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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 SEPTEMBER 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 November 8, 2001
Preferred stock, par value $l.00 per share No shares liabilities:
Common stock, par value $0.0001 per share 9,314,045 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, EXCEPT SHARE DATA)
SEPTEMBER 30, DECEMBER 31,
2001 2000
------------- ------------
(unaudited)
ASSETS
Securities available-for-sale:
Fixed maturity investments, at fair value
(amortized cost 2001 - $553,071; 2000 - $567,166).............. $568,473 $566,266
Equity investments, at fair value
(cost 2001 - $29,386; 2000 - $25,874)........................... 24,397 24,403
-------- --------
Total securities available-for-sale....................... 592,870 590,669
Real estate........................................................ 15,856 16,126
Short-term investments............................................. 118,554 84,451
-------- --------
Total investments......................................... 727,280 691,246
Cash............................................................... 5,907 10,418
Accrued investment income.......................................... 8,966 9,307
Premiums receivable................................................ 80,414 46,371
Reinsurance recoverable on paid and unpaid claims................. 58,541 44,461
Deferred federal income taxes...................................... 27,471 16,869
Costs in excess of net assets acquired............................. 5,532 6,153
Property and equipment, net........................................ 7,345 7,930
Other assets....................................................... 21,933 21,890
-------- --------
Total assets.............................................. $943,389 $854,645
======== ========
LIABILITIES
Reserves:
Losses and loss adjustment expenses............................... $492,793 $433,541
Unearned premiums................................................. 87,164 56,996
-------- --------
Total reserves............................................ 579,957 490,537
Bank loan payable................................................. 27,000 27,000
Other liabilities................................................. 39,100 20,567
-------- --------
Total liabilities......................................... 646,057 538,104
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 - 9,314,045 shares outstanding
2000 - 9,330,975 shares outstanding 1 1
Additional paid-in capital.......................................... 36,386 36,386
Retained earnings................................................... 357,167 384,437
Treasury stock, at cost
2001 - 2,978,046 shares and 2000 - 2,961,074 shares............... (98,983) (98,705)
Subscription notes receivable....................................... (4,050) (4,050)
Accumulated other comprehensive income (loss)....................... 6,811 (1,528)
-------- --------
Total stockholders' equity................................ 297,332 316,541
-------- --------
Total liabilities and stockholders' equity................ $943,389 $854,645
======== ========
See accompanying notes to Consolidated Financial Statements.
2
SCPIE HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ ----------------------
2001 2000 2001 2000
------- ------- -------- --------
Revenues:
Premiums earned $58,920 $45,428 $164,095 $129,077
Net investment income 9,627 8,801 27,339 25,557
Realized investment gains (losses) 2,947 753 4,140 (144)
Income from affiliates 439 -- 1,039 --
Other revenue 173 276 415 891
------- ------- -------- --------
Total revenues 72,106 55,258 197,028 155,381
Expenses:
Losses and loss adjustment expenses 54,105 38,738 195,221 110,750
Other operating expenses 14,695 9,837 40,452 27,240
Interest expense 310 173 1,240 570
------- ------- -------- --------
Total expenses 69,110 48,748 236,913 138,560
------- ------- -------- --------
Income (loss) before federal income taxes 2,996 6,510 (39,885) 16,821
Federal income taxes 635 1,615 (15,407) 3,753
------- ------- -------- --------
Net income (loss) $ 2,361 $ 4,895 $(24,478) $ 13,068
======= ======= ======== ========
Basic earnings (loss) per share $ .25 $ 0.52 $ (2.62) $ 1.39
Diluted earnings (loss) per share $ .25 $ 0.52 $ (2.62) $ 1.39
Cash dividend declared per share of common stock $ .10 $ 0.10 $ .30 $ 0.30
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(DOLLARS IN THOUSANDS)
(UNAUDITED)
STOCK TOTAL
ADDITIONAL ACCUMULATED 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 -- -- -- (24,478) -- -- (24,478)
Other comprehensive income for
unrealized gains on securities sold,
net of reclassification adjustments of
$220 for losses included in net income -- -- 8,339 -- -- -- 8,339
--------
Comprehensive income -- (16,139)
Treasury stock reissued -- -- -- -- 238 -- 238
Purchase of treasury stock (516) (516)
Cash dividends -- -- -- (2,792) -- -- (2,792)
---- ------- ------- -------- -------- ------- --------
BALANCE AT SEPTEMBER 30, 2001 $ 1 $36,386 $ 6,811 $357,167 $(98,983) $(4,050) $297,332
==== ======= ======= ======== ======== ======= ========
See accompanying notes to Consolidated Financial Statements.
3
SCPIE HOLDINGS INC. AND SUBISIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
NINE MONTHS ENDED
SEPTEMBER 30,
------------------------
2001 2000
---------- ----------
OPERATING ACTIVITIES
Net income (loss)................................................... $ (24,478) $ 13,068
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Provisions for amortization and depreciation...................... 3,050 2,659
Provision for deferred federal income taxes....................... (15,095) 2,427
Realized investments (gains) losses............................... (4,140) 144
Equity in earnings of affiliate................................... (1,039) --
Changes in operating assets and liabilities:
Accrued investment income......................................... 341 518
Unearned premiums................................................. 30,168 2,233
Loss and loss adjustment expense reserves......................... 59,252 (20,429)
Reinsurance recoverable on paid and unpaid claims (14,080) 4,554
Other liabilities................................................. 18,533 (11,586)
Premium receivable................................................ (32,020) --
Other assets...................................................... (43) (1,239)
--------- ---------
Net cash provided by (used in) operating activities.......... 20,449 (7,651)
INVESTING ACTIVITIES
Purchases-- fixed maturities..................................... (382,970) (179,300)
Sales--fixed maturities.......................................... 387,482 153,133
Maturities-- fixed maturities.................................... 12,197 9,851
Purchases--equities.............................................. (2,500) --
Sales--equities.................................................. 27 8,266
Change in short-term investments, net............................ (34,103) 29,152
Change in funds held by reinsured................................ (2,023) (2,482)
--------- ---------
Net cash provided by (used in) investing activities.......... (21,890) 18,620
--------- ---------
FINANCING ACTIVITIES
Purchase of treasury stock....................................... (516) (4,482)
Reissue of treasury shares....................................... 238 --
Cash dividends................................................... (2,792) (2,872)
Bank loan payment................................................ -- (4,000)
--------- ---------
Net cash used in financing activities........................ (3,070) (11,354)
--------- ---------
Increase (decrease) in cash......................................... (4,511) (385)
Cash at beginning of period......................................... 10,418 6,858
--------- ---------
Cash at end of period............................................... $ 5,907 $ 6,473
========= =========
See accompanying notes to Consolidated Financial Statements.
4
SCPIE HOLDINGS INC. AND SUBISIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
SEPTEMBER 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
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
nine-month period ended September 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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
(IN THOUSANDS, EXCEPT PER SHARE DATA) 2001 2000 2001 2000
-------- -------- --------- ----------
Numerator
Net income (loss) $ 2,361 $ 4,895 $ (24,478) $ 13,068
Numerator for:
Basic earnings (loss) per share of common stock 2,361 4,895 (24,478) 13,068
Diluted earnings (loss) per share of common stock 2,361 4,895 (24,478) 13,068
Denominator:
Denominator for basis earnings per share of common stock -
weighted-average shares outstanding 9,342 9,351 9,340 9,385
Effect of dilutive securities:
Stock options -- -- -- 8
-------- -------- --------- ---------
Denominator for diluted earnings (loss) per share of common
stock adjusted - weighted-average shares outstanding 9,342 9,351 9,340 9,393
Basic earnings (loss) per share of common stock $ 0.25 $ 0.52 $ (2.62) $ 1.39
Diluted earnings (loss) per share of common stock $ 0.25 $ 0.52 $ (2.62) $ 1.39
For the quarter and nine months ended September 30, 2001 no incremental
shares related to stock options are included in the diluted number of shares
outstanding as the impact would have been antidilutive.
5
3. INVESTMENTS
The Company's investments in available-for-sale securities at September 30,
2001 are summarized as follows:
COST OR GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED
COST GAINS LOSSES FAIR VALUE
--------- ---------- ---------- ----------
(IN THOUSANDS)
Fixed-maturity securities:
Bonds:
U. S. Government and Agencies $ 163,010 $ 6,715 $ 126 $ 169,599
State, Municipalities and
Political Subdivisions 123,524 2,452 259 125,717
Mortgage-backed securities, U.S. Government 68,529 1,420 12 69,937
Corporate 198,008 5,417 205 203,220
--------- ---------- --------- ----------
Total fixed-maturity securities 553,071 16,004 602 568,473
Equity securities 29,386 483 5,472 24,397
--------- ---------- --------- ----------
Total $ 582,457 $ 16,487 $ 6,074 $ 592,870
========= ========== ========= ==========
4. FEDERAL INCOME TAXES
The components of the federal income tax provision (benefit) in the
accompanying statements of income are summarized as follows:
NINE MONTHS ENDED
SEPTEMBER 30,
-------------------
2001 2000
--------- -------
(IN THOUSANDS)
Current $ (312) $ 1,326
Deferred (15,095) 2,427
--------- -------
Total $ (15,407) $ 3,753
========= =======
A reconciliation of income tax expense (benefit) in the accompanying
statements of income are summarized as follows:
NINE MONTHS ENDED
SEPTEMBER 30,
------------------------
2001 2000
--------- ----------
(IN THOUSANDS)
Federal income tax at 35% $ (13,960) $ 5,887
Increase (decrease) in taxes resulting from:
Tax-exempt interest (1,680) (2,454)
Dividends received deduction -- (30)
Goodwill 158 158
Other 75 192
--------- ---------
Total $ (15,407) $ 3,753
========= =========
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 Assumed
Liability Insurance Reinsurance Other Total
-------------------- ------------ --------- ----------
Nine Months Ended September 30, 2001
Premiums earned $ 112,851 $ 51,244 $ -- $ 164,095
Net investment income -- -- 27,339 27,339
Realized investment gains -- -- 4,140 4,140
Equity in earnings from affiliate -- -- 1,039 1,039
Other revenue -- -- 415 415
-------------- ----------- --------- ----------
Total revenues 112,851 51,244 32,933 197,028
Losses and loss adjustment expenses 150,477 44,744 -- 195,221
Other operating expenses 34,653 5,799 -- 40,452
Interest expenses -- -- 1,240 1,240
-------------- ----------- --------- ----------
Total expenses 185,130 50,543 1,240 236,913
-------------- ----------- --------- ----------
Segment (loss) income before income taxes (72,279) 701 31,693 (39,885)
-------------- ----------- --------- ----------
6
Combined ratio 164.05% 98.63% -- 144.38%
Segment assets $ 164,596 $ 45,606 $ 733,187 $ 943,389
Direct Healthcare Assumed
Liability Insurance Reinsurance Other Total
-------------------- ------------ ---------- ----------
Nine Months Ended September 30, 2000
Premiums earned $ 111,962 $ 17,115 $ -- $ 129,077
Net investment income -- -- 25,557 25,557
Realized investment losses -- -- (144) (144)
Other revenue -- -- 891 891
-------------- ----------- ---------- ----------
Total revenues 111,962 17,115 26,304 155,381
-------------- ----------- ---------- ----------
Losses and loss adjustment expenses 95,880 14,870 -- 110,750
Other operating expenses 24,908 2,332 -- 27,240
Interest expenses -- -- 570 570
-------------- ----------- ---------- ----------
Total expenses 120,788 17,202 570 138,560
-------------- ----------- ---------- ----------
Segment (loss) income before income taxes (8,826) (87) 25,734 16,821
-------------- ----------- ---------- ----------
Combined ratio 107.88% 101.51% -- 107.35%
Segment assets $ 118,097 $ 10,075 $ 658,857 $ 787,029
Direct Healthcare Assumed
Liability Insurance Reinsurance Other Total
------------------- ----------- --------- ---------
Three Months Ended September 30, 2001
Premiums earned $ 35,551 $ 23,369 $ -- $ 58,920
Net investment income -- -- 9,627 9,627
Realized investment losses -- -- 2,947 2,947
Equity in earnings from affiliate -- -- 439 439
Other revenue -- -- 173 173
-------------- ----------- --------- ---------
Total revenues 35,551 23,369 13,186 72,106
-------------- ----------- --------- ---------
Losses and loss adjustment expenses 34,012 20,093 -- 54,105
Other operating expenses 11,808 2,887 -- 14,695
Interest expenses -- -- 310 310
-------------- ----------- --------- ---------
Total expenses 45,820 22,980 310 69,110
-------------- ----------- --------- ---------
Segment (loss) income before income taxes (10,269) 389 12,876 2,996
-------------- ----------- --------- ---------
Combined ratio 128.89% 98.33% -- 117.29%
Segment assets $ 164,596 $ 45,606 $ 733,187 $ 943,389
Direct Healthcare Assumed
Liability Insurance Reinsurance Other Total
------------------- ----------- --------- ---------
Three Months Ended September 30, 2000
Premiums earned $ 38,745 $ 6,683 $ -- $ 45,428
Net investment income -- -- 8,801 8,801
Realized investment gains -- -- 753 753
Other revenue -- -- 276 276
-------------- ----------- --------- ---------
Total revenues 38,745 6,683 9,830 55,258
-------------- ----------- --------- ---------
Losses and loss adjustment expenses 33,481 5,257 -- 38,738
Other operating expenses 8,633 1,204 -- 9,837
Interest expenses -- -- 173 173
-------------- ----------- --------- --------
Total expenses 42,114 6,461 173 48,748
-------------- ----------- --------- --------
Segment (loss) income before income taxes (3,369) 222 9,657 6,510
-------------- ----------- --------- --------
Combined ratio 108.70% 96.67% -- 107.31%
Segment assets $ 118,097 $ 10,075 $ 658,857 $787,029
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 was 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
7
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. This terminated the action in favor of the Company.
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.
In June, 2001, the FASB issued FAS No. 141, Business Combinations and No.
142, Goodwill and Other Intangible Assets. Under the new rules, goodwill and
indefinite lived intangible assets are no longer amortized but are reviewed
annually for impairment. Separable intangible assets that are not deemed to have
an indefinite life will continue to be amortized over their useful lives. The
amortization provisions of SFAS No. 142 apply to goodwill and intangible assets
acquired after June 30, 2001. With respect to goodwill and intangible assets
acquired prior to July 1, 2001, the Company will apply the new accounting rules
beginning January 1, 2002. The Company is currently assessing the financial
impact SFAS No. 141 and No. 142 will have on its Consolidated Financial
Statements.
8. COMPREHENSIVE INCOME
Total comprehensive income (loss) was $9,175 and ($16,139) for the three
and nine months ended September 30, 2001 and $9,314 and ($16,713) for the three
and nine months ended September 30, 2000.
8
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, and the occurrence of
catastrophic events, all of which are difficult or impossible to predict
accurately and many of which are beyond the control of the Company. In
addition, the 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.
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 2001 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 2000
Consolidated Operating Results
------------------------------
Total revenues were $72.1 million for the three months ended September 30,
2001, an increase of 30.3% over total revenues of $55.3 million for the same
period in 2000. Premiums earned increased $13.5 million to $58.9 million for
the third quarter ended September 30, 2001, of which a $16.7 million increase
was produced by the assumed reinsurance segment and a $3.2 million decrease was
reported by the direct healthcare liability segment.
Net investment income increased to $9.6 million for the three months ended
September 30, 2001, an increase of 9.4% from $8.8 million a year ago. The
increase was a result of a 10.2% increase in average invested assets. 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. The average rate of return on invested assets was 5.41%
and 5.25% for the three months ended September 30, 2001 and 2000, respectively.
Total expenses were $69.1 million for the three months ended September 30,
2001, an increase of $20.4 million or 41.9% over total expenses of $48.7 million
for the same period in 2000. The loss ratios were 91.8% and 85.3% in the third
quarter of 2001 and 2000 respectively. The increase principally reflects less
favorable reserve development in the third quarter of 2001 compared to the prior
year. Also contributing to the increase in total expenses was a $4.9 million
increase in other operating expenses during the third quarter of 2001, including
higher commission expenses as a result of increased broker-produced premiums and
a $500,000 charge related to the closure of three marketing offices outside of
California.
The Company recorded net income of $2.4 million for the three months ended
September 30, 2001 as compared to net income of $4.9 million for the
corresponding period in 2000.
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 $6.8 million (net of tax) in the third quarter of 2001.
Direct Healthcare Liability Insurance Segment
---------------------------------------------
Premiums. Premiums earned in the direct healthcare liability insurance
segment decreased by approximately $3.2 million, or 8.0% to $35.6 million for
the three months ended September 30, 2001 from $38.8 million for the same period
in 2000. The decrease is attributable to lower hospital premiums and higher
ceded reinsurance premiums in the 2001 third quarter.
Gross premiums written were $22.7 million in the 2001 third quarter, and
net premiums written were $17.6 million. At the end of 2000, the Company changed
its accounting method to recognize written premiums on the effective date of the
policy rather than on the date premiums are billed. This change in accounting
had the effect of significantly changing the timing of written premium
recognition in the direct healthcare liability segment. The Company issues a
large majority of its policies in this segment on January 1 each year, and bills
for the premium quarterly. In the first quarter of 2001, the Company recognized
gross and net written premiums of $98.0 million and $94.6 million, respectively,
of which in 2000 and prior years a significant portion would have been ratably
recognized in subsequent quarters during the year. For example, in the 2000
third quarter, the Company had gross written premiums of $41.2 million and net
written premiums of $38.0 million.
9
The accounting change had no effect on the recognition of premiums earned, which
are considered earned ratably under either method of accounting. This difference
in accounting, however, accounts for the greater amount of premiums earned in
the 2001 third quarter in comparison to the net written premiums during the
quarter.
Losses and LAE. Losses and LAE in the direct healthcare liability insurance
segment increased to $34.0 million in the third quarter of 2001 from $33.5
million for the same period in 2000. The loss ratios were 95.7% and 86.4% in
the third quarter of 2001 and 2000, respectively. Loss ratio is defined as the
ratio of losses and LAE incurred to net premiums earned. The increase in the
2001 loss ratio reflects less favorable reserve development in the third quarter
of 2001 compared to the prior year. During the 2001 third quarter, the Company
reduced its prior years' loss and LAE reserve estimates for the direct
healthcare liability insurance segment by $1.7 million. In the prior year third
quarter, the Company reduced prior year loss and LAE reserves by $8.7 million.
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 most took 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 $11.8 million for the three months
ended September 30, 2001 as compared to $8.6 million for the same period in
2000. The increase was attributable to a charge of $0.5 million incurred in the
2001 quarter related to the closing of the three marketing offices, increased
commission expenses due to a greater proportion of broker produced business in
2001 and higher operating expenses generally. The resulting expense ratio for
the 2001 quarter was 33.2% compared to 22.3% for the three months ended
September 30, 2000. The expense ratio is the ratio of expenses to net premiums
earned.
Assumed Reinsurance Segment
---------------------------
Premiums. Premiums earned in the assumed reinsurance segment increased to
$23.4 million for the three months ended September 30, 2001 from $6.7 million
for the same period in 2000. The increase of $16.7 million in the third quarter
of 2001 reflects the anticipated growth in this segment. Premiums earned
included approximately $9.2 million under casualty programs, $2.6 million under
property programs, $8.9 million under accident and health programs and $2.7
million under its marine program. Gross written premiums for the three months
ended September 30, 2001 were $37.9 million, and net written premiums were $35.2
million compared to $8.8 million and $8.8 million in 2000.
Losses and LAE. Losses and LAE in the assumed reinsurance segment increased
to $20.1 million for the three months ended September 30, 2001 from $5.3 million
for the same period in 2000. The loss ratio increased to 86.0% in 2001 from
78.7% a year ago. The Company accrued $2.0 million of losses incurred in the
2001 quarter from the September 11, 2001 terrorist attack in New York. The
Company will monitor these estimated losses as additional information becomes
available. The Company does not believe its total exposure from the attack will
exceed $5.0 million on a pre-tax basis.
Other Operating Expenses. Other operating expenses for the assumed
reinsurance segment increased $1.7 million to $2.9 million for the three months
ended September 30, 2001 from $1.2 million for the same period in 2000. The
increase reflects commission expenses associated with higher premiums in 2001 as
compared to 2000. The expense ratio for the three months ended September 30,
2001 and 2000 decreased to 12.4% from 18%, respectively due to the higher
premium volume in 2001.
NINE MONTHS ENDED SEPTEMBER 30, 2001 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
2000
Consolidated Operating Results
------------------------------
Total revenues were $197.0 million for the nine months ended September 30,
2001, an increase of $41.6 million or 26.8% over total revenues of $155.4
million for the same period in 2000. Premiums earned increased $35.0 million,
or 27.1% during the first nine months in 2001 as compared to the corresponding
period a year ago. The increased premiums earned were almost entirely from the
assumed reinsurance segment.
Net investment income increased to $27.3 million for the nine months ended
September 30, 2001, an increase of 7% from $25.6 million a year ago. The
increase was a result of a 7.1% increase in average invested assets and a shift
in investment mix from tax-exempt securities to higher yielding taxable bonds in
2001. During the nine months ended September 30, 2001, the Company realized
$4.1 million of investment gains as compared to $0.1 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. The average rate of return on invested assets was 5.17% and 5.00%
for the nine months ended September 30, 2001 and 2000 respectively.
Total expenses were $40.5 million for the nine months ended September 30,
2001, an increase of 48.5% over total expenses of $27.2 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. Also contributing to the increase in total
expenses was a $13.2 million increase in other operating expenses during the
first nine 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 nine months ended September 30, 2001 was $24.5 million,
compared with net income of $13.1 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.
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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 $8.3 million (net of tax) in the first nine months of
2001.
Direct Healthcare Liability Insurance Segment
---------------------------------------------
Premiums. Premiums earned in the direct healthcare liability insurance
segment remained largely unchanged at $112.9 million for the nine months ended
September 30, 2001 compared to $112.0 million for the same period in 2000.
Gross written premiums were $136.7 million, and net written premiums were
$123.8 million in the nine months ended September 30, 2001 in the healthcare
liability insurance segment. As discussed above, at the end of 2000 the
Company changed its accounting method to recognize written premiums on the
effective date of the policy rather than on the date premiums are billed. This
change in accounting had the effect of accelerating written premium recognition
in the direct healthcare liability insurance segment. For the nine months ended
September 30, 2000, the Company had gross written premiums of $119.6 million and
net written premiums of $111.9 million, respectively.
Losses and LAE. Losses and LAE in the direct healthcare liability insurance
segment increased to $150.5 million for the nine months ended September 30, 2001
from $95.9 million in the same period of 2000. The loss ratios were 133.3% and
85.6% in the nine months ended September 30, 2001 and 2000, respectively. The
large increase in the 2001 loss ratio reflects an increase in the previous
estimate of prior years' incurred loss and LAE levels. As discussed above,
during the first nine 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 $16.3 million due almost entirely
to adverse loss developments in its physician healthcare liability insurance
business outside of California. In the first nine months of 2000, the Company
reduced its prior years' loss and LAE reserve estimates in the amount of $34.0
million.
Other Operating Expenses. Other operating expenses for the direct healthcare
liability insurance segment increased to $34.7 million for the nine months ended
September 30, 2001 as compared to $24.9 million for the same period in 2000.
The increase was due partially 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, costs related to the office closures, and higher operating
expenses. The resulting expense ratio for the nine months ended September 30,
2001 was 30.7% compared to 22.2% a year ago.
Assumed Reinsurance Segment
---------------------------
Premiums. Premiums earned in the assumed reinsurance segment increased to
$51.2 million for the nine months ended September 30, 2001 from $17.1 million
for the same period in 2000. The increase of $34.1 million in the nine months
ended September 30, 2001 reflects the anticipated growth in this segment.
Premiums earned included approximately $18.3 million under casualty programs,
$7.5 million under property programs, $19.9 million under accident and health
programs and $5.5 million under its marine program. Gross written premiums were
$74.6 million, and net written premiums were $70.5 million. For the same period
in 2000, gross written premiums were $19.4 million, and net written premiums
were $19.4 million.
Losses and LAE. Losses and LAE in the assumed reinsurance segment increased to
$44.7 million for the nine months ended September 30, 2001 from $14.9 million
for the same period in 2000. The loss and LAE ratio increased slightly to 87.3%
in 2001 from 86.9% a year ago.
Other Operating Expenses. Other operating expenses for the assumed
reinsurance segment increased $3.5 million to $5.8 million for the nine months
ended September 30, 2001 from $2.3 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 nine months ended September
30, 2001 and 2000 were 11.3% and 13.6%, 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 nine months of 2001, the
Company had positive cash flow from operations of $20.4 million compared to a
negative cash flow of $7.7 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 $24.4 million at September 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
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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
September 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, 391,420
shares have been repurchased. During the three months ended September 30, 2001,
the Company repurchased 30,600 shares at a total cost of $516,403.
EFFECT OF INFLATION
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 September 30, 2001 comprised 78% of total investments at market value.
U.S. government and tax-exempt bonds represent 51.9% 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 3.3% of total investment at market value. The remaining 18.7% 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 September 30, 2001, the value of the fixed maturity portfolio was $15.4
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 was 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. This terminated
the action in favor of the Company.
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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
September 30, 2001.
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: November 8, 2001 By: /s/ Patrick Lo
--------------------------------------
Patrick Lo
Senior Vice President and Chief
Financial Officer
13