<PAGE>
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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, 2000 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 11, 2000
Preferred stock, par value $l.00 per share No shares outstanding
Common stock, par value $0.0001 per share 9,340,269 shares
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<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,
2000 1999
-------- --------
(unaudited)
<S> <C> <C>
ASSETS
Securities available-for-sale:
Fixed-maturity investments (Note 3), at fair value
(amortized cost 2000 -- $575,264; 1999 -- $571,792) $555,882 $549,024
Equity investments, at fair value
(cost 2000 -- $24,933; 1999 -- $33,428) 20,411 33,464
-------- --------
Total securities available-for-sale 576,293 582,488
Short-term investments 58,847 72,903
-------- --------
Total investments 635,140 655,391
Cash 3,810 6,858
Accrued investment income 8,524 9,080
Reinsurance recoverable 44,961 45,007
Deferred federal income taxes 24,015 25,434
Costs in excess of net assets acquired 6,568 6,983
Property and equipment, net 7,809 8,091
Real estate 16,306 16,485
Other assets 38,800 39,863
-------- --------
Total assets $785,933 $813,192
======== ========
LIABILITIES
Reserves:
Losses and loss adjustment expenses $435,842 $449,864
Unearned premiums 26,140 25,296
-------- --------
Total reserves 461,982 475,160
Bank loan payable 9,000 13,000
Other liabilities 19,407 30,332
-------- --------
Total liabilities 490,389 518,492
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,
12,792,091 shares issued
2000 - 9,340,269 shares outstanding
1999 - 9,513,189 shares outstanding
1 1
Additional paid-in capital 36,386 36,386
Accumulated other comprehensive loss (15,538) (14,764)
Retained earnings 377,209 370,923
-------- --------
398,058 392,546
Treasury stock, at cost
(2000 - 3,096,993 shares; 1999 - 2,778,902 shares) (98,464) (93,796)
Stock subscription notes receivable (4,050) (4,050)
-------- --------
Total stockholders' equity 295,544 294,700
-------- --------
Total liabilities and stockholders' equity $785,933 $813,192
======== ========
</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,
------------------- --------------------
2000 1999 2000 1999
------- ------- ------- --------
<S> <C> <C> <C> <C>
Revenues:
Premiums earned $43,613 $39,375 $83,649 $ 80,393
Net investment income 8,417 9,961 16,756 19,437
Realized investment gains (losses) 18 506 (897) 6,608
Other revenue 81 93 218 230
------- ------- ------- --------
Total revenues 52,129 49,935 99,726 106,668
Expenses:
Losses and loss adjustment expenses 37,880 32,187 72,012 65,750
Other operating expenses 8,675 7,055 17,403 14,249
------- ------- ------- --------
Total expenses 46,555 39,242 89,415 79,999
------- ------- ------- --------
Income before federal income taxes 5,574 10,693 10,311 26,669
Federal income taxes 1,192 2,687 2,138 7,071
------- ------- ------- --------
Net income $ 4,382 $ 8,006 $ 8,173 $ 19,598
======= ======= ======= ========
Basic earnings per share of common stock $ 0.47 $ 0.69 $ 0.87 $ 1.67
Diluted earnings per share of common stock $ 0.47 $ 0.69 $ 0.87 $ 1.67
Cash dividend declared per share of common stock $ 0.10 $ 0.08 $ 0.20 $ 0.16
</TABLE>
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
STOCK ACCUMULATED TOTAL
ADDITIONAL SUBSCRIPTION OTHER STOCK-
COMMON PAID-IN RETAINED TREASURY NOTES COMPREHENSIVE HOLDERS'
STOCK CAPITAL EARNINGS STOCK RECEIVABLE INCOME EQUITY
------ ---------- ---------- ----------- -------------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT JANUARY 1, 2000 $1 $36,386 $370,923 $(93,796) $(4,050) $(14,764) $294,700
Net income -- -- 8,173 -- -- 8,173
Other comprehensive loss for
unrealized loss on securities sold,
net of reclassification adjustments
of $114 for losses included in
net income. (774) (774)
--------
Comprehensive income 7,399
========
Purchase of treasury stock -- -- -- (4,668) -- (4,668)
Cash dividends -- -- (1,887) -- -- -- (1,887)
-- ------- -------- -------- ------- -------- --------
BALANCE AT JUNE 30, 2000 $1 $36,386 $377,209 $(98,464) $(4,050) $(15,538) $295,544
== ======= ======== ======== ======= ======== ========
</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,
---------------------- ---------------------
2000 1999 2000 1999
-------- --------- -------- ---------
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net income......................................................................... $ 4,382 $ 8,006 $ 8,173 $ 19,598
Adjustments to reconcile net income to net cash
used in operating activities:
Provisions for amortization and depreciation..................................... 937 871 1,772 1,672
Provision for deferred federal income taxes...................................... 871 994 1,824 1,409
Realized investments gains....................................................... (18) (330) 897 (4,296)
Changes in operating assets and liabilities:
Accrued investment income........................................................ (190) (422) 556 493
Unearned premiums................................................................ (429) 518 844 (1,839)
Unpaid losses and loss adjustment expenses, and
reinsurance recoverables....................................................... (8,728) (19,642) (13,976) (26,863)
Other liabilities................................................................ (394) (6,496) (8,013) (2,364)
Other assets..................................................................... 2,128 (168) 1,478 4,585
-------- --------- -------- ---------
Net cash used in operating activities (1,441) (16,669) (6,445) (7,605)
INVESTING ACTIVITIES
Purchases--fixed maturities..................................................... (48,888) (110,921) (97,235) (205,347)
Sales--fixed maturities......................................................... 33,419 138,406 83,738 227,788
Maturities--fixed maturities.................................................... 4,947 72 5,127 2,928
Purchases--equities............................................................. - (3,127) - (15,789)
Sales--equities................................................................. 2,555 22 8,266 23,247
Change in short-term investments, net........................................... 17,810 (811) 14,056 (14,823)
-------- --------- -------- ---------
Net cash provided by investing activities................................ 9,843 23,641 13,952 18,004
-------- --------- -------- ---------
FINANCING ACTIVITIES
Purchase of treasury stock...................................................... (1,367) (7,682) (4,668) (11,755)
Cash dividends.................................................................. (937) (893) (1,887) (1,877)
Bank loan payment............................................................... (4,000) -- (4,000) --
-------- --------- -------- ---------
Net cash used in financing activities.................................... (6,304) (8,575) (10,555) (13,632)
-------- --------- -------- ---------
Increase (decrease) in cash....................................................... 2,098 (1,603) (3,048) (3,233)
Cash at beginning of period........................................................ 1,712 10,675 6,858 12,305
-------- --------- -------- ---------
Cash at end of period.............................................................. $ 3,810 $ 9,072 $ 3,810 $ 9,072
======== ========= ======== =========
</TABLE>
See accompanying notes.
4
<PAGE>
SCPIE HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
JUNE 30, 2000
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, 2000 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 2000. 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, 1999.
The accompanying June 30, 2000 and 1999 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 1999 amounts have been reclassified to conform to the 2000
presentation.
2. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted
earnings per share for the periods indicated:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------------- ---------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA) 2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Numerator:
Net income $ 4,382 $ 8,006 $ 8,173 $ 19,598
Numerator for:
Basic earnings per share of common
stock $ 4,382 $ 8,006 $ 8,173 $ 19,598
Diluted earnings per share of
common stock $ 4,382 $ 8,006 $ 8,173 $ 19,598
Denominator:
Denominator for basic earnings per
share of common stock -
weighted-average shares outstanding 9,385 11,616 9,403 11,711
Effect of dilutive securities:
Stock options 23 -- 12 --
-------- -------- -------- --------
Denominator for diluted earnings
per share of common stock
adjusted - weighted-average
shares outstanding 9,408 11,616 9,415 11,711
Basic earnings per share of common
stock $ .47 $ .69 $ .87 $ 1.67
======== ======== ======== ========
Diluted earnings per share of common
stock $ .47 $ .69 $ .87 $ 1.67
======== ======== ======== ========
</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,
2000 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 $160,801 $ 916 $ 5,500 $156,217
State, Municipalities and
Political Subdivisions 222,256 180 4,757 217,679
Mortgage-backed securities 44,153 101 638 43,616
Corporate 148,054 364 10,048 138,370
-------- ------ ------- --------
Total fixed-maturity investments 575,264 1,561 20,943 555,882
Equity investments 24,933 186 4,708 20,411
-------- ------ ------- --------
Total investments $600,197 $1,747 $25,651 $576,293
======== ====== ======= ========
</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,
---------------------
2000 1999
------ ------
(IN THOUSANDS)
<S> <C> <C>
Current $ 314 $5,662
Deferred 1,824 1,409
------ ------
Total $2,138 $7,071
====== ======
</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,
---------------------
2000 1999
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Federal income tax at 35% $ 3,609 $ 9,334
Increase (decrease) in taxes resulting from:
Tax-exempt interest (1,645) (2,460)
Dividends received deduction (94) (40)
Goodwill 105 105
Other 163 132
------- -------
Total $ 2,138 $ 7,071
======= =======
</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 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 $5,351 and $7,399 for the three and
six months ended June 30, 2000 and $(2,713) and $(3,379) for the three and six
months ended June 30, 1999, 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, 1998, the appellate
court reversed the judgment against the Company in its entirety. The case was
remanded to the California Superior Court in which the judgment was originally
entered. The Company filed a motion in the Superior Court for entry of judgment
in its favor, which the bankruptcy estate opposed. The trial judge ruled in
favor of the Company,
6
<PAGE>
and judgment for the Company was entered on September 29, 1999. The bankruptcy
estate has filed a notice of appeal of this ruling with the District Court of
Appeal. The Company believes that the action is entirely without merit and will
continue to aggressively pursue its rights.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
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 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,
and through its new assumed reinsurance division, are dependent upon a variety
of factors, including future economic, competitive and market conditions; future
legislative and regulatory changes; the inherent difficulty and uncertainty in
making property and casualty loss and LAE estimates; and the cyclical nature of
the property and casualty industry, all of which are difficult or impossible to
predict accurately and many of which are beyond the control of the company. In
addition, the Company is subject to certain structural risks, including
statutory restrictions on intercompany transactions within the Company's holding
company structure. These risks and uncertainties are discussed in more detail
under "Business - Risk Factors," and "Management's Discussion and Analysis -
General" in the Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1999.
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 2000 COMPARED TO THREE MONTHS ENDED JUNE 30, 1999
Premiums Earned. Premiums earned increased by $4.2 million, or 10.6%, to $43.6
million for the three months ended June 30, 2000 from $39.4 million for the same
period in 1999. Medical malpractice premiums of physicians, medical groups and
other healthcare providers were approximately $33.5 million for the three months
ended June 30, 2000 compared to $35.3 million for the same period in 1999.
Hospital medical malpractice premiums were approximately $3.0 million for the
three months ended June 30, 2000 compared to $2.4 million for the same period in
1999. Assumed reinsurance premiums were approximately $7.2 million for the three
months ended June 30, 2000 compared to $1.6 million for the same period in 1999.
The increase in assumed reinsurance premiums reflects the growth of the Ceded
and Assumed Reinsurance Activity that began in the third quarter of 1999. The
Company has underwritten a diversified assumed reinsurance portfolio of property
and casualty, accident and health and marine business during the past nine
months. The Company expects expansion of its assumed reinsurance operations to
continue during the remainder of 2000 and into 2001. The Company continues to
experience severe competition in writing medical malpractice insurance for
physicians and other healthcare providers. A decrease in premium volume in
California in this line has been largely offset by increases in other states.
The Company continues to carefully reunderwrite its hospital medical malpractice
line of insurance through nonrenewals and premium increases for those hospitals
that the Company is willing to renew. This may result in a reduction in hospital
premiums during the next year.
Net Investment Income. Net investment income decreased to $8.4 million for the
three months ended June 30, 2000 from $10.0 million for the same period in 1999.
Average invested assets decreased to $640.6 million during the three months
ended June 30, 2000 compared to $757.5 million for the same period in 1999.
Invested assets were reduced to provide the necessary funds to purchase 2.0
million shares of the Company's common stock in November 1999.
Realized Investment Gains. Realized investment gains were approximately $0.1
million for the three months ended June 30, 2000 compared to $0.5 million for
the same period in 1999.
Losses and LAE. Losses and LAE increased to $37.9 million for the three months
ended June 30, 2000 from $32.2 million for the same period in 1999. As a
percentage of premiums earned, losses and LAE increased to 86.9% for the three
months ended June 30, 2000 from 81.7% for the same period in 1999. This
increase reflects a reduction in the recognition of favorable prior years'
reserve development and continuing adverse loss developments due to the general
soft pricing environment for medical malpractice insurance, together with
ongoing losses in the professional liability programs for hospitals. For the
three months ended June 30, 2000, the Company reduced loss and LAE reserves for
claims incurred in prior policy years approximately $12.4 million as compared to
a reserve reduction of $15.4 million for the same period in 1999 for claims
incurred in prior years. The Company has historically experienced reductions in
prior years' reserves for incurred losses, but expect such reductions to
continue to decrease due to increasing trends in loss severity. There can be no
assurance concerning future reserve adjustments, positive or negative, for prior
years' claims. The liability for losses and LAE represents the Company's best
estimate of the ultimate cost of all losses incurred but unpaid and considers
prior loss experience, loss trends and changes in frequency and severity of
claims. The Company continues to establish reserve estimates for the current
year at estimates it considers conservative, but at lower levels than in prior
years.
Other Operating Expenses. Other operating expenses increased by $1.6 million,
or 22.5%, to $8.7 million for the three months ended June 30, 2000 from $7.1
million for the same period in 1999. The ratio of other operating expenses to
premiums earned was 19.9% for the three months ended June 30, 2000 and 17.9% for
the same period in 1999. This increase reflects the elimination of commissions
received by the Company on reinsurance ceded, a higher proportion of
commissioned premium, and greater employment-related expenses.
Federal Income Taxes. Federal income tax expense was $1.2 million for the
three months ended June 30, 2000 and $2.7 million for the same period in 1999.
The effective tax rate is 21.4% for the three months ended June 30, 2000
compared to 25.1% for the same period in 1999. The lower rate in the 2000
quarter was due to a greater proportion of tax exempt investment income.
Net income for the second quarter of $4.4 million, or $0.47 per share,
compares with $8.0 million, or $0.69 per share, in 1999, based on fewer shares
outstanding in 2000.
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 recorded other comprehensive gains for the second quarter of 2000 (net
of tax benefit) of $1.0 million.
SIX MONTHS ENDED JUNE 30, 2000 COMPARED TO SIX MONTHS ENDED JUNE 30, 1999
Premiums Earned. Premiums earned increased approximately $3.2 million, or
4.0%, to $83.6 million for the six months ended June 30, 2000 from $80.4 million
for the same period in 1999. Medical malpractice premiums of physicians, medical
groups and other healthcare providers were approximately $68.0 million for the
six months ended June 30, 2000 compared to $73.0 million for the same period in
1999. Hospital medical malpractice premiums were approximately $5.3 million
for the six months ended June 30, 2000 compared to $4.6 million for the same
period in 1999. Assumed reinsurance premiums were approximately $10.3 million
for the six months ended June 30, 2000 compared to $2.6 million for the same
period in 1999.
Net Investment Income. Net investment income decreased to $16.8 million for
the six months ended June 30, 2000 from $19.4 million for the same period in
1999. Average invested assets decreased to $645.3 million during the six months
ended June 30, 2000 compared to $765.3 million for the same period in 1999.
Invested assets were reduced to provide the necessary funds to purchase 2.0
million shares of the Company's common stock in November 1999.
Realized Investment Gains. Realized investment losses were approximately $0.9
million for the six months ended June 30, 2000 compared to realized gains of
$6.6 million for the same period in 1999. During the first quarter of 1999 the
Company sold the majority of its equity portfolio, which resulted in significant
realized gains.
Losses and LAE. Losses and LAE increased to $72.0 million for the six months
ended June 30, 2000 from $65.8 million for the same period in 1999. As a
percentage of premiums earned, losses and LAE increased to 86.1% for the six
months ended June 30, 2000 from 81.8% for the same period in 1999. This
increase reflects adverse developments and strengthening of reserves in the
Company's professional liability programs for hospitals. For the six months
ended June 30, 2000, the Company reduced loss and LAE reserves for claims
incurred in prior policy years approximately $25.3 million as compared to a
reserve reduction of $31.5 million for the same period in 1999 for claims
incurred in prior policy years.
Other Operating Expenses. Other operating expenses increased by $3.2 million,
or 22.5%, to $17.4 million for the six months ended June 30, 2000 from $14.2
million for the same period in 1999. The ratio of other operating expenses to
premiums earned was 20.8% for the six months ended June 30, 2000 and 17.7% for
the same period in 1999. This increase reflects the elimination of commissions
received by the Company on reinsurance ceded, a higher proportion of
commissioned premium, and greater employment-related expenses.
Federal Income Taxes. Federal income tax expense decreased $5.0 million, to
$2.1 million for the six months ended June 30, 2000 from $7.1 million for the
same period in 1999. The effective tax rate is 20.7% for the six months ended
June 30, 2000 compared to 26.5% for the same period in 1999, due to higher
realized gains in 1999.
Net income for the first six months of 2000 was $8.2 million, or $.87 per
share, compared to $19.6 million, or $1.67 per share 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 2000
(net of tax benefit) of $0.8 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 2000, the
Company had negative cash flow from operations of $6.4 million compared to a
negative cash flow of $7.6 million in 1999. Negative cash flow from operations
during the quarter ended June 30, 2000 was $1.4 million, and the Company expects
positive cash flow during the third quarter.
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 $20.4 million at June 30, 2000. 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 Company expended
$5.2 million for leasehold improvements and equipment through June 30, 2000.
One of the two former headquarters buildings was leased to a third party
effective September 1, 2000. The Company also intends to lease the other
building to a third party. 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 $58.8 million, or 9.3% of invested assets, at June 30, 2000.
The Company believes that all of its short-term and fixed maturity securities
are readily marketable.
8
<PAGE>
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 2000
without prior regulatory approval is approximately $30.6 million.
On August 31, 1999, the California Insurance Commissioner approved a special
dividend of $80.0 million from SCPIE Indemnity Company to SCPIE Holdings, which
was distributed on November 9, 1999. The proceeds from this dividend were used
by the Company to purchase 2,023,973 shares of its common stock at $35 per share
through a procedure referred to as a "Dutch Auction." Because of the large
amount of these dividends paid to SCPIE Holdings on November 9, 1999, additional
dividends in any material amount effectively may not be paid to SCPIE Holdings,
without regulatory approval, until 12 months after that date. The Company
believes that SCPIE Holdings has sufficient liquid assets and other resources of
cash that no dividends will be required until after November 9, 2000.
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 $75.0 million, 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. As of June 30, 2000, borrowing under the Credit Agreement
totaled $9.0 million.
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 during 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 its common stock on the open market. This authorization
replaced the company's prior program that expired in May 1999. Since 1997,
1,073,020 shares were repurchased under these programs. The Board of Directors
has since extended the term of the stock repurchase program until the 2001
Annual Meeting of Stockholders with respect to the remaining 659,180 shares of
the Company's common stock.
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, 2000 comprised 88% of total investments at market value. U.S.
government and tax-exempt bonds represent 67% 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 3% of total investment at market value. The remaining 9% 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.
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 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, 2000, the value of the portfolio had declined to
$19.4 million below amortized cost.
PART II -- OTHER INFORMATION
9
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ITEM 1. LEGAL PROCEEDINGS
The Company is a defendant in a California action brought by the bankruptcy
estate of an uninsured physician. The bankruptcy estate alleged that the
Company had an undisclosed conflict of interest when it provided the physician
with a free courtesy defense by an attorney who had represented the interests of
the Company's insureds in other cases. In 1995, a jury made a damage award
against the Company of $4.2 million in compensatory damages, and punitive
damages which were reduced to $14.0 million by the trial judge. The Company
appealed these awards to the California district court of appeal. On May 8,
1998, the appellate court reversed the judgment against the Company in its
entirety. The case was remanded to the California Superior Court in which the
judgment was originally entered. The Company filed a motion in the Superior
Court for entry of judgment in its favor, which the bankruptcy estate opposed.
The trial judge ruled in favor of the Company, and judgment for the Company was
entered on September 30, 1999. The bankruptcy estate has filed a notice of
appeal of this ruling with the District Court of Appeal. The Company believes
that the action is entirely without merit and will continue to pursue its
rights.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Annual Meeting of Stockholders held on May 11, 2000, the following
individuals were reelected to the Board of Directors of the Company for a term
ending in 2003: J. Hyatt Brown, 5,923,824 votes for, 88,021 withheld authority;
Henry Gluck 5,925,841 votes for, 86,004 withheld authority; Willis T. King, Jr.
5,926,673 votes for, 85,172 withheld authority; Harriet M. Opfell, MD, 5,928,163
votes for, 83,662 withheld authority, and Reinhold A. Ullrich, MD, 5,927,879
votes for, 83,966 withheld authority. The other directors whose terms of office
continued after the meeting were Mitchell S. Karlan, Jack E. McCleary, Wendell
L. Moseley, Donald P. Newell, Charles B. McElwee, William A. Renert, Henry L.
Stoutz and Donald J. Zuk.
In addition, The SCPIE Holdings Inc. Employee Stock Purchase Plan was approved
with 6,011,845 votes for, 224,034 against, 166,617 abstentions, and 888,028
broker non-votes.
Also, Ernst & Young LLP was re-appointed as the independent auditor of the
Company for the fiscal year ending December 31, 2000. With respect to this
reappointment, 5,911,267 shares voted for ratification of this appointment,
26,575 shares voted against, 74,003 shares abstained, and no broker non-votes
were received.
On July 14, 2000, Henry Gluck resigned as a director of the Company. At a
meeting on August 3, 2000, the Board of Directors reduced the authorized number
of directors from 13 directors to 12 directors.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibits are included herewith.
27 Financial Data Schedule
The Company did not file any reports on Form 8-K
during the three months ended June 30, 2000.
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 14, 2000 By: /s/ Patrick T. Lo
----------------------------------
Patrick T. Lo
Senior Vice President
and Chief Financial Officer
10
