SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------
SCHEDULE 13D
Under the Securities Exchange Act of 1934
(Amendment No. 5)
North East Insurance Company
(Name of issuer)
Common Stock, par value $1.00 per share
(Title of class of securities)
659164107
(CUSIP number)
Murry N. Gunty
Ballantrae Partners, L.L.C.
75 West End Avenue
R-12E
New York, New York 10023
(212) 957-1337
with copy to
Lawrence T. Yanowitch, Esq.
Tucker, Flyer & Lewis
a professional corporation
1615 L Street, N.W.
Suite 400
Washington, D.C. 20036-5612
(202) 429-3254
(Name, address and telephone number of person
authorized to receive notices and communications)
July 10, 1996
(Date of event which requires filing of this statement)
If the filing person has previously filed a statement on
Schedule 13G to report the acquisition which is the subject of
this Schedule 13D, and is filing this schedule because of Rule
13d-1(b)(3) or (4), check the following box [ ].
Check the following box if a fee is being paid with the
statement [ ].
(Continued on following pages)
(Page __ of __ Pages)
CUSIP No. 659164107 13D Page __ of __ Pages
1. NAME OF REPORTING PERSONS
S.S. OR I.R.S. IDENTIFICATION NOS. OF ABOVE PERSONS
Ballantrae Partners, L.L.C.
2. CHECK THE APPROPRIATE BOX IF A MEMBER OF A GROUP*
(a) [ ]
(b) [ ]
3. SEC USE ONLY
4. SOURCE OF FUNDS*
WC
5. CHECK BOX IF DISCLOSURE OF LEGAL PROCEEDINGS IS REQUIRED
PURSUANT TO ITEM 2(d) OR 2(e)
[ ]
6. CITIZENSHIP OR PLACE OF ORGANIZATION
Delaware
NUMBER 7. SOLE VOTING POWER
OF - 0 -
SHARES 8. SHARED VOTING POWER
BENEFICIALLY - 0 -
OWNED BY 9. SOLE DISPOSITIVE POWER
EACH - 0 -
REPORTING 10. SHARED DISPOSITIVE POWER
PERSON WITH - 0 -
11. AGGREGATE AMOUNT BENEFICIALLY OWNED BY EACH REPORTING PERSON
- 0 -
12. CHECK BOX IF THE AGGREGATE AMOUNT IN ROW (11) EXCLUDES
CERTAIN SHARES*
[x]
13. PERCENT OF CLASS REPRESENTED BY AMOUNT IN ROW (11)
- 0 -
14. TYPE OF REPORTING PERSON*
OO
*SEE INSTRUCTIONS BEFORE FILLING OUT!
This Amendment No. 5 amends and supplements the statement on
Schedule 13D (the "Schedule 13D"), previously filed on behalf of
Ballantrae Partners, L.L.C., a Delaware limited liability company
("Ballantrae"), relating to the Common Stock, par value $1.00 per
share (the "Common Stock"), of North East Insurance Company, a
Maine corporation (the "Company"). Capitalized terms not
otherwise defined herein shall have the meanings set forth in the
Schedule 13D.
Item 4. Purpose of Transaction.
Item 4 is hereby amended by deleting in their
entireties the eighth through the sixteenth paragraphs thereof,
inclusive.
Item 4 is hereby further amended and supplemented by
adding the following immediately prior to the last paragraph
thereof:
On July 10, 1996, Ballantrae filed with the State
of Maine Bureau of Insurance a Form A Application.
Item 5 of the Form A Application (the "Form A Proposed
Plans"), a copy of which is attached hereto as Exhibit
5.1 and is incorporated herein by reference, describes
certain proposed plans by Ballantrae to improve the
business operations of the Company. The following
description of the Form A Proposed Plans is qualified
in its entirety by reference to the Form A Proposed
Plans.
The Form A Proposed Plans describe Ballantrae's
general intentions for the Company and for the general
types of actions Ballantrae would support management in
executing on behalf of the insureds and the
stockholders. If the Maine Bureau of Insurance
approves the transactions contemplated by the Purchase
Agreement, Ballantrae hopes to be in a position to work
with the management of the Company to implement the
plans Ballantrae outlines in Form A Proposed Plans
(with input and changes from management, as
appropriate).
The Form A Proposed Plans state that Ballantrae
desires to reduce the Company's underwriting expense
ratio to a level closer to industry averages. Most of
the items listed below target increased net premiums
earned based on a modest growth plan of ten to fifteen
percent (10-15%) per year. In the Form A Proposed
Plans, Ballantrae states its belief that a three to
five (3-5) year plan with this type of growth will
enable the Company to be consistently profitable
beginning in two to three (2-3) years. The Form A
Proposed Plans would be effectuated through the
implementation of the following:
1. Lines of Business. Ballantrae anticipates
that the Company will continue to pursue established
lines of business that have produced reasonable
historical results, such as Private Passenger
Automobile, Commercial Automobile, Commercial Multi-
Peril, and General Liability.
2. Marketing. Ballantrae believes that the
Company should continue to market its products through
independent agents. Wholesale brokers and general
agencies may be considered based upon the loss ratio of
their existing business and the experience of their
principals. Ballantrae would expect that management
would continue to be very selective in expanding its
agency force. A solid reputation and financial
strength should be prerequisites to obtaining and
retaining a contract to represent the Company.
3. A.M. Best Rating. Ballantrae would like to
assist management in working with A.M. Best to improve
the rating of the Company, either immediately or over
time. Ballantrae believes that improving the current
"D" rating is critical to improving the quality of the
business that the Company is able to obtain.
4. American Colonial Insurance Company. The
American Colonial Insurance Company, under an agreement
with the Insurance Department of the State of New York,
ceased writing business in May 1990. Ballantrae would
like to work with management of the Company to have
that agreement rescinded by the New York State
Insurance Department. Ballantrae anticipates that
additional capital would need to be raised. Ballantrae
expects to make all required filings with the Insurance
Department in the State of New York in the very near
future.
5. Total Premium Growth. Ballantrae expects
that all of the above items would generate premium
growth of ten to fifteen (10-15%) per year. Ballantrae
would like to limit expansion to this type of slow,
prudent growth because it currently believes that
growth substantially in excess of these levels may be
difficult to manage profitably and may not be in the
long-term interest of the shareholders or the insureds.
6. Technology. Ballantrae will review or ask
management to review the computer capabilities of the
Company and consider any necessary improvements and
investments in order to establish an efficient method
of processing business. Ballantrae remains committed
to supporting the use of technology wherever possible
to improve the Company's expense ratio and to better
serve the policyholders.
7. Surplus. Ballantrae believes that raising
additional capital and/or access to the capital markets
at the right time and at a fair price may be a critical
ingredient in any expansion of premium written and
enhanced profitability for the Company. Ballantrae
believes that the experience of its Members may be
useful to the Company in any effort the Company may
undertake to raise capital.
The Form A Proposed Plans state that until
Ballantrae secures additional information about the
Company and has discussions with management and the
Board of the Company, Ballantrae believes that it would
be premature to comment about the methods Ballantrae
would recommend or the price at which Ballantrae or its
Members might be willing to assist the Company in
raising capital. A rights offering to existing
shareholders could be a very desirable option. The
Members of Ballantrae have sufficient capital to
participate in any such offering. In any private
placement of stock to a select group of investors,
Ballantrae would not anticipate the need for the
assistance of a placement agent or an underwriter. If
Ballantrae were to assist in raising equity capital
through its contacts in the investment community,
Ballantrae would expect that any new investors would be
largely interested because Ballantrae would be
committing its own capital on generally the same terms
as the new investors. In such cases, the Members
appreciate fully a fiduciary obligation to both the new
shareholder(s) and the existing shareholders of the
Company and would work with the Board of the Company to
effect a fair transaction for all participants.
8. Liquidity. Ballantrae would like to work
with the Company to attract investment banks and
thereby increase analyst coverage of the Company. This
may begin to attract institutional investors to the
Company and increase liquidity for the Company's stock.
9. Management. Ballantrae, at the current time,
would like to work with the management to execute the
Form A Proposed Plans to maximize shareholder value,
while protecting the interests of the insureds.
However, there can be no assurances that management
will be interested in supporting the Form A Proposed
Plans. It is possible that certain aspects of these
plans may already be in the process of being
implemented, in which case Ballantrae would obviously
support these efforts. Ballantrae would request that
the Company expand its existing Board of Directors by
adding four new seats, and that Mr. Gunty, Ms. Harmon,
Mr. Kern and Mr. Strickland be nominated to fill the
vacancies thereby created.
Item 7. Material to be Filed as Exhibits.
Exhibit 5.1. Item 5 of Form A Application Filed with
the State of Maine Bureau of Insurance on July 10, 1996.
SIGNATURE
After reasonable inquiry and to the best of my knowledge and
belief, I certify that the information set forth in this
statement is true, complete and correct.
July 15, 1996
(Date)
/s/ Murry N. Gunty
(Signature)
Murry N. Gunty
Managing Director
(Name/Title)
Exhibit Index
Exhibit Page
5.1. Item 5 of Form A Application Filed
with the State of Maine Bureau of
Insurance on July 10, 1996 7
Exhibit 5.1
ITEM 5 - FUTURE PLANS OF INSURER
A. Investment Value
Ballantrae has no current plans to declare an extraordinary
dividend, to liquidate the Insurer, to sell any of its assets, to
merge it with any other person or persons or, except as discussed
herein, to seek any material change in the business operations,
corporate structure or management of the Insurer. Ballantrae and
its principals believe that the Trust Certificate and Shares
represent an attractive long-term investment opportunity and the
realization of that investment opportunity was and remains the
primary reason for the investment described herein.
Ballantrae believes that an investment in North East
represents an attractive investment opportunity for the following
reasons:
1. The Purchase Agreement contemplates a favorable
purchase price, equal to approximately fifty percent (50%) of
shareholders' equity on a per share basis;
2. The stock price of North East is low or depressed for a
number of reasons, including the following:
(a) The trust arrangement discussed above creates
illiquidity for approximately twenty-seven percent (27%) of the
outstanding shares of North East, thereby limiting further the
value, to some extent, of the remainder of North East's stock;
(b) The financial, legal and regulatory problems that
North East has faced over the past ten (10) years have severely
restricted the company's ability to operate and grow, further
limiting profitability and depressing stock price; and
(c) Underwriting expenses currently are fifty percent
plus (50+%) of net premiums earned - well above industry averages
of thirty to thirty-five percent (30-35%).
In summary, the investment value represented by the Purchase
Agreement is, in the view of Ballantrae, substantial. In fact,
Ballantrae believes that the approval of this Application and the
related termination of the Trust will increase the opportunity
for North East to grow prudently its net premiums earned, reduce
underwriting expenses to a more reasonable percentage and
therefore create a profitable company going forward for the
benefit of shareholders and the insureds.
B. Enhanced Profitability
As noted above, Ballantrae believes that North East's
underwriting expenses as a percentage of premiums earned are well
in excess of industry standards of thirty to thirty-five percent
(30-35%). There are two primary ways of correcting this
deficiency, namely (1) reducing expenses, or (2) increasing the
volume of policies written and thereby premium volume (thereby
creating economies of scale by spreading the same amount of
expenses over a greater base of revenues). The Board of North
East appears to be committed to maintaining talented personnel
and, in general, on the basis of what Ballantrae knows at this
time, it does not think that North East's high expense ratio can
be substantially changed by cutting personnel expenses.
Applicant notes, however, that lack of surplus has probably
impacted management's ability to invest in technology (though we
recognize management's latest announcements about new systems
being installed) at levels required to realize tangible cost
savings. Thus, we believe that there are probably additional
savings that can result from further investments in technology.
However, Ballantrae believes that the key to enhancing the
profitability of North East is growing the volume of premiums
earned. In Applicant's opinion, to date management has been
unable to increase premium volume for the following principal
reasons:
1. North East has a limited surplus base to support any
material increase in premiums written;
2. The Trust arrangement may have created uncertainty over
North East's ability to raise additional capital in the event it
was required to do so. In view of this limitation, North East
may have been forced to be overly conservative, both with respect
to new premium volume and the amount of premium ceded to
reinsurers;
3. The A.M. Best rating of "D" severely restricts North
East's operations and the lines of business it can profitably
pursue;
4. North East was still engaged in lines of business (such
as homeowner's) that, given its rating, financial instability and
position in the market, it could not profitably underwrite in the
State of Maine.
We believe that with relatively few changes North East could
be positioned for a period of prudent, moderate growth in
premiums earned and thereby reach profitability on a recurring
basis. Based on market research from the Bear Stearns Insurance
Investment Banking Department, the average insurance company
stock price reflects a value equal to 8 to 12 times net income
and/or 1.5 to 2.0 times shareholders' equity. Based on 1995
results and those multiples, North East's stock should be valued
between three and five dollars ($3-5) per share. However, given
the problems discussed above, and the lack of liquidity for North
East's stock, the market has undervalued the stock, and we
believe will continue to do so until the following occurs:
(a) Removal of the 810,000 shares from the Non-Voting
Trust. Enabling these shares to be voted will provide operating
flexibility for North East to implement a conservative business
plan aimed at increasing surplus and net premiums earned;
(b) Reduction of underwriting expenses as a percentage
of net premiums earned; and
(c) Growth in the existing business lines by a
measurable amount on a consistent basis.
All of these events may attract new investors to North East,
and will serve the best interests of the policyholders while
maximizing shareholder value. Ballantrae's operating plan for
removing these impediments to profitability and growth is
discussed below.
C. Operating Plan
The operating plan discussed below is a statement of
Ballantrae's general intentions for North East and for the
general types of actions it would support management in executing
on behalf of the insureds and the stockholders, including
Ballantrae. If the Bureau approves the transaction, Ballantrae
hopes to be in a position to work with management to implement
this plan (with input and changes from management, as
appropriate).
All of the following items below are designed to reduce the
underwriting expense ratio to a level closer to industry
averages. Most of the items target increased net premiums earned
based on a modest growth plan of ten to fifteen percent (10-15%)
per year. We believe that a three to five (3-5) year plan with
this type of growth will enable North East to be consistently
profitable beginning in two to three (2-3) years.
1. Lines of Business.
We anticipate that North East will continue to pursue
established lines of business that have produced reasonable
historical results, such as Private Passenger Automobile,
Commercial Automobile, Commercial Multi-Peril, and General
Liability.
2. Marketing.
Ballantrae believes that North East should continue to
market its products through independent agents. Wholesale
brokers and general agencies may be considered based upon the
loss ratio of their existing business and the experience of their
principals. We would expect that management would continue to be
very selective in expanding its agency force. A solid reputation
and financial strength should be prerequisites to obtaining and
retaining a contract to represent North East.
3. A.M. Best Rating.
Ballantrae would like to assist management in working with
A.M. Best to improve the rating of North East, either immediately
or over time. Ballantrae believes that improving the current "D"
rating is critical to improving the quality of the business that
North East is able to obtain.
4. American Colonial Insurance Company.
The American Colonial Insurance Company ("ACIC"), under an
agreement with the Insurance Department of the State of New York,
ceased writing business in May 1990. Ballantrae would like to
work with management of North East to have that agreement
rescinded by the New York State Insurance Department. Ballantrae
anticipates that additional capital would need to be raised.
Ballantrae expects to make all required filings with the
Insurance Department in the State of New York in the very near
future.
5. Total Premium Growth.
Ballantrae expects that all of the above items would
generate premium growth of ten to fifteen percent (10-15%) per
year. Ballantrae would like to limit expansion to this type of
slow, prudent growth because it currently believes that growth
substantially in excess of these levels may be difficult to
manage profitably and may not be in the long-term interests of
the shareholders or the insureds.
6. Technology.
Ballantrae will review or ask management to review the
computer capabilities of North East and consider any necessary
improvements and investments in order to establish an efficient
method of processing business. Ballantrae remains committed to
supporting the use of technology wherever possible to improve
North East's expense ratio and to better serve the policyholders.
7. Surplus.
The members of Ballantrae Partners have significant
experience in raising and investing capital for companies and for
making investments substantially larger than the proposed
investment in North East. The members of Ballantrae, primarily
through their employment at JER, Bankers Trust, Trammell Crow,
The Blackstone Group and Lazard Freres, have invested on behalf
of, or assisted in the investment of, over $3 billion of capital
from clients and partners, including Goldman Sachs, First Boston,
Lehman Brothers, General Motors Pension Fund, California State
Teachers Retirement Systems, the State of Michigan Pension Fund
and many other institutional and individual investors.
Ballantrae believes that raising additional capital and/or access
to the capital markets at the right time and at a fair price may
be a critical ingredient in any expansion of premium written and
enhanced profitability for North East. Ballantrae believes that
the experience of its members (raising and investing) may be
useful to North East in any effort it may undertake to raise
capital.
Until Ballantrae secures additional information about North
East and has discussions with management and the Board of North
East, however, it would be premature to comment about the methods
it might recommend or the price at which it or its members might
be willing to assist North East in raising capital, if necessary.
For example, a rights offering to existing shareholders could be
a very desirable option in this case. The members of Ballantrae
also have sufficient capital to participate in any such an
offering. In any private placement of stock to a select group of
investors, Ballantrae would not anticipate the need for the
assistance of a placement agent or an underwriter. If Ballantrae
were to assist in raising equity through its contacts in the
investment community, it would expect that any new investors
would be largely interested because Ballantrae would be
committing its own capital on generally the same terms as the new
investors. In such cases, the members appreciate fully a
fiduciary obligation to both the new shareholder(s) and the
existing shareholders of North East and would work with the Board
of North East to effect a fair transaction for all participants.
In summary, if management determines that additional capital
is required, Ballantrae is committed to assisting management in
raising such capital.
8. Liquidity.
Ballantrae also would like to work with North East to
attract investment banks and thereby increase analyst coverage of
North East. This may begin to attract institutional investors to
North East and increase liquidity for North East's stock. The
members of Ballantrae have over twenty (20) years of combined
investment banking experience to assist in this endeavor.
9. Management.
Ballantrae, at the current time, would like to work with the
management to execute this plan to maximize shareholder value,
while protecting the interests of the insureds. However, there
can be no assurances that management will be interested in
supporting Ballantrae's plan. It is possible that certain
aspects of this plan may already be in process of being
implemented, in which case, Ballantrae would obviously support
these efforts.
After reviewing the operations of North East for the past
month and developing this plan, however, Ballantrae has decided
that it would request that North East expand its Board by adding
the three members of Ballantrae and an adviser to Ballantrae to
the Board: namely, Murry N. Gunty, Deborah Harmon, Jonathan Kern
and Reginald Strickland.
In summary, Ballantrae believes that approval of this
transaction and the related removal of the stock from the Trust
will increase the opportunity for North East to take the
necessary steps to move towards recurring profitability. A
critical element in that process involves reducing underwriting
expenses to more reasonable industry standards. Ballantrae
believes the foregoing can be accomplished through some cost
cutting, but primarily through slow, steady, conservative premium
growth of ten to fifteen percent (10-15%) per year. If this is
implemented, Ballantrae believes North East will reach a level of
premium value in three to five (3-5) years that will enable it to
reduce the expense ratio to industry standards and become a safe,
profitable company for the policyholders in Maine and all of its
stockholders.
