| 1999 Annual Report Highlights
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| Our
Profile SCPIE Holdings Inc. — a publicly traded company on the New York Stock Exchange (symbol: SKP) — is one of the nation's leading providers of professional liability insurance for physicians, medical groups, dentists, hospitals, oral and maxillofacial surgeons, and other healthcare providers. Since the company was founded in 1976, it has carved out a significant niche in the insurance industry by providing innovative products and services specifically for the healthcare community. 1999 Operational Overview Executive • Created Ceded and Assumed Reinsurance Department with opening of office in New York City. • Through a "Dutch Auction" procedure, purchased 2,023,973 shares of the company's common stock. • Initiated a new stock repurchase plan for up to one million shares of the company's common stock, replacing an expiring plan through which 732,200 shares were repurchased. • Paid regular quarterly cash dividend of $.08 per share to stockholders for each quarter in 1999, up from $.06 per share in 1998. • Purchased the rights to renew the medical malpractice policies of Paradigm Insurance Company, which wrote business in 14 states. Actuarial/Operations • Moved headquarters to new office space, consolidating employees into one building. • Expanded excess and surplus lines licensing through subsidiary American Healthcare Specialty Insurance Company, making the company eligible to write policies in 29 states plus the District of Columbia. • Continued filing insurance rates and policy forms for a variety of products throughout the nation. Human Resources • Developed and conducted employee training programs covering a variety of areas: products/services, software programs, disaster preparedness and continuing insurance education. • Disseminated comprehensive personal benefit statements to all employees. Communications • Along with MIS, completely redesigned the company website, which relaunched in January 2000. • Developed electronic communications plan to cost-effectively disseminate brochures, newsletters, news releases and other traditionally printed materials. • Designed 25th anniversary logo for use on a variety of materials in 2000. Marketing • Launched SCPIE Best Defense, a billing errors and omissions program. • Continued to refine infrastructure to accommodate new distribution system of selling products through brokers. • Opened a marketing department in our Phoenix, Arizona, office to secure new business in that area. • Added staff to support broker network. Underwriting • Wrote policies in five states through Brown & Brown, Inc.'s Physicians Protector Plan®. • Developed Government Proceedings Endorsement, which provides legal defense reimbursement for three types of proceedings at no additional charge to insureds. • Developed Incident Coverage Trigger Endorsement, effective January 1, 2000, which expands coverage at no additional charge. • Created new non-standard physician policy to accommodate former Paradigm insureds renewed through subsidiary American Healthcare Specialty Insurance Company. Policyholder Services • Enhanced individual account servicing for solo and small-group physicians written directly through SCPIE. Claims • Closed prior to suit or obtained dismissals on 65.5% of cases for physician insureds. • Of physician-insured cases that went to trial, received favorable verdicts in 85% of the cases. • To efficiently handle local claims, opened a branch office in Sacramento, California. • Made plans to open a claims department in our Addison, Texas, branch office in 2000. Risk Management • Streamlined survey process so that a broader range of information is obtained in the same amount of time. • Worked with MIS to develop an on-site computer-based risk evaluation program that will enhance efficiency. • Enhanced the department's educational component through the addition of a risk management writer. • In conjunction with a consulting firm, offered risk management continuing medical education course and ability to earn CME credits. MIS • Completed 100% of Year 2000 (Y2K) modifications, ensuring that all company computers and systems were Y2K-compliant. • Continued to customize various computer programs to support product and geographic expansion, as well as communications with strategic partners and brokers. • Enhanced company e-mail system with Windows-type format, facilitating the shift to paperless systems and accelerating communication. To Our Stockholders:  The year 2000 is a global milestone, and
it has added significance for SCPIE: It marks the beginning of our 25th
year of operation. Despite many challenges, SCPIE has grown and prospered
during the past quarter century. As we enter the 21st century, we are
proud to say, “SCPIE is rock-solid.”In the face of last year’s very soft stock market for insurance companies, our stock price increased 6% at year-end. As of March 31, 1999, SCPIE’s Board of Directors raised the regular quarterly cash dividend to $.08 per share from $.06, a 33% increase in tangible return to our stockholders. To further build stockholder value for our investors, we held a “Dutch Auction” self-tender offer of our stock. We accepted for purchase slightly more than two million shares at a price of $35 per share, which contributed to an increase in our operating return on equity — a basic measure of corporate performance — from 7.7% in 1998 to 10.2% in 1999. SCPIE Holdings Inc. earned a respectable profit last year. By adopting more stringent underwriting guidelines, we even made an underwriting profit in 1999, a major accomplishment in today’s medical malpractice insurance industry! Our combined ratio dropped below 100%, indicative of management’s consistent attention to that critical measure of financial stability. Although our insistence on writing a high-quality book of business meant that some of last year’s numbers weren’t as strong as the prior year’s, we are confident our emphasis on tighter underwriting will prove beneficial in the long run. Diversification of Revenue Base In order to remain solidly successful in today’s difficult medical malpractice insurance market, management has focused considerable efforts on diversifying our revenue base. This is a strategy we have pursued vigorously since SCPIE became a public company in 1997: first with geographic expansion outside our traditional California base; next with the addition of new insurance products for other medical professionals and hospitals; and recently with a broadening of our sales base from sole reliance on a direct sales force to now include a quality broker network. We continued to implement our strategy in 1999 with a corporate decision to increase reinsurance from its current 5% of total premium to upwards of 30% over a period of time. Toward that goal, we opened a reinsurance office in New York City, the center of the industry in the United States. By having a strong presence in New York, we have ready access to reinsurance brokers and ceding companies, which will help spur our growth in this significant sector. To head the office and spearhead our reinsurance program, we appointed Timothy C. Rivers as Senior Vice President, Ceded and Assumed Reinsurance. Tim brings more than 30 years of reinsurance experience and expertise to his new position — many of those working with SCPIE in his previous positions at other companies. Also in 1999, we purchased approximately 7.4 million shares of the common stock of London-based GoshawK Insurance Holdings plc., giving us nearly 10% ownership of the company. As a result, SCPIE and Munich Re, one of the largest international reinsurers in the industry, now participate equally in a 15% quota share reinsurance treaty with GoshawK. The transaction enabled us to become a core investor with the highly respected Lloyd’s Marine Specialists Syndicate — which GoshawK manages — while at the same time letting us participate in a significant net quota share treaty as assumed reinsurance. Industry Trends As it has for nearly a decade, the medical malpractice insurance industry continued to suffer from unrealistically low pricing last year. It was driven by overcapacity and the penchant of some insurers to invest their assets in common stock to make up for underwriting losses. This unrealistic pricing and risky approach to rate subsidization cannot be sustained much longer. We believe that rates will return to their proper levels within the next two to three years. Many of our competitors who have not been setting rates correctly will be forced to adopt pricing structures comparable to SCPIE’s. We already are witnessing this trend in the reinsurance sector. Because of unsustainable pricing structures by medical malpractice insurers, many reinsurers matched those low rates with their own unrealistic rates. Recently, however, there has been a definite upward rate adjustment in the reinsurance marketplace. SCPIE is expanding its reinsurance business at precisely the right time to take advantage of this trend. We think we are extremely well-positioned as we enter the new millennium. We continue to pursue our strategy of slow, steady and prudent growth. We continue to resist building policyholder volume at the expense of quality business practices. And we are confident that our reinsurance expansion will give our entire operation even greater balance and strength. Lastly, a personal note: Those of us who have been with SCPIE from the start mourned the passing last year of Ralph M. Milliken MD at the age of 88. As one of the company’s founders, its first policyholder and its medical director for many years, Dr. Milliken dedicated much of his life to SCPIE and the professional liability insurance industry. He will be missed. In this year’s Annual Report, we celebrate a number of qualities that make SCPIE the company it is. Even more important, we celebrate the people who are responsible for its success: our employees. They truly are the ones who make “We are SCPIE” a statement of pride.
Defined by efficiency and a singular commitment to further success — We are SCPIE In 1999 — as throughout our nearly 25-year history — the real force behind SCPIE’s success was our people: their expertise, energy, passion and dedication. Because of the hard work and achievements of the organization’s more than 260 employees, senior managers and Board of Directors, SCPIE Holdings Inc. and its six subsidiaries enjoyed another profitable year in 1999. By profitable, we mean the bottom line on our income statements, but we also define the word by what we invest in our staff and the “dividends” they return. We continue to be proud of the quality and quantity of those dividends, which last year included important steps toward fulfilling our strategic plan. Realizing a Vision Since SCPIE’s genesis in 1976, the company had been known largely as a medical malpractice insurer for California physicians. But all of that changed five years ago when the company — deciding it needed to reposition itself to thrive in a rapidly changing marketplace — developed a strategic plan to guide itself into the new millennium. Raising the capital to carry out this vision required taking the company public. Since launching on the New York Stock Exchange as SKP in January 1997, the company has continued to successfully transform itself from a predominantly single-line regional insurer to a multistate provider of healthcare professional liability insurance. We are accomplishing this by diversifying geographically and expanding our product line. At the same time, we are continuing to provide high-quality products and services for existing insureds, taking advantage of technology to improve efficiency, increasing stockholder value and integrating new pieces of business — including the medical malpractice policies we purchased from Fremont Indemnity Company in 1998 — into our day-to-day operations. Diversifying Geographically In 1999, SCPIE continued to build the infrastructure that will allow us to expand across the United States and its territories. For us, this means becoming licensed to write insurance in all states, then filing specific insurance rates and policy forms for our various products. At the end of the year, we held licenses in 46 states and the District of Columbia and had dozens of rates and forms filed in numerous states. We are pleased to report that in our third year as a public company, nearly 24% of our gross premiums were written outside of our home state of California, compared to 17% in 1998. We are also broadening our reach by opening new offices around the country. In 1999, we established two new satellite locations (a reinsurance office in New York and a claims office in Sacramento, California), as well as a marketing department in our Phoenix, Arizona, location. Including these, SCPIE now has a physical presence in a total of five states, with more planned in the future. The linchpin of our geographic expansion is the continued development and refinement of our network of insurance brokers, which serves as the national distribution system for our products. While we seek out relationships with new brokers, we remain committed to retaining and supporting our existing broker relationships. In 1998, we negotiated an alliance with Poe & Brown, Inc. (now Brown & Brown, Inc.), one of the nation’s leading independent insurance agency organizations. Through its Physicians Protector Plan®, we wrote policies last year in Connecticut, Florida, Georgia, Louisiana and Texas. Encouraged by the success of this strategic relationship, we will continue to partner with them with new products and in new states and territories in 2000. Specifically, in early 2000, the two companies agreed to extend the relationship whereby SCPIE will underwrite malpractice business from Brown & Brown for dentists in California and Texas, and for oral surgeons nationwide. Expanding Our Product Line In August 1999, the company took yet another step toward realizing its strategic plan when it established the aforementioned Ceded and Assumed Reinsurance office based in New York. Reinsurance, which is the business of insuring insurance companies, is an area where SCPIE has written a modest number of policies for more than a decade. Through the years, our reinsurance business has been profitable and has provided SCPIE with a way to diversify its exposure base. After carefully analyzing our loss ratios, the company identified this segment of the market, still largely untapped by us, as an area holding great promise for our future, both fiscally and strategically. By focusing on our new strategy of increasing the percentage of reinsurance in our overall business, we wrote a broad-based book of reinsurance business covering a variety of worldwide insurance sectors, such as accident/health, general casualty, marine, property, and credit and surety. As a first step, our assumed premiums written (other than those received in the Fremont and Brown & Brown arrangements) increased from about $5 million in 1998 to more than $8 million in 1999. We expect our reinsurance business to become a significant part of our revenues over the next two years. In another new development last year, SCPIE reached an agreement with Paradigm Insurance Company, a subsidiary of Queensway Financial Holdings Limited, to purchase the right to renew its medical malpractice business. That allows SCPIE — through subsidiary American Healthcare Specialty Insurance Company — to replace Paradigm’s nonstandard professional liability policies upon renewal. This purchase also expanded SCPIE’s base of insureds and network of brokers. With the federal government conducting a highly publicized $1 billion campaign to stamp out Medicare and Medicaid fraud and abuse, the company saw a market for a billing errors and omissions policy and launched its SCPIE Best Defense program. This innovative policy, introduced in California for solo physicians and medical groups with nine or fewer physicians, is expected to expand to other states and other insureds in the future. Continuing to Provide High-Quality Products and Service Although SCPIE will continue to devote a substantial amount of energy to executing our strategic plan, we remain dedicated to providing existing insureds with high-quality products and service. We realize that it’s not enough just to attract new business; we must retain existing business as well. To that end, we began the new millennium with good news for our insureds. Due to a moderate decline in the frequency of claims reported and only moderate inflation in claims severity, we announced that there would be no increase in base premium rates for our professional liability policies in the year 2000. We also enhanced the majority of our policies at no additional charge to insureds through the development of two new coverage endorsements, the Government Proceedings Endorsement and the Incident Coverage Trigger Endorsement. Prompt, personal service has always been a hallmark at SCPIE. Following in this tradition, our Policyholder Services Department fielded thousands of calls in 1999, continuing to provide individual account servicing for physicians in solo practices and small groups (two through four physicians). To provide around-the-clock service to current and potential insureds and investors, SCPIE launched its redesigned website (http://www.scpie.com/) in January 2000; it features a plethora of information about the company and its products at the click of a button. Taking Advantage of Technology to Increase Efficiency Through information technology, one of the company’s most powerful tools, we continue to streamline operations and increase efficiency. We are proud to report that because of our efforts — over a period of five years — on our Year 2000 (Y2K) project, all of our systems were fully operational on January 1, 2000. This was expected, since we were 100% Y2K-compliant as of March 1999. Further, since the installation of a new user-friendly company e-mail system, electronic communication both in and out of the office has increased dramatically, while the use of paper memos has decreased. An exciting initiative for 2000 and an integral part of our disaster recovery program will be the installation of an off-site back-up computer system. It will monitor the mainframe computer at our headquarters and will take over all functions in the event of mainframe failure. Enhanced efficiency will be the result, since we will no longer experience the occasional computer downtime. Increasing Stockholder Value In all of our endeavors, the company strives to increase stockholder value. In 1999, we accomplished this through several means. To enhance capital efficiency, our Board of Directors authorized our 1999 Stock Repurchase Program to replace our expiring plan, which was initiated in 1997. As of year-end 1999, SCPIE Holdings Inc. had bought back approximately 900,000 shares through these programs, underscoring our confidence in the company’s future. Also in 1999, the company purchased more than two million shares of its common stock through a “Dutch Auction” process, in order to return excess capital to its stockholders and improve its capital structure. Finally, the company raised its regular quarterly cash dividend to $.08 per share for every quarter in 1999, a 33% increase over the prior year’s dividend of $.06. Remaining Distinct from the Competition In order to be successful in the healthcare professional liability insurance industry, a company has to offer high-quality products at sustainable prices and distinguish itself from its competitors — both of which SCPIE has been doing for nearly a quarter century. Specifically, the attributes that set SCPIE apart are its vision and innovation; disciplined rate structure (including a favorable loss reserve development trend); strong capital base; broad, diversified product lines; geographical diversification; improving combined loss ratio; and rating of “A” (Excellent) from independent insurance rating service A.M. Best. But even with all of these distinguishing characteristics, we realize that our most important assets are our experienced management team and knowledgeable, dedicated staff. Our talented employees — and only a small portion are depicted in this report — contribute to the company’s success on a daily basis. It is because of them that we are confident about SCPIE’s growth and prosperity as we march into the new millennium. We are… Rock-Solid In an industry fraught with irresponsible pricing, SCPIE remains financially strong. We continue to manage our company in a way that is fiscally sound. Diversified Our product line has grown significantly in the past few years to better serve a rapidly changing healthcare environment. Our transformation from a single-line carrier to a multidimensional company has been swift and effective. Reinsurance, managed care products, fraud and abuse protection...let us count the ways. Service-Oriented Since our humble beginnings in 1976, a SCPIE hallmark has been our knowledgeable account teams and their responsiveness. As our scope of coverages and our client base have grown, we have not relaxed our standards one iota. Our service — both to insureds and the brokerage community — remains second to none. Committed Long-term. Big picture. That's how we view things at SCPIE. As we enter new markets and offer new programs, we're not simply sticking our toe in the water to test the acceptance climate. We are making long-term commitments to new markets and the healthcare community. Stable Call SCPIE, and chances are you will get a familiar voice. The average tenure of a SCPIE staff person is much longer than that of others in our industry, with many of our employees having been with the company for more than 15 years. That's experience you cannot buy. We invest in our people, and the dividend is long-term stability. Always Available What good is an insurance company if it isn't there when you need it? Our Claims and Risk Management departments are reachable 24 hours a day, seven days a week. And our newly revamped website (www.scpie.com), produced by our Communications and MIS departments, is always accessible. We are SCPIE | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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