<PAGE>
================================================================================
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, 1999 COMMISSION FILE NO. 1-12449
SCPIE HOLDINGS INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C>
DELAWARE 95-4457980
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
1888 CENTURY PARK EAST, STE. 800 90067-1712
LOS ANGELES, CALIFORNIA (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE
OFFICE)
</TABLE>
(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
----- -----
Indicate the number of shares outstanding of each of the issuer's classes of
stock, as of the latest practicable date.
Class Outstanding at August 12, 1999
Preferred stock, par value $l.00 per share No shares outstanding
Common stock, par value $0.0001 per share 12,068,291 shares
================================================================================
<PAGE>
PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SCPIE HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1999 1998
----------- ------------
<S> <C> <C>
(unaudited)
ASSETS
Securities available-for-sale:
Fixed-maturity investments (Note 3), at fair value
(amortized cost 1999 -- $667,485; 1998 -- $698,971) $659,230 $722,196
Equity investments, at fair value
(cost 1999 -- $26,902; 1998 -- $31,493) 28,553 37,015
-------- --------
Total securities available-for-sale 687,783 759,211
Short-term investments 49,228 34,405
-------- --------
Total investments 737,011 793,616
Cash 9,072 12,305
Accrued investment income 10,947 11,440
Reinsurance recoverable 29,440 24,899
Deferred federal income taxes 20,061 12,163
Costs in excess of net assets acquired 7,397 7,811
Property and equipment, net 20,638 19,706
Other assets 35,358 39,529
-------- --------
Total assets $869,924 $921,469
======== ========
LIABILITIES
Reserves:
Losses and loss adjustment expenses $455,309 $477,631
Unearned premiums 22,752 24,591
-------- --------
Total reserves 478,061 502,222
Other liabilities 22,356 32,729
-------- --------
Total liabilities 500,417 534,951
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 $0.0001, 30,000,000
shares authorized,
1999 - 12,937,091 shares issued
11,588,391 shares outstanding
1998 - 12,792,091 shares issued
11,878,791 shares outstanding 1 1
Additional paid-in capital 36,386 36,386
Retained earnings 362,308 344,587
Treasury stock, at cost
(1999 - 848,700 shares; 1998 - 413,300 shares) (24,896) (13,141)
Accumulated other comprehensive income (4,292) 18,685
-------- --------
Total stockholders' equity 369,507 386,518
-------- --------
Total liabilities and stockholders' equity $869,924 $921,469
======== ========
</TABLE>
See accompanying notes.
2
<PAGE>
CONSOLIDATED STATEMENTS OF INCOME
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------- -------------------
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues:
Premiums earned $39,375 $39,794 $ 80,393 $ 79,480
Net investment income 9,961 10,123 19,437 20,626
Realized investment gains 506 1,741 6,608 4,061
Other revenue 93 232 230 270
------- ------- -------- --------
Total revenues 49,935 51,890 106,668 104,437
Expenses:
Losses and loss adjustment expenses 32,187 33,945 65,750 67,376
Other operating expenses 7,055 6,841 14,249 13,940
------- ------- -------- --------
Total expenses 39,242 40,786 79,999 81,316
------- ------- -------- --------
Income before federal income taxes 10,693 11,104 26,669 23,121
Federal income taxes 2,687 2,711 7,071 5,704
------- ------- -------- --------
Net income $ 8,006 $ 8,393 $ 19,598 $ 17,417
======= ======= ======== ========
Basic earnings per share of common stock $ 0.69 $ 0.69 $ 1.67 $ 1.43
Diluted earnings per share of common stock $ 0.69 $ 0.69 $ 1.67 $ 1.42
Cash dividend declared per share of common stock $ 0.08 $ 0.06 $ 0.16 $ 0.12
</TABLE>
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
ACCUMULATED TOTAL
ADDITIONAL OTHER STOCK-
COMMON PAID-IN RETAINED TREASURY COMPREHENSIVE HOLDERS'
STOCK CAPITAL EARNINGS STOCK INCOME EQUITY
------ ---------- ---------- ---------- ------------- --------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE AT JANUARY 1, 1999 $ 1 $36,386 $344,587 $(13,141) $ 18,685 $386,518
--------
Net income -- -- 19,598 -- -- 19,598
Other comprehensive loss for
unrealized loss on securities
net of reclassification adjustments
of $1,757 for losses included
in net income. (22,977) (22,977)
--------
Comprehensive loss (3,379)
--------
Purchase of treasury stock -- -- -- (11,755) -- (11,755)
Cash dividends -- -- (1,877) -- -- (1,877)
------ ------- -------- -------- -------- --------
BALANCE AT JUNE 30, 1999 $ 1 $36,386 $362,308 $(24,896) $ (4,292) $369,507
====== ======= ======== ======== ======== ========
</TABLE>
See accompanying notes.
3
<PAGE>
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,
--------------------- ----------------------
1999 1998 1999 1998
---------- -------- --------- ----------
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net income.................................................................... $ 8,006 $ 8,393 $ 19,598 $ 17,417
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Unpaid losses and loss adjustment expenses, and
reinsurance recoverables................................................. (19,642) (4,983) (26,863) 28,399
Provision for deferred federal income taxes................................ 994 (166) 1,409 1,213
Realized investments gains................................................. (330) (1,132) (4,296) (2,640)
Changes in operating assets and liabilities:
Accrued investment income.................................................. (422) (916) 493 222
Unearned premiums.......................................................... 518 (906) (1,839) 3,146
Provisions for amortization and depreciation............................... 871 3,883 1,672 2,436
Other liabilities.......................................................... (6,496) (1,357) (2,364) (28,211)
Other assets............................................................... (168) (4,525) 4,585 (15,601)
--------- -------- --------- ---------
Net cash provided by (used in) operating activities (16,669) (1,709) (7,605) 6,381
INVESTING ACTIVITIES
Purchases--fixed maturities................................................ (110,921) (38,944) (205,347) (148,546)
Sales--fixed maturities................................................... 138,406 48,864 227,788 111,297
Maturities--fixed maturities............................................... 72 11,631 2,928 27,493
Purchases--equities........................................................ (3,127) (2,097) (15,789) (4,012)
Sales--equities............................................................ 22 (940) 23,247 1,776
Change in short-term investments, net...................................... (811) (17,887) (14,823) 9,569
--------- -------- --------- ---------
Net cash provided by (used in) investing activities................. 23,641 627 18,004 (2,423)
--------- -------- --------- ---------
FINANCING ACTIVITIES
Purchase of treasury stock................................................. (7,682) (2,863) (11,755) (4,397)
Cash dividends (893) (728) (1,877) (1,461)
--------- -------- --------- ---------
Net cash used in financing activities............................... (8,575) (3,591) (13,632) (5,858)
--------- -------- --------- ---------
Decrease in cash.............................................................. (1,603) (4,673) (3,233) (1,900)
Cash at beginning of period................................................... 10,675 16,025 12,305 13,252
--------- -------- --------- ---------
Cash at end of period......................................................... $ 9,072 $ 11,352 $ 9,072 $ 11,352
========= ======== ========= =========
</TABLE>
See accompanying notes.
4
<PAGE>
SCPIE HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
JUNE 30, 1999
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 and with instructions to Form 10-Q and Article 7 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included.
Operating results for the six-month period ended June 30, 1999 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 1999. 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, 1998.
The accompanying June 30, 1999 and 1998 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.
Certain 1998 amounts have been reclassified to conform to the 1999
presentation.
2. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings
per share:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
(IN THOUSANDS, EXCEPT PER SHARE DATA) 1999 1998 1999 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Numerator:
Net income $ 8,006 $ 8,393 $19,598 $17,417
Numerator for:
Basic earnings per share of common stock $ 8,006 $ 8,393 $19,598 $17,417
Diluted earnings per share of common stock $ 8,006 $ 8,393 $19,598 $17,417
Denominator:
Denominator for basic earnings per share of common
stock - weighted-average shares outstanding 11,616 12,196 11,711 12,208
Effect of dilutive securities:
Stock options -- 17 -- 18
------- ------- ------- -------
Denominator for diluted earnings per share of common
stock adjusted - weighted-average shares outstanding 11,616 12,213 11,711 12,226
Basic earnings per share of common stock $ .69 $ .69 $ 1.67 $ 1.43
======= ======= ======= =======
Diluted earnings per share of common stock $ .69 $ .69 $ 1.67 $ 1.42
======= ======= ======= =======
</TABLE>
At June 30, 1999 no incremental shares related to stock options are included
in the diluted average number of shares outstanding as the impact would have
been antidilutive.
5
<PAGE>
3. INVESTMENTS
The Company's investments in available-for-sale securities at June 30, 1999
are summarized as follows:
<TABLE>
<CAPTION>
COST OR GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED
COST GAINS LOSSES FAIR VALUE
-------------- ---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Fixed-maturity investments:
U. S. Government and Agencies $ 194,813 $ 2,700 $ 3,800 $ 193,713
State, Municipalities and
Political Subdivisions 320,389 2,369 5,133 317,625
Mortgage-backed securities 36,991 29 410 36,610
Corporate 115,292 63 4,073 111,282
--------- -------- -------- ---------
Total fixed-maturity investments 667,485 5,161 13,416 659,230
Equity investments 26,902 1,651 -- 28,553
--------- -------- -------- ---------
Total investments $ 694,387 $ 6,812 $ 13,416 $ 687,783
========= ======== ======== =========
</TABLE>
4. FEDERAL INCOME TAXES
The components of the federal income tax provision in the accompanying
statements of income are summarized as follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
----------------------------------------------
1999 1998
--------------------- ----------------------
(IN THOUSANDS)
<S> <C> <C>
Current $ 5,662 $ 4,491
Deferred 1,409 1,213
-------- --------
Total $ 7,071 $ 5,704
======== ========
</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,
---------------------------------------------
1999 1998
--------------------- ---------------------
(IN THOUSANDS)
<S> <C> <C>
Federal income tax at 35% $ 9,334 $ 8,092
Increase (decrease) in taxes resulting from:
Tax-exempt interest (2,460) (2,445)
Dividends received deduction (40) (79)
Goodwill 105 105
Other 132 31
-------- --------
Total $ 7,071 $ 5,704
======== ========
</TABLE>
In July 1997, the Internal Revenue Service (IRS) completed its examination
of the Company's 1993 federal income tax return and issued notices of proposed
adjustment (IRS Form 5701) that would have increased the Company's 1993 tax
liability. In June 1998, the IRS proposed similar adjustments with respect to
the Company's 1994 and 1995 federal income tax returns. All three years (1993-
1995) were the subject of a settlement (IRS Form 870AD), accepted by the IRS as
of July 16, 1999, that did not increase the Company's federal income tax
liability.
5. COMPREHENSIVE INCOME
Total comprehensive income (loss) was ($2,714) and ($3,380) for the three
and six months ended June 30, 1999 and $18,729 and $10,392 for the three and six
months ended June 30, 1998, respectively.
6. COMMITMENTS AND CONTINGENCIES
The Company is named as defendant in various legal actions primarily arising
from claims made under insurance policies and contracts. These actions are
considered by the Company in estimating the loss and loss adjustment expense
reserves. The Company's management believes that the resolution of these actions
will not have a material adverse effect on the Company's financial position or
results of operations.
The Company is a defendant in a California action brought by the bankruptcy
estate of an uninsured physician. The bankruptcy estate alleged that the
Company had an undisclosed conflict of interest when it provided the physician
with a free courtesy defense by an attorney who had represented the interests of
the Company's insureds in other cases. In 1995, a jury made a damage award
against the Company of $4.2 million in compensatory damages, and punitive
damages 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,
6
<PAGE>
1998, the appellate court reversed the judgment against the Company in its
entirety. The case is now remanded to the California Superior Court in which the
judgment was originally entered. The Company has filed a motion in the Superior
Court for entry of judgment in its favor. The bankruptcy estate has opposed this
motion and is seeking a new trial. The matter is now under submission before the
trial judge, who is expected to render a decision within the next 45 days. The
Company believes that the action is entirely without merit and plans to
aggressively pursue its rights.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
The Company is one of the nation's leading providers of medical malpractice
insurance, based on direct premiums written in 1998. The Company currently
insures more than 13,500 physicians, other providers and oral and maxillofacial
surgeons practicing alone or in medical groups, clinics or other healthcare
organizations. The Company also insures a variety of healthcare facilities,
including hospitals, emergency departments, outpatient surgery and hemodialysis
centers, and clinical and pathology laboratories. The Company currently writes
professional liability insurance in 14 states, principally in California.
Certain statements in this report on Form 10-Q that are not historical fact
constitute "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995. Such forward-looking statements
involve known, and unknown risks, uncertainties and other factors based on the
Company's estimates and expectations concerning future events that may cause the
actual results of the Company to be materially different from historical results
or from any results expressed or implied by such forward-looking statements.
Actuarial estimates of losses and loss expenses (LAE) and expectations
concerning the company's ability to retain its current insureds and to expand
its product lines and its business in existing and into new geographical areas,
including through its affiliation with a major insurance broker, Brown & Brown,
are dependent upon a variety of factors, including future economic, competitive
and market conditions; future legislative and regulatory changes; and the
cyclical nature of the property and casualty industry, all of which are
difficult or impossible to predict accurately and many of which are beyond the
control of the company. In addition, the Company is subject to certain
structural risks, including statutory restrictions on intercompany transactions
within the Company's holding company structure, and uncertainties concerning
compliance of the Company's computer systems with Year 2000 requirements. 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, 1998.
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 1999 COMPARED TO THREE MONTHS ENDED JUNE 30, 1998
Premiums Earned. Premiums earned were essentially unchanged at $39.4 million
for the three months ended June 30, 1999 from $39.8 million for the same period
in 1998. Medical malpractice premiums of physicians and medical groups were
approximately $34.2 million for the three months ended June 30, 1999 compared to
$36.4 million for the same period in 1998. This decrease was principally
attributable to the loss of physician insureds during the second quarter of 1999
in medical specialties that experienced 1999 rate increases. Hospital medical
malpractice premiums were approximately $2.4 million for the three months ended
June 30,1999 compared to $2.9 million for the same period in 1998. Assumed
reinsurance premiums were approximately $1.6 million for the three months ended
June 30, 1999 compared to $0.8 million for the same period in 1998.
Net Investment Income. Net investment income decreased to $10.0 million for
the three months ended June 30, 1999 from $10.1 million for the same period in
1998. Average assets decreased to $757.5 million during the three months ended
June 30, 1999 compared to $776.1 million for the same period in 1998. The
investment portfolio contained a larger percentage of higher yielding corporate
bonds during the three months ended June 30, 1999 than in the corresponding
period in 1998.
Realized Investment Gains. Realized investment gains were approximately $0.5
million for the three months ended June 30, 1999 compared to $1.7 million for
the same period in 1998.
Losses and LAE. Losses and LAE decreased to $32.2 million for the three
months ended June 30, 1999 from $33.9 million for the same period in 1998. As a
percentage of premiums earned, losses and LAE decreased to 81.7% for the three
months ended June 30, 1999 from 85.3% for the same period in 1998 due to
continued improvement in trends such as a decrease in the frequency of claims
reported. For the three months ended June 30, 1999, the Company reduced loss and
LAE reserves for claims incurred in prior policy years approximately $15.4
million as compared to a reserve reduction of $16.1 million for the same period
in 1998 for claims incurred in prior policy years.
Other Operating Expenses. Other operating expenses increased by $0.3
million, or 4.4%, to $7.1 million for the three months ended June 30, 1999 from
$6.8 million for the same period in 1998. The ratio of other operating expenses
to premiums earned was 17.9% for the three months ended June 30, 1999 and 17.2%
for the same period in 1998.
Federal Income Taxes. Federal income tax expense was level at $2.7 million
for the three months ended June 30, 1999 and for the same period in 1998. The
effective tax rate is 25.1% for the three months ended June 30, 1999 compared to
24.4% for the same period in 1998.
Net income for the second quarter of $8.0 million, or $0.69 per share,
compares with $8.4 million, or $.069 per share, in 1998, based on fewer shares
outstanding in 1999.
7
<PAGE>
Other comprehensive income or loss represents the change in the unrealized
gains and losses of the Company's investments occurring during the period. The
Company incurred other comprehensive losses for the second quarter of 1999 (net
of tax benefit) of $10.7 million. The losses were primarily the result of
increased market interest rates which reduced the value of the Company's
investment portfolio. See "Quantitative and Qualitative Disclosures About Market
Risk" below.
SIX MONTHS ENDED JUNE 30, 1999 COMPARED TO SIX MONTHS ENDED JUNE 30, 1998
Premiums Earned. Premiums earned increased approximately $0.9 million, or
1%, to $80.4 million for the six months ended June 30, 1999 from $79.5 million
for the same period in 1998. Medical malpractice premiums of physicians and
medical groups were approximately $71.3 million for the six months ended June
30, 1999 compared to $69.1 million for the same period in 1998. This increase
was the result of premiums attributable to an agency relationship with Brown &
Brown, Inc., previously known as Poe & Brown, which commenced on January 1, 1998
principally in Florida, Connecticut and Georgia. Hospital medical malpractice
premiums were approximately $4.6 million for the six months ended June 30,1999
compared to $5.3 million for the same period in 1998. Assumed reinsurance
premiums were approximately $2.6 million for the six months ended June 30, 1999
compared to $2.0 million for the same period in 1998.
Net Investment Income. Net investment income decreased to $19.4 million for
the six months ended June 30, 1999 from $20.6 million for the same period in
1998. Average assets decreased to $765.3 million during the six months ended
June 30, 1999 compared to $775.2 million for the same period in 1998. The
investment portfolio has a higher percentage of lower yielding tax exempt bonds
at June 30, 1999 than the corresponding period in the prior year.
Realized Investment Gains. Realized investment gains were approximately $6.6
million for the six months ended June 30, 1999 compared to $4.1 million for the
same period in 1998.
Losses and LAE. Losses and LAE decreased to $65.8 million for the six months
ended June 30, 1999 from $67.4 million for the same period in 1998. As a
percentage of premiums earned, losses and LAE decreased to 81.8% for the six
months ended June 30, 1999 from 84.8% for the same period in 1998 due to
continued improvement in trends such as a decrease in the frequency of claims
reporting. For the six months ended June 30, 1999, the Company reduced loss and
LAE reserves for claims incurred in prior policy years approximately $31.5
million as compared to a reserve reduction of $33.3 million for the same period
in 1998 for claims incurred in prior policy years.
Other Operating Expenses. Other operating expenses increased by $0.3
million, or 2%, to $14.2 million for the six months ended June 30, 1999 from
$13.9 million for the same period in 1998. The ratio of other operating expenses
to premiums earned was 17.7% for the six months ended June 30, 1999 and 17.5%
for the same period in 1998.
Federal Income Taxes. Federal income tax expense increased $1.4 million, to
$7.1 million for the six months ended June 30, 1999 from $5.7 million for the
same period in 1998. The effective tax rate is 26.5% for the six months ended
June 30, 1999 compared to 24.7% for the same period in 1998 due to higher
realized gains in 1999.
Net income for the first six months of 1999 was $19.6 million, or $1.67 per
share, compared to $17.4 million, or $1.43 per share in 1998. The difference was
principally attributable to the larger capital gains realized in 1999.
Other comprehensive income or loss represents the change in the unrealized
gains and losses of the Company's investments occurring during the period. The
Company incurred other comprehensive losses for the first six months of 1999
(net of tax benefit) of $23.0 million. The losses were primarily the result of
increased market interest rates which reduced the value of the Company's
investment portfolio. See "Quantitative and Qualitative Disclosures about Market
Risk".
LIQUIDITY AND CAPITAL RESOURCES
The primary sources of the Company's liquidity are insurance premiums, net
investment income, recoveries from reinsurers and proceeds from the maturity or
sale of invested assets. Funds are used to pay losses, LAE, operating expenses,
reinsurance premiums and taxes.
Because of uncertainty related to the timing of the payment of claims, cash
from operations for a property and casualty insurance company can vary
substantially from period to period. During the first six months of 1999, the
Company had negative cash flow from operations of $7.6 million compared to a
positive cash flow of $6.4 million in 1998. The negative cash flow during 1999
was due to the unusually high payments of losses and LAE during the second
quarter of 1999.
The Company invests its positive cash flow from operations in both fixed
maturity securities and equity securities. The Company's current policy is to
limit its investment in equity securities and real estate to no more than 8% of
the total market value of its investments. Accordingly, the Company's portfolio
of unaffiliated equity securities was $28.6 million at June 30, 1999. 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 have been
used almost entirely in the Company's operating activities, with the remainder
leased to third parties. In July 1998, the Company entered into 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 moved its headquarters and
principal operations to this space in early March 1999. The
8
<PAGE>
Company intends to lease its former headquarters to third parties. The Company
expended $4.7 million for leasehold improvements and equipment through June 30,
1999, and estimates a total of $6.9 will be incurred.
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 $49.2
million, or 6.7% of invested assets, at June 30, 1999. 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 primarily
consist of all of the capital stock of its insurance company subsidiaries. Its
principal sources of funds are dividends from its subsidiaries and proceeds from
the issuance of debt and equity securities. The insurance company subsidiaries
are restricted by state regulation in the amount of dividends they can pay in
relation to earnings or surplus, without the consent of the applicable state
regulatory authority, principally the California Department of Insurance. SCPIE
Holdings' principal insurance company subsidiary may pay dividends to SCPIE
Holdings in any 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 1999
without prior regulatory approval is approximately $41.1 million. Dividends of
$26.0 million have been paid to SCPIE Holdings through July 31, 1999.
On May 25, 1999 the Company entered into a Credit Agreement with Union Bank
of California, N.A., First Union National Bank, and Dresdner Bank AG, as
lenders. Under the Credit Agreement, the Company may borrow up to $75,000,000,
from time to time, subject to certain conditions. The proceeds from the Credit
Agreement may be used by the Company for general corporate purposes and certain
other permitted uses. The Company has made no borrowings under this agreement.
Based on historical trends, market conditions and its business plans, the
Company believes that its sources of funds will be sufficient to meet its
liquidity needs over the next 18 months and beyond. However, because economic,
market and regulatory conditions may change, there can be no assurance that the
Company's sources of funds will be sufficient to meet these liquidity needs. The
short- and long-term liquidity requirements of the Company may vary because of
the uncertainties regarding the settlement dates for unpaid claims.
During May 1999, the Board of Directors authorized the repurchase of up to
1,000,000 shares of the Company's common stock on the open market. This
authorization replaced the Company's prior program that expired on May 13.
Since 1997, 848,700 shares were repurchased. From July 1, 1999 to August 1,
1999, an additional 20,100 shares were repurchased.
YEAR 2000
The Company relies heavily on information technology ("IT") systems and
other systems and facilities such as telephones, building access control systems
and heating and ventilation equipment ("embedded systems") to conduct its
business. The Company also has business relationships with health care
providers, financial institutions, financial intermediaries, public utilities
and other critical vendors as well as regulators and customers who are
themselves reliant on IT and embedded systems to conduct their businesses.
Worldwide concerns have arisen over the ability of IT and embedded systems
to function properly on and after January 1, 2000 ("Year 2000"). The Year 2000
concern is the result of many computer programs being written using two digits
rather than four digits to define the applicable year. Systems that have date-
sensitive software may recognize a date using "00" as the year 1900 rather than
the year 2000, or as no date. This could result in a system failure or
miscalculations causing disruptions of operations, including, among other
things, a temporary inability to process transactions, send invoices or engage
in similar normal business operations.
State of Readiness
In 1995, the Company organized a multi-disciplinary Year 2000 Project Team.
The Year 2000 Project Team has developed and is currently executing a
comprehensive plan designed to make the Company's mission critical IT systems
and embedded systems Year 2000 ready. Outside consultants have reviewed the
Company's overall process, plan and progress to date. The Company's plan for IT
systems consists of four phases: (1) inventory-identifying all IT systems and
risk rating each according to its potential business impact; (2) assessment -
identifying IT systems that use date functions and assessing them for Year 2000
functionality; (3) remediation -reprogramming, or replacing where necessary,
inventoried items to ensure they are Year 2000 ready; and (4) testing and
certification - testing the code modifications and new inventory with other
associated systems, including extensive date testing and performing quality
assurance testing to ensure successful operation in the post-1999 environment.
The Company completed the remediation of substantially all of its mission
critical IT systems by year-end 1998.
During the first quarter of 1999, the Company conducted and completed
testing and certification. The Company believes that its Year 2000 project,
generally, is completed.
External Relationships
9
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The Company also faces the risk that one or more of its critical suppliers
or customers ("external relationships") will not be able to interact with the
Company due to the third party's inability to resolve its own Year 2000 issues,
including those associated with its own external relationships. The Company has
completed its inventory of external relationships and risk rated each external
relationship based upon the potential business impact, available alternatives
and cost of substitution. The Company is attempting to determine the overall
Year 2000 readiness of its external relationships. In the case of mission
critical suppliers such as banks, financial intermediaries (such as stock
exchanges), telecommunications providers and other utilities, IT vendors,
financial market data providers, major physician groups and major hospitals, the
Company is engaged in discussions with the third parties and is attempting to
obtain detailed information as to those parties' Year 2000 plans and state of
readiness. The Company, however, does not have sufficient information at the
current time to predict whether its external relationships will be Year 2000
ready.
Year 2000 Costs
Year 2000 costs incurred were $1,018,000 and $734,000 in 1998 and 1997,
respectively and are currently estimated to be $101,000 in 1999 for a total of
$1,853,000. A large majority of these costs are expected to be incremental
expenses that will not recur in the Year 2000 or thereafter. The Company
expenses these costs as incurred and funds these costs through operating cash
flows.
Risks and Contingency/Recovery Planning
If the Company's Year 2000 issues were unresolved, potential consequences
would include, among other possibilities, the inability to accurately and timely
process claims, update policyholders' accounts, process financial transactions,
bill policyholders, assess exposure to risks, determine liquidity requirements
or report accurate data to management, stockholders, policyholders, regulators
and others as well as business interruptions or shutdowns, financial losses,
reputational harm, increased scrutiny by regulators and litigation related to
Year 2000 issues. The Company is attempting to limit the potential impact of the
Year 2000 by monitoring the progress of its own Year 2000 project and those of
its critical external relationships and by developing contingency/recovery
plans. The Company cannot guarantee that it will be able to resolve all of its
Year 2000 issues. Any critical unresolved Year 2000 issues at the Company or
with its external relationships, however, could have a material adverse effect
on the Company's results of operations, liquidity or financial condition.
The Company has developed contingency/recovery plans aimed at ensuring the
continuity of critical business functions before and after December 31, 1999. As
part of that process, the Company has developed reasonably likely failure
scenarios for its critical IT systems and external relationships and the
embedded systems in its critical facilities. The Company is developing plans
that are designed to reduce the impact on the Company, and provide methods of
returning to normal operations, if one or more of those scenarios occur. The
Company substantially completed contingency/recovery planning as of June 30,
1999.
Other Factors Affecting the Company's Businesses
Any critical unresolved Year 2000 issues at the Company or with its external
relationships could have a material adverse effect on the Company's results of
operations, liquidity or financial condition. In addition, the Company's
expectations about the future costs and successful completion of its Year 2000
program are subject to uncertainties that could cause actual results to differ
materially from what has been discussed above under "Year 2000." Factors that
could influence the amount of future costs and the completion dates and
effectiveness of remediation, testing and certification and contingency planning
efforts include the Company's success in identifying IT systems and embedded
systems that contain two-digit year codes, the nature and amount of required
reprogramming, testing and certification, the rate and magnitude of related
labor and consulting costs, the availability of qualified personnel and the
success of the Company's external relationships in addressing their own Year
2000 issues.
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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is subject to various market risk exposures, including interest
rate risk and equity price risk.
The Company invests its assets primarily in fixed-maturity securities, which
at June 30, 1999 comprised 89% of total investments at market value. U.S.
government and tax-exempt bonds represent 78% of the fixed-maturity investments,
with the remainder consisting almost entirely of mortgage-backed securities and
corporate bonds. Equity securities, consisting primarily of common stocks,
account for 4% of total investment at market value. The remaining 7% of the
investment portfolio consists of highly liquid short-term investments, which are
primarily overnight bank repurchase agreements and short-term money market
funds.
The value of the fixed-maturity portfolio is subject to interest rate risk.
As market interest rates decrease, the value of the portfolio goes up with the
opposite holding true in rising interest rate environments. A common measure of
the interest sensitivity of fixed-maturity assets is modified duration, a
calculation that takes maturity, coupon rate, yield and call terms to calculate
an average age of the expected cash flows. The longer the duration, the more
sensitive the asset is to market interest rate fluctuations.
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The value of the common stock equity investments is dependent upon general
conditions in the securities markets and the business and financial performance
of the individual companies in the portfolio. Values are typically based on
future economic prospects as perceived by investors in the equity markets.
Interest rates have risen substantially since December 31, 1998, resulting
in a 4.8% decline in the value of five year treasury bonds and adversely
affecting the carrying value of the company's fixed maturity portfolio. At
December 31, 1998 the Company's fixed maturities were valued at $23.2 million in
excess of amortized cost. At June 30, 1999, the value of the portfolio had
declined to $8.3 million below amortized cost.
PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is a defendant in a California action brought by the bankruptcy
estate of an uninsured physician. The bankruptcy estate alleged that the
Company had an undisclosed conflict of interest when it provided the physician
with a free courtesy defense by an attorney who had represented the interests of
the Company's insureds in other cases. In 1995, a jury made a damage award
against the Company of $4.2 million in compensatory damages, and punitive
damages which were reduced to $14.0 million by the trial judge. The Company
appealed these awards to the California district court of appeal. On May 8,
1998, the appellate court reversed the judgment against the Company in its
entirety. The case is now remanded to the California Superior Court in which
the judgment was originally entered. The Company has filed a motion in the
Superior Court for entry of judgment in its favor. The bankruptcy estate has
opposed this motion and is seeking a new trial. The matter is now under
submission before the trial judge, who is expected to render a decision within
the next 45 days. The Company believes that the action is entirely without
merit and plans to aggressively pursue its rights.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Annual Meeting of Stockholders held on May 13, 1999, the following
individuals were reelected to the Board of Directors of the Company for a term
ending in 2002: Charles B. McElwee, M.D. 8,054,307 votes for, 121,394 withheld
authority; William A. Renert, M.D. 8,050,626 votes for, 125,075 withheld
authority; Henry L. Stoutz, M.D. 8,048,749 votes for, 126,952 withheld
authority; and Donald J. Zuk 8,033,247 votes for, 142,454 withheld authority.
In addition, The Senior Executive Bonus Plan of SCPIE Holdings Inc. was
approved with 7,258,256 votes for, 584,107 against, 333,338 abstentions, and no
broker non-votes were received.
Also, Ernst & Young LLP were reappointed as the independent auditor of the
Company for the fiscal year ending December 31, 1999. With respect to this
reappointment, 8,029,303 shares voted for ratification of this appointment,
39,060 shares voted against, 107,338 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.
3 Amended and Restated Bylaws
27 Financial Data Schedule
(b) Reports on Form 8-K.
A Form 8-K was filed on June 22, 1999,
disclosing the execution of a Credit
Agreement under Item 5 in such report.
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, 1999 By: /s/ Patrick T. Lo
--------------------------------------
Patrick T. Lo
Senior Vice President
and Chief Financial Officer
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<PAGE>
EXHIBIT 3
AMENDED AND RESTATED
BYLAWS
OF
SCPIE HOLDINGS INC.
<PAGE>
TABLE OF CONTENTS
-----------------
Page
----
ARTICLE I OFFICES........................................................2
ARTICLE II MEETINGS OF STOCKHOLDERS......................................2
ARTICLE III DIRECTORS....................................................7
ARTICLE IV OFFICERS.....................................................11
ARTICLE V INDEMNIFICATION OF DIRECTORS AND OFFICERS.....................15
ARTICLE VI INDEMNIFICATION OF EMPLOYEES AND AGENTS......................16
ARTICLE VII CERTIFICATES OF STOCK.......................................16
ARTICLE VIII GENERAL PROVISIONS.........................................19
ARTICLE IX AMENDMENTS...................................................21
<PAGE>
AMENDED AND RESTATED
BYLAWS
OF
SCPIE HOLDINGS INC.
ARTICLE I
OFFICES
Section 1. REGISTERED OFFICES. The registered office of the
corporation shall be in the City of Wilmington, County of New Castle, State of
Delaware.
Section 2. OTHER OFFICES. The corporation may also have offices at
such other places both within and without the State of Delaware as the Board of
Directors may from time to time determine or the business of the corporation may
require.
ARTICLE II
MEETINGS OF STOCKHOLDERS
Section 1. PLACE OF MEETINGS. Meetings of stockholders shall be held
at any place within or outside the State of Delaware designated by the Board of
Directors. In the absence of any such designation, stockholders' meetings shall
be held at the principal executive office of the corporation.
Section 2. ANNUAL MEETING OF STOCKHOLDERS. The annual meeting of
stockholders shall be held each year on a date and a time designated by the
Board of Directors.
Section 3. QUORUM; ADJOURNED MEETINGS AND NOTICE THEREOF A majority
of the voting power of the shares of capital stock of the corporation issued and
outstanding and entitled to vote at any meeting of stockholders, the holders of
which are
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present in person or represented by proxy, shall constitute a quorum for the
transaction of business except as otherwise provided by law, by the Certificate
of Incorporation, or by these Bylaws. A quorum, once established, shall not be
broken by the withdrawal of enough votes to leave less than a quorum and the
votes present may continue to transact business until adjournment. If, however,
such quorum shall not be present or represented at any meeting of the
stockholders, a majority of the voting power of the shares of capital stock
represented in person or by proxy may adjourn the meeting from time to time,
without notice other than announcement at the meeting of the time and place of
the adjourned meeting, until a quorum shall be present or represented. At such
adjourned meeting at which a quorum shall be present or represented, any
business may be transacted which might have been transacted at the meeting as
originally noticed. If the adjournment is for more than thirty days, or if after
the adjournment a new record date is fixed for the adjourned meeting, a notice
of the adjourned meeting shall be given to each stockholder of record entitled
to vote thereat.
Section 4. VOTING When a quorum is present at any meeting, in all
matters other than the election of directors, the vote of the holders of stock
representing a majority of the voting power present in person or represented by
proxy shall decide any question brought before such meeting, unless the question
is one upon which by express provision of the Certificate of Incorporation, or
these Bylaws, or any rule, regulation or statutory provision applicable to the
corporation, a different vote is required in which case such express provision
shall govern and control the decision of such question. Directors shall be
elected by a plurality of the votes of the shares present in person or
represented by proxy at the meeting and entitled to vote on the election of
directors.
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Section 5. PROXIES. At each meeting of the stockholders, each
stockholder having the right to vote may vote in person or may authorize another
person or persons to act for him by proxy (i) appointed by an instrument in
writing subscribed by such stockholder and bearing a date not more than one year
prior to said meeting, unless such proxy provides for a longer period, or (ii)
transmitted electronically (including by use of telephone keypad or by the
internet), provided that such transmission is suitably authenticated by a unique
password or other similar means and is recorded electronically or mechanically.
All proxies must be filed with the Secretary of the corporation at the beginning
of each meeting in order to be counted in any vote at the meeting. Each
stockholder shall have one vote for each share of common stock having voting
power, registered in his name on the books of the corporation on the record date
set by the Board of Directors as provided in Article VII, Section 6 hereof.
Section 6. SPECIAL MEETINGS. Special meetings of the stockholders,
for any purpose, or purposes, unless otherwise prescribed by statute or by the
Certificate of Incorporation, may be called by the Board of Directors, the
Chairman of the Board or the President. Such request shall state the purpose or
purposes of the proposed meeting. Business transacted at any special meeting of
stockholders shall be limited to the purposes stated in the notice.
Section 7. NOTICE OF STOCKHOLDER BUSINESS AND NOMINATIONS. (1)
Nominations of persons for election to the Board of Directors of the Corporation
and the proposal of business to be considered by the stockholders may be made at
an annual meeting of stockholders (a) pursuant to the Corporation's notice of
meeting, (b) by or at the direction of the Board of Directors or (c) by any
stockholder of the corporation who was a stockholder of
4
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record at the time of giving of notice provided for in this Bylaw, who is
entitled to vote at the meeting and who complies with the notice procedures set
forth in this Bylaw.
(2) For nominations or other business to be properly brought
before an annual meeting by a stockholder pursuant to clause (c) of paragraph
(1) of this Bylaw, the stockholder must have given timely notice thereof in
writing to the Secretary of the Corporation and such other business must
otherwise be a proper matter for stockholder action. To be timely, a
stockholder's notice shall be delivered to the Secretary at the principal
executive offices of the Corporation not later than 120 days prior to the first
anniversary of the preceding year's annual meeting; provided, however, that in
the event no annual meeting was held, or the date of the meeting changed more
than 30 days from the prior year, such number of days as the Board of Directors
may determine in its sole discretion, such determination to be communicated by
the Corporation to stockholders of the Corporation no later than 30 days before
such deadline by public announcement or by any other means determined by the
Board of Directors, in its sole discretion, to be appropriate for the
notification of stockholders. In no event shall the public announcement of an
adjournment of an annual meeting commence a new time period for the giving of a
stockholder's notice as described above. Such stockholder's notice shall set
forth (a) as to each person whom the stockholder proposes to nominate for
election or re-election as a director all information relating to such person
that is required to be disclosed in solicitations of proxies for election of
directors in an election contest, or is otherwise required, in each case
pursuant to Regulation 14A under the Securities and Exchange Act of 1934 (the
"Exchange Act") and Rule 14A-11 thereunder (including such person's written
consent to being named in the proxy statement as a nominee and to serving as a
5
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director if elected); (b) as to any other business that the stockholder proposes
to bring before the meeting, a brief description of the business desired to be
brought before the meeting, the reasons for conducting such business at the
meeting and any material interest in such business of such stockholder and the
beneficial owner, if any, on whose behalf the nomination or proposal is made and
(c) as to the stockholder giving the notice and the beneficial owner, if any, on
whose behalf the nomination or proposal is made (i) the name and address of such
stockholder, as they appear on the Corporation's books, and of such beneficial
owner and (ii) the class and number of shares of the Corporation which are owned
beneficially and of record by such stockholder and such beneficial owner.
(3) Notwithstanding the foregoing provisions of this Bylaw, a
stockholder shall also comply with all applicable requirements of the Exchange
Act and the rules and regulations thereunder with respect to matters set forth
in this Bylaw. Nothing in this Bylaw shall be deemed to affect any rights of (i)
stockholders to request inclusion of proposals in the Corporation's proxy
statement pursuant to Rule 14a-8 under the Exchange Act or (ii) the holders of
any series of Preferred Stock to elect directors under specified circumstances.
Section 8. MAINTENANCE AND INSPECTION OF STOCKHOLDER LIST The officer who
has charge of the stock ledger of the corporation shall prepare and make, at
least ten days before every meeting of stockholders, a complete list of the
stockholders entitled to vote at the meeting, arranged in alphabetical order,
and showing the address of each stockholder and the number of shares registered
in the name of each stockholder. Such list shall be open to the examination of
any stockholder, for any purpose germane to the meeting, during ordinary
business hours, for a period of at least ten days prior to the meeting, either
at
6
<PAGE>
a place within the city where the meeting is to be held, which place shall be
specified in the notice of the meeting, or, if not so specified, at the place
where the meeting is to be held. The list shall also be produced and kept at the
time and place of the meeting during the whole time thereof, and may be
inspected by any stockholder who is present.
ARTICLE III
DIRECTORS
---------
Section 1. THE NUMBER OF DIRECTORS. The number of directors (other
than directors elected by one or more series of Preferred Stock) which shall
constitute the whole Board shall be not less than seven (7) nor more than
thirteen (13), the exact number of directors to be determined from time to time
solely by resolution adopted by the affirmative vote of a majority of the
directors. The directors need not be stockholders. The directors shall be
elected at the annual meeting of the stockholders, except as provided in Section
2 of this Article, and each director elected shall hold office until his
successor is duly elected and qualified.
Section 2. VACANCIES. Vacancies on the Board of Directors by reason
of death, resignation, removal, or otherwise, and newly created directorships
resulting from any increase in the number of directors may be filled (other than
directors elected by one or more series of Preferred Stock) solely by a majority
of the directors then in office (although less than a quorum) or by a sole
remaining director. Each director so chosen shall hold office until such
director's successor shall have been duly elected and qualified or until such
director's earlier death, resignation, disqualification or removal. If, at the
time of filling any vacancy or any newly created directorship, the directors
then in office shall constitute less than a majority
7
<PAGE>
of the whole Board (as constituted immediately prior to any such increase), the
Court of Chancery may, upon application of any stockholder or stockholders
having the right to vote for such directors, summarily order an election to be
held to fill any such vacancies or newly created directorships, or to replace
the directors chosen by the directors then in office.
Section 3. POWERS. The property and business of the corporation
shall be managed by or under the direction of its Board of Directors. In
addition to the powers and authorities by these Bylaws expressly conferred upon
them, the Board may exercise all such powers of the corporation and do all such
lawful acts and things as are not by statute or by the Certificate of
Incorporation or by these Bylaws directed or required to be exercised or done by
the stockholders.
Section 4. PLACE OF DIRECTORS' MEETINGS. The directors may hold their
meetings and have one or more offices, and keep the books of the corporation
outside of the State of Delaware.
Section 5. REGULAR MEETINGS. Regular meetings of the Board of
Directors may be held without notice at such time and place as shall from time
to time be determined by the Board.
Section 6. SPECIAL MEETINGS. Special meetings of the Board of
Directors may be called by the President on forty-eight hours' notice to each
director, either personally or by mail, telecopier, or other means of electronic
transmission at the address of such director on the books and records of the
corporation; special meetings shall be called by the President or the Secretary
in like manner and on like notice on the written request of two directors.
8
<PAGE>
Section 7. QUORUM. At all meetings of the Board of Directors a
majority of the then authorized number of directors shall be necessary and
sufficient to constitute a quorum for the transaction of business, and the vote
of a majority of the directors present at any meeting at which there is a quorum
shall be the act of the Board of Directors, except as may be otherwise
specifically provided by statute, by the Certificate of Incorporation or by
these Bylaws. If a quorum shall not be present at any meeting of the Board of
Directors, the directors present thereat may adjourn the meeting from time to
time, without notice other than announcement at the meeting, until a quorum
shall be present.
Section 8. ACTION WITHOUT MEETING. Unless otherwise restricted by
the Certificate of Incorporation or these Bylaws, any action required or
permitted to be taken at any meeting of the Board of Directors or of any
committee thereof may be taken without a meeting, if all members of the Board or
committee, as the case may be, consent thereto in writing, and the writing or
writings are filed with the minutes of proceedings of the Board or committee.
Section 9. TELEPHONIC MEETINGS. Unless otherwise restricted by the
Certificate of Incorporation or these Bylaws, members of the Board of Directors,
or any committee designated by the Board of Directors, may participate in a
meeting of the Board of Directors, or any committee, by means of conference
telephone or similar communications equipment by means of which all persons
participating in the meeting can hear each other, and such participation in a
meeting shall constitute presence in person at such meeting.
Section 10. COMMITTEES OF DIRECTORS. The Board of Directors may, by
resolution passed by a majority of the whole Board, designate one or more
committees,
9
<PAGE>
each such committee to consist of one or more of the directors of the
corporation. The Board may designate one or more directors as alternate members
of any committee, who may replace any absent or disqualified member at any
meeting of the committee. In the absence or disqualification of a member of a
committee, the member or members thereof present at any meeting and not
disqualified from voting, whether or not he or they constitute a quorum, may
unanimously appoint another member of the Board of Directors to act at the
meeting in the place of any such absent or disqualified member. Any such
committee, to the extent provided in the resolution of the Board of Directors,
shall have and may exercise all the powers and authority of the Board of
Directors in the management of the business and affairs of the corporation, and
may authorize the seal of the corporation to be affixed to all papers which may
require it; but no such committee shall have the power or authority in reference
to amending the Certificate of Incorporation, adopting an agreement of merger or
consolidation, recommending to the stockholders the sale, lease or exchange of
all or substantially all of the corporation's property and assets, recommending
to the stockholders a dissolution of the corporation or a revocation of a
dissolution, or amending the Bylaws of the corporation; and, unless the
resolution or the Certificate of Incorporation expressly so provide, no such
committee shall have the power or authority to declare a dividend or to
authorize the issuance of stock.
Section 11. MINUTES OF COMMITTEE MEETINGS. Each committee shall keep
regular minutes of its meetings and report the same to the Board of Directors
when required.
10
<PAGE>
Section 12. COMPENSATION OF DIRECTORS. Unless otherwise restricted
by the Certificate of Incorporation or these Bylaws, the Board of Directors
shall have the authority to fix the compensation of directors. The directors
may be paid their expenses, if any, of attendance at each meeting of the Board
of Directors and may be paid a fixed sum for attendance at each meeting of the
Board of Directors or a stated salary as director. No such payment shall
preclude any director from serving the corporation in any other capacity and
receiving compensation therefor. Members of special or standing committees may
be allowed like compensation for attending committee meetings.
ARTICLE IV
OFFICERS
--------
Section 1. OFFICERS. The officers of this corporation shall be chosen
by the Board of Directors and shall include a Chairman of the Board of Directors
or a President, or both, and a Secretary. The corporation may also have at the
discretion of the Board of Directors such other officers as are desired,
including a Vice-Chairman of the Board of Directors, a Chief Executive Officer,
a Treasurer, one or more Vice Presidents, one or more Assistant Secretaries and
Assistant Treasurers, and such other officers as may be appointed in accordance
with the provisions of Section 3 hereof. In the event there are two or more
Vice Presidents, then one or more may be designated as Executive Vice President,
Senior Vice President, or other similar or dissimilar title. At the time of the
election of officers, the directors may by resolution determine the order of
their rank. Any number of offices may be held by the same person, unless the
Certificate of Incorporation or these Bylaws otherwise provide.
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Section 2. ELECTION OF OFFICERS. The Board of Directors, at its
first meeting after each annual meeting of stockholders, shall choose the
officers of the corporation.
Section 3. SUBORDINATE OFFICERS. The Board of Directors may appoint
such other officers and agents as it shall deem necessary who shall hold their
offices for such terms and shall exercise such powers and perform such duties as
shall be determined from time to time by the Board.
Section 4. COMPENSATION OF OFFICERS. The salaries of all officers and
agents of the corporation shall be fixed by the Board of Directors. The
officers of the corporation shall hold office until their successors are chosen
and qualify in their stead. Any officer elected or appointed by the Board of
Directors may be removed at any time by the affirmative vote of a majority of
the members of the Board of Directors. If the office of any officer or officers
becomes vacant for any reason, the vacancy shall be filled by the Board of
Directors.
Section 5. CHAIRMAN OF THE BOARD. The Chairman of the Board, if such
an officer be elected, shall, if present, preside at all meetings of the Board
of Directors and exercise and perform such other powers and duties as may be
from time to time assigned to him by the Board of Directors or prescribed by
these Bylaws. If there is no President, the Chairman of the Board shall in
addition be the Chief Executive Officer of the corporation and shall have the
powers and duties prescribed in Section 6 of this Article IV.
Section 6. PRESIDENT. Subject to such supervisory powers, if any, as
may be given by the Board of Directors to the Chairman of the Board, if there be
such an officer, the President shall be the Chief Executive Officer of the
corporation and shall, subject to the
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<PAGE>
control of the Board of Directors, have general supervision, direction and
control of the business and officers of the corporation. He shall preside at all
meetings of the stockholders and, in the absence of the Chairman of the Board,
or if there be none, at all meetings of the Board of Directors. He shall be an
ex-officio member of all committees and shall have the general powers and duties
of management usually vested in the office of President and Chief Executive
Officer of corporations, and shall have such other powers and duties as may be
prescribed by the Board of Directors or these Bylaws.
Section 7. VICE PRESIDENTS. In the absence or disability of the
President, the Vice Presidents in order of their rank as fixed by the Board of
Directors, or if not ranked, the Vice President designated by the Board of
Directors, shall perform all the duties of the President, and when so acting
shall have all the powers of and be subject to all the restrictions upon the
President. The Vice Presidents shall have such other duties as from time to
time may be prescribed for them, respectively, by the Board of Directors.
Section 8. SECRETARY. The Secretary shall attend all sessions of the
Board of Directors and all meetings of the stockholders and record all votes and
the minutes of all proceedings in a book to be kept for that purpose; and shall
perform like duties for the standing committees when required by the Board of
Directors. He shall give, or cause to be given, notice of all meetings of the
stockholders and of the Board of Directors, and shall perform such other duties
as may be prescribed by the Board of Directors or these Bylaws. He shall keep
in safe custody the seal of the corporation, and when authorized by the Board,
affix the same to any instrument requiring it, and when so affixed it shall be
attested by his signature or by the signature of an Assistant Secretary. The
Board of Directors may give
13
<PAGE>
general authority to any other officer to affix the seal of the corporation and
to attest the affixing by his signature.
Section 9. ASSISTANT SECRETARY. The Assistant Secretary, or if there
be more than one, the Assistant Secretaries in the order determined by the Board
of Directors, or if there be no such determination, the Assistant Secretary
designated by the Board of Directors, shall, in the absence or disability of the
Secretary, perform the duties and exercise the powers of the Secretary and shall
perform such other duties and have such other powers as the Board of Directors
may from time to time prescribe.
Section 10. TREASURER. The Treasurer shall have the custody of the
corporate funds and securities and shall keep full and accurate accounts of
receipts and disbursements in books belonging to the corporation and shall
deposit all moneys, and other valuable effects in the name and to the credit of
the corporation, in such depositories as may be designated by the Board of
Directors. He shall disburse the funds of the corporation as may be ordered by
the Board of Directors, taking proper vouchers for such disbursements, and shall
render to the Board of Directors, at its regular meetings, or when the Board of
Directors so requires, an account of all his transactions as Treasurer and of
the financial condition of the corporation. If required by the Board of
Directors, he shall give the corporation a bond, in such sum and with such
surety or sureties as shall be satisfactory to the Board of Directors, for the
faithful performance of the duties of his office and for the restoration to the
corporation, in case of his death, resignation, retirement or removal from
office, of all books, papers, vouchers, money and other property of whatever
kind in his possession or under his control belonging to the corporation.
14
<PAGE>
Section 11. ASSISTANT TREASURER. The Assistant Treasurer, or if there
shall be more than one, the Assistant Treasurers in the order determined by the
Board of Directors, or if there be no such determination, the Assistant
Treasurer designated by the Board of Directors, shall, in the absence or
disability of the Treasurer, perform the duties and exercise the powers of the
Treasurer and shall perform such other duties and have such other powers as the
Board of Directors may from time to time prescribe.
ARTICLE V
INDEMNIFICATION OF DIRECTORS AND OFFICERS
The corporation shall indemnify every person who was or is a party or is or
was threatened to be made a party to any action, suit, or proceeding, whether
civil, criminal, administrative or investigative, by reason of the fact that he
is or was a director or officer of the corporation or, while a director or
officer of the corporation, is or was serving at the request of the corporation
as a director or officer of another corporation, partnership, joint venture,
trust, employee benefit plan or other enterprise, against expenses (including
counsel fees), judgments, fines and amounts paid in settlement actually and
reasonably incurred by him in connection with such action, suit or proceeding,
to the full extent permitted by applicable law. The corporation shall be
required to indemnify a person in connection with a proceeding (or part thereof)
initiated by such person only if the proceeding (or part thereof) was authorized
by the Board of Directors of the corporation. The indemnification provided for
in these Bylaws shall not be deemed exclusive of any other rights to which those
seeking indemnification may be entitled under these Bylaws, or any agreement,
vote of stockholders or otherwise.
15
<PAGE>
ARTICLE VI
INDEMNIFICATION OF EMPLOYEES AND AGENTS
The corporation may, at its option, indemnify every person who was or is a
party or is or was threatened to be made a party to any action, suit, or
proceeding, whether civil, criminal, administrative or investigative, by reason
of the fact that he is or was an employee or agent of the corporation or, while
an employee or agent of the corporation, is or was serving at the request of the
corporation as an employee or agent or trustee of another corporation,
partnership, joint venture, trust, employee benefit plan or other enterprise,
against expenses (including counsel fees), judgments, fines and amounts paid in
settlement actually and reasonably incurred by him in connection with such
action, suit or proceeding, to the extent permitted by applicable law.
ARTICLE VII
CERTIFICATES OF STOCK
Section 1. CERTIFICATES. Every holder of stock of the corporation
shall be entitled to have a certificate signed by, or in the name of the
corporation by, the Chairman or Vice Chairman of the Board of Directors, or the
President or a Vice President, and by the Secretary or an Assistant Secretary,
or the Treasurer or an Assistant Treasurer of the corporation, certifying the
number of shares represented by the certificate owned by such stockholder in the
corporation.
Section 2. SIGNATURES ON CERTIFICATES. Any or all of the signatures
on the certificate may be a facsimile. In case any officer, transfer agent, or
registrar who has signed or whose facsimile signature has been placed upon a
certificate shall have ceased to be
16
<PAGE>
such officer, transfer agent, or registrar before such certificate is issued, it
may be issued by the corporation with the same effect as if he were such
officer, transfer agent, or registrar at the date of issue.
Section 3. STATEMENT OF STOCK RIGHTS, PREFERENCES, PRIVILEGES. If the
corporation shall be authorized to issue more than one class of stock or more
than one series of any class, the powers, designations, preferences and
relative, participating, optional or other special rights of each class of stock
or series thereof and the qualifications, limitations or restrictions of such
preferences and/or rights shall be set forth in full or summarized on the face
or back of the certificate which the corporation shall issue to represent such
class or series of stock, provided that, except as otherwise provided in section
202 of the General Corporation Law of the State of Delaware, in lieu of the
foregoing requirements, there may be set forth on the face or back of the
certificate which the corporation shall issue to represent such class or series
of stock, a statement that the corporation will furnish without charge to each
stockholder who so requests the powers, designations, preferences and relative,
participating, optional or other special rights of each class of stock or series
thereof and the qualifications, limitations or restrictions of such preferences
and/or rights.
Section 4. LOST CERTIFICATES. The Board of Directors may direct a new
certificate or certificates to be issued in place of any certificate or
certificates theretofore issued by the corporation alleged to have been lost,
stolen or destroyed, upon the making of an affidavit of that fact by the person
claiming the certificate of stock to be lost, stolen or destroyed. When
authorizing such issue of a new certificate or certificates, the Board of
17
<PAGE>
Directors may, in its discretion and as a condition precedent to the issuance
thereof, require the owner of such lost, stolen or destroyed certificate or
certificates, or his legal representative, to advertise the same in such manner
as it shall require and/or to give the corporation a bond in such sum as it may
direct as indemnity against any claim that may be made against the corporation
with respect to the certificate alleged to have been lost, stolen or destroyed.
Section 5. TRANSFERS OF STOCK. Upon surrender to the corporation, or
the transfer agent of the corporation, of a certificate for shares duly endorsed
or accompanied by proper evidence of succession, assignation or authority to
transfer, it shall be the duty of the corporation to issue a new certificate to
the person entitled thereto, cancel the old certificate and record the
transaction upon its books.
Section 6. FIXED RECORD DATE. In order that the corporation may
determine the stockholders entitled to notice of or to vote at any meeting of
the stockholders, or any adjournment thereof, or entitled to receive payment of
any dividend or other distribution or allotment of any rights, or entitled to
exercise any rights in respect of any change, conversion or exchange of stock or
for the purpose of any other lawful action, the Board of Directors may fix a
record date which shall not be more than sixty nor less than ten days before the
date of such meeting, nor more than sixty days prior to any other action. A
determination of stockholders of record entitled to notice of or to vote at a
meeting of stockholders shall apply to any adjournment of the meeting; provided,
however, that the Board of Directors may fix a new record date for the adjourned
meeting.
18
<PAGE>
Section 7. REGISTERED STOCKHOLDERS. The corporation shall be
entitled to treat the holder of record of any share or shares of stock as the
holder in fact thereof and accordingly shall not be bound to recognize any
equitable or other claim or interest in such share on the part of any other
person, whether or not it shall have express or other notice thereof, save as
expressly provided by the laws of the State of Delaware.
ARTICLE VIII
GENERAL PROVISIONS
Section 1. DIVIDENDS. Dividends upon the capital stock of the
corporation, subject to the provisions of the Certificate of Incorporation, if
any, may be declared by the Board of Directors at any regular or special
meeting, pursuant to law. Dividends may be paid in cash, in property, or in
shares of the capital stock, subject to the provisions of the Certificate of
Incorporation.
Section 2. PAYMENT OF DIVIDENDS; DIRECTORS' DUTIES. Before payment of
any dividend there may be set aside out of any funds of the corporation
available for dividends such sum or sums as the directors from time to time, in
their absolute discretion, think proper as a reserve fund to meet contingencies,
or for equalizing dividends, or for repairing or maintaining any property of the
corporation, or for such other purpose as the directors shall think conducive to
the interests of the corporation, and the directors may abolish any such
reserve.
Section 3. CHECK. All checks or demands for money and notes of the
corporation shall be signed by such officer or officers as the Board of
Directors may from time to time designate.
19
<PAGE>
Section 4. FISCAL YEAR. The fiscal year of the corporation shall be
fixed by resolution of the Board of Directors.
Section 5. CORPORATE SEAL. The corporate seal shall have inscribed
thereon the name of the corporation, the year of its organization and the words
"Corporate Seal, Delaware." Said seal may be used by causing it or a facsimile
thereof to be impressed or affixed or reproduced or otherwise.
Section 6. MANNER OF GIVING NOTICE. Whenever, under the provisions of
the Certificate of Incorporation, or of these Bylaws, or any rule, regulation or
statutory provision applicable to the corporation, notice is required to be
given to any director or stockholder, it shall not be construed to mean personal
notice, but such notice may be given (unless otherwise provided) in writing, by
mail, addressed to such director or stockholder, at his address as it appears on
the records of the corporation, with postage thereon prepaid, and such notice
shall be deemed to be given at the time when the same shall be deposited in the
United States mail. Notice to directors may also be given by mail, telecopier,
or other means of electronic transmission at the address of such director on the
books and records of the corporation.
Section 7. WAIVER OF NOTICE. Whenever any notice is required to be
given under the provisions of the Certificate of Incorporation or of these
Bylaws, or any rule, regulation or statutory provision applicable to the
corporation, a waiver thereof in writing, signed by the person or persons
entitled to said notice, whether before or after the time stated therein, shall
be deemed equivalent thereto.
20
<PAGE>
ARTICLE IX
AMENDMENTS
----------
Section 1. AMENDMENT BY DIRECTORS OR STOCKHOLDERS. These Bylaws may
be altered, amended or repealed or new Bylaws may be adopted by the affirmative
vote of the holders of not less than two-thirds of the total voting power of all
outstanding shares of securities of the corporation then entitled to vote
generally in the election of directors or by the Board of Directors, at any
regular meeting of the stockholders or of the Board of Directors or at any
special meeting of the stockholders or of the Board of Directors if notice of
such alteration, amendment, repeal or adoption of new Bylaws be contained in the
notice of such special meeting.
21
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 7
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<DEBT-HELD-FOR-SALE> 659,230
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 28,553
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 737,011
<CASH> 9,072
<RECOVER-REINSURE> 29,440
<DEFERRED-ACQUISITION> 0
<TOTAL-ASSETS> 869,924
<POLICY-LOSSES> 455,309
<UNEARNED-PREMIUMS> 22,752
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 0
0
0
<COMMON> 0
<OTHER-SE> 369,507<F1>
<TOTAL-LIABILITY-AND-EQUITY> 869,924
80,393
<INVESTMENT-INCOME> 19,437
<INVESTMENT-GAINS> 6,608
<OTHER-INCOME> 230
<BENEFITS> 65,750
<UNDERWRITING-AMORTIZATION> 14,249
<UNDERWRITING-OTHER> 0
<INCOME-PRETAX> 26,669
<INCOME-TAX> 7,071
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 19,598
<EPS-BASIC> 1.67
<EPS-DILUTED> 1.67
<RESERVE-OPEN> 477,631
<PROVISION-CURRENT> 101,814
<PROVISION-PRIOR> (31,523)
<PAYMENTS-CURRENT> 3,021
<PAYMENTS-PRIOR> 89,592
<RESERVE-CLOSE> 455,309
<CUMULATIVE-DEFICIENCY> (31,523)
<FN>
<F1>TREASURY STOCK OF $24,896 IS INCLUDED AS A REDUCTION OF OTHER STOCKHOLDERS'
EQUITY. ACCUMULATED OTHER COMPREHENSIVE INCOME OF $(4,292) IS INCLUDED AS A
COMPONENT OF STOCKHOLDERS' EQUITY.
</FN>
</TABLE>
