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 early 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 claims offices in Reston, Virginia, and San Diego, California.
Premiums written is a non-GAAP financial measure which represents the premiums charged on policies issued during a fiscal period less any reinsurance. Premium written is a statutory measure of production levels. Premiums earned, the most directly comparable GAAP measure, represents the portion of premiums written that is earned, on a pro-rata basis, as income in the financial statements for the periods presented. The change in unearned premium reconciles the difference between the two measures.
Certain statements in this annual report on Form 10-K that are not historical in fact constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 (PSLRA). The PSLRA provides certain “safe harbor” provisions for forward-looking statements. All forward-looking statements made in this annual report on Form 10-K are made pursuant to the PSLRA. Words such as, but not limited to, “believe,” “expect,” “anticipate,” “estimate,” “intend,” “plan,” and similar expressions are intended to identify forward-looking statements. Such forward-looking statements involve known and unknown risks, uncertainties and other factors based on the Company’s estimates and expectations concerning future events that may cause the actual results of the Company to be materially different from historical results or from any results expressed or implied by such forward-looking statements. These risks and uncertainties, as well as the Company’s critical accounting policies, are discussed in more detail under “Business-Risk Factors” and “Management’s Discussion and Analysis-Critical Accounting Policies” and in periodic filings with the Securities and Exchange Commission. The Company undertakes no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise.
SCPIE Holdings is a holding company owning subsidiaries engaged in providing insurance and reinsurance products. The Company is primarily a provider of medical malpractice insurance and related liability insurance products to physicians, healthcare facilities and others engaged in the healthcare industry in California and Delaware. Previously, the Company had also been actively engaged in the medical malpractice insurance business and related products in other states and in the assumed reinsurance business.
The Company’s insurance business is organized into two reportable business segments: direct healthcare liability insurance and assumed reinsurance operations. Since 2002, the Company has focused on its core healthcare liability business.
Unpaid losses and loss adjustment expenses are comprised of case reserves for known claims, incurred but not reported reserves for unknown claims and bulk reserves for any potential development for known claims, and reserves for the cost of
As an example of the potential variability of the estimate for loss and LAE reserves, the following table illustrates the impact on the level of reserves of potential changes in key assumptions related to the Company’s reserves:
The primary factor affecting the adequacy of reserve estimates in the core area is the trend in pure loss costs (the combination of frequency and average severity changes) related to malpractice coverage. The inherent pure loss cost trend included in the setting of the 2005, 2006 and 2007 reserves has been 2.2%, 1.2% and 0.0% respectively. The primary factor which has decreased the pure loss cost trend during this timeframe has been a significant decline in the frequency of claims. The frequency of claims declined 21.1% in 2005, 4.6% in 2006 and 0.8% in 2007. The Company does not know of any empiric reason for the decline in claim frequency but believes it may represent a general decline in the propensity of claimants to sue or file claims against doctors after the great deal of publicity that surrounded the effect that medical malpractice insurance rates had on the practice of medicine in various parts of the country. The Company also believes this decline may be in smaller less meritorious claims. This may have the effect of increasing average severity. The Company believes other companies have reported in the media that this decline in frequency has occurred across the country as well as in California where the Company primarily operates. At 2007 reserve levels, a 1% change in pure loss costs trend produces a change in reserves of approximately $4.0 million. Such changes are reflected in the period of change. Reserves related to medical malpractice coverage account for over 95% of core reserves.
As the individual cases mature and more information becomes available for evaluating individual cases, there is a declining need for Bulk and IBNR reserves. While the Company believes its reserves are adequate, several jurisdictions where the Company issued policies allow extended periods of time to elapse before the judicial or settlement process is completed. Individual settlements or judgments will determine the final incurred losses and thus the adequacy of these reserves. The recent experience has been generally consistent with Company expectations, but no assurance can be given that the Company’s current experience will continue. If the average settlement ultimately achieved is different by $15,000 for the current average reserve, the ultimate reserves will be affected by approximately $1.1 million.
The Company monitors its investments closely. The Company’s assessment of other-than-temporary impairments is security-specific as of the balance sheet date and considers various factors including the length of time and the extent to which the fair value has been lower than the cost, the financial condition and the near term prospects of the issuer, whether the debtor is current on its contractually obligated interest and principal payments, and the Company’s intent to hold the securities until they mature or recover their value.
At December 31, 2007, the Company had $31.9 million of net deferred income tax assets. Net deferred income tax assets consist of the net temporary differences created as a result of amounts deductible or revenue recognized in periods different for tax return purposes than for accounting purposes. These deferred income tax assets include an asset of $10.9 million for a $31.1 million net operating loss carryforward that will begin to expire in 2024. A net operating loss carryforward is a tax loss that may be carried forward into future years. It reduces taxable income in future years and the tax liability that would otherwise be incurred.
The Company believes it is more likely than not that the net deferred income tax assets will be realized through its future earnings. The Company will utilize an estimated $29.9 million of the net operating loss as of December 31, 2006, in its 2007 tax return.
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 nonstandard physicians in a number of states outside California.
In 2001, the Company recognized that the Brown & Brown and non-standard physician programs were seriously underpriced and implemented significant premium increases in its principal non-California markets. The Company also 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 2002, 2003 and 2004. The Company and Brown & Brown agreed in early 2002 to terminate both the physician and dental programs no later than March 2003. This exposure is currently reserved and continues to decline over time.
The underwriting expense ratio (expenses related to premiums earned) increased to 21.5% in 2007 compared to 20.7% and 20.3% in 2006 and 2005. The increase in 2007 was largely due to the effect of spreading expenses over a smaller premium base.
The premiums written and earned in 2005 were generated by policyholders exercising their right to purchase tail coverage.
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. Ultimate loss experience in this segment is based primarily on reports received by the Company from the underlying ceding insurers. Actual losses may take several years to be reported through the worldwide reinsurance system.
Assets approximately equal to Rosemont Re’s estimated liabilities under its reinsurance agreement with the Company are currently held in trust to satisfy the liabilities under the agreement. If the estimated recoveries were to increase in the future, the Company would have to rely on Rosemont Re’s continuing ability to fund these amounts. As of June 30, 2007 Rosemont Re had $66.2 million of capital.
The Company ceased writing assumed reinsurance business at the end of the 2003 underwriting year. Premiums written/(returned) and earned/(returned) in 2007 were primarily adjustments made for earlier periods.
The underwriting loss in 2006 related primarily to unexpected adjustments to World Trade Center losses reported to the Company in the latter part of the year and unexpected upward development principally on a number of London-based contracts.
The underwriting loss in 2005 was primarily attributable to (i) adjustments made to amounts ceded to Rosemont Re following a review by the parties in the third quarter, which resolved interpretative issues relating to the wording of the reinsurance contract, (ii) additional costs incurred with closing the last syndicate at Lloyd’s for which the Company provided capital, a
decision which was made in the fourth quarter and significantly improved the Company’s capital adequacy ratios under the A.M. Best capital adequacy model, and (iii) unexpected upward development on London-based business, including Lloyd’s syndicates.
Net loss reserves related to the assumed reinsurance segment declined from $59.2 million at December 31, 2005 to $49.0 million in 2006 and $35.2 million in 2007 as reserves were settled and programs were commuted.
The Rosemont Re reinsurance treaty entered into in December 2002 effectively ceded 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. 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 Rosemont Re to reimburse the Company for its acquisition and administrative expenses.
In 2006 the Company incurred $1.6 million in expenses related to a proxy contest.
The Company leases approximately 95,000 square feet of office space for its headquarters. The lease is for a term of 10 years ending in early 2009.
SCPIE Holdings is an insurance holding company whose assets primarily consist of all of the capital stock of its Insurance Subsidiaries. Its principal sources of funds are dividends from its subsidiaries and proceeds from the issuance of debt and equity securities. The Insurance 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, SCPIE Indemnity, 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 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 SCPIE Indemnity is able to pay to SCPIE Holdings during 2008 without prior regulatory approval is approximately $31.9 million.
In March 2004, the Board of Directors suspended the Company’s quarterly dividends. The payment and amount of cash dividends will depend upon, among other factors, the Company’s operating results, overall financial condition, capital requirements and general business conditions. As of December 31, 2007, SCPIE Holdings held cash and short-term securities of $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.
Unlike many other forms of contractual obligations, loss and LAE reserves do not have definitive due dates, and the ultimate payment dates are subject to a number of variables and uncertainties. The liability shown in the table represents the Company’s best estimate of the unpaid cost of settling claims, including claims that have been incurred but not yet reported, and the time period in which such claims will be resolved. The amounts shown are gross of any reinsurance that the Company estimates will be recoverable on resolution of the claims.