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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 1996 Commission File No. 1-12449
SCPIE HOLDINGS INC.
(Exact name of registrant as specified in its charter)
Delaware 95-4557980
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
9441 West Olympic Boulevard, Beverly Hills, 90213-4015
California
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (310) 551-5900
Securities registered pursuant Name of Exchange on which registered
to Section 12(b) of the Act
Common Stock New York Stock Exchange
(Title of Class)
Securities registered pursuant to Section 12(g) of the Act
NONE
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 by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (ss. 229.405 of this chapter) is not contained herein, and
will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. X
---
The aggregate market value of the Registrant's voting stock held by
non-affiliates of the Registrant at March 25, 1997, was approximately
$269,415,058 (based upon the closing sales price of such date, as reported by
the Wall Street Journal).
At March 17, 1997, the Registrant had issued and outstanding an aggregate of
12,794,652 shares of its Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
Proxy statement for the Annual Meeting of Stockholders of Registrant to be held
on May 8, 1997 (only portions of which are incorporated by reference).
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PART I
ITEM 1. BUSINESS
RECENT REORGANIZATION
SCPIE Holdings Inc. (the "Company") is the parent company of a group of
insurance and insurance-related companies conducting business principally in
California. It began operating as an independent publicly held company on
January 29, 1997, as the result of the merger of Southern California Physicians
Insurance Exchange ("SCPIE" or the "Exchange") into SCPIE Indemnity Company, a
subsidiary of the Company, and the issuance of 9,994,652 shares of Common Stock
of the Company to approximately 10,400 members of the Exchange and 500,000
shares to SCPIE Indemnity Company (the "Reorganization"). On January 30, 1997,
the Company sold an additional 2,300,000 shares in a public offering of its
Common Stock (the "Offering"). The Common Stock is listed on the New York Stock
Exchange.
For purposes of this Form 10-K report, the term the "Company" refers,
at all times prior to January 29, 1997, the effective date of the
Reorganization, to the Exchange and its subsidiaries, collectively, and at all
times on or after such effective date, to SCPIE Holdings Inc. and its
subsidiaries, collectively; the term "SCPIE Holdings" refers at all times to
SCPIE Holdings Inc., excluding its subsidiaries; and the term "Insurance
Subsidiaries" refers, at all times prior to such effective date, to the
Exchange, SCPIE Indemnity Company, a California stock insurer ("SCPIE
Indemnity"), and two insurance companies that were substantially inactive during
1996, and at all times on or after such effective date, to SCPIE Indemnity and
such other insurance companies.
OVERVIEW
The Company was organized in February 1996, as a Delaware corporation.
The Company principally engages in conducting the business of its predecessor,
the Exchange, through its subsidiaries.
The Company is a leading provider of medical malpractice insurance in
California. The Company currently insures approximately 9,800 California
physicians and oral and maxillofacial surgeons practicing alone or in medical
groups or clinics or other healthcare organizations. The Company also insures a
variety of other healthcare providers, including hospitals, emergency department
facilities, outpatient surgery centers and hemodialysis, clinical and pathology
laboratories.
The Company's total revenues and net income were $173.4 million and
$30.2 million, respectively, for the year ended December 31, 1996 and were
$165.0 million and $24.4 million, respectively, for the year ended December 31,
1995. As of December 31, 1996, the Company had $805.2 million of total assets
and $288.6 million of total equity.
Medical malpractice insurance, or medical professional liability
insurance, insures the physician, hospital or other healthcare provider against
liabilities arising from the rendering of, or failure to render, professional
medical services. Under the typical medical malpractice insurance policy, the
insurer also defends the insured against potentially covered claims. Based on
data compiled by A.M. Best, in 1995, total medical malpractice premiums in the
United States were $6.0 billion. In California, the second largest market for
medical malpractice insurance
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based on premiums written, approximately $587.7 million of medical malpractice
premiums were written in 1995. The Company's share of the medical malpractice
premiums written in California in 1995 was approximately 21%. The Company's
market share is substantially higher in Southern California where more than 95%
of the Company's insureds are located.
The Company believes that its considerable market share for medical
malpractice insurance in California is in large part due to the loyalty of its
insured physicians. The Company attributes this loyalty to the high quality,
personalized service it provides and its traditional focus on the California
physician marketplace. The medical malpractice insurance offered by the Company
has been endorsed by twelve county medical associations and specialty societies
in California.
The Company believes that the growth in managed healthcare and the
emergence of multi-state integrated healthcare providers and delivery systems
will lead to major changes in the medical malpractice insurance industry.
Practice management organizations, hospitals, administrators of large group
practices and managed care organizations have an increasing influence over the
purchasing decision for the medical malpractice insurance coverages of their
affiliated physicians. As the consolidation of healthcare providers continues,
the number of physicians insured through such organizations will increase and
the Company believes that such organizations increasingly will seek
well-capitalized medical malpractice insurers that can provide a full range of
products and a high level of service in each state in which such organizations
conduct business.
BUSINESS STRATEGY
To position the Company to compete and grow its business successfully
in this changing environment, the Company has adopted a strategy that includes:
(i) expanding the Company's product offerings, particularly to meet the
liability insurance needs of larger, more diverse healthcare entities; (ii)
diversifying geographically by increasing writings of medical malpractice
insurance in states other than California; (iii) positioning the Company to take
advantage of acquisition and consolidation opportunities relating to medical
malpractice insurance; (iv) maintaining the Company's relationship with its
primary policyholder base of California physician and medical group insureds;
and (v) maintaining sufficient capital to take advantage of future market
opportunities and to retain strong insurance ratings.
The Company's business primarily has been providing medical malpractice
insurance to physicians. In the future, the Company believes hospitals and other
healthcare entities will represent an increasing share of the market for medical
malpractice insurance and provide it with a significant area for growth. As a
result, the Company increasingly has focused its efforts on providing products
designed to meet the liability insurance needs of these entities. In 1994, the
Company began writing malpractice insurance for California hospitals and
directors and officers' liability insurance for healthcare entities. In 1995,
the Company began offering errors and omissions coverage to managed care
organizations.
In addition to its traditional direct insurance operations, the Company
assumes reinsurance of medical malpractice insurance and participates in excess
medical malpractice insurance programs. The Company believes that these lines of
business will become an increasingly important aspect of its operations as
healthcare entities become larger and obtain higher policy limits.
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To further enable it to grow, the Company has begun to expand its
operations beyond California. As part of this expansion, the Company entered
into an exclusive marketing agreement with a leading hospital malpractice
insurance broker. Through this broker, the Company has issued policies or
binders as of December 31, 1996 to more than 100 hospitals, healthcare providers
and managed care organizations in nine states representing approximately $11.1
million in estimated annual premium. Approximately 75.3% of these premiums are
from states other than California. As a result of the termination of its
relationship with a large insurance group, this broker has experienced financial
difficulties and recently filed a voluntary bankruptcy petition. Although this
broker continues to market the Company's products, there can be no assurance
that it will be able to reorganize successfully.
To facilitate its geographic expansion, in March 1996, the Company
acquired the outstanding stock of two inactive property and casualty insurance
companies, one of which is licensed in 44 states plus the District of Columbia
and the other of which is licensed in one state. The Company has contributed
$25.0 million to one of its insurance company subsidiaries and will contribute
$7.5 million to the other, and is attempting to ensure that they are fully
licensed and able to underwrite medical malpractice insurance as quickly as
possible. In the meantime, the Company has a fronting arrangement to allow the
Company to write business outside of California.
The Company believes that there will be an increasing number of
opportunities for consolidation of the highly fragmented medical malpractice
market. The Company further believes that a number of malpractice insurers lack
the size, capital strength, product breadth and geographic diversity required to
meet the needs of larger healthcare entities. Following the Reorganization and
the Offering, the Company believes that it now has the financial flexibility
to selectively pursue mergers, acquisitions and strategic alliances. The Company
also believes that such transactions will facilitate its geographic expansion,
allow it to grow its business and enable it to achieve cost savings.
The Company believes that the medical malpractice insurance industry in
California is currently experiencing a "soft insurance market," that is, an
insurance market in which the underwriting capacity exceeds current demand and
premium rates are relatively low. The Company believes that its strategy will
position it to expand premium writings and market share when the market
"hardens," that is, when demand coincides more closely with capacity and premium
rates increase to more appropriate levels.
PRODUCTS
The Company underwrites professional and related liability policy
coverages for physicians (including oral and maxillofacial surgeons), physician
medical groups and clinics, hospitals, managed care organizations and other
providers in the healthcare industry. The following table summarizes, by
product, the direct premiums written by the Company for the periods indicated:
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<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
-------------------------------------
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Physician and medical group
liability:
Physician and medical group
standard professional
liability ......................................... $117,679 $116,894 $116,425
Special risk physicians .............................. 1,398 674 261
Emergency medicine program ........................... 628 596 322
Urgent care centers .................................. 262 224 263
-------- -------- --------
Subtotal medical liability......................... 119,967 118,388 117,271
Excess personal liability ............................ 829 877 957
-------- -------- --------
Subtotal physician and
medical group liability.......................... 120,796 119,265 118,228
Hospital liability ..................................... 3,487 2,103 960
Healthcare provider liability .......................... 792 757 800
Managed care organization errors
and omissions......................................... 347 105 --
Directors and officers
liability ............................................ 213 47 36
-------- -------- --------
Total ................................................ $125,635 $122,277 $120,024
======== ======== ========
</TABLE>
An affiliated insurance agency allows the Company to meet a wide range
of insurance needs of its customers by offering, on a brokerage basis, coverages
not underwritten by the Company, including a comprehensive property protection
program and stop loss insurance related to the provision of managed care
services. The Company intends, in the future, to directly underwrite its own
property lines as part of its overall strategy to meet the principal insurance
needs of healthcare providers.
Physician and Medical Group Liability. The Company offers separate
policy forms for physicians who are sole practitioners and for those who
practice as part of a medical group or clinic. The policy issued to sole
practitioners includes coverage for professional liability that arises in the
medical practice and also for certain other "premises" liabilities that may
arise in the non-professional operations of the medical practice, such as slip
and fall accidents, and a limited defense reimbursement benefit for proceedings
by governmental disciplinary boards. The professional liability insurance for
sole practitioners and for medical groups provides protection against the legal
liability of the insureds for such things as injury caused by or as a result of
the performance of patient treatment, failure to treat and failure to diagnose.
The policy issued to medical groups and their physician members
includes not only professional liability coverage and defense reimbursement
benefits, but also substantially more comprehensive coverages for commercial
general liability and employee benefit program liability and also provides a
small medical payments benefit to injured persons. The comprehensive general
liability coverage included in the medical group policy does not exclude
coverage for certain employment related liabilities and for pollution, which are
normally excluded under a standard commercial general liability form. The
Company also offers, as part of its standard policy forms for both sole and
group practitioners, optional excess personal liability for the insured
physicians. Excess personal liability insurance provides coverage to the
physician for personal liabilities in excess of amounts covered under the
physician's homeowners and automobile policies.
The professional liability coverages are issued primarily on a "claims
made and reported" basis. Coverage is provided for claims reported to the
Company during the policy period arising from incidents that occurred at any
time the insured was covered by the policy. The Company also offers "tail
coverage" for claims reported after the expiration of the policy for occurrences
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during the coverage period. The price of the tail coverage is based on the
length of time the insured has been covered under the Company's claims made and
reported form. The Company provides free tail coverage for insured physicians
who die or become disabled during the coverage period of the policy and those
who have been insured by the Company for at least five consecutive years and
retire completely from the practice of medicine. Free tail coverage is
automatically provided to physicians with at least five consecutive years of
coverage who are also at least 65 years old.
Comprehensive general liability coverage for medical groups and clinics
and the excess personal liability insurance is underwritten on an occurrence
basis. Under occurrence coverage, the coverage is provided for incidents that
occur at any time the policy is in effect, regardless of when the claim is
reported. With occurrence coverage, there is no need to purchase tail coverage.
The Company offers limits of insurance up to $5.0 million per claim or
occurrence, with up to a $10.0 million aggregate policy limit for all claims
reported or occurrences for each calendar year or other 12-month policy period.
The most common limit is $1.0 million per claim or occurrence, subject to a $3.0
million aggregate policy limit. The Company's limit of liability under the
excess personal liability insurance coverage is $1.0 million per occurrence with
no aggregate limit. The defense reimbursement benefit for governmental
disciplinary proceedings is $25,000, and the medical payments benefit for
persons injured in non-professional activities is $10,000.
The following table summarizes the Company's physician and medical
group professional liability direct premiums written for the year ended December
31, 1996:
<TABLE>
<CAPTION>
DIRECT
PREMIUMS PERCENTAGE
GROUP SIZE WRITTEN OF TOTAL
---------- ------- --------
(IN THOUSANDS)
<S> <C> <C>
Sole practitioner physicians........ $ 73,129 61.0%
Group with less than five physicians 18,166 15.1
Group with five through eight
physicians.......................... 9,761 8.1
Group with nine or more physicians.. 18,911 15.8
-------- -----
Total..................... $119,967 100.0%
======== =====
</TABLE>
Hospital Liability. The Company writes primary liability insurance on
both a claims made and reported basis and a modified occurrence basis that in
effect includes tail coverage for up to seven years after the policy terminates.
The policy issued to hospitals provides protection for professional liabilities
related to the operation of a hospital and its various staff committees,
together with the same comprehensive general liability, medical payments and
employee benefit program liability coverages included in the policy for large
medical groups. The limits of coverage under the hospital policies issued by the
Company, net of reinsurance, are $500,000 for each claim or occurrence, with no
aggregate limit.
Healthcare Provider Liability. The Company offers its professional
liability coverage to a variety of specialty provider organizations, including
hospital emergency departments, outpatient surgery centers, medical urgent care
facilities and hemodialysis, clinical and pathology laboratories. These policies
include the standard professional liability coverage provided to physicians and
medical groups, with certain modifications to meet the special needs of these
healthcare providers. The policies are generally issued on a claims made and
reported basis with the limits of liability up to those offered to larger
medical groups. The limits of coverage under
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the current healthcare provider policies issued by the Company are between $1.0
million and $5.0 million per incident, subject to $3.0 million to $10.0 million
aggregate policy limits.
Managed Care Organization Errors and Omissions. The Company has
recently introduced a policy for managed care organizations that provides
coverage for liability arising from the errors and omissions in managed care
operations, for the vicarious liability of a managed care organization for the
acts or omissions of non-employed physician providers and for liability of
directors and officers of a managed care organization. These policies are
generally issued on a claims made and reported basis. The annual aggregate
limits of coverage under the current managed care organization policies issued
by the Company are between $1.0 million and $5.0 million.
Directors and Officers Liability. The Company historically has brokered
directors and officers liability coverage through its affiliated agency, which
has become a wholly owned subsidiary of the Company after the Reorganization.
This agency produced approximately $293,000, $271,000 and $240,000 in premiums
for other insurers in 1995, 1994 and 1993, respectively. In 1995, the Company
directly wrote one directors and officers liability policy, accounting for
approximately $47,000 of direct premiums written. In 1996, the Company began to
directly write renewals of these policies previously underwritten by other
companies, accounting for approximately $213,000 in direct premiums written. The
directors and officers liability policies are generally issued on a claims made
and reported basis. The limits of coverage on directors and officers liability
policies written by the Company are between $1.0 million and $5.0 million.
MARKETING AND POLICYHOLDER SERVICES
The Company markets directly to its insureds through a marketing
organization with approximately 25 employees providing sales solicitation and
communications services. The Company markets to sole practitioner physicians and
other prospective policyholders through its relationships with medical
associations, referrals by existing policyholders, advertisements in medical
journals, the presentation of seminars on timely topics for physicians,
telemarketing and direct mail solicitation to licensed physicians and members of
specialty group organizations. The Company attracts new physicians through
special rates for medical residents and discounts for physicians just entering
medical practice. In addition, the Company participates as a sponsor and
participant in various medical group and hospital administrators' programs,
medical association and specialty society conventions and similar programs. The
Company believes that this personal, comprehensive approach to marketing is
essential to providing professional liability insurance, where special knowledge
and experience is a prerequisite.
The Company professional liability program is endorsed by ten Southern
California county medical associations and the statewide associations of oral
and maxillofacial surgeons and osteopathic physicians. The Company considers
these endorsements to be helpful in its marketing efforts. The county medical
associations also perform certain limited information verification services for
the Company.
The Company commenced marketing its own hospital professional liability
policies during 1994 and currently underwrites coverage for 46 hospitals. In
August 1995, the Company entered into a marketing agreement with Sullivan, Kelly
& Associates, Inc. ("SKA"), one of the leading insurance brokers of hospital and
large medical group coverages in the Western United States. Under the agreement,
SKA has
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the exclusive right to market the Company's malpractice coverage for hospitals
in all states, and the Company recognizes SKA as the exclusive broker for
medical group coverage in all states other than California.
Through SKA, the Company has issued policies or binders as of December
31, 1996 to more than 100 hospitals, healthcare providers and managed care
organizations in nine states representing approximately $11.1 million in
estimated annual premiums. The Company believes that its marketing relationship
with SKA will provide an advantage in marketing to hospitals and other
healthcare entities and a cost-effective means of entering new geographic
markets. SKA recently filed for protection under Chapter 11 of the U.S.
Bankruptcy Code and is currently engaged in litigation with a large insurance
group that recently terminated its long-standing relationship with SKA. See
"Business--Risk Factors--Entry Into New Markets; Relationships with SKA."
The Company also has a policyholder services department that provides
account information to all insureds and maintains relationships with the small
medical groups and sole practitioners insured by the Company. Each of these
smaller insureds has a designated client service representative who can answer
most inquiries and, in other instances, can provide the insured with immediate
access to the person with expertise in a particular department. For hospitals
and large and mid-size medical groups, the Company has an account manager
assigned to each group who heads a service team comprised of underwriting, risk
management and claims management representatives, each of whom may be contacted
directly by the policyholder for prompt response. The Company also provides
online computer access to the large groups and hospitals so that loss and LAE
information can be accessed immediately.
The Company provides comprehensive risk management services designed to
heighten its insureds' awareness of situations giving rise to potential loss
exposures, to educate its insureds as to ways to improve their medical practice
procedures, and to assist its insureds in implementing risk modification
measures. The Company maintains a 24-hour hotline to provide immediate access to
its risk management personnel. The Company conducts surveys for hospitals and
large medical groups both to review their practice procedures generally and to
focus on specific areas in which there may be some concern. Complete reports
that specify areas of the insured's medical practice that may need attention are
provided to the policyholder. The Company also provides an annual program review
for each of its medical groups. The Company presents periodic seminars and
evening "town hall" meetings at medical societies at which pertinent subjects
are presented. The Company's risk management representatives also regularly
participate in programs presented by healthcare-related societies. These
educational offerings are designed to increase risk awareness and the
effectiveness of various healthcare professionals. Additionally, the Company
provides risk management and claims administration services to certain entities
on a fee-for-service basis.
UNDERWRITING
The underwriting department consists of a vice president in charge of
underwriting, an assistant underwriting manager, six other underwriters and five
technical and administrative assistants. Certain of these underwriters
specialize in underwriting hospitals, managed care organizations and directors
and officers liability products. The Company's underwriting department is
responsible for the evaluation of applicants for professional liability and
other coverages, the issuance of policies and the establishment and
implementation of underwriting standards for all of the coverages underwritten
by the Company.
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The Company follows a strict procedure with respect to the issuance of
all physician professional liability policies. Each applicant or member of an
applicant medical group is required to complete a detailed application that
provides a personal and professional history, the type and nature of the
applicant's professional practice, certain information relating to specific
practice procedures, hospital and professional affiliations and a complete
history of any prior claims and incidents. The application is forwarded to the
county medical association for verification of educational and professional
information. The Company performs its own independent verification of these
matters and conducts an investigation to determine if there are any lawsuits
that may not have been disclosed in the application.
The Company performs a continuous process of reunderwriting its insured
physicians. Information concerning physicians with large losses, a high
frequency of claims or unusual practice characteristics is developed through
online claims and risk management reports. Each year, the Company also sends
current practice questionnaires to approximately 15% of its insured physicians.
These questionnaires request information similar to that submitted in connection
with the physician's original application for insurance, and are designed to
detect any changes in the specialty or practice characteristics of the physician
that may require a higher or lower premium rate or possible removal from the
program.
The underwriting department submits all recommendations for premium
surcharges or non-renewal to the underwriting committee of the Company, which is
comprised solely of physicians, many of whom are insureds or retired insureds of
the Company, and members of the Board of Directors. Members of the committee are
not employees of the Company, but receive compensation for their services on the
committee. Physicians have the right to seek reconsideration of surcharges from
the committee. The Company has found that physician interchange with the
committee is often helpful in improving the practice characteristics of the
insured.
Although SKA performs the principal hospital marketing functions for
the Company, the Company makes all underwriting and rating decisions on this and
all of its direct business. Except as set forth below, each hospital is required
to submit an application that provides detailed information on operations,
financial position and risk factors. The Company reviews loss experience for at
least the past five years, prior insurance policies and endorsements, financial
reports and reports from the principal accreditation agencies for the hospital
industry. Risk management surveys are performed as needed to supplement this
information.
For hospitals currently insured with the insurance group that recently
terminated its relationship with SKA, the Company has generally issued its
policies without its normal underwriting review utilizing schedules of coverage,
limits, rating factors and other pertinent information supplied to the Company
by SKA. The Company will perform its normal underwriting review at the first
renewal date of each such policy. In situations in which a policy was issued at
a rate that was significantly lower than that charged by the insurance group,
the Company performed a normal underwriting review to confirm that it was
willing to accept the risk at the premium rate.
RATES AND DIVIDENDS
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The Company establishes, through its own actuarial staff and
independent actuaries, rates and rating classifications for its physician and
medical group insureds based on the loss and LAE experience it has developed
over the past 20 years and upon rates charged by its competitors. The Company
has various rating classifications based on practice location, medical specialty
and other factors. The Company utilizes various discounts, including discounts
for part-time practice, physicians just entering medical practice and large
medical groups. The Company has developed a special risk program for physicians
who have unfavorable loss history or practice characteristics, but whom the
Company considers insurable. Policies issued in this program have significant
surcharges. The Company has established its premium rates and rating
classifications for hospitals and managed care organizations utilizing data
publicly filed by other insurers. The data for managed care organization errors
and omissions liability is extremely limited, as tort exposures for these
organizations are only recently beginning to develop. All rates for liability
insurance in California are subject to the prior approval of the Insurance
Commissioner.
The Company instituted annual average rate increases of 4.4%, 8.9% and
9.2% in 1996, 1995 and 1994, respectively, on its physician professional
liability policies in order to improve its underwriting results. These rate
increases have been higher than those implemented by most of its competitors.
The number of policyholders insured by the Company has declined by a small
percentage in each of these years, in part due to these rate increases, but the
Company has realized a modest increase in its premium volume and has improved
its underwriting results. The California Department recently approved a 5.4%
rate increase on physician professional liability policies for the Company for
1997.
The Company paid dividends of $9.9 million, $9.5 million and $11.2
million in 1996, 1995 and 1994, respectively, in the form of premium credits.
Such dividends were paid primarily to insureds who were members of the Exchange
in 1990 and prior years and were based primarily on underwriting results in such
years. On August 8, 1996, the Board of Governors of the Exchange declared a
final dividend to the members of the Exchange of $9.0 million which is being
paid in the form of premium credits in 1997. Except for this final dividend,
after the Reorganization, the Company will cease paying such premium credit
dividends to its policyholders. Therefore, the Company may find it more
difficult to compete with other insurance companies offering such dividends.
CLAIMS
The claims department of the Company is responsible for claims
investigation, establishment of appropriate case reserves for loss and LAE,
defense planning and coordination, control of attorneys engaged by the Company
to defend a claim and negotiation of the settlement or other disposition of a
claim. Under most of the Company's policies, except managed care organization
errors and omissions policies and directors and officers liability policies, the
Company is obligated to defend its insureds, which is in addition to the limit
of liability under the policy. Medical malpractice claims often involve the
evaluation of highly technical medical issues, severe injuries and conflicting
expert opinions. In almost all cases, the person bringing the claim against the
physician is already represented by legal counsel when the Company learns of the
potential claim.
The claims department staff includes managers, litigation supervisors,
investigators and other experienced professionals trained in the evaluation and
resolution of medical professional
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liability and general liability claims. The claims department staff consists of
approximately 48 employees, including twelve clerical personnel. The Company has
five unit managers responsible for specific geographic areas, and additional
units for specialty areas such as hospitals, birth injuries and policy coverage
issues. The Company also occasionally uses independent claims adjusters,
primarily to investigate claims in remote locations. The Company selects legal
counsel from among a group of law firms in the geographic area in which the
action is filed.
California has adopted a standard of judicial administration that
requires its trial courts to set goals to dispose of 90% of all cases within
twelve months after filing and 100% of cases within 24 months. The courts in the
various counties in which the Company defends claims have sought to comply with
these "fast-track" standards during the past few years. The effect of this
change has been significant. Before this requirement was implemented, cases in
certain counties did not proceed to trial for many years after filing. The
claims department staff now must make earlier evaluations and reserve estimates,
authorize discovery expenses early in the litigation process and be prepared to
settle the case or proceed to trial within one year.
The Company emphasizes early evaluation and aggressive management of
claims. Claims department professionals complete a full evaluation and reserving
of claims under "fast-track" within six months of the filing of a claim and on
all other cases within twelve months after filing. The Company has established
different levels of authority within the claims department for approval of
reserves and settlement of claims. The Company has a claims committee comprised
solely of physicians which meets bi-monthly with the vice president in charge of
claims and other claims managers to consider and evaluate cases that have
complex medical issues and subject the Company to large exposures. At December
31, 1996, the Company had 3,296 open claims.
The Company vigorously defends its insureds against claims, but seeks
to resolve expediently cases with high exposure potential. The defense of a
medical professional liability claim requires significant cooperation between
the litigation supervisor or claims department manager responsible for the claim
and the insured physician. California law requires that a medical professional
liability claim cannot be settled for an amount in excess of $30,000 without the
consent of the physician insured. California law further requires that the
insurer report all such settlements to a medical disciplinary board, and Federal
law requires that any claim payment, regardless of amount, be reported to a
national data bank which can be accessed by various state licensing and
disciplinary boards and medical peer evaluation committees. Thus, the physician
is often placed in a difficult position of knowing that a settlement may result
in the initiation of a disciplinary proceeding or some other impediment to the
physician's ability to practice. The claims department supervisor must be able
to fully evaluate considerations of settlement or trial and to communicate
effectively the Company's recommendation to its insured. If the insured will not
consent to a settlement offer, the Company may be exposed to a larger judgment
if the case proceeds to trial.
The claims department staff utilizes structured settlements to resolve
certain large claims. In a structured settlement, the Company will typically
purchase an annuity from another insurance company that will satisfy periodic
payments owed to the claimant as part of the settlement. The Company typically
obtains a release from the claimant for its insured and itself and assigns the
annuity to a third party for payment. The Company purchased annuities during
11
<PAGE> 12
the early 1980s from a life insurance company that subsequently became insolvent
and could not satisfy its obligations. In some instances, the Company has
concluded that it is obligated to satisfy any shortfall in these periodic
payments and is making these shortfall payments. The Company has established a
reserve to cover these expected shortfall obligations. See Note 8 of Notes to
Financial Statements.
LOSS RESERVES
The determination of loss reserves is a projection of ultimate losses
through an actuarial analysis of the claims history of the Company and other
professional liability insurers, subject to adjustments deemed appropriate by
the Company due to changing circumstances. Included in its claims history are
losses and LAE paid by the Company in prior periods and case reserves for
anticipated losses and LAE developed by the Company's claims department as
claims are reported and investigated. Actuaries rely primarily on such
historical loss experience in determining reserve levels on the assumption that
historical loss experience provides a good indication of future loss experience
despite the uncertainties in loss cost trends and the delays in reporting and
settling claims. As additional information becomes available, the estimates
reflected in earlier loss reserves may be revised. Any increase in the amount of
reserves, including reserves for insured events of prior years, could have an
adverse effect on the Company's results for the period in which the adjustments
are made.
The uncertainties inherent in estimating ultimate losses on the basis
of past experience have grown significantly in recent years principally as a
result of judicial expansion of liability standards and expansive
interpretations of insurance contracts. These uncertainties may be further
affected by, among other factors, changes in the rate of inflation and changes
in the propensities of individuals to file claims. The inherent uncertainty of
establishing reserves is relatively greater for companies writing long-tail
casualty insurance, including medical malpractice insurance, due primarily to
the longer-term nature of the resolution of claims.
The Company utilizes both its internal actuarial staff and independent
actuaries in establishing its reserves. The Company's independent actuaries
review the Company's reserves for losses and LAE at the end of each fiscal year
and prepare a report that includes a recommended level of reserves. The Company
considers this recommendation as well as other factors, such as known,
anticipated or estimated changes in frequency and severity of claims, loss
retention levels and premium rates, in establishing the amount of its reserves
for losses and LAE. The Company continually refines reserve estimates as
experience develops and further claims are reported and settled. The Company
reflects adjustments to reserves in the results of the periods in which such
adjustments are made. Since medical malpractice insurance is a long-tail line of
business for which the initial loss and LAE estimates may be adversely impacted
by events occurring long after the reporting of the claim, such as sudden severe
inflation or adverse judicial or legislative decisions, the Company has
attempted to establish its loss and LAE reserves at the upper end of a
reasonable range of reserve estimates.
12
<PAGE> 13
The Company's loss reserve experience is shown in the following table,
which sets forth a reconciliation of beginning and ending reserves for unpaid
losses and LAE for the periods indicated:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------
1996 1995 1994
--------- --------- ----------
<S> <C> <C> <C>
Reserves for losses and LAE at beginning
of year..................................... $ 466,187 $ 468,743 $ 490,773
Less reinsurance recoverables............... 19,560 19,177 18,644
--------- --------- ----------
Reserves for losses and LAE, net of related
reinsurance recoverable, at
beginning of year........................... 446,627 449,566 472,129
--------- --------- ----------
Provision for losses and LAE for claims
occurring in the current year, net of
reinsurance................................. 168,545 175,856 169,143
Decrease in estimated losses and LAE for
claims occurring in prior years, net of
reinsurance................................. (59,748) (57,833) (60,423)
--------- --------- ----------
Incurred losses during the year, net of
reinsurance................................. 108,797 118,023 108,720
--------- --------- ---------
Deduct losses and LAE payments for
claims, net of reinsurance, occurring
during:
Current year.............................. 13,274 11,481 10,178
Prior years............................... 101,849 109,481 121,105
--------- --------- ----------
115,123 120,962 131,283
--------- --------- ----------
Reserve for losses and LAE, net of
related reinsurance recoverable, at
end of year................................. 440,301 446,627 449,566
Reinsurance recoverable for losses
and LAE, at end of year..................... 19,266 19,560 19,177
--------- --------- ---------
Reserves for losses and LAE, gross
of reinsurance recoverable, at end
of year..................................... $ 459,567 $ 466,187 $ 468,743
========= ========= =========
</TABLE>
- ----------
The following table reflects the development of losses and LAE reserves
for the periods indicated at the end of that year and each subsequent year. The
first line shows the reserves, net of reinsurance recoverables, as originally
reported at the end of the stated year. Each calendar year-end reserve includes
the estimated unpaid liabilities for that report or accident year and for all
prior report or accident years. The section under the caption "Liability
reestimated as of" shows the original recorded reserve as adjusted as of the end
of each subsequent year to reflect the cumulative amounts paid and all other
facts and circumstances discovered during each year. The line "Cumulative
redundancy" reflects the difference between the latest reestimated reserve
amount and the reserve amount as originally established. The section under the
caption "Cumulative amount of liability paid through" shows the cumulative
amounts paid related to the reserve as of the end of each subsequent year.
13
<PAGE> 14
In evaluating the information in the table below, it should be
noted that each amount includes the effects of all changes in amounts of prior
periods. For example, if a loss determined in 1993 to be $100,000 was first
reserved in 1986 at $150,000, the $50,000 redundancy (original estimate minus
actual loss) would be included in the cumulative redundancy in each of the years
1986 through 1996 shown below. This table presents development data by calendar
year and does not relate the data to the year in which the claim was reported or
the accident actually occurred. Conditions and trends that have affected the
development of these reserves in the past will not necessarily recur in the
future.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------------------------------------------------
1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996
-------- -------- -------- -------- -------- -------- -------- -------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Loss and LAE
reserves .......... $282,805 $329,369 $389,404 $412,679 $427,049 $439,908 $465,423 $472,129 $449,566 $446,627 $440,301
Liability reestimated
as of:
One year later .... 261,970 327,627 362,058 375,764 401,878 409,966 421,994 411,915 391,733 386,879
Two years later ... 269,855 312,956 337,901 348,781 368,124 364,105 368,521 363,562 337,441
Three years later . 260,089 295,438 315,718 320,319 324,370 316,220 325,073 315,712
Four years later .. 248,613 278,339 299,308 294,992 284,628 282,291 292,801
Five years later .. 234,449 267,880 284,972 266,649 264,582 261,344
Six years later ... 228,628 260,544 266,423 256,900 251,335
Seven years later . 229,152 249,644 262,642 247,678
Eight years later . 223,055 248,595 257,731
Nine years later .. 222,460 246,267
Ten years later ... 221,588
Cumulative
redundancy ........ 61,217 83,102 131,673 165,001 175,714 178,564 172,622 156,417 112,125 59,748
Cumulative
amount of
liability paid
through:
One year later .... 59,435 78,951 93,607 85,771 103,983 101,001 105,678 121,106 109,481 101,844
Two years later ... 121,037 147,865 155,505 162,264 171,327 171,429 184,883 192,519 170,603
Three years later . 167,331 188,038 206,413 204,129 206,499 205,829 219,649 217,484
Four years later .. 190,148 220,575 232,777 221,479 221,654 221,884 232,379
Five years later .. 205,362 233,807 242,140 228,922 230,606 227,692
Six years later ... 211,665 236,809 244,587 234,202 232,410
Seven years later . 214,314 238,105 248,319 235,274
Eight years later . 215,155 239,652 248,993
Nine years later .. 215,647 239,896
Ten years later ... 215,788
Net reserves--
December 31 ....... $449,566 $446,627 $440,301
Reinsurance
recoverables ...... 19,177 19,560 19,266
-------- -------- --------
Gross reserves ...... $468,743 $466,187 $459,567
======== ======== ========
</TABLE>
The Company has historically experienced favorable loss and LAE
reserve development. The Company believes that the favorable loss and LAE
reserve development since 1985 has resulted from four factors: (i) the Company's
conservative approach to establishing reserves for medical malpractice insurance
losses and LAE; (ii) the continuing benefits from MICRA, the California tort
reform legislation that was declared constitutional in a series of decisions by
the California Supreme Court in the mid-1980s; (iii) benefits from California's
"fast-track" legislation; and (iv) improved results from a restructuring of the
Company's internal claims process. See "-- Regulation -- Medical Malpractice
Tort Reform" and "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- General." The Company believes, based on its
analysis of annual statements filed with state regulatory authorities, that its
principal California competitors have experienced similar favorable loss and LAE
reserve development in past years.
14
<PAGE> 15
General liability losses have been less than 2.9% of medical
malpractice losses in the last five years. The Company does not have material
reserves for pollution claims and the Company's claims experience for pollution
coverage has been negligible.
While the Company believes that its reserves for losses and LAE
are adequate, there can be no assurance that the Company's ultimate losses and
LAE will not deviate, perhaps substantially, from the estimates reflected in the
Company's financial statements. If the Company's reserves should prove
inadequate, the Company will be required to increase reserves, which could have
a material adverse effect on the Company's financial condition or results of
operation.
REINSURANCE
Reinsurance Ceded. The Company follows customary industry
practice by reinsuring a portion of its risks. The Company cedes to reinsurers a
portion of its risks and pays a fee based upon premiums received on all policies
subject to such reinsurance. Insurance is ceded principally to reduce net
liability on individual risks and to provide protection against large losses.
Although reinsurance does not legally discharge the ceding insurer from its
primary liability for the full amount of the policies reinsured, it does make
the reinsurer liable to the insurer to the extent of the reinsurance ceded. The
Company determines how much reinsurance to purchase based upon its evaluation of
the risks it has insured, consultations with its reinsurance brokers and market
conditions, including the availability and pricing of reinsurance. In 1996, the
Company ceded $8.3 million of its earned premiums to reinsurers.
The Company's reinsurance arrangements are generally placed
through its exclusive reinsurance broker, Willcox Incorporated Reinsurance
Intermediaries. The Company retains the first $1.0 million of loss incurred per
incident and has various reinsurance treaties covering losses in excess of $1.0
million up to $20.0 million per incident. Losses in excess of $20.0 million are
retained by the Company. The Company often has more than one insured named as a
defendant in a lawsuit or claim arising from the same incident, and, therefore,
multiple policies and limits of liability may be involved. The Company's
reinsurance program is purchased in several layers, the limits of which may be
reinstated under certain circumstances at the Company's option subject to the
payment of additional premium. The Company also reinsures a portion of the
reinstatement premiums under a separate treaty, together with certain other
miscellaneous liability exposures, including retroactive liability for two
insurance layers from several past years and aggregate extension coverage which
provides additional aggregate loss limits for the layer $1.0 million excess of
$1.0 million, each occurrence, for specified years. The reinsurers also bear
their proportionate share of loss expenses for claims in which they have an
indemnity obligation.
The Company has a separate quota share reinsurance treaty for
1996 with respect to its managed care organization errors and omissions policies
and any directors and officers liability policies it may write. Under this
treaty, the reinsurers bear 80% of all losses and LAE incurred under these
policies.
Reinsurance is placed under reinsurance treaties and agreements
with a number of individual companies and syndicates at Lloyd's of London
("Lloyd's") to avoid concentrations of credit risk. The following table
identifies the Company's most significant reinsurers, their
15
<PAGE> 16
percentage participation in the Company's aggregate reinsured risk based upon
premiums paid by the Company and their rating as of December 31, 1996. No
other single reinsurer's percentage participation in 1996 exceeded 5% of total
reinsurance premiums.
<TABLE>
<CAPTION>
PREMIUMS CEDED PERCENTAGE OF TOTAL
FOR YEAR ENDED REINSURANCE
DECEMBER 31, 1996 RATING(1) PREMIUMS
----------------- --------- --------
(IN THOUSANDS)
<S> <C> <C>
Hannover Ruckversicherungs................ $2,868 A+ 33.1
Lloyd's Syndicates........................ 2,518 NR 29.1
Eisen und Stahl
Ruckversicherungs....................... 717 A+ 8.3
Transatlantic Reinsurance Co.............. 639 A+ 7.4
----
77.9
</TABLE>
- ----------
(1) All ratings are assigned by A.M. Best. The Company's minimum requirement
for ratings of its reinsurers is B or better from A.M. Best.
The Company analyzes the credit quality of its reinsurers and
relies on its brokers and intermediaries to assist it in such analysis. To date,
the Company has not experienced any material difficulties in collecting
reinsurance recoverables. No assurance can be given, however, regarding the
future ability of any of the Company's reinsurers to meet their obligations.
Among the reinsurers to which the Company cedes reinsurance are certain Lloyd's
syndicates. In recent years, Lloyd's has reported substantial aggregate losses
which have had adverse effects on Lloyd's in general and on certain syndicates
in particular. In addition, there has been a decrease in the underwriting
capacity of Lloyd's syndicates in recent years. The substantial losses and other
adverse developments could affect the ability of certain syndicates to continue
to trade and the ability of insureds to continue to place business with
particular syndicates. It is not possible to predict what effects the
circumstances described above may have on Lloyd's and the Company's contractual
relationship with Lloyd's syndicates in future years. The Company understands
that Lloyd's syndicates have created new trust funds to hold reserves for
reinsurance purchased by United States reinsureds gross of outward reinsurance.
This arrangement applies to all purchases on or after August 1, 1995.
Reinsurance and Excess Liability Insurance Assumed. The Company
assumes a small amount of reinsurance covering medical professional liability
risks primarily in the United States. The principal reinsurance treaty, which
has been in effect since 1988, is with a Lloyd's syndicate. Under this surplus
share treaty, the Company assumes 50% of one or more layers of coverage above
$1.0 million, which must be retained by the primary insurer. The reinsured
receives a ceding commission and a profit share. The maximum amount of the
Company's liability for any one risk is $500,000, and the Company does not
participate as a reinsurer in any of its own policies. The annual premiums
earned under this treaty have ranged from $160,000 in 1989 to $4.1 million in
1996. In 1996, this treaty also included reinsurance of excess layers of
workers' compensation and clash casualty liability risks. The Company's
liability for any one risk is limited to $500,000 above a $1.5 million layer
assumed by other members of the syndicate.
The Company also entered into a reinsurance treaty for 1995 and
1996 with Hannover Ruckversicherungs ("Hannover Re"). The treaty is a quota
share treaty, under which the
16
<PAGE> 17
Company reinsures up to $500,000 for each physician medical
malpractice claim and up to $750,000 for each hospital professional liability
claim on policies or contracts with limits in excess of $2.0 million. The
reinsured receives an override commission and is required to retain not less
than 20% of the risk, subject to a minimum retention of $1.0 million. Premiums
earned under this treaty were approximately $96,000 for 1996.
The Company is a participant in a program for which SKA is the
exclusive broker that provides excess liability insurance. The program provides
excess coverage in various layers up to $50.0 million above a primary insurance
layer of $500,000. The Company has assumed, as a reinsurer, a 5% share of each
loss above $500,000.
The Company has an indirect quota share participation in a
reinsurance program of Hannover Re that provides high layer excess of loss
property catastrophe coverage for international risks, other than in the United
States and Japan. The Company has participated in this program since 1994
through the purchase of a $5.0 million Credit Note issued by a limited liability
company organized by Hannover Re to underwrite a portion of this coverage. The
Company purchased this note through the issuance of a letter of credit, which
can be drawn to cover the Company's proportionate share of losses in this
program. Interest on the note is based upon profits, if any, of the limited
liability company. The outstanding Credit Note is held by the Company in its
investment portfolio, and the amount of the letter of credit is included in
"Other Liabilities in the Balance Sheets." See "-- Investment Portfolio."
The Company participates indirectly in another reinsurance
program of Hannover Re similar to the one described above through a swap
agreement arranged by Citibank, N.A. Under the swap agreement, the Company has
issued a letter of credit, which can be drawn to cover the Company's
proportionate share of losses in this program. The Company will share
proportionately the underwriting profit of this program and interest income on
premium receipts, and its aggregate maximum share of losses is $5.0 million.
The Company intends to seek additional assumed reinsurance
arrangements in future years. The Company believes that as more managed care
organizations and integrated healthcare delivery systems retain a larger part of
their own exposure directly or through captive insurance arrangements, they will
need to obtain excess insurance or reinsurance for the potentially larger
losses.
INVESTMENT PORTFOLIO
An important component of the Company's operating results has
been the return on its invested assets. Investments of the Company are made by
investment managers under policies established and supervised by the Board of
Directors. The Company's investment policy has placed primary emphasis on
investment grade, fixed maturity securities and maximization of after-tax
yields. The investment manager since 1978 for the portfolio of fixed maturity
securities is Brown Brothers Harriman & Co., and the investment manager for the
equity securities portion of the portfolio is Hotchkis & Wiley.
17
<PAGE> 18
The following table sets forth the composition of the investment
portfolio of the Company at the dates indicated. All of the fixed maturity
securities are held as available-for-sale.
<TABLE>
<CAPTION>
DECEMBER 31, 1996 DECEMBER 31, 1995 DECEMBER 31, 1994
----------------------- ----------------------- ------------------------
COST OR COST OR COST OR
AMORTIZED FAIR AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE COST VALUE
-------- -------- -------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Fixed maturity securities:
Bonds:
U.S. Government and
Agencies ........................... $272,315 $276,929 $304,091 $319,119 $300,131 $281,931
State, municipalities and
political subdivisions ............. 300,347 303,461 149,693 155,118 110,423 109,392
Mortgage-backed securities,
U.S. Government .................... 83,031 82,850 80,279 81,898 51,175 47,033
Corporate ............................ 5,027 5,027 46,951 48,889 120,353 115,256
Other ................................ 100 100 105 105 2,644 2,284
-------- -------- -------- -------- -------- --------
Total bonds ..................... 660,820 668,367 581,119 605,129 584,726 555,896
Redeemable preferred stock ............. -- -- 996 1,026 3,018 3,018
-------- -------- -------- -------- -------- --------
Total fixed maturity
securities .................... 660,820 668,367 582,115 606,155 587,744 558,914
-------- -------- -------- -------- -------- --------
Equity securities:
Non-redeemable preferred
stock ................................ -- -- -- -- 1,061 1,036
Common stock ........................... 15,555 19,977 49,396 61,083 42,228 45,404
-------- -------- -------- -------- -------- --------
Total equity
securities .................... 15,555 19,977 49,396 61,083 43,289 46,440
-------- -------- -------- -------- -------- --------
Total .................................... $676,375 $688,344 $631,511 $667,238 $631,033 $605,354
======== ======== ======== ======== ======== ========
</TABLE>
During 1996, the Company sold all equity securities in the
portfolio with the exception of approximately $20.0 million of publicly traded
common stocks. The Board of Directors has adopted a policy that no more than 8%
of the total market value of invested assets may be held in equity securities
and real estate.
The Company's investment portfolio of fixed maturity securities
consists primarily of intermediate-term, investment-grade securities. The
Company's investment policy provides that fixed maturity investments are limited
to purchases of investment-grade securities or unrated securities which, in the
opinion of a national investment advisor, should qualify for such rating. The
table below contains additional information concerning the investment ratings of
the Company's fixed maturity investments at December 31, 1996:
<TABLE>
<CAPTION>
AMORTIZED FAIR PERCENTAGE OF
TYPE/RATING OF INVESTMENT(1) COST VALUE FAIR VALUE
---------------------------- ---- ----- ----------
(IN THOUSANDS)
<S> <C>
AAA (including U.S. Government and
Agencies)............................................ 480,069 486,024 72.7%
AA..................................................... 125,826 126,752 18.9
A...................................................... 49,825 50,491 7.6
Non rated(2)........................................... 5,100 5,100 0.8
------- ------- ----------
660,820 668,367 100.0%
======= ======= ==========
</TABLE>
- ----------
(1) The ratings set forth above are based on the ratings, if any, assigned
by Standard & Poor's Corporation ("S&P"). If S&P's ratings were
unavailable, the equivalent ratings supplied by Moody's Investors
Services, Inc. were used.
(2) Includes a credit note received from a catastrophe reinsurance limited
liability company controlled by Hannover Re with an amortized cost and
fair value of $5.0 million. See "--Reinsurance."
18
<PAGE> 19
The following table sets forth certain information concerning the
maturities of fixed maturity securities in the Company's investment portfolio as
of December 31, 1996:
<TABLE>
<CAPTION>
AMORTIZED FAIR PERCENTAGE OF
COST VALUE FAIR VALUE
--------- ----- -------------
(IN THOUSANDS)
Years to maturity:
<S> <C> <C> <C>
One or less ............................................ $ 2,105 $ 2,105 0.3%
After one through five ................................. 63,297 64,009 9.6
After five through ten ................................. 219,032 225,358 33.7
After ten .............................................. 293,355 294,045 44.0
Mortgage-backed securities ............................... 83,031 82,850 12.4
-------- -------- -----
Totals ......................................... $660,820 $668,367 100.0%
======== ======== =====
</TABLE>
The average maturity of the securities in the Company's fixed
maturity portfolio as of December 31, 1996 was 6.4 years. The average duration
of the Company's fixed maturity portfolio as of December 31, 1996 was 5.1 years.
The Company also maintains cash and highly liquid equivalent
short-term investments, which at December 31, 1996 totaled $33.8 million.
The following table summarizes the Company's investment results
for the three years ended December 31, 1996.
<TABLE>
<CAPTION>
AS OF OR FOR THE YEAR ENDED DECEMBER 31,
----------------------------------------
1996 1995 1994
--------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
FIXED MATURITY SECURITIES:
Average invested assets (includes short-
term cash investments)(1) ................................... $650,090 $ 614,492 $ 614,005
Net investment income:
Before income taxes ......................................... 40,887 37,471 37,705
After income taxes .......................................... 29,706 26,481 26,379
Average annual return on investments:
Before income taxes ......................................... 6.29% 6.10% 6.14%
After income taxes .......................................... 4.57% 4.31% 4.30%
Net realized investment gains after
income tax .................................................. $ 351 $ 2,202 $ 165
Net increase (decrease) in unrealized
gains on all fixed maturity
investments after income taxes .............................. (10,720) 34,366 (38,184)
EQUITY SECURITIES:
Average invested assets(2) .................................... $ 37,695 $ 50,927 $ 43,338
Net investment income:
Before income taxes ......................................... 940 1,506 1,063
After income taxes .......................................... 854 1,189 972
Average annual return on investments:
Before income taxes ......................................... 2.49% 2.96% 2.45%
After income taxes .......................................... 2.27% 2.33% 2.24%
Net realized investment gains after
income tax .................................................. $ 7,279 $ 2,965 $ 191
Net increase (decrease) in unrealized
gains on all equity investments after
income taxes ................................................ (4,742) 5,548 (1,980)
</TABLE>
- ----------
(1) Fixed maturity securities at cost.
(2) Equities at market.
19
<PAGE> 20
COMPETITION
The physician professional liability insurance market in California is
highly competitive. The Company competes principally with three physician-owned
mutual or reciprocal insurance companies, Norcal Mutual Insurance Company, The
Doctors' Company and Medical Insurance Exchange of California, with several
commercial insurers, including CNA Insurance Companies and Fremont Indemnity
Company, and also with a physicians' mutual protection trust, Mutual Protection
Trust. The physician-owned insurance companies were organized at approximately
the same time as the Company and all of these companies have expanded their
operations in California. Each of these companies is actively engaged in
soliciting insureds in Southern California, the Company's primary area of
operations, and each has offered assessments or premiums at very competitive
rates during the past few years. The Company believes that the principal
competitive factors, in addition to pricing, include dividend policy, financial
stability, breadth and flexibility of coverage and the quality and level of
services provided. In addition, commercial insurance companies such as Farmers
Group, Inc. and MMI Companies, Inc. now actively compete for larger medical
groups in the California market, and companies endorsed by specialty medical
societies are also entering the market.
The Company believes that the Company's dividend policy has been an
important competitive factor in the past. On August 8, 1996, the Board of
Governors declared a final dividend to members of the Exchange of $9.0 million
which is being paid in the form of premium credits in 1997. Except for this
final dividend, after the Reorganization, the Company will cease paying such
premium credit dividends to its policyholders. Therefore, the Company may find
it more difficult to compete with other insurance companies offering such
dividends. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- General -- Policyholder Dividends."
The hospital professional liability insurance market is also extremely
competitive. Most of the Company's principal insurance company competitors for
physicians and medical groups, as well as a hospital industry sponsored captive
insurance company, actively compete in the hospital professional liability
insurance market. The largest writer of malpractice insurance for hospitals in
California is an affiliate of Farmers Group, Inc., which until recently
underwrote its coverage through SKA. The Company believes that the Company's
current relationship with SKA will enable it to expand its hospital
policyholders in California and other states.
The Company expects to encounter similar competition from local
doctor-owned insurance companies and commercial companies in other states as it
carries out its expansion plans. The Company plans to compete in other states
principally through its relationship with SKA and by offering superior
policyholder services. All markets in which the Company now writes insurance and
in which it expects to enter have certain competitors with substantially greater
financial and operating resources than the Company.
REGULATION
General. Insurance companies are regulated by government agencies in
states in which they transact insurance. The extent of regulation varies by
state, but such regulation usually includes: (i) regulating premium rates and
policy forms; (ii) setting minimum capital and surplus requirements; (iii)
regulating guaranty fund assessments; (iv) licensing companies and agents; (v)
20
<PAGE> 21
approving accounting methods and methods of setting statutory loss and expense
reserves; (vi) setting requirements for and limiting the types and amounts of
investments; (vii) establishing requirements for the filing of annual statements
and other financial reports; (viii) conducting periodic statutory examinations
of the affairs of insurance companies; (ix) approving proposed changes of
control; and (x) limiting the amounts of dividends that may be paid without
prior regulatory approval. Such regulation and supervision are primarily for the
benefit and protection of policyholders and not for the benefit of investors.
The Company has written all of its insurance in California, and SCPIE
Indemnity will be domiciled in that state. California laws and regulations,
including the tort liability laws, and laws relating to professional liability
exposures and reports, have the most significant impact on the Company and its
operations.
Insurance Guaranty Associations. Most states, including California,
require admitted property and casualty insurers to become members of insolvency
funds or associations which generally protect policyholders against the
insolvency of such insurers. Members of the fund or association must contribute
to the payment of certain claims made against insolvent insurers. Maximum
contributions required by law in any one year vary by state, and California
permits a maximum assessment of 1% of annual premiums written by a member in
that state during the preceding year. The largest assessment paid by the Company
was $697,000 in 1994. However, such payments are recoverable through policy
surcharges.
Holding Company Regulation. SCPIE Holdings is subject to the California
Insurance Holding Company System Regulatory Act (the "Holding Company Act"). The
Holding Company Act requires the Company periodically to file information with
the California Department and other state regulatory authorities, including
information relating to its capital structure, ownership, financial condition
and general business operations. Certain transactions between an insurance
company and its affiliates, including sales, loans or investments which in any
twelve-month period aggregate at least 3% of its admitted assets or 25% of its
statutory capital and surplus, whichever is less, also are subject to prior
approval by the California Department. Recently, legislation was adopted in
California which requires 30 days advance notice to the California Department of
a material transaction, rather than prior approval, and increases the types of
transactions subject to the notice requirement.
The Holding Company Act also provides that the acquisition or change of
"control" of a California insurance company or of any person or entity that
controls such an insurance company cannot be consummated without the prior
approval of the California insurance commissioner. In general, a presumption of
"control" arises from the ownership of voting securities and securities that are
convertible into voting securities, which in the aggregate constitute 10% or
more of the voting securities of a California insurance company or of a person
or entity that controls a California insurance company, such as SCPIE Holdings.
A person or entity seeking to acquire "control," directly or indirectly, of the
Company is generally required to file with the Insurance Commissioner an
application for change of control containing certain information required by
statute and published regulations and provide a copy of the application to the
Company. The Holding Company Act also effectively restricts the Company from
consummating certain reorganizations or mergers without prior regulatory
approval.
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The Company will also be subject to insurance holding company laws in
other states that contain similar provisions and restrictions.
Regulation of Dividends from Insurance Subsidiaries. The Holding
Company Act also limits the ability of SCPIE Indemnity to pay dividends to the
Company. Without prior notice to and approval of the Insurance Commissioner,
SCPIE Indemnity may not declare or pay an extraordinary dividend, which is
defined as any dividend or distribution of cash or other property whose fair
market value together with other dividends or distributions made within the
preceding twelve months exceeds the greater of such subsidiary's statutory net
income of the preceding calendar year or 10% of statutory surplus as of the
preceding December 31. 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 is approved by the
Insurance Commissioner. In addition, an insurance company is required to give
the California Department notice of any dividend after declaration, but prior to
payment.
The other Insurance Subsidiaries will be subject to similar provisions
and restrictions under the insurance holding company laws of other states.
Risk-Based Capital. The National Association of Insurance
Commissioners ("NAIC") has developed a new methodology for assessing the
adequacy of statutory surplus of property and casualty insurers which includes
a risk-based capital ("RBC") formula that attempts to measure statutory capital
and surplus needs based on the risks in a company's mix of products and
investment portfolio. The formula is designed to allow state insurance
regulators to identify potentially under-capitalized companies. Under the
formula, a company determines its RBC by taking into account certain risks
related to the insurer's assets (including risks related to its investment
portfolio and ceded reinsurance) and the insurer's liabilities (including
underwriting risks related to the nature and experience of its insurance
business). The RBC rules provide for different levels of regulatory attention
depending on the ratio of a company's total adjusted capital to its "authorized
control level" of RBC. At December 31, 1996, each of the Insurance
Subsidiaries' RBC exceeded the threshold requiring the least regulatory
attention.
Regulation of Investments. The Insurance Subsidiaries are subject to
state laws and regulations that require diversification of their investment
portfolios and limit the amount of investments in certain investment categories
such as below investment grade fixed income securities, real estate and equity
investments. Failure to comply with these laws and regulations would cause
investments exceeding regulatory limitations to be treated as nonadmitted assets
for
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purposes of measuring statutory surplus and, in some instances, would
require divestiture of such non-qualifying investments over specified time
periods unless otherwise permitted by the state insurance authority under
certain conditions.
Prior Approval of Rates and Policies. Pursuant to the California
Insurance Code, the Company must submit rating plans, rates, policies and
endorsements to the Insurance Commissioner for prior approval. The possibility
exists that the Company may be unable to implement desired rates, policies,
endorsements, forms or manuals if such items are not approved by the Insurance
Commissioner. In the past, all of the Company's rate applications have been
approved in the normal course of review. In 1996, the Company acquired two
inactive insurance companies, one of which is licensed in 44 states plus the
District of Columbia and the other of which is licensed in one state. The
licenses will have to be modified in four states and certain policy form and
rate filings will need to be made in most of the states to permit the Company to
write medical malpractice insurance in these states.
Medical Malpractice Tort Reform. MICRA, enacted in 1975, has been one
of the most comprehensive medical malpractice tort reform measures in the United
States. MICRA currently provides for limitations on damages for pain and
suffering of $250,000, limitations on fees for plaintiffs' attorneys according
to a specified formula, periodic payment of medical malpractice judgments and
the introduction of evidence of collateral source benefits payable to the
injured plaintiff. The Company believes that this legislation has brought
stability to the medical malpractice insurance marketplace in California by
making it more feasible for insurers to assess the risks involved in
underwriting this line of business.
The constitutionality of the various provisions of MICRA were
judicially challenged soon after its enactment, and California trial courts and
intermediate appellate courts reached conflicting decisions. The California
Supreme Court, in a series of decisions rendered during 1984 and 1985, upheld
the constitutionality of MICRA. Bills have been introduced in the California
Legislature from time to time to modify or limit certain of the tort reform
benefits provided to physicians and other healthcare providers by MICRA. In
1987, the principal proponents and opponents of MICRA signed an agreement under
which the parties agreed to a five-year moratorium on amendments to MICRA,
except for an increase in the limits on plaintiffs' attorneys' fees, which was
enacted at the time of this agreement. This moratorium expired by its terms on
December 31, 1992. Neither the proponents or opponents have been able to enact
significant changes since that time. The Company cannot predict what changes, if
any, to MICRA may be enacted during the next few years or what effect such
changes might have on the Company's medical malpractice insurance operations.
In February 1997, the opponents of MICRA introduced two bills in the California
legislature, which, if enacted, would eliminate the $250,000 limitation on pain
and suffering damages with respect to many claims. The Company cannot predict
whether either or both of these bills will be passed by the legislature and, if
so, signed or vetoed by the governor.
Medical Malpractice Reports. The Company is required to report detailed
information with regard to settlements or judgments against its California
physician insureds in excess of $30,000 to the Medical Board of California,
which has responsibility for investigations and initiation of proceedings
relating to professional medical conduct in California. In addition, all
payments must also be reported to the Federal National Practitioners' Data Bank
and such reports are accessible by state licensing and disciplinary authorities,
hospital and other peer review committees and other providers of medical care. A
California statute also requires that defendant physicians must consent to all
medical professional liability settlements in excess of $30,000, unless the
physician waives this requirement. The Company policy provides the physician
with the right to consent to any such settlement, regardless of the amount, but
that the matter of
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consent may be submitted to a county medical review board by either party. In
virtually all instances, the Company must obtain the consent of the insured
physician prior to any settlement.
A.M. BEST RATING
A.M. Best, which rates insurance companies based on factors of concern
to policyholders, currently assigns the Company an "A (Excellent)" rating. Such
rating is the third highest rating of 13 ratings that A.M. Best assigns to
solvent insurance companies, which currently range from "A++ (Superior)" to "D
(Very Vulnerable)." Publications of A.M. Best indicate that the A rating is
assigned to those companies that in A.M. Best's opinion have a strong ability to
meet their obligations to policyholders over a long period of time. In
evaluating a company's financial and operating performance, A.M. Best reviews
the company's profitability, leverage and liquidity, as well as its book of
business, the adequacy and soundness of its reinsurance, the quality and
estimated market value of its assets, the adequacy of its loss reserves, the
adequacy of its surplus, its capital structure, the experience and competence of
its management and its market presence. A.M. Best's ratings reflect its opinion
of an insurance company's financial strength, operating performance and ability
to meet its obligations to policyholders and are not evaluations directed to
purchasers of an insurance company's securities.
In June 1996, A.M. Best reduced the Company's rating from "A+
(Superior)," citing significant uncertainty in the medical malpractice
marketplace, caused, in part, by evolving managed care issues, the Company's
narrow product line and geographic concentration, and intense competition and
weakening premium rates in the medical malpractice industry. A.M. Best similarly
reduced the ratings of three other medical malpractice insurance companies
domiciled in California. A.M. Best also noted, however, the Company's "strong
capitalization, favorable loss reserve development and leadership position in
its principal market." No assurance can be given that A.M. Best will not reduce
its current rating of the Company in the future. The Insurance Subsidiaries have
entered into a pooling arrangement and each of the Insurance Subsidiaries has
been assigned the same "pooled" "A (Excellent)" A.M. Best rating based on their
consolidated performance.
EMPLOYEES
As of December 31, 1996, the Company employed 167 persons. None of the
employees is covered by a collective bargaining agreement. The Company believes
that its employee relations are good.
EXECUTIVE OFFICERS
The Executive Officers of the Company and their ages as of March 17,
1997 are as follows:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Donald J. Zuk 60 President, Chief Executive officer
and Director
Patrick S. Grant 54 Senior Vice President, Marketing
Joseph P. Henkes 47 Secretary and Senior Vice President,
Operations and Actuarial Services
Patrick T. Lo 44 Vice President and Chief Financial
Officer
</TABLE>
Donald J. Zuk has been President and Chief Executive Officer of SCPIE
Management Company, the management company of the Exchange, since 1989. Prior to
joining SCPIE Management Company, he served 22 years with Johnson & Higgins,
insurance brokers. His last position there was Senior Vice President in charge
of its Los Angeles Health Care operations, which included the operations of
SCPIE under a contract that then existed with SCPIE Management Company. Since
1993, Mr. Zuk has served on the Board of Directors of GCR Holdings Limited, a
catastrophe property reinsurance company.
Patrick S. Grant has been with SCPIE since 1990 serving initially as
Vice President, Marketing. He was named Senior Vice President, Marketing in
1992. Prior to that time, he spent almost 20 years with the insurance brokerage
firm of Johnson & Higgins. His last position there was Vice President,
Professional Liability. Mr. Grant has worked on the Company operations since
1976.
Joseph P. Henkes has been with the Company since 1990 serving initially
as Vice President, Operations and Actuarial Services. He was named Senior Vice
President, Operations and Actuarial Services in 1992. Prior to that time he
spent almost five years with Johnson & Higgins, where his services were devoted
primarily to the Company. He has been an Associate of the Casualty Actuarial
Society since 1975, and a member of the American Academy of Actuaries since
1980.
Patrick T. Lo has been Vice President and Chief Financial Officer of
the Company since 1993. From 1990 to 1993 he served as Vice President and
Controller of the Company. Prior to that time, he spent nine years as Assistant
Controller, Assistant Vice President and Vice President at The Doctors'
Company, a California medical malpractice insurance company.
RISK FACTORS
Certain statements in this Form 10-K that are not historical fact
constitute "forward-looking statements" within the meaning f the Private
Securities Litigation Reform Act of 1995. Such forward-looking statements
involve known and unknown risks, uncertainties and other factors which 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. Such risks, uncertainties and other factors include, but are not
limited to, the following risks:
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<PAGE> 25
CONCENTRATION OF BUSINESS
Substantially all of the Company's premiums written are generated from
medical malpractice insurance policies issued to physicians and medical groups.
As a result, negative developments in the economic, competitive or regulatory
conditions affecting the medical malpractice insurance industry, particularly as
such developments might affect medical malpractice insurance for physicians,
could have a material adverse effect on the Company's results of operations.
Substantially all of the Company's direct premiums written are
generated in Southern California. The revenues and profitability of the Company
are therefore subject to prevailing regulatory, economic and other conditions in
Southern California. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Results of Operations."
The Company's strategy includes expanding and diversifying its
insurance products and geographic operations. There can be no assurance that the
Company will be successful in implementing this strategy. See "-- Entry into New
Markets; Relationship with SKA."
INDUSTRY FACTORS
Many factors influence the financial results of the medical malpractice
insurance industry, several of which are beyond the control of the Company.
These factors include, among other things: changes in severity and frequency of
claims; changes in applicable law and regulatory reform; changes in judicial
attitudes toward liability claims; and changes in inflation, interest rates and
general economic conditions.
The availability of medical malpractice insurance, or the industry's
underwriting capacity, is determined principally by the industry's level of
capitalization, historical underwriting results, returns on investment and
perceived premium rate adequacy. Historically, the financial performance of the
medical malpractice industry has tended to fluctuate in cyclical patterns
characterized by periods of greater competition in pricing and underwriting
terms and conditions (a "soft insurance market") followed by periods of capital
shortage and lesser competition (a "hard insurance market"). In a soft insurance
market, competitive conditions could result in premium rates and underwriting
terms and conditions which may be below profitable levels. For a number of
years, the medical malpractice insurance industry in California has faced a soft
insurance market. There can be no assurance as to whether or when industry
conditions will improve or the extent to which any improvement in industry
conditions may improve the Company's results of operations.
COMPETITION
The Company competes with numerous insurance companies in the
California market. The Company's principal competitors for physicians and
medical groups consist of three physician-owned mutual or reciprocal insurance
companies, several commercial companies and a physicians' mutual protection
trust, which levies assessments primarily on a "claims paid" basis. In addition,
commercial insurance companies such as Farmers Group, Inc. and MMI Companies,
Inc. compete for the medical malpractice insurance business of larger medical
groups, hospitals
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<PAGE> 26
and other healthcare providers. Several of these competitors have greater
financial resources than the Company. In the last several years, the Company has
increased premium rates, while most of its competitors have maintained their
rates or instituted smaller increases. The Company has lost some of its
policyholders, in part due to its rate increases, but has realized a modest
increase in its premium volume and improved its underwriting results. See
"Business -- Rates and Dividends." In addition to pricing, competitive factors
may include dividend policy, financial stability, breadth and flexibility of
coverage and the quality and level of services provided. The Company paid
dividends to its members of $9.9 million, $9.5 million and $11.2 million in
1996, 1995 and 1994, respectively, in the form of premium credits. Such
dividends were paid primarily to insureds who were members of the Exchange in
1990 and prior policy years and were based primarily on underwriting results in
such years. On August 8, 1996, the Board of Governors of the Exchange declared a
final dividend to members of the Exchange of $9.0 million which is being paid in
the form of premium credits in 1997. Except for this final dividend, after the
Reorganization, the Company will cease paying such premium credit dividends to
its policyholders. Therefore, the Company may find it more difficult to compete
with other insurance companies offering such dividends. The competitive
environment could also result in lower premium rates and fees, reduced
profitability and loss of market share. As the Company expands into new product
lines and new geographic markets, it will need to compete with established
companies in such markets, many of which will have existing relationships with
the doctors and medical groups that the Company will be seeking to insure. See
"Business -- Competition."
LOSS AND LAE RESERVES
The reserves for losses and loss adjustment expenses ("LAE")
established by the Company are estimates of amounts needed to pay reported and
unreported claims and related LAE. The estimates are based on assumptions
related to the ultimate cost of settling such claims based on facts and
interpretation of circumstances then known, predictions of future events,
estimates of future trends in claims frequency and severity and judicial
theories of liability, legislative activity and other factors. However,
establishment of appropriate reserves is an inherently uncertain process
involving estimates of future losses and there can be no assurance that
currently established reserves will prove adequate in light of subsequent actual
experience. The inherent uncertainty is greater for certain types of insurance,
such as medical malpractice, where a longer period may elapse before a definite
determination of ultimate liability is made, and where the judicial, political
and regulatory climates are changing. Medical malpractice claims and expenses
may be paid over a period of ten or more years, which is longer than most
property and casualty claims. Trends in losses on long-tail lines of business
such as medical malpractice may be slow to appear, and accordingly, the
Company's reaction in terms of modifying underwriting practices and changing
premium rates may lag underlying loss trends. In addition, emerging changes in
the practice of medicine, such as the emergence of new, larger medical groups
that do not have an established claims history and additional claims resulting
from restrictions on treatment by managed care organizations, may require the
Company to adjust its underwriting and reserving practices. See "-- Changes in
Healthcare." While the Company believes that its reserves for losses and LAE are
adequate, there can be no assurance that the Company's ultimate losses and LAE
will not deviate, perhaps substantially, from the estimates reflected in the
Company's financial statements. If the Company's reserves should prove
inadequate, the Company will be required to increase reserves, which could have
a material adverse effect on the Company's financial condition or results of
operations.
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<PAGE> 27
The Company believes it has been conservative in establishing loss and
LAE reserves. In recent years, the Company has revised estimates of loss
severity and determined that certain of its reserves were redundant. Redundant
reserves, which have been released in every year since 1985, contributed
significantly to reported earnings in 1996, 1995 and 1994. The Company reduced
reserves for prior years by $59.7 million, $57.8 million and $60.4 million in
the years ending December 31, 1996, 1995 and 1994, respectively. See Note 3 of
Notes to Financial Statements. The Company cannot predict whether similar
redundancies will be experienced in future years. The Company continues to
establish its loss and LAE reserves at what it believes is the upper end of a
reasonable range of reserve estimates, but there is no assurance that such
reserves will ultimately prove to be redundant. If reserves ultimately prove
redundant, then the redundant amount will become income in the period such
amount is released from reserves and will be included in stockholders' equity.
If such redundancies do not occur or loss and LAE experience does not improve,
the Company's net income could be significantly reduced or a net loss could
occur. To the extent that reserves prove to be inadequate in the future, the
Company would have to increase such reserves and incur a charge to earnings in
the period that such reserves are increased, which could have a material adverse
effect on the Company's results of operations and financial condition. See
"Business -- Loss Reserves."
CHANGES IN HEALTHCARE
Significant attention has recently been focused on reforming the
healthcare system at both the Federal and state levels. A broad range of
healthcare reform measures have been suggested, and public discussion of such
measures will likely continue in the future. Proposals have included, among
others, spending limits, price controls, limits on increases in insurance
premiums, limits on the liability of doctors and hospitals for tort claims and
changes in the healthcare insurance system. The Company cannot predict which, if
any, reform proposals will be adopted, when they may be adopted or what impact
they may have on the Company. While some of these proposals could be beneficial
to the Company, the adoption of others could have a material adverse effect on
the Company's financial condition or results of operations.
In addition to regulatory and legislative efforts, there have been
significant market driven changes in the healthcare environment. In recent
years, a number of factors related to the emergence of "managed care" have
negatively impacted or threatened to impact the medical practice and economic
independence of physicians. Physicians have found it more difficult to conduct a
traditional fee for service practice and many have been driven to join or
contractually affiliate with managed care organizations, healthcare delivery
systems or practice management organizations. This consolidation could result in
the elimination or significant decrease in the role of the physician and the
medical group from the medical professional liability purchasing decision. In
addition, the consolidation could reduce primary medical malpractice insurance
premiums paid by healthcare systems, as larger healthcare systems generally
retain more risk by accepting higher deductibles and self-insured retentions or
form their own captive insurance companies.
ENTRY INTO NEW MARKETS; RELATIONSHIP WITH SKA
The Company's strategy is to expand and diversify its products and
operations to meet the insurance needs of large healthcare organizations, while
maintaining its traditional personalized
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<PAGE> 28
service for physicians and medical groups, both large and small. The Company has
recently introduced policies providing hospital professional liability, managed
care organization errors and omissions and directors and officers liability
insurance for healthcare organizations. The Company has also participated in
recent years as a reinsurer in the excess medical professional liability market.
There is no assurance, however, that this diversification will be successful.
Another aspect of the Company's strategy is to expand its market by
offering a variety of healthcare related liability insurance products to
hospitals, large medical groups and managed care and other healthcare systems
outside California. SCPIE Indemnity is licensed to write liability insurance
only in California. In March 1996, SCPIE Holdings acquired two inactive
insurance companies, one of which is licensed in 44 states plus the District of
Columbia and the other of which is licensed in one state. The licenses will need
to be modified in four states and certain policy form and rate filings will need
to be made in most of the states to permit the Company to write medical
malpractice insurance in these states. The Company could encounter delays in
meeting such regulatory requirements. The Company has completed its filings in a
few states and, in recent months has issued several policies in some of these
states. In the meantime, the Company is marketing certain of its policies
through a licensed fronting insurer under an arrangement whereby the Company
reinsures all or substantially all of the policy risks under the policies.
In August 1995, SCPIE entered into a marketing agreement with SKA, a
leading healthcare insurance broker in the Western United States. Under the
agreement, SKA has the exclusive right to market SCPIE's malpractice coverage
for hospitals in all states, and the Company recognizes SKA as the exclusive
broker for medical group coverage in all states other than California. The
agreement with SKA has been renewed until October 1997 and will continue to
renew on an annual basis unless terminated by either party on 90 days' notice.
SKA has offices in the states of California, Arizona, Florida, Maryland and
Texas. SKA has informed the Company that it had developed relationships with a
variety of healthcare entities in several states which for a number of years
generated malpractice insurance premiums for a large insurance group. Following
the termination of this relationship by the insurance group in August 1996, SKA
and the Company have been actively working to obtain a significant amount of
this business for the Company.
SKA experienced certain financial difficulties as a result of a
reduction in its commission revenues following the termination of its
relationship with the insurance group. SKA voluntarily filed for bankruptcy
protection under Chapter 11 of the U.S. Bankruptcy Code on December 16, 1996.
SKA has advised the Company that it expects to successfully reorganize and to be
able to continue to operate in the ordinary course of business, although it will
not be able to do so without obtaining additional financing during the next
several months. SKA continues to actively market the Company's products and
service accounts in various states. The Company does not know what effect, if
any, SKA's bankruptcy proceeding will have on its efforts to obtain the business
previously written by the insurance group.
Through SKA, the Company has issued policies or binders as of December
31, 1996 to more than 100 hospitals, healthcare providers and managed care
organizations in nine states representing approximately $11.1 million in
estimated annual premiums. There is no assurance, however, that SCPIE will
retain all of such business or that any business written pursuant to its
arrangements with SKA will ultimately be profitable for the Company. If SKA is
not successful in marketing
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<PAGE> 29
the Company's products to hospitals in California or to hospitals and medical
groups in other states, the Company may have difficulty in directly marketing
its own products in other states or developing an alternative marketing
relationship. While SKA is subject to bankruptcy court protection, the Company
may have difficulty terminating the contract without court approval.
SKA and the insurance group mentioned above are currently engaged in
litigation in the California state court regarding rights to certain insurance
information and the ability to solicit professional liability insurance from
hospitals and medical groups currently insured by the insurance group through
SKA. On September 13, 1996, the court entered a preliminary injunction placing
some restrictions on the ability of the insurance group to solicit renewals of
these policies and ordering certain information returned to SKA. The preliminary
injunction was modified on October 3, 1996 with respect to use of certain
information by the insurance group related to excess insurance policies or
self-insured retention policies and prohibiting misrepresentations regarding the
preliminary injunction and disparaging remarks about the parties. Additionally,
a cross-complaint seeking damages, restitution and certain injunctive relief was
filed by the insurance group against SKA on October 14, 1996. The Company does
not know what effect, if any, this litigation or the termination of SKA by the
insurance group will have on its efforts to obtain the business previously
underwritten by the insurance group.
PHYSICIAN AND MEDICAL ASSOCIATION RELATIONSHIPS
The Exchange was organized in 1976 by physicians, received the
exclusive endorsement and active support of a number of local county medical
associations in building its physician and medical group policyholder base and,
as a reciprocal insurance company, has been wholly owned and governed by its
members. The Exchange has relied on its relationship with physicians and medical
associations in marketing its policies in competition with commercial insurance
companies and other physician-owned companies. The Company will endeavor to
maintain its medical association endorsements and to continue its close
relationship with physicians and medical groups through personalized service.
There can be no assurance that the Company will be able to maintain these
relationships.
IMPORTANCE OF RATINGS
Ratings have become an increasingly important factor in establishing
the competitive position of insurance companies. The Company is rated "A
(Excellent)" by A.M. Best, the third highest rating of 13 ratings assigned to
solvent insurance companies, which currently range from "A++ (Superior)" to "D
(Very Vulnerable)." A.M. Best's ratings reflect its opinion of an insurance
company's financial strength, operating performance and ability to meet its
obligations to policyholders and are not evaluations directed to purchasers of
an insurance company's securities. In June 1996, A.M. Best reduced the Company's
rating from "A+ (Superior)," citing significant uncertainty in the medical
malpractice marketplace, caused, in part, by evolving managed care issues, the
Company's narrow product line and geographic concentration, and intense
competition and weakening premium rates in the medical malpractice industry.
A.M. Best similarly reduced the ratings of three other medical malpractice
insurance companies domiciled in California and several other medical
malpractice companies domiciled in states other than California. The Company's
ability to maintain or improve its rating by A.M. Best may depend on its ability
to implement successfully its business strategy. See "Business -- A.M. Best
Rating." If the Company's rating is materially reduced from its current level by
A.M. Best, the
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<PAGE> 30
Company's results of operations could be adversely affected. The
Insurance Subsidiaries have entered into a reinsurance pooling arrangement and
each of the Insurance Subsidiaries has been assigned the same "pooled" "A
(Excellent)" A.M. Best rating based on their consolidated performance.
REINSURANCE
The amount and cost of reinsurance available to companies specializing
in medical professional liability insurance are subject, in large part, to
prevailing market conditions beyond the control of the Company. The Company's
ability to provide professional liability insurance at competitive premium rates
and coverage limits on a continuing basis will depend in part upon its ability
to secure adequate reinsurance in amounts and at rates that are commercially
reasonable. Although the Company anticipates that it will continue to be able to
obtain such reinsurance, there can be no assurance that this will be the case.
Further, the Company is subject to a credit risk with respect to its reinsurers
because reinsurance does not relieve the Company of liability to its insureds
for the risks ceded to reinsurers. Although the Company places its reinsurance
with reinsurers it believes to be financially stable, a significant reinsurer's
inability to make payment under the terms of a reinsurance treaty could have a
material adverse effect on the Company. See "Business -- Reinsurance."
HOLDING COMPANY STRUCTURE; LIMITATION ON DIVIDENDS
SCPIE Holdings is an insurance holding company whose assets consist of
all of the outstanding capital stock of the Insurance Subsidiaries and,
following the Offering, will include a portion of the net proceeds of the
Offering. As an insurance holding company, SCPIE Holdings' ability to meet its
obligations and to pay dividends, if any, may depend upon the receipt of
sufficient funds from its subsidiaries. The payment of dividends to SCPIE
Holdings by the Insurance Subsidiaries is subject to general limitations imposed
by applicable insurance laws. See "Business -- Regulation -- Regulation of
Dividends from Insurance Subsidiaries."
ANTI-TAKEOVER PROVISIONS
SCPIE Holdings' amended and restated certificate of incorporation (the
"Restated Certificate") and amended and restated bylaws (the "Bylaws") include
provisions that may be deemed to have anti-takeover effects and may delay, defer
or prevent a takeover attempt that stockholders may consider to be in their best
interests. These provisions include: a Board of Directors consisting of three
classes; authorization to issue up to 5,000,000 shares of preferred stock, par
value $1.00 per share (the "Preferred Stock"), in one or more series with such
rights, obligations, powers and preferences as the Board of Directors of SCPIE
Holdings (the "SCPIE Holdings Board") may provide; a limitation which permits
only the SCPIE Holdings Board, or the Chairman or the President of SCPIE
Holdings to call a special meeting of stockholders; a prohibition against
stockholders acting by written consent; provisions which provide that directors
may be removed only for cause and only by the affirmative vote of holders of
two-thirds (66 2/3%) of the outstanding shares of voting securities; provisions
which provide that the SCPIE Holdings Board may increase the size of the Board
and may fill vacancies and newly created directorships; and certain advance
notice procedures for nominating candidates for election to the SCPIE Holdings
Board and for proposing business before a meeting of stockholders. In addition,
state insurance holding company laws applicable to the Company in
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<PAGE> 31
general provide that no person may acquire control of SCPIE Holdings without
the prior approval of appropriate insurance regulatory authorities. See
"Business -- Regulation -- Holding Company Regulation."
REGULATORY AND RELATED MATTERS
Insurance companies are subject to supervision and regulation by the
state insurance authority in each state in which they transact business. Such
supervision and regulation relate to numerous aspects of an insurance company's
business and financial condition, including limitations on lines of business,
underwriting limitations, the setting of premium rates, the establishment of
standards of solvency, statutory surplus requirements, the licensing of insurers
and agents, concentration of investments, levels of reserves, the payment of
dividends, transactions with affiliates, changes of control and the approval of
policy forms. Such regulation is concerned primarily with the protection of
policyholders' interests rather than stockholders' interests. See "Business --
Regulation."
State regulatory oversight and various proposals at the Federal level
may in the future adversely affect the Company's results of operations. In
recent years, the state insurance regulatory framework has come under increased
Federal scrutiny, and certain state legislatures have considered or enacted laws
that alter and, in many cases, increase state authority to regulate insurance
companies and insurance holding company systems. Further, the NAIC and state
insurance regulators are reexamining existing laws and regulations, which in
many states has resulted in the adoption of certain laws that specifically
focus on insurance company investments, issues relating to the solvency of
insurance companies, risk-based capital ("RBC") guidelines, interpretations of
existing laws, the development of new laws and the definition of extraordinary
dividends. See "Business -- Regulation -- Regulation of Dividends from Insurance
Subsidiaries," "-- Risk-Based Capital" and "-- Regulation of Investments."
SHARES ELIGIBLE FOR FUTURE SALE
All of the 9,994,652 shares of Common Stock issued to members of the
Exchange in connection with the Reorganization (except for the 14,220 shares
issued to members of the Board of Governors) will be eligible for immediate sale
in the public market. No prediction can be made as to the effect, if any, that
future sales of shares, or the availability of shares for future sale, will have
on the market price of the Common Stock prevailing from time to time. Sales of
substantial amounts of such shares of Common Stock in the public market or the
perception that such sales could occur could adversely affect the market price
of the Common Stock and could impair the Company's future ability to raise
capital through an offering of its equity securities.
31
<PAGE> 32
ITEM 2. PROPERTIES
The Company is the owner of two office buildings, both located in
Beverly Hills, California. One building contains approximately 25,000 square
feet of office space and is used by the Company and its subsidiaries as a home
office. The other office building contains approximately 24,000 square feet, of
which the Company and its subsidiaries occupy approximately 17,000 square feet
and the remaining 7,000 square feet of space in this office building are leased
to unaffiliated persons. Both office buildings owned by the Company are
currently unencumbered. The Company leases office space for a claims office in
San Diego, California and a sales office in Oakland, California. The Company
believes that its office space is adequate for its present purposes and that it
will be able to secure additional office space in the future if necessary.
ITEM 3. LEGAL PROCEEDINGS
The Company is a defendant in one material litigation, currently on
appeal by the Company in the California District Court of Appeal, in which an
adverse judgment was rendered for $4.2 million of compensatory damages and $14.0
million of punitive damages. The case involves an action against the Company by
the bankruptcy estate of an uninsured physician who incurred an adverse jury
verdict in a medical malpractice case. The physician's 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 insureds in other cases. The plaintiff in the
malpractice action was an infant who had suffered severe injuries at birth, and
had obtained a judgment against two Company insured physicians as well as the
uninsured physician. The jury originally rendered a verdict that included $65.0
million in punitive damages, which was reduced to $14.0 million by the trial
judge. The Company believes that the action is entirely without merit and plans
to pursue aggressively its rights on appeal.
The Company is from time to time named as a defendant in various
lawsuits incidental to its insurance business. In many of these actions,
plaintiffs assert claims for exemplary and punitive damages which are not
insurable under California judicial decisions. The Company vigorously defends
these actions, unless a reasonable settlement appears appropriate. The Company
believes that adverse results, if any, in the actions currently pending should
not have a material adverse effect on the Company's consolidated financial
condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
SCPIE Indemnity Company, the sole shareholder of the Company as of
December 2, 1996, approved the Reorganization by approving the Amended and
Restated Plan and Agreement of Merger dated August 8, 1996, as amended by
Amendment No. 1 dated December 19, 1996, at a special meeting duly held on
December 19, 1996.
During the fourth quarter of 1996, the members of the Exchange also
approved the Reorganization, which required for approval the affirmative vote
of at least two-thirds of outstanding membership interests. Of the 11,054
membership interests outstanding, 8,844 members voted in favor of the
Reorganization, 268 members were opposed and 540 members abstained.
32
<PAGE> 33
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
PRICE RANGE OF COMMON STOCK
The Company did not have an established public trading market for its
Common Stock during fiscal year 1996. The Company's Common Stock became publicly
tradable on the New York Stock Exchange ("NYSE") on January 30, 1997. The high
and low sales prices as reported on the NYSE for the period January 30, 1997
through March 25, 1997, were $24.88 and $19.50, respectively. On March 25,
1997, the closing price of the Common Stock as reported on the NYSE was $22.00.
SHAREHOLDERS OF RECORD
33
<PAGE> 34
The approximate number of shareholders of record of the Company's
Common Stock as of March 28, 1997 was 10,000. The approximate number of
beneficial holders as of March 28, 1997 was 650 according to ChaseMellon
Shareholder Services, the Company's Transfer Agent.
DIVIDENDS
The Company did not pay dividends in the past. The Company currently
intends to pay regular quarterly cash dividends. On March 4, 1997, the SCPIE
Holdings Board declared an initial cash dividend of $.05 per share payable on
March 31, 1997, to stockholders of record on March 17, 1997. The declaration and
payment of future dividends to holders of Common Stock will be at the discretion
of SCPIE Holdings' Board and will be dependent upon SCPIE Holdings' financial
condition, results of operations, cash requirements, future prospects,
regulatory restrictions on the payment of dividends to SCPIE Holdings by the
Insurance Subsidiaries and other factors deemed relevant by the SCPIE Holdings'
Board.
SCPIE Holdings is an insurance holding company whose assets consist
primarily of all of the outstanding shares of the common stock of the Insurance
Subsidiaries. Although SCPIE Holdings retained approximately $3.5 million of
the net proceeds from the Offering for general corporate purposes, SCPIE
Holdings' ability to pay dividends to its stockholders and meet its other
obligations, including operating expenses and any debt service, will depend
primarily upon the receipt of sufficient funds from the Insurance Subsidiaries.
The payment of dividends by the Insurance Subsidiaries to SCPIE Holdings will be
restricted by applicable insurance law. See "Management's Discussion and
Analysis."
ITEM 6. SELECTED FINANCIAL AND OPERATING DATA
The following table sets forth selected financial and operating data
for the Company.
SELECTED FINANCIAL AND OPERATING DATA
(in thousands, except per share data)
<TABLE>
<CAPTION>
AS OF OR FOR THE YEAR ENDED DECEMBER 31, 1996 1995 1994 1993 1992
- --------------------------------------------------------------------------------------------------------------
INCOME STATEMENT DATA(1):
<S> <C> <C> <C> <C> <C>
Direct premiums written $125,635 $122,277 $120,024 $112,459 $107,126
============================================================
Premiums earned $120,484 $116,354 $111,659 $113,194 $112,122
Net investment income 40,769 40,424 39,663 39,738 44,044
Realized investment gains
and other revenue 12,113 8,231 755 16,254 18,950
------------------------------------------------------------
Total revenues 173,366 165,009 152,077 169,186 175,116
------------------------------------------------------------
Losses and loss adjustment
expenses 108,797 118,023 108,720 125,354 135,959
Other operating expenses 14,276 12,561 11,844 9,734 8,520
------------------------------------------------------------
Total expenses 123,073 130,584 120,564 135,088 144,479
------------------------------------------------------------
Income before policyholder
dividends and
Federal income taxes 50,293 34,425 31,513 34,098 30,637
Policyholder dividends(2) 8,436 -- -- -- 2,366
Federal income taxes 11,665 10,056 9,212 8,618 7,899
------------------------------------------------------------
Net income $ 30,192 $ 24,369 $ 22,301 $ 25,480 $ 20,372
============================================================
BALANCE SHEET DATA(1):
Total investments(3) $717,910 $695,021 $636,909 $679,257 $629,289
Total assets 805,155 781,358 751,605 775,667 722,563
Total liabilities 516,588 507,539 542,069 548,268 540,920
Total equity 288,567 273,819 209,536 227,399 181,643
ADDITIONAL DATA(1):
Earnings per share(3) $ 3.02 $ 2.44 $ 2.23 $ 2.55 $ 2.04
Book value per share(3) 28.86 27.38 20.95 22.74 18.16
GAAP ratios:
Loss ratio 90.3% 101.4% 97.4% 110.7% 121.3%
Expense ratio 11.8 10.8 10.6 8.6 7.6
Combined ratio 102.1 112.2 108.0 119.3 128.9
Statutory surplus $251,958 $235,352 $187,299 $171,589 $154,675
</TABLE>
(1) Financial data as of and for the years ended December 31, 1995, 1994, 1993
and 1992 are derived from the combined financial statements of the the
Exchange and an affiliated non-profit corporation that was liquidated into
the Exchange on July 12, 1996. Financial data as of and for the year ended
December 31, 1996 are derived from the financial statements of the
Company.
(2) In the second quarter of 1996, the Company estimated an additional $9.0
million of policyholders dividends would be paid due to favorable loss
experience related to policy years 1987 through 1992. This policyholder
dividend will be paid to members of the Exchange in the form of premium
credits in 1997. Except for this final dividend the Company will cease
paying such dividends to its policyholders.
(3) Gives effect in all periods to the Reorganization completed on January 29,
1997, including the allocation of approximately 10,000,000 shares of
Common Stock to members of the Exchange in connection therewith. Does not
give effect to the sale of an additional 2,300,000 shares of Common Stock
in a concurrent public offering. An additional 500,000 shares of Common
Stock issued to SCPIE Indemnity as part of the Reorganization are not
considered outstanding for purposes of determining per share amounts.
34
<PAGE> 35
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the financial
statements and the related notes thereto appearing elsewhere in this Form 10-K
report. The financial statements for 1996 and prior years include the accounts
of the Exchange and its wholly-owned subsidiaries and certain affiliates.
The following discussion contains forward-looking statements regarding the
Company, its business, prospects and results of operations that are subject to
certain risks and uncertainties posed by many factors and events that could
cause the Company's actual business, prospects and results of operations to
differ materially from those that may be expressed or implied by such
forward-looking statements. Such risks, uncertainties and other factors are
discussed below and under "Business -- Risk Factors" and in periodic filings
with the Securities and Exchange Commission.
GENERAL
CYCLICAL NATURE OF MEDICAL MALPRACTICE INSURANCE INDUSTRY Many factors
influence the financial results of the medical malpractice insurance industry,
several of which are beyond the control of the Company. These factors include,
among other things, changes in severity and frequency of claims; changes in
applicable law and regulatory reform; changes in judicial attitudes toward
liability claims; and changes in inflation, interest rates and general economic
conditions.
The availability of medical malpractice insurance, or the industry's
underwriting capacity, is determined principally by the industry's level of
capitalization, historical underwriting results, returns on investment and
perceived premium rate adequacy. Historically, the financial performance of the
medical malpractice industry has tended to fluctuate between a soft insurance
market and a hard insurance market. In a soft insurance market, competitive
conditions could result in premium rates and underwriting terms and conditions
which may be below profitable levels. For a number of years, the medical
malpractice insurance industry in California has faced a soft insurance market.
There can be no assurance as to whether or when industry conditions will improve
or the extent to which any improvement in industry conditions may improve the
Company's financial condition and results of operations.
CHANGING NATURE OF THE BUSINESS The vast majority of the Company's business is
professional liability insurance for physicians written on a claims made and
reported basis. The Company believes that the integration of healthcare delivery
in recent years, particularly in California, will result in the growing
importance of large medical groups and other healthcare entities, and a
corresponding change in the entities that make professional liability purchasing
decisions. The Company believes that these changes have created a need for the
Company to further diversify. As a result, the Company has adopted a strategy
for growth that includes expanding the type of products offered by the Company
and diversifying geographically by offering products in states other than
California. The Company began to implement its strategy in 1994 by offering
professional liability insurance to hospitals in California and, in 1995, began
offering errors and omissions coverage for managed care organizations. In
addition, the Company has entered into a marketing arrangement with SKA to
expand its business to other states. At December 31, 1996, the Company, through
SKA, had issued policies or binders to more than 100 hospitals, healthcare
providers and managed care organizations in nine states. There is no assurance,
however, that the Company will successfully retain or expand this business
through SKA or that it will ultimately be profitable. If the Company's
relationship with SKA is not successful, the Company may encounter difficulty in
directly marketing its products in other states or developing alternative
marketing relationships.
COMPETITIVE ENVIRONMENT The California medical malpractice insurance market for
medical groups and physicians, in which the company principally operates, has
become extremely competitive in recent years. The Company's principal
competitors are three physician-owned companies and a physicians'
35
<PAGE> 36
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
mutual protection trust. In addition, commercial insurance companies have
recently returned to the California market to insure medical groups and
physicians.
In the late 1980s many medical malpractice insurance companies began to
experience significantly improved claims cost trends and attempted to attract
medical groups and physicians insured by other companies by reducing premium
rates. Beginning in 1990, the Company implemented annual rate decreases
aggregating more than 25% during the next three years, which resulted in a
reduction in premium volume to approximately $107.1 million in 1992, and a
deterioration of underwriting results. Since 1993, however, SCPIE has instituted
annual overall rate increases ranging from 4.4% to 9.2% in order to improve its
underwriting results. These rate increases have been higher than those
implemented by most of its competitors. As a result, the Company has lost some
of its policyholders, in part due to these rate increases, but has realized a
modest increase in its premium volume and has improved its underwriting results.
POLICYHOLDER DIVIDENDS Since 1981, SCPIE has followed a practice of paying
discretionary dividends to its physician and other healthcare provider members
in the form of premium credits on the basis of the results of prior policy
years, as the actual experience for such years becomes known. The Company paid
dividends to its members of $9.9 million, $9.5 million and $11.2 million in
1996, 1995 and 1994, respectively, in the form of premium credits. Such
dividends were paid primarily to insureds who were members of the Exchange in
1990 and prior policy years and were based primarily on underwriting results in
such years. These dividends have been accrued as an expense for the year in
which the related premiums were earned and not the year paid or declared. In
1996, the Board of Governors declared a final dividend to members of the
Exchange of record on November 5, 1996, which is being paid in the form of
premium credits in 1997. This dividend of approximately $9.0 million (offset by
a $0.6 million credit for forfeited dividends declared in 1995) was reflected as
an expense in the year ended December 31, 1996. Except for this final dividend,
after the Reorganization, the Company will cease paying such premium credit
dividends to its policyholders. Therefore, the Company may find it more
difficult to compete with other insurance companies offering such dividends.
LOSS AND LAE RESERVES Medical malpractice and other property and casualty loss
and loss adjustment expense ("LAE") reserves are established based on known
facts and interpretation of circumstances, including the Company's experience
with similar cases and historical trends involving claim payment patterns, loss
payments and pending levels of unpaid claims, as well as court decisions and
economic conditions. The effects of inflation are considered in the reserving
process. Establishment of appropriate reserves is an inherently uncertain
process, and there can be no assurance that currently established reserves will
prove adequate in light of subsequent actual experience. The Company follows a
practice of conservatively estimating its future liabilities relating to losses
already incurred and has attempted to establish its loss and LAE reserves at the
upper end of a reasonable range of reserve estimates. The Company believes that
it has been particularly difficult to make such estimates for medical
malpractice claims in California because of the uncertain benefits of tort
reform measures and more recently a change in the judicial process. The tort
reform measures, known as the Medical Injury Compensation Reform Act of 1975
("MICRA"), were not declared constitutional by the California Supreme Court
until the mid-1980s and their impact on settlements was difficult to evaluate
until some years later. The change in judicial process, known as "fast track,"
became fully effective for most California counties in 1992 and requires, among
other things, that all non-complex civil actions, including most medical
malpractice actions, proceed to trial within approximately one year after
filing. Prior to this rule, in some of California's larger counties, a trial
typically did not occur until more than four years after the related complaint
had been filed. "Fast track" has accelerated costs and expenses of investigation
and defense, but has also led to more rapid settlements, judicial resolutions
and, the Company believes, overall cost reductions. The Company believes that it
has now realized virtually all of the benefits from the past tort reform
legislation and from the institution of "fast track."
Beginning in 1988, the Company implemented several changes to its claims
procedures including the establishment of increased levels of authority within
the Claims department for approval of reserves and settlement of claims. The
Company believes that these changes resulted in (i) earlier
36
<PAGE> 37
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
recognition of liability, and therefore higher case reserves, and (ii) faster
settlement of claims, ultimately resulting in lower indemnity payments and
reduced legal expenses.
The Company believes that a combination of the factors discussed above and
other factors have contributed to the recent redundancies in reserves
established by SCPIE for prior years. The original reserves were established
without full knowledge of the effect of these factors. Redundant reserves, which
have been released in every year since 1985, have contributed significantly to
reported earnings in recent years. The Company reduced reserves for prior years
by $59.7 million, $57.8 million and $60.4 million in the years ended December
31, 1996, 1995 and 1994, respectively. The Company cannot predict whether
similar redundancies will be experienced in future years. The Company continues
to establish its loss and LAE reserves at what it believes is the upper end of a
reasonable range of reserve estimates, but there is no assurance that such
reserves will ultimately prove to be redundant. The Company believes that some
reduction in the amount of the redundancies recently experienced is reasonably
likely. If such redundancies do not occur or loss and LAE experience does not
improve, the Company's net income could be significantly reduced or a net loss
could occur.
OPERATING EXPENSES The Company's planned expansion into other states and markets
may increase operating expense levels to achieve and service this expansion. The
Company believes that its relationship with SKA will increase its marketing
expenses, but it also believes that this relationship, if successful, will
reduce the need to make other significant expenditures in order to expand into
other states. Commissions for hospital and other healthcare provider liability
policies, which are sold on a brokerage basis through SKA and other brokers,
typically range from 7.5% to 15.0% of premiums, whereas the Company does not
incur commissions on products sold directly. To the extent that hospital and
other healthcare provider policies represent an increased percentage of the
Company's business in the future, expense ratios will increase.
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
RESULTS OF OPERATIONS
PREMIUMS EARNED Premiums earned increased approximately $4.1 million, or
3.5%, to $120.5 million in 1996 from $116.4 million in 1995. The increase was
principally due to a $3.7 million increase in assumed reinsurance premiums.
Medical malpractice premiums from physicians and medical groups were
approximately $112.7 million in 1996 compared to $113.3 million in 1995. An
average 4.4% increase in premium rates in effect during 1996 was offset by a
4.2% decrease in the average number of policies in force during 1996 as compared
to 1995. Hospital medical malpractice premiums were approximately $2.3 million
in 1996 compared to $1.3 million in 1995. Assumed reinsurance premiums were
approximately $4.5 million in 1996 compared to less than $1.0 million in 1995.
NET INVESTMENT INCOME Net investment income, after a $0.4 million interest
expense accrual for a federal income tax settlement, increased approximately
$0.4 million, or 0.1%, to $40.8 million in 1996 from $40.4 million in 1995.
Invested assets increased $22.9 million to $717.9 million in 1996 from $695.0
million at December 31, 1995. The average pre-tax yield on the investment
portfolio increased to 6.1% in 1996 compared to 5.9% in 1995.
REALIZED INVESTMENT GAINS AND OTHER REVENUE Realized investment gains were
approximately $11.7 million in 1996 compared to $8.0 million in 1995.
Approximately $11.2 million of the gains from 1996 resulted from the sale of
equity securities in connection with the Company's decision in the first quarter
to increase the focus of its investment portfolio on fixed-maturity securities.
The remainder were attributable to sales made in the fixed-maturity portion of
the investment portfolio to take advantage of more favorable yields or to
reposition the maturity of the portfolio.
LOSSES AND LAE Losses and LAE decreased $9.2 million, or 7.8%, to $108.8 million
in 1996 from $118.0 million in 1995. As a percentage of premiums earned, losses
and LAE decreased to 90.3% in 1996 from 101.4% for the same period in 1995. For
1996, the Company reduced loss and LAE reserves incurred in prior policy years
approximately $59.7 million as compared to a reserve reduction of $81.7 million
for 1995 for claims incurred in prior policy years. This reserve reduction of
$81.7 million was offset by a $23.9 million reserve increase for free tail
coverage to be provided by the Company to currently insured physicians at the
time of their death, disability or retirement. This increase was the result of a
refinement in the actuarial methodology used to calculate this reserve.
OTHER OPERATING EXPENSES Other operating expenses increased $1.7 million, or
13.7%, to $14.3 million in 1996 from $12.6 million in 1995. This increase was
principally attributable to increases in policy
37
<PAGE> 38
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
acquisition expenses and payroll/benefit expenses of $0.6 million and $1.3
million, respectively, offset partially by lower legal fees of $0.7 million. The
ratio of other operating expenses to premiums earned is referred to as the
expense ratio, which was 11.8% in 1996 and 10.8% in 1995.
POLICYHOLDER DIVIDENDS The governing board of the Exchange declared a final
dividend to members of the Exchange of record on November 5, 1996 who were also
members of the Exchange during policy years 1987 through 1992. Such dividend is
being paid in the form of premium credits during 1997. This dividend of $9.0
million (offset by a $0.6 million credit for forfeited dividends declared in
1995) was reflected as an expense for the year ended December 31, 1996.
Dividends declared in prior years have been accrued as an expense for the period
in which the related premiums were earned and not the year paid or declared.
Accordingly, there is no expense reflected for the comparable period in 1995.
FEDERAL INCOME TAXES Federal income taxes increased $1.6 million, or 16.0%, to
$11.7 million in 1996 from $10.1 million in 1995. The effective tax rate
decreased to 27.9% in 1996 from 29.2% in 1995, due primarily to an increase in
tax-exempt interest in 1996.
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994
PREMIUMS EARNED Premiums earned increased $4.7 million, or 4.2%, to $116.4
million in 1995 from $111.7 million in 1994. The increase was principally
attributable to an average 8.9% increase in premium rates in effect throughout
1995, which was partially offset by a 3.4% decrease in the average number of
policies in force during 1995. Medical malpractice premiums from physicians and
medical groups were approximately $113.3 million in 1995 compared to $109.7
million in 1994, while the Company had hospital medical malpractice premiums of
$1.3 million in 1995 compared to $0.3 million in 1994. Assumed reinsurance
premiums were less than $1.0 million in both years.
NET INVESTMENT INCOME Net investment income increased approximately $0.7
million, or 1.9%, to $40.4 million in 1995 from $39.7 million in 1994. Invested
assets increased by $58.1 million to $695.0 million for the year ended December
31, 1995 as compared to a $42.3 million decrease to $636.9 million for the year
ended December 31, 1994. The average pre-tax yield on the investment portfolio
was virtually unchanged at 5.9% in both 1995 and 1994. The increase in
investment income resulted from additional interest of approximately $1.9
million on a Federal income tax refund due the Company and was partially offset
by lower rates available on fixed-maturity investments purchased since 1994.
REALIZED INVESTMENT GAINS AND OTHER REVENUE Net realized gains were
approximately $8.0 million in 1995 compared to $0.5 million in 1994.
Approximately $4.6 million of the 1995 gains were net gains realized from the
sale of equity securities to take advantage of appreciation in the market price
of those securities. The remainder of the net gains were attributable to sales
made in the fixed-maturities portion of the investment portfolio to take
advantage of more favorable yields or to reposition the maturity of the
portfolio.
LOSSES AND LAE Losses and LAE increased $9.3 million, or 8.6%, to $118.0 million
in 1995 from $108.7 million in 1994. As a percentage of premiums earned, losses
and LAE increased to 101.4% in 1995 from 97.4% in 1994. In 1995, SCPIE increased
its prior accident years' reserves by $23.9 million for free tail coverage to be
provided by the Company to currently insured physicians at the time of their
death, disability or retirement. The increase was the result of a refinement in
the actuarial methodology used to calculate this reserve. This additional
expense was more than offset by a decrease of approximately $81.7 million in
loss and LAE reserves in 1995 for claims incurred in prior accident years,
compared to a reserve decrease of $60.4 million in 1994 for claims incurred in
prior accident years.
OTHER OPERATING EXPENSES Other operating expenses increased $0.8 million, or
6.1%, to $12.6 million in 1995 from $11.8 million in 1994. This increase was
principally attributable to legal and consulting fees incurred in 1995 relating
to an employment law matter in litigation, which the Company successfully
defended, and a small increase in personnel and compensation levels. The expense
ratio was 10.8% in 1995 and 10.6% in 1994.
38
<PAGE> 39
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
FEDERAL INCOME TAXES Federal income taxes increased $0.9 million, or 9.2%, to
$10.1 million in 1995 from $9.2 million in 1994. The effective tax rate was
29.2% in both years.
YEAR ENDED DECEMBER 31, 1994 COMPARED TO YEAR ENDED DECEMBER 31, 1993
PREMIUMS EARNED Premiums earned decreased by $1.5 million, or 1.4%, to $111.7
million in 1994 from $113.2 million in 1993. The decrease in premiums earned is
due to the fact that reinsurance premiums ceded in 1994 were approximately $7.5
million, while they were negligible in 1993. Reinsurance premiums in 1993
included an offset of $7.2 million in profits realized on the 1993 commutation
of certain reinsurance by SCPIE attributable to prior years. There was no
comparable offset in 1994. Direct premiums written in 1994 increased by
approximately $7.5 million, or 6.7%, to $120.0 million in 1994 from $112.5
million in 1993, due primarily to an average 9.0% increase in premium rates in
effect during 1994, which was partially offset by a 3.3% decrease in the average
number of policies in force during 1994.
NET INVESTMENT INCOME Net investment income was virtually unchanged in 1994 as
compared to 1993, remaining at approximately $39.7 million. Invested assets
decreased $42.3 million to $636.9 million for the year ended December 31, 1994
as compared to a $50.0 million increase to $679.3 million for the year ended
December 31, 1993. The average pre-tax yield on the investment portfolio
decreased to 5.9% in 1994 from 6.2% in 1993.
REALIZED INVESTMENT GAINS AND OTHER REVENUE Net realized gains were $0.5 million
in 1994 compared to $16.0 million in 1993. The Company realized significant
gains in 1993 primarily due to changes in investment mix that occurred as the
Company changed its investment allocation in response to market conditions and
the Company's expected Federal income tax position based on its underwriting
results. These changes were in the fixed-maturities portion of the portfolio,
which produced a net gain of $13.2 million. Sales of equity securities produced
a gain of approximately $2.8 million.
LOSSES AND LAE Losses and LAE decreased $16.7 million, or 13.3%, to $108.7
million in 1994 from $125.4 million in 1993. As a percentage of premiums earned,
losses and LAE also decreased to 97.4% in 1994 from 110.7% in 1993. In 1994,
there was a decrease of approximately $60.4 million in estimated losses and LAE
incurred in prior years compared to a decrease of $43.4 million in 1993. Both
years reflect favorable changes in reserve estimates made in prior years, as
more experience became available for analysis by management.
OTHER OPERATING EXPENSES Other operating expenses increased $2.1 million, or
21.7%, to $11.8 million in 1994 from $9.7 million in 1993. This increase was
attributable to general increases in most expense categories, as SCPIE expanded
into hospital liability insurance and other products. The expense ratio was
10.6% in 1994 and 8.6% in 1993.
FEDERAL INCOME TAXES Federal income taxes increased $0.6 million, or 6.9%, to
$9.2 million in 1994 from $8.6 million in 1993. The effective tax rate increased
to 29.2% in 1994 from 25.3% in 1993, principally due to an increase in the
Federal income tax marginal rate to 35.0% in 1994 from 34.0% in 1993.
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. The Company has also paid significant dividends,
in the form of premium credits, to its members in each year since 1980. The
Company paid $9.9 million, $9.5 million and $11.2 million of such dividends
during the years ended December 31, 1996, 1995 and 1994, respectively. The Board
of Governors has declared a final dividend to members of the Exchange, amounting
to $9.0 million, which will be paid principally in the form of premium credits
during 1997. Except for this final dividend, after the Reorganization, the
Company will cease paying such premium credit dividends to its policyholders.
SCPIE has consistently experienced positive cash flow from operations. 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 year to year. Cash provided by operating activities for SCPIE, before the
payment of dividends to policyholders, was $39.8 million in 1996, an increase of
$18.8 million compared to 1995. The higher amount of cash flow from operations
in 1996 was due to a refund of federal income tax and interest of $25.9 million
in settlement of a tax dispute for the 1985 through 1988 tax years.
39
<PAGE> 40
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
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
8.0% of the total market value of its investments. Accordingly, the Company's
portfolio of unaffiliated equity securities was reduced from $61.1 million at
December 31, 1995 to $20.0 million at December 31, 1996. The Company plans to
continue this focus on fixed-maturity securities for the indefinite future. The
Company has made limited investments in real estate, which is used almost
entirely in the Company's operating activities, with the remainder leased to
third parties.
The Company maintains a portion of its investment portfolio in high-quality,
short-term securities to meet short-term operating liquidity requirements,
including the payment of losses and LAE. Short-term investments totaled $29.6
million, or 4.1% of invested assets, at December 31, 1996. The Company believes
that all of its short-term and fixed-maturity securities are readily marketable.
SCPIE Holdings is an insurance holding company whose assets consist of all of
the capital stock of its insurance company subsidiaries and approximately $36.0
million of net proceeds from its January 1997 common stock offering, after
payment of expenses of the Reorganization. Of the proceeds, SCPIE has
contributed $25.0 million to one of its insurance company subsidiaries and will
contribute approximately $7.5 million to another insurance company subsidiary.
Its principal sources of funds will be 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 year, 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 1997 without prior regulatory approval is
approximately $32.7 million.
The Company is seeking to obtain a new bank credit facility in the principal
amount of approximately $30.0 million from a large lender. The Company expects
that this facility will be an unsecured revolving line of credit to be used by
the Company for general corporate purposes. There can be no assurance that the
Company will be able to obtain this new bank facility, or any bank facility, on
terms that are satisfactory to the Company.
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.
The Company has no planned material expenditures for property or equipment.
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.
40
<PAGE> 41
ITEM 8. FINANCIAL STATEMENTS
The Company's Financial Statements, including supplementary data, are
set forth in the "Index" on page 44 hereof.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information regarding Directors of the Company is incorporated by
reference to the section entitled "Election of Directors" in the Company's
definitive proxy statement to be filed with the SEC in connection with the
Annual Meeting of Stockholders to be held on May 8, 1997 (the "Proxy
Statement"). Information regarding Executive Officers is set forth in Item 1 of
Part I of this Form 10-K report under the caption "Executive Officers."
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference to
the Proxy Statement under the heading "Executive Compensation."
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated by reference to
the Proxy Statement under the heading "Stock Ownership of Directors and
Executive Officers."
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated by reference to
the Proxy Statement under the heading "Certain Relationships and Related
Transactions."
41
<PAGE> 42
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) and (a)(2) and (d) FINANCIAL STATEMENTS AND SCHEDULE. Reference
is made to the "Index--Financial Statements
and Financial Statement Schedule--Annual
Report on Form 10-K" filed on page 44 of this
Form 10-K report.
(a) (3) Exhibits:
Number Document
- ------ --------
2. Amended and Restated Plan and Agreement of Merger by and among
SCPIE Holdings Inc., SCPIE Indemnity Company and Southern
California Physicians Insurance Exchange dated August 8, 1996,
as amended December 19, 1996.**
3.1 Amended and Restated Certificate of Incorporation.**
3.2 Amended and Restated Bylaws.**
10.1 Amended and Restated Employment Agreement dated January 2, 1997,
between SCPIE Management Company and Donald J. Zuk.**
10.2 Operational Agreement between Southern California Physicians
Insurance Exchange and Sullivan, Kelly and Associates, Inc.
dated August 25, 1995.**
10.2.1 Amendment to Operational Agreement between Southern California
Physicians Insurance Exchange and Sullivan, Kelly and
Associates, Inc. dated August 1, 1996.**
10.3 Letter of Credit Agreement dated January 11, 1995 between First
Interstate Bank and Southern California Physicians Insurance
Exchange in the amount of $27,368,087.**
10.4 Letter of Credit Agreement dated January 26, 1995 between First
Interstate Bank and Southern California Physicians Insurance
Exchange for a $5,000,000 Secured Standby Letter of Credit
Facility.**
10.5 First Excess of Loss Treaty No. 01-95-0020 with various
subscribing reinsurers.**
10.6 Second Excess of Loss Treaty No. 01-95-0021 with various
subscribing reinsurers.**
10.7 Third Excess of Loss Treaty No. 01-95-0022 with various
subscribing reinsurers.**
10.8 Fourth Excess of Loss Treaty No. 01-95-0599 with various
subscribing reinsurers.**
10.9 Per Policy Excess of Loss Treaty No. 01-94-0365 with various
subscribing reinsurers.**
10.10 Reinstatement/Retroactive/Aggregate Extension Excess of Loss
Treaty No. 01-95-0879 with various subscribing reinsurers.**
10.11 Medical Malpractice Surplus Reinsurance Treaty between SCPIE and
Lloyd's Syndicate No. 1010 and Syndicates Comprising 1007 Group
underwritten for by CW Spreckley, Esq. and others, effective
date January 1, 1996, Treaty No. 01-95-0374.**
10.12 Physician Medical Malpractice/Hospital Professional Liability
Quota Share Reinsurance Agreement between Hannover
Ruckversicherungs, Aktiengesellschaft/Eisen Und Stahl
Ruckversicherungs-Aktiengesellschaft, Hannover, Germany, and
various subscribing reinsurers, effective date January 1, 1995,
Treaty No. 01-95-0694.**
42
<PAGE> 43
10.13 First Excess of Loss Treaty No. 01-96-0020 with various
subscribing reinsurers.**
10.14 Second Excess of Loss Treaty No. 01-96-0021 with various
subscribing reinsurers.**
10.15 Third Excess of Loss Treaty No. 01-96-0022 with various
subscribing reinsurers.**
10.16 Fourth Excess of Loss Treaty No. 01-96-0599 with various
subscribing reinsurers.**
10.17 Per Policy Excess of Loss Treaty No. 01-96-0365 with various
subscribing reinsurers, reference is made to Exhibit 10.9.**
10.18 Reinstatement/Retroactive/Aggregate Extension Excess of Loss
Treaty No. 01-96-0879 with various subscribing reinsurers,
reference is made to Exhibit 10.10.**
10.19 Quota Share Reinsurance Agreement, Treaty No. 01-96-0922.**
10.20 Cover Note for First Excess of Loss Treaty No. 01-97-0020 with
various subscribing reinsurers.
10.21 Cover Note for Second Excess of Loss Treaty No. 01-97-0021 with
various subscribing reinsurers.
10.22 Cover Note for Third Excess of Loss Treaty No. 01-97-0022 with
various subscribing reinsurers.
10.23 Cover Note for Fourth Excess of Loss Treaty No. 01-97-0599 with
various subscribing reinsurers.
10.24 Cover Note for Per Policy Excess of Loss Treaty No. 01-97-0365
with various subscribing reinsurers.
10.25 Cover Note for Reinstatement/Retroactive/Aggregate Extension
Excess of Loss Treaty No. 01-97-0879 with various subscribing
reinsurers.
10.26 Cover Note for Quota Share Reinsurance Treaty No. 1-97-0922.
10.27 SCPIE Management Company Retirement Income Plan, as amended and
restated, effective January 1, 1989.**
10.28 Supplemental Employee Retirement Plan for Selected Employees of
SCPIE Management Company dated January 1, 1995.**
10.29 Retirement Plan for Outside Governors and Affiliated Directors,
effective January 1, 1994 as amended.**
10.30 The SMC Cash Accumulation Plan, dated July 1, 1991, as
amended.**
10.31 Inter-Company pooling Agreement as of April 1, 1996.**
10.32 Form of Indemnification Agreement.**
11. Statement re computation of per share earnings.**
21. Subsidiaries of the registrant.**
27. Financial Data Schedule.
- -----------
(**) Previously filed as Exhibits to the Company's Registration Statement on
Form S-1 (No. 33-4450), declared effective by the SEC on January 29, 1997 and
incorporated herein by this reference.
(b) Reports on Form 8-K:
None.
43
<PAGE> 44
SCPIE HOLDINGS INC.
FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE
ANNUAL REPORT ON FORM 10-K
-------------
INDEX
<TABLE>
<CAPTION>
PAGES
-----
<S> <C>
Report of Independent Auditors . . . . . . . . . . . . . . . . . . . . .
Financial Statements:
Balance Sheets as of December 31, 1996 and 1995 . . . . . . . . . . .
Statements of Income for the years ended
December 31, 1996, 1995 and 1994 . . . . . . . . . . . . . . . . . .
Statements of Cash Flows for the years ended
December 31, 1996, 1995 and 1994 . . . . . . . . . . . . . . . . . .
Statements of Policyholders' Equity for the years ended
December 31, 1996, 1995 and 1994 . . . . . . . . . . . . . . . . . .
Notes to Financial Statements . . . . . . . . . . . . . . . . . . . .
Schedule II - Condensed Financial Information of Registrant . . . . . .
</TABLE>
All other schedules for which provision is made in the applicable
accounting regulation of the Securities and Exchange Commission are not
required under the related instructions or are inapplicable and therefore have
been omitted.
44
<PAGE> 45
REPORT OF INDEPENDENT AUDITORS
BOARD OF DIRECTORS SCPIE HOLDINGS INC.
We have audited the accompanying balance sheets of SCPIE Holdings Inc. as
of December 31, 1996 and 1995, and the related statements of income,
policyholders' equity and cash flows for each of the three years in the period
ended December 31, 1996. Our audits also included the financial statement
schedule listed in the Index at Item 14(a). These financial statements and
schedule are the responsibility of the Company's management. Our responsibility
is to express an opinion on the financial statements and schedule based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of SCPIE Holdings Inc. at
December 31, 1996 and 1995, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1996, in conformity
with generally accepted accounting principles. Also, in our opinion, the related
financial statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
ERNST & YOUNG LLP
Los Angeles, California
February 28, 1997
45
<PAGE> 46
SCPIE Holdings Inc.
BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31, 1996 1995
- ----------------------------------------------------------------------
ASSETS
<S> <C> <C>
Securities available-for-sale (Note 2):
Fixed-maturity investments, at fair value
(amortized cost: 1996 - $660,820;
1995 - $582,115) $668,367 $606,155
Equity investments, at fair value
(cost: 1996 - $15,555; 1995 - $49,396) 19,977 61,083
--------------------
Total securities available-for-sale 688,344 667,238
Short-term investments 29,566 27,783
--------------------
Total investments 717,910 695,021
Cash 4,212 3,053
Accrued investment income 11,198 9,835
Reinsurance recoverable (Note 4) 19,266 19,560
Federal income taxes recoverable (Note 5) -- 20,363
Deferred federal income taxes (Note 5) 20,221 11,992
Deferred policy acquisition costs 591 468
Property and equipment, net 19,084 19,145
Other assets 12,673 1,921
--------------------
Total assets $805,155 $781,358
====================
LIABILITIES
Reserves:
Losses and loss adjustment expenses (Note 3) $459,567 $466,187
Unearned premiums 25,297 19,916
--------------------
Total reserves 484,864 486,103
Policyholders' dividends payable 7,723 8,646
Other liabilities 24,001 12,790
--------------------
Total liabilities 516,588 507,539
Commitments and contingencies (Note 8)
POLICYHOLDERS' EQUITY
Surplus 280,788 250,596
Net unrealized appreciation on securities
available-for-sale, net of deferred taxes 7,779 23,223
--------------------
Total policyholders' equity 288,567 273,819
--------------------
Total liabilities and policyholders' equity $805,155 $781,358
====================
</TABLE>
See accompanying notes.
46
<PAGE> 47
SCPIE Holdings Inc.
STATEMENTS
OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1996 1995 1994
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C>
REVENUES:
Premiums earned (Note 4) $120,484 $116,354 $111,659
Net investment income (Note 2) 40,769 40,424 39,663
Realized investment gains (Note 2) 11,738 7,950 548
Other revenue 375 281 207
--------------------------------------
Total revenues 173,366 165,009 152,077
EXPENSES:
Losses and loss adjustment expenses (Note 3) 108,797 118,023 108,720
Other operating expenses 14,276 12,561 11,844
--------------------------------------
Total expenses 123,073 130,584 120,564
--------------------------------------
Income before policyholder dividends
and federal income taxes 50,293 34,425 31,513
Policyholder dividends 8,436 -- --
Federal income taxes (Note 5) 11,665 10,056 9,212
--------------------------------------
Net income $ 30,192 $ 24,369 $ 22,301
======================================
Pro forma net income per share of
common stock (Note 1) $ 3.02 $ 2.44 $ 2.23
</TABLE>
STATEMENTS OF
POLICYHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
UNREALIZED
APPRECIATION TOTAL
(DEPRECIATION) POLICYHOLDERS'
OF INVESTMENTS SURPLUS EQUITY
- -------------------------------------------------------------------------------------
<S> <C> <C> <C>
BALANCE AT JANUARY 1, 1994 $ 23,473 $203,926 $ 227,399
Net income -- 22,301 22,301
Net unrealized depreciation (40,164) -- (40,164)
----------------------------------------------
BALANCE AT DECEMBER 31, 1994 (16,691) 226,227 209,536
Net income -- 24,369 24,369
Net unrealized appreciation 39,914 -- 39,914
----------------------------------------------
BALANCE AT DECEMBER 31, 1995 23,223 250,596 273,819
Net income -- 30,192 30,192
Net unrealized depreciation (15,444) -- (15,444)
----------------------------------------------
BALANCE AT DECEMBER 31, 1996 $ 7,779 $280,788 $ 288,567
==============================================
</TABLE>
See accompanying notes.
47
<PAGE> 48
SCPIE Holdings Inc.
STATEMENTS
OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1996 1995 1994
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $ 30,192 $ 24,369 $ 22,301
Adjustments to reconcile net income to net
cash provided by operating activities:
Unpaid losses and loss adjustment expenses,
and reinsurance recoverables (6,301) (2,796) (21,402)
Accrued investment income (1,363) 1,301 (98)
Provision for deferred federal income taxes 80 158 6,050
Unearned premiums 5,381 (2,012) 1,398
Policyholders' dividends payable (923) (9,501) (11,179)
Realized investments gains (11,738) (7,950) (548)
Provisions for amortization and depreciation 2,837 4,504 4,940
Accrued expenses and other liabilities 11,212 430 4,717
Changes in other assets 9,468 3,029 (2,496)
---------------------------------------------
Net cash provided by operating activities 38,845 11,532 3,683
INVESTING ACTIVITIES
Purchases -- fixed maturities (480,401) (269,149) (193,618)
Sales -- fixed maturities 375,877 235,332 174,705
Maturities -- fixed maturities 23,571 15,909 15,211
Purchases -- equities (5,445) (37,033) (42,581)
Sales -- equities 50,495 37,510 35,901
Change in short-term investments, net (1,783) 3,772 8,230
---------------------------------------------
Net cash used in investing activities (37,686) (13,659) (2,152)
---------------------------------------------
Increase (decrease) in cash 1,159 (2,127) 1,531
Cash at beginning of year 3,053 5,180 3,649
---------------------------------------------
Cash at end of year $ 4,212 $ 3,053 $ 5,180
=============================================
</TABLE>
See accompanying notes.
48
<PAGE> 49
SCPIE Holdings Inc.
NOTES TO
FINANCIAL STATEMENTS
NOTE 1.
NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying 1996 financial statements include the accounts and
operations, after intercompany eliminations, of the Southern California
Physicians Insurance Exchange (the Exchange) and its wholly-owned subsidiaries,
principally SCPIE Holdings Inc. (SCPIE Holdings), SCPIE Indemnity Company (SCPIE
Indemnity), American Healthcare Indemnity Company (AHI), FG Casualty Company (FG
Casualty) and SCPIE Management Company (SMC), collectively, the Company.
On January 29, 1997, the Exchange consummated its plan and agreement of merger
(the Merger Agreement) whereby the Exchange reorganized from a reciprocal
insurer to a stock insurance company and became a wholly-owned subsidiary of
SCPIE Holdings (the Reorganization). Pursuant to the Reorganization, the
Exchange merged with and into SCPIE Indemnity, a California stock insurance
company and a wholly-owned subsidiary of SCPIE Holdings, the surviving
corporation of the Reorganization. The assets and liabilities of the Exchange
that were merged into SCPIE Indemnity were accounted for at historical cost in a
manner similar to that in a pooling of interests.
The principal purpose of the Reorganization is to improve SCPIE's access to
the capital markets and to raise capital to permit the growth of existing
business and develop new business opportunities in the professional liability
insurance industry. The Reorganization also provided members of the Exchange
with shares of common stock in SCPIE Holdings.
Concurrent with the Reorganization, SCPIE Holdings completed an initial public
offering which generated net proceeds to SCPIE Holdings of approximately $36.0
million.
SCPIE Holdings acquired the outstanding stock of AHI (formerly FG Insurance
Corporation) and FG Casualty, both inactive property/casualty insurance
companies for $12.5 million in March 1996. The transaction was accounted for as
a purchase and the excess of the purchase price over the net book value ($5.6
million) recorded as goodwill and amortized over a period of 10 years. SCPIE
Holdings has utilized these companies to enter geographic markets outside
California.
The 1995 and 1994 financial statements have been combined using the
consolidated balance sheets and results of operations of the Exchange and the
Organization of Southern California Physicians (OSCAP). OSCAP was the holding
company of SMC, the Exchange's attorney-in-fact. All transactions between the
Exchange and OSCAP have been eliminated in the preparation of the combined
financial statements. On July 12, 1996, OSCAP was liquidated into the Exchange
and SMC and its subsidiaries became subsidiaries of the Exchange.
The Company writes principally professional liability insurance for
physicians, oral and maxillofacial surgeons, hospitals and other healthcare
providers. Substantially all of the Company's coverage is written on a "claims
made and reported" basis. Generally, coverage is provided only for claims which
are first reported to the Company during the insured's coverage period and which
arise from occurrences during the insured's coverage period. The Company also
makes "tail" coverage available for purchase by policyholders in order to cover
claims which arise from occurrences during the insured's coverage period, but
which are first reported to the Company after the insured's coverage period and
during the term of the applicable tail coverage.
The preparation of financial statements of insurance companies requires
management to make estimates and assumptions that affect amounts reported in the
financial statements and accompanying notes. Such estimates and assumptions
could change in the future as more information becomes known which could impact
the amounts reported and disclosed herein.
The accompanying financial statements have been prepared in conformity with
generally accepted accounting principles which differ from statutory accounting
practices prescribed or permitted by
49
<PAGE> 50
SCPIE Holdings Inc.
NOTES TO
FINANCIAL STATEMENTS
(CONTINUED)
regulatory authorities. The significant accounting policies followed by the
Company that materially affect financial reporting are summarized below:
INVESTMENTS
Recognizing the need for the ability to respond to changes in market conditions
and in tax positions, the Company has designated its entire investment portfolio
as available for sale. The Company has no securities classified as "trading" or
"held-to-maturity." Transfers between categories are severely restricted.
Changes in fair values of available-for-sale securities, after adjustment of
deferred income taxes, are reported as unrealized appreciation or depreciation
directly in policyholders' equity and, accordingly, have no effect on net
income.
For the mortgage-backed bond portion of the fixed-maturity securities
portfolio, the Company recognizes income using a constant effective yield based
on anticipated prepayments and the estimated economic life of securities. When
actual prepayments differ significantly from anticipated prepayments, the
effective yield is recalculated to reflect actual payments to date and
anticipated future payments. The net investment in the security is adjusted to
the amount that would have existed had the new effective yield been applied
since the acquisition of the security. That adjustment is included in net
investment income.
Premiums and discounts on investments are amortized to investment income using
the interest method over the contractual lives of the investments. Short-term
investments are carried at cost, which approximates fair value. Realized
investment gains and losses are included as a component of revenues based on
specific identification of the investment sold.
DEFERRED POLICY ACQUISITION COSTS
Premium taxes are capitalized and amortized as premiums are earned over the
terms of the related policies. The deferred policy acquisition costs are
amortized over the effective period of the related policies.
PREMIUMS
Premiums are recognized as earned on a pro rata basis over the terms of the
respective policies.
RESERVES FOR LOSSES AND LOSS ADJUSTMENT EXPENSES
Reserves for losses and loss adjustment expenses (LAE) represent the estimated
liability for reported claims plus those incurred but not yet reported and the
related estimated adjustment expenses. The reserve for unpaid claims and related
adjustment expenses is determined using case-basis evaluations and statistical
analyses and represents estimates of the ultimate cost of all unpaid losses
incurred through December 31 of each year. Although considerable variability is
inherent in such estimates, management believes that the reserve for unpaid
losses and related LAE is adequate. The estimates are continually reviewed and
adjusted as necessary; such adjustments are included in current operations and
are accounted for as changes in estimates.
50
<PAGE> 51
SCPIE Holdings Inc.
REINSURANCE
Reinsurance premiums, losses and loss adjustment expenses are accounted for on
bases consistent with those used in accounting for the original policies issued
and the terms of the reinsurance contracts.
DIVIDENDS TO POLICYHOLDERS
Dividends to policyholders are accrued during the period in which the related
premiums are earned. Estimates of policyholder dividends are reviewed and
adjusted as necessary; such adjustments are included in current operations and
accounted for as changes in estimates. In the second quarter of 1996, the
Company estimated an additional $9,000,000 of policyholder dividends would be
paid due to favorable loss experience related to policy years 1987 through 1992.
Except for this final dividend, after the Reorganization, the Company will
cease paying such dividends to its policyholders.
PROPERTY AND EQUIPMENT
Property and equipment, principally the Company's home office building, are
recorded at cost and depreciated principally under the straight-line method over
the useful life of the assets.
CREDIT RISK
Financial instruments which potentially subject the Company to concentrations of
credit risk consist principally of temporary cash investments and fixed
maturities. The Company places its temporary cash investments with high-credit
quality financial institutions and limits the amounts of credit exposure to any
one financial institution. Concentrations of credit risk with respect to fixed
maturities are limited due to the large number of such investments and their
distributions across many different industries and geographics.
Reinsurance is placed with a number of individual companies and syndicates at
Lloyd's of London to avoid concentration of credit risk. For the year ended
December 31, 1996, approximately 62.0% of total reinsurance premiums ceded were
placed with reinsurance companies with an A.M. Best or Insurance Solvency
International rating of A or better, including 41.4% with Hannover
Ruickversicherungs and 29.1% with Lloyd's of London syndicates. No other single
reinsurer's percentage participation in 1996 exceeded 3.7%.
SEGMENT INFORMATION
The Company operates in the United States of America and in only one reportable
industry segment which provides professional liability insurance for physicians,
oral and maxillofacial surgeons, hospitals and other healthcare providers
principally in California.
PRO FORMA NET INCOME PER SHARE OF COMMON STOCK
Pro forma net income per common share generated in the statements of income
gives effect in all periods to the Reorganization and the allocation of
10,000,000 shares of SCPIE Holdings common stock to eligible members of the
Exchange.
51
<PAGE> 52
SCPIE Holdings Inc.
NOTES TO
FINANCIAL STATEMENTS
(CONTINUED)
NOTE 2.
INVESTMENTS
The Company's investments in available-for-sale securities are summarized as
follows:
<TABLE>
<CAPTION>
COST OR GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
(IN THOUSANDS) COST GAINS LOSSES VALUE
- ---------------------------------------------------------------------------------------------
December 31, 1996
<S> <C> <C> <C> <C>
Fixed-maturity securities:
Bonds:
U.S. Government and Agencies $272,315 $ 6,576 $1,962 $276,929
State, municipalities and
political subdivisions 300,347 4,788 1,674 303,461
Mortgage-backed securities,
U.S. Government 83,031 593 774 82,850
Corporate 5,027 -- -- 5,027
Other 100 -- -- 100
-----------------------------------------------------
Total fixed-maturity securities 660,820 11,957 4,410 668,367
Common stocks 15,555 4,864 442 19,977
-----------------------------------------------------
Total $676,375 $16,821 $4,852 $688,344
=====================================================
</TABLE>
<TABLE>
<CAPTION>
COST OR GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
(IN THOUSANDS) COST GAINS LOSSES VALUE
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
December 31, 1995
Fixed-maturity securities:
Bonds:
U.S. Government and Agencies $304,091 $15,458 $ 430 $319,119
State, municipalities and
political subdivisions 149,693 5,569 144 155,118
Mortgage-backed securities,
U.S. Government 80,279 1,896 277 81,898
Corporate 46,951 2,035 97 48,889
Other 105 -- -- 105
Redeemable preferred stocks 996 30 -- 1,026
-----------------------------------------------------
Total fixed-maturity securities 582,115 24,988 948 606,155
Common stocks 49,396 13,530 1,843 61,083
-----------------------------------------------------
Total $631,511 $38,518 $2,791 $667,238
=====================================================
</TABLE>
The fair values for fixed-maturity securities are based on quoted market
prices, where available. For fixed-maturity securities not actively traded, fair
values are estimated using values obtained from independent pricing services.
The fair values for equity securities are based on quoted market prices.
52
<PAGE> 53
The amortized cost and fair value of the Company's investments in
fixed-maturity securities at December 31, 1996, are summarized by stated
maturities as follows:
<TABLE>
<CAPTION>
AMORTIZED FAIR
(IN THOUSANDS) COST VALUE
- ----------------------------------------------------------------------
<S> <C> <C>
Years to maturity:
One or less $2,105 $2,105
After one through five 63,297 64,009
After five through ten 219,032 225,358
After ten 293,355 294,045
Mortgage-backed securities 83,031 82,850
-------- --------
Totals $660,820 $668,367
======== ========
</TABLE>
The foregoing data is based on the stated maturities of the securities. Actual
maturities will differ for some securities because borrowers may have the right
to call or prepay obligations.
The ratings of the Company's fixed-maturity securities at December 31, 1996,
using Moody's and Standard & Poor's rating service, are summarized as follows:
<TABLE>
<S> <C>
AAA 72.7%
AA 18.9%
A 7.6%
Not rated .8%
-----
100.0%
=====
</TABLE>
Major categories of the Company's investment income are summarized as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS) YEAR ENDED DECEMBER 31, 1996 1995 1994
- -----------------------------------------------------------------------------------
<S> <C> <C> <C>
Fixed-maturity investments $40,594 $36,987 $37,968
Equity investments 994 1,627 1,148
Other 1,213 4,250 2,862
-------------------------------------
Total investment income 42,801 42,864 41,978
Investment expenses 2,032 2,440 2,315
-------------------------------------
Net investment income $40,769 $40,424 $39,663
=====================================
</TABLE>
Realized gains and losses from sales of investments are summarized as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS) YEAR ENDED DECEMBER 31 1996 1995 1994
- ----------------------------------------------------------------------------------
<S> <C> <C> <C>
Fixed-maturity investments:
Gross realized gains $ 6,419 $4,946 $3,440
Gross realized losses 5,880 1,558 3,186
-----------------------------------
Net realized gains $ 539 $3,388 $ 254
===================================
Equity investments:
Gross realized gains $13,028 $6,649 $2,430
Gross realized losses 1,829 2,087 2,136
-----------------------------------
Net realized gains $11,199 $4,562 $ 294
===================================
</TABLE>
53
<PAGE> 54
SCPIE Holdings Inc.
NOTES TO
FINANCIAL STATEMENTS
(CONTINUED)
The change in the Company's unrealized appreciation (depreciation) on
fixed-maturity securities was $16,493,000, $52,870,000 and ($58,915,000) for the
years ended December 31, 1996, 1995 and 1994, respectively; the corresponding
amounts for equity securities were $7,265,000, $8,536,000 and ($2,877,000).
At December 31, 1996, the Company's investments in fixed-maturity securities
with a carrying amount of $21,934,000 were on deposit with state insurance
departments to satisfy regulatory requirements.
No investment in any person or its affiliates exceeded 10% of the Company's
policyholders' equity at December 31, 1996.
NOTE 3.
LOSSES AND LOSS ADJUSTMENT EXPENSES
The following table provides a reconciliation of the beginning and ending
reserve balances, net of reinsurance recoverable, for 1996, 1995 and 1994.
<TABLE>
<CAPTION>
(IN THOUSANDS) 1996 1995 1994
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Reserve for losses and LAE, net of related
reinsurance recoverable, at beginning of year $ 446,627 $ 449,566 $ 472,129
Provision for losses and LAE for claims occurring
in the current year, net of reinsurance 168,545 175,856 169,143
Decrease in estimated losses and LAE for claims
occurring in prior years, net of reinsurance (59,748) (57,833) (60,423)
---------------------------------------------
Incurred losses during the year, net of reinsurance 108,797 118,023 108,720
Deduct losses and LAE payments for claims,
net of reinsurance, occurring during:
Current year 13,274 11,481 10,178
Prior years 101,849 109,481 121,105
---------------------------------------------
115,123 120,962 131,283
Reserve for losses and LAE, net of related
reinsurance recoverable, at end of year 440,301 446,627 449,566
Reinsurance recoverable for losses and LAE,
at end of year 19,266 19,560 19,177
---------------------------------------------
Reserves for losses and LAE, gross of
reinsurance recoverable, at end of year $ 459,567 $ 466,187 $ 468,743
=============================================
</TABLE>
The Company's reserves for unpaid losses and LAE, net of related reinsurance
recoverable, at December 31, 1995, 1994 and 1993, were decreased in the
following year by $59,748,000, $57,833,000 and $60,423,000, respectively, for
claims that had occurred on or prior to those balance sheet dates. Those
redundancies resulted primarily from settling case-basis reserves established in
prior years for amounts that were less than expected. The 1995 redundancies were
offset, in part, by a $23,900,000 increase in the loss reserves carried for
physicians who receive free tail coverage in the event of death, disability or
retirement from the medical profession. The increase was the result of a
refinement in the actuarial methodology used to calculate the reserve for this
tail coverage.
The anticipated effect of inflation is implicitly considered when estimating
liabilities for losses and LAE. While anticipated price increases due to
inflation are considered in estimating the ultimate claim costs, the increase in
average severities of claims is caused by a number of factors that vary with the
individual type of insurance written. Future average severities are projected
based on historical trends adjusted for implemented changes in underwriting
standards, policy provisions, and general economic trends. Those anticipated
trends are monitored based on actual development and are modified if necessary.
54
<PAGE> 55
SCPIE Holdings Inc.
NOTE 4.
REINSURANCE
Certain premiums and benefits are ceded to other insurance companies under
various reinsurance agreements. These reinsurance agreements provide the Company
with increased capacity to write additional risks and maintain its exposure to
loss within its capital resources. Amounts recoverable from reinsurers are
estimated in a manner consistent with the claim liability associated with the
reinsured policy.
Reinsurance contracts do not relieve the Company from its obligations to
policyholders. The failure of reinsurers to honor their obligations could result
in losses to the Company; consequently, allowances are established for amounts
deemed uncollectible. The Company evaluates the financial condition and economic
characteristics of its reinsurers to minimize its exposure to significant losses
from reinsurer insolvencies.
The effect of assumed and ceded reinsurance on premiums is summarized in the
following table.
<TABLE>
<CAPTION>
(IN THOUSANDS) 1996 1995 1994
----------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, WRITTEN EARNED WRITTEN EARNED WRITTEN EARNED
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Direct $125,635 $124,283 $122,277 $124,118 $120,024 $118,449
Assumed 8,922 4,497 780 780 736 736
Ceded 8,239 8,294 8,544 8,544 7,526 7,526
----------------------------------------------------------------------------------------
Net premiums $126,318 $120,484 $114,513 $116,354 $113,234 $111,659
========================================================================================
</TABLE>
Reinsurance ceded reduced losses and loss adjustment expenses incurred by
$866,000 in 1996, $1,402,000 in 1995 and $3,219,000 in 1994.
In November 1996, the Company entered into a six-year agreement with a third
party whereby the Company provided a $5,450,000 letter of credit in exchange for
future gains or losses based on the underwriting index of a reinsurance
portfolio. The portfolio is composed of worldwide geographically dispersed
catastrophe excess of loss treaty reinsurance business. The Company will also
receive semiannual payments based on its notional amount ($5,000,000) at a rate
determined annually. On an annual basis, if the combined ratio of the portfolio
is below a stipulated underwriting index amount, the Company will recognize a
gain; if the combined ratio is between two stipulated underwriting index
amounts, the Company will not recognize a gain or loss; and, if the combined
ratio is greater than a stipulated underwriting index amount, the Company will
recognize a loss limited to its notional value plus any interest earned during
the agreement. At December 31, 1996, the amounts recorded in the financial
statements related to this agreement are not material.
NOTE 5.
FEDERAL INCOME TAXES
The components of the federal income tax provision in the accompanying
statements of income are summarized as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS) YEAR ENDED DECEMBER 31 1996 1995 1994
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Current $ 11,585 $9,898 $3,162
Deferred 80 158 6,050
-------------------------------------
Total $ 11,665 $10,056 $ 9,212
=====================================
</TABLE>
55
<PAGE> 56
SCPIE Holdings Inc.
NOTES TO
FINANCIAL STATEMENTS
(CONTINUED)
A reconciliation of income tax computed at the federal statutory tax rate to
total income tax expense is as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS) YEAR ENDED DECEMBER 31 1996 1995 1994
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Federal income tax at 35% $ 14,650 $ 12,049 $ 11,029
Increase (decrease) in taxes resulting from:
Tax-exempt interest (3,124) (2,125) (1,825)
Dividends received deduction (139) (216) (290)
Goodwill 148 -- --
Other 130 348 298
------------------------------------------
Total federal income tax expense $ 11,665 $ 10,056 $ 9,212
==========================================
</TABLE>
Deferred income taxes reflect the net tax effect of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax assets and liabilities are summarized as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS) DECEMBER 31, 1996 1995
- -----------------------------------------------------------------
<S> <C> <C>
Deferred tax assets:
Discounting of loss reserves $22,306 $24,771
Unearned premium 1,771 --
Other 540 138
----------------------
Total deferred tax assets 24,617 24,909
Deferred tax liabilities:
Deferred policy acquisition costs 207 164
Unrealized investment gains 4,189 12,498
Other -- 255
----------------------
Total deferred tax liabilities 4,396 12,917
----------------------
Net deferred tax assets $20,221 $11,992
======================
</TABLE>
Federal income taxes paid during 1996, 1995, and 1994 were $14,800,000,
$9,900,000 and $3,250,000, respectively.
The Internal Revenue Service (IRS) had proposed adjustments to increase the
Company's tax liability for 1986 and 1987 by $60,815,000 as a result of its
examinations. The Company's management decided to contest the deficiencies
proposed by the IRS and the matter was assigned to the IRS Appellate Office. The
Appellate Office reversed the $60,815,000 proposed adjustment and concluded that
there would be no change in the 1986 or 1987 tax amounts. The Appellate Office
also allowed the Company's refund claim for $9,120,000 in tax which arose from
adjustments sustained in the 1985 IRS examination. The Appellate Office approved
an outstanding claim for refund of $3,563,000 in tax resulting from an amended
filing of the 1988 return. Both the 1985 and 1988 refunds were paid by the IRS
with interest of $13,220,000 in January 1996. At December 31, 1995, the Company
had recorded these refunds totaling $25,903,000 in federal income taxes
receivable.
The IRS had proposed adjustments to increase the Company's 1991 and 1992 tax
liabilities by $13,023,000 and $3,673,000, respectively, for the same issue
asserted in the 1986 and 1987 examinations. The Company's management decided to
contest the deficiencies proposed by the IRS and the matter was assigned to the
IRS Appellate Office. In February 1997, the Company and the Appellate Office
agreed to a settlement wherein the Company would pay approximately $616,000 and
$194,000 of the additional taxes asserted for the respective 1991 and 1992 tax
years. As part of the settlement, the Appellate Office agreed to concede the
balance of the 1991 and 1992 asserted deficiencies.
56
<PAGE> 57
SCPIE Holdings Inc.
The Company's 1993 Federal income tax return is currently under examination by
the IRS. To date, the Company has not received notification of any IRS
adjustments for the 1993 tax year.
NOTE 6.
STATUTORY ACCOUNTING PRACTICES
The Exchange is domiciled in California and prepares its statutory-basis
financial statements in accordance with accounting practices prescribed or
permitted by the California Department of Insurance. "Prescribed" statutory
accounting practices include state laws, regulations, and general administrative
rules, as well as a variety of publications of the National Association of
Insurance Commissioners (NAIC). "Permitted" statutory accounting practices
encompass all accounting practices that are not prescribed; such practices may
differ from state to state, may differ from company to company within a state,
and may change in the future. The NAIC currently is in the process of codifying
statutory accounting practices, the result of which is expected to constitute
the only source of "prescribed" statutory accounting practices. Policyholders'
surplus and net income, as reported to the domiciliary state insurance
department in accordance with its prescribed or permitted statutory accounting
practices, for the Exchange are summarized as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS) 1996 1995 1994
- ----------------------------------------------------------------------
<S> <C> <C> <C>
Statutory net income for the year $32,703 $24,393 $17,730
Statutory surplus at year-end 254,679 235,352 187,299
</TABLE>
The Exchange offers its insureds free tail coverage in the event of death,
total and permanent disability, and complete and permanent retirement. In 1993,
the NAIC published guidelines for establishing a reserve for future free tail
policies when the claims-made policy includes a provision for waiving a premium
charge in the event of death, disability or retirement of the insured. Based on
the NAIC guidelines, this reserve should be recorded as an unearned premium
reserve. Alternatively, it can be considered an unpaid loss with the permission
of the insurance entity's state insurance department. In 1996, the Exchange
received written approval from the California Department of Insurance to record
this reserve as an unpaid loss. The Exchange's statutory surplus would be
unaffected if the California Department of Insurance were to rescind its
permission for this treatment.
The maximum amount of dividends that may be paid by property/casualty
insurance companies without prior approval of the California Insurance
Commissioner is subject to restrictions relating to statutory surplus and net
income. In 1997, dividends may be distributed from the Exchange to SCPIE
Holdings of $32,703,000 without prior approval of the California Insurance
Commissioner.
NOTE 7.
BENEFIT PLANS
The Company has a 401(k) defined contribution plan and a non-contributory
defined benefit plan which provide retirement benefits to all its employees.
Under the 401(k) plan, the Company presently matches the employee's
contribution. The contribution expense for the 401(k) plan was $418,000,
$389,000 and $350,000 for the years ended December 31, 1996, 1995 and 1994,
respectively. An additional defined contribution plan that no longer accepts
contributions will remain with the trustee as funded at December 31, 1989, until
retirement or termination of all employees vested in the plan.
The Company also maintains a defined benefit pension plan whose benefits are
based on years of service and salary levels. The Company's policy is to fund the
pension plan up to the maximum deductible contributions the federal laws and
regulations permit. Plan assets consist of investment funds and cash held in a
bank money market account.
57
<PAGE> 58
SCPIE Holdings Inc.
NOTES TO
FINANCIAL STATEMENTS
(CONTINUED)
Net pension expense consists of the following components:
<TABLE>
<CAPTION>
(IN THOUSANDS) YEAR ENDED DECEMBER 31 1996 1995 1994
- -------------------------------------------------------------------------------------
<S> <C> <C> <C>
Service cost-benefits earned during the year $ 291 $ 223 $ 252
Interest on projected benefit obligation 123 73 55
Actual return on plan assets (240) (282) (60)
Net amortization and deferral 115 201 1
---------------------------------
Net pension expense $ 289 $ 215 $ 248
=================================
</TABLE>
The following table sets forth the funding status of the plan:
<TABLE>
<CAPTION>
(IN THOUSANDS) DECEMBER 31 1996 1995
- ------------------------------------------------------------------------------------
<S> <C> <C>
Actuarial present value of benefit obligations:
Accumulated benefit obligations, including vested
benefits of $988,000 in 1996 and $759,000 in 1995 $(1,378) $(1,078)
=======================
Projected benefit obligation $(1,764) $(1,370)
Plan assets 1,966 1,423
-----------------------
Plan assets in excess of
projected benefit obligations 202 53
Unrecognized net loss from past experience
different from that assumed (31) 31
Unrecognized past service cost (13) (15)
Unrecognized net asset at January 1 (76) (35)
-----------------------
Prepaid pension expense $ 82 $ 34
=======================
</TABLE>
The projected benefit obligation for 1996, 1995 and 1994 was determined using
an assumed discount rate of 7.25%, 7% and 8%, respectively, and an assumed rate
of compensation increase of 5% for 1996, 1995 and 1994. The expected long-term
rate of return on plan assets was 8% in 1996, 1995 and 1994.
The Company also has enacted a non-qualified supplemental employee retirement
agreement for selected employees which provides benefits retroactively from
January 1, 1990. At December 31, 1996 and 1995, the projected benefit obligation
for this unfunded plan was $2,079,000 and $1,925,300, respectively, of which the
accumulated benefit obligation of $1,226,000 and $585,700, respectively, is
accrued as a liability in the balance sheets. Pension expense for this plan was
approximately $349,000 in 1996, $258,000 in 1995 and $291,000 in 1994.
NOTE 8.
COMMITMENTS AND CONTINGENCIES
The Company is a defendant in an 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. The punitive damages rendered by the jury
were reduced to $14,000,000 by the trial judge. The Company believes that the
action is entirely without merit and plans to aggressively pursue its rights on
appeal. However, the ultimate resolution of this matter cannot be determined at
this time and could result in a loss to the Company.
Since 1981, the Company has purchased annuities from life insurance companies
to fund obligations under structured settlement agreements with certain medical
malpractice claimants. Annuities having an aggregate purchase price of
approximately $12,294,000 were purchased from
58
<PAGE> 59
SCPIE Holdings Inc.
Executive Life Insurance Company (ELIC) which was placed in conservatorship
during 1991 by the California Insurance Commissioner. Substantially all of the
assets of ELIC have been transferred to another insurer, which has assumed the
restructured annuities and is obligated to pay varying percentages of the
original annuity benefits as they become due. The Company has determined that it
is contractually obligated for the shortfall amounts under certain of these
annuities. At December 31, 1996, a reserve of $4,000,000 (net of expected
reinsurance recoveries of $3,036,000) has been recorded to cover these expected
shortfall payments. The Company believes that the amount of its obligations in
excess of the existing reserves, if any, is not material to its financial
positions or results of operations.
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 unaudited quarterly results of operations for 1996 and 1995 are
summarized as follows:
NOTE 9.
QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
1996 1995
- ---------------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 1ST 2ND 3RD 4TH 1ST 2ND 3RD 4TH
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Premiums earned and other revenues $31,505 $ 29,714 $29,071 $30,569 $31,009 $28,562 $28,713 $28,351
Net investment income 10,561 10,409 10,245 9,554 9,682 10,350 9,889 10,503
Realized investment gains (losses) 12,804 (1,308) 58 184 1,256 3,428 2,173 1,093
Net income 13,744 333 5,772 10,343 6,668 7,648 2,489 7,564
Pro forma net income
per share of common stock $ 1.38 $ .03 $ .58 $ 1.03 $ .67 $ .76 $ .25 $ .76
</TABLE>
59
<PAGE> 60
Schedule II - Condensed Financial Information of Registrant
SCPIE Holdings Inc.
Condensed Balance Sheets
DECEMBER 31, FEBRUARY 29,
1996 1996
----------------------------
ASSETS
Cash $ 417,310 $ 600,010
Deposit - 400,000
Investment in subsidiaries 13,489,462 -
Other 432,318 -
----------- ----------
Total assets $14,339,090 $1,000,010
=========== ==========
LIABILITIES
Due to affiliates $ 403,269 $ -
Other 5,481 -
----------- ----------
Total liabilities 408,750 -
Stockholder's equity:
Common stock, $.01 par value:
Authorized shares - 1,000
Issued and outstanding shares - 500 5 5
Additional paid-in capital 13,999,995 999,995
Retained earnings (deficit) (69,660) 10
----------- ----------
Total stockholder's equity 13,930,340 1,000,010
----------- ----------
Total liabilities and stock-
holder's equity $14,339,090 $1,000,010
=========== ==========
See accompanying notes.
Condensed Statement of Operations
TEN MONTHS
ENDED
DECEMBER 31,
1996
------------
Net investment income $ 16,679
Other expenses (929)
--------
Earnings before federal income taxes and
equity in loss of subsidiaries 15,750
Federal income taxes (5,582)
--------
Earnings before equity in net loss of
subsidiaries 10,168
Equity in loss of subsidiaries (79,838)
--------
Net loss $(69,670)
========
See accompanying notes.
60
<PAGE> 61
Schedule II - Condensed Financial Information of Registrant (continued)
SCPIE Holdings Inc.
Condensed Statement of Cash Flows
TEN MONTHS
ENDED
DECEMBER 31,
1996
-----------
OPERATING ACTIVITIES
Net loss $ (69,670)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Due to affiliates 403,269
Changes in other assets and liabilities (426,837)
Equity in undistributed loss of subsidiaries 79,838
------------
Net cash provided by operating activities (13,400)
FINANCING ACTIVITIES
Capital contribution from parent 13,000,000
INVESTING ACTIVITIES
Purchase of subsidiaries (12,119,300)
Capital contribution to subsidiaries (1,050,000)
------------
Cash used in investing activities (13,169,300)
------------
Decrease in cash (182,700)
Cash at beginning of period 600,010
------------
Cash at end of period $ 417,310
============
See accompanying notes.
SCPIE Holdings Inc.
Notes to Financial Statements
December 31, 1996
1. ORGANIZATIONS
SCPIE Holdings Inc. (SCPIE Holdings) is a Delaware corporation which is a wholly
owned subsidiary of Southern California Physicians Insurance Exchange (the
Exchange).
On January 29, 1997, the Exchange consummated its plan and agreement of merger
whereby the Exchange reorganized from a reciprocal insurer to a stock insurance
company and became a wholly owned subsidiary of SCPIE Holdings (the
Reorganization). SCPIE Holdings has no historic operations and was organized
in February 1996, as part of the Exchange's plan to reorganize its corporate
structure. Pursuant to the Reorganization, the Exchange merged with and into
SCPIE Indemnity, a California stock insurance company and a wholly owned
subsidiary of SCPIE Holdings, the surviving corporation of the Reorganization.
2. BASIS OF PRESENTATION
In the SCPIE Holdings financial statements, investment in subsidiaries is
stated at cost plus equity in undistributed earnings of subsidiaries since date
of acquisition. The SCPIE Holdings financial statements should be read in
conjunction with the basic financial statements.
61
<PAGE> 62
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.,
By /s/ DONALD J. ZUK
-------------------------------------------
Donald J. Zuk
President and Chief Executive Officer
March 28, 1997
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ DONALD J. ZUK President and
- ------------------------------------------- Chief Executive Officer
Donald J. Zuk (Principal Executive Officer) March 28, 1997
/s/ PATRICK T. LO Vice President,
- ------------------------------------------- Chief Financial Officer
Patrick T. Lo and Chief Accounting Officer
(Principal Financial Officer and
Principal Accounting Officer) March 28, 1997
/s/ MITCHELL S. KARLAN, M.D. Chairman of the Board
- ------------------------------------------- and Director March 28, 1997
Mitchell S. Karlan, M.D.
/s/ JACK E. McCLEARY, M.D. Director March 28, 1997
- -------------------------------------------
Jack E. McCleary, M.D.
/s/ WENDELL L. MOSELEY, M.D. Director March 28, 1997
- -------------------------------------------
Wendell L. Moseley, M.D.
/s/ ALLAN K. BRINEY, M.D. Director March 28, 1997
- -------------------------------------------
Allan K. Briney, M.D.
/s/ WILLIS T. KING, JR. Director March 28, 1997
- -------------------------------------------
Willis T. King, Jr.
/s/ CHARLES B. McELWEE, M.D. Director March 28, 1997
- -------------------------------------------
Charles B. McElwee, M.D.
</TABLE>
<PAGE> 63
<TABLE>
<S> <C> <C>
/s/ DONALD P. NEWELL Director March 28, 1997
- -------------------------------------------
Donald P. Newell
/s/ HARRIET M. OPFELL, M.D. Director March 28, 1997
- -------------------------------------------
Harriet M. Opfell, M.D.
/s/ WILLIAM A. RENERT, M.D. Director March 28, 1997
- -------------------------------------------
William A. Renert, M.D.
/s/ HENRY L. STOUTZ, M.D. Director March 28, 1997
- -------------------------------------------
Henry L. Stoutz, M.D.
/s/ REINHOLD A. ULLRICH, M.D. Director March 28, 1997
- -------------------------------------------
Reinhold A. Ullrich, M.D.
</TABLE>
63
<PAGE> 1
EXHIBIT 10.20
[WILLCOX INCORPORATED LETTERHEAD]
REINSURED: SOUTHERN CALIFORNIA PHYSICIANS INSURANCE EXCHANGE,
AND/OR S.C.P.I.E. INDEMNITY COMPANY,
AND/OR S.C.P.I.E. MANAGEMENT COMPANY,
AND/OR AMERICAN HEALTHCARE INDEMNITY COMPANY,
AND/OR FG CASUALTY COMPANY,
AND/OR S.C.P.I.E. INSURANCE SERVICES, INC.
AND/OR S.C.P.I.E. MANAGEMENT SERVICES, INC.
BEVERLY HILLS, CALIFORNIA
TYPE: FIRST EXCESS OF LOSS REINSURANCE
BUSINESS
COVERED: Physicians and Surgeons Comprehensive Professional and
Business Liability Policies, including Clinics and Clinical
Laboratories, Professional and Business Liability Policies
for Hospitals and Errors and Omissions Liability Policies for
Managed Care Organizations.
TERM: January 1, 1997 to December 31, 1997 as respects claims made
during the calendar year 1997.
The term "claims made" as used herein shall mean (A) In
respect of Claims Made Policies, claims first notified to the
Company during the term of this Agreement on any inforce
policy or reporting endorsement arising out of incidents
subsequent to the retroactive date of said policy as the
result of the rendering of or failure to render a
professional service or the reporting of losses which arise
from the insured premises and operations incidental to the
practice of a physician, hospital or managed care
organization and/or (B) In respect of Occurrence Policies,
claims or losses first notified to the Company during the
term of this Agreement.
Retroactive date January 1, 1976, except for Extra
Contractual Obligations which is January 1, 1979.
In the event of cancellation, and at the option of the
Reinsured, Reinsurers agree to run-off policies in force
until natural expiration not to exceed 12 months from the
expiration date hereon, subject to a Premium equal to 50% of
the Actual Earned Reinsurance Premium.
Page 1 of 5
<PAGE> 2
TERRITORY: As per the Company's original policies, contracts, or binders.
EXCLUSIONS: 1. Insolvency Funds.
2. Nuclear Incident - Liability - Reinsurance.
LIMIT AND
RETENTION: $1,000,000 each and every loss in excess of $1,000,000 each and
every loss.
Notwithstanding the foregoing it is a condition hereto that an
Annual Aggregate Deductible equal to 1% of G.N.E.P.I. shall
first be deducted before any liability attaches to Reinsurers
hereon.
WARRANTY: 1. As respects Professional and Business Liability Policies for
Hospitals written on or after January 1, 1996, Policy Limits
greater than $500,000 reinsured elsewhere on an Excess of
Loss basis or so deemed.
2. As respects Professional and Business Liability Policies for
Hospitals written prior to January 1, 1996, Policy Limits
greater than $5,000,000 reinsured elsewhere on an Excess of
Loss basis or so deemed.
MAXIMUM
AGGREGATE: Reinsurers maximum liability during the term of this Contract
shall be $8,500,000 or 182.5% of Reinsurance Premiums Earned
during the Contract term, whichever is the greater.
PREMIUM: 2.88% of G.N.E.P.I.
(Eff. 1/1/97)
Deposit - $3,450,000, payable $862,500 quarterly.
Minimum - $2,760,000
ATTACHMENT OF
LIABILITY: (A) For purposes of determining the attachment of the
Reinsurer's liability hereunder as respects any one loss,
all losses (including Discovery Period Losses) involving
one or more Original Insureds, arising from the same
medical incident, and in which First Notice of Claim or
Circumstance is notified to the Company during the term of
this Agreement shall be covered hereunder. Where first
notice falls in Agreement Years prior to January 1, 1992
the "Interlocking Clause" to apply hereon for Physicians
and Surgeons Comprehensive Professional Liability Policies
only.
(B) The date of a loss hereunder shall be the earliest date,
within the term of this Contract, that the Company has
received First Notice of Claim or Circumstance.
Page 2 of 5
<PAGE> 3
PROFIT
COMMISSION: The Company shall receive a Profit Commission equal to 90.0% of
(Eff. 1/1/97) the net profit accruing to the Reinsurers under this Contract,
computed as follows:
1. Reinsurance Premiums Earned;
2. Less: Losses and Loss Adjustment Expenses Incurred;
3. Less: Management Expenses of 25% of Reinsurance Premiums
Earned.
Unlimited deficit carryforward to next Contract period.
The term under consideration in respect of "Profit Commission"
as above shall be the period January 1, 1997 through December
31, 1997. It is further agreed that the first calculation of
Profit Commission shall be computed as of December 31, 1997 and
annually thereafter, and that the first and final payment of
any Profit Commission shall be made by the Reinsurers to the
Company as of December 31, 2001. The Company agrees that
payment of any Profit Commission shall be subject to complete
commutation as respects all losses known and unknown within the
Profit Commission period. Payment of any Profit Commission by
the Reinsurers shall constitute full and final release from all
further loss development.
ACCOUNTING: Premiums - Payments within 60 days of respective due date.
Losses - Payments within 60 days of receipt of proof of loss.
Outstanding losses reported individually as they occur.
GENERAL
CONDITIONS: Loss Adjustment Expenses to be Pro-Rated.
Excess of Original Policy Limits Clause.
80% Extra Contractual Obligations Clause.
Ultimate Net Loss Clause.
Net Retained Lines Clause.
Notice of Loss Clause.
Loss Funding Clause - Including IBNR (See Attached).
Special Funding Clause.
Confidentiality Clause.
Commutation Clause.
Federal Excise Tax Clause.
Errors and Omissions Clause.
Insolvency Clause.
Service of Suit Clause.
Arbitration Clause.
Access to Records Clause.
Willcox Incorporated Intermediary Clause.
Page 3 of 5
<PAGE> 4
<TABLE>
<S> <C> <C> <C>
REINSURERS
HEREON: Domestic:
BCS Insurance Company 5.00%
Transatlantic Reinsurance Company 10.00%
Travelers Indemnity Company 2.50%
------
Domestic Total 17.50%
Australia:
Through Australian Independent Reinsurance Services:
GIO Insurance Ltd.
trading as:
GIO Reinsurance 3.00%
------
Australia Total 3.00%
Germany:
Hannover Ruckversicherungs AG 22.50%
------
Germany Total 22.50%
United Kingdom:
Through Willcox Johnson & Higgins Reinsurance Brokers, Ltd.
London, England
Underwriters at Lloyd's
SVH 1007 15.645%
DPM 435 4.381%
SJC 1003 62.00%
2003 38.00% 4.597%
JHV 376 67.89%
2376 32.11% 3.155%
FRW 190 1.077%
ROS 227 83.00%
2227 17.00% 1.077%
BFC 780
BHB 1215 2.750%
CNA International Reinsurance Co., Ltd. 4.750%
Terra Nova Insurance Company, Ltd. 6.790%
Unionamerica Insurance Company, Ltd. 3.500%
Zurich Reinsurance (U.K.) Ltd. 9.278%
United Kingdom Total 57.00%
Domestic Total 17.50%
Foreign Total 82.50%
------
Grand Total 100.00%
======
</TABLE>
Page 4 of 5
<PAGE> 5
This Cover Note is to confirm the terms and conditions which have been
negotiated between Willcox Incorporated and the participating Reinsurers on your
behalf. We request that you review this Cover Note with regard to the specific
placement details and subscribing Reinsurers listed herein. In the event that
any of these details do not meet with your approval or security of the
subscribing Reinsurers does not meet with your requirements, please notify this
office immediately. If all is found to be in order please sign and return the
enclosed duplicate copy of this Cover Note for completion of our files.
- -------------------------------------
Signature
- -------------------------------------
Date
Willcox Incorporated
By [SIG]
--------------------------------
Executive Vice President
Page 5 of 5
<PAGE> 6
LOSS FUNDING - INCLUDING IBNR
THIS IS APPLICABLE TO NON-ADMITTED REINSURERS ONLY
After consultation with their outside Actuaries, Tillinghast, Nelson & Warren
Inc., S.C.P.I.E. intends to use the following IBNR factors applied to Gross
Reinsurance Premiums for 1997 Letter of Credit Funding purposes applicable to
Non-Admitted Reinsurers only:
<TABLE>
<CAPTION>
IBNR
Period Factor
------ ------
<S> <C>
Current Year 97.00%
First Development Year 40.00%
Second Development Year 17.00%
Third Development Year 7.00%
Fourth Development Year &
Subsequent 2.00%
</TABLE>
The Letter of Credit Funding requirement for IBNR will be net of any Specific
Case Base Loss Reserves. Therefore, the factors outlined above represent the
ceiling for the sum of Specific Case Base Loss Reserves and IBNR. Further, a cap
of five times the Gross Reinsurance Premium will apply as the Lifetime IBNR
Maximum for each Treaty Year.
Page 1 of 1
<PAGE> 1
EXHIBIT 10.21
[WILLCOX INCORPORATED LETTERHEAD]
REINSURED: SOUTHERN CALIFORNIA PHYSICIANS INSURANCE EXCHANGE,
AND/OR S.C.P.I.E. INDEMNITY COMPANY,
AND/OR S.C.P.I.E. MANAGEMENT COMPANY,
AND/OR AMERICAN HEALTHCARE INDEMNITY COMPANY,
AND/OR FG CASUALTY COMPANY,
AND/OR S.C.P.I.E. INSURANCE SERVICES, INC.
AND/OR S.C.P.I.E. MANAGEMENT SERVICES, INC.
BEVERLY HILLS, CALIFORNIA
TYPE: SECOND EXCESS OF LOSS REINSURANCE
BUSINESS
COVERED: Physicians and Surgeons Comprehensive Professional and
Business Liability Policies, including Clinics and Clinical
Laboratories, Professional and Business Liability Policies
for Hospitals and Errors and Omissions Liability Policies
for Managed Care Organizations.
TERM: January 1, 1997 to December 31, 1997 as respects claims made
(Eff. 1/1/97) during the calendar year 1997.
Retroactive date January 1, 1976, except for Extra
Contractual Obligations which is January 1, 1979.
In respect of recoveries made under Section A.1 and A.3:
The term "claims made" as used herein shall mean (A) In
respect of Claims Made Policies, claims first notified to
the Company during the term of this Agreement on any inforce
policy or reporting endorsement arising out of incidents
subsequent to the retroactive date of said policy as the
result of the rendering of or failure to render a
professional service or the reporting of losses which arise
from the insured premises and operations incidental to the
practice of a physician, hospital or managed care
organization and/or (B) In respect of Occurrence Policies,
claims or losses first notified to the Company during the
term of this Agreement.
In the event of cancellation, and at the option of the
Reinsured, Reinsurers agree to run-off policies in force
until natural expiration not to exceed 12 months from the
expiration date hereon, subject to a Premium equal to 50% of
the Actual Earned Reinsurance Premium.
Page 1 of 5
<PAGE> 2
TERM:
(Continued) In respect of recoveries made under Section A.2:
The term "claims made" shall mean claims first reported to
the Reinsured during the period January 1, 1986 to December
31, 1991 and first reported to Reinsurers during the term of
this Agreement.
TERRITORY: As per the Company's original policies, contracts, or
binders.
EXCLUSIONS: 1. Insolvency Funds.
2. Nuclear Incident - Liability - Reinsurance.
LIMIT AND
RETENTION: A.1. $3,000,000 each and every loss in excess of
(Eff. 1/1/97) $2,000,000 each and every loss.
A.2. $3,000,000 each and every loss in excess of
$2,000,000 each and every loss covering losses which
were first reported to the Company during the period
January 1, 1986 to December 31, 1991 and are first
reported to the Reinsurers during the term of this
Agreement. The coverage provided hereunder shall be
no narrower nor broader in scope than that which was
provided to the Company under their Second Excess of
Loss Reinsurance Agreement in force for the same
period (see attached Cover Note Nos. 10710-003/86,
01-87-0021, 01-88-0021, 01-89-0021, 01-90-0021,
01-91-0021).
A.3. $3,000,000 each and every loss each policy in excess
of $2,000,000 each and every loss each policy
covering losses from Professional and Business
Liability Policies for Hospitals and Errors and
Omissions Liability Policies for Managed Care
Organizations.
WARRANTY: Section (A.1 and A.2):
Maximum Original Policy Limit $10,000,000. Subject to
inuring protection of $8,000,000 in excess of $2,000,000 or
so deemed.
Section (A.3):
1. As respects Professional and Business Liability
Policies for Hospitals written on or after January
1, 1996, Policy Limits greater than $500,000
reinsured elsewhere on an Excess of Loss basis or so
deemed.
2. As respects Professional and Business Liability
Policies for Hospitals written prior to January 1,
1996, Policy Limits greater than $5,000,000
reinsured elsewhere on an Excess of Loss basis or so
deemed.
Page 2 of 5
<PAGE> 3
WARRANTY:
(Continued) 3. In respect of Errors and Omissions Liability
Policies for Managed Care Organizations, Maximum
Original Policy Limit $5,000,000.
PREMIUM: .900% of G.N.E.P.I.
(Eff. 1/1/97)
Deposit Premium: $1,080,000, payable $270,000 quarterly.
Minimum - $864,000.
REINSTATEMENT(S): A.1. & A.3. First - Pro rata as to amount 150% as respects
premium.
Second - Pro rata as to amount 200% as respects
premium.
All calculations of reinstatement premiums shall be based on
paid losses only. The decision of the Company to exercise
its reinstatement option must be relayed to Reinsurers
within three (3) months from the time any reserve invades
this Contract.
PLUS
A.2. In the event of a paid loss arising under this
Section, additional to the reinstatement premium
payable above, a further reinstatement premium shall
be payable, to be calculated at pro rata as respects
amount and 100% as respects premium based on annual
premium of $450,000 if First Reinstatement, $675,000
if Second Reinstatement.
It is understood and agreed that the payment of
reinstatement premiums arising from losses
recoverable under Section A.2. above shall be
mandatory and not at the option of the Company.
Maximum Annual Aggregate Amount Recoverable under
A.1., A.2. and A.3. combined is $9,000,000 in all.
ATTACHMENT OF
LIABILITY: (A) For purposes of determining the attachment of the
Reinsurer's liability hereunder as respects any one
loss, all losses (including Discovery Period Losses)
involving one or more Original Insureds, arising
from the same medical incident, and in which First
Notice of Claim or Circumstance is notified to the
Company during the term of this Agreement shall be
covered hereunder. Where first notice falls in
Agreement Years incepting prior to January 1, 1992
the "Interlocking Clause" to apply hereon for
Physicians and Surgeons Comprehensive Professional
Liability Policies only.
Page 3 of 5
<PAGE> 4
ATTACHMENT OF
LIABILITY:
(Continued) (B) The date of a loss hereunder shall be the
earliest date, within the term of this
Contract, that the Company has received First
Notice of Claim or Circumstance.
GENERAL
CONDITIONS: Loss Adjustment Expenses to be Pro-Rated.
Excess of Original Policy Limits Clause.
80% Extra Contractual Obligations Clause.
Ultimate Net Loss Clause.
Net Retained Lines Clause.
Notice of Loss Clause.
Loss Funding Clause - Including IBNR (See Attached).
Special Funding Clause.
Confidentiality Clause.
Commutation Clause.
Federal Excise Tax Clause.
Errors and Omissions Clause.
Insolvency Clause.
Service of Suit Clause.
Arbitration Clause.
Access to Records Clause.
Willcox Incorporated Intermediary Clause.
<TABLE>
REINSURERS
HEREON: Domestic:
<S> <C>
BCS Insurance Company 5.00%
Transatlantic Reinsurance Company 5.00%
Travelers Indemnity Company 2.50%
-----
Domestic Total 12.50%
Australia:
Through Australian Independent Reinsurance Services:
GIO Insurance Ltd.
trading as:
GIO Reinsurance 5.00%
-----
Australia Total 5.00%
Germany:
Hannover Ruckversicherungs AG 52.50%
-----
Germany Total 52.50%
</TABLE>
Page 4 of 5
<PAGE> 5
<TABLE>
<CAPTION>
REINSURERS
HEREON:
(Continued) United Kingdom:
Through Willcox Johnson & Higgins
Reinsurance Brokers, Ltd. London, England
Underwriters at Lloyd's
<S> <C> <C> <C>
SVH 1007 8.593%
DPM 435 4.196%
SJC 1003 62.00%
2003 38.00% 2.098%
RJH 122 .631%
BFC 780 .421%
SJB 1212 2.097%
GNR 570 .631%
DJN 1096 .631%
CNA International Reinsurance Co., Ltd. 4.196%
Sphere Drake Insurance PLC .631%
Unionamerica Insurance Company, Ltd. 3.772%
Zurich Reinsurance (U.K.) Ltd. 2.103%
------
United Kingdom Total 30.00%
Domestic Total 12.50%
Foreign Total 87.50%
------
Grand Total 100.00%
======
</TABLE>
This Cover Note is to confirm the terms and conditions which have been
negotiated between Willcox Incorporated and the participating Reinsurers on your
behalf. We request that you review this Cover Note with regard to the specific
placement details and subscribing Reinsurers listed herein. In the event that
any of these details do not meet with your approval or security of the
subscribing Reinsurers does not meet with your requirements, please notify this
office immediately. If all is found to be in order please sign and return the
enclosed duplicate copy of this Cover Note for completion of our files.
- -------------------------------------
Signature
- --------------------------------------
Date
Willcox Incorporated
By [SIG]
-------------------------------
Executive Vice President
Page 5 of 5
<PAGE> 6
LOSS FUNDING - INCLUDING IBNR
THIS IS APPLICABLE TO NON-ADMITTED REINSURERS ONLY
After consultation with their outside Actuaries, Tillinghast, Nelson & Warren
Inc., S.C.P.I.E. intends to use the following IBNR factors applied to Gross
Reinsurance Premiums for 1997 Letter of Credit Funding purposes applicable to
Non-Admitted Reinsurers only:
<TABLE>
<CAPTION>
IBNR
Period Factor
------ ------
<S> <C>
Current Year 97.00%
First Development Year 40.00%
Second Development Year 17.00%
Third Development Year 7.00%
Fourth Development Year &
Subsequent 2.00%
</TABLE>
The Letter of Credit Funding requirement for IBNR will be net of any Specific
Case Base Loss Reserves. Therefore, the factors outlined above represent the
ceiling for the sum of Specific Case Base Loss Reserves and IBNR. Further, a cap
of five times the Gross Reinsurance Premium will apply as the Lifetime IBNR
Maximum for each Treaty Year.
Page 1 of 1
<PAGE> 1
EXHIBIT 10.22
[WILLCOX INCORPORATED LETTERHEAD]
REINSURED: SOUTHERN CALIFORNIA PHYSICIANS INSURANCE EXCHANGE,
AND/OR S.C.P.I.E. INDEMNITY COMPANY,
AND/OR S.C.P.I.E. MANAGEMENT COMPANY,
AND/OR AMERICAN HEALTHCARE INDEMNITY COMPANY,
AND/OR FG CASUALTY COMPANY,
AND/OR S.C.P.I.E. INSURANCE SERVICES, INC.
AND/OR S.C.P.I.E. MANAGEMENT SERVICES, INC.
BEVERLY HILLS, CALIFORNIA
TYPE: THIRD EXCESS OF LOSS REINSURANCE
BUSINESS
COVERED: Physicians and Surgeons Comprehensive Professional and
Business Liability Policies, including Clinics and
Clinical Laboratories, Professional and Business
Liability Policies for Hospitals and Errors and
Omissions Liability Policies for Managed Care
Organizations.
TERM: January 1, 1997 to December 31, 1997 as respects claims
(Eff. 1/1/97) made during the calendar year 1997.
Retroactive date January 1, 1976, except for Extra
Contractual Obligations which is January 1, 1979.
In respect of recoveries made under Section A.1:
The term "claims made" as used herein shall mean (A) In
respect of Claims Made Policies, claims first notified
to the Company during the term of this Agreement on any
inforce policy or reporting endorsement arising out of
incidents subsequent to the retroactive date of said
policy as the result of the rendering of or failure to
render a professional service or the reporting of
losses which arise from the insured premises and
operations incidental to the practice of a physician,
hospital or managed care organization and/or (B) In
respect of Occurrence Policies, claims or losses first
notified to the Company during the term of this
Agreement.
Page 1 of 6
<PAGE> 2
TERM:
(Continued) In the event of cancellation, and at the option of the
Reinsured, Reinsurers agree to run-off policies in
force until natural expiration not to exceed 12 months
from the expiration date hereon, subject to a Premium
equal to 50% of the Actual Earned Reinsurance Premium.
In respect of recoveries made under Section A.2:
The term "claims made" shall mean claims first reported
to the Reinsured during the period January 1, 1986 to
December 31, 1991 and first reported to Reinsurers
during the term of this Agreement.
TERRITORY: As per the Company's original policies, contracts, or
binders.
EXCLUSIONS: 1. Insolvency Funds.
2. Nuclear Incident - Liability - Reinsurance.
LIMIT AND
RETENTION: A.1. $5,000,000 each and every loss in excess of
$5,000,000 each and every loss.
A.2. $5,000,000 each and every loss in excess of
$5,000,000 each and every loss covering losses
which were first reported to the Company during
the period January 1, 1987 to December 31, 1991
and are first reported to the Reinsurers during
the term of this Agreement. The coverage
provided hereunder shall be no narrower nor
broader in scope than that which was provided to
the Company under their Third Excess of Loss
Reinsurance Agreement in force for the same
period (see attached Cover Note Nos. 01-87-0022,
01-88-0022, 01-89-0022, 01-90-0022, 01-91-0022).
WARRANTY: 1. In respect of Physicians and Surgeons
Comprehensive Professional and Business
Liability Policies, including Clinics and
Clinical Laboratories, the Maximum Original
Policy Limit is $10,000,000, subject to inuring
protection of $8,000,000 in excess of $2,000,000
or so deemed.
2. As respects Professional and Business Liability
Policies for Hospitals written on or after
January 1, 1996, Policy Limits greater than
$500,000 reinsured elsewhere on an Excess of
Loss basis or so deemed.
Page 2 of 6
<PAGE> 3
WARRANTY:
(Continued) 3. As respects Professional and Business Liability
Policies for Hospitals written prior to January
1, 1996, Policy Limits greater than $5,000,000
reinsured elsewhere on an Excess of Loss basis
or so deemed.
4. In respect of Errors and Omissions Liability
Policies for Managed Care Organizations, Maximum
Original Policy Limit $5,000,000.
PREMIUM: .333% of G.N.E.P.I.
(Eff. 1/1/97)
Deposit Premium: $400,000, payable $100,000 quarterly.
Minimum - $400,000.
REINSTATEMENT(S): A.1. One in all at the option of the Company computed
Pro Rata as to amount 100% as respects premium.
All calculations of reinstatement premiums shall be
based on paid losses only. The decision of the Company
to exercise its reinstatement option must be relayed to
Reinsurers within three (3) months from the time any
reserve invades this Contract.
PLUS
A.2. In the event of a paid loss arising under this
Section, additional to the reinstatement
premium payable above, a further reinstatement
premium shall be payable to be calculated at
pro rata as respects amount/100% as respects
premium based on annual premium of $125,000.
It is understood and agreed that the payment of
reinstatement premiums arising from losses
recoverable under Section A.2. above shall be
mandatory and not at the option of the Company.
Maximum Annual Aggregate Amount Recoverable under (A.)
1 and 2 combined is $10,000,000 in all.
ATTACHMENT OF
LIABILITY: (A) For purposes of determining the attachment of
the Reinsurer's liability hereunder as respects
any one loss, all losses (including Discovery
Period Losses) involving one or more Original
Insureds, arising from the same medical
incident, and in which First Notice of Claim or
Circumstance is notified to the Company during
the term of this Agreement shall be covered
hereunder. Where first notice falls in
Agreement Years incepting prior to January 1,
1992 the "Interlocking Clause" to apply hereon
for Physicians and Surgeons Comprehensive
Professional Liability Policies only.
3 of 6
<PAGE> 4
ATTACHMENT OF
LIABILITY:
(Continued) (B) The date of a loss hereunder shall be the earliest
date, within the term of this Contract, that the
company has received First Notice of Claim or
Circumstance.
GENERAL
CONDITIONS: Loss Adjustment Expenses to be Pro-Rated.
Excess of Original Policy Limits Clause.
80% Extra Contractual Obligations Clause.
Ultimate Net Loss Clause.
Net Retained Lines Clause.
Notice of Loss Clause.
Loss Funding Clause - Including IBNR (See Attached).
Special Funding Clause.
Confidentiality Clause.
Commutation Clause.
Federal Excise Tax Clause.
Errors and Omissions Clause.
Insolvency Clause.
Service of Suit Clause.
Arbitration Clause.
Access to Records Clause.
Willcox Incorporated Intermediary Clause.
<TABLE>
<S> <C> <C>
REINSURERS
HEREON: Domestic:
Transatlantic Reinsurance Company 7.50%
Travelers Indemnity Company 5.00%
----
Domestic Total 12.50%
Australia:
Through Australian Independent Reinsurance
Services:
GIO Insurance Ltd.
trading as:
GIO Reinsurance 7.50%
----
Australia Total 7.50%
Germany:
Hannover Ruckversicherungs AG 7.50%
----
Germany Total 7.50%
</TABLE>
Page 4 of 6
<PAGE> 5
<TABLE>
<CAPTION>
REINSURERS
HEREON:
(Continued) United Kingdom:
Through Willcox Johnson & Higgins Reinsurance Brokers, Ltd.
London, England
Underwriters at Lloyd's
<S> <C> <C> <C>
SVH 1007 6.716%
DPM 435 6.716%
JHV 376 67.89%
2376 32.11% 2.578%
ROS 227 83.00%
2227 17.00% 1.163%
BFC 780 1.940%
BHB 1215 3.000%
SJB 1212 4.728%
GNR 570 2.328%
DJN 1096 1.164%
HGJ 205 5.478%
WEH 362 5.623%
RAE 219 4.656%
MFN 1027 55.64%
2027 44.36% 1.552%
GSC 958 .775%
ANT 51 .776%
CFP 314 1.552%
AEG 991 1.702%
SAM 727 2.328%
HLM 529 2.039%
CNA International Reinsurance Co., Ltd. 4.478%
Sphere Drake Insurance PLC 2.328%
Unionamerica Insurance Company, Ltd. 8.880%
------
United Kingdom Total 72.50%
Domestic Total 12.50%
Foreign Total 87.50%
------
Grand Total 100.00%
======
</TABLE>
Page 5 of 6
<PAGE> 6
This Cover Note is to confirm the terms and conditions which have been
negotiated between Willcox Incorporated and the participating Reinsurers on your
behalf. We request that you review this Cover Note with regard to the specific
placement details and subscribing Reinsurers listed herein. In the event that
any of these details do not meet with your approval or security of the
subscribing Reinsurers does not meet with your requirements, please notify this
office immediately. If all is found to be in order please sign and return the
enclosed duplicate copy of this Cover Note for completion of our files.
- -------------------------------------
Signature
- --------------------------------------
Date
Willcox Incorporated
By [SIG]
-------------------------------
Executive Vice President
Page 6 of 6
<PAGE> 7
LOSS FUNDING - INCLUDING IBNR
THIS IS APPLICABLE TO NON-ADMITTED REINSURERS ONLY
After consultation with their outside Actuaries, Tillinghast, Nelson & Warren
Inc., S.C.P.I.E. intends to use the following IBNR factors applied to Gross
Reinsurance Premiums for 1997 Letter of Credit Funding purposes applicable to
Non-Admitted Reinsurers only:
<TABLE>
<CAPTION>
IBNR
Period Factor
------ ------
<S> <C>
Current Year 97.00%
First Development Year 40.00%
Second Development Year 17.00%
Third Development Year 7.00%
Fourth Development Year &
Subsequent 2.00%
</TABLE>
The Letter of Credit Funding requirement for IBNR will be net of any Specific
Case Base Loss Reserves. Therefore, the factors outlined above represent the
ceiling for the sum of Specific Case Base Loss Reserves and IBNR. Further, a cap
of five times the Gross Reinsurance Premium will apply as the Lifetime IBNR
Maximum for each Treaty Year.
Page 1 of 1
<PAGE> 1
EXHIBIT 10.23
[WILLCOX INCORPORATED LETTERHEAD]
REINSURED: SOUTHERN CALIFORNIA PHYSICIANS INSURANCE EXCHANGE,
AND/OR S.C.P.I.E. INDEMNITY COMPANY,
AND/OR S.C.P.I.E. MANAGEMENT COMPANY,
AND/OR AMERICAN HEALTHCARE INDEMNITY COMPANY,
AND/OR FG CASUALTY COMPANY,
AND/OR S.C.P.I.E. INSURANCE SERVICES, INC.
AND/OR S.C.P.I.E. MANAGEMENT SERVICES, INC.
BEVERLY HILLS, CALIFORNIA
TYPE: FOURTH EXCESS OF LOSS REINSURANCE
BUSINESS
COVERED: Physicians and Surgeons Comprehensive Professional and
Business Liability Policies, including Clinics and
Clinical Laboratories, Professional and Business Liability
Policies for Hospitals and Errors and Omissions Liability
Policies for Managed Care Organizations.
TERM: January 1, 1997 to December 31, 1997 as respects claims
(Eff. 1/1/97) made during the calendar year 1997.
Retroactive date January 1, 1976, except for Extra
Contractual Obligations which is January 1, 1979.
The term "claims made" as used herein shall mean (A) In
respect of Claims Made Policies, claims first notified to
the Company during the term of this Agreement on any
inforce policy or reporting endorsement arising out of
incidents subsequent to the retroactive date of said
policy as the result of the rendering of or failure to
render a professional service or the reporting of losses
which arise from the insured premises and operations
incidental to the practice of a physician, hospital or
managed care organization and/or (B) In respect of
Occurrence Policies, claims or losses first notified to
the Company during the term of this Agreement.
In the event of cancellation, and at the option of the
Reinsured, Reinsurers agree to run-off policies in force
until natural expiration not to exceed 12 months from the
expiration date hereon, subject to a Premium equal to 50%
of the Actual Earned Reinsurance Premium.
Page 1 of 5
<PAGE> 2
TERRITORY: As per the Company's original policies, contracts, or
binders.
EXCLUSIONS: 1. Insolvency Funds.
2. Nuclear Incident - Liability - Reinsurance.
LIMIT AND
RETENTION: To pay $10,000,000 each and every loss in excess of
$10,000,000 each and every loss.
WARRANTY: 1. In respect of Physicians and Surgeons Comprehensive
Professional and Business Liability Policies,
including Clinics and Clinical Laboratories, the
Maximum Original Policy Limit is $10,000,000, subject
to inuring protection of $8,000,000 in excess of
$2,000,000 or so deemed.
2. As respects Professional and Business Liability
Policies for Hospitals written on or after January 1,
1996, Policy Limits greater than $500,000 reinsured
elsewhere on an Excess of Loss basis or so deemed.
3. As respects Professional and Business Liability
Policies for Hospitals written prior to January 1,
1996, Policy Limits greater than $5,000,000 reinsured
elsewhere on an Excess of Loss basis or so deemed.
4. In respect of Errors and Omissions Liability Policies
for Managed Care Organizations, Maximum Original
Policy Limit $5,000,000.
PREMIUM: .445% of G.N.E.P.I.
(Eff. 1/1/97)
Deposit Premium: $500,000, payable $125,000 quarterly.
Minimum - $500,000.
REINSTATEMENT(S): One in all at the option of the Company computed Pro Rata as
to amount 100% as to premium.
All calculations of reinstatement premiums shall be based on
paid losses only. The decision of the Company to exercise its
reinstatement option must be relayed to Reinsurers within
three (3) months from the time any reserve invades this
Contract.
ATTACHMENT OF
LIABILITY: (A) For purposes of determining the attachment of the
Reinsurer's liability hereunder as respects any one
loss, all losses (including Discovery Period Losses)
involving one or more Original Insureds, arising from
the same medical incident, and in
Page 2 of 5
<PAGE> 3
ATTACHMENT OF
LIABILITY:
(Continued) which First Notice of Claim or Circumstance is notified
to the Company during the term of this Agreement shall be
covered hereunder. Where first notice falls in Agreement
Years incepting prior to January 1, 1992 the
"Interlocking Clause" to apply hereon for Physicians and
Surgeons Comprehensive Professional Liability Policies
only.
(B) The date of a loss hereunder shall be the earliest
date, within the term of this Contract, that the
company has received First Notice of Claim or
Circumstance.
GENERAL
CONDITIONS: Loss Adjustment Expenses to be Pro-Rated.
Excess of Original Policy Limits Clause.
80% Extra Contractual Obligations Clause.
Ultimate Net Loss Clause.
Net Retained Lines Clause.
Notice of Loss Clause.
Loss Funding Clause - Including IBNR (See Attached).
Special Funding Clause.
Confidentiality Clause.
Commutation Clause
Federal Excise Tax Clause.
Errors and Omissions Clause.
Insolvency Clause.
Service of Suit Clause.
Arbitration Clause.
Access to Records Clause.
Willcox Incorporated Intermediary Clause.
<TABLE>
<CAPTION>
REINSURERS
HEREON: Domestic:
<S> <C> <C>
Travelers Indemnity Company 5.00%
-----
Domestic Total 5.00%
Australia:
Through Australian Independent Reinsurance
Services:
GIO Insurance Ltd.
trading as:
GIO Reinsurance 10.00%
-----
Australia Total 10.00%
France:
Through Courtage De Reassurances:
H. Des Courtis S.A.
Paris, France
AXA Reassurance 5.00%
-----
France Total 5.00%
</TABLE>
Page 3 of 5
<PAGE> 4
<TABLE>
<CAPTION>
REINSURERS
HEREON:
(Continued) Germany:
<S> <C> <C>
Hannover Ruckversicherungs AG 5.00%
----
Germany Total 5.00%
</TABLE>
<TABLE>
<CAPTION>
United Kingdom:
Through Willcox Johnson & Higgins Reinsurance Brokers, Ltd.
London, England
Underwriters at Lloyd's
<S> <C> <C> <C>
SVH 1007 6.568%
DFM 435 10.946%
SJC 1003 62.00%
2003 38.00% 4.628%
JHV 376 67.89%
2376 32.11% 2.001%
FRW 190 2.919%
ROS 227 83.00%
2227 17.00% .876%
RJH 122 .876%
BFC 780 1.459%
SJB 1212 1.970%
GNR 570 1.751%
DJN 1096 1.168%
HGJ 205 3.211%
WEH 362 7.444%
RAE 219 4.503%
MFN 1027 55.64%
2027 44.36% 1.168%
GSC 958 .584%
ANT 51 .876%
CFP 314 .730%
AEG 991 1.751%
SAM 727 1.459%
HLM 529 .876%
AFB 623 2.919%
BAR 990 .438%
CNA International Reinsurance Co., Ltd. 4.379%
Sphere Drake Insurance PLC 1.750%
Terra Nova Insurance Company Ltd. 3.500%
Unionamerica Insurance Company, Ltd. 4.250%
------
United Kingdom Total 75.00%
Domestic Total 5.00%
Foreign Total 95.00%
-----
Grand Total 100.00%
======
</TABLE>
Page 4 of 5
<PAGE> 5
This Cover Note is to confirm the terms and conditions which have been
negotiated between Willcox Incorporated and the participating Reinsurers on your
behalf. We request that you review this Cover Note with regard to the specific
placement details and subscribing Reinsurers listed herein. In the event that
any of these details do not meet with your approval or security of the
subscribing Reinsurers does not meet with your requirements, please notify this
office immediately. If all is found to be in order please sign and return the
enclosed duplicate copy of this Cover Note for completion of our files.
- -------------------------------------
Signature
- --------------------------------------
Date
Willcox Incorporated
By [SIG]
-------------------------------
Executive Vice President
Page 5 of 5
<PAGE> 6
LOSS FUNDING - INCLUDING IBNR
THIS IS APPLICABLE TO NON-ADMITTED REINSURERS ONLY
After consultation with their outside Actuaries, Tillinghast, Nelson & Warren
Inc., S.C.P.I.E. intends to use the following IBNR factors applied to Gross
Reinsurance Premiums for 1997 Letter of Credit Funding purposes applicable to
Non-Admitted Reinsurers only:
<TABLE>
<CAPTION>
IBNR
Period Factor
------ ------
<S> <C>
Current Year 97.00%
First Development Year 40.00%
Second Development Year 17.00%
Third Development Year 7.00%
Fourth Development Year &
Subsequent 2.00%
</TABLE>
The Letter of Credit Funding requirement for IBNR will be net of any Specific
Case Base Loss Reserves. Therefore, the factors outlined above represent the
ceiling for the sum of Specific Case Base Loss Reserves and IBNR. Further, a cap
of five times the Gross Reinsurance Premium will apply as the Lifetime IBNR
Maximum for each Treaty Year.
Page 1 of 1
<PAGE> 1
EXHIBIT 10.24
[WILLCOX INCORPORATED LETTERHEAD]
REINSURED: SOUTHERN CALIFORNIA PHYSICIANS INSURANCE EXCHANGE,
AND/OR S.C.P.I.E. INDEMNITY COMPANY,
AND/OR S.C.P.I.E. MANAGEMENT COMPANY,
AND/OR AMERICAN HEALTHCARE INDEMNITY COMPANY,
AND/OR FG CASUALTY COMPANY,
AND/OR S.C.P.I.E. INSURANCE SERVICES. INC.
AND/OR S.C.P.I.E. MANAGEMENT SERVICES, INC.
BEVERLY HILLS, CALIFORNIA
TYPE: PER POLICY EXCESS OF LOSS REINSURANCE
BUSINESS
COVERED: Physicians and Surgeons Comprehensive Professional and Business
Liability Policies, including Clinical Laboratories.
TERM: (A) January 1, 1997 to December 31, 1999 covering claims
made on policies inforce, issued or renewed on or after
January 1, 1997.
(B) It is understood and agreed that if the Reinsurers loss
ratio (i.e. the ratio of the Reinsurers losses and
L.A.E. incurred to the Company's reinsurance premiums
earned net of ceding commission) exceeds 115%, subject
to 120 days notice to any December 31, the terms and
conditions can be amended subject to mutual agreement
between the parties hereto.
It is further understood and agreed that the Company
shall declare to the Reinsurers hereunder all policies
issued providing limits greater than
$5,000,000/$5,000,000 per physician, per occurrence.
Upon review of such policies should the Reinsurers deem
the exposure under this contract to be measurably
altered then the terms and conditions hereunder can be
amended subject to mutual agreement between the parties
hereto.
It is specially agreed that in such case the Company
will refrain from ceding any new policies for limits
greater than $5,000,000/$5,000,000 per physician, per
occurrence until such mutual agreement has been
attained.
Page 1 of 3
<PAGE> 2
TERRITORY: As per the Company's original policies, contracts, or binders.
EXCLUSIONS: 1. Insolvency Funds.
2. Nuclear Incident - Liability - Reinsurance.
LIMIT AND
RETENTION: To pay $8,000,000 Ultimate Net Loss each occurrence each
policy in excess of $2,000,000 Ultimate Net Loss each
occurrence each policy.
MAXIMUM
AGGREGATE: Reinsurers maximum liability under this contract shall be
$8,000,000 during each twelve months period and 175% of
Reinsurance Premiums Earned hereunder or $10,000,000
(Indemnity plus Loss Adjustment Expenses), whichever is the
greater, in all during the contract term.
ANNUAL
DEPOSIT
PREMIUM: $950,000, payable $237,500 quarterly as of each 1/1, 4/1, 7/1
and 10/1 during the contract term. Adjustable as of each
December 31 on the basis of "Actual" original gross premium
charged by the Company for policy limits excess of $2,000,000
which are issued or renewed during each twelve months period
January 1 to December 31 during the term of this contract.
ANNUAL
MINIMUM
PREMIUM: $950,000 during each twelve months period.
CEDING
COMMISSION: 15%.
PROFIT
COMMISSION: The Company shall receive a Profit Commission equal to 80% of
the net profit accruing to the Reinsurers under this contract,
computed as follows:
1. Reinsurance Premiums Earned;
2. Less: Losses and Loss Adjustment Expenses Incurred;
3. Less: Ceding Commission of 15% of Reinsurance Premiums
Earned as in (1) above.
4. Less: Management expenses of 23.50% of Reinsurance
Premiums Earned as in (1) above.
Unlimited deficit carryforward to next Treaty period.
The term "Profit Commission" shall mean the period January 1,
1997 through December 31, 1999. It is further agreed that the
first calculation of Profit Commission shall be computed as of
12/31/97, and annually thereafter, and that payment of any
Profit Commission shall be made by the Reinsurers to the
Company as of 12/31/01. The Company agrees that payment of any
Profit
Page 2 of 3
<PAGE> 3
PROFIT
COMMISSION: Commission shall be subject to complete commutation at mutually
(Cont'd) agreeable terms as respects all losses reported within the Profit
Commission period. Payment of any Profit Commission by the
Reinsurers shall constitute full and final release from all
further loss development.
ACCOUNTING: Premium - Payments within 60 days of respective due date.
Losses - Payments within 15 days of receipt of proof of loss.
Outstanding losses reported individually as they
occur.
GENERAL
CONDITIONS: Loss Adjustment Expenses to be Pro-Rated.
Excess of Original Policy Limits Clause.
80% Extra Contractual Obligations Clause.
Ultimate Net Loss Clause.
Net Retained Lines Clause.
Notice of Loss Clause.
Loss Funding Clause - Including IBNR (See Attached).
Commutation Clause.
Federal Excise Tax Clause.
Errors and Omissions Clause.
Insolvency Clause.
Service of Suit Clause.
Arbitration Clause.
Access to Records Clause.
Willcox Incorporated Intermediary Clause.
REINSURERS
HEREON: Hannover Ruckversicherungs-Aktiengesellschaft 100.00%
-------
Total 100.00%
=======
This Cover Note is to confirm the terms and conditions which have been
negotiated between Willcox Incorporated and the participating Reinsurers on your
behalf. We request that you review this Cover Note with regard to the specific
placement details and subscribing Reinsurers listed herein. In the event that
any of these details do not meet with your approval or security of the
subscribing Reinsurers does not meet with your requirements, please notify this
office immediately. If all is found to be in order please sign and return the
enclosed duplicate copy of this Cover Note for completion of our files.
- -------------------------------------
Signature
- --------------------------------------
Date
Willcox Incorporated
By [SIG]
-------------------------------
Executive Vice President
Page 3 of 3
<PAGE> 4
LOSS FUNDING - INCLUDING IBNR
THIS IS APPLICABLE TO NON-ADMITTED REINSURERS ONLY
After consultation with their outside Actuaries, Tillinghast, Nelson & Warren
Inc., S.C.P.I.E. intends to use the following IBNR factors applied to Gross
Reinsurance Premiums for 1997 Letter of Credit Funding purposes applicable to
Non-Admitted Reinsurers only:
<TABLE>
<CAPTION>
IBNR
Period Factor
------ ------
<S> <C>
Current Year 97.00%
First Development Year 40.00%
Second Development Year 17.00%
Third Development Year 7.00%
Fourth Development Year &
Subsequent 2.00%
</TABLE>
The Letter of Credit Funding requirement for IBNR will be net of any Specific
Case Base Loss Reserves. Therefore, the factors outlined above represent the
ceiling for the sum of Specific Case Base Loss Reserves and IBNR. Further, a cap
of five times the Gross Reinsurance Premium will apply as the Lifetime IBNR
Maximum for each Treaty Year.
Page 1 of 1
<PAGE> 1
EXHIBIT 10.25
[WILLCOX INCORPORATED LETTERHEAD]
REINSURED: SOUTHERN CALIFORNIA PHYSICIANS INSURANCE EXCHANGE,
(Eff. 12/31/96) AND/OR S.C.P.I.E. INDEMNITY COMPANY,
AND/OR S.C.P.I.E. MANAGEMENT COMPANY,
AND/OR AMERICAN HEALTHCARE INDEMNITY COMPANY,
AND/OR FG CASUALTY COMPANY,
AND/OR S.C.P.I.E. INSURANCE SERVICES, INC.,
AND/OR S.C.P.I.E. MANAGEMENT SERVICES, INC.
BEVERLY HILLS, CALIFORNIA
TYPE: REINSTATEMENT/RETROACTIVE/AGGREGATE EXTENSION
EXCESS OF LOSS REINSURANCE
BUSINESS
COVERED:
Physicians and Surgeons Comprehensive
Professional and Business Liability
Policies, including Clinics and Clinical
Laboratories, Professional and Business
Liability Policies for Hospitals and Errors
and Omissions Liability Policies for Managed
Care Organizations.
TERM: January 1, 1995 to December 31, 1999.
EXCLUSIONS: 1. Insolvency Funds.
2. Nuclear Incident - Liability - Reinsurance.
Section (A) Reinstatement Premium Protection:
LIMITS: Whereas the Company has purchased Excess
(Eff. 12/31/96) of Loss Reinsurance for limits of $3,000,000 excess of
$2,000,000, each occurrence, $5,000,000 excess of
$5,000,000 each occurrence, and $10,000,000 excess of
$10,000,000 each occurrence, and in the event of loss
elects reinstatement thereunder must pay to the
Reinsurers thereon an additional premium as called for in
the original contracts. In such event, the Reinsurers
hereunder shall pay to the Company the following maximum
amounts:
Page 1 of 6
<PAGE> 2
<TABLE>
<CAPTION>
LIMITS:
(Eff. 12/31/96)
(Cont'd) $3,000,000 $5,000,000 $10,000,000
xs xs xs
$2,000,000 $5,000,000 $10,000,000
---------- ---------- -----------
<S> <C> <C> <C>
1987 1st Reinst. $1,862,696 $509,137 Nil
2nd Reinst. $2,794,043 Nil Nil
1988 1st Reinst. $2,118,125 $578,954 Nil
2nd Reinst. $3,262,500 Nil Nil
1989 1st Reinst. $2,175,000 $994,500 Nil
2nd Reinst. $3,262,500 Nil Nil
1990 1st Reinst. $1,687,896 $500,000 Nil
2nd Reinst. $2,531,844 Nil Nil
1991 1st Reinst. $1,533,062 $500,000 Nil
2nd Reinst. $2,299,592 Nil Nil
1992 1st Reinst. $1,462,500 $425,000 $450,000
2nd Reinst. $2,193,750 Nil Nil
1993 1st Reinst. $1,672,391 $450,000 $557,463
2nd Reinst. $2,508,586 Nil Nil
1994 1st Reinst. $1,791,639 $450,000 $581,504
2nd Reinst. $2,687,459 Nil Nil
1995 1st Reinst. $1,771,431 $450,000 $610,838
2nd Reinst. $2,834,290 Nil Nil
1996 1st Reinst. $1,471,706 $440,000 $579,626
2nd Reinst. $2,354,730 Nil Nil
</TABLE>
(Eff. 12/31/96) Section (B) Retroactive Liability:
In consideration for the premium outlined below, the
Reinsurers hereon agree to assume retroactively for the years
1989, 1990, 1991 and 1992, the limits of $1,000,000 excess of
$1,000,000 each occurrence and for the years 1987 through
1993 the limits of $3,000,000 excess of $2,000,000, each
occurrence, each policy, subject to a maximum amount
recoverable under this Section of $10,000,000 in all during
the term of this Contract.
Page 2 of 6
<PAGE> 3
LIMITS:
(Eff. 12/31/96) Section (C) First Excess Aggregate Extension:
(Cont'd)
In consideration for the premium outlined below, the
Reinsurers hereon agree to provide the Company with additional
aggregate extension limit for the layer $1,000,000 excess of
$1,000,000, each occurrence, separately for the years 1991,
1992, 1993, 1994, 1995 and 1996 such additional limit being
$5,000,000 excess of $8,500,000 or 182.5% of Gross Reinsurance
Premium Earned during each contract term, whichever is the
greater, subject to a maximum amount recoverable under this
Section of $10,000,000 in all during the term of this
Contract.
Notwithstanding the individual limitations of each Section
outlined above, the Maximum Amount Recoverable hereunder shall
not exceed $35,000,000 in all during the term of this
Contract.
WARRANTY: With the exception of the coverage provided under Section (B),
(Eff. 12/31/96) the Company deems to have carried the following additional
reinsurances:
1987 - $1,000,000 excess of $1,000,000, each occurrence.
1988 - $1,000,000 excess of $1,000,000, each occurrence.
1989 - $1,000,000 excess of $1,000,000, each occurrence
(Commuted as of 12/31/93).
1990 - $1,000,00 excess of $1,000,000, each occurrence.
(Commuted as of 12/31/94).
1991 - $1,000,000 excess of $1,000,000, each occurrence.
(Commuted as of 12/31/95).
$8,000,000 excess of $2,000,000, each occurrence,
each policy. (Commuted as of 12/31/95)
1992 - $1,000,000 excess of $1,000,000, each occurrence.
$8,000,000 excess of $2,000,000, each occurrence,
each policy. (Commuted as of 12/31/95)
1993 - $1,000,000 excess of $1,000,000, each occurrence.
$8,000,000 excess of $2,000,000, each occurrence,
each policy. (Commuted as of 12/31/95)
1994 - $1,000,000 excess of $1,000,000, each occurrence.
$8,000,000 excess of $2,000,000, each occurrence,
each policy.
1995 - $1,000,000 excess of $1,000,000, each occurrence.
$8,000,000 excess of $2,000,000, each occurrence,
each policy.
1996 - $1,000,000 excess of $1,000,000 each occurrence.
$8,000,000 excess of $2,000,000 each occurrence,
each policy.
Page 3 of 6
<PAGE> 4
PREMIUM:
(Eff. 12/31/96) The following premiums shall be payable to the Reinsurers in
full, respectively:
<TABLE>
<CAPTION>
1/1/95 12/31/95 12/31/96
------ -------- --------
<S> <C> <C> <C> <C>
Section (A) $2,983,071 $1,821,299 $1,705,669
Section (B) $1,847,218 $1,129,205 $1,057,514
Section (C) $1,132,166 $ 692,094 $ 648,154
</TABLE>
ADDITIONAL
PREMIUM: In the event that paid losses and loss adjustment expenses
(Eff. 12/31/96) under this contract as of any December 31 exceed
$14,000,000, the Company shall pay as additional premium
60% of the difference between such paid loss amount and 100%
of the premium payable hereunder as of January 1, 1995,
December 31, 1995 and December 31, 1996 combined.
PROFIT
COMMISSION: As of December 31, 1996, and annually thereafter a
(Eff. 12/31/96) provisional Profit Commission Statement shall be prepared
in accordance with the following formula:
Income - 95% of premiums payable under Sections (A), (B) and
(C) as of January 1, 1995 and December 31, 1995 and 94.9% of
premiums payable as of December 31, 1996
PLUS
Interest Credit computed at 6.25% annual interest rate on
net cash held by the Reinsurers from January 1, 1995 and
5.50% annual interest rate on net cash held by the
Reinsurers from December 31, 1995.
The term "Net Cash" shall mean 95% of premiums payable as of
January 1, 1995, December 31, 1995 and 94.9% of premiums
payable as of December 31, 1996 hereunder, less loss and
loss adjustment expenses paid and any provisional profit
commission paid in previous calculations;
LESS
Outgo - 100% of all paid and outstanding loss and loss
adjustment expenses recoverable hereunder as of the time of
calculation.
It is understood and agreed that payment of Profit
Commission to the Company shall be as of December 31, 1999,
and shall be subject to full and final release of the
Reinsurers liability under this Contract. However,
notwithstanding the foregoing, the Company at its option can
elect to receive as of any December 31 an annual provisional
payment of 20% of the expected total Profit Commission
hereunder.
Page 4 of 6
<PAGE> 5
PROFIT
COMMISSION:
(Eff. 12/31/96)
(Cont'd) Should the provisional Profit Commission calculation result
in a deficit then any previous provisional payments received
by the Company shall be returned to the Reinsurers.
Likewise, for purposes of all Profit Commission calculations
hereunder any allocation under "Outgo" for I.B.N.R. loss
reserves shall be subject to mutual agreement of the parties
hereto.
GENERAL
CONDITIONS: Loss Adjustment Expenses to be Pro-Rated.
Excess of Original Policy Limits Clause.
80% Extra Contractual Obligations Clause.
Ultimate Net Loss Clause.
Net Retained Lines Clause.
Notice of Loss Clause.
Loss Funding Clause Including IBNR. (See Attached)
Special Funding Clause.
Commutation Clause.
Offset Clause.
Errors and Omissions Clause.
Insolvency Clause.
Service of Suit Clause.
Arbitration Clause.
Access to Records Clause.
Willcox Incorporated Intermediary Clause.
REINSURERS
HEREON: Hannover Ruckversicherungs-Aktiengesellschaft 100.00%
======
Page 5 of 6
<PAGE> 6
This Cover Note is to confirm the terms and conditions which have been
negotiated between Willcox Incorporated and the participating Reinsurers on your
behalf. We request that you review this Cover Note with regard to the specific
placement details and subscribing Reinsurers listed herein. In the event that
any of these details do not meet with your approval or security of the
subscribing Reinsurers does not meet with your requirements, please notify this
office immediately. If all is found to be in order, please sign and return the
enclosed duplicate copy of this Cover Note for completion of our files.
- ---------------------------------------
Company
- ---------------------------------------
Signature
- ---------------------------------------
Date
Willcox Incorporated
By
-------------------------------
Vice President
Page 6 of 6
<PAGE> 7
LOSS FUNDING - INCLUDING IBNR
THIS IS APPLICABLE TO NON-ADMITTED REINSURERS ONLY
After consultation with their outside Actuaries, Tillinghast, Nelson & Warren
Inc., S.C.P.I.E. intends to use the following IBNR factors applied to Gross
Reinsurance Premiums for 1997 Letter of Credit Funding purposes applicable to
Non-Admitted Reinsurers only:
<TABLE>
<CAPTION>
IBNR
Period Factor
------ ------
<S> <C>
Current Year 97.00%
First Development Year 40.00%
Second Development Year 17.00%
Third Development Year 7.00%
Fourth Development Year &
Subsequent 2.00%
</TABLE>
The Letter of Credit Funding requirement for IBNR will be net of any Specific
Case Base Loss Reserves. Therefore, the factors outlined above represent the
ceiling for the sum of Specific Case Base Loss Reserves and IBNR. Further, a cap
of five times the Gross Reinsurance Premium will apply as the Lifetime IBNR
Maximum for each Treaty Year.
Page 1 of 1
<PAGE> 1
EXHIBIT 10.26
[WILLCOX INCORPORATED LETTERHEAD]
REINSURED: SOUTHERN CALIFORNIA PHYSICIANS INSURANCE EXCHANGE,
AND/OR S.C.P.I.E. INDEMNITY COMPANY,
AND/OR S.C.P.I.E. MANAGEMENT COMPANY,
AND/OR AMERICAN HEALTHCARE INDEMNITY COMPANY,
AND/OR FG CASUALTY COMPANY,
AND/OR S.C.P.I.E. INSURANCE SERVICES. INC.
AND/OR S.C.P.I.E. MANAGEMENT SERVICES, INC.
BEVERLY HILLS, CALIFORNIA
TYPE: QUOTA SHARE REINSURANCE TREATY
BUSINESS
COVERED: (A) Directors and Officers Liability for the following
type(s) of Original Insureds:
1. Physician Groups and/or Clinics.
2. Managed Care Organizations.
3. Association of California Hospital Districts -
Program Beta.
(B) Errors and Omissions Liability for the following type(s)
of Original Insureds:
1. Managed Care Organizations.
TERM: January 1, 1997 to December 31, 1997 as respects risks attaching
during the twelve (12) months period.
TERRITORY: As per the Company's original policies, contracts, or binders.
EXCLUSIONS: 1. Insolvency Funds.
2. Nuclear Incident - Liability - Reinsurance.
3. Assumed Reinsurance.
4. As per the Companies original policies.
Page 1 of 3
<PAGE> 2
LIMITS: (A) 80% of $5,000,000 ($4,000,000 maximum) per policy in the
aggregate and/or coverage part.
(B) 80% of $1,000,000 ($800,000 maximum)
per policy in the aggregate and/or
coverage part.
PREMIUM: Original Gross Premiums received by the Reinsured on business
covered hereunder less Ceding Commission.
CEDING
COMMISSION: Original Acquisition Cost plus 15% not to exceed 25% in all.
ACCOUNTS: Reports within forty five (45) days and settlements within sixty
(60) days of the end of each calendar quarter.
GENERAL
CONDITIONS: Loss Adjustment Expenses are within the limit of the original
policies.
Excess of Original Policy Limits Clause.
80% Extra Contractual Obligations Clause.
Ultimate Net Loss Clause.
Net Retained Lines Clause.
Notice of Loss Clause.
Loss and Unearned Premium Reserve Funding Clause - Including IBNR
(See Attached).
Special Funding Clause.
Confidentiality Clause.
Commutation Clause.
Federal Excise Tax Clause.
Errors and Omissions Clause.
Insolvency Clause.
Service of Suit Clause.
Arbitration Clause.
Access to Records Clause.
Willcox Incorporated Intermediary Clause.
Page 2 of 3
<PAGE> 3
<TABLE>
<S> <C>
REINSURERS
HEREON: Hannover Ruckversicherungs AG 50.00%
</TABLE>
Through Willcox Johnson & Higgins Reinsurance Brokers, Ltd.
London, England
Underwriters at Lloyd's
<TABLE>
<CAPTION>
Syndicate Pseudonym Syndicate No. Participation
- --------- --------- ------------- -------------
<S> <C> <C> <C>
Spreckley SVH 1007 11.233%
Mann DPM 435 7.246%
Catlin SJC 1003 62.00%
2003 38.00% 6.159%
Jago HJG 205 3.623%
Burnhope SJB 1212 3.623%
Keeling WEH 362 5.435%
Sub Total 37.319%
CNA International Reinsurance Co. Ltd. 7.246%
Zurich Reinsurance (U.K.) Ltd. 5.435%
-------
Sub Total 50.000%
Total 100.000%
=======
</TABLE>
This Cover Note is to confirm the terms and conditions which have been
negotiated between Willcox Incorporated and the participating Reinsurers on your
behalf. We request that you review this Cover Note with regard to the specific
placement details and subscribing Reinsurers listed herein. In the event that
any of these details do not meet with your approval or security of the
subscribing Reinsurers does not meet with your requirements, please notify this
office immediately. If all is found to be in order please sign and return the
enclosed duplicate copy of this Cover Note for completion of our files.
- -------------------------------------
Signature
- --------------------------------------
Date
Willcox Incorporated
By [SIG]
-------------------------------
Executive Vice President
Page 3 of 3
2
<PAGE> 4
LOSS FUNDING - INCLUDING IBNR
THIS IS APPLICABLE TO NON-ADMITTED REINSURERS ONLY
After consultation with their outside Actuaries, Tillinghast, Nelson & Warren
Inc., S.C.P.I.E. intends to use the following IBNR factors applied to Gross
Reinsurance Premiums for 1997 Letter of Credit Funding purposes applicable to
Non-Admitted Reinsurers only:
<TABLE>
<CAPTION>
IBNR
Period Factor
------ ------
<S> <C>
Current Year 97.00%
First Development Year 40.00%
Second Development Year 17.00%
Third Development Year 7.00%
Fourth Development Year &
Subsequent 2.00%
</TABLE>
The Letter of Credit Funding requirement for IBNR will be net of any Specific
Case Base Loss Reserves. Therefore, the factors outlined above represent the
ceiling for the sum of Specific Case Base Loss Reserves and IBNR. Further, a cap
of five times the Gross Reinsurance Premium will apply as the Lifetime IBNR
Maximum for each Treaty Year.
Page 1 of 1
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
SCPIE HOLDINGS INC. FINANCIAL STATEMENTS AS OF AND FOR THE YEAR ENDED DECEMBER
31, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<DEBT-HELD-FOR-SALE> 668,367
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 19,977
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 717,910
<CASH> 4,212
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 591
<TOTAL-ASSETS> 805,155
<POLICY-LOSSES> 459,567
<UNEARNED-PREMIUMS> 25,297
<POLICY-OTHER> 7,723
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 0
0
0
<COMMON> 0
<OTHER-SE> 288,567
<TOTAL-LIABILITY-AND-EQUITY> 805,155
120,484
<INVESTMENT-INCOME> 40,769
<INVESTMENT-GAINS> 11,738
<OTHER-INCOME> 375
<BENEFITS> 108,797
<UNDERWRITING-AMORTIZATION> 0
<UNDERWRITING-OTHER> 14,276
<INCOME-PRETAX> 50,293
<INCOME-TAX> 11,665
<INCOME-CONTINUING> 30,192
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 30,192
<EPS-PRIMARY> 3.02
<EPS-DILUTED> 0
<RESERVE-OPEN> 446,627
<PROVISION-CURRENT> 168,545
<PROVISION-PRIOR> 59,748
<PAYMENTS-CURRENT> 13,274
<PAYMENTS-PRIOR> 101,849
<RESERVE-CLOSE> 440,301
<CUMULATIVE-DEFICIENCY> 59,748
</TABLE>
