<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 SEPTEMBER 30, 2000 COMMISSION FILE NO. 1-12449
SCPIE HOLDINGS INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 95-4457980
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
1888 CENTURY PARK EAST, STE. 800 90067
LOS ANGELES, CALIFORNIA (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE
OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE:
(310) 551-5900
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
stock, as of the latest practicable date.
Class Outstanding at November 14, 2000
Preferred stock, par value $l.00 per share No shares outstanding
Common stock, par value $0.0001 per share 9,350,927 shares
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PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS:
SCPIE HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
------------- -----------
(unaudited)
<S> <C> <C>
ASSETS
Securities available-for-sale:
Fixed maturity investments, at fair value
(amortized cost 2000 - $584,526; 1999 - $572,792).................................... $570,760 $549,024
Equity investments, at fair value
(cost 2000 - $24,994; 1999 - $33,428)................................................ 21,657 33,464
-------- --------
Total securities available-for-sale............................................ 592,417 582,488
Short-term investments................................................................... 43,751 72,903
-------- --------
Total investments.............................................................. 636,168 655,391
Cash..................................................................................... 6,473 6,858
Accrued investment income................................................................ 8,562 9,080
Reinsurance recoverable.................................................................. 39,641 45,007
Deferred federal income taxes............................................................ 21,021 25,434
Costs in excess of net assets acquired................................................... 6,360 6,983
Property and equipment, net.............................................................. 7,571 8,091
Real estate.............................................................................. 16,216 16,485
Other assets............................................................................. 45,017 39,863
-------- --------
Total assets................................................................... $787,029 $813,192
======== ========
LIABILITIES
Reserves:
Losses and loss adjustment expenses.................................................... $429,435 $449,864
Unearned premiums...................................................................... 27,529 25,296
-------- --------
Total reserves......................................................................... 456,964 475,160
Bank loan payable...................................................................... 9,000 13,000
Other liabilities....................................................................... 17,006 30,332
-------- --------
Total liabilities.............................................................. 482,970 518,492
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 $.0001, 30,000,000
shares authorized, 12,792,091 shares issued,
2000 - 9,350,927 shares outstanding
1999 - 9,513,189 shares outstanding..................................................... 1 1
Additional paid-in capital............................................................... 36,386 36,386
Accumulated other comprehensive loss..................................................... (11,119) (14,764)
Retained earnings........................................................................ 381,119 370,923
-------- --------
406,386 392,546
Treasury stock, at cost
2000 - 2,941,164 shares and 1999 - 2,778,902 shares.................................... (98,278) (93,796)
Stock subscription notes receivable (4,050) (4,050)
-------- --------
Total stockholders' equity..................................................... 304,059 294,700
-------- --------
Total liabilities and stockholders' equity..................................... $787,029 $813,192
======== ========
</TABLE>
See accompanying notes to Consolidated Financial Statements.
2
<PAGE>
SCPIE HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------- ----------------------
2000 1999 2000 1999
------- ------- -------- --------
<S> <C> <C> <C> <C>
Revenues:
Premiums earned $45,428 $38,826 $129,077 $119,219
Net investment income 8,801 9,514 25,557 28,951
Realized investment gains (losses) 753 (1,325) (144) 5,283
Other revenue 103 166 321 396
------- ------- -------- --------
Total revenues 55,085 47,181 154,811 153,849
Expenses:
Losses and loss adjustment expenses 38,738 31,725 110,750 97,475
Other operating expenses 9,837 7,307 27,240 21,556
------- ------- -------- --------
Total expenses 48,575 39,032 137,990 119,031
------- ------- -------- --------
Income before federal income taxes 6,510 8,149 16,821 34,818
Federal income taxes 1,615 1,370 3,753 8,441
------- ------- -------- --------
Net income $ 4,895 $ 6,779 $ 13,068 $ 26,377
======= ======= ======== ========
Basic earnings per share $ 0.52 $ 0.59 $ 1.39 $ 2.26
Diluted earnings per share $ 0.52 $ 0.58 $ 1.39 $ 2.26
Cash dividend declared per share of common stock $ 0.10 $ 0.08 $ 0. 30 $ 0.24
</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 -- -- 13,068 -- -- -- 13,068
Other comprehensive income for unrealized
gains on securities sold, net of
reclassification adjustments of $290 for
losses included in net income -- -- -- -- -- 3,645 3,645
-------
Comprehensive income 16,713
-------
Purchase of treasury stock -- -- -- (4,482) -- -- (4,482)
Cash dividends -- -- (2,872) -- -- -- (2,872)
------- -------- -------- -------- -------- -------- -------
BALANCE AT
SEPTEMBER 30, 2000 $1 $36,386 $381,119 $(98,278) $(4,050) $(11,119) $304,059
======= ======== ======== ======== ======== ======== ========
</TABLE>
See accompanying notes to Consolidated Financial Statements.
3
<PAGE>
SCPIE HOLDINGS INC. AND SUBISIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------- -----------------------
2000 1999 2000 1999
-------- -------- --------- ---------
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net income........................................................................ $ 4,895 $ 6,779 $ 13,068 $ 26,377
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Provisions for amortization and depreciation.................................... 887 1,924 2,659 3,596
Provision for deferred federal income taxes..................................... 603 895 2,427 2,304
Realized investments (gains) losses............................................. (753) 863 144 (3,433)
Changes in operating assets and liabilities:
Accrued investment income....................................................... (38) 1,162 518 1,655
Unearned premiums............................................................... 1,389 (3,533) 2,233 (5,372)
Unpaid losses and loss adjustment expenses, and reinsurance recoverable......... (1,087) (12,220) (15,063) (39,083)
Other liabilities............................................................... (3,573) (6,587) (11,586) (8,951)
Other assets.................................................................... (5,195) 1,276 (2,051) 5,861
-------- -------- --------- ---------
Net cash used in operating activities (2,872) (9,441) (7,651) (17,046)
INVESTING ACTIVITIES
Purchases--fixed maturities.................................................... (82,065) (32,915) (179,300) (238,262)
Sales--fixed maturities........................................................ 69,395 42,582 153,133 270,370
Maturities--fixed maturities................................................... 4,724 1,000 9,851 3,928
Purchases--equities............................................................ -- -- -- (15,789)
Sales--equities................................................................ -- -- 8,266 23,247
Change in short-term investments, net.......................................... 15,096 1,202 29,152 (13,621)
Change in funds held by reinsured.............................................. (816) -- (2,482) --
-------- -------- --------- ---------
Net cash provided by investing activities............................... 6,334 11,869 18,620 29,873
-------- -------- --------- ---------
FINANCING ACTIVITIES
Purchase of treasury stock..................................................... 186 (618) (4,482) (12,373)
Cash dividends................................................................. (985) (925) (2,872) (2,802)
Payments on bank loan.......................................................... -- -- (4,000) --
-------- -------- --------- ---------
Net cash used in financing activities................................... (799) (1,543) (11,354) (15,175)
-------- -------- --------- ---------
Increase (decrease) in cash....................................................... 2,663 885 (385) (2,348)
Cash at beginning of period....................................................... 3,810 9,072 6,858 12,305
-------- -------- --------- ---------
Cash at end of period............................................................. $ 6,473 $ 9,957 $ 6,473 $ 9,957
======== ======== ========= =========
</TABLE>
See accompanying notes to Consolidated Financial Statements.
4
<PAGE>
SCPIE HOLDINGS INC. AND SUBISIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
SEPTEMBER 30, 2000
1. BASIS OF PRESENTATION
The accompanying September 30, 2000 and 1999 unaudited consolidated
financial statements include the accounts and operations, after intercompany
eliminations, of SCPIE Holdings Inc. (SCPIE Holdings) and its wholly-owned
subsidiaries, principally SCPIE Indemnity Company (SCPIE Indemnity), American
Healthcare Indemnity Company (AHI), American Healthcare Specialty Insurance
Company (AHSIC) and SCPIE Management Company (SMC), collectively, the Company.
These financial statements have been prepared in accordance with generally
accepted accounting principles for interim financial information and with
instructions to Form 10-Q and Article 7 of Regulation S-X. Accordingly, they do
not include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation have been included. Operating results for the
nine-month period ended September 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.
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:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
(IN THOUSANDS, EXCEPT PER SHARE DATA) 2000 1999 2000 1999
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Income (Numerator):
Income applicable to common stock
for basic and diluted income per
share $ 4,895 $ 6,779 $ 13,068 $ 26,377
Weighted Average Shares (Denominator):
Basic shares 9,351 11,580 9,385 11,664
Effect of dilutive securities:
Stock options -- 19 8 6
-------- -------- --------- ---------
Diluted shares 9,351 11,599 9,393 11,670
Basic earnings per share $ 0.52 $ 0.59 $ 1.39 $ 2.26
======== ======== ========= =========
Diluted earnings per share $ 0.52 $ 0.58 $ 1.39 $ 2.26
======== ======== ========= =========
</TABLE>
For the quarter ended September 30, 2000 no incremental shares related to stock
options are included in the diluted number of shares outstanding as the impact
would have been antidilutive.
3. INVESTMENTS
The Company's investments in available-for-sale securities at September 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 securities:
Bonds:
U. S. Government and Agencies $ 167,940 $ 579 $ 3,726 $ 164,793
State, Municipalities and
Political Subdivisions 216,679 529 3,167 214,041
Mortgage-backed securities, U.S. Government 40,023 228 458 39,793
Corporate 159,884 519 8,270 152,133
------------ --------- --------- ---------
Total fixed-maturity securities 584,526 1,855 15,621 570,760
Equity securities 24,994 359 3,696 21,657
------------ --------- --------- ---------
Total $ 609,520 $ 2,214 $ 19,317 $ 592,417
============ ========= ========= =========
</TABLE>
5
<PAGE>
4. FEDERAL INCOME TAXES
A reconciliation of income tax computed at the federal statutory tax rate
to total income tax expense is as follows:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
---------------------
2000 1999
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Federal income tax at 35% $ 5,887 $ 12,186
Increase (decrease) in taxes resulting from:
Tax-exempt interest (2,454) (3,703)
Dividends received deduction (30) (85)
Goodwill 158 158
Other 192 (115)
-------- --------
Total $ 3,753 $ 8,441
======== ========
</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 $9,314 and $16,713 for the three and
nine months ended September 30, 2000 and $777 and $(2,603) for the three and
nine months ended September 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 that were reduced to $14.0 million by the trial judge. The Company
appealed these awards to the California district court of appeal. On May 8,
1998, the appellate court reversed the judgment against the Company in its
entirety. The case was remanded to the California Superior Court in which the
judgment was originally entered. The Company filed a motion in the Superior
Court for entry of judgment in its favor, which the bankruptcy estate opposed.
The trial judge ruled in favor of the Company, and judgment for the Company was
entered on September 30, 1999. The bankruptcy estate has filed an appeal of
this ruling with the District Court of Appeal. The Company does not expect a
decision from the appellate court until approximately August 2001. The Company
believes that the action is entirely without merit and will continue to
aggressively pursue its rights.
7. ACCOUNTING PRONOUNCEMENTS
The Company will adopt Statement of Financial Accounting Standards (SFAS)
No. 133, "Accounting for Derivative Instruments and Hedging Activities"
effective January 1, 2001. Adoption of this pronouncement is not expected to
have a material effect on the financial position or results of operations of the
Company.
6
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
The Company is a leading provider of professional liability insurance
offering medical malpractice and other coverages to physicians, medical groups
and hospitals and also operates a Ceded and Assumed reinsurance division which
was formed in the third quarter of 1999.
Certain statements in this report on Form 10-Q that are not historical fact
constitute "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995. Such forward-looking statements
involve known, and unknown risks, uncertainties and other factors based on the
Company's estimates and expectations concerning future events that may cause the
actual results of the Company to be materially different from historical results
or from any results expressed or implied by such forward-looking statements.
Actuarial estimates of losses and loss adjustment expenses (LAE) and
expectations concerning the company's ability to retain its current insureds and
to expand its product lines and its business in existing and into new
geographical areas, including through its affiliation with a major insurance
broker, Brown & Brown, and through its reinsurance division are dependent upon a
variety of factors, including future economic, competitive and market
conditions; future legislative and regulatory changes; the inherent difficulty
and uncertainty in making property and casualty loss and LAE estimates; and the
cyclical nature of the property and casualty industry, all of which are
difficult or impossible to predict accurately and many of which are beyond the
control of the company. In addition, 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 SEPTEMBER 30, 2000 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 1999
Premiums Earned. Premiums earned increased 17.0% to $45.4 million in the
quarter ended September 30, 2000 from $38.2 million in the 1999 third quarter.
Medical malpractice premiums from physicians, medical groups and other
healthcare providers increased 8.0% to $36.4 million in the third quarter of
2000 from $33.8 million in the 1999 quarterly period. Results in 2000 reflect
continuing market competition and declines in premium volume in California,
which were more than offset during the third quarter by higher writings in other
states. Hospital medical malpractice premiums during the third quarter of 2000
increased 8.0% to $2.3 million from $2.1 million in the 1999 third quarter. The
Company continues to carefully underwrite its hospital medical malpractice line
through nonrenewals and premium increases which may result in a decline in
hospital premiums during the next 9 to 12 months. Commencing in the third
quarter of 1999, the Company began a diversified line of property and casualty,
accident and health and marine business and expects expansion of its assumed
reinsurance operations to continue throughout 2000 and 2001. Earned assumed
reinsurance premiums increased to $6.7 million in the third quarter of 2000 from
$2.9 million in the 1999 third quarter.
Net Investment Income. Net investment income for the three months ended
September 30, 2000 declined to $8.8 million from $9.5 million in the 1999 third
quarter. These changes reflect a decrease in average invested assets from
$725.5 million in the 1999 year to date period to $645.8 in the 2000 nine month
period resulting from the Company's common stock repurchase programs and the
effect of interest rate fluctuations.
Realized Investment Gains. Investment gains of $0.8 million were realized
in the third quarter of 2000 compared to a realized loss of $1.3 million in the
1999 quarterly period. Variation in investment returns occur due to interest
rate fluctuations and general conditions in the securities markets that are
evaluated by the Company in accordance with its investment guidelines.
Losses and LAE. Losses and LAE increased to $38.7 million in the third
quarter of 2000 from $31.7 million in the third quarter of 1999. As a percentage
of premiums earned, losses and LAE were 85.2% in the 2000 third quarter and
81.8% for the 1999 third quarter. Increases in loss and LAE ratios reflect a
reduction in the recognition of favorable prior years' reserve development and
the effects of the competitive pricing environment for medical malpractice
insurance combined with higher loss development in hospital professional
liability programs. In the third quarter of 2000, the Company reduced loss and
LAE reserves for claims incurred in prior policy years approximately $8.7
million as compared to a reserve reduction of $15.7 million in the 1999
quarterly period. The Company has historically experienced reductions in prior
years' reserves for incurred losses, and expects such decreases to vary as loss
severity trends increase and decrease over time. 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 the frequency and severity of claims. The
Company continues to establish reserve estimates for the current year that it
considers conservative, but at lower levels than prior years.
Other Operating Expenses. Other operating expenses increased by $2.5
million, or 34.0%, to $9.8 million for the three months ended September 30, 2000
from $7.3 million for the same period in 1999. Increases in other operating
expenses reflect the elimination of commissions received by the Company on ceded
reinsurance, a higher proportion of commissioned premium and greater employment-
related expenses. The ratio of other operating expenses to premiums earned was
21.6% for the three months ended September 30, 2000 and 18.8% for the same
period in 1999.
Federal Income Taxes. Federal income tax expenses vary primarily due to
the effect of realized gains and losses and the proportion of tax-exempt
investment income arising in the respective periods. The effective federal tax
rate was 24.8% in the 2000 third quarter as compared to 16.8% in the 1999
quarter reflecting realized losses occurring in the 1999 period.
Net Income.Net income in the third quarter of 2000 declined to $4.9 million
from $6.8 million in the 1999 quarterly period.
7
<PAGE>
Other comprehensive income or loss represents the change in unrealized gains and
losses on invested assets occurring during the period. As a result of changes
occurring in the fixed income and securities markets, the Company had
comprehensive gains of $2.7 million (net of tax effect) in the third quarter of
2000.
NINE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1999
Premiums Earned. Premiums earned increased approximately $9.9 million, or
8.3%, to $129.1 million for the nine months ended September 30, 2000 from $119.2
million for the same period in 1999. Medical malpractice premiums of physicians,
medical groups and other healthcare providers were approximately $104.5 million
for the nine months ended September 30, 2000 compared to $107.2 million for the
same period in 1999. This decrease reflects continuing market competition and
declines in premium volume in California. Hospital medical malpractice premiums
were approximately $7.6 million for the nine months ended September 30, 2000
compared to $6.7 million for the same period in 1999. Assumed reinsurance
premiums were approximately $17.0 million for the nine months ended September
30, 2000 compared to $5.5 million for the same period in 1999.
Net Investment Income. Net investment income decreased to $25.6 million
for the nine months ended September 30, 2000 from $29.0 million for the same
period in 1999. Average invested assets decreased to $645.8 million during the
nine months ended September 30, 2000 compared to $725.5 million for the same
period in 1999. These changes reflect a decrease in average invested assets from
$725.5 million in the 1999 year to date period to $645.8 in the 2000 nine month
period resulting from the Company's common stock repurchase programs and the
effect of interest rate fluctuations.
Realized Investment Gains (Losses). Realized investment losses were
approximately $0.1 million for the nine months ended September 30, 2000 compared
to realized gains of $5.3 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 $110.8 million for the nine
months ended September 30, 2000 from $97.5 million for the same period in 1999.
As a percentage of premiums earned, losses and LAE increased to 85.8% for the
nine months ended September 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 nine months
ended September 30, 2000, the Company reduced loss and LAE reserves for claims
incurred in prior policy years by approximately $34.0 million as compared to a
reserve reduction of $47.2 million for the same period in 1999 for claims
incurred in prior policy years.
Other Operating Expenses. Other operating expenses increased by $5.6
million, or 25.9%, to $27.2 million for the nine months ended September 30, 2000
from $21.6 million for the same period in 1999. The ratio of other operating
expenses to premiums earned was 21.1% for the nine months ended September 30,
2000 and 18.1% 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 $4.6 million,
to $3.8 million for the nine months ended September 30, 2000 from $8.4 million
for the same period in 1999. The effective tax rate is 22.3% for the nine months
ended September 30, 2000 compared to 24.2% for the same period in 1999, due to
higher realized gains in 1999.
Net Income. Net income for the first nine months of 2000 was $13.1
million, or $1.39 per share, compared to $26.4 million, or $2.26 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 nine months of 2000
(net of tax benefit) of $11.1 million. The losses were primarily the result of
increased market interest rates that 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 nine months of 2000, the
Company had negative cash flow from operations of $7.7 million compared to a
negative cash flow of $17.0 million in 1999. In the 2000 nine-month period,
commissions paid on assumed reinsurance and unusually high paid losses and LAE
from the hospital and core physician books contributed to negative cash flows in
the period. These effects are expected to decline as the Company's reinsurance
operations mature .
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 $21.7 million at September 30, 2000. The
Company plans to continue its emphasis on fixed maturity securities investments
for the indefinite future.
The Company has made limited investments in real estate, which have been
used almost entirely in the Company's operating activities, with the remainder
leased to third parties. 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 September 30,
2000. The Company's two former headquarters buildings were leased to third
parties during 2000.
SCPIE Holdings is an insurance holding company whose assets primarily
consist of all of the capital stock of its insurance company subsidiaries. Its
principal sources of funds are dividends from its subsidiaries and proceeds from
the issuance of debt and equity securities. The insurance company subsidiaries
are restricted
8
<PAGE>
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 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 Company may use the
proceeds from the Credit Agreement for general corporate purposes and certain
other permitted uses. Borrowings under the line of credit were $9.0 million at
September 30, 2000.
During 2000 SCPIE Holdings will commit an aggregate of approximately $21.0
million in capital to a Lloyd's of London underwriting facility and a New Jersey
reinsurance management company. SCPIE Holdings also plans to make an additional
capital contribution of $5.0 million to one of its insurance company
subsidiaries prior to year-end. SCPIE Holdings plans to fund these commitments
through dividends from its principal insurance company subsidiary and borrowings
under its bank line of credit. The Company has no other material capital
commitments.
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 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 September 30, 2000 comprised 90% of total investments at market value.
U.S. government and tax-exempt bonds represent 66% of the fixed-maturity
investments, with the remainder consisting of mortgage-backed securities and
corporate bonds. Equity securities, consisting primarily of common stocks,
account for 3% 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.
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 stabilized during 2000, resulting in an increase in the
value of five-year treasury bonds and improving the carrying value of the
company's fixed maturity portfolio. At December 31, 1999 the Company's fixed
maturities were valued at $22.8 million below amortized cost. At September 30,
2000, the value of the portfolio was $13.8 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
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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 an appeal of this ruling
with the District Court of Appeal. The Company does not expect a decision from
the appellate court until approximately August 2001. The Company believes that
the action is entirely without merit and will continue to aggressively pursue
its rights.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibits are included herewith.
27 Financial Data Schedule
(b) The Company filed no reports on Form 8-K during the quarterly period ended
September 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: November 14, 2000 By: /s/ Patrick Lo
---------------------------------------
Patrick Lo
Senior Vice President and Chief
Financial Officer
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