Prepared by R.R. Donnelley Financial -- Form 10-K405
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT
PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2001
Commission
File No. 1-12449
SCPIE HOLDINGS INC.
(Exact name of registrant as specified in
its charter)
DELAWARE |
|
95-4557980 |
(State or other jurisdiction |
|
(I.R.S. Employer |
of incorporation or organization) |
|
Identification No.) |
1888 Century Park East, Los Angeles, California |
|
90067 |
(Address of principal executive offices) |
|
(Zip Code) |
Registrants telephone number, including area code: (310) 551-5900
Securities registered pursuant |
|
Name of Exchange on which registered: |
to Section 12(b) of the Act: |
|
|
Preferred Stock, par value $1.00 per share |
|
New York Stock Exchange |
Common Stock, par value $0.0001 per share |
|
New York Stock Exchange |
(Title of Class) |
|
|
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (ss. 229.405 of this chapter) is not
contained herein, and will not be contained, to the best of registrants knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form
10-K. x
The aggregate market value
of the Registrants voting stock held by non-affiliates of the Registrant at March 18, 2002, was approximately $172,633,763 (based upon the closing sales price of such date, as reported by the Wall Street Journal).
The number of shares of the registrants Common Stock outstanding as of March 18, 2002, was 9,818,066.
DOCUMENTS INCORPORATED BY REFERENCE
Proxy statement for the Annual Meeting of Stockholders of Registrant to be
held on May 16, 2002 (only portions of which are incorporated by reference).
PART I |
Item 1. |
|
|
|
3 |
Item 2. |
|
|
|
27 |
Item 3. |
|
|
|
27 |
Item 4. |
|
|
|
27 |
|
PART II |
|
Item 5. |
|
|
|
28 |
Item 6. |
|
|
|
29 |
Item 7. |
|
|
|
30 |
Item 8. |
|
|
|
39 |
Item 9. |
|
|
|
39 |
|
PART III |
|
Item 10. |
|
|
|
40 |
Item 11. |
|
|
|
40 |
Item 12. |
|
|
|
40 |
Item 13. |
|
|
|
40 |
|
PART IV |
|
Item 14. |
|
|
|
41 |
2
PART I
GENERAL
SCPIE Holdings Inc. (the Company or SCPIE Holdings) is a holding company owning subsidiaries engaged in providing insurance and reinsurance products. The Company is a provider of medical
malpractice insurance and related liability insurance products to physicians, healthcare facilities and others engaged in the healthcare industry. Since August 1999, the Company has also been actively engaged in developing a diverse portfolio of
assumed reinsurance treaties to complement its direct insurance business. Reinsurance treaties have principally included professional and automobile liability coverages, commercial and residential property risks, accident and health and
workers compensation coverages, and a broad spread of marine insurance.
The Company conducts its insurance business through three insurance company
subsidiaries. The largest, SCPIE Indemnity Company (SCPIE Indemnity), is licensed to conduct a direct insurance business only in California, its state of domicile. American Healthcare Indemnity Company (AHI), domiciled in Delaware, is licensed to
transact insurance in 47 states and the District of Columbia. American Healthcare Specialty Insurance Company (AHSIC), domiciled in Arkansas, is eligible to write policies as an excess and surplus lines insurer in 34 states and the District of
Columbia. All three companies generally have the right to participate in domestic and international reinsurance treaties. The Company also has an insurance agency subsidiary, SCPIE Insurance Services, Inc., two subsidiary corporations providing
management services, a corporate reinsurance intermediary and a corporate member of Lloyds of London (Lloyds), SCPIE Underwriting Limited, which commenced operations in January 2001 as a member of two Lloyds underwriting
syndicates.
The Company was founded in 1976 as Southern California Physicians Insurance Exchange (the Exchange), a California reciprocal insurance company, and
for the next 20 years conducted its operations as a large policyholder-owned California medical malpractice insurance company. SCPIE Holdings was organized in Delaware in 1996 and acquired the business of the Exchange and the three insurance company
subsidiaries in a reorganization that was consummated on January 29, 1997. The policyholders of the Exchange became the stockholders of SCPIE Holdings in the reorganization, and SCPIE Holdings concurrently sold additional shares of common stock in a
public offering. The common stock of SCPIE Holdings is listed on the New York Stock Exchange under the trading symbol SKP.
For purposes of this Annual
Report on Form 10-K, the Company refers to SCPIE Holdings and its subsidiaries. The term Insurance Subsidiaries refers to SCPIE Indemnity, AHI and AHSIC.
INFORMATION ABOUT SEGMENTS
The Companys insurance business is organized into two
reportable business segments: direct healthcare liability insurance and assumed reinsurance operations. In direct (or primary) insurance activities, the insurer assumes the risk of loss from persons or organizations that are directly subject to the
risks. Such risks may relate to liability (or casualty), property, life, accident, health, financial or other perils that may arise from an insurable event. In reinsurance activities, the reinsurer assumes defined portions of similar or dissimilar
risks that primary insurers or other reinsurers have assumed in their own insuring activities.
Direct healthcare liability insurance represents professional
liability insurance for physicians, oral and maxillofacial surgeons, hospitals and other healthcare providers. Assumed reinsurance represents the book of assumed worldwide reinsurance of professional, commercial and personal liability coverages,
commercial and residential property risks, accident and health coverages, workers compensation coverages and marine coverages. Other includes items not directly related to the operating segments such as net investment income, realized
investment gains and losses, and other revenue.
The following table sets forth information concerning the Companys revenues, operating income and
identifiable assets attributable to each of its business segments for the year ended December 31, 2001.
3
YEAR ENDED DECEMBER 31, 2001 |
|
DIRECT HEALTHCARE LIABILITY INSURANCE |
|
|
ASSUMED REINSURANCE |
|
|
OTHER |
|
TOTAL |
|
|
|
|
|
|
|
|
|
|
|
|
(In Thousands) |
|
Premiums written |
|
$ |
168,600 |
|
|
$ |
112,207 |
|
|
$ |
|
|
$ |
280,807 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums earned |
|
$ |
156,442 |
|
|
$ |
79,493 |
|
|
$ |
|
|
$ |
235,895 |
|
Net investment income |
|
|
|
|
|
|
|
|
|
|
35,895 |
|
|
35,895 |
|
Realized investment gains |
|
|
|
|
|
|
|
|
|
|
5,707 |
|
|
5,707 |
|
Equity earnings from affiliates |
|
|
|
|
|
|
|
|
|
|
1,327 |
|
|
1,327 |
|
Other revenue |
|
|
|
|
|
|
|
|
|
|
875 |
|
|
875 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
|
156,442 |
|
|
|
79,493 |
|
|
|
43,804 |
|
|
279,739 |
|
Losses and loss adjustment expenses |
|
|
220,311 |
|
|
|
84,162 |
|
|
|
|
|
|
304,473 |
|
Other operating expenses |
|
|
45,820 |
|
|
|
18,912 |
|
|
|
|
|
|
64,732 |
|
Interest expense |
|
|
|
|
|
|
|
|
|
|
1,416 |
|
|
1,416 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses |
|
|
266,131 |
|
|
|
103,074 |
|
|
|
1,416 |
|
|
370,621 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before federal income tax |
|
$ |
(109,689 |
) |
|
$ |
(23,581 |
) |
|
$ |
42,388 |
|
$ |
(9,882 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined ratio |
|
|
170.11 |
% |
|
|
129.66 |
% |
|
|
|
|
|
157.09 |
% |
Segment assets |
|
$ |
211,125 |
|
|
$ |
58,200 |
|
|
$ |
708,321 |
|
$ |
977,646 |
|
The Company incurred significant losses in both segments during 2001. The losses in the direct healthcare liability
insurance segment were almost entirely attributable to adverse experience incurred by the Company under policies issued to physicians and medical groups in states outside California. Adverse experience included both losses incurred under policies
issued and renewed during 2001 and increases in loss reserves for policies issued in prior years. The Company instituted a number of premium rate increases and stricter underwriting standards during 2001 in an attempt to improve results. The Company
and the independent insurance agency for the principal non-California programs have recently agreed to terminate the Companys participation no later than March 2003. In the meantime, the Company continues to apply very strict underwriting
requirements and has the full advantage of the rate increases on policies issued and renewed under these programs. See Direct Healthcare Liability Insurance Segment Overview and Managements Discussion and Analysis of Financial Condition and
Results of Operations.
The losses and loss adjustment expenses during 2001 in the assumed reinsurance segment include approximately $19.6 million of estimated net
losses incurred as a result of the September 11, 2001, terrorist attack on the World Trade Center, Pentagon and certain airlines. These losses are estimated principally under various property, general liability, accident and health and workers
compensation reinsurance treaties. In addition, the Company incurred a charge of $8.5 million against net premiums earned in its assumed reinsurance segment attributable to September 11 estimated losses under a 1996 letter of credit arrangement
indexed to a portfolio of worldwide catastrophe excess of loss reinsurance business. See Managements Discussion and Analysis of Financial Condition and Results of Operations and Note 4 to Consolidated Financial Statements. Excluding the impact
of the September 11 attack, the 2001 combined ratio for the segment would have been 94.5%.
On February 21, 2002, A.M. Best & Co. (A.M. Best), the leading
rating organization for the insurance industry, downgraded the financial strength rating of the Companys insurance company subsidiaries to B++ (Very Good) from A (Excellent). The stated reason for the downgrade was the effect the losses for
2001 will have on the capitalization of the Company in relation to significant premium growth that occurred during 2001. This downgrade could have a material adverse effect on the ability of the Company to maintain its volume of premiums written and
earned, particularly in the Assumed Reinsurance Segment. See Risk FactorsImportance of A.M. Best Rating.
DIRECT HEALTHCARE LIABILITY INSURANCE SEGMENT
Overview and
Developments During 2001The Company has been a leading provider of medical malpractice insurance in California for many years. Medical malpractice insurance, or medical professional liability insurance, insures the physician, dentist,
hospital or other healthcare provider or facility against liabilities arising from the rendering of, or failure to render,
4
professional medical services. Based on data compiled by A.M. Best, total medical malpractice premiums in the United States in 2000 were approximately $6.3 billion. In California, the second
largest market for medical malpractice insurance based on direct premiums written, approximately $584.4 million of medical malpractice premiums were written in 2000. The Companys share of the medical malpractice premiums written in California
in 2000 was approximately 17.6% and the Company was the second largest writer in the state. During 2001, the Company had premiums earned under policies issued to California insureds of approximately $116.8 million, or 70.6% of the total premiums
earned in the direct healthcare liability insurance segment.
Expansion into Other MarketsPrior to 1996, the Company did not
offer medical malpractice insurance outside California, and insured only a small number of hospitals and other healthcare facilities. In that year, the Company adopted a strategy to meet the needs of what it perceived to be a changing healthcare
market, the growth of managed care and the emergence of multi-state integrated healthcare providers and delivery systems. The Company undertook a new strategy that included (i) expanding the types of products offered to include comprehensive
hospital and related liability coverages for large healthcare systems and (ii) diversifying geographically into states other than California, while (iii) maintaining the Companys historic relationship with its primary policyholder base of
California physician and medical group insureds.
From 1997 through 1999, the Company added more than 75 hospitals to its program. These
policies were written through national and regional brokers and covered facilities in four states, in addition to California. At approximately the same time, the Company undertook a major geographic expansion in the physician and small medical group
market through an arrangement with Brown & Brown, Inc. (Brown & Brown), one of the nations top independent insurance agency organizations. This arrangement commenced January 1, 1998, and eventually encompassed nine states, the largest
in terms of premium volume being Connecticut, Florida and Georgia.
During 2000, the Company entered into a separate arrangement with
Brown & Brown covering the California and Texas portion of a dental liability program developed by Brown & Brown. The Company also reinsures the entire risk of policies issued nationally by another insurer to oral and maxillofacial surgeons
marketed by Brown & Brown.
The Company also expanded its
operations outside California during the past few years through sales of professional liability policies to physicians who do not meet the normal underwriting criteria of the Company. These non-standard policies were issued in a number of states
through brokers at higher premiums.
In 2001, the Company undertook the insurance of physicians in Delaware through a single Delaware
broker. At December 31, 2001, the Company insured approximately 140 physicians under this program.
The Company has also developed
and marketed ancillary liability insurance products for the healthcare industry including directors and officers liability insurance for healthcare entities, errors and omissions coverage for managed care organizations and billing errors and
omissions coverage for the medical profession. These represent a small part of the business.
Discontinuance of Hospital
ProgramThe Company encountered intense price competition in its efforts to significantly expand its large hospital and other healthcare facility writings. The Company was able to expand by offering policies at competitive rates for the
coverage provided. During 2000, the Company incurred material adverse loss experience under many of these policies, including policies issued to hospitals that had already left the Company for lower rates offered by other insurers. The Company
declined to renew a number of its hospital policies or offered renewal only at substantially increased premium rates. At the beginning of 2001, the Company insured only 15 hospitals. This number is now reduced to 10 hospitals insured, and the
Company expects to completely withdraw from this business through nonrenewal of policies during 2002. The Company did not incur material losses in its hospital program during 2001.
Losses During 2001 in Non-California Physician ProgramsIn 2001, the Company derived approximately 30% of its healthcare liability premium volume from policies issued outside the state
of California, principally under the Brown & Brown and nonstandard physician programs. In the second quarter of 2001, the Company recognized that it had seriously underestimated losses incurred under these programs for prior years and during the
first quarter of 2001. The Company strengthened its prior-years loss reserves at mid-year approximately $18.7 million to reflect these higher estimates, and included an additional provision of $7.5 million for expected losses because of
premium inadequacy on then current policies under these programs. The Company implemented significant premium increases, averaging approximately 40%, in its principal non-California markets, and immediately instituted more stringent underwriting and
pricing guidelines in these states. The Company also commissioned an independent claims study to confirm the results of its reserve estimates. Throughout the remainder of 2001, the Company continued to evaluate its premiums rates in these markets
and institute or apply for additional rate increases where appropriate.
5
At the end of 2001, significant additional losses emerged under these programs, principally involving
adverse experience in the fourth quarter on policies in effect during 2001. The Company increased its reserves by an additional amount of approximately $27.3 million for the 2001 policy year and established a premium deficiency provision of $7.9
million at year end for expected losses on existing policies. These reserve actions resulted in a significant underwriting loss in the direct healthcare liability insurance segment.
The Company and Brown & Brown have an reached agreement to terminate both the physician and dental programs no later than March 6, 2003. In the interim, Brown & Brown will attempt to
identify an insurance company or companies to replace the Company. The Company will continue to issue and renew those policies under the Brown & Brown programs that satisfy stringent underwriting standards now in place. The Company will also
have the benefit of the increased rates for policies issued or renewed during the remainder of 2002 and early 2003. The Company is applying these same standards to the nonstandard physician policies renewed outside California. The Company is issuing
no new nonstandard physician policies outside of California.
The Company expects the foregoing actions to decrease the number of
physicians and medical groups insured outside of California throughout 2002. This decrease will be somewhat offset by higher premiums received from those physicians and medical groups that remain with the program. During 2001, the Company had net
premiums earned under the Brown & Brown and non-California nonstandard physician programs of $37.0 million and $8.4 million, respectively.
During 2002, the Company will concentrate its efforts on maintaining its core physician and medical group business in California. The Company also intends to continue efforts to expand its physician and medical group business in Delaware
and in selected other states. The Company does not expect to initiate any significant new programs outside California during 2002.
Products
The Company underwrites professional and related liability policy coverages for physicians (including oral and maxillofacial surgeons), physician medical
groups and clinics, hospitals, dentists, managed care organizations and other providers in the healthcare industry. The following table summarizes, by product, the direct premiums earned by the Company for the periods indicated:
FOR THE YEAR ENDED DECEMBER 31, |
|
2001 |
|
2000 |
|
1999 |
|
|
|
|
|
|
|
|
|
(In Thousands) |
Physician and medical group liability: |
|
|
|
|
|
|
|
|
|
Physician and medical group standard professional liability |
|
$ |
138,756 |
|
$ |
122,288 |
|
$ |
124,092 |
Nonstandard physicians |
|
|
9,591 |
|
|
7,657 |
|
|
5,617 |
Emergency medicine program |
|
|
763 |
|
|
2,880 |
|
|
2,243 |
Urgent care centers |
|
|
55 |
|
|
111 |
|
|
234 |
|
|
|
|
|
|
|
|
|
|
Subtotal medical liability |
|
|
149,165 |
|
|
132,936 |
|
|
132,186 |
Excess personal liability |
|
|
649 |
|
|
673 |
|
|
705 |
|
|
|
|
|
|
|
|
|
|
Subtotal physician and medical group liability |
|
|
149,814 |
|
|
133,609 |
|
|
132,891 |
Hospital liability |
|
|
5,848 |
|
|
13,618 |
|
|
12,351 |
Healthcare provider liability |
|
|
1,580 |
|
|
1,575 |
|
|
1,051 |
Healthcare facility liability |
|
|
6,161 |
|
|
4,634 |
|
|
1,707 |
Dentist liability |
|
|
2,533 |
|
|
707 |
|
|
|
Managed care organization errors and omissions |
|
|
1,327 |
|
|
665 |
|
|
699 |
Medicare billing errors and omissions |
|
|
372 |
|
|
368 |
|
|
|
Directors and officers liability |
|
|
832 |
|
|
662 |
|
|
699 |
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
168,467 |
|
$ |
155,838 |
|
$ |
149,191 |
|
|
|
|
|
|
|
|
|
|
Physician and Medical Group LiabilityThe professional liability insurance for
sole practitioners and for medical groups provides protection against the legal liability of the insureds for such things as injury caused by, or as a result of, the performance of patient treatment, failure to treat and failure to diagnose a
patient. The Company offers separate policy forms for physicians who are sole practitioners and for those who practice as part of a medical group or clinic. The policy issued to
6
sole practitioners includes coverage for professional liability that arises in the medical practice and also for certain other premises liabilities that may arise in the
non-professional operations of the medical practice, such as slip-and-fall accidents, and a limited defense reimbursement benefit for proceedings instituted by state licensing boards and other governmental entities.
The policy issued to medical groups and their physician members includes not only professional liability coverage and defense reimbursement benefits, but also
substantially more comprehensive coverages for commercial general liability and employee benefit program liability and also provides a small medical payment benefit to injured persons. The business liability coverage included in the medical group
policy includes coverage for certain employment-related liabilities and for pollution, which are normally excluded under a standard commercial general liability form. The Company also offers, as part of its standard policy forms for both sole and
group practitioners, optional excess personal liability coverage for the insured physicians. Excess personal liability insurance provides coverage to the physician for personal liabilities in excess of amounts covered under the physicians
homeowners and automobile policies. The Company has developed nonstandard programs that may exclude business liability coverages for certain physicians.
The professional liability coverages are issued primarily on a claims made and reported basis. Coverage is provided for claims reported to the Company during the policy period arising from incidents that occurred at
any time the insured was covered by the policy. The Company also offers tail coverage for claims reported after the expiration of the policy for occurrences during the coverage period. The price of the tail coverage is based on the
length of time the insured has been covered under the Companys claims made and reported policy. The Company provides free tail coverage for insured physicians who die or become disabled during the coverage period of the policy and those who
have been insured by the Company for at least five consecutive years and retire completely from the practice of medicine. Free tail coverage is automatically provided to physicians with at least five consecutive years of coverage with the Company
and who are also at least 65 years old.
Business liability coverage for medical groups and clinics and the excess personal liability
insurance is underwritten on an occurrence basis. Under occurrence coverage, the coverage is provided for incidents that occur at any time the policy is in effect, regardless of when the claim is reported. With occurrence coverage, there is no need
to purchase tail coverage.
The Company offers standard limits of insurance up to $10.0 million per claim or occurrence, with up to a
$10.0 million aggregate policy limit for all claims reported or occurrences for each calendar year or other 12-month policy period. The most common limit is $1.0 million per claim or occurrence, subject to a $3.0 million aggregate policy limit. The
Companys limit of liability under the excess personal liability insurance coverage is $1.0 million per occurrence with no aggregate limit. The defense reimbursement benefit for governmental proceedings is $25,000, and the medical payments
benefit for persons injured in non-professional activities is $10,000.
The Company has written professional liability insurance for oral
surgeons in California for a number of years. Oral surgeons are frequently licensed physicians.
Hospital LiabilityThe
Company wrote hospital liability insurance on both a claims made and reported basis and a modified occurrence basis that, in effect, includes a combination of occurrence coverage and tail coverage for up to seven years after the policy terminates.
The policy issued to hospitals provides protection for professional liabilities related to the operation of a hospital and its various staff committees, together with the same business liability, medical payments and employee benefit program
liability coverages included in the policy for large medical groups. The Company has effectively withdrawn from this market.
Healthcare Provider Liability/Healthcare Facilities LiabilityThe Company offers its professional liability coverage to a variety of specialty provider organizations, including hospital emergency departments, outpatient surgery
centers, medical urgent care facilities and hemodialysis, clinical and pathology laboratories. The Company also offers its professional liability coverage to healthcare providers such as chiropractors, podiatrists and nurse practitioners. These
policies include the standard professional liability coverage provided to physicians and medical groups, with certain modifications to meet the special needs of these healthcare providers. The policies are generally issued on a claims made and
reported basis with the limits of liability up to those offered to larger medical groups. The limits of coverage under the current healthcare provider policies issued by the Company are between $1.0 million and $5.0 million per incident, subject to
$3.0 million to $10.0 million aggregate policy limits.
7
Dentist LiabilityIn 2000, the Company initiated dental liability insurance coverage under a
program developed by Brown & Brown in Texas and California. The program provides claims-made coverage to dentists and small dental groups. Brown & Brown markets this program in other states through another insurance company. This program
will also terminate no later than March 6, 2003.
Managed Care Organization Errors and OmissionsThe Company offers a policy
for managed care organizations. The policy provides coverage for liability arising from covered managed care incidents or vicarious liability for medical services rendered by non-employed physicians. Covered services include peer review, healthcare
expense review, utilization management, utilization review and claims and benefit handling in the operation of the managed care organizations. These policies are generally issued on a claims made and reported basis. The annual aggregate limit of
coverage under the current managed care organization policies issued by the Company is $1.0 million.
Directors and Officers
LiabilityIn 1996, the Company began to directly write renewals of directors and officers liability policies previously underwritten by other companies. In 1999, the Company began offering a new directors and officers liability
policy, and expanded its marketing of this program. The directors and officers liability policies are generally issued on a claims made and reported basis. The limit of coverage on directors and officers liability policies written by the
Company is $1.0 million.
Billing Errors and OmissionsIn late 1999, the Company began offering a newly designed product that
provides physicians and medical groups with protection for defense expenses and certain liabilities related to governmental investigations into billing errors and omissions to Medicare and other government-subsidized healthcare programs.
Marketing and Policyholder Services
Historically, the Company marketed its physician professional liability policies directly to physicians and medical groups in California. Infrequently, larger medical groups were written through insurance brokers. The Company
actively marketed hospital policies through brokers when it commenced offering this coverage. During the past few years, brokered business has become a more important source of new business in California and the predominant source of new business in
all other states.
The Companys marketing organization has approximately 30 employees who directly solicit prospective policyholders, maintain relationships
with existing insureds and provide marketing support to brokers. The Companys marketing efforts include sponsorship by local medical associations, educational seminars, advertisements in medical journals and direct mail solicitation to
licensed physicians and members of physician medical specialty group organizations.
The Company attracts new physicians through special rates for medical
residents and discounts for physicians just entering medical practice. In addition, the Company sponsors and participates in various medical group and healthcare administrators programs, medical association and specialty society conventions and
similar programs that provide visibility in the healthcare community.
The Companys current marketing emphasis is directed toward California physicians and
medical groups. During 2001, the Company closed marketing offices in Texas, Florida and Arizona. These offices had principally serviced hospital insureds and solicited large group accounts.
Underwriting
The Underwriting Department consists of a Senior Vice
President in charge of Underwriting, three divisional underwriting managers, 14 underwriters and 15 technical and administrative assistants. Certain of these underwriters specialize in underwriting managed care organizations and directors and
officers liability products. The Companys underwriting department is responsible for the evaluation of applicants for professional liability and other coverages, the issuance of policies and the establishment and implementation of
underwriting standards for all of the coverages underwritten by the Company.
The Company performs a continuous process of reunderwriting its insured physicians,
medical groups and healthcare facilities. Information concerning insureds with large losses, a high frequency of claims or unusual practice characteristics is developed through claims and risk management reports or correspondence.
8
Brown & Brown had performed most of the underwriting functions with respect to policies issued by the Company under its
arrangement with Brown & Brown for physician professional liability and other coverages. The parties are in the process of terminating this relationship and the Company has assumed greater control over the establishment and application of
underwriting standards.
Rates
The Company establishes, through its own actuarial staff and independent actuaries, rates and rating classifications for its physician and medical group insureds based on the loss and loss adjustment expense (LAE) experience it
has developed over the past 25 years and upon rates charged by its competitors. The Company has various rating classifications based on practice, location, medical specialty, limits and other factors. The Company utilizes various discounts,
including discounts for part-time practice, physicians just entering medical practice and large medical groups. The Company has developed nonstandard programs for physicians who have unfavorable loss history or practice characteristics, but whom the
Company considers insurable. Policies issued in this program have significant surcharges. The Company has established its premium rates and rating classifications for managed care organizations utilizing data publicly filed by other insurers, and
based in part on its recent experience. The data for managed care organization errors and omissions liability is extremely limited, as tort exposures for these organizations are only recently beginning to develop. The rates for directors and
officers liability are developed using historical data publicly filed by other insurers, financial analysis and loss history. All rates for liability insurance in California are subject to the prior approval of the Insurance Commissioner.
The Company has consistently instituted annual overall rate increases in California during the past 10 years ranging from approximately 3.5% to 10.6%. Rate
volatility has been considerably greater in other states, particularly in the principal states in the Brown & Brown program. Since the beginning of 2001, the Company has instituted average aggregate rates increases in Florida, Georgia,
Connecticut and Texas of approximately 70%.
Claims
The Companys Claims Department is responsible for claims investigation, establishment of appropriate case reserves for loss and LAE, defense planning and coordination, control of
attorneys engaged by the Company to defend a claim and negotiation of the settlement or other disposition of a claim. Under most of the Companys policies, except managed care organization errors and omissions policies, and directors and
officers liability policies, the Company is obligated to defend its insureds, which is in addition to the limit of liability under the policy. Medical malpractice claims often involve the evaluation of highly technical medical issues, severe
injuries and conflicting expert opinions. In almost all cases, the person bringing the claim against the physician is already represented by legal counsel when the Company learns of the potential claim.
The Claims Department staff includes managers, litigation supervisors, investigators and other experienced professionals trained in the evaluation and resolution of medical professional
liability and general liability claims. The claims department staff consists of approximately 56 employees, including 16 clerical personnel. The Company has seven unit managers and three branch managers responsible for specific geographic areas, and
additional units for specialty areas such as healthcare facilities, birth injuries and policy coverage issues. The Company also occasionally uses independent claims adjusters, primarily to investigate claims in remote locations. The Company selects
legal counsel from among a group of law firms in the geographic area in which the action is filed.
The Company vigorously defends its insureds against claims, but
seeks to resolve expediently cases with high exposure potential. The defense of a healthcare professional liability claim requires significant cooperation between the litigation supervisor or claims department manager responsible for the claim and
the insured physician. The Companys policies require that a healthcare professional liability claim cannot generally be settled without the consent of the physician or the professional insured. California law requires that the insurer report
such settlements to a medical disciplinary board, and federal law requires that any claim payment, regardless of amount, be reported to a national data bank which can be accessed by various state licensing and disciplinary boards and medical peer
evaluation committees. Thus, the physician or other healthcare professional is often placed in a difficult position of knowing that a settlement may result in the initiation of a disciplinary proceeding or some other impediment to his or her ability
to practice. The claims department supervisor must be able to fully evaluate considerations of settlement or trial and to communicate effectively the Companys recommendation to its insured. If the insured will not consent to a settlement
offer, the Company may be exposed to a larger judgment if the case proceeds to trial.
9
The Company also maintains a risk management staff, including a vice president, department manager and six members. The risk
management department works directly with medical groups and individual insureds to improve their procedures in order to minimize the incidence of claims.
ASSUMED REINSURANCE SEGMENT
In August 1999, the Company established a separate Assumed Reinsurance
Division under the direction of two newly hired officers.
Reinsurance Industry Overview
Reinsurance is an arrangement in which an insurance company, the reinsurer, agrees to indemnify another insurance company, the ceding company, against all or a
portion of the insurance risks underwritten by the ceding company under one or more insurance contracts. Reinsurance can provide a ceding company with several benefits, including a reduction in net liability on individual risks, catastrophe
protection from large or multiple losses and assistance in maintaining acceptable financial ratios. Reinsurance also provides a ceding company with additional underwriting capacity by permitting it to accept larger risks and write more business than
would be possible without a concomitant increase in capital and surplus.
Reinsurance contracts are normally classified as treaty or facultative contracts. Treaty
reinsurance refers to automatic reinsurance coverage for all or a portion of a specified class of risks ceded by the primary insurer or a reinsurer, while facultative reinsurance involves underwriting of individual risks. Coverage of the risks
assumed under reinsurance contracts may be classified as quota-share or excess. Under quota-share (or pro rata) reinsurance, the reinsurer shares proportionally in the original premiums and losses of the primary insurer or reinsurer. Excess (or
non-proportional) reinsurance provides for the indemnification of the primary insurer or reinsurer for all or a portion of the loss in excess of an agreed upon amount or retention. Both quota-share and excess reinsurance may provide for
aggregate limits of indemnification.
Company Strategy
The Company has concentrated the majority of its assumed reinsurance portfolio on treaty reinsurance. Treaty reinsurers, including the Company, do not separately evaluate each of the
individual risks assumed under their treaties and, consequently, after a review of the ceding companys underwriting practices, are largely dependent on the original risk underwriting decisions made by the ceding company. Such dependence
subjects reinsurers in general to the possibility that the ceding companies have not adequately evaluated the risks to be reinsured and, therefore, that the premiums ceded under the treaty may not adequately compensate the reinsurer for the risks
assumed. The reinsurers evaluation of the ceding companys risk management and underwriting practices will usually impact the pricing of the treaty.
The Company has focused its assumed reinsurance portfolio on pro rata agreements in which the ceding company bears a proportional share of the risk and therefore has the incentive to underwrite and price the business appropriately. Further,
the Companys pro rata participations are structured to take advantage of all reinsurance protections purchased by the ceding company. The Company has treaties principally with those ceding companies with which the Companys officers have
had past experience and can demonstrate that the ceding company has outperformed its peers in its areas of expertise. The Company also participates in excess of loss reinsurance arrangements, following the same approach outlined above, where the
subject exposures can be completely identified, segmented geographically, priced accordingly and underwritten by specific individuals within the ceding company in whom the Company has confidence.
Reinsurance Programs
The principal reinsurance programs in which the
Company is a participant are the following:
Casualty ProgramsApproximately 41.5% of the Companys expected assumed
reinsurance premium written on treaties currently in effect is derived from a limited number of pro rata and excess of loss treaties for United States based ceding companies writing automobile, general liability, workers compensation and
certain professional liability lines of business.
Property ProgramsApproximately 20.8% of the Companys expected
assumed reinsurance premium written on treaties currently in effect is derived from a limited number of pro rata and excess of loss treaties for United States and international based ceding companies writing personal and commercial property coverage
throughout the world.
10
Accident and Health and Workers Compensation ProgramsApproximately 25.8% of the
Companys expected assumed reinsurance premium written on treaties currently in effect is derived from a limited number of pro rata treaties for United States based ceding companies coming from a single source, Reinsurance Management Group,
Summit, New Jersey, in which the Company has a 20% ownership interest. Reinsurance Management Group is a specialist underwriting management firm writing various forms of accident and health reinsurance risks. In addition, the Company writes a small
portfolio of international personal accident business on a pro rata treaty basis.
Marine ProgramApproximately 11.9% of the
Companys expected assumed reinsurance premium written on treaties currently in effect is derived from pro rata treaties from a single Lloyds syndicate that specializes in writing marine insurance and reinsurance on a worldwide basis. The
syndicate is managed by an affiliate of GoshawK Insurance Holdings plc (GoshawK). In November 1999, the Company purchased approximately 9.5% of the outstanding common stock of GoshawK, which is a publicly traded Lloyds underwriter. In 2001,
Goshawk sold additional shares of its capital stock reducing the Companys ownership to 4.1%. The Company entered into a quota share reinsurance treaty effective January 1, 2000, under which the Company has assumed 7.5% of GoshawKs annual
premium.
Corporate Name at LloydsIn addition to the foregoing programs, effective January 1, 2001, the Company formed
SCPIE Underwriting Limited, a limited liability corporate underwriting syndicate member at Lloyds which provides underwriting capacity to two Lloyds syndicates for the 2001 underwriting year. One syndicate wrote a varied portfolio of
property and casualty insurance and reinsurance, while the other syndicate wrote a portfolio of professional liability risks.
Distribution
The Companys predominant source of reinsurance business is through professional reinsurance intermediaries. At the
present time, the Company writes through approximately 11 intermediaries located throughout the United States and in London.
Underwriting
All underwriting of the assumed reinsurance portfolio is the responsibility of the two senior officers who head the division.
Likewise, these individuals are directly responsible for all on site audits of assumed reinsurance clients. The vast majority of assumed reinsurance treaties are written for a 12-month term and are subject to a process of reunderwriting at the end
of each period prior to renewal agreement.
Claims
All individual excess of loss claims are reviewed by the two senior officers managing the reinsurance division, who recommend cash reserves and other action to be taken with respect to these claims. With respect to
claims under pro rata treaties that are submitted in conjunction with monthly or quarterly premium accounts, these officers conduct periodic audits of these claims to confirm that they fall within the scope of the respective reinsurance treaties.
LOSS AND LAE RESERVES
The
determination of loss reserves is a projection of ultimate losses through an actuarial analysis of the claims history of the Company and other professional liability insurers, subject to adjustments deemed appropriate by the Company due to changing
circumstances. Included in its claims history are losses and LAE paid by the Company in prior periods and case reserves for anticipated losses and LAE developed by the Companys Claims Department as claims are reported and investigated.
Actuaries rely primarily on such historical loss experience in determining reserve levels on the assumption that historical loss experience provides a good indication of future loss experience despite the uncertainties in loss cost trends and the
delays in reporting and settling claims. As additional information becomes available, the estimates reflected in earlier loss reserves may be revised. Any increase in the amount of reserves, including reserves for insured events of prior years,
could have an adverse effect on the Companys results for the period in which the adjustments are made.
The uncertainties inherent in estimating ultimate
losses on the basis of past experience have grown significantly in recent years principally as a result of judicial expansion of liability standards and expansive interpretations of insurance contracts. These uncertainties may be further affected
by, among other factors, changes in the rate of inflation and changes in the propensities of individuals to file claims. The inherent uncertainty of establishing reserves is relatively greater for companies writing long-tail casualty insurance,
including medical malpractice insurance, due primarily to the longer-term nature of the resolution of claims. There can be no assurance that the ultimate liability of the Company will not exceed the amounts reserved.
11
The Company utilizes both its internal actuarial staff and independent actuaries in establishing its reserves. The Companys
independent actuaries review the Companys reserves for losses and LAE at the end of each fiscal year and prepare a report that includes a recommended level of reserves. The Company considers this recommendation as well as other factors, such
as known, anticipated or estimated changes in frequency and severity of claims, loss retention levels and premium rates, in establishing the amount of its reserves for losses and LAE. The Company continually refines reserve estimates as experience
develops and further claims are reported and settled. The Company reflects adjustments to reserves in the results of the periods in which such adjustments are made. Since medical malpractice insurance is a long-tail line of business for which the
initial loss and LAE estimates may be adversely impacted by events occurring long after the reporting of the claim, such as sudden severe inflation or adverse judicial or legislative decisions, the Company has attempted to establish its loss and LAE
reserves at what it believes are conservative levels.
The Companys loss reserve experience is shown in the following table, which sets forth a
reconciliation of beginning and ending reserves for unpaid losses and LAE for the periods indicated:
DECEMBER 31, |
|
|
2001 |
|
|
2000 |
|
|
|
1999 |
|
|
|
|
|
|
|
|
|
|
(In Thousands) |
|
Reserves for losses and LAE at beginning of year |
|
$ |
433,541 |
|
$ |
449,864 |
|
|
$ |
477,631 |
|
Less reinsurance recoverables |
|
|
40,152 |
|
|
45,007 |
|
|
|
24,899 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Reserves for losses and LAE, net of related reinsurance recoverable, at beginning of year |
|
|
393,389 |
|
|
404,857 |
|
|
|
452,732 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Reclassification of reinsurance contract |
|
|
3,840 |
|
|
|
|
|
|
|
|
Provision for losses and LAE for claims occurring in the current year, net of reinsurance |
|
|
290,649 |
|
|
194,717 |
|
|
|
183,959 |
|
Increase (decrease) in estimated losses and LAE for claims occurring in prior years, net of reinsurance |
|
|
13,824 |
|
|
(42,115 |
) |
|
|
(61,179 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Incurred losses during the year, net of reinsurance |
|
|
304,473 |
|
|
152,602 |
|
|
|
122,780 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Deduct losses and LAE payments for claims, net of reinsurance, occurring during: |
|
|
|
|
|
|
|
|
|
|
|
Current year |
|
|
36,006 |
|
|
15,181 |
|
|
|
13,742 |
|
Prior years |
|
|
155,626 |
|
|
148,889 |
|
|
|
156,913 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
191,632 |
|
|
164,070 |
|
|
|
170,655 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Reserve for losses and LAE, net of related reinsurance recoverable, at end of year |
|
|
502,390 |
|
|
393,389 |
|
|
|
404,857 |
|
Reinsurance recoverable for losses and LAE, at end of year |
|
|
74,246 |
|
|
40,152 |
|
|
|
45,007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Reserves for losses and LAE, gross of reinsurance recoverable, at end of year |
|
$ |
576,636 |
|
$ |
433,541 |
|
|
$ |
449,864 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective January 1, 1998, the Company entered into a facultative quota share reinsurance contract. The contract
represents a percentage share retrocession of an adverse loss development contract of underlying medical malpractice risks written on or prior to December 31, 1997. Premiums were collected during 1998 2000. The contract is subject to a
maximum limit and remains in force until 2023 or earlier provided the obligations under the contract have been fully satisfied. Based on the Companys reevaluation of the contract provisions, beginning 2001 the Company reclassified $3.8 million
of assumed premiums and corresponding losses recorded in prior periods to deposit reinsurance in accordance with FASB No. 113. This reclassification had no impact on net income for 2001.
The increase during 2001 in estimated losses and LAE for claims occurring in prior years was attributable to the significant adverse loss experience encountered during 2001 in the physician and medical group business
outside the state of California. See Managements Discussion and Analysis of Financial Condition and Results of OperationsOverview.
The following table
reflects the development of loss and LAE reserves for the periods indicated at the end of that year and each subsequent year. The line entitled Loss and LAE reserves reflects the reserves, net of reinsurance recoverables, as originally
reported at the end of the stated year. Each calendar year-end reserve includes the estimated unpaid liabilities for that report or accident year and for all prior report or accident years. The section under the caption Liability reestimated
as of shows the original recorded reserve as adjusted as of the end of each subsequent year to reflect the cumulative amounts paid and all other facts and circumstances discovered during each year. The line Cumulative (redundancies)
deficiencies reflects the difference between the latest reestimated reserve amount and the reserve amount as originally established. The section under
12
the caption Cumulative amount of liability paid through shows the cumulative amounts paid related to the reserve as of the end of each subsequent year.
In evaluating the information in the table below, it should be noted that each amount includes the effects of all changes in amounts of prior periods. For example, if a loss determined in
2000 to be $100,000 was first reserved in 1990 at $150,000, the $50,000 redundancy (original estimate minus actual loss) would be included in the cumulative redundancy in each of the years 1991 through 2000 shown below. This table presents
development data by calendar year and does not relate the data to the year in which the claim was reported or the incident actually occurred. Conditions and trends that have affected the development of these reserves in the past will not necessarily
recur in the future.
YEAR ENDED DECEMBER 31, |
|
1991 |
|
|
1992 |
|
|
1993 |
|
|
1994 |
|
|
1995 |
|
|
1996 |
|
|
1997 |
|
|
1998 |
|
|
1999 |
|
|
2000 |
|
2001 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In Thousands) |
Loss and LAE reserves before reclassification |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
452,732 |
|
|
$ |
403,197 |
|
|
$ |
390,600 |
|
|
|
Reclassification |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
1,660 |
|
|
$ |
1,128 |
|
|
$ |
1,052 |
|
|
|
Loss and LAE reserves |
|
$ |
439,908 |
|
|
$ |
465,423 |
|
|
$ |
472,129 |
|
|
$ |
449,566 |
|
|
$ |
446,627 |
|
|
$ |
440,302 |
|
|
$ |
433,441 |
|
|
$ |
451,072 |
|
|
$ |
402,069 |
|
|
$ |
389,548 |
|
$ |
502,390 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liability reestimated as of: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One year later |
|
|
409,966 |
|
|
|
421,994 |
|
|
|
411,915 |
|
|
|
391,733 |
|
|
|
386,872 |
|
|
|
387,094 |
|
|
|
339,673 |
|
|
|
389,893 |
|
|
|
359,954 |
|
|
|
403,374 |
|
|
|
Two years later |
|
|
364,105 |
|
|
|
368,521 |
|
|
|
363,562 |
|
|
|
337,441 |
|
|
|
337,760 |
|
|
|
301,795 |
|
|
|
283,276 |
|
|
|
351,238 |
|
|
|
356,298 |
|
|
|
|
|
|
|
Three years later |
|
|
316,220 |
|
|
|
325,073 |
|
|
|
315,712 |
|
|
|
304,063 |
|
|
|
264,813 |
|
|
|
259,022 |
|
|
|
250,962 |
|
|
|
341,763 |
|
|
|
|
|
|
|
|
|
|
|
Four years later |
|
|
282,291 |
|
|
|
292,801 |
|
|
|
293,711 |
|
|
|
254,004 |
|
|
|
236,609 |
|
|
|
237,059 |
|
|
|
243,561 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Five years later |
|
|
261,344 |
|
|
|
274,304 |
|
|
|
262,879 |
|
|
|
239,372 |
|
|
|
221,537 |
|
|
|
236,363 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six years later |
|
|
252,077 |
|
|
|
257,864 |
|
|
|
254,502 |
|
|
|
231,129 |
|
|
|
221,014 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Seven years later |
|
|
243,216 |
|
|
|
252,353 |
|
|
|
248,522 |
|
|
|
230,799 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Eight years later |
|
|
240,306 |
|
|
|
248,420 |
|
|
|
246,889 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine years later |
|
|
238,546 |
|
|
|
246,615 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ten years later |
|
|
236,828 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative (redundancies) deficiencies |
|
|
(203,080 |
) |
|
|
(218,808 |
) |
|
|
(225,240 |
) |
|
|
(218,767 |
) |
|
|
(225,613 |
) |
|
|
(203,939 |
) |
|
|
(189,880 |
) |
|
|
(109,309 |
) |
|
|
(45,771 |
) |
|
|
13,826 |
|
|
|
Cumulative amount of liability paid through: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One year later |
|
|
101,001 |
|
|
|
105,678 |
|
|
|
121,106 |
|
|
|
109,481 |
|
|
|
101,844 |
|
|
|
118,307 |
|
|
|
107,748 |
|
|
|
156,913 |
|
|
|
148,891 |
|
|
|
155,627 |
|
|
|
Two years later |
|
|
171,429 |
|
|
|
184,883 |
|
|
|
192,519 |
|
|
|
170,603 |
|
|
|
170,932 |
|
|
|
181,116 |
|
|
|
179,016 |
|
|
|
246,835 |
|
|
|
238,718 |
|
|
|
|
|
|
|
Three years later |
|
|
205,829 |
|
|
|
219,649 |
|
|
|
217,484 |
|
|
|
202,660 |
|
|
|
195,265 |
|
|
|
207,141 |
|
|
|
204,773 |
|
|
|
279,629 |
|
|
|
|
|
|
|
|
|
|
|
Four years later |
|
|
221,884 |
|
|
|
232,379 |
|
|
|
231,794 |
|
|
|
213,431 |
|
|
|
207,454 |
|
|
|
217,460 |
|
|
|
216,448 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Five years later |
|
|
227,692 |
|
|
|
237,879 |
|
|
|
237,272 |
|
|
|
221,409 |
|
|
|
211,934 |
|
|
|
222,307 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six years later |
|
|
231,277 |
|
|
|
240,363 |
|
|
|
241,904 |
|
|
|
224,555 |
|
|
|
213,257 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Seven years later |
|
|
232,416 |
|
|
|
242,698 |
|
|
|
242,736 |
|
|
|
224,882 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Eight years later |
|
|
233,784 |
|
|
|
242,818 |
|
|
|
242,875 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine years later |
|
|
233,552 |
|
|
|
242,850 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ten years later |
|
|
233,567 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reserves before reclassification |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
542,732 |
|
|
|
403,197 |
|
|
|
390,600 |
|
|
|
Reclassification |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,660 |
|
|
|
1,128 |
|
|
|
1,052 |
|
|
|
Net reservesDecember 31 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
440,302 |
|
|
|
433,441 |
|
|
|
451,072 |
|
|
|
402,069 |
|
|
|
389,548 |
|
|
502,390 |
Reinsurance Recoverables |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
19,267 |
|
|
|
21,529 |
|
|
|
24,898 |
|
|
|
45,007 |
|
|
|
40,152 |
|
|
74,246 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross reserves |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
459,569 |
|
|
$ |
454,970 |
|
|
$ |
475,970 |
|
|
$ |
447,076 |
|
|
$ |
429,700 |
|
$ |
576,636 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prior to 2001, the Company consistently experienced favorable development in loss and LAE reserves established for
prior years. During 2000, the Company experienced adverse loss development in its prior years reserves for hospitals and significant ongoing losses in this program, which resulted in less favorable loss development in 2000 than in prior years. In
2001, the Company experienced its first deficiency in its loss reserves for prior years. This deficiency was due to the significant adverse loss experience encountered in the physician and medical group business outside California. While the Company
believes that its reserves for losses and LAE are adequate, there can be no assurance that the Companys ultimate losses and LAE will not deviate, perhaps substantially, from the estimates reflected in the Companys financial statements.
If the Companys reserves should prove inadequate, the Company will be required to increase reserves, which could have a material adverse effect on the Companys financial condition or results of operations.
13
CEDED REINSURANCEDIRECT HEALTHCARE LIABILITY INSURANCE
The Company follows customary industry practice by reinsuring a portion of its healthcare liability insurance risks. The Company cedes to reinsurers a portion of
its risks and pays a fee based upon premiums received on all policies subject to such reinsurance. Insurance is ceded principally to reduce net liability on individual risks and to provide protection against large losses. Although reinsurance does
not legally discharge the ceding insurer from its primary liability for the full amount of the policies reinsured, it does make the reinsurer liable to the insurer to the extent of the reinsurance ceded. The Company determines how much reinsurance
to purchase based upon its evaluation of the risks it has insured, consultations with its reinsurance brokers and market conditions, including the availability and pricing of reinsurance. In 2001, the Company ceded $17.8 million of its earned
premiums to reinsurers.
The Companys reinsurance arrangements are generally placed through its exclusive reinsurance broker, Guy Carpenter & Company,
Inc. For 1999 and prior years, the Company retained the first $1.0 million of losses incurred per incident for its physician and medical group policies and had various reinsurance treaties covering losses in excess of $1.0 million up to $20.0
million per incident for physician coverage. The reinsurers also were obligated to bear their proportionate share of allocated loss adjustment expenses (ALAE). For hospital coverage, the Company reinsured 90% of all losses incurred above a $1.0
million retention, and the Company retained all LAE. For 2000, the Company consolidated these treaties into a program in which the Company retained the first $2.0 million of losses and ALAE per incident and the reinsurers covered losses in excess of
this amount up to $70.0 million. For 2001, the Company retained the first $1.25 million of losses and LAE, and retention for non-hospital business was reduced to $1.25 million per incident. In addition, the Company bears an annual aggregate
deductible of $1.75 million for losses in excess of the Companys retentions.
The Company often has more than one insured named as a defendant in a lawsuit
or claim arising from the same incident, and, therefore, multiple policies and limits of liability may be involved. The Companys reinsurance program is purchased in several layers, the limits of which may be reinstated under certain
circumstances, at the Companys option subject to the payment of additional premiums.
Reinsurance is placed under reinsurance treaties and agreements with a
number of individual companies and syndicates at Lloyds to avoid concentrations of credit risk. The following table identifies the Companys most significant reinsurers, their percentage participation in the Companys aggregate
reinsured risk based upon premiums paid by the Company and their rating as of December 31, 2001. No other single reinsurers percentage participation in 2001 exceeded 5% of total reinsurance premiums.
|
|
PREMIUMS CEDED FOR YEAR ENDED DECEMBER 31, 2001 |
|
RATING (1) |
|
PERCENTAGE OF TOTAL REINSURANCE PREMIUMS |
|
|
|
|
|
|
|
|
|
|
(In Thousands) |
|
|
|
|
|
Hannover Ruckversicherungs |
|
$ |
6,764 |
|
A+ |
|
39 |
% |
Lloyds of London Syndicates |
|
|
7,514 |
|
A |
|
43 |
% |
Zurich Re |
|
|
1,889 |
|
A |
|
11 |
% |
|
(1) |
|
All ratings are assigned by A.M. Best. |
The Company analyzes the credit quality
of its reinsurers and relies on its brokers and intermediaries to assist it in such analysis. To date, the Company has not experienced any material difficulties in collecting reinsurance recoverables. No assurance can be given, however, regarding
the future ability of any of the Companys reinsurers to meet their obligations. Among the reinsurers to which the Company cedes reinsurance are certain Lloyds syndicates. In recent years, Lloyds has reported substantial aggregate
losses that have had adverse effects on Lloyds in general and on certain syndicates in particular. In addition, there has been a decrease in the underwriting capacity of Lloyds syndicates in recent years. The substantial losses and other
adverse developments could affect the ability of certain syndicates to continue to trade and the ability of insureds to continue to place business with particular syndicates. It is not possible to predict what effects the circumstances described
above may have on Lloyds and the Companys contractual relationship with Lloyds syndicates in future years. The Company understands that Lloyds syndicates have created new trust funds to hold reserves for reinsurance purchased
by United States reinsureds gross of outward reinsurance. This arrangement applies to all purchases on or after August 1, 1995.
14
INVESTMENT PORTFOLIO
An important component of the Companys operating results has been the return on its invested assets. Investments of the Company are made by investment managers under policies established and supervised by the
Board. The Companys investment policy has placed primary emphasis on investment grade, fixed maturity securities and maximization of after-tax yields. The investment manager for the fixed maturity securities portfolio of the Company is Brown
Brothers Harriman & Co.
All of the fixed maturity securities are classified as available-for-sale and carried at estimated fair value. For these securities,
temporary unrealized gains and losses, net of tax, are reported directly through stockholders equity, and have no effect on net income. The following table sets forth the composition of the Companys investments in available-for-sale
securities at the dates indicated:
|
|
DECEMBER 31, 2001
|
|
DECEMBER 31, 2000
|
|
|
COST OR AMORTIZED COST |
|
FAIR VALUE |
|
COST OR AMORTIZED COST |
|
FAIR VALUE |
|
|
|
|
|
|
|
|
|
|
|
(In Thousands) |
Fixed maturity securities: |
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government and agencies |
|
$ |
175,608 |
|
$ |
177,718 |
|
$ |
185,559 |
|
$ |
187,873 |
State, municipalities and political subdivisions |
|
|
126,431 |
|
|
126,516 |
|
|
180,528 |
|
|
181,880 |
Mortgage-backed securities, U.S. government |
|
|
73,332 |
|
|
73,673 |
|
|
42,734 |
|
|
42,831 |
Corporate |
|
|
189,854 |
|
|
191,237 |
|
|
158,345 |
|
|
153,682 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed maturity securities |
|
|
565,225 |
|
|
569,144 |
|
|
567,166 |
|
|
566,266 |
Common stocks |
|
|
29,744 |
|
|
29,098 |
|
|
25,874 |
|
|
24,403 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
594,969 |
|
$ |
598,242 |
|
$ |
593,040 |
|
$ |
590,669 |
|
|
|
|
|
|
|
|
|
|
|
|
|
The Companys 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. The Companys portfolio of unaffiliated equity securities was $29.1 million at December 31, 2001.
The
Companys investment portfolio of fixed maturity securities consists primarily of intermediate-term, investment-grade securities. The Companys investment policy provides that fixed maturity investments are limited to purchases of
investment-grade securities or unrated securities which, in the opinion of a national investment advisor, should qualify for such rating. The table below contains additional information concerning the investment ratings of the Companys fixed
maturity investments at December 31, 2001:
TYPE/RATING OF INVESTMENT (1) |
|
AMORTIZED COST |
|
FAIR VALUE |
|
PERCENTAGE OF FAIR VALUE |
|
|
|
|
|
|
|
|
|
|
(In Thousands) |
|
AAA (including U.S. government and agencies) |
|
$ |
313,519 |
|
$ |
317,320 |
|
55.8 |
% |
AA |
|
|
146,992 |
|
|
145,613 |
|
25.6 |
|
A |
|
|
81,956 |
|
|
83,303 |
|
14.6 |
|
BBB |
|
|
17,687 |
|
|
17,837 |
|
3.1 |
|
Non rated (2) |
|
|
5,071 |
|
|
5,071 |
|
0.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
565,225 |
|
$ |
569,144 |
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
The ratings set forth above are based on the ratings, if any, assigned by Standard & Poors Corporation (S&P). If S&Ps ratings were unavailable, the equivalent
ratings supplied by Moodys Investors Services, Inc. were used. |
|
(2) |
|
Includes a credit note received from a catastrophe reinsurance limited liability company controlled by Hannover Re with an amortized cost and fair value of $5.0 million.
|
15
The following table sets forth certain information concerning the maturities of fixed maturity securities in the Companys
investment portfolio as of December 31, 2001:
|
|
AMORTIZED COST |
|
FAIR VALUE |
|
PERCENTAGE OF FAIR VALUE |
|
|
|
|
|
|
|
|
|
(In Thousands) |
Years to maturity: |
|
|
|
|
|
|
|
|
One or less |
|
$ |
8,163 |
|
$ |
8,256 |
|
1.5% |
After one through five |
|
|
88,656 |
|
|
90,453 |
|
15.9% |
After five through ten |
|
|
288,239 |
|
|
290,245 |
|
51.0% |
After ten |
|
|
106,835 |
|
|
106,517 |
|
18.7% |
Mortgage-backed securities |
|
|
73,332 |
|
|
73,673 |
|
12.9% |
|
|
|
|
|
|
|
|
|
Totals |
|
$ |
565,225 |
|
$ |
569,144 |
|
100.0% |
|
|
|
|
|
|
|
|
|
The average weighted maturity of the securities in the Companys fixed maturity portfolio as of December 31,
2001 was 5.6 years. The average duration of the Companys fixed maturity portfolio as of December 31, 2001 was 4.8 years.
The Company also made a $15.0
million investment in a limited partnership, which in turn invests in a portfolio of offshore hedge funds, managed accounts and other professionally managed funds that pursue non-traditional investment strategies. The investment return depends on
the performance of the portfolio. The investment had a value of $14.9 million at December 31, 2001. The financial advisor to the limited partnership is Credit Suisse First Boston International. See Notes 1 and 2 to Notes to Consolidated Financial
Statements.
The Company maintains cash and highly liquid short-term investments, which at December 31, 2001 totaled $95.2 million.
16
The following table summarizes the Companys investment results for the three years ended December 31:
FOR THE YEAR ENDED DECEMBER 31 |
|
2001 |
|
|
2000 |
|
|
1999 |
|
|
|
|
|
|
|
|
|
|
(In Thousands) |
|
FIXED MATURITY SECURITIES: |
|
|
|
|
|
|
|
|
|
|
|
|
Average invested assets (includes short-term cash investments)(1) |
|
$ |
650,915 |
|
|
$ |
648,156 |
|
|
$ |
672,403 |
|
Net investment income: |
|
|
|
|
|
|
|
|
|
|
|
|
Before income taxes |
|
|
34,122 |
|
|
|
33,152 |
|
|
|
36,404 |
|
After income taxes |
|
|
24,251 |
|
|
|
24,531 |
|
|
|
28,357 |
|
Average annual return on investments: |
|
|
|
|
|
|
|
|
|
|
|
|
Before income taxes |
|
|
5.24 |
% |
|
|
5.11 |
% |
|
|
5.41 |
% |
After income taxes |
|
|
3.73 |
% |
|
|
3.78 |
% |
|
|
4.22 |
% |
Net realized investment gains (losses) after income tax |
|
$ |
3,708 |
|
|
$ |
(149 |
) |
|
$ |
(255 |
) |
EQUITY SECURITIES: |
|
|
|
|
|
|
|
|
|
|
|
|
Average invested assets(2) |
|
$ |
26,751 |
|
|
$ |
28,934 |
|
|
$ |
35,239 |
|
Net investment income: |
|
|
|
|
|
|
|
|
|
|
|
|
Before income taxes |
|
|
223 |
|
|
|
499 |
|
|
|
927 |
|
After income taxes |
|
|
204 |
|
|
|
381 |
|
|
|
742 |
|
Average annual return on investments: |
|
|
|
|
|
|
|
|
|
|
|
|
Before income taxes |
|
|
0.83 |
% |
|
|
1.73 |
% |
|
|
2.63 |
% |
After income taxes |
|
|
0.76 |
% |
|
|
1.32 |
% |
|
|
2.11 |
% |
Net realized investment gains (losses) after income tax |
|
$ |
1 |
|
|
$ |
(112 |
) |
|
$ |
63 |
|
OTHER SECURITIES: |
|
|
|
|
|
|
|
|
|
|
|
|
Average invested assets(3) |
|
$ |
23,410 |
|
|
$ |
16,306 |
|
|
$ |
16,633 |
|
Net investment income: |
|
|
|
|
|
|
|
|
|
|
|
|
Before income taxes |
|
|
1,550 |
|
|
|
500 |
|
|
|
307 |
|
After income taxes |
|
|
1,008 |
|
|
|
325 |
|
|
|
199 |
|
Average annual return on investments: |
|
|
|
|
|
|
|
|
|
|
|
|
Before income taxes |
|
|
6.62 |
% |
|
|
3.07 |
% |
|
|
1.84 |
% |
After income taxes |
|
|
4.30 |
% |
|
|
2.00 |
% |
|
|
1.20 |
% |
Net realized investment gains (losses) after income tax |
|
$ |
0 |
|
|
$ |
0 |
|
|
$ |
0 |
|
|
(1) |
|
Fixed maturity securities at cost. |
|
(3) |
|
Principally real estate and the other investment. |
COMPETITION
The property and casualty insurance and reinsurance markets in which the Company competes are highly competitive. All
of these markets have experienced severe price competition and expanding terms of coverage over the past several years.
In the California healthcare liability
insurance market, the Company competes principally with three physician-owned mutual or reciprocal insurance companies and a physician-owned mutual protection trust for physician and medical group insureds. Each of these companies is actively
soliciting insureds in Southern California, the Companys primary area of operations, and each has offered very competitive rates during the past few years. The Company believes that the principal competitive factors, in addition to pricing,
include financial stability, breadth and flexibility of coverage and the quality and level of services provided. In addition, large commercial insurance companies actively compete in this market, particularly for larger medical groups, hospitals and
other healthcare facilities. These include the Farmers Group, Inc. and the CNA Insurance Companies.
The Company encounters similar competition from local
physician-owned insurance companies and commercial companies in other states. The Company competes in other states principally through independent agents and brokers, such as its relationship with Brown & Brown, and by offering superior
policyholder services. All markets in which the Company now writes
17
insurance and in which it expects to enter have competitors with pre-existing relationships with prospective customers, name recognition in those states and in many cases greater financial and
operating resources than the Company. At the present time the Company is substantially reducing its marketing efforts in states outside of California.
The Company
competes in the United States and international reinsurance markets with numerous international and domestic reinsurance and insurance companies. These competitors include independent reinsurance companies, subsidiaries or affiliates of large
established insurance companies, reinsurance departments of primary insurance companies and underwriting syndicates in Lloyds. A large majority of these competitors have greater financial resources than the Company, have been operating for
considerably longer than the Company, and have established long-term and continuing business relationships throughout the industry. The Company competes in this large market through the relationships developed by its senior management over many
years and the underwriting expertise and services that the Company provides. The Company has considered its A.M. Best A (Excellent) rating to be extremely important to its ability to compete in this segment. On February 21, 2002, A.M.
Best reduced the Companys rating to B++ (Very Good). This may adversely impact the Companys ability to compete, particularly in the Assumed Reinsurance Segment. See A.M. Best Rating.
REGULATION
General
Insurance companies are regulated by government agencies in each state in which they transact insurance. The extent of regulation varies by state, but the
regulation usually includes: (i) regulating premium rates and policy forms; (ii) setting minimum capital and surplus requirements; (iii) regulating guaranty fund assessments; (iv) licensing companies and agents; (v) approving accounting methods and
methods of setting statutory loss and expense reserves; (vi) setting requirements for and limiting the types and amounts of investments; (vii) establishing requirements for the filing of annual statements and other financial reports; (viii)
conducting periodic statutory examinations of the affairs of insurance companies; (ix) approving proposed changes of control; and (x) limiting the amounts of dividends that may be paid without prior regulatory approval. Such regulation and
supervision are primarily for the benefit and protection of policyholders and not for the benefit of investors.
Licenses
SCPIE Indemnity, AHI and AHSIC are licensed in their respective states of domicile, California, Delaware and Arkansas respectively. AHI
is also licensed to transact insurance and reinsurance in 47 states and the District of Columbia. This permits ceding company clients to take credit on their regulatory financial statements for reinsurance ceded to AHI in jurisdictions in which it
is authorized as a reinsurer. AHSIC is licensed to write policies as an excess and surplus lines insurer in 34 states and the District of Columbia. SCPIE Indemnity is not licensed in any jurisdiction in addition to California.
SCPIE Underwriting Limited is authorized under the laws of the United Kingdom to participate as a corporate member of Lloyds underwriting syndicates.
Most of the Companys healthcare liability insurance policies are written in California where SCPIE Indemnity is domiciled. California laws and regulations, including the
tort liability laws, and laws relating to professional liability exposures and reports, have the most significant impact on the Company and its operations.
Insurance Guaranty Associations
Most states, including California, require admitted property
and casualty insurers to become members of insolvency funds or associations that generally protect policyholders against the insolvency of such insurers. Members of the fund or association must contribute to the payment of certain claims made
against insolvent insurers. Maximum contributions required by law in any one year vary by state, and California permits a maximum assessment of 1% of annual premiums written by a member in that state during the preceding year. The largest assessment
paid by the Company was $697,000 in 1994. However, such payments are recoverable through policy surcharges.
Holding Company Regulation
SCPIE Holdings is subject to the California Insurance Holding Company System Regulatory Act (the Holding Company Act). The
Holding Company Act requires the Company periodically to file information with the California Department of Insurance and
18
other state regulatory authorities, including information relating to its capital structure, ownership, financial condition and general business operations. Certain transactions between an
insurance company and its affiliates of an extraordinary type may not be effected if the California Commissioner disapproves the transaction within 30 days after notice. Such transactions include, but are not limited to, certain
reinsurance transactions and sales, purchases, exchanges, loans and extensions of credit and investments, in the net aggregate, involving more than the lesser of 3% of the insurers admitted assets or 25% of surplus as to policyholders, as of
the preceding December 31.
The Holding Company Act also provides that the acquisition or change of control of a California insurance company or of any
person or entity that controls such an insurance company cannot be consummated without the prior approval of the California Insurance Commissioner. In general, a presumption of control arises from the ownership of voting securities and
securities that are convertible into voting securities, which in the aggregate constitute 10% or more of the voting securities of a California insurance company or of a person or entity that controls a California insurance company, such as SCPIE
Holdings. A person or entity seeking to acquire control, directly or indirectly, of the Company is generally required to file with the California Commissioner an application for change of control containing certain information required
by statute and published regulations and provide a copy of the application to the Company. The Holding Company Act also effectively restricts the Company from consummating certain reorganizations or mergers without prior regulatory approval.
The Company is also subject to insurance holding company laws in other states that contain similar provisions and restrictions.
Regulation of Dividends from Insurance Subsidiaries
The Holding Company Act also limits the ability of SCPIE Indemnity to pay dividends to the Company. Without prior notice to and approval of the Insurance Commissioner, SCPIE Indemnity may not declare or pay an extraordinary
dividend, which is defined as any dividend or distribution of cash or other property whose fair market value together with other dividends or distributions made within the preceding 12 months exceeds the greater of such subsidiarys statutory
net income of the preceding calendar year or 10% of statutory surplus as of the preceding December 31. Applicable regulations further require that an insurers statutory surplus following a dividend or other distribution be reasonable in
relation to its outstanding liabilities and adequate to meet its financial needs, and permit the payment of dividends only out of statutory earned (unassigned) surplus unless the payment out of other funds is approved by the Insurance Commissioner.
In addition, an insurance company is required to give the California Department of Insurance notice of any dividend after declaration, but prior to payment.
The
other Insurance Subsidiaries are subject to similar provisions and restrictions under the insurance holding company laws of the other states in which they are organized.
Risk-Based Capital
The National Association of Insurance Commissioners (NAIC) has developed a
methodology for assessing the adequacy of statutory surplus of property and casualty insurers which includes a risk-based capital (RBC) formula that attempts to measure statutory capital and surplus needs based on the risks in a companys mix
of products and investment portfolio. The formula is designed to allow state insurance regulators to identify potentially under-capitalized companies. Under the formula, a company determines its authorized control level RBC by taking into account
certain risks related to the insurers assets (including risks related to its investment portfolio and ceded reinsurance) and the insurers liabilities (including underwriting risks related to the nature and experience of its insurance
business). The RBC rules provide for four different levels of regulatory attention depending on the ratio of a companys total adjusted capital to its authorized control level RBC. The threshold requiring the least regulatory attention is a
company action level when total adjusted capital is less than or equal to 200% of the authorized control level RBC and the level requiring the most regulatory involvement is a mandatory control level RBC when total adjusted capital is less than 70%
of authorized control level RBC. At the mandatory control level the state insurance commissioner is required to restrict the writing of business or place the insurer under regulatory supervision or control.
At December 31, 2000, each of the Insurance Subsidiaries authorized control level RBC substantially exceeded the threshold requiring the least regulatory attention. At December 31, 2001,
SCPIE Indemnity exceeded this threshold by $32.8 million, a significantly smaller amount than at the end of the prior year.
Regulation of Investments
The Insurance Subsidiaries are subject to state laws and regulations that require diversification of
their investment portfolios and limit the amount of investments in certain investment categories such as below investment grade fixed income securities, real estate and equity investments. Failure to comply with these laws and regulations would
cause investments exceeding regulatory limitations to be treated as nonadmitted assets for purposes of measuring statutory surplus and, in some instances, would require divestiture of these non-qualifying investments over specified time periods
unless otherwise permitted by the state insurance authority under certain conditions.
19
Prior Approval of Rates and Policies
Pursuant to the California Insurance Code, the Company must submit rating plans, rates, policies and endorsements to the Insurance Commissioner for prior approval. The possibility exists
that the Company may be unable to implement desired rates, policies, endorsements, forms or manuals if the Insurance Commissioner does not approve these items. In the past, all of the Companys rate applications have been approved in the normal
course of review. AHI is similarly required to make policy form and rate filings in most of the other states to permit the Company to write medical malpractice insurance in these states. AHSIC is required in many states to obtain approval to issue
policies as a non-admitted excess and surplus lines insurer, but it is typically not required to obtain rate approvals.
Medical Malpractice Tort Reform
The California Medical Injury Compensation Reform Act (MICRA), enacted in 1975, has been one of the most
comprehensive medical malpractice tort reform measures in the United States. MICRA currently provides for limitations on damages for pain and suffering of $250,000, limitations on fees for plaintiffs attorneys according to a specified formula,
periodic payment of medical malpractice judgments and the introduction of evidence of collateral source benefits payable to the injured plaintiff. The Company believes that this legislation has brought stability to the medical malpractice insurance
marketplace in California by making it more feasible for insurers to assess the risks involved in underwriting this line of business. Bills have been introduced in the California Legislature from time to time to modify or limit certain of the tort
reform benefits provided to physicians and other healthcare providers by MICRA. Neither the proponents nor opponents have been able to enact significant changes. The Company cannot predict what changes, if any, to MICRA may be enacted during the
next few years or what effect such changes might have on the Companys medical malpractice insurance operations.
Medical Malpractice Reports
The Company has been required to report detailed information with regard to settlements or judgments
against its California physician insureds in excess of $30,000 to the Medical Board of California, which has responsibility for investigations and initiation of proceedings relating to professional medical conduct in California. Since January 1,
1998, all judgments, regardless of amount, must be reported to the Medical Board, which now publishes on the Internet all judgments reported. In addition, all payments must also be reported to the federal National Practitioner Data Bank and such
reports are accessible by state licensing and disciplinary authorities, hospital and other peer review committees and other providers of medical care. A California statute also requires that defendant physicians must consent to all medical
professional liability settlements in excess of $30,000, unless the physician waives this requirement. The Companys policy provides the physician with the right to consent to any such settlement, regardless of the amount, but that either party
may submit the matter of consent to a medical review board. In virtually all instances, the Company must obtain the consent of the insured physician prior to any settlement.
A.M. BEST RATING
A.M. Best rates insurance companies based on factors of concern to
policyholders. A.M. Best currently assigns to each insurance company a rating that ranges from A++ (Superior) to F (In Liquidation). A.M. Best reviews a companys profitability, leverage and liquidity, as well as its
book of business, the adequacy and soundness of its reinsurance, the quality and estimated market value of its assets, the adequacy of its loss reserves, the adequacy of its surplus, its capital structure, the experience and competence of its
management and its market presence. A.M. Bests ratings reflect its opinion of an insurance companys financial strength, operating performance and ability to meet its obligations to policyholders and are not evaluations directed to
purchasers of an insurance companys securities.
For a number of years, the Company received an A.M. Best rating of A (Excellent), the third highest of
thirteen rating classifications. On February 21, 2002, A.M. Best reduced the Companys classification two levels to B++ (Very Good). This classification is fifth of six classifications that A.M. Best rates as Secure. A.M. Best
assigns this rating to companies that in its view have, on balance, very good balance sheet strength, operating performance and business profile and which have a good ability to meet their ongoing obligations to policyholders.
An A.M. Best rating of at least an A- classification is important to some consumers in the property/casualty insurance industry, particularly in the assumed reinsurance
segment. Certain of the assumed reinsurance arrangements to which the Company is a party have clauses that give the ceding company or syndicate manager the right to terminate the Companys participation if the rating falls below A-. At the
present time, no party has requested that the Company withdraw from a contract. Such requests could occur, particularly at the time scheduled for renewal.
20
The Insurance Subsidiaries have entered into a pooling arrangement and each of the Insurance Subsidiaries has been assigned the
same pooled B++ (Very Good) A.M. Best rating based on their consolidated performance.
EMPLOYEES
As of December 31, 2001, the Company employed 231 persons. None of the employees is covered by a collective bargaining agreement. The Company
believes that its employee relations are good.
EXECUTIVE OFFICERS
The Executive Officers of the Company and their ages as of March 18, 2002, are as follows:
NAME |
|
AGE |
|
POSITION |
|
|
|
|
|
Donald J. Zuk |
|
65 |
|
President, Chief Executive Officer and Director |
Ronald L. Goldberg |
|
50 |
|
Senior Vice President, Underwriting |
Patrick S. Grant |
|
59 |
|
Senior Vice President, Marketing |
Joseph P. Henkes |
|
52 |
|
Secretary and Senior Vice President, Operations and Actuarial Services |
Patrick T. Lo |
|
49 |
|
Senior Vice President and Chief Financial Officer |
Donald P. Newell |
|
64 |
|
Senior Vice President and General Counsel |
Timothy C. Rivers |
|
53 |
|
Senior Vice President, Assumed Reinsurance |
Donald J. Zuk became Chief Executive Officer of the Companys predecessor in 1989. Prior to joining the
Company, he served 22 years with Johnson & Higgins, insurance brokers. His last position there was Senior Vice President in charge of its Los Angeles Health Care operations, which included the operations of the Companys predecessor. Mr.
Zuk is a director of BCSI Holdings Inc. and Homeowners Holding Company, both privately held insurance companies.
Ronald L. Goldberg joined the Company in May
2001. From June 2000 to April 2001, Mr. Goldberg was a Senior Consultant to ChannelPoint, Inc., a privately held firm providing technology services to the insurance industry. Prior to that time, Mr. Goldberg served as Senior Vice President of the
PHICO Group, a privately held professional liability insurer, from June 1998 to May 2000, and as President of its Independence Indemnity Insurance Company subsidiary. From April 1993 to May 1998, he was Vice President of USF&G Insurance Co., a
large diversified insurance company that is now part of The St. Paul Companies, Inc.
Patrick S. Grant has been with the Company since 1990 serving initially as
Vice President, Marketing. He was named Senior Vice President, Marketing in 1992. Prior to that time, he spent almost 20 years with the insurance brokerage firm of Johnson & Higgins. His last position there was Vice President, Professional
Liability. Mr. Grant has worked on the Company operations since 1976.
Joseph P. Henkes has been with the Company since 1990 serving initially as Vice President,
Operations and Actuarial Services. He was named Senior Vice President, Operations and Actuarial Services in 1992. Prior to that time he spent three years with Johnson & Higgins, where his services were devoted primarily to the Company. He has
been an Associate of the Casualty Actuarial Society since 1975 and a member of the American Academy of Actuaries since 1980.
Patrick T. Lo has been Senior Vice
President since 1999 and Chief Financial Officer of the Company since 1993. From 1990 to 1993 he served as Vice President and Controller of the Company. Prior to that time, he spent nine years as Assistant Controller, Assistant Vice President and
Vice President at The Doctors Company, a California-based medical malpractice insurance company.
Donald P. Newell joined the Company in January 2001. Prior to
that time he was a partner at the law firm of Latham & Watkins in San Diego, California. Mr. Newell has worked on matters for the Company since 1975.
21
Timothy C. Rivers has been with the Company since August 1999. Prior to that time, he spent 17 years with Guy Carpenter &
Company, a reinsurance brokerage subsidiary of Marsh McLennan, and a predecessor business, Willcox & Company. Mr. Rivers has worked on the Company operations since 1985.
RISK FACTORS
Certain statements in this Form 10-K that are not historical fact constitute
forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause the actual results of
the Company to be materially different from historical results or from any results expressed or implied by such forward-looking statements. Such risks, uncertainties and other factors include, but are not limited to, the following:
Concentration of Business
Substantially all of the Companys direct premiums written are generated from healthcare liability insurance policies issued to physicians and medical groups, healthcare facilities and other providers in the healthcare industry. As a
result, negative developments in the economic, competitive or regulatory conditions affecting the healthcare liability insurance industry, particularly as such developments might affect medical malpractice insurance for physicians, and medical
groups, could have a material adverse effect on the Companys results of operations.
Most of the Companys direct premiums written are generated in
California. The revenues and profitability of the Company are therefore subject to prevailing regulatory, economic and other conditions in California, particularly Southern California.
Disappointing Results in Expansion Efforts
In 1996, the Company began a
concerted effort to successfully expand its healthcare liability insurance business beyond its traditional focus of physicians and medical groups in California. The Company expanded initially into the market for hospitals. From 1997 to 1999, the
Company added more than 75 hospitals to its program. At the same time, the Company expanded its physician and medical group program into a number of other states, principally through its arrangement with Brown & Brown and through nonstandard
physician programs.
The results of this expansion effort have been disappointing. During 2000, the Company encountered severe adverse loss experience under its
hospital policies, and has almost entirely withdrawn from this market. In 2001, the Company incurred similar unacceptable losses in its principal physician and medical group programs outside California. The Company has agreed with Brown & Brown
to terminate their relationship no later than March 6, 2003, and has ceased accepting new nonstandard insureds outside California.
Brown & Brown is attempting
to identify another insurance company to replace the Company prior to the March 2003 termination date. In the interim, the Company is continuing to renew existing policies and issue new policies under very stringent underwriting standards and at
significantly higher premiums. The Company is taking similar measures in its non-California nonstandard physician market. If these measures are not successful, the Company could continue to incur material losses under both the Brown & Brown
program and the nonstandard program.
The Company has one other non-California program for physicians and medical groups and may add programs on a selective basis.
The Company cannot predict whether this remaining program will be successful or whether the Company will have the opportunity to add such programs, and, if so, whether any additional program will be successful.
Industry Factors
Many factors influence
the financial results of the healthcare liability insurance industry, several of which are beyond the control of the Company. These factors include, among other things: changes in severity and frequency of claims; changes in applicable law and
regulatory reform; changes in judicial attitudes toward liability claims; and changes in inflation, interest rates and general economic conditions.
The
availability of healthcare liability insurance, or the industrys underwriting capacity, is determined principally by the industrys level of capitalization, historical underwriting results, returns on investment and perceived premium rate
adequacy. Historically, the financial performance of the healthcare liability industry has tended to fluctuate between a soft insurance
22
market and a hard insurance market. In a soft insurance market, competitive conditions could result in premium rates and underwriting terms and conditions that may be below profitable levels. For
a number of years, the healthcare liability insurance industry in California and nationally has faced a soft insurance market. There can be no assurance as to whether or when industry conditions will improve or the extent to which any improvement in
industry conditions may improve the Companys financial condition and results of operations.
Competition
The Company competes with numerous insurance companies in the California market. The Companys principal competitors for physicians and
medical groups in California consist of three physician-owned mutual or reciprocal insurance companies, several commercial companies and a physicians mutual protection trust, which levies assessments primarily on a claims paid
basis. In addition, commercial insurance companies compete for the medical malpractice insurance business of larger medical groups and other healthcare providers. Several of these competitors have greater financial resources than the Company.
Between 1993 and 2001, the Company instituted overall rate increases in order to improve its underwriting results. These rate increases were higher than those implemented by most of its competitors. As a result, the Company has lost some of its
policyholders, in part due to its rate increases. In 2002, the Company instituted an average 8.4% rate increase for California physicians and medical groups. The effect of these rate increases on the Companys ability to retain and expand its
healthcare liability insurance business in California is uncertain.
In addition to pricing, competitive factors may include policyholder dividends, financial
stability, breadth and flexibility of coverage and the quality and level of services provided.
The Company has considered its A.M. Best rating to be extremely
important to its ability to compete in its markets, particularly in its assumed reinsurance segment. On February 21, 2002, A.M. Best reduced the Companys rating two classifications from A (Excellent) to B++ (Very Good). See Importance of A.M.
Best Rating.
Loss and LAE Reserves
The reserves for losses and loss adjustment expenses established by the Company are estimates of amounts needed to pay reported and unreported claims and related LAE. The estimates are based on assumptions related to the
ultimate cost of settling such claims based on facts and interpretation of circumstances then known, predictions of future events, estimates of future trends in claims frequency and severity and judicial theories of liability, legislative activity
and other factors. However, establishment of appropriate reserves is an inherently uncertain process involving estimates of future losses, and there can be no assurance that currently established reserves will prove adequate in light of subsequent
actual experience. The inherent uncertainty is greater for certain types of insurance, such as medical malpractice, where a longer period may elapse before a definite determination of ultimate liability is made, and where the judicial, political and
regulatory climates are changing. Healthcare liability claims and expenses may be paid over a period of 10 or more years, which is longer than most property and casualty claims. Trends in losses on long-tail lines of business such as healthcare
liability may be slow to appear, and accordingly, the Companys reaction in terms of modifying underwriting practices and changing premium rates may lag underlying loss trends. While the Company believes that its reserves for losses and LAE are
adequate, there can be no assurance that the Companys ultimate losses and LAE will not deviate, perhaps substantially, from the estimates reflected in the Companys financial statements. If the Companys reserves should prove
inadequate, the Company will be required to increase reserves, which could have a material adverse effect on the Companys financial condition or results of operations.
The Company consistently experienced favorable development (i.e., redundancies) in reserves established for prior years until 2001. Redundant reserves, which have been recognized or released in every year since 1985, have
contributed significantly to reported earnings. The Company reduced reserves for prior years by $42.1 million and $61.2 million in the years ended December 31, 2000 and 1999, respectively. During 2001, the Company experienced adverse loss
development in its prior years reserves for physicians and medical groups outside California, and significant ongoing losses in these programs. The Company also experienced less favorable loss development in its other insurance lines than in
prior years. In 2001 the Company recognized unfavorable development in prior years reserves of $13.8 million.
Necessary Capital and Surplus
The Insurance Subsidiaries have historically operated with ratios of net written premiums to statutory
capital and surplus (policyholder surplus) of less than 1 to 1, which the Company considers to be an appropriate measure of safety for the combination of insurance segments in which it writes. At the end of 2000, this ratio was .84 to 1. As a result
of the increase in net premiums written, particularly in the assumed reinsurance segment, and the substantial net loss the Company incurred during 2001, the ratio increased unfavorably to 1.54 to 1 at December 31, 2001. The Company does not expect a
material
23
increase in net premiums written during 2002, as the projected increase in the assumed reinsurance segment is expected to be largely offset by a decrease in the direct healthcare liability
insurance segment. Based on the Companys expected premium writings in 2002, the ratio of net written premiums to statutory capital and surplus is not expected to decrease unless the Company generates significant statutory income or is able to
obtain additional capital for the Insurance Subsidiaries. There is no assurance that either will occur. The Companys ability to increase its premium writings may be limited if it is unable to generate significant profitability or obtain
significant additional capital for the Insurance Subsidiaries. In addition, if the losses and loss reserve increases the Company has experienced in recent years continue and the Company is unable to obtain capital sufficient to offset them, the
Companys ability to write policies at its current expected levels will be limited. Moreover, if these and similar leverage ratios do not improve, the Insurance Subsidiaries ratings from A.M. Best may not improve and if they worsen, the
Insurance Subsidiaries ratings may be further reduced. Any of the events discussed above could have a material adverse effect on the Company's financial condition and results of operations.
Changes in Healthcare
Significant attention has recently been focused
on reforming the healthcare system at both the federal and state levels. A broad range of healthcare reform and patients rights measures have been suggested, and public discussion of such measures will likely continue in the future. Proposals
have included, among others, spending limits, price controls, limits on increases in insurance premiums, limits on the liability of doctors and hospitals for tort claims, increased tort liabilities for managed care organizations and changes in the
healthcare insurance system. The Company cannot predict which, if any, reform proposals will be adopted, when they may be adopted or what impact they may have on the Company. While some of these proposals could be beneficial to the Company, the
adoption of others could have a material adverse effect on the Companys financial condition or results of operations.
In addition to regulatory and
legislative efforts, there have been significant market driven changes in the healthcare environment. In recent years, a number of factors related to the emergence of managed care have negatively impacted or threatened to impact the
medical practice and economic independence of physicians. Physicians have found it more difficult to conduct a traditional fee for service practice and many have been driven to join or contractually affiliate with managed care organizations,
healthcare delivery systems or practice management organizations. This consolidation could result in the elimination or significant decrease in the role of the physician and the medical group from the medical professional liability purchasing
decision. In addition, the consolidation could reduce primary medical malpractice insurance premiums paid by healthcare systems, as larger healthcare systems generally retain more risk by accepting higher deductibles and self-insured retentions or
form their own captive insurance companies.
Importance of A.M. Best Rating
A.M. Best ratings are an increasingly important factor in establishing the competitive position of insurance companies. An A.M. Best rating reflects its opinion of an insurance
companys financial strength, operating performance and ability to meet its obligations to policyholders. Since 1996, the Company has held an A (Excellent) rating from A.M. Best. This is the same rating held by the Companys principal
competitors in the healthcare liability insurance market in California.
On February 21, 2002, A.M. Best reduced the Companys rating to B++ (Very Good). This
puts the Company at a competitive disadvantage with its principal California competitors. The Company relies heavily on its longstanding policyholder relations and reputation in California, and competes principally on this basis in the California
market. In the Assumed Reinsurance market, a rating of A- or higher is considered important and in some cases necessary to participate in reinsurance syndicates of the type in which the Company is a participant. The Company has not been requested to
withdraw from any reinsurance syndicate, but this could occur, particularly at such time as the contractual arrangements are scheduled for renewal.
Ceded
Reinsurance
The amount and cost of reinsurance available to companies specializing in medical
professional liability insurance are subject, in large part, to prevailing market conditions beyond the control of the Company. The Companys ability to provide professional liability insurance at competitive premium rates and coverage limits
on a continuing basis will depend in part upon its ability to secure adequate reinsurance in amounts and at rates that are commercially reasonable. Although the Company anticipates that it will continue to be able to obtain such reinsurance on
reasonable terms, there can be no assurance that this will be the case. In the past three years, the Company experienced a number of large paid losses under its healthcare liability insurance policies that were in excess of the limits of insurance
retained by the Company and thus were borne by the reinsurers. In addition, the September 11 terrorist attack has reduced capacity and increased rates in the reinsurance market generally.
24
The Company is subject to a credit risk with respect to its reinsurers because reinsurance does not relieve the Company of
liability to its insureds for the risks ceded to reinsurers. Although the Company places its reinsurance with reinsurers it believes to be financially stable, a significant reinsurers inability to make payment under the terms of a reinsurance
treaty could have a material adverse effect on the Company. See BusinessCeded Reinsurance.
Recent Entry Into Assumed Reinsurance Market
The Company has rapidly expanded its assumed reinsurance operations since the division was formed in late 1999. Treaties
include professional, commercial and personal liability coverages, commercial and residential property risks, accident and health coverages and marine coverages on a worldwide basis. During 2001, assumed reinsurance premiums earned were
approximately $79.5 million, and the Company expects this premium volume to increase approximately 76% for 2002, based on treaties in existence. Except for September 11 losses, loss experience for the division is based almost entirely on actuarial
estimates, as actual losses are still in the early stages of development. Actual experience could materially exceed or be less than these estimates. If the losses are excessive, there could be a significant adverse effect on the Companys
results of operations and financial condition at the premium volumes in 2001 and expected in 2002.
The strategic objective of the reinsurance division is to
create a well-balanced portfolio of carefully underwritten assumed reinsurance lines of insurance to add diversity to the direct business of the Company. The Company has relied heavily on prior relationships with lead reinsurers and reinsurance
intermediaries to gain access to attractive opportunities. In most instances, the Company is a treaty participant at a level in which the reinsured also has a significant share of the losses. In other instances, the Company has also invested in the
company managing the reinsurance arrangement. Two officers experienced in this area, who joined the Company in 1999 to start the division, have developed these relationships. If these officers left the employ of the Company for any reason, the
Company would have difficulty maintaining the relationships or the business of the division. There is no assurance that the Company will be successful in attracting appropriate reinsurance opportunities or that this business will be profitable.
Highlands Insurance Group Contingent Liability
Between January 1, 2000 and April 30, 2001, the Company issued endorsements to certain policyholders of the insurance company subsidiaries of Highlands Insurance Group, Inc. (HIG). Under these endorsements, the
Company agreed to assume the policy obligations of the HIG insurance company subsidiaries, if the subsidiaries became unable to pay their obligations by reason of having been declared insolvent by a court of competent jurisdiction. The coverages
included property, workers compensation, commercial automobile, general liability and umbrella. The gross premiums written by the HIG subsidiaries were approximately $88.0 million for the subject policies. In November 2001, HIG disclosed that
its A.M. Best rating had been reduced to C- and that its financial plan might trigger some level of regulatory involvement. In December, HIG announced that it would cease issuing any new or renewal policies as soon as practical. HIG has advised the
Company that at December 31, 2001, the HIG insurance company subsidiaries had paid losses and LAE under the subject policies of $30.7 million and had established case loss reserves of $27.9 million, net of reinsurance. Incurred but not reported
losses are expected to emerge; however, the amount cannot be reasonably determined at this time. If the HIG insurance company subsidiaries are declared insolvent at some future date by a court of competent jurisdiction and unable to pay losses under
the subject policies, the Company would be responsible to pay the amount of the losses incurred and unpaid at such date, and the Company would be entitled to indemnification of a portion of this loss from certain of the reinsurers of the HIG
insurance company subsidiaries. The Company would also be subrogated to the rights of the policyholders as creditors of the HIG insurance company subsidiaries. The Annual Statements filed by the HIG insurance company subsidiaries with the applicable
state regulatory authorities in March 2002 show combined policyholder surplus of approximately $36.3 million at December 31, 2001, which includes $152.6 million of reserve discounting. In its Quarterly Report on Form 10-Q filed with the Securities
and Exchange Commission on November 19, 2001, HIG stated that the company's failure to meet certain capital requirements and targets would expose the HIG insurance company subsidiaries to regulatory sanctions that may include placing the insurance
company subsidiaries under regulatory restrictions, supervision or control. The ultimate impact on the HIG insurance company subsidiaries of regulatory action, if any, is not currently determinable, but could be significant.
Holding Company Structure; Limitation on Dividends
SCPIE Holdings is an insurance holding company whose assets consist of all of the outstanding capital stock of the Insurance Subsidiaries. As an insurance holding company, SCPIE Holdings ability to meet its obligations
and to pay dividends, if any, may depend upon the receipt of sufficient funds from its subsidiaries. The payment of dividends to SCPIE Holdings by the Insurance Subsidiaries is subject to general limitations imposed by applicable insurance laws. See
BusinessRegulationRegulation of Dividends from Insurance Subsidiaries and Note 6 to Consolidated Financial Statements.
25
Anti-Takeover Provisions
SCPIE Holdings amended and restated certificate of incorporation (the Restated Certificate) and amended and restated bylaws (the Bylaws) include provisions that may be deemed to
have anti-takeover effects and may delay, defer or prevent a takeover attempt that stockholders may consider to be in their best interests. These provisions include: a Board of Directors consisting of three classes; authorization to issue up to
5,000,000 shares of preferred stock, par value $1.00 per share (the Preferred Stock), in one or more series with such rights, obligations, powers and preferences as the Board of Directors of SCPIE Holdings (the SCPIE Holdings Board) may provide; a
limitation which permits only the SCPIE Holdings Board, or the Chairman or the President of SCPIE Holdings to call a special meeting of stockholders; a prohibition against stockholders acting by written consent; provisions that provide that
directors may be removed only for cause and only by the affirmative vote of holders of two-thirds (66 2/3%) of the outstanding shares of
voting securities; provisions which provide that the SCPIE Holdings Board may increase the size of the Board and may fill vacancies and newly created directorships; and certain advance notice procedures for nominating candidates for election to the
SCPIE Holdings Board and for proposing business before a meeting of stockholders. In addition, state insurance holding company laws applicable to the Company in general provide that no person may acquire control of SCPIE Holdings without the prior
approval of appropriate insurance regulatory authorities. See BusinessRegulationHolding Company Regulation.
In May 1997, the Board of Directors
of the Company adopted a stockholder rights plan (the Rights Plan) to deter any attempted takeover of the Company on terms not approved by the Board of Directors. Pursuant to the Rights Agreement, dated May 13, 1997, with ChaseMellon Shareholder
Services, LLC (the Rights Agreement), the Company declared a dividend of one preferred share purchase right (a Right) for each share of Company common stock, $.0001 par value (the Common Shares), of the Company outstanding at the close of business
on June 3, 1997 (the Record Date). One Right attaches to each share of common stock, and, when exercisable, each Right will entitle the registered holder to purchase from the Company one one-hundredth of a share of Series A Junior Participating
Preferred Stock, $1.00 par value per share (the Preferred Shares), at a price of $80.00 per one one-hundredth of a Preferred Share, subject to adjustment (the Purchase Price). Because of the nature of the Preferred Shares dividend, liquidation
and voting rights, the value of one one-hundredth of a Preferred Share purchasable upon exercise of each Right should approximate the value of one Common Share.
The Rights Plan operates by diluting the ownership of any person who acquires a number of Common Shares above the 20% threshold defined in the Rights Agreement (an Acquiring Person) or any person or group who commences or announces an
intention to commence a tender or exchange offer that would result in beneficial ownership of 20% or more of the Common Shares. In the event that a person becomes an Acquiring Person or if the Company were the surviving corporation in a merger with
an Acquiring Person or any affiliate or associate of an Acquiring Person and the Common Shares were not changed or exchanged, each holder of a Right, other than Rights that are or were acquired or beneficially owned by the 20% stockholder (which
Rights will thereafter be void), thereafter have the right to receive upon exercise that number of Common Shares having a market value of two times the then current Purchase Price of the Right. In the event that, after a person has become an
Acquiring Person, the Company were acquired in a merger or other business combination transaction or more than 50% of its assets or earning power were sold, proper provision shall be made so that each holder of a Right shall thereafter have the
right to receive, upon the exercise thereof at the then current Purchase Price of the Right, that number of shares of common stock of the acquiring company that at the time of such transaction would have a market value of two times the then current
Purchase Price of the Right.
The Rights will expire on May 12, 2007, subject to the Companys right to extend such date, unless earlier redeemed or exchanged
by the Company or terminated. The Rights may be redeemed in whole, but not in part, at a price of $.01 per Right by the Board of Directors at any time prior to the time a person becomes an Acquiring Person. The Rights may also be exchanged at any
time after a person becomes an Acquiring Person and prior to the acquisition of 50% or more of the then-outstanding Common Shares (except for the Rights of the Acquiring Person) for that number of Common Shares having an aggregate value equal to the
Spread (the excess of the value of the Common Shares issuable upon exercise of a Right after a Person becomes an Acquiring Person over the Purchase Price) per Right (subject to adjustment).
Any of the provisions of the Rights Agreement may be amended by the Board of Directors of the Company prior to the Distribution Date as defined in the Rights Agreement. After the Distribution Date, the Company and
Rights Agent may amend or supplement the Rights Agreement without the approval of any holders of Right Certificates under certain circumstances provided that the interests of the holders of Right Certificates (other than an Acquiring Person or an
affiliate or associate of an Acquiring Person) are not adversely affected thereby.
26
As the result of a Delaware court case, the Board of Directors adopted an amendment to the Rights Agreement which eliminated
certain Continuing Director provisions from the Rights Agreement to bring the Rights Agreement squarely within the type of plan previously held to be valid by the Delaware Supreme Court. The Company does not believe this amendment
dilutes the effectiveness of the Companys Rights Plan or reduces the ability of the Companys directors, in response to any likely set of circumstances, to redeem the Rights if required to properly exercise their fiduciary duties.
Regulatory and Related Matters
Insurance companies are subject to supervision and regulation by the state insurance authority in each state in which they transact business. Such supervision and regulation relate to numerous aspects of an insurance
companys business and financial condition, including limitations on lines of business, underwriting limitations, the setting of premium rates, the establishment of standards of solvency, statutory surplus requirements, the licensing of
insurers and agents, concentration of investments, levels of reserves, the payment of dividends, transactions with affiliates, changes of control and the approval of policy forms. Such regulation is concerned primarily with the protection of
policyholders interests rather than stockholders interests. See BusinessRegulation.
The Risk-Based Capital (RBC) rules provide for different
levels of regulatory attention depending on the amount of a companys total adjusted capital compared to its various RBC levels. At December 31, 2000, each of the Insurance Subsidiaries RBC substantially exceeded the threshold requiring
the least regulatory attention. At December 31, 2001, SCPIE Indemnity exceeded this threshold by $32.8 million, which is a significantly smaller amount than at the end of 2000.
State regulatory oversight and various proposals at the federal level may in the future adversely affect the Companys results of operations. In recent years, the state insurance regulatory framework has come under
increased federal scrutiny, and certain state legislatures have considered or enacted laws that alter and, in many cases, increase state authority to regulate insurance companies and insurance holding company systems. Further, the NAIC and state
insurance regulators are reexamining existing laws and regulations, which in many states has resulted in the adoption of certain laws that specifically focus on insurance company investments, issues relating to the solvency of insurance companies,
RBC guidelines, interpretations of existing laws, the development of new laws and the definition of extraordinary dividends. See BusinessRegulation.
In July 1998, the Company entered into a lease covering approximately 95,000 square feet of
office space for its Company headquarters. The lease is for a term of 10 years ending in 2009 and the Company has options to renew the lease for an additional 10 years. The Company moved its headquarters and principal operations to these offices in
March 1999.
The Company also leases office space for its Assumed Reinsurance division in Summit, New Jersey and claims offices in Reston, Virginia; San Diego,
California; Sacramento, California and Tampa, Florida. During 2001, the Company closed marketing offices in Phoenix, Arizona; Addison, Texas and Boca Raton, Florida.
The Company is the owner of two office buildings that were previously occupied by the Companys headquarters, both located in Beverly Hills, California. One building contains approximately 25,000 square feet of office space and the
other office building contains approximately 24,000 square feet. Both office buildings are currently unencumbered and are fully leased to unaffiliated parties.
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 Companys management believes that the resolution of these actions will not have a
material adverse effect on the Companys financial position or results of operations.
No matters were submitted to a vote of security
holders during the fourth quarter of 2001.
27
PART II
Price Range of Common Stock
The Companys Common Stock is publicly traded on the New York Stock Exchange under the symbol
SKP. The following table shows the price ranges per share in each quarter, during the last two years:
2000 |
|
HIGH |
|
LOW |
|
|
|
|
|
First quarter |
|
$ |
36.66 |
|
$ |
27.50 |
Second quarter |
|
$ |
30.94 |
|
$ |
19.19 |
Third quarter |
|
$ |
21.69 |
|
$ |
19.75 |
Fourth quarter |
|
$ |
23.63 |
|
$ |
18.63 |
2001 |
|
|
|
|
|
|
|
|
|
First quarter |
|
$ |
29.57 |
|
$ |
20.20 |
Second quarter |
|
$ |
21.00 |
|
$ |
17.90 |
Third quarter |
|
$ |
21.50 |
|
$ |
15.26 |
Fourth quarter |
|
$ |
29.25 |
|
$ |
15.49 |
2002 |
|
|
|
|
|
|
|
|
|
First quarter (January 1 March 18) |
|
$ |
29.43 |
|
$ |
18.30 |
On March 18, 2002, the closing price of the Companys common stock was $18.53.
Stockholders of Record
The approximate
number of stockholders of record of the Companys Common Stock as of March 18, 2002, was 5,675.
Dividends
SCPIE Holdings paid cash dividends on its common stock of $0.40 per share in 2000 and 2001. On March 5, 2002, the Board of Directors declared a
$0.10 quarterly dividend payable on March 29, 2002, to stockholders of record on March 18, 2002. The continued payment and amount of cash dividends will depend upon, among other factors, the Companys operating results, overall financial
condition, capital requirements and general business conditions.
As a holding company, SCPIE Holdings is largely dependent upon dividends from its subsidiaries to
pay dividends to its stockholders. These subsidiaries are subject to state laws that restrict their ability to distribute dividends. State law permits payment of dividends and advances within any 12 month period without any prior regulatory approval
in an amount up to the greater of 10% of statutory earned surplus at the preceding December 31 or statutory net income for the calendar year preceding the date the dividend is paid. Under these restrictions, the principal insurance subsidiary of the
Company is entitled to pay dividends to SCPIE Holdings during 2002 up to approximately $12.4 million. See Note 6 of the Notes to Consolidated Financial Statements and BusinessRegulationRegulation of Dividends from Insurance Subsidiaries.
28
AS OF OR FOR THE YEAR ENDED DECEMBER 31, |
|
2001 |
|
|
2000 |
|
|
1999 |
|
|
1998 |
|
|
1997 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands, except per share data) |
|
INCOME STATEMENT DATA: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net premiums written(1) |
|
$ |
280,807 |
|
|
$ |
208,203 |
|
|
$ |
153,896 |
|
|
$ |
156,323 |
|
|
$ |
130,642 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums earned |
|
$ |
235,935 |
|
|
$ |
176,502 |
|
|
$ |
153,192 |
|
|
$ |
157,976 |
|
|
$ |
133,866 |
|
Net investment income |
|
|
35,895 |
|
|
|
34,152 |
|
|
|
37,697 |
|
|
|
40,367 |
|
|
|
42,716 |
|
Realized investment gains and other revenue |
|
|
7,909 |
|
|
|
1,602 |
|
|
|
423 |
|
|
|
11,618 |
|
|
|
7,153 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
|
279,739 |
|
|
|
212,256 |
|
|
|
191,312 |
|
|
|
209,961 |
|
|
|
183,735 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Losses and loss adjustment expenses |
|
|
304,473 |
|
|
|
152,602 |
|
|
|
122,780 |
|
|
|
132,208 |
|
|
|
123,377 |
|
Other operating expenses |
|
|
64,732 |
|
|
|
36,483 |
|
|
|
29,310 |
|
|
|
28,211 |
|
|
|
17,987 |
|
Interest expenses |
|
|
1,416 |
|
|
|
780 |
|
|
|
25 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses |
|
|
370,621 |
|
|
|
189,865 |
|
|
|
152,115 |
|
|
|
160,419 |
|
|
|
141,364 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before federal income taxes |
|
|
(90,882 |
) |
|
|
22,391 |
|
|
|
39,197 |
|
|
|
49,542 |
|
|
|
42,371 |
|
Federal income taxes (benefit) |
|
|
(32,906 |
) |
|
|
5,120 |
|
|
|
9,295 |
|
|
|
12,566 |
|
|
|
10,195 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
(57,976 |
) |
|
$ |
17,271 |
|
|
$ |
29,902 |
|
|
$ |
36,976 |
|
|
$ |
32,176 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE SHEET DATA: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investments |
|
$ |
713,925 |
|
|
$ |
675,120 |
|
|
$ |
655,391 |
|
|
$ |
793,616 |
|
|
$ |
785,664 |
|
Total assets |
|
|
977,646 |
|
|
|
854,645 |
|
|
|
834,036 |
|
|
|
921,469 |
|
|
|
888,449 |
|
Total liabilities |
|
|
718,258 |
|
|
|
538,104 |
|
|
|
518,492 |
|
|
|
534,951 |
|
|
|
527,334 |
|
Total stockholders equity |
|
|
259,388 |
|
|
|
316,541 |
|
|
|
294,700 |
|
|
|
386,518 |
|
|
|
361,115 |
|
|
ADDITIONAL DATA: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings (loss) per share of common stock(2) |
|
$ |
(6.22 |
) |
|
$ |
1.84 |
|
|
$ |
2.63 |
|
|
$ |
3.06 |
|
|
$ |
2.66 |
|
Diluted earnings (loss) per share of common stock(2) |
|
|
(6.22 |
) |
|
|
1.84 |
|
|
|
2.62 |
|
|
|
3.06 |
|
|
|
|
|
Dividends per share of common stock |
|
|
0.40 |
|
|
|
0.40 |
|
|
|
0.32 |
|
|
|
0.24 |
|
|
|
0.20 |
|
Book value per share |
|
|
27.64 |
|
|
|
33.92 |
|
|
|
30.98 |
|
|
|
32.54 |
|
|
|
29.41 |
|
GAAP ratios: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss ratio |
|
|
129.05 |
% |
|
|
86.5 |
% |
|
|
80.2 |
% |
|
|
83.7 |
% |
|
|
92.2 |
% |
Expense ratio |
|
|
28.04 |
|
|
|
21.1 |
|
|
|
19.1 |
|
|
|
17.9 |
|
|
|
13.4 |
|
Combined ratio |
|
|
157.09 |
|
|
|
107.6 |
|
|
|
99.3 |
|
|
|
101.6 |
|
|
|
105.6 |
|
Statutory capital and surplus |
|
$ |
181,916 |
|
|
$ |
249,261 |
|
|
$ |
265,459 |
|
|
$ |
343,330 |
|
|
$ |
321,289 |
|
(1) |
|
Net premiums written for 2001 and 2000 reflect the Companys recognition of written premiums on the effective date of the policy rather than on the date premiums were billed. This
change had no impact on the income statement. If 1999 premiums had been recognized under this method, net premiums written would have approximated $174.5 million. |
(2) |
|
Basic earnings (loss) per share of common stock at December 31, 2001, 2000, 1999 and 1998 are computed using the weighted average number of common shares outstanding during the year of
9,333,425, 9,375,735, 11,383,592 and 12,074,272, respectively. Earnings per share for 1997 gives effect to the merger of the Exchange into a subsidiary of SCPIE Holdings completed on January 29, 1997, including the allocation of approximately
10,000,000 shares of common stock to members of the Exchange in connection therewith. Diluted earnings per share of common stock at December 31, 2001, 2000, 1999 and 1998 are computed using the weighted average number of common shares outstanding
during the year of 9,333,425, 9,382,494, 11,403,081 and 12,089,013, respectively. For further discussion of basic earnings per share and diluted earnings per share, see the Notes to Consolidated Financial Statements. |
29
The following
discussion should be read in conjunction with the consolidated financial statements and the related notes thereto appearing elsewhere in this Form 10-K. The consolidated financial statements include the accounts and operations of SCPIE Holdings Inc.
(SCPIE Holdings or the Company) and its wholly owned subsidiaries.
Certain statements in the following discussion that are not historical fact constitute
forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements regarding the Company, its business prospects and results of operations are subject to certain risks and
uncertainties posed by many factors and events that could cause the Companys actual business, prospects and results of operations to differ materially from those that may be expressed or implied by such forward-looking statements. Such risks,
uncertainties and other factors are discussed in BusinessRisk Factors and in periodic filings with the Securities and Exchange Commission.
OVERVIEW
The Company conducts its insurance business in two business segments: direct healthcare liability insurance and
assumed reinsurance operations. Direct healthcare liability insurance represents professional liability insurance for physicians, oral and maxillofacial surgeons and dentists, healthcare facilities and other healthcare providers. The direct
healthcare liability includes premiums assumed under fronting arrangements related to the Brown & Brown dental program. Assumed reinsurance represents the book of assumed worldwide reinsurance of professional, commercial and personal liability
coverages, commercial and residential property risks, accident and health and workers compensation coverages and marine coverages.
Direct Healthcare
Liability Insurance
The Company has been a leading writer of medical malpractice insurance for physicians
and healthcare providers in California for many years.
In 1996, the Company began expansion into other professional liability products and into other geographical
markets. The principal product expansion was into professional liability insurance for hospitals. From 1997 through 1999, the Company added more than 75 hospitals to its program. These policies were written through national and regional brokers and
covered facilities in four states outside California. At approximately the same time, the Company undertook a major geographic expansion in the physician and small medical group market through an arrangement with Brown & Brown, a leading
publicly held insurance broker. This arrangement commenced in 1998, eventually encompassed nine states and in 2000 was expanded to include dentists in two states. During the same period, the Company also expanded into underwriting greater risk
nonstandard physicians in a number of states outside California.
The Company encountered intense price competition in its hospital expansion efforts. During 2000,
the Company incurred unacceptable losses under its hospital policies. The Company experienced adverse loss development in its prior years loss reserves for hospitals and significant ongoing losses in this program, which is reflected in the results
for the year ended December 31, 2000. The Company substantially reduced its hospital exposures during 2000 through policy nonrenewals and rate increases. At the beginning of 2001, it insured only 15 hospitals, and this was reduced to 10 hospitals at
year-end. The Company did not incur material losses during 2001 under its hospital policies.
In 2001, the Company derived approximately 30% of its direct
healthcare liability insurance direct premiums earned from physician and medical groups outside the state of California, principally under the Brown & Brown and nonstandard physician programs. During the second quarter of 2001, the Company
recognized that its loss reserves for these programs were severely deficient and that its current premium levels were inadequate. The Company strengthened its loss reserves by $18.7 million at mid-year to reflect this adverse development and
recorded an additional provision of $7.5 million to cover expected premium deficiencies. At the end of 2001, significant additional losses emerged under these programs, principally involving adverse experience in the fourth quarter. The Company
increased its loss reserves for the 2001 policy year by an additional $27.3 million, and established a premium deficiency reserve at year-end of $7.9 million. This non-California business was the principal reason for an underwriting loss of
approximately $109.7 million in the segment for 2001.
The Company and Brown & Brown have agreed to terminate their programs no later than March 6, 2003. In
the interim, Brown & Brown is attempting to identify another insurance company or companies to replace the Company. The Company has agreed to
30
end the programs earlier than the termination date, if replacement programs are established by Brown & Brown. The Company is following very strict underwriting standards in these programs and
for its nonstandard policies. In addition, significant rate increases during 2001 and 2002 averaging 70% are in place in the states involved. The Company expects a decrease in the number of policyholders in these programs during 2002, but premium
volume may decline by a lesser amount, or even increase, due to the rate increases.
Assumed Reinsurance
The Company has rapidly expanded its assumed reinsurance operations since it formed the division in late 1999. During 2001, assumed reinsurance net
premiums written were $112.2 million, an increase of $81.7 million from 2000. Premiums earned in this segment increased 193% in 2001 to $79.5 million, and the Company expects an approximate 76% increase during 2002.
Loss experience in this segment for 2000 was based almost entirely on actuarial estimates, as actual losses were in their early stages of development. In 2001, the unprecedented September
11 terrorist attack materially impacted the results in this segment. At year-end, the Company conducted an examination of its September 11 exposures in conjunction with its outside actuaries to identify to the fullest extent possible the amount of
these losses. The Company identified losses of $28.1 million, net of reinsurance benefit. This amount includes a reduction in premiums earned of $8.5 million to reflect estimated losses under a 1996 letter of credit program indexed to a portfolio of
worldwide catastrophe excess of loss reinsurance business. Excluding the losses from the terrorist attack, the assumed reinsurance segment would have recorded an underwriting profit of $4.5 million in 2001.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 2001, COMPARED TO YEAR ENDED DECEMBER 31,
2000
General Results
Total revenues were $279.7 million in 2001, an increase of 31.8% over total revenues of $212.3 million in 2000. Premiums earned increased $59.4 million, or 33.7%, in 2001. The increase
was principally attributable to assumed reinsurance premiums of $79.5 million earned in 2001 compared to $27.1 million earned in 2000.
Net investment income
increased approximately $1.8 million, or 5.3%, to $35.9 million in 2001 from $34.2 million in 2000. This increase was a result of a 1.1% increase in average invested assets and a shift in investment mix from tax-exempt securities to higher yielding
taxable bonds in 2001. The average rate of return on invested assets was 5.1% and 5.2% in 2001 and 2000, respectively. During 2001, the Company realized $5.7 million of investment gains as compared to $0.4 million in realized investment losses in
2000.
Income from affiliates in 2001 was $1.3 million compared to $0.9 million in 2000. These amounts were primarily attributable to a minority equity interest in
a small personal lines insurance company.
Total expenses were $370.6 million in 2001, an increase of 95.2% over total expenses of $189.9 million in 2000. The
increased expenses in 2001 reflect significant underwriting losses of $134.7, principally stemming from losses incurred in the Companys non-California direct healthcare liability insurance programs and September 11 terrorist attack losses
incurred in the Companys assumed reinsurance programs, as well as increased other operating expenses in both programs. During 2001, the company accelerated the recognition of certain deferred acquisition costs in both segments.
The Company realized an income tax benefit of $32.9 million in 2001 as a result of the net loss. In 2000, the Company had federal income tax expense of $5.1 million, at an
effective tax rate of 22.9%.
Net loss for 2001 was $58.0 million, or $6.22 basic and diluted earnings per share, compared to net income in 2000 of $17.3 million,
or $1.84 basic and diluted earnings per share.
Direct Healthcare Liability Insurance Segment
Premiums EarnedPremiums earned in the direct healthcare liability insurance segment increased approximately $7.0 million, or
4.7%, to $156.4 million in 2001 from $149.4 million in 2000.
31
Medical malpractice premiums from physicians and medical groups increased to approximately $143.7 million
in 2001 from $131.2 million in 2000. The principal increase was in physicians and small medical groups written through Brown & Brown outside California, which increased approximately $7.9 million to $30.0 million from $22.1 million in 2000.
Dentist and oral surgeon premiums written through Brown & Brown increased approximately $2.1 million to $7.2 million from $5.1 million in 2000. In California, premiums earned from physician and medical groups increased slightly to approximately
$96.6 million in 2001, from $95.3 million in 2000. This increase reflected the 10.6% average rate increase instituted in California at the beginning of 2001, somewhat offset by a decrease in the number of policyholders. The Company has instituted an
average rate increase of 8.4% in 2002 for physicians and medical groups in California.
Net hospital medical malpractice premiums earned decreased to $2.1 million from $10.0 million in 2000. During 2001, the Company substantially reduced the number of hospitals insured, but at significantly increased premium
rates. The Company expects a continued decline in earned premiums from hospitals in 2002 and continued erosion in the number of hospitals insured as it withdraws from the hospital market.
Premiums earned from other healthcare facilities and providers increased to approximately $7.3 million in 2001 from $6.0 million in 2000. Premiums earned from managed care errors and omissions,
directors and officers liability and other miscellaneous coverages totaled slightly more than $2.9 million in 2001, an increase of approximately $0.7 million over 2000.
Losses and LAELosses and LAE in the direct healthcare liability insurance segment increased to $220.3 million, or 140.8% of premiums earned in 2001, from $129.3 million, or 86.5% of
premiums earned in 2000. The ratio of losses and LAE to premiums earned is referred to as the loss ratio. This deterioration in loss experience was almost entirely due to significant unexpected losses incurred in the physician and medical group
programs outside the state of California, including principally the Brown & Brown and substandard physician programs.
The Company
experienced favorable development in loss reserves for many years, including favorable development in loss and LAE reserves established in 2000 of $42.6 million for prior policy years. During 2001, as a result of the poor experience in physician and
medical groups outside California, the Company had unfavorable development in loss and LAE reserves in this segment of $12.9 million.
Other Operating ExpensesOther operating expenses for the direct healthcare liability insurance segment in 2001 were approximately $45.8 million, compared to approximately $32.3 million in 2000. The ratio of other operating
expenses to premiums earned is referred to as the expense ratio, which increased to 29.3% in 2001 for the direct healthcare liability insurance segment from 21.6% in 2000. The increase was due partially to accelerated recognition of deferred
acquisition costs totaling $4.7 million related to physician business outside of California recorded during 2001. The remaining increase was attributable to higher commission expenses associated with the greater proportion of broker-produced
premiums in 2001 compared to 2000, costs related to the closure of three sales and marketing offices in 2001 and higher operating expenses.
The Companys combined ratio for the direct healthcare liability segment in 2001 was 170.1% compared to 108.2% in 2000. The combined ratio is the sum of loss and LAE expenses and other operating expenses to premiums earned. The
components are described in the preceding paragraphs.
Assumed Reinsurance Segment
Premiums EarnedPremiums earned in the assumed reinsurance segment increased to $79.5 million in 2001 from $27.1 million in 2000. Premiums earned during 2001 included approximately
$32.3 million under casualty programs, $6.3 million under property programs, $32.1 million under accident and health and workers compensation programs and $8.8 million under its marine program. Premiums earned in this segment were reduced by
an $8.5 million premium charge under a letter of credit exchange program indexed to the performance of a broad based catastrophe reinsurance portfolio. This portfolio incurred an underwriting loss as the result of the September 11 terrorist attack.
See Note 4 to Consolidated Financial Statements.
The Company has significantly increased its writings of assumed reinsurance. As of
December 31, 2001, the Company had treaties in effect that are estimated to produce more than $141 million in premiums earned in 2002.
32
Losses and LAEAssumed reinsurance losses and LAE [other than under fronting arrangements]
were $84.2 million in 2001, or 106% of assumed premiums earned, compared to $23.3 million, or 86.0% of premiums earned, in 2000. Losses estimated from the September 11 terrorist attack amounted to $19.6 million (not including the $8.5 million
premium charge discussed above), net of reinsurance.
Other Operating ExpensesOther operating expenses for the assumed
reinsurance segment increased $14.7 million to $18.9 million in 2001 from $4.2 million in 2000. The expense ratios for 2001 and 2000 were 23.8% and 15.3%, respectively. The increase was attributable to an overall increase in commission rates,
acceleration of recognition of deferred acquisition costs and the decrease in 2001 premiums earned as the result of the September 11 loss in the indexed reinsurance portfolio.
The Companys combined ratio for the assumed reinsurance segment in 2001 was 129.7% compared to 101.3% in 2000. The combined ratio is the sum of loss and LAE expenses and other operating
expenses to premiums earned. The components are described in the preceding paragraphs.
YEAR ENDED DECEMBER 31, 2000, COMPARED TO YEAR ENDED DECEMBER 31, 1999
As of December 31, 2000 the Company adopted FASB No. 131, Disclosure About Segments of an Enterprise and Related
Information, and classified its operations into the direct healthcare liability insurance segment and the assumed reinsurance segment. See Note 13 to Consolidated Financial Statements.
General Results
Total revenues were $212.3 million in 2000, an increase of 11.0% over total revenues of $191.3
million in 1999. Premiums earned increased $23.3 million, or 15.2%, in 2000. The increase was principally attributable to assumed reinsurance premiums of $27.1 million earned in 2000 compared to $6.8 million earned in 1999.
Net investment income decreased approximately $3.5 million, or 9.4%, to $34.2 million in 2000 from $37.7 million in 1999. This change reflects a decrease in average invested assets from
$724.5 million in 1999 to $665.3 million in 2000, due principally to the sale of securities to fund the Companys repurchase of approximately 2.0 million shares of its Common Stock from its public stockholders in November 1999. The average
annual return before taxes on the Companys portfolio of fixed-maturity securities was 5.4% in both 1999 and 2000.
The Company had small realized investment
losses in both years. Income from affiliates in 2000 of $0.9 million was attributable to a minority equity interest in a small personal lines insurance company.
Total expenses were $189.9 million in 2000, an increase of 24.9% over total expenses of $152.1 million in 1999. The increase in total expenses was attributable to a decrease in the recognition of prior-year loss reserve development and an
increase in loss costs generally in the direct healthcare liability insurance segment and higher operating expenses. The increased operating expenses reflect a greater proportion of commissioned premiums and higher employee related expenses in 2000.
Federal income tax expense as a percentage of income before federal income taxes varies primarily due to the proportion of tax-exempt investment income arising in
the respective periods. The effective tax rate was 22.9% in 2000 compared to 23.7% in 1999, reflecting a small increase in the proportion of tax exempt investment income in 2000.
Net income for 2000 was $ 17.3 million, or $1.84 diluted earnings per share, a decrease of 42.2% from net income of $29.9 million, or $2.62 diluted earnings per share, in 1999. Operating earnings, which do not include realized
gains or losses, were $1.87 per share in 2000 compared to $2.64 per share in 1999.
Direct Healthcare Liability Insurance Segment
Premiums EarnedPremiums earned in the direct healthcare liability insurance segment increased approximately $3.0 million, or 2.0%, to
$149.4 million in 2000 from $146.4 million in 1999. Medical malpractice premiums from physicians and medical groups decreased to approximately $131.2 million in 2000 from $132.8 million in 1999. This decrease in premiums was principally due to the
loss of physician and medical group insureds in the highly rate competitive California market. Physicians and small medical groups written through Brown & Brown outside California increased approximately $3.7 million to $22.1 million from
33
$18.4 million in 1999, and the Company earned an additional $5.1 million in dentist and oral surgeon premiums in 2000 written through Brown & Brown.
Hospital medical malpractice premiums remained largely unchanged with approximately $10.0 million in 2000 compared to $9.2 million in 1999. The Company
selectively underwrote its hospital business for 2001 and reduced the number of hospitals insured, but at significantly increased premium rates.
Premiums earned from other healthcare facilities and providers increased to approximately $6.0 million in 2000 from $2.8 million in 1999. Premiums earned from managed care errors and omissions, directors and officers liability and other
miscellaneous coverages totaled slightly more than $2.0 million in 2000, an increase of approximately $1.0 million over 1999.
Losses
and LAELosses and LAE in the direct healthcare liability insurance segment increased to $129.3 million, or 86.5% of premiums earned in 2000, from $116.6 million, or 79.6% of premiums earned in 1999. The increase was due to a reduction in
2000 in the favorable loss reserve development experienced by the Company with respect to prior policy years, partially offset by a reduction in the estimated losses incurred in the 2000 policy year as a percentage of premiums earned. The Company
experienced a net favorable development in loss and LAE reserves established for prior policy years in 2000 of $42.6 million compared to a favorable development of $61.8 million in
1999.
Other Operating ExpensesOther operating
expenses for the direct segment in 2000 were approximately $32.3 million, compared to total operating expenses for the entire business operation in 1999 of $29.3 million, when the Company did not allocate expenses to the different parts of its
operations. The ratio of other operating expenses to premiums earned is referred to as the expense ratio, which increased to 21.6% in 2000 for the direct medical malpractice insurance segment from 19.1% for the entire operation in 1999. This
increase reflects higher commission expenses associated with the greater proportion of broker-produced premiums in 2000 compared to 1999 and an increase in employee-related expenses.
Assumed Reinsurance Segment
Premiums EarnedPremiums earned in the assumed reinsurance
segment increased to $27.1 million in 2000, the segments first full year of operation, from $6.8 million in 1999. The Assumed Reinsurance Division was formed in August of 1999, although the Company had written small amounts of assumed
reinsurance for a number of years. Premiums earned during 2000 included approximately $8.8 million under casualty programs, $6.3 million under property programs, $9.4 million under accident and health programs and $2.6 million under its marine
program. The Company also earned $6.2 million in other assumed premiums in 2000 under fronting arrangements related to its dentist and oral surgeon programs marketed by Brown & Brown. In 1999, the Company had assumed premiums earned of $11.1
million relating to fronting insurance arrangements that are no longer in effect.
Losses and LAEAssumed reinsurance losses
and LAE (other than under fronting arrangements) were $23.3 million in 2000, or 86.0% of assumed premiums earned, compared to $6.2 million, or 91.2% of premiums earned, in 1999.
Other Operating ExpensesOther operating expenses for the assumed reinsurance segment were $4.2 million in 2000, or an expense ratio of 15.3%. No allocation of operating expenses was
made for 1999. Operating expenses consist primarily of commissions and employee-related expenses.
LIQUIDITY AND CAPITAL RESOURCES
The primary sources of the Companys 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 2001, the Company had positive cash
flow from operations of $33.4 million compared to $2.5 million in 2000. The increase in positive cash flow in 2001 was principally attributable to increased assumed reinsurance premiums received by the Company for which incurred losses had not yet
been paid.
34
The Company invests its cash flow from operations in both fixed-maturity securities and equity securities. The Companys
current policy is to limit its investment in equity securities and its real estate to no more than 8.0% of the total market value of its investments. Accordingly, the Companys portfolio of unaffiliated equity securities had a fair value of
$29.1 million at December 31, 2001. The Company plans to continue this focus on fixed-maturity securities for the indefinite future.
In October 2001, the Company
organized and funded a wholly-owned Cayman Islands subsidiary, which made a $15.0 million investment in a foreign limited partnership, whose financial advisor is Credit Suisse First Boston International. The limited partnership in turn invests
principally in a diversified portfolio of offshore hedge funds. The investment return depends on the performance of the portfolio. See Notes 1 and 2 to Consolidated Financial Statements.
The Company has made limited investments in real estate which was formerly used as its corporate headquarters. Both buildings are fully leased to unaffiliated third parties. These leases expire on April 2005 and
November 2005 with no provisions for renewal. Future minimum rentals are $1.8 million for each of the years 2002 through 2004 and $1.1 million for year 2005. The buildings are recorded at cost and depreciated principally under the straight-line
method over the useful life of the buildings. Accumulated depreciation at December 31, 2001 and 2000, was $3.8 million and $3.4 million respectively. 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 ending in 2009 and contains two options to renew the lease for a period of five years each. The Company moved its headquarters and principal operations to this space in March
1999.
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 $85.0 million, or 11.9% of invested assets, at December 31, 2001. 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 12-month period,
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 statutory net income for the preceding year. Applicable regulations further require
that an insurers 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 2002 without prior regulatory approval is approximately
$12.4 million.
Common stock dividends paid to stockholders were $0.40 per share in 2001. These dividends were funded through dividends from the Companys
insurance subsidiaries received in prior years. The Company has declared a quarterly dividend of $0.10 per share, payable on March 29, 2002. Payment of future dividends is subject to Board approval, earnings and the financial condition of the
Company.
The Company had borrowings of $9.0 million outstanding at December 31, 2001, under a Credit Agreement with three bank lenders. On February 28, 2002, the
Company fully repaid the outstanding balance, and the parties terminated the Credit Agreement. See Note 8 to Consolidated Financial Statements.
At March 15, 2002,
SCPIE Holdings held cash and short-terms securities of $2.5 million, after provision for payment of the March 29, 2002, dividend. The Company also holds a minority interest in the capital stock of a small personal lines Florida domiciled insurance
company. The stockholders of that Company have entered into an agreement to sell the Company. The sale is scheduled for completion in late May 2002. If the sale is completed, the Company will receive additional cash funds of approximately $4.0
million. Based on historical trends, market conditions and its business plans, the Company believes that its sources of funds (including dividends from the Insurance Subsidiaries) will be sufficient to meet the liquidity needs of SCPIE Holdings over
the next 18 months and beyond.
According to regulations governing insurance companies, the Insurance Subsidiaries are required to maintain sufficient statutory
capital and surplus to cover the risks associated with the policies they write. Due to losses and strengthening of loss reserves in 2001, the statutory capital and surplus of the Insurance Subsidiaries declined significantly, while premiums
35
increased. Failure to generate significant profitability in 2002 or obtain additional capital will limit the Companys ability to increase or maintain its premium writings. There is no
assurance that additional capital, if necessary, will be available to the Company on favorable or acceptable terms. See Business Risk FactorsNecessary Capital and Surplus.
On March 9, 2002, the Job Creation and Worker Assistance Act of 2002 became law. The new law allows tax losses incurred in 2001 and 2002 to be carried back five years instead of the two years allowed under prior law. As a
result of this law change, the Company will be able to recoup an additional approximate $8 million of taxes paid in the three years ended December 31, 1998 subsequent to filing its 2001 tax return. The federal income taxes receivable recorded on the
December 31, 2001 balance sheet will be increased by approximately $8 million and the deferred tax asset decreased by an identical amount in the financial statements for the quarter ended March 31, 2002.
During May 2001, the Board of Directors authorized the continuation of the Companys 1999 program to repurchase up to 1,000,000 shares of its common stock on the open market. This
authorization extended the companys 1999 program that would have otherwise expired in May 2001. Under this extended 1999 program, 391,420 shares have been repurchased of which 30,600 were purchased during 2001.
CONTRACTUAL COMMITMENTS
The Company has certain
contractual obligations and commercial commitments principally for issuing letters of credit in connection with its assumed reinsurance segment and for leasing office space for its headquarters and other regional offices. Additionally, the Company
has an outstanding bank note that is further described in Liquidity and Capital Resources. The table below presents the contractual payments due by period or expiration period for each obligation or commitment:
Contractual commitments as of December 31, 2001, are as follows:
|
|
2002 |
|
2003 |
|
2004 |
|
2005 |
|
2006 |
|
Thereafter |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period (in thousands) |
Bank Loan Payable |
|
$ |
9,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Leases |
|
$ |
2,933 |
|
$ |
3,041 |
|
$ |
3,042 |
|
$ |
3,119 |
|
$ |
3,097 |
|
$ |
5,817 |
Other commitments as of December 31, 2001 are as follows:
|
|
2002 |
|
2003 |
|
2004 |
|
2005 |
|
2006 |
|
Thereafter |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Expiration Date (in thousands) |
Letters of Credit |
|
$ |
15,316 |
|
|
|
|
|
|
|
$ |
31,000 |
|
|
MARKET RISK DISCLOSURES FOR FINANCIAL INSTRUMENTS
The investment portfolio of 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 December 31, 2001, comprised 79.7% of total investments at market value. U.S. government and tax-exempt
bonds represent 53.5% of the market values of 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 4.1% of
total investments at market value. The other investment, which is comprised of a mutual fund investment that contains derivative financial instruments, accounts for 2.1% of total investments at market value. 11.9% of the investment portfolio
consists of highly liquid short-term money market funds. The remaining 2.2% of investments consists of real estate leased to third parties.
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.
36
The Company also holds an investment in a limited partnership, which invests in a portfolio of offshore hedge funds. The
investment return depends on the performance of the portfolio, which includes both interest rate risk and credit risk. This investment had a value of $14.9 million at December 31, 2001.
The Companys invested assets are subject to interest rate risk. The following table presents the effect on current estimated fair values of the fixed-maturity securities available for sale and common stocks
assuming a 100-basis-point increase in market interest rates and a 10% decline in equity prices. The analysis excludes real estate and the other investment.
|
|
Carrying Value |
|
Estimated Fair Value at Current Market Rates/Prices |
|
Estimated Fair Value At Adjusted Market Rates/Prices as Indicated Below |
|
|
|
|
|
|
|
|
|
(In Thousands) |
December 31, 2001 |
|
|
|
|
|
|
|
|
|
Interest rate risk* Fixed-maturity
securities available for sale |
|
$ |
569,144 |
|
$ |
569,144 |
|
$ |
542,048 |
Equity price risk** Common stocks |
|
$ |
29,098 |
|
$ |
29,098 |
|
$ |
26,188 |
December 31, 2000 |
|
|
|
|
|
|
|
|
|
Interest rate risk* Fixed-maturity
securities available for sale |
|
$ |
566,266 |
|
$ |
566,266 |
|
$ |
539,586 |
Equity price risk** Common stocks |
|
$ |
24,403 |
|
$ |
24,403 |
|
$ |
21,963 |
* |
|
Adjusted interest rates assume a 100-basis-point increase in market rates |
** |
|
Adjusted equity prices assume a 10% decline in market values |
For all its
financial assets and liabilities, the Company seeks to maintain reasonable average durations, consistent with the maximization of income without sacrificing investment quality and providing for liquidity and diversification.
The estimated fair values at current market rates for financial instruments subject to interest rate risk in the table above are the same as those disclosed in Note 2 to Consolidated
Financial Statements. The estimated fair values at the adjusted market rates (assuming a 100-basis-point increase in market interest rates) are calculated using discounted cash flow analysis and duration modeling where appropriate. The estimated
values do not consider the effect that changing interest rates could have on prepayment activity (e.g., mortgages underlying mortgage-backed securities).
This
sensitivity analysis provides only a limited, point-in-time view of the market risk sensitivity of certain of the Companys financial instruments. The actual impact of market interest rate and price changes on the financial instruments may
differ significantly from those shown in the sensitivity analysis. The sensitivity analysis is further limited as it does not consider any actions the Company could take in response to actual and/or anticipated changes in interest rates and equity
prices.
RELATED PARTY TRANSACTIONS
During 2000 and 2001, the Company entered into certain insurance and reinsurance transactions in the ordinary course of its business with insurance company subsidiaries of Highlands Insurance Group, Inc. (HIG). A director of the Company was
the chief executive officer of Highlands during this period until November 2001. These transactions include:
Endorsements issued by the Company between January 1,
2000 and April 30, 2001 to holders of certain property, workers compensation, commercial automobile, general liability and umbrella policies of HIG subsidiaries. The Company received a
37
fee of 1% of the gross policy premiums written by the HIG subsidiaries of approximately $88.0 million for the subject policies. See BusinessRisk FactorsHighlands Insurance Group
Contingent Liability for more information relating to these endorsement contracts.
Arrangements under which the Company ceded to an HIG subsidiary during 2001
36%, or $2.2 million of earned premium, of the excess of loss medical malpractice policies covering healthcare facilities and physicians and other professional liability underwritten by a Lloyds syndicate in which the Company bears 100% of the
risk. The Corporation of Lloyds holds all of the premiums, and the HIG subsidiary has deposited an additional $4.9 million with Lloyds to secure its obligations.
Nine agreements under which the Company, together with other assuming reinsurers, has assumed small percentages of business written by HIG subsidiaries, including property, casualty and workers compensation coverages.
Assumed premium earned under these contracts in 2001 was approximately $673,000.
Arrangements under which the Company retroceded to HIG subsidiaries a portion of
the business assumed under four assumed reinsurance agreements. During 2001, premiums of approximately $3.1 million were ceded to HIG subsidiaries under these agreements.
The Company entered into contracts with Brown & Brown, Inc. under which Brown & Brown acts as an insurance producer for the Company. A director of the Company serves as chairman of the board, president and chief executive officer
and principal shareholder of Brown & Brown. Brown & Brown produced $45.0 million, $46.0 million and $21.3 million in gross written premiums in 2001, 2000 and 1999 respectively (including $4.5 million and $7.6 million from fronting
arrangements related to dentist and oral surgeon programs in 2001 and 2000), and received commissions of $7.2 million, $7.6 million and $3.2 million. The Company and Brown & Brown have reached agreement to terminate these programs no later than
March 6, 2003.
The Company considers all of the above arrangements to constitute transactions entered into in the ordinary course of its business.
CRITICAL ACCOUNTING POLICIES
The
Companys discussion and analysis of its financial condition and results of operations are based upon the Companys Consolidated Financial Statements, which have been prepared in accordance with accounting principles generally accepted in
the United States (GAAP). Preparation of financial statements in accordance with GAAP requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and the related notes.
Management believes that the following critical accounting policies, among others, affect the more significant judgments and estimates used in the preparation of the Consolidated Financial Statements. Actual results may differ from these estimates
under different assumptions or conditions.
Premium Revenue Recognition
Direct healthcare liability insurance premiums written are primarily earned on a daily pro rata basis over the terms of the policies. Accordingly, unearned premiums represent the portion of premiums written which is applicable to the
unexpired portion of the policies in force. Reinsurance premiums assumed are estimated based on information provided by ceding companies. The information used in establishing these estimates is reviewed and subsequent adjustments are recorded in the
period in which they are determined. These premiums are earned over the terms of the related reinsurance contracts.
Loss and Loss Adjustment Expense
Reserves
Unpaid losses and loss adjustment expenses are comprised of case reserves for known claims, incurred but not reported reserves for unknown claims
and any potential development for known claims, and reserved for the cost of administration and settlement of both known and unknown claims. Such liabilities are established based on known facts and interpretation of circumstances, including the
Companys experience with similar cases and historical trends involving claim payment patterns, loss payments and pending levels of unpaid claims, as well as court decisions and economic conditions. The effects of inflation are considered in
the reserving process. Establishing appropriate reserves is an inherently uncertain process; the ultimate liability may be in excess of or less than the amount provided. Any increase in the amount of reserves, including reserves for insured events
of prior years, could have an adverse effect on the Companys results for the period in which the adjustments are made. The Company utilizes both its internal actuarial staff and independent actuaries in establishing its reserves. The Company
does not discount its loss and loss adjustment expense reserves.
38
The reserves for unpaid loss and loss adjustment expense attributable to insured events prior to 2001 increased during 2001 by
$13.8 million. The adverse development was principally due to non-California medical malpractice business.
The Company has a growing volume of assumed
reinsurance. Assumed reinsurance is a line of business with an inherent volatility. Also in the absence of a historical data base of our own experience due to the newness of the program, greater reliance is placed on underwriting and industry
information to estimate the appropriate loss reserves.
The assumed reinsurance business exposure to losses from the events of September 11, 2001. Estimation of
ultimate liabilities for this exposure is unusually difficult and thus subject to significantly greater than normal variation and uncertainty.
Deferred
Policy Acquisition Costs
Deferred policy acquisition costs include commissions, premium taxes and other variable costs incurred in connection with writing
business. Deferred policy acquisition costs are reviewed to determine if they are recoverable from future income, including investment income. If such costs are estimated to be unrecoverable, they are expensed. Recoverability is analyzed based on
the Companys assumptions related to the underlying policies written, including the lives of the underlying policies, growth rate of the assets supporting the liabilities, and level of expenses necessary to maintain the policies over their
entire lives. Deferred policy acquisition costs are amortized over the period in which the related premiums are earned.
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 Companys 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 Companys rate-making process adequately incorporate the effects of inflation.
The Companys Consolidated Financial Statements and
related notes, including supplementary data, are set forth in the Index on page 46 hereof.
None.
39
PART III
Information regarding Directors of the Company is
incorporated by reference to the section titled Election of Directors in the Companys definitive proxy statement filed with the SEC in connection with the Annual Meeting of Stockholders to be held on May 16, 2002 (the Proxy
Statement). Information regarding Executive Officers is set forth in Item 1 of Part I of this Form 10-K report under the caption Executive Officers.
The information required by this item is incorporated by reference to the Proxy
Statement under the heading Executive Compensation.
The information required by this item is
incorporated by reference to the Proxy Statement under the heading Stock Ownership.
The information required by this item is incorporated by
reference to the Proxy Statement under the heading Certain Relationships and Related Transactions.
40
PART IV
(a)(1) and (a)(2) and (d)
FINANCIAL STATEMENTS AND SCHEDULE. Reference is made to the IndexFinancial Statements and Financial Statement ScheduleAnnual Report on Form 10-K filed on page 46 of this Form 10-K report.
(a) (3) Exhibits:
NUMBER
|
|
DOCUMENT
|
2. |
|
Amended and Restated Plan and Agreement of Merger by and among SCPIE Holdings Inc., SCPIE Indemnity Company and Southern California Physicians Insurance Exchange dated August 8, 1996,
as amended December 19, 1996. (filed with the Companys Registration Statement on Form S-1 (No. 33-4450) and incorporated herein by reference). |
3.1 |
|
Amended and Restated Certificate of Incorporation. (filed with the Companys Registration Statement on Form S-1 (No. 33-4450) and incorporated herein by reference).
|
3.2 |
|
Amended and Restated Bylaws. (filed with the Companys Quarterly Report on Form 10-Q on August 16, 1999 and incorporated herein by reference). |
10.1 |
|
Amended and Restated Employment Agreement dated January 2, 2002, between SCPIE Management Company and Donald J. Zuk. |
10.2 |
|
First Excess of Loss Treaty No. 01-95-0020 with various subscribing reinsurers. (filed with the Companys Registration Statement on Form S-1 (No. 33-4450) and incorporated herein
by reference). |
10.3 |
|
Second Excess of Loss Treaty No. 01-95-0021 with various subscribing reinsurers. (filed with the Companys Registration Statement on Form S-1 (No. 33-4450) and incorporated
herein by reference). |
10.4 |
|
Third Excess of Loss Treaty No. 01-95-0022 with various subscribing reinsurers. (filed with the Companys Registration Statement on Form S-1 (No. 33-4450) and incorporated herein
by reference). |
10.5 |
|
Fourth Excess of Loss Treaty No. 01-95-0599 with various subscribing reinsurers. (filed with the Companys Registration Statement on Form S-1 (No. 33-4450) and incorporated
herein by reference). |
10.6 |
|
Per Policy Excess of Loss Treaty No. 01-94-0365 with various subscribing reinsurers. (filed with the Companys Registration Statement on Form S-1 (No. 33-4450) and incorporated
herein by reference). |
10.7 |
|
Reinstatement/Retroactive/Aggregate Extension Excess of Loss Treaty No. 01-95-0879 with various subscribing reinsurers. (filed with the Companys Registration Statement on Form
S-1 (No. 33-4450) and incorporated herein by reference). |
10.8 |
|
Medical Malpractice Surplus Reinsurance Treaty between SCPIE and Lloyds Syndicate No. 1010 and Syndicates Comprising 1007 Group underwritten for by CW Spreckley, Esq. and
others, effective date January 1, 1996, Treaty No. 01-95-0374. (filed with the Companys Registration Statement on Form S-1 (No. 33-4450) and incorporated herein by reference). |
10.9 |
|
Physician Medical Malpractice/Hospital Professional Liability Quota Share Reinsurance Agreement between Hannover Ruckversicherungs, Aktiengesellschaft/Eisen Und Stahl
Ruckversicherungs-Aktiengesellschaft, Hannover, Germany, and various subscribing reinsurers, effective date January 1, 1995, Treaty No. 01-95-0694. (filed with the Companys Registration Statement on Form S-1 (No. 33-4450) and incorporated
herein by reference). |
10.10 |
|
First Excess of Loss Treaty No. 01-96-0020 with various subscribing reinsurers. (filed with the Companys Registration Statement on Form S-1 (No. 33-4450) and incorporated herein
by reference). |
10.11 |
|
Second Excess of Loss Treaty No. 01-96-0021 with various subscribing reinsurers. (filed with the Companys Registration Statement on Form S-1 (No. 33-4450) and incorporated
herein by reference). |
10.12 |
|
Third Excess of Loss Treaty No. 01-96-0022 with various subscribing reinsurers. (filed with the Companys Registration Statement on Form S-1 (No. 33-4450) and incorporated herein
by reference). |
10.13 |
|
Fourth Excess of Loss Treaty No. 01-96-0599 with various subscribing reinsurers. (filed with the Companys Registration Statement on Form S-1 (No. 33-4450) and incorporated
herein by reference). |
10.14 |
|
Per Policy Excess of Loss Treaty No. 01-96-0365 with various subscribing reinsurers. (filed with the Companys Registration Statement on Form S-1 (No. 33-4450) and incorporated
herein by reference). |
41
NUMBER
|
|
DOCUMENT
|
10.15 |
|
Addendum No. 1 to the Reinstatement/Retroactive/Aggregate Extension Excess of Loss Treaty No. 01-96-0879 with various subscribing reinsurers. (filed with the Companys
Registration Statement on Form S-1 (No. 33-4450) and incorporated herein by reference). |
10.16 |
|
Quota Share Reinsurance Agreement Treaty No. 01-96-0922. (filed with the Companys Registration Statement on Form S-1 (No. 33-4450) and incorporated herein by
reference). |
10.17 |
|
First Excess of Loss Treaty No. 01-97-0020 with various subscribing reinsurers. (filed with the Companys Annual Report on Form 10-K on March 31, 1998 and incorporated herein by
reference). |
10.18 |
|
Second Excess of Loss Treaty No. 01-97-0021 with various subscribing reinsurers. (filed with the Companys Annual Report on Form 10-K on March 31, 1998 and incorporated herein by
reference). |
10.19 |
|
Third Excess of Loss Treaty No. 01-97-0022 with various subscribing reinsurers. (filed with the Companys Annual Report on Form 10-K on March 31, 1998 and incorporated herein by
reference). |
10.20 |
|
Fourth Excess of Loss Treaty No. 01-97-0599 with various subscribing reinsurers. (filed with the Companys Annual Report on Form 10-K on March 31, 1998 and incorporated herein by
reference). |
10.21 |
|
Per Policy Excess of Loss Treaty No. 01-97-0365 with various subscribing reinsurers. (filed with the Companys Annual Report on Form 10-K on March 31, 1998 and incorporated
herein by reference). |
10.22 |
|
Addendum No. 2 to the Reinstatement/Retroactive/Aggregate Extension Excess of Loss Treaty No. 01-97-0879 with various subscribing reinsurers. (filed with the Companys Annual
Report on Form 10-K on March 31, 1998 and incorporated herein by reference). |
10.23 |
|
Quota Share Reinsurance Treaty No. 1-97-0922. (filed with the Companys Annual Report on Form 10-K on March 31, 1998 and incorporated herein by reference). |
10.24 |
|
First Excess of Loss Reinsurance Treaty No. 01-97-1134 with various subscribing reinsurers. (filed with the Companys Annual Report on Form 10-K on March 31, 1999 and
incorporated herein by reference). |
10.25 |
|
Second Excess of Loss Reinsurance Treaty No. 01-97-1135 with various subscribing reinsurers. (filed with the Companys Annual Report on Form 10-K on March 31, 1999 and
incorporated herein by reference). |
10.26 |
|
First Excess of Loss Treaty No. 01-98-0020 with various subscribing reinsurers. (filed with the Companys Annual Report on Form 10-K on March 31, 1999 and incorporated herein by
reference). |
10.27 |
|
Second Excess of Loss Treaty No. 01-98-0021 with various subscribing reinsurers (filed with the Companys Annual Report on Form 10-K on March 31, 1999 and incorporated herein by
reference). |
10.28 |
|
Third Excess of Loss Treaty No. 01-98-0022 with various subscribing reinsurers. (filed with the Companys Annual Report on Form 10-K on March 31, 1999 and incorporated herein by
reference). |
10.29 |
|
Fourth Excess of Loss Treaty No. 01-98-0599 with various subscribing reinsurers. (filed with the Companys Annual Report on Form 10-K on March 31, 1999 and incorporated herein by
reference). |
10.30 |
|
Quota Share Reinsurance Treaty No. 1-98-0922. (filed with the Companys Annual Report on Form 10-K on March 31, 1999 and incorporated herein by reference). |
10.31 |
|
SCPIE Management Company Retirement Income Plan, as amended and restated, effective January 1, 1989. (filed with the Companys Registration Statement on Form S-1 (No. 33-4450)
and incorporated herein by reference). |
10.32 |
|
The SMC Cash Accumulation Plan, dated July 1, 1991, as amended. (filed with the Companys Registration Statement on Form S-1 (No. 33-4450) and incorporated herein by
reference). |
10.33 |
|
Inter-Company Pooling Agreement effective January 1, 1997. (filed with the Companys Annual Report on Form 10-K on March 31, 1998 and incorporated herein by
reference). |
10.34 |
|
SCPIE Holdings Inc. and Subsidiaries Consolidated Federal Income Tax Liability Allocation Agreement effective January 1, 1996. (filed with the Companys Annual Report on Form
10-K on March 31, 1998 and incorporated herein by reference). |
10.35 |
|
Form of Indemnification Agreement. (filed with the Companys Registration Statement on Form S-1 (No. 33-4450) and incorporated herein by reference). |
42
NUMBER
|
|
DOCUMENT
|
10.36 |
|
Lease between Wh/WSA Realty, L.L.C., a Delaware limited liability company and SCPIE Holdings Inc., a Delaware corporation dated July 31, 1998. (filed with the Companys Annual
Report on Form 10-K on March 31, 1998 and incorporated herein by reference). |
10.37 |
|
Quota Share Reinsurance Agreement between Fremont Indemnity Company and SCPIE Indemnity Company, effective January 1, 1998. (filed with the Companys Annual Report on Form 10-K
on March 31, 1998 and incorporated herein by reference). |
10.38 |
|
Assumption Reinsurance Agreement between Fremont Indemnity Company and American Healthcare Indemnity Company, effective January 1, 1998. (filed with the Companys Annual Report
on Form 10-K on March 31, 1998 and incorporated herein by reference). |
10.39 |
|
First Casualty Excess of Loss Reinsurance Agreement No. S06000-251 99-01-01 SR with various subscribing reinsurers. (filed with the Companys Annual Report on Form 10-K on March
31, 2000 and incorporated herein by reference). |
10.40 |
|
Second Casualty Excess of Loss Reinsurance Agreement No. S06000-252 99-01-01 SR with various subscribing reinsurers. (filed with the Companys Annual Report on Form 10-K on March
31, 2000 and incorporated herein by reference). |
10.41 |
|
Casualty Clash Excess of Loss Reinsurance Agreement No. S06000-253 99-01-01 SR with various subscribing reinsurers. (filed with the Companys Annual Report on Form 10-K on March
31, 2000 and incorporated herein by reference). |
10.42 |
|
Casualty Quota Share Reinsurance Agreement No. SCPIE Cas QS 99-01-01 RE Rel with various subscribing reinsurers. (filed with the Companys Annual Report on Form 10-K on March 31,
2000 and incorporated herein by reference). |
10.43 |
|
First Excess of Loss Reinsurance Treaty No. 8493-00-0007-98-01 with various subscribing reinsurers. (filed with the Companys Annual Report on Form 10-K on March 31, 2000 and
incorporated herein by reference). |
10.44 |
|
Second Excess of Loss Reinsurance Treaty No. 8493-00-0007-98-02 with various subscribing reinsurers. (filed with the Companys Annual Report on Form 10-K on March 31, 2000 and
incorporated herein by reference). |
10.45 |
|
First Excess of Loss Reinsurance Treaty No. 8493-00-0001-99-01 with various subscribing reinsurers. (filed with the Companys Annual Report on Form 10-K on March 31, 2000 and
incorporated herein by reference). |
10.46 |
|
Second Excess of Loss Reinsurance Treaty No. 8493-00-0001-99-02 with various subscribing reinsurers. (filed with the Companys Annual Report on Form 10-K on March 31, 2000 and
incorporated herein by reference). |
10.47 |
|
Third Excess of Loss Reinsurance Treaty No. 8493-00-0001-99-03 with various subscribing reinsurers. (filed with the Companys Annual Report on Form 10-K on March 31, 2000 and
incorporated herein by reference). |
10.48 |
|
Fourth Excess of Loss Reinsurance Treaty No. 8493-00-0001-99-04 with various subscribing reinsurers. (filed with the Companys Annual Report on Form 10-K on March 31, 2000 and
incorporated herein by reference). |
10.49 |
|
Quota Share Reinsurance Treaty No. 8493-00-0005-99-00 with various subscribing reinsurers. (filed with the Companys Annual Report on Form 10-K on March 31, 2000 and incorporated
herein by reference). |
10.50 |
|
The SCPIE Holdings Inc. Employee Stock Purchase Plan (filed as an exhibit to the Companys Proxy Statement for the 2000 Annual Meeting of Stockholders and incorporated herein by
reference). |
10.51 |
|
Program Administrator Agreement by and between the Professional Programs Division of Poe & Brown, Inc. and American Healthcare Indemnity Company, dated as of January 1, 1998.
(filed with the Companys Annual Report on Form 10-K on March 31, 2000 and incorporated herein by reference). |
10.52 |
|
Form of Change of Control Severance Agreement entered into by Chief Executive Officer on December 14, 2000 (filed with the Companys Annual Report on Form 10-K on March 30, 2001
and incorporated herein by reference). |
10.53 |
|
Form of Change of Control Severance Agreement entered into by Senior Vice Presidents on December 14, 2000 (filed with the Companys Annual Report on Form 10-K on March 30, 2001
and incorporated herein by reference). |
10.54 |
|
Form of Change of Control Severance Agreement entered into by Vice Presidents on December 14, 2000 (filed with the Companys Annual Report on Form 10-K on March 30, 2001 and
incorporated herein by reference). |
10.55 |
|
First through Fifth Excess of Loss Agreement 8493-00/0009-00/01/02/03/04/05 with various subscribing reinsurers. |
43
NUMBER
|
|
DOCUMENT
|
10.56 |
|
Cover Note for through Fourth Excess of Loss Reinsurance Treaty 8493-0009-01/2/3/4 with various subscribing reinsures. |
10.57 |
|
The 2001 Amended and Restated Equity Participation Plan of SCPIE Holdings Inc. |
10.58 |
|
Insurance Letters of Credit Agreement dated as of November 15, 2001 by and among Barclays Bank PLC and SCPIE Holdings Inc., SCPIE Indemminty Company, American Healthcare Indemnity
Company and American Healthcare Specialty Healthcare Company. |
10.59 |
|
Supplemental Employee Retirement Plan for selected employees of SCPIE Management Company, as amended and restated, effective as of January 1, 2001. |
10.60 |
|
Amendment to Program Administrators Agreement dated as of March 6, 2002 by and between the Professional Programs Division of Brown & Brown, Inc., on the one hand, and SCPIE
Indemnity Company and American Healthcare Indemnity Company, on the other hand. |
11.1 |
|
Statement re: computation of per share earnings (filed with the Companys Registration Statement on Form S-1 (No. 33-4450) and incorporated herein by reference).
|
21.1 |
|
Subsidiaries of the registrant |
23.1 |
|
Consent of independent auditors |
44
SIGNATURES
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
SCPIE HOLDINGS INC. |
|
By |
|
/s/ DONALD J. ZUK
|
|
|
Donald J. Zuk President and Chief Executive Officer |
March 29, 2002
Pursuant to the requirements of the Securities
Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
SIGNATURE
|
|
TITLE
|
|
DATE
|
|
/S/ DONALD J. ZUK
Donald J. Zuk |
|
President, Chief Executive Officer and Director (Principal Executive Officer) |
|
March 29, 2002 |
|
/S/ PATRICK T. LO
Patrick T. Lo |
|
Senior Vice President, Chief Financial Officer and Chief Accounting Officer (Principal Financial Officer and Principal Accounting
Officer) |
|
March 29, 2002 |
|
/S/ MITCHELL S. KARLAN,
M.D.
Mitchell S. Karlan, M.D. |
|
Chairman of the Board and Director |
|
March 29, 2002 |
|
/S/ JACK E. MCCLEARY,
M.D.
Jack E. McCleary, M.D. |
|
Director and Treasurer |
|
March 29, 2002 |
|
/S/ J. HYATT BROWN
J. Hyatt Brown |
|
Director |
|
March 29, 2002 |
|
/S/ WILLIS T. KING,
JR.
Willis T. King, Jr. |
|
Director |
|
March 29, 2002 |
|
/S/ CHARLES B. MCELWEE, M.D.
Charles B. McElwee, M.D. |
|
Director |
|
March 29, 2002 |
|
/S/ WENDELL L. MOSELEY,
M.D.
Wendell L. Moseley, M.D. |
|
Director |
|
March 29, 2002 |
|
/S/ DONALD P. NEWELL
Donald P. Newell |
|
Director |
|
March 29, 2002 |
|
/S/ HARRIET M. OPFELL, M.D.
Harriet M. Opfell, M.D. |
|
Director |
|
March 29, 2002 |
|
/S/ WILLIAM A. RENERT, M.D.
William A. Renert, M.D. |
|
Director |
|
March 29, 2002 |
|
/S/ HENRY L. STOUTZ, M.D.
Henry L. Stoutz, M.D. |
|
Director |
|
March 29, 2002 |
|
/S/ REINHOLD A. ULLRICH,
M.D.
Reinhold A. Ullrich, M.D. |
|
Director |
|
March 29, 2002 |
|
/s/ RONALD H. WENDER, M.D.
Ronald H. Wender, M.D. |
|
Director |
|
March 29, 2002 |
45
SCPIE HOLDINGS INC.
FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE
ANNUAL REPORT ON FORM 10-K
INDEX |
|
PAGE |
|
|
|
Report of Independent Auditors |
|
47 |
Financial Statements: |
|
|
Consolidated Balance Sheets as of December 31, 2001 and 2000 |
|
48 |
Consolidated Statements of Operations for the years ended December 31, 2001, 2000 and 1999 |
|
49 |
Consolidated Statements of Changes in Stockholders Equity for the years ended December 31, 2001, 2000 and 1999
|
|
50 |
Consolidated Statements of Cash Flows for the years ended December 31, 2001, 2000 and 1999 |
|
51 |
Notes to Consolidated Financial Statements |
|
52 |
Schedule II Condensed Financial Information of Registrant |
|
70 |
Schedule III Supplementary Insurance Information |
|
74 |
All other schedules for which provision is made in the applicable accounting regulation of the Securities and
Exchange Commission are not required under the related instructions or are inapplicable and therefore have been omitted.
46
Report of Independent Auditors
Board of Directors and Stockholders
SCPIE Holdings Inc.
We have audited the accompanying consolidated
balance sheets of SCPIE Holdings Inc. and subsidiaries as of December 31, 2001 and 2000, and the related consolidated statements of operations, changes in stockholders equity and cash flows for each of the three years in the period ended
December 31, 2001. Our audits also included the financial statement schedules listed in the index at item 14(a). These financial statements and schedules are the responsibility of the Companys management. Our responsibility is to express an
opinion on these financial statements and schedules based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the
United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the
consolidated financial position of SCPIE Holdings Inc. and subsidiaries at December 31, 2001 and 2000, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2001, in
conformity with accounting principles generally accepted in the United States. Also, in our opinion, the related financial statement schedules, when considered in relation to the basic financial statements taken as a whole, present fairly in all
material respects the information set forth therein.
/s/ ERNST & YOUNG LLP
Los
Angeles, California
March 26, 2002
47
SCPIE Holdings Inc. and Subsidiaries
Consolidated Balance Sheets
(In thousands, except share data)
DECEMBER 31, |
|
2001 |
|
|
2000 |
|
|
|
|
|
|
|
ASSETS |
|
|
|
|
|
|
|
|
Securities available for sale (Note 2): |
|
|
|
|
|
|
|
|
Fixed-maturity investments, at fair value (amortized cost: 2001 $565,225; 2000 $567,166) |
|
$ |
569,144 |
|
|
$ |
566,266 |
|
Equity investments, at fair value (cost: 2001 $29,744; 2000 $25,874) |
|
|
29,098 |
|
|
|
24,403 |
|
|
|
|
|
|
|
|
|
|
Total securities available for sale |
|
|
598,242 |
|
|
|
590,669 |
|
Other investment (cost: 2001 $15,000) |
|
|
14,928 |
|
|
|
|
|
Real estate |
|
|
15,766 |
|
|
|
16,126 |
|
Short-term investments |
|
|
84,989 |
|
|
|
84,451 |
|
|
|
|
|
|
|
|
|
|
Total investments |
|
|
713,925 |
|
|
|
691,246 |
|
Cash |
|
|
10,162 |
|
|
|
10,418 |
|
Accrued investment income |
|
|
8,673 |
|
|
|
9,307 |
|
Premiums receivable |
|
|
82,490 |
|
|
|
46,371 |
|
Reinsurance recoverable on unpaid loss and loss adjustment expense reserves (Note 4) |
|
|
79,248 |
|
|
|
44,461 |
|
Deferred policy acquisition costs |
|
|
19,465 |
|
|
|
18,124 |
|
Federal income taxes receivable |
|
|
11,558 |
|
|
|
|
|
Deferred federal income taxes |
|
|
36,661 |
|
|
|
16,869 |
|
Costs in excess of net assets acquired |
|
|
5,324 |
|
|
|
6,153 |
|
Property and equipment, net |
|
|
6,839 |
|
|
|
7,930 |
|
Other assets |
|
|
3,301 |
|
|
|
3,766 |
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
977,646 |
|
|
$ |
854,645 |
|
|
|
|
|
|
|
|
|
|
LIABILITIES |
|
|
|
|
|
|
|
|
Reserves: |
|
|
|
|
|
|
|
|
Losses and loss adjustment expenses (Note 3) |
|
$ |
576,636 |
|
|
$ |
433,541 |
|
Unearned premiums |
|
|
101,868 |
|
|
|
56,996 |
|
|
|
|
|
|
|
|
|
|
Total reserves |
|
|
678,504 |
|
|
|
490,537 |
|
Bank loan payable (Note 8) |
|
|
9,000 |
|
|
|
27,000 |
|
Other liabilities |
|
|
30,754 |
|
|
|
20,567 |
|
|
|
|
|
|
|
|
|
|
Total liabilities |
|
|
718,258 |
|
|
|
538,104 |
|
Commitments and contingencies (Note 9) |
|
|
|
|
|
|
|
|
|
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, 2001 9,318,066 shares outstanding 2000
9,330,975 shares outstanding |
|
|
1 |
|
|
|
37,803 |
|
Additional paid-in capital |
|
|
37,803 |
|
|
|
36,386 |
|
Retained earnings |
|
|
322,734 |
|
|
|
384,437 |
|
Treasury stock, at cost (2001 2,974,025 shares and 2000 2,961,074 shares) |
|
|
(98,983 |
) |
|
|
(98,705 |
) |
Stock subscription notes receivable |
|
|
(4,050 |
) |
|
|
(4,050 |
) |
Accumulated other comprehensive income (loss) |
|
|
1,883 |
|
|
|
(1,528 |
) |
|
|
|
|
|
|
|
|
|
Total stockholders equity |
|
|
259,388 |
|
|
|
316,541 |
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity |
|
$ |
977,646 |
|
|
$ |
854,645 |
|
|
|
|
|
|
|
|
|
|
See accompanying notes.
48
SCPIE Holdings Inc. and Subsidiaries
Consolidated Statements of Operations
(In thousands, except per-share data)
FOR THE YEAR ENDED DECEMBER 31, |
|
2001 |
|
|
2000 |
|
|
1999 |
|
|
|
|
|
|
|
|
|
REVENUES |
|
|
|
|
|
|
|
|
|
|
|
|
Premiums earned (Note 4) |
|
$ |
235,935 |
|
|
$ |
176,502 |
|
|
$ |
153,192 |
|
Net investment income (Note 2) |
|
|
35,895 |
|
|
|
34,152 |
|
|
|
37,697 |
|
Realized investment gains (losses) (Note 2) |
|
|
5,707 |
|
|
|
(400 |
) |
|
|
(295 |
) |
Equity in earnings from affiliates |
|
|
1,327 |
|
|
|
880 |
|
|
|
64 |
|
Other revenue |
|
|
875 |
|
|
|
1,122 |
|
|
|
654 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
|
279,739 |
|
|
|
212,256 |
|
|
|
191,312 |
|
|
EXPENSES |
|
|
|
|
|
|
|
|
|
|
|
|
Losses and loss adjustment expenses (Note 3) |
|
|
304,473 |
|
|
|
152,602 |
|
|
|
122,780 |
|
Amortization of deferred policy acquisition costs |
|
|
46,164 |
|
|
|
19,524 |
|
|
|
13,221 |
|
Other underwriting and operating expenses |
|
|
18,568 |
|
|
|
16,959 |
|
|
|
16,089 |
|
Interest expenses |
|
|
1,416 |
|
|
|
780 |
|
|
|
25 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses |
|
|
370,621 |
|
|
|
189,865 |
|
|
|
152,115 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before federal income tax expense (benefit) |
|
|
(90,882 |
) |
|
|
22,391 |
|
|
|
39,197 |
|
Federal income tax expense (benefit) (Note 5) |
|
|
(32,906 |
) |
|
|
5,120 |
|
|
|
9,295 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
(57,976 |
) |
|
$ |
17,271 |
|
|
$ |
29,902 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings (loss) per share of common stock (Note 11) |
|
$ |
(6.22 |
) |
|
$ |
1.84 |
|
|
$ |
2.63 |
|
Diluted earnings (loss) per share of common stock (Note 11) |
|
$ |
(6.22 |
) |
|
$ |
1.84 |
|
|
$ |
2.62 |
|
See accompanying notes.
49
SCPIE Holdings Inc. and Subsidiaries
Consolidated Statements of Changes in Stockholders Equity
(In thousands)
|
|
COMMON STOCK |
|
ADDITIONAL PAID-IN CAPITAL |
|
RETAINED EARNINGS |
|
|
TREASURY STOCK |
|
|
STOCK SUBSCRIPTION NOTES RECEIVABLE |
|
|
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) |
|
|
TOTAL STOCKHOLDERS EQUITY |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 1998 |
|
$ |
1 |
|
$ |
36,386 |
|
$ |
344,587 |
|
|
$ |
(13,141 |
) |
|
|
|
|
|
$ |
18,685 |
|
|
$ |
386,518 |
|
Net income |
|
|
|
|
|
|
|
|
29,902 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
29,902 |
|
Comprehensive income for unrealized gains on securities, net of reclassification adjustments of $1,985 for gains included in net
income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(33,449 |
) |
|
|
(33,449 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,547 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of treasury stock |
|
|
|
|
|
|
|
|
|
|
|
|
(84,705 |
) |
|
|
|
|
|
|
|
|
|
|
(84,705 |
) |
Treasury stock reissued |
|
|
|
|
|
|
|
|
|
|
|
|
4,050 |
|
|
|
(4,050 |
) |
|
|
|
|
|
|
|
|
Cash dividends |
|
|
|
|
|
|
|
|
(3,566 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,566 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 1999 |
|
|
1 |
|
|
36,386 |
|
|
370,923 |
|
|
|
(93,796 |
) |
|
|
(4,050 |
) |
|
|
(14,764 |
) |
|
|
294,700 |
|
Net income |
|
|
|
|
|
|
|
|
17,271 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17,271 |
|
Comprehensive income for unrealized gains on securities, net of reclassification adjustments of $1,027 for losses included in net
income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13,236 |
|
|
|
13,236 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30,507 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of treasury stock |
|
|
|
|
|
|
|
|
|
|
|
|
(5,095 |
) |
|
|
|
|
|
|
|
|
|
|
(5,095 |
) |
Treasury stock reissued |
|
|
|
|
|
|
|
|
|
|
|
|
186 |
|
|
|
|
|
|
|
|
|
|
|
186 |
|
Cash dividends |
|
|
|
|
|
|
|
|
(3,757 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,757 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2000 |
|
|
1 |
|
|
36,386 |
|
|
384,437 |
|
|
|
(98,705 |
) |
|
|
(4,050 |
) |
|
|
(1,528 |
) |
|
|
316,541 |
|
Net loss |
|
|
|
|
|
|
|
|
(57,976 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(57,976 |
) |
Comprehensive income for unrealized gains on securities, net of reclassification adjustments of $714 for losses included in net
income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,110 |
|
|
|
4,110 |
|
Change in minimum pension liability, net of applicable income taxes of $376 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(699 |
) |
|
|
(699 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(54,565 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of treasury stock |
|
|
|
|
|
|
|
|
|
|
|
|
(278 |
) |
|
|
|
|
|
|
|
|
|
|
(278 |
) |
Cash dividends |
|
|
|
|
|
|
|
|
(3,727 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,727 |
) |
Other |
|
|
|
|
|
1,417 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,417 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2001 |
|
$ |
1 |
|
$ |
37,803 |
|
$ |
322,734 |
|
|
$ |
(98,983 |
) |
|
$ |
(4,050 |
) |
|
$ |
1,883 |
|
|
$ |
259,388 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
50
SCPIE Holdings Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(In thousands)
FOR THE YEAR ENDED DECEMBER 31, |
|
2001 |
|
|
2000 |
|
|
1999 |
|
|
|
|
|
|
|
|
OPERATING ACTIVITIES |
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
(57,976 |
) |
|
$ |
17,271 |
|
|
$ |
29,902 |
|
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Provisions for amortization and depreciation |
|
|
4,545 |
|
|
|
3,761 |
|
|
|
4,562 |
|
Provision (benefit) for deferred federal income taxes |
|
|
(21,546 |
) |
|
|
1,501 |
|
|
|
4,739 |
|
Realized investment (gains) losses |
|
|
(5,707 |
) |
|
|
400 |
|
|
|
295 |
|
Equity in earnings of affiliates |
|
|
(1,327 |
) |
|
|
(880 |
) |
|
|
(64 |
) |
Changes in operating assets and liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
Deferred acquisition costs |
|
|
(1,341 |
) |
|
|
(8,057 |
) |
|
|
(2,016 |
) |
Accrued investment income (loss) |
|
|
634 |
|
|
|
(227 |
) |
|
|
2,360 |
|
Federal income tax receivable |
|
|
(11,558 |
) |
|
|
|
|
|
|
|
|
Unearned premiums |
|
|
44,872 |
|
|
|
10,856 |
|
|
|
705 |
|
Unpaid losses and loss adjustment expenses, and reinsurance recoverables |
|
|
108,308 |
|
|
|
(11,468 |
) |
|
|
(47,875 |
) |
Other liabilities |
|
|
10,187 |
|
|
|
(6,853 |
) |
|
|
(279 |
) |
Premiums receivable and other assets |
|
|
(35,654 |
) |
|
|
(3,806 |
) |
|
|
(2,199 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) operating activities |
|
|
33,437 |
|
|
|
2,498 |
|
|
|
(9,870 |
) |
|
INVESTING ACTIVITIES |
|
|
|
|
|
|
|
|
|
|
|
|
Purchasesfixed maturities |
|
|
(480,444 |
) |
|
|
(313,082 |
) |
|
|
(290,369 |
) |
Salesfixed maturities |
|
|
474,571 |
|
|
|
300,703 |
|
|
|
380,415 |
|
Maturitiesfixed maturities |
|
|
12,197 |
|
|
|
11,575 |
|
|
|
29,967 |
|
Purchasesequities |
|
|
(2,500 |
) |
|
|
|
|
|
|
(26,597 |
) |
Purchaseother investment |
|
|
(15,000 |
) |
|
|
|
|
|
|
|
|
Salesequities |
|
|
27 |
|
|
|
8,266 |
|
|
|
24,776 |
|
Change in short-term investments, net |
|
|
(538 |
) |
|
|
(11,548 |
) |
|
|
(38,498 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities |
|
|
(11,687 |
) |
|
|
(4,086 |
) |
|
|
79,694 |
|
|
FINANCING ACTIVITIES |
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from bank loan |
|
|
|
|
|
|
18,000 |
|
|
|
13,000 |
|
Repayment of bank loan |
|
|
(18,000 |
) |
|
|
(4,000 |
) |
|
|
|
|
Purchase of treasury stock, net |
|
|
(278 |
) |
|
|
(5,095 |
) |
|
|
(84,705 |
) |
Cash dividends |
|
|
(3,727 |
) |
|
|
(3,757 |
) |
|
|
(3,566 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities |
|
|
(22,005 |
) |
|
|
5,148 |
|
|
|
(75,271 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in cash |
|
|
(256 |
) |
|
|
3,560 |
|
|
|
(5,447 |
) |
Cash at beginning of year |
|
|
10,418 |
|
|
|
6,858 |
|
|
|
12,305 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash at end of year |
|
$ |
10,162 |
|
|
$ |
10,418 |
|
|
$ |
6,858 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes.
51
SCPIE HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying 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), SCPIE Underwriting Limited (SUL) and SCPIE Management Company (SMC), collectively, the Company. Significant intercompany accounts and
transactions have been eliminated in consolidation.
The Company principally writes professional liability insurance for physicians, oral and maxillofacial
surgeons, hospitals and other healthcare providers. Most of the Companys coverage is written on a claims-made and reported basis. This coverage is provided only for claims that are first reported to the Company during the
insureds coverage period and that arise from occurrences during the insureds coverage period. The Company also makes tail coverage available for purchase by policyholders in order to cover claims that arise from occurrences
during the insureds coverage period, but that are first reported to the Company after the insureds coverage period and during the term of the applicable tail coverage.
In 1999, the Company formed an assumed reinsurance division and has rapidly expanded those operations. The strategic objective of the reinsurance division is to create a well-balanced portfolio of carefully underwritten assumed
reinsurance lines of insurance to add diversity to the direct business of the Company. Treaties include professional, commercial and personal liability coverages, commercial and residential property risks, accident and health coverages and marine
coverages on a worldwide basis. (See Notes 4 and 13.)
The preparation of financial statements of insurance companies requires management to make estimates and
assumptions that affect amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.
The accompanying
financial statements have been prepared in conformity with accounting principles generally accepted in the United States (GAAP) which differ from statutory accounting practices prescribed or permitted by regulatory authorities. The significant
accounting policies followed by the Company that materially affect financial reporting are summarized below:
FOREIGN OPERATIONS
SCPIE Underwriting Limited, a corporate member of Lloyds of London (Lloyds), commenced operations in January 2001 as a member of two
Lloyds underwriting syndicates. The Company reports this subsidiarys operations on a one quarter lag.
INVESTMENTS
Management determines the appropriate classification of investment securities at the time of purchase and reevaluates such designation as of each
balance sheet date.
Available-for-saleAvailable-for-sale securities are stated at fair value, with the unrealized gains and losses, net of tax,
reported in other comprehensive income. The net carrying value of fixed-maturity investments classified as available-for-sale is adjusted for amortization of premiums and accretion of discounts to maturity, or in the case of mortgage-backed
securities, over the estimated life of the security. Such amortization is computed under the effective interest method and included in net investment income. Interest and dividends are recorded in net investment income. Realized gains and losses,
and declines in value judged to be other-than-temporary are recorded in realized investment gains (losses). The cost of securities sold is based on the specific identification method.
The Company has no securities classified as held to maturity or trading.
Other InvestmentThe other
investment consists of an interest in a diversified portfolio of offshore hedge funds, managed accounts and other professionally managed funds that pursue non-traditional investment strategies, e.g., futures, options, forward exchange contracts and
other derivative instruments. The Company does not take part in the management or control of the business of these funds and is not personally liable for any debt or obligation of the funds beyond its investment. The investment return on the
Companys investment depends on the performance of the underlying portfolio of funds. This investment is stated at fair value and the change in value is reported in net investment income. At December 31, 2001 and 2000, the Company was not a
direct party to any other derivative instruments.
52
SCPIE HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
Short-term investments are carried at cost, which approximates fair value. The cost of securities sold is based on the
specific identification method.
Investments in 20% to 50% owned affiliates are accounted for on the equity method and investments in less than 20% owned
affiliates are accounted for on the cost method.
Real EstateThe Companys former home office headquarters, is recorded at cost and depreciated
principally under the straight-line method over the useful life of the buildings. Accumulated depreciation at December 31, 2001 and 2000, was $3.8 million and $3.4 million respectively. 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 March 1999. During 2000 and 2001, both former
headquarters buildings were leased entirely to third parties. These leases expire on April 30, 2005 and November 30, 2005 with no provisions for renewal. Future minimum rentals are $1.8 million for each of the years 2002 through 2004 and $1.1
million for year 2005.
DEFERRED ACQUISITION COSTS
Costs of acquiring insurance business that vary with and are primarily related to the production of such business are deferred and amortized ratably over the period the related premiums are recognized. Such costs include
commissions, premium taxes and certain underwriting and policy issuance costs. Anticipated investment income is considered in the determination of the recoverability of deferred acquisition costs.
|
|
2001 |
|
|
2000 |
|
|
1999 |
|
|
|
|
|
|
|
|
|
|
(In Thousands) |
|
Balance at beginning of year |
|
$ |
18,124 |
|
|
$ |
10,067 |
|
|
$ |
8,051 |
|
Costs deferred |
|
|
47,505 |
|
|
|
27,581 |
|
|
|
15,237 |
|
Costs amortized |
|
|
(46,164 |
) |
|
|
(19,524 |
) |
|
|
(13,221 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of year |
|
$ |
19,465 |
|
|
$ |
18,124 |
|
|
$ |
10,067 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As the Company has expanded its assumed reinsurance operations and operations in other states through brokerage
relationships, the corresponding commissions and fronting fee arrangements have resulted in an overall increase in acquisition costs. The Company accelerated the amortization of certain acquisition costs in 2001 based on the adequacy of the
corresponding premium in accordance with Financial Accounting Standards Board Statement (FASB) No. 60, Accounting and Reporting by Insurance Enterprises.
PREMIUMS
Premiums are recognized as earned on a pro rata basis over the terms of the respective policies.
UNEARNED PREMIUMS
Unearned
premiums are calculated using the monthly pro rata basis over the terms of the respective policies.
RESERVES FOR LOSSES AND LOSS ADJUSTMENT EXPENSES
Reserves for losses and loss adjustment expenses (LAE) represent the estimated liability for reported claims plus
those incurred but not yet reported and the related estimated costs to adjust those claims. The reserve for losses and LAE
53
SCPIE HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
is determined using case-basis evaluations and statistical analysis and represents estimates of the ultimate cost of all unpaid losses incurred through December 31 of each year. Although
considerable variability is inherent in such estimates, management believes that the reserve for unpaid losses and related LAE is adequate. The estimates are continually reviewed and adjusted as necessary; such adjustments are included in current
operations and are accounted for as changes in estimates.
REINSURANCE
Prospective reinsurance premiums, losses and loss adjustment expenses are accounted for on bases consistent with those used in accounting for the original policies issued and the terms of
the reinsurance contracts.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost and depreciated principally under the straight-line method over the useful life of the assets that range from five to seven years. Property and equipment consist of the following:
DECEMBER 31, |
|
2001 |
|
|
2000 |
|
|
|
|
|
|
|
|
(In Thousands) |
|
Leasehold improvements |
|
$ |
5,256 |
|
|
$ |
5,256 |
|
Furniture and equipment |
|
|
7,271 |
|
|
|
10,077 |
|
|
|
|
|
|
|
|
|
|
|
|
|
12,527 |
|
|
|
15,333 |
|
Accumulated depreciation |
|
|
(5,688 |
) |
|
|
(7,403 |
) |
|
|
|
|
|
|
|
|
|
Property and equipment, net |
|
$ |
6,839 |
|
|
$ |
7,930 |
|
|
|
|
|
|
|
|
|
|
INCOME TAXES
Income taxes have been provided using the liability method in accordance with FASB No. 109, Accounting for Income Taxes.
BUSINESS SEGMENTS
As a result of the expansion of the Companys Assumed Reinsurance operations,
effective December 31, 2000, the Company adopted FASB No. 131, Disclosures about Segments of an Enterprise and Related Information (FASB No. 131). FASB No. 131 establishes standards for the way that public business enterprises report
information about operating segments in annual financial statements and requires that those enterprises report selected information about operating segments in interim financial reports. FASB No. 131 also establishes standards for related
disclosures about products and services, geographic areas, and major customers. The adoption of FASB No. 131 did not affect the Companys results of operations or financial position. (See Note 13)
CREDIT RISK
Financial instruments that potentially
subject the Company to concentrations of credit risk consist principally of temporary cash investments and fixed maturities. The Company places its temporary cash investments with high-credit quality financial institutions and limits the amounts of
credit exposure to any one financial institution. Concentrations of credit risk with respect to fixed maturities are limited due to the large number of such investments and their distributions across many different industries and geographics.
Ceded reinsurance is placed with a number of individual companies and syndicates at Lloyds of London to avoid concentration of credit risk. For the year
ended December 31, 2001, approximately 59% of total ceded reinsurance premiums written were placed with reinsurance companies with an A.M. Best or Insurance Solvency International rating of A- or better, including 9% with Lloyds of London
syndicates, 16% with Hannover Ruckversicherungs, and 4% with Zurich Re. The remaining 41% of reinsurance premiums paid was placed among other reinsurers including Highlands Insurance Group subsidiaries, which represent 26% of ceded reinsurance
premium.
54
SCPIE HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
STOCK-BASED COMPENSATION
The Company grants stock options for a fixed number of shares to employees and nonemployee directors with an exercise price equal to the fair value of the shares
at the date of grant. The Company accounts for stock option grants in accordance with Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (APB 25), and related Interpretations because the Company believes the
alternative fair value accounting provided for under FASB Statement No. 123, Accounting for Stock-Based Compensation, requires the use of option valuation models that were not developed for use in valuing employee stock options. Under APB 25,
if the exercise price of the Companys employee stock options equals the market price of the underlying stock on the dates of grant, no compensation expense is recognized.
EARNINGS PER SHARE
Basic and diluted earnings per share are calculated in accordance with
FASB Statement No. 128, Earnings Per Share.
NEW ACCOUNTING STANDARDS
In June 2001, the Financial Accounting Standards Board issued FASB Statement No. 141, Business Combinations and No. 142, Goodwill and Other Intangible Assets. Under the new
rules, goodwill and indefinite lived intangible assets are no longer amortized but are reviewed annually for impairment. Separable intangible assets that are not deemed to have an indefinite life will continue to be amortized over their useful
lives. The amortization provisions of FASB No. 142 apply to goodwill and intangible assets acquired after June 30, 2001. With respect to goodwill and intangible assets acquired prior to July 1, 2001, the Company will apply the new accounting rules
beginning January 1, 2002. Management anticipates that the adoption of this new statement will not have a material impact on the financial position or results of operations of the Company.
RECLASSIFICATIONS
Certain prior-year amounts have been reclassified to conform to
the current year presentation.
55
SCPIE HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
NOTE 2. INVESTMENTS
The Companys investments in available-for-sale securities are summarized as follows:
|
|
COST OR AMORTIZED COST |
|
GROSS UNREALIZED GAINS |
|
GROSS UNREALIZED LOSSES |
|
FAIR VALUE |
|
|
|
|
|
|
|
|
|
|
|
(In Thousands) |
December 31, 2001 |
|
|
|
|
|
|
|
|
|
|
|
|
Fixed-maturity securities: |
|
|
|
|
|
|
|
|
|
|
|
|
Bonds: |
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government and agencies |
|
$ |
175,608 |
|
$ |
3,076 |
|
$ |
966 |
|
$ |
177,718 |
State, municipalities and political subdivisions |
|
|
126,431 |
|
|
1,387 |
|
|
1,302 |
|
|
126,516 |
Mortgage-backed securities, U.S. government |
|
|
73,332 |
|
|
715 |
|
|
374 |
|
|
73,673 |
Corporate |
|
|
189,854 |
|
|
2,781 |
|
|
1,398 |
|
|
191,237 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed-maturity securities |
|
|
565,225 |
|
|
7,959 |
|
|
4,040 |
|
|
569,144 |
Common stocks |
|
|
29,744 |
|
|
1,463 |
|
|
2,109 |
|
|
29,098 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
594,969 |
|
$ |
9,422 |
|
$ |
6,149 |
|
$ |
598,242 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2000 |
|
|
|
|
|
|
|
|
|
|
|
|
Fixed-maturity securities: |
|
|
|
|
|
|
|
|
|
|
|
|
Bonds: |
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government and agencies |
|
$ |
185,476 |
|
$ |
2,953 |
|
$ |
639 |
|
$ |
187,790 |
State, municipalities and political subdivisions |
|
|
180,528 |
|
|
2,126 |
|
|
774 |
|
|
181,880 |
Mortgage-backed securities, U.S. government |
|
|
42,734 |
|
|
229 |
|
|
132 |
|
|
42,831 |
Corporate |
|
|
158,345 |
|
|
1,449 |
|
|
6,112 |
|
|
153,682 |
Other |
|
|
83 |
|
|
|
|
|
|
|
|
83 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed-maturity securities |
|
|
567,166 |
|
|
6,757 |
|
|
7,657 |
|
|
566,266 |
Common stocks |
|
|
25,874 |
|
|
491 |
|
|
1,962 |
|
|
24,403 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
593,040 |
|
$ |
7,248 |
|
$ |
9,619 |
|
$ |
590,669 |
|
|
|
|
|
|
|
|
|
|
|
|
|
The fair values for fixed-maturity securities are based on quoted market prices, where available. For fixed-maturity
securities not actively traded, fair values are estimated using values obtained from independent pricing services. The fair values for equity securities are based on quoted market prices.
The amortized cost and fair value of the Companys investments in fixed-maturity securities at December 31, 2001, are summarized by stated maturities as follows:
|
|
AMORTIZED COST |
|
FAIR VALUE |
|
|
|
|
|
|
|
(In Thousands) |
Years to maturity: |
|
|
|
|
|
|
One or less |
|
$ |
8,163 |
|
$ |
8,256 |
After one through five |
|
|
88,656 |
|
|
90,453 |
After five through ten |
|
|
288,239 |
|
|
290,245 |
After ten |
|
|
106,835 |
|
|
106,517 |
Mortgage-backed securities |
|
|
73,332 |
|
|
73,673 |
|
|
|
|
|
|
|
Totals |
|
$ |
565,225 |
|
$ |
569,144 |
|
|
|
|
|
|
|
56
SCPIE HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
The foregoing data is based on the stated maturities of the securities. Actual
maturities will differ for some securities because borrowers may have the right to call or prepay obligations.
Major categories of the Companys investment
income are summarized as follows:
YEAR ENDED DECEMBER 31, |
|
2001 |
|
2000 |
|
1999 |
|
|
|
|
|
|
|
|
|
(In Thousands) |
Fixed-maturity investments |
|
$ |
31,771 |
|
$ |
32,355 |
|
$ |
36,715 |
Equity investments |
|
|
238 |
|
|
534 |
|
|
590 |
Other |
|
|
6,266 |
|
|
3,684 |
|
|
2,758 |
|
|
|
|
|
|
|
|
|
|
Total investment income |
|
|
38,275 |
|
|
36,573 |
|
|
40,063 |
Investment expenses |
|
|
2,380 |
|
|
2,421 |
|
|
2,366 |
|
|
|
|
|
|
|
|
|
|
Net investment income |
|
$ |
35,895 |
|
$ |
34,152 |
|
$ |
37,697 |
|
|
|
|
|
|
|
|
|
|
Realized gains and losses from sales of investments are summarized as follows:
YEAR ENDED DECEMBER 31, |
|
2001 |
|
|
2000 |
|
|
1999 |
|
|
|
|
|
|
|
|
|
|
(In Thousands) |
|
Fixed-maturity investments: |
|
|
|
|
|
|
|
|
|
|
|
|
Gross realized gains |
|
$ |
8,870 |
|
|
$ |
3,147 |
|
|
$ |
6,952 |
|
Gross realized losses |
|
|
(3,165 |
) |
|
|
(3,376 |
) |
|
|
(7,340 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net realized gains (losses) on fixed-maturity investments |
|
|
5,705 |
|
|
|
(229 |
) |
|
|
(388 |
) |
Equity investments: |
|
|
|
|
|
|
|
|
|
|
|
|
Gross realized gains |
|
|
6 |
|
|
|
|
|
|
|
6,716 |
|
Gross realized losses |
|
|
(4 |
) |
|
|
(171 |
) |
|
|
(6,623 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net realized gains (losses) on equity investments |
|
|
2 |
|
|
|
(171 |
) |
|
|
93 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net realized gains (losses) |
|
$ |
5,707 |
|
|
$ |
(400 |
) |
|
$ |
(295 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
The change in the Companys unrealized appreciation (depreciation) on fixed-maturity securities was $4.8
million, $21.9 million and $(46.0) million for the years ended December 31, 2001, 2000 and 1999, respectively; the corresponding amounts for equity securities were $0.9 million, $1.5 million and $(5.5 million).
At December 31, 2001, the Companys investments in fixed-maturity securities with a fair value of $38.8 million were on deposit with state insurance departments to satisfy regulatory
requirements.
No investment in any person or its affiliates exceeded 10% of the Companys stockholders equity at December 31, 2001.
57
SCPIE HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
NOTE 3. LOSSES AND LOSS ADJUSTMENT EXPENSES
The following table provides a reconciliation of the beginning and ending reserve balances, net of reinsurance recoverable, for 2001, 2000 and 1999.
|
|
2001 |
|
2000 |
|
|
1999 |
|
|
|
|
|
|
|
|
|
|
(In Thousands) |
|
Reserve for losses and LAE, net of related reinsurance recoverable, at beginning of year |
|
$ |
393,389 |
|
$ |
404,857 |
|
|
$ |
452,732 |
|
Reclassification of reinsurance contract |
|
|
3,840 |
|
|
|
|
|
|
|
|
Provision for losses and LAE for claims occurring in the current year, net of reinsurance |
|
|
290,649 |
|
|
194,717 |
|
|
|
183,959 |
|
Increase (decrease) in estimated losses and LAE for claims occurring in prior years, net of reinsurance |
|
|
13,824 |
|
|
(42,115 |
) |
|
|
(61,179 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Incurred losses during the year, net of reinsurance |
|
|
304,473 |
|
|
152,602 |
|
|
|
122,780 |
|
|
Deduct losses and LAE payments for claims, net of reinsurance, occurring during: |
|
|
|
|
|
|
|
|
|
|
|
Current year |
|
|
36,006 |
|
|
15,181 |
|
|
|
13,742 |
|
Prior years |
|
|
155,626 |
|
|
148,889 |
|
|
|
156,913 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
191,632 |
|
|
164,070 |
|
|
|
170,655 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Reserve for losses and LAE, net of related reinsurance recoverable, at end of year |
|
|
502,390 |
|
|
393,389 |
|
|
|
404,857 |
|
Reinsurance recoverable for losses and LAE, at end of year |
|
|
74,246 |
|
|
40,152 |
|
|
|
45,007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Reserves for losses and LAE, gross of reinsurance recoverable, at end of year |
|
$ |
576,636 |
|
$ |
433,541 |
|
|
$ |
449,864 |
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company experienced favorable development in loss reserves for many years, including favorable development in
loss and LAE reserves established for prior policy years in 2000 and 1999 of $42.1 million and $61.2 million, respectively. During 2001, primarily as a result of the poor experience in physician group business outside of California, the Company had
unfavorable development in loss and LAE reserves of $13.8 million.
The anticipated effect of inflation is implicitly considered when estimating liabilities for
losses and LAE. While anticipated price increases due to inflation are considered in estimating the ultimate claim costs, the increase in average severities of claims is caused by a number of factors that vary with the individual type of insurance
written. Future average severities are projected based on historical trends adjusted for implemented changes in underwriting standards, policy provisions, and general economic trends. Those anticipated trends are monitored based on actual
development and are modified if necessary.
Effective January 1, 1998 the Company entered into a facultative quota share reinsurance contract. The contract
represents a percentage share retrocession of an adverse loss development contract of underlying medical malpractice risks written on or prior to December 31, 1997. Premiums were collected during 1998 through 2000. The contract is subject to a
maximum limit and remains in force until 2023 or earlier provided the obligations under the contract have been fully satisfied. Based on the Companys reevaluation of the contract provisions, beginning 2001 the Company reclassified $3.8 million
of assumed premiums and corresponding losses recorded in prior periods to deposit reinsurance in accordance with FASB No. 113. This reclassification had no impact on net income for 2001.
NOTE 4. REINSURANCE
Certain premiums and benefits are ceded to other insurance companies under
various reinsurance agreements. These reinsurance agreements provide the Company with increased capacity to write additional risks and maintain its exposure to loss within its capital resources. Amounts recoverable from reinsurers are estimated in a
manner consistent with the claim liability associated with the reinsured policy. Some of these agreements include terms whereby the Company earns a profit-sharing commission if the reinsurers experience is favorable.
58
SCPIE HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
Reinsurance contracts do not relieve the Company from its obligations to
policyholders. The failure of reinsurers to honor their obligations could result in losses to the Company; consequently, allowances are established for amounts deemed uncollectible. The Company evaluates the financial condition and economic
characteristics of its reinsurers to minimize its exposure to significant losses from reinsurer insolvencies. The Company generally does not require collateral from its reinsurers that are licensed to assume such business.
The effect of reinsurance on premiums written and earned are as follows:
YEAR ENDED DECEMBER 31, |
|
2001 |
|
2000 |
|
1999 |
|
|
|
|
|
|
|
|
|
WRITTEN
|
|
EARNED
|
|
WRITTEN
|
|
EARNED
|
|
WRITTEN
|
|
EARNED
|
|
|
(In Thousands) |
Direct |
|
$ |
180,979 |
|
$ |
168,467 |
|
$ |
180,634 |
|
$ |
155,838 |
|
$ |
152,708 |
|
$ |
149,191 |
Assumed |
|
|
139,820 |
|
|
95,899 |
|
|
39,848 |
|
|
33,314 |
|
|
15,564 |
|
|
17,932 |
Ceded |
|
|
39,992 |
|
|
28,431 |
|
|
12,279 |
|
|
12,650 |
|
|
14,376 |
|
|
13,931 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net premiums |
|
$ |
280,807 |
|
$ |
235,935 |
|
$ |
208,203 |
|
$ |
176,502 |
|
$ |
153,896 |
|
$ |
153,192 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net premiums written for 2001 and 2000 reflects the recognition of written premiums on the effective date of the
policy rather than on the date premiums were billed. If 1999 premiums had been recognized under this method, net premiums written would have approximated $174.5 million. This change had no impact on the statement of operations.
Reinsurance ceded reduced losses and loss adjustment expenses paid by $12.7 million, $6.0 million and $12.4 in 2001, 2000 and 1999, respectively. Reinsurance ceded reduced loss
and loss adjustment expenses reserves by $74.2 million, $40.2 million and $45.0 in 2001, 2000 and 1999, respectively.
For 1999 and prior years, the Company
retained the first $1.0 million of losses incurred per incident and had various reinsurance up to $20.0 million per incident for physician coverage. The reinsurers also were obligated to bear their proportionate share of LAE. For hospital coverage,
the Company reinsured 90% of all losses incurred above a $1.0 million retention, and the Company retained all LAE. For 2000, the Company consolidated these treaties into a program in which the Company retained the first $2.0 million of losses and
LAE per incident and reinsured the excess losses and LAE per incident up to $50.0 million. For 2001, the Company retained the first $1.25 million and $2.0 million of losses and LAE per incident for physician coverage and hospital coverage,
respectively, and reinsured the excess losses and LAE per incident up to $50.0 million.
In 1999, the Company formed an assumed reinsurance division and has
rapidly expanded this operation. The strategic objective of the reinsurance division is to create a well-balanced portfolio of carefully underwritten assumed reinsurance lines of insurance to add diversity to the direct business of the Company. (See
Note 13)
Between January 2000 and April 2001, the Company issued endorsements to certain policyholders of the insurance company subsidiaries of Highlands
Insurance Group, Inc. (HIG). The Company received 1% of the policy premiums and the coverages included property, workers compensation, commercial automobile, general liability and umbrella. The gross premiums written by the insurance
subsidiaries of HIG while this arrangement was in effect were approximately $88.0 million for the subject policies. The Company has no liability under these endorsements, unless the insurance subsidiaries of HIG are unable to pay their policy
obligations by reason of having been declared insolvent by a court of competent jurisdiction. At the time the endorsements were issued, a director of the Company was the chief executive officer of HIG.
In November 2001, HIG disclosed that the A.M. Best rating of its insurance company subsidiaries had been reduced to C- and that its financial plan might trigger some level of regulatory
involvement. HIG has advised the Company that at December 31, 2001, its insurance company subsidiaries had paid losses and ALAE under the subject policies of $30.7 million and had established case loss and ALAE reserves of $27.9 million, net of
reinsurance. Incurred but not reported losses are expected to emerge, but the amount cannot be reasonably determined at this time. If the HIG insurance company subsidiaries are declared insolvent by a court of competent jurisdiction at some future
date and unable to pay losses under the subject policies, the company would be responsible to pay the amount of the losses incurred and unpaid at such date, and the Company would be
59
SCPIE HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
entitled to indemnification of a portion of this loss from certain of the reinsurers of HIG. The Company would also be subrogated to the rights of the policyholders as creditors of the HIG
insurance subsidiaries. The Annual Statements filed by the HIG insurance company subsidiaries with the applicable state regulatory authorities in March 2002 show combined policyholder surplus of approximately $36.3 million at December 31, 2001,
which includes $152.6 million of reserve discounting. In its Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on November 19, 2001, HIG stated that the companys failure to meet certain capital requirements and
targets would expose the HIG insurance company subsidiaries to regulatory sanctions that may include placing the insurance company subsidiaries under regulatory restrictions, supervision or control. The ultimate impact on the HIG insurance company
subsidiaries of regulatory action, if any, is not currently determinable, but could be significant.
The Company ceded during 2001 to an HIG subsidiary 36% of the
business underwritten by a Lloyds syndicate in which the Company has 100% of the risk. The syndicate writes excess of loss medical malpractice policies covering healthcare facilities and physicians and other professional liability coverages.
Approximately $2.2 million of earned premium was ceded to the HIG subsidiary. The Corporation of Lloyds holds all of the premiums, and the HIG subsidiary has deposited an additional $4.9 million with Lloyds to secure its obligations.
Under nine other agreements, the Company, together with other assuming reinsurers, has assumed small percentages of business written by HIG subsidiaries,
including property, casualty and workers compensation coverages. Assumed premium earned under these contracts in 2001 and 2000 was approximately $673,000 and $516,000. The Company has also retroceded to HIG subsidiaries a portion of the
business assumed under four other assumed reinsurance agreements. Premiums of approximately $3.1 million and $73,000 were ceded to HIG subsidiaries under these agreements in 2001 and 2000, respectively.
Effective January 1, 2001, the Company acquired a 20% interest in Reinsurance Management Group LLC (RMG) for $2.5 million. RMG underwrites accident and health and workers
compensation assumed reinsurance. During 2001 the Company had assumed premiums produced by RMG in the amount of $21.2 million. At December 31, 2001, $12.1 million was due from RMG relating to these reinsurance agreements.
Approximately $8.6 million of the Companys assumed reinsurance premium earned is derived from pro rata treaties from a single Lloyds syndicate that specializes in writing
marine insurance and reinsurance on a worldwide basis. The syndicate is managed by an affiliate of GoshawK Insurance Holdings plc (GoshawK). The Company owns 7,151,446 shares which represent 4.1% of the outstanding common stock of GoshawK, a
specialist Lloyds insurance and reinsurance underwriting business listed on the London Stock Exchange.
As a result of the terrorist attacks at the World
Trade Center, the Pentagon and on various airlines on September 11, 2001 (collectively the September 11 terrorist attacks), the Company incurred pre-tax losses, based on an estimate of ultimate exposure developed through a review of its
assumed reinsurance coverages, which totaled $20.6 million gross of reinsurance and $19.6 million net of reinsurance. Additionally, the Company incurred a charge against net premiums earned in the amount of $8.5 million as a result of its ongoing
participation in the reinsurance agreement described below.
In November 1996, the Company entered into a six-year agreement with a third party whereby the Company
made a $5.0 million commitment in exchange for future gains or losses based on the underwriting index of a reinsurance portfolio. In July 2001, the Company entered into an amended agreement, extending the agreement three years and provided an
additional $5.0 million commitment secured by a letter of credit bringing its notional amount up to $10.0 million. The portfolio is composed of worldwide geographically dispersed catastrophe excess of loss treaty reinsurance business. The Company
will also receive semiannual payments based on its notional amount at a rate determined annually. On an annual basis, if the combined ratio of the portfolio is below a stipulated underwriting index amount, the Company will recognize a gain; if the
combined ratio is between two stipulated underwriting index amounts, the Company will not recognize a gain or loss; and, if the combined ratio is greater than a stipulated underwriting index amount, the Company will recognize a loss limited to its
notional value plus any interest earned during the agreement. Based on reported results through December 31, 2001, following the September 11 events, the Company has recorded a charge of $8.5 million as a reduction to assumed premiums earned.
Effective July 1, 2001, the Company entered into an excess of loss reinsurance contract that provides recoveries, subject to a maximum, on its assumed reinsurance
portfolio on a per risk basis and on a catastrophic occurrence basis. This agreement does not transfer risk in accordance with FASB No. 113, Accounting and Reporting for Reinsurance of Short-Duration and Long-Duration Contracts and is
therefore being accounted for as a deposit. The annual deposit premium is $5.0 million payable in installments. As of December 31, 2001, $2.5 million has been paid to reinsurers and is recorded as a deposit asset.
60
SCPIE HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
NOTE 5. FEDERAL INCOME TAXES
The components of the federal income tax provision (benefit) in the accompanying consolidated statements of operations are summarized as follows:
YEAR ENDED DECEMBER 31, |
|
2001 |
|
|
2000 |
|
1999 |
|
|
|
|
|
|
|
|
|
(In Thousands) |
Current |
|
$ |
(11,360 |
) |
|
$ |
3,619 |
|
$ |
4,556 |
Deferred |
|
|
(21,546 |
) |
|
|
1,501 |
|
|
4,739 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
(32,906 |
) |
|
$ |
5,120 |
|
$ |
9,295 |
|
|
|
|
|
|
|
|
|
|
|
A reconciliation of income tax computed at the federal statutory tax rate to total income tax expense is as follows:
YEAR ENDED DECEMBER 31, |
|
2001 |
|
|
2000 |
|
|
1999 |
|
|
|
|
|
|
|
|
|
|
(In Thousands) |
|
Federal income tax (benefit) at 35% |
|
$ |
(31,809 |
) |
|
$ |
7,837 |
|
|
$ |
13,719 |
|
Increase (decrease) in taxes resulting from: |
|
|
|
|
|
|
|
|
|
|
|
|
Tax-exempt interest |
|
|
(2,591 |
) |
|
|
(3,194 |
) |
|
|
(4,657 |
) |
Dividends received deduction |
|
|
|
|
|
|
(56 |
) |
|
|
(84 |
) |
Intangibles |
|
|
210 |
|
|
|
210 |
|
|
|
210 |
|
Other |
|
|
1,290 |
|
|
|
323 |
|
|
|
107 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total federal income tax expense (benefit) |
|
$ |
(32,906 |
) |
|
$ |
5,120 |
|
|
$ |
9,295 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred income taxes reflect the net tax effect of temporary differences between the carrying amounts of assets and
liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Companys deferred tax assets and liabilities are summarized as follows:
DECEMBER 31, |
|
2001 |
|
2000 |
|
|
|
|
|
|
|
(In Thousands) |
Deferred tax assets: |
|
|
|
|
|
|
Discounting of loss reserves |
|
$ |
27,036 |
|
$ |
19,019 |
Unearned premium |
|
|
7,131 |
|
|
2,531 |
Unrealized investment losses |
|
|
|
|
|
847 |
Net operating loss carryforward |
|
|
10,076 |
|
|
|
Other |
|
|
1,618 |
|
|
2,523 |
|
|
|
|
|
|
|
Total deferred tax assets |
|
|
45,861 |
|
|
24,920 |
|
Deferred tax liabilities: |
|
|
|
|
|
|
Deferred acquisition costs |
|
|
6,813 |
|
|
6,343 |
Tax accounting method changes |
|
|
729 |
|
|
|
Other |
|
|
1,658 |
|
|
1,708 |
|
|
|
|
|
|
|
Total deferred tax liabilities |
|
|
9,200 |
|
|
8,051 |
|
|
|
|
|
|
|
Net deferred tax assets |
|
$ |
36,661 |
|
$ |
16,869 |
|
|
|
|
|
|
|
The Company is required to establish a valuation allowance for any portion of the deferred tax asset
that management believes will not be realized. In the opinion of management, it is more likely than not that the Company will realize the benefit of the net deferred tax asset and, therefore, no such valuation allowance has been established.
Federal income taxes paid during 2001, 2000 and 1999 were $1.1 million, $1.3 million and $8.1 million, respectively.
At December 31, 2001, the Company had a net operating loss carryforward of $28.8 million for income tax purposes that expires in 2021. (See Note 14.)
61
SCPIE HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
NOTE 6. STATUTORY ACCOUNTING PRACTICES
State insurance laws and regulations prescribe accounting practices for determining statutory net income and equity for insurance companies. In addition, state regulators may
permit statutory accounting practices that differ from prescribed practices. The statutory financial statements, for the Companys insurance subsidiaries, are completed in accordance with the National Association of Insurance
Commissioners Accounting Practices and Procedures manual, version effective January 1, 2001 (NAIC SAP). The NAIC SAP was fully adopted by the Arkansas, California and Delaware Departments of Insurance. The principal differences between
financial statement net income and statutory net income are due to policy acquisition costs, which are deferred under GAAP but expensed for statutory purposes. Policyholders surplus and net income, for the Companys insurance
subsidiaries, as determined in accordance with statutory accounting practices, are summarized as follows:
DECEMBER 31, |
|
2001 |
|
|
2000 |
|
1999 |
|
|
|
|
|
|
|
|
|
(In Thousands) |
Statutory net income (loss) for the year ended |
|
$ |
(83,268 |
) |
|
$ |
14,050 |
|
$ |
34,021 |
Statutory capital and surplus at year end |
|
|
181,916 |
|
|
|
249,261 |
|
|
265,459 |
As of January 1, 2001 certain changes in accounting principles were adopted to conform the new provisions of NAIC
SAP. The cumulative effect of changes in accounting principles is reported as an adjustment to statutory capital and surplus. As a result of these changes, the Company reported a change of accounting principle that increased statutory capital and
surplus by $10.9 million due primarily to the recognition of deferred tax assets.
Generally, the capital and surplus of the Companys insurance subsidiaries
available for transfer to the parent company are limited to the amounts that the insurance subsidiaries capital and surplus, as determined in accordance with statutory accounting practices, exceed minimum statutory capital requirements;
however, payments of the amounts as dividends may be subject to approval by regulatory authorities. At December 31, 2001, the amount of dividends available to SCPIE Holdings from its insurance subsidiaries during 2002 not limited by such
restrictions is approximately $12.4 million.
NOTE 7. BENEFIT PLANS
The Company has a 401(k) defined contribution plan and a noncontributory defined benefit plan, which provide retirement benefits to all its employees. In 2001, under the 401(k) plan, the Company paid a matching contribution
based on the first 3% of employees compensation plus a discretionary contribution of 1% of employees compensation. In 2000, the Company matched the employees contribution up to 6% of compensation. The contribution expenses for the
401(k) plan were $902,000, $760,000 and $661,000 for the years ended December 31, 2001, 2000 and 1999, respectively. An additional defined contribution plan that no longer accepts contributions will remain with the trustee as funded at December 31,
1989, until retirement or termination of all employees vested in the plan.
Effective December 31, 2000, the Companys defined benefit pension plan was
amended to freeze accrued benefits for all active participants. Participants in the defined benefit pension plan continue to accrue service for vesting purposes only. Effective January 1, 2001, no future employees were eligible to participate in the
plan.
Also, effective December 31, 2000, the Company amended its nonqualified supplemental plan. The participation requirements were modified to exclude all
employees not specifically designated by the plan sponsor and the minimum age to participate in the plan was modified to age 45. As of December 31, 2001, the nonqualified supplemental plan was comprised of five active plan participants.
62
SCPIE HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
The net pension expense (income) for these plans consists of the following
components:
|
|
Qualified Plan
|
|
|
Supplemental Plan
|
YEAR ENDED DECEMBER 31, |
|
2001 |
|
|
2000 |
|
|
1999 |
|
|
2001 |
|
2000 |
|
1999 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In Thousands) |
Service cost |
|
$ |
0 |
|
|
$ |
483 |
|
|
$ |
503 |
|
|
$ |
199 |
|
$ |
141 |
|
$ |
220 |
Interest cost |
|
|
268 |
|
|
|
298 |
|
|
|
255 |
|
|
|
226 |
|
|
308 |
|
|
250 |
Actual return on plan assets |
|
|
(276 |
) |
|
|
(293 |
) |
|
|
(254 |
) |
|
|
|
|
|
|
|
|
|
Amortization of: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transition asset |
|
|
(4 |
) |
|
|
(4 |
) |
|
|
(4 |
) |
|
|
|
|
|
|
|
|
|
Prior service cost |
|
|
|
|
|
|
(1 |
) |
|
|
(1 |
) |
|
|
84 |
|
|
84 |
|
|
84 |
Actuarial loss (gain) |
|
|
|
|
|
|
(44 |
) |
|
|
|
|
|
|
|
|
|
11 |
|
|
38 |
Curtailment loss (gain) |
|
|
|
|
|
|
(710 |
) |
|
|
|
|
|
|
|
|
|
481 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net pension expense (income) |
|
$ |
(12 |
) |
|
$ |
(271 |
) |
|
$ |
499 |
|
|
$ |
509 |
|
$ |
1,025 |
|
$ |
592 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table sets forth the funding status of the plan:
|
|
Qualified Plan
|
|
|
Supplemental Plan
|
|
DECEMBER 31, |
|
2001 |
|
|
2001 |
|
|
|
|
|
|
|
|
(In Thousands) |
|
Change in Benefit Obligation |
|
|
|
|
|
|
|
|
Net benefit obligation at beginning of year |
|
$ |
3,602 |
|
|
$ |
3,740 |
|
Service cost |
|
|
|
|
|
|
199 |
|
Plan amendments |
|
|
|
|
|
|
|
|
Interest cost |
|
|
268 |
|
|
|
226 |
|
Effect of settlement |
|
|
|
|
|
|
(1,003 |
) |
Actuarial (gain) loss |
|
|
308 |
|
|
|
396 |
|
Gross benefits paid |
|
|
(53 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net benefit obligation at end of year |
|
|
4,125 |
|
|
|
3,558 |
|
|
|
|
|
|
|
|
|
|
|
Change in Plan Assets |
|
|
|
|
|
|
|
|
Fair value of plan assets at beginning of year |
|
|
3,399 |
|
|
|
|
|
Actual return (loss) on plan assets |
|
|
(551 |
) |
|
|
|
|
Employer contributions |
|
|
363 |
|
|
|
1,003 |
|
Gross benefits paid |
|
|
(53 |
) |
|
|
(1,003 |
) |
|
|
|
|
|
|
|
|
|
Fair value of plan assets at end of year |
|
|
3,158 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funded status (underfunded) |
|
|
(967 |
) |
|
|
(3,558 |
) |
Unrecognized actuarial (gain) loss |
|
|
1,087 |
|
|
|
415 |
|
Unrecognized prior service cost (benefit) |
|
|
|
|
|
|
177 |
|
Unrecognized net transition obligation (asset) |
|
|
(12 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued pension expense |
|
$ |
(108 |
) |
|
$ |
(2,966 |
) |
|
|
|
|
|
|
|
|
|
Amounts recognized in the statement of financial position consists of |
|
|
|
|
|
|
|
|
Prepaid benefit cost |
|
|
108 |
|
|
|
|
|
Accrued benefit liability |
|
|
|
|
|
|
(2,966 |
) |
Additional minimum liability |
|
|
(1,075 |
) |
|
|
(49 |
) |
Intangible asset |
|
|
|
|
|
|
49 |
|
Accumulated other comprehensive income |
|
|
1,075 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued pension expense |
|
$ |
108 |
|
|
$ |
(2,966 |
) |
|
|
|
|
|
|
|
|
|
63
SCPIE HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
|
|
Qualified Plan
|
|
|
Supplemental Plan
|
|
DECEMBER 31, |
|
2001 |
|
|
2000 |
|
|
1999 |
|
|
2001 |
|
|
2000 |
|
|
1999 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average assumptions |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount rate |
|
7.00 |
% |
|
7.50 |
% |
|
7.75 |
% |
|
7.00 |
% |
|
7.50 |
% |
|
7.75 |
% |
Expected return on plan assets |
|
8.00 |
% |
|
8.00 |
% |
|
8.00 |
% |
|
|
|
|
|
|
|
|
|
Rate of compensation increase |
|
N/A |
|
|
5.00 |
% |
|
5.00 |
% |
|
5.00 |
% |
|
5.00 |
% |
|
5.00 |
% |
During 1999, the Company implemented the Director and Senior Management Stock Purchase Plan. The directors and
senior managers purchased a total of 145,000 shares of common stock under this plan. The eligible participants executed promissory notes in the aggregate amount of $4.1 million to fund this purchase.
The Companys Employee Stock Purchase Plan, effective January 1, 2000, offers eligible employees the opportunity to purchase shares of SCPIE common stock through payroll deductions.
NOTE 8. BANK LOAN PAYABLE
On May 25, 1999,
the Company entered into a credit agreement with Union Bank of California, N. A., First Union Bank and Dresdner Bank AG, as lenders. The Credit Agreement, as amended, allowed the Company borrowings up to $40 million from time to time, subject to
certain conditions. The proceeds may be used by the Company for general corporate purposes and certain other permitted uses. Under the Credit Agreement, the interest rate (2.755% and 7.378% at December 31, 2001 and 2000 respectively) was based upon
fluctuations in the London InterBank Offered Rate (LIBOR). Borrowings outstanding at December 31, 2001 and 2000, were $9.0 million and $27.0 million, respectively. All amounts outstanding under the Credit Agreement at December 31, 2001 were paid
during February 2002, and the agreement was terminated effective February 28, 2002. Interest paid was $1.4 million in 2001 and $724,000 in 2000. No interest was paid in 1999.
NOTE 9. COMMITMENTS AND CONTINGENCIES
In July 1998, the Company entered a lease covering approximately 95,000
square feet of office space for the Company headquarters. The lease has escalating payments over a term of 10 years ending 2009 with options to renew for an additional 10 years. The Company also leases space in other locations throughout the
country.
The company expended $5.3 million for leasehold improvements and equipment through December 31, 2001. Occupancy expense for the years ended December 31,
2001 and 2000, was $3.4 million and $3.6 million respectively. Future minimum payments under noncancelable operating leases with initial terms of one year or more consist of the following at December 31, 2001 (in thousands):
2002 |
|
$ |
2,933 |
2003 |
|
|
3,041 |
2004 |
|
|
3,042 |
2005 |
|
|
3,119 |
2006 |
|
|
3,097 |
Thereafter |
|
|
5,817 |
|
|
|
|
Total minimum lease payments |
|
$ |
21,049 |
|
|
|
|
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 Companys management believes that the resolution of these actions will not have a material adverse effect on
the Companys financial position or results of operations.
The Company was 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
64
SCPIE HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
courtesy defense by an attorney who had represented the interests of the Companys 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 29, 1999. The bankruptcy estate then filed an appeal of this ruling with the district court of appeal. On April 26, 2001, the appellate court
affirmed the judgment in favor of the Company. On May 25, 2001, the court of appeal denied Plaintiffs petition for rehearing. On July 11, 2001, the California Supreme Court denied Plaintiffs petition for review. This terminated the
action in favor of the Company.
In November 2001, the Company arranged a letter of credit facility in the amount of $50 million with Barclays Bank PLC. Letters of
credit are collateralized and may be issued under the facility to fulfill the requirements of Lloyds and to guarantee loss reserves under reinsurance contracts. As of December 31, 2001, letter of credit issuance under the facility was
approximately $46.3 million.
NOTE 10. STOCK-BASED COMPENSATION
The Company has a stock compensation plan, the 2001 Amended and Restated Equity Participation Plan of SCPIE Holdings Inc. (the Plan) which provides for grants of stock options to key employees and nonemployee directors of the
Company.
FASB Statement No. 123 requires disclosure of the pro forma net income and earnings per share as if the Company had accounted for its employee stock
compensation under the fair value method of that Statement.
The aggregate number of options for common shares issued and issuable under the Plan currently is
limited to 1,250,000. On February 13, 2002, the Companys Board of Directors adopted an amendment to the Plan to, among other things, increase the number of shares that may be granted under the Plan to 1,700,000. This amendment must be approved
by the stockholders of the Company within 12 months after the adoption by the Board of Directors. The amendment is expected to be considered and voted upon at the annual meeting of the stockholders of the Company to be held May 16, 2002. All options
granted have 10-year terms and vest over various future periods.
A summary of the Companys stock-option activity and related information follows:
|
|
2001
|
|
2000
|
|
1999
|
|
|
Number of Options |
|
Weighted-Average Exercise Price |
|
Number of Options |
|
Weighted-Average Exercise Price |
|
Number of Options |
|
Weighted-Average Exercise Price |
|
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding at beginning of year |
|
608,690 |
|
$ |
30.71 |
|
466,390 |
|
$ |
29.97 |
|
256,790 |
|
$ |
30.76 |
Granted during year |
|
628,000 |
|
|
16.76 |
|
180,400 |
|
|
32.40 |
|
216,200 |
|
|
29.02 |
Exercised during year |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited during year |
|
26,200 |
|
|
30.34 |
|
38,100 |
|
|
29.74 |
|
6,600 |
|
|
29.19 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding at end of year |
|
1,210,490 |
|
$ |
23.48 |
|
608,690 |
|
$ |
30.71 |
|
466,390 |
|
$ |
29.97 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
65
SCPIE HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
Information about stock options outstanding at December 31, 2001, is
summarized as follows:
|
|
Options Outstanding
|
|
Options Exercisable
|
|
|
Number Outstanding |
|
Weighted-Average Remaining Contractual Life |
|
Weighted-Average Exercise Price |
|
Number Exercisable |
|
Weighted-Average Exercise Price |
|
|
|
|
|
|
|
|
|
|
|
Range of Exercise Prices: |
|
|
|
|
|
|
|
|
|
|
|
|
$16.70$19.32 |
|
628,000 |
|
9.78 |
|
$ |
16.76 |
|
|
|
|
|
$24.25$36.50 |
|
582,490 |
|
7.02 |
|
|
30.72 |
|
405,307 |
|
$ |
30.56 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,210,490 |
|
8.45 |
|
$ |
23.48 |
|
405,307 |
|
$ |
30.56 |
The Companys pro forma information using the Black-Scholes valuation model follows:
|
|
2001 |
|
|
2000 |
|
1999 |
|
|
|
|
|
|
|
Estimated weighted average of the fair value of options granted |
|
$ |
4.80 |
|
|
$ |
9.79 |
|
$ |
7.40 |
Pro forma net income (loss) (in 000s) |
|
$ |
(59,841 |
) |
|
$ |
15,846 |
|
$ |
28,373 |
Pro forma earnings (loss) per share Basic |
|
$ |
(6.42 |
) |
|
$ |
1.70 |
|
$ |
2.50 |
Diluted |
|
$ |
(6.42 |
) |
|
$ |
1.70 |
|
$ |
2.50 |
For pro forma disclosure purposes, the fair value of stock options was estimated at each date of grant using a
Black-Scholes option pricing model using the following assumptions: Risk-free interest rates ranging from 5.5% to 6.1%; dividend yields ranging from 0.66% to 1.14%; volatility factors of the expected market price of the Companys common stock
ranging from .273 to .358; and a weighted average expected life of the options ranging from three to five years.
In managements opinion, existing stock
option valuation models do not provide an entirely reliable measure of the fair value of nontransferable employee stock options with vesting restrictions.
NOTE
11. EARNINGS PER SHARE OF COMMON STOCK
The following table sets forth the computation of basic and diluted earnings per share as of and
for the year ended:
DECEMBER 31, |
|
2001 |
|
|
2000 |
|
1999 |
|
|
|
|
|
|
|
|
|
(In Thousands, Except Per-Share Data) |
Numerator: |
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
(57,976 |
) |
|
$ |
17,271 |
|
$ |
29,902 |
Numerator for: |
|
|
|
|
|
|
|
|
|
|
Basic earnings (loss) per share of common stock |
|
$ |
(57,976 |
) |
|
$ |
17,271 |
|
$ |
29,902 |
Diluted earnings (loss) per share of common stock |
|
$ |
(57,976 |
) |
|
$ |
17,271 |
|
$ |
29,902 |
Denominator: |
|
|
|
|
|
|
|
|
|
|
Denominator for basic earnings per share of common stockweighted-average shares outstanding |
|
|
9,333 |
|
|
|
9,376 |
|
|
11,384 |
Effect of dilutive securities: |
|
|
|
|
|
|
|
|
|
|
Stock options |
|
$ |
|
|
|
|
5 |
|
|
19 |
|
|
|
|
|
|
|
|
|
|
|
Denominator for diluted earnings per share of common stock adjustedweighted-average shares outstanding |
|
$ |
9,333 |
|
|
$ |
9,381 |
|
$ |
11,403 |
|
|
|
|
|
|
|
|
|
|
|
Basic earnings (loss) per share of common stock |
|
$ |
(6.22 |
) |
|
$ |
1.84 |
|
$ |
2.63 |
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings (loss) per share of common stock |
|
$ |
(6.22 |
) |
|
$ |
1.84 |
|
$ |
2.62 |
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31, 2001 no incremental shares related to stock options are included in the diluted
number of shares outstanding as the impact would have been antidilutive.
66
SCPIE HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
NOTE 12. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The unaudited quarterly results of operations for 2001 and 2000 are summarized as follows:
|
|
2001
|
|
|
2000
|
|
|
|
1ST |
|
2ND |
|
|
3RD |
|
4TH |
|
|
1ST |
|
|
2ND |
|
3RD |
|
4TH |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In Thousands, Except Per-Share Data) |
|
Premiums earned and other revenues |
|
$ |
48,020 |
|
$ |
57,928 |
|
|
$ |
59,532 |
|
$ |
72,657 |
|
|
$ |
40,173 |
|
|
$ |
43,694 |
|
$ |
45,531 |
|
$ |
48,326 |
|
Net investment income |
|
|
8,732 |
|
|
8,710 |
|
|
|
9,627 |
|
|
8,826 |
|
|
|
8,339 |
|
|
|
8,417 |
|
|
8,801 |
|
|
8,595 |
|
Realized investment gains (losses) |
|
|
1,200 |
|
|
(7 |
) |
|
|
2,947 |
|
|
1,567 |
|
|
|
(915 |
) |
|
|
18 |
|
|
753 |
|
|
(256 |
) |
Net income (loss) |
|
|
2,241 |
|
|
(29,080 |
) |
|
|
2,361 |
|
|
(33,498 |
) |
|
|
3,791 |
|
|
|
4,382 |
|
|
4,895 |
|
|
4,203 |
|
Basic earnings (loss) per share of common stock |
|
$ |
0.24 |
|
$ |
(3.11 |
) |
|
$ |
0.25 |
|
$ |
(3.59 |
) |
|
$ |
0.40 |
|
|
$ |
0.47 |
|
$ |
0.52 |
|
$ |
0.45 |
|
Diluted earnings (loss) per share of common stock |
|
$ |
0.24 |
|
$ |
(3.11 |
) |
|
$ |
0.25 |
|
$ |
(3.59 |
) |
|
$ |
0.40 |
|
|
$ |
0.47 |
|
$ |
0.52 |
|
$ |
0.45 |
|
During the fourth quarter of 2001, based on sharply increased losses for the 2001 accident year outside California,
the Company increased reserves in its direct healthcare liability insurance segment an additional $26.0 million and established a premium deficiency reserve of $7.9 million at year end. Additionally in the fourth quarter, the Company recorded $26.1
million in losses related to the September 11 terrorist attacks. (See Note 4.)
NOTE 13. BUSINESS SEGMENTS
The Company classifies its business into two segments: Direct Healthcare Liability Insurance and Assumed Reinsurance. Segments are designated based on the types of products provided and
based on the risks associated with the products. Direct Healthcare Liability Insurance represents professional liability insurance for physicians, oral and maxillofacial surgeons, hospitals and other healthcare providers. Assumed Reinsurance
represents the book of assumed worldwide reinsurance of professional, commercial and personal liability coverages, commercial and residential property risks, accident and health coverages and marine coverages. Other includes items not directly
related to the operating segments such as net investment income, realized investment gains and losses, and other revenue.
The accounting policies of the segments
are the same as those described in Note 1. The Company evaluates insurance segment performance based on the combined ratios of the segments. Intersegment transactions are not significant.
67
SCPIE HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
The following table presents information about reportable segment income
(loss) and segment assets as of and for the period indicated:
Year Ended December 31, 2001 |
|
Direct Healthcare Liability Insurance |
|
|
Assumed Reinsurance |
|
|
Other |
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
(In Thousands) |
|
Premium written |
|
$ |
168,600 |
|
|
$ |
112,207 |
|
|
$ |
|
|
$ |
280,807 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums earned |
|
$ |
156,442 |
|
|
$ |
79,493 |
|
|
$ |
|
|
$ |
235,935 |
|
Net investment income |
|
|
|
|
|
|
|
|
|
|
35,895 |
|
|
35,895 |
|
Realized investment gains |
|
|
|
|
|
|
|
|
|
|
5,707 |
|
|
5,707 |
|
Income from affiliates |
|
|
|
|
|
|
|
|
|
|
1,327 |
|
|
1,327 |
|
Other revenue |
|
|
|
|
|
|
|
|
|
|
875 |
|
|
875 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
|
156,442 |
|
|
|
79,493 |
|
|
|
43,804 |
|
|
279,739 |
|
Losses and loss adjustment expenses |
|
|
220,311 |
|
|
|
84,162 |
|
|
|
|
|
|
304,473 |
|
Other operating expenses |
|
|
45,820 |
|
|
|
18,912 |
|
|
|
|
|
|
64,732 |
|
Interest expense |
|
|
|
|
|
|
|
|
|
|
1,416 |
|
|
1,416 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses |
|
|
266,131 |
|
|
|
103,074 |
|
|
|
1,416 |
|
|
370,621 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment (loss) income before federal income taxes |
|
$ |
(109,689 |
) |
|
$ |
(23,581 |
) |
|
$ |
42,388 |
|
$ |
(90,882 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined ratio |
|
|
170.11 |
% |
|
|
129.66 |
% |
|
|
|
|
|
157.09 |
% |
Segment assets |
|
$ |
211,125 |
|
|
$ |
58,200 |
|
|
$ |
708,321 |
|
$ |
977,646 |
|
Year Ended December 31, 2000 |
|
Direct Healthcare Liability Insurance |
|
|
Assumed Reinsurance |
|
|
Other |
|
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
(In Thousands) |
|
|
Premium written |
|
$ |
177,703 |
|
|
$ |
30,500 |
|
|
$ |
|
|
|
$ |
208,203 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums earned |
|
$ |
149,404 |
|
|
$ |
27,098 |
|
|
$ |
|
|
|
$ |
176,502 |
|
Net investment income |
|
|
|
|
|
|
|
|
|
|
34,152 |
|
|
|
34,152 |
|
Realized investment gains (losses) |
|
|
|
|
|
|
|
|
|
|
(400 |
) |
|
|
(400 |
) |
Equity earnings from affiliate |
|
|
|
|
|
|
|
|
|
|
880 |
|
|
|
880 |
|
Other revenue |
|
|
|
|
|
|
|
|
|
|
1,122 |
|
|
|
1,122 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
|
149,404 |
|
|
|
27,098 |
|
|
|
35,754 |
|
|
|
212,256 |
|
Losses and loss adjustment expenses |
|
|
129,307 |
|
|
|
23,295 |
|
|
|
|
|
|
|
152,602 |
|
Other operating expenses |
|
|
32,333 |
|
|
|
4,150 |
|
|
|
|
|
|
|
36,483 |
|
Interest expenses |
|
|
|
|
|
|
|
|
|
|
780 |
|
|
|
780 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses |
|
|
161,640 |
|
|
|
27,445 |
|
|
|
780 |
|
|
|
189,865 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment (loss) income before income taxes |
|
$ |
(12,236 |
) |
|
$ |
(347 |
) |
|
$ |
34,974 |
|
|
$ |
22,391 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined ratio |
|
|
108.19 |
% |
|
|
101.28 |
% |
|
|
|
|
|
|
107.57 |
% |
Segment assets |
|
$ |
155,176 |
|
|
$ |
13,931 |
|
|
$ |
685,538 |
|
|
$ |
854,645 |
|
NOTE 14. SUBSEQUENT EVENTS
The company entered into certain contracts with Brown & Brown, Inc., under which Brown & Brown acts as an insurance producer for the Company. A director of the Company serves as chairman of the board,
president and chief executive officer and principal shareholder of Brown & Brown. Brown & Brown produced $45.0 million, $46.0 million and $21.3 million in gross written premiums in 2001, 2000 and 1999 respectively (including $4.5 million and
$7.6 million from fronting arrangements related
68
SCPIE HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
to dentist and oral surgeon programs in 2001 and 2000), and received commissions of $7.0 million, $7.6 million and $3.2 million. On March 6, 2002, the Company and Brown & Brown reached
agreement to terminate these programs no later than March 6, 2003.
On March 9, 2002, the Job Creation and Worker Assistance Act of 2002 became law. The new law
allows tax losses incurred in 2001 and 2002 to be carried back five years instead of the two years allowed under prior law. As a result of this law change, the Company will be able to recoup an additional approximate $8 million of taxes paid in the
three years ended December 31, 1998 subsequent to filing its 2001 tax return. The federal income taxes receivable recorded on the December 31, 2001 balance sheet will be increased by approximately $8 million and the deferred tax asset decreased by
an identical amount in the financial statements for the quarter ended March 31, 2002.
69
Schedule IICondensed Financial Information of Registrant
SCPIE Holdings Inc.
Condensed Balance Sheets
(In Thousands, Except Share Data)
DECEMBER 31 |
|
2001 |
|
|
2000 |
|
|
|
|
|
|
|
ASSETS |
|
|
|
|
|
|
|
|
Securities available for sale: |
|
|
|
|
|
|
|
|
Fixed-maturity investments, at fair value (amortized cost: $5,016) |
|
$ |
|
|
|
$ |
5,016 |
|
Equity investments, at fair value (cost: 2001$19,676; 2000$15,849) |
|
|
17,567 |
|
|
|
13,892 |
|
Short-term investments |
|
|
10,807 |
|
|
|
13,034 |
|
Investment in subsidiaries |
|
|
238,153 |
|
|
|
291,727 |
|
|
|
|
|
|
|
|
|
|
Total investments |
|
|
266,527 |
|
|
|
323,669 |
|
Cash |
|
|
743 |
|
|
|
286 |
|
Deposits |
|
|
|
|
|
|
17,550 |
|
Due from affiliates |
|
|
|
|
|
|
365 |
|
Other |
|
|
1,615 |
|
|
|
1,671 |
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
268,885 |
|
|
$ |
343,541 |
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES |
|
|
|
|
|
|
|
|
Due to affiliates |
|
$ |
430 |
|
|
$ |
|
|
Other |
|
|
67 |
|
|
|
|
|
Bank loan payable |
|
|
9,000 |
|
|
|
27,000 |
|
|
|
|
|
|
|
|
|
|
Total liabilities |
|
|
9,497 |
|
|
|
27,000 |
|
|
Stockholders equity: |
|
|
|
|
|
|
|
|
Preferred stockpar value $1.00, 5,000,000 shares authorized, no shares issued or outstanding |
|
|
|
|
|
|
|
|
Common stockpar value $0.0001, 30,000,000 shares authorized, 12,792,091 shares issued, 20019,318,066 shares outstanding 20009,331,017 shares outstanding |
|
|
1 |
|
|
|
1 |
|
Additional paid-in capital |
|
|
37,803 |
|
|
|
36,386 |
|
Accumulated other comprehensive gain (loss) |
|
|
1,883 |
|
|
|
(1,528 |
) |
Retained earnings |
|
|
322,734 |
|
|
|
384,437 |
|
Treasury stock, at cost (20012,974,025 shares and 20002,961,074 shares) |
|
|
(98,983 |
) |
|
|
(98,705 |
) |
Stock subscription notes receivable |
|
|
(4,050 |
) |
|
|
(4,050 |
) |
|
|
|
|
|
|
|
|
|
Total stockholders equity |
|
|
259,388 |
|
|
|
316,541 |
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity |
|
$ |
268,885 |
|
|
$ |
343,541 |
|
|
|
|
|
|
|
|
|
|
See accompanying notes.
70
Schedule IICondensed Financial Information of Registrant (continued)
SCPIE Holdings Inc.
Condensed Statements of Operations
(In Thousands)
FOR THE YEAR ENDED |
|
DECEMBER 31, 2001 |
|
|
DECEMBER 31, 2000 |
|
|
DECEMBER 31, 1999 |
|
|
|
|
|
|
|
|
Dividend from subsidiary |
|
$ |
|
|
|
$ |
26,000 |
|
|
$ |
106,000 |
|
Net investment income |
|
|
1,585 |
|
|
|
806 |
|
|
|
638 |
|
Realized investment gains (losses) |
|
|
|
|
|
|
(170 |
) |
|
|
(4,278 |
) |
Other income |
|
|
1,564 |
|
|
|
1,118 |
|
|
|
|
|
Interest expenses |
|
|
(1,416 |
) |
|
|
(780 |
) |
|
|
(25 |
) |
Other expenses |
|
|
(1,743 |
) |
|
|
(2,110 |
) |
|
|
(2,204 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) before federal income taxes and equity in income of subsidiaries |
|
|
(10 |
) |
|
|
24,864 |
|
|
|
100,131 |
|
Federal income tax benefit (expense) |
|
|
535 |
|
|
|
1,035 |
|
|
|
(22 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings before equity in income (loss) of subsidiaries |
|
|
525 |
|
|
|
25,899 |
|
|
|
100,109 |
|
Equity in income (loss) of subsidiaries |
|
|
(58,501 |
) |
|
|
(8,628 |
) |
|
|
(70,207 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
(57,976 |
) |
|
$ |
17,271 |
|
|
$ |
29,902 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes.
71
Schedule IICondensed Financial Information of Registrant (continued)
SCPIE Holdings Inc.
Condensed Statements of Cash Flows
(In thousands)
FOR THE YEAR ENDED |
|
DECEMBER 31, 2001 |
|
|
DECEMBER 31, 2000 |
|
|
DECEMBER 31, 1999 |
|
|
|
|
|
|
|
|
|
OPERATING ACTIVITIES |
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
(57,976 |
) |
|
$ |
17,271 |
|
|
$ |
29,902 |
|
Adjustments to reconcile net loss to net cash provided by operating
activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Realized investment (gains) losses |
|
|
|
|
|
|
170 |
|
|
|
4,278 |
|
Due to affiliates |
|
|
795 |
|
|
|
(1,005 |
) |
|
|
(374 |
) |
Provision for amortization |
|
|
670 |
|
|
|
563 |
|
|
|
839 |
|
Changes in other assets and liabilities |
|
|
123 |
|
|
|
(928 |
) |
|
|
(61 |
) |
Equity in undistributed (income) loss of subsidiaries and affiliates |
|
|
56,573 |
|
|
|
8,628 |
|
|
|
70,207 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
185 |
|
|
|
24,699 |
|
|
|
104,791 |
|
|
INVESTING ACTIVITIES |
|
|
|
|
|
|
|
|
|
|
|
|
Salesequities |
|
|
|
|
|
|
8,033 |
|
|
|
|
|
Salesfixed maturities |
|
|
5,000 |
|
|
|
|
|
|
|
43 |
|
Purchasefixed maturities |
|
|
|
|
|
|
(5,016 |
) |
|
|
(25,839 |
) |
Purchaseequities |
|
|
(2,500 |
) |
|
|
|
|
|
|
|
|
Change in short-term investments |
|
|
19,777 |
|
|
|
(27,860 |
) |
|
|
(1,514 |
) |
Capital contribution to subsidiaries |
|
|
|
|
|
|
(5,000 |
) |
|
|
(2,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash used in investing activities |
|
|
22,277 |
|
|
|
(29,843 |
) |
|
|
(29,310 |
) |
|
FINANCING ACTIVITIES |
|
|
|
|
|
|
|
|
|
|
|
|
Repayment of bank loan |
|
|
(18,000 |
) |
|
|
(4,000 |
) |
|
|
|
|
Proceeds from bank loan |
|
|
|
|
|
|
18,000 |
|
|
|
13,000 |
|
Purchase of treasury stock |
|
|
(278 |
) |
|
|
(5,095 |
) |
|
|
(84,705 |
) |
Cash dividends |
|
|
(3,727 |
) |
|
|
(3,757 |
) |
|
|
(3,566 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash provided by (used in) financing activities |
|
|
(22,005 |
) |
|
|
5,148 |
|
|
|
(75,271 |
) |
Increase (decrease) in cash |
|
|
457 |
|
|
|
4 |
|
|
|
210 |
|
Cash at beginning of period |
|
|
286 |
|
|
|
282 |
|
|
|
72 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash at end of period |
|
$ |
743 |
|
|
$ |
286 |
|
|
$ |
282 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes.
72
Schedule IICondensed Financial Information of Registrant (continued)
SCPIE Holdings Inc.
Notes to Condensed Financial Statements
December 31, 2001
1. BASIS OF PRESENTATION
In the SCPIE Holdings financial statements, investment in subsidiaries is stated at cost plus equity in undistributed earnings of subsidiaries since date of acquisition.
The SCPIE Holdings financial statements should be read in conjunction with the consolidated financial statements.
2. BANK LOAN
PAYABLE
On May 25, 1999, the Company entered into a credit agreement with Union Bank of California, N. A., First Union Bank and Dresdner Bank AG, as lenders.
The Credit Agreement allows company borrowings up to $40 million from time to time, subject to certain conditions. The proceeds may be used by the Company for general corporate purposes and certain other permitted uses. Under the Credit Agreement,
the interest rate (2.755% and 7.378% at December 31, 2001 and 2000 respectively) is based upon fluctuations in the London InterBank Offered Rate (LIBOR). Borrowings outstanding at December 31, 2001 and 2000 were $9.0 million and $27.0 million,
respectively. All amounts outstanding under the Credit Agreement at December 31, 2001 were paid during February 2002, and the agreement was terminated effective February 28, 2002. Interest paid was $1.4 million and $724,000 in 2001 and 2000,
respectively. No interest was paid during 1999.
73
Schedule IIISupplementary Insurance Information
SCPIE Holdings Inc.
Year Ended December 31, 2001
Segments
|
|
Deferred Policy Acquisition Cost
|
|
Future Policy Benefits, Losses, Claims and Loss Expenses
|
|
Unearned Premiums
|
|
Other Policy Claims and Benefits Payable
|
|
Premium Revenue
|
|
Net Investment Income
|
|
Benefits, Claims, Losses and Settlement Expenses
|
|
Amortization of Deferred Policy Acquisition Costs
|
|
Other Operating Expenses
|
|
Premiums Written
|
Direct Healthcare Liability Insurance |
|
$ |
5,991 |
|
$ |
463,276 |
|
$ |
64,537 |
|
$ |
|
|
$ |
156,442 |
|
$ |
|
|
$ |
220,311 |
|
$ |
28,712 |
|
$ |
17,108 |
|
$ |
168,600 |
Assumed Reinsurance (1) |
|
|
13,474 |
|
$ |
113,360 |
|
|
37,329 |
|
|
|
|
|
79,493 |
|
|
|
|
|
84,162 |
|
|
17,452 |
|
|
1,460 |
|
|
112,207 |
Other |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
35,895 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
19,465 |
|
$ |
576,636 |
|
$ |
101,866 |
|
$ |
|
|
$ |
235,935 |
|
$ |
35,895 |
|
$ |
304,473 |
|
$ |
46,164 |
|
$ |
18,568 |
|
$ |
280,807 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2000
Segments
|
|
Deferred Policy Acquisition Cost
|
|
Future Policy Benefits, Losses, Claims and Loss Expenses
|
|
Unearned Premiums
|
|
Other Policy Claims and Benefits Payable
|
|
Premium Revenue
|
|
Net Investment Income
|
|
Benefits, Claims, Losses and Settlement Expenses
|
|
Amortization of Deferred Policy Acquisition Costs
|
|
Other Operating Expenses
|
|
Premiums Written
|
Direct Healthcare Liability Insurance |
|
$ |
16,293 |
|
$ |
402,048 |
|
$ |
52,380 |
|
$ |
|
|
$ |
149,404 |
|
$ |
|
|
$ |
129,307 |
|
$ |
17,891 |
|
$ |
14,442 |
|
$ |
177,703 |
Assumed Reinsurance (1) |
|
|
1,831 |
|
|
31,493 |
|
|
4,616 |
|
|
|
|
|
27,098 |
|
|
|
|
|
23,295 |
|
|
1,633 |
|
|
2,517 |
|
|
30,500 |
Other |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
34,152 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
18,124 |
|
$ |
433,541 |
|
$ |
56,996 |
|
$ |
|
|
$ |
176,502 |
|
$ |
34,152 |
|
$ |
152,602 |
|
$ |
19,524 |
|
$ |
16,959 |
|
$ |
208,203 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Assumed reinsurance excludes amounts received under fronting arrangements. |
74