The Company is the owner of two office buildings, both located in Beverly Hills, California. One building contains approximately 25,000 square feet of office space and is used by the Company and its subsidiaries as a home office. The other office building contains approximately 24,000 square feet, of which the Company and its subsidiaries occupy approximately 17,000 square feet and the remaining 7,000 square feet of space in this office building are leased to unaffiliated persons. Both office buildings owned by the Company are currently unencumbered. The Company leases office space for a claims office in San Diego, California and a sales office in Oakland, California. The Company believes that its office space is adequate for its present purposes and that it will be able to secure additional office space in the future if necessary.
(1) Financial data as of and for the years ended December 31, 1995, 1994, 1993 and 1992 are derived from the combined financial statements of the the Exchange and an affiliated non-profit corporation that was liquidated into the Exchange on July 12, 1996. Financial data as of and for the year ended December 31, 1996 are derived from the financial statements of the Company.
(3) Gives effect in all periods to the Reorganization 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. Does not give effect to the sale of an additional 2,300,000 shares of Common Stock in a concurrent public offering. An additional 500,000 shares of Common Stock issued to SCPIE Indemnity as part of the Reorganization are not considered outstanding for purposes of determining per share amounts.
CYCLICAL NATURE OF MEDICAL MALPRACTICE INSURANCE INDUSTRY Many factors influence the financial results of the medical malpractice 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.
COMPETITIVE ENVIRONMENT The California medical malpractice insurance market for medical groups and physicians, in which the company principally operates, has become extremely competitive in recent years. The Company's principal competitors are three physician-owned companies and a physicians'
In the late 1980s many medical malpractice insurance companies began to experience significantly improved claims cost trends and attempted to attract medical groups and physicians insured by other companies by reducing premium rates. Beginning in 1990, the Company implemented annual rate decreases aggregating more than 25% during the next three years, which resulted in a reduction in premium volume to approximately $107.1 million in 1992, and a deterioration of underwriting results. Since 1993, however, SCPIE has instituted annual overall rate increases ranging from 4.4% to 9.2% in order to improve its underwriting results. These rate increases have been higher than those implemented by most of its competitors. As a result, the Company has lost some of its policyholders, in part due to these rate increases, but has realized a modest increase in its premium volume and has improved its underwriting results.
NET INVESTMENT INCOME Net investment income, after a $0.4 million interest expense accrual for a federal income tax settlement, increased approximately $0.4 million, or 0.1%, to $40.8 million in 1996 from $40.4 million in 1995. Invested assets increased $22.9 million to $717.9 million in 1996 from $695.0 million at December 31, 1995. The average pre-tax yield on the investment portfolio increased to 6.1% in 1996 compared to 5.9% in 1995.
REALIZED INVESTMENT GAINS AND OTHER REVENUE Realized investment gains were approximately $11.7 million in 1996 compared to $8.0 million in 1995. Approximately $11.2 million of the gains from 1996 resulted from the sale of equity securities in connection with the Company's decision in the first quarter to increase the focus of its investment portfolio on fixed-maturity securities. The remainder were attributable to sales made in the fixed-maturity portion of the investment portfolio to take advantage of more favorable yields or to reposition the maturity of the portfolio.
acquisition expenses and payroll/benefit expenses of $0.6 million and $1.3 million, respectively, offset partially by lower legal fees of $0.7 million. The ratio of other operating expenses to premiums earned is referred to as the expense ratio, which was 11.8% in 1996 and 10.8% in 1995.
PREMIUMS EARNED Premiums earned increased $4.7 million, or 4.2%, to $116.4 million in 1995 from $111.7 million in 1994. The increase was principally attributable to an average 8.9% increase in premium rates in effect throughout 1995, which was partially offset by a 3.4% decrease in the average number of policies in force during 1995. Medical malpractice premiums from physicians and medical groups were approximately $113.3 million in 1995 compared to $109.7 million in 1994, while the Company had hospital medical malpractice premiums of $1.3 million in 1995 compared to $0.3 million in 1994. Assumed reinsurance premiums were less than $1.0 million in both years.
REALIZED INVESTMENT GAINS AND OTHER REVENUE Net realized gains were approximately $8.0 million in 1995 compared to $0.5 million in 1994. Approximately $4.6 million of the 1995 gains were net gains realized from the sale of equity securities to take advantage of appreciation in the market price of those securities. The remainder of the net gains were attributable to sales made in the fixed-maturities portion of the investment portfolio to take advantage of more favorable yields or to reposition the maturity of the portfolio.
FEDERAL INCOME TAXES Federal income taxes increased $0.9 million, or 9.2%, to $10.1 million in 1995 from $9.2 million in 1994. The effective tax rate was 29.2% in both years.
YEAR ENDED DECEMBER 31, 1994 COMPARED TO YEAR ENDED DECEMBER 31, 1993
NET INVESTMENT INCOME Net investment income was virtually unchanged in 1994 as compared to 1993, remaining at approximately $39.7 million. Invested assets decreased $42.3 million to $636.9 million for the year ended December 31, 1994 as compared to a $50.0 million increase to $679.3 million for the year ended December 31, 1993. The average pre-tax yield on the investment portfolio decreased to 5.9% in 1994 from 6.2% in 1993.
REALIZED INVESTMENT GAINS AND OTHER REVENUE Net realized gains were $0.5 million in 1994 compared to $16.0 million in 1993. The Company realized significant gains in 1993 primarily due to changes in investment mix that occurred as the Company changed its investment allocation in response to market conditions and the Company's expected Federal income tax position based on its underwriting results. These changes were in the fixed-maturities portion of the portfolio, which produced a net gain of $13.2 million. Sales of equity securities produced a gain of approximately $2.8 million.
OTHER OPERATING EXPENSES Other operating expenses increased $2.1 million, or 21.7%, to $11.8 million in 1994 from $9.7 million in 1993. This increase was attributable to general increases in most expense categories, as SCPIE expanded into hospital liability insurance and other products. The expense ratio was 10.6% in 1994 and 8.6% in 1993.
SCPIE Holdings is an insurance holding company whose assets consist of all of the capital stock of its insurance company subsidiaries and approximately $36.0 million of net proceeds from its January 1997 common stock offering, after payment of expenses of the Reorganization. Of the proceeds, SCPIE has contributed $25.0 million to one of its insurance company subsidiaries and will contribute approximately $7.5 million to another insurance company subsidiary. Its principal sources of funds will be dividends from its subsidiaries and proceeds from the issuance of debt and equity securities. The insurance company subsidiaries are restricted by state regulation in the amount of dividends they can pay in relation to earnings or surplus, without the consent of the applicable state regulatory authority, principally the California Department of Insurance. SCPIE Holdings' principal insurance company subsidiary may pay dividends to SCPIE Holdings in any year, without regulatory approval, to the extent such dividends do not exceed the greater of (i) 10% of its statutory surplus at the end of the preceding year or (ii) its net income for the preceding year. Applicable regulations further require that an insurer's statutory surplus following a dividend or other distribution be reasonable in relation to its outstanding liabilities and adequate to meet its financial needs, and permit the payment of dividends only out of statutory earned (unassigned) surplus unless the payment out of other funds receives regulatory approval. The amount of dividends that the insurance company subsidiaries are able to pay to SCPIE Holdings during 1997 without prior regulatory approval is approximately $32.7 million.