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UNITED STATES

SECURITIES
AND EXCHANGE COMMISSION

Washington, D.C. 20549



| | 
| | 



FORM 10-K



ANNUAL REPORT

PURSUANT TO SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934



FOR THE
FISCAL YEAR ENDED DECEMBER 31, 2002



| | 
| | 



Commission File No. 1-12449



SCPIE
HOLDINGS INC.

(Exact name of registrant as specified in its charter)



|DELAWARE                                        |  | 95-4557980         
|----------------------------------------------- |  | -------------------
|(State or other jurisdiction                    |  | (I.R.S. Employer   
|of incorporation or organization)               |  | Identification No.)
|                                               
|1888 Century Park East, Los Angeles, California |  | 90067              
|(Address of principal executive offices)        |  | (Zip Code)         



Registrants
telephone number, including area code: (310) 551-5900



| | 
| | 



|Securities registered pursuant             |  | Name of Exchange on which registered:
|------------------------------------------ |  | -------------------------------------
|To Section 12(b) of the Act:               |  |                                      
|                                          
|Preferred Stock, par value $1.00 per share |  | New York Stock Exchange              
|Common Stock, par value $0.0001 per share  |  | New York Stock Exchange              
|(Title of Class)                           |  |                                      



Securities
registered pursuant to Section 12(g) of the Act: None



Indicate by check
mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes xNo  ̈



Indicate by check mark if disclosure of
delinquent filers pursuant to Item 405 of Regulation S-K (ss. 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrants knowledge, in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this Form 10-K.   ̈



Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2).  Yes  ̈No x



The aggregate market value of the Registrants voting stock held by non-affiliates of the Registrant at June 28, 2002, was $56,700,353 (based upon the closing sales price of such date, as reported by The Wall Street
Journal).



The number of shares of the registrants Common Stock
outstanding as of March 18, 2003, was 9,833,807.



DOCUMENTS INCORPORATED BY REFERENCE



Proxy statement
for the Annual Meeting of Stockholders of Registrant to be held on May 15, 2003 (only portions of which are incorporated by reference).



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TABLE OF CONTENTS



|PART I  
|--------
|Item 1. 
|Item 2. 
|Item 3. 
|Item 4. 
|        
|PART II 
|Item 5. 
|Item 6. 
|Item 7. 
|Item 7a.
|Item 8. 
|Item 9. 
|        
|PART III
|Item 10.
|Item 11.
|Item 12.
|Item 13.
|Item 14.
|        
|PART IV 
|Item 15.





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PART I



ITEM 1.    BUSINESS



GENERAL

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SCPIE Holdings Inc. (the Company or 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. Since August 1999, the Company has also been actively engaged in the assumed reinsurance business. Reinsurance treaties have principally
included professional and automobile liability coverages, commercial and residential property risks, accident and health and workers compensation coverages, and a broad spread of marine insurance.



The Company conducts its insurance business through three insurance company
subsidiaries. The largest, SCPIE Indemnity Company (SCPIE Indemnity), a wholly owned subsidiary of SCPIE Holdings, is licensed to conduct direct insurance business only in California, its state of domicile. American Healthcare Indemnity Company
(AHI), domiciled in Delaware, is licensed to transact insurance in 47 states and the District of Columbia. American Healthcare Specialty Insurance Company (AHSIC), domiciled in Arkansas, is eligible to write policies as an excess and surplus lines
insurer in 34 states and the District of Columbia. AHI and AHSIC are wholly owned subsidiaries of SCPIE Indemnity. All three companies generally have the right to participate in domestic and international reinsurance treaties. The Company also has
an insurance agency subsidiary, SCPIE Insurance Services, Inc., two subsidiary corporations providing management services, a corporate reinsurance intermediary and a corporate member of Lloyds of London (Lloyds), SCPIE Underwriting
Limited, which commenced operations in January 2001 as a member of two Lloyds underwriting syndicates.



The Company was founded in 1976 as Southern California Physicians Insurance Exchange (the Exchange), a California reciprocal insurance company, and for the next 20 years conducted its operations as a large
policyholder-owned California medical malpractice insurance company. SCPIE Holdings was organized in Delaware in 1996 and acquired the business of the Exchange and the three insurance company subsidiaries in a reorganization that was consummated on
January 29, 1997. The policyholders of the Exchange became the stockholders of SCPIE Holdings in the reorganization, and SCPIE Holdings concurrently sold additional shares of common stock in a public offering. The common stock of SCPIE Holdings is
listed on the New York Stock Exchange under the trading symbol SKP.



Primarily due to significant losses on medical malpractice insurance outside of the state of California and assumed reinsurance business losses arising out of the September 11, 2001, World Trade Center terrorist attack, the Company
incurred significant losses in fiscal years 2001 and 2002. The resulting reductions in surplus and corresponding decrease in capital adequacy ratios under both the A.M. Best Company (A.M. Best) and National Association of Insurance Commissioners
(NAIC) capital adequacy models has required the Company to take actions to improve its long-term capital adequacy position. The primary actions taken by the Company were to begin a withdrawal from all healthcare liability insurance markets outside
of California and Delaware and to enter into a 100% quota share reinsurance agreement in December 2002 to retrocede to another insurer the majority of reinsurance business written in 2002 and 2001. See Information about Segments.



For purposes of this Annual Report on Form 10-K, the Company
refers to SCPIE Holdings and its subsidiaries. The term Insurance Subsidiaries refers to SCPIE Indemnity, AHI and AHSIC.



The Companys website address is www.scpie.com. The Company makes available free of charge through its website the annual report on Form 10-K, quarterly
reports on Form 10-Q, current reports on Form 8-K and all amendments to those reports as soon as reasonably practicable after such material has been electronically filed with or furnished to the Securities and Exchange Commission.



INFORMATION ABOUT SEGMENTS

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The Companys insurance business is organized into two reportable
business segments: direct healthcare liability insurance and assumed reinsurance operations. In direct (or primary) insurance activities, the insurer assumes the risk



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of loss from persons or organizations that are directly subject to the risks. Such risks may relate to liability (or casualty), property, life,
accident, health, financial or other perils that may arise from an insurable event. In reinsurance activities, the reinsurer assumes defined portions of similar or dissimilar risks that primary insurers or other reinsurers have assumed in their own
insuring activities.



Direct healthcare liability insurance represents
professional liability insurance for physicians, oral and maxillofacial surgeons, hospitals and other healthcare providers. Assumed reinsurance represents the book of assumed worldwide reinsurance of professional, commercial and personal liability
coverages, commercial and residential property risks, accident and health coverages, workers compensation coverages and marine coverages. Other includes items not directly related to the operating segments such as net investment income,
realized investment gains and losses, and other revenue.



The following
tables set forth information concerning the Companys revenues, operating income and identifiable assets attributable to each of its business segments for the years ended December 31, 2002, and 2001.



|YEAR ENDED DECEMBER 31, 2002                    |  | DIRECT HEALTHCARE LIABILITY INSURANCE |         |   | ASSUMED REINSURANCE |   |         | OTHER |  | TOTAL |        
|----------------------------------------------- |  | ------------------------------------- | ------- | - | ------------------- | - | ------- | ----- |  | ----- | -------
|                                               
|                                                |  | (In Thousands)                        |         |   |                    
|Premiums written                                |  | $                                     | 138,901 |   |                     | $ | 112,849 |       |  |       |        
|                                                |  |                                       |         |   |                     |   |         |       |  |       |        
|Premiums earned                                 |  | $                                     | 163,519 |   |                     | $ | 122,544 |       |  |       |        
|Net investment income                           |  |                                       |        |   |                     |   |        |       |  | $     | 32,231 
|Realized investment gains                       |  |                                       |        |   |                     |   |        |       |  |       | 18,910 
|Equity earnings from affiliates                 |  |                                       |        |   |                     |   |        |       |  |       | 750    
|Other revenue                                   |  |                                       |        |   |                     |   |        |       |  |       | 1,280  
|                                                |  |                                       |         |   |                     |   |         |       |  |       |        
|Total revenues                                  |  |                                       | 163,519 |   |                     |   | 122,544 |       |  |       | 53,171 
|Losses and loss adjustment expenses             |  |                                       | 197,456 |   |                     |   | 123,060 |       |  |       |       
|Other operating expenses                        |  |                                       | 32,398  |   |                     |   | 47,278  |       |  |       |       
|Interest expense                                |  |                                       |        |   |                     |   |        |       |  |       | 66     
|                                                |  |                                       |         |   |                     |   |         |       |  |       |        
|Total expenses                                  |  |                                       | 229,854 |   |                     |   | 170,338 |       |  |       | 66     
|                                                |  |                                       |         |   |                     |   |         |       |  |       |        
|Segment Income (loss) before federal income tax |  | $                                     | (66,335 | ) |                     | $ | (47,794 | )     |  | $     | 53,105 
|                                                |  |                                       |         |   |                     |   |         |       |  |       |        
|Combined ratio                                  |  |                                       | 140.6   | % |                     |   | 139.0   | %     |  |       |        
|Segment assets                                  |  | $                                     | 105,689 |   |                     | $ | 171,439 |       |  | $     | 786,638



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|YEAR ENDED DECEMBER 31, 2001                    |  | DIRECT HEALTHCARE LIABILITY INSURANCE |          |   | ASSUMEDREINSURANCE |   |         | OTHER |  | TOTAL |        
|----------------------------------------------- |  | ------------------------------------- | -------- | - | ------------------ | - | ------- | ----- |  | ----- | -------
|                                               
|                                                |  | (In Thousands)                        |         
|Premiums written                                |  | $                                     | 168,600  |   |                    | $ | 112,207 |       |  |       |        
|                                                |  |                                       |          |   |                    |   |         |       |  |       |        
|Premiums earned                                 |  | $                                     | 156,442  |   |                    | $ | 79,493  |       |  |       |        
|Net investment income                           |  |                                       |         |   |                    |   |        |       |  | $     | 35,895 
|Realized investment gains                       |  |                                       |         |   |                    |   |        |       |  |       | 5,707  
|Equity earnings from affiliates                 |  |                                       |         |   |                    |   |        |       |  |       | 1,327  
|Other revenue                                   |  |                                       |         |   |                    |   |        |       |  |       | 875    
|                                                |  |                                       |          |   |                    |   |         |       |  |       |        
|Total revenues                                  |  |                                       | 156,442  |   |                    |   | 79,493  |       |  |       | 43,804 
|Losses and loss adjustment expenses             |  |                                       | 220,311  |   |                    |   | 84,162  |       |  |       |       
|Other operating expenses                        |  |                                       | 45,820   |   |                    |   | 18,912  |       |  |       |       
|Interest expense                                |  |                                       |         |   |                    |   |        |       |  |       | 1,416  
|                                                |  |                                       |          |   |                    |   |         |       |  |       |        
|Total expenses                                  |  |                                       | 266,131  |   |                    |   | 103,074 |       |  |       | 1,416  
|                                                |  |                                       |          |   |                    |   |         |       |  |       |        
|Segment Income (loss) before federal income tax |  | $                                     | (109,689 | ) |                    | $ | (23,581 | )     |  | $     | 42,388 
|                                                |  |                                       |          |   |                    |   |         |       |  |       |        
|Combined ratio                                  |  |                                       | 170.1    | % |                    |   | 129.7   | %     |  |       |        
|Segment assets                                  |  | $                                     | 123,003  |   |                    | $ | 58,200  |       |  | $     | 796,443



The Company incurred significant
losses in both segments during 2002 and 2001.



The losses in the direct
healthcare liability insurance segment were primarily attributable to adverse experience incurred by the Company under policies issued to physicians and medical groups in states outside California. Adverse experience included both losses incurred
under policies issued and renewed during 2002 and 2001 and increases in loss reserves for policies issued in prior years. The Company instituted a number of premium rate increases and stricter underwriting standards during 2002 and 2001 in an
attempt to improve results. The Company and Brown & Brown, Inc. (Brown & Brown), an independent insurance agency for the principal non-California programs, agreed in early 2002 to terminate the Companys participation in these programs
as of March, 6, 2003. The Company continued to apply very strict underwriting requirements through termination and has the full advantage of the rate increases on policies issued and renewed under these programs. The application of stricter
underwriting standards during 2002 resulted in the decrease in premiums written in this segment. See Direct Healthcare Liability Insurance Segment and Managements Discussion and Analysis of Financial Condition and Results of
Operations.



The losses and loss adjustment expenses incurred during
2002 and 2001 in the assumed reinsurance segment include approximately $15.4 million and $19.6 million of net losses incurred as a result of the September 11, 2001, terrorist attack on the World Trade Center, Pentagon and certain airlines. These
losses arose principally under various property, general liability, accident and health and workers compensation reinsurance treaties. See Managements Discussion and Analysis of Financial Condition and Results of Operations.



On February 21, 2002, A.M. Best, the leading rating organization for the
insurance industry, downgraded the financial strength rating of the Companys insurance company subsidiaries to B++ (Very Good) from A (Excellent). A.M. Best further downgraded the rating for the Companys insurance subsidiaries from B++
to B+ (Very Good) on October 7, 2002. The primary reasons for the downgrades were the effect the losses for 2001 and 2002 had on the capitalization of the Company in relation to premiums written during 2001 and 2002 and the Companys
unsuccessful attempts to raise capital or enter into a significant reinsurance transaction by September 30, 2002. These downgrades could have a material adverse effect on the ability of the Company to maintain its volume of premiums written and
earned. See Risk FactorsImportance of A.M. Best Rating.



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On August 8, 2002, the Company announced
an initiative to divest its assumed reinsurance business in order to reallocate capital to its core physician business, reduce its premium to surplus leverage ratios and improve its overall capital adequacy ratios. The Company engaged in continuing
discussions regarding this initiative into the fourth quarter of 2002. In December 2002, the Company entered into a quota share reinsurance transaction with a subsidiary of GoshawK Insurance Holdings plc, a publicly held London-based insurer and
reinsurer (GoshawK), under which the Company ceded almost all of its unearned assumed reinsurance premiums as of June 30, 2002, together with written reinsurance premiums after that date, in each case related to the assumed reinsurance business for
the 2001 and 2002 underwriting years. The effect of this transaction was to retrocede to GoshawK $129.3 million of premiums in 2002 and an estimated $63 million to be written in subsequent periods. Charges and fees associated with this reinsurance
agreement added $36.9 million to the segment underwriting loss in 2002. See Managements Discussion and Analysis of Financial Condition and Results of Operations; BusinessAssumed Reinsurance and Note 4 to
Consolidated Financial Statements. The Company retained certain losses related to the assumed reinsurance business, including those related to the World Trade Center, and the Company will continue to participate in one Lloyds syndicate
for the 2003 underwriting year. Other than estimated premiums of $23 million from this syndicate, the Company will have no significant premiums written or earned from assumed reinsurance after December 31, 2002.



DIRECT HEALTHCARE LIABILITY INSURANCE SEGMENT

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Overview and Developments During 2002The
Company has been a leading provider of medical malpractice insurance in California for many years. Medical malpractice insurance, or medical professional liability insurance, insures the physician, dentist, hospital or other healthcare provider or
facility against liabilities arising from the rendering of, or failure to render, professional medical services. The Companys share of the medical malpractice premiums written in California in 2001 (latest data available) was approximately 18%
and the Company was the second largest writer in the state. During 2002, the Company had premiums earned under policies issued to California insureds of approximately $101.3 million, or 62.0% of the total premiums earned in the direct healthcare
liability insurance segment. This percentage is expected to increase in 2003 as the Company withdraws from other states.



Expansion into Other MarketsIn 1996, the Company undertook an expansion plan that included products which offered comprehensive hospital and related
liability coverages for large healthcare systems. 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, in addition
to 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, one of the nations top independent insurance agency organizations. This arrangement commenced January 1, 1998, and
eventually encompassed nine states, the largest in terms of premium volume being Connecticut, Florida and Georgia. During 2000, the Company entered into a separate arrangement with Brown & Brown covering the California and Texas portion of a
dental liability program developed by Brown & Brown. The Company also reinsured the entire risk of policies issued nationally by another insurer to oral and maxillofacial surgeons marketed by Brown & Brown.



The Company also expanded its operations inside and outside of California during the
past few years through sales of professional liability policies to physicians who do not meet the normal underwriting criteria of the Company. These non-standard policies were issued in a number of states through brokers at higher premiums.



In 2001, the Company undertook the insurance of physicians in Delaware
through a single Delaware broker. At December 31, 2002, the Company insured 166 policies under this program.



The Company has also developed and marketed ancillary liability insurance products for the healthcare industry including directors and officers liability insurance for healthcare entities, errors and omissions
coverage for managed care organizations and billing errors and omissions coverage for the medical profession. These represent a small part of the Companys business.



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Discontinuance of Non-Core
Business



Hospital ProgramsThe Company encountered
intense price competition in its large hospital and other healthcare facility writings. During 2000, the Company incurred material adverse loss experience under many of these policies, including policies issued to hospitals that subsequently had
left the Company for lower rates offered by other insurers. As a result, the Company declined to renew a number of its hospital policies or offered renewal only at substantially increased premium rates. At the beginning of 2001, the Company insured
only 15 hospitals. The number was reduced to 10 hospitals insured as of December 31, 2001, and the last hospital policy expired in December 2002. The Company did not incur material losses in its hospital program during 2002.



Physician Programs Outside of California and DelawareIn 2001 and 2002, the
Company derived approximately 29% and 30% of its healthcare liability earned premium volume, respectively, from policies issued outside the states of California and Delaware (principally under the Brown & Brown and nonstandard physician
programs). In 2001, the Company recognized that these programs were severely underpriced and implemented significant rate increases, averaging approximately 40% and 30% in 2001 and 2002, respectively, in its principal non-California markets, and
immediately instituted more stringent underwriting and pricing guidelines. Despite the significant price increases and more stringent underwriting guidelines, the non-California and non-Delaware programs produced significant underwriting losses.



The Company and Brown & Brown agreed in March 2002 to terminate both
the physician and dental programs no later than March 6, 2003. During 2002, the Company continued to issue and renew those policies under the Brown & Brown programs that satisfied the stringent underwriting standards now in place. As of December
31, 2001, 2,997 policies were in force related to the Brown & Brown program. That number was reduced to 813 policies as of December 31, 2002. The Company applied these same standards to the nonstandard physician policies renewed outside
California. The Company is issuing no new nonstandard physician policies outside California. During 2001 and 2002, the Company had net premiums earned under the Non-Core Healthcare Liability programs of $49.9 million and $47.4 million, respectively.



The non-core business produced underwriting losses of $82.5 million and
$53.8 million in 2001 and 2002, respectively. During 2003, the Company will 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 2003.



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Products



The Company underwrites professional and related liability policy coverages for
physicians (including oral and maxillofacial surgeons), physician medical groups and clinics, hospitals, dentists, managed care organizations and other providers in the healthcare industry. As a result of the Companys withdrawal from certain
segments of the healthcare insurance industry, the premiums earned are split between core and non-core premium. Core premium represents California and Delaware business excluding the Brown & Brown dental program and hospital business. Non-core
premiums represent other state business, all hospital liability and all premiums related to the Brown & Brown programs. The following table summarizes the premiums earned by product in the Companys core and non-core businesses for the
periods indicated:



|FOR THE YEARS ENDED DECEMBER 31,                              |  | 2002           |         | 2001 |   | 2000   
|------------------------------------------------------------- |  | -------------- | ------- | ---- | - | -------
|                                                             
|                                                              |  | (In Thousands)
|Core Business:                                                |  |                |         |      |   |        
|Physician and medical group professional liability            |  | $              | 107,090 |      | $ | 98,240 
|Healthcare provider and facility liability                    |  |                | 6,393   |      |   | 6,206  
|Ancillary liability products                                  |  |                | 2,056   |      |   | 1,565  
|Other                                                         |  |                | 587     |      |   | 536    
|                                                              |  |                |         |      |   |        
|Total core business                                           |  |                | 116,126 |      |   | 106,547
|Non-Core Business:                                            |  |                |         |      |   |        
|Physician and medical group and dental professional liability |  | $              | 41,946  |      | $ | 43,177 
|Hospital liability                                            |  |                | 3,210   |      |   | 4,875  
|Healthcare provider and facility liability                    |  |                | 1,398   |      |   | 1,078  
|Ancillary liability products                                  |  |                | 815     |      |   | 730    
|Other                                                         |  |                | 24      |      |   | 35     
|                                                              |  |                |         |      |   |        
|Total Non-core business                                       |  |                | 47,393  |      |   | 49,895 
|                                                              |  |                |         |      |   |        
|Total Premiums Earned                                         |  | $              | 163,519 |      | $ | 156,442
|                                                              |  |                |         |      |   |        



Physician and Medical Group
LiabilityThe professional liability insurance for sole practitioners and for medical groups provides protection against the legal liability of the insureds for such things as injury caused by, or as a result of, the performance of patient
treatment, failure to treat and failure to diagnose a patient. The Company offers separate policy forms for physicians who are sole practitioners and for those who practice as part of a medical group or clinic. The policy issued to sole
practitioners includes coverage for professional liability that arises in the medical practice and also for certain other premises liabilities that may arise in the non-professional operations of the medical practice, such as
slip-and-fall accidents, and a limited defense reimbursement benefit for proceedings instituted by state licensing boards and other governmental entities.



The policy issued to medical groups and their physician members includes not only professional liability coverage and defense reimbursement benefits, but also
substantially more comprehensive coverages for commercial general liability and employee benefit program liability and also provides a small medical payment benefit to injured persons. The business liability coverage included in the medical group
policy includes coverage for certain employment-related liabilities and for pollution, which are normally excluded under a standard commercial general liability form. The Company also offers, as part of its standard policy forms for both sole and
group practitioners, optional excess personal liability coverage for the insured physicians. Excess personal liability insurance provides coverage to the physician for personal liabilities in excess of amounts covered under the physicians
homeowners and automobile policies. The Company has developed nonstandard programs that may exclude business liability coverages for certain physicians.



The professional liability coverages are issued primarily on a claims-made and reported basis. Coverage is provided for claims reported to the Company
during the policy period arising from incidents that occurred at any time the insured was covered by the policy. The Company also offers tail coverage for claims reported after the expiration of the policy



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for occurrences during the coverage period. The price of the tail coverage is based on the length of time the insured has been covered under the
Companys claims-made and reported policy. The Company provides free tail coverage for insured physicians who die or become disabled during the coverage period of the policy and those who have been insured by the Company for at least five
consecutive years and retire completely from the practice of medicine. Free tail coverage is automatically provided to physicians with at least five consecutive years of coverage with the Company and who are also at least 65 years old.



Business liability coverage for medical groups and clinics and the excess personal
liability insurance is underwritten on an occurrence basis. Under occurrence coverage, the coverage is provided for incidents that occur at any time the policy is in effect, regardless of when the claim is reported. With occurrence coverage, there
is no need to purchase tail coverage.



The Company offers standard limits
of insurance up to $5.0 million per claim or occurrence, with up to a $10.0 million aggregate policy limit for all claims reported or occurrences for each calendar year or other 12-month policy period. The most common limit is $1.0 million per claim
or occurrence, subject to a $3.0 million aggregate policy limit. The Companys limit of liability under the excess personal liability insurance coverage is $1.0 million per occurrence with no aggregate limit. The defense reimbursement benefit
for governmental proceedings is $25,000, and the medical payments benefit for persons injured in non-professional activities is $10,000.



The Company has written professional liability insurance for oral surgeons in California for a number of years. Oral surgeons are frequently licensed physicians.



Dental LiabilityIn 2000, the Company initiated dental
liability insurance coverage primarily in Texas and California under a program developed by Brown & Brown. The program provides claims-made coverage to dentists and small dental groups. Brown & Brown marketed this program in other states
through another insurance company. The Company withdrew from a significant portion of the program in July 2002 and ceased renewal of other policies under this program on March 6, 2003.



Hospital LiabilityThe Company wrote hospital liability insurance on both a claims-made and reported basis and a modified
occurrence basis that, in effect, includes a combination of occurrence coverage and tail coverage for up to seven years after the policy terminates. The policy issued to hospitals provides protection for professional liabilities related to the
operation of a hospital and its various staff committees, together with the same business liability, medical payments and employee benefit program liability coverages included in the policy for large medical groups. The Company has effectively
withdrawn from this market.



Healthcare Provider Liability/Healthcare
Facilities LiabilityThe Company offers its professional liability coverage to a variety of specialty provider organizations, including outpatient surgery centers, medical urgent care facilities, hemodialysis, clinical and pathology
laboratories and, on a limited basis, hospital emergency departments. The Company also offers its professional liability coverage to healthcare providers such as chiropractors, podiatrists and nurse practitioners. These policies include the standard
professional liability coverage provided to physicians and medical groups, with certain modifications to meet the special needs of these healthcare providers. The policies are generally issued on a claims-made and reported basis with the limits of
liability up to those offered to larger medical groups. The limits of coverage under the current healthcare provider policies issued by the Company are between $1.0 million and $5.0 million per incident, subject to $3.0 million to $5.0 million
aggregate policy limits.



Ancillary Liability ProductsThe
Company offers a policy for managed care organizations, that provides coverage for liability arising from covered managed care incidents or vicarious liability for medical services rendered by non-employed physicians. Covered services include peer
review, healthcare expense review, utilization management, utilization review and claims and benefit handling in the operation of the managed care organizations. These policies are generally issued on a claims-made and reported basis. The annual
aggregate limit of coverage under the current managed care organization policies issued by the Company is $1.0 million. The Company offers directors and officers liability policies to medical providers. The directors and officers
liability policies are generally issued on a claims-made



9



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and reported basis. The limit of coverage on directors and officers liability policies written by the Company is $1.0 million. In late 1999, the
Company began offering a newly designed product that provides physicians and medical groups with protection for defense expenses and certain liabilities related to governmental investigations into billing errors and omissions to Medicare and other
government-subsidized healthcare programs.



Brown & Brown
ProgramsAs previously mentioned, the Company had an agency agreement with Brown & Brown, a national insurance agency operation, that began on January 1, 1998. The Brown & Brown programs represented 66% ($31.3 million), 76% ($37.9
million), and 73% ($38.9 million) of the non-core earned premium in 2002, 2001, and 2000, respectively.



As previously mentioned, the Company incurred significant losses from these programs and significantly raised rates and tightened underwriting standards in 2001 and 2002 for these programs. Rate increases
averaged 40% and 30% in 2001 and 2002 respectively. The agency agreement expired March 6, 2003, and no policies will be renewed after that date. Policies in force written under the Brown & Brown programs significantly declined during 2002. In
force policies for this business were 813, 2,997 and 2,815 as of December 31, 2002, 2001 and 2000, respectively.



Marketing and Policyholder Services



Historically, the Company marketed its physician professional liability policies directly to physicians and medical groups in California. Infrequently, larger medical groups were written through insurance brokers. The Company
actively marketed hospital policies through brokers when it commenced offering this coverage. During the past few years, brokered business has become a more important source of new business in California. In Delaware, the Company markets its
policies through a single broker.



The Companys marketing
organization has approximately 25 employees who directly solicit prospective policyholders, maintain relationships with existing insureds and provide marketing support to brokers. The Companys marketing efforts include sponsorship by local
medical associations, educational seminars, advertisements in medical journals and direct mail solicitation to licensed physicians and members of physician medical specialty group organizations.



The Company attracts new physicians through special rates for medical residents and
discounts for physicians just entering medical practice. In addition, the Company sponsors and participates in various medical group and healthcare administrators programs, medical association and specialty society conventions and similar programs
that provide visibility in the healthcare community.



The Companys
current marketing emphasis is directed almost entirely toward California physicians and medical groups. The Company conducts its marketing efforts from its principal office in Los Angeles.



Underwriting



The Underwriting Department consists of a Senior Vice President in charge of Underwriting, three divisional underwriting managers, 11 underwriters and 13 technical
and administrative assistants. The Companys Underwriting Department is responsible for the evaluation of applicants for professional liability and other coverages, the issuance of policies and the establishment and implementation of
underwriting standards for all of the coverages underwritten by the Company. Certain of these underwriters specialize in underwriting managed care organizations and directors and officers liability products.



The Company performs a continuous process of reunderwriting its insured physicians,
medical groups and healthcare facilities. Information concerning insureds with large losses, a high frequency of claims or unusual practice characteristics is developed through claims and risk management reports or correspondence.



Brown & Brown performed most of the underwriting functions with respect to policies
issued by the Company under its arrangement with Brown & Brown for physician professional liability and other coverages. The Company assumed greater control over the establishment and application of underwriting standards related to Brown &
Brown programs in January 2002.



10



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Rates



The Company establishes, through its own actuarial staff and independent actuaries,
rates and rating classifications for its physician and medical group insureds based on the loss and loss adjustment expense (LAE) experience developed over the past 25 years and upon rates charged by its competitors. The Company has various rating
classifications based on practice, location, medical specialty, limits and other factors. The Company utilizes various discounts, including discounts for part-time practice, physicians just entering medical practice and large medical groups. The
Company has developed nonstandard programs for physicians who have unfavorable loss history or practice characteristics, but whom the Company considers insurable. Policies issued in this program have significant surcharges. The Company has
established its premium rates and rating classifications for managed care organizations utilizing data publicly filed by other insurers, and based in part on its recent experience. The data for managed care organization errors and omissions
liability is extremely limited, as tort exposures for these organizations are only recently beginning to develop. The rates for directors and officers liability are developed using historical data publicly filed by other insurers, financial analysis
and loss history. All rates for liability insurance in California are subject to the prior approval of the Insurance Commissioner.



The Company has consistently instituted annual overall rate increases in California during the past 10 years ranging from approximately 3.5% to 10.6%. The Company
has recently filed for a 15.6% rate increase in California for 2003 which is currently pending implementation. The Foundation for Taxpayer and Consumer Rights, a California-based, non-profit education and advocacy organization, intervened in the
ratemaking process, and the Department of Insurance commenced a hearing on the Companys application on March 11, 2003, before an administrative law judge. The Company expects the administrative law judge to render her decision in late June
2003. The Commissioner of Insurance will then review the decision of the judge, and may adopt, modify or reject this decision. The Company believes its rate request is fully justified and supported by the filing. The Company cannot predict what
level of increase, if any, will be approved and when an approved increase can be implemented. See Risk FactorsPending Rate Increase in California.



Claims



The Companys Claims Department is responsible for claims investigation, establishment of appropriate case reserves for loss and LAE, defense planning and
coordination, control of attorneys engaged by the Company to defend a claim and negotiation of the settlement or other disposition of a claim. Under most of the Companys policies, except managed care organization errors and omissions policies,
and directors and officers liability policies, the Company is obligated to defend its insureds, which is in addition to the limit of liability under the policy. Medical malpractice claims often involve the evaluation of highly technical
medical issues, severe injuries and conflicting expert opinions. In almost all cases, the person bringing the claim against the physician is already represented by legal counsel when the Company is notified of the potential claim.



The Claims Department staff includes managers, litigation supervisors, investigators and
other experienced professionals trained in the evaluation and resolution of medical professional liability and general liability claims. The Claims Department staff consists of approximately 38 employees, including 8 clerical personnel. The Company
has five unit managers and two branch managers responsible for specific geographic areas, and additional units for specialty areas such as healthcare facilities, birth injuries and policy coverage issues. The Company also occasionally uses
independent claims adjusters, primarily to investigate claims in remote locations. The Company selects legal counsel from among a group of law firms in the geographic area in which the action is filed.



The Company vigorously defends its insureds against claims, but seeks to expediently
resolve cases with high-exposure potential. The defense of a healthcare professional liability claim requires significant cooperation between the litigation supervisor or Claims Department manager responsible for the claim and the insured physician.
In certain states, the law requires that a healthcare professional liability claim cannot generally be settled without the consent of the insured. California law requires that the insurer report such settlements to a medical disciplinary board, and
federal law requires that any claim payment, regardless of amount, be reported to a national data bank, which can be accessed by various state licensing and disciplinary boards and medical peer evaluation committees. Thus, the physician or other
healthcare professional is often placed in a difficult position of knowing that a settlement may result in the initiation of a disciplinary



11



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proceeding or some other impediment to his or her ability to practice. The Claims Department supervisor must be able to fully evaluate considerations
of settlement or trial and to communicate effectively the Companys recommendation to its insured. If the insured will not consent to a settlement offer, the Company may be exposed to a larger judgment if the case proceeds to trial.



The Company also maintains a risk management staff, including a department
manager and two members. The Risk Management Department works directly with medical groups and individual insureds to improve their procedures in order to minimize the incidence of claims.



ASSUMED REINSURANCE SEGMENT

---



General



In August 1999, the Company established a separate Assumed Reinsurance Division under the direction of two senior officers. Net written
premiums in the Assumed Reinsurance Segment increased from $30.5 million in 2000 to $112.8 million in 2002.



Reinsurance is an arrangement in which an insurance company, the reinsurer or the assuming company, agrees to indemnify another insurance company, the reinsured or the ceding company, against all or a portion of
the insurance risks underwritten by the ceding company under one or more insurance contracts. The Company has concentrated the majority of its assumed reinsurance portfolio on treaty reinsurance. Treaty reinsurers, including the Company, do not
separately evaluate each of the individual risks assumed under their treaties and, consequently, after a review of the ceding companys underwriting practices, are largely dependent on the original risk underwriting decisions made by the ceding
company. The Company has focused on pro rata, or quota share, arrangements, in which the ceding company bears a proportional share of the risk and therefore the incentive to underwrite and price the business appropriately. The Company entered into
treaties principally with those ceding companies in which the Companys officers had past favorable experience.



The principal reinsurance programs include casualty, property, accident and health and workers compensation programs and a marine program. Almost all the
accident and health and workers compensation programs in which the Company participates involve pro rata treaties produced by a single source, Reinsurance Management Group, Summit, New Jersey, in which the Company has a 20% ownership interest.
Reinsurance Management Group is a specialist underwriting management firm writing various forms of accident and health reinsurance risks. The marine risks involve pro rata treaties from a single Lloyds syndicate managed by an affiliate of
GoshawK. In 1999, the Company purchased approximately 9.5% of the outstanding common stock of GoshawK, which has since been reduced to a 4.1% interest as result of additional common stock sales by GoshawK.



In addition to the foregoing programs, in 2001 the Company formed SCPIE Underwriting
Limited, a limited liability corporate underwriting syndicate member at Lloyds, which provided underwriting capacity to two syndicates in 2001 and 2002 .



Divestiture of Most Ongoing Reinsurance Operations



The Company suffered significant 2001 losses in non-California healthcare operations and in its assumed reinsurance operations from the World Trade Center terrorist
attacks. These losses impacted the capital adequacy ratios under the A.M. Best and NAIC capital adequacy models and resulted in the reduction in the A.M. Best rating assigned to the Insurance Subsidiaries. The Company unsuccessfully attempted to
raise additional capital during the first six months of 2002 to provide capital to support the rapidly growing written premiums in the assumed reinsurance operations and to restore the Companys A.M. Best rating to A-. In the latter part of
2002, the Company focused its efforts on divesting the assumed reinsurance operations and thereby reducing its overall capital requirements. The Company engaged in ongoing discussions with a number of companies to accomplish the divestiture through
one or more reinsurance transactions.



12



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In December 2002, the Company entered
into a 100% quota share reinsurance agreement with a subsidiary of GoshawK, under which the Company ceded almost all of its assumed unearned reinsurance premiums as of June 30, 2002, for the 2001 and 2002 underwriting years, and almost all of its
assumed reinsurance premiums written after that date for those underwriting years. The effect of this transaction was to divest the Company of almost all of its ongoing assumed reinsurance business. This includes $129.3 million of premiums in 2002
and approximately $63 million of premium estimated to be written in future periods. This treaty relieves the Company of significant written premium leverage in 2002 and 2003 and significantly improves the Companys risk-based capital adequacy
ratios under both the A.M. Best and NAIC models.



Under the terms of the
treaty with GoshawK, there are no limitations on the amount of losses recoverable by the Company, and the treaty includes a profit-sharing provision should the combined ratios calculated on the base premium ceded be below 100.0% The treaty requires
GoshawK to reimburse the Company for its acquisition and administrative expenses attributable to the premium ceded. The Company is required to pay GoshawK additional premium in excess of the base premium ceded of 14.3% or an estimated $27.5 million.
The additional premium reduced 2002 earned premium by $18.5 million and will reduce 2003 earned premium by an estimated $9 million.



The GoshawK 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 period. 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 retroactive accounting treatment required under FASB No. 113 requires that a charge
to income be recorded to the extent premiums ceded under the contract are in excess of the estimated losses and expenses ceded under the contract. The charge related to the cession of the unearned premium as of July 1, 2002, and ceded premium
written in the third quarter is included in operating expenses in the Assumed Reinsurance Segment. This charge and placement fees amounted to $18.4 million and was recorded in the fourth quarter 2002. The assumed reinsurance premium written in the
fourth quarter 2002 ceded to GoshawK has been included in net premium written for the segment with a corresponding reduction in net earned premium and net incurred losses.



There are certain losses not included in the treaty with GoshawK, including any World Trade Center losses. Further, the treaty does not
involve the assumption of any earned premium or losses attributable to periods prior to June 30, 2002, which remain the responsibility of the Company.



Ongoing Assumed Reinsurance Operations



The Company will have only one ongoing reinsurance activity for 2003. This relates to a Lloyds syndicate that specializes on underwriting medical professional
liability excess insurance. The Company provides 90% of the syndicates capital capacity. The Companys decision to continue to support this syndicate was primarily due to the attractive increases in reinsurance rates in this segment of
the market as well as the significant capital costs involved in running off the business if the syndicate was terminated.



The two senior officers in charge of the division continue to administer the ongoing treaty and to review and administer all claims under existing treaties that
remain the responsibility of the Company. This includes the review of individual excess of loss treaty claims and the conduct of periodic audits of claims under pro rata treaties.



LOSS AND LOSS ADJUSTMENT EXPENSE (LAE) RESERVES

---



The determination of loss reserves is a projection of ultimate losses through an
actuarial analysis of the claims history of the Company and other professional liability insurers, subject to adjustments deemed appropriate by the Company due to changing circumstances. Included in its claims history are losses and LAE paid by the
Company in prior periods and case reserves for anticipated losses and LAE developed by the Companys Claims Department as claims are reported and



13



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investigated. Actuaries rely primarily on such historical loss experience in determining reserve levels on the assumption that historical loss
experience provides a good indication of future loss experience despite the uncertainties in loss cost trends and the delays in reporting and settling claims. As additional information becomes available, the estimates reflected in earlier loss
reserves may be revised. Any increase in the amount of reserves, including reserves for insured events of prior years, could have an adverse effect on the Companys results for the period in which the adjustments are made.



The loss and LAE reserves included in the Companys financial statements represent
the Companys best estimate of the amounts that the Company will ultimately pay on claims, and the related costs of adjusting those claims, as of the date of the financial statements. The uncertainties inherent in estimating ultimate losses on
the basis of past experience have increased significantly in recent years principally as a result of judicial expansion of liability standards and expansive interpretations of insurance contracts. These uncertainties may be further affected by,
among other factors, changes in the rate of inflation and changes in the propensities of individuals to file claims. The inherent uncertainty of establishing reserves is relatively greater for companies writing liability insurance, including medical
malpractice insurance, due primarily to the longer-term nature of the resolution of claims. There can be no assurance that the ultimate liability of the Company will not exceed the amounts reserved.



The Company utilizes both its internal actuarial staff and independent actuaries in
establishing its reserves. The Companys internal actuarial staff reviews reserve adequacy on a quarterly basis. The Companys independent actuaries review the Companys reserves for losses and LAE at the end of each fiscal year and
prepare a report that includes a recommended level of reserves. The Company considers this recommendation as well as other factors, such as known, anticipated or estimated changes in frequency and severity of claims, loss retention levels and
premium rates, in establishing the amount of its reserves for losses and LAE. The Company continually refines reserve estimates as experience develops and further claims are reported and resolved. The Company reflects adjustments to reserves in the
results of the periods in which such adjustments are made. Medical malpractice insurance is a line of business for which the initial loss and LAE estimates may be adversely impacted by events occurring long after the reporting of the claim, such as
sudden severe inflation or adverse judicial or legislative decisions.



The
Companys loss reserve experience is shown in the following table, which sets forth a reconciliation of beginning and ending reserves for unpaid losses and LAE for the periods indicated:



|DECEMBER 31,                                                                                            |  | 2002           |         | 2001 |   | 2000    | 
|------------------------------------------------------------------------------------------------------- |  | -------------- | ------- | ---- | - | ------- | 
|                                                                                                       
|                                                                                                        |  | (In Thousands) |        
|Reserves for losses and LAE at beginning of year                                                        |  | $              | 576,636 |      | $ | 433,541 | 
|Less reinsurance recoverables                                                                           |  |                | 74,246  |      |   | 40,152  | 
|                                                                                                        |  |                |         |      |   |         | 
|Reserves for losses and LAE, net of related reinsurance recoverable, at beginning of
year               |  |                | 502,390 |      |   | 393,389 | 
|                                                                                                        |  |                |         |      |   |         | 
|Reclassification of reinsurance contract                                                                |  |                |        |      |   | 3,840   | 
|                                                                                                        |  |                |         |      |   |         | 
|Provision for losses and LAE for claims occurring in the current year, net of
reinsurance               |  |                | 303,296 |      |   | 290,649 | 
|Increase (decrease) in estimated losses and LAE for claims occurring in prior years, net of
reinsurance |  |                | 17,220  |      |   | 13,824  | 
|                                                                                                        |  |                |         |      |   |         | 
|Incurred losses during the year, net of reinsurance                                                     |  |                | 320,516 |      |   | 304,473 | 
|                                                                                                        |  |                |         |      |   |         | 
|Deduct losses and LAE payments for claims, net of reinsurance, occurring during:                        |  |                |         |      |   |         | 
|Current year                                                                                            |  |                | 47,258  |      |   | 36,006  | 
|Prior years                                                                                             |  |                | 210,907 |      |   | 155,626 | 
|                                                                                                        |  |                |         |      |   |         | 
|                                                                                                        |  |                | 258,165 |      |   | 191,632 | 
|                                                                                                        |  |                |         |      |   |         | 
|Reserve for losses and LAE, net of related reinsurance recoverable, at end of year                      |  |                | 564,741 |      |   | 502,390 | 
|Reinsurance recoverable for losses and LAE, at end of year                                              |  |                | 85,930  |      |   | 74,246  | 
|                                                                                                        |  |                |         |      |   |         | 
|Reserves for losses and LAE, gross of reinsurance recoverable, at end of year                           |  | $              | 650,671 |      | $ | 576,636 | 
|                                                                                                        |  |                |         |      |   |         | 



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The increase during 2002 and 2001 in
estimated losses and LAE for claims occurring in prior years was primarily attributable to the significant adverse loss experience encountered during 2002 and 2001 in the assumed reinsurance and the non-core direct healthcare liability insurance
business. The decrease during 2000 in estimated losses and LAE for claims occurring in prior years was principally attributable to favorable loss experience in the core direct healthcare liability insurance business offset by adverse development in
the non-core hospital programs. See Managements Discussion and Analysis of Financial Condition and Results of OperationsOverview.



The following table reflects the development of loss and LAE reserves for the periods indicated at the end of that year and each subsequent year. The line entitled
Loss and LAE reserves reflects the reserves, net of reinsurance recoverables, as originally reported at the end of the stated year. Each calendar year-end reserve includes the estimated unpaid liabilities for that report or accident year
and for all prior report or accident years. The section under the caption Liability reestimated as of shows the original recorded reserve as adjusted as of the end of each subsequent year to reflect the cumulative amounts paid and all
other facts and circumstances discovered during each year. The line Cumulative (redundancies) deficiencies reflects the difference between the latest reestimated reserve amount and the reserve amount as originally established. The
section under the caption Cumulative amount of liability paid through shows the cumulative amounts paid related to the reserve as of the end of each subsequent year.



In evaluating the information in the table below, it should be noted that each amount includes the effects of all changes in amounts of
prior periods. For example, if a loss determined in 2000 to be $100,000 was first reserved in 1990 at $150,000, the $50,000 redundancy (original estimate minus actual loss) would be included in the cumulative redundancy in each of the years 1991
through 2000 shown below. This table presents development data by calendar year and does not relate the data to the year in which the claim was reported or the incident actually occurred. Conditions and trends that have affected the development of
these reserves in the past will not necessarily recur in the future.



|YEAR ENDED DECEMBER 31,                      |  | 1992           |          |   | 1993 |   |          | 1994 |  |   | 1995     |   |  | 1996 |          |   | 1997 |   |          | 1998 |  |   | 1999     |   |  | 2000 |         | 2001 |  | 2002
|-------------------------------------------- |  | -------------- | -------- | - | ---- | - | -------- | ---- |  | - | -------- | - |  | ---- | -------- | - | ---- | - | -------- | ---- |  | - | -------- | - |  | ---- | ------- | ---- |  | ----
|                                            
|                                             |  | (In Thousands)
|Loss and LAE reserves                        |  | $              | 465,423  |   |      | $ | 472,129  |      |  | $ | 449,566  |   |  | $    | 446,627  |   |      | $ | 440,302  |      |  | $ | 433,441  |   |  | $    | 451,072 |      |  | $   
|Liability reestimated as of:                 |  |                |          |   |      |   |          |      |  |   |          |   |  |      |          |   |      |   |          |      |  |   |          |   |  |      |         |      |  |     
|One year later                               |  |                | 421,994  |   |      |   | 411,915  |      |  |   | 391,733  |   |  |      | 386,872  |   |      |   | 387,094  |      |  |   | 339,673  |   |  |      | 389,893 |      |  |     
|Two years later                              |  |                | 368,521  |   |      |   | 363,562  |      |  |   | 337,441  |   |  |      | 337,760  |   |      |   | 301,795  |      |  |   | 283,276  |   |  |      | 351,238 |      |  |     
|Three years later                            |  |                | 325,073  |   |      |   | 315,712  |      |  |   | 304,063  |   |  |      | 264,813  |   |      |   | 259,022  |      |  |   | 250,962  |   |  |      | 341,763 |      |  |     
|Four years later                             |  |                | 292,801  |   |      |   | 293,711  |      |  |   | 254,004  |   |  |      | 236,609  |   |      |   | 237,059  |      |  |   | 243,561  |   |  |      | 329,588 |      |  |     
|Five years later                             |  |                | 274,304  |   |      |   | 262,879  |      |  |   | 239,372  |   |  |      | 221,537  |   |      |   | 236,363  |      |  |   | 237,487  |   |  |      |         |      |  |     
|Six years later                              |  |                | 257,864  |   |      |   | 254,502  |      |  |   | 231,129  |   |  |      | 221,014  |   |      |   | 235,919  |      |  |   |          |   |  |      |         |      |  |     
|Seven years later                            |  |                | 252,353  |   |      |   | 248,522  |      |  |   | 230,799  |   |  |      | 220,566  |   |      |   |          |      |  |   |          |   |  |      |         |      |  |     
|Eight years later                            |  |                | 248,420  |   |      |   | 246,889  |      |  |   | 230,194  |   |  |      |          |   |      |   |          |      |  |   |          |   |  |      |         |      |  |     
|Nine years later                             |  |                | 246,615  |   |      |   | 246,526  |      |  |   |          |   |  |      |          |   |      |   |          |      |  |   |          |   |  |      |         |      |  |     
|Ten years later                              |  |                | 246,327  |   |      |   |          |      |  |   |          |   |  |      |          |   |      |   |          |      |  |   |          |   |  |      |         |      |  |     
|Cumulative (redundancies) deficiencies       |  |                | (219,096 | ) |      |   | (225,603 | )    |  |   | (219,372 | ) |  |      | (226,061 | ) |      |   | (204,383 | )    |  |   | (195,954 | ) |  |      | (21,484 | )    |  |     
|Cumulative amount of liability paid through: |  |                |          |   |      |   |          |      |  |   |          |   |  |      |          |   |      |   |          |      |  |   |          |   |  |      |         |      |  |     
|One year later                               |  |                | 105,678  |   |      |   | 121,106  |      |  |   | 109,481  |   |  |      | 101,844  |   |      |   | 118,307  |      |  |   | 107,748  |   |  |      | 156,913 |      |  |     
|Two years later                              |  |                | 184,883  |   |      |   | 192,519  |      |  |   | 170,603  |   |  |      | 170,932  |   |      |   | 181,116  |      |  |   | 179,016  |   |  |      | 246,835 |      |  |     
|Three years later                            |  |                | 219,649  |   |      |   | 217,484  |      |  |   | 202,660  |   |  |      | 195,265  |   |      |   | 207,141  |      |  |   | 204,773  |   |  |      | 279,629 |      |  |     
|Four years later                             |  |                | 232,379  |   |      |   | 231,794  |      |  |   | 213,431  |   |  |      | 207,454  |   |      |   | 217,460  |      |  |   | 216,448  |   |  |      | 299,106 |      |  |     
|Five years later                             |  |                | 237,879  |   |      |   | 237,272  |      |  |   | 221,409  |   |  |      | 211,934  |   |      |   | 222,307  |      |  |   | 223,540  |   |  |      |         |      |  |     
|Six years later                              |  |                | 240,363  |   |      |   | 241,904  |      |  |   | 224,555  |   |  |      | 213,257  |   |      |   | 227,782  |      |  |   |          |   |  |      |         |      |  |     
|Seven years later                            |  |                | 242,698  |   |      |   | 242,736  |      |  |   | 224,882  |   |  |      | 216,782  |   |      |   |          |      |  |   |          |   |  |      |         |      |  |     
|Eight years later                            |  |                | 242,818  |   |      |   | 242,875  |      |  |   | 226,524  |   |  |      |          |   |      |   |          |      |  |   |          |   |  |      |         |      |  |     
|Nine years later                             |  |                | 242,850  |   |      |   | 243,304  |      |  |   |          |   |  |      |          |   |      |   |          |      |  |   |          |   |  |      |         |      |  |     
|Ten years later                              |  |                | 243,256  |   |      |   |          |      |  |   |          |   |  |      |          |   |      |   |          |      |  |   |          |   |  |      |         |      |  |     
|Net reservesDecember 31                     |  |                |          |   |      |   |          |      |  |   |          |   |  |      |          |   |      |   | 440,302  |      |  |   | 433,441  |   |  |      | 451,072 |      |  |     
|Reinsurance Recoverables                     |  |                |          |   |      |   |          |      |  |   |          |   |  |      |          |   |      |   | 19,267   |      |  |   | 21,529   |   |  |      | 24,898  |      |  |     
|                                             |  |                |          |   |      |   |          |      |  |   |          |   |  |      |          |   |      |   |          |      |  |   |          |   |  |      |         |      |  |     
|Gross reserves                               |  |                |          |   |      |   |          |      |  |   |          |   |  |      |          |   |      | $ | 459,569  |      |  | $ | 454,970  |   |  | $    | 475,970 |      |  | $   
|                                             |  |                |          |   |      |   |          |      |  |   |          |   |  |      |          |   |      |   |          |      |  |   |          |   |  |      |         |      |  |     



15



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Prior to 2000, the Company consistently
experienced favorable development in loss and LAE reserves established for prior years. The Company believes that the favorable loss and LAE reserve development resulted from four factors: (i) the Companys conservative approach of
establishing reserves for medical malpractice insurance losses and LAE; (ii) the continuing benefits from the Medical Injury Compensation Reform Act (MICRA), the California tort reform legislation that was declared constitutional in a series of
decisions by the California Supreme Court in the mid-1980s; (iii) benefits from California legislation requiring matters in litigation to proceed more expeditiously to trial; and (iv) improved results from a restructuring of the
Companys internal claims process at that time. The Company believes, based on its analysis of annual statements filed with state regulatory authorities, that its principal California competitors have experienced similar favorable loss and LAE
reserve development in past years.



The Companys reserve analysis
(and the independent actuaries analysis) began to exhibit less variability related to the core California healthcare liability business from 1999 forward as the effects of the items mentioned in the preceding paragraph were reflected in the
historical loss and LAE data which is the foundation of actuarial estimates. As this variability decreased, the Companys estimates, although still considered conservative, were inherently less conservative than before.



With the Companys growth in non-core healthcare liability business outside of
California and the assumed reinsurance business after 1999, the reserve estimation process became inherently more volatile. The healthcare liability business outside of California did not have the benefits of MICRA-type tort reform and assumed
reinsurance business is, by its nature, extremely volatile.



During 2000,
the Company experienced adverse loss development in its prior years reserves for hospitals which resulted in less favorable loss development in 2000 than in prior years. In 2001 and 2002, the Company experienced its first deficiencies in its loss
reserves for prior years. These deficiencies were due to significant adverse loss experience encountered in the assumed reinsurance and the non-core direct healthcare liability insurance business. The adverse development in the assumed reinsurance
was principally the result of upward development in 2002 on September 11, 2001, terrorist attack losses. The adverse reserve development in the non-core healthcare liability insurance business in 2001 and 2002 was primarily attributable to a sharp
increase in the severity and frequency of large claims. This sharp increase in large claim costs was not projected by the Companys internal and independent actuaries at that time. Based upon the Companys knowledge of claim severity
outside of California, and the current medical malpractice insurance crisis situation in several states, the Company believes that most medical malpractice insurance writers experienced a similar sharp increase in severity and frequency of large
claims.



Because the medical malpractice liability insurance product
generally has high limits ($1 to $3 million), and relatively low frequency, an increase in the frequency of large losses creates great variability in the reserve estimation process. While the Company believes that its reserves for losses and LAE are
adequate, there can be no assurance that the Companys ultimate losses and LAE will not deviate, perhaps substantially, from the estimates reflected in the Companys financial statements. If the Companys reserves should prove
inadequate, the Company will be required to increase reserves, which could have a material adverse effect on the Companys financial condition or results of operations.



CEDED REINSURANCE PROGRAMS

---



The Company follows customary industry practice by reinsuring a portion of its
healthcare liability insurance risks. The Company cedes to reinsurers a portion of its risks and pays a fee based upon premiums received on all policies subject to such reinsurance. Insurance is ceded principally to reduce net liability on
individual risks and to provide protection against large losses. Although reinsurance does not legally discharge the ceding insurer from its primary liability for the full amount of the policies reinsured, it does make the reinsurer liable to the
insurer to the extent of the reinsurance ceded. The Company determines how much reinsurance to purchase based upon its evaluation of the risks it has insured, consultations with its reinsurance brokers and market conditions, including the
availability and pricing of reinsurance. In 2002, the Company ceded $21.2 million of its healthcare liability earned premiums to reinsurers.



16



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The Companys reinsurance
arrangements are generally placed through its reinsurance broker, Guy Carpenter & Company, Inc. For 1999 and prior years, the Company retained the first $1.0 million of losses incurred per incident for its physician and medical group policies
and had various reinsurance treaties covering losses in excess of $1.0 million up to $20.0 million per incident for physician coverage. The reinsurers also were obligated to bear their proportionate share of allocated loss adjustment expenses (LAE).
For hospital coverage, the Company reinsured 90% of all losses incurred above a $1.0 million retention, and the Company retained all LAE. For 2000, the Company consolidated these treaties into a program in which the Company retained the first $2.0
million of losses and LAE per incident and the reinsurers covered losses in excess of this amount up to $70.0 million. For 2001, the Company retained the first $1.25 million of losses and LAE, and retention for non-hospital business was reduced to
$1.25 million per incident. For 2002, the Company retained approximately the first $2.0 million of losses and LAE per incident for both physician and hospital coverages up to $20.0 million. The Company also had additional coverage for approximately
92% of the losses in excess of $20.0 million up to $50.0 million. In addition, the Company was responsible for a blended annual aggregate deductible of $1.75 million and $3.2 million, respectively, in 2001 and 2002, for losses in excess of the
Companys retentions.



The Company often has more than one insured
named as a defendant in a lawsuit or claim arising from the same incident, and, therefore, multiple policies and limits of liability may be involved. The Companys reinsurance program is purchased in several layers, the limits of which may be
reinstated under certain circumstances, at the Companys option subject to the payment of additional premiums.



In addition, in December 2002, the Company entered into the GoshawK retrocessional reinsurance agreement more fully described in Note 4 to Consolidated
Financial Statements.



In general, reinsurance is placed under
reinsurance treaties and agreements with a number of individual companies and syndicates at Lloyds to avoid concentrations of credit risk. The GoshawK 100% quota share reinsurance agreement includes a trust fund arrangement to guarantee the
collection of losses ceded under the treaty. The following table identifies the Companys most significant reinsurers based upon premiums paid by the Company and their A.M. Best ratings as of December 31, 2002. No other single reinsurers
percentage participation in 2002 exceeded 5% of total reinsurance premiums.



|                             |  | PREMIUMS CEDED FOR YEAR ENDED DECEMBER 31, 2002 |        | RATING (1) |   |   | PERCENTAGE OF TOTAL REINSURANCE PREMIUMS |   
|---------------------------- |  | ----------------------------------------------- | ------ | ---------- | - | - | ---------------------------------------- | --
|                            
|                             |  | (In Thousands)                                  |       
|GoshawK Re                   |  | $                                               | 58,685 |            | A | - |                                          | 70
|Hannover Ruckversicherungs   |  | $                                               | 10,515 |            | A | + |                                          | 12
|Lloyds of London Syndicates |  |                                                 | 4,915  |            | A |   |                                          | 6 
|Converium Re                 |  |                                                 | 3,832  |            | A |   |                                          | 5 

---

|(1) |  | All ratings are assigned by A.M. Best.
|--- |  | --------------------------------------



The Company analyzes the credit quality of its reinsurers and relies on its brokers and intermediaries to assist in such analysis. To date, the Company has not
experienced any material difficulties in collecting reinsurance recoverables. No assurance can be given, however, regarding the future ability of any of the Companys reinsurers to meet their obligations. Among the reinsurers to which the
Company cedes reinsurance are certain Lloyds syndicates. In recent years, Lloyds has reported substantial aggregate losses that have had adverse effects on Lloyds in general and on certain syndicates in particular. In addition,
there has been a decrease in the underwriting capacity of Lloyds syndicates in recent years. The substantial losses and other adverse developments could affect the ability of certain syndicates to continue to trade and the ability of insureds
to continue to place business with particular syndicates. It is not possible to predict what effects the circumstances described above may have on Lloyds and the Companys contractual relationship with Lloyds syndicates in future
years. The Company understands that Lloyds syndicates have created new



17



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trust funds to hold reserves for reinsurance purchased by United States reinsureds gross of outward reinsurance. This arrangement applies to all
purchases on or after August 1, 1995.



INVESTMENT PORTFOLIO

---



An important
component of the Companys operating results has been the return on its invested assets. The Companys investments are made by investment managers under policies established and supervised by the Board. The Companys investment policy
has placed primary emphasis on investment grade, fixed-maturity securities and maximization of after-tax yields.



All of the fixed-maturity securities are classified as available-for-sale and carried at estimated fair value. For these securities, temporary unrealized gains and losses, net of tax, are reported directly
through stockholders equity, and have no effect on net income. The following table sets forth the composition of the Companys investments in available-for-sale securities at the dates indicated:



|                                                 |  | DECEMBER 31, 2002      |         | DECEMBER 31, 2001
|------------------------------------------------ |  | ---------------------- | ------- | -----------------
|                                                 |  | COST OR AMORTIZED COST |         | FAIR VALUE       
|                                                
|                                                 |  | (In Thousands)        
|Fixed-maturity securities:                       |  |                        |         |                  
|U.S. government and agencies                     |  | $                      | 234,424 |                  
|State, municipalities and political subdivisions |  |                        |        |                  
|Mortgage-backed and asset-backed                 |  |                        | 63,293  |                  
|Corporate                                        |  |                        | 225,799 |                  
|                                                 |  |                        |         |                  
|Total fixed-maturity securities                  |  |                        | 523,516 |                  
|Common stocks                                    |  |                        | 29,758  |                  
|                                                 |  |                        |         |                  
|Total                                            |  | $                      | 553,274 |                  
|                                                 |  |                        |         |                  



The Companys current policy
is to limit its investment in equity securities and real estate to no more than 8% of the total market value of its investments. The fair value of the Companys portfolio of unaffiliated equity securities was $27.6 million at December 31,
2002.



18



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The Companys investment portfolio
of fixed-maturity securities consists primarily of intermediate-term, investment-grade securities. The Companys investment policy provides that fixed-maturity investments are limited to purchases of investment-grade securities or unrated
securities which, in the opinion of a national investment advisor, should qualify for such rating. The table below contains additional information concerning the investment ratings of the Companys fixed-maturity investments at December 31,
2002:



|TYPE/RATING OF INVESTMENT (1)                |  | AMORTIZED COST |         | FAIR VALUE |   | PERCENTAGE OF FAIR VALUE | 
|-------------------------------------------- |  | -------------- | ------- | ---------- | - | ------------------------ | 
|                                             |  | (In Thousands) |        
|AAA (including U.S. government and agencies) |  | $              | 311,035 |            | $ | 322,944                  | 
|AA                                           |  |                | 20,213  |            |   | 20,638                   | 
|A                                            |  |                | 153,541 |            |   | 156,022                  | 
|BBB                                          |  |                | 33,727  |            |   | 34,071                   | 
|Non rated (2)                                |  |                | 5,000   |            |   | 5,000                    | 
|                                             |  |                |         |            |   |                          | 
|                                             |  | $              | 523,516 |            | $ | 538,675                  | 
|                                             |  |                |         |            |   |                          | 

---

|(1) |  | The ratings set forth above are based on the ratings, if any, assigned by Standard & Poors Corporation (S&P). If S&Ps ratings were unavailable, the
equivalent ratings supplied by Moodys Investors Services, Inc. were used.
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) |  | Represents a credit note received from a catastrophe reinsurance limited liability company controlled by Hannover Re with an amortized cost and fair value of $5.0 million.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------



The following table sets forth certain information
concerning the maturities of fixed-maturity securities in the Companys investment portfolio as of December 31, 2002:



|                                            |  | AMORTIZED COST |         | FAIR VALUE |   | PERCENTAGE OF FAIR VALUE | 
|------------------------------------------- |  | -------------- | ------- | ---------- | - | ------------------------ | 
|                                           
|                                            |  | (In Thousands) |        
|Years to maturity:                          |  |                |         |            |   |                          | 
|One or less                                 |  | $              | 16,568  |            | $ | 16,850                   | 
|After one through five                      |  |                | 231,947 |            |   | 236,688                  | 
|After five through ten                      |  |                | 202,380 |            |   | 210,680                  | 
|After ten                                   |  |                | 9,328   |            |   | 10,171                   | 
|Mortgage-backed and asset-backed securities |  |                | 63,293  |            |   | 64,286                   | 
|                                            |  |                |         |            |   |                          | 
|Totals                                      |  | $              | 523,516 |            | $ | 538,675                  | 
|                                            |  |                |         |            |   |                          | 



The average weighted maturity of
the securities in the Companys fixed-maturity portfolio as of December 31, 2002, was 4.8 years. The average duration of the Companys fixed-maturity portfolio as of December 31, 2002, was 4.3 years.



In October 2001, the Company made a $15.0 million investment in a limited partnership,
which in turn invests in a portfolio of offshore hedge funds, managed accounts and other professionally managed funds that pursue non-traditional investment strategies. The investment return depends on the performance of the portfolio. The
investment had a value of $15.0 million at December 31, 2002. See Note 1 to Notes to Consolidated Financial Statements.



The Company maintains cash and highly liquid short-term investments, which at December 31, 2002, totaled $115.8 million.



19



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The following table summarizes the
Companys investment results for the three years ended December 31, 2002, 2001 and 2000:



|FOR THE YEARS ENDED DECEMBER 31                                   |  | 2002           |         |   | 2001 |   |         | 2000 | 
|----------------------------------------------------------------- |  | -------------- | ------- | - | ---- | - | ------- | ---- | 
|                                                                 
|                                                                  |  | (In Thousands) |        
|FIXED-MATURITY SECURITIES:                                        |  |                |         |   |      |   |         |      | 
|Average invested assets (includes short-term cash investments)(1) |  | $              | 639,853 |   |      | $ | 650,915 |      | 
|Net investment income:                                            |  |                |         |   |      |   |         |      | 
|Before income taxes                                               |  |                | 29,964  |   |      |   | 34,122  |      | 
|After income taxes                                                |  |                | 20,310  |   |      |   | 24,251  |      | 
|Average annual return on investments:                             |  |                |         |   |      |   |         |      | 
|Before income taxes                                               |  |                | 4.7     | % |      |   | 5.2     | %    | 
|After income taxes                                                |  |                | 3.2     | % |      |   | 3.7     | %    | 
|Net realized investment gains (losses) after income tax           |  | $              | 12,292  |   |      | $ | 3,708   |      | 
|EQUITY SECURITIES:                                                |  |                |         |   |      |   |         |      | 
|Average invested assets(2)                                        |  | $              | 31,668  |   |      | $ | 26,751  |      | 
|Net investment income:                                            |  |                |         |   |      |   |         |      | 
|Before income taxes                                               |  |                | 102     |   |      |   | 223     |      | 
|After income taxes                                                |  |                | 96      |   |      |   | 204     |      | 
|Average annual return on investments:                             |  |                |         |   |      |   |         |      | 
|Before income taxes                                               |  |                | 0.3     | % |      |   | 0.8     | %    | 
|After income taxes                                                |  |                | 0.3     | % |      |   | 0.8     | %    | 
|Net realized investment gains (losses) after income tax           |  | $              | 0       |   |      | $ | 1       |      | 
|OTHER SECURITIES:                                                 |  |                |         |   |      |   |         |      | 
|Average invested assets(3)                                        |  | $              | 30,551  |   |      | $ | 23,410  |      | 
|Net investment income:                                            |  |                |         |   |      |   |         |      | 
|Before income taxes                                               |  |                | 2,165   |   |      |   | 1,550   |      | 
|After income taxes                                                |  |                | 1,408   |   |      |   | 1,008   |      | 
|Average annual return on investments:                             |  |                |         |   |      |   |         |      | 
|Before income taxes                                               |  |                | 7.1     | % |      |   | 6.6     | %    | 
|After income taxes                                                |  |                | 4.2     | % |      |   | 4.3     | %    | 
|Net realized investment gains (losses) after income tax           |  | $              | 0       |   |      | $ | 0       |      | 

---

|(1) |  | Fixed-maturity securities at cost.
|--- |  | ----------------------------------

|(2) |  | Equities at market.
|--- |  | -------------------

|(3) |  | Principally real estate and interest on funds held.
|--- |  | ---------------------------------------------------



The Company recognized significant capital gains in 2002 primarily to generate statutory surplus to improve its capital adequacy ratios. In addition, the Company
moved its portfolio entirely into taxable securities to maximize its cash income based on its current tax position.



COMPETITION

---



The California physician professional liability insurance market is highly competitive. The Company competes principally with three physician-owned mutual or
reciprocal insurance companies and a physician-owned mutual protection trust for physician and medical group insureds. Each of these companies is actively soliciting insureds in Southern California, the Companys primary area of operations, and
each has offered very competitive rates during the past few years. The Company believes that the principal competitive factors, in addition to pricing, include financial stability, breadth and flexibility of coverage and the quality and level of
services provided. In addition, large commercial insurance companies actively compete in this market, particularly for larger medical groups, hospitals and other healthcare facilities. The



20



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Company has considered its A.M. Best rating to be extremely important to its ability to compete. On February 21, 2002, A.M. Best reduced the Insurance
Subsidiaries rating to B++ (Very Good) and on October 7, 2002, further reduced the Insurance Subsidiaries rating to B+ (Very Good). See A.M. Best Rating for a description of potential impact of these reductions.



The Company encountered similar competition from local doctor-owned insurance companies
and commercial companies in the other states it operated, principally under the Brown & Brown program. In Delaware, where the Company continues to operate, the Company competes principally through its relationship with a Delaware broker, who has
considerable and long-standing relationships with Delaware physician insureds.



In the assumed reinsurance markets, the Company competed with numerous international and domestic reinsurance and insurance operations. The reduction in the Companys A.M. Best rating below an A- level made it
extremely difficult for the Company to compete in this business. The Company has only one ongoing treaty in 2003. See Assumed Reinsurance Segment.



REGULATION

---



General



Insurance companies are regulated by government agencies in each state in which they transact insurance. The extent of regulation varies by state, but the regulation usually includes: (i) regulating premium
rates and policy forms; (ii) setting minimum capital and surplus requirements; (iii) regulating guaranty fund assessments; (iv) licensing companies and agents; (v) approving accounting methods and methods of setting statutory loss and expense
reserves; (vi) setting requirements for and limiting the types and amounts of investments; (vii) establishing requirements for the filing of annual statements and other financial reports; (viii) conducting periodic statutory examinations of the
affairs of insurance companies; (ix) approving proposed changes of control; and (x) limiting the amounts of dividends that may be paid without prior regulatory approval. Such regulation and supervision are primarily for the benefit and protection of
policyholders and not for the benefit of investors.



Licenses



SCPIE Indemnity, AHI and AHSIC are licensed in their respective
states of domicileCalifornia, Delaware and Arkansas. AHI is also licensed to transact insurance and reinsurance in 47 states and the District of Columbia. This permits ceding company clients to take credit on their regulatory financial
statements for reinsurance ceded to AHI in jurisdictions in which it is authorized as a reinsurer. AHSIC is licensed to write policies as an excess and surplus lines insurer in 34 states and the District of Columbia. SCPIE Indemnity is not licensed
in any jurisdiction outside of California.



SCPIE Underwriting Limited is
authorized under the laws of the United Kingdom to participate as a corporate member of Lloyds underwriting syndicates.



Most of the Companys healthcare liability insurance policies are written in California where SCPIE Indemnity is domiciled. California laws and regulations,
including the tort liability laws, and laws relating to professional liability exposures and reports, have the most significant impact on the Company and its operations.



Insurance Guaranty Associations



Most states, including California, require admitted property and casualty insurers to become members of insolvency funds or
associations that generally protect policyholders against the insolvency of such insurers. Members of the fund or association must contribute to the payment of certain claims made against insolvent insurers. Maximum contributions required by law in
any one year vary by state, and California permits a maximum assessment of 1% of annual premiums written by a member in that state during the preceding year. However, such payments are recoverable by law through policy surcharges.



21



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Holding Company Regulation



SCPIE Holdings is subject to the California Insurance Holding Company
System Regulatory Act (the Holding Company Act). The Holding Company Act requires the Company to periodically file information with the California Department of Insurance and other state regulatory authorities, including information relating to its
capital structure, ownership, financial condition and general business operations. Certain transactions between an insurance company and its affiliates of an extraordinary type may not be effected if the California Commissioner
disapproves the transaction within 30 days after notice. Such transactions include, but are not limited to, certain reinsurance transactions and sales, purchases, exchanges, loans and extensions of credit and investments, in the net aggregate,
involving more than the lesser of 3% of the insurers admitted assets or 25% of surplus as to policyholders, as of the preceding December 31.



The Holding Company Act also provides that the acquisition or change of control of a California insurance company or of any person or entity that
controls such an insurance company cannot be consummated without the prior approval of the California Insurance Commissioner. In general, a presumption of control arises from the ownership of voting securities and securities that are
convertible into voting securities, which in the aggregate constitute 10% or more of the voting securities of a California insurance company or of a person or entity that controls a California insurance company, such as SCPIE Holdings. A person or
entity seeking to acquire control, directly or indirectly, of the Company is generally required to file with the California Commissioner an application for change of control containing certain information required by statute and
published regulations and provide a copy of the application to the Company. The Holding Company Act also effectively restricts the Company from consummating certain reorganizations or mergers without prior regulatory approval.



The Company is also subject to insurance holding company laws in other states that
contain similar provisions and restrictions.



Regulation of Dividends
from Insurance Subsidiaries



The Holding Company Act also limits
the ability of SCPIE Indemnity to pay dividends to the Company. Without prior notice to and approval of the Insurance Commissioner, SCPIE Indemnity may not declare or pay an extraordinary dividend, which is defined as any dividend or distribution of
cash or other property whose fair market value together with other dividends or distributions made within the preceding 12 months exceeds the greater of such subsidiarys statutory net income of the preceding calendar year or 10% of statutory
surplus as of the preceding December 31. 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 is approved by the Insurance Commissioner. In addition, an insurance company is required to give the
California Department of Insurance notice of any dividend after declaration, but prior to payment.



The other insurance subsidiaries are subject to similar provisions and restrictions under the insurance holding company laws of the other states in which they are organized.



Risk-Based Capital



The NAIC has developed a methodology for assessing the adequacy of statutory surplus of
property and casualty insurers which includes a risk-based capital (RBC) formula that attempts to measure statutory capital and surplus needs based on the risks in a companys mix of products and investment portfolio. The formula is designed to
allow state insurance regulators to identify potentially under-capitalized companies. Under the formula, a company determines its authorized control level RBC by taking into account certain risks related to the insurers assets (including risks
related to its investment portfolio and ceded reinsurance) and the insurers liabilities (including underwriting risks related to the nature and experience of its insurance business). The RBC rules provide for four different levels of
regulatory attention depending on the ratio of a companys total adjusted capital to its authorized control level RBC. The threshold requiring the least regulatory attention is a company action level when total adjusted capital is less than or
equal to 200% of the authorized control level RBC and the level requiring the most regulatory involvement is a mandatory control level RBC when total



22



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adjusted capital is less than 70% of authorized control level RBC. At the mandatory control level the state insurance commissioner is required to
restrict the writing of business or place the insurer under regulatory supervision or control.



At December 31, 2002, the authorized control level RBC of each Insurance Subsidiary exceeded the threshold requiring the least regulatory attention. At December 31, 2002, SCPIE Indemnity exceeded this threshold by $32.0
million. If the Company continues to incur material losses, the Company could fall below this threshold.



Regulation of Investments



The Insurance Subsidiaries are subject to state laws and regulations that require diversification of their investment portfolios and limit the amount of investments in certain investment categories such as below investment grade
fixed-income securities, real estate and equity investments. Failure to comply with these laws and regulations would cause investments exceeding regulatory limitations to be treated as nonadmitted assets for purposes of measuring statutory surplus
and, in some instances, would require divestiture of these non-qualifying investments over specified time periods unless otherwise permitted by the state insurance authority under certain conditions.



Prior Approval of Rates and Policies



Pursuant to the California Insurance Code, the Company must submit rating plans, rates,
policies and endorsements to the Insurance Commissioner for prior approval. The possibility exists that the Company may be unable to implement desired rates, policies, endorsements, forms or manuals if the Insurance Commissioner does not approve
these items. In the past, all of the Companys rate applications have been approved in the normal course of review. AHI is similarly required to make policy form and rate filings in most of the other states to permit the Company to write
medical malpractice insurance in these states. AHSIC is required in many states to obtain approval to issue policies as a non-admitted excess and surplus lines insurer, but it is typically not required to obtain rate approvals.



The Company has filed for a 15.6% rate increase in California for 2003 which is
currently pending implementation. The Foundation for Taxpayer and Consumer Rights, a California-based non-profit education and advocacy organization, intervened in the rate-making process and the Department of Insurance commenced a rate hearing on
March 11, 2003, related to this matter. The Company believes its rate request is fully justified and supported by its filing. The Company believes that the result of this hearing will be an approved rate increase, but cannot anticipate at what level
or when it could be implemented. The administrative law judge overseeing the hearing should make her recommendation to the California Insurance Commissioner in late June 2003.



Medical Malpractice Tort Reform



The California Medical Injury Compensation Reform Act (MICRA), enacted in 1975, has been one of the most comprehensive medical
malpractice tort reform measures in the United States. MICRA currently provides for limitations on damages for pain and suffering of $250,000, limitations on fees for plaintiffs attorneys according to a specified formula, periodic payment of
medical malpractice judgments and the introduction of evidence of collateral source benefits payable to the injured plaintiff. The Company believes that this legislation has brought stability to the medical malpractice insurance marketplace in
California by making it more feasible for insurers to assess the risks involved in underwriting this line of business. Bills have been introduced in the California Legislature from time to time to modify or limit certain of the tort reform benefits
provided to physicians and other healthcare providers by MICRA. Neither the proponents nor opponents have been able to enact significant changes. The Company cannot predict what changes, if any, to MICRA may be enacted during the next few years or
what effect such changes might have on the Companys medical malpractice insurance operations.



Medical Malpractice Reports



The
Company has been required to report detailed information with regard to settlements or judgments against its California physician insureds in excess of $30,000 to the Medical Board of California, which has responsibility for



23



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investigations and initiation of proceedings relating to professional medical conduct in California. Since January 1, 1998, all judgments, regardless
of amount, must be reported to the Medical Board, which now publishes on the Internet all judgments reported. In addition, all payments must also be reported to the federal National Practitioner Data Bank and such reports are accessible by state
licensing and disciplinary authorities, hospital and other peer review committees and other providers of medical care. A California statute also requires that defendant physicians must consent to all medical professional liability settlements in
excess of $30,000, unless the physician waives this requirement. The Companys policy provides the physician with the right to consent to any such settlement, regardless of the amount, but that either party may submit the matter of consent to a
medical review board. In virtually all instances, the Company must obtain the consent of the insured physician prior to any settlement.



Terrorism Risk Insurance Act of 2002



Under the Federal Terrorism Risk Insurance Act, effective November 26, 2002, each commercial property and casualty insurer is required to make terrorism coverage
available in policies for property and liability coverages other than medical malpractice coverage (which is excluded under the Act). Any terrorism exclusion in a subject policy is rendered void by the Act to the extent it excludes losses covered by
the Act. The federal government will pay a major share of the covered losses after a deductible is paid by the insurers. The Company provides other liability coverages in its various policies, in addition to medical malpractice insurance, and may be
subject to the Act. The Companys policy forms do not exclude coverage for acts of terrorism, except in a few instances. The Company has notified its policyholders of this coverage as provided by the Act, has removed any terrorism exclusion in
its policies, and has informed its policyholders that no premium is currently charged for acts of terrorism coverage. The Company does not consider this coverage material to its policies, which protect its insureds principally against liability, not
property losses.



A.M. BEST RATING

---



A.M. Best rates insurance companies based on factors of
concern to policyholders. A.M. Best currently assigns to each insurance company a rating that ranges from A++ (Superior) to F (In Liquidation). A.M. Best reviews a companys profitability, leverage and liquidity, as well
as its book of business, the adequacy and soundness of its reinsurance, the quality and estimated market value of its assets, the adequacy of its loss reserves, the adequacy of its surplus, its capital structure, the experience and competence of its
management and its market presence. A.M. Bests ratings reflect its opinion of an insurance companys financial strength, operating performance and ability to meet its obligations to policyholders and are not evaluations directed to
purchasers of an insurance companys securities.



For a number of
years, the Insurance Subsidiaries received an A.M. Best rating of A (Excellent), the third highest of thirteen rating classifications. On February 21, 2002, A.M. Best reduced the Insurance Subsidiaries rating two levels to B++ (Very Good), and
on October 7, 2002, A.M. Best further reduced the Companys rating to B+ (Very Good). This classification meets A.M. Bests Secure definition. A.M. Best assigns this rating to companies that in its view have, on balance, good
balance sheet strength, operating performance and business profile and which have a good ability to meet their ongoing obligations to policyholders.



An A.M. Best rating of at least an A- classification is important to some consumers in the property/casualty insurance industry. At the present time, the Company
has not been significantly affected by the lower A.M. Best ratings. The Company believes that its major competitors in California may use the Insurance Subsidiaries lower A.M. Best rating in an attempt to solicit some of the Companys
customers.



The Insurance Subsidiaries participate in a pooling arrangement
and each of the Insurance Subsidiaries has been assigned the same pooled B+ (Very Good) A.M. Best rating based on their consolidated performance.



24



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EMPLOYEES

---



As of December 31, 2002, the Company employed
160 persons. This reflects a net reduction of 30.7% during 2002 in recognition of the anticipated reduction in operations as the Company focuses on its core operations and withdraws from other states. None of the employees are covered by a
collective bargaining agreement. The Company believes that its employee relations are good.



EXECUTIVE OFFICERS

---



The Executive Officers of the Company and their ages as of March 18, 2003, are as follows:



|NAME               |  | AGE |  | POSITION                                                              
|------------------ |  | --- |  | ----------------------------------------------------------------------
|                  
|Donald J. Zuk      |  | 66  |  | President, Chief Executive Officer and Director                       
|Ronald L. Goldberg |  | 51  |  | Senior Vice President, Underwriting                                   
|Patrick S. Grant   |  | 60  |  | Senior Vice President, Marketing                                      
|Joseph P. Henkes   |  | 53  |  | Secretary and Senior Vice President, Operations and Actuarial Services
|Robert B. Tschudy  |  | 54  |  | Senior Vice President and Chief Financial Officer                     
|Edward G. Marley   |  | 42  |  | Vice President and Chief Accounting Officer                           
|Donald P. Newell   |  | 65  |  | Senior Vice President, General Counsel and Director                   
|Timothy C. Rivers  |  | 54  |  | Senior Vice President, Assumed Reinsurance                            
|Margaret A. McComb |  | 59  |  | Senior Vice President, Claims                                         



Donald J. Zuk became Chief
Executive Officer of the Companys predecessor in 1989. Prior to joining the Company, he served 22 years with Johnson & Higgins, insurance brokers. His last position there was Senior Vice President in charge of its Los Angeles Health Care
operations, which included the operations of the Companys predecessor. Mr. Zuk is a director of BCSI Holdings Inc. and Homeowners Holding Company, both privately held insurance companies.



Ronald L. Goldberg joined the Company in May 2001. From June 2000 to April 2001, Mr.
Goldberg was a Senior Consultant to ChannelPoint, Inc., a privately held firm providing technology services to the insurance industry. Prior to that time, Mr. Goldberg served as Senior Vice President of the PHICO Group, a privately held professional
liability insurer, from June 1998 to May 2000, and as President of its Independence Indemnity Insurance Company subsidiary. From April 1993 to May 1998, he was Vice President of USF&G Insurance Co., a large diversified insurance company that is
now part of The St. Paul Companies, Inc.



Patrick S. Grant has been with
the Company since 1990, serving initially as Vice President, Marketing. He was named Senior Vice President, Marketing in 1992. Prior to that time, he spent almost 20 years with the insurance brokerage firm of Johnson & Higgins. His last position
there was Vice President, Professional Liability. Mr. Grant has worked on the Company operations since 1976.



Joseph P. Henkes has been with the Company since 1990, serving initially as Vice President, Operations and Actuarial Services. He was named Senior Vice President, Operations and Actuarial Services in 1992. Prior
to that time, he spent three years with Johnson & Higgins, where his services were devoted primarily to the Company. He has been an Associate of the Casualty Actuarial Society since 1975 and a member of the American Academy of Actuaries since
1980.



25



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Edward G. Marley joined the Company in
December 2001 as Vice President and Controller. Prior to that time, he spent 14 years with CAMICO Mutual Insurance Company where he served as Chief Financial Officer, Secretary and Treasurer.



Margaret A. McComb has been with the Company for over 27 years. She assumed management
responsibility for the Claims Department in 1985. Ms. McComb was named Senior Vice President in May 2002.



Donald P. Newell joined the Company in January 2001. Prior to that time, he was a partner at the law firm of Latham & Watkins in San Diego, California. Mr. Newell has worked on matters for the Company since
1975.



Timothy C. Rivers has been with the Company since August 1999. Prior
to that time, he spent 17 years with Guy Carpenter & Company, a reinsurance brokerage subsidiary of Marsh McLennan, and a predecessor business, Willcox & Company. Mr. Rivers has worked on the Company operations since 1985.



Robert B. Tschudy joined the Company in May 2002. From July 1995 to March 2001, Mr.
Tschudy was Senior Vice President and Chief Financial Officer with 21st Century Insurance Group, a publicly held property casualty insurance company writing primarily personal automobile insurance in California. Prior to that time, Mr. Tschudy was a
partner, specializing in insurance, in the Los Angeles Office of Ernst & Young LLP for over 10 years.



RISK FACTORS

---



Certain statements in this Form 10-K that are not historical fact constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such
forward-looking statements involve known and unknown risks, uncertainties and other factors which 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. Such risks, uncertainties and other factors include, but are not limited to, the following:



Concentration of Business



Substantially all of the Companys direct premiums written are generated from healthcare liability insurance policies issued to physicians and medical groups,
healthcare facilities and other providers in the healthcare industry. As a result, negative developments in the economic, competitive or regulatory conditions affecting the healthcare liability insurance industry, particularly as such developments
might affect medical malpractice insurance for physicians and medical groups, could have a material adverse effect on the Companys results of operations.



Most of the Companys 2003 premiums written will be generated in California. The revenues and profitability of the Company are therefore subject to prevailing
regulatory, economic and other conditions in California, particularly Southern California.



Disappointing Results in Expansion Efforts



In 1996, the Company began a concerted effort to successfully expand its healthcare liability insurance business beyond its traditional focus of physicians and medical groups in California. The Company expanded initially into the
market for hospitals. From 1997 to 1999, the Company added more than 75 hospitals to its program. At the same time, the Company expanded its physician and medical group program into a number of other states, principally through its arrangement with
Brown & Brown and through nonstandard physician programs.



The results
of this expansion effort have been disappointing. During 2000, the Company encountered severe adverse loss experience under its hospital policies, and has entirely withdrawn from this market. In 2001 and 2002, the Company incurred similar
unacceptable losses in its principal physician and medical group programs outside California. The Company agreed to terminate its relationship with Brown & Brown and ceased accepting all policies under these programs as of March 6, 2003. In
addition, the Company has ceased accepting new nonstandard insureds outside California. In the interim, the Company continued to renew existing policies and issue new policies under very stringent



26



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underwriting standards and at significantly higher premiums. The Company may continue to incur material losses under both these programs, as it
continues to settle and adjudicate claims under policies issued in these programs.



The Company has one other non-California program for physicians and medical groups and may consider adding programs on a selective basis in the future. The Company cannot predict whether this remaining program will be successful or
whether the Company will have the opportunity to add such programs, and, if so, whether any additional program will be successful.



Industry Factors



Many factors influence the financial results of the healthcare liability 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.



The availability of healthcare liability insurance, or the
industrys underwriting capacity, is determined principally by the industrys level of capitalization, historical underwriting results, returns on investment and perceived premium rate adequacy. Historically, the financial performance of
the healthcare liability industry has tended to fluctuate between a soft insurance market and a hard insurance market. In a soft insurance market, competitive conditions could result in premium rates and underwriting terms and conditions that may be
below profitable levels. For a number of years, the healthcare liability insurance industry in California and nationally has faced a soft insurance market. Although the Company and many experts believe this currently is a hard insurance market,
there can be no assurance as to whether or when industry conditions will improve or the extent to which any improvement in industry conditions may improve the Companys financial condition and results of operations.



Competition



The Company competes with numerous insurance companies in the California market. The Companys principal competitors for
physicians and medical groups in California consist of three physician-owned mutual or reciprocal insurance companies, several commercial companies and a physicians mutual protection trust, which levies assessments primarily on a claims
paid basis. In addition, commercial insurance companies compete for the medical malpractice insurance business of larger medical groups and other healthcare providers. Several of these competitors have greater financial resources than the
Company. Between 1993 and 2001, the Company instituted overall rate increases in order to improve its underwriting results. These rate increases were higher than those implemented by most of its competitors. As a result, the Company has lost some of
its policyholders, in part due to its rate increases. In 2002, the Company instituted an average 8.4% rate increase for California physicians and medical groups and has filed for a 15.6% rate increase for 2003. The effect of these rate increases on
the Companys ability to retain and expand its healthcare liability insurance business in California is uncertain.



In addition to pricing, competitive factors may include policyholder dividends, financial stability, breadth and flexibility of coverage and the quality and level
of services provided.



The Company has considered its A.M. Best rating to
be extremely important to its ability to compete in its markets, particularly in its assumed reinsurance segment. On February 21, 2002, A.M. Best reduced the Companys rating two classifications from A (Excellent) to B++ (Very Good) and further
reduced the Companys rating to B+ (Very Good) on October 7, 2002. See Importance of A.M. Best Rating.



Loss and LAE Reserves



The reserves for losses and LAE established by the Company are estimates of amounts needed to pay reported and unreported claims and related LAE. The estimates are
based on assumptions related to the ultimate cost of settling such claims based on facts and interpretation of circumstances then known, predictions of future events, estimates of future



27



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trends in claims frequency and severity and judicial theories of liability, legislative activity and other factors. However, establishment of
appropriate reserves is an inherently uncertain process involving estimates of future losses, and there can be no assurance that currently established reserves will prove adequate in light of subsequent actual experience. The inherent uncertainty is
greater for certain types of insurance, such as medical malpractice, where a longer period may elapse before a definite determination of ultimate liability is made, and where the judicial, political and regulatory climates are changing. Healthcare
liability claims and expenses may be paid over a period of 10 or more years, which is longer than most property and casualty claims. Trends in losses on long-tail lines of business such as healthcare liability may be slow to appear, and accordingly,
the Companys reaction in terms of modifying underwriting practices and changing premium rates may lag underlying loss trends. While the Company believes that its reserves for losses and LAE are adequate, there can be no assurance that the
Companys ultimate losses and LAE will not deviate, perhaps substantially, from the estimates reflected in the Companys financial statements. If the Companys reserves should prove inadequate, the Company will be required to increase
reserves, which could have a material adverse effect on the Companys financial condition or results of operations.



Pending Rate Increase in California



In September 2002, the Company filed an application with the California Department of Insurance for a rate increase for physicians and medical groups of
approximately 15.6%, effective January 1, 2003. A self-styled consumer group objected to this proposed rate increase in November 2002, and requested a hearing on the application. The Department granted a hearing pursuant to state procedural rules.
The hearing commenced on March 11, 2003, before an administrative law judge. The Company expects the judge to render her decision in late June 2003. After the judge renders her decision, that decision is subject to review by the California Insurance
Commissioner, who may adopt, modify or reject the decision of the administrative law judge. After the Insurance Commissioner renders his decision, either party may institute judicial review. If the decision is adverse to the Company or if there are
substantial delays in implementing a favorable decision, the Companys operations would be adversely affected.



Necessary Capital and Surplus



The Insurance Subsidiaries have historically operated with ratios of net written premiums to statutory capital and surplus (policyholder surplus) of approximately 1
to 1, which the Company considers to be an appropriate measure of safety for the combination of insurance segments in which it writes. At the end of 2000, this ratio was .84 to 1. As a result of the increases in net premiums written, particularly in
the assumed reinsurance segment, and the substantial net losses the Company incurred during 2001 and 2002, the ratio increased unfavorably to 1.54 to 1 at December 31, 2001, and 1.61 to 1 at December 31, 2002. The Company expects a material decrease
in net premiums written during 2003 as a result of the decrease in the direct healthcare liability insurance written outside of California and the cession of assumed reinsurance premium to GoshawK. Based on the Companys expected premium
writings in 2003, the ratio of net written premiums to statutory capital and surplus is expected to decrease to approximately a 1 to 1 ratio. However, if the losses and loss reserve increases the Company has experienced in recent years continue and
the Company is unable to obtain capital sufficient to offset them, the Companys ability to write policies at its current expected levels may be limited. Moreover, if these and similar leverage ratios do not improve, the Insurance
Subsidiaries ratings from A.M. Best may not improve and if they worsen, the Insurance Subsidiaries ability to write business may be further reduced. In addition, at December 31, 2002, the Companys principal insurance subsidiary
exceeded minimum requirements of an NAIC risk-based capital threshold (requiring some regulatory attention) by $32.0 million. If the Company continues to incur material losses, the Company could fall below this threshold. Any of the events discussed
above could have a material adverse effect on the Companys financial condition and results of operations.



Changes in Healthcare



Significant attention has recently been focused on reforming the healthcare system at both the federal and state levels. A broad range of healthcare reform and patients rights measures have been suggested, and public discussion
of such measures will likely continue in the future. Proposals have included, among others, spending limits, price controls, limits on increases in insurance premiums, limits on the liability of doctors and hospitals for tort claims, increased tort
liabilities



28



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for managed care organizations and changes in the healthcare insurance system. The Company cannot predict which, if any, reform proposals will be
adopted, when they may be adopted or what impact they may have on the Company. While some of these proposals could be beneficial to the Company, the adoption of others could have a material adverse effect on the Companys financial condition or
results of operations.



In addition to regulatory and legislative efforts,
there have been significant market-driven changes in the healthcare environment. In recent years, a number of factors related to the emergence of managed care have negatively impacted or threatened to impact the medical practice and
economic independence of physicians. Physicians have found it more difficult to conduct a traditional fee for service practice and many have been driven to join or contractually affiliate with managed care organizations, healthcare delivery systems
or practice management organizations. This consolidation could result in the elimination or significant decrease in the role of the physician and the medical group from the medical professional liability purchasing decision. In addition, the
consolidation could reduce primary medical malpractice insurance premiums paid by healthcare systems, as larger healthcare systems generally retain more risk by accepting higher deductibles and self-insured retentions or form their own captive
insurance companies.



Importance of A.M. Best Rating



A.M. Best ratings are an increasingly important factor in
establishing the competitive position of insurance companies. An A.M. Best rating reflects its opinion of an insurance companys financial strength, operating performance and ability to meet its obligations to policyholders. Prior to 2002, the
Company held an A (Excellent) rating from A.M. Best. This is the same rating held by the Companys principal competitors in the healthcare liability insurance market in California.



On February 21, 2002, A.M. Best reduced the Insurance Subsidiaries rating to B++ (Very Good) and further reduced the Insurance
Subsidiaries rating to B+ (Very Good) on October 7, 2002. This puts the Insurance Subsidiaries at a competitive disadvantage with its principal California competitors. The Insurance Subsidiaries rely heavily on their longstanding
policyholder relations and reputation in California, and compete principally on this basis in the California market. The Insurance Subsidiaries have not currently experienced a significant loss of business because of this A.M. Best rating, however,
competitors could use their rating advantage to attract some of the Insurance Subsidiaries customers. If the Insurance Subsidiaries continue to encounter the adverse loss experience they have seen in recent years, the Insurance
Subsidaries A.M. Best rating may be further reduced, which could have a material adverse effect on the Insurance Subsidiaries ability to continue to write policies in some segments of the market.



Ceded Reinsurance



The amount and cost of reinsurance available to companies specializing in medical
professional liability insurance are subject, in large part, to prevailing market conditions beyond the control of the Company. The Companys ability to provide professional liability insurance at competitive premium rates and coverage limits
on a continuing basis will depend in part upon its ability to secure adequate reinsurance in amounts and at rates that are commercially reasonable. Although the Company anticipates that it will continue to be able to obtain such reinsurance on
reasonable terms, there can be no assurance that this will be the case. In the past three years, the Company experienced a number of large paid losses under its healthcare liability insurance policies that were in excess of the limits of insurance
retained by the Company and thus were borne by the reinsurers. In addition, the September 11, 2001, terrorist attack has reduced capacity and increased rates in the reinsurance market generally.



The Company is subject to a credit risk with respect to its reinsurers because
reinsurance does not relieve the Company of liability to its insureds for the risks ceded to reinsurers. Although the Company places its reinsurance with reinsurers it believes to be financially stable, a significant reinsurers inability to
make payment under the terms of a reinsurance treaty could have a material adverse effect on the Company. See BusinessCeded Reinsurance.



Assumed Reinsurance Market Exposure



Between 1999 and 2002, the Company rapidly expanded its assumed reinsurance operations. Treaties include professional, commercial and personal liability coverages,
commercial and residential property risks, accident and



29



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health coverages and marine coverages on a worldwide basis. During 2001 and 2002, assumed reinsurance premiums earned were $79.5 million and $122.5
million respectively on treaties in existence. Except for September 11, 2001, losses, loss experience for the division is based almost entirely on actuarial estimates, as actual losses are still in the early stages of development. Actual experience
could materially exceed or be less than these estimates. Although significant protection is afforded the Company under the GoshawK treaty, excessive loss development, especially for the 2000 underwriting year or the September 11, 2001, events, could
adversely affect the Companys results of operations and financial conditions.



Highlands Insurance Group Contingent Liability



Between January 1, 2000, and April 30, 2001, the Company issued endorsements to certain policyholders of the insurance company subsidiaries of Highlands Insurance Group, Inc. (HIG). Under these endorsements, the Company agreed to
assume the policy obligations of the HIG insurance company subsidiaries, if the subsidiaries became unable to pay their obligations by reason of having been declared insolvent by a court of competent jurisdiction. The coverages included property,
workers compensation, commercial automobile, general liability and umbrella. The gross premiums written by the HIG subsidiaries were approximately $88.0 million for the subject policies. In November 2001, HIG disclosed that its A.M. Best
rating had been reduced to C- and that its financial plan might trigger some level of regulatory involvement. In December 2001, HIG announced that it would cease issuing any new or renewal policies as soon as practical. HIG has advised the Company
that at December 31, 2002, the HIG insurance company subsidiaries had paid losses and LAE under the subject policies of $50.6 million and had established case loss reserves of $18.6 million, net of reinsurance. Incurred but not reported losses are
expected to emerge; however, the amount cannot be reasonably determined at this time. If the HIG insurance company subsidiaries are declared insolvent at some future date by a court of competent jurisdiction and are unable to pay losses under the
subject policies, the Company would be responsible to pay the amount of the losses incurred and unpaid at such date, and the Company would be entitled to indemnification of a portion of this loss from certain of the reinsurers of the HIG insurance
company subsidiaries. The Company would also be subrogated to the rights of the policyholders as creditors of the HIG insurance company subsidiaries.



In a court document dated October 31, 2002, in connection with a bankruptcy petition for the HIG non-insurance subsidiaries, HIG disclosed that the insurance
subsidiaries had combined policyholder surplus of approximately $41 million at December 31, 2001. In addition, the court document included projections of HIGs insurance subsidiaries for the next five years which project that they would
continue to meet their obligations to their policyholders. HIGs insurance subsidiaries are currently in voluntary liquidation and under close supervision by the state insurance departments involved. The ultimate impact on the HIG insurance
company subsidiaries of regulatory action, if any, is not currently determinable, but could be significant.



Holding Company StructureLimitation on Dividends



SCPIE Holdings is an insurance holding company whose assets consist of all of the outstanding capital stock of SCPIE Indemnity, which in turn owns all of the outstanding capital stock of AHI and AHSIC. As an
insurance holding company, SCPIE Holdings ability to meet its obligations and to pay dividends, if any, may depend upon the receipt of sufficient funds from SCPIE Indemnity. The payment of dividends to SCPIE Holdings by SCPIE Indemnity is
subject to general limitations imposed by California insurance laws. See BusinessRegulationRegulation of Dividends from Insurance Subsidiaries and Note 6 to Consolidated Financial Statements.



Anti-Takeover Provisions



SCPIE Holdings amended and restated certificate of incorporation and amended and
restated bylaws include provisions that may delay, defer or prevent a takeover attempt that stockholders may consider to be in their best interests. These provisions include:



| |  |  | a classified Board of Directors;
| | - |  | --------------------------------



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| |  |  | authorization to issue up to 5,000,000 shares of preferred stock, par value $1.00 per share, in one or more series with such rights, obligations, powers and preferences as the
Board of Directors may provide;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | a limitation which permits only the Board of Directors, the Chairman of the Board or the President of SCPIE Holdings to call a special meeting of stockholders;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | a prohibition against stockholders acting by written consent;
| | - |  | -------------------------------------------------------------



| |  |  | provisions prohibiting directors from being removed without cause and only by the affirmative vote of holders of two-thirds of the outstanding shares of voting securities;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | provisions allowing the Board of Directors to increase the size of the Board and to fill vacancies and newly created directorships; and
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------



| |  |  | advance notice procedures for nominating candidates for election to the Board of Directors and for proposing business before a meeting of stockholders.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------



In addition, state insurance holding company laws applicable
to the Company in general provide that no person may acquire control of SCPIE Holdings without the prior approval of appropriate insurance regulatory authorities. See BusinessRegulationHolding Company Regulation.



The Company has also adopted a rights plan that could discourage, delay or
prevent an acquisition of the Company that is not approved by the Board of Directors of the Company. The rights plan provides for preferred stock purchase rights attached to each share of the Companys Common Stock, which will cause substantial
dilution to a person or group acquiring 20% or more of the Companys outstanding stock if the acquisition is not approved by the Companys Board of Directors.



Regulatory and Related Matters



Insurance companies are subject to supervision and regulation by the state insurance authority in each state in which they transact business. Such supervision and
regulation relate to numerous aspects of an insurance companys business and financial condition, including limitations on lines of business, underwriting limitations, the setting of premium rates, the establishment of standards of solvency,
statutory surplus requirements, the licensing of insurers and agents, concentration of investments, levels of reserves, the payment of dividends, transactions with affiliates, changes of control and the approval of policy forms. Such regulation is
concerned primarily with the protection of policyholders interests rather than stockholders interests. See BusinessRegulation.



The Risk-Based Capital (RBC) rules provide for different levels of regulatory attention depending on the amount of a companys total adjusted capital compared
to its various RBC levels. At December 31, 2002, each of the Insurance Subsidiaries RBC exceeded the threshold requiring the least regulatory attention. At December 31, 2002, SCPIE Indemnity exceeded this threshold by $32.0 million. If the
Company continues to incur material losses, the Company could fall below this threshold.



State regulatory oversight and various proposals at the federal level may in the future adversely affect the Companys results of operations. In recent years, the state insurance regulatory framework has come under increased
federal scrutiny, and certain state legislatures have considered or enacted laws that alter and, in many cases, increase state authority to regulate insurance companies and insurance holding company systems. Further, the NAIC and state insurance
regulators are reexamining existing laws and regulations, which in many states has resulted in the adoption of certain laws that specifically focus on insurance company investments, issues relating to the solvency of insurance companies, RBC
guidelines, interpretations of existing laws, the development of new laws and the definition of extraordinary dividends. See BusinessRegulation.



State Income Taxes on Dividends to Parent Company



In the third quarter of 2002, the Company received a notice of assessment from the California Franchise Tax Board (FTB) for 1997, 1998,
1999 and 2000 in the total amount of $15.4 million, not including the federal tax benefits from the payment of



31



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such assessment or interest that might be included on amounts, if any, ultimately paid to the FTB. The assessment is the result of a memorandum issued
by the FTB in April 2002. The memorandum, which is based partly on the California Court of Appeals Decision in Ceridian v. Franchise Tax Board, challenges the exclusion from California income tax of dividends received by holding companies
from their insurance company subsidiaries during the tax years ended on or after December 1, 1997. The assessed amounts, if paid, may be offset, in part, by federal tax benefits. The Company has protested these assessments and while the Company
intends to vigorously protest the current and any future assessments, there can be no assurance as to the ultimate outcome of these protests. No amount has been reported in the financial statements pending the resolution of this industry-wide issue.



ITEM 2.    PROPERTIES



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 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 Assumed Reinsurance division in Summit, New Jersey, and claims offices in Reston, Virginia, and San Diego, California. During 2001, the Company closed marketing
offices in Phoenix, Arizona, Addison, Texas, and Boca Raton, Florida. During 2002, the Company closed its claims offices in Tampa, Florida, and Sacramento, California.



The Company is the owner of two office buildings that were previously occupied by the Companys headquarters, both located in
Beverly Hills, California. One building contains approximately 25,000 square feet of office space and the other office building contains approximately 24,000 square feet. Both office buildings are currently unencumbered and are fully leased to
unaffiliated parties.



ITEM 3.    LEGAL PROCEEDINGS



The Company is named as defendant in various legal actions primarily arising from claims made under insurance policies and contracts. These actions are considered by the Company in estimating the loss and loss adjustment expense
reserves. The Companys management believes that the resolution of these actions will not have a material adverse effect on the Companys financial position or results of operations.



ITEM 4.    SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS



No matters were submitted to a vote of security holders during the fourth quarter of 2002.



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PART II



ITEM 5.    MARKET FOR REGISTRANTS COMMON EQUITY AND RELATED STOCKHOLDER MATTERS



Price Range of Common Stock



The Companys Common Stock is publicly traded on the New York Stock Exchange under the symbol SKP. The following table shows the price ranges per
share in each quarter, during the last two years:



|                                   |  | HIGH |       | LOW
|---------------------------------- |  | ---- | ----- | ---
|                                  
|2001                               |  |      |       |    
|First quarter                      |  | $    | 29.57 |    
|Second quarter                     |  | $    | 21.00 |    
|Third quarter                      |  | $    | 21.50 |    
|Fourth quarter                     |  | $    | 29.25 |    
|2002                               |  |      |       |    
|First quarter                      |  | $    | 29.43 |    
|Second quarter                     |  | $    | 16.70 |    
|Third quarter                      |  | $    | 6.02  |    
|Fourth quarter                     |  | $    | 7.15  |    
|2003                               |  |      |       |    
|First quarter (January 1March 18) |  | $    | 7.16  |    



On March 18, 2003, the closing
price of the Companys common stock was $6.13.



Stockholders of
Record



The approximate number of stockholders of record of the
Companys Common Stock as of March 18, 2003, was 5,400.



Dividends



SCPIE Holdings paid cash
dividends on its common stock of $0.40 per share in 2001 and 2002. On February 27, 2003, the Board of Directors declared a $0.10 quarterly dividend payable on March 31, 2003, to stockholders of record on March 17, 2003. The continued 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 a holding company, SCPIE Holdings is largely dependent upon dividends from its subsidiaries to pay dividends to its stockholders.
These subsidiaries are subject to state laws that restrict their ability to distribute dividends. State law permits payment of dividends and advances within any 12-month period without any prior regulatory approval in an amount up to the greater of
10% of statutory earned surplus at the preceding December 31 or statutory net income for the calendar year preceding the date the dividend is paid. Under these restrictions, neither AHI nor AHSIC may pay a dividend during 2003 to SCPIE Indemnity.
SCPIE Indemnity paid a dividend of $3 million in 2002 to SCPIE Holdings and is entitled to pay dividends in 2003 of up to approximately $15.6 million. See BusinessRegulationRegulation of Dividends from Insurance Subsidiaries
and Note 6 of the Notes to Consolidated Financial Statements.



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ITEM 6.    SELECTED CONSOLIDATED FINANCIAL DATA



|AS OF OR FOR THE YEARS ENDED DECEMBER 31,            |  | 2002                                  |           |   | 2001 |   |         | 2000 |  |   | 1999    |   |  | 1998 |        
|---------------------------------------------------- |  | ------------------------------------- | --------- | - | ---- | - | ------- | ---- |  | - | ------- | - |  | ---- | -------
|                                                    
|                                                     |  | (In Thousands, except per share data) |          
|INCOME STATEMENT DATA:                               |  |                                       |           |   |      |   |         |      |  |   |         |   |  |      |        
|Net premiums written(1)                              |  | $                                     | 251,750   |   |      | $ | 280,807 |      |  | $ | 208,203 |   |  | $    | 153,896
|                                                     |  |                                       |           |   |      |   |         |      |  |   |         |   |  |      |        
|Premiums earned                                      |  | $                                     | 286,063   |   |      | $ | 235,935 |      |  | $ | 176,502 |   |  | $    | 153,192
|Net investment income                                |  |                                       | 32,231    |   |      |   | 35,895  |      |  |   | 34,152  |   |  |      | 37,697 
|Realized investment gains and other revenue          |  |                                       | 20,940    |   |      |   | 7,909   |      |  |   | 1,602   |   |  |      | 423    
|                                                     |  |                                       |           |   |      |   |         |      |  |   |         |   |  |      |        
|Total revenues                                       |  |                                       | 339,234   |   |      |   | 279,739 |      |  |   | 212,256 |   |  |      | 191,312
|                                                     |  |                                       |           |   |      |   |         |      |  |   |         |   |  |      |        
|Losses and loss adjustment expenses                  |  |                                       | 320,516   |   |      |   | 304,473 |      |  |   | 152,602 |   |  |      | 122,780
|Other operating expenses                             |  |                                       | 79,676    |   |      |   | 64,732  |      |  |   | 36,483  |   |  |      | 29,310 
|Interest expenses                                    |  |                                       | 66        |   |      |   | 1,416   |      |  |   | 780     |   |  |      | 25     
|                                                     |  |                                       |           |   |      |   |         |      |  |   |         |   |  |      |        
|Total expenses                                       |  |                                       | 400,258   |   |      |   | 370,621 |      |  |   | 189,865 |   |  |      | 152,115
|                                                     |  |                                       |           |   |      |   |         |      |  |   |         |   |  |      |        
|Income (loss) before federal income taxes            |  |                                       | (61,024   | ) |      |   | (90,882 | )    |  |   | 22,391  |   |  |      | 39,197 
|Federal income taxes (benefit)                       |  |                                       | (22,642   | ) |      |   | (32,906 | )    |  |   | 5,120   |   |  |      | 9,295  
|                                                     |  |                                       |           |   |      |   |         |      |  |   |         |   |  |      |        
|Net income (loss)                                    |  | $                                     | (38,382   | ) |      | $ | (57,976 | )    |  | $ | 17,271  |   |  | $    | 29,902 
|                                                     |  |                                       |           |   |      |   |         |      |  |   |         |   |  |      |        
|BALANCE SHEET DATA:                                  |  |                                       |           |   |      |   |         |      |  |   |         |   |  |      |        
|Total investments                                    |  | $                                     | 709,261   |   |      | $ | 713,925 |      |  | $ | 675,120 |   |  | $    | 655,391
|Total assets                                         |  |                                       | 1,063,766 |   |      |   | 977,646 |      |  |   | 854,645 |   |  |      | 834,036
|Total liabilities                                    |  |                                       | 836,600   |   |      |   | 718,258 |      |  |   | 538,104 |   |  |      | 518,492
|Total stockholders equity                           |  |                                       | 227,166   |   |      |   | 259,388 |      |  |   | 316,541 |   |  |      | 294,700
|ADDITIONAL DATA:                                     |  |                                       |           |   |      |   |         |      |  |   |         |   |  |      |        
|Basic earnings (loss) per share of common stock(2)   |  | $                                     | (4.12     | ) |      | $ | (6.22   | )    |  | $ | 1.84    |   |  | $    | 2.63   
|Diluted earnings (loss) per share of common stock(2) |  |                                       | (4.12     | ) |      |   | (6.22   | )    |  |   | 1.84    |   |  |      | 2.62   
|Dividends per share of common stock                  |  |                                       | 40        |   |      |   | 0.40    |      |  |   | 0.40    |   |  |      | 0.32   
|Book value per share                                 |  |                                       | 24.34     |   |      |   | 27.85   |      |  |   | 33.92   |   |  |      | 30.98  
|GAAP ratios:                                         |  |                                       |           |   |      |   |         |      |  |   |         |   |  |      |        
|Loss ratio                                           |  |                                       | 112.0     | % |      |   | 129.1   | %    |  |   | 86.4    | % |  |      | 80.2   
|Expense ratio                                        |  |                                       | 27.9      | % |      |   | 27.4    | %    |  |   | 20.7    | % |  |      | 19.1   
|Combined ratio                                       |  |                                       | 139.9     | % |      |   | 156.5   | %    |  |   | 107.1   | % |  |      | 99.3   
|Statutory capital and surplus                        |  | $                                     | 155,785   |   |      | $ | 181,916 |      |  | $ | 249,261 |   |  | $    | 265,459

---

|(1) |  | Net premiums written for 2002, 2001 and 2000 reflect the Companys recognition of written premiums on the effective date of the policy rather than on the date premiums
were billed. This change had no impact on earned premiums.
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) |  | Basic earnings (loss) per share of common stock at December 31, 2002, 2001, 2000, 1999 and 1998 are computed using the weighted average number of common shares outstanding
during the year of 9,322,249, 9,333,425, 9,375,735, 11,383,592 and 12,074,272, respectively. Diluted earnings per share of common stock at December 31, 2002, 2001, 2000, 1999 and 1998 are computed using the weighted average number of common shares
outstanding during the year of 9,322,249 9,333,425, 9,382,494, 11,403,081 and 12,089,013, respectively. For further discussion of basic earnings per share and diluted earnings per share, see the Notes to Consolidated Financial
Statements.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



34



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|ITEM 7. |  | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|------- |  | -------------------------------------------------------------------------------------



The following discussion should be read in conjunction with the consolidated financial statements and the related notes thereto
appearing elsewhere in this Form 10-K. The consolidated financial statements include the accounts and operations of SCPIE Holdings Inc. (SCPIE Holdings or the Company) and its wholly owned subsidiaries.



Certain statements in the following discussion that are not historical fact constitute
forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements regarding the Company, its business prospects and results of operations are subject to certain risks and
uncertainties posed by many factors and events that could cause the Companys actual business, prospects and results of operations to differ materially from those that may be expressed or implied by such forward-looking statements. Such risks,
uncertainties and other factors are discussed in BusinessRisk Factors and in periodic filings with the Securities and Exchange Commission.



OVERVIEW

---



The Company conducts its insurance business in two business segments: direct healthcare liability insurance and assumed reinsurance operations. Direct healthcare
liability insurance represents professional liability insurance for physicians, oral and maxillofacial surgeons and dentists, healthcare facilities and other healthcare providers. The direct healthcare liability includes premiums assumed under
fronting arrangements related to the Brown & Brown dental program. 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.



|YEAR ENDED DECEMBER 31, 2002                    |  | DIRECT HEALTHCARE LIABILITY INSURANCE |         |   | ASSUMED REINSURANCE |   |         | OTHER |  | TOTAL |       
|----------------------------------------------- |  | ------------------------------------- | ------- | - | ------------------- | - | ------- | ----- |  | ----- | ------
|                                               
|                                                |  | (In Thousands)                        |        
|Premiums written                                |  | $                                     | 138,901 |   |                     | $ | 112,849 |       |  |       |       
|                                                |  |                                       |         |   |                     |   |         |       |  |       |       
|Premiums earned                                 |  | $                                     | 163,519 |   |                     | $ | 122,544 |       |  |       |       
|Net investment income                           |  |                                       |        |   |                     |   |        |       |  | $     | 32,231
|Realized investment gains                       |  |                                       |        |   |                     |   |        |       |  |       | 18,910
|Income from affiliates                          |  |                                       |        |   |                     |   |        |       |  |       | 750   
|Other revenue                                   |  |                                       |        |   |                     |   |        |       |  |       | 1,280 
|                                                |  |                                       |         |   |                     |   |         |       |  |       |       
|Total revenues                                  |  |                                       | 163,519 |   |                     |   | 122,544 |       |  |       | 53,171
|Losses and loss adjustment expenses             |  |                                       | 197,456 |   |                     |   | 123,060 |       |  |       |      
|Other operating expenses                        |  |                                       | 32,398  |   |                     |   | 47,278  |       |  |       |      
|Interest expense                                |  |                                       |        |   |                     |   |        |       |  |       | 66    
|                                                |  |                                       |         |   |                     |   |         |       |  |       |       
|Total expenses                                  |  |                                       | 229,854 |   |                     |   | 170,338 |       |  |       | 66    
|                                                |  |                                       |         |   |                     |   |         |       |  |       |       
|Segment (loss) income before federal income tax |  | $                                     | (66,335 | ) |                     | $ | (47,794 | )     |  | $     | 53,105
|                                                |  |                                       |         |   |                     |   |         |       |  |       |       
|Loss ratio                                      |  |                                       | 120.8   | % |                     |   | 100.4   | %     |  |       |       
|Underwriting ratio                              |  |                                       | 19.8    | % |                     |   | 38.6    | %     |  |       |       
|Combined ratio                                  |  |                                       | 140.6   | % |                     |   | 139.0   | %     |  |       |       



35



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|YEAR ENDED DECEMBER 31, 2001                    |  | DIRECT HEALTHCARE LIABILITY INSURANCE |          |   | ASSUMED REINSURANCE |   |         | OTHER |  | TOTAL |       
|----------------------------------------------- |  | ------------------------------------- | -------- | - | ------------------- | - | ------- | ----- |  | ----- | ------
|                                               
|                                                |  | (In Thousands)                        |         
|Premiums written                                |  | $                                     | 168,600  |   |                     | $ | 112,207 |       |  |       |       
|                                                |  |                                       |          |   |                     |   |         |       |  |       |       
|Premiums earned                                 |  | $                                     | 156,442  |   |                     | $ | 79,493  |       |  |       |       
|Net investment income                           |  |                                       |         |   |                     |   |        |       |  | $     | 35,895
|Realized investment gains                       |  |                                       |         |   |                     |   |        |       |  |       | 5,707 
|Income from affiliates                          |  |                                       |         |   |                     |   |        |       |  |       | 1,327 
|Other revenue                                   |  |                                       |         |   |                     |   |        |       |  |       | 875   
|                                                |  |                                       |          |   |                     |   |         |       |  |       |       
|Total revenues                                  |  |                                       | 156,442  |   |                     |   | 79,493  |       |  |       | 43,804
|Losses and loss adjustment expenses             |  |                                       | 220,311  |   |                     |   | 84,162  |       |  |       |      
|Other operating expenses                        |  |                                       | 45,820   |   |                     |   | 18,912  |       |  |       |      
|Interest expense                                |  |                                       |         |   |                     |   |        |       |  |       | 1,416 
|                                                |  |                                       |          |   |                     |   |         |       |  |       |       
|Total expenses                                  |  |                                       | 266,131  |   |                     |   | 103,074 |       |  |       | 1,416 
|                                                |  |                                       |          |   |                     |   |         |       |  |       |       
|Segment (loss) income before federal income tax |  | $                                     | (109,689 | ) |                     | $ | (23,581 | )     |  | $     | 42,388
|                                                |  |                                       |          |   |                     |   |         |       |  |       |       
|Loss ratio                                      |  |                                       | 140.8    | % |                     |   | 105.9   | %     |  |       |       
|Underwriting ratio                              |  |                                       | 29.3     | % |                     |   | 23.8    | %     |  |       |       
|Combined ratio                                  |  |                                       | 170.1    | % |                     |   | 129.7   | %     |  |       |       



|YEAR ENDED DECEMBER 31, 2000                    |  | DIRECT HEALTHCARE LIABILITY INSURANCE |         |   | ASSUMED REINSURANCE |   |        | OTHER |  |   | TOTAL  |  
|----------------------------------------------- |  | ------------------------------------- | ------- | - | ------------------- | - | ------ | ----- |  | - | ------ | -
|                                               
|                                                |  | (In Thousands)                        |        
|Premiums written                                |  | $                                     | 177,703 |   |                     | $ | 30,500 |       |  |   |        |  
|                                                |  |                                       |         |   |                     |   |        |       |  |   |        |  
|Premiums earned                                 |  | $                                     | 149,404 |   |                     | $ | 27,098 |       |  |   |        |  
|Net investment income                           |  |                                       |        |   |                     |   |       |       |  | $ | 34,152 |  
|Realized investment gains (losses)              |  |                                       |        |   |                     |   |       |       |  |   | (400   | )
|Equity earnings from affiliates                 |  |                                       |        |   |                     |   |       |       |  |   | 880    |  
|Other revenue                                   |  |                                       |        |   |                     |   |       |       |  |   | 1,122  |  
|                                                |  |                                       |         |   |                     |   |        |       |  |   |        |  
|Total revenues                                  |  |                                       | 149,404 |   |                     |   | 27,098 |       |  |   | 35,754 |  
|Losses and loss adjustment expenses             |  |                                       | 129,307 |   |                     |   | 23,295 |       |  |   |       |  
|Other operating expenses                        |  |                                       | 32,333  |   |                     |   | 4,150  |       |  |   |        |  
|Interest expenses                               |  |                                       |        |   |                     |   |       |       |  |   | 780    |  
|                                                |  |                                       |         |   |                     |   |        |       |  |   |        |  
|Total expenses                                  |  |                                       | 161,640 |   |                     |   | 27,445 |       |  |   | 780    |  
|                                                |  |                                       |         |   |                     |   |        |       |  |   |        |  
|Segment (loss) income before federal income tax |  | $                                     | (12,236 | ) |                     | $ | (347   | )     |  | $ | 34,974 |  
|                                                |  |                                       |         |   |                     |   |        |       |  |   |        |  
|Loss ratio                                      |  |                                       | 86.6    | % |                     |   | 86.0   | %     |  |   |        |  
|Underwriting ratio                              |  |                                       | 21.6    | % |                     |   | 15.3   | %     |  |   |        |  
|Combined ratio                                  |  |                                       | 108.2   | % |                     |   | 101.3  | %     |  |   |        |  



Direct Healthcare Liability
Insurance



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



36



---

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 greater risk nonstandard physicians in a number of states outside California.



The Company encountered intense price competition in its hospital expansion efforts. During 2000, the Company incurred unacceptable
losses under its hospital policies. The Company experienced adverse loss development in its prior years loss reserves for hospitals and significant ongoing losses in this program, which is reflected in the results for the year ended December 31,
2000. The Company substantially reduced its hospital exposures during 2000 through policy nonrenewals and rate increases. At the beginning of 2001, it insured only 15 hospitals, and this was reduced to 10 hospitals at December 31, 2001, and the last
hospital policy expired in December 2002.



In 2000, 2001 and 2002, the
Company derived approximately 23%, 29% and 31% 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, and 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 2000, 2001 and
2002.



The Company and Brown & Brown agreed to terminate both the
physician and dental programs no later than March 6, 2003. During 2002, the Company continued to issue and renew those policies under the Brown & Brown programs that satisfy the stringent underwriting standards. The Company applied these same
standards to the nonstandard physician policies renewed outside California. As of December 31, 2001, 2,997 policies were in force related to the Brown & Brown program. That number was reduced to 813 policies as of December 31, 2002. The Company
issued no new nonstandard physician policies outside of California in 2002.



During 2003, the Company will 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 2003.



Assumed Reinsurance



The Company rapidly expanded its assumed reinsurance operations since it formed the
division in late 1999. Written premiums were $112.8, $112.2 and $30.5 million, respectively for 2002, 2001 and 2000. Earned premiums, which lag behind written premiums, were $122.5, 79.5 and $27.1 million, respectively for 2002, 2001 and 2000.



Loss experience in this segment is based significantly on actuarial
estimates, as actual losses are still in their early stages of development. In 2001, the unprecedented September 11, 2001, terrorist attack materially impacted the results in this segment. The Company identified losses of $19.6 million, net of
reinsurance benefit as of December 31, 2001, and a further $15.4 million in losses has been recorded in 2002.



In December 2002, the Company entered a 100% quota share reinsurance agreement with GoshawK that divested substantially all of the Companys ongoing assumed reinsurance operations.



The cession under the GoshawK reinsurance treaty impacted 2002 assumed reinsurance
results negatively by $36.9 million.



37



---



RESULTS OF OPERATIONSTHREE YEAR
COMPARISON

---



Direct Healthcare Liability Insurance Segment



The Company underwrites professional and related liability policy coverages for physicians (including oral and maxilofacial surgeons), physician medical groups and clinics, hospitals, dentists, managed care organizations and other
providers in the healthcare industry. As a result of the Companys withdrawal from certain segments of the healthcare industry, the premiums earned are split between core and non-core premium. Core premium represents California and Delaware
business excluding the Brown & Brown dental program and hospital business. Non-core business represents other state business related to the Brown & Brown 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.



Direct Healthcare Liability Insurance Segment

Underwriting Results



|                             |  | CORE |         |   | NON-CORE |   |         | TOTAL | 
|---------------------------- |  | ---- | ------- | - | -------- | - | ------- | ----- | 
|                            
|YEAR ENDED DECEMBER 31, 2002 |  |      |         |   |          |   |         |       | 
|Premiums written             |  | $    | 116,984 |   |          | $ | 21,917  |       | 
|                             |  |      |         |   |          |   |         |       | 
|Premiums earned              |  | $    | 116,126 |   |          | $ | 47,393  |       | 
|Losses and LAE incurred      |  |      | 105,852 |   |          |   | 91,604  |       | 
|Underwriting expenses        |  |      | 22,786  |   |          |   | 9,612   |       | 
|                             |  |      |         |   |          |   |         |       | 
|Underwriting loss            |  |      | (12,512 | ) |          |   | (53,823 | )     | 
|Loss and LAE ratio           |  |      | 91.2    | % |          |   | 193.3   | %     | 
|Underwriting ratio           |  |      | 19.6    | % |          |   | 20.3    | %     | 
|Combined ratio               |  |      | 110.8   | % |          |   | 213.6   | %     | 
|YEAR ENDED DECEMBER 31, 2001 |  |      |         |   |          |   |         |       | 
|Premiums written             |  | $    | 111,655 |   |          | $ | 56,945  |       | 
|                             |  |      |         |   |          |   |         |       | 
|Premiums earned              |  | $    | 106,547 |   |          | $ | 49,895  |       | 
|Losses and LAE incurred      |  |      | 112,024 |   |          |   | 108,287 |       | 
|Underwriting expenses        |  |      | 21,749  |   |          |   | 24,071  |       | 
|                             |  |      |         |   |          |   |         |       | 
|Underwriting loss            |  |      | (27,226 | ) |          |   | (82,463 | )     | 
|Loss and LAE ratio           |  |      | 105.2   | % |          |   | 217.1   | %     | 
|Underwriting ratio           |  |      | 20.4    | % |          |   | 48.2    | %     | 
|Combined ratio               |  |      | 125.6   | % |          |   | 265.3   | %     | 
|YEAR ENDED DECEMBER 31, 2000 |  |      |         |   |          |   |         |       | 
|Premiums written             |  | $    | 97,078  |   |          | $ | 80,625  |       | 
|                             |  |      |         |   |          |   |         |       | 
|Premiums earned              |  | $    | 95,758  |   |          | $ | 53,646  |       | 
|Losses and LAE incurred      |  |      | 65,505  |   |          |   | 63,802  |       | 
|Underwriting expenses        |  |      | 13,760  |   |          |   | 18,573  |       | 
|                             |  |      |         |   |          |   |         |       | 
|Underwriting gain (loss)     |  |      | 16,493  |   |          |   | (28,729 | )     | 
|Loss and LAE ratio           |  |      | 68.4    | % |          |   | 119.0   | %     | 
|Underwriting ratio           |  |      | 14.4    | % |          |   | 34.6    | %     | 
|Combined ratio               |  |      | 82.8    | % |          |   | 153.6   | %     | 



38



---



Core Business



Premiums written for the core business increased 4.8% and 15.0%, in 2002 and 2001,
respectively, as average rate increases of 8.4% and 10.6% in 2002 and 2001, respectively, were partially offset by a decline in the number of insureds. Premiums earned in the core direct healthcare liability insurance business increased 9.0% and
11.3% in 2002 and 2001, respectively, primarily due to rate increases.



The
loss ratio for 2002 was 91.2% compared to a loss ratio of 105.2% for 2001. 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. Losses and LAE increased significantly in 2001 from 2000 primarily due to smaller favorable developments in 2001 on prior-year reserves.



The expense ratio decreased from 20.4% in 2001 to 19.6% in 2002. The primary reason for the change was staff reductions implemented in April and November 2002. The
underwriting expense ratio increased in 2001 primarily due to a larger proportion of the core business being written through general agencies, thus increasing commission expenses.



Non-Core Business



Premiums written decreased in 2002 to $21.9 million from $56.9 million in 2001 and $80.6 million in 2000. 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 Brown & Brown insureds in 2002 from 2,997 at December 31, 2001, to 813 insureds at December 31, 2002. The increases in rates and the
significant decline in insureds resulted from the Companys remedial actions taken to mitigate the significant losses arising from this business. After March 6, 2003, no new or renewal business will be written in the non-core programs as the
Company exists these markets. The decrease in written premium in 2001 was primarily the result of this decline in hospital writings. Premium earned in the non-core direct healthcare liability insurance business decreased as the Company began its
withdrawal from states other than California and Delaware and its hospital program wound down in 2002 and 2001 and written premium declined.



The lower loss ratio in 2002 of 193.3% compared to 217.1% in 2001 is the result of the significant rate increases being offset by additional upward development in
loss reserves for prior years of $16.4 million in 2002. Despite the significant rate increases taken in 2001, the loss ratio deteriorated significantly in 2001 from 2000 as adverse development of $21.2 million in 2001 from prior years began to
emerge. This development related primarily to programs administered by the Brown & Brown agency. In addition, general increases in average claim costs continued to rise for the non-core business.



The underwriting expense ratio increased in 2001 versus 2000 as the Company expensed
previously deferred acquisition costs in 2001 in light of the unprofitability of the non-core business. The underwriting expense ratio changed from 48.2% in 2001 to 20.3% in 2002. The primary reason for the change was the expense charge in 2001 of
acquisition costs previously deferred and the impact of closing out of state offices.



39



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Assumed Reinsurance Segment



The following table summarizes the underwriting results of the
assumed reinsurance segment for the periods indicated.



|                                          |  | Assumed Reinsurance Segment Underwriting Results |        
|----------------------------------------- |  | ------------------------------------------------ | -------
|FOR THE YEAR ENDED DECEMBER 31            |  | 2002                                             |        
|                                         
|Premiums written                          |  | $                                                | 112,849
|                                          |  |                                                  |        
|Premiums earned                           |  | $                                                | 122,544
|Underwriting expenses                     |  |                                                  |        
|Losses                                    |  |                                                  | 107,680
|WTC losses                                |  |                                                  | 15,380 
|Underwriting and other operating expenses |  |                                                  | 47,278 
|                                          |  |                                                  |        
|Underwriting loss                         |  |                                                  | (47,794
|Loss ratio                                |  |                                                  | 100.4  
|Expense ratio                             |  |                                                  | 38.6   
|Combined ratio                            |  |                                                  | 139.0  





The Assumed Reinsurance Segment continued to expand in 2002. Premiums written increased 267% in 2001 as more and larger treaties were added to the portfolio. The
2002 written premium for the assumed reinsurance segment was essentially unchanged from 2001 as premiums were ceded under the GoshawK treaty in the fourth quarter 2002. Premiums earned increased to $122.5 million in 2002 from $79.5 million in 2001
and $27.1 million in 2000. The increase in earned premiums is primarily attributable to the increase in premiums written in 2001 and the beginning of 2002.



The loss ratio declined in 2002 to 100.4% from 105.9% in 2001. The year 2002 and 2001 loss ratios were impacted by 12.6 and 24.7 percentage points, respectively,
because of the World Trade Center terrorist attack. The loss ratios without the effect of the World Trade Center terrorist attack were 87.8% and 81.2% for 2002 and 2001 respectively. This increase represents changes in 2002 to the initial estimates
of loss ratios for prior years as more information became available and was reported to the Company.



The underwriting and other operating expense ratio was 38.6% in 2002 and 23.8% in 2001 and 15.3% in 2000. The underwriting and other operating expense ratio increased in 2001 over 2000 as commission rates rose
as proportionately more business was written from Lloyds syndicates which generally have higher expense ratios. The underwriting and other operating expense ratio increased in 2002, primarily because of the GoshawK transaction expenses
discussed below.



As a result of the Insurance Subsidiaries decline
in statutory surplus in 2001 and the resulting impact on the capital adequacy ratios under the A.M. Best and NAIC capital adequacy models, the Company attempted to raise additional capital in the first half of 2002. Due to market conditions at that
time, its capital raising efforts were unsuccessful. In the latter half of 2002, the Company focused on attaining a reinsurance agreement to retrocede the future written and earned premium after June 30, 2002, related to its assumed reinsurance
business. This course of action culminated in the signing of a reinsurance agreement with a subsidiary of GoshawK in December 2002. This treaty cedes 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 approximately $63 million to be written in future periods.) This treaty relieves the Company of significant underwriting leverage in 2002 and
2003 and significantly improves the Companys risk-based capital adequacy ratios under both the A.M. Best and NAIC models.



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 to reimburse the Company for its acquisition and administrative expenses. In addition, the Company is required to pay GoshawK additional premium in



40



---

excess of the base premium ceded of 14.3% or an estimated $27.5 million. The additional premium reduced 2002 earned premium by $18.5 million and will
reduce 2003 earned premium by an estimated $9 million.



The GoshawK
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, 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 retroactive accounting treatment required under FASB 113 requires that a charge to income be recorded to the extent premiums ceded under the contract are in excess of the estimated losses and expenses ceded
under the contract. The charge related to the cession of the unearned premium as of July 1, 2002, and ceded premium written in the third quarter is included in operating expenses in the Assumed Reinsurance Segment. The charge and placement fees
amounted to $18.4 million and was recorded in the fourth quarter 2002. The assumed reinsurance premiums written in the fourth quarter 2002 ceded to GoshawK has reduced premiums written for the segment with a corresponding reduction in premiums
earned and net incurred losses.



Other Operations



Net investment income decreased $3.7 million or 10.2% to $32.2
million in 2002 from $35.9 million in 2001. This decrease is primarily a result in the decline in average rate of return from 5.2% in 2001 to 4.7% in 2002. 2001 net investment income increased approximately $1.7 million to $35.9 million from $34.2
million in 2000. This increase was a result of a 1.1% increase in average invested assets and a shift in investment mix from tax-exempt securities to higher-yielding taxable bonds in 2001. The average rate of return on invested assets was 5.1% and
5.2% in 2001 and 2000, respectively. The Company realized $18.9 million in capital gains in 2002 versus $5.7 million in 2001. This increased statutory capital for insurance regulatory purposes and improved the Insurance Subsidiaries risk-based
capital ratios. During 2001, the Company realized $5.7 million of investment gains as compared to $0.4 million in realized investment losses in 2000.



The Company had an income tax benefit of $22.6 million in 2002 compared to a benefit of $32.9 million in 2001 and expense of $5.1 million in 2000.



LIQUIDITY AND CAPITAL RESOURCES

---



The primary sources of the Companys liquidity are insurance
premiums, net investment income, recoveries from reinsurers and proceeds from the maturity or sale of invested assets. Funds are used to pay losses, LAE, operating expenses, reinsurance premiums and taxes.



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 2002, the Company had negative cash flow from operations of $24.5 million compared to positive cash flow of $33.4 million in 2001. The
negative cash flow in 2002 was principally attributable to decreased premium written and increased loss payments on the non-core healthcare liability business and the GoshawK reinsurance agreement.



The Company invests its cash flow from operations in both fixed-maturity securities and
equity securities. The Companys current policy is to limit its investment in equity securities and its 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 $34.2 million at December 31, 2002. The Company plans to continue its focus on taxable fixed-maturity securities for the indefinite future.



The Company maintains a portion of its investment portfolio in high-quality, short-term securities to meet short-term operating
liquidity requirements, including the payment of losses and LAE. Short-term investments totaled $105.9 million,



41



---

or 14.9% of invested assets, at December 31, 2002. The Company believes that all of its short-term and fixed-maturity securities are readily
marketable.



SCPIE Holdings is an insurance holding company whose assets
primarily consist of all of the capital stock of its insurance company subsidiaries. Its principal sources of funds are 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 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 the insurance company
subsidiaries are able to pay to SCPIE Holdings during 2003 without prior regulatory approval is approximately $15.6 million.



Common stock dividends paid to stockholders were $0.40 per share in 2002. These dividends were funded through dividends from the Companys insurance
subsidiaries received in prior years. The Company has declared a quarterly dividend of $0.10 per share, payable on March 31, 2003. Payment of future dividends is subject to Board approval, earnings and the financial condition of the Company. As of
December 31, 2002, SCPIE Holdings held cash and short-terms securities of $10.5 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 had borrowings of $9.0 million outstanding at December 31, 2001, under a Credit Agreement with three bank lenders. On February 28, 2002, the Company
fully repaid the outstanding balance, and the parties terminated the Credit Agreement. See Note 8 to Consolidated Financial Statements.



CONTRACTUAL COMMITMENTS

---



The Company has certain contractual obligations and commercial commitments principally for providing letters of credit in connection
with its assumed reinsurance segment and for leasing office space for its headquarters and other regional offices. The table below presents the contractual payments due by period or expiration period for each obligation or commitment:



Contractual commitments as of December 31, 2002, are as follows:



|                 |  | 2003                                  |       | 2004 |   | 2005  |  | 2006 |       | 2007 |   | Thereafter
|---------------- |  | ------------------------------------- | ----- | ---- | - | ----- |  | ---- | ----- | ---- | - | ----------
|                
|                 |  | Payments Due by Period (in thousands)
|Operating Leases |  | $                                     | 2,991 |      | $ | 2,934 |  | $    | 3,006 |      | $ | 3,035     



In November 2001, the Company
arranged a letter of credit facility in the amount of $50 million with Barclays Bank PLC. Letters of credit issued under the facility fulfill the requirements of Lloyds and guarantee loss reserves under reinsurance contracts. As of December
31, 2002, letter of credit issuance under the facility was approximately $46.3 million. Securities of $50.1 million are pledged as collateral under the facility.



CRITICAL ACCOUNTING POLICIES

---



The Companys discussion and analysis of its financial condition and results of
operations are based upon the Companys Consolidated Financial Statements, which have been prepared in accordance with accounting principles generally accepted in the United States (GAAP). Preparation of financial statements in accordance with
GAAP requires



42



---

management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and the related notes.
Management believes that the following critical accounting policies, among others, affect the more significant judgments and estimates used in the preparation of the Consolidated Financial Statements. Actual results may differ from these estimates
under different assumptions or conditions.



Premium Revenue
Recognition



Direct healthcare liability insurance premiums
written are primarily earned on a daily pro rata basis over the terms of the policies. Accordingly, unearned premiums represent the portion of premiums written which is applicable to the unexpired portion of the policies in force. Reinsurance
premiums assumed are estimated based on information provided by ceding companies. The information used in establishing these estimates is reviewed and subsequent adjustments are recorded in the period in which they are determined. These premiums are
earned over the terms of the related reinsurance contracts.



Loss and
Loss Adjustment Expense Reserves



Unpaid losses and loss
adjustment expenses are comprised of case reserves for known claims, incurred but not reported reserves for unknown claims and any potential development for known claims, and reserves for the cost of administration and settlement of both known and
unknown claims. Such liabilities are established based on known facts and interpretation of circumstances, including the Companys experience with similar cases and historical trends involving claim payment patterns, loss payments and pending
levels of unpaid claims, as well as court decisions and economic conditions. The effects of inflation are considered in the reserving process. Establishing appropriate reserves is an inherently uncertain process; the ultimate liability may be in
excess of or less than the amount provided. Any increase in the amount of reserves, including reserves for insured events of prior years, could have an adverse effect on the Companys results for the period in which the adjustments are made.
The Company utilizes both its internal actuarial staff and independent actuaries in establishing its reserves. The Company does not discount its loss and loss adjustment expense reserves.



The Company had a growing volume of assumed reinsurance between 1999 and 2002. Assumed reinsurance is a line of business with an
inherent volatility. Also in the absence of a historical data base of our own experience due to the newness of the program, greater reliance is placed on underwriting and industry information to estimate the appropriate loss reserves.



The assumed reinsurance business has exposure to losses from the events of September 11,
2001. Estimation of ultimate liabilities for this exposure is unusually difficult and thus subject to significantly greater than normal variation and uncertainty.



Deferred Policy Acquisition Costs



Deferred policy acquisition costs include commissions, premium taxes and other variable costs incurred in connection with writing
business. Deferred policy acquisition costs are reviewed to determine if they are recoverable from future income, including investment income. If such costs are estimated to be unrecoverable, they are expensed. Recoverability is analyzed based on
the Companys assumptions related to the underlying policies written, including the lives of the underlying policies, growth rate of the assets supporting the liabilities, and level of expenses necessary to maintain the policies over their
entire lives. Deferred policy acquisition costs are amortized over the period in which the related premiums are earned.



EFFECT OF INFLATION

---



The primary effect of inflation on the Company is considered in pricing and estimating reserves for unpaid losses and LAE for claims in
which there is a long period between reporting and settlement, such as medical malpractice claims. The actual effect of inflation on the Companys results cannot be accurately known until claims are ultimately settled.



43



---

Based on actual results to date, the Company believes that loss and LAE reserve levels and the Companys rate making process adequately
incorporate the effects of inflation.



ITEM 7A.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK



The investment portfolio of the Company is subject to various market risk exposures, including interest rate risk, credit risk and equity price risk. Financial
instruments that potentially subject the Company to concentrations of credit risk consist principally of fixed-maturity investments. Concentrations of credit risk with respect to fixed-maturities are limited due to the large number of such
investments and their distributions across many different industries and geographics.



The Company invests its assets primarily in fixed-maturity securities, which at December 31, 2002, comprised 76.0% of total investments at market value. U.S. government and tax-exempt bonds represent 45.4% of the market values of
fixed-maturity investments, with the remainder consisting almost entirely of mortgage-backed securities and corporate bonds. Equity securities, consisting primarily of common stocks, account for 4.8% of total investments at market value. The other
investment, which is comprised of a mutual fund investment that contains derivative financial instruments, accounts for 2.1% of total investments at market value. 14.9% of the investment portfolio consists of highly liquid short-term money market
funds. The remaining 2.2% of investments consists of real estate leased to third parties.



The value of the fixed-maturity portfolio is subject to interest rate risk. As market interest rates decrease, the value of the portfolio goes up with the opposite holding true in rising interest rate environments. A common measure
of the interest sensitivity of fixed-maturity assets is modified duration, a calculation that takes maturity, coupon rate, yield and call terms to calculate an average age of the expected cash flows. The longer the duration, the more sensitive the
asset is to market interest rate fluctuations.



The value of the common
stock equity investments is dependent upon general conditions in the securities markets and the business and financial performance of the individual companies in the portfolio. Values are typically based on future economic prospects as perceived by
investors in the equity markets.



The Company also holds an investment in a
limited partnership, which invests in a portfolio of offshore hedge funds. The investment return depends on the performance of the portfolio, which includes both interest rate risk and credit risk. This investment had a value of $15.0 million at
December 31, 2002.



The Companys invested assets are subject to
interest rate risk. The following table presents the effect on current estimated fair values of the fixed-maturity securities available for sale and common stocks assuming a 100-basis-point increase in market interest rates and a 10% decline in
equity prices. The analysis excludes real estate and the other investment.



|                                             |  | Carrying Value |         | Estimated Fair Value at Current Market Rates/Prices |   | Estimated Fair Value At Adjusted
MarketRates/Prices asIndicated Below
|-------------------------------------------- |  | -------------- | ------- | --------------------------------------------------- | - | ---------------------------------------------------------------------
|                                            
|                                             |  | (In Thousands)
|December 31, 2002                            |  |                |         |                                                     |   |                                                                      
|Interest rate risk*                          |  |                |         |                                                     |   |                                                                      
|Fixed-maturity securities available for sale |  | $              | 538,675 |                                                     | $ | 538,675                                                              
|Equity price risk**                          |  |                |         |                                                     |   |                                                                      
|Common stocks                                |  | $              | 34,237  |                                                     | $ | 34,237                                                               
|December 31, 2001                            |  |                |         |                                                     |   |                                                                      
|Interest rate risk*                          |  |                |         |                                                     |   |                                                                      
|Fixed-maturity securities available for sale |  | $              | 569,144 |                                                     | $ | 569,144                                                              
|Equity price risk**                          |  |                |         |                                                     |   |                                                                      
|Common stocks                                |  | $              | 29,098  |                                                     | $ | 29,098                                                               

---

|* |  | Adjusted interest rates assume a 100-basis-point increase in market rates
|- |  | -------------------------------------------------------------------------

|** |  | Adjusted equity prices assume a 10% decline in market values
|-- |  | ------------------------------------------------------------



44



---



For all its financial assets and
liabilities, the Company seeks to maintain reasonable average durations, consistent with the maximization of income without sacrificing investment quality and providing for liquidity and diversification.



The estimated fair values at current market rates for financial instruments subject to
interest rate risk in the table above are the same as those disclosed in Note 2 to Consolidated Financial Statements. The estimated fair values at the adjusted market rates (assuming a 100-basis-point increase in market interest rates) are
calculated using discounted cash flow analysis and duration modeling where appropriate. The estimated values do not consider the effect that changing interest rates could have on prepayment activity (e.g., mortgages underlying mortgage-backed
securities).



This sensitivity analysis provides only a limited,
point-in-time view of the market risk sensitivity of certain of the Companys financial instruments. The actual impact of market interest rate and price changes on the financial instruments may differ significantly from those shown in the
sensitivity analysis. The sensitivity analysis is further limited as it does not consider any actions the Company could take in response to actual and/or anticipated changes in interest rates and equity prices.



ITEM 8.    FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA



The Companys Consolidated Financial Statements and related notes, including supplementary data, are set forth in the Index on page 47 hereof.



|ITEM 9. |  | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
|------- |  | -------------------------------------------------------------------------------------



None.



45



---

PART III



ITEM 10.    DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT



Information regarding Directors of the Company is incorporated by reference to the section titled Election of Directors in the Companys definitive proxy statement filed with the SEC in
connection with the Annual Meeting of Stockholders to be held on May 15, 2003 (the Proxy Statement). Information regarding Executive Officers is set forth in Item 1 of Part I of this Form 10-K report under the caption Executive Officers.



ITEM 11.    EXECUTIVE COMPENSATION



The information required by this item is incorporated by reference to the Proxy Statement under the heading Executive Compensation.



|ITEM 12. |  | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
|-------- |  | ----------------------------------------------------------------------------------------------



The information required by this item is incorporated by reference to the Proxy
Statement under the heading Stock Ownership and Equity Compensation Plan Information.



ITEM 13.    CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS



The information required by this item is incorporated by reference to the Proxy Statement under the heading Certain Relationships and Related Transactions.



ITEM 14.    CONTROLS AND PROCEDURES



The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in its reports under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported
within the time periods specified in the rules and forms of the Securities and Exchange Commission (SEC), and that such information is accumulated and communicated to the Companys management, including its Chief Executive Officer and Chief
Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and
operated, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.



Within 90 days prior to the date of this Annual Report on Form 10-K, the Company carried
out an evaluation, under the supervision and with the participation of its management, including its Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Companys disclosure controls and
procedures. Based on the foregoing, the Chief Executive Officer and Chief Financial Officer concluded that the Companys disclosure controls and procedures were effective.



There have been no significant changes in the Companys internal controls or in other factors that could significantly affect the
internal controls subsequent to the date the Chief Executive Officer and the Chief Financial Officer completed their evaluation.



46



---

PART IV



ITEM 15.    EXHIBITS, FINANCIAL STATEMENTS AND SCHEDULES, AND REPORTS ON FORM 8-K



(a)(1) and (a)(2) and (d) FINANCIAL STATEMENTS AND SCHEDULES. Reference is made to the IndexFinancial Statements and Financial Statement
ScheduleAnnual Report on Form 10-K filed on page 56 of this Form 10-K report.



(a) (3) Exhibits:



|NUMBER |  | DOCUMENT                                                                                                                                                                                                                                                                                                                                                                                                                                    
|------ |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|      
|2.     |  | Amended and Restated Plan and Agreement of Merger by and among SCPIE Holdings Inc., SCPIE Indemnity Company and Southern
California Physicians Insurance Exchange dated August 8, 1996, as amended December 19, 1996. (filed with the Companys Registration Statement on Form S-1 (No. 33-4450) and incorporated herein by reference).                                                                                                     
|      
|3.1    |  | Amended and Restated Certificate of Incorporation. (filed with the Companys Registration Statement on Form S-1 (No.
33-4450) and incorporated herein by reference).                                                                                                                                                                                                                                                                        
|      
|3.2    |  | Amended and Restated Bylaws. (filed with the Companys Quarterly Report on Form 10-Q on August 16, 1999 and incorporated
herein by reference).                                                                                                                                                                                                                                                                                              
|      
|10.1   |  | Amended and Restated Employment Agreement dated January 2, 2003, between SCPIE Management Company and Donald J.
Zuk.                                                                                                                                                                                                                                                                                                                        
|      
|10.2   |  | First Excess of Loss Treaty No. 01-95-0020 with various subscribing reinsurers. (filed with the Companys Registration
Statement on Form S-1 (No. 33-4450) and incorporated herein by reference).                                                                                                                                                                                                                                           
|      
|10.3   |  | Second Excess of Loss Treaty No. 01-95-0021 with various subscribing reinsurers. (filed with the Companys Registration
Statement on Form S-1 (No. 33-4450) and incorporated herein by reference).                                                                                                                                                                                                                                          
|      
|10.4   |  | Third Excess of Loss Treaty No. 01-95-0022 with various subscribing reinsurers. (filed with the Companys Registration
Statement on Form S-1 (No. 33-4450) and incorporated herein by reference).                                                                                                                                                                                                                                           
|      
|10.5   |  | Fourth Excess of Loss Treaty No. 01-95-0599 with various subscribing reinsurers. (filed with the Companys Registration
Statement on Form S-1 (No. 33-4450) and incorporated herein by reference).                                                                                                                                                                                                                                          
|      
|10.6   |  | Per Policy Excess of Loss Treaty No. 01-94-0365 with various subscribing reinsurers. (filed with the Companys Registration
Statement on Form S-1 (No. 33-4450) and incorporated herein by reference).                                                                                                                                                                                                                                      
|      
|10.7   |  | Reinstatement/Retroactive/Aggregate Extension Excess of Loss Treaty No. 01-95-0879 with various subscribing reinsurers. (filed
with the Companys Registration Statement on Form S-1 (No. 33-4450) and incorporated herein by reference).                                                                                                                                                                                                   
|      
|10.8   |  | Medical Malpractice Surplus Reinsurance Treaty between SCPIE and Lloyds Syndicate No. 1010 and Syndicates Comprising 1007
Group underwritten for by CW Spreckley, Esq. and others, effective date January 1, 1996, Treaty No. 01-95-0374. (filed with the Companys Registration Statement on Form S-1 (No. 33-4450) and incorporated herein by
reference).                                                                                
|      
|10.9   |  | Physician Medical Malpractice/Hospital Professional Liability Quota Share Reinsurance Agreement between Hannover
Ruckversicherungs, Aktiengesellschaft/Eisen Und Stahl Ruckversicherungs-Aktiengesellschaft, Hannover, Germany, and various subscribing reinsurers, effective date January 1, 1995, Treaty No. 01-95-0694. (filed with the Companys Registration
Statement on Form S-1 (No. 33-4450) and incorporated herein by reference).
|      
|10.10  |  | First Excess of Loss Treaty No. 01-96-0020 with various subscribing reinsurers. (filed with the Companys Registration
Statement on Form S-1 (No. 33-4450) and incorporated herein by reference).                                                                                                                                                                                                                                           
|      
|10.11  |  | Second Excess of Loss Treaty No. 01-96-0021 with various subscribing reinsurers. (filed with the Companys Registration
Statement on Form S-1 (No. 33-4450) and incorporated herein by reference).                                                                                                                                                                                                                                          
|      
|10.12  |  | Third Excess of Loss Treaty No. 01-96-0022 with various subscribing reinsurers. (filed with the Companys Registration
Statement on Form S-1 (No. 33-4450) and incorporated herein by reference).                                                                                                                                                                                                                                           



47



---

|NUMBER |  | DOCUMENT                                                                                                                                                                                                                                                       
|------ |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|      
|      
|10.13  |  | Fourth Excess of Loss Treaty No. 01-96-0599 with various subscribing reinsurers. (filed with the Companys Registration
Statement on Form S-1 (No. 33-4450) and incorporated herein by reference).                                                             
|      
|10.14  |  | Per Policy Excess of Loss Treaty No. 01-96-0365 with various subscribing reinsurers. (filed with the Companys Registration
Statement on Form S-1 (No. 33-4450) and incorporated herein by reference).                                                         
|      
|10.15  |  | Addendum No. 1 to the Reinstatement/Retroactive/Aggregate Extension Excess of Loss Treaty No. 01-96-0879 with various
subscribing reinsurers. (filed with the Companys Registration Statement on Form S-1 (No. 33-4450) and incorporated herein by reference).
|      
|10.16  |  | Quota Share Reinsurance Agreement Treaty No. 01-96-0922. (filed with the Companys Registration Statement on Form S-1 (No.
33-4450) and incorporated herein by reference).                                                                                     
|      
|10.17  |  | First Excess of Loss Treaty No. 01-97-0020 with various subscribing reinsurers. (filed with the Companys Annual Report on
Form 10-K on March 31, 1998 and incorporated herein by reference).                                                                  
|      
|10.18  |  | Second Excess of Loss Treaty No. 01-97-0021 with various subscribing reinsurers. (filed with the Companys Annual Report on
Form 10-K on March 31, 1998 and incorporated herein by reference).                                                                 
|      
|10.19  |  | Third Excess of Loss Treaty No. 01-97-0022 with various subscribing reinsurers. (filed with the Companys Annual Report on
Form 10-K on March 31, 1998 and incorporated herein by reference).                                                                  
|      
|10.20  |  | Fourth Excess of Loss Treaty No. 01-97-0599 with various subscribing reinsurers. (filed with the Companys Annual Report on
Form 10-K on March 31, 1998 and incorporated herein by reference).                                                                 
|      
|10.21  |  | Per Policy Excess of Loss Treaty No. 01-97-0365 with various subscribing reinsurers. (filed with the Companys Annual
Report on Form 10-K on March 31, 1998 and incorporated herein by reference).                                                             
|      
|10.22  |  | Addendum No. 2 to the Reinstatement/Retroactive/Aggregate Extension Excess of Loss Treaty No. 01-97-0879 with various
subscribing reinsurers. (filed with the Companys Annual Report on Form 10-K on March 31, 1998 and incorporated herein by reference).    
|      
|10.23  |  | Quota Share Reinsurance Treaty No. 1-97-0922. (filed with the Companys Annual Report on Form 10-K on March 31, 1998 and
incorporated herein by reference).                                                                                                    
|      
|10.24  |  | First Excess of Loss Reinsurance Treaty No. 01-97-1134 with various subscribing reinsurers. (filed with the Companys
Annual Report on Form 10-K on March 31, 1999 and incorporated herein by reference).                                                      
|      
|10.25  |  | Second Excess of Loss Reinsurance Treaty No. 01-97-1135 with various subscribing reinsurers. (filed with the Companys
Annual Report on Form 10-K on March 31, 1999 and incorporated herein by reference).                                                     
|      
|10.26  |  | First Excess of Loss Treaty No. 01-98-0020 with various subscribing reinsurers. (filed with the Companys Annual Report on
Form 10-K on March 31, 1999 and incorporated herein by reference).                                                                  
|      
|10.27  |  | Second Excess of Loss Treaty No. 01-98-0021 with various subscribing reinsurers (filed with the Companys Annual Report on
Form 10-K on March 31, 1999 and incorporated herein by reference).                                                                  
|      
|10.28  |  | Third Excess of Loss Treaty No. 01-98-0022 with various subscribing reinsurers. (filed with the Companys Annual Report on
Form 10-K on March 31, 1999 and incorporated herein by reference).                                                                  
|      
|10.29  |  | Fourth Excess of Loss Treaty No. 01-98-0599 with various subscribing reinsurers. (filed with the Companys Annual Report on
Form 10-K on March 31, 1999 and incorporated herein by reference).                                                                 
|      
|10.30  |  | Quota Share Reinsurance Treaty No. 1-98-0922. (filed with the Companys Annual Report on Form 10-K on March 31, 1999 and
incorporated herein by reference).                                                                                                    
|      
|10.31  |  | SCPIE Management Company Retirement Income Plan, as amended and restated, effective January 1, 1989. (filed with the
Companys Registration Statement on Form S-1 (No. 33-4450) and incorporated herein by reference).                                         
|      
|10.32  |  | The SMC Cash Accumulation Plan, dated July 1, 1991, as amended. (filed with the Companys Registration Statement on Form
S-1 (No. 33-4450) and incorporated herein by reference).                                                                              



48



---

|NUMBER |  | DOCUMENT                                                                                                                                                                                                                                                    
|------ |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|      
|      
|10.33  |  | Inter-Company Pooling Agreement effective January 1, 1997. (filed with the Companys Annual Report on Form 10-K on March
31, 1998 and incorporated herein by reference).                                                                                    
|      
|10.34  |  | SCPIE Holdings Inc. and Subsidiaries Consolidated Federal Income Tax Liability Allocation Agreement effective January 1, 1996.
(filed with the Companys Annual Report on Form 10-K on March 31, 1998 and incorporated herein by reference).                
|      
|10.35  |  | Form of Indemnification Agreement. (filed with the Companys Registration Statement on Form S-1(No. 33-4450) and
incorporated herein by reference).                                                                                                         
|      
|10.36  |  | Lease between Wh/WSA Realty, L.L.C., a Delaware limited liability company and SCPIE Holdings Inc., a Delaware corporation dated
July 31, 1998. (filed with the Companys Annual Report on Form 10-K on March 31, 1998 and incorporated herein by reference).
|      
|10.37  |  | Quota Share Reinsurance Agreement between Fremont Indemnity Company and SCPIE Indemnity Company, effective January 1, 1998.
(filed with the Companys Annual Report on Form 10-K on March 31, 1998 and incorporated herein by reference).                   
|      
|10.38  |  | Assumption Reinsurance Agreement between Fremont Indemnity Company and American Healthcare Indemnity Company, effective January
1, 1998. (filed with the Companys Annual Report on Form 10-K on March 31, 1998 and incorporated herein by reference).      
|      
|10.39  |  | First Casualty Excess of Loss Reinsurance Agreement No. S06000-251 99-01-01 SR with various subscribing reinsurers. (filed with
the Companys Annual Report on Form 10-K on March 31, 2000 and incorporated herein by reference).                           
|      
|10.40  |  | Second Casualty Excess of Loss Reinsurance Agreement No. S06000-252 99-01-01 SR with various subscribing reinsurers. (filed with
the Companys Annual Report on Form 10-K on March 31, 2000 and incorporated herein by reference).                          
|      
|10.41  |  | Casualty Clash Excess of Loss Reinsurance Agreement No. S06000-253 99-01-01 SR with various subscribing reinsurers. (filed with
the Companys Annual Report on Form 10-K on March 31, 2000 and incorporated herein by reference).                           
|      
|10.42  |  | Casualty Quota Share Reinsurance Agreement No. SCPIE Cas QS 99-01-01 RE Rel with various subscribing reinsurers. (filed with the
Companys Annual Report on Form 10-K on March 31, 2000 and incorporated herein by reference).                              
|      
|10.43  |  | First Excess of Loss Reinsurance Treaty No. 8493-00-0007-98-01 with various subscribing reinsurers. (filed with the
Companys Annual Report on Form 10-K on March 31, 2000 and incorporated herein by reference).                                           
|      
|10.44  |  | Second Excess of Loss Reinsurance Treaty No. 8493-00-0007-98-02 with various subscribing reinsurers. (filed with the
Companys Annual Report on Form 10-K on March 31, 2000 and incorporated herein by reference).                                          
|      
|10.45  |  | First Excess of Loss Reinsurance Treaty No. 8493-00-0001-99-01 with various subscribing reinsurers. (filed with the
Companys Annual Report on Form 10-K on March 31, 2000 and incorporated herein by reference).                                           
|      
|10.46  |  | Second Excess of Loss Reinsurance Treaty No. 8493-00-0001-99-02 with various subscribing reinsurers. (filed with the
Companys Annual Report on Form 10-K on March 31, 2000 and incorporated herein by reference).                                          
|      
|10.47  |  | Third Excess of Loss Reinsurance Treaty No. 8493-00-0001-99-03 with various subscribing reinsurers. (filed with the
Companys Annual Report on Form 10-K on March 31, 2000 and incorporated herein by reference).                                           
|      
|10.48  |  | Fourth Excess of Loss Reinsurance Treaty No. 8493-00-0001-99-04 with various subscribing reinsurers. (filed with the
Companys Annual Report on Form 10-K on March 31, 2000 and incorporated herein by reference).                                          



49



---

|NUMBER |  | DOCUMENT                                                                                                                                                                                                                                                                                                                                                                 
|------ |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|      
|      
|10.49  |  | Quota Share Reinsurance Treaty No. 8493-00-0005-99-00 with various subscribing reinsurers. (filed with the Companys Annual
Report on Form 10-K on March 31, 2000 and incorporated herein by reference).                                                                                                                                                                 
|      
|10.50  |  | The SCPIE Holdings Inc. Employee Stock Purchase Plan. (filed as an exhibit to the Companys Proxy Statement for the 2000
Annual Meeting of Stockholders and incorporated herein by reference).                                                                                                                                                                           
|      
|10.51  |  | Program Administrator Agreement by and between the Professional Programs Division of Poe & Brown, Inc. and American
Healthcare Indemnity Company, dated as of January 1, 1998. (filed with the Companys Annual Report on Form 10-K on March 31, 2000 and incorporated herein by reference).                                                                             
|      
|10.52  |  | Form of Change of Control Severance Agreement entered into by Chief Executive Officer on December 14, 2000. (filed with the
Companys Annual Report on Form 10-K on March 30, 2001 and incorporated herein by reference).                                                                                                                                                
|      
|10.53  |  | Form of Change of Control Severance Agreement entered into by Senior Vice Presidents on December 14, 2000. (filed with the
Companys Annual Report on Form 10-K on March 30, 2001 and incorporated herein by reference).                                                                                                                                                 
|      
|10.54  |  | Form of Change of Control Severance Agreement entered into by Vice Presidents on December 14, 2000. (filed with the
Companys Annual Report on Form 10-K on March 30, 2001 and incorporated herein by reference).                                                                                                                                                        
|      
|10.55  |  | First through Fifth Excess of Loss Agreement 8493-00/0009-00/01/02/03/04/05 with various subscribing reinsurers. (filed with the
Companys Annual Report on Form 10-K on April 1, 2002 and incorporated herein by reference).                                                                                                                                            
|      
|10.56  |  | The 2001 Amended and Restated Equity Participation Plan of SCPIE Holdings Inc. (filed with the Companys Annual Report on
Form 10-K on April 1, 2002 and incorporated herein by reference).                                                                                                                                                                              
|      
|10.57  |  | Insurance Letters of Credit Agreement dated as of November 15, 2001 by and among Barclays Bank PLC and SCPIE Holdings Inc.,
SCPIE Indemnity Company, American Healthcare Indemnity Company and American Healthcare Specialty Healthcare Company. (filed with the Companys Annual Report on Form10-K on April 1, 2002 and incorporated herein by
reference).             
|      
|10.58  |  | Supplemental Employee Retirement Plan for selected employees of SCPIE Management Company, as amended and restated, effective as
of January 1, 2001. (filed with the Companys Annual Report on Form 10-K on April 1, 2002 and incorporated herein by reference).                                                                                                         
|      
|10.59  |  | Amendment to Program Administrators Agreement dated as of March 6, 2002 by and between the Professional Programs Division of
Brown & Brown, Inc., on the one hand, and SCPIE Indemnity Company and American Healthcare Indemnity Company, on the other hand. (filed with the Companys Annual Report on Form 10-K on April 1, 2002 and incorporated herein by
reference).
|      
|10.60  |  | First Amendment to the 2001 Amended and Restated Equity Participation Plan of the Company. (filed with the Companys
Definitive Proxy Statement for the 2002 Annual Meeting of Stockholders and incorporated herein by reference).                                                                                                                                       
|      
|10.61  |  | Employment Agreement dated May 1, 2002, by and between the Company and Timothy C. Rivers. (filed with the Companys
Quarterly Report on Form 10-Q on May 15, 2002 and incorporated herein by reference).                                                                                                                                                                 
|      
|10.62  |  | Form of Incentive Stock Option Agreement under the 2001 Amended And Restated Equity Participation Plan of the
Company.                                                                                                                                                                                                                                                   
|      
|10.63  |  | Form of Non-Qualified Stock Option Agreement for Independent Directors under the 2001 Amended And Restated Equity Participation
Plan of the Company.                                                                                                                                                                                                                     
|      
|10.64  |  | Form of Stock Appreciation Rights Agreement for selected employees of the Company under the 2001 Amended and Restated Equity
Participation Plan of the Company.                                                                                                                                                                                                          



50



---

|NUMBER |  | DOCUMENT                                                                                                                                                                           
|------ |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|      
|      
|10.65  |  | Medical Malpractice Shortfall Excess of Loss Reinsurance Agreement with various subscribing reinsurers.                                                                            
|      
|10.66  |  | First through Fourth Excess of Loss Reinsurance Treaty with various subscribing reinsurers.                                                                                        
|      
|10.67  |  | Placement Slip for First through Fourth Excess of Loss Reinsurance Treaty 8493-0009-01/2/3/4 with various subscribing
reinsurers.                                                  
|      
|10.68  |  | Deferred Compensation Agreement dated as January 1, 2001, by and between SCPIE Management Company and Donald P.
Newell.                                                            
|      
|10.69  |  | Employment Memorandum regarding the employment terms of Donald P. Newell with the Company, dated as of October 30,
2000.                                                           
|      
|10.70  |  | Quota Share Retrocession Contract, issued to the Company, American Healthcare Indemnity Company and American Healthcare
Specialty Insurance Company by GoshawK Reinsurance Limited.
|      
|10.71  |  | Guarantee Agreement by and between the Company and GoshawK Reinsurance Limited.                                                                                                    
|      
|10.72  |  | Amendments to Supplemental Employee Retirement Plan for selected employees of SCPIE Management Company.                                                                            
|      
|23.1   |  | Consent of independent auditors.                                                                                                                                                   



51



---



SIGNATURES



Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.



SCPIE HOLDINGS INC.By:

/s/    DONALD J.
ZUKDonald J. ZukPresident and Chief Executive Officer




March 28, 2003



Pursuant to the requirements of the
Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.



|SIGNATURE                                               |  | TITLE                                                                           |  | DATE          
|------------------------------------------------------- |  | ------------------------------------------------------------------------------- |  | --------------
|                                                       
|/S/    DONALD J.
ZUKDonald J.
Zuk                       |  | President, Chief Executive Officer and Director (Principal Executive Officer)   |  | March 28, 2003
|                                                       
|/S/    ROBERT B.
TSCHUDYRobert B.
Tschudy               |  | Senior Vice President and Chief Financial Officer (Principal Financial Officer) |  | March 28, 2003
|                                                       
|/S/    EDWARD G.
MARLEYEdward G.
Marley                 |  | Vice President and Chief Accounting Officer (Principal Accounting Officer)      |  | March 28, 2003
|                                                       
|/S/    MITCHELL S. KARLAN,
M.D.Mitchell S. Karlan,
M.D. |  | Chairman of the Board and Director                                              |  | March 28, 2003
|                                                       
|/S/    JACK E.
MCCLEARY, M.D.Jack E. McCleary, M.D.     |  | Director and Treasurer                                                          |  | March 28, 2003
|                                                       
|/S/    WILLIS T. KING,
JR.Willis T. King,
Jr.           |  | Director                                                                        |  | March 28, 2003
|                                                       
|/S/    LOUIS H. MASOTTI,
PHD.Louis H.
Masotti, Phd.     |  | Director                                                                        |  | March 28, 2003
|                                                       
|/S/    CHARLES B.
MCELWEE, M.D.Charles B. McElwee, M.D. |  | Director                                                                        |  | March 28, 2003
|                                                       
|/S/    WENDELL L. MOSELEY,
M.D.Wendell L. Moseley,
M.D. |  | Director                                                                        |  | March 28, 2003
|                                                       
|/S/    DONALD P.
NEWELLDonald P.
Newell                 |  | Director                                                                        |  | March 28, 2003
|                                                       
|/S/    HARRIET M. OPFELL,
M.D.Harriet M. Opfell,
M.D.   |  | Director                                                                        |  | March 28, 2003



52



---

|SIGNATURE                                                 |  | TITLE    |  | DATE          
|--------------------------------------------------------- |  | -------- |  | --------------
|                                                         
|/S/    WILLIAM A. RENERT,
M.D.William A. Renert,
M.D.     |  | Director |  | March 28, 2003
|                                                         
|/S/    HENRY L. STOUTZ,
M.D.Henry L. Stoutz,
M.D.         |  | Director |  | March 28, 2003
|                                                         
|/S/    REINHOLD A. ULLRICH,
M.D.Reinhold A. Ullrich, M.D. |  | Director |  | March 28, 2003
|                                                         
|/S/    RONALD H. WENDER,
M.D.Ronald H. Wender,
M.D.       |  | Director |  | March 28, 2003



53



---



CERTIFICATIONS



I, Donald J. Zuk, certify that:



|1. |  | I have reviewed this annual report on Form 10-K of SCPIE Holdings Inc.;
|-- |  | -----------------------------------------------------------------------



|2. |  | Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in
light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;
|-- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|3. |  | Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial
condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;
|-- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|4. |  | The registrants other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules
13a-14 and 15d-14) for the registrant and have:
|-- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | a) |  | designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the period in which this annual report is being prepared;
| | -- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | b) |  | evaluated the effectiveness of the registrants disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the
Evaluation Date); and
| | -- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | c) |  | presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
| | -- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------



|5. |  | The registrants other certifying officers and I have disclosed, based on our most recent evaluation, to the registrants auditors and the audit committee of the
registrants board of directors (or persons performing the equivalent functions):
|-- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | a) |  | all significant deficiencies in the design or operation of internal controls which could adversely affect the registrants ability to record, process, summarize and
report financial data and have identified for the registrants auditors any material weaknesses in internal controls; and
| | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | b) |  | any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal controls; and
| | -- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------



|6. |  | The registrants other certifying officers and I have indicated in this annual report whether or not there were significant changes in internal controls or in other
factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
|-- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Date: March 28, 2003



/s/    DONALD J.
ZUK



Donald J. Zuk

Chief Executive Officer



54



---



I, Robert B. Tschudy, certify that:



|1. |  | I have reviewed this annual report on Form 10-K of SCPIE Holdings Inc.;
|-- |  | -----------------------------------------------------------------------



|2. |  | Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in
light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;
|-- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|3. |  | Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial
condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;
|-- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|4. |  | The registrants other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules
13a-14 and 15d-14) for the registrant and have:
|-- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | a) |  | designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the period in which this annual report is being prepared;
| | -- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | b) |  | evaluated the effectiveness of the registrants disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the
Evaluation Date); and
| | -- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | c) |  | presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
| | -- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------



|5. |  | The registrants other certifying officers and I have disclosed, based on our most recent evaluation, to the registrants auditors and the audit committee of the
registrants board of directors (or persons performing the equivalent functions):
|-- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | a) |  | all significant deficiencies in the design or operation of internal controls which could adversely affect the registrants ability to record, process, summarize and
report financial data and have identified for the registrants auditors any material weaknesses in internal controls; and
| | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | b) |  | any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal controls; and
| | -- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------



|6. |  | The registrants other certifying officers and I have indicated in this annual report whether or not there were significant changes in internal controls or in other
factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
|-- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Date: March 28, 2003



/s/    ROBERT B.
TSCHUDY



Robert B. Tschudy

Chief Financial Officer



55



---



SCPIE HOLDINGS INC.



ITEM 15(d) FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE



ANNUAL REPORT ON FORM 10-K



|INDEX                                                                                                |  | PAGE
|---------------------------------------------------------------------------------------------------- |  | ----
|                                                                                                    
|Report of Independent Auditors                                                                       |  | 57  
|Financial Statements:                                                                                |  |     
|Consolidated Balance Sheets as of December 31, 2002 and 2001                                         |  | 58  
|Consolidated Statements of Operations for the years ended December 31, 2002, 2001 and 2000           |  | 59  
|Consolidated Statements of Stockholders Equity for the years ended December 31, 2002, 2001 and 2000 |  | 60  
|Consolidated Statements of Cash Flows for the years ended December 31, 2002, 2001 and 2000           |  | 61  
|Notes to Consolidated Financial Statements                                                           |  | 62  
|Schedule IICondensed Financial Information of Registrant                                            |  | 80  
|Schedule IIISupplementary Insurance Information                                                     |  | 85  



All other schedules for which
provision is made in the applicable accounting regulation of the Securities and Exchange Commission are not required under the related instructions or are inapplicable and therefore have been omitted.



56



---

REPORT OF INDEPENDENT AUDITORS



Board of
Directors and Stockholders

SCPIE Holdings Inc.



We have audited the accompanying consolidated balance sheets of SCPIE Holdings Inc. and subsidiaries (the Company) as of December 31, 2002 and 2001, and the related
consolidated statements of operations, stockholders equity and cash flows for each of the three years in the period ended December 31, 2002. Our audits also included the financial statement schedules listed in the index at item 15(d). These
financial statements and schedules are the responsibility of the Companys management. Our responsibility is to express an opinion on these financial statements and schedules based on our audits.



We conducted our audits in accordance with auditing standards generally accepted in the
United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.



In our opinion, the
financial statements referred to above present fairly, in all material respects, the consolidated financial position of SCPIE Holdings Inc. and subsidiaries at December 31, 2002 and 2001, and the consolidated results of their operations and their
cash flows for each of the three years in the period ended December 31, 2002, in conformity with accounting principles generally accepted in the United States. Also, in our opinion, the related financial statement schedules, when considered in
relation to the basic financial statements taken as a whole, present fairly in all material respects the information set forth therein.



/s/  ERNST & YOUNG LLP



Los Angeles, California

February 20, 2003



57



---

SCPIE HOLDINGS INC. AND SUBSIDIARIES



CONSOLIDATED BALANCE SHEETS

(In thousands, except share data)



|DECEMBER 31,                                                                                                                                                |  | 2002 |           |   | 2001 |  
|----------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---- | --------- | - | ---- | -
|                                                                                                                                                           
|ASSETS                                                                                                                                                      |  |      |           |   |      |  
|Securities available for sale (Note 2):                                                                                                                     |  |      |           |   |      |  
|Fixed-maturity investments, at fair value (amortized cost: 2002$523,516;
2001$565,225)                                                                    |  | $    | 538,675   |   |      | $
|Equity investments, at fair value (cost: 2002$29,758; 2001$29,744)                                                                                        |  |      | 34,237    |   |      |  
|                                                                                                                                                            |  |      |           |   |      |  
|Total securities available for sale                                                                                                                         |  |      | 572,912   |   |      |  
|Other investments                                                                                                                                           |  |      | 15,000    |   |      |  
|Real estate                                                                                                                                                 |  |      | 15,407    |   |      |  
|Short-term securities                                                                                                                                       |  |      | 105,942   |   |      |  
|                                                                                                                                                            |  |      |           |   |      |  
|Total investments                                                                                                                                           |  |      | 709,261   |   |      |  
|Cash                                                                                                                                                        |  |      | 9,845     |   |      |  
|Accrued investment income                                                                                                                                   |  |      | 8,157     |   |      |  
|Premiums receivable                                                                                                                                         |  |      | 117,335   |   |      |  
|Reinsurance recoverables (Note 4)                                                                                                                           |  |      | 153,589   |   |      |  
|Deferred policy acquisition costs                                                                                                                           |  |      | 6,858     |   |      |  
|Federal income taxes receivable                                                                                                                             |  |      | 10,944    |   |      |  
|Deferred federal income taxes, net (Note 5)                                                                                                                 |  |      | 32,356    |   |      |  
|Property and equipment, net                                                                                                                                 |  |      | 5,305     |   |      |  
|Other assets                                                                                                                                                |  |      | 10,116    |   |      |  
|                                                                                                                                                            |  |      |           |   |      |  
|Total assets                                                                                                                                                |  | $    | 1,063,766 |   |      | $
|                                                                                                                                                            |  |      |           |   |      |  
|LIABILITIES                                                                                                                                                 |  |      |           |   |      |  
|Reserves:                                                                                                                                                   |  |      |           |   |      |  
|Losses and loss adjustment expenses (Note 3)                                                                                                                |  | $    | 650,671   |   |      | $
|Unearned premiums                                                                                                                                           |  |      | 67,556    |   |      |  
|                                                                                                                                                            |  |      |           |   |      |  
|Total reserves                                                                                                                                              |  |      | 718,227   |   |      |  
|Bank loan payable (Note 8)                                                                                                                                  |  |      |          |   |      |  
|Amounts held for reinsurance                                                                                                                                |  |      | 87,701    |   |      |  
|Other liabilities                                                                                                                                           |  |      | 30,672    |   |      |  
|                                                                                                                                                            |  |      |           |   |      |  
|Total liabilities                                                                                                                                           |  |      | 836,600   |   |      |  
|Commitments and contingencies (Note 9)                                                                                                                      |  |      |           |   |      |  
|STOCKHOLDERS EQUITY                                                                                                                                        |  |      |           |   |      |  
|Preferred stockpar value $1.00, 5,000,000 shares authorized, no shares issued or
outstanding                                                               |  |      |          |   |      |  
|Common stockpar value $0.0001, 30,000,000 shares authorized, 12,792,091 shares issued,
20029,333,807 shares outstanding 20019,318,066 shares outstanding |  |      | 1         |   |      |  
|Additional paid-in capital                                                                                                                                  |  |      | 37,805    |   |      |  
|Retained earnings                                                                                                                                           |  |      | 280,609   |   |      |  
|Treasury stock, at cost (20022,958,284 shares and 20012,974,025
shares)                                                                                   |  |      | (98,830   | ) |      |  
|Stock subscription notes receivable                                                                                                                         |  |      | (3,592    | ) |      |  
|Accumulated other comprehensive income                                                                                                                      |  |      | 11,173    |   |      |  
|                                                                                                                                                            |  |      |           |   |      |  
|Total stockholders equity                                                                                                                                  |  |      | 227,166   |   |      |  
|                                                                                                                                                            |  |      |           |   |      |  
|Total liabilities and stockholders equity                                                                                                                  |  | $    | 1,063,766 |   |      | $
|                                                                                                                                                            |  |      |           |   |      |  



See accompanying
notes.



58



---

SCPIE HOLDINGS INC. AND SUBSIDIARIES



CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per-share data)



|FOR THE YEAR ENDED DECEMBER 31,                               |  | 2002 |         |   | 2001 |   |         | 2000 | 
|------------------------------------------------------------- |  | ---- | ------- | - | ---- | - | ------- | ---- | 
|                                                             
|REVENUES                                                      |  |      |         |   |      |   |         |      | 
|Premiums earned (Note 4)                                      |  | $    | 286,063 |   |      | $ | 235,935 |      | 
|Net investment income (Note 2)                                |  |      | 32,231  |   |      |   | 35,895  |      | 
|Realized investment gains (losses) (Note 2)                   |  |      | 18,910  |   |      |   | 5,707   |      | 
|Equity in earnings from affiliates                            |  |      | 750     |   |      |   | 1,327   |      | 
|Other revenue                                                 |  |      | 1,280   |   |      |   | 875     |      | 
|                                                              |  |      |         |   |      |   |         |      | 
|Total revenues                                                |  |      | 339,234 |   |      |   | 279,739 |      | 
|EXPENSES                                                      |  |      |         |   |      |   |         |      | 
|Losses and loss adjustment expenses (Note 3)                  |  |      | 320,516 |   |      |   | 304,473 |      | 
|Underwriting and other operating expenses (Note 1 and Note 4) |  |      | 79,676  |   |      |   | 64,732  |      | 
|Interest expenses                                             |  |      | 66      |   |      |   | 1,416   |      | 
|                                                              |  |      |         |   |      |   |         |      | 
|Total expenses                                                |  |      | 400,258 |   |      |   | 370,621 |      | 
|                                                              |  |      |         |   |      |   |         |      | 
|Income (loss) before federal income tax expense (benefit)     |  |      | (61,024 | ) |      |   | (90,882 | )    | 
|Federal income tax expense (benefit) (Note 5)                 |  |      | (22,642 | ) |      |   | (32,906 | )    | 
|                                                              |  |      |         |   |      |   |         |      | 
|Net income (loss)                                             |  | $    | (38,382 | ) |      | $ | (57,976 | )    | 
|                                                              |  |      |         |   |      |   |         |      | 
|Basic earnings (loss) per share of common stock (Note 11)     |  | $    | (4.12   | ) |      | $ | (6.22   | )    | 
|Diluted earnings (loss) per share of common stock (Note 11)   |  | $    | (4.12   | ) |      | $ | (6.22   | )    | 





See accompanying notes.



59



---

SCPIE HOLDINGS INC. AND SUBSIDIARIES



CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY

(In thousands)



|                                                                                                                                         |  | COMMON STOCK |   | ADDITIONAL PAID-IN CAPITAL |   | RETAINED EARNINGS |  |   | TREASURY STOCK |   |  | STOCK SUBSCRIPTION NOTES RECEIVABLE |         |   | ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) |   |        | TOTAL STOCKHOLDERS EQUITY | 
|---------------------------------------------------------------------------------------------------------------------------------------- |  | ------------ | - | -------------------------- | - | ----------------- |  | - | -------------- | - |  | ----------------------------------- | ------- | - | --------------------------------------------- | - | ------ | -------------------------- | 
|                                                                                                                                        
|Balance at December 31, 1999                                                                                                             |  | $            | 1 |                            | $ | 36,386            |  | $ | 370,923        |   |  | $                                   | (93,796 | ) |                                               | $ | (4,050 | )                          | 
|Net income                                                                                                                               |  |              |   |                            |   |                   |  |   | 17,271         |   |  |                                     |         |   |                                               |   |        |                            | 
|Comprehensive income for unrealized gains on securities, net of reclassification adjustments of
$1,027 for losses included in net income |  |              |   |                            |   |                   |  |   |                |   |  |                                     |         |   |                                               |   |        |                            | 
|                                                                                                                                         |  |              |   |                            |   |                   |  |   |                |   |  |                                     |         |   |                                               |   |        |                            | 
|Comprehensive income                                                                                                                     |  |              |   |                            |   |                   |  |   |                |   |  |                                     |         |   |                                               |   |        |                            | 
|Purchase of treasury stock                                                                                                               |  |              |   |                            |   |                   |  |   |                |   |  |                                     | (5,095  | ) |                                               |   |        |                            | 
|Treasury stock reissued                                                                                                                  |  |              |   |                            |   |                   |  |   |                |   |  |                                     | 186     |   |                                               |   |        |                            | 
|Cash dividends                                                                                                                           |  |              |   |                            |   |                   |  |   | (3,757         | ) |  |                                     |         |   |                                               |   |        |                            | 
|                                                                                                                                         |  |              |   |                            |   |                   |  |   |                |   |  |                                     |         |   |                                               |   |        |                            | 
|Balance at December 31, 2000                                                                                                             |  |              | 1 |                            |   | 36,386            |  |   | 384,437        |   |  |                                     | (98,705 | ) |                                               |   | (4,050 | )                          | 
|Net loss                                                                                                                                 |  |              |   |                            |   |                   |  |   | (57,976        | ) |  |                                     |         |   |                                               |   |        |                            | 
|Comprehensive income for unrealized gains on securities, net of reclassification adjustments of
$714 for gains included in net income    |  |              |   |                            |   |                   |  |   |                |   |  |                                     |         |   |                                               |   |        |                            | 
|Change in minimum pension liability, net of applicable income taxes of $376                                                              |  |              |   |                            |   |                   |  |   |                |   |  |                                     |         |   |                                               |   |        |                            | 
|                                                                                                                                         |  |              |   |                            |   |                   |  |   |                |   |  |                                     |         |   |                                               |   |        |                            | 
|Comprehensive loss                                                                                                                       |  |              |   |                            |   |                   |  |   |                |   |  |                                     |         |   |                                               |   |        |                            | 
|Purchase of treasury stock                                                                                                               |  |              |   |                            |   |                   |  |   |                |   |  |                                     | (278    | ) |                                               |   |        |                            | 
|Cash dividends                                                                                                                           |  |              |   |                            |   |                   |  |   | (3,727         | ) |  |                                     |         |   |                                               |   |        |                            | 
|Other                                                                                                                                    |  |              |   |                            |   | 1,417             |  |   |                |   |  |                                     |         |   |                                               |   |        |                            | 
|                                                                                                                                         |  |              |   |                            |   |                   |  |   |                |   |  |                                     |         |   |                                               |   |        |                            | 
|Balance at December 31, 2001                                                                                                             |  |              | 1 |                            |   | 37,803            |  |   | 322,734        |   |  |                                     | (98,983 | ) |                                               |   | (4,050 | )                          | 
|Net loss                                                                                                                                 |  |              |   |                            |   |                   |  |   | (38,382        | ) |  |                                     |         |   |                                               |   |        |                            | 
|Comprehensive income for unrealized gains on securities, net of reclassification adjustments of
$14,567 for gains included in net income |  |              |   |                            |   |                   |  |   |                |   |  |                                     |         |   |                                               |   |        |                            | 
|Change in minimum pension liability, net of applicable income taxes of $306                                                              |  |              |   |                            |   |                   |  |   |                |   |  |                                     |         |   |                                               |   |        |                            | 
|Unrealized foreign currency gain                                                                                                         |  |              |   |                            |   |                   |  |   |                |   |  |                                     |         |   |                                               |   |        |                            | 
|                                                                                                                                         |  |              |   |                            |   |                   |  |   |                |   |  |                                     |         |   |                                               |   |        |                            | 
|Comprehensive loss                                                                                                                       |  |              |   |                            |   |                   |  |   |                |   |  |                                     |         |   |                                               |   |        |                            | 
|Treasury stock reissued                                                                                                                  |  |              |   |                            |   |                   |  |   |                |   |  |                                     | 153     |   |                                               |   |        |                            | 
|Cash dividends                                                                                                                           |  |              |   |                            |   |                   |  |   | (3,743         | ) |  |                                     |         |   |                                               |   |        |                            | 
|Stock subscription notes                                                                                                                 |  |              |   |                            |   |                   |  |   |                |   |  |                                     |         |   |                                               |   | 458    |                            | 
|Other                                                                                                                                    |  |              |   |                            |   | 2                 |  |   |                |   |  |                                     |         |   |                                               |   |        |                            | 
|                                                                                                                                         |  |              |   |                            |   |                   |  |   |                |   |  |                                     |         |   |                                               |   |        |                            | 
|Balance at December 31, 2002                                                                                                             |  | $            | 1 |                            | $ | 37,805            |  | $ | 280,609        |   |  | $                                   | (98,830 | ) |                                               | $ | (3,592 | )                          | 
|                                                                                                                                         |  |              |   |                            |   |                   |  |   |                |   |  |                                     |         |   |                                               |   |        |                            | 

See accompanying notes.





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SCPIE HOLDINGS INC. AND SUBSIDIARIES



CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)



|FOR THE YEAR ENDED DECEMBER 31,                                                                    |  | 2002 |          |   | 2001 |   |          | 2000 | 
|-------------------------------------------------------------------------------------------------- |  | ---- | -------- | - | ---- | - | -------- | ---- | 
|                                                                                                  
|OPERATING ACTIVITIES                                                                               |  |      |          |   |      |   |          |      | 
|Net income (loss)                                                                                  |  | $    | (38,382  | ) |      | $ | (57,976  | )    | 
|Adjustments to reconcile net income (loss) to net cash provided by (used in) operating
activities: |  |      |          |   |      |   |          |      | 
|Provisions for amortization and depreciation                                                       |  |      | 5,207    |   |      |   | 4,545    |      | 
|Provision (benefit) for deferred federal income taxes                                              |  |      | (11,928  | ) |      |   | (21,546  | )    | 
|Realized investment (gains) losses                                                                 |  |      | (18,910  | ) |      |   | (5,707   | )    | 
|Equity in earnings of affiliates                                                                   |  |      | (750     | ) |      |   | (1,327   | )    | 
|Changes in operating assets and liabilities:                                                       |  |      |          |   |      |   |          |      | 
|Accrued investment income                                                                          |  |      | 516      |   |      |   | 634      |      | 
|Premiums receivable                                                                                |  |      | (34,845  | ) |      |   | (36,119  | )    | 
|Reinsurance recoverables                                                                           |  |      | (74,341  | ) |      |   | (34,787  | )    | 
|Deferred policy acquisition costs                                                                  |  |      | 12,607   |   |      |   | (1,341   | )    | 
|Federal income tax receivable                                                                      |  |      | 614      |   |      |   | (11,558  | )    | 
|Losses and loss adjustment expense reserves                                                        |  |      | 74,035   |   |      |   | 143,095  |      | 
|Unearned premiums                                                                                  |  |      | (34,312  | ) |      |   | 44,872   |      | 
|Amounts held for reinsurance                                                                       |  |      | 87,701   |   |      |   |         |      | 
|Other assets                                                                                       |  |      | 8,402    |   |      |   | 465      |      | 
|Other liabilities                                                                                  |  |      | (82      | ) |      |   | 10,186   |      | 
|                                                                                                   |  |      |          |   |      |   |          |      | 
|Net cash provided by (used in) operating activities                                                |  |      | (24,468  | ) |      |   | 33,436   |      | 
|INVESTING ACTIVITIES                                                                               |  |      |          |   |      |   |          |      | 
|Purchasesfixed maturities                                                                         |  |      | (731,898 | ) |      |   | (480,444 | )    | 
|Salesfixed maturities                                                                             |  |      | 784,220  |   |      |   | 474,571  |      | 
|Maturitiesfixed maturities                                                                        |  |      | 4,914    |   |      |   | 12,197   |      | 
|Purchasesequities                                                                                 |  |      | (502     | ) |      |   | (17,500  | )    | 
|Salesequities                                                                                     |  |      | 500      |   |      |   | 27       |      | 
|Change in short-term investments, net                                                              |  |      | (20,953  | ) |      |   | (538     | )    | 
|                                                                                                   |  |      |          |   |      |   |          |      | 
|Net cash provided by (used in) investing activities                                                |  |      | 36,281   |   |      |   | (11,687  | )    | 
|FINANCING ACTIVITIES                                                                               |  |      |          |   |      |   |          |      | 
|Proceeds from bank loan                                                                            |  |      |         |   |      |   |         |      | 
|Repayment of bank loan                                                                             |  |      | (9,000   | ) |      |   | (18,000  | )    | 
|Purchase of treasury stock, net and repayment of stock subscription notes                          |  |      | 613      |   |      |   | (278     | )    | 
|Cash dividends                                                                                     |  |      | (3,743   | ) |      |   | (3,727   | )    | 
|                                                                                                   |  |      |          |   |      |   |          |      | 
|Net cash provided by (used in) financing activities                                                |  |      | (12,130  | ) |      |   | (22,005  | )    | 
|                                                                                                   |  |      |          |   |      |   |          |      | 
|Increase (decrease) in cash                                                                        |  |      | (317     | ) |      |   | (256     | )    | 
|Cash at beginning of year                                                                          |  |      | 10,162   |   |      |   | 10,418   |      | 
|                                                                                                   |  |      |          |   |      |   |          |      | 
|Cash at end of year                                                                                |  | $    | 9,845    |   |      | $ | 10,162   |      | 
|                                                                                                   |  |      |          |   |      |   |          |      | 



See accompanying
notes.



61



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SCPIE HOLDINGS INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 1.    NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES



BASIS OF PRESENTATION

---



The accompanying consolidated financial statements include the accounts and operations, after intercompany eliminations, of SCPIE Holdings Inc. (SCPIE Holdings) and
its direct and indirect wholly owned subsidiaries, principally SCPIE Indemnity Company (SCPIE Indemnity), American Healthcare Indemnity Company (AHI), American Healthcare Specialty Insurance Company (AHSIC), SCPIE Underwriting Limited (SUL) and
SCPIE Management Company (SMC), collectively, the Company. Significant intercompany accounts and transactions have been eliminated in consolidation.



The Company principally writes professional liability insurance for physicians, oral and maxillofacial surgeons, hospitals and other healthcare providers. Most of
the Companys coverage is written on a claims-made and reported basis. This coverage is provided only for claims that are first reported to the Company during the insureds coverage period and that arise from occurrences during
the insureds coverage period. The Company also makes tail coverage available for purchase by policyholders in order to cover claims that arise from occurrences during the insureds coverage period, but that are first reported
to the Company after the insureds coverage period and during the term of the applicable tail coverage.



In 1999, the Company formed an assumed reinsurance division and rapidly expanded this operation. In December 2002, the Company retroceded most of its assumed reinsurance business, as it no longer was considered
part of the Companys core business, and the Company began refocusing on its core business of Healthcare Liability Insurance. This retrocession was placed with a subsidiary of GoshawK Insurance Holdings plc (GoshawK).



The preparation of financial statements of insurance companies requires management to
make estimates and assumptions that affect amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.



The accompanying financial statements have been prepared in conformity with accounting principles generally accepted in the United
States (GAAP) which differ from statutory accounting practices prescribed or permitted by regulatory authorities. The significant accounting policies followed by the Company that materially affect financial reporting are summarized below:



FOREIGN OPERATIONS

---



SUL, a corporate member of Lloyds of London (Lloyds),
commenced operations in January 2001 as a member of two Lloyds underwriting syndicates. In 2002, the Company provided capital in support of three syndicates. The Company reports this subsidiarys operations on a one-quarter lag.



INVESTMENTS

---



Management determines the appropriate classification of investment
securities at the time of purchase and reevaluates such designation as of each balance sheet date.



Available-for-saleAvailable-for-sale securities are stated at fair value, with the unrealized gains and losses, net of tax, reported in
other comprehensive income. The net carrying value of fixed-maturity investments classified as available-for-sale is adjusted for amortization of premiums and accretion of discounts to maturity, or in the case of mortgage-backed securities, over the
estimated life of the security. Such amortization is computed under the effective interest method and included in net investment income. Interest and dividends are recorded in net investment income.



62



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SCPIE HOLDINGS INC., AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Realized gains and losses, and declines in value judged to be other-than-temporary are recorded in realized investment gains (losses). The cost of
securities sold is based on the specific identification method.



The Company has no securities classified as held to maturity or trading as defined in FASB No. 115, Accounting for Certain Investments in Debt and Equity Investments.



Other InvestmentThe other investment consists of an
interest in a diversified portfolio of offshore hedge funds, managed accounts and other professionally managed funds that pursue non-traditional investment strategies, e.g., futures, options, forward exchange contracts and other derivative
instruments. The Company does not take part in the management or control of the business of these funds and is not personally liable for any debt or obligation of the funds beyond its investment. The investment return on the Companys
investment depends on the performance of the underlying portfolio of funds. This investment is stated at fair value and the change in value is reported in net investment income. At December 31, 2002 and 2001, the Company was not a direct party to
any other derivative instruments.



Short-term investments
are carried at cost, which approximates fair value. The cost of securities sold is based on the specific identification method.



Investments in 20% to 50%-owned affiliates are accounted for on the equity method and investments in less than 20% owned affiliates are accounted
for on the cost method.



Real EstateThe
Companys former home office headquarters, is recorded at cost and depreciated principally under the straight-line method over the useful life of the buildings. Accumulated depreciation at December 31, 2002 and 2001 was $4.1 million and $3.8
million respectively. In July 1998, the Company entered into a lease covering approximately 95,000 square feet of office space for new Company headquarters. The lease is for a term of 10 years and the Company moved its headquarters and principal
operations to this space in March 1999.



During 2002 and
2001, both former headquarters buildings were leased entirely to third parties. These leases expire on April 30, 2005, and November 30, 2005, with no provisions for renewal. Future minimum rentals are $1.8 million for each of the years 2003 through
2004 and $1.1 million for year 2005.



DEFERRED POLICY ACQUISITION COSTS

---



Costs of acquiring
insurance business that vary with and are primarily related to the production of such business are deferred and amortized ratably over the period the related premiums are recognized. Such costs include commissions, premium taxes and certain
underwriting and policy issuance costs. Anticipated investment income is considered in the determination of the recoverability of deferred policy acquisition costs.



|                             |  | 2002           |         |   | 2001 |   |         | 2000 | 
|---------------------------- |  | -------------- | ------- | - | ---- | - | ------- | ---- | 
|                            
|                             |  | (In Thousands)
|Balance at beginning of year |  | $              | 19,465  |   |      | $ | 18,124  |      | 
|Costs deferred               |  |                | 20,003  |   |      |   | 47,505  |      | 
|Costs amortized              |  |                | (32,610 | ) |      |   | (46,164 | )    | 
|                             |  |                |         |   |      |   |         |      | 
|Balance at end of year       |  | $              | 6,858   |   |      | $ | 19,465  |      | 
|                             |  |                |         |   |      |   |         |      | 



As the Company has reduced its
assumed reinsurance operations and operations in other states through brokerage relationships, the corresponding commissions and fronting fee arrangements have resulted in an overall decrease in acquisition costs during 2002. The Company accelerated
the amortization of certain acquisition costs in 2002 based on the adequacy of the corresponding premium in accordance with Financial Accounting Standards Board Statement (FASB) No. 60, Accounting and Reporting by Insurance Enterprises.



63



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SCPIE HOLDINGS INC., AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)





PREMIUMS

---



Premiums are recognized as earned on a pro rata basis over the terms of the respective policies.



RESERVES FOR LOSSES AND LOSS ADJUSTMENT EXPENSES

---



Reserves for losses and loss adjustment expenses (LAE) represent the estimated liability for reported claims plus those incurred but not yet reported and the
related estimated costs to adjust those claims. The reserve for losses and LAE is determined using case-basis evaluations and statistical analysis and represents estimates of the ultimate cost of all unpaid losses incurred through December 31 of
each year. Although considerable variability is inherent in such estimates, management believes that the reserve for unpaid losses and related LAE is adequate. The estimates are continually reviewed and adjusted as necessary; such adjustments are
included in current operations and are accounted for as changes in estimates.



REINSURANCE

---



Prospective reinsurance premiums, losses and loss adjustment expenses are accounted for on bases consistent with those used in accounting for the original policies issued and the terms of the reinsurance contracts.



PROPERTY AND EQUIPMENT

---



Property and equipment are recorded at cost and depreciated principally
under the straight-line method over the useful life of the assets that range from five to seven years. Property and equipment consist of the following:



|DECEMBER 31,                |  | 2002           |        |   | 2001 |  
|--------------------------- |  | -------------- | ------ | - | ---- | -
|                           
|                            |  | (In Thousands)
|Leasehold improvements      |  | $              | 5,445  |   |      | $
|Furniture and equipment     |  |                | 7,154  |   |      |  
|                            |  |                |        |   |      |  
|                            |  |                | 12,599 |   |      |  
|Accumulated depreciation    |  |                | (7,294 | ) |      |  
|                            |  |                |        |   |      |  
|Property and equipment, net |  | $              | 5,305  |   |      | $
|                            |  |                |        |   |      |  



CREDIT RISK

---



Financial instruments that potentially
subject the Company to concentrations of credit risk consist principally of fixed-maturity investments. Concentrations of credit risk with respect to fixed maturities are limited due to the large number of such investments and their distributions
across many different industries and geographics.



Ceded reinsurance is
placed with a number of individual companies and syndicates at Lloyds of London to avoid concentration of credit risk. For the year ended December 31, 2002, approximately 96% of total ceded reinsurance premiums written were placed with
reinsurance companies with an A.M. Best or Insurance Solvency International rating of A- or better, including 70% with GoshawK Re, 6% with Lloyds of London syndicates and 12% with Hannover Ruckversicherungs. The remaining 12% of reinsurance
premiums paid was placed among other reinsurers including Converium Re Insurance and National Indemnity, which represent 8% of ceded reinsurance premium. The amounts due from GoshawK are collateralized by a trust account (funds held).



64



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SCPIE HOLDINGS INC., AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)





STOCK-BASED COMPENSATION

---



As of December 31, 2002, the Company has a stock-based employee and nonemployee compensation plan more fully described in Note 10.



The Company grants stock options for a fixed number of shares with an exercise price equal to the fair value of the shares at the date of grant. The Company
accounts for stock option grants in accordance with Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (APB 25), and related Interpretations. No stock-based compensation costs are included in the statements
of operations, as all options granted had an exercise price of the Companys employee stock options equal to the market price of the underlying stock on the dates of grant.



NEW ACCOUNTING STANDARDS

---



Effective January 1, 2002, the Company adopted Financial Accounting Standard (SFAS) No.
142, Goodwill and Other Intangible Assets, which establishes financial accounting and reporting for acquired goodwill and other intangible assets. Under SFAS No. 142, goodwill and indefinite-lived intangible assets are no longer amortized but
are reviewed at least annually for impairment. Separable intangible assets that have finite useful lives will continue to be amortized over their useful lives.



SFAS No. 142 requires that goodwill be tested for impairment at the reporting unit level at adoption and at least annually thereafter, utilizing a two-step
methodology. The initial step required the Company to determine the fair value of each reporting unit and compare it to the carrying value, including goodwill, of such unit. If the fair value exceeded the carrying value, no impairment loss was
recognized. However, if the carrying value of the reporting unit exceeded its fair value, the goodwill of this unit might have been impaired. The amount, if any, of the impairment would then be measured in the second step.



In connection with adopting this standard as of January 1, 2002, the Company completed
step one of the test for impairment utilizing a discounted cash flow model, which indicated that the fair values exceeded their carrying value. Therefore, no impairment has been recognized.



The Companys only intangible asset is goodwill of approximately $5 million, which
is no longer subject to amortization.



In August 2001, the Financial
Accounting Standards Board (FASB) issued SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. SFAS No. 144 changes the criteria that have to be met to classify an asset as held-for-sale, extends the reporting of
discontinued operations to all components of an entity, and requires expected future operating losses from discounted operations to be recorded in the period in which the losses are incurred, rather than as of the date management commits to a formal
plan to dispose of a segment as previously required. The Company adopted SFAS No. 144 on December 1, 2001. There was no material effect upon adoption of this statement.



In June 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities. SFAS No. 146
generally requires companies to recognize costs associated with exit or disposal activities when they are incurred rather than at the date of a commitment to an exit or disposal plan. This pronouncement is effective for exit or disposal activities
initiated after December 31, 2002, and is not expected to have a significant effect on the Companys financial results.



RECLASSIFICATIONS

---



Certain prior-year amounts have been reclassified to conform to the current-year presentation.



65



---

SCPIE HOLDINGS INC., AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)





NOTE 2.    INVESTMENTS



The
Companys investments in available-for-sale securities are summarized as follows:



|                                                 |  | COST OR AMORTIZED COST |         | GROSS UNREALIZED GAINS |   | GROSS UNREALIZED LOSSES |  | FAIR VALUE
|------------------------------------------------ |  | ---------------------- | ------- | ---------------------- | - | ----------------------- |  | ----------
|                                                
|                                                 |  | (In Thousands)        
|December 31, 2002                                |  |                        |         |                        |   |                         |  |           
|Fixed-maturity securities:                       |  |                        |         |                        |   |                         |  |           
|Bonds:                                           |  |                        |         |                        |   |                         |  |           
|U.S. government and agencies                     |  | $                      | 234,424 |                        | $ | 10,384                  |  | $         
|Mortgage-backed and asset-backed                 |  |                        | 63,293  |                        |   | 1,041                   |  |           
|Corporate                                        |  |                        | 225,799 |                        |   | 4,482                   |  |           
|                                                 |  |                        |         |                        |   |                         |  |           
|Total fixed-maturity securities                  |  |                        | 523,516 |                        |   | 15,907                  |  |           
|Common stocks                                    |  |                        | 29,758  |                        |   | 4,581                   |  |           
|                                                 |  |                        |         |                        |   |                         |  |           
|Total                                            |  | $                      | 553,274 |                        | $ | 20,488                  |  | $         
|                                                 |  |                        |         |                        |   |                         |  |           
|December 31, 2001                                |  |                        |         |                        |   |                         |  |           
|Fixed-maturity securities:                       |  |                        |         |                        |   |                         |  |           
|Bonds:                                           |  |                        |         |                        |   |                         |  |           
|U.S. government and agencies                     |  | $                      | 175,608 |                        | $ | 3,076                   |  | $         
|State, municipalities and political subdivisions |  |                        | 126,431 |                        |   | 1,387                   |  |           
|Mortgage-backed and asset-backed                 |  |                        | 73,332  |                        |   | 715                     |  |           
|Corporate                                        |  |                        | 189,854 |                        |   | 2,781                   |  |           
|                                                 |  |                        |         |                        |   |                         |  |           
|Total fixed-maturity securities                  |  |                        | 565,225 |                        |   | 7,959                   |  |           
|Common stocks                                    |  |                        | 29,744  |                        |   | 1,463                   |  |           
|                                                 |  |                        |         |                        |   |                         |  |           
|Total                                            |  | $                      | 594,969 |                        | $ | 9,422                   |  | $         
|                                                 |  |                        |         |                        |   |                         |  |           



The fair values of fixed-maturity
securities are based on quoted market prices, where available. For fixed-maturity securities not actively traded, fair values are estimated using values obtained from independent pricing services. The fair values of equity securities are based on
quoted market prices.



The amortized cost and fair value of the
Companys investments in fixed-maturity securities at December 31, 2002, are summarized by stated maturities as follows:



|                                            |  | AMORTIZED COST |         | FAIR VALUE
|------------------------------------------- |  | -------------- | ------- | ----------
|                                           
|                                            |  | (In Thousands)
|Years to maturity:                          |  |                |         |           
|One or less                                 |  | $              | 16,568  |           
|After one through five                      |  |                | 231,947 |           
|After five through ten                      |  |                | 202,380 |           
|After ten                                   |  |                | 9,328   |           
|Mortgage-backed and asset-backed securities |  |                | 63,293  |           
|                                            |  |                |         |           
|Totals                                      |  | $              | 523,516 |           
|                                            |  |                |         |           



66



---

SCPIE HOLDINGS INC., AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)





The foregoing data is based on the stated maturities of the securities. Actual maturities will differ for some securities because borrowers may have the right to call or prepay obligations.



Major categories of the Companys investment income are summarized as follows:



|YEAR ENDED DECEMBER 31,    |  | 2002           |        | 2001 |   | 2000  
|-------------------------- |  | -------------- | ------ | ---- | - | ------
|                          
|                           |  | (In Thousands)
|Fixed-maturity investments |  | $              | 31,993 |      | $ | 31,771
|Equity investments         |  |                | 109    |      |   | 238   
|Other                      |  |                | 2,312  |      |   | 6,266 
|                           |  |                |        |      |   |       
|Total investment income    |  |                | 34,414 |      |   | 38,275
|Investment expenses        |  |                | 2,183  |      |   | 2,380 
|                           |  |                |        |      |   |       
|Net investment income      |  | $              | 32,231 |      | $ | 35,895
|                           |  |                |        |      |   |       



Realized gains and losses from
sales of investments are summarized as follows:



|YEAR ENDED DECEMBER 31,                                   |  | 2002           |        |   | 2001 |   |        | 2000 | 
|--------------------------------------------------------- |  | -------------- | ------ | - | ---- | - | ------ | ---- | 
|                                                         
|                                                          |  | (In Thousands)
|Fixed-maturity investments:                               |  |                |        |   |      |   |        |      | 
|Gross realized gains                                      |  | $              | 22,484 |   |      | $ | 8,870  |      | 
|Gross realized losses                                     |  |                | (3,526 | ) |      |   | (3,165 | )    | 
|                                                          |  |                |        |   |      |   |        |      | 
|Net realized gains (losses) on fixed-maturity investments |  |                | 18,958 |   |      |   | 5,705  |      | 
|Equity investments:                                       |  |                |        |   |      |   |        |      | 
|Gross realized gains                                      |  |                |       |   |      |   | 6      |      | 
|Gross realized losses                                     |  |                | (48    | ) |      |   | (4     | )    | 
|                                                          |  |                |        |   |      |   |        |      | 
|Net realized gains (losses) on equity investments         |  |                | (48    | ) |      |   | 2      |      | 
|                                                          |  |                |        |   |      |   |        |      | 
|Total net realized gains (losses)                         |  | $              | 18,910 |   |      | $ | 5,707  |      | 
|                                                          |  |                |        |   |      |   |        |      | 



The change in the Companys
unrealized appreciation (depreciation) on fixed-maturity securities was $11.2 million, $4.8 million and $21.9 million for the years ended December 31, 2002, 2001 and 2000, respectively; the corresponding amounts for equity securities were $4.4
million, $0.9 million and $1.5 million.



At December 31, 2002, the
Companys investments in fixed-maturity securities with a fair value of $8.9 million were on deposit with state insurance departments to satisfy regulatory requirements.



No investment in any person or its affiliates exceeded 10% of the Companys stockholders equity at December 31, 2002.



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)





NOTE 3.    LOSSES AND LOSS ADJUSTMENT EXPENSES



The following table provides a reconciliation of the beginning and ending reserve balances, net of reinsurance recoverable, for 2002, 2001 and 2000.



|                                                                                                        |  | 2002           |         | 2001 |   | 2000    | 
|------------------------------------------------------------------------------------------------------- |  | -------------- | ------- | ---- | - | ------- | 
|                                                                                                       
|                                                                                                        |  | (In Thousands)
|Reserve for losses and LAE, net of related reinsurance recoverable, at beginning of
year                |  | $              | 502,390 |      | $ | 393,389 | 
|Reclassification of reinsurance contract                                                                |  |                |        |      |   | 3,840   | 
|Provision for losses and LAE for claims occurring in the current year, net of
reinsurance               |  |                | 303,296 |      |   | 290,649 | 
|Increase (decrease) in estimated losses and LAE for claims occurring in prior years, net of
reinsurance |  |                | 17,220  |      |   | 13,824  | 
|                                                                                                        |  |                |         |      |   |         | 
|Incurred losses during the year, net of reinsurance                                                     |  |                | 320,516 |      |   | 304,473 | 
|                                                                                                        |  |                |         |      |   |         | 
|Deduct losses and LAE payments for claims, net of reinsurance, occurring during:                        |  |                |         |      |   |         | 
|Current year                                                                                            |  |                | 47,258  |      |   | 36,006  | 
|Prior years                                                                                             |  |                | 210,907 |      |   | 155,626 | 
|                                                                                                        |  |                |         |      |   |         | 
|                                                                                                        |  |                | 258,165 |      |   | 191,632 | 
|                                                                                                        |  |                |         |      |   |         | 
|Reserve for losses and LAE, net of related reinsurance recoverable, at end of year                      |  |                | 564,741 |      |   | 502,390 | 
|Reinsurance recoverable for losses and LAE, at end of year                                              |  |                | 85,930  |      |   | 74,246  | 
|                                                                                                        |  |                |         |      |   |         | 
|Reserves for losses and LAE, gross of reinsurance recoverable, at end of year                           |  | $              | 650,671 |      | $ | 576,636 | 
|                                                                                                        |  |                |         |      |   |         | 



The increase during 2002 and 2001
in estimated losses and LAE for claims occurring in prior years was primarily attributable to the significant adverse loss experience encountered during 2002 and 2001 in the assumed reinsurance and the non-core direct healthcare liability insurance
business. See Managements Discussion and Analysis of Financial Condition and Results of OperationsOverview.



The anticipated effect of inflation is implicitly considered when estimating liabilities for losses and LAE. While anticipated price increases due to inflation are
considered in estimating the ultimate claim costs, the increase in average severities of claims is caused by a number of factors that vary with the individual type of insurance written. Future average severities are projected based on historical
trends adjusted for implemented changes in underwriting standards, policy provisions, and general economic trends. Those anticipated trends are monitored based on actual development and are modified if necessary.



Effective January 1, 1998, the Company entered into a facultative quota share
reinsurance contract. The contract represents a percentage share retrocession of an adverse loss development contract of underlying medical malpractice risks written on or prior to December 31, 1997. Premiums were collected during 1998 through 2000.
The contract is subject to a maximum limit and remains in force until 2023 or earlier provided the obligations under the contract have been fully satisfied. Based on the Companys reevaluation of the contract provisions, beginning 2001 the
Company reclassified $3.8 million of assumed premiums and corresponding losses recorded in prior periods to deposit reinsurance in accordance with FASB No. 113. This reclassification had no impact on net income for 2002 and 2001.



NOTE 4.    REINSURANCE



Certain premiums and benefits are ceded to other insurance companies under various
reinsurance agreements. These reinsurance agreements provide the Company with increased capacity to write additional risks and maintain its



68



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SCPIE HOLDINGS INC., AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



exposure to loss within its capital resources. Amounts recoverable from reinsurers are estimated in a manner consistent with the claim liability
associated with the reinsured policy. Some of these agreements include terms whereby the Company earns a profit-sharing commission if the reinsurers experience is favorable.



Reinsurance contracts do not relieve the Company from its obligations to policyholders. The failure of reinsurers to honor their
obligations could result in losses to the Company; consequently, allowances are established for amounts deemed uncollectible. The Company evaluates the financial condition and economic characteristics of its reinsurers to minimize its exposure to
significant losses from reinsurer insolvencies. The Company generally does not require collateral from its reinsurers that are licensed to assume such business.



The effect of reinsurance on premiums written and earned are as follows:



|YEAR ENDED DECEMBER 31, |  | 2002    |         | 2001   |   | 2000   
|----------------------- |  | ------- | ------- | ------ | - | -------
|                       
|                        |  | WRITTEN |         | EARNED |   | WRITTEN
|Direct                  |  | $       | 161,656 |        | $ | 184,014
|Assumed                 |  |         | 174,436 |        |   | 155,902
|Ceded                   |  |         | 84,342  |        |   | 53,853 
|                        |  |         |         |        |   |        
|Net premiums            |  | $       | 251,750 |        | $ | 286,063
|                        |  |         |         |        |   |        



Reinsurance ceded reduced loss and
loss adjustment expenses incurred by $35.8 million, $46.8 million and $1.1 million in 2002, 2001 and 2000 respectively. Reinsurance ceded also reduced loss and loss adjustment expense reserves by $85.9 million, $74.2 million and $40.2 million in
2002, 2001 and 2000 respectively. Reinsurance ceded reduced losses and loss adjustment expenses paid by $24.1 million, $12.7 million and $4.1 million in 2002, 2001 and 2000, respectively.



For 2000, the Company consolidated several treaties into a program in which the Company retained the first $2.0 million of losses and
allocated loss adjustment expenses (LAE) per incident and reinsured the excess losses and LAE per incident up to $70.0 million. For 2001 and 2002, the Company retained the first $1.25 million and $2.0 million of losses and LAE per incident for
physician coverage and hospital coverage, respectively, and reinsured the excess losses and LAE per incident up to $50.0 million.



In 1999, the Company formed an assumed reinsurance division and rapidly expanded this operation. In December 2002, the Company retroceded most of its assumed
reinsurance business, as it no longer was considered part of the Companys core business, and the Company began refocusing on its core business of healthcare liability insurance. In December 2002, SCPIE Indemnity and its two wholly owned
insurance subsidiaries, AHI and AHSIC, entered into a reinsurance agreement with GoshawK whereby they ceded the majority of the written and earned premium related to their assumed reinsurance program after July 1, 2002. The GoshawK agreement covers
the 2001 and 2002 underwriting years of the assumed business. Premiums to be ceded under this agreement are estimated to be $192 million of written and unearned premiums ($129.3 million in 2002 and $63 million in 2003) and $192 million in earned
premium ($71.4 million in 2002, $99 million in 2003, and $22 million in 2004). In consideration of the premium ceded, the reinsurer will reimburse the Companies for losses occurring after June 30, 2002, on an unlimited basis and their direct
acquisition costs. Losses related to premiums earned prior to July 1, 2002, remain the responsibility of the Company. This includes losses related to the World Trade Center terrorist attack.



The GoshawK reinsurance agreement 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,



69



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SCPIE HOLDINGS INC., AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



potential upward 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 retroactive accounting treatment required
under FASB 113 requires that a charge to income be recorded to the extent premiums ceded under the contract are in excess of the estimated losses ceded under the contract. The charge related to the cession of the unearned premium as of July 1, 2002,
and ceded premium written in the third quarter is included in operating expenses in the Assumed Reinsurance Segment. This charge amounted to $18.4 million and was recorded in the fourth quarter 2002. The assumed reinsurance premium written in the
fourth quarter 2002 ceded to GoshawK has been included in net premium written for the segment with a corresponding reduction in net earned premium and net incurred losses.



In addition to the basic premium ceded to the reinsurer, the GoshawK agreement calls for an additional premium to be ceded of 14.3% of
the basic premium. The additional premium under the agreement is expensed as the basic premium is ceded. Accordingly, $18.5 million was expensed in 2002 related to the additional premium. The additional premium obligation is collateralized by
securities. The reinsurance agreement is on a 100% funds withheld basis and balances due to the reinsurer are held in a trust account for the benefit of the Companies. As of December 31, 2002, $11.9 million in assets were in trust securing net
amounts due under the reinsurance agreement. In addition to the preceding terms, the Company receives 1.5% expense reimbursement or administrative expenses. Further, the agreement contains a profit-sharing provision, which states that the Company
will receive 50% of the profits of the ceded reinsurance (not including the additional premium paid) when the combined ratio for the basic ceded is below 100.



In November 1996, the Company entered into a six-year agreement with a third party whereby the Company provided a $5.0 million letter of credit in exchange for
future gains or losses based on the underwriting index of a reinsurance portfolio. In July 2001, the Company entered into an amended agreement, extending the agreement three years and providing an additional $5.0 million secured by a letter of
credit bringing its notional amount up to $10.0 million. In August 2002, the Company exercised its right to terminate its participation in the agreement and settle its losses (which included losses associated with the September 11, 2001, WTC events)
for $5.8 million. The Company had previously recorded an $8.5 million charge as an adjustment to assumed premiums earned as of December 31, 2001.



NOTE 5.    FEDERAL INCOME TAXES



The components of the federal income tax provision (benefit) in the accompanying consolidated statements of operations are summarized as follows:



|YEAR ENDED DECEMBER 31, |  | 2002           |         |   | 2001 |   |         | 2000
|----------------------- |  | -------------- | ------- | - | ---- | - | ------- | ----
|                       
|                        |  | (In Thousands)
|Current                 |  | $              | (10,714 | ) |      | $ | (11,360 | )   
|Deferred                |  |                | (11,928 | ) |      |   | (21,546 | )   
|                        |  |                |         |   |      |   |         |     
|Total                   |  | $              | (22,642 | ) |      | $ | (32,906 | )   
|                        |  |                |         |   |      |   |         |     



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SCPIE HOLDINGS INC., AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)





A reconciliation of income tax computed at the federal statutory tax rate to total income tax expense is as follows:



|YEAR ENDED DECEMBER 31,                      |  | 2002           |         |   | 2001 |   |         | 2000 | 
|-------------------------------------------- |  | -------------- | ------- | - | ---- | - | ------- | ---- | 
|                                            
|                                             |  | (In Thousands)
|Federal income tax (benefit) at 35%          |  | $              | (21,358 | ) |      | $ | (31,809 | )    | 
|Increase (decrease) in taxes resulting from: |  |                |         |   |      |   |         |      | 
|Tax-exempt interest                          |  |                | (1,557  | ) |      |   | (2,597  | )    | 
|Dividends received deduction                 |  |                | (70     | ) |      |   |        |      | 
|Goodwill                                     |  |                |        |   |      |   | 210     |      | 
|Other                                        |  |                | 343     |   |      |   | 1,290   |      | 
|                                             |  |                |         |   |      |   |         |      | 
|Total federal income tax expense (benefit)   |  | $              | (22,642 | ) |      | $ | (32,906 | )    | 
|                                             |  |                |         |   |      |   |         |      | 



Deferred income taxes reflect the
net tax effect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Companys deferred tax assets and
liabilities are summarized as follows:



|DECEMBER 31,                    |  | 2002           |        | 2001
|------------------------------- |  | -------------- | ------ | ----
|                               
|                                |  | (In Thousands)
|Deferred tax assets:            |  |                |        |     
|Discounting of loss reserves    |  | $              | 21,116 |     
|Unearned premium                |  |                | 2,674  |     
|Net operating loss carryforward |  |                | 16,819 |     
|Other                           |  |                | 466    |     
|                                |  |                |        |     
|Total deferred tax assets       |  |                | 41,075 |     
|Deferred tax liabilities:       |  |                |        |     
|Deferred acquisition costs      |  |                | 1,890  |     
|Unrealized investment gains     |  |                | 6,829  |     
|                                |  |                |        |     
|Total deferred tax liabilities  |  |                | 8,719  |     
|                                |  |                |        |     
|Net deferred tax assets         |  | $              | 32,356 |     
|                                |  |                |        |     



The Company is required to
establish a valuation allowance for any portion of the deferred tax asset that management believes will not be realized. In the opinion of management, it is more likely than not that the Company will realize the benefit of the net
deferred tax asset and, therefore, no such valuation allowance has been established.



Federal income taxes recovered in 2002 were $20.9 million. Federal income taxes paid during 2001 and 2000 were $1.0 million and $1.1 million, respectively.



At December 31, 2002, the Company had a net operating loss carryforward of $49.5 million for income tax purposes that expires in 2021.
On March 9, 2002, the Job Creation and Worker Assistance Act of 2002 became law. The new law allows tax losses incurred in 2001 and 2002 to be carried back five years instead of the two years allowed under prior law. As a result of this law change,
the Company was able to recoup an additional approximate $8 million of taxes paid in the three years ended December 31, 1998 on its 2001 tax return.



71



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SCPIE HOLDINGS INC., AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)





NOTE 6.    STATUTORY ACCOUNTING PRACTICES



State insurance laws and regulations prescribe accounting practices for determining statutory net income and equity for insurance companies. In addition, state regulators may permit statutory accounting practices that differ from
prescribed practices. The statutory financial statements, for the Companys insurance subsidiaries, are completed in accordance with the National Association of Insurance Commissioners Accounting Practices and Procedures manual, version
effective January 1, 2002 (NAIC SAP). The NAIC SAP was fully adopted by the Arkansas, California and Delaware Departments of Insurance. The principal differences between financial statement net income and statutory net income are due to policy
acquisition costs, which are deferred under GAAP but expensed for statutory purposes. Policyholders surplus and net income, for the Companys insurance subsidiaries, as determined in accordance with statutory accounting practices, are
summarized as follows:



|DECEMBER 31,                                   |  | 2002           |         |   | 2001 |   |         | 2000
|---------------------------------------------- |  | -------------- | ------- | - | ---- | - | ------- | ----
|                                              
|                                               |  | (In Thousands)
|Statutory net income (loss) for the year ended |  | $              | (23,164 | ) |      | $ | (83,268 | )   
|Statutory capital and surplus at year end      |  |                | 155,785 |   |      |   | 181,916 |     



As of January 1, 2001, certain
changes in accounting principles were adopted to conform to the new provisions of NAIC SAP. The cumulative effect of changes in accounting principles was reported as an adjustment to statutory capital and surplus. As a result of these changes, the
Company reported a change of accounting principle that increased statutory capital and surplus by $10.9 million due primarily to the recognition of deferred tax assets.



Generally, the capital and surplus of the Companys insurance subsidiaries available for transfer to the parent company are
limited to the amounts that the insurance subsidiaries capital and surplus, as determined in accordance with statutory accounting practices, exceed minimum statutory capital requirements; however, payments of the amounts as dividends may be
subject to approval by regulatory authorities. At December 31, 2002, the amount of dividends available to SCPIE Holdings from its insurance subsidiaries during 2003 not limited by such restrictions is approximately $15.6 million.



NOTE 7.    BENEFIT PLANS



The Company has a 401(k) defined contribution plan and a noncontributory defined
benefit plan, which provide retirement benefits to all its employees. In 2002, under the 401(k) plan, the Company contributed a 200% matching contribution based on the first 3% of employees compensation plus a discretionary contribution of 1%
of employees compensation. The contribution expense for the 401(k) plan was $903,000, $902,000 and $760,000 for the years ended December 31, 2002, 2001 and 2000, respectively.



Effective December 31, 2000, the Companys defined benefit pension plan was amended to freeze accrued benefits for all active
participants. Participants in the defined benefit pension plan continue to accrue service for vesting purposes only. Effective January 1, 2001, no future employees were eligible to participate in the plan.



Also effective December 31, 2000, the Company amended its nonqualified supplemental
plan. The participation requirements were modified to exclude all employees not specifically designated by the plan sponsor and the minimum age to participate in the plan was modified to age 45. As of December 31, 2002, the nonqualified supplemental
plan was comprised of five active plan participants.



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SCPIE HOLDINGS INC., AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)





The net pension expense (income) for these plans consists of the following components:



|                             |  | Qualified Plan |      |   | Supplemental Plan
|---------------------------- |  | -------------- | ---- | - | -----------------
|YEAR ENDED DECEMBER 31,      |  | 2002           |      |   | 2001             
|                            
|                             |  | (In Thousands)
|Service cost                 |  | $              |     |   |                  
|Interest cost                |  |                | 273  |   |                  
|Actual return on plan assets |  |                | (257 | ) |                  
|Amortization of:             |  |                |      |   |                  
|Transition asset             |  |                | (4   | ) |                  
|Prior service cost           |  |                |     |   |                  
|Actuarial loss (gain)        |  |                | 40   |   |                  
|Curtailment loss (gain)      |  |                |     |   |                  
|                             |  |                |      |   |                  
|Net pension expense (income) |  | $              | 52   |   |                  
|                             |  |                |      |   |                  



The following table sets forth the
funding status of the plan:



|                                                                      |  | Qualified Plan |        |   | Supplemental Plan |  
|--------------------------------------------------------------------- |  | -------------- | ------ | - | ----------------- | -
|DECEMBER 31,                                                          |  | 2002           |        |   | 2002              |  
|                                                                     
|                                                                      |  | (In Thousands)
|Change in Benefit Obligation                                          |  |                |        |   |                   |  
|Net benefit obligation at beginning of year                           |  | $              | 4,125  |   |                   | $
|Service cost                                                          |  |                |       |   |                   |  
|Interest cost                                                         |  |                | 273    |   |                   |  
|Effect of settlement                                                  |  |                |       |   |                   |  
|Actuarial loss                                                        |  |                | 137    |   |                   |  
|Gross benefits paid                                                   |  |                | (97    | ) |                   |  
|                                                                      |  |                |        |   |                   |  
|Net benefit obligation at end of year                                 |  | $              | 4,438  |   |                   | $
|                                                                      |  |                |        |   |                   |  
|Change in Plan Assets                                                 |  |                |        |   |                   |  
|Fair value of plan assets at beginning of year                        |  | $              | 3,158  |   |                   | $
|Actual loss on plan assets                                            |  |                | (400   | ) |                   |  
|Employer contributions                                                |  |                | 235    |   |                   |  
|Gross benefits paid                                                   |  |                | (97    | ) |                   |  
|                                                                      |  |                |        |   |                   |  
|Fair value of plan assets at end of year                              |  |                | 2,896  |   |                   |  
|                                                                      |  |                |        |   |                   |  
|Funded status (underfunded)                                           |  | $              | (1,542 | ) |                   | $
|Unrecognized actuarial (gain) loss                                    |  |                | 1,840  |   |                   |  
|Unrecognized prior service cost (benefit)                             |  |                |       |   |                   |  
|Unrecognized net transition asset                                     |  |                | (8     | ) |                   |  
|                                                                      |  |                |        |   |                   |  
|Accrued pension expense                                               |  | $              | 290    |   |                   | $
|                                                                      |  |                |        |   |                   |  
|Amounts recognized in the statement of financial position consists of |  |                |        |   |                   |  
|Prepaid benefit cost                                                  |  | $              | 290    |   |                   | $
|Accrued benefit liability                                             |  |                |       |   |                   |  
|Additional minimum liability                                          |  |                | (1,832 | ) |                   |  
|Intangible asset                                                      |  |                |       |   |                   |  
|Accumulated other comprehensive income                                |  |                | 1,832  |   |                   |  
|                                                                      |  |                |        |   |                   |  
|Net amount recognized                                                 |  | $              | 290    |   |                   | $
|                                                                      |  |                |        |   |                   |  



73



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SCPIE HOLDINGS INC., AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)





|                               |  | Qualified Plan |   |  | Supplemental Plan |  
|------------------------------ |  | -------------- | - |  | ----------------- | -
|DECEMBER 31,                   |  | 2002           |   |  | 2001              |  
|                              
|Weighted-average assumptions   |  |                |   |  |                   |  
|Discount rate                  |  | 6.5            | % |  | 7.0               | %
|Expected return on plan assets |  | 8.0            | % |  | 8.0               | %
|Rate of compensation increase  |  | N/A            |   |  | N/A               |  



During 1999, the Company
implemented the Director and Senior Management Stock Purchase Plan. The directors and senior managers purchased a total of 145,000 shares of common stock under this plan. The eligible participants executed promissory notes in the aggregate amount of
$4.1 million to fund this purchase. As of December 31, 2002, $458,000 of the promissory notes has been repaid.



The Companys Employee Stock Purchase Plan, effective January 1, 2000, offers eligible employees the opportunity to purchase shares of SCPIE Holdings Inc. common stock through payroll deductions.



NOTE 8.    BANK LOAN PAYABLE



On May 25, 2000, the Company entered into a credit agreement with Union Bank of
California, N. A., First Union Bank and Dresdner Bank AG, as lenders. The Credit Agreement, as amended, allowed the Company borrowings up to $40 million from time to time, subject to certain conditions. Under the Credit Agreement, the interest rate
(2.755% and 7.378% at December 31, 2001 and 2000 respectively) was based upon fluctuations in the London InterBank Offered Rate (LIBOR). Borrowings outstanding at December 31, 2001 and 2000, were $9.0 million and $27.0 million, respectively. All
amounts outstanding under the Credit Agreement were paid during February 2002, and the agreement was terminated effective February 28, 2002. Interest paid was $0.1 million, $1.4 million and $0.7 million in 2002, 2001 and 2000, respectively.



NOTE 9.    COMMITMENTS AND CONTINGENCIES



In July 1998, the Company entered a lease covering approximately
95,000 square feet of office space for the Company headquarters. The lease has escalating payments over a term of 10 years ending 2009 with options to renew for an additional 10 years. Occupancy expense for the years ended December 31, 2002, 2001
and 2000 was $3.5 million, $3.5 million and $3.6 million, respectively. Future minimum payments under noncancelable operating leases with initial terms of one year or more consist of the following at December 31, 2002 (in thousands):



|2003                         |  | $ | 2,991 
|---------------------------- |  | - | ------
|2004                         |  |   | 2,934 
|2005                         |  |   | 3,006 
|2006                         |  |   | 3,035 
|2007                         |  |   | 3,177 
|Thereafter                   |  |   | 2,640 
|                             |  |   |       
|Total minimum lease payments |  | $ | 17,783
|                             |  |   |       



The Company is named as defendant
in various legal actions primarily arising from claims made under insurance policies and contracts. These actions are considered by the Company in estimating the loss and loss adjustment expense reserves. The Companys management believes that
the resolution of these actions will not have a material adverse effect on the Companys financial position or results of operations.



74



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SCPIE HOLDINGS INC., AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)





Between January 1, 2000, and April 30, 2001, the Company issued endorsements to certain policyholders of the insurance company subsidiaries of Highlands Insurance Group, Inc. (HIG). Under these endorsements, the Company agreed to
assume the policy obligations of the HIG insurance company subsidiaries, if the subsidiaries became unable to pay their obligations by reason of having been declared insolvent by a court of competent jurisdiction. The coverages included property,
workers compensation, commercial automobile, general liability and umbrella. The gross premiums written by the HIG subsidiaries were approximately $88.0 million for the subject policies. In November 2001, HIG disclosed that its A.M. Best
rating had been reduced to C- and that its financial plan might trigger some level of regulatory involvement. In December 2001, HIG announced that it would cease issuing any new or renewal policies as soon as practical. HIG has advised the Company
that at December 31, 2002, the HIG insurance company subsidiaries had paid losses and LAE under the subject policies of $50.6 million and had established case loss reserves of $18.6 million, net of reinsurance. Incurred but not reported losses are
expected to emerge; however, the amount cannot be reasonably determined at this time. If the HIG insurance company subsidiaries are declared insolvent at some future date by a court of competent jurisdiction and are unable to pay losses under the
subject policies, the Company would be responsible to pay the amount of the losses incurred and unpaid at such date, and the Company would be entitled to indemnification of a portion of this loss from certain of the reinsurers of the HIG insurance
company subsidiaries. The Company would also be subrogated to the rights of the policyholders as creditors of the HIG insurance company subsidiaries.



In a court document dated October 31, 2002, in connection with a bankruptcy petition for the HIG and non-insurance subsidiaries, HIG, disclosed that the insurance
subsidiaries had combined policyholder surplus of approximately $41 million at December 31, 2001. In addition, the court document included projections of HIGs insurance subsidiaries for the next five years which project that they would
continue to meet their obligations to their policyholders. HIGs insurance subsidiaries are currently in voluntary liquidation and under close supervision by the state insurance departments involved. The ultimate impact on the HIG insurance
company subsidiaries of regulatory action, if any, is not currently determinable, but could be significant.



In November 2001, the Company arranged a letter of credit facility in the amount of $50 million with Barclays Bank PLC. Letters of credit issued under the facility fulfill the requirements of Lloyds and
guarantee loss reserves under reinsurance contracts. As of December 31, 2002, letter of credit issuance under the facility was approximately $46.3 million. Securities of $50.1 million are pledged as collateral under the facility.



In the third quarter of 2002, the Company received a notice of assessment from the
California Franchise Tax Board (FTB) for 1997, 1998, 1999 and 2000 in the total amount of $15.4 million, not including the federal tax benefits from the payment of such assessment or interest that might be included on amounts, if any, ultimately
paid to the FTB. The assessment is the result of a memorandum issued by the FTB in April 2002. The memorandum, which is based partly on the California Court of Appeals Decision in Ceridian v. Franchise Tax Board, challenges the exclusion from
the California income tax of dividends received by holding companies from their insurance company subsidiaries during the tax years ended on or after December 1, 1997. The assessed amounts, if paid, may be offset, in part, by federal tax benefits.
The Company has protested these assessments and while the Company intends to vigorously protest the current and any future assessments, there can be no assurance as to the ultimate outcome of these protests.



NOTE 10.    STOCK-BASED COMPENSATION



The Company has a stock-based compensation plan, the 2001 Amended and Restated Equity
Participation Plan of SCPIE Holdings Inc. (the Plan), which provides for grants of stock options to key employees and nonemployee directors of the Company.



The aggregate number of options for common shares issued and issuable under the Plan is limited to 1,700,000. All options granted have 10-year terms and vest over
various future periods.



75



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SCPIE HOLDINGS INC., AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)





A summary of the Companys stock-option activity and related information follows:



|                                         |  | 2002              |  | 2001                            |       | 2000             
|---------------------------------------- |  | ----------------- |  | ------------------------------- | ----- | -----------------
|                                         |  | Number of Options |  | Weighted-Average Exercise Price |       | Number of Options
|                                        
|Options outstanding at beginning of year |  | 1,211,490         |  | $                               | 23.48 |                  
|Granted during year                      |  | 80,000            |  |                                 | 15.74 |                  
|Exercised during year                    |  |                  |  |                                 |      |                  
|Forfeited during year                    |  | 147,730           |  |                                 | 24.03 |                  
|                                         |  |                   |  |                                 |       |                  
|Options outstanding atend of year        |  | 1,143,760         |  | $                               | 22.87 |                  
|                                         |  |                   |  |                                 |       |                  



Information about stock options
outstanding at December 31, 2002, is summarized as follows:



|                                   |  | Options Outstanding |  | Options Exercisable                        
|---------------------------------- |  | ------------------- |  | -------------------------------------------
|                                   |  | Number Outstanding  |  | Weighted-Average Remaining Contractual Life
|                                  
|Range of Exercise Prices:          |  |                     |  |                                            
|$ 5.10$12.90                      |  | 5,000               |  | 9.49                                       
|$16.70$19.32                      |  | 637,800             |  | 8.85                                       
|$24.25$36.50                      |  | 500,960             |  | 6.01                                       
|                                   |  |                     |  |                                            
|Options outstanding at end of year |  | 1,143,760           |  | 7.60                                       



The following table illustrates
the effect on net income (loss) and earnings per share if the Company applied the fair value recognition provision FASB Statement No. 123 Accounting of Stock-Based Compensation:



|                                                                                                                                           |  | 2002 |         |   | 2001 |   |         | 2000 | 
|------------------------------------------------------------------------------------------------------------------------------------------ |  | ---- | ------- | - | ---- | - | ------- | ---- | 
|Net income (loss) as reported                                                                                                              |  | $    | (38,382 | ) |      | $ | (57,976 | )    | 
|                                                                                                                                           |  |      |         |   |      |   |         |      | 
|Deduct: Total stock-based employee compensation expense determined under fair value based method
for all awards net of related tax effects |  |      | (1,102  | ) |      |   | (1,865  | )    | 
|                                                                                                                                           |  |      |         |   |      |   |         |      | 
|Pro forma net income (loss)                                                                                                                |  | $    | (39,484 | ) |      | $ | (59,841 | )    | 
|Earnings (loss) per share                                                                                                                  |  |      |         |   |      |   |         |      | 
|Basicas reported                                                                                                                         |  | $    | (4.12   | ) |      | $ | (6.22   | )    | 
|Basicproforma                                                                                                                            |  | $    | (4.24   | ) |      | $ | (6.42   | )    | 
|Dilutedas reported                                                                                                                       |  | $    | (4.12   | ) |      | $ | (6.22   | )    | 
|Dilutedproforma                                                                                                                          |  | $    | (4.24   | ) |      | $ | (6.42   | )    | 



For pro forma disclosure purposes,
the fair value of stock options was estimated at each date of grant using a Black-Scholes option pricing model using the following assumptions: Risk-free interest rates ranging from 3.5% to 6.1%; dividend yields ranging from 0.66% to 1.14%;
volatility factors of the expected market price of the Companys common stock ranging from .273 to .871; and a weighted average expected life of the options ranging from three to five years.



76



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SCPIE HOLDINGS INC., AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)





In managements opinion, existing stock option valuation models do not provide an entirely reliable measure of the fair value of nontransferable employee stock options with vesting restrictions.





NOTE
11.    EARNINGS PER SHARE OF COMMON STOCK



The
following table sets forth the computation of basic and diluted earnings per share as of and for the years ended:



|DECEMBER 31,                                                                                            |  | 2002                                  |         |   | 2001 |   |         | 2000
|------------------------------------------------------------------------------------------------------- |  | ------------------------------------- | ------- | - | ---- | - | ------- | ----
|                                                                                                       
|                                                                                                        |  | (In Thousands, Except PerShare Data)
|Numerator:                                                                                              |  |                                       |         |   |      |   |         |     
|Net income (loss)                                                                                       |  | $                                     | (38,382 | ) |      | $ | (57,976 | )   
|Numerator for:                                                                                          |  |                                       |         |   |      |   |         |     
|Basic earnings (loss) per share of common stock                                                         |  | $                                     | (38,382 | ) |      | $ | (57,976 | )   
|Diluted earnings (loss) per share of common stock                                                       |  | $                                     | (38,382 | ) |      | $ | (57,976 | )   
|Denominator:                                                                                            |  |                                       |         |   |      |   |         |     
|Denominator for basic earnings per share of common stockweighted-average shares
outstanding            |  |                                       | 9,322   |   |      |   | 9,333   |     
|Effect of dilutive securities:                                                                          |  |                                       |         |   |      |   |         |     
|Stock options                                                                                           |  | $                                     |        |   |      | $ |        |     
|                                                                                                        |  |                                       |         |   |      |   |         |     
|Denominator for diluted earnings per share of common stock adjustedweighted-average shares
outstanding |  | $                                     | 9,322   |   |      | $ | 9,333   |     
|                                                                                                        |  |                                       |         |   |      |   |         |     
|Basic earnings (loss) per share of common stock                                                         |  | $                                     | (4.12   | ) |      | $ | (6.22   | )   
|                                                                                                        |  |                                       |         |   |      |   |         |     
|Diluted earnings (loss) per share of common stock                                                       |  | $                                     | (4.12   | ) |      | $ | (6.22   | )   
|                                                                                                        |  |                                       |         |   |      |   |         |     



For the years ended December 31,
2002 and 2001 no incremental shares related to stock options are included in the diluted number of shares outstanding as the impact would have been antidilutive.



NOTE 12.    QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)



The unaudited quarterly results of operations for 2002 and 2001 are summarized as
follows:



|                                                  |  | 2002                                  |        |     | 2001 |        
|------------------------------------------------- |  | ------------------------------------- | ------ | --- | ---- | -------
|                                                  |  | 1ST                                   |        | 2ND |      |        
|                                                 
|                                                  |  | (In Thousands, Except Per-Share Data) |       
|Premiums earned and other revenues                |  | $                                     | 81,405 |     | $    | 79,686 
|Net investment income                             |  |                                       | 8,538  |     |      | 7,917  
|Realized investment gains (losses)                |  |                                       | 335    |     |      | 1,041  
|Net income (loss)                                 |  |                                       | 926    |     |      | (11,989
|Basic earnings (loss) per share of common stock   |  | $                                     | 0.10   |     | $    | (1.29  
|Diluted earnings (loss) per share of common stock |  | $                                     | 0.10   |     | $    | (1.29  



In the fourth quarter 2002, the
Company entered into a reinsurance agreement more fully described in Note 4. The after tax impact of that transaction was to reduce net income by $24.0 million.



During the fourth quarter of 2001, based on sharply increased losses for the 2001 accident year outside California, the Company
increased reserves in its direct healthcare liability insurance segment an additional $26.0 million and



77



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SCPIE HOLDINGS INC., AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



established a premium deficiency reserve of $7.9 million at year end. Additionally in the fourth quarter, the Company recorded $26.1 million in losses
related to the September 11, 2001, terrorist attacks. The after tax effect of these items was to reduce net income by $39.0 million.



NOTE 13.    BUSINESS SEGMENTS



The Company classifies its business into two segments: Direct Healthcare Liability Insurance and Assumed Reinsurance. Segments are designated based on the types of
products provided and based on the risks associated with the products. Direct Healthcare Liability Insurance represents professional liability insurance for physicians, oral and maxillofacial surgeons, hospitals and other healthcare providers.
Assumed Reinsurance represents the book of assumed worldwide reinsurance of professional, commercial and personal liability coverages, commercial and residential property risks, accident and health coverages and marine coverages. Other includes
items not directly related to the operating segments such as net investment income, realized investment gains and losses, and other revenue.



The accounting policies of the segments are the same as those described in Note 1. The Company evaluates insurance segment performance based on the combined ratios
of the segments. Intersegment transactions are not significant.



The
following table presents information about reportable segment income (loss) and segment assets as of and for the period indicated:



|Year Ended December 31, 2002                      |  | Direct Healthcare Liability Insurance |         |   | Assumed Reinsurance |   |         | Other |  | Total |        
|------------------------------------------------- |  | ------------------------------------- | ------- | - | ------------------- | - | ------- | ----- |  | ----- | -------
|                                                 
|                                                  |  | (In Thousands)                       
|Premiums written                                  |  | $                                     | 138,901 |   |                     | $ | 112,849 |       |  |       |        
|                                                  |  |                                       |         |   |                     |   |         |       |  |       |        
|Premiums earned                                   |  | $                                     | 163,519 |   |                     | $ | 122,544 |       |  |       |        
|Net investment income                             |  |                                       |        |   |                     |   |        |       |  | $     | 32,231 
|Realized investment gains                         |  |                                       |        |   |                     |   |        |       |  |       | 18,910 
|Equity earnings from affiliates                   |  |                                       |        |   |                     |   |        |       |  |       | 750    
|Other revenue                                     |  |                                       |        |   |                     |   |        |       |  |       | 1,280  
|                                                  |  |                                       |         |   |                     |   |         |       |  |       |        
|Total revenues                                    |  |                                       | 163,519 |   |                     |   | 122,544 |       |  |       | 53,171 
|Losses and loss adjustment expenses               |  |                                       | 197,456 |   |                     |   | 123,060 |       |  |       |       
|Other operating expenses                          |  |                                       | 32,398  |   |                     |   | 47,278  |       |  |       |       
|Interest expense                                  |  |                                       |        |   |                     |   |        |       |  |       | 66     
|                                                  |  |                                       |         |   |                     |   |         |       |  |       |        
|Total expenses                                    |  |                                       | 229,854 |   |                     |   | 170,338 |       |  |       | 66     
|                                                  |  |                                       |         |   |                     |   |         |       |  |       |        
|Segment (loss) income before federal income taxes |  | $                                     | (66,335 | ) |                     | $ | (47,794 | )     |  | $     | 53,105 
|                                                  |  |                                       |         |   |                     |   |         |       |  |       |        
|Combined ratio                                    |  |                                       | 140.6   | % |                     |   | 139.0   | %     |  |       |        
|Segment assets                                    |  | $                                     | 105,689 |   |                     | $ | 171,439 |       |  | $     | 786,638



78



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SCPIE HOLDINGS INC., AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



|Year Ended December 31, 2001                      |  | Direct Healthcare Liability Insurance |          |   | Assumed Reinsurance |   |         | Other |  | Total |        
|------------------------------------------------- |  | ------------------------------------- | -------- | - | ------------------- | - | ------- | ----- |  | ----- | -------
|                                                 
|                                                  |  | (In Thousands)                       
|Premiums written                                  |  | $                                     | 168,600  |   |                     | $ | 112,207 |       |  |       |        
|                                                  |  |                                       |          |   |                     |   |         |       |  |       |        
|Premiums earned                                   |  | $                                     | 156,442  |   |                     | $ | 79,493  |       |  |       |        
|Net investment income                             |  |                                       |         |   |                     |   |        |       |  | $     | 35,895 
|Realized investment gains                         |  |                                       |         |   |                     |   |        |       |  |       | 5,707  
|Equity earnings from affiliates                   |  |                                       |         |   |                     |   |        |       |  |       | 1,327  
|Other revenue                                     |  |                                       |         |   |                     |   |        |       |  |       | 875    
|                                                  |  |                                       |          |   |                     |   |         |       |  |       |        
|Total revenues                                    |  |                                       | 156,442  |   |                     |   | 79,493  |       |  |       | 43,804 
|Losses and loss adjustment expenses               |  |                                       | 220,311  |   |                     |   | 84,162  |       |  |       |       
|Other operating expenses                          |  |                                       | 45,820   |   |                     |   | 18,912  |       |  |       |       
|Interest expense                                  |  |                                       |         |   |                     |   |        |       |  |       | 1,416  
|                                                  |  |                                       |          |   |                     |   |         |       |  |       |        
|Total expenses                                    |  |                                       | 266,131  |   |                     |   | 103,074 |       |  |       | 1,416  
|                                                  |  |                                       |          |   |                     |   |         |       |  |       |        
|Segment (loss) income before federal income taxes |  | $                                     | (109,689 | ) |                     | $ | (23,581 | )     |  | $     | 42,388 
|                                                  |  |                                       |          |   |                     |   |         |       |  |       |        
|Combined ratio                                    |  |                                       | 170.1    | % |                     |   | 129.7   | %     |  |       |        
|Segment assets                                    |  | $                                     | 123,003  |   |                     | $ | 58,200  |       |  | $     | 796,443



79



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Schedule IICondensed Financial Information of Registrant



SCPIE HOLDINGS INC.



|Year Ended December 31, 2000                      |  | Direct Healthcare Liability Insurance |         |   | Assumed Reinsurance |   |        | Other |  |   | Total   |  
|------------------------------------------------- |  | ------------------------------------- | ------- | - | ------------------- | - | ------ | ----- |  | - | ------- | -
|                                                 
|                                                  |  | (In Thousands)                       
|Premiums written                                  |  | $                                     | 177,703 |   |                     | $ | 30,500 |       |  |   |         |  
|                                                  |  |                                       |         |   |                     |   |        |       |  |   |         |  
|Premiums earned                                   |  | $                                     | 149,404 |   |                     | $ | 27,098 |       |  |   |         |  
|Net investment income                             |  |                                       |        |   |                     |   |       |       |  | $ | 34,152  |  
|Realized investment gains                         |  |                                       |        |   |                     |   |       |       |  |   | (400    | )
|Equity earnings Income from affiliates            |  |                                       |        |   |                     |   |       |       |  |   | 880     |  
|Other revenue                                     |  |                                       |        |   |                     |   |       |       |  |   | 1,122   |  
|                                                  |  |                                       |         |   |                     |   |        |       |  |   |         |  
|Total revenues                                    |  |                                       | 149,404 |   |                     |   | 27,098 |       |  |   | 35,754  |  
|Losses and loss adjustment expenses               |  |                                       | 129,307 |   |                     |   | 23,295 |       |  |   |        |  
|Other operating expenses                          |  |                                       | 32,333  |   |                     |   | 4,150  |       |  |   |        |  
|Interest expense                                  |  |                                       |        |   |                     |   |       |       |  |   | 780     |  
|                                                  |  |                                       |         |   |                     |   |        |       |  |   |         |  
|Total expenses                                    |  |                                       | 161,640 |   |                     |   | 27,445 |       |  |   | 780     |  
|                                                  |  |                                       |         |   |                     |   |        |       |  |   |         |  
|Segment (loss) income before federal income taxes |  | $                                     | (12,236 | ) |                     | $ | (347   | )     |  | $ | 34,974  |  
|                                                  |  |                                       |         |   |                     |   |        |       |  |   |         |  
|Combined ratio                                    |  |                                       | 108.2   | % |                     |   | 101.3  | %     |  |   |         |  
|Segment assets                                    |  | $                                     | 155,176 |   |                     | $ | 13,931 |       |  | $ | 685,538 |  



80



---



Schedule
IICondensed Financial Information of Registrant (continued)



SCPIE HOLDINGS INC.



CONDENSED
BALANCE SHEETS

(In Thousands, Except Share Data)



|DECEMBER 31,                                                                                                                                                |  | 2002 |         |   | 2001 |  
|----------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---- | ------- | - | ---- | -
|                                                                                                                                                           
|ASSETS                                                                                                                                                      |  |      |         |   |      |  
|Securities available for sale:                                                                                                                              |  |      |         |   |      |  
|Equity investments, at fair value (cost: 2002$6,771; 2001$19,676)                                                                                         |  | $    | 6,611   |   |      | $
|Short-term investments                                                                                                                                      |  |      | 9,928   |   |      |  
|Investment in subsidiaries                                                                                                                                  |  |      | 207,436 |   |      |  
|                                                                                                                                                            |  |      |         |   |      |  
|Total investments                                                                                                                                           |  |      | 223,975 |   |      |  
|Cash                                                                                                                                                        |  |      | 528     |   |      |  
|Federal income tax receivable                                                                                                                               |  |      | 1,338   |   |      |  
|Deferred federal income taxes                                                                                                                               |  |      | 1,004   |   |      |  
|Other assets                                                                                                                                                |  |      | 1,546   |   |      |  
|                                                                                                                                                            |  |      |         |   |      |  
|Total assets                                                                                                                                                |  | $    | 228,391 |   |      | $
|                                                                                                                                                            |  |      |         |   |      |  
|LIABILITIES                                                                                                                                                 |  |      |         |   |      |  
|Due to affiliates                                                                                                                                           |  | $    | 20      |   |      | $
|Other liabilities                                                                                                                                           |  |      | 1,205   |   |      |  
|Bank loan payable                                                                                                                                           |  |      |        |   |      |  
|                                                                                                                                                            |  |      |         |   |      |  
|Total liabilities                                                                                                                                           |  |      | 1,225   |   |      |  
|Stockholders equity:                                                                                                                                       |  |      |         |   |      |  
|Preferred stockpar value $1.00, 5,000,000 shares authorized, no shares issued or
outstanding                                                               |  |      |         |   |      |  
|Common stockpar value $0.0001, 30,000,000 shares authorized, 12,792,091 shares
issued, 20029,333,807 shares outstanding 20019,318,066 shares outstanding |  |      | 1       |   |      |  
|Additional paid-in capital                                                                                                                                  |  |      | 37,805  |   |      |  
|Retained earnings                                                                                                                                           |  |      | 280,609 |   |      |  
|Treasury stock, at cost (20022,958,284 shares and 20012,974,025
shares)                                                                                   |  |      | (98,830 | ) |      |  
|Stock subscription notes receivable                                                                                                                         |  |      | (3,592  | ) |      |  
|Accumulated other comprehensive income                                                                                                                      |  |      | 11,173  |   |      |  
|                                                                                                                                                            |  |      |         |   |      |  
|Total stockholders equity                                                                                                                                  |  |      | 227,166 |   |      |  
|                                                                                                                                                            |  |      |         |   |      |  
|Total liabilities and stockholders equity                                                                                                                  |  | $    | 228,391 |   |      | $
|                                                                                                                                                            |  |      |         |   |      |  





See accompanying notes.



81



---



Schedule
IICondensed Financial Information of Registrant (continued)



SCPIE HOLDINGS INC.



CONDENSED
STATEMENTS OF OPERATIONS

(In Thousands)



|FOR THE YEARS ENDED                                                            |  | DECEMBER 31, 2002 |         |   | DECEMBER 31, 2001 |   |         | DECEMBER 31, 2000 | 
|------------------------------------------------------------------------------ |  | ----------------- | ------- | - | ----------------- | - | ------- | ----------------- | 
|                                                                              
|Dividend from subsidiary                                                       |  | $                 | 3,000   |   |                   | $ |        |                   | 
|Net investment income                                                          |  |                   | 389     |   |                   |   | 1,585   |                   | 
|Realized investment losses                                                     |  |                   | (2,312  | ) |                   |   |        |                   | 
|Other income                                                                   |  |                   | 180     |   |                   |   | 1,564   |                   | 
|Interest expenses                                                              |  |                   | (66     | ) |                   |   | (1,416  | )                 | 
|Other expenses                                                                 |  |                   | (4,881  | ) |                   |   | (1,743  | )                 | 
|                                                                               |  |                   |         |   |                   |   |         |                   | 
|Income (loss) before federal income taxes and equity in losses of subsidiaries |  |                   | (3,690  | ) |                   |   | (10     | )                 | 
|Federal income tax benefit                                                     |  |                   | 2,341   |   |                   |   | 535     |                   | 
|                                                                               |  |                   |         |   |                   |   |         |                   | 
|Income (loss) before equity in losses of subsidiaries                          |  |                   | (1,349  | ) |                   |   | 525     |                   | 
|Equity in losses of subsidiaries                                               |  |                   | (37,033 | ) |                   |   | (58,501 | )                 | 
|                                                                               |  |                   |         |   |                   |   |         |                   | 
|Net income (loss)                                                              |  | $                 | (38,382 | ) |                   | $ | (57,976 | )                 | 
|                                                                               |  |                   |         |   |                   |   |         |                   | 





See accompanying notes.



82



---



Schedule
IICondensed Financial Information of Registrant (continued)



SCPIE HOLDINGS INC.



CONDENSED
STATEMENTS OF CASH FLOWS

(In thousands)



|FOR THE YEARS ENDED                                                                      |  | DECEMBER 31, 2002 |         |   | DECEMBER 31, 2001 |   |         | DECEMBER 31, 2000 | 
|---------------------------------------------------------------------------------------- |  | ----------------- | ------- | - | ----------------- | - | ------- | ----------------- | 
|                                                                                        
|OPERATING ACTIVITIES                                                                     |  |                   |         |   |                   |   |         |                   | 
|Net income (loss)                                                                        |  | $                 | (38,382 | ) |                   | $ | (57,976 | )                 | 
|Adjustments to reconcile net income (loss) to net cash provided by operating
activities: |  |                   |         |   |                   |   |         |                   | 
|Realized investment losses                                                               |  |                   | 2,312   |   |                   |   |        |                   | 
|Due to affiliates                                                                        |  |                   | (410    | ) |                   |   | 795     |                   | 
|Provision for amortization                                                               |  |                   |        |   |                   |   | 670     |                   | 
|Changes in other assets and liabilities                                                  |  |                   | (110    | ) |                   |   | 123     |                   | 
|Equity in undistributed loss of subsidiaries                                             |  |                   | 37,033  |   |                   |   | 56,573  |                   | 
|                                                                                         |  |                   |         |   |                   |   |         |                   | 
|Net cash provided by operating activities                                                |  |                   | 443     |   |                   |   | 185     |                   | 
|INVESTING ACTIVITIES                                                                     |  |                   |         |   |                   |   |         |                   | 
|Salesequities                                                                           |  |                   | 10,593  |   |                   |   |        |                   | 
|Salesfixed maturities                                                                   |  |                   |        |   |                   |   | 5,000   |                   | 
|Purchasefixed maturities                                                                |  |                   |        |   |                   |   |        |                   | 
|Purchaseequities                                                                        |  |                   |        |   |                   |   | (2,500  | )                 | 
|Change in short-term investments                                                         |  |                   | 879     |   |                   |   | 19,777  |                   | 
|Capital contribution to subsidiaries                                                     |  |                   |        |   |                   |   |        |                   | 
|                                                                                         |  |                   |         |   |                   |   |         |                   | 
|Cash provided by (used in) investing activities                                          |  |                   | 11,472  |   |                   |   | 22,277  |                   | 
|FINANCING ACTIVITIES                                                                     |  |                   |         |   |                   |   |         |                   | 
|Repayment of bank loan                                                                   |  |                   | (9,000  | ) |                   |   | (18,000 | )                 | 
|Proceeds from bank loan                                                                  |  |                   |        |   |                   |   |        |                   | 
|Purchase of treasury stock, net and repayment of stock subscription notes                |  |                   | 613     |   |                   |   | (278    | )                 | 
|Cash dividends                                                                           |  |                   | (3,743  | ) |                   |   | (3,727  | )                 | 
|                                                                                         |  |                   |         |   |                   |   |         |                   | 
|Cash provided by (used in) financing activities                                          |  |                   | (12,130 | ) |                   |   | (22,005 | )                 | 
|Increase (decrease) in cash                                                              |  |                   | (215    | ) |                   |   | 457     |                   | 
|Cash at beginning of period                                                              |  |                   | 743     |   |                   |   | 286     |                   | 
|                                                                                         |  |                   |         |   |                   |   |         |                   | 
|Cash at end of period                                                                    |  | $                 | 528     |   |                   | $ | 743     |                   | 
|                                                                                         |  |                   |         |   |                   |   |         |                   | 



See accompanying
notes.



83



---

Schedule IICondensed Financial Information of Registrant (continued)



SCPIE HOLDINGS INC.



NOTES TO CONDENSED FINANCIAL STATEMENTS

December 31, 2002



1.  BASIS OF PRESENTATION



In the SCPIE Holdings Inc.s financial statements, investment in subsidiaries are stated at cost plus equity in undistributed earnings of subsidiaries since
date of acquisition. The SCPIE Holdings Inc.s financial statements should be read in conjunction with its consolidated financial statements.



2.  BANK LOAN PAYABLE



On May 25, 1999, the Company entered into a credit agreement with Union Bank of California, N. A., First Union Bank and Dresdner Bank AG, as lenders. The Credit
Agreement allows company borrowings up to $40 million from time to time, subject to certain conditions. The proceeds may be used by the Company for general corporate purposes and certain other permitted uses. Under the Credit Agreement, the interest
rate (2.755% and 7.378% at December 31, 2001 and 2000 respectively) is based upon fluctuations in the London InterBank Offered Rate (LIBOR). Borrowings outstanding at December 31, 2001 and 2000 were $9.0 million and $27.0 million, respectively. All
amounts outstanding under the Credit Agreement at December 31, 2001 were paid during February 2002, and the agreement was terminated effective February 28, 2002. Interest paid was $.1 million, $1.4 million and $.7 million in 2002, 2001, and 2000,
respectively.



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---

Schedule IIISupplementary Insurance Information



SCPIE Holdings Inc. and Subsidiaries



Year Ended December 31, 2002

---



|Segments                |  | Deferred Policy Acquisition Cost |       | Future Policy Benefits, Losses, Claims and Loss Expenses |   | Unearned Premiums |  | Other Policy Claims and Benefits Payable |        | Premiums Earned |         | Net Investment Income |   | Benefits, Claims, Losses and Settlement Expenses |  | Amortization of Deferred Policy Acquisition Costs |        | Other Operating Expenses |   | Premiums Written
|----------------------- |  | -------------------------------- | ----- | -------------------------------------------------------- | - | ----------------- |  | ---------------------------------------- | ------ | --------------- | ------- | --------------------- | - | ------------------------------------------------ |  | ------------------------------------------------- | ------ | ------------------------ | - | ----------------
|                       
|Direct Healthcare       |  |                                  |       |                                                          |   |                   |  |                                          |        |                 |         |                       |   |                                                  |  |                                                   |        |                          |   |                 
|Liability Insurance     |  | $                                | 6,858 |                                                          | $ | 459,025           |  | $                                        | 39,921 |                 | $      |                       | $ | 163,519                                          |  | $                                                 |       |                          | $ | 197,456         
|Assumed Reinsurance (1) |  |                                  |      |                                                          | $ | 191,646           |  |                                          | 27,635 |                 |        |                       |   | 122,544                                          |  |                                                   |       |                          |   | 123,060         
|Other                   |  |                                  |      |                                                          |   |                  |  |                                          |       |                 |        |                       |   |                                                 |  |                                                   | 32,231 |                          |   |                
|                        |  |                                  |       |                                                          |   |                   |  |                                          |        |                 |         |                       |   |                                                  |  |                                                   |        |                          |   |                 
|Total                   |  | $                                | 6,858 |                                                          | $ | 650,671           |  | $                                        | 67,556 |                 | $      |                       | $ | 286,063                                          |  | $                                                 | 32,231 |                          | $ | 320,516         
|                        |  |                                  |       |                                                          |   |                   |  |                                          |        |                 |         |                       |   |                                                  |  |                                                   |        |                          |   |                 



Year Ended December 31, 2001

---



|Segments                |  | Deferred Policy Acquisition Cost |        | Future Policy Benefits, Losses, Claims and Loss Expenses |   | Unearned Premiums |  | Other Policy Claims and Benefits Payable |         | Premiums Earned |         | Net Investment Income |   | Benefits, Claims, Losses and Settlement Expenses |  | Amortization of Deferred Policy Acquisition Costs |        | Other Operating Expenses |   | Premiums Written
|----------------------- |  | -------------------------------- | ------ | -------------------------------------------------------- | - | ----------------- |  | ---------------------------------------- | ------- | --------------- | ------- | --------------------- | - | ------------------------------------------------ |  | ------------------------------------------------- | ------ | ------------------------ | - | ----------------
|                       
|Direct Healthcare       |  |                                  |        |                                                          |   |                   |  |                                          |         |                 |         |                       |   |                                                  |  |                                                   |        |                          |   |                 
|Liability Insurance     |  | $                                | 5,991  |                                                          | $ | 463,276           |  | $                                        | 64,538  |                 | $      |                       | $ | 156,442                                          |  | $                                                 |       |                          | $ | 220,311         
|Assumed Reinsurance (1) |  |                                  | 13,474 |                                                          | $ | 113,360           |  |                                          | 37,330  |                 |        |                       |   | 79,493                                           |  |                                                   |       |                          |   | 84,162          
|Other                   |  |                                  |       |                                                          |   |                  |  |                                          |        |                 |        |                       |   |                                                 |  |                                                   | 35,895 |                          |   |                
|                        |  |                                  |        |                                                          |   |                   |  |                                          |         |                 |         |                       |   |                                                  |  |                                                   |        |                          |   |                 
|Total                   |  | $                                | 19,465 |                                                          | $ | 576,636           |  | $                                        | 101,868 |                 | $      |                       | $ | 235,935                                          |  | $                                                 | 35,895 |                          | $ | 304,473         
|                        |  |                                  |        |                                                          |   |                   |  |                                          |         |                 |         |                       |   |                                                  |  |                                                   |        |                          |   |                 

---

|(1) |  | Assumed reinsurance excludes amounts received under fronting arrangements.
|--- |  | --------------------------------------------------------------------------



Year Ended December 31, 2000

---



|Segments                |  | Deferred Policy Acquisition Cost |        | Future Policy Benefits, Losses, Claims and Loss Expenses |   | Unearned Premiums |  | Other Policy Claims and Benefits Payable |        | Premiums Earned |         | Net Investment Income |   | Benefits, Claims, Losses and Settlement Expenses |  | Amortization of Deferred Policy Acquisition Costs |        | Other Operating Expenses |   | Premiums Written
|----------------------- |  | -------------------------------- | ------ | -------------------------------------------------------- | - | ----------------- |  | ---------------------------------------- | ------ | --------------- | ------- | --------------------- | - | ------------------------------------------------ |  | ------------------------------------------------- | ------ | ------------------------ | - | ----------------
|                       
|Direct Healthcare       |  |                                  |        |                                                          |   |                   |  |                                          |        |                 |         |                       |   |                                                  |  |                                                   |        |                          |   |                 
|Liability Insurance     |  | $                                | 16,293 |                                                          | $ | 402,048           |  | $                                        | 52,380 |                 | $      |                       | $ | 149,404                                          |  | $                                                 |       |                          | $ | 129,307         
|Assumed Reinsurance (1) |  |                                  | 1,831  |                                                          | $ | 31,493            |  |                                          | 4,616  |                 |        |                       |   | 27,098                                           |  |                                                   |       |                          |   | 23,295          
|Other                   |  |                                  |       |                                                          |   |                  |  |                                          |       |                 |        |                       |   |                                                 |  |                                                   | 34,152 |                          |   |                
|                        |  |                                  |        |                                                          |   |                   |  |                                          |        |                 |         |                       |   |                                                  |  |                                                   |        |                          |   |                 
|Total                   |  | $                                | 18,124 |                                                          | $ | 433,541           |  | $                                        | 56,996 |                 | $      |                       | $ | 176,502                                          |  | $                                                 | 34,152 |                          | $ | 152,602         
|                        |  |                                  |        |                                                          |   |                   |  |                                          |        |                 |         |                       |   |                                                  |  |                                                   |        |                          |   |                 

---

|(1) |  | Assumed reinsurance excludes amounts received under fronting arrangements.
|--- |  | --------------------------------------------------------------------------



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