<PAGE> 1
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED JUNE 30, 1998 COMMISSION FILE NO. 1-12449
SCPIE HOLDINGS INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 95-4457980
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
9441 WEST OLYMPIC BOULEVARD, 90212
BEVERLY HILLS, CALIFORNIA (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICE)
(310) 551-5900
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
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
--- ---
At August 7, 1998 the Registrant had issued and outstanding an aggregate of
12,480,991 shares of its Common Stock.
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<PAGE> 2
PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SCPIE HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1998 1997
----------- ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Securities available-for-sale:
Fixed maturity investments, at fair value
(amortized cost 1998 - $709,542;
1997 - $692,811)...................... $725,155 $708,860
Equity investments, at fair value
(cost 1998 - $18,649; 1997 - $17,052). 27,574 23,523
-------- --------
Total securities available-for-sale 752,729 732,383
Short-term investments.................... 43,712 53,281
-------- --------
Total investments................. 796,441 785,664
Cash...................................... 11,352 13,252
Accrued investment income................. 11,980 12,202
Reinsurance recoverables.................. 23,087 21,531
Deferred federal income taxes............. 14,238 16,158
Deferred policy acquisition costs......... 9,344 520
Property and equipment, net............... 19,860 19,534
Other assets.............................. 26,365 19,588
-------- --------
Total assets...................... $912,667 $888,449
======== ========
LIABILITIES
Reserves:
Losses and loss adjustment expenses..... $484,926 $454,971
Unearned premiums....................... 25,218 22,072
-------- --------
Total reserves.................. 510,144 477,043
Other liabilities......................... 28,537 50,291
-------- --------
Total liabilities............... 538,681 527,334
Commitments and contingencies
STOCKHOLDERS' EQUITY
Preferred stock, par value $1.00, 5,000,000
shares authorized, no shares issued or
outstanding -- --
Common stock, par value $.0001, 30,000,000
shares authorized, 12,792,091 shares issued,
1998 - 12,136,591 shares outstanding
1997 - 12,276,691 shares outstanding.. 1 1
Additional paid-in capital................ 36,386 36,386
Retained earnings......................... 326,462 310,506
Treasury stock, at cost
1998 - 155,500 shares and
1997 - 15,400 shares.................... (4,813) (416)
Accumulated other comprehensive income.... 15,950 14,638
------- -------
Total stockholders' equity...... 373,986 361,115
-------- --------
Total liabilities and
stockholders' equity.......... $912,667 $888,449
======== ========
</TABLE>
See accompanying notes.
2
<PAGE> 3
SCPIE HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------------------- ------------------------
1998 1997 1998 1997
------------- ------------- ------------- ---------
Revenues:
<S> <C> <C> <C> <C>
Premiums earned $ 39,794 $ 32,687 $ 79,480 $ 69,111
Net investment income 10,123 10,637 20,626 21,209
Realized investment gains 1,741 1,975 4,061 3,187
Other revenue 232 150 270 289
-------- -------- -------- --------
Total revenues 51,890 45,449 104,437 93,796
Expenses:
Losses and loss adjustment expenses 33,945 30,201 67,376 63,744
Other operating expenses 6,841 4,388 13,940 8,583
-------- -------- -------- --------
Total expenses 40,786 34,589 81,316 72,327
-------- -------- -------- --------
Income before federal income taxes 11,104 10,860 23,121 21,469
Federal income taxes 2,711 2,856 5,704 5,344
-------- -------- -------- --------
Net income $ 8,393 $ 8,004 $ 17,417 $ 16,125
======== ======== ======== ========
Basic earnings per share of common stock $ 0.69 $ 0.65 $ 1.43 $ 1.35
Diluted earnings per share of common stock $ 0.69 N/A $ 1.42 N/A
Cash dividend declared per share of common $ 0.06 $ 0.05 $ 0.12 $ 0.10
stock
</TABLE>
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(UNAUDITED)
<TABLE>
<CAPTION>
ACCUMULATED
ADDITIONAL OTHER TOTAL
PREFERRED COMMON PAID-IN RETAINED TREASURY COMPREHENSIVE STOCKHOLDERS'
STOCK STOCK CAPITAL EARNINGS STOCK INCOME EQUITY
---------- ---------- ----------- -------- --------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT JANUARY 1, 1998 $ - $ 1 $ 36,386 $310,506 ($ 416) $14,638 $ 361,115
Comprehensive Income:
Net income - - - 17,417 - - 17,417
Unrealized
comprehensive
income, net of
reclassification of
$3,919 adjustment for
realized gains
included in net
income of $2,607 1,312 1,312
--------
Comprehensive income $ 18,729
========
Purchase of treasury stock - - - - (4,397) - (4,397)
Cash dividend - - - (1,461) - - (1,461)
--- --- -------- --------- ------ ------- ----------
BALANCE AT JUNE 30, 1998 $ - $ 1 $ 36,386 $326,462 ($4,813) $15,950 $ 373,986
=== === ======== ======== ======= ======= =========
</TABLE>
See accompanying notes.
3
<PAGE> 4
SCPIE HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------------- -----------------------
1998 1997 1998 1997
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net income ...................................... $ 8,393 $ 8,004 $ 17,417 $ 16,125
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Unpaid losses and loss adjustment expenses, and
reinsurance recoverables ........................ (4,983) 1,481 28,399 4,268
Accrued investment income ....................... (916) (3,078) 222 (1,967)
Provision for deferred federal income taxes ..... (166) 116 1,213 (134)
Policy acquisition costs ........................ 923 (124) (8,824) 10
Unearned premiums ............................... (906) (275) 3,146 (546)
Policyholders' dividends payable ................ -- (2,377) -- (4,779)
Realized investments gains ...................... (1,741) (1,975) (4,061) (3,187)
Provisions for amortization and depreciation .... 3,883 857 2,436 1,452
Accrued expenses and other liabilities .......... (1,357) (685) (28,211) (3,551)
Changes in other assets ......................... (5,448) 2,476 (6,777) (4,597)
--------- --------- --------- ---------
Net cash provided by (used in) operating ........ (2,318) 4,420 4,960 3,094
activities
INVESTING ACTIVITIES
Purchases-- fixed maturities .................... (38,944) (101,288) (148,546) (198,483)
Sales-- fixed maturities ........................ 49,182 80,666 112,125 161,285
Maturities-- fixed maturities ................... 11,631 3,006 27,493 4,224
Purchases--equities ............................. (2,097) (1,648) (4,012) (4,340)
Sales--equities ................................. (649) 5,085 2,369 6,958
Change in short-term investments, net ........... (17,887) 11,794 9,569 (2,573)
--------- --------- --------- ---------
Net cash provided by (used in) investing ........ 1,236 (2,385) (1,002) (32,929)
--------- --------- --------- ---------
activities
FINANCING ACTIVITIES
Issuance of common stock, net of expenses ....... -- -- -- 36,387
Purchase of treasury stock ...................... (2,863) -- (4,397) --
Cash dividends .................................. (728) (615) (1,461) (1,230)
--------- --------- --------- ---------
Net cash provided by (used in) financing
activities .................................... (3,591) (615) (5,858) 35,157
--------- --------- --------- ---------
Increase (decrease) in cash ..................... (4,673) 1,420 (1,900) 5,322
Cash at beginning of period ..................... 16,025 8,114 13,252 4,212
--------- --------- --------- ---------
Cash at end of period ........................... $ 11,352 $ 9,534 $ 11,352 $ 9,534
========= ========= ========= =========
</TABLE>
See accompanying notes.
4
<PAGE> 5
SCPIE HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
JUNE 30, 1998
1. BASIS OF PRESENTATION AND REORGANIZATION
Basis of Presentation
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the three-month and six-month period ended
June 30, 1998 are not necessarily indicative of the results that may be expected
for the year ending December 31, 1998. For further information, refer to the
consolidated financial statements and notes thereto included in SCPIE Holdings
Inc.'s annual report on Form 10-K for the year ended December 31, 1997.
The accompanying June 30, 1998 and 1997 consolidated financial statements
include the accounts and operations, after intercompany eliminations, of SCPIE
Holdings Inc. (SCPIE Holdings) and its wholly-owned subsidiaries, principally
SCPIE Indemnity Company (SCPIE Indemnity), American Healthcare Indemnity Company
(AHI), American Healthcare Specialty Insurance Company (AHSIC) and SCPIE
Management Company (SMC), collectively, the Company.
On January 29, 1997, the Southern California Physicians Insurance Exchange
(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. Pursuant to the Reorganization, the
Exchange merged with and into SCPIE Indemnity, a California stock 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 was to improve the Company'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 exchange for their membership interests
in the Exchange.
Concurrent with the Reorganization, SCPIE Holdings completed an initial
public offering, which generated net proceeds to SCPIE Holdings of approximately
$36.4 million.
Certain 1997 amounts have been reclassified to conform to the 1998
presentation.
2. EARNINGS PER SHARE OF COMMON STOCK
The following table sets forth the computation of basic and diluted
earnings per share:
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
---------------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA) 1998 1997
-------- --------
<S> <C> <C>
Numerator:
Net income $17,417 $16,125
Numerator for
basic earnings per share of common stock $17,417 $16,125
diluted earnings per share of common stock $17,417 $16,125
Denominator:
Denominator for basic earnings per share
of common stock - weighted-average 12,208 11,927
shares outstanding
Effect of dilutive securities:
Stock options 18 N/A
-------
Denominator for diluted earnings
per share of common stock adjusted - 12,226 N/A
weighted-average shares outstanding
Basic earnings per share of common stock $ 1.43 $ 1.35
======== =======
Diluted earnings per share of common stock $ 1.42 N/A
========
</TABLE>
5
<PAGE> 6
3. NEW ACCOUNTING STANDARD
As of January 1, 1998, the Company adopted Financial Accounting Standards
Board Statement No. 130 (FASB 130) "Reporting Comprehensive Income." FASB 130
establishes new rules for the reporting and display of comprehensive income and
its components; however, the adoption had no impact on the Company's net income
or stockholders' equity. FASB 130 requires unrealized gains or losses on the
Company's available-for-sale securities, which prior to adoption were reported
separately in stockholders' equity, to be included in other comprehensive
income.
The components of comprehensive income net of related tax, for the six-month
periods ended June 30, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
1998 1997
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Net income $17,417 $16,125
Other comprehensive income:
Change in unrealized gains
(losses) on securities 1,312 (4,076)
------- -------
Total $18,729 $12,049
======= =======
</TABLE>
4. INVESTMENTS
The Company's investments in available-for-sale securities at June 30, 1998
are summarized as follows:
<TABLE>
<CAPTION>
COST OR GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED
COST GAINS LOSSES FAIR VALUE
---- ----- ------ ----------
(IN THOUSANDS)
Fixed-maturity securities:
Bonds:
<S> <C> <C> <C> <C>
U.S. Government and Agencies $315,105 $10,729 $ 181 $325,653
State, Municipalities and
Political Subdivisions 343,192 6,024 1,049 348,167
Mortgage-backed securities,
U.S. Government 46,152 236 146 46,242
Corporate 5,093 - - 5,093
-------- ------- ------- --------
Total fixed-maturity securities 709,542 16,989 1,376 725,155
Equity securities 18,649 9,177 252 27,574
-------- ------- ------- --------
Total $728,191 $26,166 $ 1,628 $752,729
======== ======= ======= ========
</TABLE>
5. FEDERAL INCOME TAXES
The components of the federal income tax provision in the accompanying
consolidated statements of income are summarized as follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
-------------------------
1998 1997
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Current $ 4,491 $ 5,478
Deferred 1,213 (134)
------- -------
Total $ 5,704 $ 5,344
======= =======
</TABLE>
A reconciliation of income tax computed at the federal statutory tax rate to
total income tax expense is as follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
----------------------
1998 1997
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Federal income tax at 35% $ 8,092 $7,514
Increase (decrease) in taxes
resulting from:
Tax-exempt interest (2,445) (2,241)
Dividends received deduction (79) (63)
Goodwill 105 98
Other 31 36
-------- ------
Total $ 5,704 $5,344
======== ======
</TABLE>
6
<PAGE> 7
The Internal Revenue Service (IRS) has proposed adjustments to increase the
Company's tax liability for 1993 through 1995 as a result of its examinations.
The Company's management disagrees with the adjustments proposed by the IRS and
has decided to contest the deficiencies proposed by the IRS for these years. The
1993 taxable year has been assigned to the IRS Appeals Office (Appeals Office)
and it is expected that the 1994 and 1995 taxable years will also be assigned to
the Appeals Office shortly.
The Company's management will take all necessary steps to contest the IRS'
position. The Company's management believes that resolution of this matter will
not have a material adverse effect on the Company's financial position or
results of operation. However, the ultimate outcome cannot be predicted at this
time.
6. COMMITMENTS AND CONTINGENCIES
The Company is a defendant in a California action brought by the bankruptcy
estate of an uninsured physician. The bankruptcy estate alleged that the Company
had an undisclosed conflict of interest when it provided the physician with a
free courtesy defense by an attorney who had represented the interests of the
Company's insureds in other cases. In 1995, a jury made a damage award against
the Company of $4.2 million in compensatory damages, and punitive damages which
were reduced to $14.0 million by the trial judge. The Company appealed these
awards to the California district court of appeal. On May 8, 1998, the appellate
court reversed the judgment against the Company in its entirety. The bankruptcy
estate may attempt to obtain a new trial in the California Superior Court in
which the judgment was originally entered. The Company believes that the
bankruptcy estate is not entitled to any additional trial under applicable
California appellate court decisions and will aggressively oppose any such
attempt. The Company believes that the action is entirely without merit and will
continue to aggressively pursue its rights.
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 $12.3 million were purchased from 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, 1997, a reserve of $4.0 million (net of expected reinsurance
recoveries of $3.0 million) 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 position 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.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
For purposes of this Quarterly Report on Form 10-Q, the terms "SCPIE" and
the "Company" refer, at all times prior to January 29, 1997, to Southern
California Physicians Insurance Exchange (the "Exchange") and its subsidiaries,
collectively, and at all times on or after such date, to SCPIE Holdings Inc. and
its subsidiaries, collectively; and the term "SCPIE Holdings" refers at all
times to SCPIE Holdings Inc., excluding its subsidiaries.
GENERAL
Certain statements in this report on Form 10-Q that are not historical fact
constitute "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995. Such forward-looking statements
involve known and unknown risks, uncertainties and other factors 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 Company's concentration of business in a single line in a single
state; the Company's entry into new markets; competition and other industry
factors, including uncertainties inherent in the estimate of loss and loss
adjustment expense (LAE) reserves, reinsurance, importance of ratings,
regulatory matters, and changes in healthcare; the availability of bank
financing; and certain structural matters, including the Company's holding
company structure and anti-takeover measures. These risks and uncertainties are
discussed in more detail under "Business--Risk Factors," and "Management's
Discussion and Analysis --General" in the Company's Annual Report on Form 10-K
for the fiscal year ended December 31, 1997.
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 1998 COMPARED TO THREE MONTHS ENDED JUNE 30, 1997
Premiums Earned. Premiums earned increased approximately $7.1 million, or
21.7%, to $39.8 million for the three months ended June 30, 1998 from $32.7
million for the same period in 1997. The increase was principally due to a $9.1
million increase in medical malpractice premiums from physicians and medical
groups to approximately $36.4 million for the three months ended June 30, 1998
compared to $27.3 million for the same period in 1997. This increase was a
result of the Company's acquisition of the medical malpractice book of business
of Fremont Indemnity Company (Fremont Indemnity) on January 1, 1998 and initial
premiums attributable to an agency relationship with Poe & Brown, Inc. which
commenced on January 1, 1998. Hospital medical malpractice premiums were
approximately $2.9 million for the three months ended June 30, 1998 compared to
$3.6 million for the same period in 1997. This decrease in 1998 hospital medical
malpractice premiums was due principally to the loss of one large integrated
hospital account in Florida in late 1997. Assumed reinsurance premiums were
approximately $0.8 million for the three months ended June 30, 1998 compared to
$1.6 million for the same period in 1997.
7
<PAGE> 8
Net Investment Income. Net investment income decreased approximately $0.5
million, or 4.8%, to $10.1 million for the three months ended June 30, 1998 from
$10.6 million for the same period in 1997. Average invested assets increased to
$776.1 million during the three months ended June 30, 1998 compared to $735.1
million for the same period in 1997. The average pre-tax yield on the investment
portfolio declined to 5.2% from 5.8% for the same period in 1997 due to a
greater percentage of the portfolio held in 1998 in lower yielding tax-exempt
securities.
Realized Investment Gains and Other Revenue. Realized investment gains were
approximately $1.7 million for the three months ended June 30, 1998 compared to
a realized gain of $2.0 million for the same period in 1997.
Losses and LAE. Losses and LAE increased $3.7 million, or 12.4%, to $33.9
million for the three months ended June 30, 1998 from $30.2 million for the same
period in 1997. As a percentage of premiums earned, losses and LAE decreased to
85.3% for the three months ended June 30, 1998 from 92.4% for the same period in
1997. For the three months ended June 30, 1998, the Company reduced loss and LAE
reserves incurred in prior policy years approximately $16.1 million as compared
to a reserve reduction of $12.0 million for the same period in 1997 for claims
incurred in prior policy years.
Other Operating Expenses. Other operating expenses increased $2.4 million,
or 55.9%, to $6.8 million for the three months ended June 30, 1998 from $4.4
million for the same period in 1997. The ratio of other operating expenses to
premiums earned is referred to as the expense ratio, which was 17.2% for the
three months ended June 30, 1998 and 13.4% for the same period in 1997. This
increase in the expense ratio is due primarily to the amortization of costs of
$1.3 million related to the Fremont Indemnity acquisition, along with higher
expenses associated with the higher premium volume and general personnel
increases.
Federal Income Taxes. Federal income tax expense decreased $0.2 million, to
$2.7 million for the three months ended June 30, 1998 from $2.9 million for the
same period in 1997. The effective tax rate is 24.4% for the three months ended
June 30, 1998 compared to 26.3 % for the three months ended June 30, 1997.
SIX MONTHS ENDED JUNE 30, 1998 COMPARED TO SIX MONTHS ENDED JUNE 30, 1997
Premiums Earned. Premiums earned increased approximately $10.4 million, or
15.0%, to $79.5 million for the six months ended June 30, 1998 from $69.1
million for the same period in 1997. The increase was principally due to a $14.6
million increase in medical malpractice insurance premiums from physicians and
medical groups that were approximately $72.2 million for the six months ended
June 30, 1998 compared to $57.6 million for the same period in 1997. Hospital
medical malpractice premiums were approximately $5.3 million for the six months
ended June 30, 1998 compared to $8.1 million for the same period in 1997. This
decrease was due to the loss of one large Florida integrated hospital account in
late 1997. Assumed reinsurance premiums were approximately $2.0 million for the
six months ended June 30, 1998 compared to $2.9 million for the same period in
1997.
Net Investment Income. Net investment income decreased approximately $0.6
million, or 2.7%, to $20.6 million for the six months ended June 30, 1998 from
$21.2 million and for the same period in 1997. Average invested assets increased
to $775.2 million during the six months ended June 30, 1998 compared to $724.7
million for the same period in 1997. The average pre-tax yield on the investment
portfolio declined to 5.3% for the six months ended June 30, 1998 compared to
5.9% for the same period in 1997 due to a greater percentage of the portfolio
held in 1998 in lower yielding tax-exempt securities.
Realized Investment Gains and Other Revenue. Realized investment gains were
approximately $4.1 million for the six months ended June 30, 1998 compared to
$3.2 million for the same period in 1997.
Losses and LAE. Losses and LAE increased $3.7 million, or 5.7%, to $67.4
million for the six months ended June 30, 1998 from $63.7 million for the same
period in 1997. As a percentage of premiums earned, losses and LAE decreased to
84.8% for the six months ended June 30, 1998 from 92.2% for the same period in
1997. For the six months ended June 30, 1998, the Company reduced loss and LAE
reserves incurred in prior policy years approximately $33.3 million as compared
to a reserve reduction of approximately $27.0 million in loss and LAE reserves
for the six months ended June 30, 1997 for claims incurred in prior policy
years.
Other Operating Expenses. Other operating expenses increased $5.3 million,
or 62.4%, to $13.9 million for the six months ended June 30, 1998 from $8.6
million for the same period in 1997. The expense ratio was 17.5% for the six
months ended June 30, 1998 and 12.4% for the same period in 1997. This increase
in the expense ratio is due primarily to the amortization of costs of $2.5
million related to the Fremont Indemnity acquisition. Additionally, other
operating expenses include certain one-time charges related to the Fremont
Indemnity acquisition and higher expenses associated with the higher premium
volume and general personnel increases
Federal Income Taxes. Federal income taxes increased $0.4 million, or 6.7%,
to $5.7 million for the six months ended June 30, 1998 from $5.3 million for the
same period in 1997. The effective tax rate decreased to 24.7% for the six
months ended June 30, 1998 from 24.9% for the same period in 1997.
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 claims, LAE, operating expenses,
reinsurance premiums and taxes. SCPIE has also paid significant dividends, in
the form of premium credits, to its policyholders in each year since 1980. In
1996, SCPIE declared a final dividend to policyholders of the Exchange of $9.0
million, which was paid principally in the form of premium credits during 1997.
Except for this final dividend, after the Reorganization, the Company has ceased
paying such premium credit dividends to its policyholders.
8
<PAGE> 9
Because of uncertainty related to the timing of the payment of claims, cash
from operations for a property and casualty insurance company can vary
substantially from period to period. During the first six months of 1998, the
cash provided by operating activities for the Company was $5.0 million compared
to $ 7.9 million during the corresponding 1997 period prior to the payment of
policyholders' dividends.
The Company invests its positive cash flow from operations in both fixed
maturity securities and equity securities. A change in SCPIE's investment
philosophy in 1993 resulted in an increase in the purchase of equity securities
and a reduction in the purchase of fixed maturity 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,
SCPIE's portfolio of unaffiliated equity securities was $27.6 million, or 3.5%
of invested assets, at June 30, 1998. The Company plans to continue this focus
on fixed maturity securities investments for the indefinite future. The Company
has made limited investments in real estate, which is used entirely in the
Company's operating activities.
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 $43.7
million, or 5.5% of invested assets, at June 30, 1998. 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 principally
consist of all of the capital stock of its insurance subsidiaries. SCPIE
Holdings' 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 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 is approved by the Insurance Commissioner. The
amount of dividends the insurance subsidiaries are able to pay to SCPIE Holdings
during 1998 without prior regulatory approval is approximately $27.5 million.
Dividends of $15 million were paid during the first six months of 1998.
The Company has received a commitment from a large lender for a bank
facility in the amount of $50.0 million. The commitment is subject to certain
terms and conditions as well as negotiation and completion of all documentation.
The Company expects to use this facility for general corporate purposes.
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.
On July 24, 1998, the Company entered a lease covering approximately 95,000
square feet of office space for new Company headquarters. The lease is for a
term of 10 years and the Company expects to occupy this space in early March
1999. The Company estimates that expenditures of approximately $6.1 million in
capital improvements, equipment and relocation costs will be incurred in
connection with this relocation. The Company does not expect any other material
capital expenditures during the next six months.
During May 1998, the Board of Directors extended the term of the stock
repurchase program in the open market until the 1999 Annual Meeting of
Stockholders. The Company has repurchased 311,500 shares through July 31, 1998
at a total cost of $10.1 million.
IMPACT OF YEAR 2000
The Company has determined that significant portions of its software require
modification so that its computer system will function properly with respect to
dates in the Year 2000 and thereafter. The Company has developed an
implementation plan. The Company estimates that approximately 95% of the most
important changes have been made and anticipates completing the entire project
by December 31, 1998. The total cost of the Year 2000 project since its
inception in 1995 is estimated at $1.8 million, of which approximately $1.4
million has been incurred through June 30, 1998. There can be no assurance,
however, that there will not be a delay in or increased costs associated with
the completion and implementation of such changes by the Company or its
significant suppliers, and the Company's inability to implement such changes
could have an adverse effect on the future results of operations.
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
ratemaking process adequately incorporate the effects of inflation.
9
<PAGE> 10
PART II -- OTHER INFORMATION
ITEM 3. LEGAL PROCEEDINGS
The Company is a defendant in a California action brought by the bankruptcy
estate of an uninsured physician. The bankruptcy estate alleged that the Company
had an undisclosed conflict of interest when it provided the physician with a
free courtesy defense by an attorney who had represented the interests of the
Company's insureds in other cases. In 1995, a jury made a damage award against
the Company of $4.2 million in compensatory damages, and punitive damages which
were reduced to $14.0 million by the trial judge. The Company appealed these
awards to the California district court of appeal. On May 8, 1998, the appellate
court reversed the judgment against the Company in its entirety. The bankruptcy
estate may attempt to obtain a new trial in the California Superior Court in
which the judgment was originally entered. The Company believes that the
bankruptcy estate is not entitled to any additional trial under applicable
California appellate court decisions and will aggressively oppose any such
attempt. The Company believes that the action is entirely without merit and will
continue to aggressively pursue its rights.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At an Annual Meeting of Stockholders held on May 14, 1998, the following
individuals were reelected to the Board of Directors of the Company for a term
ending in 2001: Mitchell S. Karlan, M.D. (8,031,394 votes for, 101,205 withheld
authority), Jack E. McCleary M.D. (8,029,303 votes for, 103,296 withheld
authority), Wendell L. Moseley, M.D. (8,032,171 votes for, 100,428 withheld
authority), and Donald P. Newell. (8,016,291 votes for, 116,308 withheld
authority).
In addition, the 1997 Equity Participation Plan of SCPIE Holdings Inc. was
approved with 4,819,504 votes for, 1,733,133 votes against, 231,652 abstentions,
and 1,348,310 broker non votes.
Also, Ernst & Young LLP was reappointed as the independent auditor of the
Company for the fiscal year ending December 31, 1998. With respect to this
reappointment, 7,957,665 shares voted for ratification of this appointment,
26,072 shares voted against, 148,862 shares abstained, and no broker non-votes
were received.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibits are included herewith.
27 Financial Data Schedule
(b) Not applicable.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SCPIE HOLDINGS INC.
Date: August 13, 1998 By:
-----------------------------------------
Patrick T. Lo
Vice President and Chief Financial Officer
10
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<ARTICLE> 7
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<DEBT-HELD-FOR-SALE> 725,155
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 27,574
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 796,441
<CASH> 11,352
<RECOVER-REINSURE> 23,087
<DEFERRED-ACQUISITION> 9,344
<TOTAL-ASSETS> 912,667
<POLICY-LOSSES> 484,926
<UNEARNED-PREMIUMS> 25,218
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 0
0
0
<COMMON> 1
<OTHER-SE> 373,985<F1>
<TOTAL-LIABILITY-AND-EQUITY> 912,667
79,480
<INVESTMENT-INCOME> 20,626
<INVESTMENT-GAINS> 4,061
<OTHER-INCOME> 270
<BENEFITS> 67,376
<UNDERWRITING-AMORTIZATION> 0
<UNDERWRITING-OTHER> 13,940
<INCOME-PRETAX> 23,121
<INCOME-TAX> 5,704
<INCOME-CONTINUING> 17,417
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 17,417
<EPS-PRIMARY> 1.43
<EPS-DILUTED> 1.42<F2>
<RESERVE-OPEN> 470,411<F3>
<PROVISION-CURRENT> 100,721
<PROVISION-PRIOR> (33,345)
<PAYMENTS-CURRENT> 927
<PAYMENTS-PRIOR> 75,021
<RESERVE-CLOSE> 461,839
<CUMULATIVE-DEFICIENCY> (33,345)
<FN>
<F1>Treasury stock of $4,813 is included as a reduction of other stockholders'
equity. Accumulated other comprehensive income of $15,950 is included as a
component of stockholders' equity.
<F2>The adoption of FASB 128 did not have an impact on the prior period per share
calculations as the Company had only common stock outstanding.
<F3>Includes loss and loss adjustment expense reserves the Company assumed under a
reinsurance agreement from Fremont Indemnity Company as of January 1, 1998.
</FN>
</TABLE>
