Basic earnings (loss) per share of common stock at December 31, 2003, 2002, 2001, 2000 and 1999 are computed using the weighted average number of common shares outstanding during the year of 9,352,070, 9,322,249, 9,333,425, 9,375,735, and 11,383,592, respectively. Diluted earnings per share of common stock at December 31, 2003, 2002, 2001, 2000 and 1999 are computed using the weighted average number of common shares outstanding during the year of 9,352,070, 9,322,249 9,333,425, 9,382,494, and 11,403,081, respectively. For further discussion of basic earnings per share and diluted earnings per share, see the “Note 11 to Consolidated Financial Statements.”
Because the reserve establishment process is by definition an estimate, actual results will vary from amounts established in earlier periods. The Company recognizes such differences in the periods they are determined. Since reserves accumulate on the balance sheet over several years until all claims are settled, a determination of inadequacy or redundancy could easily have a significant impact on earnings and therefore stockholders’ equity. A 1% difference in the ultimate value of reserves, net of reinsurance recoverable, would decrease or increase future pretax earnings by $5.3 million.
the extent to which the market value of the security is less than its cost basis;
The Company believes it is more likely than not that the deferred income tax assets will be realized through its future earnings. As a result, the Company has not recorded a valuation allowance. In relation to the net operating loss carryforward, the Company has been historically profitable except for the last three years because of losses primarily related to the non-core healthcare liability and assumed reinsurance operations. Since those operations are now in run-off, the Company believes it should return to a position of taxable income, thus utilizing the net operation loss carryforward.
In 2001, 2002 and 2003, the Company derived approximately 29%, 31% and 11% of its healthcare liability earned premium volume, respectively, from policies issued outside the state of California, principally under the Brown & Brown and nonstandard physician programs. In 2001, the Company recognized that these programs were seriously underpriced and implemented significant premium increases, averaging approximately 40% and 30% in 2001 and 2002, respectively, in its principal non-California markets. The Company also immediately instituted more stringent underwriting and pricing guidelines in these states. Despite the significant price increases and more stringent underwriting guidelines, the non-California programs produced significant underwriting losses in 2001, 2002 and 2003.
During 2004, the Company will continue to concentrate its efforts on maintaining its core physician and medical group business in California and Delaware. The Company does not expect to initiate any significant new programs outside California during 2004.
The Company significantly reduced its assumed reinsurance operations in 2002 and 2003 due to the adverse impact on its capital and surplus from the World Trade Center losses and losses incurred in healthcare insurance outside California. In addition, in February 2002, A. M. Best reduced the Insurance Subsidiaries ratings to B++ (Very Good) from A (Excellent), reflecting the rating agency’s view of the Company’s decline in financial strength and operating performance at that time. Many ceding companies and companies in assumed reinsurance syndicates are reluctant to deal with insurers whose ratings are below A-, which made it more difficult for the Company to remain in the assumed reinsurance market. The assumed reinsurance operations were significantly reduced in 2003.
During 2002, the Company pursued various financial alternatives to improve its capital position, including a complete or partial divestiture of its assumed reinsurance operations. In December 2002, the Company entered into a quota share
represents business related to the Brown & Brown programs, other state non-standard physician programs and hospital programs including those in California. The following table summarizes by core and non-core business the underwriting results of the direct healthcare liability insurance segment for the periods indicated.
The loss ratio for 2003 was 88.6% compared to a loss ratio of 91.2% for 2002. The change in loss ratio reflected increases in average claim costs offset by a decline in the frequency of claims and the effect of the average rate increases on earned premiums.
Premiums written decreased in 2003 to $5.3 million from $21.9 million in 2002 and $56.9 million in 2001. This resulted from significant average rate increases of 40% and 30% in 2001 and 2002, respectively, being offset by even more significant declines in the number of insureds from 2,997 at December 31, 2001, to 813 and 379 insureds at December 31, 2002 and 2003, respectively. The increases in rates and the significant decline in insureds resulted from the Company’s actions taken to mitigate the significant losses arising from this business. After March 6, 2003, as the Company exited these markets, no new or renewal business was written in the non-core programs. Premium earned in the non-core direct healthcare liability insurance business decreased as the Company withdrew from states other than California and Delaware and its hospital program wound down.
The following table summarizes the underwriting results of the assumed reinsurance segment for the periods indicated.
The Assumed Reinsurance Segment declined 84% in 2003, as the full effect of the retrocession to GoshawK Re took effect. The 2002 premiums written for the assumed reinsurance segment were essentially unchanged from 2001, as premiums were ceded under the GoshawK Re treaty in the fourth quarter 2002. Premiums earned decreased to
The loss ratio declined in 2003 to 87.4% from 100.4% in 2002 and 105.9% in 2001. The 2003, 2002 and 2001 loss ratios were impacted by 22.2, 12.6 and 24.7 percentage points, respectively, because of the World Trade Center terrorist attack.
The underwriting and other operating expense ratio was 54.3% in 2003 and 38.6% in 2002 and 23.8% in 2001. The underwriting and other operating expense ratio increased in 2003 over 2002 as premiums decreased in relation to fixed expenses. The underwriting and other operating expense ratio increased in 2002 over 2001, primarily because of the GoshawK transaction expenses discussed below.
The December 2002 GoshawK Re treaty ceded effectively all of the unearned premium and future reported premium after June 30, 2002, for the assumed business written for underwriting years 2001 and 2002 by the Company ($129.3 million in 2002 and $38.0 million in 2003). The treaty has no limitations on loss recoveries and includes a profit-sharing provision should the combined ratios calculated on the base premium ceded be below 100%. The treaty requires GoshawK Re to reimburse the Company for its acquisition and administrative expenses. In addition, the Company is required to pay GoshawK Re additional premium in excess of the base premium ceded of 14.3% or an estimated $27.5 million. The additional premium reduced 2003 and 2002 earned premium by $5.5 and $18.5 million, respectively, and will reduce 2004 earned premium by an estimated $3.5 million.
The GoshawK Re reinsurance treaty has both prospective and retroactive elements as defined in Financial Accounting Standards Board Statement (FASB) No. 113, Accounting and Reporting for Reinsurance of Short-Duration and Long-Duration Contracts. As such, any gains under the contract will be deferred and amortized to income based upon the expected recovery. No gains are anticipated currently. Losses related to future earned premium ceded, as well as development on losses related to existing earned premium ceded after June 30, 2002, will ultimately determine whether a gain will be recorded under the contract.
The sudden GoshawK financial deterioration produced a significant loss to the Company in the quarter ended September 30, 2003. The value of the Company’s 4.1% ownership interest in the GoshawK common stock declined materially and the
Company wrote down its investment by $9.6 million to $3.3 million based on the market value of GoshawK common stock on September 30, 2003. The Company also reported an assumed reinsurance loss of $8.5 million in the third quarter for its share of the increased losses reported in GoshawK Syndicate 102 under its two reinsurance treaties.
The Company had an income tax benefit of $7.4 million in 2003 compared to a benefit of $22.6 million and $32.9 million in 2002 and 2001, respectively. Because the Company has historically been profitable on a tax basis except for the 2001-2003 period, the Company does not have a valuation allowance related to its net deferred tax asset.
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 2003 and 2002, the Company had negative cash flow from operations of $46.8 million and $24.5 million, respectively, compared to positive cash flow of $33.4 million in
2001. The negative cash flow in 2003 and 2002 is principally attributable to decreased premiums written and increased loss payments on the non-core healthcare liability business and the GoshawK Re reinsurance agreement. As the Company continues to pay-off non-core healthcare liability and assumed reinsurance reserves generated by prior years written premiums, the Company may continue to have negative cash flow from operations.
The Company invests its cash flow from operations principally in taxable fixed-maturity securities. The Company’s current policy is to limit its investment in equity securities and real estate to no more than 8.0% of the total market value of its investments. Accordingly, the Company’s portfolio of unaffiliated equity securities had a fair value of $20.5 million at December 31, 2003, compared to $34.2 million at December 31, 2002. The Company plans to continue its focus on taxable fixed-maturity securities for the indefinite future.
Common stock dividends paid to stockholders were $0.40 per share in 2003. These dividends were funded through dividends received from the Insurance Subsidiaries in prior years. The Company has suspended the quarterly dividend payable on March 31, 2004. Payment of future dividends is subject to Board approval, earnings and the financial condition of the Company. As of December 31, 2003, SCPIE Holdings held cash and short-terms securities of $9.5 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.
The Company’s Consolidated Financial Statements and related notes, including supplementary data, are set forth in the “Index” on page 54 hereof.