<PAGE> 1
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Form 10 - QSB
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For quarterly period ended March 31, 1996
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________ to _________
Commission File No. 0-11184
NORTH EAST INSURANCE COMPANY
(Name of small business issuer as specified in its charter)
Maine 01-0278387
(State or other Jurisdiction of (I.R.S employer
incorporation or organization) identification number)
482 Payne Road, Scarborough, Maine 04074
(Address of principal executive offices)
(207) 883-2232
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the issuer was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes [ X ] No [ ]
As of May 10, 1996 there were 2,992,314 outstanding shares of Common Stock,
$1.00 par value, the only authorized class of the issuer.
Transitional Small Business Disclosure Format: Yes [ ] No [ X ]
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NORTH EAST INSURANCE COMPANY
AND SUBSIDIARIES
INDEX
-----
Part I. - Financial Information
Item 1 - Financial Statements 3
Consolidated Balance Sheet
March 31, 1996 3
Consolidated Statements of Operations
Three Months Ended March 31, 1996 and 1995 4
Consolidated Statements of Cash Flows for the
Three Months Ended March 31, 1996 and 1995 5
Notes to Consolidated Financial Statements 7
Management's Discussion and Analysis of
the Financial Condition and Results of Operations 8
Part II - Other Information
Item 5 - Other Information 10
Item 6 - Exhibits and Reports on Form 8-K 10
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NORTH EAST INSURANCE COMPANY AND SUBSIDIARIES
Item 1. FINANCIAL INFORMATION
- - -----------------------------
<TABLE>
Consolidated Balance Sheet
as of March 31, 1996
<CAPTION>
1996
-----------
<S> <C>
ASSETS
Investments:
Fixed maturities available for sale, at
fair value (amortized cost $17,707,955) $17,628,623
Investment property, at cost less
accumulated depreciation of $95,416 194,583
Equity securities available for sale,
at fair value (cost $71,393) 23,538
Short-term investments 2,418,309
-----------
Total investments 20,265,053
Reinsurance (loss and loss adjustment expense
reserves and paid recoverables) 5,050,033
Premium balances receivable 4,029,296
Deferred policy acquisition costs 307,729
Prepaid reinsurance premiums (ceded unearned premium) 3,005,563
Investment income due and accrued 285,566
Property and equipment, net of accumulated depreciation 515,475
Other assets 242,184
-----------
Total Assets $33,700,899
-----------
LIABILITIES
Losses and loss adjustment expenses $17,781,546
Unearned premiums 5,865,346
Ceded reinsurance balances payable 2,789,977
Reserve for unpaid expenses 361,057
Book overdraft 892,710
Federal income tax payable 14,865
Other liabilities 60,680
-----------
Total Liabilities 27,766,181
SHAREHOLDERS' EQUITY
Common stock $1.00 par value,
authorized 6,000,000 shares, issued
and outstanding 2,992,314 shares 2,992,314
Additional paid-in capital 6,346,156
Unrealized depreciation of investment (127,187)
Accumulated deficit (3,271,565)
-----------
5,939,718
Treasury stock, at cost, 5,000 shares (5,000)
-----------
Total Shareholders' Equity 5,934,718
-----------
Total Liabilities and Shareholders' Equity $33,700,899
-----------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
3
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NORTH EAST INSURANCE COMPANY AND SUBSIDIARIES
<TABLE>
Consolidated Statements of Operations
for the Three Months ended March 31,
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Revenues:
Premiums earned $2,798,108 $3,114,427
Premiums ceded 892,729 1,135,928
---------- ----------
Net premiums earned 1,905,379 1,978,499
Net investment income 281,206 352,224
Realized capital gains 79,140 0
---------- ----------
Total revenues 2,265,725 2,330,723
Expenses:
Losses and loss adjustment expenses 2,264,961 2,110,853
Reinsurance recoveries (611,556) (755,764)
---------- ----------
Net losses and loss adjustment
expenses 1,653,405 1,355,089
Underwriting expenses incurred 594,048 1,034,288
---------- ----------
Total expenses 2,247,453 2,389,377
---------- ----------
Income (loss) before provision for
income taxes 18,272 (58,654)
Provision for income taxes, net of $5,847
tax benefit from loss carryforward for 1996 365 0
---------- ----------
Net income (loss) $ 17,907 $ (58,654)
---------- ----------
Earnings per common share:
Net income (loss) $ 0.01 $ (0.02)
---------- ----------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
4
<PAGE> 5
NORTH EAST INSURANCE COMPANY AND SUBSIDIARIES
<TABLE>
Consolidated Statements of Cash Flows
for the Three Months ended March 31,
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Cash flow from operating activities:
Insurance premium received $ 2,394,714 $1,985,306
Loss and loss adjustment expenses paid (2,846,656) (1,651,139)
Operating expenses paid (906,832) (994,997)
Investment income received 324,424 429,147
----------- ----------
Net cash used in operating activities (1,034,350) (231,683)
----------- ----------
Cash flows from investing activities:
Fixed maturities available for sale, sold 600,000 0
Fixed maturities available for sale, purchased (204,559) 0
Proceeds from mortgage note 459,140 0
Purchase of furniture, fixtures and
equipment (16,732) (9,615)
----------- ----------
Net cash provided
(used) in investing activities 837,849 (9,615)
----------- ----------
Net increase (decrease) in cash, book overdraft
and short-term investments (196,501) (241,298)
Cash, book overdraft and short-term
investments at beginning of year 1,722,100 844,155
----------- ----------
Cash, book overdraft and short-term
investments at end of period $ 1,525,599 $ 602,857
----------- ----------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
5
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North East Insurance Company And Subsidiaries
<TABLE>
Consolidated Reconciliation of Cash Used In
Operating Activities to Net Income (Loss)
for the Three Months ended March 31,
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Net income (loss) $ 17,907 $ (58,654)
Increase in net premium and ceded
reinsurance balances 995,665 1,528,036
Increase (decrease) in unearned
premium reserve (474,402) (619,333)
Decrease in loss and loss adjustment
expense reserve (1,225,179) (1,197,946)
Decrease in investment income
due and accrued 43,218 76,923
Decrease in deferred policy acquisition
costs 4,494 64,422
Decrease in expense accruals (389,590) (77,568)
Amortization of bond premium, net 19,048 19,915
Depreciation and amortization expense 53,629 32,522
Loss (gain) on investment activities (79,140) 0
----------- -----------
Net cash used in operating activities $(1,034,350) $ (231,683)
----------- -----------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
6
<PAGE> 7
North East Insurance Company and Subsidiaries
Notes to Consolidated Financial Statements
MARCH 31, 1996
1. The condensed financial statements included herein have been prepared by the
Registrant, without audit, pursuant to the rules and regulations of the
Commission. Certain information and footnote disclosure normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to such rules and
regulations, although the Registrant believes that the disclosures which are
made are adequate to make the information presented not misleading, particularly
when read in conjunction with the financial statements and the notes thereto
included in the Registrant's latest annual report on Form 10-KSB. In
Management's opinion, the attached interim financial statements reflect all
adjustments which are necessary for a fair statement of the results for the
periods presented.
2. In March 1995, the FASB issued FAS No. 121("Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of"), which requires
that long-lived assets and certain intangibles to be held and used by an entity
be reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. The Statement is
effective for financial statements for fiscal years beginning after December
15,1995. The Company adopted the provisions of FAS No. 121 effective January 1,
1996. Adopting FAS No. 121 did not have a material effect on the Company's
consolidated results of operations or financial position.
3. North East Insurance Company owns 100% of American Colonial Insurance Company
and North Atlantic Underwriters, Inc. whose results are consolidated herein.
4. Earnings per share are computed using the weighted average method.
7
<PAGE> 8
North East Insurance Company and Subsidiaries
Item 2 - Management's Discussion and Analysis of Financial Condition and
Results of Operations
Three Months Ended March 31, 1996
- - ---------------------------------
Net premiums written amounted to $1,430,978 for the three months ended March 31,
1996 compared with $1,359,166 for the three months ended March 31, 1995. Net
premiums earned for the three months ended March 31, 1996 and 1995 amounted to
$1,905,379 and $1,978,499, respectively. Inforce policy count at March 31, 1996
increased less than 1% over the inforce policy count at March 31, 1995 while the
average premium for inforce policies declined by approximately 0.5% over the
same period.
Loss and loss adjustment expenses represented 86.8 % and 68.5% of net premium
earned for the three months ended March 31, 1996 and 1995, respectively. The
increase is the result of the severe weather conditions experienced in the first
quarter of 1996 compared with the relatively mild conditions experienced in the
first quarter of 1995. As a result of the severe weather the Company experienced
a higher claims experience, particularly in the private passenger collision
class.
Underwriting expenses incurred represented 41.5% and 76.1% of net premiums
written for the three months ended March 31, 1996 and 1995, respectively. The
improvement in the expense ratio is the result of a modification to the
Company's' reinsurance arrangements whereby in 1996 the Company is recovering
expenses from its reinsurers proportional to its direct experience compared with
arrangements in 1995 where expense recovery applied only to its quota share
reinsurance treaty. Underwriting expenses incurred on a direct basis represented
40.8% and 41.5% of direct premiums written for the three months ended March 31,
1996 and 1995, respectively.
Total return from investment activities amounted to $360,346 for the three
months ended March 31, 1996 compared with $352,224 for the three months ended
March 31, 1995. The return on invested assets, based on amortized cost, net of
allocated expenses was 5.5% for the three months ended March 31, 1996 compared
with 6.2% for the three months ended March 31, 1995.
Net income for the three months ended March 31, 1996 amounted to $17,907 or
$0.01 per share compared with a net loss of $58,654 or $0.02 per share for the
three months ended March 31, 1995.
Shareholders' equity at March 31, 1996 amounted to $5,934,718 or $1.99 per share
compared with $6,421,051 or $2.15 per share at December 31, 1995. The decline in
shareholders' equity is attributable to a decline in the market value of the
company's'
8
<PAGE> 9
fixed maturities available for sale. The decline in market value resulted in a
charge to surplus of $504,240 or $0.17 per share for the three months ended
March 31, 1996.
Liquidity and Capital Resources
- - -------------------------------
Cash used in operating activities amounted to $1,024,350 for the three months
ended March 31, 1996 compared with $231,683 for the three months ended March 31,
1995. The increase in cash used in operating activities pertains to higher than
normal settlement of losses for prior accident years. Cash provided by investing
activities amounted to $837,849 for the three months ended March 31, 1996
compared with cash used in investing activities of $9,615 for the three months
ended March 31,1995.
The fair value of the Company's fixed maturities available for sale was $79,332
less than the amortized cost at March 31,1996 compared with $427,268 greater
than amortized cost at December 31,1995.
The Company maintains short term investments to provide a cash resource should
the demands from operations exceed incoming cash flow. Short term investments
amounted to $2,418,309 at March 31, 1996 compared with $1,868,258 at December
31, 1995. The Company believes that this level is sufficient to meet any
unanticipated cash demands.
9
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North East Insurance Company and Subsidiaries
Part II: OTHER INFORMATION
- - --------------------------
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits
27 Financial Data Schedules
b) Reports on Form 8-K
No report on Form 8-K was filed during the most recent fiscal quarter.
10
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North East Insurance Company and Subsidiaries
Form 10-QSB
Exhibit Index
Exhibit
Number Description Page
- - ------ ----------- ----
27 Financial Data Schedules 13
11
<PAGE> 12
North East Insurance Company and Subsidiaries
SIGNATURES
In accordance with the requirements of the Exchange Act, the Registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
NORTH EAST INSURANCE COMPANY
Date: May 13, 1996 By /S/Robert G. Schatz
----------------------------------
Robert G. Schatz
President and Chief Executive Officer
Date: May 13, 1996 By /S/Graham S. Payne
----------------------------------
Graham S. Payne
Treasurer and Chief Financial Officer
12
<TABLE> <S> <C>
<ARTICLE> 7
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
<EXCHANGE-RATE> 1
<DEBT-HELD-FOR-SALE> 17,628,623
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 23,538
<MORTGAGE> 0
<REAL-ESTATE> 194,583
<TOTAL-INVEST> 20,265,053
<CASH> 2,418,309
<RECOVER-REINSURE> 5,050,033
<DEFERRED-ACQUISITION> 307,729
<TOTAL-ASSETS> 33,700,899
<POLICY-LOSSES> 17,781,546
<UNEARNED-PREMIUMS> 5,865,346
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 0
<COMMON> 2,992,314
0
0
<OTHER-SE> 2,942,404
<TOTAL-LIABILITY-AND-EQUITY> 33,700,899
1,905,379
<INVESTMENT-INCOME> 281,206
<INVESTMENT-GAINS> 79,140
<OTHER-INCOME> 0
<BENEFITS> 1,653,405
<UNDERWRITING-AMORTIZATION> 594,048
<UNDERWRITING-OTHER> 0
<INCOME-PRETAX> 18,272
<INCOME-TAX> 365
<INCOME-CONTINUING> 17,907
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 17,907
<EPS-PRIMARY> 0.01
<EPS-DILUTED> 0.01
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
