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STATE OF MAINE
DEPARTMENT OF PROFESSIONAL AND FINANCIAL REGULATION
BUREAU OF INSURANCE

 

This Decision and Order is made by the Superintendent of the Bureau of Insurance on the application for approval by Motor Club of America in the above captioned proceeding.

I. BACKGROUND

This matter is before the Superintendent of Insurance as the result of the filing on April 27, 1999, as amended on May 26, 1999, of an application by Motor Club of America (hereinafter, "Motor Club" or the "Applicant"), acting through NEIC Insurance Acquisition Corporation (hereinafter, "NEIC Acquisition"). The application seeks the approval, pursuant to 24–A M.R.S.A. §§222 and 3474, of the Applicant's plan to acquire control of North East Insurance Company (hereinafter, "North East") by merger of NEIC Acquisition with North East. Following the merger, NEIC Acquisition will be extinguished as a legal entity and North East will become the surviving corporation (with all of its pre–merger assets, liabilities, obligations and rights intact and preserved). After the acquisition of control, North East will continue its corporate existence as a wholly–owned subsidiary of the Applicant.

Under the terms of the merger, stockholders of North East will receive, at their individual election:

(a) cash in the amount of $3.30 per share of North East stock;
(b) 0.19048 of a share of Motor Club stock per share of North East stock; or
(c) a combination of cash and stock.

Motor Club will not issue more than 290,389 shares of its stock, and cash will be paid in lieu of fractional shares. Therefore, North East stockholders who elect to receive Motor Club stock may be required to take cash for some of their shares if North East stockholders elect to take more than 290,389 shares of Motor Club stock in the aggregate.

Docket No. INS–99–7

DECISION AND ORDER

Since the agreement in principle to merge was announced in late January, 1999, Motor Club and North East have been engaged in discussions concerning the combination of North East with Motor Club. Following consummation of the merger, North East will be a wholly–owned subsidiary of Motor Club, a New Jersey holding corporation. North East will continue its business as a State of Maine domestic stock insurance company. Motor Club intends that North East and its wholly owned New York subsidiary, American Colonial Insurance Company (hereinafter, "ACIC"), will continue to operate independently and service their insureds from their present Scarborough, Maine, location.

North East was organized as a Maine corporation and began writing property and casualty insurance in Maine in June, 1966. Its wholly–owned insurance company subsidiary, ACIC, formerly wrote insurance in the State of New York. North East's principal products are personal and commercial automobile insurance, including both liability and physical damage coverages. North East also offers other types of insurance, such as general liability, commercial multi–peril, inland marine, and fire. It no longer writes homeowners insurance, having withdrawn from this market in 1995.

Motor Club is a holding company for subsidiaries that write property and casualty insurance. Motor Club was incorporated in New Jersey in 1933 as "Automobile Association of New Jersey" and is the successor to a New Jersey corporation organized in 1926. The present name was adopted in 1958. Motor Club has two subsidiaries that write property and casualty insurance in the State of New Jersey: Motor Club of America Insurance Company (hereinafter, "MCA") and Preserver Insurance Company (hereinafter, "Preserver" ).

In addition to the MCA and Preserver subsidiaries, Motor Club also wholly–owns MCA Insurance Company. MCA writes private passenger automobile business, and Preserver writes small commercial, homeowners, and ancillary coverages. Both MCA and Preserver are New Jersey corporations. NEIC Insurance Acquisition Corporation was organized in May, 1999, as a Maine corporation (wholly–owned by Motor Club), and was formed solely for the purpose of merging with and into North East. North East will be the survivor of the merger, and thereby will become a wholly–owned subsidiary of Motor Club.

II. PROCEDURAL HISTORY

Following the filing of the application on April 27, 1999, a Notice of Pending Proceeding and Prehearing Conference was published in the five daily newspapers, in the State of Maine. The Superintendent issued his First Discovery Request on May 14, 1999. The first prehearing conference was held on May 21, 1999. Following the prehearing, a Notice of Hearing was issued (and published in the five daily newspapers in the State of Maine) which, among other matters, set June 4, 1999 as the intervention deadline.

No persons filed applications to intervene as parties in this proceeding. ; set June 24, 1999 as the date for public hearing; and identified the various issues to be considered by the Superintendent at the public hearing. The Superintendent issued his Second Discovery Request on June 10, 1999. On June 24, 1999, the Superintendent ruled that the proceeding that day would be a prehearing conference, based upon his finding that the Applicant's filing was not complete for hearing. Following the second prehearing conference, the Superintendent issued a Notice of Continuance and Rescheduled Hearing (also published in the five daily newspapers in the State of Maine), setting July 13, 1999 as the new date for public hearing in this matter. The hearing was held, as rescheduled, on July 13, 1999. The Applicant and North East appeared at and participated in the hearing. No other persons, personally or through counsel or other representative, appeared at or participated in the hearing.

III. FINDINGS OF FACT

The Superintendent is required by 24–A M.R.S.A. §222 (7)(A) to hold a hearing on an application for approval of the acquisition of control of a domestic insurance company within thirty days of the filing of an application. An application is considered "filed" once it has been deemed complete by the Superintendent. The Superintendent found the application in this proceeding to be "complete" as of July 13, 1999. After the conclusion of the hearing on the application for approval, the Superintendent is required to issue a decision on the application within thirty days. 24–A M.R.S.A. §222 (7)(A) requires that, in making his decision, the Superintendent shall approve any acquisition of control unless he finds that:

1. After the change of control, the domestic insurer could not satisfy the requirements for the issuance of a certificate of authority according to requirements in force at the time of the issuance, or last renewal or continuation of its certificate of authority to do the insurance business which it intends to transact in this State;

2. The effect of the purchase, exchange, merger of a controlling person of the insurer, or other acquisitions of control may be substantially to lessen competition in insurance in this State or tend to create a monopoly therein; or would violate the laws of this State or of the United States relating to monopolies or restraints of trade;

3. The financial condition of an acquiring person is such as would jeopardize the financial stability of the insurer or prejudice the interest of its policyholders;

4. The plans or proposals which the acquiring person has to liquidate the insurer, to sell its assets or to merge it with any person, or to make any other major change in its business or corporate structure or management, are unfair or prejudicial to policyholders;

5. The competence, experience and integrity of those persons who would control the operation of the insurer indicate that it would not be in the interest of policyholders or the public to permit them to do so;

6. Any merger of a domestic insurer does not comply with section 3474; or

7. The acquisition of control would tend to affect adversely the contractual obligations of the domestic insurer or its ability and tendency to render service in the future to its policyholders and the public. 24–A M.R.S.A. §3474 requires in subsection (2) that the Superintendent shall approve the plan and agreement of merger unless he finds that the plan or agreement:

1. Is contrary to law;
2. Is unfair or inequitable to the policyholders of any insurer involved;
3. Would substantially reduce the security of and service to be rendered to policyholders of the domestic insurer in this State or elsewhere;
4. Would materially tend to lessen competition in the insurance business in this State or elsewhere as to the kinds of insurance involved, or would materially tend to create a monopoly as to such business; or
5. Is subject to other material and reasonable objections.

At the hearing held on July 13, 1999, the Superintendent accepted evidence and arguments from the Applicant and North East. Testimonial evidence was presented in a panel format by Stephen A. Gilbert, President, Chief Executive Officer, and Director of Motor Club; Patrick J. Haveron, Executive Vice President, Chief Financial Officer, Treasurer, and Director of Motor Club; Robert G. Shatz, President, Chief Executive Officer, and Director of North East; and Ronald A. Libby, Executive Vice President and Chief Operating Officer of North East. Also presenting testimonial evidence was Graham S. Payne, Vice President and Treasurer of North East. In addition to the testimonial evidence, documentary evidence was admitted into the record comprised of Applicant Exhibits 1 through 13, and Hearing Officer

Exhibit 1.

Except for Applicant Exhibit 5 and Applicant Exhibit 6, comprised of the North East and Motor Club business plans, respectively, which were designated confidential, all other Exhibits were non–confidential and admitted into the public record. Based on the testimonial and documentary evidence presented at the hearing, the Superintendent's analysis of the statutory standards is as follows:

1. Whether, after the change of control, North East can satisfy the requirements for the continuation of its certificate of authority to do the insurance business which it intends to transact in Maine.

North East currently holds a certificate of authority in the State of Maine to transact the following lines of insurance business: fire, allied lines, homeowners multiple peril, commercial multiple peril, inland marine, other liability, auto liability, and auto physical damage.

The Superintendent finds that certain issues exist concerning North East's ability to satisfy the requirements for the continuation of its certificate of authority to transact insurance business in the State of Maine.

To continue to hold a certificate of authority to transact insurance business in the State of Maine an insurer, among other matters, must be in compliance with Title 24–A of Maine law (also known as the "Maine Insurance Code" ), specifically including, but not limited to, capital and surplus funds requirements under §410, the parent–subsidiary–affiliate transaction requirements under §425, and the risk based capital standards under Chapter 79. The evidence presented at hearing, however, satisfies the Superintendent that his concerns will be appropriately addressed after the change of control, consistent with certain of the conditions of approval established in Part V. of this Decision and Order.

The testimony of Patrick J. Haveron describes Motor Club's knowledge of two issues that have the potential to adversely affect the continuation of North East's certificate of authority in Maine, as follows:

[t]he first issue concerns the financial impact of [North East's] reinsurance program during 1999 and its negative impact on the financial results of the Company. . . . The second deals with the investment of [North East] in its subsidiary ACIC that is resulting, because of its favorable runoff, in creating an investment greater than [North East's] surplus. Applicant Exhibit 11, pp. 1 and 2 of Supplemental Prefiled Testimony. See also Hearing Officer Exhibit 1.

As a point of clarification, while the Superintendent agrees that these two issues of concern exist, the Superintendent does not agree with Mr. Haveron's implication that the second issue is caused solely by ACIC's favorable runoff. While ACIC's "favorable runoff" is a contributing factor, the Superintendent believes an equally important factor is that the surplus of North East has decreased while the value of its equity investments has increased. The combination of these factors results in North East having equity investments greater than surplus potentially in violation of the Maine Insurance Code. The apparent violation of 24–A M.R.S.A. §1106 (2), which prohibits investments in stocks in excess of an insurance company's surplus, and the disadvantageous reinsurance program used by North East could have such a negative impact on the surplus level of North East so as to adversely affect its ability to continue to meet the minimum statutory surplus requirements of the Maine Insurance Code. Motor Club presented evidence at the hearing reflecting its willingness and intention to correct the financial concerns threatening the surplus level of North East. Specifically, with respect to reinsurance, Mr. Haveron testified that Motor Club:

[r]ecognizes the need to immediately reevaluate the [North East] reinsurance program to produce cost savings. In fact, we have mentioned the need to evaluate North East's reinsurance arrangements with an eye to replacing those arrangements as soon as contractually possible. That plan extends specifically to North East's 1999 aggregate stop loss package which will expire December 31, 1999 and not be extended. Applicant Exhibit 11, at p. 2 of Supplemental Prefiled Testimony. Mr. Haveron further testified that the amount of cost–savings to be realized from a replacement of North East's current reinsurance program could approximate $0.5 million annually, based on Motor Club's experience with reinsurance cost–savings realized at its Preserver subsidiary. With respect to the value of North East's investment in ACIC being greater than surplus, Mr. Haveron testified that:

$6.4 million of [North East's] $6.9 million investment in common stocks is attributable to its investment in ACIC. [Motor Club's] $2 million infusion of capital into [North East], along with the inter–company dividend of $0.5 million from ACIC to [North East] will resolve the immediacy of this concern. In addition, North East's asset management will be consolidated with Conning Asset Management's current program for [Motor Club]. The current investment philosophy and the policy of [Motor Club], including Motor Club of America Insurance Company and Preserver Insurance Company, does not include investment in equities. Mr. Haveron also testified that the $2 Million capital infusion will be made by Motor Club at or about the time of the closing of the merger transaction. Based upon the corrective actions proposed by Motor Club, and assuming those actions occur, the Superintendent finds that North East will be able to continue to satisfy the requirements for continuation of its certificate of authority to transact insurance business after the change of control.

2. Whether the effect of the merger of NEIC Acquisition and North East and the resulting acquisition of control of North East by Motor Club of America may be substantially to lessen competition in insurance in Maine or tend to create a monopoly therein, or would violate the laws of Maine or of the United States relating to monopolies or restraints of trade; or would materially tend to lessen competition in the insurance business in Maine or elsewhere as to the kinds of insurance involved, or would materially tend to create a monopoly as to such business. This encompasses the statutory standards under both 24–A M.R.S.A. §222 (7)(A)(2) and 24–A M.R.S.A. §3474 (2)(D). No evidence was presented that demonstrates, and the Superintendent does not find, that any aspect of the merger will be substantially to lessen competition in insurance in Maine or tend to create a monopoly therein, or would violate the laws of Maine or of the United States relating to monopolies or restraints of trade; or would materially tend to lessen competition in the insurance business in Maine or elsewhere as to the kinds of insurance involved. The documentary evidence presented by North East in this proceeding includes a Market Share Analysis of North East for Calendar Year 1996 that demonstrates a market share percentage based on direct written premiums reported in the State of Maine for certain lines of business, as follows:

[t]o the extent that the merger has any appreciable impact on competition in Maine, that impact will be to enhance North East's overall ability to compete with those other insurers active in various sectors of the Maine insurance market, namely Acadia, Maine Mutual, Hanover, Peerless, Commercial Union and York.

Applicant Exhibit 11, p. 18 of Prefiled Testimony. It was further clarified that the Motor Club of America parent company will not be entering the Maine insurance market as the result of this merger. Mr. Gilbert also testified that, at the federal level, the Applicant satisfied the Hart–Scott–Rodino filing requirements with the Federal Trade Commission and the Antitrust Division of the Department of Justice relating to the merger transaction. The federal agencies determined that Motor Club and North East met the Premerger Notification Requirements under the Hart–Scott–Rodino Antitrust Improvements Act of 1976, and granted early termination of the waiting period required by federal law for the merger transaction. The record is devoid of any evidence that this merger will have a negative impact on competition.

3. Whether the financial condition of the Applicant is such as would jeopardize the financial stability of North East or prejudice the interest of its policyholders. To address this statutory criterion, the Superintendent relied upon the documentary and testimonial evidence constituting the record in this proceeding including, but not limited to, Motor Club's Form A Filing, its confidential Business Plan, and the 1998 Annual Statements. Based on the evidence presented at hearing, the Superintendent finds that the financial condition of Motor Club is such as would not jeopardize the financial stability of North East or prejudice the interest of its policyholders, although certain concerns, which are addressed through conditions, do exist. Motor Club's confidential Business Plan and supporting testimony demonstrate that it has sufficient assets and access to capital to effectuate the merger. Specifically, the financial statements show that Motor Club has available the necessary cash on hand to complete the $2 million capital infusion of cash by Motor Club into North East. See Applicant Exhibit 6, Motor Club Business Plan (Confidential). In addition to the initial $2 million capital infusion of cash by Motor Club into North East, Mr. Haveron testified that Motor Club is committed to the financial success of its subsidiaries, which will include North East upon consummation of the merger transaction.

At the hearing, Mr. Haveron noted the capital infusion by Motor Club of $5 million into Preserver in order to achieve a B+ A. M. Best rating, as an example of Motor Club's commitment to financial success. A clear demonstration of commitment to North East by Motor Club is reflected by the willingness of three of Motor Club's current directors, Messrs. McWhorter, Swanner and Lobeck, to invest in the aggregate as much of the $10 million as may be necessary to finance the merger consideration. This is significant because the success of Motor Club, as a holding company, depends upon the success of its subsidiary entities. It is also significant because these individuals will be Directors of North East. With respect to the $10 million unsecured subordinated convertible debenture financing to fund the merger consideration, the debt service or carrying costs of the financing will be approximately $0.75 million annually. See Applicant Exhibit 7, the debenture documentation, and Applicant Exhibit 11, pp. 12 and 13 of the Prefiled Testimony. The convertible debenture has a 10–year term, yet Motor Club's confidential Business Plan shows the debentures being converted from debt to equity in calendar year 2001. Given the lack of a contractual requirement to convert prior to the expiration of the 10–year term, conversion of the debentures in year 3 is not guaranteed a contractual necessity. Therefore, the Superintendent is concerned about the potential ongoing financial impact of the debt service beyond calendar year 2001, and possibly continuing to calendar year 2009. Another area of concern to the Superintendent is the impact of Motor Club's merger and acquisition ("M&A" ) business strategy on its financial condition. Messrs. Gilbert and Haveron testified that Motor Club intends to expand geographically, without focus on any particular area of the United States. Motor Club looks for strength of company management and the agency force – with a commercial lines focus. The Superintendent recognizes the North East merger transaction as only Motor Club's first. Therefore, the potential financial impact on Motor Club and diversion of parent company focus away from North East may adversely affect North East.

Finally, certain risks related to so–called Year 2000 Issues are faced by Motor Club, its present subsidiaries, and North East. These companies rely on date sensitive calculations that are generated by their computer systems to determine premium revenues, verify claims, make timely and correct billings, monitor reinsurance, calculate agents' commissions and other matters. The companies also depend on information supplied and processed by outside vendors. Testimony was provided on behalf of Motor Club and North East that they have taken reasonable and customary actions to determine that their computer systems will by Year 2000 compliant. The Superintendent is convinced that ongoing regulatory oversight is an adequate means to address his concerns.

4. Whether the Applicant has any plans or proposals to liquidate North East, to sell its assets or to merge it with any person, or to make any other major change in its business or corporate structure or management which is unfair or prejudicial to policyholders. No evidence was presented that demonstrates, and the Superintendent does not find, that Motor Club has any plans or proposals to liquidate North East, to sell its assets or to merge it with any person. Evidence was presented demonstrating certain plans or proposals of Motor Club to make changes in North East's business or corporate structure or management. The Superintendent does not find Motor Club's proposed changes in this regard to be unfair or prejudicial to North East's policyholders. Testimony was presented regarding Motor Club's plans to achieve cost savings through a variety of means including, but not limited to, changing certain of North East's business practices such as its current reinsurance program and existing investment management arrangement. Cost–savings are planned to result from economies of scale, such as the consolidation of the financial and administrative functions, with positions either being eliminated or relocated to Motor Club's Paramus, New Jersey, location. Applicant Exhibit 1, p. 6 of Form A Filing. Other areas of cost–savings include a reduction in salary expense and the elimination of legal and regulatory costs associated with North East's current status as a publicly held company (which no longer will be the case when North East becomes a wholly–owned subsidiary of Motor Club.)

The management of North East will undergo changes as well. After the merger, North East's Board of Directors will be removed and replaced in its entirety. The present eight directors of Motor Club, plus Ronald A. Libby will be the Board of Directors of North East. Additionally, North East's current President and Chief Executive Officer, Robert G. Shatz, will resign and terminate his employment. As of the effective date of the merger, Ronald A. Libby will become President and Chief Operating Officer of North East; Patrick J. Haveron will become Executive Vice President and Chief Financial Officer of North East; and Stephen A. Gilbert will become Chairman of the Board and Chief Executive Officer of North East. Id. p. 8 of Form A Filing.

An area of particular strength for Motor Club is its implementation of internal controls. Specifically, Motor Club described its control processes and procedures as follows:

a.) "Asset Management". The use of external investment accounting and reporting services provided by Conning Asset Management, including SASS 70 review.
b.) "Lock Box". The use of "lock box" techniques to segregate cash receipts and otherwise.
c.) "Audit". The outsourcing of the internal control audit function to external auditors that provide formal reporting, management response, action planning, Board of Director presentation, follow–up as necessary, ability of auditors to go directly to the Board if management non–responsive.

Internal control have has been an area of particular difficulty for North East. Mr. Haveron testified that Motor Club will implement its internal control processes and procedures at North East. To the extent Motor Club was able to provide information on changes to be made at North East, those changes appear to be positive and beneficial to policyholders. Continuing regulatory oversight will provide safeguards for future integration.

5. Whether the competence, experience and integrity of the Applicant indicates that it would not be in the interest of policyholders or the public to control the operation of North East. The Superintendent finds no evidence that the competence, experience, and integrity of Motor Club indicates that it would not be in the interest of policyholders and the public for Motor Club to control the operation of North East. The evidence to support the Superintendent's conclusion includes biographical affidavits on the Officers and Directors of Motor Club. Applicant Exhibit 3, Biographical Affidavits. Other than as noted below, there is no information in this material that could indicate that Motor Club's management lacks the competence, experience and integrity to control the operation of North East. In fact, the consistency and stability of Motor Club's Officers and Board would tend to support the opposite conclusion.

On a negative note, while there are no pending court proceedings involving a reorganization or liquidation of Motor Club or any of its affiliates, it has been disclosed that in 1992 an Order of Liquidation for MCA Insurance Company, a subsidiary of Motor Club that is an Oklahoma insurer, was entered in the District Court of Oklahoma County, State of Oklahoma. The proceedings which resulted in entry of that Order occurred after losses resulting from Hurricane Andrew. While the circumstances of Hurricane Andrew were, to an extent, an anomaly, Motor Club continues to take steps to protect itself from such an event in the future, including (1) more extensive use of catastrophic modeling, (2) increasing its excess catastrophic reinsurance coverage, and (3) improved geographic distribution of its property risks within New Jersey, including the initiative to expand outside the State of New Jersey without compounding its catastrophic risk. See Applicant Exhibit 1, pp. 3 and 4 of the Form A Filing. Mr. Haveron testified that New Jersey insurance regulators are in the final stages of field work examining MCA and Preserver for the period ending December 31, 1997, and that he is not aware of any potential adverse findings or adjustments at this time. Therefore, nothing in the record indicates a lack of competence, experience, or integrity on the part of Motor Club.

6. Whether the proposed acquisition of control by merger would tend to affect adversely the contractual obligations of North East or its ability and tendency to render service in the future to its policyholders and the public; is unfair or inequitable to the policyholders of North East; or would substantially reduce the security of and service to be rendered to North East's policyholders in Maine or elsewhere.

This encompasses the statutory standards under 24–A M.R.S.A. §222 (7)(A)(7) and 24–A M.R.S.A. § 3474 (2)(B) and (C). No evidence was presented that demonstrates, and the Superintendent does not find, that the merger would tend to affect adversely the contractual obligations of North East or its ability and tendency to render service in the future to its policyholders and the public; is unfair or inequitable to the policyholders of North East; or would substantially reduce the security of and service to be rendered to North East's policyholders in Maine or elsewhere. While the filing in this proceeding seeks approval of a merger transaction, following consummation of the merger, North East will continue its business as a State of Maine domestic stock insurance company. Evidence was presented by Motor Club that it intends for North East and its wholly owned New York subsidiary, ACIC, to continue to operate independently and to service their insureds from their present Scarborough, Maine, location. Applicant Exhibit 1, p. 6 of Form A Filing.

In this regard, Motor Club does not anticipate implementing any changes in North East's underwriting or claims handling practices. One of the positive changes that was identified is the ability of Motor Club to provide new insurance product offerings to North East to service the needs of its customers in the State of Maine.

Motor Club and North East have engaged in a variety of communications with North East's agent force regarding the proposed merger transaction, including meetings with key agents and the agent advisory board, as well as separate visits with agents personally. All of the actions taken by Motor Club to date are positive for the policyholders and, in fact, should improve services and product offerings. See Analysis of item 4, above, for further discussion.

7. Whether the proposed acquisition of control by merger is contrary to law; or subject to other material and reasonable objections.

This encompasses the statutory standards under both 24–A M.R.S.A. §3474 (2)(A) and (E). No evidence was presented that demonstrates, and the Superintendent does not find, that the proposed merger is contrary to law; or is subject to other material and reasonable objections. While it does not represent a material objection that would cause the Superintendent to withhold approval of the merger transaction, the Superintendent is concerned that the 1999 Consolidated Budget and Projection for Years 2000 – 2001 contained in North East's confidential Business Plan does not reflect (1) Mr. Shatz's executive severance, and (2) Mr. Koren's employment claims, each as detailed in Amendment No. 1 to Form S–4/A. Applicant Exhibit 4, pp. 60 and 61. It must be recognized, however, that the Superintendent does have certain concerns regarding the proposed merger, as identified elsewhere in this Decision and Order, but that those concerns do not rise to a sufficient level to support a finding of material and reasonable objection that would result in non–approval of the merger transaction.

IV. CONCLUSIONS OF LAW

After having reviewed the record in this proceeding, the Superintendent concludes that the Applicant has met the standards of 24–A M.R.S.A. §§222 and 3474. The Superintendent is concerned that certain aspects of the integration and operation of the combined companies require specific regulatory oversight. Therefore, the proposed acquisition of control of North East Insurance Company by merger of Motor Club of America, acting through NEIC Insurance Acquisition Corporation, should be approved with certain conditions.

V. ORDER

The application of Motor Club of America, acting through NEIC Insurance Acquisition Corporation, to acquire control of North East Insurance Company by merger is hereby APPROVED, subject to the following conditions:

1. Written confirmation of at least seventy five percent (75%) of North East stockholders voting in favor of the merger transaction must be filed with the Superintendent within 30 days of the effective date of this Decision and Order.

2. Written confirmation of the capital infusion from Motor Club to North East in the amount of $2 million cash must be filed with the Superintendent within 30 days of the effective date of this Decision and Order.

3. Written confirmation of the cash dividend from ACIC to North East in the amount of $499,031 must be filed with the Superintendent within 30 days of the effective date of this Decision and Order.

4. Copies of the Convertible Debentures executed by Messrs. McWhorter, Swanner, Lobeck, and E. Townes Duncan must be filed with the Superintendent within 30 days of the effective date of this Decision and Order.

5. Any North East custodial agreements shall be amended to require the custodian to notify the Superintendent whenever any transaction or series of transactions results in a withdrawal of greater than twenty five percent (25%) of the assets under the custodian's control in any calendar year. The amended custodial agreements shall be filed with the Superintendent within 30 days of the effective date of this Decision and Order. Any future custodial agreements shall contain the language required by this condition. North East shall file with the Superintendent a new custodial agreement any time its custodial arrangements change.

6. North East shall provide written notice to the Superintendent when the contemplated changes in reinsurance are consummated, including the identities of the reinsurers to be used, a written summary of the changes compared to North East's existing reinsurance program, and the expected cost–savings.

7. Without prior written approval of the Superintendent, North East is prohibited from declaring or issuing dividends to Motor Club, or otherwise, until on or after September 30, 2002.

8. If at any time North East's risk based capital (RBC) level equals or falls below two hundred percent (200%), Motor Club shall make a capital infusion of cash into North East to raise its RBC level above two hundred percent (200%), unless some other action is approved by the Superintendent.

9. Motor Club shall provide written notice to the Superintendent if at any time the Convertible Debentures are transferred or converted.

10. Motor Club shall file promptly with the Superintendent copies of the final reports of examination prepared by the State of New Jersey insurance regulators for Motor Club of America Insurance Company and Preserver Insurance Company for the period ending December 31, 1997.

11. Motor Club shall provide written notice to the Superintendent any time Motor Club seeks a change in the status of ACIC and shall file copies of any filings, including business plans, required by the State of New York Department of Insurance.

12. When conducting an examination of North East, the Bureau of Insurance, or its designees, shall be given complete access to the accounts, records, documents, and transactions pertaining to or affecting the affairs of North East, whether in the possession of North East or Motor Club. Nothing in this condition shall affect the prohibition contained in 24–A M.R.S.A. §3408 against removing all or a material part of the records or assets of North East from Maine.

13. Motor Club and North East shall file with the Superintendent any decisions or orders of other state or federal regulators with respect to the merger transaction, including those related to ACIC.

VI. NOTICE OF APPEAL RIGHTS

This Decision and Order is a final agency action of the Superintendent of Insurance within the meaning of the Maine Administrative Procedures Act. It is appealable to the Superior Court in the manner provided in 24–A M.R.S.A. §236, 5 M.R.S.A. §11001, et seq., and M.R. Civ. P. 80C. Any party to the proceeding may initiate an appeal within thirty (30) days after receiving this notice. Any aggrieved non–party whose interests are substantially and directly affected by this Decision and Order may initiate an appeal within forty (40) days of the issuance of this Decision and Order. There is no automatic stay pending appeal; application for stay may be made in the manner provided in 5 M.R.S.A. §11004.

PER ORDER OF THE SUPERINTENDENT OF INSURANCE

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