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 the quarterly period ended March 31, 1997
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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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 12, 1997 there were 3,002,375 outstanding shares of Common Stock,
$1.00 par value, the only authorized class of the issuer.
Transitional Small Business Disclosure Format: Yes [ ] No [ X ]
NORTH EAST INSURANCE COMPANY AND SUBSIDIARIES
INDEX
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Part I - Financial Information
Item 1. Financial Statements
Consolidated Balance Sheet
As of March 31, 1997 3
Consolidated Statements of Operations for the
Three Months Ended March 31,1997 and 1996 4
Consolidated Statements of Cash Flows for the
Three Months Ended March 31,1997 and 1996 5
Notes to Consolidated Financial Statements 7
Management's Discussion and Analysis of
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
NORTH EAST INSURANCE COMPANY AND SUBSIDIARIES
Item 1. Financial Statements
<TABLE>
<CAPTION>
Consolidated Balance Sheet
as of March 31, 1997
ASSETS 1997
------
<S> <C>
Investments:
Fixed maturities available for sale, at
fair value (amortized cost $15,494,967 ) $15,130,280
Investment property, at cost less
accumulated depreciation of $46,291 63,709
Equity securities available for sale,
fair value (cost $154,970 ) 90,508
Short-term investments 2,214,246
-----------
Total investments 17,498,743
Reinsurance (loss and loss adjustment expense
reserves and paid recoverables) 5,078,001
Premium balances receivable 3,947,141
Deferred policy acquisition costs 511,834
Cash 220,320
Prepaid reinsurance premiums (ceded unearned premium) 1,755,820
Investment income due and accrued 247,442
Property and equipment, net of accumulated depreciation 498,114
Deferred tax asset 2,107,847
Prepaid federal income tax 9,242
Other assets 198,201
-----------
Total Assets $32,072,705
===========
LIABILITIES
Losses and loss adjustment expenses $15,057,731
Unearned premiums 5,821,225
Ceded reinsurance balances payable 840,796
Reserve for unpaid expenses 1,097,888
Book overdraft 411,698
Other liabilities 55,710
-----------
Total Liabilities 23,285,048
SHAREHOLDERS' EQUITY
Common stock $1.00 par value,
authorized 6,000,000 shares, issued
and outstanding 3,002,375 shares 3,002,375
Additional paid-in capital 6,348,039
Unrealized depreciation of investments (428,649)
Accumulated deficit (134,108)
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Total Shareholders' Equity 8,787,657
-----------
Total Liabilities and Shareholders' Equity $32,072,705
===========
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
NORTH EAST INSURANCE COMPANY AND SUBSIDIARIES
<TABLE>
<CAPTION>
Consolidated Statements of Operations
for the Three Months ended March 31,
1997 1996
------------------------
<S> <C> <C>
Revenues:
Premiums earned $2,756,797 $2,798,108
Premiums ceded 665,447 892,729
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Net premiums earned 2,091,350 1,905,379
Net investment income 138,188 281,206
Realized capital gains 82,424 79,140
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Total revenues 2,311,962 2,265,725
Expenses:
Losses and loss adjustment expenses 2,116,098 2,264,961
Reinsurance recoveries (364,946) (611,556)
Net losses and loss adjustment expenses 1,751,152 1,653,405
Underwriting expenses incurred 838,395 594,048
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Total expenses 2,589,547 2,247,453
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Income (loss) before provision for
income taxes (277,585) 18,272
Provision (credit) for income taxes (57,453) 365
Net income (loss) $ (220,132) $ 17,907
========== ==========
Earnings per common share:
Net income (loss) $ (0.07) $ 0.01
========== ==========
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
NORTH EAST INSURANCE COMPANY AND SUBSIDIARIES
<TABLE>
<CAPTION>
Consolidated Statements of Cash Flows
for the Three Months ended March 31,
1997 1996
-------------------------
<S> <C> <C>
Cash flow from operating activities:
Insurance premium received $2,609,858 $2,394,714
Loss and loss adjustment expenses paid (2,068,973) (2,846,656)
Operating expenses paid (862,053) (906,832)
Investment income received 175,097 324,424
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Net cash used in operating activities (146,071) (1,034,350)
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Cash flows from investing activities:
Fixed maturities available for sale, sold 946,747 600,000
Fixed maturities available for sale, purchased (1,568,400) (204,559)
Proceeds from mortgage note 0 459,140
Purchase of furniture, fixtures and equipment (71,218) (16,732)
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Net cash provided (used) in investing activities (692,871) 837,849
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Net decrease in cash, book overdraft
and short-term investments (838,942) (196,501)
Cash, book overdraft and short-term
investments at beginning of year 2,861,810 1,722,100
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Cash, book overdraft and short-term
investments at end of period $2,022,868 $1,525,599
========== ==========
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
NORTH EAST INSURANCE COMPANY AND SUBSIDIARIES
<TABLE>
<CAPTION>
Consolidated Reconciliation of Cash Used In
Operating Activities to Net Income (Loss)
for the Three Months ended March 31,
1997 1996
------------------------
<S> <C> <C>
Net income (loss) $(220,132) $ 17,907
Decrease (increase) in net premium and ceded
reinsurance balances (549,796) 995,665
Increase (decrease) in unearned
premium reserve 898,335 (474,402)
Increase (decrease) in loss and loss adjustment
expense reserve (147,852) (1,225,179)
Decrease in investment income
due and accrued 36,909 43,218
Decrease (increase) in deferred tax asset (57,453) 0
Decrease (increase) in deferred policy
acquisition costs (113,239) 4,494
Increase (decrease) in expense accruals 21,889 (389,590)
Amortization of bond premium, net 20,208 19,048
Depreciation and amortization expense 47,484 53,629
Gain on investment activities (82,424) (79,140)
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Net cash used in operating activities $(146,071) $(1,034,350)
========= ===========
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
NORTH EAST INSURANCE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
1. The condensed financial statements included herein have been prepared by
the Registrant, without audit, pursuant to the rules and regulations of the
Securities and Exchange Commission. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted
pursuant to such rules and regulations. The Registrant believes that the
disclosures which are made are adequate to make the information presented
not misleading. These financial statements should be 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
(consisting only of normally recurring adjustments) which are necessary for
a fair presentation of results of operations and financial position for the
periods presented.
2. In June 1996 the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("FAS") No. 125 ("Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities") which provides standards whereby an entity recognizes the
financial and servicing assets it controls and the liabilities it has
incurred, de-recognizes financial assets when control has been surrendered,
and de-recognizes liabilities when extinguished. The Statement is effective
for transfers and servicing of financial assets and extinguishments of
liabilities occurring after December 31, 1996. The effect of adopting the
provisions of FAS No. 125 did not have a material effect on the Company's
consolidated results of operations or financial position.
In March 1997 the FASB issued FAS No. 128 ("Earnings Per Share") which
provides for a "basic" earnings per share computation based upon the
weighted-average shares outstanding. The new standard requires a dual
presentation of basic and diluted earnings per share. The effect of adopting
the provisions of FAS No. 128 did not have a material effect on the
Company's per share earnings.
In March 1997 the FASB also issued FAS No. 129 ("Disclosures of Information
About Capital Structure"). The effect of adopting the provision of FAS No.
129 did not result in significant disclosure due in part to the simplified
nature of the Company's capital structure.
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.
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Three Months Ended March 31, 1997
During the first quarter of 1997 the Company, based on its most recent
historic operating results, was able to reduce the cost of its excess of
loss reinsurance protection by over 50% of the amount previously charged.
Further as a result of improved results of operations for the year ended
December 31, 1996 and the related increase in capital (shareholders' equity)
the Company decided to terminate its quota share reinsurance on a run off
basis effective January 1, 1997. The effect of these reinsurance changes are
reflected in our first quarter results of operations.
Net premiums written amounted to $2,989,684 for the three months ended March
31, 1997 compared with $1,430,978 for the three months ended March 31, 1996.
Net premiums earned for the three months ended March 31, 1997 and 1996
amounted to $2,091,350 and $1,905,379, respectively.
Loss and loss adjustment expenses represented 83.7 % and 86.8% of net
premium earned for the three months ended March 31, 1997 and 1996,
respectively. The high loss ratio is the result of the severe weather
conditions experienced in both the first quarter of 1997 and 1996.
Underwriting expenses incurred represented 28.0% and 41.5% of net premiums
written for the three months ended March 31, 1997 and 1996, respectively.
Total return from investment activities amounted to $220,612 for the three
months ended March 31, 1997 compared with $360,346 for the three months
ended March 31, 1996. The return on invested assets, based on amortized
cost, net of allocated expenses was 5.0% for the three months ended March
31, 1997 compared with 5.5% for the three months ended March 31, 1996.
Net loss for the three months ended March 31, 1997 amounted to $220,132 or
$0.07 per share compared with net income of $17,907 or $0.01 per share for
the three months ended March 31, 1996.
Shareholders' equity at March 31, 1997 amounted to $8,787,657 or $2.93 per
share compared with $9,324,961 or $3.11 per share at December 31, 1996. The
decline in shareholders' equity is attributable to a decline in the market
value of the company's' fixed maturities available for sale and the
previously mentioned net loss of $220,132. The decline in market value
resulted in a charge to surplus of $317,172 for the three months ended March
31, 1997.
Liquidity and Capital Resources
Cash used in operating activities amounted to $146,071 for the three months
ended March 31, 1997 compared with $1,034,350 for the three months ended
March 31, 1996. The decrease in cash used in operating activities is a
direct result of the reinsurance restructuring previously mentioned. Cash
used by investing activities amounted to $692,871 for the three months ended
March 31, 1997 compared with cash provided by investing activities of
$837,849 for the three months ended March 31,1996.
The fair value of the Company's fixed maturities available for sale was
$364,687 less than the amortized cost at March 31,1997 compared with $52,717
less than amortized cost at December 31,1996.
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 $2,214,246 at March 31, 1997 compared with
$2,868,875 at December 31, 1996. The Company believes that this level is
sufficient to meet any unanticipated cash demands.
NORTH EAST INSURANCE COMPANY AND SUBSIDIARIES
PART II
Item 5. Other Information
As previously announced, A.M. Best Company has upgraded the Registrant to a
"B-" rating. For many years, the Registrant carried a "D" rating from A.M.
Best. The Registrant had previously announced its intention to seek an
improved rating on the basis of a significant improvement in its financial
condition and resolution of uncertainties surrounding sale of a large block
of the Registrant's common stock formerly held in a non-voting trust.
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits
27 Financial Data Schedules
b) Reports on Form 8-K
The Company filed a report on Form 8-K on May 5, 1997, announcing
the upgrade in its A.M. Best rating.
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, 1997 By /s/ Robert G. Schatz
President and Chief Executive Officer
Date: May 13, 1997 By /s/ Graham S. Payne
Treasurer and Chief Financial Officer
NORTH EAST INSURANCE COMPANY AND SUBSIDIARIES
FORM 10-QSB
EXHIBIT INDEX
Exhibit
Number Description Page
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27 Financial Data Schedules 13
<TABLE> <S> <C>
<ARTICLE> 7
<CIK> 0000352162
<NAME> NORTHEAST INSURANCE COMPANY
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<DEBT-HELD-FOR-SALE> 15,130,280
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 90,508
<MORTGAGE> 0
<REAL-ESTATE> 63,709
<TOTAL-INVEST> 17,498,743
<CASH> 2,214,246
<RECOVER-REINSURE> 5,078,001
<DEFERRED-ACQUISITION> 511,834
<TOTAL-ASSETS> 32,072,705
<POLICY-LOSSES> 15,057,731
<UNEARNED-PREMIUMS> 5,821,225
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 0
0
0
<COMMON> 3,002,375
<OTHER-SE> 5,785,282
<TOTAL-LIABILITY-AND-EQUITY> 32,072,705
2,091,350
<INVESTMENT-INCOME> 138,188
<INVESTMENT-GAINS> 82,424
<OTHER-INCOME> 0
<BENEFITS> 1,751,152
<UNDERWRITING-AMORTIZATION> 838,395
<UNDERWRITING-OTHER> 0
<INCOME-PRETAX> (277,585)
<INCOME-TAX> (57,453)
<INCOME-CONTINUING> (220,132)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (220,132)
<EPS-PRIMARY> (0.07)
<EPS-DILUTED> (0.07)
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
