Insurer receives downgrade after warning on loss.

SCPIE Holdings Inc., a leading Southern California underwriter in the troubled medical malpractice insurance sector, has had its rating downgraded in anticipation of a "substantial" year-end and fourth-quarter loss.

The Century City-based insurer's rating was reduced from A to B++ by the A.M. Best Co. after disclosing that its fourth quarter 2001 results will include an underwriting loss of $55 million.

SCPIE started as an insurance exchange for Southern California physicians in 1976 and went public five years ago. It expanded its underwriting nationwide in the late '90s, though the core of its business remains in Southern California.

SCPIE declined to offer details of its losses, pending its final quarter and year-end results, which will be released Tuesday.

But as a nationwide medical malpractice insurer, its results last year were not unusual. St. Paul Cos., the nation's second largest malpractice insurer, pulled out of the market in December after losing nearly $1 billion last year. Other insurers have taken big charges for losses after stiff competition in the sector led them to lower rates and skimp on reserves, said Chris Roush, editor of Insurance Investor Magazine.

"There are just a lot more medical insurance companies than what we really need," Roush said. "It's such a money losing business that insurers like St. Paul are just getting out."

Losses in the sector are typical of the cyclical nature of insurance markets. Fifteen years ago, malpractice underwriters were making handsome profits, prompting other insurers to jump in and eventually leading to overcapacity that is now hurting the sector.

At the same time, medical malpractice awards have been growing in the two dozen states without limits on jury awards for pain and suffering. Jury Verdict Research, a Pennsylvania firm that studies jury awards, found in a study released last year that median medical malpractice jury awards rose nationwide from $375,000 in 1995 to $800,000 in 1999.

Analysts speculate that the rise has a lot to do with patient dissatisfaction over managed care, and in response to the losses, underwriters have been radically upping premiums. However, California passed a tort reform law in the 1970s that limited awards for pain and suffering to $250,000, which has largely insulated physicians from the rate hikes.

"The rates from SCPIE for Los Angeles physicians have remained relatively stable," said Darc Keller, chief executive officer of the Los Angeles County Medical Association, which started SCPIE's predecessor company, the Southern California Physicians Exchange.

Until 2001, SCPIE had been profitable since it went public, reporting net income of $30.2 million in 1996 and $37 million in 1998. However, it then skidded to $17.3 million in 2000 as SCPIE expanded and diversified.

In 2001, the company reported third quarter net income of $2.4 million, down from $4.9 million in the like year-earlier quarter. That followed dismal second quarter results when the company reported a loss of $29.1 million.

A.M. Best downgraded the company over concerns that the expected year-end loss will weaken the company's capitalization, or the amount of money it has set aside beyond its reserves to handle unexpectedly large claims. Capitalization weakened during the year when SCPIE strengthened reserves by $80 million in anticipated of larger payouts.

A.M. Best analyst Angela Quinn said the B++ rating is still "very good," indicating that the agency does not believe SCPIE is in danger of folding.

The company's stock has been pummeled by the expected loss, retreating from a high of $29.30 per share on Feb. 14 to a low of $18.47 on Feb. 28. It recently bounced back slightly and was trading last week over $20.