U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Form 10 - KSB
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 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 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) (Zip code)
Issuer's telephone number: (207) 883-2232
Securities registered under Section 12(b) of the Exchange Act: None
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, Par Value $1.00
(Title of class)
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, and (2)
has been subject to such filing requirements for the past 90 days.
Yes [X] No [ ]
Check if no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in any definitive proxy or
information statement incorporated by reference in Part III of this Form 10-
KSB or any amendment to this Form 10-KSB. [ ]
The issuer's revenues for its most recent fiscal year: $12,981,268
The aggregate market value of the voting stock held by non-affiliates as of
March 22, 1999 was $8,766,131.
There were 3,049,089 common shares outstanding as of March 22, 1999.
Documents Incorporated by Reference: Portions of the Proxy Statement for
1998 Annual Meeting of Shareholders (to be filed by April 30, 1999) are
incorporated into Part III.
Transitional Small Business Disclosure Format: Yes [ ] No [X]
Page 1 of 96
Exhibit index on Page 67
PART I
ITEM 1 - DESCRIPTION OF BUSINESS
GENERAL
North East Insurance Company ("North East" or "NEIC") was organized as a
Maine corporation on August 9, 1965 and began writing insurance in June,
1966. In 1981, North East's securities became publicly traded (Symbol:
NEIC). The Company has a wholly-owned subsidiary, American Colonial
Insurance Company ("ACIC"), a New York corporation, which began business in
1982. In addition to ACIC, North East owns 100% of North Atlantic
Underwriters, Inc. ("NAU"), a dormant Maine corporation, originally designed
to assist North East in marketing its insurance products to independent
brokers. The consolidated financial results of North East and its
subsidiaries (the "Group") for 1998 and prior years are presented and
discussed elsewhere in this report. See "Consolidated Financial Statements"
and "Management's Discussion and Analysis."
At December 31, 1998 the Group employed 45 full-time employees and 3 part-
time employees.
The Group is engaged in the business of underwriting and accepting property
and casualty insurance risks. Its principal insurance products consist of
personal and commercial automobile coverage (including automobile liability
and automobile physical damage) and other general lines including but not
limited to homeowners, general liability, commercial multi-peril, inland
marine, fire and allied lines. In 1995, management made the decision to
withdraw its homeowner program from the market due to an inadequate premium
base, market pressure on homeowner pricing and the ever broadening of
coverages.
North East or its subsidiary, ACIC, is licensed to write business in the
states of Louisiana, Maine, Mississippi, Nevada, New York, Rhode Island,
Texas, Utah and in the District of Columbia. In addition, either North East
or ACIC is approved to write business as a surplus lines carrier on a non-
admitted basis in several other states. These licenses and approvals are
subject to regulatory limitations in certain of the named jurisdictions.
North East has limited its writing of insurance products to the State of
Maine since 1986. ACIC, under an agreement with the Insurance Department of
the State of New York, has not written any new or renewed any existing
business since March 1990.
On March 16, 1999, the Company entered into an Agreement and Plan of Merger
with Motor Club of America ("MCA"), a property and casualty insurance
holding company whose stock is publicly traded through NASDAQ under the
symbol MOTR. Under the agreement, MCA would acquire NEIC through a merger
between the Company and a wholly-owned subsidiary of MCA. The proposed
merger was recently approved by the Boards of Directors of both NEIC and
MCA. The transaction will require approval by the shareholders of both
corporations, and will require authorization by state insurance regulators
in Maine and New York. Consummation of the merger is also subject to various
other conditions, which the Company currently expects to be satisfied in due
course. Under the proposed merger, NEIC shareholders would receive, at their
individual election, (a) $3.30 per share of NEIC common stock or (b) one
share of MCA common stock for each 5.25 shares of NEIC common stock, or (c)
a combination thereof. If the NEIC shareholders in the aggregate elect to
exchange more than 50% of their shares for MCA stock, the aggregate
percentage will be ratably reduced to 50%. Upon completion of the merger,
NEIC would become a wholly-owned subsidiary of MCA.
The following is a summary of selected consolidated financial information
for each of the three years in the period ended December 31, 1998. This
information should be read in conjunction with the Consolidated Financial
Statements and the Notes presented elsewhere in this report.
<TABLE>
<CAPTION>
Year Ended December 31
-------------------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Total Assets $33,630,972 $32,811,570 $32,558,905
Total Liabilities 23,374,105 22,825,916 23,233,944
Shareholders' Equity 10,256,867 9,985,654 9,324,961
Net Premiums Written 13,761,997 14,225,224 6,065,741
Net Premiums Earned 12,056,448 11,493,483 6,232,856
Net Investment Income 870,548 763,438 1,041,762
Realized Capital Gains 54,272 35,321 57,617
Total Revenue 12,981,268 12,292,242 7,332,235
Underwriting Gain (Loss) (703,297) (332,753) 206,981
Income Before
Provision for Income Taxes 221,523 466,006 1,306,360
Provision (Benefit) for
Income Taxes 63,836 177,326 (2,069,136)
Net Income $ 157,687 $ 288,680 $3,375,496
</TABLE>
UNDERWRITING
The Group experienced a net loss and loss adjustment expense ratio of 69.3%
and an expense ratio of 32.0% in 1998. The combined ratio for the Group in
1998 was 101.3%, meaning that loss and loss adjustment expenses and
underwriting expenses exceeded premium income by 1.3%. The combined ratios
for 1997 and 1996 were 94.5% and 97.8%, respectively. The combined ratio is
a key measure of underwriting profitability traditionally used in the
property and casualty insurance business. It equals the sum of the ratio of
net losses and loss adjustment expenses to net premiums earned and the ratio
of underwriting expenses incurred to net premiums written. For further
information on computation of the combined ratio and the effect of recent
changes in the Group's reinsurance arrangements, see "Management's
Discussion and Analysis" at page 11.
Net premiums written and earned by the Group by line of business for 1998
and 1997 were as follows:
<TABLE>
<CAPTION>
1998 1997
--------------------------------------------------------------
Net Net Net Net
Premiums Premiums Premiums Premiums
Written Earned Written Earned
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Auto Liability
Private Passenger $ 7,489,404 $ 6,305,878 $ 7,307,788 $ 5,851,371
Commercial 1,402,977 1,384,692 1,587,390 1,260,032
Auto Physical Damage 3,602,555 3,122,247 3,710,398 3,029,121
Other Liability 553,513 515,170 538,385 421,860
Inland Marine 303,463 315,556 377,569 311,688
All Other Lines 410,085 412,905 703,694 619,411
--------------------------------------------------------------
Total $13,761,997 $12,056,448 $14,225,224 $11,493,483
==============================================================
</TABLE>
The auto programs represent approximately 90.8% of the total premium written
by the Group. This book includes private passenger and commercial policies.
The private passenger products include non-standard, standard and preferred
auto coverages as well as snowmobiles. The commercial product is focused on
small, single vehicle commercial enterprises including logging, garages,
refuse haulers and snowplowers. Approximately 71% of the auto written
premium is for liability coverage with the remaining 29% providing physical
damage protection.
The balance of the Group's book of business is composed of inland marine
(2.2%); other liability (4.0%); companion or adjunct commercial coverages
(3.0%).
MARKETING
The Group supports the Independent Agency System and believes the Agency
System provides the best system for its products and programs. North East
chooses to utilize independent agents in order to maximize its geographical
service and marketing coverage. Management believes that the development of
strong agency relationships must be instigated by the Group. Agents' profit
contingencies and reliable products have become key ingredients in
developing stronger ties to agents representing North East Insurance
Company. An agents advisory board provides a forum through which the Group
can respond in an effective and timely manner to its agents' needs.
Management annually reviews the performance of its agents, utilizing
quantitative and qualitative measures. Factors in the review include written
premium volume, historical loss ratios - one and three year analyses, mix of
products, North East's rank in agent's office, other carriers represented by
the agency, long term plans of agency, geographic location and agent's plans
or needs. These reviews provide the Company's marketing and underwriting
personnel with individual agent goals and objectives for the upcoming year.
At year end 1998 there were 154 active agents who represented North East.
Certain agents and brokers are under common ownership. Although no single
agency produced more than 5% of North East's direct premiums written in
1998, one affiliated group of agents was responsible for 11%, a second group
accounted for 9% and a third group accounted for 5%. Eighteen agents
provided North East with direct premiums written in excess of $200,000, and
forty-four agents provided North East with direct premiums written between
$100,000 and $200,000. While the loss of any individual producing agent
could have an impact on the business of North East, management believes it
has a good relationship with its agents.
Agents, in recognition of North East's reliance on them for the selection of
profitable business, are compensated with both commissions and a profit
sharing plan. The profit sharing plan formula considers a combination of
volume and profitability in determining the amount of additional
compensation. Certain minimum targets, in both categories, must be reached
in order to qualify for profit sharing under the formula. The amount of
profit sharing is dependent on the degree each component betters the minimum
target. Profit sharing expense amounted to $270,032, $85,000 and $81,571 in
1998, 1997 and 1996, respectively, and is expected to increase as agents
recognize the heightened incentives under the plan.
REINSURANCE
The Group operates under the philosophy of retaining as much risk as is
prudent for its size. A key aspect of this approach is that the Group seeks
to establish stable, long-term arrangements with high quality reinsurers who
meet the Group's criteria for financial integrity. In formulating its
reinsurance arrangements, the Group complies with both Maine and New York
insurance laws prohibiting the retention of any individual risk in an amount
exceeding 10 % of its surplus. The Group's current reinsurance is placed
through MIC Reinsurance Corporation, rated "A" by A.M. Best.
The Group manages its risk exposure through individual and aggregate risk
excess of loss reinsurance arrangements (treaties), casualty clash excess of
loss treaties and property catastrophe excess of loss reinsurance in which
the reinsurers assume that portion of the risk not retained by the Group.
The Group utilized quota share reinsurance until September 30, 1997.
The maximum gross policy limits offered by the Company during 1998, 1997 and
1996 were $1,000,000. The Company's maximum net retention was $32,850 for
the period covering January 1, 1996 through December 31, 1996 and $50,000
for the period covering January 1, 1997 through December 31, 1998.
Current reinsurance protection is provided through two layers of excess of
loss reinsurance. The first layer, considered to be the working layer,
assumes $150,000 of coverage beyond the first $50,000. The second layer,
allows the Company to offer policy limits up to $1,000,000 by assuming
$800,000 of coverage beyond the first $200,000. The casualty clash excess of
loss treaty provides coverage for $1,000,000 in excess of $1,000,000 in the
event more than one insured is involved in a single loss occurrence exposing
the coverage limits of the policies. The property catastrophe coverage
provides for $1,500,000 of coverage in excess of $500,000 in the event of a
catastrophe. The 35% quota share treaty in effect for 1996 was cancelled on
a runoff basis effective January 1, 1997 and subsequently commuted on
September 30, 1997.
INVESTMENTS
At December 31, 1998, based on current market values, 38% of the fixed
maturities were invested in U.S. Treasuries or U.S. Government guaranteed
instruments, 6% were invested in public utilities and 56% were invested in
corporate securities. The Group does not purchase securities with the
intention of holding such securities through their maturity date and
therefore does not match the maturation dates to the expected settlement of
its claim liabilities.
The Group also maintains short-term investments, primarily U.S. Government
backed funds, which are immediately available for operating activities
should cash outflow suddenly exceed incoming cash from premium collections
and investment income. At December 31, 1998, short-term investments amounted
to $1,526,752.
The gross average investment yield based on fair value of the investment
portfolio was 6.4% and 5.9% for the years ended December 31, 1998 and 1997,
respectively. The total return, including realized capital gains (losses)
was 6.7% and 6.1% for the years ended December 31, 1998 and 1997,
respectively. Realized gains (losses) for the year ended 1997 included a
loss of $62,705 pertaining to the write down of the Company's investment in
Memorex which the Company considers fully impaired.
The table below summarizes the credit quality of fixed maturities, based on
Standard and Poor's rating system, as of December 31, 1998:
Bond Credit Quality Rating
<TABLE>
<S> <C>
AAA 34.0%
AA- 5.1
A+ 3.2
A 36.6
A- 14.6
BBB+ 6.5
-----
100.0%
=====
</TABLE>
Bond credit quality ratings are based on the capacity of the borrower to
meet interest and principal payments as they become due. Capacity is
considered extremely strong for AAA rated issues; very strong for AA rated
issues; strong for A rated issues; and adequate for
BBB+ rated issues. At December 31, 1998 the Group did not hold any fixed
maturities considered to be below investment grade (rated below BBB+).
REGULATION
The Group is subject to regulation and supervision by the Maine
Superintendent of Insurance or similar official in each of the jurisdictions
in which it is authorized to transact insurance business. Such regulation
and supervision includes, among other things, requirements as to capital and
surplus, solvency standards, granting and revoking licenses to transact
business, the licensing of agents, approval of policy forms and rates,
restrictions on the amount of risk assumed, deposits of securities, methods
of computing reserves and the types and concentration of investments
permitted. The Group is required to file detailed annual and other reports
of its financial condition, affairs and management with such regulatory
agencies and is subject to periodic examination by them.
Statutory surplus, as adjusted herein, at December 31, 1998 was $5,937,909.
Based on guidelines established by the National Association of Insurance
Commissioners, the ratio of net premiums written to statutory surplus should
not exceed 3 to 1. Under this formula, the Group may retain approximately
$17,813,727 of net written premiums for its own account (by comparison, 1998
net written premiums amounted to $13,761,997). The Group expects to remain
well within the constraints of this guideline in 1999.
The National Association of Insurance Commissioners requires the reporting
of Risk Based Capital for Property and Casualty Insurance Companies. Risk
based capital is a method of measuring the minimum amount of capital
appropriate for an insurance company to support its overall business
operations in consideration of its size and risk profile. It provides a
flexible means of setting the capital requirement in which the degree of
risk taken by the insurer is the primary determinant. The four major
categories of risks involved are:
* Asset Risk - This is the risk of assets' default of
principal/interest or fluctuation in market value.
* Credit Risk - This is the risk of default on amounts due from
reinsurers, policyholders, or other creditors.
* Underwriting Risk - This is the risk of under-estimating
liabilities from business already written or inadequately pricing
business in the coming year.
* Off-Balance Sheet Risk - This is the risk associated with items,
such as excessive premium growth, contingent liabilities and other
items not reflected on the balance sheet.
The results of the risk based capital computation provide regulators with a
tool from which they can base regulatory action. Based on trigger points
included in the risk based capital computation, the following actions could
result should a company's surplus level be less than predetermined multiples
of the authorized control level amount as determined by the formula.
<TABLE>
<CAPTION>
Action % of Authorized Control Level Risk Based Capital
------ ------------------------------------------------
<S> <C>
None Greater than 200%
Company Action Less than 200%, but Greater than 150%
Regulatory Action Less than 150%, but Greater than 100%
Authorized Control Less than 100%, but Greater than 70%
Mandatory Control Less than 70%
</TABLE>
Under the risk based capital formula, the authorized control level risk
based capital for North East Insurance Company and American Colonial
Insurance Company at December 31, 1998 was $2,095,400 and $174,323,
respectively. The statutory surplus at December 31, 1998, after audit
adjustments, was $5,937,909 or 283.4% of authorized control level risk based
capital for North East Insurance Company and $6,296,631 or 3,612.0% of
authorized control level risk based capital for American Colonial Insurance
Company. Accordingly, the statutory surplus levels of North East Insurance
Company and American Colonial Insurance Company were adequate under the risk
based capital formula.
COMPETITION
The Group currently does not write any business outside the State of Maine.
The Company competes with national and regional insurers that market their
products directly as well as through the independent agency system. Over the
past several years, the direct writers have significantly increased their
market share, at the expense of independent agents. Management continues to
believe, however, the Company's products are best marketed through a network
of independent agents.
The Company also faces competition from certain insurers that focus on non-
standard markets, particularly with regard to automobile insurance. This
competition includes pricing pressures and one-time agent incentives.
ITEM 2 - DESCRIPTION OF PROPERTY
North East currently leases approximately 10,000 square feet of office space
at 482 Payne Road, Scarborough, Maine pursuant to a lease expiring December
31, 2000. Upon expiration North East has an option to extend the lease for
an additional 10 years. Management believes that the premises are adequate
for its current needs.
ITEM 3 - LEGAL PROCEEDINGS
On March 29, 1999 the Company received a letter from counsel to Samuel M.
Koren, who has been a Vice President of North East since 1978. As further
described in Item 10 below (see "Koren Employment Agreement; Resignation"),
Mr. Koren's counsel has asserted a claim for payment under an Employment
Continuity Agreement, and has stated an intention to file claims for
discrimination on various bases, including without limitation age and
religion. The letter does not specify the amount of damages. The Company
has offered to negotiate a reasonable retirement payment to Mr. Koren in
view of his many years of service to North East, but has denied liability on
the asserted claims.
Other than ordinary routine litigation incidental to the business, there are
no other material legal proceedings pending with regard to NEIC or its
wholly-owned subsidiary ACIC.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to shareholders in the fourth quarter of 1998.
EXECUTIVE OFFICERS OF THE REGISTRANT
Set forth below is information concerning the executive officers of North
East Insurance Company.
Under the Company's bylaws, officers are elected annually by the Board of
Directors and serve at the pleasure of the Board.
There are no family relationships between any of the executive officers of
the Company, nor were there any special arrangements by which any of them
was elected to his or her position.
ROBERT G. SCHATZ, age 53, has served as President and Chief Executive
Officer of the Company since March 1988. He was elected as a Director in
December 1987.
RONALD A. LIBBY, age 55, joined the Company in December 1994 and serves as
its Chief Operating Officer. From 1987 to 1994 he was President of Maine
Mutual Fire Insurance Company.
SAMUEL M. KOREN, age 58, is Senior Vice President and Secretary of NEIC. He
joined the Company in 1977 and has been an Officer since 1978.
GRAHAM S. PAYNE, age 53, has been Treasurer and Chief Financial Officer of
the Company since 1987.
REBECCA J. CERNY, age 46, has held the position of Vice President of the
Company since 1989. From 1986 to 1995 she also served as a Director of the
Company.
Part II
ITEM 5 - MARKET FOR COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
North East's common shares are traded on the NASDAQ Stock Market under the
symbol NEIC. Quotations are available from the National Quotation Bureau
Inc.
As of March 22, 1999, there were 181 holders of record of North East's
common shares.
The high and low closing bid prices (as quoted by the NASDAQ Stock Market)
for North East's common shares for each quarterly period for the two most
recent fiscal years are as follows:
<TABLE>
<CAPTION>
1998 1997
---------------- ----------------
HIGH LOW HIGH LOW
---- --- ---- ---
<S> <C> <C> <C> <C>
First Quarter $2.88 $2.44 $2.94 $2.00
Second Quarter 3.13 2.50 2.81 1.94
Third Quarter 2.69 1.75 3.50 2.06
Fourth Quarter 2.88 1.63 3.19 2.00
</TABLE>
Such prices reflect prices without retail mark-up, mark-down or commission
and may not represent actual transactions.
DIVIDENDS
North East has never paid and does not anticipate paying dividends in the
foreseeable future. Based on the current accumulated statutory unassigned
deficit of North East, the Company currently is prohibited from paying
dividends.
Under the insurance laws of the State of Maine, cash dividends may only be
paid out of that part of the available accumulated statutory unassigned
deficit which are derived from realized net operating profits on North
East's insurance business and from net realized capital gains. In addition,
amongst other statutory restrictions, a Maine insurer's policyholders'
surplus following any dividends or distributions to shareholders must be
reasonable in relation to the insurer's outstanding liabilities and its
financial needs. Furthermore, North East may not pay "extraordinary"
dividends or make any other distribution (i.e. dividends or distributions
made within the next 12 months, which exceed the greater of (i) 10% of North
East's surplus to policyholders or (ii) North East's net investment income,
in either case, as of the December 31 preceding) unless the Maine
Superintendent of Insurance has been notified of the declaration and has
either approved it or has failed to disapprove it within 60 days. Any
payment of cash dividends would reduce the capacity to write new premiums
since the volume of insurance that can be written is determined by the
available statutory surplus of North East.
ITEM 6 - MANAGEMENT'S DISCUSSION AND ANALYSIS
Refer to Item 1 "Description of Business" for additional information on the
operations of the Group.
Management's discussion and analysis reviews the consolidated financial
condition of North East at December 31, 1998 and 1997, the consolidated
results of operations for the past three years and, where appropriate,
factors that may affect future financial performance. This discussion should
be read in conjunction with the Consolidated Financial Statements.
FORWARD-LOOKING INFORMATION
From time to time, the Company publishes information that includes forward-
looking statements, as defined in Section 21E of the Securities Exchange Act
of 1934. The "Management's Discussion and Analysis" section and "Description
of Business" section of this report contain forward-looking statements, such
as those concerning estimated future costs of agency profit-sharing,
estimates of costs and implementation dates associated with Y2K compliance
efforts, and anticipated effects of the pending merger transaction with MCA.
In addition, certain items reflected in the Group's financial statements are
based in large part on estimates of future revenues and losses.
The Company cautions readers that numerous factors beyond NEIC's control
could cause projected revenue growth to differ materially from the levels
reflected in these forward-looking statements, including changes in interest
rates and the performance of financial markets, changes in laws and
regulations affecting insurers, changes in the pricing of competing
insurers' policies, industry consolidation among insurers or insurance
agents, or changes in consumer preferences. Factors that could cause Y2K-
related costs to exceed expectations include the failure of agents and
outside vendors to cooperate with NEIC compliance efforts or unanticipated
problems with systems believed to be Y2K compliant. Factors that could delay
or prevent consummation of the MCA merger transaction include a failure to
obtain requisite shareholder approvals or regulatory authorizations, a
withdrawal of Board of Directors endorsement of the transaction,
commencement of a competing offer for NEIC, or a material change in the
condition of NEIC or MCA.
PENDING MERGER TRANSACTION
As noted above, the Company is a party to an Agreement and Plan of Merger
with Motor Club of America. The Company expects to incur significant
professional fees and other one-time expenses in connection with such
transaction. Consummation of the transaction is contingent on receipt of
various conditions, including shareholder approvals and regulatory
authorizations. Upon completion of the merger, NEIC would become a wholly-
owned subsidiary of MCA.
GENERAL DISCUSSION
North East continues to pursue a course of action set into motion in 1994
under which it has produced consistent growth in gross written premium. The
blending of premium volume, product development, consistent and focused risk
selection philosophy and refining agency relationships contributed to the
progress. In May 1998 the Company introduced a new personal automobile
insurance program ("Auto"Matic). AutoMatic replaced both the non-standard
and standard/preferred personal auto programs. Policies issued under the
non-standard and standard/preferred personal automobile programs are being
renewed under the new AutoMatic program. Key features of the new program
include assignment of drivers to specific vehicles and automatic mid-term
premium credits at predefined eligibility dates instead of at the policy
renewal date.
Operating results for 1998 fell short of expectations due to higher than
expected losses in the first quarter specifically related to the "Ice Storm
of 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 above average snowfall
combined with moderating temperatures and freezing rain resulted in an
extraordinary number of building collapse losses relating to the weight of
the snow and ice. Additionally, the State experienced several smaller ice
and snowstorms which provided a distinguishable increase in claims activity
throughout the first quarter. Fortunately, loss experience for the remainder
of 1998 moderated the impact experienced in the first quarter.
RESULTS OF OPERATIONS IN 1998
COMPARED WITH 1997 AND 1997 COMPARED WITH 1996
The Group's operations for the each of three years ended December 31, 1998
comprise two major components. Direct business represents insurance income
and expenses associated with policies issued directly by the Group to its
policyholders. Ceded business, commonly referred to as reinsurance, includes
excess of loss, catastrophe and clash reinsurance arrangements which provide
the Group with insurance protection against excessive losses and quota share
reinsurance in which the reinsurer assumes a contractually agreed percentage
share or limit of each risk insured by the Group, after all other
reinsurance.
Direct
The following comparative table illustrates the components of direct
business (including assumed business) of the Group for each of the three
years ended December 31, 1998:
<TABLE>
<CAPTION>
Year ended December 31,
---------------------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Premiums Written $15,866,841 $12,314,676 $11,193,557
=============================================
Premiums Earned $13,768,678 $11,759,548 $11,536,429
Losses and Loss Adjustment
Expenses Incurred 8,493,082 8,358,886 5,775,929
Underwriting Expenses
Incurred 4,621,732 4,907,733 4,997,272
---------------------------------------------
Underwriting Income (Loss) $ 653,864 $(1,507,071) $ 763,228
=============================================
Loss Ratio 61.7% 71.1% 50.1%
Expense Ratio 29.1 39.8 44.6
--------------------------------------------
Combined Ratio 90.8% 110.9% 94.7%
============================================
</TABLE>
Direct premiums written in 1998 increased 28.8% compared with 1997. Direct
earned premiums increased approximately 17.1% over 1997. Direct premiums
written and earned in 1997 were marginally greater than those reported in
1996. Increased market presence, resulting from the introduction of
AutoMatic, is encouraging in a market which has been experiencing
substantial price competition and agent volume incentives.
Direct losses and loss adjustment expenses incurred increased slightly in
1998 to $8,493,082 compared with $8,358,886 incurred in 1997 whereas 1996
losses incurred were substantially less at $5,775,929. Direct losses and
loss adjustment expenses for the years 1998, 1997 and 1996 include
$2,301,000, $638,000 and $2,012,000 of favorable loss development,
respectively (refer to "Loss and Loss Adjustment Expense Reserves" - this
section). Without this development the loss ratios would approximate 78%,
68%, and 74% for 1998, 1997 and 1996, respectively. The 1998 results
includes weather-related loss frequency in the first quarter discussed
previously herein and 1996 includes adverse loss experience for auto
physical damage during the first quarter due to severe winter storms whereas
1997 losses reflect more moderate winter weather compared with both 1998 and
1996.
Underwriting expenses decreased $286,001 or 5.8% in 1998 compared with 1997
and $89,539 or 1.8% in 1997 compared with 1996. Expenses for 1996 included
higher data processing costs associated with our new information system and
employee incentive awards not present in either 1998 or 1997. The ratio of
incurred expenses to premiums written has declined from 44.6. % in 1996 to
39.8% in 1997 to 29.1% in 1998. The decline in the expense ratio reflects
the Company's efforts to control its fixed overhead expenses relative to the
growth in direct written premiums.
Ceded
The following comparative table illustrates the components of ceded business
of the Group for each of the three years ended December 31, 1998:
<TABLE>
<CAPTION>
Year ended December 31,
--------------------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Premiums Written $2,104,844 $(1,910,548) $5,127,816
============================================
Premiums Earned $1,712,230 $ 266,065 $5,303,573
Losses and Loss Adjustment
Expenses Incurred 135,409 1,558,084 2,270,542
Underwriting Expenses
Recovered (Expensed) 219,660 (117,701) 2,476,784
--------------------------------------------
Net Cost (Benefit) from
Reinsurance Activities $1,357,161 $(1,174,318) $ 556,247
============================================
Loss Ratio 7.9% n/m% 42.8%
Expense Ratio 10.4 n/m 48.3
-------------------------------------------
Combined Ratio 18.3% n/m% 91.1%
===========================================
<FN>
<FN1> n/m - not meaningful
</FN>
</TABLE>
The Group manages its risk exposure through individual and aggregate risk
excess of loss reinsurance arrangements (treaties), casualty clash excess of
loss treaties and property catastrophe excess of loss reinsurance in which
the reinsurers assume that portion of the risk not retained by the Group.
The Group utilized quota share reinsurance until September 30, 1997.
The maximum gross policy limits offered by the Company during 1998, 1997 and
1996 were $1,000,000. The Company's maximum net retention was $32,850 for
the period covering January 1, 1996 through December 31, 1996 and $50,000
for the period covering January 1, 1997 through December 31, 1998.
Current reinsurance protection is provided through two layers of excess of
loss reinsurance. The first layer, considered to be the working layer,
assumes $150,000 of coverage beyond the first $50,000. The second layer,
allows the Company to offer policy limits up to $1,000,000 by assuming
$800,000 of coverage beyond the first $200,000. The casualty clash excess of
loss treaty provides coverage for $1,000,000 in excess of $1,000,000 in the
event more than one insured is involved in a single loss occurrence exposing
the coverage limits of the policies. The property catastrophe coverage
provides for $1,500,000 of coverage in excess of $500,000 in the event of a
catastrophe. The 35% quota share treaty in effect for 1996 and 1995 was
cancelled on a runoff basis effective January 1, 1997 and subsequently
commuted on September 30, 1997. For further information, see Part I, Item1
"Description of Business - Reinsurance".
During the third quarter of 1997 management determined that the Company's
reinsurance program was not performing as originally intended. A review of
the underwriting results indicated that the terms of the first layer excess
of loss treaty required revision, either through a rate reduction or lower
retention, in order to achieve timely matching of premiums and losses (the
original treaty included a profit sharing formula under which the Company
would participate in any excess profits, the recording of which would occur
in years subsequent to 1997). In meetings with its reinsurer an agreement
was reached to revise the premium rate and eliminate the profit sharing. In
addition, the treaty was further endorsed to provide an experience rated
premium adjustment in the event North East's direct loss and loss expense
ratio exceeded 57% for the 1997 calendar year and 68% for the 1998 calendar
year.
Ceded premiums written in 1997 include the effect of the rate reduction and
the experience rated premium adjustment under the excess of loss treaty. In
addition to the above changes for ceded written premium, ceded earned
premium includes the runoff of earned premium for the 35% quota share treaty
through September 30, 1997. Losses and loss expenses incurred for 1997
consist primarily of claims associated with the runoff of the quota share
treaty through September 30, 1997.
Ceded losses and loss adjustment expenses for 1998 includes $734,000 of
favorable loss development whereas ceded losses and loss adjustment expenses
for 1997 and 1996 include $471,000 and $306,000 of unfavorable development,
respectively with respect to the Company's reinsurers (refer to "Loss and
Loss Adjustment Expense Reserves" - this section).
Net
The following comparative table illustrates the components of net business
of the Group for each of the three years ended December 31, 1998:
<TABLE>
<CAPTION>
Year ended December 31,
--------------------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Premiums Written $13,761,997 $14,225,224 $6,065,741
============================================
Premiums Earned $12,056,448 $11,493,483 $6,232,856
Losses and Loss Adjustment
Expenses Incurred 8,357,673 6,800,802 3,505,387
Underwriting Expenses
Incurred 4,402,072 5,025,434 2,520,488
--------------------------------------------
Underwriting Income (Loss) $ (703,297) $ (332,753) $ 206,981
============================================
Loss Ratio 69.3% 59.2% 56.2%
Expense Ratio 32.0 35.3 41.6
-------------------------------------------
Combined Ratio 101.3% 94.5% 97.8%
===========================================
</TABLE>
Underwriting activities for 1998 generated a loss of $703,297. This compares
to underwriting loss in 1997 of $332,753 and an underwriting profit of
$206,981 in 1996. For the three year period losses and loss adjustment
expense represented 69.3% (1998), 59.2% (1997) and 56.2% (1996) of net
earned premium. The ratios, for the periods represented, include the
favorable development which is not likely to occur in 1999 (refer to "Loss
and Loss Adjustment Expense Reserves" - this section). Without this
favorable development the three year period losses and loss adjustment
expense represented 82.3% (1998), 68.8% (1997) and 93.4% (1996) of net
earned premium. Earned premium for 1997 also includes the benefit derived
from the endorsements to the excess of loss treaty not in effect in 1996 and
the termination of the quota share treaty in 1997.
Underwriting expenses incurred amounted to $4,402,072 in 1998, $5,025,434 in
1997 and $2,520,488 in 1996.
Underwriting profit (loss) by major category for each of the years ended
December 31, 1998, 1997 and 1996 were as follows:
<TABLE>
<CAPTION>
Year ended December 31,
---------------------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Auto Liability $ 534,982 $(284,099) $ (151,833)
Auto Physical Damage (1,327,380) (775,261) (1,094,897)
Commercial Multi Peril 89,556 377,315 680,289
Other Liability 363,449 227,023 625,140
All Other (363,904) 122,269 148,282
--------------------------------------------
Underwriting (Loss)
Income $ (703,297) $(332,753) $ 206,981
============================================
</TABLE>
All Other includes fire & allied, inland marine and homeowners. The
underwriting loss in the All Other and Auto Physical Damage categories of
1998 is directly related to the severe winter experience in the first
quarter.
Underwriting income (loss) by quarter for each of the years ended December
31,1998, 1997 and 1996 were as follows:
<TABLE>
<CAPTION>
Underwriting (Loss) Income
--------------------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
First Quarter $(1,017,711) $(498,197) $(342,074)
Second Quarter 112,189 129,293 87,237
Third Quarter 106,929 (417,134) 51,211
Fourth Quarter 95,296 453,285 (3,355)
-------------------------------------------
Total Year $ (703,297) $(332,753) $ 206,981
===========================================
</TABLE>
INVESTMENT RESULTS
Net investment income was $870,548 for 1998 compared with $763,438 in 1997
and $1,041,762 in 1996. The gross average yield of the investment portfolio
was 6.4%, 5.9% and 6.6% for 1998, 1997 and 1996, respectively. The Company
realized net investment gains of $54,272, $35,321 and $57,617 for 1998, 1997
and1996, respectively. Total return from investment activities (including
realized gains or losses) was 6.7%, 6.1% and 6.9% for 1998, 1997, and 1996,
respectively.
NET INCOME
Net income before the provision for federal income taxes was $221,523,
$466,006 and $1,306,360 in 1998, 1997 and 1996, respectively.
The provision for income taxes includes the effect of a reassessment in 1996
of the Company's position relative to the Company's ability to utilize the
value of its loss carryforwards based on the future income and capital gains
of the Company. In accordance with FAS 109 ("Accounting for Income Taxes"),
the change in the valuation allowance has been included in net income for
the year ended December 31, 1998, 1997 and 1996 and a deferred tax asset has
been reported in the Company's balance sheet. The 1996 provision for income
taxes included a benefit of approximately $2,500,000 resulting from this
reassessment.
Net income after the provision for income taxes was $157,687, $288,680 and
$3,375,496 in 1998, 1997 and 1996, respectively.
YEAR 2000 ISSUES
Year 2000 ("Y2K") issues arise from the inability of some computer-based
systems to properly recognize and handle dates after December 31, 1999. Like
other insurers, NEIC relies on time-sensitive calculations in determining
sales revenues (premiums) and, in the case of a claim, verifying coverage at
the time of the claim. Other time-sensitive calculations include, but are
not limited to, installment billing, credit or debit surcharges, reinsurance
protection, authority of authorized agents and agents' commissions.
Beginning in 1995, the Company replaced its accounting, billing,
underwriting, and claims processing software and hardware. This upgrade was
motivated by factors other than Y2K issues, but was conducted with a view
toward avoiding Y2K problems. Since June 1997, NEIC has been reviewing Y2K
issues as they pertain to the new system. Program code has been searched in
order to identify any commands that include a two-digit year reference, and
modifications to a four-digit year have been made or are scheduled to be
made no later than June 30, 1999. As modified, the software will reject
attempts to input year codes having fewer than four digits. All of the new
hardware has since been upgraded or checked for Y2K compliance.
Although NEIC believes it has identified its internal Y2K issues, no
assurance can be given that it has identified all such problems.
Accordingly, the Company continues to perform information systems tests to
further evaluate its posture relative to Y2K.
Failure of the policy issuance, premium collection or premium billing
systems as a result of any corrupt data or unclear program code, including
those issues associated with Y2K, for any significant length of time could
result in complete loss of revenue for the Company. Accordingly, the Company
has placed great emphasis on these systems to correct Y2K issues of which it
is aware. In the event any of these systems fail to perform, the Company
would depend upon its information system staff and outside consultants to
identify the source of the failure and rectify the problem.
In November 1998 the Company began issuing insurance policies having terms
that expire in the year 2000. Subsequent to November 1998 the Company has
processed endorsements for policies with year 2000 expiration dates. In
November 1999 the Company will issue its first policy with a year 2000
effective date and a year 2001 expiration date. Each phase of this process
is being closely monitored.
Systems failure of the claims processing system would receive similar
attention, although manual intervention is an alternative. Should manual
intervention be necessary, the Company would utilize its existing staff on
an overtime basis and, if necessary, hire additional part-time staff.
The Company relies on the independent agents to market and sell its
insurance products. NEIC has sent letters to agents, who represent the
Company, to ascertain whether their systems will be Y2K compliant, whether
new business submissions will be affected by noncompliance with Y2K and what
steps are being taken to rectify areas known to be Y2K noncompliant.
NEIC uses outside vendors to verify information provided by its insureds and
to determine credits or surcharges in calculating the amount of insurance
premium charged for the risk assumed. This data is provided through
electronic media. The Company also uses outside vendors for various
electronic financial statement preparation processes. NEIC is in the process
of contacting these vendors to ascertain their status relative to Y2K
issues; the Company expects to have completed this process by July 1, 1999.
The Company is reviewing its non-financial software (security, mail
processing equipment, telephone, etc.) to assess the effect Y2K
noncompliance could have on the operations of the Company. Since the Company
is in the information gathering phase, it does not yet have a contingency
plan for Y2K-related disruptions in these systems.
The Company estimates that the cost of upgrading its information processing
systems (over and above normal systems maintenance costs) did not exceed
$1,000,000 from 1995 through the date of substantial completion of the
upgrade. As noted above, this upgrade was motivated primarily by factors
other than Y2K compliance. The Company estimates its additional expenditures
for Y2K compliance will not exceed $100,000.
No assurance can be given that the Company will be fully Y2K compliant by
the dates required. However, based on current information, the Company
believes that the effects of any noncompliance will not be material to the
overall operations of the Company.
ACCOUNTING POLICIES ADOPTED
Refer to Item 7 Note A under the caption "Accounting Pronouncements Adopted"
for information.
NEW ACCOUNTING PRONOUNCEMENTS
Refer to Item 7 Note A under the caption "New Accounting Pronouncements" for
information.
LIQUIDITY AND CAPITAL RESOURCES
Cash provided by operating activities for the year ended December 31, 1998
amounted to $973,283 compared with cash used in operating activities of
$1,469,805 for the year ended December 31, 1997. Cash used in investing
activities amounted to $2,909,702 for the year ended December 31, 1998
compared with cash provided from investing activities of $1,883,561 for the
year ended December 31, 1997.
The Company's investment in fixed maturities, carried at fair value, was
$425,187 higher than amortized acquisition cost and its investment in equity
securities, carried at fair value, was $18,740 lower than their cost of
acquisition. Federal Reserve interest rate adjustments have a significant
impact on the fair value of fixed maturity investments. In order to reduce
its exposure to interest rate fluctuations, management and the board of
directors have reduced the average maturity of securities in its investment
portfolio. The Company believes that the current level of short-term
investments is adequate to meet any shortfall resulting from its immediate
operating activities.
DERIVATIVES
The Company's investment policy is to invest in investment grade securities
only and does not permit the Company to participate in the derivatives
market for either hedging or speculative purposes. This policy has been
adhered to for the two years ended December 31, 1998. The Company has no
open derivative financial instrument position as of the balance sheet date.
LOSSES AND LOSS ADJUSTMENT EXPENSE RESERVES
Reserves for losses and loss adjustment expenses (LAE) represent estimates
of the ultimate net cost of all unpaid losses and loss adjustment expenses
incurred through December 31 of each year. The reserves are determined using
adjusters' individual case estimates and statistical projections. These
projections are subject to the effects of trends in claims severity and
frequency. Statistical projections are employed in four specific areas: (1)
to calculate the incurred but not reported (IBNR) reserves; (2) to calculate
the adequacy of case basis estimates of loss reserves; (3) to calculate the
allocated LAE reserves; and (4) to calculate the unallocated LAE reserves.
These projections are reviewed on a quarterly basis, and as experience
develops and new information becomes known, they are adjusted as necessary.
Such adjustments are reflected in the current year's consolidated statement
of operations.
The following table provides a reconciliation of the changes in loss and LAE
reserves, after deducting amounts recoverable from reinsurers for 1998 and
1997.
Reconciliation of Liability for Losses and
Loss Adjustment Expenses
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Reserves for losses and LAE:
Beginning of year $14,657,226 $15,205,583
Amounts recoverable from reinsurers
on unpaid losses 3,668,346 4,828,760
----------------------------
Beginning of year, net 10,988,880 10,376,823
----------------------------
Provision for losses and LAE for claims
arising in:
Current year 9,924,585 7,909,126
Prior years (1,566,912) (1,108,324)
----------------------------
8,357,673 6,800,802
----------------------------
Losses and LAE paid on claims arising in:
Current year 5,796,220 4,555,270
Prior years 3,243,377 1,633,475
----------------------------
9,039,597 6,188,745
----------------------------
Reserves for losses and LAE:
End of year, net 10,306,956 10,988,880
Amounts recoverable from reinsurers
on unpaid losses 2,662,118 3,668,346
----------------------------
Losses and loss adjustment expenses
per Consolidated Balance Sheet $12,969,074 $14,657,226
============================
</TABLE>
The tables on the pages following illustrates the original ultimate reserve
established and the reestimated reserve after deducting amounts recoverable
from reinsurers over each of the subsequent years through the balance sheet
date for both net and gross reserves.
Analysis of Ultimate Losses and Loss Adjustment
Expenses Development
(in Thousands)
Net Reserves
<TABLE>
<CAPTION>
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Ultimate Net Liability for unpaid
claims and claim adjustment expenses $24,062 $20,085 $18,342 $18,661 $18,705 $17,472 $14,303 $10,377 $10,989 $10,307
Cumulative amount paid
One year later 7,521 5,048 4,619 3,899 5,019 3,843 3,605 1,633 3,243
Two years later 11,212 8,503 7,004 7,460 7,595 6,625 5,769 3,467
Three years later 14,039 10,212 9,931 9,590 9,516 8,287 7,179
Four years later 15,373 12,718 11,685 11,131 10,756 9,367
Five years later 16,995 14,254 12,833 12,213 11,352
Six years later 18,483 15,278 13,835 12,745
Seven years later 19,356 16,195 14,307
Eight years later 20,177 16,629
Nine years later 20,518
Ultimate Net liability reestimated
as of end of year
One year later $24,653 $20,605 $18,329 $17,974 $17,685 $15,340 $11,985 $ 9,268 $ 9,422
Two years later 24,743 20,676 18,823 18,087 16,829 13,748 11,825 7,989
Three years later 24,316 21,009 19,022 17,457 15,318 13,469 10,724
Four years later 25,108 21,247 18,675 16,463 14,986 12,481
Five years later 24,624 20,902 17,848 16,063 13,950
Six years later 24,581 20,205 17,417 15,120
Seven years later 23,971 19,731 16,518
Eight years later 23,538 18,791
Nine years later 22,602
Redundancy (deficiency) $ 1,460 $ 1,294 $ 1,824 $ 3,541 $ 4,755 $ 4,991 $ 3,579 $ 2,388 $ 1,567
</TABLE>
Analysis of Loss and Loss Adjustment Expense Development
(In Thousands)
Gross Reserves
<TABLE>
<CAPTION>
1994 1995 1996 1997 1998
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Gross liability for unpaid claims
and claim adjustment expenses $21,517 $19,007 $15,206 $14,657 $12,969
Cumulative amount paid
One year later 4,766 5,077 3,716 4,133
Two years later 8,625 7,836 6,271
Three years later 10,338 9,963
Four years later 12,034
Gross liability reestimated as of
One year later $19,618 $16,995 $14,568 $12,356
Two years later 18,181 16,469 12,560
Three years later 17,499 14,989
Four years later 16,344
Redundancy (deficiency) $ 5,173 $ 4,018 $ 2,646 $ 2,301
</TABLE>
The top line shows the original reserves at the balance sheet date for each
of the indicated years. These amounts represent initial reserve estimates
for the current and all prior accident years. The lower portion of the table
shows the Group's re-estimated values for the previously recorded reserves
based on the experience at the end of each succeeding year. The upper
portion of the table shows the cumulative amounts paid on claims settled
subsequent to the end of each calendar year.
The cumulative redundancy (deficiency) represents the total change in
initial estimates over all subsequent calendar years. For example, the 1989
net reserve developed a redundancy of approximately $1,460,000 over nine
years. That amount is reflected in income over the nine year period. Its
full impact was not reflected in any one calendar year. New or modified
products can produce different results from historical trends of similar
product lines utilized in forecasting their ultimate loss exposure.
Claim payment patterns can be affected by numerous circumstances, such as
changes in reinsurance retention or changes in claim practices that could
lead to a speeding up or slowing of claim settlement rates.
In evaluating the information contained in the reserve development table, it
should be noted that each entry includes the effects of all changes in
amounts for prior periods. For example, the redundancy or deficiency related
to losses settled in 1998, but incurred in 1989, will be included in the
cumulative deficiency amounts for 1989 through 1998. Conditions and trends,
such as inflation, that have affected reserve development in the past may
not necessarily occur in the future. Therefore, it is not appropriate to
extrapolate future deficiencies or redundancies from this table.
ITEM 7 - CONSOLIDATED FINANCIAL STATEMENTS
NORTH EAST INSURANCE COMPANY AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE(S)
<S> <C>
Report of Independent Accountants 24
Financial Statements:
Consolidated Balance Sheet as of December 31, 1998 25
Consolidated Statements of Operations for the years
ended December 31, 1998 and 1997 26
Consolidated Statements of Comprehensive Income
for the years ended December 31, 1998 and 1997 27
Consolidated Statements of Changes in Shareholders'
Equity for the years ended December 31, 1998 and 1997 28
Consolidated Statements of Cash Flows for the years
ended December 31, 1998 and 1997 29
Notes to Consolidated Financial Statements 31
</TABLE>
PricewaterhouseCoopers
a professional services firm
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders and Directors of
North East Insurance Company:
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of operations, comprehensive income, shareholders'
equity and cash flows presently fairly, in all material respects, the
financial position of North East Insurance Company and subsidiaries (the
"Company") at December 31, 1998, and the results of their operations and
their cash flows for each of the two years in the period ended December 31,
1998, in conformity with generally accepted accounting principles. These
financial statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based
on our audits. We conducted our audits of these statements in accordance
with generally accepted auditing standards which require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining,
on a test basis, evidence supporting the amounts and disclosures in the
financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
/S/PricewaterhouseCoopers LLP
Portland, Maine
March 31, 1999
NORTH EAST INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
as of December 31, 1998
<TABLE>
<CAPTION>
ASSETS 1998
- ------ ----
<S> <C>
Investments (Note F):
Fixed maturities available for sale, at fair value
(amortized cost $15,257,356) $15,682,543
Equity securities available for sale, at fair value
(cost $501,628) 482,888
Short-term investments, at fair value 1,526,752
-----------
Total investments 17,692,183
Reinsurance (loss and loss adjustment expense
reserves and paid recoverables (Note D)) 2,723,957
Premium balances receivable 6,367,423
Reinsurance premium balances receivable 1,694,592
Deferred policy acquisition costs (Note B) 1,856,230
Prepaid reinsurance premiums (ceded unearned premium
(Note D)) 765,934
Cash on hand 310,937
Investment income due and accrued 250,422
Property and equipment, net of accumulated depreciation
(Note G) 249,982
Deferred tax asset (Note C) 1,671,040
Prepaid federal income tax 9,242
Other assets 39,030
-----------
Total Assets $33,630,972
===========
LIABILITIES
- -----------
Losses and loss adjustment expenses (Note D and H) $12,969,074
Unearned premiums 8,370,294
Reinsurance balances payable 761,044
Reserve for unpaid expenses and other liabilities 834,220
Book overdraft, net 392,735
Other liabilities 46,738
-----------
Total Liabilities 23,374,105
-----------
Commitments and contingent liabilities (Notes D and J)
SHAREHOLDERS' EQUITY (Note E)
- -----------------------------
Common stock $1.00 par value, authorized 12,000,000 shares,
issued and outstanding 3,049,089 shares 3,049,089
Additional paid-in capital 6,407,132
Accumulated other comprehensive income 268,255
Accumulated retained earnings 532,391
-----------
Total Shareholders' Equity 10,256,867
-----------
Total Liabilities and Shareholders' Equity $33,630,972
===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
NORTH EAST INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
for the years ended December 31, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Revenues:
Premiums earned $13,768,678 $11,759,548
Premiums ceded (Note D) (1,712,230) (266,065)
----------------------------
Net premiums earned 12,056,448 11,493,483
Net investment income (Note F) 870,548 763,438
Realized capital gains and
other income (Note F) 54,272 35,321
----------------------------
Total revenues 12,981,268 12,292,242
Expenses:
Losses and loss adjustment expenses 8,493,082 8,358,886
Reinsurance recoveries (Note D) (135,409) (1,558,084)
----------------------------
Net losses and loss adjustment
expenses 8,357,673 6,800,802
Underwriting expenses incurred 4,402,072 5,025,434
----------------------------
Total expenses 12,759,745 11,826,236
----------------------------
Income (loss) before provision for
income taxes 221,523 466,006
Provision for income taxes (Note C) 63,836 177,326
----------------------------
Net income $ 157,687 $ 288,680
============================
Net income per common share:
Basic $ 0.05 $ 0.10
============================
Diluted $ 0.05 $ 0.09
============================
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
NORTH EAST INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
for the years ended December 31, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Net income $157,687 $288,680
Other comprehensive income:
Change in unrealized appreciation
(depreciation) of securities 162,040 307,285
Reclassification adjustment for gains included
in net income (54,272) (35,321)
----------------------
Total other comprehensive income 107,768 271,964
----------------------
Comprehensive income $265,455 $560,644
======================
Supplemental disclosures of comprehensive income
information:
Tax expense relating to unrealized holding gains $ 55,517 $ 82,675
Tax expense relating to reclassification
adjustment for realized gains $ 0 $ 0
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
NORTH EAST INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
for the years ended December 31, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Common stock issued and outstanding
(authorized 12,000,000 shares):
Outstanding at beginning of year 3,046,842 3,002,375
Issued during year 2,247 44,467
---------------------------
Outstanding at end of year 3,049,089 3,046,842
---------------------------
Common stock, par value $1.00:
Balance at beginning of year $ 3,046,842 $3,002,375
Change during year 2,247 44,467
---------------------------
Balance at end of year 3,049,089 3,046,842
---------------------------
Additional paid-in capital:
Balance at beginning of year 6,403,621 6,348,039
Change during year 3,511 55,582
---------------------------
Balance at end of year 6,407,132 6,403,621
---------------------------
Accumulated other comprehensive income:
Balance at beginning of year 160,487 (111,477)
Change during year, net 107,768 271,964
---------------------------
Balance at end of year 268,255 160,487
---------------------------
Accumulated retained earnings:
Balance at beginning of year 374,704 86,024
Net income (loss) 157,687 288,680
---------------------------
Balance at end of year 532,391 374,704
---------------------------
Total shareholders' equity at end of year $10,256,867 $9,985,654
===========================
</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 years ended December 31, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Cash flows from operating activities:
Insurance premiums received $12,289,267 $11,123,501
Loss and loss adjustment expenses paid (7,542,863) (7,668,046)
Operating expenses paid (4,597,393) (5,663,096)
Investment income received 830,030 837,885
----------------------------
Net cash provided by (used in)
operating activities 979,041 (1,369,756)
----------------------------
Cash flows from investing activities:
Fixed maturities - sold 3,556,062 3,863,582
Fixed maturities - matured 1,130,571 0
Fixed maturities - purchased (7,143,841) (1,850,675)
Equity securities - purchased (409,365) 0
Purchase of property and equipment (67,716) (223,730)
Investment property sold 0 76,160
Sale of property and equipment 24,587 18,224
----------------------------
Net cash provided by (used in)
investing activities (2,909,702) 1,883,561
----------------------------
Cash flows from financing activities:
Increase (decrease) in book overdraft (4,388) 390,058
----------------------------
Net cash provided
By (used in) financing activities (4,388) 390,058
----------------------------
Net increase (decrease) in cash
and short-term investments (1,935,049) 903,863
Cash and short-term
investments at beginning of year 3,772,738 2,868,875
----------------------------
Cash and short-term
investments at end of year $ 1,837,689 $ 3,772,738
----------------------------
</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
for the years ended December 31, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Net income $ 157,687 $ 288,680
Increase (decrease) in loss and loss
adjustment expense reserve 814,810 (548,357)
Increase in unearned premium reserve, net 1,705,549 2,731,741
Increase (decrease) in expense accruals and
other liabilities 183,464 (350,338)
Loss on disposal of property and equipment 0 63,238
Gain on investment activities (54,272) (18,974)
Increase in deferred policy acquisition
costs (826,742) (630,893)
Depreciation and amortization expense 218,576 195,115
Common shares issued under employee bonus
incentive plan 5,758 100,049
Increase in premium and ceded
reinsurance balances (1,471,730) (3,405,610)
Decrease in allowance for doubtful
accounts (1,000) (15,000)
Decrease (increase) in investment income
due and accrued (40,518) 74,447
Amortization of bond premium, net 72,616 72,030
Gain on sale of real estate 0 (16,347)
Decrease (increase) in other assets 151,007 (86,863)
Decrease in deferred tax asset 63,836 177,326
----------------------------
Net cash provided by (used in) operating
activities $ 979,041 $(1,369,756)
============================
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
NORTH EAST INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
____________________
A. Summary of Significant Accounting Policies:
Basis of Presentation
North East Insurance Company and Subsidiaries' ("North East" or "the
Company") consolidated financial statements have been prepared on the basis
of generally accepted accounting principles. The consolidated financial
statements include the Company and its wholly-owned subsidiaries American
Colonial Insurance Company (ACIC) and North Atlantic Underwriters, Inc.
(NAU). Intercompany transactions have been eliminated.
The Company is engaged in the business of underwriting and accepting
property and casualty insurance risks in the State of Maine. Its principal
insurance products consist of personal and commercial automobile coverage
(including automobile liability and automobile physical damage) and other
general lines, including but not limited to, general liability, commercial
multi-peril, inland marine, fire and allied lines. ACIC, licensed to write
property and casualty insurance risks in the states of New York and Texas,
has not written or renewed any insurance risks since March 1990 and is in
runoff. NAU, a Maine domiciled brokerage company, is dormant.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at
the date of the financial statements, and the reported revenues and expenses
during the reporting period. Actual results could differ from these
estimates.
Certain 1997 amounts have been reclassified in 1998 for comparative
purposes.
Premiums and Unearned Premiums
Premium revenues are reported as earned, principally on a daily pro rata
basis over the terms of the respective policies. Unearned premiums represent
the portion of premiums written applicable to the unexpired terms of the
policies.
Premium balances receivable represent amounts to be collected from agents
and insureds. The Company offers insureds installment plans under which
insureds may remit amounts due, in accordance with a predetermined schedule,
over the term of the policy. Premium balances receivable are recorded for
the full premium amount when the policy is written. These receivables
include amounts not currently due under the installment plan. Premium
balances receivable include $5,272,227 for amounts not yet due at December
31, 1998. The allowance for doubtful accounts at December 31, 1998 was
$16,000.
Losses and Loss Adjustment Expenses
The reserve for losses and loss adjustment expenses includes unpaid losses
and loss adjustment expenses and a provision for incurred but not reported
losses. Unpaid losses and loss adjustment expenses are based primarily on
loss adjusters' evaluations, estimates for losses incurred but not reported
and an estimate for salvage and subrogation recoverable. Reserves are
continually reviewed and modified, and any resulting adjustments are
reflected in current operating results.
Deferred Policy Acquisition Costs
Policy acquisition costs, such as commissions, underwriting salaries and
other costs incurred in connection with acquiring new business, have been
capitalized to the extent that the related costs are recoverable and are
being amortized over the period in which the related premiums are earned.
Anticipated losses and loss adjustment expenses and investment income
attributable to the related premiums are considered in determining the
amount of costs to be deferred.
Reinsurance
Premiums ceded are reported as earned, principally on a daily pro rata basis
over the terms of the respective policies. Unearned premiums ceded represent
the portion of ceded premiums written applicable to the unexpired terms of
the policies.
Ceded premium adjustments for loss sensitive reinsurance contracts are
reported immediately as ceded earned premium based on the Company's best
estimate of the ultimate loss exposure for the contract as of the balance
sheet date.
Property and Equipment
Property and equipment are stated at cost, net of accumulated depreciation.
The Company provides for depreciation on the straight-line method by charges
to expense which are sufficient to write off the cost of the assets over
their estimated useful lives. Maintenance and repairs are charged to expense
as incurred; expenditures for improvements are capitalized. Upon sale or
retirement, the cost and related accumulated depreciation are eliminated
from their respective accounts and any resulting gain or loss is included in
the results of operations.
Employee Benefits
The Company maintains a 401(k) Profit Sharing Plan (the "Plan") covering all
employees. The Plan is intended to provide funds for participants' use at
retirement. Employees may elect to contribute up to 10% of their pre-tax
earnings to the Plan. The Company provides a matching contribution of 25% of
the first 4% of an employee's elective contribution. The Plan also provides
that the Company may make an additional contribution subject to the
profitability of the Company for the related calendar year. For the years
ended December 31, 1998 and 1997, the Company contributed $10,218 and
$9,401, respectively, pursuant to the matching formula. The Company
contributed $0 under the profitability formula for the years ended December
31, 1998 and 1997.
The Company does not provide any post-retirement benefits to its employees.
Income Taxes
The provision for income taxes includes amounts currently payable and
deferred income taxes, which result from differences between financial
reporting and tax basis reporting of assets and liabilities, and are
measured using enacted tax rates and laws. Deferred tax assets are
recognized to the extent future realization of the tax benefit is more
likely than not.
Investments
Fixed maturities and equity securities, all of which are available for sale,
are stated at fair value. Short-term investments are carried at cost which
approximates fair value. The Company, at times, may be at risk on short-term
investments as the values on deposit may exceed the amount protected through
federally guaranteed insurance programs; however, the Company has never
experienced a loss of this nature.
Realized capital gains and losses from the sale of investments are
determined on the basis of identified cost and are credited or charged to
income. Unrealized capital gains and losses from the valuation of fixed
maturities and equity securities at fair value, net of provision for income
taxes, are credited or charged directly to shareholders' equity. If a
decline in fair value of an invested asset is considered to be other than
temporary, the investment is reduced to its net realizable fair value and
the reduction is accounted for as a realized loss.
Capital Structure
The Company's capital consists of 12,000,000 authorized common shares, par
value $1.00, of which 3,049,089 are issued and outstanding. During 1998 and
1997 the Company issued 2,247 and 44,467 common shares pursuant to employee
bonus awards.
Earnings per Share
Effective December 31, 1997, North East adopted Financial Accounting
Standards ("FAS") No. 128, "Earnings Per Share" which requires dual
presentation of basic and diluted earnings per share ("EPS") . Basic EPS is
computed by dividing net income available to common stockholders by the
weighted average number of common shares outstanding. The weighted average
number of shares outstanding used to calculate basic EPS was 3,048,138 and
3,022,898 in 1998 and 1997, respectively. The weighted average number of
shares outstanding used to calculate diluted EPS was 3,124,489 and 3,098,235
in 1998 and 1997, respectively. Diluted EPS is computed by dividing net
income available to common stockholders by the weighted average number of
common shares outstanding while giving effect to all dilutive potential
common shares outstanding. The difference between basic and diluted shares
used to calculate EPS is the dilutive effect of stock options. Net income
used to calculate basic and diluted EPS was identical.
Statements of Cash Flows
The Company utilizes the direct method of presenting cash flows from
operating activities. For purposes of the statements of cash flows, cash was
determined to include cash and short-term (highly liquid) investments with
original maturities less than three months.
Accounting Pronouncements Adopted
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
shareholders' 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 was required to adopt FAS 131
effective January 1, 1998 and comparative information for earlier years must
be restated. North East has determined that its current segment reporting
structure meets the requirements of FAS 131 and no restatement of financial
information is required.
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 (see Earnings per Share, above).
In February 1998, the FASB issued FAS No. 132, Employers' Disclosures about
Pensions and Other Postretirement Benefits", which revises current
disclosure requirements for employers' pension and other retiree benefits.
FAS 132 does not change the measurement or recognition of pension or other
postretirement benefit plans. The Company was required to adopt FAS 132
effective January 1, 1998, with restatement of disclosure for earlier years
required. The adoption of FAS 132 by North East did not have a material
effect on NEIC's results of operation or financial position in that the
Company does not provide pension or other postretirement benefits.
New Accounting Prouncements
In December 1997, the Accounting Standards Executive Committee ("AsSEC")
issued Statement of Position ("SOP") 97-3, "Accounting by Insurance and
Other Enterprises for Insurance-Related Assessments", which provides
guidance on accounting for insurance-related assessments. North East is
required to adopt SOP 97-3 effective January 1, 1999. Previously issued
financial statements should not be restated unless the SOP is adopted
prior to the effective date and during an interim period. The adoption of
SOP 97-3 is not expected to have a material impact on North East's results
of operation, liquidity or financial position.
In October, 1998 the AsSEC issued SOP 98-7, "Deposit Accounting: Accounting
for Insurance and Reinsurance Contracts That Do Not Transfer Insurance
Risk", which provides guidance on applying the deposit method of accounting
to insurance and reinsurance contracts that do not transfer insurance risk.
North East is required to adopt SOP 98-7 effective January 1, 2000.
Previously issued financial statements should not be restated unless the SOP
is adopted prior to the effective date and during an interim period. The
adoption of SOP 98-7 is not expected to have a material impact on North
East's results of operation, liquidity or financial position.
In June 1998, the FASB issued FAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which establishes accounting and
reporting standards for derivative instruments, including certain
derivatives embedded in other contracts, and for hedging activities.
Generally, FAS 133 requires recognition of all derivatives, at fair value,
as either assets or liabilities in the statement of financial position. The
Company is required to adopt the provisions of FAS 133 effective January 1,
2000. Adoption of FAS 133 is not expected to have a material effect on the
Company's consolidated results of operations or financial position as the
Company presently does not hold any derivative instruments nor does it
participate in any hedging transactions.
B. Deferred Policy Acquisition Costs:
Deferred policy acquisition costs represent the Company's best estimate of
amounts expected to be recovered against future earned premium from policies
currently inforce and anticipated investment income. The estimates take into
account an estimate for anticipated future loss experience of these
policies. During 1998, based on the absence of loss volatility in its
current insurance coverages, the Company modified certain assumptions
relative to anticipated future loss experience volatility resulting in a
change in estimate of approximately $600,000. While the Company believes
that the recovery of this asset is likely, it is remotely possible that the
assumptions used will prove inappropriate and the Company's estimate that it
will recover the carrying amount of this asset could change.
The following table reconciles the change in deferred policy acquisition
costs for the years ended December 31, 1998 and 1997:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Balance, beginning of year $ 1,029,488 $ 398,595
Deferral of policy acquisition costs
during year 4,398,369 3,570,811
Amortization of deferred policy
acquisition costs during year (3,571,626) (2,939,918)
----------------------------
Balance, end of year $ 1,856,230 $ 1,029,488
============================
</TABLE>
C. Federal Income Taxes:
A reconciliation of income taxes computed by applying the federal income tax
rate to income before income taxes and the provision for income taxes for
the year ended December 31, 1998 and 1997 is as follows:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Tax provision at federal
statutory rate of 34% $ 75,318 $158,442
Permanent differences between GAAP basis
income and tax basis income 6,971 9,392
Change in valuation allowance (18,453) 9,492
----------------------
Provision for income taxes $ 63,836 $177,326
======================
</TABLE>
Details of the components of the deferred tax asset and liabilities and the
valuation allowance at December 31, 1998 are as follows:
<TABLE>
<S> <C>
Deferred Tax Assets
- -------------------
Tax based on net operating loss carryforward $1,547,368
Loss reserve adjustments 420,524
Unearned premium adjustments 517,096
Capital loss carryforward, including temporary difference 211,554
----------
Gross deferred tax assets 2,696,542
Less Valuation allowance (211,554)
----------
Gross deferred tax asset after valuation allowance 2,484,988
----------
Deferred Tax Liabilities
- ------------------------
Deferred policy acquisition costs 631,118
Unrealized appreciation of investments 138,192
Other 44,638
----------
Gross deferred tax liability 813,948
----------
Net deferred tax asset $1,671,040
==========
</TABLE>
The Company's unused net operating loss carryforwards of $4,551,082 expire
in varying amounts between 2001 and 2013. The Company also has unused
capital loss carryforwards of approximately $209,504 expiring by 2001.
D. Commitments and Contingent Liabilities:
Reinsurance
The Company cedes various risks to other insurers and reinsurers. The
Company utilizes excess of loss and quota share reinsurance as well as
catastrophe and clash coverage. Ceding of insurance does not discharge the
Company's obligation to the policyholder in the event the reinsurer is
unable to fulfill its obligation.
Current reinsurance protection is provided through two layers of excess of
loss reinsurance. The first layer, considered to be the working layer,
assumes $150,000 of coverage beyond the first $50,000. The second layer,
allows the Company to offer policy limits up to $1,000,000 by assuming
$800,000 of coverage beyond the first $200,000. The casualty clash excess of
loss treaty provides coverage for $1,000,000 in excess of $1,000,000 in the
event more than one of our insureds is involved in a single loss occurrence
exposing the coverage limits of the policies. The property catastrophe
coverage provides for $1,500,000 of coverage in excess of $500,000 in the
event of a catastrophe. The first layer excess of loss treaty was endorsed
in 1997 to revise the premium rate, eliminate the profit sharing and provide
a experience rated premium adjustment in the event the North East's direct
loss and loss expense ratio exceeded 57% and 68% for the 1997 and 1998
calendar years, respectively. The 35% quota share treaty in effect for 1996
and 1995 was cancelled on a runoff basis effective January 1, 1997 and
subsequently commuted on September 30, 1997.
The reinsurance balances receivable include $1,666,985 from Motors Insurance
Corporation on behalf of a wholly owned subsidiary, MIC Reinsurance
Corporation. No other reinsurer accounts for more than 10% of the total
balance at December 31, 1998.
Reinsurance balances payable represent unpaid ceded premiums of $186,130 and
funds held under reinsurance contracts of $574,914 at December 31,1998.
Paid loss and loss adjustment expenses recoverable from reinsurers at
December 31, 1998 amounted to $171,839. The allowance for uncollectible
reinsurance balances at December 31, 1998 was $110,000.
Ceded loss and loss adjustment expense reserves include estimates of the
reinsurers share of the ultimate cost for all unpaid losses and loss
adjustment expenses incurred as of the balance sheet date. The ceded
reserves are determined using statistical projections based on the
historical development of past incurred and paid claims. Management believes
these reserves are adequate to cover all future loss settlements and
represent the best estimate of the total ceded reserves as of the balance
sheet date; however, management is also cognizant that the final ultimate
ceded reserves may yield a different result. Management will continue to
monitor the Company's claim settlements closely in order to provide timely
adjustments to this ceded reserve when appropriate.
Written premium amounts reflected in the financial statements are as
follows:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Direct Written Premiums $15,857,353 $12,304,640
Assumed Written Premiums 9,488 10,036
Ceded Return (Written) Premiums (2,104,844) 1,910,548
----------------------------
Net Written Premiums $13,761,997 $14,225,224
============================
</TABLE>
Ceded written premium for the year ended December 31, 1998 includes $914,162,
$515,477 and $544,107 for the first layer, second layer and aggregate limit
endorsement to the first excess of loss reinsurance coverages, respectively. In
addition 1998 ceded written premium includes $121,004 for the casualty clash
and property catastrophe coverage and $10,094 in experience adjustments for
prior year reinsurance protection. Ceded return (written) premiums for the year
ended December 31, 1997 includes $793,697 in return premium due to retroactive
rate adjustments to the Company's first layer excess of loss treaty currently
in force, $175,503 of return premium due to experience rating adjustments for
various treaties now in runoff and $71,005 in return premium due rate
adjustments to the Company's second layer excess of loss treaty currently
inforce. In addition, the aggregate limit excess endorsement to the first
layer excess of loss treaty provided $1,800,000 in ceded return adjustment
premium. Without these adjustments, ceded written premium for the year ended
December 31, 1997 was $929,657.
Earned premium amounts reflected in the financial statements are as follows:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Direct Earned Premiums $13,758,008 $11,742,870
Assumed Earned Premiums 10,670 16,678
Ceded Earned Premiums (1,712,230) (266,065)
----------------------------
Net Earned Premiums $12,056,448 $11,493,483
============================
</TABLE>
Other ceded reinsurance amounts reflected in the financial statements include
reinsurance commission recovered from the reinsurer in 1998 of $219,660 and
reinsurance commission returned to the reinsurer in 1997 of $1,194,463.
Reinsurance commission recovered in 1998 pertains to the first and second
layer excess of loss treaties. Reinsurance commission returned to the
reinsurer in 1997 includes commission on the returned written premium and a
commission adjustment pursuant to the quota share treaty commuted
September 30, 1997 wherein the deductible was reduced from $1,000 to $100
increasing loss recoveries and reducing expense recoveries by approximately
$900,000.
Other
The Company has an Employment Agreement with Mr. Schatz, dated December 1,
1997 commencing January 1, 1998 and expiring December 31, 2000. The
agreement provides for a base salary of $175,000 per annum commencing in
1998 (subject to annual adjustments based on increases in the Consumer Price
Index). The agreement also entitles Mr. Schatz to a bonus in the event
aggregate after tax net profit exceeds targeted growth expectations as
determined by the Board of Directors. The agreement contains certain non-
renewal and termination clauses which if triggered could result in
compensation awards ranging from $175,000 to $350,000 depending on the
circumstances.
As of October 28, 1996 the Company entered into a letter agreement with Mr.
Schatz, in which it agreed to pay him a special cash bonus of $60,000 in
1996,and cash bonuses of $33,997 per year in 1997 through 2006 (totaling
$339,970). These annual cash bonuses will terminate if Mr. Schatz
voluntarily terminates his employment other than for "Good Reason" as
defined in his Employment Continuity Agreement, or if the Company terminates
his employment for "Good Cause" as defined in the Employment Continuity
Agreement. In exchange for these payments, Mr. Schatz has agreed to release
any and all claims he may have had for non-payments under his Employment
Agreement for 1991 through October 1996.
The Company has an Employment Agreement with Mr. Libby commencing January 1,
1998 and expiring December 31, 1999. The agreement provides for a base
salary of $120,000 per annum commencing in 1998 (subject to annual
adjustments based on increases in the Consumer Price Index). The agreement
contains certain non- renewal and termination clauses which if triggered
could result in a compensation award of $120,000 depending on the
circumstances.
The Company has an Employment Agreement with Mr. Koren commencing October 1,
1998 and expiring December 31, 2000. The agreement provides for a base
salary of $85,000 per annum (subject to annual adjustments, after 1999,
based on increases in the Consumer Price Index). The agreement contains
certain non- renewal and termination clauses which if triggered could result
in a compensation award ranging from $50,000 to $85,000 depending on the
circumstances.
As of October 28, 1996 the Company entered into Employment Continuity
Agreements with each of Messrs. Schatz, Libby, and Koren. These Agreements
provide for special severance compensation if, within 12 months after a
"Change in Control Event," the executive's employment terminates at the
instigation of the Company (other than for "Good Cause") or at the
instigation of the executive for "Good Reason." The maximum benefit payable
under these Agreements is 300% (for Mr. Schatz) or 200% (for Messrs. Libby
or Koren) of the executive's annual base salary then in effect plus profit-
sharing award for the prior year, subject however to a cap of 299% of the
executive's "Base Amount" as defined in Section 280G of the Internal Revenue
Code.
E. Statutory Surplus and Statutory Net Income:
The following tables reconcile statutory surplus and net income amounts
reported under statutory accounting principles to those reported herein
under GAAP at December 31, 1998 and 1997 and for the years then ended.
<TABLE>
<CAPTION>
As of December 31,
----------------------------
1998 1997
---- ----
<S> <C> <C>
Statutory surplus,
as reported by the Company $ 5,686,442 $6,457,206
Statutory basis adjustments 251,467 (98,443)
----------------------------
Statutory surplus, as adjusted herein 5,937,909 6,358,763
Reconciliation to GAAP basis:
Deferred policy acquisition costs 1,856,230 1,029,488
Provision for unauthorized reinsurance 253,000 126,600
Deferred tax asset 1,671,040 1,790,393
Excess of statutory reserve over
statement reserves 36,200 145,400
Other non-admitted assets
Data processing equipment 8,881 62,500
Other 189,056 380,115
Premiums receivable 5,363 233
Adjustment for difference in valuation
method for certain fixed maturities 425,188 243,162
GAAP basis reserves in lieu of provision
for unauthorized and other statutorily
non-admitted assets (126,000) (151,000)
----------------------------
GAAP basis, surplus $10,256,867 $9,985,654
============================
</TABLE>
<TABLE>
<CAPTION>
year ended December 31,
----------------------------
1998 1997
---- ----
<S> <C> <C>
Statutory net income (loss), as reported $(1,031,346) $ (266,788)
Statutory basis adjustments 251,467 (161,148)
----------------------------
As adjusted herein (779,879) (427,936)
Reconciliation to GAAP basis:
Change in deferred policy acquisition
costs 826,742 630,893
Equity in net income (loss) on non
insurance subsidiary 0 13,339
GAAP basis reserves in lieu of provision
for unauthorized and other statutorily
non-admitted assets 25,000 39,000
Other 149,660 251,507
Federal income tax adjustment 0 (40,797)
Deferred tax expense (63,836) (177,326)
----------------------------
GAAP basis, net income $ 157,687 $ 288,680
============================
</TABLE>
F. Investments:
The amortized cost and fair value of investments in fixed maturities
available for sale at December 31, 1998 were as follows:
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- -----
<S> <C> <C> <C> <C>
U.S. Treasury Securities
and Obligations of U.S.
Government agencies $ 5,551,361 $323,858 $ 1,744 $ 5,873,475
Public Utilities 1,000,959 9,041 0 1,010,000
Corporate Securities 8,705,036 108,276 14,244 8,799,068
-------------------------------------------------------
Total Fixed Maturities $15,257,356 $441,175 $15,988 $15,682,543
=======================================================
</TABLE>
The investment concentration of corporate fixed maturities for each
investment category which in the aggregate exceeds 10% of shareholders'
equity at December 31,1998 is as follows:
<TABLE>
<CAPTION>
Estimated
Fair
Value %
--------- -
<S> <C> <C>
Category:
Bank & Finance $3,408,000 38.7
Retail & Consumer 756,068 8.6
Industrial 4,635,000 52.7
---------------------
$8,799,068 100.0
=====================
</TABLE>
The amortized cost and estimated fair value of all fixed maturities
available for sale at December 31, 1998 are shown below by contractual
maturity. Actual dates for realization of such proceeds will differ from the
contractual maturity date because the borrowers may have the right to call
or prepay obligations with or without call or prepayment penalties.
<TABLE>
<CAPTION>
Amortized Estimated
Cost Fair Value
--------- ----------
<S> <C> <C>
Due to Mature:
Within one year $ 1,059,289 $ 1,059,067
After one year through five years 10,880,463 11,069,300
After five years through ten years 832,443 853,396
After ten years through fifteen years 249,243 260,000
After fifteen years 2,235,918 2,440,780
----------------------------
$15,257,356 $15,682,543
============================
</TABLE>
Proceeds from sales of investments in fixed maturities available for sale
during 1998 and 1997 were $3,556,062 and $3,863,582, respectively. During
1998, fixed maturities with par value of $1,130,571 matured. There were no
maturities of fixed maturities available for sale in 1997. Gross gains of
$55,730 and $3,320 and gross losses of $462 and $4,849 were realized on
sales of fixed maturities in 1998 and 1997, respectively.
The Company maintains deposits with various states in which the Company is
licensed. These deposits are subject to certain regulatory restrictions. The
aggregate amortized cost of such investments was $2,787,535 at December 31,
1998.
The estimated fair value of the Company's investment portfolio is based on
market values as at the balance sheet date. The majority of the Company's
investment portfolio is sensitive to movement in the interest rate regulated
by the Federal Reserve. Generally, an increase in the interest rate by the
Federal Reserve would result in a lower market value and a decline in the
rate should result in a higher market value for the Company's investment
portfolio. The value of these assets is adjusted according to the market
conditions as of the balance sheet date.
Realized capital gains (losses) for the years ended December 31, 1998 and
1997 consisted of the following:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Fixed maturities $55,268 $(1,529)
Gain on sale of real estate 0 16,347
Gain from equity securities 0 20,870
Other (996) (367)
--------------------
Total gain $54,272 $35,321
====================
</TABLE>
The change in unrealized appreciation (depreciation), before provision for
income taxes, on fixed maturities available for sale and equity securities
was as follows:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Fixed maturities $182,025 $295,880
Equity securities (18,740) 58,759
----------------------
Total $163,285 $354,639
======================
</TABLE>
Net investment income for the years ended December 31, 1998 and 1997
consisted of the following:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Interest on fixed maturities $ 963,896 $943,477
Interest on short-term investments 190,551 105,330
Rental income, investment property 0 7,250
Dividends on equity securities 3,219 451
Amortization of bond premium, net (69,735) (70,537)
Other 9,096 9,575
------------------------
Total investment income 1,097,027 995,546
Investment expenses 226,479 232,108
------------------------
Net investment income $ 870,548 $763,438
========================
</TABLE>
G. Property and Equipment:
Property and equipment, which are stated at cost, consist of the following
as of December 31, 1998:
<TABLE>
<CAPTION>
Estimated
Useful
Amount Life
------ ---------
<S> <C> <S>
Leasehold Improvements $ 74,104 lease term - expires
year 2000
Equipment, furniture and
fixtures and automobiles 252,587 3-5 years
Computer software & hardware 478,931 3-5 years
--------
805,622
Less accumulated
depreciation and amortization 555,640
--------
$249,982
========
</TABLE>
Depreciation and amortization expense for the years ended December 31, 1998
and 1997 was $218,576 and $195,115, respectively.
The unamortized value of computer software was $17,354 for the year ended
December 31, 1998. Depreciation expense of computer software was $5,785 and
$38,213 for the years ended December 31, 1998 and 1997, respectively.
H. Reserve for loss and loss adjustment expenses :
The following table provides a reconciliation of the changes in loss and
loss adjustment expense reserves, after deducting amounts recoverable from
reinsurers for 1998 and 1997.
Reconciliation of Liability for Loss and
Loss Adjustment Expenses (LAE)
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Reserves for losses and LAE:
Beginning of year $14,657,226 $15,205,583
Amounts recoverable from reinsurers
on unpaid losses 3,668,346 4,828,760
----------------------------
Beginning of year, net 10,988,880 10,376,823
Provision for losses and LAE for claims
arising in:
Current year 9,924,585 7,909,126
Prior years (1,566,912) (1,108,324)
----------------------------
8,357,673 6,800,802
Losses and LAE paid on claims arising in:
Current year 5,796,220 4,555,270
Prior years 3,243,377 1,633,475
----------------------------
9,039,597 6,188,745
Reserves for losses and LAE:
End of year, net 10,306,956 10,988,880
Amounts recoverable from reinsurers
on unpaid losses 2,662,118 3,668,346
----------------------------
Losses and loss adjustment expenses
per Consolidated Balance Sheet $12,969,074 $14,657,226
============================
</TABLE>
Reserves for losses and loss adjustment expenses represent estimates of the
ultimate cost of all unpaid losses and loss adjustment expenses incurred
through to the balance sheet date. These estimates are reviewed on a
quarterly basis and as experience develops and new information becomes
known, they are adjusted as necessary and are reflected in current operating
results.
For the years ending December 31, 1998 and 1997 the actuarial estimate
indicated that the prior year reserve for losses and loss adjustment
expenses were redundant by $1,566,912 and $1,108,324 respectively.
I. Stock Options:
At the Annual Shareholders Meeting, June 10, 1997, shareholders approved the
North East Insurance Company Stock Option Plan. The Plan provides for awards
of Incentive Stock Options (ISOs), nonqualified Stock Options (NSOs), and
Stock Appreciation Rights (SARs). ISOs and NSOs represent the right to
purchase North East common stock at a designated option price per share.
SARs represent the right to receive a future payment in an amount which is
determined by reference to the value of a share of common stock. Common
stock issuable under the Plan is limited to 400,000 shares in the aggregate.
The Plan is administered by a committee of two or more non-employee
directors appointed by the Board of Directors.
Employees may be awarded either ISOs or NSOs, in each case carrying an
option price of not less than 100% of the fair market value per share on the
date of grant. No ISO may be exercised more than ten years after the date of
grant, and no ISO may be granted to any employee who, at the time of grant,
owns more than 10% of the outstanding voting stock of the Company.
On October 28, 1996 the Board of Directors granted Robert G. Schatz a
Nonqualified Stock Option for 200,000 shares of common stock, at an exercise
price of $1.625 per share. The option was subject to shareholder approval of
the Plan at the Annual Shareholders Meeting, June 10, 1997. These options
are fully excercisable.
On June 10, 1997 the Board of Directors granted Ronald A. Libby an ISO for
100,000 shares of common stock, at an exercise price of $2.375 per share.
Under the option 20 percent become exercisable on the date of grant and on
the anniversary date of each of the four years following the date of grant.
During 1998 the Board implemented a program to award Nonqualified Stock
Options to non-employee directors. Nonqualified Stock Options have been
granted to each standing director at the rate of 1,000 shares per quarter at
a exercise price equal to the fair market value of the common stock on the
last day of the quarter. On April 10, 1998 the Company granted directors
options to purchase 74,000 shares at an exercise price of $2.8125 per share
and quarterly thereafter. Nonqualified Stock Options granted non-employee
directors and remaining unexercised at December 31, 1998 represented 95,000
shares of common stock at a weighted average price of $2.076 per share.
Total options granted during December 31, 1998 and 1997 represented 95,000
and 300,000 shares of common stock at a weighted average price of $2.71 and
$1.88 per share, respectively. Options excercisable at December 31, 1998 and
1997 represented 335,000 and 220,000 shares of common stock at a weighted
average price of $2.023 and $1.69 per share, respectively. At December 31,
1998 there were 5,000 shares reserved for issuance under the plan. No
options were exercised in 1998 or 1997.
All options expire ten years from the date of grant. No options were
exercised, forfeited or expired in 1998. The Company uses Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees",
to recognize compensation cost. If the Company had adopted the provisions of
FAS No. 123, "Accounting for Stock Based Compensation", net income and
earnings per share for 1998 and 1997 would have been reduced to the pro
forma amounts indicated below:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Net income (Loss)
As reported $157,687 $288,680
Pro forma 17,753 (4,848)
Earnings per common share:
As reported
Basic $ 0.05 $ 0.10
Diluted $ 0.05 $ 0.09
Pro forma
Basic $ 0.01 $ 0.00
Diluted $ 0.01 $ 0.00
</TABLE>
The fair value of each option granted is estimated on the effective date of
grant using a Black-Scholes option-pricing model assuming a seven year life
expectancy, a stock price volatility of 65% in 1998 and 80% in 1997, a
dividend yield of 0% for both 1998 and 1997 and a risk-free interest rate of
5.51% and 6.56% for 1998 and 1997, respectively. Fair value of options
granted during 1998 and 1997 were $1.90 and $1.85 per share, respectively.
J. Dividend Restriction:
Under Maine Law, dividends may only be paid from available and accumulated
statutory surplus funds which have been derived from net operating income
and net realized capital gains. At the present time the Company has an
accumulated statutory unassigned deficit and does not expect to be in a
position to pay dividends in the near future. The Company has never paid a
dividend.
K. Legal Proceedings:
On March 29, 1999 the Company received a letter from counsel to Samuel M.
Koren, who has been a Vice President of North East since 1978. As further
described in Item 10 below (see "Koren Employment Agreement; Resignation"),
Mr. Koren's counsel has asserted a claim for payment under an Employment
Continuity Agreement, and has stated an intention to file claims for
discrimination on various bases, including without limitation age and
religion. The letter does not specify the amount of damages. The Company
has offered to negotiate a reasonable retirement payment to Mr. Koren in
view of his many years of service to North East, but has denied liability on
the asserted claims.
Other than ordinary routine litigation incidental to the business, there are
no other material legal proceedings pending with regard to NEIC or its
wholly-owned subsidiary ACIC.
L. Leases:
The Company has various operating leases, including the lease of its home
office building, required in the day to day operations of the Company. The
expense incurred for lease and lease related items for the years ended
December 31, 1998 and 1997 was $165,693 and $210,934, respectively.
The following table is a schedule of future minimum lease payments:
<TABLE>
<CAPTION>
Lease Payment
-------------
<S> <C>
Year 1999 $141,291
Year 2000 144,823
</TABLE>
M. Subsequent Events:
During the fourth quarter of 1998 the Company initiated a rights offering to
existing shareholders of one share of common stock for each share
outstanding on November 9, 1998 at a price of $2.25 per share. On January
26, 1999, the Company terminated the planned offering of common stock to its
shareholders. Under the terms of the Rights Offering all subscription
amounts held by the Subscription Agent have been returned.
On March 16, 1999, the Company entered into an Agreement and Plan of Merger
with Motor Club of America ("MCA"), a property and casualty insurance
holding company whose stock is publicly traded through NASDAQ under the
symbol MOTR. Under the agreement, MCA would acquire NEIC through a merger
between the Company and a wholly-owned subsidiary of MCA. The proposed
merger was recently approved by the Boards of Directors of both NEIC and
MCA. The transaction will require approval by the shareholders of both
corporations, and will require authorization by state insurance regulators
in Maine and New York. Consummation of the merger is also subject to various
other conditions, which the Company currently expects to be satisfied in due
course. Under the proposed merger, NEIC shareholders would receive, at their
individual election, (a) $3.30 per share of NEIC common stock or (b) one
share of MCA common stock for each 5.25 shares of NEIC common stock, or (c)
a combination thereof. If the NEIC shareholders in the aggregate elect to
exchange more than 50% of their shares for MCA stock, the aggregate
percentage will be ratably reduced to 50%. Upon completion of the merger,
NEIC would become a wholly-owned subsidiary of MCA.
NORTH EAST INSURANCE COMPANY AND SUBSIDIARIES
ITEM 8 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None
Part III
ITEM 9 - DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
Set forth below is information concerning the current executive officers and
directors of NEIC.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Robert G. Schatz 53 President, Chairman of the
Board, Chief Executive
Officer and Director
Ronald A. Libby 55 Chief Operating Officer
Samuel M. Koren 58 Senior Vice President,
Secretary
Graham S. Payne 53 Treasurer, Chief Financial
Officer
Rebecca J. Cerny 46 Vice President
Edward B. Batal 58 Director
Terence P. Cummings 44 Director
Robert A. Hancock 46 Director
Wilson G. Hess 46 Director
Joseph M. Hochadel 51 Director
Bruce H. Suter 78 Director
Peter A. Russ 54 Director
</TABLE>
ROBERT G. SCHATZ has served as President and Chief Executive Officer of the
Company since March 1988. He was first elected as a Director in December
1987. Mr. Schatz also serves on the Board of Trustees of Unity College, in
Unity, Maine.
RONALD A. LIBBY joined the Company in December 1994 and serves as its Chief
Operating Officer. From 1987 to 1994 he was President of Maine Mutual Fire
Insurance Company.
SAMUEL M. KOREN is Senior Vice President and Secretary of NEIC. He joined
the Company in 1977 and has been an Officer since 1978. Mr. Koren recently
gave notice of termination of his employment, as described below.
GRAHAM S. PAYNE has been Treasurer and Chief Financial Officer of the
Company since 1987.
REBECCA J. CERNY has held the position of Vice President of the Company
since 1989. From 1986 to 1995 she also served as a Director of the Company.
EDWARD B. BATAL is President of Batal Agency, an insurance agency and real
estate broker in Sanford, Maine. He has been President of the agency since
1964. Mr. Batal was elected a Director of NEIC in November 1995.
TERENCE P. CUMMINGS is a Partner with Clausen Miller P.C., a law firm in New
York City. He has been a practicing attorney in New York since 1982, and was
affiliated with Ohrenstein & Brown from 1985 to 1997. Mr. Cummings was
elected a Director of NEIC in November 1995. Mr. Cummings also serves as a
Director of First United American Life Insurance Company, a subsidiary of
Torchmark Corporation.
ROBERT A. HANCOCK is a Principal of Mann, Frankfort, Stein & Lipp, an
accounting firm in Houston, Texas. Mr. Hancock was an auditor with Ernst &
Ernst in Houston from 1975 to 1978, and was President of Hancock, Carameros
& Rawls, P.C. from 1978 to 1996. Mr. Hancock was elected a Director of NEIC
in November 1995.
WILSON G. HESS has served as President of Unity College in Unity, Maine
since 1990. After starting as a professor at the college in 1977, he later
became Department Chairman (1985-88) and then Dean of Academic Affairs
(1988-89). From 1989 to 1990 he served as Dean of Sterling College in
Craftsbury, Vermont. Mr. Hess was elected a Director of NEIC in November
1995.
JOSEPH M. HOCHADEL has served as a Director since 1990, and previously had
served as a Director from 1981 to 1986. Since 1981 he has been a Partner
with Monaghan, Leahy, Hochadel & Libby, a Portland, Maine law firm.
PETER A. RUSS was first elected as a Director of NEIC in May 1998. Since
1990 he has served as President and sole Director of Foothold Management
Corporation, an investment advisory firm. He also is a General Partner of
Foothold Fund, L.P., an investment fund that owns approximately 9.9% of the
outstanding NEIC Common Stock.
BRUCE H. SUTER was first elected as a Director of NEIC in 1990. Mr. Suter
was a Vice President of Stone & Webster Management Consultants, a management
consulting firm, from 1985 until his retirement in December 1993. Prior to
joining Stone & Webster, Mr. Suter was President and Chief Executive Officer
of Ebasco Risk Management Consultants, Inc. and Associated Consulting
Management of Ebasco, Ltd.
Under the Company's bylaws, officers are elected annually by the Board of
Directors and serve at the pleasure of the Board. The Company's bylaws
currently provide that all directors of the Company are to be elected each
year at an annual meeting of shareholders.
There are no family relationships between any of the executive officers or
directors of the Company, nor were there any special arrangements by which
any of them was elected to his or her position.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Under Section 16(a) of the Securities Exchange Act of 1934, certain persons
associated with the Company (directors, executive officers and beneficial
owners of more than 10% of the outstanding Common Stock) are required to
file with the Securities and Exchange Commission and the Company various
reports disclosing their ownership of Company securities and changes in such
ownership. Under Section 16(a) of the Securities Exchange Act of 1934,
certain persons associated with the Company (directors, executive officers
and beneficial owners of more than 10% of the outstanding Common Stock) are
required to file with the Securities and Exchange Commission and the Company
various reports disclosing their ownership of Company securities and changes
in such ownership. The following is a list, to the Company's knowledge, of
all required Section 16(a) filings for 1998 that were not made on a timely
basis: Mr. Russ filed a late Form 3 report, concerning his election as a
director; Messrs. Batal, Cummings, Hancock, Hess, Hochadel, Russ, and Suter
each filed late Form 5 reports, concerning exempt option grants to them in
1998; Mr. Libby filed a late Form 5 report, concerning an exempt option
grant in 1997; Mr. Hochadel filed a late Form 4 report, concerning a
purchase of stock by him in 1998; and Ballantrae Partners, LLC, Murry N.
Gunty, Gunty & Co., Deborah L. Harmon, and Jonathan S. Kern each filed late
Form 4 reports, concerning four related sales in 1998 of stock owned by
Ballantrae and indirectly owned by the other reporting persons; Ms. Harmon
and Mr. Kern have not filed Form 5 reports, concerning exempt option grants
to them in 1998.
ITEM 10 - EXECUTIVE COMPENSATION
Set forth below is certain information concerning the compensation of each
executive officer of the Company who received more than $100,000 of salary
and bonus compensation for the prior fiscal year.
<TABLE>
<CAPTION>
Principle Position Year Salary Bonus Compensation (1)
- ------------------ ---- ------ ----- ----------------
<S> <C> <C> <C> <C>
Robert G. Schatz 1998 $175,673 $35,356 $10,541
President and Chief 1997 175,012 28,276 7,505
Executive Officer 1996 155,289 96,216 73,960
Ronald A. Libby 1998 120,465 7,000 3,984
Chief Operating 1997 110,319 25,293 3,316
Officer 1996 101,173 36,707 7,740
<FN>
<F1> For Mr. Schatz, other compensation in 1998 consists of $3,366 of
vacation pay, $5,575 for Company-paid insurance premiums, and $1,600
of matching contributions under the 401(k) Plan; other compensation
in 1997 consists of $3,365 in retroactive salary adjustments, $2,540
for Company-paid insurance premiums, and $1,600 of matching
contributions under the 401(k) Plan; and other compensation in 1996
consists of a $60,000 special bonus in lieu of prior year payments,
$9,590 of vacation pay, $2,540 for Company-paid insurance premiums,
and $1,830 of matching contributions under the 401(k) Plan.
For Mr. Libby, other compensation in 1998 consists of $2,692 of
vacation pay and $1,292 of matching contributions under the 401(k)
Plan; other compensation in 1997 consists of $2,116 of vacation pay
and $1,200 of matching contributions under the 401(k) Plan; and other
compensation in 1996 consists of $7,740 of vacation pay.
</FN>
</TABLE>
SCHATZ EMPLOYMENT AGREEMENT
The Company is a party to an Employment Agreement with Mr. Schatz that
became effective January 1, 1998. The Agreement provides for (i) a base
salary of $175,000 per annum (subject to annual adjustments based on
increases in the Consumer Price Index) and (ii) a three-year profit sharing
bonus calculated on After-Tax Profit.
Under the bonus arrangement, if the Company's aggregate After-Tax Profit (as
defined) for 1998, 1999, and 2000 exceeds a threshold amount of After-Tax
Profit, then Mr. Schatz will be entitled to a bonus under the Agreement.
Specifically, if After-Tax Profit over the three-year period exceeds
approximately $3.3 million, then the bonus would equal 5% of the excess over
such target; to the extent that After-Tax Profit exceeds approximately $5.2
million, Mr. Schatz would be entitled to a bonus of approximately $94,800
plus 10% of the excess over such higher threshold. (The lower and higher
thresholds represent a 10% and 15% compounded growth rate, respectively, in
shareholders equity over the three-year period.) The targeted growth rates
are subject to adjustment, to account for capital influxes into the Company
or to account for dividends or distributions of capital to shareholders.
Under the Employment Agreement, if the Company terminates his employment
"without cause" or Mr. Schatz terminates his employment "for good reason"
(as such terms are defined in the Agreement), he is entitled to (i) a lump-
sum severance payment of $175,000, (ii) up to one year's continuation of
health insurance and other Company benefits, and (iii) additional payments
totaling $175,000 over an eight-year period, with interest at the federal
long-term rate (as defined). The eight-year installment payment obligation
was previously negotiated with Mr. Schatz in 1996, in settlement of his
claims for unpaid bonuses and options under his 1991 Employment Agreement.
For a period of 12 months after termination of employment, Mr. Schatz would
be subject to a noncompetition covenant, restricting his ability to provide
services to any insurance business in Maine or any other state in which NEIC
was conducting business or actively planning to conduct business.
In October 1996 Mr. Schatz was granted a stock option for 200,000 shares of
Common Stock, at the then prevailing market price per share ($1.625). The
option expires in 2006.
EFFECT OF MCA MERGER TRANSACTION
ON SCHATZ EMPLOYMENT ARRANGEMENTS
As noted above, the Company has executed an Agreement and Plan of Merger
with Motor Club of America. MCA has announced its intention to retain Mr.
Libby as President and Chief Operating Officer of the Company. At the time
of the merger, Mr. Schatz would step down as President and Chief Executive
Officer and would resign from the NEIC Board of Directors.
MCA and NEIC have entered into an Undertaking and Agreement with Mr. Schatz,
under which his termination of employment will be deemed to trigger the
severance payments and other severance benefits provided by his Employment
Agreement, as described above. In addition, Mr. Schatz has agreed to waive
his rights to the three-year profit sharing bonus, in exchange for a lump
sum payment of $16,000. Consistent with the terms of the merger, Mr.
Schatz's stock option for 200,000 shares will be terminated in exchange for
a cash settlement of $335,000, representing the spread between the merger
price ($3.30 per share) and the option exercise price ($1.625 per share).
Mr. Schatz will retain existing rights to indemnification by the Company, as
set forth in NEIC's bylaws and the form of Indemnification Agreement to
which the Company and its directors are parties. The Undertaking and
Agreement will terminate and be of no further force or effect if the MCA
merger transaction for any reason is not consummated.
LIBBY EMPLOYMENT AGREEMENT
The Company is a party to an Employment Agreement with Mr. Libby that was
executed in November 1998, effective as of January 1, 1998. The Agreement
provides for a base salary of $120,000 per annum (subject to annual
adjustments based on increases in the Consumer Price Index).
Under the Employment Agreement, in the event that the Company terminates his
employment without "Cause" or Mr. Libby terminates his employment for "Good
Reason" (as such terms are defined in the Agreement), he is entitled to (i)
severance payments of $120,000 over the following 12 months and (ii) up to 6
months' continuation of health insurance and other Company benefits. For one
year after termination of employment, Mr. Libby would be subject to a
noncompetition covenant, restricting his ability to provide services to any
insurance business in Maine or any other state in which NEIC was conducting
business or actively planning to conduct business.
The initial term of the Employment Agreement expires December 31, 1999. The
agreement is subject to two-year extensions unless Mr. Libby fails to give
notice of renewal or the Company gives notice of non-renewal. Upon any non-
renewal at the Company's election, Mr. Libby would be entitled to non-
renewal payments totalling $120,000 over the 12 months after expiration of
the agreement.
In June 1997 Mr. Libby was granted a stock option for 100,000 shares of
Common Stock, at the then prevailing market price per share ($2.375). The
option expires in 2007.
KOREN EMPLOYMENT AGREEMENT; RESIGNATION
In December 1998, the Company and Mr. Koren executed an Employment
Agreement, to be effective as of October 1, 1998 through December 31, 1999.
The Agreement provides for a base salary of $85,000 per annum (subject to
annual adjustments based on increases in the Consumer Price Index).
Under the Employment Agreement, in the event that the Company terminates his
employment without "Cause" or Mr. Koren terminates his employment for "Good
Reason" (as such terms are defined in the Agreement), he is entitled to (i)
severance payments of $85,000 over the following 12 months and (ii) up to 6
months' continuation of health insurance and other Company benefits. For
one year after termination of employment, Mr. Koren would be subject to a
noncompetition covenant, restricting his ability to provide services to any
insurance business in Maine or any other state in which NEIC was conducting
business or actively planning to conduct business. The Agreement contains a
non-renewal provision (similar to that contained in Mr. Libby's contract),
which provides for non-renewal payments totalling $50,000 under certain
circumstances.
On March 24, 1999 the Company received a letter from Mr. Koren's counsel,
stating that Mr. Koren was voluntarily terminating his employment for "Good
Reason" pursuant to an Employment Continuity Agreement with the Company
(described below). The letter demanded payment in accordance with that
agreement. On March 29, 1999, the Company received another letter from Mr.
Koren's counsel, stating that Mr. Koren may also file charges of
discrimination based on age, religion, and certain other factors. The
Company has denied liability for all such claims.
Employment Continuity Agreements were executed with Mr. Libby and Mr. Koren
in October 1996. Under those Agreements, if the executive's employment were
terminated within twelve months after the occurrence of a "Change in Control
Event" (as defined), then the executive would receive severance compensation
equal to 200% of the sum of his current annual base salary plus any profit
sharing award for the prior year, provided that the payment will be reduced
if and to the extent necessary to keep the payment from becoming
non-deductible under Section 280G of the Internal Revenue Code. This same
benefit would accrue if the executive terminated his employment for "Good
Reason" (as defined). The Employment Continuity Agreement also provided for
a stay-on bonus equal to 100% of his annual base salary if the executive
remained employed for six months after the Change in Control Event, subject
to the condition that he not compete with the Company for the following six
months. These special severance benefits would not apply if the Company
terminates the executive's employment for "Good Cause," including a
substantial neglect of duties after written notice and an opportunity to
correct.
The Company asserts that Mr. Koren's recently executed Employment Agreement
supersedes the Employment Continuity Agreement, and that in any case there
has occurred no "Change in Control Event" or alternation in Mr. Koren's
employment situation which would constitute "Good Reason" for him to
terminate his employment. A voluntary resignation by Mr. Koren also would
not entitle him to any severance payments under the Employment Agreement.
However, the Company has offered to negotiate a reasonable retirement
payment to Mr. Koren in view of his many years of service to North East. To
date, no resolution of Mr. Koren's claims has been reached.
DIRECTOR COMPENSATION
Directors who are not employees of the Company receive directors' fees at
therate of $3,000 per annum, plus $250 for each Board meeting attended.
Directors also receive $100 for each Committee meeting attended, except that
the Committee chairman receives $150 for each such meeting.
The Board in 1998 approved a program by which the Company awards stock
options on a quarterly basis to each non-employee director. As of the last
day of the calendar quarter, each such director receives a fully vested
option to purchase 1,000 shares of NEIC common stock at an exercise price
equal to the market price of the stock on such date. In addition, Messrs.
Batal, Cummings, Hancock, Hess, Hochadel and Suter each received a one-time
grant of options on April 10, 1998, at an exercise price of $2.8125 per
share (the market price of the stock on that date). Thereafter, each of
Messrs. Batal, Cummings, Hancock, Hess, Hochadel, Russ and Suter each
received quarterly option grants for 1,000 shares at $2.6875, $1.75, and
$2.625 per share as of June 30, September 30, and December 31, 1998,
respectively. During 1998 pursuant to this same director stock option
program, two former directors of NEIC received options on April 10, 1998 for
7,000 shares each at $2.8125 per share and options for 1,000 shares each on
June 30, 1998 at $2.6875 per share.
ITEM 11 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
CHANGES IN CONTROL
As of March 22, 1999, a total of 3,049,089 shares of NEIC's Common Stock
were outstanding. The Common Stock is entitled to one vote per share and is
the only class of NEIC stock outstanding. Set forth below, as of the record
date, is information concerning the only persons known to NEIC to
beneficially own more than five percent of the outstanding shares.
<TABLE>
<CAPTION>
Number of Shares Percent of
Name and Address Beneficially Owned Outstanding
- ---------------- ------------------ -----------
<S> <C> <C>
The Foothold Fund, L.P. 299,000 9.8%
c/o Foothold Capital Management
51 JFK Parkway
Short Hills, NJ 07078
Richard H. Konrad 299,000 9.8%
c/o Lincluden Management Limited
1275 North Service Road West, Suite 607
Oakville, Ontario, Canada L6M 3G4
Capitol Indemnity Corporation 299,000 9.8%
4610 University Ave.
Madison, WI 53705
Everest Partners, L.P. 296,680 9.7%
Job's Peak Ranch
P.O. Box 3178
Gardnerville, Nevada 89410
<FN>
<F1> Information regarding the stock ownership of The Foothold Fund, L.P.
is given on the basis of its Schedule 13D report, filed August 6, 1997
and most recently amended July 7, 1998. Foothold's sole general
partner is The Foothold Management Corp. Peter A. Russ is the
President, sole director and sole shareholder of Foothold Management.
Foothold's Schedule 13D report states that it was purchasing the
Common Shares for investment purposes and not for the purpose of
acquiring control of North East.
<F2> Information regarding the stock ownership of Mr. Konrad is given on
the basis of his Schedule 13G report filed on July 2, 1998. The
Schedule 13G report states that the NEIC shares were not acquired and
are not held for the purpose of or with the effect of changing or
influencing the control of North East and were not acquired and are
not held in connection with or as a participant in any transaction
having that purpose or effect.
<F3> Information regarding the stock ownership of Capitol Indemnity
Corporation is given on the basis of a partial Schedule 13D report
filed on July 16, 1998. Capitol Indemnity is an insurer and surety
company located in Madison, Wisconsin. It is a wholly-owned subsidiary
of Capitol Transamerica Corporation, a publicly traded company of
which George A. Fait is President and Chairman of the Board.
<F4> Information regarding the stock ownership of Everest Partners, L.P. is
given on the basis of its Schedule 13G report filed on July 13, 1998
and most recently amended January 15, 1999. The general partner of
Everest Partners is Everest Partners, Inc. The manager of Everest
Partners is Everest Managers, L.L.C. David M.W. Harvey is the sole
principal of the general partner and the manager. The Schedule 13G
report states that the NEIC shares were not acquired and are not held
for the purpose of or with the effect of changing or influencing the
control of North East and were not acquired and are not held in
connection with or as a participant in any transaction having that
purpose or effect.
</FN>
</TABLE>
The following table shows, as of the March 22,1999, the number of shares of
NEIC Common Stock which, to NEIC's knowledge, were beneficially owned by the
directors and certain executive officers of NEIC. Except as otherwise
indicated, each person named owned less than one percent of the outstanding
Common Stock of NEIC.
<TABLE>
<CAPTION>
Number of Shares Percent of
Name Beneficially Owned(1) Outstanding
- ---- --------------------- -----------
<S> <C> <C>
Robert G. Schatz 295,859 9.1%
Ronald A. Libby 40,063 1.3%
Samuel M. Koren 9,500
Edward B. Batal 19,500
Terence P. Cummings 13,000
Robert A. Hancock 15,500
Wilson G. Hess 13,000
Joseph M. Hochadel 13,000
Peter A. Russ 302,000 9.9%
Bruce H. Suter 13,500
All directors and executive
officers as a group 734,922 21.7%
<FN>
<F1> Includes shares owned by spouses or other relatives residing in the
same household, and by entities owned or controlled by the person
named. Also includes the following shares purchasable within the next
60 days under outstanding stock options: Mr. Schatz, 200,000; Mr.
Libby, 40,000; Mr. Batal, 13,000; Mr. Cummings, 13,000; Mr. Hancock,
13,000; Mr. Hess, 13,000; Mr. Hochadel, 13,000; Mr. Russ, 3,000; and
Mr. Suter, 13,000.
</FN>
</TABLE>
ITEM 12 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The firm of Monaghan, Leahy, Hochadel & Libby provides legal services to the
Company. Mr. Hochadel, a Director of NEIC, is a partner in that firm. Fees
paid to that firm in 1998 and 1997 were approximately $211,000 and $135,000,
respectively.
The Company received legal services in 1997 and 1998 from two firms in which
Mr. Cummings was or is now a Partner. Fees paid to such firms by the Company
did not exceed $60,000 in either 1997 or 1998
During each of the past two years, Batal Agency has been an independent
insurance agent for NEIC. Mr. Batal, a Director of NEIC, is President of
that agency. Commissions paid to the agency were based on NEIC's standard
rates and did not exceed $60,000 in either 1997 or 1998.
ITEM 13 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
3.1 Conformed Copy of Articles of Incorporation, as amended to date;
incorporated herein by reference to Exhibit 3.1 to the Company's
Form SB-2/A (Registration No. 333-62881), filed November 12, 1998
3.2 Bylaws, as amended to date; incorporated herein by reference to
Exhibit 3.2 to the Company's Form 10-KSB for the fiscal year ended
December 31, 1995
4.1 Instruments Defining the Rights of Security Holders; see Exhibits
3.1 and 3.2
10.1 Lease, dated August 14, 1990, of the Company's home office;
incorporated herein by reference to Exhibit 10.1 to the Company's
Form 10-KSB for the fiscal year ended December 31, 1994
10.2 Agreement and Plan of Merger Agreement and Plan of Merger between
the Company and Motor Club of America, dated as of March 16, 1999;
incorporated herein by reference to Exhibit 2 to Form 8-K filed by
Motor Club of America (Commission File No. 0-671) on March 18, 1999
NOTE: Compensatory plans and arrangements and management contracts are
filed as Exhibits 10.3 through 10.7 below.
10.3 Employment Agreement dated December 1, 1997 between the Company and
Robert G. Schatz; incorporated herein by reference to Exhibit 10.3
to the Company's Form 10-KSB for the fiscal year ended December 31,
1997.
10.3A Letter Agreement dated October 28, 1996 between the Company and
Robert G. Schatz, regarding bonus compensation arrangements;
incorporated herein by reference to Exhibits 10.4 to the Company's
Form 10-KSB for the fiscal year ended December 31, 1996.
10.3B Undertaking and Agreement dated March 16, 1999 among the Company,
Robert G. Schatz, and Motor Club of America
10.4 Conformed copy of Employment Agreement, effective as of January 1,
1998, between the Company and Ronald A. Libby
10.5 Employment Agreement, effective as of October 1, 1998, between the
Company and Samuel M. Koren
10.6 Form of Employment Continuity Agreement, dated as of October 28,
1996, with Ronald A. Libby and Samuel M. Koren; incorporated herein
by reference to Exhibits 10.8 and 10.9 to the Company's Form 10-KSB
for the fiscal year ended December 31, 1996.
10.7 North East Insurance Company Stock Option Plan; incorporated herein
by reference to Exhibit 10.10 to the Company's Form 10-KSB for the
fiscal year ended December 31, 1997
21 A list of subsidiaries of the Company is incorporated by reference
to Exhibit 21 to the Company's Form 10-KSB for the fiscal year ended
December 31, 1993.
27 Financial Data Schedule.
28 Information from Reports Furnished to State Insurance Regulatory
Authorities: Schedule P for NEIC and its subsidiary, American
Colonial Insurance Company, are filed herewith under cover of Form
SE.
(b) Reports on Form 8-K
During the fourth quarter of 1998, the Company filed four reports on Form 8-
K, as follows: on December 14, 1998, announcing receipt of an acquisition
offer and rejection of such offer by the Board of Directors; on December 18,
1998, announcing extension of a pending rights offering; on December 23,
1998, announcing receipt of a revised acquisition offer; and on December 29,
1998, announcing a further extension of the rights offering.
SIGNATURES
In accordance with Section 13 of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Date: March 31, 1999 NORTH EAST INSURANCE COMPANY
By: /S/ Robert G. Schatz
Robert G. Schatz, President
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Signature Title Date
- --------- ----- ----
/S/Robert G. Schatz President, Chief Executive March 31, 1999
Robert G. Schatz Officer and Director
/S/Graham S. Payne Treasurer and Chief March 31, 1999
Graham S. Payne Financial Officer
/S/Edward B. Batal Director March 29, 1999
Edward B. Batal
/S/Terence P.Cummings Director March 26, 1999
Terence P. Cummings
/S/Robert A. Hancock Director March 26, 1999
Robert A. Hancock
/S/Peter A.Russ Director March 27, 1999
Peter A. Russ
/S/Wilson G. Hess Director March 31, 1999
Wilson G. Hess
/S/Joseph M. Hocadel Director March 25, 1999
Joseph M. Hochadel
/S/Bruce H. Suter Director March 25, 1999
Bruce H. Suter
NORTH EAST INSURANCE COMPANY AND SUBSIDIARIES
INDEX TO CONSOLIDATED EXHIBITS
Exhibit No. PAGE(S)
- ----------- -------
10.3B Undertaking and Agreement dated March 16, 1999
among the Company, Robert G. Schatz, and Motor
Club of America 68
10.4 North East Employment Agreement - Ronald Libby 74
10.5 North East Employment Agreement - Samuel Koren 83
27 Financial Data Schedule 93
Exhibit 10.3B
UNDERTAKING AND AGREEMENT
Undertaking and Agreement made this 16th day of March, 1999, by and
among Motor Club of America, a New Jersey corporation having offices at 95
Route 17, Paramus, New Jersey 07653 ("Motor Club"), North East Insurance
Company, a Maine corporation having offices at 482 Payne Road, Scarborough,
Maine 04074 (the "Company") and Robert G. Schatz, an individual residing at 6
Roundabout Lane, Cape Elizabeth, Maine 04107 ("Executive").
W I T N E S E T H:
WHEREAS, Motor Club and the Company have entered into an Agreement and
Plan of Merger, dated the date hereof (the "Merger Agreement"), whereby a to
be formed subsidiary of Motor Club ("Sub") will merge with and into the
Company, with the Company being the surviving corporation (the "Merger"); and
WHEREAS, Motor Club, the Company and Executive desire to provide for
and facilitate the Merger, the orderly transition of management of the
Company in connection with the Merger and the orderly resignation of
Executive from all positions and offices which at the Effective Time of the
Merger ( as defined in the Merger Agreement) are held by Executive in or with
Northeast Insurance Company, any of its subsidiaries, and in respect of any
and all retirement and/or benefit plans of the foregoing and otherwise, and
the termination of his employment with the Company consistent with the rights
of Executive under certain agreements between the Company and the Executive
and as provided herein.
NOW, THEREFORE, in consideration of the premises and of the mutual
covenants and other good and valuable consideration hereinafter set forth,
the parties hereto agree as follows:
1. a. From and after the execution of the Merger Agreement,
Executive shall in good faith use his best efforts and shall devote such time
and energy as is required to assist the Company to consummate the Merger,
including, without limitation, assisting the Company, Motor Club and Sub in
obtaining the consents and approvals referred to in Section 3.01(f) of the
Merger Agreement. Motor Club and the Company acknowledge and agree that the
granting of such consents and approvals is within the authority and (subject
to such limitations as may be established by applicable law and regulation)
discretion of the respective governmental agencies, and that, his assistance
pursuant to this paragraph 1(a) notwithstanding, Executive does not guarantee
that such consents and approvals (or any of them) will be granted. It is
therefore agreed and understood that to the extent action and/or inaction on
the part of Executive is in furtherance of such assistance and is in
accordance with the standards set forth in the first sentence of this
paragraph 1.a, such action or inaction shall not be deemed a breach of this
Agreement or of the terms of the Employment Agreement with the Company, dated
December 1, 1997 (the "Employment Agreement").
b. Nothing contained in a. above shall restrict the Executive
from remaining as a volunteer and uncompensated trustee of the Northeast
Insurance Charitable Foundation subject to the Foundation's procedures.
2. a. The Company and the Executive agree that, except as may
otherwise be provided herein, all terms, provisions and conditions of the
Employment Agreement shall remain in full force and effect until the
Effective Time of the Merger.
Motor Club confirms that Executive's rendering of
assistance in accordance with paragraph 1(a) hereof is contemplated by
Section 5.05 of the Merger Agreement.
b. All reference herein to the Company shall, when the context
so requires, encompass the subsidiaries of the Company. All references herein
to resignations and indemnifications shall encompass, be binding upon, and
shall inure to the benefit of the Company and its subsidiaries and any
retirement or benefit plans of the foregoing.
3. a. At the Closing under the Merger Agreement, Executive shall
submit to the Company his resignation from all positions of any nature or
kind which at the Effective Time of the Merger are held by Executive in or
with North East Insurance Company, any of its subsidiaries (including without
limitation his positions as a director, President and Chief Executive
Officer) and in respect of any and all retirement and/or benefit plans of the
foregoing and otherwise. Such resignations shall be in written form
satisfactory to the Company and Motor Club, shall be effective at the
Effective Time of the Merger, and the Company agrees to accept such
resignation.
b. In furtherance thereof and at the Effective Time of the
Merger, Executive shall return to the Company any and all Company credit
cards in his possession and any and all Company property and written
information and material in his possession.
c. (i) Executive shall have the right to purchase from the
Company for $1.00 the executive chair and desk lamp located in his office and
the desk top computer (and peripherals) used by the Executive; provided, the
Company shall cause its management information systems personnel to erase all
Company data which may be located on the hard drive of such computer.
Executive shall also remove such personal items as are owned by Executive as
may be located in the office, which shall include the pictures, plaques,
awards, clocks and knick-knacks in his office.
(ii) The Company shall fully cooperate with Executive to
arrange for the packing and delivery of items in ( i) above.
4. In the event of the death or disability of the Executive at or
following the Effective Time of the Merger, the Executive or his estate, as
the case may be, shall be entitled to and shall receive the benefits and
payments set forth in Sections 5 and 6 below, which benefits and payments
shall continue to be made as if the Executive remained alive and in good
health.
5. The resignation of Executive as aforesaid shall be deemed a
termination of employment of Executive under Section 9( c) of the Employment
Agreement as of the date of the Effective Time of the Merger (the "Effective
Date") with the following effect:
a. The Company shall pay Executive on the Effective Date any unpaid
base salary due through such date plus an amount in respect of all of
Executive's accrued and unused vacation time and personal leave time.
b. The Company shall pay the Executive $175,000 on the Effective
Date.
c. If the Executive complies with all of the requirements of Section
10 and Section 11 of the Employment Agreement during the "Restricted Period",
as defined in Section 11 of the Employment Agreement, the Company shall pay
the Executive an additional $175,000 payable in 108 equal fully amortizing
monthly installments of principal plus interest at the Federal Long-Term Rate
(as defined in Section 8(b) of the Employment Agreement), such payments to
commence on the first anniversary of the Effective Date of the Merger.
d. Medical, hospitalization, disability and other health benefits,
as applicable on the Effective Date, shall continue to be provided by the
Company at its expense for the Executive and his family until the earlier of
( I) the first anniversary of the Effective Date or (ii) the date the
Executive is entitled to comparable benefits under any plan maintained by a
subsequent employer of Executive. These benefits and their reported current
costs are set forth on SCHEDULE 1.
e. All other compensation and benefits due or payable to Executive
as of the Effective Date under the terms and conditions of any applicable
plans, programs or other coverages maintained by the Company shall be due
and/or payable to Executive as provided in any such plans, programs or other
coverages maintained by the Company. These benefits and their reported
current costs are set forth on SCHEDULE 1 hereto.
f. The Company shall pay to Executive on the Effective Date of the
Merger $16,000 in full satisfaction of Executive's rights to any and all
bonuses otherwise to be paid to him as provided for in Section 4 of the
Employment Agreement.
g. The Company shall also pay the premium(s) in respect to the life
insurance policy insuring the Executive described on SCHEDULE 1 hereto
through and including the premium for the year 2000.
h. The Company shall also pay the rent reserved under the motor
vehicle lease described in Schedule 1 and shall provide the automobile leased
thereunder to Executive for his use, until the March 31, 2000 expiration date
of the current lease.
6. Pursuant to the first two (2) sentences of Paragraph (2) of the
Letter Agreement between Executive and the Company, dated October 28, 1996
(the "Letter Agreement"), the Company shall continue to pay all amounts due
under such sentences as and when provided therein, i.e. as follows:
year: annual amount:
1999-2006 (8 years) $33,996.85
provided, that the payment due thereunder in respect of 1999 shall be paid on
the Effective Date of the Merger.
7. a. Any and all payments to Executive hereunder pursuant to
Sections 5 and 6 hereof shall be paid subject to such withholding as the
Company's accountants may determine to be applicable in recognition of
applicable requirements of law and regulation
b. All payments to Executive shall be made as the Company may
determine by means of a bank cashier's check or by wiring of funds in
accordance with wiring instructions which the Executive shall provide upon
request by the Company.
8. Except as set forth herein, all agreements and contracts of any
nature or kind, whether written or oral, between the Company and the
Executive (including without limitation the Employment Agreement and the
Letter Agreement) shall be terminated and of no further force and effect as
of the Effective Date of the Merger and the only contractual obligations of
the Company to Executive that shall survive the Merger are those set forth in
or arising under this Agreement.
9. Notwithstanding the termination of the Employment Agreement and
the Letter Agreement, the Indemnification Agreement between the Company and
Executive, dated as of November 15, 1995, and the Company's and Executive's
rights and obligations thereunder shall continue in full force and effect
with respect to any claim against Executive which gives rise to his
entitlement to, or the Company's right to deny, indemnification pursuant to
the terms and conditions of such Agreement, including, without limitation,
the provisions of Section 7 thereof affording Executive additional rights of
indemnification under the Company's Articles of Incorporation or Bylaws, any
resolution of the Company's Board of Directors or shareholders, any policy of
insurance or other contract, or otherwise.
10. The execution of this Agreement by Motor Club shall be deemed its
consent under Sections 4.01(b) and 4.01( c) of the Merger Agreement.
11. Failure by the Company to take any action required hereunder as
of the Effective Time or failure to make any payment hereunder to Executive
at the time such payment is due shall result in the acceleration of any and
all other payments not yet paid Executive hereunder to become immediately due
and payable in full as of time of such failure to act or non-payment, as the
case may be; provided however that the provisions of this paragraph 11 shall
be effective only upon Executive's written notice to the Company of such
failure of payment, and upon the expiration of a period of 10 days following
receipt of such notice from Executive in which the Company may cure such
failure. Any payment to be made to Executive hereunder shall be made without
any offset by the Company with respect to any claim it may either have or
alleges that it has against Executive.
12. The parties shall take such actions as may reasonably be
necessary or useful to implement and perform this Agreement. In amplification
thereof, after the Effective Time of the Merger, MCA shall take such actions
as may be necessary or useful to enable the Company to perform its
obligations to Executive hereunder.
13. In the event the Merger is not consummated or the Merger
Agreement is terminated, this Agreement shall be of no further force and
effect. Except for the specific agreements of Motor Club contained in
paragraphs 1a and 12 hereof, nothing in this Agreement shall be construed to
create any binding obligation on the part of Motor Club, and it is understood
and agreed that Motor Club does not guarantee any obligation hereunder on the
part of the Company or Executive.
14. This Agreement may be executed in counterpart copies which shall
upon their aggregation be deemed a duly executed original copy.
IN WITNESS WHEREOF, the parties have executed this Undertaking and
Agreement on the day and year first above written.
North East Insurance Company Motor Club of America
By:_/S/Ronald A. Libby By:/S/Stephen A. Gilbert
Name: Ronald A. Libby Name: Stephen A. Gilbert
Title: Chief Operating Officer Title: President & Chief Executive
Officer
/S/Robert G. Schatz
Robert G. Schatz
Robert G. Schatz
Separation Agreement
Schedule 1
Monthly Payments
Group Health $502.21
(Harvard Pilgrim)
Group Life & Disability $173.55
(Phoenix Life)
Owned Life Insurance $364.58
(Union Central #1000000679)
Jeep Lease $422.40
(Lee Auto - Expiration 3/00)
Exhibit 10.4
NORTH EAST INSURANCE COMPANY
EMPLOYMENT AGREEMENT
AGREEMENT, effective as of January 1, 1998 between NORTH EAST
INSURANCE COMPANY, a Maine corporation (the "Company"), and RONALD A. LIBBY
(the "Executive").
WHEREAS, the Company wishes to obtain the continued services of the
Executive; and
WHEREAS, the Executive wishes to continue in employment with the
Company on the terms herein provided;
NOW, THEREFORE, in consideration of the premises and mutual covenants
and agreements of the parties herein contained, the parties hereto (the
"Parties") agree as follows:
1. Term. Subject to the provisions for termination hereinafter
provided, the Executive's employment hereunder shall be for a term (the
"Employment Term") commencing on January 1, 1998 (the "Employment Date")
and ending on December 31, 1999 (the "Termination Date").
2. Positions and Duties. During the Employment Term the Executive
shall serve as Chief Operating Officer of the Company. The Executive shall
report to the President of the Company (the "President ") and perform such
employment duties, consistent with his position, as are specified by the
President, with duties and responsibilities including, but not limited to,
primary general supervision and authority over the internal business and
affairs of the Company and such additional duties as may be assigned from
time to time by the President. The Executive shall devote his full
productive time, energy and ability to the proper and efficient conduct of
the Company's business. The Executive may (i) devote reasonable periods of
time to passive investment of his personal assets, and (ii) engage in
community activities (including, with the Board's consent, service on one
or more boards of nonprofit institutions) so long as such activities do not
interfere with the performance of his obligations hereunder. The Executive
shall observe and comply with all lawful and reasonable rules of conduct
set by the Board for executives of the Company, and shall endeavor to
promote the business, reputation and interests of the Company.
3. Salary. For his services hereunder the Company shall pay the
Executive a base salary of One Hundred Twenty Thousand Dollars ($120,000)
per annum (the "Base Salary"). After 1998, Base Salary shall be increased
annually to reflect the increase, if any, in the cost of living for such
year versus 1998, as measured by the CPI. For purposes hereof, "CPI" shall
mean the United States Bureau of Labor Statistics Consumer Price Index All
Urban Consumers (CPI-U), (1982 - 4 = 100) Base Year, or any comparable
successor index designated by such agency.
4. Expenses. The Executive shall be entitled to receive prompt
reimbursement for all reasonable expenses incurred by him in the course of
his employment by the Company hereunder, as per Company policies currently
in effect, provided that the Executive properly accounts therefor.
5. Other Benefits. During his employment the Executive shall be
entitled to:
(a) participate in the Company's benefit plans and
arrangements on terms at least as favorable as the terms generally
applicable to senior management from time to time;
(b) the exclusive use of an automobile to be provided by the
Company during the term of his employment; and
(c) up to four (4) weeks paid vacation in any calendar year.
6. Renewal of Agreement.
(a) Renewal. If the Executive gives the Company notice of his
willingness to renew this Agreement, then the Agreement shall be
deemed renewed for an additional two-year period unless the Company
gives the Executive notice of its intention not to renew the
Agreement. To be effective, such notice must be given in writing by
the Executive or the Company (as the case may be) at least one
hundred twenty (120) days or ninety (90) days, respectively, prior to
the Termination Date. Any such renewal of this Agreement shall extend
the Employment Term and Termination Date under this Agreement by two
(2) years.
(b) Non-Renewal Payment. If, prior to the Termination Date,
the Company does not offer the Executive employment with the Company
for the period commencing immediately after the Termination Date
under terms and conditions at least as favorable to the Executive as
those contained herein, including, but not limited to, the terms and
conditions of Sections 2 through 6 hereof, then, the Executive shall
be entitled to a payment of One Hundred Twenty Thousand Dollars
($120,000) (the "Non-Renewal Payment"); provided, however, that
should the Executive's employment with the Company be terminated
prior to the Termination Date under the terms of Section 7 herein,
this Section 6 shall have no effect, and the Executive shall not be
entitled to the Non-Renewal Payment. The Company shall pay the Non-
Renewal Payment in twelve (12) equal monthly installments to commence
within ten (10) business days following the Termination Date.
7. Termination of Employment. The Executive's employment by the
Company pursuant hereto is subject to termination during the Employment
Term only as follows:
(a) Death. The Executive's employment shall terminate as of
the date of his death, in which case:
(i) The Company shall pay to the Executive's estate the
Base Salary accrued through the date of the Executive's death;
(ii) All other compensation and benefits shall be as
determined under the terms and conditions of any applicable
plans, programs or other coverages maintained by the Company.
(b) Disability. The Company may terminate the Executive's
employment due to disability, as determined under the Company's long-
term disability plan as in effect from time to time, in which case:
(i) The Company shall continue to pay the Base Salary
for one year following termination of employment, such period
ending on the last day of the payroll period during which the
first anniversary of such termination occurs;
(ii) All other compensation and benefits shall be as
determined under the terms and conditions of any applicable
plans, programs or other coverages maintained by the Company.
(c) Termination by the Company Without Cause or Termination
by the Executive for Good Reason. The Company may terminate the
Executive's employment without Cause, as defined below, and the
Executive may terminate his employment for Good Reason, as defined
below. In either case:
(i) The Company shall pay the Executive One Hundred
Twenty Thousand Dollars ($120,000) in twelve equal monthly
payments to commence within ten (10) business days following
the Termination Date;
(ii) Medical, hospitalization and any other health
benefits, as applicable on the date of termination of the
Executive's employment, shall continue to be provided until the
earlier of (i) the six month anniversary of termination of the
Executive's employment, or (ii) the date the Executive is
entitled to comparable benefits under any plan maintained by a
subsequent employer of the Executive; and
(iii) All other compensation and benefits shall be as
determined under the terms and conditions of any applicable
plans, programs or other coverages maintained by the Company.
(d) Termination by the Company for Cause. The Company shall
be entitled to terminate the Executive's employment at any time under
this Section 7(d), by written notice to the Executive if it has
"Cause" to do so, which shall mean:
(i) The Executive's indictment for or plea of nolo
contendere to, (A) a felony, or (B) a misdemeanor materially
injurious to the Company;
(ii) The Executive's continued substantial neglect of
duties, after written notice and an opportunity to correct;
(iii) Gross misconduct in the performance of duties
hereunder, materially injurious to the reputation, business or
operation of the Company; or
(iv) The issuance of an order from an insurance
regulatory body of any state or other jurisdiction in which the
Company does business that (A) finds that the Executive
violated statutory requirements of applicable insurance laws or
regulations, and (B) prohibits the Executive from exercising
any material portion of his duties as Chief Operating Officer
of the Company.
If the Company terminates the Executive's employment for Cause, the
Executive's Base Salary and other benefits shall be paid through the date
of termination and the Executive shall have no further rights to
compensation or benefits other than as determined by the terms of any
applicable plan or program.
The Executive must be notified in writing of any termination of his
employment for Cause. The Executive shall then have the right, exercisable
only within ten (10) days following receipt of such notice, to file a
written request for review by the Company. In such case, the Executive
shall be given the opportunity to be heard, personally or through counsel,
by the President and members of the Board who are not employees (the
"Independent Directors") and a majority of the Independent Directors and
the President must thereafter confirm that such termination is for Cause.
If the Directors do not provide such confirmation, the termination shall be
treated as other than for Cause.
If, following a termination of the Executive's employment for reasons
other than Cause, the President or the Independent Directors become aware
of facts clearly demonstrating the existence, at the time of such
termination, of grounds for terminating the Executive's employment for
Cause, such termination shall be treated as a termination for Cause,
subject to the Executive's right to be heard, and to have such
determination confirmed, as provided immediately above. Such right of post-
effective termination for Cause shall be deemed waived unless written
notice of the basis therefor is given to the Executive (i) within one year
from the Termination Date of his employment or (ii) by June 30 of the
calendar year following the year in which such termination occurred,
whichever is later.
(e) Termination by the Executive for Good Reason. The
Executive shall be entitled to terminate his employment at any time
under this Section 7(e) by written notice to the Company if he has
"Good Reason" to do so, which shall mean (i) the Company's breach of
this Agreement, including, but not limited to: (A) a breach of this
Agreement caused by the Company's attempt to reduce the Executive's
compensation; (B) the Company's attempt to remove the Executive from
the position of Chief Operating Officer, or (ii) a move of the
Company's headquarters to a location more than 50 miles from
Portland, Maine.
(f) Voluntary Termination of Employment. The Executive may
terminate employment voluntarily, in which case the Base Salary and
other benefits shall be paid through the date of termination and the
Executive shall have no further rights to compensation or benefits
other than as determined by the terms of any applicable plan or
program.
8. Confidential Information. (a) The Executive recognizes that the
services to be performed by him hereunder are special, unique and
extraordinary and that, by reason of his employment with the Company, he
may acquire Confidential Information (as hereinafter defined) concerning
the operation of the Company the use or disclosure of which would cause the
Company substantial, irreparable loss and damage which could not be readily
calculated and for which no remedy at law would be adequate. Accordingly,
the Executive agrees that he shall not (directly or indirectly) at any
time, whether during or after the Employment Term:
(i) knowingly use for an improper personal benefit any
Confidential Information that he may learn or has learned by reason
of his employment with the Company or
(ii) disclose any such Confidential Information to any person
except (A) in the good faith performance of his obligations to the
Company hereunder, (B) in connection with the enforcement of his
rights under this Agreement or (C) with the prior consent of the
Board.
As used herein "Confidential Information" includes information with
respect to the Company's facilities and methods, trade secrets and other
intellectual property, systems, patents and patent applications,
procedures, manuals, confidential reports, financial information, business
plans, prospects or opportunities, personnel information or lists of
customers and suppliers; provided, however, that such term shall not
include any information which is or becomes generally known or available
publicly other than as a result of disclosure by the Executive which is not
permitted as described in clause (ii) above.
(b) The Executive confirms that all Confidential Information is the
exclusive property of the Company. All business records, papers and
documents and electronic materials kept or made by the Executive relating
to the business of the Company which comprise Confidential Information
shall be and remain the property of the Company during the Employment Term
and all times thereafter. Upon the termination of his employment with the
Company or upon the request of the Company at any time, the Executive shall
promptly deliver to the Company, and shall retain no copies of, any written
or electronic materials, records and documents made by the Executive or
coming into his possession concerning the business or affairs of the
Company and which constitute Confidential Information.
9. Non-Competition. (a) During the term of his employment and for
the period commencing on the date the Executive's employment terminates and
ending on the first anniversary thereof (the "Restricted Period"), the
Executive shall not (i) directly or indirectly, for his own account or for
the account of others, as an officer, director, stockholder, owner,
partner, employee, promoter, consultant, manager or otherwise participate
in the promotion, financing, ownership, operation, or management of, or
assist in or carry on through a proprietorship, corporation, partnership or
other form of entity, within Maine or any other state in which the Company
was conducting, or was actively planning to conduct, the business of
insurance (the "Business") as of the date of such termination of
employment, (ii) solicit or contact in an effort to do business with any
person who was a customer or agent of the Company during the period of the
Executive's employment, or any affiliate of any such person, if such
solicitation or contact is directly or indirectly in competition with the
Company, or (iii) interfere in a similar manner with the business of the
Company. Nothing in this Section 9 shall prohibit the Executive from
acquiring or holding any issue of stock or securities of any person that
has any securities registered under Section 12 of the Securities Exchange
Act of 1934 as amended, listed on a national securities exchange or quoted
on the automated quotation system of the National Association of Securities
Dealers, Inc. so long as (x) the Executive is not deemed to be an
"affiliate" of such person as such term is used in paragraphs (c) and (d)
of Rule 145 under the Securities Act of 1933, as amended, and (y) the
Executive, members of his immediate family or persons under his control do
not own or hold more than five percent (5%) of any voting securities of any
such person.
(b) During the Restricted Period, the Executive shall not, whether
for his own account or for the account of any other person (excluding the
Company), (i) solicit or induce any of the Company's employees to leave
their employment with the Company or to accept employment with anyone else
or (ii) hire any such employees.
(c) The Executive has carefully read and considered the provisions
of this Section 9 and, having done so, agrees that the restrictions set
forth in this Section 9 (including the Restricted Period, the scope of
activity to be restrained and the geographical scope) are fair and
reasonable and are reasonably required for the protection of the interests
of the Company, its officers, directors, employees, creditors and
shareholders. The Executive understands that the restrictions contained in
this Section 9 may limit his ability to engage in a business similar to the
Company's business, but acknowledges that he will receive sufficiently high
remuneration and other benefits from the Company hereunder to justify such
restrictions.
10. Breach of Section 8 or Section 9. The Executive acknowledges
that a breach of any of the covenants contained in Section 8 or Section 9
hereof may result in material, irreparable injury to the Company for which
there is not adequate remedy at law, that it will not be possible to
measure damages for such injuries precisely and that, in the event of such
a breach, any payments remaining under the terms of this Agreement shall
cease and the Company shall be entitled to obtain a temporary restraining
order and a preliminary or permanent injunction restraining the Executive
from engaging in activities prohibited by Section 8 or Section 9 hereof or
such other relief as may be required to enforce any of the covenants
contained in Section 8 or Section 9 hereof.
11. Arbitration. The Parties agree that any controversy or claim
arising out of or relating to this Agreement, or the breach of any
provision hereof, or the terms or conditions of employment, including
whether such controversy or claim is arbitrable, and excepting any claim or
controversy arising out of the provisions of Section 8 or Section 9 hereof,
shall be settled by arbitration in the City of Portland, Maine, in
accordance with the rules for commercial arbitration of the American
Arbitration Association as in effect at the time a demand for arbitration
under the rules is made, and judgment upon the award rendered by the
arbitrators may be entered in any court having jurisdiction thereof. The
decision of the arbitrators, including determination of the amount of any
damages suffered, shall be conclusive, final and binding on both Parties,
their heirs, executors, administrators, successors and assigns. The cost of
arbitration incurred by either Party shall be borne by that party unless
otherwise determined by the arbitrators.
12. Withholding. Anything to the contrary notwithstanding, all
payments required to be made by the Company hereunder to the Executive, his
spouse, his estate or beneficiaries, shall be subject to withholding of
such amounts relating to taxes as the Company may reasonably determine it
should withhold pursuant to any applicable law or regulation. In lieu of
withholding such amounts, in whole or in part, the Company may, in its sole
discretion, accept other provisions for payment of taxes, provided it is
satisfied that all requirements of law affecting its responsibilities to
withhold such taxes have been satisfied.
13. Assignability; Binding Nature. This Agreement is binding upon,
and shall inure to the benefit of, the Parties hereto and their respective
successors, heirs, administrators, executors and assigns. No rights or
obligations of the Executive under this Agreement may be assigned or
transferred by the Executive except that (a) his rights to compensation and
benefits hereunder may be transferred by will or operation of law, subject
to the limitations of this Agreement, and (b) his rights under employee
benefit plans or programs may be assigned or transferred in accordance with
such plans, programs. No rights or obligations of the Company under this
Agreement may be assigned or transferred except that such rights or
obligations may be assigned or transferred by operation of law in the event
of a merger or consolidation in which the Company is not the continuing
entity, or the sale or liquidation of all or substantially all of the
assets of the Company, provided that the assignee or transferee is the
successor to all or substantially all of the assets of the Company and such
assignee or transferee assumes the liabilities, obligations and duties of
the Company, as contained in this Agreement, either contractually or as a
matter of law.
14. Entire Agreement. This Agreement contains the entire agreement
between the Parties concerning the subject matter hereof and supersedes all
prior agreements, understandings, discussions, negotiations, and
undertakings, whether written or oral, between the Parties with respect
thereto.
15. Notice. For the purposes of this Agreement, notices and all
other communications provided for in this Agreement shall be in writing and
shall be deemed to have been duly given when delivered by hand or mailed by
United States overnight express mail, or nationally recognized private
delivery service on an overnight basis, return receipt requested, postage
prepaid. All such notices to the Executive shall be marked clearly
"Personal and Confidential."
If to the Executive:
Office Address: Ronald A. Libby
North East Insurance Company
482 Payne Road
Scarborough, Maine 04074
Home Address: 12 Ledge Hill Road
Gorham, Maine 04038
If to the Company: North East Insurance Company
482 Payne Road
Scarborough, Maine 04074
Attn: Secretary
With a Copy to: Chair -- Compensation Committee
c/o North East Insurance Company
482 Payne Road
Scarborough, Maine 04074
Notices may also be sent to such other address as either Party may have
furnished to the other in writing in accordance herewith, except that
notice of change of address shall be effective only upon receipt.
16. Miscellaneous. No provision of this Agreement may be modified,
waived, or discharged unless such waiver, modification or discharge is
agreed to in writing and signed by the Executive and such officer of the
Company as may be specifically designated by the Board. No waiver by either
Party at any time of any breach by the other Party of, or compliance with,
any condition or provision of this Agreement to be performed by such other
Party shall be deemed a waiver of similar or dissimilar provisions or
conditions at the same or at any prior or subsequent time. No agreements or
representations, oral or otherwise, express or implied, with respect to the
subject matter hereof have been made by either Party which are not
expressly set forth in this Agreement. The validity, interpretation,
construction, and performance of this Agreement shall be governed by the
laws of the State of Maine.
17. Validity. The invalidity or unenforceability of any provision of
this Agreement shall not affect the validity or enforceability of any other
provision of this Agreement, which shall remain in full force and effect.
18. Counterparts. This Agreement may be executed in several
counterparts, each of which shall be deemed to be an original, but all of
which together shall constitute one and the same instrument.
IN WITNESS WHEREOF, the Parties have executed this Agreement as of
the date and year first above written.
NORTH EAST INSURANCE COMPANY
By: /s/ Samuel M. Koren Date: 11/18/98
Title: Secretary
The Executive:
/s/ Ronald A. Libby Date: 10/01/98
Exhibit 10.5
NORTH EAST INSURANCE COMPANY
EMPLOYMENT AGREEMENT
AGREEMENT, effective as of October 1, 1998 between NORTH EAST
INSURANCE COMPANY, a Maine corporation (the "Company"), and SAMUEL M. KOREN
(the "Executive").
WHEREAS, the Company wishes to obtain the continued services of the
Executive; and
WHEREAS, the Executive wishes to continue in employment with the
Company on the terms herein provided;
NOW, THEREFORE, in consideration of the premises and mutual covenants
and agreements of the parties herein contained, the parties hereto (the
"Parties") agree as follows:
1. Term. Subject to the provisions for termination hereinafter
provided, the Executive's employment hereunder shall be for a term (the
"Employment Term") commencing on October 1, 1998 (the "Employment Date")
and ending on December 31, 2000 (the "Termination Date").
2. Positions and Duties. During the Employment Term the Executive
shall serve as Senior Vice President Claims of the Company. The Executive
shall report to the Chief Operating Officer of the Company (the "COO ") and
perform such employment duties, consistent with his position, as are
specified by the COO, with duties and responsibilities including, but not
limited to, claims administration and such additional duties as may be
assigned from time to time by the COO. The Executive shall devote his full
productive time, energy and ability to the proper and efficient conduct of
the Company's business. The Executive may (i) devote reasonable periods of
time to passive investment of his personal assets, and (ii) engage in
community activities (including, with the Board's consent, service on one
or more boards of nonprofit institutions) so long as such activities do not
interfere with the performance of his obligations hereunder. The Executive
shall observe and comply with all lawful and reasonable rules of conduct
set by the Board for executives of the Company, and shall endeavor to
promote the business, reputation and interests of the Company.
3. Salary. For his services hereunder the Company shall pay the
Executive a base salary of Eighty Five Thousand Dollars ($85,000) per annum
(the "Base Salary"). After 1999, Base Salary shall be increased annually to
reflect the increase, if any, in the cost of living for such year versus
1999, as measured by the CPI. For purposes hereof, "CPI" shall mean the
United States Bureau of Labor Statistics Consumer Price Index All Urban
Consumers (CPI-U), (1982 - 4 = 100) Base Year, or any comparable successor
index designated by such agency.
4. Expenses. The Executive shall be entitled to receive prompt
reimbursement for all reasonable expenses incurred by him in the course of
his employment by the Company hereunder, as per Company policies currently
in effect, provided that the Executive properly accounts therefor.
5. Other Benefits. During his employment the Executive shall be
entitled to:
(a) participate in the Company's benefit plans and
arrangements on terms at least as favorable as the terms generally
applicable to senior management from time to time;
(b) the exclusive use of an automobile to be provided by the
Company during the term of his employment;
(c) up to four (4) weeks paid vacation in any calendar year.
6. Renewal of Agreement.
(a) Renewal. If the Executive gives the Company notice of his
willingness to renew this Agreement, then the Agreement shall be
deemed renewed for an additional two-year period unless the Company
gives the Executive notice of its intention not to renew the
Agreement. To be effective, such notice must be given in writing by
the Executive or the Company (as the case may be) at least one
hundred twenty (120) days or ninety (90) days, respectively, prior to
the Termination Date. Any such renewal of this Agreement shall extend
the Employment Term and Termination Date under this Agreement by two
(2) years.
(b) Non-Renewal Payment. If, prior to the Termination Date,
the Company does not offer the Executive employment with the Company
for the period commencing immediately after the Termination Date
under terms and conditions at least as favorable to the Executive as
those contained herein, including, but not limited to, the terms and
conditions of Sections 2 through 6 hereof, then, the Executive shall
be entitled to a payment of Fifty Thousand Dollars ($50,000) (the
"Non-Renewal Payment"); provided, however, that should the
Executive's employment with the Company be terminated prior to the
Termination Date under the terms of Section 7 herein, this Section 6
shall have no effect, and the Executive shall not be entitled to the
Non-Renewal Payment. The Company shall pay the Non-Renewal Payment in
twelve (12) equal monthly installments to commence within ten (10)
business days following the Termination Date.
7. Termination of Employment. The Executive's employment by the
Company pursuant hereto is subject to termination during the Employment
Term only as follows:
(a) Death. The Executive's employment shall terminate as of
the date of his death, in which case:
(i) The Company shall pay to the Executive's estate the
Base Salary accrued through the date of the Executive's death;
(ii) All other compensation and benefits shall be as
determined under the terms and conditions of any applicable
plans, programs or other coverages maintained by the Company.
(b) Disability. The Company may terminate the Executive's
employment due to disability, as determined under the Company's long-
term disability plan as in effect from time to time, in which case:
(i) The Company shall continue to pay the Base Salary
for one year following termination of employment, such period
ending on the last day of the payroll period during which the
first anniversary of such termination occurs;
(ii) All other compensation and benefits shall be as
determined under the terms and conditions of any applicable
plans, programs or other coverages maintained by the Company.
(c) Termination by the Company Without Cause or Termination
by the Executive for Good Reason. The Company may terminate the
Executive's employment without Cause, as defined below, and the
Executive may terminate his employment for Good Reason, as defined
below. In either case:
(i) The Company shall pay the Executive Eighty Five
Thousand Dollars ($85,000) in twelve equal monthly payments to
commence within ten (10) business days following the
Termination Date;
(ii) Medical, hospitalization and any other health
benefits, as applicable on the date of termination of the
Executive's employment, shall continue to be provided until the
earlier of (i) the six month anniversary of termination of the
Executive's employment, or (ii) the date the Executive is
entitled to comparable benefits under any plan maintained by a
subsequent employer of the Executive; and
(iii) All other compensation and benefits shall be as
determined under the terms and conditions of any applicable
plans, programs or other coverages maintained by the Company.
(d) Termination by the Company for Cause. The Company shall
be entitled to terminate the Executive's employment at any time under
this Section 9(d), by written notice to the Executive if it has
"Cause" to do so, which shall mean:
(i) The Executive's indictment for or plea of nolo
contendere to, (A) a felony, or (B) a misdemeanor materially
injurious to the Company;
(ii) The Executive's continued substantial neglect of
duties, after written notice and an opportunity to correct;
(iii) Gross misconduct in the performance of duties
hereunder, materially injurious to the reputation, business or
operation of the Company; that
(iv) The issuance of an order from an insurance
regulatory body of any state or other jurisdiction in which the
Company does business that (A) finds that the Executive
violated statutory requirements of applicable insurance laws or
regulations, and (B) prohibits the Executive from exercising
any material portion of his duties as Senior Vice President of
the Company.
If the Company terminates the Executive's employment for Cause, the
Executive's Base Salary and other benefits shall be paid through the date
of termination and the Executive shall have no further rights to
compensation or benefits other than as determined by the terms of any
applicable plan or program.
The Executive must be notified in writing of any termination of his
employment for Cause. The Executive shall then have the right, exercisable
only within ten (10) days following receipt of such notice, to file a
written request for review by the Company. In such case, the Executive
shall be given the opportunity to be heard, personally or through counsel,
by the President and members of the Board who are not employees (the
"Independent Directors") and a majority of the Independent Directors and
the President must thereafter confirm that such termination is for Cause.
If the Directors do not provide such confirmation, the termination shall be
treated as other than for Cause.
If, following a termination of the Executive's employment for reasons other
than Cause, the President or the Independent Directors become aware of
facts clearly demonstrating the existence, at the time of such termination,
of grounds for terminating the Executive's employment for Cause, such
termination shall be treated as a termination for Cause, subject to the
Executive's right to be heard, and to have such determination confirmed, as
provided immediately above. Such right of post-effective termination for
Cause shall be deemed waived unless written notice of the basis therefor is
given to the Executive (i) within one year from the Termination Date of his
employment or (ii) by June 30 of the calendar year following the year in
which such termination occurred, whichever is later.
(e) Termination by the Executive for Good Reason. The Executive
shall be entitled to terminate his employment at any time under this
Section 9(e) by written notice to the Company if he has "Good Reason" to do
so, which shall mean (i) the Company's breach of this Agreement, including,
but not limited to: (A) a breach of this Agreement caused by the Company's
attempt to reduce the Executive's compensation; (B) the Company's attempt
to remove the Executive from the position of Senior Vice President, or (ii)
a move of the Company's headquarters to a location more than 50 miles from
Portland, Maine.
(f) Voluntary Termination of Employment. The Executive may
terminate employment voluntarily, in which case the Base Salary and other
benefits shall be paid through the date of termination and the Executive
shall have no further rights to compensation or benefits other than as
determined by the terms of any applicable plan or program.
8. Confidential Information.
(a) The Executive recognizes that the services to be performed by
him hereunder are special, unique and extraordinary and that, by reason of
his employment with the Company, he may acquire Confidential Information
(as hereinafter defined) concerning the operation of the Company the use or
disclosure of which would cause the Company substantial, irreparable loss
and damage which could not be readily calculated and for which no remedy at
law would be adequate. Accordingly, the Executive agrees that he shall not
(directly or indirectly) at any time, whether during or after the
Employment Term:
(i) knowingly use for an improper personal benefit any
Confidential Information that he may learn or has learned by reason
of his employment with the Company or
(ii) disclose any such Confidential Information to any person
except (A) in the good faith performance of his obligations to the
Company hereunder, (B) in connection with the enforcement of his
rights under this Agreement or (C) with the prior consent of the
Board.
As used herein "Confidential Information" includes information with
respect to the Company's facilities and methods, trade secrets and other
intellectual property, systems, patents and patent applications,
procedures, manuals, confidential reports, financial information, business
plans, prospects or opportunities, personnel information or lists of
customers and suppliers; provided, however, that such term shall not
include any information which is or becomes generally known or available
publicly other than as a result of disclosure by the Executive which is not
permitted as described in clause (ii) above.
(b) The Executive confirms that all Confidential Information is the
exclusive property of the Company. All business records, papers and
documents and electronic materials kept or made by the Executive relating
to the business of the Company which comprise Confidential Information
shall be and remain the property of the Company during the Employment Term
and all times thereafter. Upon the termination of his employment with the
Company or upon the request of the Company at any time, the Executive shall
promptly deliver to the Company, and shall retain no copies of, any written
or electronic materials, records and documents made by the Executive or
coming into his possession concerning the business or affairs of the
Company and which constitute Confidential Information.
9. Non-Competition.
(a) During the term of his employment and for the period commencing
on the date the Executive's employment terminates and ending on the first
anniversary thereof (the "Restricted Period"), the Executive shall not (i)
directly or indirectly, for his own account or for the account of others,
as an officer, director, stockholder, owner, partner, employee, promoter,
consultant, manager or otherwise participate in the promotion, financing,
ownership, operation, or management of, or assist in or carry on through a
proprietorship, corporation, partnership or other form of entity, within
Maine or any other state in which the Company was conducting, or was
actively planning to conduct, the business of insurance (the "Business") as
of the date of such termination of employment, (ii) solicit or contact in
an effort to do business with any person who was a customer or agent of the
Company during the period of the Executive's employment, or any affiliate
of any such person, if such solicitation or contact is directly or
indirectly in competition with the Company, or (iii) interfere in a similar
manner with the business of the Company. Nothing in this Section 11 shall
prohibit the Executive from acquiring or holding any issue of stock or
securities of any person that has any securities registered under Section
12 of the Securities Exchange Act of 1934 as amended, listed on a national
securities exchange or quoted on the automated quotation system of the
National Association of Securities Dealers, Inc. so long as (x) the
Executive is not deemed to be an "affiliate" of such person as such term is
used in paragraphs (c) and (d) of Rule 145 under the Securities Act of
1933, as amended, and (y) the Executive, members of his immediate family or
persons under his control do not own or hold more than five percent (5%) of
any voting securities of any such person.
(b) During the Restricted Period, the Executive shall not, whether
for his own account or for the account of any other person (excluding the
Company), (i) solicit or induce any of the Company's employees to leave
their employment with the Company or to accept employment with anyone else
or (ii) hire any such employees.
(c) The Executive has carefully read and considered the provisions
of this Section 11 and, having done so, agrees that the restrictions set
forth in this Section 11 (including the Restricted Period, the scope of
activity to be restrained and the geographical scope) are fair and
reasonable and are reasonably required for the protection of the interests
of the Company, its officers, directors, employees, creditors and
shareholders. The Executive understands that the restrictions contained in
this Section 11 may limit his ability to engage in a business similar to
the Company's business, but acknowledges that he will receive sufficiently
high remuneration and other benefits from the Company hereunder to justify
such restrictions.
10. Breach of Section 10 or Section 11. The Executive acknowledges
that a breach of any of the covenants contained in Section 10 or Section 11
hereof may result in material, irreparable injury to the Company for which
there is not adequate remedy at law, that it will not be possible to
measure damages for such injuries precisely and that, in the event of such
a breach, any payments remaining under the terms of this Agreement shall
cease and the Company shall be entitled to obtain a temporary restraining
order and a preliminary or permanent injunction restraining the Executive
from engaging in activities prohibited by Section 10 or Section 11 hereof
or such other relief as may be required to enforce any of the covenants
contained in Section 10 or Section 11 hereof.
11. Arbitration. The Parties agree that any controversy or claim
arising out of or relating to this Agreement, or the breach of any
provision hereof, or the terms or conditions of employment, including
whether such controversy or claim is arbitrable, and excepting any claim or
controversy arising out of the provisions of Section 10 or Section 11
hereof, shall be settled by arbitration in the City of Portland, Maine, in
accordance with the rules for commercial arbitration of the American
Arbitration Association as in effect at the time a demand for arbitration
under the rules is made, and judgment upon the award rendered by the
arbitrators may be entered in any court having jurisdiction thereof. The
decision of the arbitrators, including determination of the amount of any
damages suffered, shall be conclusive, final and binding on both Parties,
their heirs, executors, administrators, successors and assigns. The cost of
arbitration incurred by either Party shall be borne by that party unless
otherwise determined by the arbitrators.
12. Withholding. Anything to the contrary notwithstanding, all
payments required to be made by the Company hereunder to the Executive, his
spouse, his estate or beneficiaries, shall be subject to withholding of
such amounts relating to taxes as the Company may reasonably determine it
should withhold pursuant to any applicable law or regulation. In lieu of
withholding such amounts, in whole or in part, the Company may, in its sole
discretion, accept other provisions for payment of taxes, provided it is
satisfied that all requirements of law affecting its responsibilities to
withhold such taxes have been satisfied.
13. Assignability; Binding Nature. This Agreement is binding upon,
and shall inure to the benefit of, the Parties hereto and their respective
successors, heirs, administrators, executors and assigns. No rights or
obligations of the Executive under this Agreement may be assigned or
transferred by the Executive except that (a) his rights to compensation and
benefits hereunder may be transferred by will or operation of law, subject
to the limitations of this Agreement, and (b) his rights under employee
benefit plans or programs may be assigned or transferred in accordance with
such plans, programs. No rights or obligations of the Company under this
Agreement may be assigned or transferred except that such rights or
obligations may be assigned or transferred by operation of law in the event
of a merger or consolidation in which the Company is not the continuing
entity, or the sale or liquidation of all or substantially all of the
assets of the Company, provided that the assignee or transferee is the
successor to all or substantially all of the assets of the Company and such
assignee or transferee assumes the liabilities, obligations and duties of
the Company, as contained in this Agreement, either contractually or as a
matter of law.
14. Entire Agreement. This Agreement contains the entire agreement
between the Parties concerning the subject matter hereof and supersedes all
prior agreements, understandings, discussions, negotiations, and
undertakings, whether written or oral, between the Parties with respect
thereto.
15. Notice. For the purposes of this Agreement, notices and all
other communications provided for in this Agreement shall be in writing and
shall be deemed to have been duly given when delivered by hand or mailed by
United States overnight express mail, or nationally recognized private
delivery service on an overnight basis, return receipt requested, postage
prepaid. All such notices to the Executive shall be marked clearly
"Personal and Confidential."
If to the Executive:
Office Address: Samuel M. Koren
North East Insurance Company
482 Payne Road
Scarborough, Maine 04074
Home Address: 53 Bartlett Street
Portland, Maine 04103
If to the Company: North East Insurance Company
482 Payne Road
Scarborough, Maine 04074
Attn: Secretary
With a Copy to: Chair -- Compensation Committee
c/o North East Insurance Company
482 Payne Road
Scarborough, Maine 04074
Notices may also be sent to such other address as either Party may have
furnished to the other in writing in accordance herewith, except that
notice of change of address shall be effective only upon receipt.
16. Miscellaneous.
No provision of this Agreement may be modified, waived, or discharged
unless such waiver, modification or discharge is agreed to in writing and
signed by the Executive and such officer of the Company as may be
specifically designated by the Board. No waiver by either Party at any time
of any breach by the other Party of, or compliance with, any condition or
provision of this Agreement to be performed by such other Party shall be
deemed a waiver of similar or dissimilar provisions or conditions at the
same or at any prior or subsequent time. No agreements or representations,
oral or otherwise, express or implied, with respect to the subject matter
hereof have been made by either Party which are not expressly set forth in
this Agreement. The validity, interpretation, construction, and performance
of this Agreement shall be governed by the laws of the State of Maine.
17. Validity. The invalidity or unenforceability of any provision of
this Agreement shall not affect the validity or enforceability of any other
provision of this Agreement, which shall remain in full force and effect.
18. Counterparts. This Agreement may be executed in several
counterparts, each of which shall be deemed to be an original, but all of
which together shall constitute one and the same instrument.
IN WITNESS WHEREOF, the Parties have executed this Agreement as of
the date and year first above written.
NORTH EAST INSURANCE COMPANY
By: /s/ Robert G. Schatz Date: 12/01/98
Title: President
The Executive:
/s/ Samuel M. Koren Date: 12/01/98
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0
0
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12,056,448
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</TABLE>
