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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 MARCH 31, 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 May 10, 2001
Preferred stock, par value $l.00 per share No. shares outstanding
Common stock, par value $0.0001 per share 9,338,627 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)
MARCH 31, DECEMBER 31,
2001 2000
------------ --------------
(unaudited)
ASSETS
Securities available-for-sale:
Fixed maturity investments, at fair value
(amortized cost 2001 - $572,263; 2000 - $567,166)............................... $ 578,444 $ 566,266
Equity investments, at fair value
(cost 2001 - $28,624; 2000 - $25,874)............................................ 26,281 24,403
--------- ---------
Total securities available for sale........................................ 604,725 590,669
Real estate......................................................................... 16,036 16,126
Cash equivalents.................................................................... 94,197 84,451
--------- ---------
Total investments.......................................................... 714,958 691,246
Cash................................................................................. 4,531 10,418
Accrued investment income............................................................ 8,926 9,307
Premiums receivable.................................................................. 98,158 46,371
Reinsurance recoverable.............................................................. 41,775 40,152
Deferred federal income taxes........................................................ 16,941 16,869
Costs in excess of net assets acquired............................................... 5,945 6,153
Property and equipment, net.......................................................... 8,190 7,930
Other assets......................................................................... 30,825 26,199
--------- ---------
Total assets............................................................... $ 930,249 $ 854,645
========= =========
LIABILITIES
Reserves:
Losses and loss adjustment expenses................................................ $ 430,800 $ 433,541
Unearned premiums.................................................................. 115,657 56,996
--------- ---------
Total reserves............................................................. 546,457 490,537
Bank loan payable................................................................... 27,000 27,000
Other liabilities................................................................... 34,730 20,567
--------- ---------
Total liabilities.......................................................... 608,187 538,104
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 - 9,338,625 shares outstanding
2000 - 9,331,017 shares outstanding 1 1
Additional paid-in capital........................................................... 36,386 36,386
Accumulated other comprehensive income (loss).......................... 2,542 (1,528)
Retained earnings.................................................................... 385,754 384,437
--------- ---------
424,683 419,296
Treasury stock, at cost
(2001 - 2,953,466 shares and 2000 - 2,961,074 shares).............................. (98,571) (98,705)
Stock subscription notes receivable.................................................. (4,050) (4,050)
--------- ---------
Total stockholders' equity................................................. 322,062 316,541
--------- ---------
Total liabilities and stockholders' equity................................. $ 930,249 $ 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
MARCH 31,
---------
2001 2000
---- ----
Revenues:
Premiums earned $47,638 $40,036
Net investment income 8,732 8,339
Realized investment gains (losses) 1,200 (915)
Equity in earnings from affiliate 250 --
Other revenue 132 137
------- -------
Total revenues 57,952 47,597
Expenses:
Losses and loss adjustment expenses 45,840 34,132
Other operating expenses 9,504 8,728
------- -------
Total expenses 55,344 42,860
------- -------
Income before federal income taxes 2,608 4,737
Federal income taxes 367 946
------- -------
Net income $ 2,241 $ 3,791
======= =======
Basic earnings per share of common stock $ 0.24 $ 0.40
Diluted earnings per share of common stock $ 0.24 $ 0.40
Cash dividend declared per share of common stock $ 0.10 $ 0.10
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(DOLLARS IN THOUSANDS)
(UNAUDITED)
ADDITIONAL ACCUMULATED OTHER
COMMON PAID-IN COMPREHENSIVE RETAINED TREASURY
STOCK CAPITAL INCOME (LOSS) EARNINGS STOCK
------ ---------- ----------------- ---------- ----------
BALANCE AT JANUARY 1, 2001 $ 1 $ 36,386 $ (1,528) $ 384,437 $ (98,705)
Net income -- -- -- 2,241 --
Other comprehensive income for unrealized
gains on securities sold, net of
reclassification adjustments of $185 for
losses included in net income
-- -- 4,070 -- --
Comprehensive income --
Treasury stock reissued -- -- -- -- 134
Cash dividends -- -- -- (924) --
----- --------- -------- --------- ---------
BALANCE AT MARCH 31, 2001 $ 1 $ 36,386 $ 2,542 $ 385,754 $ (98,571)
===== ========= ======== ========= =========
STOCK TOTAL
SUBSCRIPTION STOCK-
NOTES HOLDERS'
RECEIVABLE EQUITY
----------- ---------
BALANCE AT JANUARY 1, 2001 $ (4,050) $ 316,541
Net income -- 2,241
Other comprehensive income for unrealized
gains on securities sold, net of
reclassification adjustments of $185 for
losses included in net income
-- 4,070
---------
Comprehensive income 6,311
---------
Treasury stock reissued -- 134
Cash dividends -- (924)
-------- ---------
BALANCE AT MARCH 31, 2001 $ (4,050) $ 322,062
======== =========
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
MARCH 31,
---------
2001 2000
---- ----
OPERATING ACTIVITIES
Net income $ 2,241 $ 3,791
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Provision for amortization and depreciation 467 835
Provision for deferred federal income taxes (2,264) 953
Realized investment (gains) losses (1,200) 915
Equity in earnings of affiliate (250) --
Changes in operating assets and liabilities:
Accrued investment income 381 746
Unearned premiums 58,661 1,273
Unpaid losses and loss adjustment expenses, and
reinsurance recoverables (4,364) (5,248)
Other liabilities 14,163 (7,579)
Premium receivable (51,787) --
Other assets (4,626) (690)
--------- --------
Net cash provided by (used in) operating activities $ 11,422 $ (5,004)
--------- --------
INVESTING ACTIVITIES
Purchases--fixed maturities $(153,748) $(48,347)
Sales - fixed maturities 142,327 50,319
Maturities-- fixed maturities 7,148 180
Purchases - equities (2,500) --
Sales - equities -- 5,711
Changes in short-term investments (9,746) (3,754)
--------- --------
Net cash provided by (used in) investing activities $ (16,519) $ 4,109
--------- --------
FINANCING ACTIVITIES
Purchase of treasury stock $ -- $ (3,301)
Reissue of treasury shares 134 --
Cash dividends (924) (950)
--------- --------
Net cash used in financing activities $ (790) $ (4,251)
--------- --------
Decrease in cash $ (5,887) $ (5,146)
--------- --------
Cash at beginning of period 10,418 6,858
--------- --------
Cash at end of period $ 4,531 $ 1,712
========= ========
See accompanying notes to Consolidated Financial Statements.
4
SCPIE HOLDINGS INC. AND SUBISIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
MARCH 31, 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
three-month period ended March 31, 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
MARCH 31,
(IN THOUSANDS, EXCEPT PER SHARE DATA) 2001 2000
-------- --------
Numerator:
Net income $2,241 $3,791
Numerator for:
Basic earnings per share of common stock $2,241 $3,791
Diluted earnings per share of common stock $2,241 $3,791
Denominator:
Denominator for basic earnings per share of common
stock - weighted-average shares outstanding 9,339 9,421
Effect of dilutive securities:
Stock options -- 23
------ ------
Denominator for diluted earnings per share of common
stock adjusted - weighted-average shares outstanding 9,339 9,444
Basic earnings per share of common stock $ 0.24 $ 0.40
====== ======
Diluted earnings per share of common stock $ 0.24 $ 0.40
====== ======
5
3. INVESTMENTS
The Company's investments in available-for-sale securities at March 31, 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 $174,119 $3,654 $ 532 $177,241
State, municipalities and
political subdivisions 173,042 2,074 1,506 173,610
Mortgage-backed securities, U.S. Government 36,821 563 179 37,205
Corporate 188,281 3,105 998 190,388
-------- ------ ------ --------
Total fixed-maturity securities 572,263 9,396 3,215 578,444
Equity securities 28,624 486 2,829 26,281
-------- ------ ------ --------
Total $600,887 $9,882 $6,044 $604,725
======== ====== ====== ========
4. FEDERAL INCOME TAXES
The components of the federal income tax provision (benefit) in the
accompanying statements of income are summarized as follows:
THREE MONTHS ENDED
MARCH 31,
-------------------------
2001 2000
------------ ------------
(IN THOUSANDS)
Current $ 2,631 $ (7)
Deferred (2,264) 953
------- ------
Total $ 367 $ 946
======= ======
A reconciliation of income tax computed at the federal statutory tax rate to
total income tax expense is as follows:
THREE MONTHS ENDED
MARCH 31,
-------------------------
2001 2000
------------ ------------
(IN THOUSANDS)
Federal income tax at 35% $ 913 $1,658
Increase (decrease) in taxes resulting from:
Tax-exempt interest (620) (842)
Dividends received deduction -- (23)
Goodwill 53 53
Other 21 100
------ ------
Total $ 367 $ 946
======= ======
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 period indicated (dollars in
thousands):
Direct Healthcare Assumed
Liability Insurance Reinsurance Other Total
------------------- ----------- ----- -----
Three Months Ended March 31, 2001
Premiums earned $ 35,592 $12,046 $ -- $ 47,638
Net investment income -- -- 8,732 8,732
Realized investment gains -- -- 1,200 1,200
Equity earnings from affiliate -- -- 250 250
Other revenue -- -- 132 132
-------- ------- -------- -------
Total revenues 35,592 12,046 10,314 57,952
Losses and loss adjustment expenses 35,117 10,723 -- 45,840
Other operating expenses 8,126 1,378 -- 9,504
-------- ------- -------- -------
Total expenses 43,243 12,101 -- 55,344
-------- ------- -------- -------
Segment (loss) income before income taxes (7,651) (55) 10,314 2,608
-------- ------- -------- -------
Combined ratio 121.5% 100.5% -- 116.2%
Segment assets $195,061 $15,699 $719,489 $930,249
Direct Healthcare Assumed
Liability Insurance Reinsurance Other Total
------------------- ----------- ----- -----
Three Months Ended March 31, 2000
Premiums earned $ 36,763 $3,273 $ -- $ 40,036
Net investment income -- -- 8,339 8,339
Realized investment losses -- -- (915) (915)
Other revenue -- -- 137 137
-------- ------ -------- --------
Total revenues 36,763 3,273 7,561 47,597
Losses and loss adjustment expenses 31,507 2,625 -- 34,132
Other operating expenses 8,017 711 -- 8,728
-------- ------ -------- --------
Total expenses 39,524 3,336 -- 42,860
-------- ------ -------- --------
Segment (loss) income before income taxes (2,761) (63) 7,561 4,737
-------- ------ -------- --------
Combined ratio 107.5% 101.9% -- 107.1%
Segment assets $144,844 $4,250 $647,804 $796,898
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. The bankruptcy estate may
still petition the District Court of Appeal for a rehearing and the California
Supreme Court for a hearing of the appeal. The Company believes that the action
is entirely without merit and will continue to aggressively pursue its rights.
7
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 division 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.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2001 COMPARED TO THREE MONTHS ENDED MARCH 31, 2000
Consolidated Operating Results
------------------------------
Total revenues were $58.0 million for the three months ended March 31,
2001, an increase of 21.8% over total revenues of $47.6 million for the same
period in 2000. Premiums earned increased $7.6 million, or 19.0% for the first
quarter ended March 31, 2001. The increase was attributable to assumed
reinsurance premiums earned of $12.0 million in the first quarter of 2001 as
compared to $3.2 million earned the prior year.
Net investment income increased to $8.7 million for the three months ended
March 31, 2001, or 4.8% from $8.3 million a year ago. The slight increase was a
result of a 3.5% increase in average invested assets. During the first quarter
of 2001, the Company realized $1.2 million of investment gains as compared to a
$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 $55.3 million for the three months ended March 31,
2001, an increase of 28.9% over total expenses of $42.9 million for the same
period in 2000. The increase was primarily driven by higher losses and loss
adjustment expenses in 2001 as compared to 2000.
Net income for the three months ended March 31, 2001 was $2.2 million, a
decrease of 42.1% from net income of $3.8 million for the corresponding period
in 2000. The decrease in net income reflects higher loss costs and increased
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 $4.1 million (net of tax) in the first quarter of 2001.
Direct Healthcare Liability Insurance Segment
---------------------------------------------
Premiums Earned. Premiums earned in the direct healthcare liability insurance
segment decreased by approximately $1.2 million, or 3.3% to $35.6 million for
the three months ended March 31, 2001 from $36.8 million for the same period in
2000. This decrease in premiums was principally due to the Company's actions
during the year 2000 to cull its hospital business to meet stricter underwriting
standards. Hospital medical malpractice premiums during the first quarter of
2001 decreased to $0.8 million from $2.3 million earned in the first quarter of
2000. Premium volume in California continued to decline during the quarter,
which was more than offset by increased writings in other states.
Losses and LAE. Losses and LAE in the direct healthcare liability insurance
segment increased to $35.1 million, or 98.6% of premiums earned in the first
quarter 2001, from $31.5 million, or 85.7% of premiums earned for the same
period in 2000. The increase was principally attributable to a reduction in
favorable loss and LAE reserve development during the first quarter of 2001
compared to the same period in 2000. For the three months ended March 31, 2001,
the Company reduced
8
loss and LAE reserves for claims incurred in prior policy years approximately
$2.9 million as compared to a reserve reduction of $13.4 million for the same
period in 2000 for claims incurred in prior policy years. During the first
quarter of 2001, the Company also experienced higher than expected loss costs in
physician business outside the state of California.
Other Operating Expenses. Other operating expenses for the direct healthcare
liability insurance segment increased slightly to $8.1 million for the three
months ended March 31, 2001 as compared to $8.0 million for the same period in
2000.
Assumed Reinsurance Segment
---------------------------
Premiums Earned. Premiums earned in the assumed reinsurance segment increased
to $12.0 million for the three months ended March 31, 2001 from $3.2 million for
the same period in 2000. Premiums earned included approximately $3.6 million
under casualty programs, $3.1 million under property programs, $4.5 million
under accident and health programs and $0.8 million under its marine program.
Losses and LAE. Losses and LAE in the assumed reinsurance segment increased to
$10.7 million, or 89.0% of premiums earned in the first quarter 2001, from $2.6
million, or 80.2% of premiums earned for the same period in 2000. Losses in this
segment are still in their early stages of development.
Other Operating Expenses. Other operating expenses for the assumed reinsurance
segment increased $0.7 million to $1.4 million for the three months ended March
31, 2001 from $0.7 million for the same period in 2000. The increase reflects
higher commission expenses associated with higher premiums in 2001 as compared
to 2000.
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 three months of 2001, the
Company had positive cash flow from operations of $11.4 million compared to a
negative cash flow of $5.0 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 $26.3 million at March 31, 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's two former headquarters buildings were leased 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. SCPIE
Holdings' principal insurance company subsidiary 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 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 March
31, 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 2000, the Board of Directors authorized the repurchase of 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 2000.
Under this 1999 program as extended, 360,820 shares have been repurchased.
9
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 March 31, 2001 comprised 81% of total investments at market value. U.S.
government and tax-exempt bonds represent 61% 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 15% 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 March 31, 2001, the value of the fixed maturity portfolio was $6.2
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 which 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. The bankruptcy estate may
still petition the District Court of Appeal for a rehearing and the California
Supreme Court for a hearing of the appeal. The Company believes that the action
is entirely without merit and will continue to aggressively pursue its rights.
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
March 31, 2001.
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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: May 11, 2001 By: /s/ Patrick Lo
___________________________________________________
Patrick Lo
Senior Vice President and Chief Financial Officer
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