with the statutes, rules and regulations enforced or promulgated by the 
regulatory authority with which they were filed.

	5.9	Insurance; Reinsurance.  

	(a)	[INTENTIONALLY OMITTED.]
<PAGE>



	(b)	Since December 31, 1994, all insurance policies issued, 
reinsured or underwritten by the Company have been, to the extent 
required by applicable law, in all material respects on forms approved 
by the insurance regulatory authority of the jurisdiction where issued 
or delivered or have been filed with and not objected to by such 
authority within the period prescribed for such objection, and have 
utilized premium rates which if required to be filed with or approved by 
insurance regulatory authorities have been so filed or approved and the 
premiums charged conform thereto.

	(c)	All reported claims under insurance policy obligations 
incurred by the Company have either been paid (or provision for payment 
has been made therefor) in accordance with the terms of the contracts 
under which they arose, except for (i) such obligations for which the 
Company reasonably believes there is a basis to contest payment, (ii) 
such claims as the Company is currently investigating, and (iii) the 
items listed on Schedule 5.9(c).

	(d)	No outstanding insurance contract has been issued or assumed 
by the Company that would entitle the holder thereof or any other Person 
to receive dividends, distributions or other benefits based on the 
revenues or earnings of the Company.

	(e)	Except as set forth on Schedule 5.9(e), there are (A) no 
claims asserted, (B) no actions, suits, investigations or proceedings by 
or before any court or other governmental entity, and (C) no 
investigations by or on behalf of the Company ((A), (B) and (C) being 
collectively referred to as "Actions") pending or, to the best knowledge 
of the Company threatened, against the Company that include allegations 
that the Company was in violation of or failed to comply with any Law, 
determination or award applicable to the Company in the respective 
jurisdictions in which its products have been sold, and, to the best 
knowledge of the Company, no facts exist which would reasonably be 
expected to result in the filing or commencement of any such Action.

	(f)	Schedule 5.9(f) contains a complete and correct list as of 
the date hereof of all reinsurance agreements to which the Company is a 
party.

	(g)	Since December 31, 1994, all advertising, promotional, sales 
and solicitation materials and product illustrations used by the 
Company, or, to the best knowledge of the Company as of the date of this 
Agreement, by any Agent of the Company, have complied, with all 
applicable Laws.

	(h)	Since December 31, 1994, each Agent appointed by the 
Company, at the time such Agent wrote, sold or produced business for the 
Company, was duly appointed and, to the best knowledge of the Company, 
duly licensed, as an insurance agent (for the type of business written, 
sold or produced by such Agent) in the particular jurisdiction in which 
such Agent wrote, sold or produced such business for the Company; and to 
the best knowledge of the Company as of the date of this Agreement, no 
such Agent has violated (or with or without notice or lapse of time or 
both would have violated) any term or provision of any Law applicable to 
the writing, sale or production of business for the Company.
<PAGE>



	(i)	As of the date of this Agreement, to the best knowledge of 
the Company, except as disclosed on Schedule 5.9(i) the Company has not 
received any written notification by any Agent or Agents threatening 
litigation or termination of their agency agreements with the Company or 
otherwise establishing a basis reasonably to believe that such Agents 
are likely to cease to do business with the Company in the same manner 
as such business has been conducted historically, whether as a result of 
the transactions contemplated by this Agreement or otherwise.  There are 
no side agreements or other written agreements between the Company and 
such Agents or former Agents, including, without limitation, agreements 
with respect to the payment of compensation by the Company to such 
Agents or former Agents in existence on the date hereof and on the 
Closing Date.

	(j)	As of the date of this Agreement, all reinsurance treaties 
and arrangements to which the Company is a party are in full force and 
effect, and neither the Company nor, to the best knowledge of the 
Company, any other party thereto, is in violation of or in default in 
the performance, observance or fulfillment of any material obligation, 
agreement, covenant or condition contained therein; the Company has not 
received any notice from any of the other parties to such treaties, 
contracts or agreements that such other party intends not to perform 
such treaty, contract or agreement and, to the best knowledge of the 
Company, the Company has no reason to believe that any of the other 
parties to such treaties, contracts or arrangements will be unable to 
perform such treaty, contract or arrangement.

	5.10	Regulatory Agreements.  Except as set forth on Schedule 
5.10, as of the date of this Agreement, the Company is not subject to or 
the recipient of any of the following (each a "Regulatory Agreement"):  
a cease-and-desist or other order issued by, a written agreement, 
consent agreement or memorandum of understanding with, a commitment 
letter or similar undertaking to, an order or directive by (in each case 
specifically addressed to the Company), or an extraordinary supervisory 
letter from, or a board of director resolution adopted at the request 
of, any Authority that restricts the conduct of the business of the 
Company or of any direct or indirect beneficial owner of the capital 
stock of the Company, or that, in any other manner, relates to the 
Company's capital adequacy, its underwriting or investment policies, its 
management, or its business.  There are no disciplinary proceedings 
pending before or, to the best knowledge of the Company, being actively 
considered by any Authority.

	5.11	Absence of Changes.  

	(a)	Since December 31, 1997:  (i) the business of the Company 
has been conducted in the ordinary course and substantially consistent 
with recent past practices; and (ii) there has not been, occurred or 
arisen any adverse change in the business, affairs or financial 
condition of the Company other such events which, individually or in the 
aggregate, have not had a Material Adverse Effect on the Company.  

	(b)	The Company has not been given notice from A.M. Best 
Company, Inc. of any condition (financial or otherwise) on retaining the 
currently held rating or any threatened or prospective downgrading in 
such rating.
<PAGE>



	5.12	Absence of Undisclosed Liabilities.  Except as and to the 
extent reflected in the Annual Statement, the Quarterly Statement, or on 
Schedule 5.12, the Company does not have any liabilities, commitments or 
obligations of any nature, whether absolute, accrued, contingent or 
otherwise, and whether due or to become due which would be required by 
SAP to be disclosed on the Annual Statement or the Quarterly Statement, 
other than liabilities incurred since the Most Recent Balance Sheet Date 
in the ordinary course of business, consistent with past practice.

	5.13	Insurance Coverage Reserves.

	(a)	The aggregate reserves and other amounts of liabilities or 
obligations of the Company (including, without limitation, reserves 
established as an allowance for uncollectible amounts under any 
reinsurance, coinsurance or similar contract) as established or 
reflected in the Annual Statements and the Quarterly Statements were 
determined in accordance with SAP consistently applied and meet the 
requirements of the insurance Laws of the applicable jurisdiction.

	(b)	The Company has made no material change in its insurance 
reserving practices since December 31, 1994.

	5.14	Operating Permits/Compliance with Law.

	(a)	Except as set forth on Schedule 5.14, the Company has 
received no notice from any Authority that it is lacking any approvals, 
authorizations, consents, licenses, orders, governmental security 
clearances, and registrations and permits of all governmental agencies, 
whether federal, state or local, United States or foreign, required to 
permit the operation of its business as presently conducted.

	(b)	The Company has complied and is in compliance with all 
United States and foreign laws, rules, regulations, ordinances, decrees 
and orders applicable to the operation of its business as presently 
conducted and/or to its owned or leased properties.

	5.15	Personal and Real Property.  Schedule 5.15 sets forth (i) a 
true and correct list of all real property owned by the Company, and 
(ii) a true and correct list of all real property leased by the Company.  
Except as disclosed on Schedule 5.15, the Company has good and 
marketable title to, and owns outright or leases or holds licenses to 
use, all of its properties and assets (including, but not limited to, 
the assets reflected in the Quarterly Statement) except for those 
disposed of in the ordinary course of business, and none of such assets 
is encumbered by any mortgage, lien, claim or encumbrance except such 
mortgages, liens, claims or encumbrances as (a) are reflected on the 
Quarterly Statement or Schedule 5.15, (b) arise out of taxes not yet due 
and payable, or (c) relate to immaterial properties or assets.  All 
leases pursuant to which the Company leases any real or material 
personal property are valid and binding in accordance with their 
respective terms, and there is not under any such lease any existing 
default by the Company, event of default or event which, with notice 
and/or lapse of time, would constitute a default.
<PAGE>



All items of real or personal property owned or used by the Company and 
material to its business have been property maintained and, to the best 
knowledge of the Company, are in good operating order and repair in 
light of their age.  As of the date of this Agreement, there are no 
pending lawsuits or condemnation, expropriation, eminent domain or 
similar proceedings affecting all or any portion of any property listed 
on Schedule 5.15 or the value thereof, and, to the best knowledge of the 
Company, no such lawsuits or proceedings are contemplated.

	5.16	Intellectual Property.  Schedule 5.16 hereto sets forth a 
list of all trademarks, trade names, service marks and copyrights (or 
pending registrations and applications therefor) owned or used under 
license by the Company (collectively, the "Intellectual Property," 
provided, however, that the term "Intellectual Property" shall not 
include the AAA Marks and the Automobile Insurance Marks and Phrases), 
and except as set forth in Schedule 5.16, no royalties, honorariums or 
fees are payable by the Company to any Person by reason of the ownership 
or use of the Intellectual Property, the AAA Marks or the Automobile 
Insurance Marks and Phrases.  Schedule 5.16 indicates each item of 
Intellectual Property which the Company licenses or sublicenses to 
others.  No claims have been asserted against the Company by any Person 
in connection with the use by the Company of any Intellectual Property, 
no Person is infringing upon any of the rights of the Company with 
respect to the Intellectual Property; and  the Company's use of the 
Intellectual Property does not infringe upon the rights of any Person.

	5.17	Year 2000.   

	(a)	Schedule 5.17 summarizes, as of the date of this Agreement, 
in all material respects (i) the Company's communications and actions to 
endeavor to ensure that the Company's computer systems will maintain the 
functionality existing as of the date hereof, taking into account any 
processing, accepting, calculating, writing and outputting of 
date-related data whether on, before, or after January 1, 2000 (failure 
to maintain such functionality hereinafter referred to as a "Year 2000 
Problem") and (ii) the status of the Company's dealings and 
communications with the Company's Agents, insurance companies, vendors, 
suppliers and service providers with respect to the preparedness of such 
Persons with respect to the Year 2000 Problem.  The Company has made 
available to Buyer copies of all in-house correspondence and memoranda 
and all correspondence between the Company and its Agents, insurance 
companies, vendors, suppliers and service providers concerning Year 2000 
Problem compliance.

	(b)	As of the date of this Agreement, to the best knowledge of 
the Company, no Agent, insurance company, supplier, vendor or service 
provider with which the Company transacts business will be unable to 
timely remedy their own deficiencies in respect of the Year 2000 
Problem.
<PAGE>



	5.18	Labor Relations.  

	(a)	Schedule 5.18(a) sets forth (i) the name and respective 
salaries, or wages, dates of employment, and positions of each officer 
and director of the Company and each other Employee whose total 
compensation during the year ended December 31, 1997 exceeded $75,000, 
(ii) all wage or salary increases or bonuses received by such persons 
since December 31, 1997, and any accrual for such increases or bonuses 
since December 31, 1997, and (iii) all commitments or agreements by the 
Company to increase the wages or modify the conditions or terms of 
employment of any of its Employees, other than, in the case of Employees 
who are not officers or directors, year-end raises consistent with past 
practice.

	(b)	Except as disclosed on Schedule 5.18(b), there are no 
complaints, charges or claims against the Company pending or, to the 
best knowledge of the Company, threatened to be brought or filed with 
any governmental authority, arbitrator or court based on, arising out 
of, in connection with, or otherwise relating to the employment or 
termination of employment of any individual by the Company.  True and 
correct copies of all written personnel policies and manuals of the 
Company as they relate to the Employees have been made available to 
Buyer.

	(c)	The Company is not a party to any labor or collective 
bargaining agreement, and no employees of the Company are represented by 
any labor organization.  Since December 31, 1994, (i) there have been no 
representation or certification proceedings, or petitions seeking a 
representation proceeding, pending or, to the best knowledge of the 
Company, threatened to be brought or filed with the National Labor 
Relations Board or any other labor relations tribunal or authority, and 
(ii) to the best knowledge of the Company, there have been no organizing 
activities involving the Company with respect to any group of employees 
of the Company.  No election or proceedings relating to the Company's 
labor relations with the Employees is pending or, to the best knowledge 
of the Company, contemplated.

	(d)	Except as set forth on Schedule 5.18(d), the Company has no 
written policy or written agreement requiring the Company to make 
severance payments to any Employee in connection with the termination of 
their employment with the Company.

	5.19	Benefit Plans and Agreements.  

	(a)	A true and complete list of all Benefit Plans in effect that 
the Company maintains or to which it contributes or since December 31, 
1994 has maintained or contributed for the benefit of the Employees is 
listed in Schedule 5.19(a).

	(b)	The Company has delivered to Buyer an accurate and complete 
copy of each of (i) each Benefit Plan (including any amendments thereto) 
listed on Schedule 5.19(b) (or, to the extent any Benefit Plan has not 
been reduced to writing, an accurate description thereof), and, to the 
extent applicable, an accurate and complete copy of each of any related 
trust agreement, annuity contract or other funding instrument and any 
other documents pursuant to which the Benefit Plan is or has been 
maintained, funded or administered; (ii) the most recent determination 
letter issued by the Internal Revenue Service with respect to each 
Benefit Plan and all written 
<PAGE>



communications with the Internal Revenue Service, the U. S. Department 
of Labor and/or the Pension Benefit Guaranty Corporation made or 
received since January 1, 1993 with respect to each plan and any summary 
plan description and other written communication by the Company to the 
Employees, plan participants and beneficiaries concerning such Benefit 
Plan; (iii) with respect to each Benefit Plan Internal Revenue Service 
Form 5500 and attached schedules, audited financial statements, 
actuarial valuation reports and attorneys' responses to any auditor's 
request for information filed or prepared since January 1, 1995; and 
(iv) the most recent non-discrimination tests performed for each of the 
tax-qualified Benefit Plans, including, without limitation, the average 
deferral percentage and average contribution percentage tests for the 
defined contribution pension benefit plans.

	(c)	Each Benefit Plan has been established and administered in 
all respects in accordance with its terms, and in compliance with the 
applicable provisions of the Code, ERISA and other applicable Laws.  
Each Benefit Plan which is intended to be qualified within the meaning 
of the Code is so qualified and has received a favorable determination 
letter from the Internal Revenue Service as to its qualification and, to 
the best knowledge of the Company, nothing has occurred which would 
cause the loss of such qualification.  With respect to each Benefit 
Plan, no action, suit or claim (other than ordinary and usual claims for 
benefits) is pending or, to the best knowledge of the Company, 
threatened, and to the best knowledge of the Company no fact or 
circumstance exists which could reasonably be expected to give rise to 
any such action, suit or claim.  No event has occurred and no condition 
exists and the transactions contemplated by this Agreement shall not 
constitute or cause any such event to occur or condition to exist that 
would subject the Company to any tax, fine, penalty, cause of action or 
damages imposed under the Code or ERISA with respect to any Controlled 
Group Benefit Plan.  Except as identified on Schedule 5.19(c), each 
Benefit Plan may be amended or terminated, without obligation or 
liability (other than (i) those obligations and liabilities for which 
specific and sufficient assets have been set aside in a trust or other 
funding vehicle or reserved for on the Most Recent Balance Sheet, and 
(ii) those obligations and liabilities identified under Section 5.19 
hereof that might arise upon termination of the Company's Employees' 
Pension Plan), which currently is known as the Automobile Club Insurance 
Company Employees' Pension Plan (the "Employees' Pension Plan").  No 
Benefit Plan has incurred any "accumulated funding deficiency" as such 
term is defined in Section 412 of the Code or Section 302 of ERISA 
(whether or not waived).  The Company has made all payments and 
contributions identified by the actuary for the Employees' Pension Plan 
as necessary to satisfy the funding requirements imposed by the Code and 
under the terms of said pension plan for the period commencing January 
1, 1998, and ending on the Closing Date, as computed by said pension 
plan's actuary in the actuarial valuation prepared August 11, 1998 for 
the 1998 calendar year as previously provided to Buyer pursuant to 
Section 5.19(b) above.  No Benefit Plan will be amended other than for 
any amendment that is required by law to be adopted prior to or at the 
Closing without Buyer's prior written consent.

	(d)	There exists no condition or set of circumstances which 
present a risk of termination or partial termination of any Benefit Plan 
which could result in any liability, increased funding obligation or 
acceleration of vesting or benefit availability on the part of the 
Company. The Company does not and has not contributed to a Multiemployer 
Plan.
<PAGE>



	(e)	Except as disclosed on Schedule 5.19(e), there is no 
unfunded obligation under any Benefit Plan providing benefits after 
termination of employment to any Employee and the Company has made no 
other commitment to Employees, former Employees or their beneficiaries 
under which they are or would be obligated to provide any benefit or 
payment which is not fully funded through a trust or other funding 
arrangement or reserved for on the most recent Quarterly Statement.  
Except as disclosed on Schedule 5.19(e), the Company has no "accumulated 
post-retirement benefit obligation," as defined in FASB Statement No. 
106 (or any successor statements), in respect of post-retirement 
benefits for Employees.  No Benefit Plan exists which could result in 
the payment to any Employee as a result of any transaction explicitly 
contemplated by this Agreement.

	(f)	The Company is not, nor at any time since January 1, 1992 
has it been, a fiduciary, service provider or "party in interest," as 
defined by Section 3(14) of ERISA and applicable regulations, or 
"disqualified person," as defined by Section 4975(e)(2) of the Code and 
applicable regulations, with respect to any employee benefit plan, other 
than a Benefit Plan.

	5.20	Environmental Matters.

	(a)	Company is not subject to any liability (and has not handled 
or disposed of any substance, arranged for the disposal of any 
substance, or owned or operated any property or facility in any manner 
that could reasonably be expected to form the basis for any future 
Environmental Claim against the Company giving rise to any liability) 
for damage to the atmosphere or any site, location or body of water 
(surface or subsurface) or for any other reason under any Environmental 
Law.

	(b)	No notice, citation, summons or order has been received by 
the Company and no complaint has been filed and no penalty has been 
assessed or, to the best knowledge of the Company, threatened by any 
Authority or third party with respect to (i) any alleged violation by 
the Company of any Environmental Law, (ii) any alleged failure by the 
Company to have any Environmental Permit required under any 
Environmental Law in connection with its business or (iii) any other 
Environmental Claim to which the Company or any of its assets is, or 
reasonably could be expected to be, subject.  

	(c)	Except as disclosed on Schedule 5.20, to the best knowledge 
of the Company, no environmental inspection report (collectively, 
"Environmental Reports") has been prepared by any Person concerning 
compliance with, or actual or potential liability under, applicable 
Environmental Law with respect to the Company's business, operations, 
assets or properties or any property contiguous thereto.

	5.21	Full Disclosure.  Each statement of fact set forth in any 
Schedule to Article V of this Agreement is true and accurate and does 
not omit to state any material fact necessary in order to make the 
statements made or information disclosed, in light of the circumstances 
under which they were made or disclosed, not misleading.
<PAGE>



ARTICLE VI

CONDITIONS PRECEDENT TO OBLIGATIONS

	6.1	Conditions to Obligations of Buyer.  Each and every 
obligation of Buyer to be performed under this Agreement shall be 
subject to the satisfaction at or prior to the Closing of each of the 
following conditions (unless waived in writing by Buyer):

	(a)	Representations and Warranties.  The representations and 
warranties set forth in Articles III and IV and Sections 5.1(a), 5.3, 
5.18(d) and 5.19(a) of this Agreement shall have been true and correct 
when made and shall be true and correct at and as of the Closing.  The 
representations and warranties set forth in Article V, other than 
Sections 5.1(a), 5.3, 5.18(d), and 5.19(a) shall have been true and 
correct in all material respects when made and shall be true and correct 
in all material respects at and as of the Closing, including those 
representations and warranties that, by their terms, are made only "as 
of the date of this Agreement" or "as of the date hereof," disregarding 
such qualification solely for purposes of this Section 6.1(a); provided, 
however, that for purposes of this sentence, such representations and 
warranties shall be deemed to be true and correct in all material 
respects unless the failure or failures of such representations and 
warranties to be so true and correct, in the aggregate, represents a 
material adverse change to the properties, assets, liabilities 
(contingent or other), business, results of operations or condition 
(financial or otherwise) (including contingent liabilities) of the 
Company as represented in this Agreement, and further provided that for 
purposes of determining whether such a material adverse change occurred 
from the date of execution of this Agreement to the Closing, there shall 
be disregarded any adverse change that, is directly and proximately 
related solely to (w) a decrease in the volume of the Company's direct 
written premiums, or (x) a decision by one or more agents of the Company 
to terminate doing business with the Company or to decrease the volume 
of the policies that they write on behalf of the Company, or (y) a 
decrease in the market value of the Company's investment securities, or 
(z) an increase in either or both the volume or average severity of 
claims made under insurance policies issued by the Company in the 
ordinary course of business consistent with past practice, which claims 
arise out of facts or circumstances occurring after the date of this 
Agreement, including, without limitation, an increase in either or both 
the volume or average severity of claims as a consequence of adverse 
weather conditions occurring after the date of this Agreement; provided, 
however, that the exclusion set forth in clause (z) shall not apply to 
the extent such material adverse change arises out of the Company's 
mismanagement of one or more such claims, including, without limitation, 
acts or omissions constituting fraud or bad faith by the Company.  

	(b)	Performance of Agreement.  Each of AAA, CSAAIIB and the 
Company shall have fully performed and complied in all material respects 
with the covenants, conditions and other obligations under this 
Agreement which are to be performed or complied with by it at or prior 
to the Closing, including, without limitation, all deliveries to be made 
pursuant to Sections 7.2, 7.3 and 7.4 of this Agreement and all 
covenants to be performed prior to the Closing pursuant to Articles VIII 
and IX of this Agreement.
<PAGE>



	(c)	Consents. All applicable governmental approvals, including 
approval of the Superintendent of Insurance of the State of Ohio and any 
other state and other Authorities whose approval is required to 
consummate the transactions contemplated hereby shall have been 
received, and no approval shall have imposed any condition or 
requirement which would have a Material Adverse Effect on the Company or 
on the economic benefits to Buyer of the transactions contemplated by 
this Agreement.  All conditions required to be satisfied prior to the 
Closing imposed by the terms of such approvals shall have been 
satisfied. All waiting periods relating to such approvals shall have 
expired.  All notifications to any Authority that are required shall 
have been made.  All pre-merger filing requirements and waiting periods, 
including, without limitation, those under the HSR Act, shall have been 
received or satisfied.

	(d)	No Adverse Change.  There shall not have been any material 
adverse change in the business operations, assets, or financial position 
of the Company since the date of this Agreement provided, however, that 
for purposes of determining whether this condition has been satisfied 
there shall be disregarded any adverse change that is directly and 
proximately related solely to (w) a decrease in the volume of the 
Company's direct written premiums, or (x) a decision by one or more 
agents of the Company to terminate doing business with the Company or to 
decrease the volume of the policies that they write on behalf of the 
Company, or (y) a decrease in the market value of the Company's 
investment securities, or (z) an increase in either or both the volume 
or average severity of claims made under insurance policies issued by 
the Company in the ordinary course of business consistent with past 
practice, which claims arise out of facts or circumstances occurring 
after the date of this Agreement, including, without limitation, an 
increase in either or both the volume or average severity of claims as a 
consequence of adverse weather conditions occurring after the date of 
this Agreement; further provided, however, that the exclusion set forth 
in clause (z) shall not apply to any material adverse change arising out 
of the Company's mismanagement of one or more such claims, including, 
without limitation, a material adverse change arising out of allegations 
that the Company committed acts or omissions constituting fraud or bad 
faith.  Since the date of this Agreement, the Company shall have 
conducted its business, operations, activities and practices only in the 
ordinary course of business substantially consistent with past practice.

	(e)	No Adverse Proceeding.  There shall not be pending or 
threatened any claim, action, litigation or proceeding (judicial or 
administrative) or governmental investigation against Buyer, either 
Seller or the Company for the purpose of enjoining or preventing the 
consummation of this Agreement, or otherwise claiming that this 
Agreement or the consummation of the transactions contemplated hereby is 
illegal.









<PAGE>



	(f)	Certificates.  

	(i)	AAA shall have delivered to Buyer at the Closing a 
certificate signed on its behalf by its President or Vice 
President and Secretary or Assistant Secretary, dated the date of 
Closing, to the effect that AAA has fully performed and satisfied 
all covenants and conditions required hereunder to be performed 
and satisfied by it at or prior to the Closing, including, without 
limitation, the condition set forth in Section 6.1(a) and all 
deliveries to be made by it pursuant to Section 7.2 of this 
Agreement and all covenants to be performed by it prior to the 
Closing pursuant to Article VIII of this Agreement, (2) to the 
best knowledge of AAA the Company has fully performed and 
satisfied all covenants required hereunder to be performed and 
satisfied by it at or prior to the Closing, including, without 
limitation, all covenants to be performed by it prior to the 
Closing pursuant to Article VIII of this Agreement, (3) the 
condition set forth in subsection (e) of this Section 6.1 has been 
satisfied insofar as it pertains to AAA, and (4) to the best 
knowledge of AAA, the condition set forth in subsection (e) of 
this Section 6.1 has been satisfied insofar as it pertains to the 
Company.

	(ii)	CSAAIIB shall have delivered to Buyer at the Closing a 
certificate signed on its behalf by its President, Senior Vice 
President or Vice President and Secretary, dated the Closing Date, 
to the effect that the representations and warranties set forth in 
Article IV which apply to CSAAIIB were true and correct when made 
and are true and correct at and as of the Closing and that it has 
made the deliveries required of it by Section 7.3 of the 
Agreement.

	(iii)	The Company shall have delivered to Buyer at the 
Closing a certificate signed on its behalf by its President or 
Vice President and Secretary or Assistant Secretary, dated the 
Closing Date, to the effect that (1) the Company  has fully 
performed and satisfied all covenants and conditions required 
hereunder to be performed and satisfied by it at or prior to the 
Closing, including, without limitation, the condition set forth in 
Section 6.1(a) and all deliveries to be made by it pursuant to 
Section 7.4 of this Agreement and all covenants to be performed by 
it prior to the Closing pursuant to Article VIII of this 
Agreement, (2) the condition set forth in subsection (d) of this 
Section 6.1 has been satisfied and (3) the condition set forth in 
subsection (e) of this Section 6.1 has been satisfied insofar as 
it pertains to the Company.  

	(g)	ACIC Shares.  There shall have been delivered to Buyer 
certificates representing the ACIC Shares, which shall be registered in 
the name of Buyer, or duly endorsed for transfer to Buyer or accompanied 
by duly executed stock powers.  

	(h)	ACIC Note.  There shall have been delivered to Buyer the 
ACIC Note which shall be duly endorsed for transfer to Buyer or 
accompanied by a duly executed instrument effectuating its transfer to 
Buyer.

	(i)	No Bankruptcy Issues.  No proceeding in which the Company or 
either Seller shall be a debtor, defendant or party seeking an order for 
its own relief or reorganization shall have been brought or be pending 
by or against such Person under any federal, state or foreign bankruptcy 
or insolvency law.
<PAGE>



	(j)	Resignation of Directors.  The directors of the Company on 
the date of the Closing shall have resigned as directors of the Company.

	6.2	Conditions to Obligations of Sellers.  Each and every 
obligation of each Seller to be performed under this Agreement shall be 
subject to the satisfaction at or prior to the Closing of the following 
conditions (unless waived in writing by each Seller affected by such 
waiver):

	(a)	Representations and Warranties.  The representations and 
warranties of Buyer set forth in Article II of this Agreement shall have 
been true and correct when made, and shall be true and correct at and as 
of the Closing as though such representations and warranties were made 
as of the Closing.

	(b)	Performance of Agreement.  Buyer shall have fully performed 
and complied with the covenants, conditions and other obligations under 
this Agreement which are to be performed or complied with by it at or 
prior to the Closing, including, without limitation, all deliveries to 
be made pursuant to Section 7.5 of this Agreement.

	(c)	Consents.  All applicable governmental approvals, including 
approval of the Superintendent of Insurance of the State of Ohio and any 
other state and other Authorities whose approval is required to 
consummate the transactions contemplated hereby shall have been 
received.  All conditions required to be satisfied prior to the Closing 
imposed by the terms of such approvals (other than those conditions 
which could not reasonably be expected to have a Material Adverse Effect 
on the economic benefits of the transaction to either Seller) shall have 
been satisfied. All waiting periods relating to such approvals shall 
have expired.  All notifications to any Authority that are required 
shall have been made.  All pre-merger filing requirements and waiting 
periods, including, without limitation, those under the HSR Act, shall 
have been received or satisfied.

	(d)	No Adverse Proceeding.  There shall not be pending or 
threatened any claim, action, litigation, proceeding or order or decree 
(judicial or administrative) or governmental investigation against 
Buyer, the Sellers or the Company for the purpose of enjoining or 
preventing the consummation of this Agreement, or otherwise claiming 
that this Agreement or the consummation of the transactions contemplated 
hereby is illegal.

	(e)	Certificates.  Buyer shall have delivered to the Sellers at 
the Closing a certificate signed on its behalf by its President or Vice 
President and Secretary or Assistant Secretary, dated the date of 
Closing, to the effect that Buyer has fully performed and satisfied all 
covenants and conditions required hereunder to be performed and 
satisfied by it at or prior to the Closing, including, without 
limitation, all deliveries to be made by it pursuant to Section 7.5 of 
this Agreement and all covenants to be performed by it prior to the 
Closing pursuant to Article VIII of this Agreement.

	(f)	Purchase Price.  Buyer shall have paid the Purchase Price at 
the Closing in accordance with Section 1.2 hereof.
<PAGE>



	(g)	Sun Bank Guaranty.  The Commerce Insurance Company ("CIC") 
shall have delivered to AAA a guaranty in form and substance reasonably 
acceptable to AAA pursuant to which CIC will agree to guarantee Buyer's 
obligations under Section 8.13 of this Agreement.


ARTICLE VII

CLOSING

	7.1	The Closing.  The transactions contemplated by this 
Agreement shall be closed (the "Closing"), and all deliveries to be made 
at such time in connection therewith shall take place at the offices of 
Baker & Hostetler, L.L.P., 2300 Sun Trust Center, 200 South Orange 
Avenue, Orlando, Florida, or at such other place as the parties mutually 
agree, commencing at 10:00 a.m., Orlando, Florida time, on that date 
(the "Closing Date") which is the third Business Day following the date 
on which the last to occur of (i) the receipt of all required 
governmental authorizations, approvals, and consents that are conditions 
to the consummation of the transactions contemplated hereby have been 
obtained, and (ii) the expiration of all required waiting periods.

	7.2	Deliveries of AAA at Closing.  At the Closing, AAA will 
deliver or cause to be delivered to Buyer the following:

	(a)	Certificates representing the AAA Shares, which shall be 
registered in the name of Buyer, or duly endorsed for transfer to Buyer 
or accompanied by duly executed stock powers as set forth in Section 
6.1(g);

	(b)	The ACIC Note which shall be duly endorsed for transfer to 
Buyer or accompanied by a duly executed instrument effectuating their 
transfer to Buyer as set forth in Section 6.1(h);

	(c)	The certificates of officers of AAA referred to in Section 
6.1(f)(i) of this Agreement;

	(d)	Certificate issued by the Secretary of State of Connecticut, 
as of a date reasonably acceptable to Buyer, as to the legal existence 
and good standing of AAA, together with a copy of its Articles of 
Incorporation, as certified by the Secretary of State of Connecticut, as 
of a date reasonably acceptable to Buyer.

	(e)	A certificate of the Secretary or an Assistant Secretary of 
AAA and certifying as to (i) the requisite corporate or other action 
authorizing the transactions contemplated by the Agreement and (ii) the 
incumbency and signatures of the Officers of AAA executing this 
Agreement and the other agreements contemplated hereby;

	(f)	All minute books, stock transfer books, stock certificate 
books, and corporate certificates, and all corporate seals of the 
Company in AAA's possession; and
<PAGE>



	(g)	An opinion letter of Baker & Hostetler LLP, counsel to AAA, 
dated as of the Closing Date, addressed to Buyer in substantially the 
form attached hereto as Exhibit 7.2(g).

	7.3	Deliveries of CSAAIIB at Closing.  At the Closing, CSAAIIB 
shall deliver or cause to be delivered to Buyer the following:

	(a)	Certificates representing the CSAAIIB Shares, which shall be 
registered in the name of Buyer, or duly endorsed for transfer to Buyer 
or accompanied by duly executed stock powers as set forth in Section 
6.1(g);

	(b)	The certificate of officers of CSAAIIB referred to in 
Section 6.1(f)(ii) of this Agreement;

	(c)	A certificate of the President, Senior Vice President or 
Secretary, or an Assistant Secretary of CSAIIB and certifying as to:  
(i) the requisite action authorizing the transactions contemplated by 
this Agreement; and (ii) the incumbency and signatures of the CSAAIIB 
officers executing this Agreement and the other instruments contemplated 
hereby.

	7.4	Deliveries of the Company at Closing.  At the Closing, the 
Company will deliver or cause to be delivered  the following:

	(a)	To Buyer:

	(i)	The certificate of officers of the Company referred to 
in Section 6.1(f)(iii);

	(ii)	A Certificate of the Secretary of State of Ohio as to 
the legal existence and good standing of the Company, together 
with a copy of the Company's Articles of Incorporation, certified 
by the Secretary of State of Ohio; and 

	(iii)	A certificate issued by the Ohio Department of 
Insurance, as of a date reasonably acceptable to Buyer, that the 
Company is duly licensed to conduct the business presently 
conducted by the Company; and

	(b)	To Sellers:

	(i)	A certificate of the individuals listed on Schedule 
7.4(b) to AAA that the representations and warranties of the 
Company set forth in Article V are true and correct, except as set 
forth on the Disclosure Schedule attached to that certificate, to 
the best knowledge of each such individual, after reasonable 
inquiry of appropriate management personnel.

	7.5	Deliveries of Buyer at Closing.  At the Closing, Buyer will 
deliver or cause to be delivered to Sellers the following:

	(a)	The Purchase Price in the form specified in Section 1.2 of 
this Agreement, against an appropriate receipt therefor;
<PAGE>



	(b)	The certificate referred to in Section 6.2(e) of this 
Agreement; and

	(c)	A Certificate of the Secretary of State of Rhode Island as 
to the legal existence and good standing of Buyer, together with a copy 
of Buyer's Articles of Incorporation, certified by the Secretary of 
State of Rhode Island.


ARTICLE VIII

COVENANTS

	8.1	Covenant Not to Compete.  AAA covenants and agrees that it 
shall not, for a period of ten (10) years following the Closing Date 
engage whether on its own account or as a shareholder, partner, joint 
venturer or agent of any Person, in any business which competes with the 
personal lines property and casualty insurance business of the Company 
anywhere in the United States; provided, however, the foregoing covenant 
shall not be deemed to have been violated by the ownership of shares of 
any class of capital stock of any publicly held corporation so long as 
the aggregate holdings of AAA represent less than five percent (5%) of 
the outstanding shares of such class of capital stock and that class of 
capital stock is registered under Section 12(b) or 12(g) of the Exchange 
Act and is listed or admitted for trading on any United States national 
securities exchange or is quoted on the National Association of 
Securities Dealers, Inc. Automated Quotations System.  Notwithstanding 
the foregoing, this Section 8.1 shall not in any way limit AAA from 
conducting any activities (other than activities directly related to the 
underwriting and issuance of personal line property and casualty 
insurance policies directly by AAA or indirectly by AAA as a 
shareholder, partner, joint venturer or agent of any Person) that AAA 
reasonably determines are necessary for, or incident to, the performance 
of its functions as a national association of entities that perform 
automobile club services, including but not limited to:  (a) granting to 
any AAA-Affiliated Club or any Related Underwriter the right to use 
(including, without limitation, such use in connection with the sale of 
any insurance products whether personal line property and casualty 
insurance policies or otherwise) the AAA Marks and the Automobile 
Insurance Marks and Phrases (excluding the ACIC Name), (b) the 
performance of any functions, actions or activities (other than 
activities directly related to the underwriting and issuance of personal 
line property and casualty insurance policies directly by AAA or 
indirectly by AAA as a shareholder, partner, joint venturer or agent of 
any Person) contemplated by, or referenced in, AAA's By-laws or other 
governing documents, as the same shall be amended from time to time, (c) 
or any activities (other than activities directly related to the 
underwriting and issuance of personal line property and casualty 
insurance policies directly by AAA, or indirectly by AAA as a 
shareholder, partner, joint venturer, or agent of any Person) presently 
conducted directly or indirectly by AAA.  Buyer acknowledges that AAA-
Affiliated Clubs and their Related Underwriters shall not be bound by 
the covenants set forth in this Agreement, including, without 
limitation, this Section 8.1, and nothing in this Section 8.1 shall in 
any way limit the activity of any entity other than AAA, including but 
not limited to any AAA-Affiliated Club or any Related Underwriter, 
including but not limited to those Related Underwriters listed on 
Schedule 8.1.  This Section 8.1 is the "Covenant Not to Compete."
<PAGE>



	8.2	Conduct of Business of the Company Prior to the Closing.  
AAA covenants and agrees that on and after the date hereof and prior to 
the Closing, and except as otherwise consented to or approved by Buyer 
in writing, AAA shall take all commercially reasonable efforts 
(excluding the payment of money) to cause the Company to comply with the 
following, and the Company covenants and agrees that on and after the 
date hereof and prior to the Closing, and except as otherwise consented 
to or approved by Buyer, the Company shall comply with the following:

	(a)	The business, operations, activities and practices of the 
Company shall be conducted only in the ordinary course of business and 
consistent with past practice including making contributions required to 
be made to any Benefit Plan, except as otherwise expressly provided in 
this Agreement; 

	(b)	The Company shall not sell, transfer, pledge, mortgage, 
encumber or otherwise dispose of any of its material amount of property 
or assets other than the sale of insurance policies issued in the 
ordinary course of business;

	(c)	The Company shall not merge or consolidate with any other 
person or entity or acquire a material amount of assets of any other 
person or entity;

	(d)	No change shall be made in the Articles of Incorporation or 
Code of Regulations of the Company, except as otherwise expressly 
provided in this Agreement;

	(e)	No change shall be made in the number of shares of 
authorized or issued capital stock of the Company; nor shall any option, 
warrant, call, right, commitment or agreement of any character be 
granted or made by the Company relating to its authorized or issued 
capital stock; nor shall the Company issue, grant or sell any securities 
or obligations convertible into or exchangeable for shares of capital 
stock of the Company;

	(f)	Except as provided in Section 9.3, no dividend shall be 
declared or paid or other distribution (whether in cash, stock, property 
or any combination thereof) or payment declared or made in respect of 
the capital stock of the Company, nor shall the Company purchase, 
acquire or redeem or split, combine or reclassify any shares of its 
capital stock;

	(g)	The Company shall not (i) except in the ordinary course of 
business and consistent with past practice, incur any indebtedness for 
borrowed money in addition to any such indebtedness outstanding on the 
date of this Agreement, including any renewals or extensions thereof; 
(ii) assume, guarantee, endorse, or otherwise become liable or 
responsible (whether directly, contingently or otherwise) for the 
obligations of any other individual, firm or corporation except in the 
ordinary course of the conduct of its insurance business consistent with 
past practice; or (iii) make any loans, advances or capital 
contributions to, or investments in, any other individual, firm or 
corporation, except for investments in the ordinary course of its 
insurance business consistent with past practice; 

	(h)	The Company shall not materially change any method or 
principle of accounting in a manner that is inconsistent with past 
practice except as a result of changes to SAP and after prior notice to 
Buyer;
<PAGE>



	(i)	Except as set forth in Section 8.11 and the Tax Sharing 
Agreement, the Company shall not make any payment to AAA or CSAAIIB or 
any of their respective Affiliates (other than for expenditures made on 
behalf of the Company in the ordinary course of business consistent with 
past practice made after ten (10) Business Days notice to Buyer) or 
forgive any indebtedness due or owing from AAA or CSAAIIB or any of 
their respective Affiliates; or 

	(j)	The Company shall not (i) enter into any agreement with any 
labor union or association representing any Employee, (ii) institute, 
amend or terminate any Benefit Plan, (iii) pay any pension or retirement 
allowance to any Person not required by an existing plan or agreement, 
(iv) except as set forth on Schedule 8.2, increase in any manner the 
compensation or fringe benefits of, or pay any bonus to, any officer or 
employee other than customary annual (or less frequent) increases in the 
wages or salaries of non-officer employees consistent with past 
practice, which increases on an annualized basis do not increase the 
salary or wage of any individual employee by more than 5% and in the 
aggregate do not increase personnel costs for all non-officer employees 
by more than 2% over the levels in effect as of December 31, 1997, or 
(v) increase any other direct or indirect compensation or employee 
benefit for or to any of its officers, directors or employees; or

	(k)	The Company shall not enter into, amend, terminate or fail 
to renew any Material Contract except in the ordinary course of business 
consistent with past practices; or

	(l)	The Company shall not amend, terminate or renew any 
reinsurance contract set forth on Schedule 5.9(f) without Buyer's 
consent, which consent shall not be unreasonably withheld or delayed.

	(m)	The Company shall not make any capital expenditures, capital 
additions or capital improvements in excess of $50,000 in the aggregate; 
or 

	(n)	The Company shall not enter into any agreement or commitment 
to do any of the foregoing.

	8.3	No Negotiations.

	(a)	After the date of this Agreement and prior to the Closing, 
AAA and the Company shall not, and shall instruct and cause each of 
their respective Representatives not to, solicit or encourage, directly 
or indirectly, inquiries or proposals from any Person (including any of 
their respective Representatives) with respect to any recapitalization, 
merger, consolidation or other business combination involving the 
Company, any sale of all or a substantial portion of the assets of the 
Company, or the sale of the ACIC Shares or ACIC Note or any material 
equity interest in the Company (any of the foregoing, a "Competing 
Transaction").  Except as expressly permitted by Section 8.3(b), AAA and 
the Company shall not, and shall instruct and cause each of their 
respective Representatives not to, furnish any non-public information 
relating to or participate in any negotiations, discussions or other 
activities concerning any Competing Transaction with any Person other 
than Buyer.
<PAGE>



	(b)	If any bona fide written proposal for a Competing 
Transaction (a "Competing Transaction Proposal") is received by, or any 
negotiations or discussions regarding a Competing Transaction Proposal 
are sought to be initiated with, directly or indirectly, AAA or the 
Company or any of their Representatives, AAA or the Company, as the case 
may be, shall promptly notify Buyer and shall disclose to Buyer the 
identity of the Person making or seeking to make such Competing 
Transaction Proposal, the terms and conditions thereof and such other 
information as Buyer may reasonably request.

	(c)	Notwithstanding Section 8.3(a), following receipt of a 
"Qualifying Competing Transaction Proposal" (as defined below), neither 
AAA nor any of its Representatives shall be prohibited from (x) engaging 
in discussions or negotiations with the Person that has made the 
Qualifying Competing Transaction Proposal and thereafter providing to 
such Person information previously provided or contemporaneously made 
available to Buyer, provided such Person shall have entered into a 
confidentiality agreement substantially in the form attached hereto as 
Exhibit 8.3(c), or (y) subject to the terms of Section 10.1(f) of this 
Agreement, terminating this Agreement.  A "Qualifying Competing 
Transaction Proposal" shall mean a Competing Transaction Proposal with 
respect to which the following condition is satisfied:  the AAA Board of 
Directors, or a duly constituted committee thereof, shall have 
determined that the financial terms of such Competing Transaction 
Proposal are, from AAA's perspective, financially superior to the value 
to be received by AAA pursuant to this Agreement as of the date 
referenced in Section 1.2(b)(i).

	(d)	In the event that AAA determines that a Competing 
Transaction Proposal is a Qualifying Competing Transaction Proposal, it 
shall, within twenty (20) Business Days of the date of the determination 
referenced in Section 8.3(c), give notice to Buyer either (i) 
reaffirming AAA's intent to proceed under this Agreement and to 
consummate the purchase and sale of the ACIC Shares and the ACIC Note, 
or (ii) seeking to terminate this Agreement pursuant to Section 10.1(g).  
If AAA does not, within such twenty (20) Business Day-period, either 
expressly reaffirm its intent to proceed under this Agreement or 
terminate this Agreement pursuant to Section 10.1(g), Buyer may at any 
time thereafter terminate this Agreement pursuant to Section 10.1(f).

	8.4	Access to Records.  From the date of this Agreement until 
the Closing, AAA and the Company, upon reasonable notice, shall make or 
cause to be made fully available to Buyer and its representatives, 
attorneys, accountants and agents, for examination the assets and 
property of the Company and all books, contracts, agreements, 
commitments, records and documents relating to the Company's business, 
and shall permit Buyer and its representatives, attorneys, accountants 
and agents to have full access to the same at all reasonable times after 
reasonable notice.  Buyer shall hold in confidence all information so 
obtained and shall use such information only for the purpose of 
implementing the transactions contemplated hereby.
<PAGE>


Buyer further covenants and agrees that, prior to the consummation of 
the transactions contemplated herein, it shall not at any time, and 
shall cause its agents, affiliates and representatives not to at any 
time, without the prior written consent of AAA and CSAAIIB (as to such 
information as relates to CSAAIIB), disclose any confidential 
information regarding the operations of the Company, AAA or CSAAIIB to 
third parties.  If the transactions contemplated hereby are not 
consummated, Buyer shall return all data and other information to AAA or 
the Company and continue to honor the foregoing confidentiality and 
nondisclosure covenants.  Such obligation of confidentiality and nonuse 
shall not extend to any (i) information which is shown to be or to have 
been generally known to others engaged in the same trade or business as 
the Company; (ii) information that is or shall be public knowledge 
through no act or omission by Buyer or any of its directors, officers, 
employees, professional advisors, or other representatives; (iii) 
information which is rightfully obtained by Buyer from a third party 
that is under no contractual or other obligation of confidentiality with 
respect to such information; or (iv) information which is required to be 
disclosed pursuant to judicial or governmental requirements.

	8.5	Hart-Scott-Rodino Act Filings.  AAA, CSAAIIB and Buyer shall 
reasonably cooperate in the preparation of, and promptly file, all 
notices and other filings required of it under the HSR Act as a result 
of the transactions contemplated by this Agreement.

	8.6	Insurance License Filings.  Buyer, with the cooperation of 
AAA and the Company, shall prepare and file within (15) fifteen Business 
Days of the date hereof (unless such delay is due to AAA or the Company) 
with the Ohio Department of Insurance and any other applicable 
jurisdictions, such applications or notifications as may be required in 
order to obtain any approvals necessary for the consummation of the 
transactions contemplated hereby and such other pre-acquisition 
notifications as may be required to be made by Buyer prior to Closing in 
order for the Company to maintain, after the Closing Date, the insurance 
licenses of the Company in effect on the date hereof.  In connection 
with such approvals, Buyer shall accept, and use all reasonable efforts 
to satisfy, all conditions to the consummation of the transactions 
contemplated hereby imposed by such regulatory authorities which would 
not have a material adverse effect on the financial condition or 
business of the Company.

	8.7	Insurance Holding Company Filings.  Prior to the Closing, 
Buyer, with the cooperation of AAA and the Company shall prepare and 
file within fifteen (15) Business Days of the date hereof (unless such 
delay is due to the Company or AAA) with all applicable state insurance 
authorities such registrations or other information as may be required 
to comply with all applicable state insurance holding company statutes, 
including, without limitation, the filing of a Form A with the Ohio 
Department of Insurance.

	8.8	Additional Financial Statements.  For the periods ending 
subsequent to June 30, 1998 and prior to the Closing, the Company shall 
promptly furnish to Buyer (i) copies of monthly unaudited financial 
statements of the Company, and (ii) copies of quarterly unaudited 
financial statements of the Company, and (iii) copies of Quarterly 
Statements of the Company.  Such financial statements will be complete 
and correct in all material respects and will be consistent in form with 
those previously prepared by the Company for such interim periods.
<PAGE>



	8.9	Welfare Plans and Other Benefit Plans.

	(a)	Employees of the Company shall continue to participate in 
the Employee Welfare Benefit Plans (as defined in Section 3(1) of ERISA) 
available through AAA and its affiliates (the "Welfare Plan") through 
11:59 p.m. the day before the Closing Date, at which time coverage under 
the Welfare Plan shall cease for such employees of the Company and their 
eligible beneficiaries and dependents.

	(b)	Effective as of 12:01 a.m. on the day of the Closing the 
Company shall establish such new employee welfare benefits plans (as 
defined in section 3(1) of ERISA) as it may desire; provided, however, 
that the Company (or Purchaser for employees of the Company) shall, 
effective as of 12:01 a.m. on the Closing Date:  (i) establish a group 
health plan (as defined in section 607(1) of ERISA) for active employees 
of the Company which plan shall waive any pre-existing conditions and 
evidence of insurability requirements with respect to employees of the 
Company (and, if applicable, count total service with the Company both 
before and after the Closing for eligibility purposes), except for such 
pre-existing conditions and evidence of insurability requirements as are 
contained in the Welfare Plan on the Closing Date which could have been 
imposed had coverage under the Welfare Plan continued; and (ii) shall 
also provide to any then retired employees and their eligible 
beneficiaries and dependents ongoing retiree healthcare and other 
related benefits under such terms and conditions as are then applicable 
to such retirees and their eligible beneficiaries and dependents.  
Effective as of 12:01 a.m. on the day of the Closing, the Company and 
the Buyer shall be solely responsible and liable for such employee 
welfare benefit plans, and Seller shall have no liability whatsoever 
with respect to such plans; and Buyer shall, and shall cause the Company 
to, indemnify Seller against, and hold them harmless from, any liability 
related to any such employee welfare benefit plans established or 
maintained by the Company or Buyer.

	(c)	AAA shall, at no cost to AAA, provide such cooperation at 
any time and from time to time after the Closing as the Company or Buyer 
may reasonably request in connection with any termination of a Defined 
Benefit Pension Plan.

	8.10	Severance Pay.  If, during the one year period from and 
after the Closing, the Company terminates the employment of any Employee 
other than for cause or as a result of unsatisfactory job performance, 
the Company shall give such Employee two weeks' prior notice of such 
termination for each year the Employee was employed by the Company, up 
to a maximum of twenty-six (26) weeks of notice.
<PAGE>



	8.11	Certain Tax Matters.

	(a)	AAA will include the income of the Company (including any 
deferred income triggered into income by Treasury Regulations  1.1502-13 
and  1.502-14 and any excess loss accounts taken into income under 
Treasury Regulation  1.1502-19) on AAA's consolidated federal income Tax 
Returns for all periods through the Closing Date and pay all federal 
income Taxes attributable to such income; provided, however, that for 
all periods ending on or prior to the Closing the Company shall continue 
to be liable to reimburse AAA, in accordance with the terms of the Tax 
Sharing Agreement in effect as of the date of this Agreement, for the 
Company's share of such income Taxes.  The Company will furnish to AAA 
upon AAA's request, no later than ten Business Days after such request, 
Tax information for inclusion in AAA's federal consolidated income Tax 
Return for any period ending on or prior to the Closing Date in 
accordance with the Company's past custom and practice.  AAA will take 
no position with respect to any item on its Tax Returns that relate to 
the Company that is inconsistent with respect to the treatment of such 
item by the Company on prior Tax Returns and that is reasonably likely 
to have a Material Adverse Effect on the Company's Tax liability after 
the Closing Date.  AAA will allow the Company a period of not more than 
twenty (20) Business Days to review and comment upon such Tax Return 
(including any amended returns) to the extent they relate to the Company 
provided, however, that the Company will not object to any return 
position taken by AAA with respect to the Company unless such position 
is reasonably likely to have a Material Adverse Effect on the Company's 
Tax liability after the Closing Date.  The income of the Company will be 
apportioned to the period up to and including the Closing Date and the 
period after the Closing Date by closing the books of the Company as of 
the end of the Closing Date.  The Company and AAA shall terminate, not 
later than the Closing Date, the Tax Sharing Agreement, which 
termination shall provide that the Tax Sharing Agreement shall have no 
further effect after the Closing for any taxable year (whether the 
current year, a future year or a past year).

	(b)	If AAA is assessed additional federal income tax 
attributable to an increase in the taxable income of the Company for any 
period (a "Pre-Closing Period") ending on or prior to the Closing during 
which the Company joined with AAA in the filing of a consolidated 
federal income tax return, then, provided that AAA has complied in all 
material respects with the procedures set forth under Section 8.11(c), 
the Company shall reimburse AAA within twenty (20) Business Days after 
receipt of a written request therefor from AAA, which request shall be 
accompanied by evidence that AAA has paid such assessment.  
Notwithstanding the immediately preceding sentence, the Company will 
have no obligation to reimburse AAA for any such assessment to the 
extent that the aggregate amount of "Damages" under "Buyer Indemnifiable 
Claims" for which the Buyer has given notice is equal to or in excess of 
the "Deductible" (as such term is defined in Article XI of this 
Agreement).

<page



	(c)	AAA shall provide the Company with prompt notice of any 
actual or proposed IRS audit of a Pre-Closing Period to the extent that 
such audit will relate to the Company, and the Company and its counsel 
shall e entitled to participate at the Company's expense in any such 
audit to the extent that it relates to the Company.  Without the 
Company's prior written consent, which consent may not be unreasonably 
withheld, AAA may not settle any issue arising in such audit in a manner 
that would obligate the Company to reimburse AAA pursuant to Section 
8.11(b) or otherwise adversely affect, in any material respect, the 
Company's Taxes after the Closing.  AAA also shall promptly notify the 
Company of any actions taken, inquiries made (whether written or oral), 
or written determinations received by the IRS relating to the Company 
for any Pre-Closing Period.

	(d)	Any refund of Taxes received by the Company and attributable 
to a period prior to the Closing shall be applied and offset against any 
Buyer's Indemnifiable Claims described in Section 11.2(b)(iv) asserted 
at the time such refund is received, and the resulting amount shall be 
paid to AAA (if a refund results) or treated as a Buyer Indemnifiable 
Claim (if a Buyer Indemnifiable Claim results).  The netting of amounts 
described in the previous sentence shall be done without regard to the 
Deductible.

	8.12	Insurance Coverage.  Buyer shall cause the Company to 
maintain in full force and effect the directors' and officers'/errors 
and omissions/fiduciary/employment practices and liability insurance in 
effect immediately prior to the Closing for such time as is necessary to 
provide coverage for acts of directors and officers on or prior to the 
Closing; provided, however, that Buyer shall not be obligated to cause 
the Company to expend more than Twenty-Five Thousand Dollars 
($25,000)(the "Premium Cap") to maintain or procure such coverage; and 
provided further that if the Company is unable to maintain or procure 
the insurance coverage called for by this Section 8.12 for an amount 
equal to or less than the Premium Cap, Buyer shall cause the Company to 
obtain as much comparable insurance as may be obtained for an amount 
equal to the Premium Cap; and provided further that AAA may, at its sole 
discretion, request the Company to procure additional coverage in excess 
of the amount purchased for $25,000, but only if and to the extent AAA 
pays the incremental cost of such coverage over $25,000. The Company 
will upon request make available to Buyer for inspection and copying at 
the Company's headquarters complete and correct copies of all forms of 
insurance policies of the Company together with all forms of riders 
thereto.

	8.13	Sun Bank Guaranty.  Buyer shall indemnify and hold AAA 
harmless from any and all liability that AAA may have under that certain 
Corporate Guaranty Agreement given to Sun Bank National Association 
dated April 1993, a copy of which is set forth as Schedule 8.13.
<PAGE>



ARTICLE IX

INTELLECTUAL PROPERTY

	9.1	Use of Certain Intellectual Property.

	(a)	Buyer acknowledges that the Company presently has the right 
to use the AAA Marks for the purpose of selling personal lines property 
and casualty insurance products in the Service Areas of AAA Affiliated 
Clubs that have granted such rights to the Company (the "Granting AAA 
Club").  The Service Areas where the Company has obtained, and 
subsequent to the Closing obtains, the right to use the AAA Marks from 
the Granting AAA Club operating in such Service Area and such right has 
not been revoked or terminated are collectively referred to herein as 
the "Approved Territories" and separately as an "Approved Territory."  
The Company may, from and after the Closing, use the AAA Marks in 
accordance with the Emblem Regulations in the Approved Territories until 
such right is revoked or terminated in whole or in part by the Granting 
AAA Club.  The Company shall have no right to use (and AAA shall have 
the right to  prevent the Company from using) any AAA Marks outside of 
the Approved Territories. All other uses by the Company of any AAA Marks 
will be terminated prior to the Closing.  AAA shall not grant any 
Person, including the Company, the right to use the ACIC Name, provided, 
however, that AAA may grant to any AAA Affiliated Club or Related 
Underwriter the right to use (i) the Automobile Insurance Marks and 
Phrases; and (ii) the phrase "Automobile Club Insurance Company" as part 
of a larger name or phrase.  Example of the types of usage allowed by 
(i) and (ii) of the preceding sentence are set forth on Schedule 9.1.  
The Company shall use all commercially reasonable efforts not to (and 
Buyer shall use all commercially reasonable efforts to cause the Company 
not to) by any means, including, without limitation, any display or 
transmission via radio broadcast, television broadcast, cable 
transmission or internet transmission use, display or transmit any AAA 
Marks or Automobile Insurance Marks and Phrases or any component or 
derivation thereof outside of the Approved Territories; provided, 
however, that the Company shall not be deemed to be in breach of this 
sentence if the radio, television, cable or print medium is disseminated 
from, and the message is solely directed to customers or potential 
customers who reside in, an Approved Territory.  The Company shall not 
(and Buyer shall cause the Company not to) make any reference to its 
affiliation with AAA or any AAA Affiliated Club in connection with any 
activities conducted in, or with respect to, any geographic area other 
than an Approved Territory, and then reference may be made only to AAA 
and the Granting AAA Club to the extent permitted by the Granting AAA 
Club operating in such Approved Territory.  
<PAGE>



	9.2	Change of Company's Name.  As soon as practical after the 
date of this Agreement, Sellers and the Company shall cause the 
Company's Articles of Incorporation to be amended to change the name of 
the Company to Members Property & Casualty Company.  AAA, the Company, 
and Buyer shall cooperate and use all commercially reasonable efforts to 
prepare, execute, file and deliver all documentation necessary to 
effect, evidence or notify third parties (including without limitation, 
Authorities) of such name change.  The Company shall have the right to 
use the name "Automobile Club Insurance Company" but only in an Approved 
Territory and only until completion of the change of name, provided that 
Buyer and the Company are cooperating and, after the Closing, Buyer and 
the Company are diligently pursuing, such name change.  Buyer 
acknowledges that nothing in this Agreement shall be construed as 
granting to Buyer any rights to use the Automobile Insurance Marks and 
Phrases except and to the extent expressly provided in the immediately 
preceding sentence.  Provided that the Closing occurs, the reasonable 
fees and expenses relating to such name change (including filing fees 
and attorney fees) shall be shared equally by AAA and Buyer.  Each party 
shall, to the extent practicable, give the other party notice of such 
expense prior to incurring the expense.  The covenant set forth in this 
Section 9.2 shall survive the Closing. 

	9.3	Dividend of Name and Mark.  The parties acknowledge and 
agree that, prior to the Closing, the Company shall distribute as a 
dividend to Sellers all of the Company's rights to the service mark 
"Automobile Club Insurance," the ACIC Name and all trademarks and 
service marks and other intellectual property related to the name or the 
service mark.  AAA, the Buyer and the Company shall cooperate and use 
all commercially reasonable efforts to prepare, execute, file and 
deliver all documentation necessary to effect, evidence or notify third 
parties (including, without limitation, Authorities) of such transfer.  
The covenant set forth in this Section 9.3 shall survive Closing.  

	9.4	Specific Performance.  Sellers and Buyer acknowledge and 
agree that a party's remedy for a breach of any provision of this 
Article IX shall be specific performance, in addition to any other 
remedies available to it under this Agreement.  

	9.5	Enforcement.  AAA and the Company agree to notify each other 
in writing (an "Infringement Notice") of any material infringing use of 
the precise name "Automobile Club Insurance Company" (the "ACIC Name"), 
other than as part of a larger name or phrase.  AAA in its sole and 
absolute discretion may commence or prosecute claims or suits with 
respect to any infringing use of, or challenge to any and all rights 
Sellers may presently have or may acquire in the future to the ACIC 
Name, in its own name or in the name of the Company, or join the Company 
as a party in any such claim or suit, provided, however, that AAA shall 
provide the Company with written notice (a "Commencement Notice") of the 
commencement of any such suit or proceeding no later than thirty (30) 
Business Days after the commencement thereof.  If, within sixty (60) 
Business Days after the Company delivers an Infringement Notice to 
Sellers, AAA does not provide the Company with a Commencement Notice 
with respect to the subject matter of the Infringement Notice, the 
Company shall be free to pursue the infringement action described in the 
Infringement Notice at the Company's cost and expense provided, however, 
that the Company 
<PAGE>



may not agree to any settlement terms other than the payment of money 
without the prior written consent of AAA, which shall not be 
unreasonably withheld. AAA shall not be compelled to commence litigation 
in order to protect the Company's rights to the ACIC Name nor be 
required to bear the costs incurred in any litigation commenced by the 
Company.  In the event AAA elects to commence litigation to protect its 
rights in the ACIC Name against third parties, AAA shall bear all fees, 
costs and expenses incurred in connection therewith.  The covenant set 
forth in this Section 9.5 shall survive the closing. 


ARTICLE X

TERMINATION

	10.1	Termination of Agreement.  This Agreement may be terminated 
at any time prior to the Closing:

	(a)	by the mutual written consent of Buyer and the Sellers;

	(b)	by either Buyer or AAA if any of the representations or 
warranties of the other party contained herein shall be inaccurate or 
untrue in any material respect;

	(c)	by either Buyer or AAA if any obligation, term or condition 
to be performed, kept or observed by such other party hereunder has not 
been performed, kept or observed in any material respect at or prior to 
the time specified in this Agreement;

	(d)	by Buyer or either Seller if any permanent injunction or 
other order of a court or other competent authority preventing the 
consummation of the transactions contemplated by this Agreement shall 
have become final and nonappealable; 

	(e)	by either Buyer or AAA, if not then in material breach of 
any of its obligations hereunder, if the Closing has not occurred by May 
31, 1999; 

	(f)	by Buyer if AAA has not reaffirmed, pursuant to Section 
8.3(d), its intent to proceed with the transactions contemplated by this 
Agreement following its receipt of a Qualifying Competing Transaction 
Proposal; provided, however, that in the case of a termination under 
this Section 10.1(f), Buyer shall be entitled to receive from AAA the 
Reimbursement Fee (as defined below) pursuant to Section 10.2; or

	(g)	by AAA following notice to Buyer if AAA elects to accept a 
Qualifying Competing Transaction Proposal, subject to termination of 
this Agreement and Buyer's first refusal right specified below, which 
notice shall specify the final terms and conditions of such Qualifying 
Competing Transaction Proposal, including, without limitation, the form 
and amount of consideration to be received by AAA and CSAAIIB in 
exchange for the ACIC Shares and the ACIC Note; provided, however, that 
the effectiveness of a termination pursuant to this Section 10.1(g) is 
subject to the satisfaction of each of the following conditions:  (i) 
Buyer shall not have exercised its right of first refusal pursuant to 
Section 10.3 and (ii) AAA shall have paid the Termination Fee to Buyer 
pursuant to Section 10.2.
<PAGE>



	10.2	Effect of Termination.

	(a)	A termination under this Article X shall not prejudice any 
claims which any party may have under this Agreement, in law or in 
equity, as a consequence of any failure or default under this Agreement 
by another party hereto provided, however, that in no event shall a 
termination of this Agreement entitle any party to a claim for 
consequential, special or punitive damages. 

	(b)	If this Agreement is terminated pursuant to Section 10.1(f) 
or 10.1(g), AAA shall pay to Buyer the Termination Fee not more than ten 
(10) days after the later of (X) AAA's receipt of notice of Buyer's 
termination of this Agreement pursuant to Section 10.1(f) or (Y) the 
expiration of Buyer's right of first refusal pursuant to Section 10.3.  
The "Termination Fee" means the greater of (i) Five Million Dollars 
($5,000,000) or (ii) fifty percent (50.0%) of the amount by which the 
aggregate value to be received by AAA and CSAAIIB pursuant to the 
Qualifying Competing Transaction Proposal exceeds the Purchase Price.  
If Buyer terminates this Agreement pursuant to Section 10.2(f) and 
within one (1) year after such termination AAA enters into a definitive 
agreement for a different Competing Transaction pursuant to which the 
aggregate value to be received by AAA and CSAAIIB would be greater than 
the value of the Qualifying Competing Transaction Proposal used 
initially in calculating the Termination Fee, then the Termination Fee 
shall be recalculated using such higher value and AAA shall pay the 
increase, if any, in the Termination Fee not more than five (5) days 
after closing such subsequent Competing Transaction.

	10.3	Right of First Refusal.  By notice from Buyer to AAA given 
not later than twenty (20) Business Days after delivery to Buyer of 
notice from AAA of its intention to seek termination of this Agreement 
as provided by Section 8.3(d)(ii) and Section 10.1(g), Buyer shall have 
the right to enter into a definitive agreement with AAA and, if 
applicable, CSAAIIB on the same terms and conditions as the Qualifying 
Competing Transaction Proposal that AAA identified in its notice 
pursuant to Section 10.1(g), except that the purchase price payable 
thereunder shall be reduced by the amount of the Termination Fee that 
would have otherwise been payable to Buyer pursuant to Section 10.2.  
Notwithstanding any provision of this Agreement to the contrary, any 
proposed sale by AAA of the AAA Shares other than the sale contemplated 
by this Agreement, including, without limitation, a sale pursuant to 
this Section 10.3 shall remain subject to CSAAIIB's rights of first 
refusal as set forth in the Shareholders' Agreement.
<PAGE>



ARTICLE XI

INDEMNIFICATION

	11.1	Survival of Representations, Warranties and Agreements.  
Subject to the limitations set forth in Section 11.3 of this Agreement 
and notwithstanding any investigation conducted at any time with regard 
thereto by or on behalf of either party hereto, all representations and 
warranties of Buyer, Seller and the Company in this Agreement shall 
survive execution, delivery and performance of this Agreement.  All 
representations and warranties of Buyer, Seller and the Company set 
forth in this Agreement shall be deemed to have been made again by 
Buyer, Seller or the Company, as the case may be, at and as of the 
Closing except to the extent any representation and warranty (or part 
thereof) is limited in time by its specific terms.  All statements 
contained in any Schedule or Exhibit hereto shall be deemed 
representations and warranties of Buyer, Seller or the Company, as the 
case may be, set forth in this Agreement within the meaning of this 
Article.

	11.2	Indemnification.

	(a)	As used in this Article, any reference to a representation, 
warranty or covenant contained in any Section of this Agreement shall 
include the Schedule relating to such Section.  

	(b)	AAA shall indemnify and hold harmless Buyer, its directors, 
officers, employees and agents, from and against any and all losses, 
liabilities, damages, demands, claims, suits, actions, judgments or 
causes of action, assessments, costs and expenses, and any and all 
amounts paid in settlement of any claim or litigation (collectively, 
"Damages"), asserted against, resulting to, imposed upon, or incurred or 
suffered by Buyer, directly as a result of or arising from any of the 
following (collectively with the CSAAIIB Claims as defined in Section 
11.2(c), "Buyer's Indemnifiable Claims"):  (i) any inaccuracy in or 
breach or nonfulfillment of any of the representations, warranties, 
covenants or agreements made by AAA in this Agreement, provided, 
however, that any failure to deliver the certificate to be delivered 
with regard to Section 6.1(a) shall not give rise to any liability on 
the part of AAA; (ii) any inaccuracy in or any breach of any 
representation or warranty of the Company; (iii) any facts or 
circumstances constituting such an inaccuracy, breach or nonfulfillment; 
(iv) any liability of the Company for Taxes incurred by the Company 
prior to the Closing.  For purposes of this Agreement, Damages for 
claims other than third party claims shall not include any 
consequential, special or punitive damages.  Notwithstanding anything 
else in this Agreement, Buyer shall not be entitled to indemnification 
pursuant to this Section 11.2 on account of the failure of any of the 
representations set forth in this Agreement, including but not limited 
to Section 5.11(a)(ii), to be accurate from the date of this Agreement 
up to and including the Closing Date to the extent that the failure of 
such representation to be accurate as of the Closing Date is directly 
and proximately related solely to (w) a decrease in the volume of the 
Company's direct written premiums, or (x) a decision by one or more 
agents of the Company to terminate doing business with the Company or to 
decrease the volume of the policies that they write on behalf of the 
Company, or (y) a decrease in the market value of the Company's 
investment securities, or (z) an increase in either or both the volume 
or average severity of claims made under insurance policies issued by 
the Company in the ordinary course of business consistent with past 
practice, which claims arise out of facts or circumstances occurring 
after the date of this Agreement, including, without limitation, an 
increase in either or 
<PAGE>



both the volume or average severity of claims as a consequence of 
adverse weather conditions occurring after the date of this Agreement 
shall be disregarded; provided, however, that the exclusion set forth in 
clause (z) shall not apply to any Damages arising out of the Company's 
mismanagement of one or more of such claims, including without 
limitations Damages arising out of allegations that the Company 
committed acts or omissions constituting fraud or bad faith; and 
provided further, the exclusion shall not affect in any way AAA's 
obligation under this Section 11.2 to indemnify Buyer for a breach of 
the Company's representation set forth in Section 5.13(a).  

	(c)	CSAAIIB shall indemnify and hold harmless Buyer, AAA and 
their respective directors, officers, employees and agents, from and 
against any and all Damages asserted against, resulting to, imposed 
upon, or incurred or suffered by Buyer or AAA, directly as a result of 
or arising from any inaccuracy in or breach or nonfulfillment of any of 
the representations, warranties covenants or agreements made by CSAAIIB 
in Article IV and Section 7.3 of this Agreement (collectively, "CSAAIIB 
Claims").

	(d)	Buyer shall indemnify and hold harmless each Seller and 
their respective, directors, officers, employees and agents, from and 
against any and all Damages asserted against, resulting to, imposed 
upon, or incurred or suffered by Seller, directly as a result of or 
arising from any inaccuracy in or breach or nonfulfillment of any of the 
representations, warranties, covenants or agreements made by Buyer in 
this Agreement or any facts or circumstances constituting such an 
inaccuracy, breach or nonfulfillment (collectively, "Sellers 
Indemnifiable Claims").

	(e)	Any payment made by either Seller pursuant to either 
Seller's indemnification obligations under this Section 11.2 shall 
constitute a reduction in the Purchase Price hereunder.  Any payment 
made by Buyer pursuant to Buyer's indemnification obligations under this 
Section 11.2 shall constitute an addition to the Purchase Price 
hereunder.

	(f)	If the event that has caused the Damages for the purposes of 
this Section 11.2 gives rise to a current deduction against taxable 
income of the Indemnified Party, the Damages shall be reduced by the tax 
benefit attributable thereto.  If such event will give rise to a future 
tax deduction to the Indemnified Party, the Damages  shall be reduced by 
the tax benefit attributable thereto discounted at the prime rate of 
interest reported in the Wall Street Journal at the time of payment.

	(g)	The amount of any indemnification claim by Buyer against 
either Seller under this Section 11.2 shall be reduced by any insurance 
payment received by Buyer, pursuant to an insurance policy of the 
Company in effect as of the date of this Agreement, on account of the 
Damages that give rise to such indemnification claim; provided, however, 
that this Section 11.2(g) shall not obligate Buyer or the Company to 
obtain any insurance coverage or, if already obtained, to maintain the 
effectiveness of such insurance or to make any claim thereunder.

	(h)	Buyer shall be deemed to have suffered Damages arising out 
of or resulting from the matters referred to in subsection (b) or (c) of 
this Section 11.2 if the same shall be suffered by any parent, 
subsidiary or affiliate of Buyer, including, without limitation, the 
Company.
<PAGE>



	(i)	Either Seller shall be deemed to have suffered Damages 
arising out of or resulting from the matters referred to in subsection 
(d) of this Section 11.2 if the same shall be suffered by any parent, 
subsidiary or affiliate of either Seller.

	(j)	In the event and to the extent Buyer asserts a Buyer's 
Indemnifiable Claim against CSAAIIB, other than pursuant to a CSAAIIB 
Claim, AAA shall indemnify and hold harmless CSAAIIB its directors, 
officers, employees and agents from and against any and all Damages.  

	11.3	Limitations on Indemnification.  Rights to indemnification 
hereunder are subject to the following limitations:

	(a)	The obligation of indemnity provided herein with respect to 
the representations and warranties set forth in Section 5.6 shall 
terminate on the expiration of the periods of limitations applicable to 
assessment and collection of federal, state and local taxes with respect 
to the representations as to the absence of unpaid or undisclosed taxes 
(including any interest, penalties or expenses) of any Person;

	(b)	The obligation of indemnity provided herein with respect to 
the representations and warranties set forth in Article III, Article IV 
and Sections 5.1(a) and 5.3 shall never terminate.  The obligation of 
indemnity provided herein with respect to the representation and 
warranty set forth in Section 5.2 shall terminate on the Closing Date.

	(c)	The obligation of indemnity provided herein, other than with 
respect to Article III, Article IV and Sections 5.1(a), 5.2, 5.3 and 5.6 
of this Agreement, shall apply only to Indemnifiable Claims with respect 
to which the Indemnifying Party has received notice as provided in this 
Article XI on or before on March 31, 2000.

	(d)	Notwithstanding subsections (a), (b) and (c) of this Section 
11.3, Buyer shall not be entitled to indemnification hereunder with 
respect to Buyer's Indemnifiable Claim (as defined in Section 11.2) (or, 
if more than one Indemnifiable Claim is asserted, with respect to all of 
Buyer's Indemnifiable Claims) unless the aggregate amount of Damages 
with respect to Buyer's Indemnifiable Claim or Claims exceeds $3,925,000 
(the "Deductible"), in which event the indemnity provided for in Section 
11.2 hereof shall be effective with respect to only such amount of such 
Damages as exceeds the Deductible.  The Deductible shall not apply to or 
be reduced by:  (i) claims asserted for breaches of the representations 
and warranties set forth in Article III, Article IV and Sections 5.1(a), 
5.3, 5.18(d) and 5.19(a); (ii) claims asserted for a breach or breaches 
of the representations and warranties set forth in Section 5.6(e); and 
(iii) claims asserted for Damages incurred by the Company with respect 
to any Controlled Group Benefit Plan other than a Benefit Plan.  With 
respect to those Buyer Indemnifiable Claims that are subject to the 
limitation set forth in this subsection (d), Buyer shall not be entitled 
to indemnification for any Buyer Indemnifiable Claim unless the total 
amount of Damages attributable to such Buyer Indemnifiable Claim 
(measured on a claim by claim basis, with no aggregation of claims 
provided that all claims made with respect to a financial statement 
described in Section 5.7 shall be treated as a single claim) exceeds 
$25,000, and any Buyer Indemnifiable Claim for which the Damages are 
below that threshold shall not be taken into account for purposes of 
calculating the aggregate amount of Damage in excess of the Deductible.
<PAGE>



	(e)	Notwithstanding anything contained in this Agreement to the 
contrary, the maximum liability of a Seller for Buyer's Indemnifiable 
Claims shall be the Purchase Price received by such Seller.

	(f)	Any claim for indemnification hereunder which is not 
asserted by notice given as herein provided which specifically 
identifies a particular breach and the underlying facts and Damages 
relating thereto in the periods of survival specified in this Section 
11.3 may not be pursued and is hereby irrevocably waived after such 
time.

	11.4	Procedure for Indemnification.

	If any party hereto determines to seek indemnification (for 
purposes of this Section 11.4, the "Indemnified Party") under this 
Article with respect to an Indemnifiable Claim, it shall give notice to 
the other party hereto (for purposes of this Section 11.4, the 
"Indemnifying Party") in accordance with the following procedures.

	(a)	Procedure with Respect to All Claims. 

	(i)	Notice of Claim.  An Indemnified Party shall give 
written notice to the Indemnifying Party specifying the nature and 
amount of the alleged Indemnifiable Claim and setting forth a 
reasonably detailed statement of the facts giving rise to the 
claim.

	(ii)	Acceptance of Claim.  If the Indemnifying Party, 
within thirty (30) Business Days after the receipt of notice from 
the Indemnified Party, shall not give written notice to the 
Indemnified Party announcing its intent to contest such assertion 
of the Indemnified Party, such assertion shall be deemed accepted 
and the amount of the claim shall be deemed a valid Indemnifiable 
Claim.

	(iii)	Contesting Assertion of Claim.  The Indemnifying Party 
may contest the assertion of a claim by giving such written notice 
to the Indemnified Party within such thirty (30) Business Day 
period.

	(A)	Negotiations.  The parties, acting in good 
faith, shall endeavor to reach agreement with respect to 
such claim within thirty (30) Business Days after the 
Indemnified Party's receipt of such notice contesting the 
assertion of an Indemnifiable Claim.
<PAGE>



	(B)	Arbitration.  If the parties cannot reach 
agreement with respect to such claim within the thirty (30) 
Business Day period, the contested assertion of a claim 
shall be resolved by binding arbitration administered by the 
American Arbitration Association in accordance with the 
American Arbitration Association's Commercial Arbitration 
Rules.  Any such arbitration proceeding shall be conducted 
in Columbus, Ohio before a panel of three neutral 
arbitrators, all of whom shall be professionals with at 
least five (5) years of experience in the applicable field.  
The arbitrators shall be appointed as provided in the 
American Arbitration Association's Commercial Arbitration 
Rules.  In rendering the award, the arbitrators shall 
determine whether there is an Indemnifiable Claim, and if 
so, the value of the Indemnifiable Claim.  The arbitration 
shall be governed by the Federal Arbitration Act, 9 U.S.C.   
201 et seq., and judgment upon the award rendered by the 
arbitrators may be entered by any court having jurisdiction 
thereof.

	(C)	Costs.  Each party shall pay its own legal, 
auditing and other fees in connection with such a contest; 
provided, however, that the fees of the arbitrators and the 
expenses incurred by the arbitrators shall be shared equally 
by the parties.

	(b)	Procedures with Respect to Third Party Claims.  With respect 
to Indemnifiable Claims resulting from the assertion of liability by 
third parties, the following procedures shall also apply.  
Notwithstanding this Section 11.4(b), however, any difference(s) between 
the parties concerning the existence of value of an Indemnifiable Claim 
resulting from the assertion of liability by third parties shall be 
resolved in accordance with the procedures detailed in Section 11.4(a).  

	(i)	Time to Give Notice.  The Indemnified Party shall 
provide notice within sixty (60) days of becoming aware of an 
Indemnifiable Claim.  The notice shall set forth such information 
with respect thereto as is then reasonably available to the 
Indemnified Party.  For purposes of this clause (i), the 
Indemnified Party shall not be deemed to be "aware" of any 
Indemnifiable Claim unless one or more executive officers of the 
Indemnified Party has actual knowledge of the fact that the 
Indemnified Party has a reasonable basis upon which to assert an 
Indemnifiable Claim.

	(ii)	Assumption of Defense.  The Indemnifying Party will be 
entitled, if it so elects by written notice delivered to the 
Indemnified Party within thirty (30) days after receiving the 
Indemnified Party's notice, to assume the defense thereof with 
counsel satisfactory to the Indemnified Party.  Notwithstanding 
the foregoing, the Indemnified Party shall also have the right to 
employ its own counsel in any such case, but the fees and expenses 
of such counsel shall be at the expense of the Indemnified Party.

	(iii)	Failure to Assume Defense.  In the event that the 
Indemnifying Party, within thirty (30) days after receipt of the 
aforesaid notice of an Indemnifiable Claim, fails to provide any 
written notice to the Indemnified Party, the Indemnifying Party 
shall be deemed to have accepted the Indemnifiable Claim, and the 
Indemnified Party shall have the right to undertake the defense, 
compromise or settlement of such action on behalf of and for the 
account and risk of the Indemnifying Party.
<PAGE>



ARTICLE XII

MISCELLANEOUS PROVISIONS

	12.1	Notice.

	All notices, requests, demands and other communications required 
or permitted under this Agreement, including, without limitation, all 
notices required pursuant to Article VIII of this Agreement, shall be 
deemed to have been duly given and made if in writing and served either 
by personal delivery (which shall include delivery by Federal Express or 
similar services) to the party for whom it is intended, or by being 
deposited postage prepaid, certified or registered mail, return receipt 
requested (or such form of mail as may be substituted therefor by postal 
authorities), in the United States mail, bearing the address shown in 
this Agreement for, or such other address as may be designated in 
writing hereafter by, such party, or by being sent by a telecopy with a 
hard copy sent simultaneously via overnight courier:

	If to Seller:		The American Automobile Association 
(Incorporated)
				1000 AAA Drive
				Heathrow, Florida 32746-5063
				Attention:  Richard D. Rinner
				Telecopy (407) 444-7997

	With a copy to:	Edward G. Ptaszek, Jr.
				Baker & Hostetler
				3200 National City Center
				1900 East 9th Street
				Cleveland, Ohio 44114-3485
				Telecopy (216) 696-0740

	If to Buyer:		AAA Southern New England
				501 Centerville Road
				Warwick, RI  02886-4390
				Attention:  H. Thomas Rowles, President
				Telecopy (401) 732-5022

			and

				The Commerce Group, Inc.
				211 Main Street
				Webster, MA 01570
				Attention:	Gerald Fels,
						Executive Vice President and CFO
						Tel:  (508) 949-4113
						Fax:  (508) 949-4111
<PAGE>



	With a copy to:	Regan P. Remillard, Senior Vice President 
				   and General Counsel
				The Commerce Group, Inc.
				c/o Commerce West Insurance Company
				500 Hopyard Road, Suite 2000 (94568)
				Pleasanton, CA 94556
				Tel:  (925) 734-1701
				Fax:  (925) 734-6120

			and

				Partridge, Snow & Hahn
				180 South Main Street
				Providence, RI  02903-9120
				Telecopy:  (401) 861-8210
				Attention:  John J. Partridge, Esq.

				Nutter, McClennen & Fish, LLP
				One International Place
				Boston, MA 92110-2699
				Tel:  (617) 439-2000
				Fax:  (617) 973-9748
				Attention:	Constantine Alexander, Esq.
						and
						Michael K. Krebs, Esq.

	If to CSAAIIB:	California State Automobile Association
				Inter-Insurance Bureau
				P.O. Box 429186
				San Francisco, California 94142-9186
				Telecopy:  (415) 552-5261
				Attention:  Paul Drewitz

	If to the Company:	Automobile Club Insurance Company
				3590 Twin Creeks Drive
				P.O. Box 182580
				Columbus, Ohio 43218-2580
				Telecopy:  (614) 272-2676
				Attention:  Thomas E. Berridge
<PAGE>



	12.2	Entire Agreement.  This Agreement and the Schedules and 
Exhibits hereto embody the entire agreement and understanding of the 
parties hereto with respect to the subject matter hereof, and supersede 
all prior and contemporaneous agreements and understanding relative to 
said subject matter. Each reference in this Agreement to an Exhibit or 
Schedule shall mean an Exhibit or Schedule attached to this Agreement.  
Each such Exhibit or Schedule is deemed to be incorporated into this 
Agreement by such reference.  Any item disclosed in this Agreement or 
any Schedule hereto is deemed to be disclosed on any other Schedule, or 
be treated as an exception to any other representation and warranty to 
which the item reasonably relates.

	12.3	Binding Effect; Assignment.  This Agreement and the various 
rights and obligations arising hereunder shall inure to the benefit of 
and be binding upon Buyer, its representatives, successors and assigns, 
and each Seller, their respective representatives, successors and 
assigns.  Neither this Agreement nor any of the rights, interests or 
obligations hereunder shall be transferred or assigned (by operation of 
law or otherwise) by any party hereto without the prior written consent 
of the other parties (which consent shall not be unreasonably withheld), 
except that Buyer shall have the right to assign any or all of its 
rights hereunder to a wholly owned subsidiary of Buyer and to transfer 
and assign ownership of the Company or its assets and properties to an 
Affiliate of Buyer.  No such transfer by Buyer shall operate in any way 
to modify or discharge any of the obligations of Buyer contemplated by 
this Agreement. 

	12.4	No Third-Party Beneficiaries.  Subject to Section 12.3 
hereof, nothing herein, expressed or implied, is intended or shall be 
construed to confer upon or give to any person, firm, corporation or 
legal entity, other than the parties hereto, any rights, remedies or 
other benefits under or by reason of this Agreement.

	12.5	Counterparts.  This Agreement may be executed simultaneously 
in multiple counterparts, each of which shall be deemed an original, but 
all of which taken together shall constitute one and the same 
instrument.

	12.6	Captions.  The article and section headings of this 
Agreement are inserted for convenience only and shall not constitute a 
part of this Agreement in construing or interpreting any provision 
hereof.

	12.7	Expenses and Transactions.  Except as provided in Section 
10.2 with respect to the Termination Fee, each of the parties hereto 
will bear its own costs and expenses (including legal fees and expenses) 
incurred in connection with this Agreement and the transactions 
contemplated hereby.

	12.8	Waiver; Consent.  This Agreement may not be changed, 
amended, terminated, augmented, rescinded or discharged (other than in 
accordance with its terms), in whole or in part, except by a writing 
executed by the parties hereto, and no waiver of any of the provisions 
or conditions of this Agreement or any of the rights of a party hereto 
shall be effective or binding unless such waiver shall be in writing and 
signed by the party claimed to have given or consented thereto.
<PAGE>



	12.9	Other and Further Covenants.  The parties shall, in good 
faith, execute such other and further instruments, assignments or 
documents as may be necessary for the consummation of the transactions 
and performance of the covenants contemplated by this Agreement, and 
shall assist and cooperate with each other in connection with these 
activities.

	12.10	Construction.  Whenever the context requires, words used in 
the singular shall be construed to mean or include the plural and vice 
versa, and pronouns of any gender shall be deemed to include and 
designate the masculine, feminine or neuter gender.  Whenever used in 
this Agreement, the word "including" shall be non-exclusive and shall 
mean "including without limitation."  All references to Sections, 
Articles, Schedules and Exhibits shall, unless another agreement is 
expressly referenced, mean the applicable Sections or Articles of, or 
the Schedules or Exhibits to, this Agreement.  The terms "herein," 
"hereunder," and terms of similar import refer to this Agreement as a 
whole and not to the specific Section or Article in which they are used.  
This Agreement is the joint product of the parties, and each provision 
hereof has been subject to the mutual consultation, negotiation and 
agreement of such parties, and shall not be construed for or against any 
party.

	12.11	Governing Law.  This Agreement shall in all respects be 
construed in accordance with and governed by the laws of the State of 
Ohio, without regard to any such laws relating to choice or conflict of 
laws.

	12.12	Public Announcements.  Neither Buyer, the Company nor either 
Seller shall, without the prior written consent of the others, make any 
public announcement or any release to trade publications or to the press 
or make any statement to any competitor, customer or any other third 
party with respect to the transactions contemplated herein, except such 
announcement, release or statement necessary in the opinion of its 
counsel to comply with applicable requirements of federal or state law, 
the content of which is reasonably acceptable to the parties.  

	12.13	Certain Definitions.  In the context of this Agreement, the 
following terms, when utilized in this Agreement and unless the context 
otherwise requires, shall have the meanings indicated, which meaning 
shall be equally applicable to both the singular and plural forms of 
such terms:

	"AAA Affiliated Club" means any corporation, association or 
organization including parent or subsidiary corporations, and affiliated 
business entities, operated primarily to accomplish objectives and 
purposes similar to those of AAA, and who agrees to comply with, or 
where the context is appropriate, agrees to cause member subsidiary 
corporations to comply with, AAA Bylaws, and AAA Accreditation and 
Quality Standards, including but not limited to a AAA Organization 
Member as defined in the AAA Bylaws.

	"AAA Bylaws" mean the Bylaws of AAA.

	"AAA Marks" means the AAA emblem (the letters AAA in block form, 
enclosed within an oval or without an oval and as otherwise described in 
the Emblem Regulations.
<PAGE>



	"ACIC Name" means the precise name "Automobile Club Insurance 
Company."

	"Affiliate" with respect to any Person means any person (a 
"Controlling Person") which, directly or indirectly, through one or more 
intermediaries, controls the subject Person or any person which is 
controlled by or is under common control with a Controlling Person.  For 
the purposes of this definition, "control" (including the correlative 
terms "controlling," "controlled by" and "under common control with"), 
with respect to any Person, means possession, directly or indirectly, of 
the power to direct or cause the direction of the management and 
policies of such Person, whether through the ownership of voting 
securities or by contract or otherwise.

	"Agent" means any insurance broker or insurance agent used by the 
Company.

	"Amended Shareholders' Agreement" shall have the meaning set forth 
in section 3.3.

	"Approved Territory" shall have the meaning set forth in Section 
9.1.

	"Authority" means any federal, state or local governmental 
regulatory agency, commission, bureau or authority.

	"Automobile Insurance Marks and Phrases " means:  (i) the ACIC 
Name; (ii)  the phrases contained within, and any component parts of or 
derivation of the ACIC Name such as (A) "Auto Club Insurance," (B) 
"Automobile Club Insurance" and (C) "Automobile Club Insurance Company" 
but only when used in any combination or order in conjunction with other 
words to form a larger name; and (iii) the name "Otto Klub."

	"Benefit Plan" means each "employee benefit plan" as set forth in 
Section 3(3) of ERISA, and includes, without limitation, Multiemployer 
Plans, and each employment, compensation, deferred compensation, stock 
purchase, stock option, consulting, severance, change-in-control, fringe 
benefit, welfare, insurance, bonus, incentive and other employee or 
service provider benefit plan, agreement, contract, program, policy or 
arrangement, whether or not subject to ERISA (including any funding 
mechanism therefor now in effect or required in the future), whether 
formal or informal, oral or written, legally binding or not, under which 
any employee or former employee of, or other provider or former provider 
of services to, the Company has, had or may have any present or future 
right to benefits or under which the Company has, had or may have any 
liability to fund a present or future benefit, or which the Company 
maintains or contributes to (including any such plan, agreement, 
contract, program, policy or arrangement to which the Company or any 
such entity is obligated to contribute) at any time during the five (5) 
year period preceding the Closing Date.

	"Best knowledge of Buyer " or as knowledge relates to Buyer, means 
the actual knowledge of any officer or director of Buyer, without any 
obligation to make any investigation or inquiry.

	"Best knowledge of Company " or as knowledge relates to the 
Company, means the actual knowledge of any of the individuals listed on 
Schedule 7.4(d) after such individuals make reasonable inquiry of 
appropriate management personnel.  
<PAGE>



	"Best knowledge of CSAAIIB" means the actual knowledge of CSAIIB's 
chief executive officer, chief financial officer or general counsel 
without any obligation to make any investigation or inquiry.

	"Best knowledge of Seller" , "Best of Knowledge of AAA" or as 
knowledge  relates to Seller or AAA, means the actual knowledge of AAA's 
chief executive officer, chief financial officer or general counsel 
without any obligation to make any investigation or inquiry.

	"Business Day" means each Monday, Tuesday, Wednesday, Thursday or 
Friday that banks in Orlando, Florida or Boston, Massachusetts are not 
required or permitted by Law to be closed.

	"Buyer's Indemnifiable Claims" shall have the meaning set forth in 
Section 11.2(b).

	"CSAAIIB" shall have the meaning set forth in the preamble to this 
Agreement.

	"Closing Date" shall have the meaning set forth in Section 7.1.

	"Code" means the Internal Revenue Code of 1986, as amended.

	"Competing Transaction" shall have the meaning set forth in 
Section 8.3.

	"Controlled Group" means the group of organizations or entities 
that may be treated as a single employer with the Company pursuant to 
Section 414(b), (c), (m) or (o) of the Code or Section 4001(b) of ERISA.

	"Controlled Group Benefit Plan" each "employee benefit plan" as 
set forth in Section 3(3) of ERISA, and includes, without limitation, 
Multiemployer Plans, and each employment, compensation, deferred 
compensation, stock purchase, stock option, consulting, severance, 
change-in-control, fringe benefit, welfare, insurance, bonus, incentive 
and other employee or service provider benefit plan, agreement, 
contract, program, policy or arrangement, whether or not subject to 
ERISA (including any funding mechanism therefor now in effect or 
required in the future), whether formal or informal, oral or written, 
legally binding or not, under which any employee or former employee of, 
or other provider or former provider of services to, the Company or any 
other entity that may be deemed to be a single employer with the Company 
for one or more employee benefit purposes, including, without 
limitation, any other organization which is a member of the Controlled 
Group has, had or may have any present or future right to benefits or 
under which the Company or any such entity has, had or may have any 
liability to fund a present or future benefit, or which the Company or 
any such entity maintains or contributes to (including any such plan, 
agreement, contract, program, policy or arrangement to which the Company 
or any such entity is obligated to contribute) at any time during the 
five (5) year period preceding the Closing Date.

	"Damages" shall have the meaning set forth in Section 11.2.

	"Deductible" shall have the meaning set forth in Section 11.3.
<PAGE>



	"Emblem Regulations" means the Regulations Governing the Use of 
the Emblem and Other Trademarks of the American Automobile Association 
adopted by the AAA Board of Directors on July 8, 1992, attached hereto 
as Exhibit 9.1, as the same may be amended, supplemented or superceded 
from time to time. 

	"Employees" means all of the Company's officers and employees.

	"Environmental Claim" means any civil, criminal or investigative 
action, suit, litigation, demand, claim, citation, notice or notice of 
violation, warning, consent decree, judgment or order by any Person 
alleging, claiming, concerning or finding liability or potential 
liability (including, without limitation, liability or potential 
liability for investigatory costs, clean-up costs, governmental response 
or oversight costs, natural resources damages, property damages, 
penalties, personal injuries, death or any other damages or costs, 
including, without limitation, litigation and settlement costs and 
consultants' and attorneys' fees) arising out of, based on or resulting 
from, in whole or in part, (1) the actual or alleged presence, 
threatened release, release, emission, disposal, storage, treatment, 
transportation, generation, manufacture or use of any Hazardous 
Substance at or from any location or (2) circumstances forming the basis 
of any violation, or alleged violation, of any Environmental Laws or (3) 
under any Environmental Law.

	"Environmental Law" means the Federal Water Pollution Control Act, 
the Federal Resource Conservation and Recovery Act of 1976, the 
Comprehensive Environmental Response, Compensation and Liability Act of 
1980, each as amended, and any other Law concerning pollution or 
protection of the environment, or natural resources, including any Law 
relating to emissions, discharges, releases or threatened releases of 
any Hazardous Substance into ambient air, surface water, groundwater, or 
lands or otherwise relating to the manufacture, processing, 
distribution, use, treatment, storage, disposal, transport or handling 
of any Hazardous Substance.  "Laws" for purposes of the foregoing 
definition should be deemed to include, without limitation, nuisance, 
trespass or "toxic tort," so called.

	"Environmental Permit" means any authorization, approval, 
registration or license or permit relating to the environmental Laws.

	"ERISA" means the Employee Retirement Income Security Act of 1974, 
as amended, and the regulations promulgated thereunder.

	"GAAP" shall mean generally accepted accounting principles.

	"Granting AAA Club" shall have the meaning set forth in Section 
9.1.
	"HSR Act" shall have the meaning set forth in Section 2.3.

	"Law" means any law, statute, rule or regulation, and any 
judgment, writ, decree, injunction, order or requirement of any court or 
Authority.
<PAGE>



	"Material Adverse Effect" means (i) with respect to the Company, a 
material adverse effect on the properties, assets, liabilities 
(contingent or other), business, results of operations or condition 
(financial or otherwise) of the Company, and (ii) with respect to Buyer 
or Seller, a material adverse effect on the ability of Buyer or Seller, 
as applicable, to consummate the transactions contemplated  hereby or to 
perform its obligations set forth herein.

	"Material Contract" means any (i) agreement, contract or 
commitment, whether written or oral, which involves or may involve 
payments or receipts of more than $50,000 in any single year or $250,000 
in the aggregate or which cannot be terminated without liability to the 
Company upon less than thirty (30) days' written notice; (ii) agreement, 
understanding and arrangement of any kind between the Company and any 
officer, director, employee, or stock holder; (iii) contract, agreement, 
commitment, arrangement or understanding limiting the freedom of the 
Company from competing in any line of business or with any Person, from 
selling any products or services, from competing with or obtaining 
products or services from any Person, or from soliciting any Person to 
become an Employee; (iv) partnership or joint venture agreement between 
the Company and any Person; (v) agreement, instrument, arrangement or 
understanding which otherwise reasonably could be expected to have a 
Material Adverse Effect on the Company's assets, financial condition, 
properties or business; and (vi) commitment or understanding to enter 
into any of the foregoing.

	"Most Recent Balance Sheet" means the Company's balance sheet at 
June 30, 1998.

	"Most Recent Balance Sheet Date" is June 30, 1998.

	"Multiemployer Plan" has the meaning set forth in ERISA Section 
3(37) or Section 4001(a)(3).

	"Operating Permits" means all licenses, permits, orders, 
approvals, registrations, authorizations, qualification filings with all 
Authorities and all industry or non-governmental self-regulatory 
organizations required in connection with the operation of the business 
of the Company as presently conducted, and includes, without limitation, 
those licenses of the Company to transact insurance and reinsurance.

	"PBGC" means the Pension Benefit Guaranty Corporation or any 
entity succeeding to any or all of its functions under ERISA.

	"Person" means any natural person, corporation, limited liability 
company, unincorporated organization, partnership, limited partnership, 
limited liability partnership, association, joint-stock company, joint 
venture, trust or government, or any agency or political subdivision of 
any government.

	"Quarterly Statements" means the Company's quarterly financial 
statements, including the notes thereto, filed with the Superintendent 
of Insurance of the State of Ohio for the quarterly periods ended after 
January 1, 1998.
<PAGE>



	"Related Underwriter" shall mean any AAA Affiliated Club, 
insurance affiliate of an AAA Affiliated Club or associated insurance 
company granted rights to use the Automobile Insurance Marks and Phrases 
by a Granting AAA Club, including any insurance company and any 
subsidiary of any such AAA Affiliated Club, insurance affiliate of an 
AAA Affiliated Club or associated insurance company, including but not 
limited to any entity listed on Schedule 9.1.

	"Representatives" means each of the applicable Person's directors, 
officers, employees, agents, representatives, attorney, accountants, and 
other advisors.

	"SAP" means the statutory accounting practices prescribed or 
permitted by the insurance regulatory Authority of Ohio.

	"Seller's Indemnifiable Claims" shall have the meaning set forth 
in Section 11.2(d).

	"Service Area" shall have the meaning set forth in the AAA Bylaws.

	"Taxes" shall have the meaning set forth in Section 5.6.

	"Termination Fee" shall have the meaning set forth in Section 
10.2(b).
<PAGE>


	IN WITNESS WHEREOF, the parties hereto have caused this Agreement 
to be executed as of the date first set forth above.

					BUYER:
					ACIC HOLDING CO., INC.

					By:	H. Thomas Rowles		

					Title	Chairman of the Board	

						And

					By:	Regan P. Remillard              	

					Title	President			


					SELLER:
					THE AMERICAN AUTOMOBILE ASSOCIATION, 
(INCORPORATED)

					By:	Richard D. Rinner		

					Title	President & CEO		


					CALIFORNIA STATE AUTOMOBILE
ASSOCIATION INTER-INSURANCE BUREAU

					By:	James P. Molinelli	

					Title	President			


					COMPANY

						AUTOMOBILE CLUB INSURANCE COMPANY


					By:	Gerald P. Hogan			

					Title	President / C.E.O.			

722333.1

<PAGE>


GUARANTY AND UNDERTAKING

	In consideration of the execution of the foregoing Share and Note 
Purchase Agreement (the "Agreement"), and in order to induce Seller to 
execute the Agreement with Buyer, each of The Commerce Insurance 
Company, a Massachusetts corporation ("CIC") and AAA Southern New 
England, a Rhode Island corporation ("AAA SNE") hereby: 

	(a)	Jointly and severally  absolutely and unconditionally 
guaranty the full and timely performance by Buyer under the Agreement, 
and any agreement, certificate or other document required by the 
Agreement, of all of Buyer's obligations and duties thereunder to be 
performed before or at the Closing Date; and 

	(b)	Each of CIC and AAA SNE agree with AAA to exercise all 
commercially reasonable efforts to cause Buyer to perform all of Buyer's 
obligations and duties thereunder to be performed after the Closing Date 
except Buyer's obligations set forth in Section 11.2 relating to 
indemnification.  

	Neither Seller shall be obligated to pursue any remedies it may 
have against Buyer under the Agreement prior to enforcing its rights 
against either CIC or AAA SNE under this Guaranty and Undertaking.

	All capitalized terms used herein and not otherwise defined shall 
have the meaning ascribed to them in the Agreement.

THE COMMERCE INSURANCE			AAA SOUTHERN NEW ENGLAND
COMPANY


By:    Gerald Fels              		By:    H.Thomas Rowles             

Title:  E.V.P.                 		Title:  President and CEO          
<PAGE>


SCHEDULES

<TABLE>
<CAPTION>
<S>                             <C>
Schedule 1.2(c)	Purchase Price Allocation

Schedule 3.3	AAA Share Ownership and Authority

Schedule 3.4	Note Ownership, Authority and Validity

Schedule 3.5	No Conflicts (AAA)

Schedule 4.3	CSAAIIB Share Ownership and Authority

Schedule 5.1	Jurisdictions Where Qualified to do Business

Schedule 5.3	Capitalization and Security Holders

Schedule 5.4	Litigation

Schedule 5.5	No Conflicts (Company)

Schedule 5.6	Taxes

Schedule 5.7	Financial Statements

Schedule 5.9(c)	Reported Claims

Schedule 5.9(e)	Asserted Claims

Schedule 5.9(f)	Reinsurance Agreements

Schedule 5.9(i)	Notifications from Agents

Schedule 5.10	Regulatory Agreements

Schedule 5.12	Undisclosed Liabilities

Schedule 5.14	Compliance with Law

Schedule 5.15	Real and Personal Property

Schedule 5.16	Intellectual Property

Schedule 5.17	Y2K

Schedule 5.18(a)	Certain Employees
</TABLE>
<PAGE>


<TABLE>
<CAPTION>
<S>                             <C>
Schedule 5.18(b)	Employment Claims

Schedule 5.18(d)	Severance Agreements

Schedule 5.19(a)	Benefit Plans and Agreements

Schedule 5.19(b)	Certain Benefit Plans

Schedule 5.19(c)	Ability to Amend or Terminate Plans

Schedule 5.19(e)	Unfunded Plan Obligations

Schedule 5.20	Environmental Matters

Schedule 7.4(d)	Best Knowledge of Company

Schedule 8.1	Related Underwriters

Schedule 8.2	Increase in Compensation

Schedule 9.1	Permitted Use of ACIC Name


EXHIBITS

Exhibit 7.2(g)	Opinion of Baker & Hostetler

Exhibit 8.3(c)	Confidentiality Agreement

Exhibit 9.1	Emblem Regulations
</TABLE>


722333.1
<page


MULTIPLE LINE QUOTA SHARE
REINSURANCE AGREEMENT
NO. TM666A

EFFECTIVE JULY 1, 1998
between
COMMERCE INSURANCE COMPANY
CITATION INSURANCE COMPANY
both of Webster, Massachusetts
and
The reinsurers subscribing to the respective
Interests and Liabilities Contracts attached to 
and forming part of this Agreement
<PAGE>


MULTIPLE LINE QUOTA SHARE REINSURANCE AGREEMENT NO. TM666A
<TABLE>
<CAPTION>

ARTICLE                   CONTENTS                                 PAGE
<S>                       <C>                                                               
<C>
                                         PREAMBLE                                                                                
1
I                                        BUSINESS COVERED                                                               
1
II                                      EFFECTIVE DATE AND TERMINATION                                 
2
III                                     TERRITORY                                                                               
3
IV                                     DEFINITION OF ULTIMATE NET 
LIABILITY                        4
V                                      RETENTION                                                                               
4
VI                                     CATASTROPHE REINSURANCE                                             
4
VII                                   LOSS IN EXCESS OF POLICY LIMITS                                     
4
VIII                                  EXTRA CONTRACTUAL OBLIGATIONS                                
4
IX                                     DEFINITION OF RISK                                                               
5
X                                      EXCLUSIONS                                                                             
5
XI                                    LOSS OCCURRENCE                                                               
11
XII                                   REINSURANCE PREMIUM                                                      
13
XIII                                  SLIDING SCALE COMMISSION                                             
14
XIV                                  LOSSES, LOSS ADJUSTMENT EXPENSES 
AND
                                         SALVAGES                                                                              
16
XV                                   REPORTS AND REMITTANCES                                             
16
XVI                                  ACCESS TO RECORDS                                                           
18
XVII                                TAXES                                                                                      
18
XVIII                               CURRENCY                                                                             
18
XIX                                  OFFSET                                                                                   
19
XX                                   ERRORS OR OMISSIONS                                                       
19
XXI                                  DISPUTE RESOLUTION                                                         
19
XXII                                 INSOLVENCY                                                                         
21
XXIII                                SPECIAL TERMINATION                                                      
22
XXIV                               AMENDMENTS                                                                       
23
</TABLE>

ATTACHMENTS:           INSOLVENCY FUNDS EXCLUSION CLAUSE
              POOLS, ASSOCIATIONS AND SYNDICATES EXCLUSION CLAUSE
              TOTAL INSURED VALUE EXCLUSION CLAUSE
              POLLUTION AND SEEPAGE EXCLUSION CLAUSE
              NUCLEAR INCIDENT EXCLUSION CLAUSE - PHYSICAL DAMAGE - 
              REINSURANCE - U.S.A.
              NUCLEAR INCIDENT EXCLUSION CLAUSE - PHYSICAL DAMAGE - 
              REINSURANCE - CANADA 
              NUCLEAR INCIDENT EXCLUSION CLAUSE - REINSURANCE - NO. 4
              POLLUTION LIABILITY EXCLUSION CLAUSE - REINSURANCE
              NUCLEAR INCIDENT EXCLUSION CLAUSE - LIABILITY - 
              REINSURANCE  - U.S.A.
              NUCLEAR INCIDENT EXCLUSION CLAUSE - LIABILITY - 
              REINSURANCE - CANADA

<PAGE>


MULTIPLE LINE QUOTA SHARE
REINSURANCE AGREEMENT
NO. TM666A
(hereinafter referred to as the "Agreement")

between

COMMERCE INSURANCE COMPANY
CITATION INSURANCE COMPANY
both of Webster, Massachusetts
(hereinafter collectively referred to as the "Company")

and

The reinsurers subscribing to the respective
Interests and Liabilities Contracts attached to 
and forming part of this Agreement
(hereinafter referred to as the "Reinsurer")

ARTICLE I - BUSINESS COVERED

A.      By this Agreement the Company obligates itself to cede to the 
Reinsurer and the Reinsurer obligates itself to accept from the 
Company a 75% Quota Share participation of the Company's Ultimate 
Net Liability for Policies in force as of July 1, 1998, and new and 
renewal Policies becoming effective on or after said date as 
respects losses occurring on or after July 1, 1998.

B.      This Quota Share is subject to a maximum cession limit of 
$750,000 each Policy (75% share of the Company's Ultimate Net 
Liability of $1,000,000).  Further, the liability of the Reinsurer 
under this Agreement shall never exceed:

          1.   The greater of an amount equal to 350% of the Net 
Premiums Written in any Agreement Year ceded hereunder or 
$175,875,000 as respects any one Loss Occurrence, never to exceed

          2.   The greater of 450% of the Net Premiums Written in any 
Agreement Year ceded hereunder or $226,125,000 as respects all 
Loss Occurrences taking place during any Agreement Year.

          The term "Agreement Year" shall mean each consecutive twelve 
month period commencing July 1.

C.      Any loss arising under this Agreement with respect to 100% of 
Extra Contractual Obligations, as defined in Article VIII - Extra 
Contractual Obligations shall be recovered in the same proportion 
as the contractual loss recoverable hereunder provided such 
contractual loss plus Extra Contractual Obligations shall never 
exceed the



1.  No. TM666A
<PAGE>



maximum cession, Loss Occurrence and Agreement Year limits set 
forth under Paragraph B. above.  

D.     This Agreement is solely between the Company and the Reinsurer, 
and nothing contained in this 
Agreement shall create any obligations or establish any rights 
against the Reinsurer in favor of any person or entity not a party 
hereto.

E.       The performance of obligations by both parties under this 
Agreement shall be in accordance with a fiduciary standard of good 
faith and fair dealing. 

F.       The term "Policies" shall mean each of the Company's binders, 
policies and contracts of insurance or reinsurance on the business 
covered hereunder. 

G.       Under this Agreement, the indemnity for reinsured loss applies 
only to the following Property and Casualty Business except as 
excluded under Article X - Exclusions of this Agreement.

           PROPERTY BUSINESS

NAIC
CODE:       LINES OF BUSINESS:

  01             Fire
  02             Allied Lines
  09             Inland Marine
  04             Homeowners (Section I only)
  05             Commercial Multiple Peril (Section I only)
  12             Earthquake

           CASUALTY BUSINESS

CLASSES OF INSURANCE

1.  Liability Other Than Automobile:

Bodily Injury Liability, Property Damage Liability, Personal 
and Advertising Injury Liability, and Medical Payments Coverage 
when written as part of a Commercial or Personal Package Policy 
or on a monoline basis.  However, Advertising Injury Liability 
shall only apply to this Agreement when written as part of a 
Commercial Package Policy or a Commercial General Liability 
Coverage Form.

2.  Umbrella Liability (for the Company's net retention.)

ARTICLE II - EFFECTIVE DATE AND TERMINATION

A.       This Agreement shall become effective 12:01 a.m., Eastern 
Standard Time, July 1, 1998, and shall remain in full force until 
terminated.






2.  No. TM666A
<PAGE>



This Agreement may be terminated at the close of any Agreement Year 
by either party giving to the other 90 days prior written notice by 
certified mail of its intention to do so.

B.    During the running of such notice as stipulated in Paragraph A. 
above, the Reinsurer shall 
participate in business coming within the terms of this Agreement 
until the date of termination of this Agreement.

C.       In the event of termination of this Agreement, the Company 
shall have the option of continuing or terminating the liability in 
force at the date of termination as set forth below.  The Company 
may exercise such option provided written notice of the Company's 
election is given by certified mail to the Reinsurer prior to the 
date of termination.

1.   All Policies covered hereunder and in force at the date of 
termination of this Agreement shall continue until their natural 
expiry, cancellation or next anniversary of such business, 
whichever first occurs; but in no case shall this reinsurance be 
extended for longer than one year, plus odd time, after the 
termination date.  At such time, the Reinsurer shall return to 
the Company the unearned premiums, less commissions applicable, 
for the unexpired periods.

2.   All reinsurance hereunder shall be automatically cancelled as 
of the date of termination and the Reinsurer shall be released of 
all liability as respects losses occurring subsequent to the date 
of termination.  The Reinsurer shall return to the Company the 
unearned premiums on the business in force hereunder at the date 
of termination, less the commission allowed thereon.

ARTICLE III - TERRITORY

A.    As respects Property Business this Agreement applies to risks 
located in the United States of 
America, its territories and possessions, and Canada, except that 
with respect to Inland Marine and Multiple Peril Policies covered 
hereunder, the territorial limits of this Agreement shall be those 
of the original Policies when such Policies are written to cover 
risks primarily located in the United States of America, its 
territories and possessions, and Canada.

B.      As respects Casualty Business this Agreement applies to Policies 
issued by the Company within the United States of America, its 
territories and possessions, and Canada and shall apply to losses 
covered hereunder wherever occurring.


















3.  No. TM666A
<PAGE>



ARTICLE IV - DEFINITION OF ULTIMATE NET LIABILITY

The term "Ultimate Net Liability" shall mean the remaining portion of 
the Company's gross liability on each risk reinsured under this 
Agreement after deducting recoveries from all other reinsurance, whether 
specific or general and whether collectible or not, other than the 
reinsurance provided in Article VI - Catastrophe Reinsurance.

ARTICLE V - RETENTION

The Company warrants that it shall retain net for its own account and 
not reinsure in any way subject to Catastrophe Reinsurance provided in 
Article VI - Catastrophe Reinsurance, 25% of its Ultimate Net Liability.

ARTICLE VI - CATASTROPHE REINSURANCE

The Company has the right to maintain catastrophe reinsurance on that 
portion of its Ultimate Net Liability which it retains net for its own 
account and recoveries under such catastrophe reinsurance shall inure 
solely to the benefit of the Company.

ARTICLE VII - LOSS IN EXCESS OF POLICY LIMITS

A.   In the event the Company is liable to a policyholder as the result 
of a settlement or judgment 
rendered against the policyholder which is in excess of the Policy 
limit, 100% of that portion of the award made to the third party 
claimant which is in excess of the Company's Policy limit shall be 
added to the amount of the Company's Policy limit and the sum 
thereof shall be considered one loss, subject to the  provision in 
Paragraph B. below and all other provisions set forth in this 
Agreement.

B.     With respect to coverage provided under this Article, recoveries 
from any insurance or reinsurance other than this Agreement, shall 
inure to the benefit of the Reinsurer and shall be deducted to 
arrive at the amount of the Company's Ultimate Net Liability.

ARTICLE VIII - EXTRA CONTRACTUAL OBLIGATIONS

A.  "Extra Contractual Obligations" are defined as those liabilities not 
covered under any other 
provision of this Agreement and which arise from the handling of any 
claim on business covered hereunder, such liabilities arising 
because of, but not limited to, the following: failure by the 
Company to settle within the Policy limit, or by reason of alleged 
or actual negligence, fraud or bad faith in rejecting an offer of 
settlement or in the preparation of the defense or in the trial of










4.  No. TM666A
<PAGE>



any action against its insured or reinsured or in the preparation or 
prosecution of an appeal consequent upon such action.

B.     The date on which an Extra Contractual Obligation is incurred by 
the Company shall be deemed, in all circumstances, to be the date of 
the original accident, casualty, disaster or loss occurrence.

C.    However, coverage hereunder as respects Extra Contractual 
Obligations shall not apply where the loss has been incurred due to 
the fraud of a member of the Board of Directors or a corporate 
officer of the Company acting individually or collectively or in 
collusion with any individual or corporation or any other 
organization or party involved in the presentation, defense or 
settlement of any claim covered hereunder.

D.     Extra Contractual Obligations shall not include loss arising out 
of engineering or other services or any other non-claims related 
activity provided to the insured by the Company.

E.   Recoveries, collectibles or retention from any other form of 
insurance or reinsurance including 
deductibles or self-insured retention which protect the Company 
against Extra Contractual Obligations shall inure to the benefit of 
the Reinsurer and shall be deducted from the total amount of Extra 
Contractual Obligations for purposes of determining the loss 
hereunder.

ARTICLE IX - DEFINITION OF RISK

The Company shall be the sole judge of what constitutes one risk 
provided, however, that:

A.   A risk shall never be less than all insurable values within 
exterior walls and under one roof 
regardless of fire divisions, the number of Policies involved, and 
whether there is a single, multiple or unrelated named insureds 
involved in such risk.

B.     When two or more buildings are situated at the same general 
location, the Company shall identify on its records at the time of 
acceptance by the Company, those individual buildings and all 
insurable values contained therein that are considered to constitute 
each risk.  If such identification is not made, each building and 
all insurable values contained therein shall be considered to be a 
separate risk.

ARTICLE X - EXCLUSIONS

I.  AS RESPECTS PROPERTY BUSINESS COVERED UNDER THIS AGREEMENT THIS 
AGREEMENT DOES NOT COVER:

A.     THE FOLLOWING GENERAL CATEGORIES












5.  No. TM666A
<PAGE>



1.   All Lines of Business not specifically listed in Article I - 
Business Covered.

2.   Policies issued with a deductible of $100,000 or more; provided 
this exclusion shall not apply to Policies which customarily 
provide a percentage deductible on the perils of earthquake or 
windstorm.

3.   Reinsurance assumed, except pro rata local agency reinsurance 
on specific risks.

4.   Ex-gratia Payments.

5. Loss or damage occasioned by war, invasion, revolution, 
bombardment, hostilities, acts
of foreign enemies, civil war, rebellion, insurrection, military 
or usurped power, martial law, or confiscation by order of any 
government or public authority, but not excluding loss or damage 
which would be covered under a standard form of Policy containing 
a standard war exclusion clause.

6.    Insolvency Funds as per the attached Insolvency Funds 
Exclusion Clause, which is made part of this Agreement.

7.    Pool, Syndicate and Association business as per the attached 
Pools, Associations and Syndicates Exclusion Clause, which is 
made part of this Agreement.

8.    Risks where the Total Insured Value, per risk, exceeds the 
figure specified as per the attached Total Insured Value 
Exclusion Clause, which is made part of this Agreement.

B.     THE FOLLOWING CLASSES OF BUSINESS AND TYPES OF RISKS

1.    Mortgage Impairment.

2.    Growing and/or standing crops.

3.    Mortality and Health covering birds, animals or fish.

4.    All onshore and offshore gas and oil drilling rigs. 

5.     Petrochemical operations engaged in the production, refining 
or upgrading of petroleum 
       or petroleum derivatives or natural gas

6.    Satellites. 

7.    All railroad business.

8.    As respects Inland Marine business:

a.    Registered Mail and Armored Car Policies.







6.  No. TM666A
<PAGE>



b.    Jeweler's Block Policies.
c.    Furrier's Customers Policies.
d.    Rolling Stock.
e.    Parcel Post when written to cover banks and financial 
institutions.
f.    Commercial Negative Film Insurance.
g.    Garment Contractors Policies.
h.    Mining Equipment while underground.
i.    Radio and Television Broadcasting Towers.
j.    Motor Truck Cargo Insurance written for common carriers 
operating beyond a radius of 
      200 miles.

C.    THE FOLLOWING PERILS

1.     Flood and/or Earthquake when written as such.
2.     Difference in Conditions, however styled.
3.    Pollution and Seepage as per the attached Pollution and Seepage 
Exclusion Clause which is made 
part of this Agreement.
4.     Nuclear Incident Exclusion Clauses which are attached and made 
part of this Agreement:
a.    Nuclear Incident Exclusion Clause - Physical Damage - 
Reinsurance - U.S.A.
b.    Nuclear Incident Exclusion Clause - Physical Damage - 
Reinsurance - Canada. 
c.    Nuclear Incident Exclusion Clause - Reinsurance - No. 4.

D.  In the event the Company is inadvertently bound on any risk which is    
xcluded under this Agreement and identified below, the reinsurance   
provided under this Agreement shall apply to such risk until  
discovery by the Company within its Home Office of the existence of 
such risk and for 30 days thereafter, and shall then cease unless 
within the 30 day period, the Company has received from the Reinsurer 
written notice of its approval of such risk.

As respects Classes of Business and Types of Risks:

Items 1. through 8. of Section B. of this Part I.

II.    AS RESPECTS CASUALTY BUSINESS COVERED UNDER THIS AGREEMENT THIS 
AGREEMENT DOES NOT COVER:

A.    THE FOLLOWING GENERAL CATEGORIES

1.    Ex-gratia payments.

2.    Risks subject to a deductible or a self-insured retention 
excess of $25,000.









7.  No. TM666A
<PAGE>



3.   Loss or damage caused directly or indirectly by: (a) enemy 
attack by armed forces including action taken by military, naval 
or air forces in resisting an actual or an immediately impending 
enemy attack; (b) invasion; (c) insurrection; (d) rebellion; (e) 
revolution; (f) intervention; (g) civil war; and (h) usurped 
power.

4.    Reinsurance assumed by the Company. 

5.  Business derived from any Pool, Association, including Joint 
Underwriting Association, Syndicate, Exchange, Plan, Fund or other 
facility directly as a member, subscriber or participant, or 
indirectly by way of reinsurance or assessments. 

6.    Pollution Liability as per the attached Pollution Liability 
Exclusion Clause - Reinsurance. 

7.    Insolvency Funds as per the attached Insolvency Funds Exclusion 
Clause. 

8.    Nuclear Incident Exclusion Clauses which are attached and made 
part of this Agreement:

a.    Nuclear Incident Exclusion Clause - Liability - Reinsurance 
- U.S.A.

b.    Nuclear Incident Exclusion Clause - Liability - Reinsurance 
- Canada.

c.    Nuclear Incident Exclusion  Clause - Reinsurance - No. 4.

B.   THE FOLLOWING INSURANCE COVERAGES

1.    Fiduciary Liability. 

2.    Fidelity and Surety. 

3.    Credit and Financial Guarantee. 

4.    Securities and Exchange Liability. 

5.    Retroactive coverage. 

6.    Personal and Commercial Excess Liability.

7.   Malpractice or Professional Liability except incidental 
Malpractice Liability and Professional Liability when written for 
Beauticians, Morticians, Opticians and Pharmacists.

8.    Errors and Omissions Liability. 

9.    Directors' and Officers' Liability except Condominium 
Directors' and Officers' Liability.








8.  No. TM666A
<PAGE>



10.   Advertisers', Broadcasters' and Telecasters' Liability as 
respects Personal Injury Liability except as provided under 
Commercial Package Policies or Commercial General Liability 
Coverage Forms.

11.    Liquor Law Liability except Host Liquor Law Liability. 

12.    Kidnap, Extortion and Ransom Liability. 

13.    Boiler and Machinery Insurance. 

14.    Protection and Indemnity (Ocean Marine). 

15.    Automobile Liability.

16.    Automobile Collision.

17.    Workers Compensation and Employers Liability.

C.   THE FOLLOWING AS RESPECTS LIABILITY OTHER THAN AUTOMOBILE 

1.  The manufacturing, mining, refining, processing, distribution, 
installation, removal or encapsulment of asbestos.

2.     Risks involving known exposure to the following substances:

a. dioxin.
b.  polychlorinated biphenols. 
c. asbestos.

3.     Liability as respects Products and Completed Operations:

a.     The manufacture, labeling or re-labeling, importation or 
wholesale distribution of:
(i)     Drugs or pharmaceuticals.
(ii)    Cosmetics.
(iii)   Herbicides, insecticides or pesticides.
(iv)    Petrochemical or electrical equipment used for 
heating, lighting or cooking.
(v)     Industrial or toxic chemicals.
(vi)    Valves, gaskets or seals of a hydraulic, 
petrochemical or high pressure nature.
(vii)   Medical supplies.
(viii)  Heavy machinery and equipment.
(ix)    Power tools.
(x)     Medical equipment used for diagnostic or life 
sustaining purposes.

b.     The manufacture or importing of motorized or self-
propelled vehicles and equipment.

c.     The manufacturing, importing, packing, canning, bottling 
or processing of foodstuffs.






9.  No. TM666A
<PAGE>



d.     The blending, mixing, processing or importing of animal 
feed.
e.  The manufacture, sale, distribution, handling, servicing or 
maintenance of aircraft, aerospacecraft, missiles, satellites 
or any component or components thereof.

4.     Ownership, operation or use of vessels exceeding 50 feet in 
length.

5.     All railway operations except sidetrack agreements.  

6.     Amusement parks, carnivals or circuses. 

7.     Public assembly exposure in excess of 5,000.

8.     Gas, electric and water utility companies.

9.     Subaqueous operations. 

10.   Mining. 

11.   Blasting operations. 

12.   Demolition of buildings or structures in excess of two stories.

13.    Shoring, underpinning or moving of buildings or structures.

14.    Manufacture, sale, rental, lease, erection or repair of 
scaffolds.

15.    Construction of bridges, tunnels or dams.

16.   a.   Manufacturers or importers of fireworks, fuses, or any  
substance, as defined and noted below, intended for use as  an 
explosive.
B.   Loading of fireworks, fuses, or any explosive substance 
defined below into containers for 
use as explosive objects, propellant charges or detonation 
devices and the storage thereof.
c.   Manufacturers or importers of any product in which 
fireworks, fuses, or any explosive substance defined below is 
an ingredient.
d.   Handling, storage, transportation or use of fireworks, 
fuses, or any explosive substance defined below.

NOTE: An explosive substance is defined as any substance 
manufactured for the express purpose of exploding as 
differentiated from commodities used industrially and which are 
only incidentally explosive.    













10.  No. TM666A
<PAGE>



17.    Manufacture, production, refining, storage, wholesale 
distribution or transportation of natural or artificial fuel gas, 
butane, propane or liquefied petroleum gases or gasoline.   

18.    Onshore and offshore gas and oil drilling operations.

19.   Ownership, maintenance or use of any airport or aircraft, 
including fueling, or any device or machine intended for and/or 
aiding in the achievement of atmospheric flight, projection or 
orbit. 

20.   Municipalities. 

D.   Those exclusions set forth under Items 6. and 17. of Section C. of 
this Part II. shall not apply if the exposure is incidental to the 
regular operations of the insured covered hereunder.

E.  In the event the Company is inadvertently bound on any risk which is 
excluded under Items 3. 
through 20. of Section C. of this Part II, the reinsurance provided 
under this Agreement shall apply to such risk until discovery by the 
Company within its Home Office of the existence of such risk and for 
30 days thereafter, and shall then cease unless within the 30 day 
period, the Company has received from the Reinsurer written notice of 
its approval of such risk.

ARTICLE Xi - LOSS OCCURRENCE

As respects Property Business covered under this Agreement:

A.   The term "Loss Occurrence" shall mean the sum of all individual 
losses directly occasioned by any 
one disaster, accident or loss or series of disasters, accidents or 
losses arising out of one event which occurs within the area of one 
state of the United States or province of Canada and states or 
provinces contiguous thereto and to one another.  However, the 
duration and extent of any one Loss Occurrence shall be limited to 
all individual losses sustained by the Company occurring during any 
period of 168 consecutive hours arising out of and directly 
occasioned by the same event except that the term "Loss Occurrence" 
shall be further defined as follows:

1.   As regards windstorm, hail, tornado, hurricane, cyclone, 
including ensuing collapse and water damage, all individual losses 
sustained by the Company occurring during any period of 72 
consecutive hours arising out of and directly occasioned by the 
same event.  However, the event need not be limited to one state 
or province or states or provinces contiguous thereto.

2.   As regards riot, riot attending a strike, civil commotion, 
vandalism and malicious mischief, all individual losses sustained 
by the Company, occurring during any period of 72 consecutive 
hours within the area of one municipality or county 











11.  No. TM666A
<PAGE>



and the municipalities or counties contiguous thereto arising out 
of and directly occasioned by the same event.  The maximum 
duration of 72 consecutive hours may be extended in respect of 
individual losses which occur beyond such 72 consecutive hours 
during the continued occupation of an assured's premises by 
strikers, provided such occupation commenced during the aforesaid 
period.

3.   As regards earthquake (the epicentre of which need not 
necessarily be within the territorial confines referred to in the 
opening paragraph of this Article) and fire following directly 
occasioned by the earthquake, only those individual fire losses 
which commence during the period of 168 consecutive hours may be 
included in the Company's Loss Occurrence.

4.    As regards Freeze, only individual losses directly occasioned 
by collapse, breakage of glass and water damage (caused by 
bursting of frozen pipes and tanks) may be included in the 
Company's Loss Occurrence.

B.  For all Loss Occurrences the Company may choose the date and time 
when any such period of consecutive hours commences provided that it 
is not earlier than the date and time of the occurrence of the first 
recorded individual loss sustained by the Company arising out of that 
disaster, accident or loss and provided that only one such period of 
168 consecutive hours shall apply with respect to one event except 
for those Loss Occurrences referred to in 1. and 2. above, where only 
one such period of 72 consecutive hours shall apply with respect to 
one event, regardless of the duration of the event.

C.  No individual losses occasioned by an event that would be covered by 
72 hours clauses may be included in any Loss Occurrence claimed under 
the 168 hours provision.

As respects Casualty Business covered under this Agreement:

The term "Loss Occurrence" shall mean any accident or occurrence or 
series of accidents or occurrences arising out of any one event and 
happening within the term and scope of this Agreement. Without limiting 
the generality of the foregoing, the term "Loss Occurrence" shall be 
held to include:

A.   As respects Products Bodily Injury and Products Property Damage 
Liability, injuries to all persons and all damage to property of 
others occurring during a Policy Period and proceeding from or 
traceable to the same causative agency shall be deemed to arise out 
of one Loss Occurrence, and the date of such Loss Occurrence shall be 
deemed to be the commencing date of the Policy Period.  For the 
purpose of this provision, each annual period of a Policy which 
continues in force for more than one year shall be deemed to be a 
separate Policy Period.









12.  No. TM666A
<PAGE>



B   As respects Bodily Injury Liability (other than Automobile and 
Products), said term shall also be understood to mean, as regards 
each original assured, injuries to one or more than one person 
resulting from infection, contagion, poisoning, or contamination 
proceeding from or traceable to the same causative agency.

C.   As respects Property Damage Liability (other than Automobile and 
Products), said term shall also, subject to Provisions 1. and 2. 
below, be understood to mean loss or losses caused by a series of 
operations, events, or occurrences arising out of operations at one 
specific site and which cannot be attributed to any single one of 
such operations, events or occurrences, but rather to the cumulative 
effect of the same.  In assessing each and every Loss Occurrence 
within the foregoing definition, it is understood and agreed that:

1.   the series of operations, events or occurrences shall not extend 
over a period longer than 12 consecutive months; and

2.    the Company may elect the date on which the period of not 
exceeding 12 consecutive months shall be deemed to have commenced.

In the event that the series of operations, events or occurrences 
extend over a period longer than 12 consecutive months, then each 
consecutive period of 12 months, the first of which commences on the 
date elected under 2. above, shall form the basis of claim under this 
Agreement.

D.    As respects those Policies of the Company which provide aggregate 
limits of liability, the total of all individual losses occurring 
during any one Policy year which proceed from or are traceable to the 
same causative agency.


ARTICLE XII - REINSURANCE PREMIUM

A.   The Company shall cede to the Reinsurer 75% of the Company's 
unearned premiums on its Ultimate Net Liability in force as of July 
1, 1998 on the business covered hereunder.

B.   The Company shall cede to the Reinsurer 75% of the Company's Net 
Premiums Written applicable to new and renewal Policies becoming 
effective on or after July 1, 1998, with respect to its Ultimate Net 
Liability on the business covered hereunder.

C.   The term "Net Premiums Written" shall mean gross and additional 
premiums less return premiums and less premiums ceded on all other 
reinsurance, other than premiums ceded for Catastrophe Reinsurance 
provided in Article VI - Catastrophe Reinsurance.













13.  No. TM666A
<PAGE>



D.  The following percentages of the Company's premium shall be 
allocated to the business covered 
under this Agreement:

Homeowners:       Section I -  90%           Section II -  10%

Businessowners:   Section I -  60%           Section II -  40%


ARTICLE XIII - SLIDING SCALE COMMISSION

A.   The Reinsurer shall make to the Company a provisional commission 
allowance of 37.50% of the Net Premiums Written, ceded hereunder. The 
Company shall debit the Reinsurer with the provisional commission 
allowance; such provisional commission shall be adjusted as provided 
hereafter.  On all return premiums the Company shall return to the 
Reinsurer the provisional commission allowance of 37.50%. Such 
commission allowance includes provision for all brokerage and 
commission, premium taxes of all kinds, all board, bureau and 
exchange assessments and any other expenses whatsoever except Loss 
Adjustment Expenses.

B.  The adjusted commission allowance which the Reinsurer shall make to 
the Company shall be in 
accordance with the following formula and computed and paid on Earned 
Premiums.  All 
 intermediate and final calculations shall be rounded to two decimal 
places.
<TABLE>
<CAPTION>
             <S>                                                                   
<C>
If the actual ratio of Incurred                            
The adjusted commission
Losses to Earned Premiums is:                         
shall be:                           	

42.50% or less                                                 
43.50% Maximum

Higher than 42.50% but                                   
43.50% less 60.00% of
not exceeding 52.50%                                      
the difference between
                                                                        
the actual loss ratio
                                                                        
and 42.50%

Higher than 52.50% but                                   
37.50% less 83.33% of 
not exceeding 67.50%                                      
the difference between
                                                                        
the actual loss ratio 
                                                                                     
and 67.50%

67.50% or higher                                             
25.00% Minimum
</TABLE>

C.   The term "Incurred Losses" means all losses and Loss Adjustment 
Expenses paid less recoveries, 
 including salvage and subrogation, during the current Period for 
which computation is being made  
 plus all losses and Loss Adjustment Expenses outstanding at the end 
of the current Period less all 
 losses and Loss Adjustment Expenses outstanding at the close of the 
preceding Period.

D.    The term "Earned Premiums" means the total of the Net Premiums 
Written, ceded during the current 
Period plus the unearned premiums






14.  No. TM666A
<PAGE>



at the close of the preceding Period less the unearned premiums at 
the close of the current Period, said unearned premiums to be 
calculated on a monthly pro rata basis.

E.     The term "Period" means the actual time covered by each 
adjustment of commission.

F.      The adjustment of commission shall be made as soon as 
practicable after the close of each Period.  
The first adjustment shall be made as of June 30, 1999, for the 
Period from July 1, 1998, through June 30, 1999, and thereafter 
adjustments shall be made annually for each Period commencing July 1 
and ending the following June 30.

G.    As soon as practicable after the close of each Period, the Company 
shall calculate the commission 
adjustment on the Earned Premiums during the Period.  If the 
adjusted commission on the Earned Premiums during the Period exceeds 
the provisional commission already allowed on the Earned Premiums, 
the Reinsurer shall pay the difference to the Company.  If the 
provisional commission already allowed on the Earned Premiums 
exceeds the adjusted commission on the Earned Premiums, the 
difference shall be refunded by the Company to the Reinsurer.  In 
addition, the difference in commission adjustment shall be paid by 
the debtor party within 30 days after the Reinsurer's verification 
of the Company's calculations.

H.    If the ratio of Incurred Losses to Earned Premiums for any Period, 
including any debits or credits 
carried forward, is more than 67.50%, the difference in percentage 
between the actual ratio and 67.50% shall be multiplied by the 
Earned Premiums for the Period, and the product shall be carried 
forward to the next Period's commission adjustment calculations as a 
debit to Incurred Losses.

I.     If the ratio of Incurred Losses to Earned Premiums for any 
Period, including any debits or credits 
carried forward, is less than 42.50%, the difference in percentage 
between the actual ratio and 42.50% shall be multiplied by the 
Earned Premiums for the Period and the product shall be carried 
forward to the next Period's commission adjustment calculations as a 
credit to Incurred Losses.

J.     In case notice of termination has been given, no further 
adjustments of commission shall be made until the expiration of all 
liability and the settlement of all losses covered under this 
Agreement.

K.     In the event this Agreement is terminated by the Company prior to 
July 1, 2003 or at any subsequent date other than the end of an 
adjustment Period, the ultimate commission allowance shall be 
calculated in accordance with the following scale:

If the ratio of "Incurred Losses" to "Earned Premiums" is:

1.   92.50% or greater, the commission shall be 0;













15.  No. TM666A
<PAGE>



2.    Less than 92.50% but not less than 67.50%, the commission 
shall be 100% of the difference between such ratio and 92.50%, 
but such commission shall not be greater than 25.00%;

3.     Less than 67.50%, the commission shall be 25.00% plus 83.33% 
of the difference between such ratio and 67.50%, but such 
commission shall not be greater than 43.50%.


ARTICLE XIV - LOSSES, LOSS ADJUSTMENT EXPENSES AND SALVAGES

A.    The Reinsurer shall pay its pro rata share of losses paid by the 
Company arising under Policies 
covered under this Agreement, and the Reinsurer shall benefit 
proportionately in all recoveries, including salvage and 
subrogation.

B.     The Reinsurer shall pay its pro rata share of Loss Adjustment 
Expenses paid by the Company in connection with the investigation, 
settlement, defense or litigation of any claim or loss which is the 
subject matter of Policies covered under this Agreement.  The term 
"Loss Adjustment Expenses" shall mean all claim or loss expenses 
and shall include Claim-Specific Declaratory Judgment Expenses.  
However, the term "Loss Adjustment Expenses" shall not include the 
salaries and expenses of Company employees, office expenses and 
other overhead expenses.

C.     "Claim-Specific Declaratory Judgment Expenses" shall mean 
expenses incurred in actions brought to determine the Company's 
defense and/or indemnification obligations for individual claims 
presented against Policies covered under this Agreement.  Any Claim-
Specific Declaratory Judgment Expense shall be deemed to have been 
fully incurred on the same date as the insured's original loss (if 
any) giving rise to the action, unless otherwise provided for within 
this Agreement.

D.   The Company shall have the responsibility to investigate, defend or 
negotiate settlements of all 
claims and lawsuits related to Policies written by the Company and 
reinsured under this Agreement.  The Reinsurer, at its own expense, 
may associate with the Company in the defense or control of any 
claim, suit or other proceeding which involves or is likely to 
involve the reinsurance provided under this Agreement, and the 
Company shall cooperate in every respect in the defense of any such 
claim, suit or proceeding. 


ARTICLE XV- REPORTS AND REMITTANCES

A.    The Company shall provide the Reinsurer with a quarterly account 
as well as quarterly and annual reports in accordance with the 
provisions set forth in Paragraphs C., D. and E. below.











16.  No. TM666A
<PAGE>



B.     Portfolio Assumption - Within 30 days after July 1, 1998, the 
Company shall pay to the Reinsurer the Reinsurer's pro rata share of 
the Company's unearned premium reserve on the business in force as 
of said date.

C.    Quarterly Account - Within 45 days after the close of each quarter 
the Company shall forward a 
quarterly account summarizing the following transactions under this 
Agreement during such quarter:

1.    Net Premiums Written ceded segregated by Line of Business;

2.    Commissions;

3.   Loss and Loss Adjustment Expenses paid less recoveries, 
including salvage and subrogation, segregated by Line of 
Business, by year of loss.

The balance due either party shall be paid within 60 days after the 
close of each quarter for the transactions during such quarter.

D.     Quarterly Report - The Company shall furnish the Reinsurer within 
45 days after the close of each 
quarter the following information as respects the business ceded 
hereunder:

1.   Unearned premium reserves segregated by Line of Business at the 
end of the quarter and calculated on the monthly pro rata basis;

2.    Estimated loss and Loss Adjustment Expense reserves outstanding at 
the end of the quarter 
segregated by Line of Business, by year of loss.

E.      Annual Report - The Company shall furnish the Reinsurer within 
60 days after the close of each 
calendar year a summary of the business ceded hereunder:

1.    Net Premiums Written ceded during the year segregated by Line 
of Business;

2.    Unearned premium reserves segregated by Line of Business;

3.    Losses and Loss Adjustment Expenses paid, less recoveries, 
including salvage and subrogation, 
during the year segregated by Line of Business, by year of loss;

4.    Losses and Loss Adjustment Expenses outstanding at the end of 
the year segregated by Line of 
Business, by year of loss.

F.    As respects Property Business covered under this Agreement, the 
Company shall furnish the 
following to the Reinsurer with respect to occurrences designated 
as catastrophes by the Property Claim Services:









18.  No. TM666A
<PAGE>



1.    Prompt preliminary estimate of amount recoverable from the 
Reinsurer;

2.   Within 30 days after the close of each quarter the amount of 
losses and Loss Adjustment 
Expenses paid, less all recoveries, including salvage and 
subrogation, at the end of each quarter segregated by Line of 
Business;

3.   Within 30 days after the close of each quarter the amount of 
losses and Loss Adjustment 
 Expenses outstanding at the end of each quarter segregated by 
Line of Business.


ARTICLE XVI - ACCESS TO RECORDS

The Reinsurer or its duly authorized representatives shall have the 
right to examine, at the offices of the Company at a reasonable time, 
during the currency of this Agreement or anytime thereafter, all books 
and records of the Company relating to business which is the subject of 
this Agreement.


ARTICLE XVII - TAXES

The Company shall be liable for all taxes on premiums paid to the 
Reinsurer under this Agreement, except income or profit taxes of the 
Reinsurer, and shall indemnify and hold the Reinsurer harmless for any 
such taxes which the Reinsurer may become obligated to pay to any local, 
state or federal taxing authority.


ARTICLE XVIII - CURRENCY

Wherever the word "dollars" or the "$" symbol is used in this Agreement, 
it shall mean dollars of the United States of America, excepting in 
those cases where the Policy is issued by the Company in Canadian 
dollars, in which case it shall mean dollars of Canada.  In the event 
the Company is involved in a loss requiring payment in United States and 
Canadian currency, the Company's retention and the limit of liability of 
the Reinsurer shall be apportioned between the two currencies in the 
same proportion as the amount of net loss in each currency bears to the 
total amount of net loss paid by the Company.  For the purposes of this 
Agreement, where the Company receives premiums or pays losses in 
currencies other than United States or Canadian currency, such premiums 
and losses shall be converted into United States dollars at the actual 
rates of exchange at which the premiums and losses are entered in the 
Company's books.















18.  No. TM666A
<PAGE>




ARTICLE XIX - OFFSET

Each party to this Agreement together with their successors or assigns 
shall have and may exercise, at any time, the right to offset any 
balance or balances due the other (or, if more than one, any other).  
Such offset may include balances due under this Agreement and any other 
agreements heretofore or hereafter entered into between the parties 
regardless of whether such balances arise from premiums, losses or 
otherwise, and regardless of capacity of any party, whether as assuming 
insurer and/or ceding insurer, under the various agreements involved, 
provided however, that in the event of insolvency of a party hereto, 
offsets shall only be allowed in accordance with the provisions of 
Section 7427 of the Insurance Law of the State of New York to the extent 
such statute or any other applicable law, statute or regulation 
governing such offset shall apply.


ARTICLE XX - ERRORS OR OMISSIONS

Errors or omissions of a clerical nature on the part of the Company 
shall not invalidate the reinsurance under this Agreement, provided such 
errors or omissions are corrected promptly after discovery thereof; but 
the liability of the Reinsurer under this Agreement or any exhibits, 
addenda, or endorsements attached hereto shall in no event exceed the 
limits specified herein nor be extended to cover any risks, perils, 
lines of business or classes of insurance generally or specifically 
excluded herein.


ARTICLE XXI - DISPUTE RESOLUTION

Part I - Choice Of Law And Forum 

Any dispute arising under this Agreement shall be resolved in the State 
of Massachusetts, and the laws of the State of Massachusetts shall 
govern the interpretation and application of this Agreement.

Part II - Mediation

If a dispute between the Company and the Reinsurer, arising out of the 
provisions of this Agreement or concerning its interpretation or 
validity and whether arising before or after termination of this 
Agreement has not been settled through negotiation, both parties agree 
to try in good faith to settle such dispute by nonbinding mediation, 
before resorting to arbitration.

Part III - Arbitration
A.      Resolution of Disputes - As a condition precedent to any right 
arising hereunder, any dispute not resolved by mediation between 
the Company and the Reinsurer arising out of the provisions of this 
Agreement or concerning its interpretation or validity, whether 
arising before or after termination of this Agreement, shall be 
submitted to arbitration in the manner hereinafter set forth.









19.  No. TM666A
<PAGE>



B.     Composition of Panel - Unless the parties agree upon a single 
arbitrator within 15 days after the 
receipt of a notice of intention to arbitrate, all disputes shall 
be submitted to an arbitration panel composed of two arbitrators 
and an umpire chosen in accordance with Paragraph C hereof.

C.     Appointment of Arbitrators - The members of the arbitration panel 
shall be chosen from persons 
knowledgeable in the insurance and reinsurance business.  Unless a 
single arbitrator is agreed upon, the party requesting arbitration 
(hereinafter referred to as the "claimant") shall appoint an 
arbitrator and give written notice thereof by certified mail, to 
the other party (hereinafter referred to as the "respondent") 
together with its notice of intention to arbitrate.  Within 30 days 
after receiving such notice, the respondent shall also appoint an 
arbitrator and notify the claimant thereof by certified mail.  
Before instituting a hearing, the two arbitrators so appointed 
shall choose an umpire.  If, within 20 days after the appointment 
of the arbitrator chosen by the respondent, the two arbitrators 
fail to agree upon the appointment of an umpire, each of them shall 
nominate three individuals to serve as umpire, of whom the other 
shall decline two and the umpire shall be chosen from the remaining 
two by drawing lots.  The name of the individual first drawn shall 
be the umpire.

D.       Failure of Party to Appoint an Arbitrator - If the respondent 
fails to appoint an arbitrator within 30 
days after receiving a notice of intention to arbitrate, the 
claimant's arbitrator shall appoint an arbitrator on behalf of the 
respondent, such arbitrator shall then, together with the 
claimant's arbitrator, choose an umpire as provided in Paragraph C. 
of Part III of this Article.

E.       Involvement of Other Reinsurers - If more than one reinsurer is 
involved in the same dispute, all 
such reinsurers shall constitute and act as one party for purposes 
of this Article and communications shall be made by the Company to 
each of the reinsurers constituting the one party; provided, 
however, nothing herein shall impair the right of such reinsurers 
to assert several, rather than joint, defenses or claims, nor be 
construed as changing the liability of the reinsurers under the 
terms of this Agreement from several to joint.

F.      If the Company is involved in a dispute under the terms of this 
Agreement and in one or more 
separate disputes with one or more other reinsurers in which common 
questions of law or fact are in issue, the Company or the 
Reinsurer, at its option, may join with such other reinsurers in a 
common arbitration proceeding under the terms of this Article.  If 
the Company and such other reinsurers have commenced arbitration, 
the Reinsurer may at its option join such proceeding for the 
determination of the dispute between the Company and the Reinsurer.

















20.  No. TM666A
<PAGE>



G.       Submission of Dispute to Panel - Unless otherwise extended by 
the arbitration panel or agreed to by 
the parties, each party shall submit its case to the panel within 
30 days after the selection of the umpire.

H.       Procedure Governing Arbitration - All proceedings before the 
panel shall be informal and the panel 
shall not be bound by the formal rules of evidence.  The panel 
shall have the power to fix all procedural rules relating to the 
arbitration proceeding.  In reaching any decision, the panel shall 
give due consideration to the customs and usages of the insurance 
and reinsurance business.

I.        Arbitration Award - The arbitration panel shall render its 
decision within 60 days after termination 
of the proceeding, which decision shall be in writing, stating the 
reasons therefor.  The decision of the majority of the panel shall 
be final and binding on the parties to the proceeding.

J.        Cost of Arbitration - Unless otherwise allocated by the panel, 
each party shall bear the expense of 
its own arbitrator and shall jointly and equally bear with the 
other parties the expense of the umpire and the arbitration.


ARTICLE XXII - INSOLVENCY

A.     In the event of insolvency of the Company, the reinsurance 
provided by this Agreement shall be 
payable by the Reinsurer on the basis of the liability of the 
Company as respects Policies covered hereunder, without diminution 
because of such insolvency, directly to the Company or its 
liquidator, receiver, conservator or statutory successor except as 
provided in Sections 4118(a)(1)(A) and 1114(c) of the New York 
Insurance Law.

B.    The Reinsurer shall be given written notice of the pendency of 
each claim or loss which may 
involve the reinsurance provided by this Agreement within a 
reasonable time after such claim or loss is filed in the insolvency 
proceedings.  The Reinsurer shall have the right to investigate 
each such claim or loss and interpose, at its own expense, in the 
proceedings where the claim or loss is to be adjudicated, any 
defense which it may deem available to the Company, its liquidator, 
receiver, conservator or statutory successor.  The expense thus 
incurred by the Reinsurer shall be chargeable, subject to court 
approval, against the insolvent Company as part of the expense of 
liquidation to the extent of a proportionate share of the benefit 
which may accrue to the Company solely as a result of the defense 
undertaken by the Reinsurer.

















21.  No. TM666A
<PAGE>



C.       In addition to the offset provisions set forth in Article XIX - 
Offset, any debts or credits, liquidated 
or unliquidated, in favor of or against either party on the date of 
the receivership or liquidation order (except where the obligation 
was purchased by or transferred to be used as an offset) are deemed 
mutual debts or credits and shall be set off with the balance only 
to be allowed or paid.  Although such claim on the part of either 
party against the other may be unliquidated or undetermined in 
amount on the date of the entry of the receivership or liquidation 
order, such claim will be regarded as being in existence as of such 
date and any claims then in existence and held by the other party 
may be offset against it.

D.      Nothing contained in this Article is intended to change the 
relationship or status of the parties to this Agreement or to 
enlarge upon the rights or obligations of either party hereunder 
except as provided herein.


ARTICLE XXIII - SPECIAL TERMINATION

A.      Notwithstanding the termination provisions set forth in Article 
II - Effective Date and Termination, 
this Agreement shall be:

1.  Terminated automatically and simultaneously upon the happening 
of any of the following 
  events:

a.   Entry of an order of liquidation, rehabilitation, 
receivership or conservatorship with respect 
 to the Company or the Reinsurer by any court or regulatory 
authority;

b.   General reinsurance of any portion of the Company's 
business it retains net for its own 
 account, as determined under the provisions of this Agreement 
without prior consent of the 
 Reinsurer.

2.   Terminated simultaneously, at the option of either party, upon 
the happening of any of the 
following events:

a.    Assignment of this Agreement by either party;
b.    Any transfer of control of either party by change in 
ownership or otherwise.

3.    Terminated in accordance with the provisions set forth in 
this Paragraph, upon the discovery of the following event:

A reduction  of 50% or more of the Company's policyholders 
surplus during any calendar year.  Such reduction shall be 
determined by calculating the difference between the 
Company's prior year annual statement and each subsequent 










22.  No. TM666A
<PAGE>



quarterly statutory statement within such current calendar 
year. 

As respects the event set forth in this Paragraph A.3., the Company 
shall be obligated to notify the Reinsurer in writing within 30 days 
after the filing of its quarterly statement.  Upon receipt of such 
notification the Reinsurer shall have the right to terminate this 
Agreement, by giving not less than 30 days notice of its intention to do 
so.

B.       Any notice of termination pursuant to provisions set forth in 
Paragraphs A.2. and A.3. above shall be sent by certified mail, 
return receipt requested.  The notice period under Paragraph A.3. 
above shall commence upon the other party's receipt of the notice 
of termination.

C.       In the event of termination, the Reinsurer shall not be liable 
for losses occurring subsequent to the date of termination.


ARTICLE XXIV - AMENDMENTS

This Agreement may be amended by mutual consent of the parties expressed 
in an addendum; and such addendum, when executed by both parties, shall 
be deemed to be an integral part of this Agreement and binding on the 
parties hereto.



KS:sb
COM666A-98



























23.  No. TM666A
<PAGE>


SUPPLEMENT TO THE ATTACHMENTS


DEFINITION OF IDENTIFICATION TERMS USED WITHIN THE ATTACHMENTS


A.      Wherever the term "Company" or "Reinsured" or "Reassured" or 
whatever other term is used to designate the reinsured company or 
companies within the various attachments to the reinsurance 
agreement, the term shall be understood to mean Company or 
Reinsured or Reassured or whatever other term is used in the 
attached reinsurance agreement to designate the reinsured company 
or companies.

B.      Wherever the term "Agreement" or "Contract" or "Policy" or 
whatever other term is used to designate the attached reinsurance 
agreement within the various attachments to the reinsurance 
agreement, the term shall be understood to mean Agreement or 
Contract or Policy or whatever other term is used to designate the 
attached reinsurance agreement.

C.        Wherever the term "Reinsurer" or "Reinsurers" or 
"Underwriters" or whatever other term is used to designate the 
reinsurer or reinsurers in the various attachments to the 
reinsurance agreement, the term shall be understood to mean 
Reinsurer or Reinsurers or Underwriters or whatever other term is 
used to designate the reinsuring company or companies.

												
												


INSOLVENCY FUNDS EXCLUSION CLAUSE


This Agreement excludes all liability of the Company arising by 
contract, operation of law, or otherwise from its participation or 
membership, whether voluntary or involuntary, in any insolvency fund or 
from reimbursement of any person for any such liability.  "Insolvency 
fund" includes any guaranty fund, insolvency fund, plan, pool, 
association, fund or other arrangement, howsoever denominated, 
established or governed, which provides for any assessment of or payment 
or assumption by any person of part or all of any claim, debt, charge, 
fee, or other obligation of an insurer, or its successors or assigns, 
which has been declared by any competent authority to be insolvent or 
which is otherwise deemed unable to meet any claim, debt, charge, fee or 
other obligation in whole or in part.

<PAGE>


POOLS, ASSOCIATIONS AND SYNDICATES EXCLUSION CLAUSE

SECTION A

Excluding:

(a)      All Business derived directly or indirectly from any Pool, 
Association or Syndicate which maintains its own reinsurance 
facilities.
(B)     Any Pool or Scheme (whether voluntary or mandatory) formed after 
March 1, 1968, for the purpose 
of insuring Property whether on a country-wide basis or in respect 
of designated areas.  This Exclusion shall not apply to so-called 
Automobile Insurance Plans or other Pools formed to provide 
coverage for Automobile Physical Damage.

SECTION B

It is agreed that business, written by the Company for the same perils, 
which is known at the time to be insure d by or in excess of underlying 
amounts placed in the following Pools, Associations or Syndicates, 
whether by way of insurance or reinsurance is excluded hereunder:

Industrial Risk Insurers (successor to Factory Insurance 
Association and Oil Insurance Association); Associated Factory 
Mutuals; Improved Risk Mutuals.

Any Pool, Association or Syndicate formed for the purpose of 
writing Oil, Gas or Petro-Chemical Plants and/or Oil or Gas 
Drilling Rigs.

United States Aircraft Insurance Group, Canadian Aircraft Insurance 
Group, Associated Aviation Underwriters, American Aviation 
Underwriters.



SECTION B does not apply:

(a)      Where the Total Insured Value over all interests of the risk in 
question is less than $250,000,000.

(b)    To interests traditionally underwritten as Inland Marine or Stock 
and/or Contents written on a 
Blanket basis.

(c)      To Contingent Business Interruption, except when the Company is 
aware that the key location is 
known at the time to be insured in any Pool, Association or 
Syndicate named above.

(d)    To risks as follows: Offices, Hotels, Apartments, Hospitals, 
Educational Establishments, Public 
Utilities (other than Railroad Schedules) and Builders Risks on the 
classes of risks specified in this subsection (d) only.
<PAGE>


TOTAL INSURED VALUE EXCLUSION CLAUSE


It is the mutual intention of the parties to exclude risks, other than 
Offices, Hotels, Apartments, Hospitals, Educational Establishments, 
Public Utilities (except Railroad schedules) and Builders Risk on the 
above classes where, at the time of the cession, the Total Insured Value 
over all interests exceeds $250,000,000.  However, the Company shall be 
protected hereunder, subject to the other terms and conditions of this 
Agreement, if subsequently to cession being made the Company becomes 
acquainted with the true facts of the case and discovers that the mutual 
intention has been inadvertently breached, the Company shall at the 
first opportunity, and certainly by next anniversary of the original 
policy, exclude the risk in question.

It is agreed that this mutual intention does not apply to Contingent 
Business Interruption or to interest traditionally underwritten as 
Inland Marine or to Stock and/or Contents written on a blanket basis 
except where the Company is aware that the Total Insured Value of 
$250,000,000 is already exceeded for buildings, machinery, equipment and 
direct use and occupancy at the key location.

It is understood and agreed that this Clause shall not apply hereunder 
where the Company writes 100% of the risk.

Notwithstanding anything contained herein to the contrary, it is the 
mutual intention of the parties in respect of bridges and tunnels to 
exclude such risks where the Total Insured Value over all interests 
exceeds $250,000,000.
<PAGE>


POLLUTION AND SEEPAGE EXCLUSION CLAUSE



This Reinsurance does not apply to:

1.       Pollution, seepage, contamination or environmental impairment 
insurances (hereinafter collectively referred to as "pollution"), 
however styled;

2.      Loss or damage caused directly or indirectly by pollution, 
unless said loss or damage follows as a result of a loss caused 
directly by a peril covered hereunder;

3.       Expenses resulting from any governmental direction or request 
that material present in or part of or utilized on an insured's 
property be removed or modified, except as provided in 5. Below;

4.       Expenses incurred in testing for and/or monitoring pollutants;

5.       Expenses incurred in removing debris, unless (A) the debris 
results from a loss caused directly by a 
peril covered hereunder, and (B) the debris to be removed is itself 
covered hereunder, and (C) the debris is on the insured's premises, 
subject, however, to a limit of $5,000 plus 25% of (i) the property 
damage loss, any risk, any one location, any one original insured, 
and (ii) any deductible applicable to the loss;

6.        Expenses incurred to extract pollutants from land or water at 
the insured's premises unless (A) the release, discharge, or 
dispersal of pollutants results from a loss caused directly by a 
peril covered hereunder, and (B) such expenses shall not exceed 
$10,000;

7.      Loss of income due to any increased period of time required to 
resume operations resulting from enforcement of any law regulating 
the prevention, control, repair, clean-up or restoration of 
environmental damage;

8.      Claims under 5. and/or 6. above, unless notice thereof is given 
to the Company within 180 days 
after the date of the loss occurrence to which such claims relate.


"Pollutants" means any solid, liquid, gaseous or thermal irritant or 
contaminant, including smoke, vapor, soot, fumes, acids, alkalis, 
chemicals and waste.  Waste includes materials to be recycled, 
reconditioned or reclaimed.
<PAGE>



Where no pollution exclusion has been accepted or approved by an 
insurance regulatory authority for use in a policy that is subject to 
this Agreement or where a pollution exclusion that has been used in a 
policy is overturned, either in whole or in part, by a court having 
jurisdiction, there shall be no recovery for pollution under this 
Agreement unless said pollution loss or damage follows as a result of a 
loss caused directly by a peril covered hereunder.

Nothing herein shall be deemed to extend the coverage afforded by this 
reinsurance to property or perils specifically excluded or not covered 
under the terms and conditions of the original policy involved.
<PAGE>


NUCLEAR INCIDENT EXCLUSION CLAUSE - PHYSICAL DAMAGE - REINSURANCE - 
U.S.A.


N.M.A. 1119

1.    This Reinsurance does not cover any loss or liability accruing to 
the Reassured, directly or 
indirectly, and whether as Insurer or Reinsurer, from any Pool of 
Insurers or Reinsurers formed for the purpose of covering Atomic or 
Nuclear Energy risks.

2.       Without in any way restricting the operation of paragraph 1. of 
this Clause, this Reinsurance does not cover any loss or liability 
accruing to the Reassured, directly or indirectly, and whether as 
Insurer or Reinsurer, from any insurance against Physical Damage 
(including business interruption or consequential loss arising out 
of such Physical Damage) to:

I.    Nuclear reactor power plants including all auxiliary property 
on the site, or

II.   Any other nuclear reactor installation, including 
laboratories handling radioactive materials in 
       connection with reactor installations, and critical 
facilities as such, or

III.  Installations for fabricating complete fuel elements or for 
processing substantial quantities of 
     "special nuclear material," and for reprocessing, salvaging, 
chemically separating, storing or 
       disposing of spent nuclear fuel or waste materials, or

IV. Installations other than those listed in paragraph 2. III. 
above using substantial quantities of 
      radioactive isotopes or other products of nuclear fission.

3.      Without in any way restricting the operation of paragraphs 1. 
and 2. of this Clause, this Reinsurance 
does not cover any loss or liability by radioactive contamination 
accruing to the Reassured, directly or indirectly, and whether as 
Insurer or Reinsurer, from any insurance on property which is on the 
same site as a nuclear reactor power plant or other nuclear 
installation and which normally would be insured therewith, except 
that this paragraph 3. shall not operate:

(a)      where the Reassured does not have knowledge of such 
nuclear reactor power plant or nuclear installation, or

(b)     where the said insurance contains a provision excluding 
coverage for damage to property caused by or resulting from 
radioactive contamination, however caused.  However, on and 
after 1st January, 1960, this sub-paragraph (b) shall only 
apply provided the said radioactive contamination exclusion 
provision has been approved by the Governmental Authority 
having jurisdiction thereof.











- 1 -
<PAGE>



4.    Without in any way restricting the operation of paragraphs 1., 2. 
and 3. of this Clause, this Reinsurance does not cover any loss or 
liability by radioactive contamination accruing to the Reassured, 
directly or indirectly, and whether as Insurer or Reinsurer, when 
such radioactive contamination is a named hazard specifically 
insured against.

5.       It is understood and agreed this Clause shall not extend to 
risks using radioactive isotopes in any form where the nuclear 
exposure is not considered by the Reassured to be the primary 
hazard.

6.        The term "special nuclear material" shall have the meaning 
given to it by the Atomic Energy Act of 1954 or by any law 
amendatory thereof.

7.        Reassured to be sole judge of what constitutes:

(a)     substantial quantities, and

(b)     the extent of installation, plant or site.

NOTE: - Without in any way restricting the operation of paragraph 1. 
hereof, it is understood and agreed that

(a)    all policies issued by the Reassured on or before 31st 
December, 1957 shall be free from the 
application of the other provisions of this Clause until expiry 
date or 31st December, 1960 whichever first occurs whereupon 
all the provisions of this Clause shall apply,

(b)     with respect to any risk located in Canada policies issued 
by the Reassured on or before 31st 
December, 1958 shall be free from the application of the other 
provisions of this Clause until expiry date or 31st December, 
1960 whichever first occurs whereupon all the provisions of 
this Clause shall apply.






















N.M.A.    1119
- 2 -
<PAGE>


NUCLEAR INCIDENT EXCLUSION CLAUSE - PHYSICAL DAMAGE - REINSURANCE - 
CANADA


N.M.A. 1980

1.       This Agreement does not cover any loss or liability accruing to 
the Company directly or indirectly, and whether as Insurer or 
Reinsurer, from any Pool of Insurers or Reinsurers formed for the 
purpose of covering Atomic or Nuclear Energy risks.

2.      Without in any way restricting the operation of paragraph 1. of 
this clause, this Agreement does 
not cover any loss or liability accruing to the Company, directly 
or indirectly, and whether as Insurer or Reinsurer, from any 
insurance against Physical Damage (including business interruption 
or consequential loss arising out of such Physical Damage) to:

a.     Nuclear reactor power plants including all auxiliary 
property on the site, or

b.     Any other nuclear reactor installation, including 
laboratories handling radioactive materials in 
connection with reactor installations, and critical facilities 
as such, or

c.     Installations for fabricating complete fuel elements or for 
processing substantial quantities of 
prescribed substances, and for reprocessing, salvaging, 
chemically separating, storing or disposing of spent nuclear 
fuel or waste materials, or

d.   Installations other than those listed in c. above using 
substantial quantities of radioactive 
isotopes or other products of nuclear fission.

3.       Without in any way restricting the operation of paragraphs 1. 
and 2. of this clause, this Agreement does not cover any loss or 
liability by radioactive contamination accruing to the Company, 
directly or indirectly, and whether as Insurer or Reinsurer, from 
any insurance on property which is on the same site as a nuclear 
reactor power plant or other nuclear installation and which 
normally would be insured therewith, except that this paragraph 3. 
shall not operate:

a.   where the Company does not have knowledge of such nuclear 
reactor power plant or nuclear 
|installation, or

b.   where the said insurance contains a provision excluding 
coverage for damage to property 
caused by or resulting from radioactive contamination, however 
caused.




- 1 -
<PAGE>



4.    Without in any way restricting the operation of paragraphs 1., 2. 
and 3. of this clause, this 
Agreement does not cover any loss or liability by radioactive 
contamination accruing to the Company, directly or indirectly, and 
whether as Insurer or Reinsurer, when such radioactive 
contamination is a named hazard specifically insured against.

5.      This clause shall not extend to risks using radioactive isotopes 
in any form where the nuclear 
exposure is not considered by the Company to be the primary 
hazard.

6.      The term "prescribed substances" shall have the meaning given to 
it by the Atomic Energy 
Control Act R.S.C. 1974 or by any law amendatory thereof.

7.         Company to be sole judge of what constitutes:

a.     substantial quantities, and

b.     the extent of installation, plant or site.

8.       Without in any way restricting the operation of paragraphs 1., 
2., 3. and 4. of this clause, this 
Agreement does not cover any loss or liability accruing to the 
Company, directly or indirectly, and whether as Insurer or 
Reinsurer, caused by any nuclear incident as defined in The 
Nuclear Liability Act, nuclear explosion or contamination by 
radioactive material.

NOTE:   Without in any way restricting the operation of paragraphs 1., 
2., 3. and 4. of this clause, 
paragraph 8. of this clause shall apply to all original 
contracts of the Company whether new, renewal or replacement 
which become effective on or after December 31, 1984.

























N.M.A.   1980
- 2 -
<PAGE>



NUCLEAR INCIDENT EXCLUSION CLAUSE - REINSURANCE - NO. 4

1.         This Reinsurance does not cover any loss or liability 
accruing to the Reassured as a member of, or subscriber to, any 
association of insurers or reinsurers formed for the purpose of 
covering nuclear energy risks or as a direct or indirect reinsurer 
of any such member, subscriber or association.

2.         Without in any way restricting the operations of Nuclear 
Incident Exclusion Clauses, - Liability, - Physical Damage, - 
Boiler and Machinery and paragraph 1. of this Clause, it is 
understood and agreed that for all purposes of the reinsurance 
assumed by the Reinsurer from the Reinsured, all original 
insurance policies or contracts of the Reinsured (new, renewal and 
replacement) shall be deemed to include the applicable existing 
Nuclear Clause and/or Nuclear Exclusion Clause(s) in effect at the 
time and any subsequent revisions thereto as agreed upon and 
approved by the Insurance Industry and/or a qualified Advisory or 
Rating Bureau.
<PAGE>


POLLUTION LIABILITY EXCLUSION CLAUSE - REINSURANCE

This Reinsurance excludes:

(1)    Any loss occurrence arising out of the actual, alleged or 
threatened discharge, dispersal, release or |escape of pollutants:

a)   At or from premises owned, rented or occupied by an original 
assured; or

b)   At or from any site or location used for the handling, storage, 
disposal, processing or treatment of waste; or

c)   Which are at any time transported, handled, stored, treated, 
disposed of, or processed as waste; or

d)   At or from any site or location on which any original assured 
is performing operations:

(i)   If the pollutants are brought on or to the site or location 
in connection  with such operations; or

(ii) If the operations are to test for, monitor, clean up, remove, 
contain, treat, detoxify or 
neutralize the pollutants.

(2)    Any liability, loss, cost or expense arising out of any 
governmental direction or request to test for, monitor, clean up, 
remove, contain, treat, detoxify or neutralize pollutants.

"Pollutants" means any solid, liquid, gaseous or thermal irritant or 
contaminant, including smoke, vapor, soot, fumes, acids, alkalis, 
chemicals and waste.  Waste includes materials to be recycled, 
reconditioned or reclaimed.

Subparagraphs a) and d) (i) of paragraph (1) of this exclusion do not 
apply to loss occurrences caused by heat, smoke or fumes from a hostile 
fire. As used herein, "hostile fire" means one which becomes 
uncontrollable or breaks out from where it was intended to be.

"Original assured" as used herein means all insureds as defined in the 
policy issued by the Company.
<PAGE>


NUCLEAR INCIDENT EXCLUSION CLAUSE - LIABILITY - REINSURANCE - U.S.A.

N.M.A. 1590


1.      This reinsurance does not cover any loss or liability accruing 
to the Reassured as a member of, or 
subscriber to, any association of insurers or reinsurers formed for 
the purpose of covering nuclear energy risks or as a direct or 
indirect reinsurer of any such member, subscriber or association.

2.      Without in any way restricting the operation of paragraph 1. of 
this Clause it is understood and 
agreed that for all purposes of this reinsurance all the original 
policies of the Reassured (new, renewal and replacement) of the 
classes specified in Clause II. in this paragraph 2. from the time 
specified in Clause III. in this paragraph 2. shall be deemed to 
include the following provision (specified as the Limited Exclusion 
Provision):


LIMITED EXCLUSION PROVISION*

I.    It is agreed that the policy does not apply under any 
liability  coverage, to injury, 
 sickness, disease, death or destruction, bodily injury or 
property damage with respect to 
 which an insured under the policy is also an insured under a 
nuclear energy liability 
 policy issued by Nuclear Energy Liability Insurance 
Association, Mutual Atomic Energy 
 Liability Underwriters or Nuclear Insurance Association of 
Canada, or would be an
 insured under any such policy but for its termination upon 
exhaustion of its limit of 
 liability.

II.     Family Automobile Policies (liability only), Special 
Automobile Policies (private passenger 
automobiles, liability only), Farmers Comprehensive Personal 
Liabilities Policies (liability only), Comprehensive Personal 
Liability Policies (liability only) or policies of a similar 
nature; and the liability portion of combination forms 
related to the four  classes of policies stated above, such 
as the Comprehensive Dwelling Policy and the applicable types 
of Homeowners Policies.

III.   The inception dates and thereafter of all original 
policies as described in II. above, whether 
new, renewal or replacement, being policies which either

















- 1 -
<PAGE>



(a)      become effective on or after 1st May, 1960, or

(b)    become effective before that date and contain the Limited 
Exclusion Provision set out above; provided this paragraph 
2. shall not be applicable to Family Automobile Policies, 
Special Automobile Policies, or policies or combination 
policies of a similar nature, issued by the Reassured on New 
York risks, until 90 days following approval of the Limited 
Exclusion Provision by the Governmental Authority having 
jurisdiction thereof.

3.    Except for those classes of policies specified in Clause II. of 
paragraph 2. and without in any way restricting the operation of 
paragraph 1. of this Clause, it is understood and agreed that for 
all purposes of this reinsurance the original liability policies of 
the Reassured (new, renewal and replacement) affording the following 
coverages:

Owners, Landlords and Tenants Liability, Contractual Liability, Elevator 
Liability, Owners or Contractors (including railroad) Protective 
Liability, Manufacturers and Contractors Liability, Product Liability, 
Professional and Malpractice Liability, Storekeepers Liability, Garage 
Liability, Automobile Liability (including Massachusetts Motor Vehicle 
or Garage Liability)

shall be deemed to include with respect to such coverages, from the time 
specified in Clause V. of this paragraph 3., the following provision 
(specified as the Broad Exclusion Provision):


BROAD EXCLUSION PROVISION*

It is agreed that the policy does not apply:

I.    Under any Liability Coverage to injury, sickness, disease, 
death or destruction, bodily injury or 
property damage

(a)   with respect to which an insured under the policy is also an 
insured under nuclear energy liability policy issued by Nuclear 
Energy Liability Insurance Association, Mutual Atomic Energy 
Liability Underwriters or Nuclear Insurance Association of 
Canada, or would be an insured under any such policy but for 
its termination upon exhaustion of its limit of liability; or















N.M.A.  1590
- 2 -
<PAGE>



(b)    resulting from the hazardous properties of nuclear material 
and with respect to which (1) any person or organization is 
required to maintain financial protection pursuant to the 
Atomic Energy Act of 1954, or any law amendatory thereof, or 
(2) the insured is, or had this policy not been issued would 
be, entitled to indemnity from the United States of America, or 
any agency thereof, under any agreement entered into by the 
United States of America, or any agency thereof, with any 
person or organization.

II.   Under any Medical Payments Coverage, or under any Supplementary 
Payments Provision relating 
 to immediate medical or surgical relief, first aid, to expenses 
incurred with respect to bodily injury, sickness, disease or death, 
bodily injury resulting from the hazardous properties of nuclear 
material and arising out of the operation of a nuclear facility by 
any person or organization.

III. Under any Liability Coverage, to injury, sickness, disease, 
death or destruction, bodily injury or 
 property damage resulting from the hazardous properties of nuclear 
material, if

(a)   the nuclear material (1) is at any nuclear facility owned 
by, or operated by or on behalf of, an insured or (2) has been 
discharged or dispersed therefrom;

(b)   the nuclear material is contained in spent fuel or waste at 
any time possessed, handled, used, processed, stored, 
transported or disposed of by or on behalf of an insured; or

(c)   the injury, sickness, disease, death or destruction, bodily 
injury or property damage arises out of the furnishing by an 
insured of services, materials, parts or equipment in 
connection with the planning, construction, maintenance, 
operation or use of any nuclear facility, but if such facility 
is located within the United States of America, its 
territories, or possessions or Canada, this exclusion (c) 
applies only to injury to or destruction of property at such 
nuclear facility, property damage to such nuclear facility and 
any property thereat.






















N.M.A.  1590
- 3-
<PAGE>



IV.   As used in this endorsement:

"hazardous properties" include radioactive, toxic or explosive 
properties; "nuclear material" means source material, special 
nuclear material or byproduct material; "source material," 
"special nuclear material," and "byproduct material" have the 
meanings given them in the Atomic Energy Act of 1954 or in any law 
amendatory thereof; "spent fuel" means any fuel element or fuel 
component, solid or liquid, which has been used or exposed to 
radiation in a nuclear reactor; "waste" means any waste material 
(1) containing byproduct material other than the tailings or 
wastes produced by the extraction or concentration of uranium or 
thorium from any ore processed for its source material content and 
(2) resulting from the operation by any person or organization of 
any nuclear facility included within the definition of nuclear 
facility under paragraph (a) or (b) thereof; "nuclear facility" 
means

(a)    any nuclear reactor,

(b)   any equipment or device designed or used for (1) separating 
the isotopes of uranium or 
plutonium, (2) processing or utilizing spent fuel, or (3) 
handling, processing or packaging waste,

(c)    any equipment or device used for the processing, 
fabricating or alloying of special nuclear 
material if at any time the total amount of such material in 
the custody of the insured at the premises where such 
equipment or device is located consists of or contains more 
than 25 grams of plutonium or uranium 233 or any combination 
thereof, or more than 250 grams of uranium 235,

(d)   any structure, basin, excavation, premises or place prepared 
or used for the storage or 
disposal of waste

and includes the site on which any of the foregoing is located, 
all operations conducted on such site and all premises used for 
such operations; "nuclear reactor" means any apparatus designed or 
used to sustain nuclear fission in a self-supporting chain 
reaction or to contain a critical mass of fissionable material; 
with respect to injury to or destruction of property, the word 
"injury" or "destruction" includes all forms of radioactive 
contamination of property; "property damage" includes all forms of 
radioactive contamination of property.

V.    The inception dates and thereafter of all original policies 
affording coverages specified in this 
paragraph 3., whether new, renewal or replacement, being policies 
which become effective on or after 1st May, 1960, provided this 
paragraph 3. shall not be applicable to











N.M.A.   1590
- 4 -
<PAGE>



(i)     Garage and Automobile Policies issued by the Reassured 
         on New York risks, or

(ii)     Statutory liability insurance required under Chapter 90, 
General Laws of Massachusetts,

until 90 days following approval of the Broad Exclusion Provision 
by the Governmental Authority having jurisdiction thereof.

4.   Without in any way restricting the operations of paragraph 1. of 
this Clause, it is understood and agreed that paragraphs 2. and 3. 
above are not applicable to original liability policies of the 
Reassured in Canada, and that with respect to such policies, this 
Clause shall be deemed to include the Nuclear Energy Liability 
Exclusion Provisions adopted by the Canadian Underwriters' 
Association or the Independent Insurance Conference of Canada.

*NOTE:   The words printed in BOLD TYPE in the Limited Exclusion 
Provision and in the Broad Exclusion Provision shall apply only 
in relation to original liability policies which include a 
Limited Exclusion Provision or a Broad Exclusion Provision 
containing those words.
































N.M.A.   1590

- 5 -
<PAGE>


NUCLEAR INCIDENT EXCLUSION CLAUSE - LIABILITY - REINSURANCE - CANADA

N.M.A. 1979

1.   This Agreement does not cover any loss or liability accruing to the 
Company as a member of, or subscriber to, any association of insurers 
or reinsurers formed for the purpose of covering nuclear energy risks 
or as a direct or indirect reinsurer of any such member, subscriber 
or association.

2.   Without in any way restricting the operation of Paragraph 1. of 
this Clause, it is agreed that for all 
purposes of this Agreement all the original liability contracts of 
the Company, whether new, renewal or replacement, of the following 
classes, namely,

Personal Liability

Farmers' Liability

Storekeepers' Liability

which become effective on or after 31st December 1984, shall be 
deemed to include, from their inception dates and thereafter, the 
following provision:

Limited Exclusion Provision -

This Policy does not apply to bodily injury or property damage with 
respect to which the Insured is also insured under a contract of 
nuclear energy liability insurance (whether the Insured is unnamed in 
such contract and whether or not it is legally enforceable by the 
Insured) issued by the Nuclear Insurance Association of Canada or any 
other group or pool of insurers or would be an Insured under any such 
policy but for its termination upon exhaustion of its limits of 
liability.

With respect to property, loss of use of such property shall be 
deemed to be property damage.

3.   Without in any way restricting the operation of Paragraph 1. of 
this Clause, it is agreed that for all 
purposes of this Agreement all the original liability contracts of 
the Company, whether new, renewal or replacement, of any class 
whatsoever (other than Personal Liability, Farmers' Liability, 
Storekeepers' Liability or Automobile Liability contracts), which 
become effective on or after 31st December 1984, shall be deemed to 
include, from their inception dates and thereafter, the following 
provision:
<PAGE>



Broad Exclusion Provision -

It is agreed that this Policy does not apply:

(a)   to liability imposed by or arising under the Nuclear Liability 
Act; nor

(b)  to bodily injury or property damage with respect to which an 
Insured under this Policy is also 
insured under a contract of nuclear energy liability insurance 
(whether the Insured is unnamed in such contract and whether or 
not it is legally enforceable by the Insured) issued by the 
Nuclear Association of Canada or any other insurer or group or 
pool of insurers or would be an Insured under any such policy but 
for its termination upon exhaustion of its limit of liability; nor

(c)  to bodily injury or property damage resulting directly or 
indirectly from the nuclear energy hazard arising from:

(i)   the ownership, maintenance, operation or use of a
nuclear facility by or on behalf of an Insured;

(ii)  the furnishing of an Insured of services, materials,
parts or equipment in connection with the planning,
construction, maintenance, operation or use of any
nuclear facility; and

(iii)  the possession, consumption, use, handling, disposal
or transportation of fissionable substances, or of
other radioactive material (except radioactive
isotopes, away from a nuclear facility, which have
reached the final stage of fabrication so as to
be usable for any scientific, medical, agricultural,
commercial or industrial purpose) used, distributed,
handled or sold by an Insured.

As used in this Policy:

(1)  The term "nuclear energy hazard" means the radioactive, toxic, 
explosive, or other hazardous properties of radioactive material;

(2)  The term "radioactive material" means uranium, thorium, plutonium, 
neptunium, their respective derivatives and compounds, radioactive 
isotopes of other elements and any other substances that the Atomic 
Energy Control Board may, by regulation, designate as being 
prescribed substances capable of releasing atomic energy, or as 
being requisite for the production, use or application of atomic 
energy;








N.M.A.   1979

- 2 -
<PAGE>



(3)  The term "nuclear facility" means:

(a)   any apparatus designed or used to sustain nuclear fission in a 
self-supporting chain reaction or to contain a critical mass of 
plutonium, thorium and uranium or any one or more of them;

(b)  any equipment or device designed or used for (i) separating the 
isotopes of plutonium, thorium 
and uranium or any one or more of them, (ii) processing or 
utilizing spent fuel, or (iii) handling, processing or packaging 
waste;

(c)   any equipment or device used for the processing, fabricating or 
alloying of plutonium, thorium 
or uranium enriched in the isotope uranium 233 or in the isotope 
uranium 235, or any one or more of them if at any time the total 
amount of such material in the custody of the Insured at the 
premises where such equipment or device is located consists of or 
contains more than 25 grams of plutonium or uranium 233 or any 
combination thereof, or more than 250 grams of uranium 235;

(d)   any structure, basin, excavation, premises or place prepared or 
used for the storage or disposal of waste radioactive material;

and includes the site on which any of the foregoing is located, 
together with all operations conducted thereon and all premises used 
for such operations.

(4)  The term "fissionable substance" means any prescribed substance 
that is, or from which can be obtained, a substance capable of 
releasing atomic energy by nuclear fission.

(5)  With respect to property, loss of use of such property shall be 
deemed to be property damage.























N.M.A.   1979

- 3 -
<page








1998
annual
report
















The
CGI

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

<page



<TABLE>
<CAPTION>
INDEX TO 1998 ANNUAL REPORT
										   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.....................    22

Report of Management............................................    23

Report of Independent Auditors..................................    24

Consolidated Balance Sheets at December 31, 1998 and 1997.......    25

Consolidated Statements of Earnings for the Years Ended
 December 31, 1998, 1997 and 1996...............................    26

Consolidated Statements of Stockholders' Equity for the Years
 Ended December 31, 1998, 1997 and 1996.........................    27

Consolidated Statements of Cash Flows for the Years Ended
 December 31, 1998, 1997 and 1996...............................    28

Consolidated Statements of Cash Flows - Reconciliation of Net
 Earnings to Net Cash Provided by Operating Activities for the
 years ended December 31, 1998, 1997 and 1996...................    29

Notes to Consolidated Financial Statements......................    30

Selected Consolidated Financial Data............................    50

Management's Discussion of the Supplemental Information on
 Insurance Operations...........................................    51

Directors.......................................................    56

Officers........................................................    59

Stockholder Information.........................................    61








<PAGE>


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

</TABLE>
<TABLE>
<CAPTION>
                                                     1998          1997         
1996
<S>                                              <C>           <C>             
<C>
Net premiums written............................ $  745,048    $  
741,501      $  711,570

Earned premiums................................. $  745,620    $  
730,497      $  668,716
Net investment income...........................     86,501        
80,972          77,402
Premium finance and service fees................     13,440         
7,074           9,713
Net realized investment gains (losses)..........      6,769        
22,770          (7,574)
	Total revenues............................ $  852,330    $  
841,313      $  748,257

Earnings before income taxes.................... $  124,467    $  
127,695      $   92,013
Income taxes....................................     27,975        
31,480          18,049
	Net earnings.............................. $   96,492    $   
96,215      $   73,964

Comprehensive income............................ $   94,555    $  
100,368      $   80,539

Basic and diluted net earnings per common share. $     2.68    $     
2.67      $     2.04

Net earnings excluding the after-tax impact of
 net realized investment gains (losses)(1)...... $   92,092    $   
81,415      $   78,887

Basic and diluted net earnings per common
 share excluding the after-tax impact of net
 realized investment gains (losses)(1).......... $     2.56    $     
2.26      $     2.18

Cash dividends paid per share................... $     1.07    $     
1.03      $     0.81

Weighted average number of common shares
  outstanding................................... 36,042,652    
36,044,679      36,311,887

Total investments at market value............... $1,257,900    
$1,242,695	 $1,167,671
Total assets....................................  1,755,983     
1,754,753	  1,676,799
Total liabilities...............................  1,050,198     
1,104,957	  1,089,760
Total stockholders' equity......................    705,785       
649,796	    587,039
Total stockholders' equity per share............      19.58         
18.03	      16.28
Certain statutory financial ratios (unaudited):
  Loss and LAE ratio............................       71.6%         
71.4%	       70.9%
  Underwriting expense ratio....................       26.5          
25.1	       27.1
	Combined ratio............................       98.1%         
96.5%	       98.0%

  Net premiums written to policyholders'
    surplus.....................................      132.2%        
143.3%	      153.1%
</TABLE>


(1) The above figures are presented to provide information to the reader 
due to the amount
    of, and fluctuations in, net realized gains and losses.  The amounts 
noted, commonly 
    known as Operating Income, are important measures of corporate 
performance.





1
<page


THE COMMERCE GROUP, INC.


									   March 26, 1999

To Our Stockholders:

	In 1998, your Company experienced satisfactory financial results 
for the 23rd consecutive year.  From the very first day the funding of 
The Commerce Insurance Company was accomplished (April 3, 1972) through 
December 31, 1998, we have achieved underwriting profit of $243.5 
million on total premiums written of $6.8 billion.  This underwriting 
profit represents 3.6% of total premiums written.

	In January, the 1999 personal automobile insurance rates were 
announced by the Massachusetts Insurance Commissioner.  Despite the 
industry's request for a 15.5% increase, 1999 rates increased only 0.7%.  
This slight increase follows four consecutive years of rate decreases.  
Although a number of companies modified safe driver deviations and 
affinity group discount programs in response to the 1999 rates, the 
Massachusetts marketplace continues to be highly competitive.  Through 
these ongoing competitive conditions, your Company's share of the 
Massachusetts personal automobile market has remained stable, and at 
year-end, our market share was 21.6%.

	Your Company made a significant acquisition in 1999, which will 
provide us with a vehicle to grow and expand our business beyond 
Massachusetts.  In a joint venture with AAA Southern New England, we 
purchased the Automobile Club Insurance Company of Columbus, Ohio.  This 
company writes personal automobile and homeowners insurance in 28 states 
through AAA affiliated insurance agencies.  Their annual direct written 
premium is approximately $100 million.  Following the acquisition, the 
Company's name was changed to American Commerce Insurance Company 
("ACIC").  Together with our California company, Commerce West Insurance 
Company, we are poised to grow and expand geographically well beyond the 
borders of Massachusetts.

	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, including the newest member of our corporate family - 
ACIC, are an extremely dedicated group of people: Our Policyholders 
(represented by over 894,000 policies in force); Agents (791); Employees 
(1,692); Officers (47); Directors (19); and of course, our Stockholders 
(over 4,300, not including our Employee Stock Ownership Plan 
participants who now number 1,662).

	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 stockholders well.

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



							  Arthur J. Remillard, Jr.
								  President

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 1984 through 1998.  The Y axis lists 
the dollar values starting at $0.00 and increasing in one dollar 
increments to $24.00.  The graph depicts a total stockholders' equity 
per share value 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 $10.88, 1995 of $14.96, 1996 of 
$16.28, 1997 of $18.03 and 1998 of $19.58.  The graph also depicts the 
total stockholders' equity per share value adjusted for 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, 1997 of $20.25 and 1998 of $22.87.










































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 1998, the industry as a whole, experienced slightly 
weaker underwriting results and slower premium growth as compared to 
1997.  Slightly weaker industry underwriting results were primarily 
attributable to competitive markets.  Within the property and casualty 
industry, personal automobile insurance remains profitable, however 
trends have indicated increased claims costs.  The frequency of loss 
occurrences continue to improve, which reflects the absence of severe 
weather, safer cars and highways, enforcement of speeding laws and 
continued drunk driver awareness.  The severity, or cost per accident, 
however, is increasing due to higher medical and automobile repair 
costs.  Industry results have further intensified competition among 
insurers, which when coupled with lower insurance rates, emphasizes the 
advantages to companies of operating efficiently.  The Commerce Group, 
Inc. ("Company") is well positioned to both lead in this environment and 
to respond to the prevailing conditions in the market.

	The Company, incorporated in 1976, is a holding company for 
several property and casualty insurers 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 affinity groups, 
individuals, families and businesses through the Company's strong 
relationships with professional independent insurance agencies.  The 
Company writes insurance primarily in the state of Massachusetts through 
The Commerce Insurance Company ("Commerce") and Citation Insurance 
Company ("Citation"), both wholly-owned subsidiaries of Commerce 
Holdings, Inc. ("CHI").  The Company also writes insurance in the state 
of California through Commerce West Insurance Company ("Commerce West"), 
formerly Western Pioneer Insurance Company, a wholly-owned subsidiary of 
Commerce.  Commerce formed a joint venture (ACIC Holding Co., Inc.), in 
November 1998, with AAA Southern New England to purchase Automobile Club 
Insurance Company, located in Columbus, Ohio, a property and casualty 
insurer with policies written in 28 states and licensed in several 
others.  In conjunction with the acquisition, which was completed on 
January 29, 1999, the newly acquired company's name was changed to 
American Commerce Insurance Company ("ACIC").

	The Company's business strategy remains focused on activities 
primarily related to personal automobile insurance.  The Company has 
been the largest writer of personal property and casualty insurance in 
the state of Massachusetts in terms of market share of direct premiums 
written since 1990.  The Company's share of the Massachusetts personal 
automobile market remained fairly stable in 1998 at approximately 21.6%, 
a slight decrease from the 21.8% in 1997.

	During 1998, direct premiums written totalled $796,858, a 3.7% 
increase over 1997.  Direct premiums written through Commerce and 
Citation amounted to $773,463.  Direct premiums written in California, 
through Commerce West amounted to $23,395.  Of the total direct premiums 
written, direct personal automobile premiums written during 1998 
totalled $687,232, an increase of 4.0% over 1997, and direct homeowners 
insurance premiums written totalled $59,761, an increase of 5.4% over 
1997.  The Company is also the fourth largest writer of commercial 
automobile insurance in Massachusetts based on direct premiums written.  
During 1998, direct commercial automobile premiums written totalled 
$36,299, a 2.1% decrease compared to 1997.








4
<page



	Personal automobile insurance is subject to extensive regulation.  
Owners of registered automobiles are generally 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.  
Companies in Massachusetts are also assigned agents, known as Exclusive 
Representative Producers ("ERP's") based on market share, that have been 
unable to get a voluntary contract with an insurance carrier.  Marketing 
and underwriting strategies for companies operating in Massachusetts are 
limited by maximum premium rates and minimum agency commission levels 
for personal automobile insurance 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.

	During the three-year period from 1996 to 1998, Massachusetts 
personal automobile insurance premium rates decreased an average of 4.9% 
per year.  The Commissioner approved an average 0.7% increase in 
personal automobile premiums for 1999, the first increase since 1994.  
Average mandated rates decreased 4.0%, 6.2% and 4.5% in 1998, 1997 and 
1996, respectively.  Coinciding with the 1999 rate increase, the 
Commissioner also approved a 1.0% increase in the commissions agents 
receive from selling private passenger automobile insurance for 1999.  
The decision slightly offsets the financial benefit of the average 0.7% 
increase in personal automobile premiums for 1999.

	Although average mandated personal automobile premium rates 
decreased 4.0% in 1998, the impact upon the Company resulted in a 2.6% 
increase in the average personal automobile premium per exposure (each 
vehicle insured).  The 2.6% increase for the Company was 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, 1998 and 1999 average rate decisions 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.  Mandated rates for 1997, 1998 and 1999 include an 
adjustment to recoup $176 million from the industry.  The adjustment 
included in the rate decision to recoup the error was phased in at 40%, 
40% and 20% in 1997, 1998 and 1999.

	The estimated earned premium impact of the above item, coupled 
with the impact of a previous year imbalance in the SDIP, was 
approximately $15.3 million for 1997, $23.9 million for 1998 and is 
expected to be approximately $14.0 million for 1999.  The earnings per 
share after-tax impact resulting from lower earned premiums has been 
estimated at $0.28 for 1997, $0.43 for 1998, and is estimated to be 
$0.24 for 1999.  If the Company's 1999 market share increases 
(decreases), a larger (smaller) financial impact will result.

	Also factored into the 1999 rate decision were two sanctions 
levied by the Commissioner against the Massachusetts personal automobile 
insurance industry.  One fine, amounting to $6 million, was imposed as a 
result of the industry's alleged failure to show that it adhered to 
adequate cost containment efforts as identified by the Commissioner.  A 
second fine of $3 million was allegedly the result of what the 
Commissioner termed "incomplete compliance" on the part of the 
Automobile Insurers Bureau of Massachusetts ("AIB") with a discovery 
order concerning disclosure of certain information as identified by the 
Commissioner.  The industry and several insurance carriers, including 
Commerce, are appealing one or both of the sanctions.













5
<page



	In August 1998, then Acting Massachusetts Governor, Paul Cellucci 
("Governor"), signed legislation granting Massachusetts-based insurers, 
that choose to participate, $48 million a year in total tax relief in 
exchange for a, total industry-wide, $200 million investment commitment 
to low income communities over a five-year period.  The legislation 
amounts to a gradual elimination of the 1.0% gross investment tax for 
those insurers choosing to commit funds to these community investments.  
The legislation effectively taxes Massachusetts based insurers at rates 
levied equal with out-of-state insurers.  Prior to the legislation, 
Massachusetts was the only state in the nation to tax domestic insurers 
at higher rates than charged to non-domestic insurers.  If the overall 
$200 million goal is attained, all domestic insurers will benefit from 
the lower tax rate.  The Company is currently analyzing the potential 
benefits of participating in this program.

	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 1999.  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 of increased voluntary retention, the 
credits impacting the utilization formula have favorably affected the 
Company's participation ratio.  The Company estimates its private 
passenger automobile participation ratio in C.A.R. to be approximately 
16.7% at December 31, 1998.  This ratio is several percentage points 
below the Company's estimated 21.6% 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.

	The percentage of commercial automobile premiums ceded to C.A.R. 
by the industry has decreased to a Company estimate of 21% in 1998.  The 
percentage of commercial automobile business ceded to C.A.R. by the 
Company, is approximately 19%.  C.A.R. depopulation, coupled with C.A.R. 
rate increases for ceded commercial business, have led to a reduction in 
the size of the annual commercial automobile deficits.  The Company 
intends to continue to respond to the incentives and disincentives 
provided by C.A.R. rules as deemed necessary and appropriate.

	The Company provides a separate rating tier for preferred 
commercial automobile business through Citation.  Approximately 22% of 
the commercial automobile premiums produced by its voluntary agents in 
1998 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 1999 and beyond.











6
<page



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

	During the latter part of 1995, Commerce signed affinity 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.  In 1998, primarily as a result of four 
consecutive private passenger rate reductions, the Company reduced the 
AAA clubs discount from 10% to 6%.  In 1999, the same 6% percent AAA 
club discount was approved for policies effective as of January 1, 1999.  
The AAA clubs discount can be combined with safe driver deviations for 
up to a 13.5% reduction from the 1999 state mandated rates.  Membership 
in these clubs is estimated to represent approximately one-third of the 
Massachusetts motoring public, and has been the primary reason for a 
43.2% increase in the number of personal automobile exposures written by 
Commerce since year-end 1995.  As expected, this increase leveled off in 
1998 as evidenced by the 1.9% increase in personal automobile exposures 
as compared to increases of 8.3% in 1997 and 29.8% in 1996.  In 1998, 
total direct premiums written attributable to the AAA group business 
were $457,430 or 57.3% of the Company's total direct premiums written 
(68.7% of the Company's total Massachusetts personal automobile 
premium), an increase of 8.1% over 1997.  Total exposures attributable 
to the AAA clubs group business were 547,100 or 67.6% of total 
Massachusetts personal automobile exposures in 1998, an increase of 
25,002 or 4.8% over 1997.  Of the total Massachusetts automobile 
exposures written by the Company, approximately 11% were written through 
insurance agencies owned by the AAA clubs.  The remaining 89% were 
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 one year.  Accordingly, Commerce, in 
coordination with the AAA clubs, aggressively pursued AAA members for 
the AAA Affinity 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.  This requirement has subsequently been waived by the 
Massachusetts Legislature for 1998 and 1999.  Waiving the penetration 
requirements allows insurance companies to continue offering group 
discounts without reaching the 35% level.  The waiver of penetration 
requirements cannot be predicted for years beyond 1999.

	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.













7
<page



	The Company previously announced that it had entered into an 
agreement with, and purchased software known as Series III, from Policy 
Management Services Corporation ("PMSC") to allow for development of 
internal operating systems to enable the Company to first process 
policies in states outside of Massachusetts and eventually to replace 
the Company's systems for Massachusetts business.  Although the Company 
began writing business in Rhode Island in early 1998 on the Series III 
system, in early 1999 the Company stopped work on all development.  The 
Company is currently in the process of negotiating with PMSC as to the 
future continuation of the Series III system.  Costs to date for this 
effort have been approximately $47.0 million, of which $18.4 million is 
applicable to 1998.  Funds expended to date included the purchase of a 
main frame computer, license fees and the costs associated with 
programming, implementation and training.  The vast majority of these 
costs were expensed as incurred.

	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, 1998, 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 100.1% in 1997 to a high of 103.0% in 1994 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 98.1% in 1998.  On an average basis, the Company's combined 
ratio was 95.1% for the five year period ended December 31, 1998 
compared to a weighted industry average of 102.0%.

	The Company's total revenues were supplemented in fiscal 1998, 
1997 and 1996 by net investment income of $86,501, $80,972 and $77,402 
respectively.  Additionally, the Company had realized investment gains 
(losses) of $6,769, $22,770 and ($7,574) in 1998, 1997 and 1996, 
respectively.


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 preempt 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 certain 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.




8
<page



	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.


Personal Automobile Insurance

	As previously mentioned, beginning in 1995, the Company received 
approval for affinity 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 exposures by 1.9% 
in 1998 primarily as a result of this program, ending the year with 
approximately 21.6% of the Massachusetts private passenger automobile 
market.

	Since 1996, the Company has been granted approval to offer its 
Massachusetts customers safe driver deviations to drivers with Safe 
Driver Insurance Plan ("SDIP") classifications of either Steps 9 or 10.  
Safe driver deviations are rate discounts based on the customers driving 
record and resulting SDIP classification.  Steps 9 and 10 are the two 
best driver SDIP classifications in Massachusetts, representing drivers 
with no at fault accidents and not more than one minor moving vehicle 
violation in the last six years.  In January 1999, in response to the 
average personal automobile rate decisions over the last several years, 
the Company filed for and ultimately received approval to offer SDIP 
deviations of 8% for Step 9 and 3% for Step 10 for the 1999 calendar 
year.  At December 31, 1998, 68.7% of the Company's exposures were 
eligible for either Step 9 or Step 10 deviations.  For drivers that 
qualify, the Company's 1999 affinity group automobile discounts and SDIP 
deviations can be combined for up to a 13.5% (Step 9) and 9.8% (Step 10) 
reduction from the state mandated rates.  This can be compared to the 
SDIP deviations of 15% for Step 9 and 4% for Step 10 SDIP 
classifications for the 1998 calendar year.  For drivers that qualified, 
the Company's 1998 affinity group automobile discounts and SDIP 
deviations could be combined for up to a 20.1% (Step 9) and 9.8% (Step 
10) 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 personal lines policies with effective dates of 
January 1, 1998 and beyond.  As a result of this change, premium finance 
and service fees increased $6,366 or 90.0% in 1998.  Previously, for 
1997 and 1996, the Company had utilized a "late fee" system.

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.













9
<page



	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 Commerce West, have RBC amounts at December 31, 1998 of $71 
million, $2 million and $3 million, respectively, and they have 
statutory surplus of approximately $470 million, $93 million and $25 
million, respectively.  The statutory surplus of Commerce, Citation and 
Commerce West at December 31, 1998 exceeded the RBC Company Action 
Levels of $142 million, $4 million and $6 million, respectively, by 
approximately $328 million, $89 million and $19 million, respectively.  
The Company's new acquisition, ACIC, has RBC amounts at December 31, 
1998 of $15 million and they have statutory surplus of approximately $90 
million.  The statutory surplus of ACIC at December 31, 1998, exceeded 
the RBC company action levels of $30 million by approximately $60 
million.

Year Ended December 31, 1998 Compared to Year Ended December 31, 1997

	Direct premiums written during 1998 increased $28,209, or 3.7% to 
$796,858 as compared to 1997.  The increase was primarily attributable 
to a $26,157, or 4.0% increase in direct premiums written for personal 
automobile insurance to $687,232.  This increase was the result of a 
$30,239 or 4.8% increase in direct premiums written for Massachusetts 
personal automobile insurance offset by a $4,082 or 14.9% decrease in 
California personal automobile written premiums.  The decrease in 
California personal automobile direct premiums written resulted 
primarily from the increasingly competitive personal automobile market 
that has witnessed several new entrants since 1997.  The increase in 
Massachusetts personal automobile direct premiums written resulted 
primarily from an increase of 4.5% in the number of personal automobile 
physical damage exposures written (Massachusetts personal automobile 
exposures written with liability coverage increased 1.9%), coupled with 
a 13.3% increase in average rates for personal automobile physical 
damage exposures.  The impact of this was partially offset by a 3.2% 
decrease in the average rates for liability exposures.  These results 
were primarily the result of the changes to the Company's affinity group 
marketing programs, safe driver rate deviations and the effect of the 
1998 state mandated average rate decrease of 4.0%.  The combination of 
these factors resulted in a 2.6% increase in the average personal 
automobile premium (each vehicle insured).  Despite the 1998 state 
mandated average rate decrease of 4.0%, the Company's increase in the 
average personal automobile premium per exposure was primarily due to 
the fact that the rate decision does not anticipate purchases of new 
automobiles in the year in which the rate decision applies, the 
Company's mix of personal automobile business differs from that of the 
industry and the factors mentioned previously.  In 1998, the Company 
offered its customers safe driver deviations of 15% to drivers with SDIP 
classifications of Step 9 and 4.0% for Step 10 (10% for both Steps 9 and 
10 in 1997).

	The AAA affinity group discount for 1998 was established at 6.0% 
(10% in 1997).  In 1998, for drivers who qualified, the Company's group 
discount and safe driver deviations could be combined for up to a 20.1% 
reduction from state mandated rates.

	Direct premiums written for commercial automobile insurance 
decreased by $772 or 2.1%, due primarily to a decrease of approximately 
0.2% in the number of policies written, and a 1.9% decrease in the 
average commercial automobile premium per policy.  Direct premiums 
written for homeowners insurance (excluding the Massachusetts FAIR Plan) 
increased by $2,862, or 5.2% due primarily to a 1.6% increase in the 
number of policies written and a 3.6% increase in the average premium 
per policy.





10
<page



	Net premiums written during 1998 increased $3,547, or 0.5% as 
compared to 1997.  The increase in net premiums written was due to the 
growth in direct premiums written as described above, offset by 
increased levels of coverage provided by non-automobile reinsurance 
treaties resulting in an increase of ceded premiums.  Written premiums 
assumed from C.A.R. decreased $1,887, or 2.5% and written premiums ceded 
to C.A.R. decreased $1,381 or 1.9% as compared to 1997, 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 
$24,151 or 75.0% as compared to 1997 as a result of the changes to 
reinsurance mentioned previously.

	Earned premiums increased $15,123 or 2.1% during 1998 as compared 
to 1997.  The increase was primarily attributable to a $32,407 or 5.2% 
increase in earned premiums for Massachusetts personal automobile 
insurance offset by a $7,115 decrease in earned premiums for homeowners 
insurance, a $3,803 or 9.3% decrease in earned premiums for commercial 
automobile insurance, a $3,481 or 12.3% decrease in earned premiums for 
California personal automobile insurance and a $2,885 or 29.4% decrease 
in earned premiums for all other than automobile lines.  Earned premiums 
were impacted by increased levels of coverage provided by non-automobile 
reinsurance treaties which took effect during the 2nd half of 1998.  
Earned premiums assumed from C.A.R. decreased $7,149 or 8.6% during 1998 
compared to 1997.  Earned premiums ceded to C.A.R. decreased $3,594 or 
5.0% during 1998 compared to 1997.

	Net investment income increased $5,529 or 6.8%, compared to 1997, 
principally as a result of an increase in average invested assets (at 
cost).  Net investment income as a percentage of total average 
investments was 7.0% in 1998 compared to 6.8% in 1997.  Net investment 
income after tax as a percentage of total average investments was 5.7% 
in 1998 compared to 5.5% in 1997.  The increase was primarily the result 
of increased dividends received on common and preferred stocks.

	Premium finance and service fees increased $6,366 or 90.0% during 
1998.  The increase was primarily attributable to the Company receiving 
state regulatory approval to charge a $3.00 installment on each invoice 
following the down payment for all personal lines policies with 
effective dates of January 1, 1998 and beyond.  Previously, in 1996 and 
1997, the Company had utilized a "late fee" system.

	The market value of the Company's investment portfolio totaled 
$1,257,900, at December 31, 1998 compared to $1,242,695 at December 31, 
1997.  Management's investment philosophy is to emphasize investment 
yield while maintaining investment quality.  Fixed maturities comprised 
49.2% of the portfolio at December 31, 1998 compared to 47.5% at 
December 31, 1997.  Equity investments comprised 38.3% at December 31, 
1998 compared to 26.3% at December 31, 1997.  Cash and short-term 
investments comprised 6.0% at December 31, 1998 compared to 19.2% at 
December 31, 1997.  The decrease in cash and short-term investments and 
increase in equity investments was partially driven 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 fixed maturities, which totaled $619,267 at 
December 31, 1998, is comprised of 81.8% tax-exempt and 18.2% taxable 
investments as compared to total fixed maturities of $590,597, comprised 
of 69.3% tax-exempt and 30.7% taxable investments at December 31, 1997.  
The market value of equity investments, which totaled $481,386 at 
December 31, 1998, is comprised of 41.0% preferred stocks and 59.0% 
common stocks as compared to total equity investments of $326,588, 
comprised of 45.5% preferred stocks and 54.5% common stocks at December 
31, 1997.  The increase in equity investments was primarily attributable 
to a change in the mix of investments resulting primarily from the 
maturity of Government National Mortgage Association ("GNMA") mortgage-
backed bonds and the redeployment of cash and short-term investments to 
higher yielding preferred stock mutual funds which are classified as 
common stocks.  Of the common stock portfolio $172,455 or 60.7% of the 
balance, is comprised of preferred stock mutual funds and $111,506 or 
39.3% of pure common stocks.




11
<page



	Gross realized gains and losses on fixed maturity investments 
totaled $99 and $2,903, respectively, for the year ended December 31, 
1998 compared to gross realized gains and losses on fixed maturity 
investments of $4,306 and $2,887, respectively, for the year ended 
December 31, 1997.  Gross realized gains and losses on preferred stocks 
totaled $369 and $1,096, respectively, for the year ended December 31, 
1998 compared to gross realized gains and losses on preferred stocks of 
$2,688 and $2,682, respectively, for the year ended December 31, 1997.  
Gross realized gains on common stocks amounted to $9,313 for the year 
ended December 31, 1998 compared to gross realized gains on common 
stocks of $21,440 for the year ended December 31, 1997.

	Net realized investment gains totalled $6,769 during 1998 as 
compared to net realized investment gains of $22,770 for 1997.  A 
significant portion of the net realized gains in 1998 were the result of 
sales of common stocks partially offset by net realized losses in the 
sales of non-taxable bonds, preferred stocks and in the maturity of 
GNMA's, all as detailed in the preceding paragraph.  A significant 
portion of the realized gains in 1997 were 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 coupled 
with subsequent post merger sales of this corporation's common stock 
resulted in realized investment gains of $18,968.  Also included were 
realized gains on mortgage activity of $321 in 1998 compared to realized 
losses of $95 in 1997 and realized investment gains in the Conning 
Insurance Limited Partnership of $666 in 1998 compared with none in 
1997.

	Gross unrealized gains and losses on fixed maturity investments 
totaled $21,381 and $2,596, respectively, at December 31, 1998 compared 
to $24,190 and $377, respectively, at December 31, 1997.  The unrealized 
gains on fixed maturities decreased despite increased fixed maturity 
holdings and declining interest rates in 1998.  Gross unrealized gains 
and losses on preferred stocks totaled $2,706 and $5,551, respectively, 
at December 31, 1998 compared to $1,599 and $1,235, respectively at 
December 31, 1997.  Gross unrealized gains and losses on common stocks 
totaled $24,721 and $2,120, respectively, at December 31, 1998 compared 
to $17,888 and $170, respectively, at December 31, 1997.  The Company 
also recognized gross unrealized gains in the Conning Insurance Limited 
Partnership of $375 in 1998 compared with none in 1997.

	Losses and loss adjustment expenses ("LAE") incurred (on a 
statutory basis) as a percentage of insurance premiums earned ("loss 
ratio") was 71.6% in 1998 as compared to 71.4% in 1997.  The ratio of 
net incurred losses, excluding LAE, to premiums earned ("pure loss 
ratio") on personal automobile was 61.4% in 1998 compared to 61.3% in 
1997.  Although the personal automobile pure loss ratio remained stable, 
various components impacted the ratio, primarily in the bodily injury 
area.  Redundancies from prior year losses realized in the current year, 
relating to bodily injury claims, were approximately $18.0 million less 
in 1998, as compared to 1997.  Approximately $11.0 million of this 
amount was attributable to voluntary personal automobile bodily injury 
loss reserves and $7.0 million to fewer redundancies from C.A.R. assumed 
reserves.  The decreased redundancies, however, were offset by better 
current year experience, also primarily in the personal automobile 
bodily injury area.  This improvement was primarily the result of 
improved severity of bodily injury claims coupled with slightly improved 
claim frequency.  The commercial automobile pure loss ratio increased to 
52.3% in 1998 compared to 45.4% in 1997.  For homeowners, the pure loss 
ratio was 31.0% in 1998 compared to 48.2% in 1997.  This decrease was 
due to favorable weather conditions during 1998 as compared to normal 
weather conditions experienced during 1997, coupled with favorable 
development in the homeowners liability area.  The LAE component of the 
loss ratio was primarily impacted by an increase of approximately $3.2 
million in computer service expenses, relating to the Year 2000 and PMSC 
projects, offset by a decrease of management incentive plan expenses.  
On a consolidated financial statement basis, total expenses related to 
the Company's management incentive plan included in losses and loss 
adjustment expenses were $10,093 lower in 1998 as compared to 1997.  Of 
this decrease, $3,112 benefited the insurance companies with the 
remainder benefiting corporate expenses.  Corporate expenses are not 
included in the calculation of the Company's statutory loss ratio.  The 
decrease in the Company's management incentive plan expenses was 
primarily driven by the average decrease in the market price of the 
Company's common stock which directly impacts plan expenses.




12
<page



	Policy acquisition costs expensed increased by $8,943 or 4.8% in 
1998, compared to an increase of $6,478 or 3.6% in 1997.  The increase 
in policy acquisition costs was primarily due to higher contingent 
commission accruals, and higher computer service expenses relating to 
the Year 2000 and PMSC projects, both offset by lower expenses relating 
to the Company's management incentive plan.  Specifically, total 
expenses related to the Company's management incentive plan included in 
policy acquisition costs were $8,764 lower in 1998 as compared to 1997.  
Of this decrease, $3,052 benefited the insurance companies with the 
remainder benefiting corporate expenses.  Corporate expenses are not 
included in the calculation of the statutory underwriting expense ratio.  
The decrease in the Company's management incentive plan expenses was 
primarily driven by the average decrease in the market price of the 
Company's common stock which directly impacts plan expenses.  As a 
percentage of net premiums written, underwriting expenses for the 
insurance companies (on a statutory basis) were 26.5% during 1998 as 
compared to 25.1% for 1997.

	The Company's effective tax rate was 22.5% and 24.7% for the years 
ended December 31, 1998 and 1997, respectively.  The decrease was 
primarily attributable to higher dividends on preferred and common stock 
coupled with less realized capital gains during 1998 as compared to 
1997.  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 comprising a greater portion of net 
earnings before taxes.

	Net earnings increased to $96,492, during 1998 as compared to 
$96,215 in 1997 and operating earnings, which exclude the after-tax 
impact of net realized investment gains, increased $10,677 or 13.1% to 
$92,092 during 1998 as compared to $81,415 in 1997, both as a result of 
the factors previously mentioned.


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, Commerce West.  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 
its 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 could be combined 
for up to a 19.0% 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 $2,329, or 4.4% 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 $901 or 2.9% as 
compared to 1996.








13
<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 Commerce West increased $531 to $28,159 for 1997 
compared to 1996.

	Net investment income increased $3,570 or 4.6%, 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 and service 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 lines 
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.  In 1997, the Company 
received state regulatory approval to charge a $3.00 installment on each 
invoice following the down payment for all personal lines 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 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.













14
<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 $24,190 and $377, 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 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.  For further discussion refer to Note E in the Consolidated 
Financial Statements.

	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 24.7% 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 $73,964 in 1996 and operating earnings increased $2,528 or 
3.2% to $81,415 as compared to $78,887 in 1996 both as a result of the 
factors previously mentioned.


15
<page



Liquidity and Capital Resources
	The focus of the discussion of liquidity and capital resources is 
on the Consolidated Balance Sheets on page 25 and the Consolidated 
Statements of Cash Flows on pages 28 and 29.  Stockholders' equity 
increased by $55,989, or 8.6%, in 1998 as compared to 1997.  Growth 
stemmed from $96,492 in net earnings partially offset by changes in net 
unrealized losses, net of income taxes (known as Other Comprehensive 
Income), on fixed maturities and preferred and common stocks of $1,937 
and dividends paid to stockholders of $38,566.  Total assets at December 
31, 1998 increased to $1,755,983 as compared to total assets of 
$1,754,753 at December 31, 1997.  Although total assets remained 
virtually unchanged, certain asset categories changed considerably 
during 1998 as reflected in an increase of invested assets of $15,205, 
or 1.2%, an increase in deferred policy acquisition costs of $3,495 or 
4.1%, and an increase in receivable from reinsurers of $18,517, or 
101.9%, offset by a decrease in residual market receivable of $27,579 or 
15.3% and a decrease in all other assets of $8,408 or 3.7% as compared 
to December 31, 1997.  The increase in receivable from reinsurers was 
primarily a result of increased levels of coverage provided through the 
new other than automobile quota share reinsurance treaty which the 
Company implemented July 1, 1998.  The new quota share contract provides 
for a 75% cession of other than automobile property and liability 
premium and related losses.  This contract replaced the former contract 
which provided for a 49% cession of other than automobile property 
premium, a 45% cession of related losses and an excess loss component 
providing 100% of reimbursement of property losses in excess of $125 up 
to $1,000.  The decrease in residual market receivable was primarily 
attributable to lower case reserves ceded to C.A.R. in 1998, as compared 
to 1997.

	The Company's fixed maturity portfolio is comprised of GNMAs 
(18.2%) and municipal bonds (81.8%).  Of the Company's bonds, 100.0% are 
rated in either of the two highest quality categories provided by the 
National Association of Insurance Commissioners ("NAIC").  As of 
December 31, 1998, the market value of the Company's fixed maturity 
portfolio exceeded its book value by $18,785 ($12,210 after taxes, or 
$0.34 per share).  At December 31, 1997 the market value of the 
Company's fixed maturity portfolio exceeded its book value by $23,813 
($15,478 after taxes, or $0.43 per share).  At December 31, 1998, the 
cost of the Company's preferred stocks exceeded market value by $2,845 
($1,849 after taxes, or $0.05 per share).  At December 31, 1997, the 
market value of preferred stocks exceeded cost by $364 ($237 after 
taxes, or $0.01 per share).  At December 31, 1998, the market value of 
the Company's common stocks exceeded cost by $22,601 ($14,691 after 
taxes, or $0.41 per share).  At December 31, 1997, the market value of 
common stocks exceeded cost by $17,718 ($11,517 after taxes, or $0.32 
per share).

	Preferred stocks increased $48,926 or 32.9% and common stocks 
(primarily composed of closed-end preferred stock mutual funds) 
increased $105,872 or 59.4%, during 1998 primarily as a result of the 
Company's previously announced change in investment strategy.  The 
Company's strategy is to acquire equity investments, including potential 
acquisitions, which forego current investment yield in favor of future 
potentially higher yielding capital appreciation.  As a result of these 
increases to preferred and common stocks, the Company is now carrying 
$75,912 million in cash and short-term investments which is a decrease 
of $162,976 or 68.2% as compared to December 31, 1997.















16
<page



	The Company's liabilities totalled $1,050,198 at December 31, 1998 
as compared to $1,104,957 at December 31, 1997.  Loss and loss 
adjustment expense reserves comprised 56.8% of the Company's liabilities 
at December 31, 1998 compared with 58.8% at December 31, 1997.  Unearned 
premiums comprised 37.3% of the Company's liabilities at December 31, 
1998 compared with 34.4% at December 31, 1997.  All other liabilities 
comprised 5.9% of the Company's liabilities at December 31, 1998 
compared with 6.8% at December 31, 1997.  Although unearned premium and 
contingent commission liabilities increased $11,825 or 3.1% and $8,206 
or 59.2%, respectively, the $54,759 or 5.0%, decrease in total 
liabilities was primarily due to decreases of $52,477 or 8.1%, in losses 
and loss adjustment expense reserves, $8,269 or 51.4%, to income tax 
liabilities and $14,044 or 30.6%, to all other liabilities.  The 
decrease in the liability for loss and loss adjustment expenses is 
attributed primarily to better current year underwriting results coupled 
with increased net loss payments during 1998, as described below.  
However, $17,353 of the $52,477 decrease in the liability for loss and 
loss adjustment expenses relates to the decrease in losses and loss 
adjustment expense receivable from the residual market.  The increase in 
unearned premiums primarily resulted from the increase in Massachusetts 
personal automobile direct premiums written and the expected seasonality 
impact of policy effective dates.

	The primary sources of the Company's liquidity are funds generated 
from insurance premiums, net investment income, premium finance and 
service fees and the maturing and sales of investments as reflected in 
the Consolidated Statements of Cash Flows on 
pages 28 and 29.  The discussion of these items can be found under "Year 
Ended December 31, 1998 Compared to Year Ended December 31, 1997", 
herein.

	The Company's operating activities provided cash of $65,324 in 
1998 as compared to $80,006 in 1997.  These cash flows were primarily 
impacted by the fact that while premiums collected increased $34,009 or 
4.7% in 1998 as compared to an increase of $51,847 or 7.7% in 1997, 
losses and LAE paid increased $56,531 or 11.0% in 1998 as compared to an 
increase of $87,589 or 20.4% in 1997 and policy acquisition costs paid 
decreased $11,142 or 5.6% in 1998 as compared to a decrease of $2,911 or 
1.4% in 1997.  The increase in premiums was primarily the result of 
higher physical damage exposures written, coupled with average rate 
increases in the physical damage side of the business.  The impact of 
this was partially offset by slight decreases in the average rates for 
liability exposures.  However, this impact was reduced with the slight 
increases of liability exposures written.  Federal income tax payments 
increased $13,368 or 61.2% in 1998 as compared to an increase of $4,883 
or 28.8% in 1997 due to additional payments made in 1998 applicable to 
prior years.

	The increase in net losses and LAE paid, which includes the change 
in the losses and LAE liability, resulted primarily from a decrease in 
the loss and loss adjustment expense liability.  Additionally, direct 
payments on automobile liability claims increased $29,400 or 11.7%.  The 
remaining amount is primarily the result of increased payments for the 
management incentive compensation plan and computer services expenses 
associated with claims coupled with increased payments assumed from 
C.A.R.  Offsetting this, claim payments for other than automobile lines 
of business, after reinsurance, decreased in the first half of 1998 
versus 1997.  The increase in automobile liability loss payments was 
primarily attributable to two factors:  increased payments for bodily 
injury claims and increased payments for property damage liability 
claims.  The liability payments were higher primarily due to increased 
business writings coupled with continued efforts in the claims 
department to accelerate the claims settlement process in an effort to 
reduce the overall cost and potential build-up of bodily injury claims 
in the long run, as well as to reduce the overall number of open 
liability claims.








17
<page



	The net cash flows used in investing activities were primarily the 
result of purchases of fixed maturities and equity securities offset by 
a net decrease in short-term investments and by proceeds from the sale 
and maturity of fixed maturities and equity securities.  Investing 
activities were funded by accumulated cash and cash provided by 
operating activities during 1998 and 1997.

	Cash flows used in financing activities totaled $38,566 during 
1998 compared to $37,611 during 1997.  The 1998 cash flows used in 
financing activities consisted exclusively of dividends paid to 
stockholders.  The 1997 cash flows used in financing activities 
consisted of $37,124 in dividends paid to stockholders and $487 used to 
purchase 20,000 shares of Treasury Stock under the Company's stock 
buyback program.  There were no Treasury Stock purchases in 1998.

	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, 1998 was $1,257,900.  At December 31, 1998, 
the Company held cash and cash equivalents of $72,243 and short-term 
investments of $3,669.  These funds provide sufficient liquidity for the 
payment of claims and other short-term cash needs.  The Company also 
relies upon dividends from its subsidiaries for its cash requirements.  
Every Massachusetts insurance company seeking to make any dividend or 
other distributions to its stockholders may, within certain limitations, 
pay such dividends and then file a report with the Commissioner.  
Dividends in excess of these limitations are called extraordinary 
dividends.  An extraordinary dividend is any dividend or other property, 
whose fair value together with other dividends or distributions made 
within the preceding twelve months exceeds the greater of ten percent of 
the insurer's surplus as regards to policyholders as of the end of the 
preceding year, or the net income of a non-life insurance company for 
the preceding year.  No pro-rata distribution of any class of the 
insurer's own securities is to be included.  No Massachusetts insurance 
company shall pay an extraordinary dividend or other extraordinary 
distribution until thirty days after the Commissioner has received 
notice of the intended distribution and has not objected.  No 
extraordinary dividends were paid in 1998, 1997 and 1996.

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

	Industry and regulatory guidelines suggest that the ratio of a 
property and casualty insurer's annual net premiums written to statutory 
policyholders' surplus should not exceed 3.00 to 1.00.  The Company's 
statutory premiums to surplus ratio was 1.32 to 1.00, 1.43 to 1.00, and 
1.53 to 1.00 for the years ended December 31, 1998, 1997 and 1996, 
respectively.

	The Company's long-term growth objective has been to expand its 
writings outside of Massachusetts.  In continued pursuit of this 
objective Commerce has become licensed in the states of Connecticut, 
Rhode Island, Vermont and New Hampshire and Maine.

	In keeping with the Company's long-term growth objective to expand 
outside Massachusetts, the Company has also monitored potential 
acquisition opportunities 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.  This objective 
has been exemplified by the 1995 acquisition of Commerce West, a 
personal automobile insurer, located in Pleasanton, California and, most 
recently, by the Company's formation of a joint venture (ACIC Holding 
Co., Inc.) in November 1998, and the subsequent acquisition, in January 
1999, of ACIC, located in Columbus, Ohio.

	ACIC writes automobile and homeowners insurance solely through 38 
AAA automobile clubs.  Commerce and AAA SNE intend that ACIC will retain 
its management team and staff and continue to have its principle office 
in Columbus, Ohio.






18
<page



	In early 1999, Commerce, a subsidiary of the Company, invested 
$90.8 million in the joint venture (ACIC Holding Co., Inc.) to fund the 
ACIC acquisition and to capitalize the joint venture that is owned 
together with AAA SNE.  Of this $90.8 million, Commerce invested $90 
million in the form of preferred stock and an additional $800 
representing its 80% common stock ownership.  The terms of the preferred 
stock call for quarterly cash dividends at the rate of 10% per annum.  
AAA SNE invested $200 representing its 20% common stock ownership.  
Commerce intends to consolidate ACIC Holding Co., Inc. and it's wholly-
owned subsidiary, ACIC, for financial reporting purposes.  Since 1995, 
Commerce has maintained an affinity group marketing relationship with 
AAA Insurance Agency, Inc., a subsidiary of AAA SNE.  AAA Insurance 
Agency, Inc. has been an agent of Commerce since 1985.


Internal Software Development Project with PMSC

	The Company previously announced that it had entered into an 
agreement with, and purchased software, known as Series III, from Policy 
Management Services Corporation ("PMSC") to allow for development of 
internal operating systems to enable the Company to first process 
policies in states outside of Massachusetts and eventually to replace 
the Company's systems for Massachusetts business.  Although the Company 
began writing business in Rhode Island in early 1998 on the Series III 
system, in early 1999 the Company stopped work on all development.  The 
Company is currently in the process of negotiating with PMSC as to the 
future continuation of the Series III system.  Costs to date for this 
effort have been approximately $47.0 million, of which $18.4 million is 
applicable to 1998.  Funds expended to date included the purchase of a 
main frame computer, license fees and the costs associated with 
programming, implementation and training.  The vast majority of these 
costs were expensed as incurred.


Year 2000 Compliance

	The year 2000 issue exists primarily because most computer 
programs were originally coded to recognize only the last two digits in 
the date field.  If not addressed and corrected, many systems could fail 
and produce erroneous results.  The impact of this could lead to a 
material adverse impact upon the Company's business including policy and 
claims processing.  As a result, considerable effort has taken place to 
assess the impact and determine whether to replace and/or reprogram the 
systems in order for the systems to distinguish the intended year.  The 
Company subsequently initiated the Century Change project to address all 
internal/external systems, software, agents, third parties and vendors 
in dealing with year 2000 compliance.

	The Century Change project, enlisting both a redeployment of 
internal resources and additional external consultant resources, 
involved the development of a formal plan to address the Year 2000 
problem and has progressed in accordance with that plan.  The Company's 
plan, which was designed to, and is proceeding so as to, avoid any 
material adverse business production issues, organized corporate systems 
into four sub-categories:  Data Exchange, AS400 Systems/Programs, PC 
Applications and PC Based Vendor Purchased Application Software. 
Different sub-plans were established for each category with the same 
Year 2000 objective in mind.  As a result of this effort, the majority 
of the programming changes dealing with policy issuance, claims 
processing  and maintenance have been completed as of October 1998.   
Other internal changes are expected to be completed in accordance with 
specified delivery dates as outlined in the plan.  Looking forward, the 
project has and will continue to move into the testing phases of the 
plan which will primarily conclude at the end of second quarter 1999.











19
<page



	The Company has reviewed the Century Change status of  vendors who 
perform outside processing, those whose software the Company uses for 
internal processing and those third parties with whom the Company does 
significant business.  Accordingly, the Company has recognized that year 
2000 non-compliance could materially adversely affect the financial 
position, results of operations and cash flows of the Company.  As a 
result, the Company has contacted all significant related third parties 
in an effort to determine year 2000 compliance.  This program includes 
sending out questionnaires to our major business partners, including our 
agents, regarding their year 2000 readiness.  Based on the responses 
received to date, the Company does not anticipate any material impact on 
its operations or financial condition.  If there are instances where the 
Company ascertains a potential non-compliance, the Company will seek 
alternative year 2000 compliant third parties.  This process is on-going 
and the Company has started to conduct system testing, as needed, with 
such third parties, which will conclude in 1999.  While the Company is 
taking what it believes are the appropriate safeguards, there can be no 
assurances that the failure of such third parties to be year 2000 
compliant will not have a material adverse impact on the Company.  The 
Company expects that the implementation of the contingency plans, if 
necessary, will not have a material adverse effect on the Company's 
ability to conduct its business or on its operating results or financial 
condition.

	The Company's Executive Committee, as well as all departments in 
the Company, are currently reviewing issues dealing with identifying 
possible year 2000 worst case scenarios and the development of 
contingency plans to respond to the likelihood of these scenarios. 
Contingency Plans will be discussed and developed, where deemed 
appropriate, for all material systems and relationships during the first 
half of 1999.  At a minimum, contingency plans will be developed for the 
continuation of policy and claim processing in the event that the 
Company's computer systems are not available due to a year 2000 related 
failure.

	The project to date has involved internal staff costs as well as 
consulting expenses to prepare the systems for the year 2000.  Total 
costs to date for the Century Change project have been approximately 
$4.9 million ($3.6 million of which relate to 1998).  Costs to date 
applicable to internal staff and external consulting have been 
approximately $1.6 million and $3.3 million, respectively ($1.1 million 
and $2.5 million, respectively, relate to 1998).  Administration, 
programming, testing and implementation of system applications relating 
to the Century Change project are expected to cost an additional $1.9 
million in 1999. 


Market Risk:  Interest Rate Sensitivity and Equity Price Risk

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

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

	The Company manages its overall market risk by focusing on higher 
quality equity and fixed income investments,  by continuously reviewing 
the credit strength of all companies in which investments are made, by 
limiting exposure in any one investment and by monitoring the quality of 
the investment portfolio by taking into account credit ratings assigned 
by recognized rating organizations.






20
<page



	As part of its investing activities, the Company assumes positions 
in fixed maturity,  equity, short-term and cash equivalents markets.  
The Company is, therefore, exposed to the impacts of interest rate 
changes in the market value of investments.  For 1998, the Company's 
exposure to interest rate changes and equity price risk has been 
estimated using sensitivity analysis. The interest rate impact is 
defined as the effect of a hypothetical interest rate change of plus-or-
minus 200 basis points on the market value of fixed maturities and 
preferred stocks.  The equity price risk is defined as a hypothetical 
change of plus-or-minus 10% in the fair value of common stocks.  Changes 
in interest rates would result in unrealized gains or losses in the 
market value of the fixed maturity and preferred stock portfolio due to 
differences between current market rates and the stated rates for these 
investments.  Based on the results of the sensitivity analysis at 
December 31, 1998, the Company's estimated market exposure for a 200 
basis point increase (decrease) in interest rates was calculated.  A 200 
basis point increase results in a $42,665 decrease in the market value 
of the fixed maturities and preferred stocks.  A 200 basis point 
decrease results in a $46,732 increase in the market value of the same 
securities.  The equity price risk at December 31, 1998,  based upon a 
10% increase in the fair value of common stocks would increase $28,396.  
Based upon a 10% decrease, common stocks would decrease $28,396.



Recent Accounting Developments

	In 1997, the Accounting Standards Executive Committee ("AcSEC") 
issued Statement of Position 97-3 Accounting by Insurance and Other 
Enterprise for Insurance-Related Assessments ("SOP 97-3") effective for 
financial statements issued for periods ending after December 31, 1998.  
This statement provides guidance on accounting by insurance companies on 
the timing of recognition, the methods of measurement, and the required 
disclosures for guaranty fund and other related assessments.  The 
Company believes that the adoption of this statement will not have a 
material impact on the Consolidated Financial Statements.

	In 1998, the AcSEC issued Statement of Position 98-1, Accounting 
for Costs of Computer Software Developed or Obtained for Internal use 
("SOP 98-1") effective for financial statements issued for periods 
beginning after December 15, 1998.  This statement establishes guidance 
on accounting for the costs incurred related to internal use software.  
The Company expenses these costs as incurred and 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 Massachusetts 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.




21
<page






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 1998 and 1997 were as follows:
<TABLE>
<CAPTION>
					             1998            	                
1997         	
					     High     Low     Close		 High     
Low     Close
      <S>                         <C>     <C>      <C>            <C>     
<C>      <C>
	First Quarter...........    $37-3/8 $31-3/4  $35-1/4        $29     
$22-7/8  $23-1/4
	Second Quarter..........     39-5/8  34-3/8   38-3/4         24-
3/4  21-3/8   24-5/8
	Third Quarter...........     39      24-7/8   27-5/8         33-
3/8  23-7/8   30-7/8
	Fourth Quarter..........     36-1/2  22-11/16 35-7/16        36      
30       32-5/8
</TABLE>
	As of March 1, 1999, there were 1,241 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 $1.07 per share 
and $1.03 per share in 1998 and 1997, respectively.  On May 15, 1998, 
the Board voted to increase the quarterly stockholder dividend from 
$0.26 to $0.27 per share to stockholders of record as of June 5, 1998.  
Prior to that declaration, the Company had paid quarterly dividends of 
$0.26 per share dating back to May 30, 1997 when the Board voted to 
increase the dividend from $0.25 to $0.26 per share.

	The Company purchased no additional Treasury Stock under the stock 
buyback program during 1998.  The stock buyback program, authorized by 
the Board on May 19, 1995, enables the Company to purchase up to 
3,000,000 shares of the Company's common stock.  As of December 31, 
1998, 1,957,348 shares of Treasury Stock were purchased under the 
program.  Since December 31, 1998, the Company completed its share 
purchases under that program.  Additionally, under prior Board of 
Director authorizations, the Company purchased 143,248 shares through 
March 19, 1999.




























22
<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 1998 consolidated financial statements were audited by the 
Company's independent auditors, Ernst & Young LLP, in accordance with 
generally accepted auditing standards. In addition, Ernst & Young LLP 
performs reviews of the unaudited quarterly financial statements.  
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 were valid and 
appropriate.





























23
<page



REPORT OF INDEPENDENT AUDITORS


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

	We have audited the accompanying consolidated balance sheets of 
The Commerce Group, Inc. and Subsidiaries as of December 31, 1998 and 
1997, and the related consolidated statements of earnings, stockholders' 
equity and cash flows for each of the two years ended December 31, 1998.  
These financial statements are the responsibility of the Company's 
management.  Our responsibility is to express an opinion on these 
financial statements based on our audits.  The accompanying consolidated 
financial statements of the Company for the year ended December 31, 
1996, was 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 that our audits provide a reasonable basis for 
our opinion.

	In our opinion, the 1998 and 1997 financial statements referred to 
above present fairly, in all material respects, the consolidated 
financial position of The Commerce Group, Inc. and Subsidiaries at 
December 31, 1998 and 1997, and the consolidated results of their 
operations and their cash flows for each of the two years in the period 
ended December 31, 1998 in conformity with generally accepted accounting 
principles.



										ERNST & 
YOUNG LLP




Boston, Massachusetts
January 22, 1999


























24
<page


THE COMMERCE GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
December 31,
(Thousands of Dollars Except Per Share Data)
<TABLE>
<CAPTION>
												  
1998	  1997
ASSETS
<S>                                                                   
<C>         <C>
Investments (notes A2, A3, A4 and B)
  Fixed maturities, at market (cost: $600,482 in 1998 and $566,784
   in 1997).......................................................... $  
619,267  $  590,597
  Preferred stocks, at market (cost: $200,270 in 1998 and $148,135
   in 1997)..........................................................    
197,425     148,499
  Common stocks, at market (cost: $261,360 in 1998 and $160,371 in 
   1997).............................................................    
283,961     178,089
  Mortgage loans on real estate and collateral notes receivable 
   (less allowance for possible loan losses of $2,301 in 1998
   and $2,812 in 1997)...............................................     
73,510      82,839
  Short-term investments.............................................      
3,669     132,700
  Cash and cash equivalents..........................................     
72,243     106,188
  Other investments (cost: $7,450 in 1998 and $3,783 in 1997)........      
7,825       3,783
      Total investments..............................................  
1,257,900   1,242,695

Accrued investment income............................................     
13,662      12,237
Premiums receivable (less allowance for doubtful receivables of
  $1,450 in 1998 and $1,451 in 1997).................................    
162,878     169,469
Deferred policy acquisition costs (notes A5 and C)...................     
88,759      85,264
Property and equipment, net of accumulated depreciation
  (notes A6 and D)...................................................     
35,854      36,280
Residual market receivable (note F)
  Losses and loss adjustment expenses................................    
111,784     129,137
  Unearned premiums..................................................     
41,436      51,662
Due from reinsurers (note F).........................................     
36,687      18,170
Other assets.........................................................      
7,023       9,839
      Total assets................................................... 
$1,755,983  $1,754,753

LIABILITIES AND STOCKHOLDERS' EQUITY

Liabilities
  Losses and loss adjustment expenses (notes A7, E and F)............ $  
596,996  $  649,473
  Unearned premiums (note A8)........................................    
391,424     379,599
  Current income taxes (notes A9 and G)..............................      
4,061       2,656
  Deferred income taxes (notes A9 and G).............................      
3,769      13,443
  Deferred income (notes A10 and F)..................................      
6,948       7,271
  Contingent commissions accrued (note A11)..........................     
22,067      13,861
  Payable for securities purchased...................................         
62      11,500
  Other liabilities and accrued expenses.............................     
24,871      27,154
      Total liabilities..............................................  
1,050,198   1,104,957

Stockholders' Equity (notes B, J, K and L)
  Preferred stock, authorized 5,000,000 shares at $1.00 par value;
   none issued in 1998 and 1997......................................        
-           -  
  Common stock, authorized 100,000,000 shares at $.50 par value;
   issued and outstanding 38,000,000 shares in 1998 and 1997.........     
19,000      19,000
  Paid-in capital....................................................     
29,621      29,621
  Net accumulated other comprehensive income, net of income taxes of
   $13,621 in 1998 and $14,663 in 1997...............................     
25,295      27,232
  Retained earnings..................................................    
670,556     612,630
                                                                         
744,472     688,483
  Treasury Stock, 1,957,348 shares in 1998 and 1997, at cost 
   (note A13)........................................................    
(38,687)    (38,687)
      Total stockholders' equity.....................................    
705,785     649,796

      Total liabilities and stockholders' equity..................... 
$1,755,983  $1,754,753
</TABLE>

The accompanying notes are an integral part of these consolidated 
financial statements.
25
<page


THE COMMERCE GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF EARNINGS
For the years ended December 31,
(Thousands of Dollars Except Share and Per Share Data)
<TABLE>
<CAPTION>
										 1998		 
1997 	 1996
<S>                                                      <C>         <C>         
<C>
Revenues
  Earned premiums (notes A8 and F).....................  $  745,620  $  
730,497  $  668,716
  Net investment income (note B).......................      86,501      
80,972      77,402
  Premium finance and service fees.....................      13,440       
7,074       9,713
  Net realized investment gains (losses) (note B)......       6,769      
22,770      (7,574)
       Total revenues..................................     852,330     
841,313     748,257

Expenses
  Losses and loss adjustment expenses 
   (notes A7, E and F).................................     531,429     
526,127     475,231
  Policy acquisition costs (notes A5 and C)............     196,434     
187,491     181,013
       Total expenses..................................     727,863     
713,618     656,244

       Earnings before income taxes....................     124,467     
127,695      92,013

Income taxes (notes A9 and G)..........................      27,975      
31,480      18,049

       NET EARNINGS....................................  $   96,492  $   
96,215  $   73,964

       COMPREHENSIVE INCOME............................  $   94,555  $  
100,368  $   80,539

       BASIC AND DILUTED NET EARNINGS PER COMMON SHARE
        (note A12).....................................  $     2.68  $     
2.67  $     2.04

       CASH DIVIDENDS PAID PER SHARE...................  $     1.07  $     
1.03  $     0.81

       WEIGHTED AVERAGE NUMBER OF COMMON
        SHARES OUTSTANDING.............................  36,042,652  
36,044,679  36,311,887
</TABLE>

























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

26
<page


THE COMMERCE GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the years ended December 31,
(Thousands of Dollars)
<TABLE>
<CAPTION>
					                      Net
					                   Accumulated
                                                    Other
					 Common  Paid-in  Comprehensive   Retained   
Treasury
					 Stock   Capital  Income/(Loss)   Earnings    
Stock     Total
<S>                           <C>      <C>        <C>          <C>       
<C>       <C>
Balance January 1, 1996...... $19,000  $29,621    $ 16,504     $508,948  
$(24,359) $549,714

 Net earnings................                                    73,964              
73,964
 Other comprehensive income:
  Net unrealized gains arising
   during the period, net of
   taxes of $3,540...........                        6,575                            
6,575
 Comprehensive income........                                                        
80,539
 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
 Other comprehensive income:
  Net unrealized gains arising
   during the period, net of
   taxes of $2,236...........                        4,153                            
4,153
 Comprehensive income........                                                       
100,368
 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

 Net earnings................                                    96,492              
96,492
 Other comprehensive income (loss):
  Unrealized holding gains arising
   during the period, net
   of taxes of $1,455........                        2,702                            
2,702
  Reclassification adjustment
   net of tax benefits of
   ($2,498)..................                       (4,639)                          
(4,639)
  Other comprehensive loss...                       (1,937)                          
(1,937)
 Comprehensive income........                                                        
94,555
 Stockholder dividends.......                                   (38,566)            
(38,566)

Balance December 31, 1998.... $19,000  $29,621    $ 25,295     $670,556  
$(38,687) $705,785	
</TABLE>












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

27
<page


THE COMMERCE GROUP, INC. AND SUBSIDIARIES

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

<TABLE>
<CAPTION>
                                                              1998        
1997        1996


<S>                                                       <C>         
<C>         <C>
Cash flows from operating activities
  Premiums collected..................................... $ 761,539   $ 
727,530   $ 675,683
  Net investment income received.........................    85,076      
81,376      79,269
  Premium finance and service fees received..............    13,440       
7,074       9,713 
  Losses and loss adjustment expenses paid...............  (572,661)   
(516,130)   (428,541)
  Policy acquisition costs paid..........................  (186,869)   
(198,011)   (200,922)
  Federal income tax payments............................   (35,201)    
(21,833)    (16,950)
      Net cash provided by operating activities..........    65,324      
80,006     118,252

Cash flows from investing activities
  Proceeds from maturity of fixed maturities.............    64,004     
108,592     170,646
  Proceeds from sale of fixed maturities.................    34,034     
124,653     122,431
  Proceeds from sale of equity securities................    80,420     
224,059      11,326
  Purchase of fixed maturities...........................  (134,540)    
(98,098)   (200,113)
  Purchase of equity securities..........................  (224,896)   
(296,714)    (85,480)
  Purchase of other investments..........................    (3,616)     
(1,752)       (700)
  Net (increase) decrease in short-term investments,
    net of payable for securities purchased..............   117,531    
(121,200)        -  
  Payments received on mortgage loans and collateral
    notes receivable.....................................    26,788      
11,386       8,311
  Mortgage loans and collateral notes originated.........   (16,450)    
(19,816)     (7,446)
  Purchase of property and equipment.....................    (4,293)     
(8,133)     (4,477)
  Other proceeds from investing activities...............       315         
281         235
      Net cash provided by (used in) investing activities   (60,703)    
(76,742)     14,733

Cash flows from financing activities
  Dividends paid to stockholders.........................   (38,566)    
(37,124)    (29,373)
  Purchase of treasury stock.............................       -          
(487)    (15,742)
      Net cash used in financing activities..............   (38,566)    
(37,611)    (45,115)

Increase (decrease) in cash and cash equivalents.........   (33,945)    
(34,347)     87,870
Cash and cash equivalents at beginning of year...........   106,188     
140,535      52,665
Cash and cash equivalents at end of year................. $  72,243   $ 
106,188   $ 140,535
</TABLE>
















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

28
<page


THE COMMERCE GROUP, INC. AND SUBSIDIARIES

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

<TABLE>
<CAPTION>
                                                              1998        
1997        1996


<S>                                                       <C>         
<C>         <C>
Cash flows from operating activities
  Net earnings........................................... $  96,492   $  
96,215   $  73,964
  Adjustments to reconcile net earnings to net cash
   provided by operating activities:
    Premiums receivable..................................     6,591     
(11,634)    (30,788)
    Deferred policy acquisition costs....................    (3,495)     
(2,296)    (15,808)
    Residual market receivable...........................    27,579      
14,414       4,911 
    Due from reinsurers..................................   (18,517)      
1,489       2,238
    Losses and loss adjustment expenses..................   (52,477)    
(13,359)     36,803
    Unearned premiums....................................    11,825      
11,608      37,537
    Current income taxes.................................     1,405       
2,485      (1,009)
    Deferred income taxes................................    (8,632)      
6,984       2,098
    Deferred income......................................      (323)       
(703)       (980)
    Contingent commissions...............................     8,206     
(11,851)     (6,838)
    Other assets, liabilities and accrued expenses.......       533       
4,992       3,017
    Net realized investment (gains) losses...............    (6,769)    
(22,770)      7,574
    Other - net..........................................     2,906       
4,432       5,533

       Net cash provided by operating activities......... $  65,324   $  
80,006   $ 118,252
</TABLE>






























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

29
<page



THE COMMERCE GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998, 1997 and 1996
(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.  Commerce 
West Insurance Company ("Commerce West") 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 1998 presentation.

	The insurance subsidiaries, Commerce, Citation and Commerce West 
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 and preferred stocks, 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 preferred stocks, are 
carried at fair market value and are classified as available for sale.  
Unrealized investment gains and losses on common and 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, known as "net accumulated other comprehensive 
income", 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 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 5% in fixed 
maturities of any one state or political subdivision.

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

30
<page


THE COMMERCE GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998, 1997 and 1996
(Thousands of Dollars)

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

	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.  The Company held $13,572 and $27,476 in U.S. 
Government Repurchase Agreements at various banks in 1998 and 1997.  
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 1998, 1997 and 
1996. In determining whether a premium deficiency exists, the Company 
considers anticipated investment income on unearned premiums.









31
<page


THE COMMERCE GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998, 1997 and 1996
(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>
<CAPTION>
											 
Percent
Asset Classification						Per 
Annum
<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") 
affinity group marketing program.  Of the Company's total direct 
premiums written, the portion attributable to the AAA group business was 
$457,430 or 57% in 1998 as compared to $423,243 or 55% in 1997.  Of 
these amounts, 11% were written through insurance agencies owned by the 
AAA clubs and 89% were written through the Company's network of 
independent agents in both 1998 and 1997, 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).

32
<page


THE COMMERCE GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998, 1997 and 1996
(Thousands of Dollars)

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

11.  Contingent Commissions

	In addition to state mandated commissions on policies written, the 
Company pays certain of its agencies compensation in the form of profit 
sharing.  This is based, in part, on the underwriting profits of an 
individual agent's business written with the Company.  This arrangement 
utilizes a three year rolling plan, with one third of each of the 
current and the two prior years profit or loss calculations, summed to a 
single amount.  This amount, if positive, is multiplied by the profit 
sharing commission rate and paid to the agent.

12.  Net Earnings Per Common Share

	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, 1998, 1997 and 1996 was 36,042,652, 36,044,679 and 
36,311,887, respectively.  Weighted average number of common shares 
outstanding is determined by taking the average of the following 
calculation for a specified period of time:  The daily amount of the 
total issued and outstanding common shares minus the total Treasury 
Stock purchased.

13.  Treasury Stock (unaudited)

	On May 19, 1995, the Board of Directors of the Company announced 
the approval of a stock buyback program of up to 3,000,000 shares.  
Through December 31, 1998, the Company had purchased 1,957,348 shares of 
Treasury Stock under this program.  Since December, 1998, the Company 
completed its share repurchases under that program.  Additionally, under 
prior Board of Director authorizations, the Company purchased 143,248 
shares through March 19, 1999.

14.  New and Pending Accounting Pronouncements

	During the first quarter of 1998, the Company adopted 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 transaction, 
minimum pension liability adjustments and unrealized gains and losses on 
certain investments in debt and equity securities (i.e. available for 
sale securities).

	During the first quarter of 1998, the Company adopted 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.

	During 1998 the Financial Accounting Standards Board ("FASB") 
issued statement of Financial Accounting Standards No. 133, "Accounting 
for Derivative Instruments and Hedging Activities" ("FAS 133") effective 
for financial statements issued to fiscal years beginning after June 15, 
1999.  FAS 133 establishes accounting and reporting standards for 
derivative instruments, including certain derivative instruments 
embedded in other contracts, (collectively referred to as derivatives) 
and for hedging activities.  It requires that an entity recognize all 
derivatives as either assets or liabilities in the balance sheet and 
measure those instruments at fair value.  The Company had no derivative 
or hedging activity in 1998, 1997 or 1996.


33
<page


THE COMMERCE GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998, 1997 and 1996
(Thousands of Dollars)

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>
<CAPTION>
								        Gross         
Gross       Estimated
						     Amortized    Unrealized    
Unrealized   Fair Market
						        Cost         Gains        
Losses        Value  	

<S>                                      <C>           <C>           <C>          
<C>
At December 31, 1998:
  GNMA mortgage-backed bonds...........  $109,624      $  2,965      $     
(1)    $112,588
  Obligations of states and 
   political subdivisions..............   490,858        18,416        
(2,595)     506,679
       Totals..........................  $600,482      $ 21,381      $ 
(2,596)    $619,267

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	



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


For the year ended December 31, 1998:
  GNMA mortgage-backed bonds.........................  $    -        $    
-       $    -  
  Obligations of states and political subdivisions...    34,034            
25         (435)
       Totals........................................  $ 34,034      $     
25     $   (435)

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)
</TABLE>













34
<page


THE COMMERCE GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998, 1997 and 1996
(Thousands of Dollars)

NOTE B-Investments and Investment Income - (continued)

	The amortized cost and approximate fair market value of fixed 
maturities at December 31, 1998 and 1997, by contractual maturity, are 
as follows:
<TABLE>
<CAPTION>
								          1998         	       
1997         	
								                 Fair                 
Fair
								    Amortized   Market   
Amortized   Market
								      Cost       Value      
Cost      Value 	
<S>                                                <C>        <C>        
<C>       <C>
Obligations of states and political subdivisions:
Due in one year or less..........................  $    -     $    -     
$    -    $    -  
Due after one year through five years............     2,096      2,177      
2,083     2,200
Due after five years through ten years...........     1,748      1,740      
1,321     1,324
Due after ten years..............................   487,014    502,762    
387,592   406,004
								    490,858    506,679    
390,996   409,528

GNMA mortgage-backed bonds.......................   109,624    112,588    
175,788   181,069
       Total fixed maturities....................  $600,482   $619,267   
$566,784  $590,597
</TABLE>
	Expected maturities may differ from contractual maturities because 
issuers may have the right to call or prepay obligations.


2. Common Stocks

	The cost and approximate fair market value of common stocks at 
December 31, 1998 and 1997, are as follows:
<TABLE>
<CAPTION>
								          1998       	         
1997      	
								                Fair	
	        Fair
								               Market	
	       Market
								     Cost       Value 	   
Cost       Value 	
<S>                                                <C>        <C>        
<C>       <C>   
Preferred stock mutual funds................	   $169,394   $172,455   
$115,943  $ 119,439
Common stocks...............................	     91,966    111,506     
44,428     58,650
            Total common stocks.............	   $261,360   $283,961   
$160,371  $ 178,089
</TABLE>
3. Mortgage Loans on Real Estate and Collateral Notes Receivable

	At December 31, 1998 and 1997, mortgage loans on real estate and 
collateral notes receivable consisted of the following:
<TABLE>
<CAPTION>
										
	December 31,	
										  1998	
	1997
                 <S>                                        <C>             
<C>
                  Residential (1st Mortgages)............   $59,377         
$58,430
                  Residential (2nd Mortgages)............       261             
523
                  Commercial (1st Mortgages).............    13,762          
14,755
                  Commercial (2nd Mortgages).............       104             
172
                                                             73,504          
73,880
                  Collateral notes receivable............     2,307          
11,771
                                                             75,811          
85,651
                  Allowance for possible loan losses.....    (2,301)         
(2,812)
                    Mortgage loans on real estate and
                       collateral notes receivable.......   $73,510         
$82,839
</TABLE>
35
<page


THE COMMERCE GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998, 1997 and 1996
(Thousands of Dollars)

NOTE B-Investments and Investment Income - (continued)

	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, 1998 and 1997, prior to the allowance for possible loan 
losses, was $78,382 and $87,867, respectively, which was estimated by 
discounting the future cash flows.

	At December 31, 1998 and 1997 mortgage loans which were on 
nonaccrual status amounted to $1,638 and $2,021, respectively.  The 
reduction in interest income associated with nonaccrual loans was $205, 
$207 and $152 for the years ended December 31, 1998, 1997 and 1996, 
respectively.

	The Company originates and services residential and commercial 
mortgages in Massachusetts and Connecticut.  The Company's 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.

	A summary of the changes in the allowance for possible loan losses 
follows:
<TABLE>
<CAPTION>
                                                                    Year 
ended December 31,
                                                                       
1998          1997
            <S>                                                     <C>           
<C>
            Balance, beginning of year........................      $  
2,812      $  2,760
              Increase (decrease) in provision for possible
                loan losses...................................          
(511)           52

            Balance, end of year..............................      $  
2,301      $  2,812
</TABLE>

	The following table describes mortgage principal balances by 
maturity, total mortgages over 90 days past due and total 
mortgages in foreclosure:
<TABLE>
<CAPTION>
                                                                       
1998          1997
            <S>                                                     <C>          
<C>
            Fixed rate mortgages maturing:
              One year or less................................      $    
-        $      4
              More than one year to five years................         
1,886         2,062
              More than five years to ten years...............         
7,121         4,608
              Over ten years..................................        
48,053        46,868
                   Total fixed mortgages......................      $ 
57,060      $ 53,542

            Adjustable rate mortgages maturing:
              One year or less................................      $    
-        $    -  
              More than one year to five years................            
67           -  
              More than five years to ten years...............           
395           498
              Over ten years..................................        
15,831        19,840
                   Total adjustable mortgages.................      $ 
16,293      $ 20,338

            Past due over 90 days.............................      $  
1,638      $  2,021

            Mortgages in foreclosure..........................      $    
979      $  1,459
</TABLE>




36
<page


THE COMMERCE GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998, 1997 and 1996
(Thousands of Dollars)

NOTE B-Investments and Investment Income - (continued)


4. Net Investment Income
	The components of net investment income were as follows:

<TABLE>
<CAPTION>
										Year ended 
December 31,       	
									   1998	     
1997	       1996
      <S>                                             <C>           <C>           
<C>
      Interest on fixed maturities..................  $ 41,368      $ 
46,449      $ 56,034
      Dividends on common and preferred stocks......    32,145        
19,799        12,765
      Interest on cash and short-term investments...     8,683        
10,544         4,022
      Interest on mortgage loans....................     6,604         
6,578         6,737
      Other.........................................       119           
122           105
               Total investment income..............    88,919        
83,492        79,663
      Investment expenses...........................     2,418         
2,520         2,261
               Net investment income................  $ 86,501      $ 
80,972      $ 77,402
</TABLE>

5. Net Realized and Unrealized Investment Gains (Losses)

	Net realized investment gains (losses) were as follows:
<TABLE>
<CAPTION>
										Year ended 
December 31,	   	
									  1998	   
1997        1996
<S>                                                 <C>           <C>         
<C>
Net realized investment gains (losses):
  Fixed maturities................................. $  (2,804)    $  
1,419    $ (7,364)
  Preferred stocks.................................      (727)           
6        (349)
  Common stocks....................................     9,313       
21,440         456
  Other............................................       987          
(95)       (317)
      Total........................................ $   6,769     $ 
22,770    $ (7,574)
</TABLE>
6. Other Comprehensive Income (Loss)

	Net increases (decreases) in other comprehensive income (loss) 
less applicable income 
       tax expense were as follows:
<TABLE>
<CAPTION>
										Year ended 
December 31,	   	
									  1998	   
1997        1996
<S>                                                 <C>           <C>         
<C>    
Other comprehensive income (loss):
  Fixed maturities................................. $  (5,028)    $  
7,622    $  2,222
  Preferred stocks.................................    (3,209)       
1,165        (424)
  Common stocks....................................     4,883       
(2,398)      8,317
  Other............................................       375          -           
-  	
  Tax expense...................................... $   1,042     $ 
(2,236)   $ (3,540)
      Total........................................ $  (1,937)    $  
4,153    $  6,575
</TABLE>
	A summary of net accumulated other comprehensive income (loss) on 
stocks and fixed maturity investments in 1998, 1997 and 1996 follows:
<TABLE>
<CAPTION>
										Year ended 
December 31,    	
									  1998	   
1997	   1996
   <S>                                              <C>           <C>         
<C>
   Unrealized gains................................ $  49,184     $ 
43,675    $ 40,227
   Unrealized losses...............................   (10,268)      
(1,780)     (4,721)
   Tax expense.....................................   (13,621)     
(14,663)    (12,427)
      Net accumulated other comprehensive
        income..................................... $  25,295     $ 
27,232    $ 23,079
</TABLE>


37
<page


THE COMMERCE GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998, 1997 and 1996
(Thousands of Dollars)


NOTE C-Deferred Policy Acquisition Costs

	Policy acquisition costs incurred and amortized to income are as 
follows:
<TABLE>
<CAPTION>
										Year ended 
December 31,	  	
									  1998	   
1997	   1996
            <S>                                     <C>           <C>         
<C>
            Balance, beginning of year............. $  85,264     $ 
82,968    $ 67,160
            Costs deferred during the year.........   199,929      
189,787     196,821
            Amortization charged to expense........  (196,434)    
(187,491)   (181,013)
            Balance, end of year................... $  88,759     $ 
85,264    $ 82,968
</TABLE>

NOTE D-Property and Equipment

	A summary of property and equipment at December 31, is as follows:
<TABLE>
<CAPTION>
											 1998	       
1997
                  <S>                                           <C>         
<C>
			Buildings.................................    $ 30,719    
$ 27,873
			Equipment and office furniture............      33,230      
30,286
			Building improvements.....................         838         
828
										      64,787      
58,987
				Less accumulated depreciation.......     
(29,907)    (25,081)
										      34,880      
33,906
			Land......................................         939         
934
			Construction in progress..................          35       
1,440 	
										    $ 35,854    
$ 36,280
</TABLE>
	Depreciation expense incurred was $4,706, $4,213 and $3,202 for 
the years ended December 31, 1998, 1997 and 1996, respectively.  
Depreciation expense is allocated evenly 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:

											1998	
	1997
<TABLE>
<CAPTION>
                  <S>                                           <C>         
<C>
			Unpaid loss and LAE reserves..............    $666,177    
$725,886
			Salvage and subrogation recoverable.......     
(69,181)    (76,413)
										    $596,996    
$649,473
</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 annually obtain a certification from either a qualified 
actuary or an approved loss reserve specialist that its loss and LAE 
reserves are reasonable.








38
<page


THE COMMERCE GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998, 1997 and 1996
(Thousands of Dollars)

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

	When a claim is reported to the Company, 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.

	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, 1998 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 experience.  
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 
$5,687 and $6,924 in 1998 and 1997, respectively.















39
<page


THE COMMERCE GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998, 1997 and 1996
(Thousands of Dollars)

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

	The following table sets forth a reconciliation of beginning and 
ending reserves for losses and loss adjustment expense, net of 
reinsurance deductions from all reinsurers including C.A.R., as shown in 
the Company's consolidated financial statements for the periods 
indicated.
<TABLE>
<CAPTION>
										Year ended 
December 31,	    	
									  1998	     
1997	      1996
<S>                                                   <C>           <C>          
<C>
 Loss and loss adjustment expense reserves,
 beginning of year, prior to effect of ceded
 reinsurance recoverable............................. $530,077      
$533,980     $493,911

Incurred losses and loss adjustment expenses:
   Provision for insured events of the current year..  592,796       
609,930      562,997 
   Decrease in provision for insured events of
    prior years......................................  (61,367)      
(83,803)     (87,766)
     Total incurred losses and loss adjustment
      expenses.......................................  531,429       
526,127      475,231

Payments:
   Losses and loss adjustment expenses attributable
    to insured events of the current year............  335,047       
322,882      267,653 
   Losses and loss adjustment expenses attributable
    to insured events of prior years.................  227,630       
207,148      167,509
     Total payments..................................  562,677       
530,030      435,162

   Loss and loss adjustment expense reserves prior to
    effect of ceded reinsurance recoverable..........  498,829       
530,077      533,980 
   Ceded reinsurance recoverable.....................   98,167       
119,396      128,852
Reserves for losses and loss adjustment expenses
 at the end of year per financial statements.........	$596,996      
$649,473     $662,832
</TABLE>
	The provision for insured events of the current year is lower for 
1998 compared to 1997 primarily due to better loss results in the 
Company's bodily injury area mainly due to improved severity of bodily 
injury claims coupled with slightly improved claim frequency.  

	The provision for loss and LAE reserves relating to prior years is 
lower in 1998 due primarily to activity in the bodily injury area.  
Redundancies from prior year losses realized in the current year, 
relating to bodily injury claims, were approximately $18.0 million less 
in 1998, as compared to 1997.  Approximately $11.0 million of this 
amount was attributable to voluntary personal automobile bodily injury 
loss reserves and $7.0 million to fewer redundancies from C.A.R. assumed 
reserves.

	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 11.0%.  
Net loss payments in the direct personal automobile lines of business 
increased approximately 11.7% or $29,400 which were offset by a decrease 
in payments for other than automobile lines of business of approximately 
$18.2% or $5,748 compared to 1997.  The decrease in other than 
automobile loss payments was primarily the result of more favorable 
weather in 1998 versus the weather experienced in 1997.  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.





40
<page



THE COMMERCE GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998, 1997 and 1996
(Thousands of Dollars)

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

	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 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, Catastrophe and Quota Share Reinsurance

	From September 30, 1995 through June 30, 1998, the Company had a 
combined property quota share and excess loss reinsurance contract which 
was written with six reinsurance companies.  Under the quota share 
portion of the arrangement, the reinsurers indemnified the Company for 
45% 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 49% of the net premium pertaining to the related 
business.  The maximum per occurrence loss reimbursement was $50.0 
million and the maximum annual aggregate occurrence loss reimbursement 
was $75.0 million.  Under the excess loss reinsurance portion of the 
arrangement, the Company reinsured each risk, retaining $125 and 
reinsuring 100% of the next $875.

	Various catastrophe only reinsurance programs were utilized from 
1996 through May, 1998 in conjunction with the quota share and excess 
loss program noted above.  

	Effective July 1, 1998, the Company expanded the quota share 
portion of the program.  A 75% quota-share reinsurance program was 
incepted, covering all non-automobile property and liability business, 
except umbrella policies.  The excess loss portion of the program was 
reduced on July 1, 1998 and completely eliminated on September 30, 1998.  
The expanded program is split between Employers Reinsurance Corporation, 
American Re-Insurance Company, Nationwide Mutual Insurance Company and 
Swiss Reinsurance America Corporation.  The maximum per occurrence loss 
reimbursement is the higher of 350% of premium ceded under the program 
or $175.9 million.  The maximum annual aggregate occurrence loss 
reimbursement is the higher of 450% of premium ceded under the program 
or $226.1 million.  A sliding scale commission, based on loss ratio, is 
utilized under this program.  This program provides the Company with 
sufficient protection for catastrophe coverage so as to enable the 
Company to forego pure catastrophe reinsurance coverage, which was 
previously tailored in conjunction with the former quota share 
arrangement.














41
<page



THE COMMERCE GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998, 1997 and 1996
(Thousands of Dollars)


NOTE F-Reinsurance Activity - (continued)

	The table below provides information depicting the approximate 
recovery under the expanded quota share contract at various loss 
scenarios, if a single catastrophe were to strike:
<TABLE>
<CAPTION>
										 Net Loss
				  Total		Reinsurance		Retained by
				  Loss 		 Recovery  		the Company
                        <S>                 <C>               <C>
				$ 50,000		  $ 37,500		  $12,500
				 100,000		    75,000		   25,000
				 150,000		   112,500		   37,500
				 200,000		   150,000		   50,000
				 250,000		   175,875		   74,125
</TABLE>
	Under the above scenario, the Company has no reinsurance 
recoveries for a single event catastrophe in excess of a total loss of 
approximately $234.5 million.  The Company's estimated total loss on its 
other than automobile business for 100 and 250 year storms is $108.6 
million and $184.2 million, respectively.  The Company estimates were 
derived through the services of Swiss Reinsurance America Corporation 
who utilized the CLASIC model provided by Applied Insurance Research.

	Written premiums ceded in 1998, 1997 and 1996 under the above 
referenced programs were $54.0 million, $27.5 million and $26.6 million, 
respectively.  Ceding commission income is calculated on a ceded earned 
premium basis.

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 (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 American Re-
Insurance Company (rated A+ by A.M. Best).

	Earned premiums and losses and loss adjustment expenses are stated 
in the accompanying consolidated financial statements after deductions 
for ceded reinsurance.  Those deductions for reinsurance other than 
C.A.R. are as follows:
<TABLE>
<CAPTION>
										Year ended 
December 31,       	
								            1998         
1997        1996
  <S>                                                     <C>          
<C>        <C>
  Written premiums ceded............................      $56,341      
$32,190    $ 31,289
  Earned premiums ceded.............................       43,518       
33,847      36,261
  Losses and loss adjustment expenses ceded.........       16,542       
10,616      22,453
</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.
42
<page


THE COMMERCE GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998, 1997 and 1996
(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, 1998, 
1997 and 1996, these servicing fees amounted to $15,574, $17,333 and 
$17,127, 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.  The Company's strategy has been to 
voluntarily retain more types of private passenger automobile business 
that are factored as credits, thereby favorably impacting the 
utilization formula.  As a result of increased voluntary retention, the 
credits impacting the utilization formula have favorably affected the 
Company's participation ratio.  During 1998, 1997 and 1996, the 
Company's net participation in the C.A.R. personal automobile pool 
approximated 16.7%, 18.0% and 19.0%, respectively.

	Written premiums, earned premiums, losses incurred and the 
liabilities for unearned premiums, unpaid losses ceded to and assumed 
from C.A.R. were as follows:
<TABLE>
<CAPTION>
			    				Year ended December 31,		  
			
			    	     1998              	     1997        	             
1996    	
			     Ceded      Assumed	     Ceded      Assumed	     
Ceded       Assumed
<S>                  <C>         <C>         <C>         <C>         <C>         
<C>
Income Statement
 Written premiums... $ 70,435    $ 74,644    $ 71,816    $ 76,530    $ 
82,861    $ 93,703
 Earned premiums....   68,383      75,718      71,977      82,866      
85,977      92,469
 Losses incurred....   64,784      95,937      83,240      89,081      
84,074      93,278

Balance Sheet
 Unearned premiums.. $ 41,436    $ 39,271    $ 51,662    $ 40,345    $ 
49,487    $ 46,681
 Unpaid losses......  111,784      99,427     129,137     102,819     
145,726     117,237
</TABLE>
	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 1998, 
1997 and 1996 the Company's amount of personal automobile exposures it 
reinsured through C.A.R. approximated 6.4%, 6.6% and 8.1%, respectively.


43
<page



THE COMMERCE GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998  1997 and 1996
(Thousands of Dollars)

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>
<CAPTION>
									      Year ended 
December 31,       	
									      1998         
1997        1996
                  <S>                                    <C>          
<C>         <C>
			Current............................    $ 36,607     $ 
24,496    $ 15,951
			Deferred...........................      (8,632)       
6,984       2,098
									   $ 27,975     $ 
31,480    $ 18,049
</TABLE>

	Deferred taxes arise from temporary differences in the basis of 
assets and liabilities for tax and financial statement purposes.  The 
sources of these differences and the related tax effects consisted of 
the following:
<TABLE>
<CAPTION>
									        Year ended 
December 31,       	
									      1998         
1997         1996
  <S>                                                    <C>          
<C>         <C>
  Unearned premiums..................................    $     39     $   
(769)   $ (3,695)
  Discounting of loss reserves.......................       2,782        
2,421      (2,954)
  Bad debt expense...................................         (17)         
129         131
  Deferred policy acquisition costs..................        (782)       
1,297       6,022
  Salvage and subrogation recoverable................        (233)        
(406)        425
  Tax depreciation in excess of book depreciation....         109          
151         192
  Book value rights/book value awards/stock
   appreciation rights...............................     (11,056)       
4,912       1,686
  Deferred items not included above..................         526         
(751)        291
        Deferred income tax..........................      (8,632)       
6,984       2,098
  Other comprehensive income (loss)..................      (1,042)       
2,236       3,540
        Change in deferred tax liability.............    $ (9,674)    $  
9,220    $  5,638
</TABLE>

	Realization of a deferred tax asset is dependent on generating 
sufficient taxable income in future years.  Although realization is not 
assured, Management believes it is more likely than not that all of the 
deferred tax assets will be realized.  The amount of the deferred tax 
asset considered realizable, however, could be reduced in the near term 
if estimates of future taxable income are reduced.  Deferred tax 
liabilities (assets) were comprised of the following components at 
December 31, 1998 and 1997:
<TABLE>
<CAPTION>
                                                                      
1998         1997
<S>                                                                <C>          
<C>
Unearned premiums................................................  
$(20,569)    $(20,608)
Discounting of loss reserves.....................................   
(18,597)     (21,379)
Book value awards/stock appreciation rights......................    
(2,857)         -
Bad debt allowances..............................................      
(789)        (772)
      Deferred tax assets........................................   
(42,812)     (42,759)

Deferred policy acquisition costs................................    
25,050       25,832
Salvage and subrogation recoverable..............................     
1,768        2,001
Tax depreciation in excess of book depreciation..................     
2,965        2,856
Book value awards/stock appreciation rights......................       
-          8,199
Net accumulated comprehensive income.............................    
13,621       14,663
Deferred items not included above................................     
3,177        2,651
      Deferred tax liabilities...................................    
46,581       56,202

      Net deferred tax liability.................................  $  
3,769     $ 13,443
</TABLE>
44
<page


THE COMMERCE GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998, 1997 and 1996
(Thousands of Dollars)



NOTE G-Income Taxes (continued)

	Federal income tax on income is less than the amount computed by 
applying the statutory rate of 35% for the years ended 1998, 1997 and 
1996 for the following reasons:
<TABLE>
<CAPTION>
								Year ended December 31,	
	  			
					   1998            	   1997        	            
1996   	
<S>                      <C>          <C>         <C>           <C>           
<C>       <C>
Tax at statutory rate..  $ 43,563     35.0%       $44,693       35.0%         
$32,205    35.0%
Tax exempt interest....    (8,429)    (6.8)        (8,036)      (6.3)         
(10,062)  (10.9)
Dividends paid to ESOP
  participants.........      (762)    (0.6)          (782)      (0.6)          
(1,169)   (1.3)
Dividends received
  deduction............    (6,152)    (4.9)        (4,567)      (3.6)          
(3,167)   (3.4)
Other..................      (245)    (0.2)           172        0.2              
242     0.2	
Tax at effective rate..  $ 27,975     22.5%       $31,480       24.7%         
$18,049    19.6%
</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, 1998, eight of these loans, which had an 
aggregate outstanding principal balance of $2,738, were collateralized 
by the assets of the agencies.  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, 1998 
and 1997 there were no mortgage loans outstanding to agents 
collateralized by real estate.

	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, 1998, 1997 and 1996, 
the agency received from the Company commissions of $940, $834 and $906, 
respectively, in the aggregate, for policies written.  The Company also 
purchased certain insurance coverages through the agency and paid 
premiums for these policies of $520, $367 and $360 in 1998, 1997 and 
1996, respectively.

NOTE I-Employee Stock Ownership Plan and 401(k) Plan

	The Company offers an Employee Stock Ownership Plan ("E.S.O.P.") 
and 401(k) Plan for the benefit of substantially all employees, 
including those of the Company's subsidiaries.  The E.S.O.P. is 
noncontributory on the part of participants and contributions are made 
at the discretion of the Board of Directors.  The Company is under no 
obligation to make contributions or maintain the E.S.O.P. for any length 
of time, and may completely discontinue or terminate the E.S.O.P at any 
time without liability.  Contributions by the Company and subsidiaries 
to the E.S.O.P. for the years ending December 31, 1998, 1997 and 1996 
were $5,412, $4,841 and $6,216, respectively.  The E.S.O.P. owned 
3,186,968 and 3,305,986 shares of the Company's common stock at December 
31, 1998 and 1997, respectively.

	The 401(k) Plan, implemented in September, 1998, enables eligible 
employees to contribute up to 15% of eligible compensation on a pre-tax 
basis up to the annual maximum limits under federal tax law.  The 
Company incurs no expenses in the form of matching contributions but 
does pay for administration of the Plan.




45
<page


THE COMMERCE GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998, 1997 and 1996
(Thousands of Dollars Except for Per Share Data)

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 specified 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 granted.  Expenses relating to this Book Value Rights Program 
were $234 in 1996.  The Book Value Rights Program was replaced by a Book 
Value Awards Program in 1994 maturing on December 31, 1996 and beyond.

	The Management Incentive Plan approved by the Company's 
stockholders in May, 1994 provides for the award of incentive stock 
options, non-qualified stock options, book value awards, stock 
appreciation rights, restricted stock and performance stock units.  Up 
to 2,500,000 shares of common stock (subject to increase for anti-
dilution adjustments) may be issued under the Plan, including shares 
that may be issued pursuant to awards of restricted stock or upon the 
exercise of common stock equivalent awards such as stock options and 
stock appreciation rights payable in the form of common stock (not in 
the form of cash).  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 482,215, 453,488 and 468,381 in 1998, 
1997 and 1996, respectively.  Stock appreciation rights issued also 
relating to this Plan totalled 509,872, 493,492 and 520,625 in 1998, 
1997 and 1996, 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 $470, $3,068 and $2,140 in 1998, 1997 and 1996.  Expenses 
(income) relating to stock appreciation rights were ($656), $15,657 and 
$6,224 in 1998, 1997 and 1996. Aggregate liabilities for the combined 
programs were $9,609 and $23,426 at year-end 1998 and 1997, 
respectively.

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 may, within certain limitations, pay such dividends and 
then file a report with the Commissioner.  Dividends in excess of these 
limitations are called extraordinary dividends.  An extraordinary 
dividend is any dividend or other property, whose fair value together 
with other dividends or distributions made within the preceding twelve 
months exceeds the greater of ten percent of the insurer's surplus as 
regards policyholders as of the end of the preceding year, or the net 
income of a non-life insurance company for the preceding year.  No pro-
rata distribution of any class of the insurer's own securities is to be 
included.  No Massachusetts insurance company shall pay an extraordinary 
dividend or other extraordinary distribution until thirty days after the 
Commissioner has received notice of the intended distribution and has 
not objected.  No extraordinary dividends were paid in 1998, 1997 and 
1996.

	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 1998 Commerce and Citation paid 
$43,300 and $8,338 in dividends, respectively, to CHI; CHI then paid 
$51,345 to the Company in March 1998.  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.

	The Board of Directors of the Company voted to declare four 
quarterly dividends to stockholders of record totaling $1.07 per share 
and $1.03 per share in 1998 and 1997, respectively.  On May 15, 1998, 
the Board voted to increase the quarterly stockholder dividend from 
$0.26 to $0.27 per share to stockholders of record as of June 5, 1998.  
Prior to that declaration, the Company had paid quarterly dividends of 
$0.26 per share dating back to May 30, 1997 when the Board voted to 
increase the dividend from $0.25 to $0.26 per share.
46
<page



THE COMMERCE GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998, 1997 and 1996
(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 Commerce West:
<TABLE>
<CAPTION>
					     	      1998          	   1997                
1996       	
					    Earnings  Equity     Earnings   Equity   
Earnings    Equity
<S>                               <C>       <C>        <C>       <C>       
<C>        <C>
GAAP............................  $ 93,888  $649,751   $101,528  
$609,416  $ 74,432   $550,151
Deferred income taxes...........    (1,971)    5,423      4,039     
8,352       929      2,165
Deferred acquisition costs......    (3,495)  (88,759)    (2,296)  
(85,264)  (15,808)   (82,968)
Bonds-book versus market........       -     (18,786)       -     
(23,812)      -      (16,194)
Preferred stock-market versus
 book...........................       -      (1,307)       -        
(429)      -         (331)
Deferred income.................      (326)    6,744       (697)    
7,071      (963)     7,768
Deferred service fee income.....        91     3,411      1,784     
3,139     1,538      1,538
Deferred reinsurance
 commissions....................     5,728    10,253     (1,267)    
4,424     2,082      5,796
Statutory reserve over statement
 reserves.......................       -      (4,072)       -      
(8,567)      -       (5,397)
Goodwill in subsidiary..........      (291)    1,936       (291)    
2,226      (270)     2,515
Difference in GAAP to statutory
 net income in subsidiary.......        80       -           57       -         
416        -   
Other...........................       -      (1,091)       -          
42         4       (304)
     Total adjustments..........      (184)  (86,248)     1,329   
(92,818)  (12,072)   (85,412)
Statutory.......................  $ 93,704  $563,503   $102,857  
$516,598  $ 62,360   $464,739
</TABLE>

NOTE M-Segment Information

	The Company has three reportable segments:  (1) property and 
casualty insurance; (2) real estate and commercial lending; and, (3) 
corporate and other.  The Company's property and casualty insurance 
operations are written through Commerce, Citation and Commerce West and 
are marketed to affinity groups, individuals, families and businesses 
through the Company's relationships with professional independent 
insurance agencies.  The Company's real estate and commercial lending 
operations are a result of insurance companies having the authorization 
to invest in mortgages.  The Company's wholly-owned subsidiary, Bay 
Finance Company, Inc., originates and services residential and 
commercial mortgages in Massachusetts and Connecticut.  The corporate 
and other segment represents the remainder of the Company's activities, 
including those of the parent company.

	The Company evaluates performance and allocates resources based 
primarily on the property and casualty insurance segment which 
represents 99.0% of the Company's total revenue for the past three 
years.  The accounting policies of the reportable segments are the same 
as those described in Note A - Summary of Significant Accounting 
Polices.















47
<page


THE COMMERCE GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998, 1997 and 1996
(Thousands of Dollars Except for Per Share Data)


NOTE M-Segment Information - (continued)

Selected information by industry segment for 1998, 1997 and 1996 is 
summarized as follows:
<TABLE>
<CAPTION>
										Earnings 
Before	Identifiable
								Revenue	  Income 
Taxes 	   Assets   	
1998
  <S>                                           <C>             <C>            
<C>
  Property and casualty insurance............   $843,798        $117,259       
$1,672,999
  Real estate and commercial lending.........      5,049           5,049           
74,070
  Corporate and other........................      3,483           2,159            
8,914	
	Consolidated...........................   $852,330        $124,467       
$1,755,983	

1997
  Property and casualty insurance............   $833,482        $132,722       
$1,659,374
  Real estate and commercial lending.........      4,448           4,448           
83,420
  Corporate and other........................      3,383          
(9,475)          11,959	
	Consolidated...........................   $841,313        $127,695       
$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
</TABLE>

NOTE N-Supplement to Consolidated Statements of Cash Flows

	During the years ended December 31, 1998 and 1997, the Company did 
not acquire any property through foreclosure of mortgages.  During 1996, 
the Company acquired property through foreclosure of mortgages held with 
remaining principal balances at the time of foreclosure of $245.


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, 1998, the M.I.I.F. has approved assessments 
totaling $126,822, of which the Company's share was approximately 
$7,269.  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.  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 has been to 
recognize the recovery of the assessed amounts as received.  Refunds of 
assessments by the M.I.I.F. for the year ended December 31, 1998 and 
1997 were $271 and $283, respectively.  Assessments by the M.I.I.F. for 
the year ended December 31, 1996 were $742.

	In 1997, the Accounting Standards Executive Committee ("AcSEC") 
issued Statement of Position 97-3 Accounting by Insurance and Other 
Enterprise for Insurance-Related Assessments ("SOP 97-3") effective for 
financial statements issued for periods ending after December 31, 1998.  
This statement provides guidance on accounting by insurance companies on 
the timing of recognition, the methods of measurement, and the required 
disclosures for guaranty fund and other related assessments.  The 
Company believes that the adoption of this statement will not have a 
material impact on the Consolidated Financial Statements.

48
<page


THE COMMERCE GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998, 1997 and 1996
(Thousands of Dollars Except for Per Share Data)


NOTE P-Quarterly Results of Operations (Unaudited)

An unaudited summary of the Company's 1998 and 1997 quarterly 
performance is as follows:

<TABLE>
<CAPTION>
1998								   First      Second       
Third     Fourth
								  Quarter     Quarter     
Quarter    Quarter
<S>                                              <C>         <C>         
<C>        <C>
Total revenues.................................  $214,380    $217,610    
$206,060   $214,280
Net earnings...................................    25,235      19,585      
29,861     21,811
Comprehensive income...........................    23,953      16,473      
32,417     21,712
Net earnings excluding the after-tax impact
 of net realized investment gains (losses)(1)..    22,764      18,752      
29,862     20,714
Net earnings per weighted average common
  share (basic and diluted)....................      0.70        0.54        
0.83       0.61
Basic and diluted net earnings per common
 share excluding the after-tax impact of net
 realized investment gains (losses)(1)........       0.63        0.52        
0.83       0.58
Cash dividends paid per share..................      0.26        0.27        
0.27       0.27


1997
Total revenues.................................  $199,069    $205,589    
$225,131   $211,524
Net earnings...................................    16,638      19,971      
35,012     24,594
Comprehensive income...........................    12,355      30,328      
27,722     30,283
Net earnings excluding the after-tax impact
 of net realized investment gains (losses)(1)..    16,830      18,531      
21,365     24,688
Net earnings per weighted average common
  share (basic and diluted)....................      0.46        0.56        
0.97       0.68
Basic and diluted net earnings per common
 share excluding the after-tax impact of net
 realized investment gains (losses)(1)........       0.47        0.52        
0.59       0.68
Cash dividends paid per share..................      0.25        0.26        
0.26       0.26
</TABLE>

(1) The above figures are presented to provide information to the reader 
due to the amount of, 
    and fluctuations in, net realized gains and losses.  The amounts 
noted, commonly known as 
    Operating Income, are important measures of corporate performance.

NOTE Q-Subsequent Events (Unaudited)

	Commerce, a subsidiary of the Company, formed a joint venture 
(ACIC Holding Co., Inc.) in November 1998 with AAA Southern New England 
("AAA SNE") and completed the subsequent acquisition of ACIC, located in 
Columbus, Ohio. in January 1999.  ACIC writes automobile and homeowners 
insurance solely through 38 AAA automobile clubs.  Commerce and AAA SNE 
intend that ACIC will retain its management team and staff and continue 
to have its principle office in Columbus, Ohio.  In early 1999, Commerce 
invested $90.8 million in the joint venture (ACIC Holding Co., Inc.) to 
fund the ACIC acquisition and to capitalize the joint venture that will 
be owned together with AAA SNE.  Of this $90.8 million, Commerce 
invested $90 million in the form of preferred stock and an additional 
$800 representing its 80% common stock ownership.  The terms of the 
preferred stock call for quarterly cash dividends at the rate of 10% per 
annum.  AAA SNE invested $200 representing its 20% common stock 
ownership.  Commerce intends to consolidate ACIC Holding Co., Inc., and 
it's wholly-owned subsidiary, ACIC, for financial reporting purposes.  
Since 1995, Commerce has maintained an affinity group marketing 
relationship with AAA Insurance Agency, Inc., a subsidiary  of AAA SNE.  
AAA Insurance Agency, Inc. has been an agent of Commerce since 1985.





49
<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 1998 and 1997 and by other auditors 
in 1994 through 1996.  All dollar amounts set forth in the following tables 
are in thousands except per share data.
<TABLE>
<CAPTION>
									Year ended December 31,	
			
						    1998         1997        1996        
1995        1994
<S>                                 <C>          <C>         <C>         <C>         
<C>
Statement of Earnings Data:
  Net premiums written...........	$  745,048   $  741,501  $  711,570  $  
603,421  $  589,197
  (Increase) decrease in 
    unearned premiums............	       572      (11,004)    (42,854)    
(10,831)    (17,144)
  Earned premiums................	   745,620      730,497     668,716     
592,590     572,053
  Net investment income..........	    86,501       80,972      77,402      
71,313      62,901
  Premium finance and service
    fees.........................	    13,440        7,074       9,713      
19,420      18,497
  Net realized investment gains
   (losses)......................	     6,769       22,770      (7,574)        
712      45,612
       Total revenues............	   852,330      841,313     748,257     
684,035     699,063

  Losses and loss adjustment 
   expenses......................	   531,429      526,127     475,231     
367,552     369,660
  Policy acquisition costs.......	   196,434      187,491     181,013     
166,741     157,415
       Total expenses............	   727,863      713,618     656,244     
534,293     527,075

  Earnings before income taxes...	   124,467      127,695      92,013     
149,742     171,988
  Income taxes...................	    27,975       31,480      18,049      
39,541      49,405
       Net earnings..............	$   96,492   $   96,215  $   73,964  $  
110,201  $  122,583

       Comprehensive Income......   $   94,555   $  100,368  $   80,539  $  
169,119  $   35,941

Per Share Data:
       Basic and diluted
         net earnings per share..   $     2.68   $     2.67  $     2.04  $     
2.93  $     3.23

       Cash dividends paid per
         share...................   $     1.07   $     1.03  $     0.81  $     
0.23  $     0.15

Weighted average number of
 shares outstanding..............   36,042,652   36,044,679  36,311,887  
37,632,236  38,000,000
</TABLE>
<TABLE>
<CAPTION>
									    December 31,		
		
						    1998	     1997	     1996	     
1995	     1994
<S>                                 <C>          <C>         <C>         <C>         
<C>
Balance Sheet Data:
  Total investments..............   $1,257,900   $1,242,695  $1,167,671  
$1,096,778  $  905,031
  Premiums receivable............      162,878      169,469     157,835     
127,047     102,432
  Total assets...................    1,755,983    1,754,753   1,676,799   
1,564,175   1,382,226
  Unpaid losses and loss 
   adjustment expenses...........      596,996      649,473     662,832     
626,029     599,502
  Unearned premiums..............      391,424      379,599     367,991     
330,454     314,719
  Stockholders' equity...........      705,785      649,796     587,039     
549,714     413,589
  Stockholders' equity per share.        19.58        18.03       16.28       
14.96       10.88
</TABLE>





50
<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 $5,502,344.  During this 
period, the average statutory financial ratios were 68.2% for losses and 
loss expenses and 26.8% for underwriting expenses resulting in an 
average combined ratio of 95.0%.  Total net investment income amounted 
to $598,469 or 10.9% of net premiums written.  Net realized gains were 
$94,199.  Stockholders' equity was $18,219 at the beginning of 1984 and 
$649,751, at the end of 1998, resulting in an average annual increase in 
excess of 26.9%.  The progress of the insurance operations during the 
most recent five year period, compared to the two previous five year 
periods, can best be illustrated by the following comparison:
<TABLE>
<CAPTION>
											5-Year 
Period		

									  1994-98	    
1989-93	    1984-88
<S>                                                   <C>           <C>          
<C>
Direct premiums written............................	$3,549,019	  
$2,324,133   $795,206

Net premiums written...............................	 3,390,737	   
1,743,511    368,096

Net investment income..............................	   379,053	     
172,448     46,968

Net realized gains.................................	    54,436	      
33,629      6,134

Stockholders' equity at end of period..............	   649,751	     
351,631     67,205

Statutory Financial Ratios (Unaudited)
  Losses and loss expenses to premiums earned......	      68.5%	        
66.1%      75.1%

  Underwriting expenses to net premiums written....	      26.8	        
27.4       23.9
	Combined ratio...............................	      95.3%         
93.5%      99.0%

Increase in Stockholders' Equity...................	      84.8%	       
423.2%     268.9%
</TABLE>
						

The insurance operations of the Company include the operating results of 
Commerce, its subsidiary company, Commerce West, 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.  In September 1993, ownership of both Commerce and 
Citation was transferred from The Commerce Group, Inc. to CHI, a 
subsidiary of The Commerce Group, Inc.  Results of Commerce West are 
included since its acquisition by Commerce on August 31, 1995.  The 
combined balance sheets of these insurance subsidiaries appear on pages 
52 and 53.  The combined statements of earnings of insurance operations 
appear on pages 54 and 55.
















51
<page


MANAGEMENT'S DISCUSSION OF THE SUPPLEMENTAL INFORMATION
ON INSURANCE OPERATIONS (continued)

THE COMMERCE GROUP, INC. AND SUBSIDIARIES
COMBINED BALANCE SHEETS OF INSURANCE SUBSIDIARIES
December 31,
(Thousands of Dollars)
<TABLE>
<CAPTION>
                                         1998       1997         1996        
1995        1994



ASSETS
<S>                                  <C>         <C>         <C>         
<C>         <C>
Cash and short-term investments..... $   75,655  $  238,685  $  140,102  
$   52,308  $    4,560
Bonds, at market (at amortized cost
 prior to 1993).....................    619,267     590,597     716,702     
815,277     745,010
Preferred stocks, at market (at
 amortized cost prior to 1993)......    197,425     148,499     147,680     
111,220      85,574
Common stocks, at market............    283,961     178,089      86,041      
40,359       9,656
Mortgage loans on real estate.......     46,573      57,425      45,398      
31,404      35,715
Other investments...................      7,825       3,783         127         
-           -
Premium balances receivable.........    162,704     169,311     157,673     
126,090     101,529
Investment income receivable........     13,544      12,103      12,655      
14,440      13,285
Residual market receivable..........    153,220     180,799     195,213     
200,124     214,818
Reinsurance receivable..............     36,687      18,170      19,659      
21,897      16,892
Deferred acquisition costs..........     88,759      85,264      82,968      
67,160      59,066
Current income taxes................      2,773         -           -           
-           -
Deferred income taxes...............        -           -           -         
2,100      38,180
Real estate, furniture and equipment     27,885      29,060      26,011      
24,642      25,246

	 Total assets................. $1,716,278  $1,711,785  $1,630,229  
$1,507,021  $1,349,531

LIABILITIES

Unpaid losses and loss expenses..... $  592,174  $  637,094  $  657,854  
$  618,791  $  592,373
Unearned premiums...................    391,424     379,599     367,991     
330,454     314,719
Notes payable.......................        -           -           -           
-           -
Deferred income.....................      6,948       7,271       7,974       
8,954      10,451
Accounts payable, accrued and other
 liabilities........................     70,558      60,332      41,368      
34,351      43,433
Current income taxes................        -         9,635       2,726       
1,596      10,254
Deferred income taxes...............      5,423       8,438       2,165         
-           -  	
	 Total liabilities............  1,066,527   1,102,369   1,080,078     
994,146     971,230

STOCKHOLDERS' EQUITY

Capital stock.......................      3,620       3,600       3,600       
3,450       3,450
Paid-in capital.....................     45,050      45,050      45,050      
23,700      23,700
Retained earnings
  Balance, January 1................    560,766     501,501     485,725     
351,151     339,481
  Net earnings......................     93,888     101,528      74,432     
110,450     113,892
  Other comprehensive income (loss).     (1,935)      4,152       6,574      
58,919     (77,622)
  Dividends paid....................    (51,638)    (46,415)    (65,230)    
(34,795)    (24,600)
Balance, December 31................    601,081     560,766     501,501     
485,725     351,151
	 Total stockholders' equity...    649,751     609,416     550,151     
512,875     378,301
	 Total liabilities and
	   stockholders' equity....... $1,716,278  $1,711,785  $1,630,229  
$1,507,021  $1,349,531
</TABLE>



52
<page


MANAGEMENT'S DISCUSSION OF THE SUPPLEMENTAL INFORMATION
ON INSURANCE OPERATIONS (continued)

THE COMMERCE GROUP, INC. AND SUBSIDIARIES
COMBINED BALANCE SHEETS OF INSURANCE SUBSIDIARIES
December 31,
(Thousands of Dollars)
<TABLE>
<CAPTION>
     1993       1992     1991     1990     1989     1988     1987      1986     
1985     1984



ASSETS
<S>        <C>        <C>      <C>      <C>      <C>      <C>       <C>      
<C>
$   12,615 $   25,809 $ 11,190 $ 38,654 $ 84,308 $ 60,885 $ 21,051  $ 
10,048 $ 11,802 $  7,953

   649,491    505,565  329,935  242,735  153,621  133,867  116,220    
88,755   56,985   34,422

    80,059      2,261      869    1,010    1,324    1,606    2,295     
6,755    9,956   10,837
    47,462     43,545   30,055    4,869    2,900    1,921    1,438       
149      134    1,494
    42,042     60,697   66,122   56,124   52,244   42,882   15,931       -        
-      7,825
       -       67,876   55,510   57,733   56,713   33,727   19,329    
11,817    8,194    6,028
    94,333        -        -        -        -        -        -         -        
-        -
    10,205      9,710    6,063    4,235    3,093    2,889    2,370     
2,485    1,722    1,286
   220,312    274,426  277,196  290,440  268,951  198,177  132,725    
87,178   50,327   29,187
    12,868        365      -        -         -        -        -         -       
-        -  
    53,647     55,442   33,981   27,273   22,702   15,699   10,898     
7,129    5,417    3,968
       -          -        -        -        341      266      -       
2,209    1,294      -
       -          -        883    1,666      -        -        -         -        
-        -  
    22,371     23,183   24,163   25,046   23,118    9,684    8,356     
7,370    5,648    3,136

$1,245,405 $1,068,879 $835,967 $749,785 $669,315 $501,603 $330,613  
$223,895 $151,479 $106,136

LIABILITIES

$  567,797 $  495,800 $439,551 $403,752 $345,020 $270,628 $169,539  
$113,513 $ 71,525 $ 44,425
   283,526    264,567  192,785  175,334  174,345  118,079   84,876    
55,378   36,024   23,585
       -          -        -      1,662    1,837    2,013    2,204     
3,772    4,140    2,858
     7,351      8,384   12,918   20,264   23,689   23,307   11,058     
7,503    4,208    3,173

    16,564     20,863    7,677   21,065   27,513   19,350   14,532     
8,532    4,162    4,479
     4,867      9,249    5,811    3,542      -        -        470       -        
-        418
    13,669      4,400      -        -      1,623    1,021    1,853     
3,736    3,623    2,610
   893,774    803,263  658,742  625,619  574,027  434,398  284,532   
192,434  123,682   81,548

STOCKHOLDERS' EQUITY

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

   253,466    165,075  112,016   83,138   62,877   37,231   22,611    
18,947   15,738   10,469
    79,837     91,980   55,214   32,414   21,966   21,837   15,614     
4,362    4,025    6,033

    21,928      9,811    2,545      (86)     645      321      (54)        
7     (158)    (179)
   (15,750)   (13,400)  (4,700)  (3,450)  (2,350)  (1,034)    (940)     
(705)    (658)    (585)
   339,481    253,466  165,075  112,016   83,138   58,355   37,231    
22,611   18,947   15,738
   351,631    265,616  177,225  124,166   95,288   67,205   46,081    
31,461   27,797   24,588

$1,245,405 $1,068,879 $835,967 $749,785 $669,315 $501,603 $330,613  
$223,895 $151,479 $106,136
</TABLE>




53
<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>
<CAPTION>
							   1998      1997      1996      
1995     1994
<S>                                       <C>       <C>       <C>       
<C>       <C>
Underwriting
  Direct premiums written..............	$796,858  $768,649  $731,823  
$626,666  $625,023

  Net premiums written.................	$745,048  $741,501  $711,570  
$603,421  $589,197
  Increase (decrease) in unearned
   premiums............................	    (572)   11,004    42,854    
10,831    17,144
	Earned premiums..................	 745,620   730,497   668,716   
592,590   572,053

Expenses
  Losses and loss expenses.............	 533,523   521,775   474,173   
367,258   369,764
  Underwriting expenses................	 200,525   185,146   194,873   
171,892   162,446
  (Increase) decrease in deferred 
   acquisition costs...................	  (3,495)   (2,296)  (15,809)   
(5,723)   (5,420)
	Total expenses...................	 730,553   704,625   653,237   
533,427   526,790
Underwriting income (loss).............	  15,067    25,872    15,479    
59,163    45,263
Net investment income..................	  86,664    81,396    76,867    
71,007    63,119
Premium finance fees...................	  13,426     7,056     9,666    
19,246    18,315
Net realized investment gains (losses).	   6,645    22,909    (7,863)      
720    32,025
	Earnings before Federal income 
	taxes and withdrawing companies'
	settlements......................	 121,802   137,233    94,149   
150,136   158,722

Other income
  Withdrawing companies' settlements...	    -          -         -         
-         - 	
Earnings before Federal income taxes...	 121,802   137,233    94,149   
150,136   158,722
Federal income taxes (benefits)........	  27,914    35,705    19,717    
39,686    44,830
Earnings before cumulative effect of
 change in accounting principle........	  93,888   101,528    74,432   
110,450   113,892
Cumulative effect on prior years (to 
 December 31, 1986) of changing to 
 different method of accounting for
 income taxes..........................	     -         -         -         
-         -  	
	NET EARNINGS.....................	$ 93,888  $101,528  $ 74,432  
$110,450  $113,892

Statutory Financial Ratios (Unaudited)
  Losses and loss expenses to 
   premiums earned.....................	  71.6%     71.4%     70.9%     
62.0%     64.6%  
  Underwriting expenses to net 
   premiums written....................	  26.5      25.1      27.1      
29.0      27.1  
	Combined ratio...................	  98.1%     96.5%     98.0%     
91.0%     91.7%  
	Underwriting profit (loss).......	   1.9%      3.5%      2.0%      
9.0%      8.3%  
</TABLE>










54
<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>
<CAPTION>
  1993     1992      1991      1990     1989      1988     1987      
1986     1985      1984

<S>      <C>       <C>       <C>      <C>       <C>      <C>       <C>       
<C>      <C>
$601,289 $525,495  $429,780  $401,077 $366,492  $306,469 $206,231  
$131,807  $85,000  $65,699

$563,416 $508,847  $310,999  $219,936 $140,313  $124,923 $ 99,193  $ 
60,808  $49,229  $33,943
  14,856   98,353    30,193    34,692   12,655     9,678   13,428     
6,775    6,392    2,137
 548,560  410,494   280,806   185,244  127,658   115,245   85,765    
54,033   42,837   31,806


 373,243  271,848   173,901   125,219   88,564    80,203   65,299    
44,205   33,548   19,567
 147,290  138,669    85,655    55,551   44,181    33,115   25,882    
18,460   15,177   11,241

   1,796  (21,462)   (6,708)   (4,571)  (7,003)   (4,801)  (3,769)   
(1,712)  (1,448)    (911)
 522,329  389,055   252,848   176,199  125,742   108,517   87,412    
60,953   47,277   29,897
  26,231   21,439    27,958     9,045    1,916     6,728   (1,647)   
(6,920)  (4,440)   1,909
  52,868   39,685    32,661    25,978   21,256    15,999   10,896     
7,554    6,835    5,684
  16,486   13,734    11,165    10,074    8,095     4,592    3,021     
1,436      531      324
  13,040   12,368     7,529        74      618     2,298    3,423       
185      336     (108)


 108,625   87,226    79,313    45,171   31,885    29,617   15,693     
2,255    3,262    7,809


     -     43,168       -         -        -         -        -         
-        -        -  	
 108,625  130,394    79,313    45,171   31,885    29,617   15,693     
2,255    3,262    7,809
  28,788   38,414    24,099    12,757    9,919     7,780    2,987    
(2,107)    (763)   1,776

  79,837   91,980    55,214    32,414   21,966    21,837   12,706     
4,362    4,025    6,033



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

$ 79,837 $ 91,980  $ 55,214  $ 32,414 $ 21,966  $ 21,837 $ 15,614  $  
4,362  $ 4,025  $ 6,033



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

  25.7     28.1      30.0      26.7      26.3      22.0     22.5      
24.4     28.1     27.8
  93.7%    94.3%     91.9%     92.4%     94.3%     91.5%   101.9%    
107.9%   107.8%    91.4%
   6.3%     5.7%      8.1%      7.6%      5.7%      8.5%    (1.9%)    
(7.9%)   (7.8)%    8.6%
</TABLE>










55
<page


THE COMMERCE GROUP, INC.

DIRECTORS
<TABLE>
<capton>
<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 and 
General Claims Manager
							of Commerce and Citation

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

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

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 and 
General Counsel
                                          of the Company; President and 
Secretary of 
                                          Commerce West Insurance 
Company; President of
                                          ACIC Holding Co., Inc.; Vice 
Chairman of the 
                                          Board and Chief Executive 
Officer of American 
                                          Commerce 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>





56
<page


                               DIRECTORS OF
                               COMMERCE HOLDINGS, INC.
                               The Commerce Insurance Company
Commerce West 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 and General 
Counsel, President 
and Secretary of Commerce West 
Insurance Company

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

John M. Nelson (1)................     Chairman of TJX Companies

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.
</TABLE>
                               DIRECTORS OF
                               ACIC Holding Co., Inc.(2)
                                 American Commerce Insurance Company
<TABLE>
<CAPTION>
<S>                                    <C>
H. Thomas Rowles..................     Chairman of the Board and Chief 
Executive Officer of ACIC Holding 
Co., Inc.; Chairman of the Board 
of American Commerce Insurance 
Company; President, Chief 
Executive Officer and Director of 
AAA Southern New England

Regan P. Remillard................     President of ACIC Holding Co., 
Inc.; Vice Chairman of the Board 
and Chief Executive Officer of 
American Commerce Insurance 
Company; Senior Vice President 
and General Counsel of The 
Commerce Group, Inc.; President 
and Secretary of Commerce West 
Insurance Company

Mark A. Shaw......................     Treasurer of ACIC Holding Co., 
Inc., Executive Vice 
President and Chief Operating 
Officer of the AAA Southern New 
England

Gerald Fels.......................     Executive Vice President and 
Chief Financial Officer of The 
Commerce Group, Inc.

Patrick W. Doherty (3)............     President and Chief Executive 
Officer of AAA Oklahoma

Terry R. Farias (3)...............     President and Chief Executive 
Officer of AAA Hoosier 
Motor Club

Roger L. Graybeal (3).............     President and Secretary of AAA 
Oregon/Idaho

Gerald P. Hogan(3)................     President and Chief Operating 
Officer of American
Commerce Insurance Company

D. James McDowell (3).............     President of AAA Arizona

Peter C. Ohlheiser (3)............     President of Ohio Motorists 
Association
</TABLE>
					
(1) Commerce Holdings, Inc., The Commerce Insurance Company and Citation 
Insurance Company
    only.
(2) Incorporated in November, 1998.  80% owned by The Commerce Insurance 
Company and 20% 
    owned by AAA Southern New England.
(3) American Commerce Insurance Company only, which was acquired in 
January 1999.
57
<page








                               DIRECTORS OF
                               BAY FINANCE COMPANY, INC.

<TABLE>
<CAPTION>
<S>                                       <C>
Arthur J. Remillard, Jr................   President and Chairman of the 
Board

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

John W. Spillane.......................   Clerk and practicing attorney

Arthur J. Remillard, III...............   Assistant Clerk

Regan P. Remillard.....................   Senior Vice President
</TABLE>




                               DIRECTORS OF
                               CLARK-PROUT INSURANCE AGENCY, INC.
<TABLE>
<CAPTION>
<S>                                       <C>
Arthur J. Remillard, Jr................	President and Chairman of the 
Board

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

John W. Spillane.......................	Clerk and practicing attorney

Arthur J. Remillard, III...............	Assistant Clerk

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




























58
<page


                                  THE COMMERCE GROUP, INC.
                                    Commerce Holdings, Inc.
                                      The Commerce Insurance Company
                                        Commerce West Insurance Company
                                        ACIC Holding Co., Inc.(1)
                                          American Commerce Insurance 
Company(2)
                                      Citation Insurance Company
                                    Bay Finance Company, Inc.
                                    Clark-Prout Insurance Agency, Inc.

OFFICERS OF THE COMMERCE GROUP, INC.
<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
Vice President and Associate General Counsel.....................     James 
A. Ermilio
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 Massachusetts Subsidiaries (3)

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
                                                                      Karen 
A. Lussier
                                                                      
Michael J. Richards
                                                                      
Angelos Spetseris
                                                                      Henry 
R. Whittier, Jr.

Vice President and Associate General Counsel.....................     James 
A. Ermilio
</TABLE>
<TABLE>
<CAPTION>
<S>                                             <C>                   <C>
Assistant Vice Presidents.......................David P. Antocci      Susan 
A. Horan
                                                Robert M. Blackmer    John 
V. Kelly
                                                Stephen R. Clark      Ronald 
J. Lareau
                                                Raymond J. DeSantis   Donald 
G. MacLean
                                                Warren S. Ehrlich     Robert 
E. McKenna
                                                Richard W. Goodus     Robert 
L. Mooney
                                                James E. Gow          
Kenneth E. Morrison
                                                                      Emile 
E. Riendeau
</TABLE>
<TABLE>
<CAPTION>
<S>                                                                   <C>
Treasurer and Chief Accounting Officer...........................     
Randall V. Becker

Assistant Treasurer..............................................     Thomas 
A. Gaylord
</TABLE>
(1) Incorporated in November, 1998. 80% owned by The Commerce Insurance 
Company and 20% owned by 
    AAA Southern New England.
(2) Acquired by ACIC Holding Co., Inc. in January, 1999.
(3) Massachusetts subsidiaries include The Commerce Insurance Company, 
Citation Insurance 
    Company, Bay Finance Company, Inc. and Clark-Prout.  Officers often hold 
positions with 
    several operating subsidiaries.  The titles listed represent their 
primary office as of
    March 1, 1999.
59
<page







Officers of ACIC Holding Co., Inc.
<TABLE>
<CAPTION>
<S>                                                                   
<C>
Chairman of the Board and Chief Executive Officer...............      H. 
Thomas Rowles
President.......................................................      
Regan P. Remillard
Treasurer.......................................................      
Mark A. Shaw
Secretary.......................................................      
James A. Ermilio
</TABLE>




Officers of American Commerce Insurance Company

<TABLE>
<CAPTION>
<S>                                                                   
<C>
Chairman of the Board...........................................      H. 
Thomas Rowles
Vice Chairman of the Board and Chief Executive Officer..........      
Regan P. Remillard
President and Chief Operating Officer...........................      
Gerald P. Hogan
Senior Vice President and Secretary.............................      
Thomas E. Berridge
Senior Vice President...........................................      
Carol R. Blaine
Vice President, Chief Financial Officer and Treasurer...........      
Curt C. Anderson
Vice Presidents.................................................      
Timothy M. Montgomery
                                                                      
Thomas E. Timbrook
</TABLE>




Officers of Commerce West Insurance Company

<TABLE>
<CAPTION>
<S>                                                                   
<C>
Chairman of the Board...........................................      
Arthur J. Remillard, Jr.
President, Chief Executive Officer and Secretary................      
Regan P. Remillard
Chief Financial Officer.........................................      
Michael V. Vrban
Chief Reporting Officer.........................................      
Albert E. Peters
Investment Officer..............................................      
Gerald Fels
Vice Presidents.................................................      
Howard M. Dreyfus
                                                                      
Albert H. Harris
                                                                      
Tushar M. Kothare
Assistant Vice President........................................      
Michael J. Berryessa
Treasurer and Controller........................................      
Joan M. Kelly
</TABLE>



















60
<page



Stockholder Information


Annual Meeting

The Annual meeting of stockholders will be held at 9:00 a.m. on Friday, 
May 21, 1999 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
    EquiServe, L.P.
P.O. Box 8040
Boston, MA 02266-8040
(781) 575-3100
http://www.equiserve.com


Executive Offices

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

Company Website

http://www.commerceinsurance.com


Trading of Common Stock

The Company's Common Stock trades on the NYSE under the symbol "CGI".

Independent Auditors

Ernst & Young LLP
200 Clarendon Street
Boston, MA 02116
(617) 266-2000
http://www.ey.com













61
<page










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