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The stock of insurer Commerce Group (CGI) has been driving higher lately. The company is the largest auto insurer in Massachusetts, with about 30% market share, thanks in part to a marketing program with the American Automobile Association. Commerce Group also offers homeowners insurance and operates in 13 states.

At Tuesday's closing price of $30.89 a share, the company is up 5 points from its April lows. It has been so hot lately that last week management executed its first stock split (2-for-1) in 13 years.

With that in mind, I'm here to answer investors' questions: Should I do it? Should I consider buying Commerce Group at current levels, even though it already has generated a 9.7% total return year to date in a volatile market?

In April, the company delivered first-quarter earnings of 92 cents a share. This was a 19% improvement from the previous year, and a full 21 cents ahead of analyst estimates. Commerce Group's net written premiums fell 2.3% year over year, on the heels of an 8.7% state-mandated auto-insurance rate decline for 2006.

Even so, the insurer's combined loss ratio improved 230 basis points annually to 86.8%, as mild weather was attributed for lower accident rates and property damage. While the loss ratio may vary from one quarter to next, the company does not expect further mandatory rate reductions any time soon.

Commerce Group is set to post second-quarter results in late July. The consensus analyst estimate is for the company to earn 71 cents a share, down 12% from the previous year. Commerce Group posted earnings of $3.38 a share in 2005, more than double the $1.66 a share it earned just two years ago.

The consensus analyst estimate calls for a 9% earnings decline this year to $3.07, though at Tuesday's closing price of $30.89, the company trades at just 10.1 times expected 2006 earnings. According to Bloomberg, this is a 14% discount to the property and casualty (P&C) insurer's peers and 21% lower than its average historical valuation.

I also looked at how Commerce Group stacks up against the competition on a price-to-tangible-book valuation. This is a popular metric used in the insurance and other financial areas; the company also measures up well in this area. According to Capital IQ, Commerce Group is currently valued at 1.5 times its tangible book value (common shareholders' equity, less goodwill and other intangible assets), compared with the industry mean of two times.

Finally, it's worth noting that the company pays a 25-cent quarterly dividend. The most recent payment will be made June 23, to investors at the close of trading June 13. The 3.2% dividend yield is at the high end of the P&C insurance group, and can be comfortably covered 3.1 times with expected 2006 earnings of $3.08 a share.

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With that in mind, yes, I believe readers should take a look at Commerce Group at current levels. The company continues to grow nicely in its operating and geographic market niches; with the dividend, I believe the stock can generate a double-digit total return over the next 12 months.

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David Peltier is a research associate at In keeping with TSC's editorial policy, he doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Peltier appreciates your feedback;

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