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, 1998
[ ] 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 12, 1998 there were 3,046,842 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
Part I. - Financial Information
Item 1 - Financial Statements
Consolidated Balance Sheet
As of March 31, 1998 3
Consolidated Statements of Operations and
Comprehensive Income for the
Three Months Ended March 31,1998 and 1997 4
Consolidated Statements of Cash Flows for the
Three Months Ended March 31,1998 and 1997 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
North East Insurance Company and Subsidiaries
Item 1. FINANCIAL INFORMATION
Consolidated Balance Sheet
As of March 31, 1998
<TABLE>
<CAPTION>
ASSETS 1998
----
<S> <C>
Investments:
Fixed maturities available for sale, at
fair value (amortized cost $12,767,640 ) $13,005,308
Equity securities available for sale,
at fair value (cost $133,748) 136,664
Short-term investments 4,917,125
-----------
Total investments 18,059,097
Reinsurance (loss and loss adjustment expense
reserves and paid recoverables) 3,568,279
Premium balances receivable 4,964,083
Reinsurance balances receivable 1,057,513
Deferred policy acquisition costs 1,098,820
Cash 362,264
Prepaid reinsurance premiums (ceded unearned premium) 624,740
Investment income due and accrued 220,251
Property and equipment, net of accumulated depreciation 380,152
Deferred tax asset 2,061,212
Prepaid federal income tax 9,242
Other assets 182,096
-----------
Total Assets $32,587,749
===========
LIABILITIES
Losses and loss adjustment expenses $14,080,586
Unearned premiums 6,921,706
Ceded reinsurance balances payable 729,001
Reserve for unpaid expenses 560,744
Book overdraft 711,560
Other liabilities 91,014
-----------
Total Liabilities 23,094,611
SHAREHOLDERS' EQUITY
Common stock $1.00 par value,
authorized 6,000,000 shares, issued
and outstanding 3,046,842 shares 3,046,842
Additional paid-in capital 6,403,621
Unrealized appreciation of investments 158,785
Accumulated deficit (116,110)
-----------
Total Shareholders' Equity 9,493,138
-----------
Total Liabilities and Shareholders' Equity $32,587,749
===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
North East Insurance Company and Subsidiaries
Consolidated Statements of Operations and Comprehensive Income (Loss)
for the Three Months ended March 31,
Consolidated Statements of Operations
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Revenues:
Premiums earned $3,021,357 $2,756,797
Premiums ceded 482,400 665,447
--------------------------
Net premiums earned 2,538,957 2,091,350
Net investment income 223,763 138,188
Realized capital gains 33,192 82,424
--------------------------
Total revenues 2,795,912 2,311,962
Expenses:
Losses and loss adjustment expenses 2,644,689 2,116,098
Reinsurance recoveries (166,513) (364,946)
--------------------------
Net losses and loss adjustment
expenses 2,478,176 1,751,152
Underwriting expenses incurred 1,078,492 838,395
--------------------------
Total expenses 3,556,668 2,589,547
--------------------------
Income (loss) before provision for income
taxes (760,756) (277,585)
Provision (credit) for income taxes (269,942) (57,453)
--------------------------
Net income (loss) $ (490,814) $ (220,132)
==========================
Net income (loss) per common share:
Basic $ (0.16) $ (0.07)
==========================
Diluted $ (0.16) $ (0.07)
==========================
</TABLE>
Consolidated Statements of Comprehensive Income (Loss)
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Net income (loss) $ (490,814) $ (220,132)
Other comprehensive income (loss),
net of income tax:
Change in unrealized appreciation
(depreciation) of securities (1,702) (317,172)
--------------------------
Comprehensive income (loss) $ (492,516) $ (537,304)
==========================
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
North East Insurance Company And Subsidiaries
Consolidated Statements of Cash Flows
for the Three Months ended March 31,
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Cash flow from operating activities:
Insurance premium received $3,472,758 $2,609,858
Loss and loss adjustment expenses paid (1,396,176) (2,068,973)
Operating expenses paid (1,122,195) (862,053)
Investment income received 213,416 175,097
--------------------------
Net cash provided (used) in
operating activities 1,167,803 (146,071)
--------------------------
Cash flows from investing activities:
Fixed maturities available for sale, sold 2,065,995 946,747
Fixed maturities available for sale,
purchased (1,997,344) (1,568,400)
Equity securities available for
sale, purchased (41,485) 0
Purchase of furniture, fixtures and
equipment (2,755) (71,218)
--------------------------
Net cash provided (used) in investing
activities 24,411 (692,871)
--------------------------
Cash flows from financing activities:
Increase (decrease) in book overdraft 314,437 0
--------------------------
Net cash provided (used) in financing
activities 314,437 0
--------------------------
Net increase (decrease) in cash,
and short-term investments 1,506,651 (838,942)
Cash and short-term investments at
beginning of year 3,772,738 2,861,810
--------------------------
Cash and short-term investments at
end of period $5,279,389 $2,022,868
==========================
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
North East Insurance Company And Subsidiaries
Consolidated Reconciliation of Cash Used In
Operating Activities to Net Income (Loss)
for the Three Months ended March 31,
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Net income (loss) $ (490,814) $(220,132)
Decrease (increase) in net premium and
ceded reinsurance balances 535,646 (549,796)
Increase (decrease) in unearned
premium reserve 398,155 898,335
Increase (decrease) in net loss and loss
adjustment expense reserve 1,082,000 (147,852)
Decrease in investment income
due and accrued (10,347) 36,909
Decrease (increase) in deferred tax asset (269,942) (57,453)
Decrease (increase) in deferred policy
acquisition costs (69,332) (113,239)
Increase (decrease) in expense accruals (36,795) 21,889
Amortization of bond premium, net 15,069 20,208
Depreciation and amortization expense 48,031 47,484
Gain on investment activities (33,868) (82,424)
--------------------------
Net cash provided
(used) in operating activities $1,167,803 $(146,071)
==========================
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
North East Insurance Company and Subsidiaries
Notes to Consolidated Financial Statements
MARCH 31, 1998
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
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 June 1997, the Financial Accounting Standards Board ("FASB") issued
FAS No. 130, "Reporting Comprehensive Income", which establishes standards
for reporting and display of comprehensive income and its components in a
financial statement with the same prominence as other financial statements.
Comprehensive income is defined as net income adjusted for changes in
stockholders' equity resulting from events other than net income or
transactions related to an entity's capital instruments. North East adopted
the provisions of FAS 130 effective January 1, 1998.
In June 1997, the FASB issued FAS No. 131, "Disclosure about Segments of an
Enterprise and Related Information", which establishes standards for
reporting information about operating segments. Generally, FAS 131 requires
that financial information be reported on the basis that is used internally
for evaluating performance. The Company is required to adopt FAS 131
effective January 1, 1998 and comparative information for earlier years must
be restated. This statement does not need to be applied to interim financial
statements in the initial year of application. The Company is currently
considering what impact, if any, FAS 131 will have on its year end reporting
format.
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 in accordance with the provisions of
FAS No. 128 "Earnings Per Share" which requires the dual presentation of
basic and diluted earnings per share.
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, 1998
Net premiums written amounted to $2,937,112 for the three months ended March
31, 1998 compared with $2,989,684 for the three months ended March 31, 1997.
Net premiums earned for the three months ended March 31, 1998 and 1997
amounted to $2,538,957 and $2,091,350, respectively. Net written premium
reported for the first quarter of 1997 benefited from the reinsurance rate
reduction, which applied to the Company's inforce business, and the effect
of terminating its quota share reinsurance on a run off basis effective
January 1, 1997. Reinsurance treaties for the first quarter of 1998 remained
unchanged from the reinsurance treaties in effect at December 31, 1997
however, first quarter 1998 includes an endorsement to the first layer
excess of loss treaty for a net premium cost of approximately $238,000 not
present in the first quarter of 1997.
Loss and loss adjustment expense represented 97.6% and 83.7% of net earned
premium for the three months ended March 31, 1998 and 1997, respectively.
Typically the loss and loss adjustment expense ratio are significantly
higher for the first quarter of the year than the second and third quarters;
the fourth quarter normally exhibits a ratio higher than the second and
third quarter but lower than first quarter. First quarter experience may be
somewhat misleading in comparison to prior year ratios; this is attributable
to the by now infamous "Ice Storm 98". Much of the State of Maine was
paralyzed by the severity of the storm, which left some areas without
electrical power for more than ten days. In the northern and western
sections of the State, significantly above average snowfall combined with
moderating temperatures and freezing rain resulting in an extraordinary
number of building collapse losses related to the weight of the snow and
ice. Additionally, the State was exposed to frequent smaller ice and
snowstorms, which provided a distinguishable increase in claims activity
throughout the first quarter. Though these small storms did not garner the
headlines of "Ice Storm 98", their impact was significant on the loss side.
Underwriting expenses incurred represented 36.7% and 28.0% of net premiums
written for the three months ended March 31, 1998 and 1997, respectively.
Underwriting expenses for the first quarter of 1997 were reduced by a profit
sharing adjustment amounting to $193,773 as the result of favorable loss
experience by our reinsurers on the first layer excess of loss treaty. With
the exception of the profit sharing adjustment expenses incurred for 1998
approximated those incurred in 1997.
Gross investment income amounted to $256,955 for the three months ended
March 31, 1998 compared with $220,612 for the three months ended March 31,
1997. The return on invested assets, based on amortized cost, net of
allocated expenses was 5.9% for the three months ended March 31, 1998
compared with 5.0% for the three months ended March 31, 1997.
Net loss for the three months ended March 31, 1998 amounted to $457,814 or
$0.16 per share compared with a net loss of $220,132 or $0.07 per share for
the three months ended March 31, 1997.
Shareholders' equity at March 31, 1998 amounted to $9,493,138 or $3.12 per
share compared with $9,985,654 or $3.28 per share at December 31, 1997.
Liquidity and Capital Resources
Cash provided by operating activities amounted to $1,167,803 for the three
months ended March 31, 1998 compared with cash used by operating activities
of $146,071 for the three months ended March 31, 1997. Cash flow for the
first quarter of 1998 included receipt of approximately $2,450,000 due the
Company under its reinsurance treaties. Cash provided by investing
activities amounted to $24,411 for the three months ended March 31, 1998
compared with cash used by investing activities of $692,871 for the three
months ended March 31, 1997.
The fair value of the Company's fixed maturities available for sale was
$237,668 more than the amortized cost at March 31,1998 compared with
$243,162 more than amortized cost at December 31,1997. During the first
quarter of 1998 the Company used $41,485 for the purchase of equity
securities.
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 $4,917,125 at March 31, 1998 compared with
$3,397,581 at December 31, 1997. The Company believes that this level is
sufficient to meet any unanticipated cash demands.
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
none
North East Insurance Company and Subsidiaries
Form 10-QSB
Exhibit Index
Exhibit
Number Description Page
- ------- ----------- ----
27 Financial Data Schedules 13
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, 1998 By /S/Robert G. Schatz
Robert G. Schatz
President and Chief Executive Officer
Date: May 13, 1998 By /S/Graham S. Payne
Graham S. Payne
Treasurer and Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 7
<CIK> 0000352162
<NAME> NORTHEAST INSURANCE COMPANY
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<DEBT-HELD-FOR-SALE> 13,005,308
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 136,664
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 13,141,972
<CASH> 5,279,389
<RECOVER-REINSURE> 3,568,279
<DEFERRED-ACQUISITION> 1,098,820
<TOTAL-ASSETS> 32,587,749
<POLICY-LOSSES> 14,080,586
<UNEARNED-PREMIUMS> 6,921,706
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 0
0
0
<COMMON> 3,046,842
<OTHER-SE> 6,446,296
<TOTAL-LIABILITY-AND-EQUITY> 32,587,749
2,538,957
<INVESTMENT-INCOME> 223,763
<INVESTMENT-GAINS> 33,192
<OTHER-INCOME> 0
<BENEFITS> 2,478,176
<UNDERWRITING-AMORTIZATION> 1,078,492
<UNDERWRITING-OTHER> 0
<INCOME-PRETAX> (760,756)
<INCOME-TAX> (269,942)
<INCOME-CONTINUING> (490,814)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (490,814)
<EPS-PRIMARY> (0.16)
<EPS-DILUTED> (0.16)
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
