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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED JUNE 30, 2001 COMMISSION FILE NO. 1-12449
SCPIE HOLDINGS INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 95-4457980
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
1888 CENTURY PARK EAST, STE. 800 90067
LOS ANGELES, CALIFORNIA (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE
OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE:
(310) 551-5900
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's
classes of stock, as of the latest practicable date.
Class Outstanding at August 10, 2001
Preferred stock, par value $l.00 per share No shares outstanding
Common stock, par value $0.0001 per share 9,338,785 shares
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PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS:
SCPIE HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
JUNE 30, DECEMBER 31,
2001 2000
--------- ---------
(unaudited)
ASSETS
Securities available-for-sale:
Fixed maturity investments, at fair value
(amortized cost 2001 - $551,556; 2000 - $567,166) .... $ 552,724 $ 566,266
Equity investments, at fair value
(cost 2001 - $28,952; 2000 - $25,874) ................. 27,713 24,403
--------- ---------
Total securities available for sale ............. 580,437 590,669
Real estate ............................................. 15,946 16,126
Cash equivalents ........................................ 112,535 84,451
--------- ---------
Total investments ............................... 708,918 691,246
Cash ...................................................... 5,194 10,418
Accrued investment income ................................. 9,625 9,307
Premiums receivable ....................................... 85,489 46,371
Reinsurance recoverable on paid and unpaid claims ......... 49,970 44,461
Deferred federal income taxes ............................. 31,776 16,869
Costs in excess of net assets acquired .................... 5,739 6,153
Property and equipment, net ............................... 7,533 7,930
Other assets .............................................. 17,838 21,890
--------- ---------
Total assets .................................... $ 922,082 $ 854,645
========= =========
LIABILITIES
Reserves:
Losses and loss adjustment expenses ..................... $ 480,190 $ 433,541
Unearned premiums ....................................... 93,415 56,996
--------- ---------
Total reserves .................................. 573,605 490,537
Bank loan payable ........................................ 27,000 27,000
Other liabilities ........................................ 31,974 20,567
--------- ---------
Total liabilities ............................... 632,579 538,104
Commitments and contingencies
STOCKHOLDERS' EQUITY
Preferred stock - par value $1.00, 5,000,000
shares authorized, no shares issued or outstanding ... -- --
Common stock - par value $.0001, 30,000,000
shares authorized, 12,792,091 shares issued,
2001 - 9,338,785 shares outstanding
2000 - 9,330,975 shares outstanding .................. 1 1
Additional paid-in capital ................................ 36,386 36,386
Retained earnings ......................................... 355,740 384,437
Treasury stock, at cost
(2001 - 2,953,306 shares; 2000 - 2,961,074 shares) ... (98,571) (98,705)
Subscription notes receivable ............................. (4,050) (4,050)
Accumulated other comprehensive loss ...................... (3) (1,528)
--------- ---------
Total stockholders' equity ...................... 289,503 316,541
--------- ---------
Total liabilities and stockholders' equity ...... $ 922,082 $ 854,645
========= =========
See accompanying notes to Consolidated Financial Statements.
2
SCPIE HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------------- ----------------------
2001 2000 2001 2000
--------- --------- --------- ---------
Revenues:
Premiums earned ................................... $ 57,537 $ 43,613 $ 105,175 $ 83,649
Net investment income ............................. 8,710 8,417 17,712 16,756
Realized investment gains (losses) ................ (7) 18 1,193 (897)
Equity in earnings from affiliate ................. 350 -- 600 --
Other revenue ..................................... 41 304 242 615
--------- --------- --------- ---------
Total revenues ............................ 66,631 52,352 124,922 100,123
Expenses:
Losses and loss adjustment expenses ............... 95,276 37,880 141,116 72,012
Other operating expenses .......................... 16,493 8,675 25,757 17,403
Interest expenses ................................. 351 223 930 397
--------- --------- --------- ---------
Total expenses ............................ 112,120 46,778 167,803 89,812
--------- --------- --------- ---------
Income (loss) before federal income taxes ........... (45,489) 5,574 (42,881) 10,311
Federal income tax expense (benefit) ................ (16,409) 1,192 (16,042) 2,138
--------- --------- --------- ---------
Net income (loss) ......................... $ (29,080) $ 4,382 $ (26,839) $ 8,173
========= ========= ========= =========
Basic earnings (loss) per share of common stock ..... $ (3.11) $ 0.47 $ (2.87) $ 0.87
Diluted earnings (loss) per share of common stock ... $ (3.11) $ 0.47 $ (2.87) $ 0.87
Cash dividend declared per share of common stock .... $ 0.10 $ 0.10 $ 0.20 $ 0.20
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(DOLLARS IN THOUSANDS)
(UNAUDITED)
ACCUMULATED STOCK TOTAL
ADDITIONAL OTHER SUBSCRIPTION STOCK-
COMMON PAID-IN COMPREHENSIVE RETAINED TREASURY NOTES HOLDERS'
STOCK CAPITAL INCOME (LOSS) EARNINGS STOCK RECEIVABLE EQUITY
--------- --------- ------------- --------- --------- ---------- ---------
BALANCE AT JANUARY 1, 2001 ............ $ 1 $ 36,386 $ (1,528) $ 384,437 $ (98,705) $ (4,050) $ 316,541
Net loss............................. -- -- -- (26,839) -- -- (26,839)
Other comprehensive income for
unrealized gains on securities sold,
net of reclassification adjustments
of $146 for losses included in net
income ............................. -- -- 1,525 -- -- -- 1,525
---------
Comprehensive income -- (25,314)
---------
Treasury stock reissued ............ -- -- -- -- 134 -- 134
Cash dividends ..................... -- -- -- (1,858) -- -- (1,858)
--------- --------- --------- --------- --------- --------- ---------
BALANCE AT JUNE 30, 2001 .............. $ 1 $ 36,386 $ (3) $ 355,740 $ (98,571) $ (4,050) $ 289,503
========= ========= ========= ========= ========= ========= =========
See accompanying notes to Consolidated Financial Statements.
3
SCPIE HOLDINGS INC. AND SUBISIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------------- ----------------------
2001 2000 2001 2000
--------- --------- --------- ---------
OPERATING ACTIVITIES
Net income (loss) ........................................ $ (29,080) $ 4,382 $ (26,839) $ 8,173
Adjustments to reconcile net income to net cash
used in operating activities:
Provisions for amortization and depreciation ........... 1,458 937 1,925 1,772
Provision for deferred federal income taxes ............ (13,466) 871 (15,730) 1,824
Realized investments (gains) losses .................... 7 (18) (1,193) 897
Equity in earnings of affiliate ........................ (350) -- (600) --
Changes in operating assets and liabilities:
Accrued investment income .............................. (699) (190) (318) 556
Unearned premiums ...................................... (22,242) (429) 36,419 844
Loss and loss adjustment expense reserves .............. 49,390 (8,099) 46,649 (14,022)
Reinsurance recoverables on paid and unpaid claims ..... (2,195) (1,354) (5,509) (30)
Other liabilities ...................................... (2,756) (394) 11,407 (8,013)
Premium receivable ..................................... 12,669 -- (39,118) --
Other assets ........................................... 6,983 2,853 4,048 1,554
--------- --------- --------- ---------
Net cash used in operating activities .......... (281) (1,441) 11,141 (6,445)
INVESTING ACTIVITIES
Purchases--fixed maturities ........................... (79,073) (48,888) (232,821) (97,235)
Sales--fixed maturities ............................... 94,216 33,419 236,543 83,738
Maturities--fixed maturities .......................... 5,049 4,947 12,197 5,127
Purchases--equities ................................... -- -- (2,500) --
Sales--equities ....................................... 24 2,555 24 8,266
Change in short-term investments, net ................. (18,338) 17,810 (28,084) 14,056
--------- --------- --------- ---------
Net cash provided by investing activities ..... 1,878 9,843 (14,641) 13,952
--------- --------- --------- ---------
FINANCING ACTIVITIES
Purchase of treasury stock ............................ -- (1,367) -- (4,668)
Reissue of treasury shares ............................ -- -- 134 --
Cash dividends ........................................ (934) (937) (1,858) (1,887)
Bank loan payment ..................................... -- (4,000) -- (4,000)
--------- --------- --------- ---------
Net cash used in financing activities .......... (934) (6,304) (1,724) (10,555)
--------- --------- --------- ---------
Increase (decrease) in cash ............................. 663 2,098 (5,224) (3,048)
Cash at beginning of period .............................. 4,531 1,712 10,418 6,858
--------- --------- --------- ---------
Cash at end of period .................................... $ 5,194 $ 3,810 $ 5,194 $ 3,810
========= ========= ========= =========
See accompanying notes to Consolidated Financial Statements.
4
SCPIE HOLDINGS INC. AND SUBISIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
JUNE 30, 2001
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements include
the accounts and operations, after intercompany eliminations, of SCPIE Holdings
Inc. (SCPIE Holdings) and its wholly-owned subsidiaries, principally SCPIE
Indemnity Company (SCPIE Indemnity), American Healthcare Indemnity Company
(AHI), American Healthcare Specialty Insurance Company (AHSIC) and SCPIE
Management Company (SMC), collectively, the Company.
These financial statements have been prepared in accordance with
generally accepted accounting principles for interim financial information and
with the instructions to Form 10-Q and Article 7 of Regulation S-X. Accordingly,
they do not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. In the opinion
of management, all adjustments (consisting of normal recurring accruals)
considered necessary for a fair presentation have been included. Operating
results for the six-month period ended June 30, 2001 are not necessarily
indicative of the results that may be expected for the year ending December 31,
2001. For further information, refer to the consolidated financial statements
and notes thereto included in SCPIE Holdings Inc.'s annual report on Form 10-K
for the year ended December 31, 2000.
Certain 2000 amounts have been reclassified to conform to the 2001
presentation.
2. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted
earnings per share:
THREE MONTHS ENDED SIX MONTHS ENDED
-------------------- --------------------
JUNE 30, JUNE 30,
(IN THOUSANDS, EXCEPT PER SHARE DATA) 2001 2000 2001 2000
-------- -------- -------- --------
Numerator:
Net income (loss) $(29,080) $ 4,382 $(26,839) $ 8,173
Numerator for:
Basic earnings per share of common stock $(29,080) $ 4,382 $(26,839) $ 8,173
Diluted earnings per share of common stock $(29,080) $ 4,382 $(26,839) $ 8,173
Denominator:
Denominator for basic earnings per share of common
stock - weighted-average shares outstanding 9,339 9,385 9,339 9,403
Effect of dilutive securities:
Stock options -- 23 -- 12
-------- -------- -------- --------
Denominator for diluted earnings per share of common
stock adjusted - weighted-average shares outstanding 9,339 9,408 9,339 9,415
Basic earnings (loss) per share of common stock $ (3.11) $ .47 $ (2.87) $ .87
======== ======== ======== ========
Diluted earnings (loss) per share of common stock $ (3.11) $ .47 $ (2.87) $ .87
======== ======== ======== ========
5
3. INVESTMENTS
The Company's investments in available-for-sale securities at June 30,
2001 are summarized as follows:
COST OR GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
-------- -------- -------- --------
(IN THOUSANDS)
Fixed-maturity securities:
Bonds:
U. S. Government and Agencies $151,218 $ 2,121 $ 1,428 $151,911
State, municipalities and
political subdivisions 159,555 1,498 1,418 159,635
Mortgage-backed securities, U.S. Government 51,997 568 454 52,111
Corporate 188,786 1,961 1,680 189,067
-------- -------- -------- --------
Total fixed-maturity securities 551,556 6,148 4,980 552,724
Equity securities 28,952 483 1,722 27,713
-------- -------- -------- --------
Total $580,508 $ 6,631 $ 6,702 $580,437
======== ======== ======== ========
4. FEDERAL INCOME TAXES
The components of the federal income tax provision (benefit) in the
accompanying statements of income are summarized as follows:
SIX MONTHS ENDED
JUNE 30,
--------------------
2001 2000
-------- --------
(IN THOUSANDS)
Current $ (312) $ 314
Deferred (15,730) 1,824
-------- --------
Total $(16,042) $ 2,138
======== ========
A reconciliation of income tax expense (benefit) computed at the
federal statutory tax rate to the total income tax provision is as follows:
SIX MONTHS ENDED
JUNE 30,
--------------------
2001 2000
-------- --------
(IN THOUSANDS)
Federal income tax at 35% $(15,008) $ 3,609
Increase (decrease) in taxes resulting from:
Tax-exempt interest (1,193) (1,645)
Dividends received deduction -- (94)
Goodwill 105 105
Other 54 163
-------- --------
Total $(16,042) $ 2,138
======== ========
6
5. BUSINESS SEGMENTS
The Company classifies its business into two segments: Direct
Healthcare Liability Insurance and Assumed Reinsurance. Segments are designated
based on the types of products provided and based on the risks associated with
the products. Direct Healthcare Liability Insurance represents professional
liability insurance for physicians, oral and maxillofacial surgeons, hospitals
and other healthcare providers. Assumed Reinsurance represents the book of
assumed, worldwide reinsurance of professional, commercial and personal
liability coverages, commercial and residential property risks, accident and
health coverages and marine coverages. Other includes items not directly related
to the operating segments such as net investment income, realized investment
gains and losses, and other revenue.
The following table presents information about reportable segment
income (loss) and segment assets as of and for the periods indicated (dollars in
thousands):
Direct
Healthcare
Liability Assumed
Insurance Reinsurance Other Total
--------- --------- --------- ---------
Six Months Ended June 30, 2001
Premiums earned $ 77,300 $ 27,875 $ -- $ 105,175
Net investment income -- -- 17,712 17,712
Realized investment gains -- -- 1,193 1,193
Equity in earnings from affiliate -- -- 600 600
Other revenue -- -- 242 242
--------- --------- --------- ---------
Total revenues 77,300 27,875 19,747 124,922
Losses and loss adjustment expenses 116,465 24,651 -- 141,116
Other operating expenses 22,845 2,912 -- 25,757
Interest expenses -- -- 930 930
--------- --------- --------- ---------
Total expenses 139,310 27,563 930 167,803
--------- --------- --------- ---------
Segment (loss) income before income taxes (62,010) 312 18,817 (42,881)
--------- --------- --------- ---------
Combined ratio 180.22% 98.88% -- 159.55%
Segment assets $ 197,691 $ 26,225 $ 698,166 $ 922,082
Direct
Healthcare
Liability Assumed
Insurance Reinsurance Other Total
--------- --------- --------- ---------
Six Months Ended June 30, 2000
Premiums earned $ 73,217 $ 10,432 $ -- $ 83,649
Net investment income -- -- 16,756 16,756
Realized investment losses -- -- (897) (897)
Other revenue -- -- 615 615
--------- --------- --------- ---------
Total revenues 73,217 10,432 16,474 100,123
Losses and loss adjustment expenses 62,399 9,613 -- 72,012
Other operating expenses 16,275 1,128 -- 17,403
Interest expenses -- -- 397 397
--------- --------- --------- ---------
Total expenses 78,674 10,741 397 89,812
--------- --------- --------- ---------
Segment (loss) income before income taxes (5,457) (309) 16,077 10,311
--------- --------- --------- ---------
Combined ratio 107.45% 102.96% -- 107.37%
Segment assets $ 140,436 $ 6,547 $ 638,950 $ 785,933
Direct
Healthcare
Liability Assumed
Insurance Reinsurance Other Total
--------- --------- --------- ---------
Three Months Ended June 30, 2001
Premiums earned $ 41,708 $ 15,829 $ -- $ 57,537
Net investment income -- -- 8,710 8,710
Realized investment losses -- -- (7) (7)
Equity in earnings from affiliate -- -- 350 350
Other revenue -- -- 41 41
--------- --------- --------- ---------
Total revenues 41,708 15,829 9,094 66,631
Losses and loss adjustment expenses 81,348 13,928 -- 95,276
Other operating expenses 14,959 1,534 -- 16,493
Interest expenses -- -- 351 351
--------- --------- --------- ---------
Total expenses 96,307 15,462 351 112,120
--------- --------- --------- ---------
Segment (loss) income before income taxes (54,599) 367 8,743 (45,489)
--------- --------- --------- ---------
Combined ratio 230.91% 97.68% -- 194.87%
Segment assets $ 197,691 $ 26,225 $ 698,166 $ 922,082
7
Direct
Healthcare
Liability Assumed
Insurance Reinsurance Other Total
--------- --------- --------- ---------
Three Months Ended June 30, 2000
Premiums earned $ 36,454 $ 7,159 $ -- $ 43,613
Net investment income -- -- 8,417 8,417
Realized investment gains -- -- 18 18
Other revenue -- -- 304 304
--------- --------- --------- ---------
Total revenues 36,454 7,159 8,739 52,352
Losses and loss adjustment expenses 30,892 6,988 -- 37,880
Other operating expenses 8,258 417 -- 8,675
Interest expenses -- -- 223 223
--------- --------- --------- ---------
Total expenses 39,150 7,405 223 46,778
--------- --------- --------- ---------
Segment (loss) income before income taxes (2,696) (246) 8,516 5,574
--------- --------- --------- ---------
Combined ratio 107.40% 103.44% -- 107.26%
Segment assets $ 140,436 $ 6,547 $ 638,950 $ 785,933
6. COMMITMENTS AND CONTINGENCIES
The Company is named as defendant in various legal actions primarily
arising from claims made under insurance policies and contracts. These actions
are considered by the Company in estimating the loss and loss adjustment expense
reserves. The Company's management believes that the resolution of these actions
will not have a material adverse effect on the Company's financial position or
results of operations.
The Company is a defendant in a California action brought by the
bankruptcy estate of an uninsured physician. The bankruptcy estate alleged that
the Company had an undisclosed conflict of interest when it provided the
physician with a free courtesy defense by an attorney who had represented the
interests of the Company's insureds in other cases. In 1995, a jury made a
damage award against the Company of $4.2 million in compensatory damages, and
punitive damages that were reduced to $14.0 million by the trial judge. The
Company appealed these awards to the California district court of appeal. On May
8, 1998, the appellate court reversed the judgment against the Company in its
entirety. The case was remanded to the California Superior Court in which the
judgment was originally entered. The Company filed a motion in the Superior
Court for entry of judgment in its favor, which the bankruptcy estate opposed.
The trial judge ruled in favor of the Company, and judgment for the Company was
entered on September 29, 1999. The bankruptcy estate then filed an appeal of
this ruling with the district court of appeal. On April 26, 2001, the appellate
court affirmed the judgment in favor of the Company. On May 25, 2001, the court
of appeal denied Plaintiff's petition for rehearing. On July 11, 2001, the
California Supreme Court denied Plaintiff's petition for review. The Company
believes this action is now favorably concluded.
7. ACCOUNTING PRONOUNCEMENTS
Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting
for Derivative Instruments and Hedging Activities", was effective January 1,
2001. This pronouncement did not have any effect on the financial position or
results of operations of the Company as it currently does not use derivative
instruments.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
The Company is a leading provider of professional liability insurance
offering medical malpractice and other coverages to physicians, medical groups
and hospitals and also operates an Assumed Reinsurance division which was formed
in the third quarter of 1999. Accordingly, the Company classifies its business
into two segments: Direct Healthcare Liability Insurance and Assumed
Reinsurance.
Certain statements in this report on Form 10-Q that are not historical
fact constitute "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995. Such forward-looking statements
involve known and unknown risks, uncertainties and other factors based on the
Company's estimates and expectations concerning future events that may cause the
actual results of the Company to be materially different from historical results
or from any results expressed or implied by such forward-looking statements.
Actuarial estimates of losses and loss adjustment expenses (LAE) and
expectations concerning the Company's ability to retain its current insureds and
to profitably expand its product lines and its business in existing and into new
geographical areas, including through its affiliation with a major insurance
broker, Brown & Brown, and through its reinsurance operations are dependent upon
a variety of factors, including future economic, competitive and market
conditions; future legislative and regulatory changes; the inherent difficulty
and uncertainty in making property and casualty loss and LAE estimates; and the
cyclical nature of the property and casualty industry, all of which are
difficult or impossible to predict accurately and many of which are beyond the
control of the Company. In addition, Company's future results will be, in large
part, dependent upon the successful growth and profitability of a new business
segment, assumed reinsurance, in which the Company has only limited experience.
The Company is also subject to certain structural risks, including statutory
restrictions on intercompany transactions within the Company's holding company
structure. These risks and uncertainties are discussed in more detail under
"Business - Risk Factors," and "Management's Discussion and Analysis - General"
in the Company's Annual Report on Form 10-K for the fiscal year ended December
31, 2000.
8
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 2001 COMPARED TO THREE MONTHS ENDED JUNE 30, 2000
Consolidated Operating Results
------------------------------
Total revenues were $66.6 million for the three months ended June 30,
2001, an increase of 27.1% over total revenues of $52.4 million for the same
period in 2000. Premiums earned increased $13.9 million to $57.5 million for the
second quarter ended June 30, 2001, of which an $8.7 million increase was
generated by the assumed reinsurance segment and a $5.2 million increase was
reported by the direct healthcare liability segment.
Net investment income increased to $8.7 million for the three months
ended June 30, 2001, an increase of 3.6% from $8.4 million a year ago. The
slight increase was a result of a 4.7% increase in average invested assets.
Realized gains during the second quarters of 2001 and 2000 were immaterial.
Variation in investment returns occur due to interest rate fluctuations, the
allocation of investments between taxable and nontaxable securities and general
conditions in the securities markets that are evaluated by the Company in
accordance with its investment guidelines.
Total expenses were $112.1 million for the three months ended June 30,
2001, an increase of $65.3 million or 139.5% over total expenses of $46.8
million for the same period in 2000. During the second quarter of 2001, the
Company strengthened its loss and LAE reserves by $26.4 million to reflect
unanticipated increases in estimated losses incurred in prior years and the
recognition of rate inadequacies for certain existing policies, in both cases
relating to physician business outside California. The Company also increased
its expected rate of losses and LAE for the current accident year substantially
relating to physician business outside California, resulted in an additional
increase in loss and LAE incurred of $10.4 million which was fully reflected in
the second quarter. Also contributing to the increase in total expenses was a
$7.8 million increase in other operating expenses during the second quarter of
2001, including a write off of $3.6 million of deferred policy acquisition costs
related to physician business outside of California, higher commission expenses
as a result of increased broker-produced premiums in 2001 compared to 2000 and
an increase in other operating expenses.
The Company recorded a net loss of $29.1 million for the three months
ended June 30, 2001 as compared to a net income of $4.4 million for the
corresponding period in 2000. The decrease in net income reflects reserve
strengthening for prior years' businesses, higher loss costs and expected
premium deficiencies for the current year, write-off of deferred acquisition
costs, increased commission and higher operating expenses.
Other comprehensive income or loss represents the change in unrealized
gains and losses on invested assets occurring during the period. As a result of
changes occurring in the fixed income and securities markets, the Company had
comprehensive losses of $2.5 million (net of tax) in the second quarter of 2001.
Direct Healthcare Liability Insurance Segment
---------------------------------------------
Premiums Earned. Premiums earned in the direct healthcare liability insurance
segment increased by approximately $5.2 million, or 14.2% to $41.7 million for
the three months ended June 30, 2001 from $36.5 million for the same period in
2000. This increase in premiums was attributable to an increase of $7.4 million
in physician professional liability of which $1.3 million was generated from
California. Partially offsetting this increase was a decrease in hospital earned
premiums of $2.5 million.
Losses and LAE. Losses and LAE in the direct healthcare liability insurance
segment increased to $81.3 million in the second quarter of 2001 from $30.9
million for the same period in 2000. The Loss ratios were 195.0% and 84.7% in
the second quarter of 2001 and 2000, respectively. Loss ratio is defined as the
ratio of losses and LAE incurred to net premiums earned. The large increase in
the 2001 loss ratio reflects both an increase in the previous estimate of prior
years' incurred loss and LAE levels and an increase in loss and LAE estimates
for the current 2001 accident year from those used in 2000. As discussed above,
during the second quarter of 2001, the Company strengthened its prior years'
loss reserves and included an additional reserve for premium inadequacy on
current policies, in the aggregate amount of $26.4 million due almost entirely
to adverse loss developments in its physician healthcare liability insurance
business outside the state of California. In the second quarter of 2000, the
Company reduced its prior years' loss and LAE reserve estimates in the amount of
$12.4 million. In the second quarter of 2001, the Company also reevaluated and
increased its ratio of expected losses during the 2001 accident year in relation
to premiums earned, again related substantially to the adverse experience
outside of California. The effect of this reevaluation is reflected entirely in
the second quarter loss and LAE results.
The Company has adopted and proposed healthcare liability rate increases in the
principal states outside of California in which it does businesses. These
increases average approximately 50%, and will be implemented during the
remainder of the year, with most increases taking effect on September 1, 2001.
The Company has also adopted stricter underwriting standards in these states,
and has placed moratoriums on underwriting new business in certain states.
Other Operating Expenses. Other operating expenses for the direct healthcare
liability insurance segment increased to $15.0 million for the three months
ended June 30, 2001 as compared to $8.3 million for the same period in 2000. The
increase of $6.7 million was due primarily to a $3.6 million write-off of the
deferred acquisition costs related to physician business outside of California.
The remaining increase was attributable to an increase in commission expense as
a result of increased broker-produced premiums during 2001 as well as higher
operating expenses. The resulting expense ratio for the 2001 quarter was 35.9%
compared to 22.7% for the three months ended June 30, 2000. The expense ratio is
the ratio of expenses to net premiums earned.
Assumed Reinsurance Segment
---------------------------
Premiums Earned. Premiums earned in the assumed reinsurance segment increased to
$15.8 million for the three months ended June 30, 2001 from $7.1 million for the
same period in 2000. The increase of $8.7 million in the second quarter of 2001
reflects the anticipated growth in this segment. Premiums earned included
9
approximately $5.5 million under casualty programs, $1.7 million under property
programs, $6.6 million under accident and health programs and $2.0 million under
its marine program.
Losses and LAE. Losses and LAE in the assumed reinsurance segment increased to
$13.9 million for the three months ended June 30, 2001 from $7.0 million for the
same period in 2000. The loss and LAE ratio decreased to 88.0% in 2001 from
97.6% a year ago. The improvement in the loss and LAE ratio in 2001 was due to
better results in the second quarter of 2001 as compared to the same period of
2000 for the property reinsurance program.
Other Operating Expenses. Other operating expenses for the assumed reinsurance
segment increased $1.1 million to $1.5 million for the three months ended June
30, 2001 from $0.4 million for the same period in 2000. The increase reflects
higher commission expenses associated with higher premiums in 2001 as compared
to 2000. The expense ratio for the three months ended June 30, 2001 and 2000
were 9.7% and 5.8%, respectively.
SIX MONTHS ENDED JUNE 30, 2001 COMPARED TO SIX MONTHS ENDED JUNE 30, 2000
Consolidated Operating Results
------------------------------
Total revenues were $124.9 million for the six months ended June 30,
2001, an increase of $24.8 million or 24.8% over total revenues of $100.1
million for the same period in 2000. Premiums earned increased $21.5 million, or
25.7% during the first six months in 2001 as compared to the corresponding
period a year ago. The assumed reinsurance and direct healthcare liability
segments reported increased writings of $17.4 million and $4.1 million,
respectively.
Net investment income increased to $17.7 million for the six months
ended June 30, 2001, an increase of 5.4% from $16.8 million a year ago. The
increase was a result of a 2.5% increase in average invested assets and a shift
in investment mix from tax-exempt securities to taxable bonds in 2001. During
the six months ended June 30, 2001, the Company realized $1.2 million of
investment gains as compared to $0.9 million in realized investment losses for
the same period in 2000. Variation in investment returns occur due to interest
rate fluctuations, the allocation of investments between taxable and nontaxable
securities and general conditions in the securities markets that are evaluated
by the Company in accordance with its investment guidelines.
Total expenses were $167.8 million for the six months ended June 30,
2001, an increase of 86.9% over total expenses of $89.8 million for the same
period in 2000. During the second quarter of 2001, the Company strengthened its
loss and LAE reserves by $26.4 million to reflect unanticipated increases in
estimated losses incurred in prior years and the recognition of rate
inadequacies for certain existing policies, in both cases relating to physician
business outside California. The Company also increased its expected rate of
losses and LAE for the current accident year substantially relating to physician
business outside of California, resulted in an additional increase in loss and
LAE incurred of $10.4 million which was fully reflected in the six months ended
June 30, 2001. Also contributing to the increase in total expenses was an $8.4
million increase in other operating expenses during the first six months of
2001, including a write off of $3.6 million of deferred policy acquisition costs
related to physician business outside of California, higher commission expenses
as a result of increased broker-produced premiums in 2001 compared to 2000 and
an increase in other operating expenses.
Net loss for the six months ended June 30, 2001 was $26.8 million,
compared with net income of $8.2 million for the corresponding period in 2000.
Net loss reported in 2001 reflects reserve strengthening for prior years'
businesses, higher loss costs and expected premium deficiencies for the current
year, write-off of deferred acquisition costs, increased commission and higher
operating expenses.
Other comprehensive income or loss represents the change in unrealized
gains and losses on invested assets occurring during the period. As a result of
changes occurring in the fixed income and securities markets, the Company had
comprehensive gains of $1.5 million (net of tax) in the first six months of
2001.
Direct Healthcare Liability Insurance Segment
---------------------------------------------
Premiums Earned. Premiums earned in the direct healthcare liability insurance
segment increased by approximately $4.1 million, or 5.6% to $77.3 million for
the six months ended June 30, 2001 from $73.2 million for the same period in
2000. This increase in premiums was attributable to an increase of $7.3 million
in physician professional liability business generated outside the state of
California. Partially offsetting this increase was a decrease in hospital earned
premiums of $4.0 million.
Losses and LAE. Losses and LAE in the direct healthcare liability insurance
segment increased to $116.5 million for the six months ended June 30, 2001 from
$62.4 million in the same period of 2000. The loss ratios were 150.7% and 85.2%
in the six months ended June 30, 2001 and 2000, respectively. The large increase
in the 2001 loss ratio reflects both an increase in the previous estimate of
prior years' incurred loss and LAE levels and an increase in loss and LAE
estimates for the current 2001 accident year from those used in 2000. As
discussed above, during the first six months of 2001, the Company strengthened
its prior years' loss reserves and included an additional reserve for premium
inadequacy on current policies, in the aggregate amount of $26.4 million due
almost entirely to adverse loss developments in its physician healthcare
liability insurance business outside the state of California. In the first six
months of 2000, the Company reduced its prior years' loss and LAE reserve
estimates in the amount of $25.3 million. In the second quarter of 2001, the
Company also reevaluated and increased its ratio of expected losses during the
2001 accident year in relation to premiums earned, again related substantially
to the adverse experience outside of California.
Other Operating Expenses. Other operating expenses for the direct healthcare
liability insurance segment increased to $22.8 million for the six months ended
June 30, 2001 as compared to $16.3 million for the same period in 2000. The
increase of $6.5 million was due primarily to a $3.6 million write-off of the
deferred acquisition costs related to physician business outside of California
recorded in the second quarter of 2001. The remaining increase was attributable
to an increase in commission expense as a result of increased broker-produced
premiums during 2001 as well as higher operating expenses. The resulting expense
ratio for the six months ended June 30, 2001 was 29.6% compared to 22.2% a year
ago.
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Assumed Reinsurance Segment
---------------------------
Premiums Earned. Premiums earned in the assumed reinsurance segment increased to
$27.8 million for the six months ended June 30, 2001 from $10.4 million for the
same period in 2000. The increase of $17.4 million in the six months ended June
30, 2001 reflects the anticipated growth in this segment. Premiums earned
included approximately $9.2 million under casualty programs, $4.8 million under
property programs, $11.1 million under accident and health programs and $2.8
million under its marine program.
Losses and LAE. Losses and LAE in the assumed reinsurance segment increased to
$24.7 million for the six months ended June 30, 2001 from $9.6 million for the
same period in 2000. The loss and LAE ratio decreased to 88.4% in 2001 from
92.1% a year ago. The improvement in the loss and LAE ratio in 2001 was due to
better results in the six months ended June 30, 2001 as compared to the same
period of 2000 for the property reinsurance program.
Other Operating Expenses. Other operating expenses for the assumed reinsurance
segment increased $1.8 million to $2.9 million for the six months ended June 30,
2001 from $1.1 million for the same period in 2000. The increase reflects higher
commission expenses associated with higher premiums in 2001 as compared to 2000.
The expense ratio for the six months ended June 30, 2001 and 2000 were 10.4% and
10.8%, respectively.
LIQUIDITY AND CAPITAL RESOURCES
The primary sources of the Company's liquidity are insurance premiums,
net investment income, recoveries from reinsurers and proceeds from the maturity
or sale of invested assets. Funds are used to pay losses, LAE, operating
expenses, reinsurance premiums and taxes.
Because of uncertainty related to the timing of the payment of claims,
cash from operations for a property and casualty insurance company can vary
substantially from period to period. During the first six months of 2001, the
Company had positive cash flow from operations of $11.1 million compared to a
negative cash flow of $6.4 million in 2000. The positive cash flow in 2001 was
principally due to the receipt of increased assumed reinsurance premiums for
which incurred losses had not yet been paid.
The Company invests its positive cash flow from operations in both
fixed maturity securities and equity securities. The Company's current policy is
to limit its investment in equity securities and real estate to no more than 8%
of the total market value of its investments. Accordingly, the Company's
portfolio of unaffiliated equity securities was $27.7 million at June 30, 2001.
The Company plans to continue its emphasis on fixed maturity securities
investments for the indefinite future.
The Company has made limited investments in real estate, which have
been used almost entirely in the Company's operating activities, with the
remainder leased to third parties. The Company leases approximately 95,000
square feet of office space for its headquarters. The lease is for a term of 10
years ending in 2009, and the Company has two options to renew the lease for a
period of five years each. The Company leased its two former headquarters
buildings to third parties during 2000.
SCPIE Holdings is an insurance holding company whose assets primarily
consist of all of the capital stock of its insurance company subsidiaries. Its
principal sources of funds are dividends from its subsidiaries and proceeds from
the issuance of debt and equity securities. The insurance company subsidiaries
are restricted by state regulation in the amount of dividends they can pay in
relation to earnings or surplus, without the consent of the applicable state
regulatory authority, principally the California Department of Insurance. Each
of SCPIE Holdings' insurance company subsidiaries may pay dividends to SCPIE
Holdings in any 12-month period, without regulatory approval, to the extent such
dividends do not exceed the greater of (i) 10% of its statutory surplus at the
end of the preceding year or (ii) its statutory net income for the preceding
year. Applicable regulations further require that an insurer's statutory surplus
following a dividend or other distribution be reasonable in relation to its
outstanding liabilities and adequate to meet its financial needs, and permit the
payment of dividends only out of statutory earned (unassigned) surplus unless
the payment out of other funds receives regulatory approval. The amount of
dividends that the insurance company subsidiaries are able to pay to SCPIE
Holdings during 2001 without prior regulatory approval is approximately $24.1
million. Of this amount, approximately $2.9 million may be paid after November
26, 2001, and the remainder on or after December 29, 2001. The Company believes
that SCPIE Holdings has sufficient liquid assets and other sources of cash that
no dividends will be required until after November 26, 2001.
The Company has entered into a Credit Agreement with Union Bank of
California, N.A., First Union National Bank, and Dresdner Bank AG, as lenders.
Under the Credit Agreement, the Company may borrow up to $40.0 million, from
time to time, subject to certain conditions. The Company may use the proceeds
from the Credit Agreement for general corporate purposes and certain other
permitted uses. Borrowings under the line of credit were $27.0 million at June
30, 2001.
Based on historical trends, market conditions and its business plans,
the Company believes that its sources of funds will be sufficient to meet its
liquidity needs over the next 18 months and beyond. However, because economic,
market and regulatory conditions may change, there can be no assurance that the
Company's sources of funds will be sufficient to meet these liquidity needs. The
short- and long-term liquidity requirements of the Company may vary because of
the uncertainties regarding the settlement dates for unpaid claims.
During May 2001, the Board of Directors authorized the continuation of
the Company's 1999 program to repurchase up to 1,000,000 shares of the Company's
common stock on the open market. This authorization extended the Company's 1999
program that expired in May 2001. Under this 1999 program as extended, 360,820
shares have been repurchased.
EFFECT OF INFLATION
11
The primary effect of inflation on the Company is considered in pricing
and estimating reserves for unpaid losses and LAE for claims in which there is a
long period between reporting and settlement, such as medical malpractice
claims. The actual effect of inflation on the Company's results cannot be
accurately known until claims are ultimately settled. Based on actual results to
date, the Company believes that loss and LAE reserve levels and the Company's
rate-making process adequately incorporate the effects of inflation.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is subject to various market risk exposures, including
interest rate risk and equity price risk.
The Company invests its assets primarily in fixed-maturity securities,
which at June 30, 2001 comprised 78% of total investments at market value. U.S.
government and tax-exempt bonds represent 56% of the fixed-maturity investments,
with the remainder consisting of mortgage-backed securities and corporate bonds.
Equity securities, consisting primarily of common stocks, account for 4% of
total investment at market value. The remaining 18% of the investment portfolio
consists of real estate investments and highly liquid short-term investments,
which are primarily overnight bank repurchase agreements and short-term money
market funds.
The value of the fixed-maturity portfolio is subject to interest rate
risk. As market interest rates decrease, the value of the portfolio goes up with
the opposite holding true in rising interest rate environments. A common measure
of the interest sensitivity of fixed-maturity assets is modified duration, a
calculation that takes maturity, coupon rate, yield and call terms to calculate
an average age of the expected cash flows. The longer the duration, the more
sensitive the asset is to market interest rate fluctuations.
The value of the common stock equity investments is dependent upon
general conditions in the securities markets and the business and financial
performance of the individual companies in the portfolio. Values are typically
based on future economic prospects as perceived by investors in the equity
markets.
At June 30, 2001, the value of the fixed maturity portfolio was $1.2
million above amortized cost. At December 31, 2000 the Company's fixed
maturities were valued at $0.9 million below amortized cost.
PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is a defendant in a California action brought by the
bankruptcy estate of an uninsured physician. The bankruptcy estate alleged that
the Company had an undisclosed conflict of interest when it provided the
physician with a free courtesy defense by an attorney who had represented the
interests of the Company's insureds in other cases. In 1995, a jury made a
damage award against the Company of $4.2 million in compensatory damages, and
punitive damages that were reduced to $14.0 million by the trial judge. The
Company appealed these awards to the California district court of appeal. On May
8, 1998, the appellate court reversed the judgment against the Company in its
entirety. The case was remanded to the California Superior Court in which the
judgment was originally entered. The Company filed a motion in the Superior
Court for entry of judgment in its favor, which the bankruptcy estate opposed.
The trial judge ruled in favor of the Company, and judgment for the Company was
entered on September 29, 1999. The bankruptcy estate then filed an appeal of
this ruling with the district court of appeal. On April 26, 2001, the appellate
court affirmed the judgment in favor of the Company. On May 25, 2001, the court
of appeal denied Plaintiff's petition for rehearing. On July 11, 2001, the
California Supreme Court denied Plaintiff's petition for review. The Company
believes this action is now favorably concluded.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Annual Meeting of Stockholders held on May 10, 2001, the
following individuals were reelected to the Board of Directors of the Company
for a term ending in 2004: Mitchell S. Karlan, M.D., 6,166,999 votes for, 93,263
withheld authority; Jack E. McCleary, M.D., 5,158,433 votes for, 1,101,829
withheld authority; Wendell L. Moseley, M.D., 6,172,901 votes for, 87,361
withheld authority; and Donald P. Newell, 5,458,174 votes for, 802,088 withheld
authority. The other directors whose terms of office continued after the meeting
were Charles B. McElwee, M.D., William A. Renert, M.D., Henry L. Stoutz, M.D.,
Donald J. Zuk, J. Hyatt Brown, Willis T. King, Jr., Harriet M. Opfell, M.D., and
Reinhold A. Ullrich, M.D.
Also, Ernst & Young LLP was re-appointed as the independent auditor of
the Company for the fiscal year ending December 31, 2001. With respect to this
reappointment, 6,177,714 shares voted for ratification of this appointment,
22,864 shares voted against, 59,684 shares abstained, and no broker non-votes
were received.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibits are included herewith.
None
(b) The Company filed no reports on Form 8-K during the quarterly period
ended June 30, 2001.
12
SIGNATURES
Pursuant to the requirements 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.
SCPIE HOLDINGS INC.
Date: August 10, 2001 By: /s/ Patrick Lo
-------------------------------------------------
Patrick Lo
Senior Vice President and Chief Financial Officer
13