##### Table of Contents

SCPIE HOLDINGS INC.

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2003 FORM 10-K



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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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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, 2003



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Commission File No. 1-12449



SCPIE HOLDINGS INC.

(Exact name of registrant as specified in its charter)



|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|DELAWARE                                                       |  | 95-4557980                          
|(State or other jurisdiction of
incorporation or organization) |  | (I.R.S. Employer Identification No.)



1888 Century Park East, Los
Angeles, California 90067

www.scpie.com

(Address of
principal executive offices and Internet site)



(310) 551-5900

(Registrants telephone number, including area code)



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|                                           |  |                                      
|------------------------------------------ |  | -------------------------------------
|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 x  No  ̈



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.  x



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 30, 2003, was $71,917,064 (based upon the closing sales price of
such date, as reported by TheWall Street Journal).



The number of shares
of the registrants Common Stock outstanding as of March 9, 2004, was 9,871,933.



DOCUMENTS INCORPORATED BY REFERENCE



Proxy statement for
the Annual Meeting of Stockholders of Registrant to be held on May 20, 2004 (only portions of which are incorporated by reference).



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TABLE OF CONTENTS



|         |  |                                                                                                |  |   
|-------- |  | ---------------------------------------------------------------------------------------------- |  | --
|         |  | PART I                                                                                         |  |   
|Item 1.  |  | Business                                                                                       |  | 3 
|Item 2.  |  | Properties                                                                                     |  | 31
|Item 3.  |  | Legal Proceedings                                                                              |  | 31
|Item 4.  |  | Submission of Matters to a Vote of Security Holders                                            |  | 31
|         |  |                                                                                               
|         |  | PART II                                                                                        |  |   
|Item 5.  |  | Market for Registrants Common Equity and Related Stockholder Matters                          |  | 32
|Item 6.  |  | Selected Consolidated Financial Data                                                           |  | 33
|Item 7.  |  | Managements Discussion and Analysis of Financial Condition and Results of Operations          |  | 34
|Item 7A. |  | Quantitative and Qualitative Disclosures About Market Risk                                     |  | 45
|Item 8.  |  | Financial Statements and Supplementary Data                                                    |  | 46
|Item 9.  |  | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.          |  | 47
|Item 9A. |  | Controls and Procedures.                                                                       |  | 47
|         |  |                                                                                               
|         |  | PART III                                                                                       |  |   
|Item 10. |  | Directors and Executive Officers of the Registrant                                             |  | 48
|Item 11. |  | Executive Compensation                                                                         |  | 48
|Item 12. |  | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters |  | 48
|Item 13. |  | Certain Relationships and Related Transactions                                                 |  | 48
|Item 14. |  | Principal Accountant Fees and Services                                                         |  | 48
|         |  |                                                                                               
|         |  | PART IV                                                                                        |  |   
|Item 15. |  | Exhibits, Financial Statements and Schedules, and Reports on Form 8-K                          |  | 49



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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, oral
surgeons, healthcare facilities and others engaged in the healthcare industry in California and Delaware. Previously, the Company had also been actively engaged in the medical malpractice insurance business and related products in other states and
the assumed reinsurance business. During 2002 and 2003, the Company largely completed its withdrawal from the assumed reinsurance market and medical malpractice insurance outside of California and Delaware.



The Company conducts its insurance business through three insurance company subsidiaries. The largest
wholly owned subsidiary, SCPIE Indemnity Company (SCPIE Indemnity), 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 22 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 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 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 the three fiscal years 2001, 2002 and 2003. 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 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 in 2002 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.



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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 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.



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, 2003, and 2002.



|                                          |  |                                       |         |   |                     |   |         |       |  |       |         |  |   |           |  
|----------------------------------------- |  | ------------------------------------- | ------- | - | ------------------- | - | ------- | ----- |  | ----- | ------- |  | - | --------- | -
|YEAR ENDED DECEMBER 31, 2003              |  | DIRECT HEALTHCARE LIABILITY INSURANCE |         |   | ASSUMED REINSURANCE |   |         | OTHER |  | TOTAL |        
|                                          | 
|                                          |  | (In Thousands)                        |        
|Premiums written                          |  | $                                     | 128,589 |   |                     | $ | 18,450  |       |  |       |         |  | $ | 147,039   |  
|                                          |  |                                       |         |   |                     |   |         |       |  |       |         |  |   |           |  
|Premiums earned                           |  | $                                     | 131,460 |   |                     | $ | 32,427  |       |  |       |         |  | $ | 163,887   |  
|Net investment income                     |  |                                       |        |   |                     |   |        |       |  | $     | 21,954  |  |   | 21,954    |  
|Realized investment gains                 |  |                                       |        |   |                     |   |        |       |  |       | 216     |  |   | 216       |  
|Other revenue                             |  |                                       |        |   |                     |   |        |       |  |       | 936     |  |   | 936       |  
|                                          |  |                                       |         |   |                     |   |         |       |  |       |         |  |   |           |  
|Total revenues                            |  |                                       | 131,460 |   |                     |   | 32,427  |       |  |       | 23,106  |  |   | 186,993   |  
|Losses and loss adjustment expenses       |  |                                       | 133,034 |   |                     |   | 28,332  |       |  |       |        |  |   | 161,366   |  
|Other operating expenses                  |  |                                       | 28,234  |   |                     |   | 17,610  |       |  |       |        |  |   | 45,844    |  
|                                          |  |                                       |         |   |                     |   |         |       |  |       |         |  |   |           |  
|Total expenses                            |  |                                       | 161,268 |   |                     |   | 45,942  |       |  |       |        |  |   | 207,210   |  
|                                          |  |                                       |         |   |                     |   |         |       |  |       |         |  |   |           |  
|Segment income (loss) before income taxes |  | $                                     | (29,808 | ) |                     | $ | (13,515 | )     |  | $     | 23,106  |  | $ | (20,217   | )
|                                          |  |                                       |         |   |                     |   |         |       |  |       |         |  |   |           |  
|Combined ratio                            |  |                                       | 122.7   | % |                     |   | 141.7   | %     |  |       |         |  |   | 126.5     | %
|Segment assets                            |  | $                                     | 28,042  |   |                     | $ | 253,315 |       |  | $     | 709,893 |  | $ | 991,250   |  
|                                          |  |                                       |         |  
|YEAR ENDED DECEMBER 31, 2002              |  | DIRECT HEALTHCARE LIABILITY INSURANCE |         |   | ASSUMED REINSURANCE |   |         | OTHER |  | TOTAL |        
|                                          | 
|                                          |  | (In Thousands)                        |        
|Premiums written                          |  | $                                     | 138,901 |   |                     | $ | 112,849 |       |  |       |         |  | $ | 251,750   |  
|                                          |  |                                       |         |   |                     |   |         |       |  |       |         |  |   |           |  
|Premiums earned                           |  | $                                     | 163,519 |   |                     | $ | 122,544 |       |  |       |         |  | $ | 286,063   |  
|Net investment income                     |  |                                       |        |   |                     |   |        |       |  | $     | 32,231  |  |   | 32,231    |  
|Realized investment gains                 |  |                                       |        |   |                     |   |        |       |  |       | 18,910  |  |   | 18,910    |  
|Other revenue                             |  |                                       |        |   |                     |   |        |       |  |       | 2,030   |  |   | 2,030     |  
|                                          |  |                                       |         |   |                     |   |         |       |  |       |         |  |   |           |  
|Total revenues                            |  |                                       | 163,519 |   |                     |   | 122,544 |       |  |       | 53,171  |  |   | 339,234   |  
|Losses and loss adjustment expenses       |  |                                       | 197,456 |   |                     |   | 123,060 |       |  |       |        |  |   | 320,516   |  
|Other operating expenses                  |  |                                       | 32,398  |   |                     |   | 47,278  |       |  |       |        |  |   | 79,676    |  
|Interest expense                          |  |                                       |        |   |                     |   |        |       |  |       | 66      |  |   | 66        |  
|                                          |  |                                       |         |   |                     |   |         |       |  |       |         |  |   |           |  
|Total expenses                            |  |                                       | 229,854 |   |                     |   | 170,338 |       |  |       | 66      |  |   | 400,258   |  
|                                          |  |                                       |         |   |                     |   |         |       |  |       |         |  |   |           |  
|Segment income (loss) before income taxes |  | $                                     | (66,335 | ) |                     | $ | (47,794 | )     |  | $     | 53,105  |  | $ | (61,024   | )
|                                          |  |                                       |         |   |                     |   |         |       |  |       |         |  |   |           |  
|Combined ratio                            |  |                                       | 140.6   | % |                     |   | 139.0   | %     |  |       |         |  |   | 139.9     | %
|Segment assets                            |  | $                                     | 105,689 |   |                     | $ | 171,439 |       |  | $     | 786,638 |  | $ | 1,063,766 |  



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The direct healthcare liability insurance segment is comprised of core and non-core business components. Core business represents
direct healthcare liability insurance business in California and Delaware excluding a dental program managed by Brown & Brown, Inc. (Brown & Brown), a national independent insurance agency, and hospital business. Non-core business represents
direct healthcare liability business outside of California and Delaware (principally managed by Brown & Brown), the Brown & Brown dental program and all hospital business. The non-core business is in run-off and no new or renewal policies
have been issued since March 6, 2003. The losses in the direct healthcare liability insurance segment in both 2002 and 2003 are principally attributable to losses and adverse loss development in the non-core business component. See
Managements Discussion and Analysis of Financial Condition and Results of Operations.



The assumed reinsurance operations were significantly reduced in 2002 and 2003. In December 2002, the Company entered into a quota share reinsurance transaction with GoshawK Reinsurance Limited (Goshawk Re), a Bermuda
reinsurance subsidiary of GoshawK Insurance Holdings plc (GoshawK), a publicly held London-based Lloyds underwriter. Under the agreement, the Company ceded to GoshawK Re 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 Re $129.3 million of
written premium in 2002 and $38.0 million of written premium in 2003. The Company retains certain losses related to the assumed reinsurance business, including those related to the World Trade Center terrorist attack, and the Company continues to
participate in one Lloyds syndicate for the 2003 underwriting year. Other than net written premiums of $18.3 million from this syndicate in 2003, the Company had no significant net premiums written from prior year contracts.



On February 21, 2002, A.M. Best, the leading rating organization for the insurance industry, downgraded
the financial strength rating of the Insurance Subsidiaries to B++ (Very Good) from A (Excellent). A.M. Best further downgraded the rating for the 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 prior to September 30, 2002. On November 14, 2003, A.M. Best further downgraded the financial strength rating of the Insurance Subsidiaries to B (Fair) with a negative outlook. The rating action followed the Companys
net loss in the third quarter of 2003. 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.



DIRECT HEALTHCARE LIABILITY INSURANCE SEGMENT

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Overview and Developments During 2003Core
BusinessThe Company has been a leading provider of medical malpractice insurance in California for many years. The Companys share of the medical malpractice premiums written in California in 2002 (latest data available) was
approximately 16.1% and the Company was the second largest writer in the state. In 2001, the Company undertook the insurance of physicians in Delaware through a single Delaware broker. During 2003, the Company had net premiums earned under policies
issued to California insureds representing 99% of the total net premiums earned in the core business component of the direct healthcare liability insurance segment.



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.



Overview and Developments During 2003Non-Core Business



Hospital Programs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.



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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 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 and 2003.



Physician Programs Outside of California and DelawareThe Company undertook a major geographic expansion in the physician and small medical group market through an
arrangement with Brown & Brown, a large national independent insurance agency. 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.



In 2002 and 2003, the Company derived approximately 30% and 10.6% of its healthcare liability earned premium volume, respectively, from policies issued outside the states of California and Delaware (principally under the Brown & Brown
and certain 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 revised stringent underwriting
standards. As of December 31, 2001, 2,997 policies were in force under the Brown & Brown program. That number was reduced to 813 and 379 policies as of December 31, 2002 and 2003, respectively. During 2002 and 2003, the Company had net premiums
earned under the non-core healthcare liability programs of $47.4 million and $12.3 million, respectively and as of March 6, 2004, all policies had expired.



The non-core business produced underwriting losses of $53.8 million and $19.0 million in 2002 and 2003, respectively. During 2004, the Company will continue to 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 2004.



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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 allocated between core
and non-core business premiums. Core business represents California and Delaware business excluding the Brown & Brown dental program and hospital business. Non-core business represents 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,                              |  | 2003           |         | 2002 |   | 2001   
|                                                             
|                                                              |  | (In Thousands)
|Core Business:                                                |  |                |         |      |   |         |  |   |        
|Physician and medical group professional liability            |  | $              | 107,952 |      | $ | 107,090 |  | $ | 98,240 
|Healthcare provider and facility liability                    |  |                | 8,393   |      |   | 6,393   |  |   | 6,206  
|Ancillary liability products                                  |  |                | 2,229   |      |   | 2,056   |  |   | 1,565  
|Other                                                         |  |                | 574     |      |   | 587     |  |   | 536    
|                                                              |  |                |         |      |   |         |  |   |        
|Total core business                                           |  |                | 119,148 |      |   | 116,126 |  |   | 106,547
|Non-Core Business:                                            |  |                |         |      |   |         |  |   |        
|Physician and medical group and dental professional liability |  | $              | 12,092  |      | $ | 41,946  |  | $ | 43,177 
|Hospital liability                                            |  |                |        |      |   | 3,210   |  |   | 4,875  
|Healthcare provider and facility liability                    |  |                | 7       |      |   | 1,398   |  |   | 1,078  
|Ancillary liability products                                  |  |                | 211     |      |   | 815     |  |   | 730    
|Other                                                         |  |                | 2       |      |   | 24      |  |   | 35     
|                                                              |  |                |         |      |   |         |  |   |        
|Total non-core business                                       |  |                | 12,312  |      |   | 47,393  |  |   | 49,895 
|                                                              |  |                |         |      |   |         |  |   |        
|Total Premiums Earned                                         |  | $              | 131,460 |      | $ | 163,519 |  | $ | 156,442
|                                                              |  |                |         |      |   |         |  |   |        



Physician and Medical Group
Liability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 a patient 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 may also include coverages 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 a nonstandard program that may exclude business liability coverages.



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



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was covered by the policy. The Company also offers tail coverage for claims reported after the expiration of the policy 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.



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 all 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 withdrawn from this market.



Healthcare Provider Liability/Healthcare Facility 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 and reported basis. The limit of coverage on directors and officers liability policies written by the Company is



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$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.



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. 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 Department has approximately 15 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 administrator 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, 12 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.



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 Companys loss and loss adjustment expense (LAE) experience developed over the past 10 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.



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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 filed for a 15.6% rate increase in California for 2003. 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 administrative law judge rendered her decision in late September 2003 and a rate increase of
9.9% was implemented on October 1, 2003. In Delaware, the Company implemented an approved rate increase of 34.9% in June 2003. The Company intends to file an application for a rate increase in California shortly after its 2003 data has been
assembled and analyzed. The Company cannot predict what level of increase, if any, will be approved and when an approved increase can be implemented. See Risk FactorsRate Increases 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 a Senior Vice President in charge of Claims, unit
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 37
employees. The Company has unit managers and 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 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 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 three 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.



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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 decreased to $18.5 million in 2003 from $112.8 million in 2002 and $112.2 million in 2001.



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. In 1999, the Company purchased approximately 9.5% of the outstanding common stock of GoshawK. During the first quarter of
2004, the Company sold its GoshawK common stock holdings.



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 three syndicates during 2001 and 2002. In 2003, SCPIE Underwriting
Limited reduced underwriting capacity to one syndicate.



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 attack. 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 improve the Companys A.M. Best rating. 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.



In December 2002, the Company entered into a 100% quota share reinsurance agreement with GoshawK Re, 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. $129.3 million of written premiums in 2002 and $38.0 million of written premiums in 2003 were ceded under the treaty. This treaty relieved 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.



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Under the terms of the treaty with GoshawK Re, there are no limitations on the amount of losses recoverable by the Company, and the
treaty includes a profit-sharing provision if the combined ratio calculated on the base premium ceded is below 100.0%. The treaty requires GoshawK Re to reimburse the Company for its acquisition and administrative expenses attributable to the
premium ceded. The Company is required to pay GoshawK Re additional premium in excess of the base premium ceded of 14.3%. The additional premium reduced earned premium by $18.5 million in 2002 and $5.5 million in 2003.



The GoshawK Re 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.



There are certain losses not included in the treaty with
GoshawK Re, 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. GoshawK incurred
significant losses in 2003, which affected the Company (See Managements Discussion and Analysis of Financial Condition and Results of Operations.). These losses did not materially affect GoshawK Re.



Ongoing Assumed Reinsurance Operations



During 2003, the Company participated in one Lloyds reinsurance syndicate that specializes in
underwriting medical professional liability excess insurance. The Company provided 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 reinsurance 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 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. See Risk FactorsLoss and LAE Reserves.



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



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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 its internal actuarial staff, reports received from ceding insurers under assumed reinsurance contracts and independent consulting actuaries in establishing
its reserves. The Companys internal actuarial staff reviews reserve adequacy on a quarterly basis. The Companys independent consulting 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 and assumed reinsurance insurance are lines 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 events include sudden severe inflation or adverse judicial or legislative decisions in medical malpractice insurance and the inherent long reporting delays in assumed reinsurance.



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,                                                                                            |  | 2003           |         |   | 2002 |   | 2001   
|                                                                                                       
|                                                                                                        |  | (In Thousands)
|Reserves for losses and LAE at beginning of year                                                        |  | $              | 650,671 |   |      | $ | 576,636 |  | $ | 429,700
|Less reinsurance recoverables                                                                           |  |                | 85,930  |   |      |   | 74,246  |  |   | 40,151 
|                                                                                                        |  |                |         |   |      |   |         |  |   |        
|Reserves for losses and LAE, net of related reinsurance recoverable, at beginning of year               |  |                | 564,741 |   |      |   | 502,390 |  |   | 389,549
|                                                                                                        |  |                |         |   |      |   |         |  |   |        
|Provision for losses and LAE for claims occurring in the current year, net of reinsurance               |  |                | 169,474 |   |      |   | 303,296 |  |   | 290,649
|Increase (decrease) in estimated losses and LAE for claims occurring in prior years, net of reinsurance |  |                | (8,108  | ) |      |   | 17,220  |  |   | 13,824 
|                                                                                                        |  |                |         |   |      |   |         |  |   |        
|Incurred losses during the year, net of reinsurance                                                     |  |                | 161,366 |   |      |   | 320,516 |  |   | 304,473
|                                                                                                        |  |                |         |   |      |   |         |  |   |        
|Deduct losses and LAE payments for claims, net of reinsurance, occurring during:                        |  |                |         |   |      |   |         |  |   |        
|Current year                                                                                            |  |                | 18,424  |   |      |   | 47,258  |  |   | 36,006 
|Prior years                                                                                             |  |                | 173,528 |   |      |   | 210,907 |  |   | 155,626
|                                                                                                        |  |                |         |   |      |   |         |  |   |        
|Total payments during the year, net of reinsurance                                                      |  |                | 191,952 |   |      |   | 258,165 |  |   | 191,632
|                                                                                                        |  |                |         |   |      |   |         |  |   |        
|Reserve for losses and LAE, net of related reinsurance recoverable, at end of year                      |  |                | 534,155 |   |      |   | 564,741 |  |   | 502,390
|Reinsurance recoverable for losses and LAE, at end of year                                              |  |                | 108,891 |   |      |   | 85,930  |  |   | 74,246 
|                                                                                                        |  |                |         |   |      |   |         |  |   |        
|Reserves for losses and LAE, gross of insurance recoverable, at end of year                             |  | $              | 643,046 |   |      | $ | 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 businesses.
The decrease during 2003 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 and assumed reinsurance businesses partially offset
by adverse development in the non-core healthcare liability insurance 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



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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 2003 to be $100,000 was first reserved in 1993 at $150,000, the $50,000
redundancy (original estimate minus actual loss) would be included in the cumulative redundancy in each of the years 1993 through 2003 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,                      |  | 1993           |          |   | 1994 |   |          | 1995 |  |   | 1996     |   |  | 1997 |          |   | 1998 |   |          | 1999 |  |   | 2000     |   | 2001 |   | 2002    |   |  | 2003
|                                            
|                                             |  | (In Thousands)
|Loss and LAE reserves                        |  | $              | 472,129  |   |      | $ | 449,566  |      |  | $ | 446,627  |   |  | $    | 440,302  |   |      | $ | 433,441  |      |  | $ | 451,072  |   |      | $ | 404,857 |   |  | $    | 389,549 |  | $ | 502,390 |  | $ | 564,741 |   |  | $ | 534,155
|Liability reestimated as of:                 |  |                |          |   |      |   |          |      |  |   |          |   |  |      |          |   |      |   |          |      |  |   |          |   |      |   |         |   |  |      |         |  |   |         |  |   |         |   |  |   |        
|One year later                               |  |                | 411,915  |   |      |   | 391,733  |      |  |   | 386,872  |   |  |      | 387,094  |   |      |   | 339,673  |      |  |   | 389,893  |   |      |   | 359,954 |   |  |      | 403,374 |  |   | 519,610 |  |   | 556,633 |   |  |   |        
|Two years later                              |  |                | 363,562  |   |      |   | 337,441  |      |  |   | 337,760  |   |  |      | 301,795  |   |      |   | 283,276  |      |  |   | 351,238  |   |      |   | 356,298 |   |  |      | 402,559 |  |   | 510,274 |  |   |         |   |  |   |        
|Three years later                            |  |                | 315,712  |   |      |   | 304,063  |      |  |   | 264,813  |   |  |      | 259,022  |   |      |   | 250,962  |      |  |   | 341,763  |   |      |   | 338,196 |   |  |      | 397,129 |  |   |         |  |   |         |   |  |   |        
|Four years later                             |  |                | 293,711  |   |      |   | 254,004  |      |  |   | 236,609  |   |  |      | 237,059  |   |      |   | 243,561  |      |  |   | 329,588  |   |      |   | 342,176 |   |  |      |         |  |   |         |  |   |         |   |  |   |        
|Five years later                             |  |                | 262,879  |   |      |   | 239,372  |      |  |   | 221,537  |   |  |      | 236,363  |   |      |   | 237,487  |      |  |   | 329,172  |   |      |   |         |   |  |      |         |  |   |         |  |   |         |   |  |   |        
|Six years later                              |  |                | 254,502  |   |      |   | 231,129  |      |  |   | 221,014  |   |  |      | 235,919  |   |      |   | 239,389  |      |  |   |          |   |      |   |         |   |  |      |         |  |   |         |  |   |         |   |  |   |        
|Seven years later                            |  |                | 248,522  |   |      |   | 230,799  |      |  |   | 220,566  |   |  |      | 236,434  |   |      |   |          |      |  |   |          |   |      |   |         |   |  |      |         |  |   |         |  |   |         |   |  |   |        
|Eight years later                            |  |                | 246,889  |   |      |   | 230,194  |      |  |   | 220,266  |   |  |      |          |   |      |   |          |      |  |   |          |   |      |   |         |   |  |      |         |  |   |         |  |   |         |   |  |   |        
|Nine years later                             |  |                | 246,526  |   |      |   | 230,060  |      |  |   |          |   |  |      |          |   |      |   |          |      |  |   |          |   |      |   |         |   |  |      |         |  |   |         |  |   |         |   |  |   |        
|Ten years later                              |  |                | 246,400  |   |      |   |          |      |  |   |          |   |  |      |          |   |      |   |          |      |  |   |          |   |      |   |         |   |  |      |         |  |   |         |  |   |         |   |  |   |        
|Cumulative (redundancies) deficiencies       |  |                | (225,729 | ) |      |   | (219,506 | )    |  |   | (226,361 | ) |  |      | (203,868 | ) |      |   | (194,052 | )    |  |   | (121,900 | ) |      |   | (62,681 | ) |  |      | 7,580   |  |   | 7,884   |  |   | (8,108  | ) |  |   |        
|Cumulative amount of liability paid through: |  |                |          |   |      |   |          |      |  |   |          |   |  |      |          |   |      |   |          |      |  |   |          |   |      |   |         |   |  |      |         |  |   |         |  |   |         |   |  |   |        
|One year later                               |  |                | 121,106  |   |      |   | 109,481  |      |  |   | 101,844  |   |  |      | 118,307  |   |      |   | 107,748  |      |  |   | 156,913  |   |      |   | 148,891 |   |  |      | 155,626 |  |   | 210,907 |  |   | 173,528 |   |  |   |        
|Two years later                              |  |                | 192,519  |   |      |   | 170,603  |      |  |   | 170,932  |   |  |      | 181,116  |   |      |   | 179,016  |      |  |   | 246,835  |   |      |   | 238,718 |   |  |      | 273,680 |  |   | 319,076 |  |   |         |   |  |   |        
|Three years later                            |  |                | 217,484  |   |      |   | 202,660  |      |  |   | 195,265  |   |  |      | 207,141  |   |      |   | 204,773  |      |  |   | 279,629  |   |      |   | 281,048 |   |  |      | 319,636 |  |   |         |  |   |         |   |  |   |        
|Four years later                             |  |                | 231,794  |   |      |   | 213,431  |      |  |   | 207,454  |   |  |      | 217,460  |   |      |   | 216,448  |      |  |   | 299,106  |   |      |   | 304,588 |   |  |      |         |  |   |         |  |   |         |   |  |   |        
|Five years later                             |  |                | 237,272  |   |      |   | 221,409  |      |  |   | 211,934  |   |  |      | 222,307  |   |      |   | 223,540  |      |  |   | 309,809  |   |      |   |         |   |  |      |         |  |   |         |  |   |         |   |  |   |        
|Six years later                              |  |                | 241,904  |   |      |   | 224,555  |      |  |   | 213,257  |   |  |      | 227,782  |   |      |   | 228,007  |      |  |   |          |   |      |   |         |   |  |      |         |  |   |         |  |   |         |   |  |   |        
|Seven years later                            |  |                | 242,736  |   |      |   | 224,882  |      |  |   | 216,121  |   |  |      | 230,648  |   |      |   |          |      |  |   |          |   |      |   |         |   |  |      |         |  |   |         |  |   |         |   |  |   |        
|Eight years later                            |  |                | 242,875  |   |      |   | 226,524  |      |  |   | 216,651  |   |  |      |          |   |      |   |          |      |  |   |          |   |      |   |         |   |  |      |         |  |   |         |  |   |         |   |  |   |        
|Nine years later                             |  |                | 243,304  |   |      |   | 227,001  |      |  |   |          |   |  |      |          |   |      |   |          |      |  |   |          |   |      |   |         |   |  |      |         |  |   |         |  |   |         |   |  |   |        
|Ten years later                              |  |                | 243,620  |   |      |   |          |      |  |   |          |   |  |      |          |   |      |   |          |      |  |   |          |   |      |   |         |   |  |      |         |  |   |         |  |   |         |   |  |   |        
|                                             |  |                |          |   |      |   |          |      |  |   |         
|Net reservesDecember 31                     |  |                |          |   |      |   |          |      |  |   |          |   |  |      |          |   |      |   | 433,441  |      |  |   | 451,072  |   |      |   | 404,857 |   |  |      | 389,549 |  |   | 502,390 |  |   | 564,741 |   |  |   | 534,155
|Reinsurance Recoverables                     |  |                |          |   |      |   |          |      |  |   |          |   |  |      |          |   |      |   | 21,529   |      |  |   | 24,898   |   |      |   | 45,007  |   |  |      | 40,151  |  |   | 74,246  |  |   | 85,930  |   |  |   | 108,891
|                                             |  |                |          |   |      |   |          |      |  |   |          |   |  |      |          |   |      |   |          |      |  |   |          |   |      |   |         |   |  |      |         |  |   |         |  |   |         |   |  |   |        
|Gross reserves                               |  |                |          |   |      |   |          |      |  |   |          |   |  |      |          |   |      | $ | 454,970  |      |  | $ | 475,970  |   |      | $ | 449,864 |   |  | $    | 429,700 |  | $ | 576,636 |  | $ | 650,671 |   |  | $ | 643,046
|                                             |  |                |          |   |      |   |          |      |  |   |          |   |  |      |          |   |      |   |          |      |  |   |          |   |      |   |         |   |  |      |         |  |   |         |  |   |         |   |  |   |        



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. The Company believes, based on its analysis of annual statements filed with state regulatory authorities, that its principal California competitors experienced similar favorable loss and LAE reserve development in those years.



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The Companys reserve analysis (and the independent consulting 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 prior year 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 non-core direct healthcare liability insurance businesses. The adverse development in assumed reinsurance was principally the result of upward development in 2002 on September 11, 2001, terrorist attack
losses. The adverse reserve development in non-core healthcare liability insurance 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.



During 2003, the Company experienced favorable development in its core direct healthcare liability insurance loss and LAE reserves. The Company also experienced some improvement in
its assumed reinsurance reserves. The non-core business, particularly in the Brown & Brown program, continued to produce deficiencies in the run-off of claims included in prior year loss reserves, which partially offset the favorable
developments in the core and assumed reinsurance businesses.



Because the medical
malpractice liability insurance product generally has high limits ($1.0 to $3.0 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 2003, the Company ceded $16.7 million of its healthcare liability earned premiums to reinsurers.



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



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$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 both 2002 and 2003, 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
in 2002 and 2003 for approximately 92% and 84%, respectively, 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, $3.2 million and $3.0
million, respectively, in 2001, 2002 and 2003, for losses in excess of the Companys retentions. The Companys reinsurance arrangement for 2004 is the same as 2003 except that reinsurance above $20.0 million has been discontinued.



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 ceded by the Company and their A.M. Best ratings as of December 31, 2003. No other single reinsurers percentage participation in 2003 exceeded 3% of total reinsurance premiums ceded.



|                             |  |                                                 |        |            |    |                              |    |  
|---------------------------- |  | ----------------------------------------------- | ------ | ---------- | -- | ---------------------------- | -- | -
|                             |  | PREMIUMS CEDED FOR YEAR ENDED DECEMBER 31, 2003 |        | RATING (1) |    | PERCENTAGE OF PREMIUMS CEDED |   
|                             | 
|                             |  | (In Thousands)                                  |       
|GoshawK Re (Bermuda)         |  | $                                               | 44,479 |            | A- |                              | 64 | %
|Arch Reinsurance (Bermuda)   |  | $                                               | 9,161  |            | A- |                              | 12 | %
|Hannover Ruckversicherungs   |  | $                                               | 7,944  |            | A  |                              | 11 | %
|Lloyds of London Syndicates |  | $                                               | 6,290  |            | A- |                              | 9  | %

---

|(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. Should future events cause the Company to determine adjustments in the amounts recoverable from
reinsurance are necessary, such adjustments would be reflected in the results of current operations.



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.



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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, 2003      |         | DECEMBER 31, 2002
|                                 |  | COST OR AMORTIZED COST |         | FAIR VALUE        |   | COST OR AMORTIZED COST |  | FAIR VALUE
|                                
|                                 |  | (In Thousands)        
|Fixed-maturity securities:       |  |                        |         |                   |   |                        |  |            |         |  |   |        
|U.S. government and agencies     |  | $                      | 195,564 |                   | $ | 198,284                |  | $          | 234,424 |  | $ | 244,804
|Mortgage-backed and asset-backed |  |                        | 95,206  |                   |   | 95,541                 |  |            | 63,293  |  |   | 64,286 
|Corporate                        |  |                        | 260,024 |                   |   | 260,316                |  |            | 225,799 |  |   | 229,585
|                                 |  |                        |         |                   |   |                        |  |            |         |  |   |        
|Total fixed-maturity securities  |  |                        | 550,794 |                   |   | 554,141                |  |            | 523,516 |  |   | 538,675
|Common stocks                    |  |                        | 15,766  |                   |   | 20,543                 |  |            | 29,758  |  |   | 34,237 
|                                 |  |                        |         |                   |   |                        |  |            |         |  |   |        
|Total                            |  | $                      | 566,560 |                   | $ | 574,684                |  | $          | 553,274 |  | $ | 572,912
|                                 |  |                        |         |                   |   |                        |  |            |         |  |   |        



The Companys current policy is to limit
its investment in equity securities and real estate to no more than 8.0% of the total market value of its investments. 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, 2003:



|                                             |  |                |         |           |   |                          |  |       |  
|-------------------------------------------- |  | -------------- | ------- | --------- | - | ------------------------ |  | ----- | -
|TYPE/RATING OF INVESTMENT (1)                |  | AMORTIZED COST |         | FAIRVALUE |   | PERCENTAGE OF
FAIR VALUE | 
|                                             | 
|                                             |  | (In Thousands) |        
|AAA (including U.S. government and agencies) |  | $              | 307,415 |           | $ | 310,607                  |  | 56.1  | %
|AA                                           |  |                | 58,741  |           |   | 57,969                   |  | 10.5  | %
|A                                            |  |                | 148,533 |           |   | 148,799                  |  | 26.8  | %
|BBB                                          |  |                | 36,105  |           |   | 36,766                   |  | 6.6   | %
|                                             |  |                |         |           |   |                          |  |       |  
|                                             |  | $              | 550,794 |           | $ | 554,141                  |  | 100.0 | %
|                                             |  |                |         |           |   |                          |  |       |  

---

|(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.
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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The following table sets forth certain information concerning the maturities of fixed-maturity securities in the Companys
investment portfolio as of December 31, 2003:



|                                            |  |                |         |            |   |                          |  |       |  
|------------------------------------------- |  | -------------- | ------- | ---------- | - | ------------------------ |  | ----- | -
|                                            |  | AMORTIZED COST |         | FAIR VALUE |   | PERCENTAGE OF
FAIR VALUE | 
|                                            | 
|                                            |  | (In Thousands) |        
|Years to maturity:                          |  |                |         |            |   |                          |  |       |  
|One or less                                 |  | $              | 7,083   |            | $ | 7,078                    |  | 1.3   | %
|After one through five                      |  |                | 195,188 |            |   | 198,563                  |  | 35.8  | %
|After five through ten                      |  |                | 236,430 |            |   | 236,054                  |  | 42.6  | %
|After ten                                   |  |                | 16,887  |            |   | 16,905                   |  | 3.1   | %
|Mortgage-backed and asset-backed securities |  |                | 95,206  |            |   | 95,541                   |  | 17.2  | %
|                                            |  |                |         |            |   |                          |  |       |  
|Totals                                      |  | $              | 550,794 |            | $ | 554,141                  |  | 100.0 | %
|                                            |  |                |         |            |   |                          |  |       |  



The average weighted maturity of the securities
in the Companys fixed-maturity portfolio as of December 31, 2003, was 5.2 years. The average duration of the Companys fixed-maturity portfolio as of December 31, 2003, was 4.3 years.



The Company maintains cash and highly liquid short-term investments, which at December 31, 2003,
totaled $62.1 million.



The following table summarizes the Companys investment
results for the three years ended December 31, 2003, 2002 and 2001:



|                                                                                           |  |                |         |   |      |   |         |      |  |   |         |  
|------------------------------------------------------------------------------------------ |  | -------------- | ------- | - | ---- | - | ------- | ---- |  | - | ------- | -
|FOR THE YEARS ENDED DECEMBER 31,                                                           |  | 2003           |         |   | 2002 |   |         | 2001 | 
|                                                                                           | 
|                                                                                           |  | (In Thousands) |        
|Average invested assets (includes short-term cash investments)(1)                          |  | $              | 660,769 |   |      | $ | 702,053 |      |  | $ | 701,076 |  
|                                                                                           |  |                |        
|Net investment income:                                                                     |  |                |         |   |      |   |         |      |  |   |         |  
|Before income taxes                                                                        |  |                | 21,954  |   |      |   | 32,231  |      |  |   | 35,895  |  
|After income taxes                                                                         |  |                | 14,334  |   |      |   | 21,814  |      |  |   | 25,469  |  
|                                                                                           |  |                |        
|Average annual yield on investments:                                                       |  |                |         |   |      |   |         |      |  |   |         |  
|Before income taxes                                                                        |  |                | 3.3     | % |      |   | 4.6     | %    |  |   | 5.1     | %
|After income taxes                                                                         |  |                | 2.2     | % |      |   | 3.1     | %    |  |   | 3.6     | %
|                                                                                           |  |                |        
|Net realized investment gains                                                              |  |                |         |   |      |   |         |      |  |   |         |  
|Before income taxes                                                                        |  |                | 216     |   |      |   | 18,910  |      |  |   | 5,707   |  
|After income taxes                                                                         |  |                | 141     |   |      |   | 12,292  |      |  |   | 3,710   |  
|                                                                                           |  |                |        
|Net increase (decrease) in unrealized gains (losses) on all investments after income taxes |  | $              | (7,484  | ) |      | $ | 10,637  |      |  | $ | 3,669   |  

---

|(1) |  | Includes fixed-maturity securities at amortized cost and equities at market.
|--- |  | ----------------------------------------------------------------------------



The Company recognized significant capital gains in 2002 and to a lesser extent in 2003 primarily to generate statutory surplus to improve its capital adequacy ratios. In addition,
the Company moved its portfolio entirely into taxable securities over the 2002-2003 time frame 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 company is soliciting insureds in Southern California, the Companys primary area of operations, and each has offered 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



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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 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). On November 14, 2003, A.M. Best, after a review of the Companys third quarter financial results, further reduced the Insurance
Subsidiaries rating to B (Fair) with a negative outlook. See A.M. Best Rating for a description of potential impact of these reductions. See also Risk FactorsImportance of A.M. Best Rating.



The Company encountered similar competition from local doctor-owned insurance companies and commercial
companies in the other states in which 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 the assumed reinsurance business. The Company had 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 establishing statutory loss and expense reserves; (vi) establishing
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 22 states. 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



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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 2% of annual premiums written by a member in that state during the preceding year. However, such payments are recoverable by law through policy surcharges.



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



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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 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, 2003, the authorized control level RBC of each Insurance Subsidiary exceeded the
threshold requiring the least regulatory attention. At December 31, 2003, SCPIE Indemnity exceeded this threshold by $47.6 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 Insurance Subsidiaries must submit
rating plans, rates, and certain 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. 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 Insurance Subsidiaries filed for a 15.6% rate increase in California for 2003. 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 administrative law judge overseeing the hearing recommended a 9.9% increase and the
Insurance Commissioner upheld the ruling. The rate increase was implemented on October 1, 2003. The Company filed for an overall 8.9% rate increase in California for 2004 and the same foundation, as allowed under Proposition 103, challenged this
increase. The Insurance Subsidiaries withdrew their applications in order to avoid another lengthy and costly hearing. The Company believes its rate requests were fully justified and supported by its filings and plans to file another application for
a rate increase during 2004 after 2003 data is accumulated and analyzed. The Company cannot anticipate at what level or when any future rate increase will be implemented.



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



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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 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 and in the future will
publicize certain settlements above $30,000. 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.



Health Insurance Portability and Accountability Act



The Health Insurance Portability and Accountability Act of 1996 (HIPAA) was enacted by Congress to ultimately simplify the healthcare
administrative process. HIPAA contains a variety of provisions, including privacy rules designed to maintain the confidentiality of protected health information, which became effective on April 14, 2003. Protected health information
includes, among other things, medical and billing records relating to medical care provided by the Companys insureds and loss descriptions and other information relating to medical liability claims asserted by patients against such insureds.
The Company has developed various documents and procedures for use with its insureds and vendors to safeguard this information from disclosure and use not permitted under HIPAA.



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



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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). On November 14, 2003, A.M. Best, after a
review of the Companys third quarter financial results, further reduced the Insurance Subsidiaries rating to B (Fair) with a negative outlook. A rating of B (Fair) is the seventh highest of the A.M. Best rating classifications and is the
highest classification A.M. Best rates as Vulnerable. A.M. Best assigns this rating to companies that have, in its opinion, a fair ability to meet their current obligations to policyholders, but are financially vulnerable to adverse
changes in underwriting and economic conditions.



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 (Fair) A.M. Best
rating based on their consolidated performance.



EMPLOYEES

---



As of December 31, 2003, the Company employed 157 persons.
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 9, 2004, are as follows:



|                   |  |     |  |                                                                       
|------------------ |  | --- |  | ----------------------------------------------------------------------
|NAME               |  | AGE |  | POSITION                                                              
|                  
|Donald J. Zuk      |  | 67  |  | President, Chief Executive Officer and Director                       
|Ronald L. Goldberg |  | 52  |  | Senior Vice President, Underwriting                                   
|Patrick S. Grant   |  | 61  |  | Senior Vice President, Marketing                                      
|Joseph P. Henkes   |  | 54  |  | Secretary and Senior Vice President, Operations and Actuarial Services
|Robert B. Tschudy  |  | 55  |  | Senior Vice President and Chief Financial Officer                     
|Edward G. Marley   |  | 43  |  | Vice President and Chief Accounting Officer                           
|Donald P. Newell   |  | 66  |  | Senior Vice President, General Counsel and Director                   
|Timothy C. Rivers  |  | 55  |  | 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., a privately held insurance company.



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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 joining the Company, he served 20 years with Johnson & Higgins, insurance brokers. His last position there was Vice President, Professional Liability.
Mr. Grant has worked on 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 joining the Company, he served three years with Johnson &
Higgins, insurance brokers, 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.



Edward G. Marley joined the Company in December 2001 as Vice President and Controller. He was named
Chief Accounting Officer in 2003. 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 since 1990. Prior to joining the Company, she served 14 years with Johnson & Higgins, insurance
brokers. 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. Mr. Newell is a director of Mercury General Corporation, a publicly held personal lines insurance company.



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 reinsurance matters for the Company 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,



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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.



Almost all of the Companys 2004 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 terminated its relationship with Brown & Brown and ceased issuing and renewing all policies under this program as of March 6, 2003. In addition, the Company ceased renewing nonstandard insureds outside
California. By early March 2004, all policies had expired under these programs. The Company may continue to incur material losses under both these programs, as it continues to settle and adjudicate claims under policies and tail coverage issued in
these programs.



The Company has one continuing 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 California 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



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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 2002, 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 lost some of its
policyholders, in part due to its rate increases. In 2003, the Companys rates became more competitive, as its requested rate increase for that year was delayed until the fourth quarter. In October 2003, the Company instituted an average 9.9%
rate increase for California physicians and medical groups. The effect of this rate increase on the Companys ability to retain and expand its healthcare liability insurance business in California is uncertain. The Company believes its rates
remain generally competitive with those of other companies, after giving effect to this rate increase.



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 subsequently reduced the Companys rating to B+ (Very
Good) on October 7, 2002. On November 14, 2003, A.M. Best further reduced the Companys rating to B (Fair) with a negative outlook after a review of the Companys third quarter financial results. This reduction could aversely affect the
Companys ability to attract and retain policyholders in California and Delaware. 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 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 healthcare liability reserves where a longer
period may elapse before a definite determination of ultimate claim 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. In addition, assumed reinsurance reserves are based primarily on reports received by the Company from the underlying ceding insurers. Ultimate losses in the assumed reinsurance business may take
years to be reported through the reinsurance system.



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.



Rate Increases 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



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judge. The administrative law judge rendered her decision for a 9.9% increase and the California Insurance Commissioner upheld her ruling. The Company implemented the
rate increase in the fourth quarter 2003. In September 2003, the Company filed another application for a rate increase of approximately 8.9%, effective January 1, 2004. The consumer group requested a hearing on the application in November 2003. In
December 2003, in order to avoid another lengthy and costly hearing, the Company withdrew its application.



The Company plans to file an application for an additional rate increase in California promptly after year-end 2003 data is accumulated and analyzed. The Company may encounter objections and delays in obtaining approval of the
requested change. If this request or future rate requests are denied or significantly reduced, or if there are substantial delays in implementing a favorable decision, the Companys operations could 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 2002, this ratio was 1.61 to 1. As a
result of the decreases in 2003 net premiums written in the non-core direct healthcare liability insurance written outside of California and in the assumed reinsurance business, the ratio improved to 1.06 to 1 at December 31, 2003. Based on the
Companys expected premium writings in 2004, the ratio of net written premiums to statutory capital and surplus is expected to slightly improve. The other primary measure affecting financial strength ratios is the net reserves-to-statutory
surplus ratio. At the end of 2003, this ratio was 3.8 to 1, which is higher than the 3.0 to 1 standard generally followed in the industry. As the non-core healthcare liability reserves and the assumed reinsurance reserves are reduced in 2004 due to
claim payments and settlements, this ratio should improve. However, if the unexpected losses and loss reserve increases the Company has experienced in recent years continue, this ratio might not improve or could worsen, in which case the
Companys ability to write policies at its current levels could 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 would be further reduced. In addition, at December 31, 2003, the Companys principal insurance subsidiary, SCPIE Indemnity, exceeded minimum requirements of an NAIC risk-based capital threshold
(requiring some regulatory attention) by $47.6 million. If the Company incurs additional 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 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.



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Importance of A.M. Best Rating



A.M. Best ratings are an increasingly important factor in establishing the competitive position of insurance companies. The rating reflects A.M.
Bests opinion of an insurance companys financial strength, operating performance and ability to meet its obligations to policyholders. Prior to 2002, each of the Insurance Subsidiaries 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 and to B (Fair) with a negative outlook on November 14, 2003. 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 policyholders. If the Insurance Subsidiaries continue to encounter the adverse loss experience they have seen in recent years, the Insurance
Subsidiaries 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 few 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 Programs.



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 health coverages and marine coverages on a worldwide basis. During 2001, 2002 and
2003, assumed reinsurance premiums earned were $79.5 million, $122.5 million and $32.4 million, respectively on treaties in existence. Ultimate loss experience for the Assumed Reinsurance Division is based primarily on reports received by the
Company from the underlying ceding insurers. As a result, many losses take years to be reported through the reinsurance system. Actual experience could materially exceed or be less than reserve 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, terrorist attack, could adversely affect the Companys results of operations and financial conditions. A
major insurance coverage dispute continues with respect to whether the September 11, 2001 terrorist attack constitutes one or more than one occurrence under the applicable primary and excess policies. If the attack is determined to be
more than one occurrence, the Company could incur additional material losses, which are not determinable at this time.



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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. In February 2002, the Texas Department of Insurance placed the principal HIG insurance company subsidiaries under its supervision while HIG voluntarily liquidated their claim liabilities.



During 2002 and 2003, all of the HIG insurance company subsidiaries (with the exception
of a California subsidiary) were merged into a single Texas domiciled subsidiary, Highlands Insurance Company (Highlands). Highlands has advised the Company that at December 31, 2003, the HIG insurance company subsidiaries had paid losses and LAE
under the subject policies of $65.0 million and had established case loss reserves of $12.5 million, net of reinsurance. Based on a limited review of the exposures remaining, the Company estimates that incurred but not reported losses range from
$6.7 million to $10.0 million for a total loss and loss expense reserve of $19.2 million to $22.5 million. This estimate is not based on a full reserve analysis of the exposures. To the extent Highlands is declared insolvent at some future date by a
court of competent jurisdiction and is 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 would be subrogated to the rights of the policyholders as
creditors of Highlands. The Company may also be entitled to indemnification of a portion of this loss from certain of the reinsurers of Highlands. The quarterly financial statement of Highlands filed with the Texas Department of Insurance as of
September 30, 2003, showed $660.4 million in assets and policyholder surplus of $5.2 million.



On November 6, 2003, the State of Texas obtained an order in the Texas District Court appointing the Texas Insurance Commissioner as the permanent Receiver of Highlands and placing the Receiver in possession of all assets of Highlands. The
order specifically enjoined various persons, including the plaintiff in a California asbestos action (against Highlands and other insurers) who had obtained a $57.4 million judgment against Highlands, from taking any action against the assets of
Highlands. The order expressly provided that it did not constitute a finding of Highlands insolvency nor an authorization to liquidate Highlands. On December 1, 2003, however, the State of Texas filed an application to liquidate Highlands, to
forestall certain actions taken by the plaintiff in the California action to perfect a judgment lien on certain assets of Highlands. The State of Texas alleged that these actions would make it unfeasible to rehabilitate Highlands. The California
plaintiff has disputed these allegations and filed an opposition to the entry of any liquidation order. A hearing on the application for liquidation was scheduled for March 9, 2004 in the Texas District Court. On February 27, 2004, the State of
Texas and the California plaintiff filed a stipulation with the Texas court postponing the liquidation hearing to no earlier than August 9, 2004. If an order of liquidation is ultimately entered and becomes final, the Company would likely be
required to assume Highlands then remaining obligations under the subject policies.



The California domiciled HIG subsidiary has been the subject of regulatory liquidation. On August 1, 2003, the Superior Court of the County of Orange, California, upon an application filed by the California Insurance Commissioner, declared
the California domiciled HIG insurance company subsidiary insolvent and appointed the Insurance Commissioner liquidator of the subsidiary. That subsidiary had established case loss reserves under the subject policies of $900,000 at December 31,
2003.



The ultimate impact to the Company of these regulatory actions against Highlands,
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,



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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;
| | - |  | --------------------------------



| |  |  | 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 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, 2003, each of the Insurance Subsidiaries RBC exceeded the threshold requiring the least regulatory attention. At December 31, 2003, SCPIE Indemnity exceeded this threshold by $47.6 million. If the Company continues to
incur material losses, the Company could fall below this threshold.





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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 the 1997, 1998, 1999 and 2000 tax years 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 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.



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.



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 2003.



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##### Table of Contents

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
|                               
|2002                            |  |      |       |     |   |      
|First quarter                   |  | $    | 29.43 |     | $ | 16.98
|Second quarter                  |  | $    | 16.70 |     | $ | 6.08 
|Third quarter                   |  | $    | 6.02  |     | $ | 3.80 
|Fourth quarter                  |  | $    | 7.15  |     | $ | 4.00 
|2003                            |  |      |       |     |   |      
|First quarter                   |  | $    | 7.16  |     | $ | 5.93 
|Second quarter                  |  | $    | 10.45 |     | $ | 6.53 
|Third quarter                   |  | $    | 11.02 |     | $ | 7.63 
|Fourth quarter                  |  | $    | 15.55 |     | $ | 8.82 
|2004                            |  |      |       |     |   |      
|First quarter (JanuaryMarch 9) |  | $    | 8.63  |     | $ | 7.08 



On March 9, 2004, the closing price of the
Companys common stock was $8.63.



Stockholders of Record



The approximate number of stockholders of record of the Companys Common Stock as of March 9,
2004, was 5,300.



Dividends



SCPIE Holdings paid cash dividends on its common stock of $0.40 per share in both 2002 and 2003. In
March 2004, the Board of Directors suspended its quarterly dividends. 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 2004 to SCPIE Indemnity without regulatory approval. SCPIE Indemnity paid no dividends in 2003 to SCPIE Holdings and is entitled to pay dividends in 2004 of up to approximately $14.0
million to SCPIE Holdings. See BusinessRegulationRegulation of Dividends from Insurance Subsidiaries and Note 6 to Consolidated Financial Statements.



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##### Table of Contents

ITEM 6.    SELECTED CONSOLIDATED FINANCIAL DATA



|                                                     |  |                                       |         |   |      |   |           |      |  |   |         |   |  |      |         |   |  |   |         |  
|---------------------------------------------------- |  | ------------------------------------- | ------- | - | ---- | - | --------- | ---- |  | - | ------- | - |  | ---- | ------- | - |  | - | ------- | -
|AS OF OR FOR THE YEARS ENDED DECEMBER 31,            |  | 2003                                  |         |   | 2002 |   |           | 2001 |  |   | 2000    |   |  | 1999 |        
|                                                     | 
|                                                     |  | (In Thousands, except per share data) |        
|INCOME STATEMENT DATA:                               |  |                                       |         |   |      |   |           |      |  |   |         |   |  |      |         |   |  |   |         |  
|Net premiums written                                 |  | $                                     | 147,039 |   |      | $ | 251,750   |      |  | $ | 280,807 |   |  | $    | 208,203 |   |  | $ | 153,896 |  
|                                                     |  |                                       |         |   |      |   |           |      |  |   |         |   |  |      |         |   |  |   |         |  
|Premiums earned                                      |  | $                                     | 163,887 |   |      | $ | 286,063   |      |  | $ | 235,935 |   |  | $    | 176,502 |   |  | $ | 153,192 |  
|Net investment income                                |  |                                       | 21,954  |   |      |   | 32,231    |      |  |   | 35,895  |   |  |      | 34,152  |   |  |   | 37,697  |  
|Realized investment gains and other revenue          |  |                                       | 1,152   |   |      |   | 20,940    |      |  |   | 7,909   |   |  |      | 1,602   |   |  |   | 423     |  
|                                                     |  |                                       |         |   |      |   |           |      |  |   |         |   |  |      |         |   |  |   |         |  
|Total revenues                                       |  |                                       | 186,993 |   |      |   | 339,234   |      |  |   | 279,739 |   |  |      | 212,256 |   |  |   | 191,312 |  
|                                                     |  |                                       |         |   |      |   |           |      |  |   |         |   |  |      |         |   |  |   |         |  
|Losses and loss adjustment expenses                  |  |                                       | 161,366 |   |      |   | 320,516   |      |  |   | 304,473 |   |  |      | 152,602 |   |  |   | 122,780 |  
|Other operating expenses                             |  |                                       | 45,844  |   |      |   | 79,676    |      |  |   | 64,732  |   |  |      | 36,483  |   |  |   | 29,310  |  
|Interest expenses                                    |  |                                       |        |   |      |   | 66        |      |  |   | 1,416   |   |  |      | 780     |   |  |   | 25      |  
|                                                     |  |                                       |         |   |      |   |           |      |  |   |         |   |  |      |         |   |  |   |         |  
|Total expenses                                       |  |                                       | 207,210 |   |      |   | 400,258   |      |  |   | 370,621 |   |  |      | 189,865 |   |  |   | 152,115 |  
|                                                     |  |                                       |         |   |      |   |           |      |  |   |         |   |  |      |         |   |  |   |         |  
|Income (loss) before federal income taxes            |  |                                       | (20,217 | ) |      |   | (61,024   | )    |  |   | (90,882 | ) |  |      | 22,391  |   |  |   | 39,197  |  
|Federal income taxes (benefit)                       |  |                                       | (7,411  | ) |      |   | (22,642   | )    |  |   | (32,906 | ) |  |      | 5,120   |   |  |   | 9,295   |  
|                                                     |  |                                       |         |   |      |   |           |      |  |   |         |   |  |      |         |   |  |   |         |  
|Net income (loss)                                    |  | $                                     | (12,806 | ) |      | $ | (38,382   | )    |  | $ | (57,976 | ) |  | $    | 17,271  |   |  | $ | 29,902  |  
|                                                     |  |                                       |         |   |      |   |           |      |  |   |         |   |  |      |         |   |  |   |         |  
|BALANCE SHEET DATA:                                  |  |                                       |         |   |      |   |           |      |  |   |         |   |  |      |         |   |  |   |         |  
|Total investments and cash and cash equivalents      |  | $                                     | 647,179 |   |      | $ | 719,106   |      |  | $ | 724,087 |   |  | $    | 701,664 |   |  | $ | 678,734 |  
|Total assets                                         |  |                                       | 991,250 |   |      |   | 1,063,766 |      |  |   | 977,646 |   |  |      | 854,645 |   |  |   | 813,192 |  
|Total liabilities                                    |  |                                       | 787,062 |   |      |   | 836,600   |      |  |   | 718,258 |   |  |      | 538,104 |   |  |   | 518,492 |  
|Total stockholders equity                           |  |                                       | 204,188 |   |      |   | 227,166   |      |  |   | 259,388 |   |  |      | 316,541 |   |  |   | 294,700 |  
|ADDITIONAL DATA:                                     |  |                                       |         |   |      |   |           |      |  |   |         |   |  |      |         |   |  |   |         |  
|Basic earnings (loss) per share of common stock(1)   |  | $                                     | (1.37   | ) |      | $ | (4.12     | )    |  | $ | (6.22   | ) |  | $    | 1.84    |   |  | $ | 2.63    |  
|Diluted earnings (loss) per share of common stock(1) |  | $                                     | (1.37   | ) |      | $ | (4.12     | )    |  | $ | (6.22   | ) |  | $    | 1.84    |   |  | $ | 2.62    |  
|Dividends per share of common stock                  |  | $                                     | 0.40    |   |      | $ | 0.40      |      |  | $ | 0.40    |   |  | $    | 0.40    |   |  | $ | 0.32    |  
|Book value per share                                 |  | $                                     | 21.79   |   |      | $ | 24.34     |      |  | $ | 27.85   |   |  | $    | 33.92   |   |  | $ | 30.98   |  
|GAAP ratios:                                         |  |                                       |         |   |      |   |           |      |  |   |         |   |  |      |         |   |  |   |         |  
|Loss ratio                                           |  |                                       | 98.5    | % |      |   | 112.0     | %    |  |   | 129.1   | % |  |      | 86.4    | % |  |   | 80.2    | %
|Expense ratio                                        |  |                                       | 28.0    | % |      |   | 27.9      | %    |  |   | 27.4    | % |  |      | 20.7    | % |  |   | 19.1    | %
|Combined ratio                                       |  |                                       | 126.5   | % |      |   | 139.9     | %    |  |   | 156.5   | % |  |      | 107.1   | % |  |   | 99.3    | %
|Statutory capital and surplus                        |  | $                                     | 140,216 |   |      | $ | 155,785   |      |  | $ | 181,916 |   |  | $    | 249,261 |   |  | $ | 265,459 |  

---

|(1) |  | Basic earnings (loss) per share of common stock at December 31, 2003, 2002, 2001, 2000 and 1999 are computed using the weighted average number of common shares outstanding during the year of
9,352,070, 9,322,249, 9,333,425, 9,375,735, and 11,383,592, respectively. Diluted earnings per share of common stock at December 31, 2003, 2002, 2001, 2000 and 1999 are computed using the weighted average number of common shares outstanding during
the year of 9,352,070, 9,322,249 9,333,425, 9,382,494, and 11,403,081, respectively. For further discussion of basic earnings per share and diluted earnings per share, see the Note 11 to Consolidated Financial Statements.
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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##### Table of Contents

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. and 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

---



SCPIE Holdings is a holding company owning subsidiaries engaged in
providing insurance and reinsurance products. The Company is primarily a provider of medical malpractice insurance and related liability insurance products to physicians, healthcare facilities and others engaged in the healthcare industry in
California and Delaware. Previously, the Company had also been actively engaged in the medical malpractice insurance business and related products in other states and the assumed reinsurance business. During 2002 and 2003, the Company largely
completed its withdrawal from the assumed reinsurance market and medical malpractice insurance outside of California and Delaware.



The Companys insurance business is organized into two reportable business segments: direct healthcare liability insurance and assumed reinsurance operations. 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 the
three fiscal years 2001, 2002 and 2003. 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 in 2002 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.



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
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.



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##### Table of Contents

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 consulting 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 inherent volatility. Ultimate loss experience for the assumed reinsurance operation is based primarily on reports received by the
Company from the underlying ceding insurers. Many losses take several years to be reported through the system. The Company relies heavily on the ceding entitys, especially Lloyds syndicates, estimates of ultimate incurred losses. Ceding
entities, representing over 65% of the reinsurance assumed business for the 1999 to 2003 underwriting years (based on gross written premiums), submit reports to the Company containing ultimate incurred loss estimates reviewed by independent or
internal actuaries of the ceding entities. These reported ultimate incurred losses are the primary basis for the Companys reserving estimates. In other cases, the Company relies on its own internal estimates determined primarily by experience
to date, individual knowledge of the specific reinsurance contract, industry experience and other actuarial techniques to determine reserve requirements.



Because the reserve establishment process is by definition an estimate, actual results will vary from amounts established in earlier periods. The Company recognizes such
differences in the periods they are determined. Since reserves accumulate on the balance sheet over several years until all claims are settled, a determination of inadequacy or redundancy could easily have a significant impact on earnings and
therefore stockholders equity. A 1% difference in the ultimate value of reserves, net of reinsurance recoverable, would decrease or increase future pretax earnings by $5.3 million.



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.



Investments



The Company considers its fixed maturity and equity
securities as available-for-sale securities. Available-for-sale securities are available to be sold in response to a number of issues, including the Companys liquidity needs, changes in market interest rates and investment management
strategies, among others. During the fourth quarters of 2002 and 2003, the Company sold significant amounts of its available-for-sale securities to increase surplus for statutory accounting purposes. In late 2001 and 2002, the Company began to shift
the character of its investment income to fully taxable in recognition of the Companys current tax position. Available-for-sale securities are recorded at fair value. The related unrealized gains and losses, net of income tax effects, are
excluded from net income and reported as a component of stockholders equity.



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The Company evaluates the securities in its available-for-sale investment portfolio on at least a quarterly basis for declines in
market value below cost for the purpose of determining whether these declines represent other than temporary declines. Some of the factors the Company considers in the evaluation of our investments are:



| |  |  | the extent to which the market value of the security is less than its cost basis;
| | - |  | ---------------------------------------------------------------------------------



| |  |  | the length of time for which the market value of the security has been less than its cost basis;
| | - |  | ------------------------------------------------------------------------------------------------



| |  |  | the financial condition and near-term prospects of the securitys issuer, taking into consideration the economic prospects of the issuers industry and geographical region, to the
extent that information is publicly available; and
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the Companys ability and intent to hold the investment for a period of time sufficient to allow for any anticipated recovery in market value.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------



A decline in the fair value of an available-for-sale security below cost that is judged to be other
than temporary is realized as a loss in the current period and reduces the cost basis of the security.



Income taxes



At December 31, 2003, the Company had
$43.7 million of net deferred income tax assets. Net deferred income tax assets consist of the net temporary differences created as a result of amounts deductible or revenue recognized in periods different for tax return purposes than for accounting
purposes. These deferred income tax assets include an asset of $13.9 million for a net operating loss carryforward that will expire in 2021. A net operating loss carryforward is a tax loss that may be carried forward into future years. It reduces
taxable income in future years and the tax liability that would otherwise be incurred.



The Company believes it is more likely than not that the deferred income tax assets will be realized through its future earnings. As a result, the Company has not recorded a valuation allowance. In relation to the net operating loss
carryforward, the Company has been historically profitable except for the last three years because of losses primarily related to the non-core healthcare liability and assumed reinsurance operations. Since those operations are now in run-off, the
Company believes it should return to a position of taxable income, thus utilizing the net operation loss carryforward.



The Companys estimate of future taxable income used the same assumptions and projections as in their internal financial projections. These projections are subject to
uncertainties primarily related to future underwriting results. If the Companys results are not as profitable as expected, the Company may be required in future periods to record a valuation allowance for all or a portion of the deferred
income tax assets. That requirement would reduce the Companys earnings.



RESULTS
OF OPERATIONSTHREE YEAR COMPARISON

---



Direct Healthcare Liability InsuranceBackground



The
Company has been a leading writer of medical malpractice insurance for physicians and healthcare providers in California for many years. In 1996, the Company began expansion into other professional liability products and into other geographical
markets. The principal product expansion was into professional liability insurance for hospitals. From 1997 through 1999, the Company added more than 75 hospitals to its program. These policies were written through national and regional brokers and
covered facilities in four states outside California. At approximately the same time, the Company undertook a major geographic expansion in the physician and small medical group market through an arrangement with Brown & Brown, a leading
publicly held insurance broker. This arrangement commenced in 1998, eventually encompassed nine states and in 2000 was expanded to include dentists in two states. During the same period, the Company also expanded into underwriting greater risk
nonstandard physicians in a number of states outside California.



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##### Table of Contents

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 2001, 2002 and 2003, the Company derived
approximately 29%, 31% and 11% 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. The Company also 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 2001, 2002 and
2003.



The Company and Brown & Brown agreed in early 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. 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 and 379 policies as of December 31, 2002 and
2003, respectively. The Company issued no new nonstandard physician policies outside of California in 2002 or 2003.



During 2004, the Company will continue to 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 2004.



Assumed ReinsuranceBackground



The Company rapidly expanded
its assumed reinsurance operations after the formation of the division in late 1999. Written premiums were $18.5, $112.8, and $112.2 million, respectively for 2003, 2002 and 2001. Earned premiums, which lag behind written premiums, were $32.4,
$122.5, and $79.5 million, respectively for 2003, 2002 and 2001. Assumed reinsurance represents the book of assumed worldwide reinsurance of professional, commercial and personal liability coverages, commercial and residential property risks,
accident and health and workers compensation coverages and marine coverages.



Ultimate loss experience in this segment is based primarily on reports received by the Company from the underlying ceding insurers. Actual losses may take several years to be reported through the system. 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 and $7.2 million in losses has been recorded
in 2002 and 2003, respectively.



The Company significantly reduced its assumed
reinsurance operations in 2002 and 2003 due to the adverse impact on its capital and surplus from the World Trade Center losses and losses incurred in healthcare insurance outside California. In addition, in February 2002, A. M. Best reduced the
Insurance Subsidiaries ratings to B++ (Very Good) from A (Excellent), reflecting the rating agencys view of the Companys decline in financial strength and operating performance at that time. Many ceding companies and companies in assumed
reinsurance syndicates are reluctant to deal with insurers whose ratings are below A-, which made it more difficult for the Company to remain in the assumed reinsurance market. The assumed reinsurance operations were significantly reduced in 2003.



During 2002, the Company pursued various financial alternatives to improve its capital
position, including a complete or partial divestiture of its assumed reinsurance operations. In December 2002, the Company entered into a quota share



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##### Table of Contents

reinsurance transaction with GoshawK Reinsurance Limited (Goshawk Re), a Bermuda reinsurance subsidiary of GoshawK Insurance Holdings plc, a publicly held London-based
Lloyds underwriter (GoshawK), under which the Company ceded to GoshawK Re 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 written premium in 2002 and $38.0 million of written premium in 2003. The Company retains certain
losses related to the assumed reinsurance business, including those related to the World Trade Center, and the Company continues to participate in one Lloyds syndicate for the 2003 underwriting year. The GoshawK Re treaty relieved the Company
of underwriting leverage in 2002 and 2003 and improves the Companys risk-based capital adequacy ratios under both the A.M. Best and NAIC models. Other than net written premiums of $18.3 million from the Lloyds syndicate in 2003, the
Company had no significant net premiums written from prior year contracts.



Results
of Operations



The following tables present the Companys results of
operations before taxes:



|                                          |  |                                       |         |   |                     |   |         |       |  |       |        |  |   |         |  
|----------------------------------------- |  | ------------------------------------- | ------- | - | ------------------- | - | ------- | ----- |  | ----- | ------ |  | - | ------- | -
|YEAR ENDED DECEMBER 31, 2003              |  | DIRECT HEALTHCARE LIABILITY INSURANCE |         |   | ASSUMED REINSURANCE |   |         | OTHER |  | TOTAL |       
|                                          | 
|                                          |  | (In Thousands)                        |        
|Premiums written                          |  | $                                     | 128,589 |   |                     | $ | 18,450  |       |  |       |        |  | $ | 147,039 |  
|                                          |  |                                       |         |   |                     |   |         |       |  |       |        |  |   |         |  
|Premiums earned                           |  | $                                     | 131,460 |   |                     | $ | 32,427  |       |  |       |        |  | $ | 163,887 |  
|Net investment income                     |  |                                       |        |   |                     |   |        |       |  | $     | 21,954 |  |   | 21,954  |  
|Realized investment gains                 |  |                                       |        |   |                     |   |        |       |  |       | 216    |  |   | 216     |  
|Other revenue                             |  |                                       |        |   |                     |   |        |       |  |       | 936    |  |   | 936     |  
|                                          |  |                                       |         |   |                     |   |         |       |  |       |        |  |   |         |  
|Total revenues                            |  |                                       | 131,460 |   |                     |   | 32,427  |       |  |       | 23,106 |  |   | 186,993 |  
|Losses and loss adjustment expenses       |  |                                       | 133,034 |   |                     |   | 28,332  |       |  |       |       |  |   | 161,366 |  
|Other operating expenses                  |  |                                       | 28,234  |   |                     |   | 17,610  |       |  |       |       |  |   | 45,844  |  
|                                          |  |                                       |         |   |                     |   |         |       |  |       |        |  |   |         |  
|Total expenses                            |  |                                       | 161,268 |   |                     |   | 45,942  |       |  |       |       |  |   | 207,210 |  
|                                          |  |                                       |         |   |                     |   |         |       |  |       |        |  |   |         |  
|Segment income (loss) before income taxes |  | $                                     | (29,808 | ) |                     | $ | (13,515 | )     |  | $     | 23,106 |  | $ | (20,217 | )
|                                          |  |                                       |         |   |                     |   |         |       |  |       |        |  |   |         |  
|Loss ratio                                |  |                                       | 101.2   | % |                     |   | 87.4    | %     |  |       |        |  |   | 98.5    | %
|Underwriting ratio                        |  |                                       | 21.5    | % |                     |   | 54.3    | %     |  |       |        |  |   | 28.0    | %
|Combined ratio                            |  |                                       | 122.7   | % |                     |   | 141.7   | %     |  |       |        |  |   | 126.5   | %



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|                                          |  |                                       |          |   |                     |   |         |       |  |       |        |  |   |         |  
|----------------------------------------- |  | ------------------------------------- | -------- | - | ------------------- | - | ------- | ----- |  | ----- | ------ |  | - | ------- | -
|YEAR ENDED DECEMBER 31, 2002              |  | DIRECT HEALTHCARE LIABILITY INSURANCE |          |   | ASSUMED REINSURANCE |   |         | OTHER |  | TOTAL |       
|                                          | 
|                                          |  | (In Thousands)                        |         
|Premiums written                          |  | $                                     | 138,901  |   |                     | $ | 112,849 |       |  |       |        |  | $ | 251,750 |  
|                                          |  |                                       |          |   |                     |   |         |       |  |       |        |  |   |         |  
|Premiums earned                           |  | $                                     | 163,519  |   |                     | $ | 122,544 |       |  |       |        |  | $ | 286,063 |  
|Net investment income                     |  |                                       |         |   |                     |   |        |       |  | $     | 32,231 |  |   | 32,231  |  
|Realized investment gains                 |  |                                       |         |   |                     |   |        |       |  |       | 18,910 |  |   | 18,910  |  
|Other revenue                             |  |                                       |         |   |                     |   |        |       |  |       | 2,030  |  |   | 2,030   |  
|                                          |  |                                       |          |   |                     |   |         |       |  |       |        |  |   |         |  
|Total revenues                            |  |                                       | 163,519  |   |                     |   | 122,544 |       |  |       | 53,171 |  |   | 339,234 |  
|Losses and loss adjustment expenses       |  |                                       | 197,456  |   |                     |   | 123,060 |       |  |       |       |  |   | 320,516 |  
|Other operating expenses                  |  |                                       | 32,398   |   |                     |   | 47,278  |       |  |       |       |  |   | 79,676  |  
|Interest expense                          |  |                                       |         |   |                     |   |        |       |  |       | 66     |  |   | 66      |  
|                                          |  |                                       |          |   |                     |   |         |       |  |       |        |  |   |         |  
|Total expenses                            |  |                                       | 229,854  |   |                     |   | 170,338 |       |  |       | 66     |  |   | 400,258 |  
|                                          |  |                                       |          |   |                     |   |         |       |  |       |        |  |   |         |  
|Segment income (loss) before income taxes |  | $                                     | (66,335  | ) |                     | $ | (47,794 | )     |  | $     | 53,105 |  | $ | (61,024 | )
|                                          |  |                                       |          |   |                     |   |         |       |  |       |        |  |   |         |  
|Loss ratio                                |  |                                       | 120.8    | % |                     |   | 100.4   | %     |  |       |        |  |   | 112.0   | %
|Underwriting ratio                        |  |                                       | 19.8     | % |                     |   | 38.6    | %     |  |       |        |  |   | 27.9    | %
|Combined ratio                            |  |                                       | 140.6    | % |                     |   | 139.0   | %     |  |       |        |  |   | 139.9   | %
|                                          |  |                                       |          |  
|YEAR ENDED DECEMBER 31, 2001              |  | DIRECT HEALTHCARE LIABILITY INSURANCE |          |   | ASSUMED REINSURANCE |   |         | OTHER |  | TOTAL |       
|                                          | 
|                                          |  | (In Thousands)                        |         
|Premiums written                          |  | $                                     | 168,600  |   |                     | $ | 112,207 |       |  |       |        |  | $ | 280,807 |  
|                                          |  |                                       |          |   |                     |   |         |       |  |       |        |  |   |         |  
|Premiums earned                           |  | $                                     | 156,442  |   |                     | $ | 79,493  |       |  |       |        |  | $ | 235,935 |  
|Net investment income                     |  |                                       |         |   |                     |   |        |       |  | $     | 35,895 |  |   | 35,895  |  
|Realized investment gains                 |  |                                       |         |   |                     |   |        |       |  |       | 5,707  |  |   | 5,707   |  
|Other revenue                             |  |                                       |         |   |                     |   |        |       |  |       | 2,202  |  |   | 2,202   |  
|                                          |  |                                       |          |   |                     |   |         |       |  |       |        |  |   |         |  
|Total revenues                            |  |                                       | 156,442  |   |                     |   | 79,493  |       |  |       | 43,804 |  |   | 279,739 |  
|Losses and loss adjustment expenses       |  |                                       | 220,311  |   |                     |   | 84,162  |       |  |       |       |  |   | 304,473 |  
|Other operating expenses                  |  |                                       | 45,820   |   |                     |   | 18,912  |       |  |       |       |  |   | 64,732  |  
|Interest expense                          |  |                                       |          |   |                     |   |         |       |  |       | 1,416  |  |   | 1,416   |  
|                                          |  |                                       |          |   |                     |   |         |       |  |       |        |  |   |         |  
|Total expenses                            |  |                                       | 266,131  |   |                     |   | 103,074 |       |  |       | 1,416  |  |   | 370,621 |  
|                                          |  |                                       |          |   |                     |   |         |       |  |       |        |  |   |         |  
|Segment income (loss) before income taxes |  | $                                     | (109,689 | ) |                     | $ | (23,581 | )     |  | $     | 42,388 |  | $ | (90,882 | )
|                                          |  |                                       |          |   |                     |   |         |       |  |       |        |  |   |         |  
|Loss ratio                                |  |                                       | 140.8    | % |                     |   | 105.9   | %     |  |       |        |  |   | 129.1   | %
|Underwriting ratio                        |  |                                       | 29.3     | % |                     |   | 23.8    | %     |  |       |        |  |   | 27.4    | %
|Combined ratio                            |  |                                       | 170.1    | % |                     |   | 129.7   | %     |  |       |        |  |   | 156.5   | %



Direct Healthcare Liability Insurance
Segment



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 industry, the premiums earned are allocated 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



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represents business related to the Brown & Brown programs, other state non-standard physician programs 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, 2003 |  |      |         |   |          |   |         |       |  |   |          |  
|Premiums written             |  | $    | 123,251 |   |          | $ | 5,338   |       |  | $ | 128,589  |  
|                             |  |      |         |   |          |   |         |       |  |   |          |  
|Premiums earned              |  | $    | 119,148 |   |          | $ | 12,312  |       |  | $ | 131,460  |  
|Losses and LAE incurred      |  |      | 105,530 |   |          |   | 27,504  |       |  |   | 133,034  |  
|Underwriting expenses        |  |      | 24,402  |   |          |   | 3,832   |       |  |   | 28,234   |  
|                             |  |      |         |   |          |   |         |       |  |   |          |  
|Underwriting loss            |  | $    | (10,784 | ) |          | $ | (19,024 | )     |  | $ | (29,808  | )
|Loss ratio                   |  |      | 88.6    | % |          |   | 223.4   | %     |  |   | 101.2    | %
|Expense ratio                |  |      | 20.5    | % |          |   | 31.1    | %     |  |   | 21.5     | %
|Combined ratio               |  |      | 109.1   | % |          |   | 254.5   | %     |  |   | 122.7    | %
|YEAR ENDED DECEMBER 31, 2002 |  |      |         |   |          |   |         |       |  |   |          |  
|Premiums written             |  | $    | 116,984 |   |          | $ | 21,917  |       |  | $ | 138,901  |  
|                             |  |      |         |   |          |   |         |       |  |   |          |  
|Premiums earned              |  | $    | 116,126 |   |          | $ | 47,393  |       |  | $ | 163,519  |  
|Losses and LAE incurred      |  |      | 105,852 |   |          |   | 91,604  |       |  |   | 197,456  |  
|Underwriting expenses        |  |      | 22,786  |   |          |   | 9,612   |       |  |   | 32,398   |  
|                             |  |      |         |   |          |   |         |       |  |   |          |  
|Underwriting loss            |  | $    | (12,512 | ) |          | $ | (53,823 | )     |  | $ | (66,335  | )
|Loss ratio                   |  |      | 91.2    | % |          |   | 193.3   | %     |  |   | 120.8    | %
|Expense ratio                |  |      | 19.6    | % |          |   | 20.3    | %     |  |   | 19.8     | %
|Combined ratio               |  |      | 110.8   | % |          |   | 213.6   | %     |  |   | 140.6    | %
|YEAR ENDED DECEMBER 31, 2001 |  |      |         |   |          |   |         |       |  |   |          |  
|Premiums written             |  | $    | 111,655 |   |          | $ | 56,945  |       |  | $ | 168,600  |  
|                             |  |      |         |   |          |   |         |       |  |   |          |  
|Premiums earned              |  | $    | 106,547 |   |          | $ | 49,895  |       |  | $ | 156,442  |  
|Losses and LAE incurred      |  |      | 112,024 |   |          |   | 108,287 |       |  |   | 220,311  |  
|Underwriting expenses        |  |      | 21,749  |   |          |   | 24,071  |       |  |   | 45,820   |  
|                             |  |      |         |   |          |   |         |       |  |   |          |  
|Underwriting loss            |  | $    | (27,226 | ) |          | $ | (82,463 | )     |  | $ | (109,689 | )
|Loss ratio                   |  |      | 105.2   | % |          |   | 217.1   | %     |  |   | 140.8    | %
|Expense ratio                |  |      | 20.4    | % |          |   | 48.2    | %     |  |   | 29.3     | %
|Combined ratio               |  |      | 125.6   | % |          |   | 265.3   | %     |  |   | 170.1    | %



Core Business



Premiums written for the core direct healthcare liability insurance business increased 5.4% and 4.8%,
in 2003 and 2002, respectively, as average rate increases of 2.5% and 8.4% in 2003 and 2002, respectively, were partially offset by a decline in the number of insureds. Premiums earned in the core business increased 2.6% and 9.0% in 2003 and 2002,
respectively, primarily due to rate increases. The Company has historically had a high renewal rate in its core business. The renewal rates of insureds who were offered renewal was 92% in both 2003 and 2002. The Company primarily loses insureds due
to underwriting actions taken by the Company, insureds moving to competitors, leaving their practice, retiring or joining a health facility which provides for their insurance. These losses are offset by new sales activities. The core business
policies inforce were 11,137 policies, 11,530 policies and 11,731 policies at year end 2003, 2002 and 2001, respectively.



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The loss ratio for 2003 was 88.6% compared to a loss ratio of 91.2% for 2002. 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.



The underwriting expense ratio increased from 19.6% in 2002 to 20.5% in 2003. The primary reason for the change was additional expenses connected with the rate approval hearing and
regulatory triennial audit expenses in excess of amounts previously accrued. The expense ratio decreased in 2002 compared to 2001, primarily due to a smaller proportion of the core business being written through general agencies, thus decreasing
commission expenses.



Non-Core Business



Premiums written decreased in 2003 to $5.3 million from $21.9 million in 2002 and $56.9 million in
2001. 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 insureds from 2,997 at December 31, 2001, to 813 and 379 insureds at December
31, 2002 and 2003, respectively. The increases in rates and the significant decline in insureds resulted from the Companys actions taken to mitigate the significant losses arising from this business. After March 6, 2003, as the Company exited
these markets, no new or renewal business was written in the non-core programs. Premium earned in the non-core direct healthcare liability insurance business decreased as the Company withdrew from states other than California and Delaware and its
hospital program wound down.



The loss ratio in 2003 of 223.4% compared to 193.3% in 2002
is the result of continued deterioration and additional upward development in loss reserves for prior years of $7.5 million in 2003. In addition, general increases in average claim costs continued to rise for the non-core business.



The underwriting expense ratio increased in 2003 versus 2002 as the 2002 ratio was artificially low due
to expensing of 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 and 31.1% in 2003. No acquisition costs related to
non-core business were deferred in 2003 or 2002.



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,           |  | 2003                                             |         |   | 2002 |   |         | 2001 | 
|                                          | 
|Premiums written                          |  | $                                                | 18,450  |   |      | $ | 112,849 |      |  | $ | 112,207 |  
|                                          |  |                                                  |         |   |      |   |         |      |  |   |         |  
|Premiums earned                           |  | $                                                | 32,427  |   |      | $ | 122,544 |      |  | $ | 79,493  |  
|Underwriting expenses                     |  |                                                  |         |   |      |   |         |      |  |   |         |  
|Losses                                    |  |                                                  | 28,332  |   |      |   | 123,060 |      |  |   | 84,162  |  
|Underwriting and other operating expenses |  |                                                  | 17,610  |   |      |   | 47,278  |      |  |   | 18,912  |  
|                                          |  |                                                  |         |   |      |   |         |      |  |   |         |  
|Underwriting loss                         |  | $                                                | (13,515 | ) |      | $ | (47,794 | )    |  | $ | (23,581 | )
|Loss ratio                                |  |                                                  | 87.4    | % |      |   | 100.4   | %    |  |   | 105.9   | %
|Expense ratio                             |  |                                                  | 54.3    | % |      |   | 38.6    | %    |  |   | 23.8    | %
|Combined ratio                            |  |                                                  | 141.7   | % |      |   | 139.0   | %    |  |   | 129.7   | %



The Assumed Reinsurance Segment declined 84% in
2003, as the full effect of the retrocession to GoshawK Re took effect. The 2002 premiums written for the assumed reinsurance segment were essentially unchanged from 2001, as premiums were ceded under the GoshawK Re treaty in the fourth quarter
2002. Premiums earned decreased to



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$32.4 million in 2003 from $122.5 million in 2002 and $79.5 million in 2001 because of reduction in treaty programs to one account and the cession of premiums
written to GoshawK Re.



The loss ratio declined in 2003 to 87.4% from 100.4% in 2002 and
105.9% in 2001. The 2003, 2002 and 2001 loss ratios were impacted by 22.2, 12.6 and 24.7 percentage points, respectively, because of the World Trade Center terrorist attack.



The underwriting and other operating expense ratio was 54.3% in 2003 and 38.6% in 2002 and 23.8% in 2001. The underwriting and other operating expense
ratio increased in 2003 over 2002 as premiums decreased in relation to fixed expenses. The underwriting and other operating expense ratio increased in 2002 over 2001, primarily because of the GoshawK transaction expenses discussed below.



The December 2002 GoshawK Re treaty ceded 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 $38.0 million in 2003). 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 Re to reimburse the Company for its acquisition and administrative expenses. In addition, the Company is required to
pay GoshawK Re additional premium in excess of the base premium ceded of 14.3% or an estimated $27.5 million. The additional premium reduced 2003 and 2002 earned premium by $5.5 and $18.5 million, respectively, and will reduce 2004 earned premium by
an estimated $3.5 million.



The GoshawK Re 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 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 $15.4 million in 2003 and $18.4 million in
2002. The retroactive accounting treatment accounted for 9.4 and 6.4 percentage points of the expense ratio in 2003 and 2002, respectively.



September 30, 2003 Loss Attributable to GoshawK



The Company has had an ongoing relationship with GoshawK and its two business operations, Syndicate 102 at Lloyds of London (Syndicate 102) and GoshawK Re (a reinsurance
company) in Bermuda. In 1999, the Company made a common stock investment in GoshawK of $12.9 million (representing 4.1% of the then outstanding shares of GoshawK). In addition, the Company participated through its assumed reinsurance segment in two
treaties reinsuring Syndicate 102 for the 2000 and 2001 underwriting years. One treaty is a marine excess of loss reinsurance treaty and the other treaty was a quota share treaty covering Syndicate 102s net retained business.



In late September 2003, GoshawK announced that Syndicate 102 had incurred significant losses in its
2000, 2001, 2002 and 2003 years of account. The losses stemmed primarily from two programs initiated in 1999. The losses were so significant GoshawK announced it would need to raise capital in Syndicate 102 and was reviewing its strategic options.
GoshawK reported that GoshawK Re and its operations would not be materially affected by the financial problems of Syndicate 102. On October 31, 2003, Syndicate 102 was required to stop writing new business and was placed in run-off by regulators at
Lloyds of London. GoshawK stated it would focus its further efforts on its GoshawK Re Bermuda operations.



The sudden GoshawK financial deterioration produced a significant loss to the Company in the quarter ended September 30, 2003. The value of the Companys 4.1% ownership
interest in the GoshawK common stock declined materially and the



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Company wrote down its investment by $9.6 million to $3.3 million based on the market value of GoshawK common stock on September 30, 2003. The Company also reported an
assumed reinsurance loss of $8.5 million in the third quarter for its share of the increased losses reported in GoshawK Syndicate 102 under its two reinsurance treaties.



GoshawK Re has an A- rating from A.M. Best and the cession of business to GoshawK Re is on a funds withheld basis whereby premiums ceded under the
contract are kept in trust to collateralize GoshawK Res obligations to the Company.



Other Operations



|                                    |  |                |         |   |      |   |         |      |  |   |         |  
|----------------------------------- |  | -------------- | ------- | - | ---- | - | ------- | ---- |  | - | ------- | -
|DECEMBER 31,                        |  | 2003           |         |   | 2002 |   |         | 2001 | 
|                                    | 
|                                    |  | (In Thousands) |        
|Net investment income               |  | $              | 21,954  |   |      | $ | 32,231  |      |  | $ | 35,895  |  
|Net realized investment gains       |  |                | 216     |   |      |   | 18,910  |      |  |   | 5,707   |  
|Average invested assets             |  |                | 660,769 |   |      |   | 702,053 |      |  |   | 701,076 |  
|Average rate of return before taxes |  |                | 3.3     | % |      |   | 4.6     | %    |  |   | 5.1     | %



The decrease in net investment income in 2003
from 2002 levels is primarily related to the decline in average invested assets resulting from lower premiums and loss payments related to the non-core healthcare liability and assumed reinsurance businesses. In addition, the net investment income
was reduced in 2003 as the average rate of return before tax decreased due to the significant realized gains recognized in the latter half of 2002. The lower rate reflects the rates available for reinvestment at the time as the quality of the
portfolio was maintained.



The decrease in net investment income in 2002 from 2001 levels
is primarily related to changes in reinvestment rates available in the latter half of 2002 as the Company realized the investment gains.



The net realized gains of 2003 includes the $9.6 million write down of the Companys GoshawK stock investment in the third quarter of the year offset by other gains recognized
to increase statutory surplus.



Income Taxes



The Company had an income tax benefit of $7.4 million in 2003 compared to a benefit of $22.6 million
and $32.9 million in 2002 and 2001, respectively. Because the Company has historically been profitable on a tax basis except for the 2001-2003 period, the Company does not have a valuation allowance related to its net deferred tax asset.



The Company currently has a net deferred tax asset of $43.7 million as of December 31, 2003, of
which $13.9 million relates to a net operating loss carryforward of $39.9 million, which expires in 2021. The Company will be able to utilize this carryforward to reduce taxes in future periods. The losses in 2001 to 2003 which gave rise to the
operating loss carryforward were derived primarily by underwriting losses generated by the non-core direct healthcare liability and assumed reinsurance businesses. Since these operations are now in run-off and the core business has historically been
profitable on both a GAAP and tax basis after consideration of investment income, the Companys projections indicate that it is more likely than not that the net operating carryforward will be fully utilized within the carryforward period.



LIQUIDITY AND CAPITAL RESOURCES AND FINANCIAL CONDITION

---



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 2003 and 2002, the Company had negative cash flow from operations of $46.8 million and $24.5 million, respectively, compared to positive cash flow of $33.4
million in



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2001. The negative cash flow in 2003 and 2002 is principally attributable to decreased premiums written and increased loss payments on the non-core healthcare
liability business and the GoshawK Re reinsurance agreement. As the Company continues to pay-off non-core healthcare liability and assumed reinsurance reserves generated by prior years written premiums, the Company may continue to have negative cash
flow from operations.



The Company invests its cash flow from operations principally in
taxable fixed-maturity securities. The Companys current policy is to limit its investment in equity securities and 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 $20.5 million at December 31, 2003, compared to $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 and cash to meet short-term operating liquidity requirements, including the payment of losses and LAE. Cash and cash equivalents investments totaled $62.1 million, or 9.6% of invested assets, at December 31, 2003. 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 Subsidiaries. Its principal sources of funds are dividends from its subsidiaries and proceeds from the issuance of debt and equity
securities. The Insurance Subsidiaries are restricted by state regulation in the amount of dividends they can pay in relation to earnings or surplus, without the consent of the applicable state regulatory authority, principally the California
Department of Insurance. SCPIE Holdings principal insurance company subsidiary, SCPIE Indemnity, may pay dividends to SCPIE Holdings in any 12-month period, without regulatory approval, to the extent such dividends do not exceed the greater of
(i) 10% of its statutory surplus at the end of the preceding year or (ii) its statutory net income for the preceding year. Applicable regulations further require that an insurers statutory surplus following a dividend or other distribution be
reasonable in relation to its outstanding liabilities and adequate to meet its financial needs, and permit the payment of dividends only out of statutory earned (unassigned) surplus unless the payment out of other funds receives regulatory approval.
The amount of dividends that SCPIE Indemnity is able to pay to SCPIE Holdings during 2004 without prior regulatory approval is approximately $14.0 million.



Common stock dividends paid to stockholders were $0.40 per share in 2003. These dividends were funded through dividends received from the Insurance Subsidiaries in prior years. The
Company has suspended the quarterly dividend payable on March 31, 2004. Payment of future dividends is subject to Board approval, earnings and the financial condition of the Company. As of December 31, 2003, SCPIE Holdings held cash and short-terms
securities of $9.5 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.



The Companys capital adequacy position has been
weakened by the continuing losses in the non-core business, particularly the $18.1 million loss incurred in September 2003 due to the unexpected losses attributable to GoshawK. On November 14, 2003, A.M. Best, after a review the third quarter
results, reduced the rating of the Insurance Subsidiaries to B (Fair), with a negative outlook. A. M. Best assigns this rating to companies that have, in its opinion, a fair ability to meet their current obligations to policyholders, but are
financially vulnerable to adverse changes in underwriting and economic conditions. The NAIC has developed a methodology for measuring the adequacy of an insurers surplus which includes a RBC formula designed to measure state statutory capital
and surplus needs. The RBC rules provide for different levels of regulatory attention based on four thresholds determined under the formula. At December 31, 2003, the RBC level of each Insurance Subsidiary exceeded the threshold requiring the least
regulatory attention. At December 31, 2003, SCPIE Indemnity exceeded this threshold by $47.6 million.



44



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##### Table of Contents

The Company believes that it has the ability to fund its continuing operations at current and increased levels from its premiums
written and investment income. The Company plans to focus on the efficient operation of its core business, while at the same time continuing to adjudicate and settle claims incurred in its discontinued non-core business. As the Company continues to
run-off the non-core loss and LAE reserves, its capital position should improve. The Company believes it has, at best, only limited opportunities to raise capital, if that becomes necessary. The Company may improve its capital adequacy
and RBC ratios through temporary reinsurance arrangements with highly rated insurers.



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, 2003, are as follows:



|                 |  |                                       |       |      |   |       |  |      |       |      |   |            |  |   |       |  |   |    
|---------------- |  | ------------------------------------- | ----- | ---- | - | ----- |  | ---- | ----- | ---- | - | ---------- |  | - | ----- |  | - | ---
|                 |  | 2004                                  |       | 2005 |   | 2006  |  | 2007 |       | 2008 |   | Thereafter
|                
|                 |  | Payments Due by Period (in thousands)
|Operating Leases |  | $                                     | 2,934 |      | $ | 3,006 |  | $    | 3,035 |      | $ | 3,177      |  | $ | 2,640 |  | $ | -0-



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, 2003, letter of
credit issuance under the facility was approximately $47.3 million. Securities of $52.1 million are pledged as collateral under the facility.



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. 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, 2003, comprised 85.6% of total investments at market value. U.S. government bonds represents 35.8% 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 3.2% of total investments at market value. A secured mortgage loan accounts for 1.6% of total investments at
market value. Cash and cash equivalents consist of highly liquid short-term money market funds, representing 9.6%.



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.



45



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##### Table of Contents

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 sold its investment in a limited partnership, which invests in a portfolio of offshore hedge funds. This investment had a value of $15.0
million at December 31, 2002. The Company realized a gain of $0.5 million on the sale.



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
(1.0%) 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 Market Rates/Prices as Indicated Below
|                                            
|                                             |  | (In Thousands)
|December 31, 2003                            |  |                |         |                                                     |   |                                                                         |  |   |        
|Interest rate risk*                          |  |                |         |                                                     |   |                                                                         |  |   |        
|Fixed-maturity securities available for sale |  | $              | 554,141 |                                                     | $ | 554,141                                                                 |  | $ | 529,844
|Equity price risk**                          |  |                |         |                                                     |   |                                                                         |  |   |        
|Common stocks                                |  | $              | 20,543  |                                                     | $ | 20,543                                                                  |  | $ | 18,489 
|December 31, 2002                            |  |                |         |                                                     |   |                                                                         |  |   |        
|Interest rate risk*                          |  |                |         |                                                     |   |                                                                         |  |   |        
|Fixed-maturity securities available for sale |  | $              | 538,675 |                                                     | $ | 538,675                                                                 |  | $ | 517,021
|Equity price risk**                          |  |                |         |                                                     |   |                                                                         |  |   |        
|Common stocks                                |  | $              | 34,237  |                                                     | $ | 34,237                                                                  |  | $ | 30,814 

---

|* |  | Adjusted interest rates assume a 100-basis-point (1.0%) increase in market rates
|- |  | --------------------------------------------------------------------------------

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



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 54 hereof.



46



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##### Table of Contents

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



None.



ITEM 9A.    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, as amended, 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.



As required by Securities and Exchange Commission Rule 13a-15(b), 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 as of the end of the quarter covered by this report. Based on the foregoing, the Chief Executive Officer and Chief Financial Officer concluded that the Companys disclosure controls and procedures were effective at the reasonable
assurance level.



There have been no significant changes in the Companys internal
controls over financial reporting during the Companys most recent fiscal quarter that may have materially affected, or are reasonably likely to materially affect the Companys internal controls over financial reporting.



47



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##### Table of Contents

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 20, 2004 (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.    PRINCIPAL ACCOUNTANT FEES AND SERVICES



The information required by this item is incorporated by reference to the Proxy Statement under the heading Principal Accountant Fees and Services.



48



---

##### Table of Contents

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 48 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.                                                                                                                                                                                                                                                                                                          
|       |  
|10.1*  |   |  | Amended and Restated Employment Agreement dated January 2, 2003, between SCPIE Management Company and Donald J. Zuk.                                                                                                                                                                                                                  
|       |  
|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).                                                                                                                                                      
|       |  
|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).                                                                           
|       |  
|10.50  | * |  | 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  | * |  | 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).                                                                                                              
|       |  
|10.52  | * |  | 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).                                                                                                               
|       |  
|10.53  | * |  | 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).                                                                                                                      



49



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##### Table of Contents

|       |   |  |                                                                                                                                                                                                                                                                                                                                                                         
|------ | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NUMBER |   |  | DOCUMENT                                                                                                                                                                                                                                                                                                                                                                
|      
|       |  
|10.54  |   |  | 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).                                                                                                                                            
|       |  
|10.55  |   |  | 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 Form 10-K on April 1, 2002 and incorporated herein by reference).            
|       |  
|10.56  | * |  | 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).                                                                                                         
|       |  
|10.57  |   |  | 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).
|       |  
|10.58  | * |  | 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).                                                                                                                                                                 
|       |  
|10.59  | * |  | Form of Stock Option Agreement under the 2001 Amended and Restated Equity Participation Plan of the Company (filed with the Companys Annual Report on Form 10-K on March 31, 2003 and incorporated
herein by reference).                                                                                                                                               
|       |  
|10.60  | * |  | Form of Non-Qualified Stock Option Agreement for Independent Directors under the 2001 Amended and Restated Equity Participation Plan of the Company (filed with the Companys Annual Report on Form
10-K on March 31, 2003 and incorporated herein by reference).                                                                                                       
|       |  
|10.61  | * |  | Form of Stock Appreciation Rights Agreement for selected employees of the Company under the 2001 Amended and Restated Equity Participation Plan of the Company (filed with the Companys Annual
Report on Form 10-K on March 31, 2003 and incorporated herein by reference).                                                                                            
|       |  
|10.62  |   |  | Medical Malpractice Shortfall Excess of Loss Reinsurance Agreement with various subscribing reinsurers (filed with the Companys Annual Report on Form 10-K on March 31, 2003 and incorporated
herein by reference).                                                                                                                                                    
|       |  
|10.63  |   |  | First through Fourth Excess of Loss Reinsurance Treaty with various subscribing reinsurers (filed with the Companys Annual Report on Form 10-K on March 31, 2003 and incorporated herein by
reference).                                                                                                                                                                
|       |  
|10.65  | * |  | Deferred Compensation Agreement dated as of January 1, 2001, by and between SCPIE Management Company and Donald P. Newell (filed with the Companys Annual Report on Form 10-K on March 31, 2003 and
incorporated herein by reference).                                                                                                                                 
|       |  
|10.66  | * |  | Employment Memorandum regarding the employment terms of Donald P. Newell with the Company, dated as of October 30, 2000 (filed with the Companys Annual Report on Form 10-K on March 31, 2003 and
incorporated herein by reference).                                                                                                                                   
|       |  
|10.67  |   |  | Quota Share Retrocession Contract, issued to the Company, American Healthcare Indemnity Company and American Healthcare Specialty Insurance Company by GoshawK Reinsurance Limited (filed with the
Companys Annual Report on Form 10-K on March 31, 2003 and incorporated herein by reference).                                                                        
|       |  
|10.68  |   |  | Guarantee Agreement by and between the Company and GoshawK Reinsurance Limited (filed with the Companys Annual Report on Form 10-K on March 31, 2003 and incorporated herein by
reference).                                                                                                                                                                            
|       |  
|10.69  | * |  | Amendments to Supplemental Employee Retirement Plan for selected employees of SCPIE Management Company (filed with the Companys Annual Report on Form 10-K on March 31, 2003 and incorporated
herein by reference).                                                                                                                                                    



50



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##### Table of Contents

|       |   |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|------ | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NUMBER |   |  | DOCUMENT                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|      
|       |  
|10.70  | * |  | 2003 Amended and Restated Equity Participation Plan of SCPIE Holdings Inc. (filed with the Companys Quarterly Report on Form 10-Q on November 14, 2003 and incorporated herein by
reference).                                                                                                                                                                                                                                                                    
|       |  
|10.71  | * |  | Form of Restricted Stock Agreement for Independent Directors (filed with the Companys Quarterly Report on Form 10-Q on November 14, 2003 and incorporated herein by reference).                                                                                                                                                                                                                                                                                  
|       |  
|10.72  | * |  | First Amendment to the 2003 Amended and Restated Equity Participation Plan.                                                                                                                                                                                                                                                                                                                                                                                       
|       |  
|10.73  | * |  | Amendment 2004-1 to the Supplemental Employee Retirement Plan for selected employees of SCPIE Management Company.                                                                                                                                                                                                                                                                                                                                                 
|       |  
|10.74  |   |  | FirstFourth Excess of Loss Reinsurance Contract 8493-00-0009-00 with various subscribing reinsurers.                                                                                                                                                                                                                                                                                                                                                             
|       |  
|10.75  |   |  | Addendum No. 1 to Per Policy of Loss Reinsurance Agreement 8493-00-0003-00 with various subscribing reinsurers.                                                                                                                                                                                                                                                                                                                                                   
|       |  
|10.76  |   |  | Cover note for FirstThird Excess of Loss Reinsurance Agreement 8493-00-0009-00 with various subscribing reinsurers.                                                                                                                                                                                                                                                                                                                                              
|       |  
|10.77  |   |  | Cover Note for Per Policy Excess of Loss Reinsurance Agreement 8493-3 with various subscribing reinsurers.                                                                                                                                                                                                                                                                                                                                                        
|       |  
|23.1   |   |  | Consent of independent auditors.                                                                                                                                                                                                                                                                                                                                                                                                                                  
|       |  
|31.1   |   |  | Certifications of Registrants Chief Executive Officer and Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                                                                     
|       |  
|32.1   |   |  | Certifications of Registrants Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as created by Section 906 of the Sarbanes Oxley Act of 2002. These
certifications are being furnished solely to accompany this Annual Report on Form 10-K and are not being filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and are not to be incorporated by reference into any filing
of the Company

---

|* |  | Management contract or compensatory plan or arrangement required to be filed as an exhibit to this Annual Report on Form 10-K.
|- |  | ------------------------------------------------------------------------------------------------------------------------------



(b) Reports on Form 8-K: The Company filed a Form 8-K on December 18, 2003.



51



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##### Table of Contents

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. Zuk President and Chief Executive Officer




March 26,
2004



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 26, 2004
|                                                        |  |                                                                                           
|/s/    ROBERT B.
TSCHUDYRobert B. Tschudy               |  | Senior Vice President, Treasurer and Chief Financial Officer (Principal Financial Officer) |  | March 26, 2004
|                                                        |  |                                                                                           
|/s/    EDWARD G.
MARLEYEdward G. Marley                 |  | Vice President and Chief Accounting Officer (Principal Accounting Officer)                 |  | March 26, 2004
|                                                        |  |                                                                                           
|/s/    MITCHELL S. KARLAN,
M.D.Mitchell S. Karlan, M.D. |  | Chairman of the Board and Director                                                         |  | March 26, 2004
|                                                        |  |                                                                                           
|/s/    WILLIS T. KING,
JR.Willis T. King, Jr.           |  | Director                                                                                   |  | March 26, 2004
|                                                        |  |                                                                                           
|/s/    LOUIS H. MASOTTI,
PH.D.Louis H. Masotti,
Ph.D.   |  | Director                                                                                   |  | March 26, 2004
|                                                        |  |                                                                                           
|/s/    JACK E. MCCLEARY,
M.D.Jack E. McCleary, M.D.     |  | Director                                                                                   |  | March 26, 2004
|                                                        |  |                                                                                           
|/s/    CHARLES B. MCELWEE,
M.D.Charles B. McElwee, M.D. |  | Director                                                                                   |  | March 26, 2004
|                                                        |  |                                                                                           
|/s/    WENDELL L. MOSELEY,
M.D.Wendell L. Moseley, M.D. |  | Director                                                                                   |  | March 26, 2004
|                                                        |  |                                                                                           
|/s/    DONALD P.
NEWELLDonald P. Newell                 |  | Director                                                                                   |  | March 26, 2004
|                                                        |  |                                                                                           
|/s/    HARRIET M. OPFELL,
M.D.Harriet M. Opfell, M.D.   |  | Director                                                                                   |  | March 26, 2004



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##### Table of Contents

|                                                          |  |          |  |               
|--------------------------------------------------------- |  | -------- |  | --------------
|SIGNATURE                                                 |  | TITLE    |  | DATE          
|                                                          |  |         
|/s/    WILLIAM A. RENERT,
M.D.William A. Renert, M.D.     |  | Director |  | March 26, 2004
|                                                          |  |         
|/s/    HENRY L. STOUTZ,
M.D.Henry L. Stoutz, M.D.         |  | Director |  | March 26, 2004
|                                                          |  |         
|/s/    REINHOLD A. ULLRICH,
M.D.Reinhold A. Ullrich, M.D. |  | Director |  | March 26, 2004
|                                                          |  |         
|/s/    RONALD H. WENDER,
M.D.Ronald H. Wender, M.D.       |  | Director |  | March 26, 2004



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##### Table of Contents

SCPIE HOLDINGS INC.



ITEM 15(d) FINANCIAL
STATEMENTS AND FINANCIAL STATEMENT SCHEDULES



ANNUAL REPORT ON
FORM 10-K



|                                                                                                     |  |     
|---------------------------------------------------------------------------------------------------- |  | ----
|INDEX                                                                                                |  | PAGE
|                                                                                                    
|Report of Independent Auditors                                                                       |  | 55  
|Financial Statements:                                                                                |  |     
|Consolidated Balance Sheets as of December 31, 2003 and 2002                                         |  | 56  
|Consolidated Statements of Operations for the years ended December 31, 2003, 2002 and 2001           |  | 57  
|Consolidated Statements of Stockholders Equity for the years ended December 31, 2003, 2002 and 2001 |  | 58  
|Consolidated Statements of Cash Flows for the years ended December 31, 2003, 2002 and 2001           |  | 59  
|Notes to Consolidated Financial Statements                                                           |  | 60  
|Schedule IICondensed Financial Information of Registrant                                            |  | 79  
|Schedule IIISupplementary Insurance Information                                                     |  | 83  



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.



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##### Table of Contents

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, 2003 and 2002, and the related consolidated
statements of operations, stockholders equity and cash flows for each of the three years in the period ended December 31, 2003. 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, 2003 and 2002, and the consolidated results of their operations and their cash flows for each of
the three years in the period ended December 31, 2003, 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, 2004



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SCPIE HOLDINGS INC. AND SUBSIDIARIES



CONSOLIDATED BALANCE SHEETS

(In thousands, except share data)



|                                                                                                                                                             |  |      |         |   |      |   |           |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | ---- | ------- | - | ---- | - | --------- | -
|DECEMBER 31,                                                                                                                                                 |  | 2003 |         |   | 2002 |  
|                                                                                                                                                             | 
|ASSETS                                                                                                                                                       |  |      |         |   |      |   |           |  
|Securities available for sale (Note 2):                                                                                                                      |  |      |         |   |      |   |           |  
|Fixed-maturity investments, at fair value (amortized cost 2003$550,794; 2002$523,516)                                                                      |  | $    | 554,141 |   |      | $ | 538,675   |  
|Equity investments, at fair value (cost: 2003$15,766; 2002$29,758)                                                                                         |  |      | 20,543  |   |      |   | 34,237    |  
|                                                                                                                                                             |  |      |         |   |      |   |           |  
|Total securities available for sale                                                                                                                          |  |      | 574,684 |   |      |   | 572,912   |  
|Other investments                                                                                                                                            |  |      |        |   |      |   | 15,000    |  
|Mortgages and real estate                                                                                                                                    |  |      | 10,400  |   |      |   | 15,407    |  
|Cash and cash equivalents                                                                                                                                    |  |      | 62,095  |   |      |   | 115,787   |  
|                                                                                                                                                             |  |      |         |   |      |   |           |  
|Total investments and cash and cash equivalents                                                                                                              |  |      | 647,179 |   |      |   | 719,106   |  
|Accrued investment income                                                                                                                                    |  |      | 7,526   |   |      |   | 8,157     |  
|Premiums receivable                                                                                                                                          |  |      | 120,112 |   |      |   | 117,335   |  
|Reinsurance recoverables (Note 4)                                                                                                                            |  |      | 151,829 |   |      |   | 153,589   |  
|Deferred policy acquisition costs                                                                                                                            |  |      | 9,416   |   |      |   | 6,858     |  
|Federal income taxes receivable                                                                                                                              |  |      |        |   |      |   | 10,944    |  
|Deferred federal income taxes, net (Note 5)                                                                                                                  |  |      | 43,725  |   |      |   | 32,356    |  
|Property and equipment, net                                                                                                                                  |  |      | 3,816   |   |      |   | 5,305     |  
|Other assets                                                                                                                                                 |  |      | 7,647   |   |      |   | 10,116    |  
|                                                                                                                                                             |  |      |         |   |      |   |           |  
|Total assets                                                                                                                                                 |  | $    | 991,250 |   |      | $ | 1,063,766 |  
|                                                                                                                                                             |  |      |         |   |      |   |           |  
|LIABILITIES                                                                                                                                                  |  |      |         |   |      |   |           |  
|Reserves:                                                                                                                                                    |  |      |         |   |      |   |           |  
|Losses and loss adjustment expenses (Note 3)                                                                                                                 |  | $    | 643,046 |   |      | $ | 650,671   |  
|Unearned premiums                                                                                                                                            |  |      | 50,707  |   |      |   | 67,556    |  
|                                                                                                                                                             |  |      |         |   |      |   |           |  
|Total reserves                                                                                                                                               |  |      | 693,753 |   |      |   | 718,227   |  
|Amounts held for reinsurance                                                                                                                                 |  |      | 67,223  |   |      |   | 87,701    |  
|Other liabilities                                                                                                                                            |  |      | 26,086  |   |      |   | 30,672    |  
|                                                                                                                                                             |  |      |         |   |      |   |           |  
|Total liabilities                                                                                                                                            |  |      | 787,062 |   |      |   | 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, 20039,371,933 shares outstanding; 20029,333,807
shares outstanding |  |      | 1       |   |      |   | 1         |  
|Additional paid-in capital                                                                                                                                   |  |      | 37,281  |   |      |   | 37,805    |  
|Retained earnings                                                                                                                                            |  |      | 264,063 |   |      |   | 280,609   |  
|Treasury stock, at cost (20032,920,158 shares and 20022,958,284 shares)                                                                                    |  |      | (98,006 | ) |      |   | (98,830   | )
|Stock subscription notes receivable                                                                                                                          |  |      | (3,312  | ) |      |   | (3,592    | )
|Accumulated other comprehensive income                                                                                                                       |  |      | 4,161   |   |      |   | 11,173    |  
|                                                                                                                                                             |  |      |         |   |      |   |           |  
|Total stockholders equity                                                                                                                                   |  |      | 204,188 |   |      |   | 227,166   |  
|                                                                                                                                                             |  |      |         |   |      |   |           |  
|Total liabilities and stockholders equity                                                                                                                   |  | $    | 991,250 |   |      | $ | 1,063,766 |  
|                                                                                                                                                             |  |      |         |   |      |   |           |  



See accompanying notes.



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SCPIE HOLDINGS INC. AND SUBSIDIARIES



CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per-share data)



|                                                              |  |      |         |   |      |   |         |      |  |   |         |  
|------------------------------------------------------------- |  | ---- | ------- | - | ---- | - | ------- | ---- |  | - | ------- | -
|FOR THE YEAR ENDED DECEMBER 31,                               |  | 2003 |         |   | 2002 |   |         | 2001 | 
|                                                              | 
|REVENUES                                                      |  |      |         |   |      |   |         |      |  |   |         |  
|Premiums earned (Note 4)                                      |  | $    | 163,887 |   |      | $ | 286,063 |      |  | $ | 235,935 |  
|Net investment income (Note 2)                                |  |      | 21,954  |   |      |   | 32,231  |      |  |   | 35,895  |  
|Realized investment gains (Note 2)                            |  |      | 216     |   |      |   | 18,910  |      |  |   | 5,707   |  
|Other revenue                                                 |  |      | 936     |   |      |   | 2,030   |      |  |   | 2,202   |  
|                                                              |  |      |         |   |      |   |         |      |  |   |         |  
|Total revenues                                                |  |      | 186,993 |   |      |   | 339,234 |      |  |   | 279,739 |  
|EXPENSES                                                      |  |      |         |   |      |   |         |      |  |   |         |  
|Losses and loss adjustment expenses (Note 3)                  |  |      | 161,366 |   |      |   | 320,516 |      |  |   | 304,473 |  
|Underwriting and other operating expenses (Note 1 and Note 4) |  |      | 45,844  |   |      |   | 79,676  |      |  |   | 64,732  |  
|Interest expenses (Note 8)                                    |  |      |        |   |      |   | 66      |      |  |   | 1,416   |  
|                                                              |  |      |         |   |      |   |         |      |  |   |         |  
|Total expenses                                                |  |      | 207,210 |   |      |   | 400,258 |      |  |   | 370,621 |  
|                                                              |  |      |         |   |      |   |         |      |  |   |         |  
|Loss before federal income tax benefit                        |  |      | (20,217 | ) |      |   | (61,024 | )    |  |   | (90,882 | )
|Federal income tax benefit (Note 5)                           |  |      | (7,411  | ) |      |   | (22,642 | )    |  |   | (32,906 | )
|                                                              |  |      |         |   |      |   |         |      |  |   |         |  
|Net loss                                                      |  | $    | (12,806 | ) |      | $ | (38,382 | )    |  | $ | (57,976 | )
|                                                              |  |      |         |   |      |   |         |      |  |   |         |  
|Basic loss per share of common stock (Note 11)                |  | $    | (1.37   | ) |      | $ | (4.12   | )    |  | $ | (6.22   | )
|Diluted loss per share of common stock (Note 11)              |  | $    | (1.37   | ) |      | $ | (4.12   | )    |  | $ | (6.22   | )







See accompanying notes.



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SCPIE HOLDINGS INC. AND SUBSIDIARIES



CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY

(In thousands)



|                                                                                                                                         |  |              |   |                            |   |        |                   |  |   |                |   |  |                                    |         |   |                                               |   |        |                            |  |   |        |   |  |   |         |  
|---------------------------------------------------------------------------------------------------------------------------------------- |  | ------------ | - | -------------------------- | - | ------ | ----------------- |  | - | -------------- | - |  | ---------------------------------- | ------- | - | --------------------------------------------- | - | ------ | -------------------------- |  | - | ------ | - |  | - | ------- | -
|                                                                                                                                         |  | COMMON STOCK |   | ADDITIONAL PAID-IN CAPITAL |   |        | RETAINED EARNINGS |  |   | TREASURY STOCK |   |  | STOCK SUBSCRIPTION NOTESRECEIVABLE |         |   | ACCUMULATED OTHER COMPREHENSIVE INCOME
(LOSS) |   |        | TOTAL STOCKHOLDERS EQUITY | 
|                                                                                                                                         | 
|Balance at December 31, 2000                                                                                                             |  | $            | 1 |                            | $ | 36,386 |                   |  | $ | 384,437        |   |  | $                                  | (98,705 | ) |                                               | $ | (4,050 | )                          |  | $ | (1,528 | ) |  | $ | 316,541 |  
|Net loss                                                                                                                                 |  |              |  |                            |   |       |                   |  |   | (57,976        | ) |  |                                    |        |   |                                               |   |       |                            |  |   |       |   |  |   | (57,976 | )
|Comprehensive income for unrealized gains on securities, net of reclassification adjustments of $714 for gains included in net income    |  |              |  |                            |   |       |                   |  |   |               |   |  |                                    |        |   |                                               |   |       |                            |  |   | 4,110  |   |  |   | 4,110   |  
|Change in minimum pension liability, net of applicable income taxes of $376                                                              |  |              |  |                            |   |       |                   |  |   |               |   |  |                                    |        |   |                                               |   |       |                            |  |   | (699   | ) |  |   | (699    | )
|                                                                                                                                         |  |              |   |                            |   |        |                   |  |   |                |   |  |                                    |         |   |                                               |   |        |                            |  |   |        |   |  |   |         |  
|Comprehensive loss                                                                                                                       |  |              |   |                            |   |        |                   |  |   |                |   |  |                                    |         |   |                                               |   |        |                            |  |   |        |   |  |   | (54,565 | )
|Purchase of treasury stock                                                                                                               |  |              |  |                            |   |       |                   |  |   |               |   |  |                                    | (278    | ) |                                               |   |       |                            |  |   |       |   |  |   | (278    | )
|Cash dividends                                                                                                                           |  |              |  |                            |   |       |                   |  |   | (3,727         | ) |  |                                    |        |   |                                               |   |       |                            |  |   |       |   |  |   | (3,727  | )
|Other                                                                                                                                    |  |              |  |                            |   | 1,417  |                   |  |   |               |   |  |                                    |        |   |                                               |   |       |                            |  |   |       |   |  |   | 1,417   |  
|                                                                                                                                         |  |              |   |                            |   |        |                   |  |   |                |   |  |                                    |         |   |                                               |   |        |                            |  |   |        |   |  |   |         |  
|Balance at December 31, 2001                                                                                                             |  |              | 1 |                            |   | 37,803 |                   |  |   | 322,734        |   |  |                                    | (98,983 | ) |                                               |   | (4,050 | )                          |  |   | 1,883  |   |  |   | 259,388 |  
|Net loss                                                                                                                                 |  |              |  |                            |   |       |                   |  |   | (38,382        | ) |  |                                    |        |   |                                               |   |       |                            |  |   |       |   |  |   | (38,382 | )
|Comprehensive income for unrealized gains on securities, net of reclassification adjustments of $14,567 for gains included in net income |  |              |  |                            |   |       |                   |  |   |               |   |  |                                    |        |   |                                               |   |       |                            |  |   | 9,551  |   |  |   | 9,551   |  
|Change in minimum pension liability, net of applicable income taxes of $306                                                              |  |              |  |                            |   |       |                   |  |   |               |   |  |                                    |        |   |                                               |   |       |                            |  |   | (569   | ) |  |   | (569    | )
|Unrealized foreign currency gain                                                                                                         |  |              |  |                            |   |       |                   |  |   |               |   |  |                                    |        |   |                                               |   |       |                            |  |   | 308    |   |  |   | 308     |  
|                                                                                                                                         |  |              |   |                            |   |        |                   |  |   |                |   |  |                                    |         |   |                                               |   |        |                            |  |   |        |   |  |   |         |  
|Comprehensive loss                                                                                                                       |  |              |   |                            |   |        |                   |  |   |                |   |  |                                    |         |   |                                               |   |        |                            |  |   |        |   |  |   | (29,092 | )
|Treasury stock reissued                                                                                                                  |  |              |  |                            |   |       |                   |  |   |               |   |  |                                    | 153     |   |                                               |   |       |                            |  |   |       |   |  |   | 153     |  
|Cash dividends                                                                                                                           |  |              |  |                            |   |       |                   |  |   | (3,743         | ) |  |                                    |        |   |                                               |   |       |                            |  |   |       |   |  |   | (3,743  | )
|Stock subscription notes repaid                                                                                                          |  |              |  |                            |   |       |                   |  |   |               |   |  |                                    |        |   |                                               |   | 458    |                            |  |   |       |   |  |   | 458     |  
|Other                                                                                                                                    |  |              |  |                            |   | 2      |                   |  |   |               |   |  |                                    |        |   |                                               |   |       |                            |  |   |       |   |  |   | 2       |  
|                                                                                                                                         |  |              |   |                            |   |        |                   |  |   |                |   |  |                                    |         |   |                                               |   |        |                            |  |   |        |   |  |   |         |  
|Balance at December 31, 2002                                                                                                             |  |              | 1 |                            |   | 37,805 |                   |  |   | 280,609        |   |  |                                    | (98,830 | ) |                                               |   | (3,592 | )                          |  |   | 11,173 |   |  |   | 227,166 |  
|Net loss                                                                                                                                 |  |              |  |                            |   |       |                   |  |   | (12,806        | ) |  |                                    |        |   |                                               |   |       |                            |  |   |       |   |  |   | (12,806 | )
|Comprehensive income for unrealized losses on securities, net of reclassification adjustments of ($8,080) for gains included in net loss |  |              |  |                            |   |       |                   |  |   |               |   |  |                                    |        |   |                                               |   |       |                            |  |   | (6,820 | ) |  |   | (6,820  | )
|Change in minimum pension liability, net of applicable income taxes of ($154)                                                            |  |              |  |                            |   |       |                   |  |   |               |   |  |                                    |        |   |                                               |   |       |                            |  |   | 286    |   |  |   | 286     |  
|Unrealized foreign currency loss                                                                                                         |  |              |  |                            |   |       |                   |  |   |               |   |  |                                    |        |   |                                               |   |       |                            |  |   | (478   | ) |  |   | (478    | )
|                                                                                                                                         |  |              |   |                            |   |        |                   |  |   |                |   |  |                                    |         |   |                                               |   |        |                            |  |   |        |   |  |   |         |  
|Comprehensive loss                                                                                                                       |  |              |   |                            |   |        |                   |  |   |                |   |  |                                    |         |   |                                               |   |        |                            |  |   |        |   |  |   | (19,818 | )
|Treasury stock reissued                                                                                                                  |  |              |  |                            |   |       |                   |  |   |               |   |  |                                    | 824     |   |                                               |   |       |                            |  |   |       |   |  |   | 824     |  
|Cash dividends                                                                                                                           |  |              |  |                            |   |       |                   |  |   | (3,740         | ) |  |                                    |        |   |                                               |   |       |                            |  |   |       |   |  |   | (3,740  | )
|Stock subscription notes repaid                                                                                                          |  |              |  |                            |   |       |                   |  |   |               |   |  |                                    |        |   |                                               |   | 280    |                            |  |   |       |   |  |   | 280     |  
|Other                                                                                                                                    |  |              |  |                            |   | (524   | )                 |  |   |               |   |  |                                    |        |   |                                               |   |       |                            |  |   |       |   |  |   | (524    | )
|                                                                                                                                         |  |              |   |                            |   |        |                   |  |   |                |   |  |                                    |         |   |                                               |   |        |                            |  |   |        |   |  |   |         |  
|Balance at December 31, 2003                                                                                                             |  | $            | 1 |                            | $ | 37,281 |                   |  | $ | 264,063        |   |  | $                                  | (98,006 | ) |                                               | $ | (3,312 | )                          |  | $ | 4,161  |   |  | $ | 204,188 |  
|                                                                                                                                         |  |              |   |                            |   |        |                   |  |   |                |   |  |                                    |         |   |                                               |   |        |                            |  |   |        |   |  |   |         |  



See accompanying notes.



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SCPIE HOLDINGS INC. AND SUBSIDIARIES



CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)



|                                                                                          |  |      |          |   |      |   |          |      |  |   |          |  
|----------------------------------------------------------------------------------------- |  | ---- | -------- | - | ---- | - | -------- | ---- |  | - | -------- | -
|FOR THE YEARS ENDED DECEMBER 31,                                                          |  | 2003 |          |   | 2002 |   |          | 2001 | 
|                                                                                          | 
|OPERATING ACTIVITIES                                                                      |  |      |          |   |      |   |          |      |  |   |          |  
|Net loss                                                                                  |  | $    | (12,806  | ) |      | $ | (38,382  | )    |  | $ | (57,976  | )
|Adjustments to reconcile net loss to net cash provided by (used in) operating activities: |  |      |          |   |      |   |          |      |  |   |          |  
|Provisions for amortization and depreciation                                              |  |      | 11,037   |   |      |   | 5,207    |      |  |   | 4,545    |  
|Benefit for deferred federal income taxes                                                 |  |      | (7,411   | ) |      |   | (11,928  | )    |  |   | (21,546  | )
|Realized investment gains                                                                 |  |      | (216     | ) |      |   | (18,910  | )    |  |   | (5,707   | )
|Changes in operating assets and liabilities:                                              |  |      |          |   |      |   |          |      |  |   |          |  
|Accrued investment income                                                                 |  |      | 631      |   |      |   | 516      |      |  |   | 634      |  
|Premiums receivable                                                                       |  |      | (2,777   | ) |      |   | (34,845  | )    |  |   | (36,119  | )
|Reinsurance recoverables                                                                  |  |      | 1,760    |   |      |   | (74,341  | )    |  |   | (34,787  | )
|Deferred policy acquisition costs                                                         |  |      | (2,558   | ) |      |   | 12,607   |      |  |   | (1,341   | )
|Federal income tax receivable                                                             |  |      | 10,944   |   |      |   | 614      |      |  |   | (11,558  | )
|Losses and loss adjustment expense reserves                                               |  |      | (7,625   | ) |      |   | 74,035   |      |  |   | 143,095  |  
|Unearned premiums                                                                         |  |      | (16,849  | ) |      |   | (34,312  | )    |  |   | 44,872   |  
|Amounts held for reinsurance                                                              |  |      | (20,478  | ) |      |   | 87,701   |      |  |   |         |  
|Other assets                                                                              |  |      | 4,162    |   |      |   | 7,652    |      |  |   | (862     | )
|Other liabilities                                                                         |  |      | (4,586   | ) |      |   | (82      | )    |  |   | 10,186   |  
|                                                                                          |  |      |          |   |      |   |          |      |  |   |          |  
|Net cash provided by (used in) investing activities                                       |  |      | (46,772  | ) |      |   | (24,468  | )    |  |   | 33,436   |  
|INVESTING ACTIVITIES                                                                      |  |      |          |   |      |   |          |      |  |   |          |  
|Purchasesfixed maturities                                                                |  |      | (644,318 | ) |      |   | (731,898 | )    |  |   | (480,444 | )
|Salesfixed maturities                                                                    |  |      | 617,153  |   |      |   | 784,220  |      |  |   | 474,571  |  
|Maturitiesfixed maturities                                                               |  |      | 4,480    |   |      |   | 4,914    |      |  |   | 12,197   |  
|Purchasesequities                                                                        |  |      |         |   |      |   | (502     | )    |  |   | (17,500  | )
|Salesequities                                                                            |  |      | 3,925    |   |      |   | 500      |      |  |   | 27       |  
|Sale of other investments                                                                 |  |      | 15,000   |   |      |   |         |      |  |   |         |  
|                                                                                          |  |      |          |   |      |   |          |      |  |   |          |  
|Net cash provided by (used in) investing activities                                       |  |      | (3,760   | ) |      |   | 57,234   |      |  |   | (11,149  | )
|FINANCING ACTIVITIES                                                                      |  |      |          |   |      |   |          |      |  |   |          |  
|Repayment of bank loan                                                                    |  |      |         |   |      |   | (9,000   | )    |  |   | (18,000  | )
|Purchase of treasury stock, net and repayment of stock subscription notes                 |  |      | 580      |   |      |   | 613      |      |  |   | (278     | )
|Cash dividends                                                                            |  |      | (3,740   | ) |      |   | (3,743   | )    |  |   | (3,727   | )
|                                                                                          |  |      |          |   |      |   |          |      |  |   |          |  
|Net cash used in financing activities                                                     |  |      | (3,160   | ) |      |   | (12,130  | )    |  |   | (22,005  | )
|                                                                                          |  |      |          |   |      |   |          |      |  |   |          |  
|Increase (decrease) in cash and cash equivalents                                          |  |      | (53,692  | ) |      |   | 20,636   |      |  |   | 282      |  
|Cash and cash equivalents at beginning of year                                            |  |      | 115,787  |   |      |   | 95,151   |      |  |   | 94,869   |  
|                                                                                          |  |      |          |   |      |   |          |      |  |   |          |  
|Cash and cash equivalents at end of year                                                  |  | $    | 62,095   |   |      | $ | 115,787  |      |  | $ | 95,151   |  
|                                                                                          |  |      |          |   |      |   |          |      |  |   |          |  



See accompanying notes.



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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 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 1998, the Company significantly expanded its healthcare liability insurance operations outside of
its core base in California. Because of significant underwriting losses in these non-core operations, the Company has withdrawn from all states other than California and Delaware and completely from the hospital business.



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 GoshawK Re, a subsidiary of GoshawK Insurance Holdings plc.



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. In 2003, the Company provided capital in
support of one syndicate. 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.



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



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. 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.



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.



The Company has no securities
classified as held to maturity or trading as defined in Financial Accounting Standards Board Statement (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 sold this investment in 2003 and recognized a $0.5 million gain. At December 31, 2003, the Company was not a party to any derivative instruments.



MortgagesReal EstateThe Company sold its real estate holdings in 2003 and recognized a $2.5 million loss. The Company received a $10.4 million,
7-year mortgage note and cash as part of the sale. The mortgage note is secured by the property sold and bears interest at 6.125% payable monthly. Principal is payable in seven years.



Cash and Cash EquivalentsShort-term investments are included in cash and cash equivalents, carried at cost, which
approximates fair value.



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.



|                             |  |                |         |   |      |   |         |      |  |   |         |  
|---------------------------- |  | -------------- | ------- | - | ---- | - | ------- | ---- |  | - | ------- | -
|                             |  | 2003           |         |   | 2002 |   |         | 2001 | 
|                             | 
|                             | 
|                             |  | (In Thousands) |        
|Balance at beginning of year |  | $              | 6,858   |   |      | $ | 19,465  |      |  | $ | 18,124  |  
|Costs deferred               |  |                | 12,824  |   |      |   | 20,003  |      |  |   | 47,505  |  
|Costs amortized              |  |                | (10,266 | ) |      |   | (32,610 | )    |  |   | (46,164 | )
|                             |  |                |         |   |      |   |         |      |  |   |         |  
|Balance at end of year       |  | $              | 9,416   |   |      | $ | 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 assumed reinsurance acquisition costs during 2002 and 2003.
The Company accelerated the amortization of certain acquisition costs in 2002 based on the adequacy of the corresponding premium in accordance with FASB No. 60, Accounting and Reporting by Insurance Enterprises.



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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:



|                            |  |                |        |   |      |   |        |  
|--------------------------- |  | -------------- | ------ | - | ---- | - | ------ | -
|                            |  | 2003           |        |   | 2002 |  
|                            | 
|                            | 
|                            |  | (In Thousands) |       
|Leasehold improvements      |  | $              | 5,445  |   |      | $ | 5,445  |  
|Furniture and equipment     |  |                | 4,186  |   |      |   | 7,154  |  
|                            |  |                |        |   |      |   |        |  
|                            |  |                | 9,631  |   |      |   | 12,599 |  
|Accumulated depreciation    |  |                | (5,815 | ) |      |   | (7,294 | )
|                            |  |                |        |   |      |   |        |  
|Property and equipment, net |  | $              | 3,816  |   |      | $ | 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, 2003, approximately 95% of total written premiums ceded were placed with reinsurance companies with an A.M. Best or Insurance
Solvency International rating of A- or better, including 64% with GoshawK Re, 12% with Arch Reinsurance, 11% with Hannover Ruckversicherungs and 9% with Lloyds of London syndicates.



STOCK-BASED COMPENSATION

---



As of December 31, 2003, the Company has a stock-based employee and nonemployee compensation plan more fully described in Note 10.



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



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 of the Companys employee stock options granted had an exercise price equal to the market price of the underlying stock on the dates of grant.



NEW ACCOUNTING STANDARDS

---



In May 2003, FASB issued SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity. FASB
No. 150 establishes standards for the classification and measurement of certain financial instruments with characteristics of both liabilities and equity. FASB No. 150 was effective for financial instruments entered into or modified after May 31,
2003, and otherwise was effective at the beginning of the first interim period beginning after June 15, 2003. FASB No. 150 is to be implemented by reporting the cumulative effect of a change in an accounting principle for financial instruments
created before the issuance date of the statement and still existing at the beginning of the interim period of adoption. In October 2003, FASB voted to defer the effective date for applying certain provisions of FASB No. 150. The Company has
determined that the effect of the adoption of this pronouncement was not material as of December 31, 2003.



In January 2003, FASB issued Financial Interpretation (FIN) No. 46, Consolidation of Variable Interest Entities, which requires the consolidation of variable interest entities (VIE) by an
enterprise if that enterprise has a variable interest that will absorb a majority of the VIEs expected losses if they occur, receive a majority of the entitys expected residual returns if they occur, or both. If one enterprise will
absorb a majority of a VIEs expected losses and another enterprise will receive a majority of that VIEs expected residual returns, the enterprise absorbing a majority of the losses shall consolidate the VIE. A VIE is an entity in which
equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. In October
2003, FASB deferred the effective date for applying the provisions of FIN No. 46 until the end of the first interim or annual period ending after December 15, 2003. Currently, the Company does not believe the adoption of this pronouncement will have
a material impact to its consolidated financial condition or results of operations.



In
August 2002, FASB issued FIN No. 45, Guarantors Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Other, prescribing the disclosures to be made by a guarantor in its interim and
annual financial statements about its obligations under certain guarantees that it has issued. The Company has determined that the effect of the adoption of this pronouncement was not material at December 31, 2003.



In December 2003, the FASB issued FASB No. 132 (revised 2003), Employers Disclosures about
Pensions and Other Postretirement Benefits. This revision carries forward the disclosures previously required by FASB No. 132, and requires additional disclosure of the measurement date used for the majority of the plans, the accumulated benefit
obligation, and information about the plans assets and cash flows. It also requires that cost and contribution information be presented in interim period reports. The new disclosure requirements are generally effective for annual financial
statements for fiscal years ending after December 15, 2003 or interim periods beginning after December 15, 2003. The required disclosures are provided in Note 7.



Effective January 1, 2002, the Company adopted FASB No. 142, Goodwill and Other Intangible Assets, which establishes financial accounting and
reporting for acquired goodwill and other intangible assets. Under FASB 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. The Companys only



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



intangible asset is goodwill of approximately $5.5 million, which is no longer subject to amortization. The Company has 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.



In June 2002, the FASB issued FASB No. 146, Accounting for Costs Associated with Exit or Disposal Activities. FASB 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.



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, 2003                |  |                        |         |                        |   |                         |  |            |       |  |   |        
|Fixed-maturity securities:       |  |                        |         |                        |   |                         |  |            |       |  |   |        
|Bonds:                           |  |                        |         |                        |   |                         |  |            |       |  |   |        
|U.S. government and agencies     |  | $                      | 195,564 |                        | $ | 3,053                   |  | $          | 333   |  | $ | 198,284
|Mortgage-backed and asset-backed |  |                        | 95,206  |                        |   | 997                     |  |            | 662   |  |   | 95,541 
|Corporate                        |  |                        | 260,024 |                        |   | 2,776                   |  |            | 2,484 |  |   | 260,316
|                                 |  |                        |         |                        |   |                         |  |            |       |  |   |        
|Total fixed-maturity securities  |  |                        | 550,794 |                        |   | 6,826                   |  |            | 3,479 |  |   | 554,141
|Common stocks                    |  |                        | 15,766  |                        |   | 4,777                   |  |            |      |  |   | 20,543 
|                                 |  |                        |         |                        |   |                         |  |            |       |  |   |        
|Total                            |  | $                      | 566,560 |                        | $ | 11,603                  |  | $          | 3,479 |  | $ | 574,684
|                                 |  |                        |         |                        |   |                         |  |            |       |  |   |        
|December 31, 2002                |  |                        |         |                        |   |                         |  |            |       |  |   |        
|Fixed-maturity securities:       |  |                        |         |                        |   |                         |  |            |       |  |   |        
|Bonds:                           |  |                        |         |                        |   |                         |  |            |       |  |   |        
|U.S. government and agencies     |  | $                      | 234,424 |                        | $ | 10,384                  |  | $          | 4     |  | $ | 244,804
|Mortgage-backed and asset-backed |  |                        | 63,293  |                        |   | 1,041                   |  |            | 48    |  |   | 64,286 
|Corporate                        |  |                        | 225,799 |                        |   | 4,482                   |  |            | 696   |  |   | 229,585
|                                 |  |                        |         |                        |   |                         |  |            |       |  |   |        
|Total fixed-maturity securities  |  |                        | 523,516 |                        |   | 15,907                  |  |            | 748   |  |   | 538,675
|Common stocks                    |  |                        | 29,758  |                        |   | 4,581                   |  |            | 102   |  |   | 34,237 
|                                 |  |                        |         |                        |   |                         |  |            |       |  |   |        
|Total                            |  | $                      | 553,274 |                        | $ | 20,488                  |  | $          | 850   |  | $ | 572,912
|                                 |  |                        |         |                        |   |                         |  |            |       |  |   |        



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.



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



The amortized cost and fair value of the Companys investments in fixed-maturity securities at December 31, 2003, are summarized by stated
maturities as follows:



|                                            |  |                |         |            |   |        
|------------------------------------------- |  | -------------- | ------- | ---------- | - | -------
|                                            |  | AMORTIZED COST |         | FAIR VALUE
|                                           
|                                            | 
|                                            |  | (In Thousands)
|Years to maturity:                          |  |                |         |            |   |        
|One or less                                 |  | $              | 7,083   |            | $ | 7,078  
|After one through five                      |  |                | 195,188 |            |   | 198,563
|After five through ten                      |  |                | 236,430 |            |   | 236,054
|After ten                                   |  |                | 16,887  |            |   | 16,905 
|Mortgage-backed and asset-backed securities |  |                | 95,206  |            |   | 95,541 
|                                            |  |                |         |            |   |        
|Totals                                      |  | $              | 550,794 |            | $ | 554,141
|                                            |  |                |         |            |   |        



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,    |  | 2003           |        | 2002 |   | 2001  
|                          
|                           | 
|                           |  | (In Thousands)
|Fixed-maturity investments |  | $              | 22,116 |      | $ | 31,993 |  | $ | 31,771
|Equity investments         |  |                | 234    |      |   | 109    |  |   | 238   
|Other                      |  |                | 1,557  |      |   | 2,312  |  |   | 6,266 
|                           |  |                |        |      |   |        |  |   |       
|Total investment income    |  |                | 23,907 |      |   | 34,414 |  |   | 38,275
|Investment expenses        |  |                | 1,953  |      |   | 2,183  |  |   | 2,380 
|                           |  |                |        |      |   |        |  |   |       
|Net investment income      |  | $              | 21,954 |      | $ | 32,231 |  | $ | 35,895
|                           |  |                |        |      |   |        |  |   |       



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



|                                                 |  |                |         |   |      |   |        |      |  |   |        |  
|------------------------------------------------ |  | -------------- | ------- | - | ---- | - | ------ | ---- |  | - | ------ | -
|YEAR ENDED DECEMBER 31,                          |  | 2003           |         |   | 2002 |   |        | 2001 | 
|                                                 | 
|                                                 | 
|                                                 |  | (In Thousands) |        
|Fixed-maturity investments:                      |  |                |         |   |      |   |        |      |  |   |        |  
|Gross realized gains                             |  | $              | 13,749  |   |      | $ | 22,484 |      |  | $ | 8,870  |  
|Gross realized losses                            |  | $              | (2,757  | ) |      | $ | (3,526 | )    |  | $ | (3,165 | )
|                                                 |  |                |         |   |      |   |        |      |  |   |        |  
|Net realized gains on fixed-maturity investments |  |                | 10,992  |   |      |   | 18,958 |      |  |   | 5,705  |  
|Equity InvestmentsGross realized gains (losses) |  |                | (10,172 | ) |      |   | (48    | )    |  |   | 6      |  
|Net other losses                                 |  |                | (604    | ) |      |   |       |      |  |   | (4     | )
|                                                 |  |                |         |   |      |   |        |      |  |   |        |  
|Total net realized gains                         |  | $              | 216     |   |      | $ | 18,910 |      |  | $ | 5,707  |  
|                                                 |  |                |         |   |      |   |        |      |  |   |        |  



Included in net other losses for 2003 is the
$2.5 million loss on the sale of real estate holdings in 2003, a $0.5 million realized gain on the sale of a hedge fund and a $1.5 million gain on the sale of Lloyds syndicate holdings in 2003 by the Companys U.K. subsidiary.



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



The change in the Companys unrealized appreciation (depreciation) on fixed-maturity securities was $(11.8) million, $11.2 million and $4.8
million for the years ended December 31, 2003, 2002 and 2001, respectively; the corresponding amounts for equity securities were $0.3 million, $4.4 million and $0.9 million.



The Company held 64 investment positions with unrealized losses as of December 31, 2003. All of the investments are investment grade and the
unrealized losses are primarily due to interest rate fluctuations. The Company held no securities that were in an unrealized loss position for 12 months or more.



|                                 |  |                         |       |                   |   |                         |  |            |   |                         |   |            |  |   |       |  |   |        
|-------------------------------- |  | ----------------------- | ----- | ----------------- | - | ----------------------- |  | ---------- | - | ----------------------- | - | ---------- |  | - | ----- |  | - | -------
|                                 |  | LESS THAN 12 MONTHS     |       | 12 MONTHS OR MORE |   | TOTAL                  
|                                 |  | GROSS UNREALIZED LOSSES |       | FAIR VALUE        |   | GROSS UNREALIZED LOSSES |  | FAIR VALUE |   | GROSS UNREALIZED LOSSES |   | FAIR VALUE
|                                
|                                 | 
|                                 |  | (In Thousands)         
|Fixed-maturity securities:       |  |                         |       |                   |   |                         |  |            |   |                         |   |            |  |   |       |  |   |        
|Bonds:                           |  |                         |       |                   |   |                         |  |            |   |                         |   |            |  |   |       |  |   |        
|U.S. government and agencies     |  | $                       | 333   |                   | $ | 198,284                 |  | $          |  |                         | $ |           |  | $ | 333   |  | $ | 198,284
|Mortgage-backed and asset-backed |  |                         | 662   |                   |   | 95,541                  |  |            |  |                         |   |           |  |   | 662   |  |   | 95,541 
|Corporate                        |  |                         | 2,484 |                   |   | 260,316                 |  |            |  |                         |   |           |  |   | 2,484 |  |   | 260,316
|                                 |  |                         |       |                   |   |                         |  |            |   |                         |   |            |  |   |       |  |   |        
|Total fixed-maturity securities  |  |                         | 3,479 |                   |   | 554,141                 |  |            |  |                         |   |           |  |   | 3,479 |  |   | 554,141
|Total common stock               |  |                         |      |                   |   | 20,543                  |  |            |  |                         |   |           |  |   |      |  |   | 20,543 
|                                 |  |                         |       |                   |   |                         |  |            |   |                         |   |            |  |   |       |  |   |        
|Total                            |  | $                       | 3,479 |                   | $ | 574,684                 |  | $          |  |                         | $ |           |  | $ | 3,479 |  | $ | 574,684
|                                 |  |                         |       |                   |   |                         |  |            |   |                         |   |            |  |   |       |  |   |        



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 2003, 2002 and 2001.



|                                                                                                        |  |                |         |   |      |   |         |  |   |        
|------------------------------------------------------------------------------------------------------- |  | -------------- | ------- | - | ---- | - | ------- |  | - | -------
|DECEMBER 31,                                                                                            |  | 2003           |         |   | 2002 |   | 2001   
|                                                                                                       
|                                                                                                        | 
|                                                                                                        |  | (In Thousands)
|Reserves for losses and LAE at beginning of year                                                        |  | $              | 650,671 |   |      | $ | 576,636 |  | $ | 429,700
|Less reinsurance recoverables                                                                           |  |                | 85,930  |   |      |   | 74,246  |  |   | 40,151 
|                                                                                                        |  |                |         |   |      |   |         |  |   |        
|Reserves for losses and LAE, net of related reinsurance recoverable, at beginning of year               |  |                | 564,741 |   |      |   | 502,390 |  |   | 389,549
|                                                                                                        |  |                |         |   |      |   |         |  |   |        
|Provision for losses and LAE for claims occurring in the current year, net of reinsurance               |  |                | 169,474 |   |      |   | 303,296 |  |   | 290,649
|Increase (decrease) in estimated losses and LAE for claims occurring in prior years, net of reinsurance |  |                | (8,108  | ) |      |   | 17,220  |  |   | 13,824 
|                                                                                                        |  |                |         |   |      |   |         |  |   |        
|Incurred losses during the year, net of reinsurance                                                     |  |                | 161,366 |   |      |   | 320,516 |  |   | 304,473
|                                                                                                        |  |                |         |   |      |   |         |  |   |        
|Deduct losses and LAE payments for claims, net of reinsurance, occurring during:                        |  |                |         |   |      |   |         |  |   |        
|Current year                                                                                            |  |                | 18,424  |   |      |   | 47,258  |  |   | 36,006 
|Prior years                                                                                             |  |                | 173,528 |   |      |   | 210,907 |  |   | 155,626
|                                                                                                        |  |                |         |   |      |   |         |  |   |        
|Total payments during the year, net of reinsurance                                                      |  |                | 191,952 |   |      |   | 258,165 |  |   | 191,632
|                                                                                                        |  |                |         |   |      |   |         |  |   |        
|Reserve for losses and LAE, net of related reinsurance recoverable, at end of year                      |  |                | 534,155 |   |      |   | 564,741 |  |   | 502,390
|Reinsurance recoverable for losses and LAE, at end of year                                              |  |                | 108,891 |   |      |   | 85,930  |  |   | 74,246 
|                                                                                                        |  |                |         |   |      |   |         |  |   |        
|Reserves for losses and LAE, gross of reinsurance recoverable, at end of year                           |  | $              | 643,046 |   |      | $ | 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 2003 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 and assumed reinsurance businesses offset by adverse development in the non-core healthcare liability insurance programs.



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.



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 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, |  | 2003    |         | 2002   |   | 2001   
|                       
|                        |  | WRITTEN |         | EARNED |   | WRITTEN |  | EARNED |         | WRITTEN |   | EARNED 
|Direct                  |  | $       | 147,085 |        | $ | 149,571 |  | $      | 161,656 |         | $ | 184,014 |  | $ | 180,979 |  | $ | 168,467
|Assumed                 |  |         | 74,236  |        |   | 102,866 |  |        | 174,436 |         |   | 155,902 |  |   | 139,820 |  |   | 95,899 
|Ceded                   |  |         | 74,282  |        |   | 88,550  |  |        | 84,342  |         |   | 53,853  |  |   | 39,992  |  |   | 28,431 
|                        |  |         |         |        |   |         |  |        |         |         |   |         |  |   |         |  |   |        
|Net premiums            |  | $       | 147,039 |        | $ | 163,887 |  | $      | 251,750 |         | $ | 286,063 |  | $ | 280,807 |  | $ | 235,935
|                        |  |         |         |        |   |         |  |        |         |         |   |         |  |   |         |  |   |        



Reinsurance ceded reduced loss and loss
adjustment expenses incurred by $29.9 million, $35.8 million and $46.8 million in 2003, 2002 and 2001, respectively. Reinsurance ceded also reduced loss and loss adjustment expense reserves by $108.9 million, $85.9 million and $74.2 million in 2003,
2002 and 2001, respectively. Reinsurance ceded reduced losses and loss adjustment expenses paid by $13.1 million, $24.1 million and $12.7 million in 2003, 2002 and 2001, respectively.



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



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$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 both 2002 and 2003, 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 in 2002 and 2003 for approximately 92% and 84%, respectively, 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, $3.2
million and $3.0 million in 2001, 2002 and 2003, respectively, for losses in excess of the Companys retentions.



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 Re whereby they ceded the majority of the written and earned premium related to their assumed reinsurance program after July 1, 2002. The GoshawK Re agreement covers the 2001 and 2002
underwriting years of the assumed business. Written premiums ceded under this agreement were $129.3 million in 2002 and $38.0 million in 2003. Earned premiums ceded under this agreement were $71.4 million in 2002 and $89.2 million in 2003. 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 Re reinsurance agreement has both prospective and retroactive elements as defined in 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 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 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 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 $15.4 million for 2003. The assumed reinsurance premium written in 2003 ceded to GoshawK Re 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 Re 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 and $5.5 million was expensed in 2002 and 2003, respectively,
related to the additional premium. The additional premium obligation is collateralized by securities. The reinsurance agreement requires funds to be held in trust to collateralize GoshawK Res obligations under the agreement. As of December 31,
2003, the market value and assets held in the trust was $37.2 million. 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%.



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NOTE 5.    FEDERAL INCOME TAXES



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



|                        |  |                |        |   |      |   |         |      |  |   |         |  
|----------------------- |  | -------------- | ------ | - | ---- | - | ------- | ---- |  | - | ------- | -
|YEAR ENDED DECEMBER 31, |  | 2003           |        |   | 2002 |   |         | 2001 | 
|                        | 
|                        | 
|                        |  | (In Thousands) |       
|Current                 |  | $              |       |   |      | $ | (10,714 | )    |  | $ | (11,360 | )
|Deferred                |  |                | (7,411 | ) |      |   | (11,928 | )    |  |   | (21,546 | )
|                        |  |                |        |   |      |   |         |      |  |   |         |  
|Total                   |  | $              | (7,411 | ) |      | $ | (22,642 | )    |  | $ | (32,906 | )
|                        |  |                |        |   |      |   |         |      |  |   |         |  



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



|                                             |  |                |        |   |      |   |         |      |  |   |         |  
|-------------------------------------------- |  | -------------- | ------ | - | ---- | - | ------- | ---- |  | - | ------- | -
|YEAR ENDED DECEMBER 31,                      |  | 2003           |        |   | 2002 |   |         | 2001 | 
|                                             | 
|                                             | 
|                                             |  | (In Thousands) |       
|Federal income tax benefit at 35%            |  | $              | (7,076 | ) |      | $ | (21,358 | )    |  | $ | (31,809 | )
|Increase (decrease) in taxes resulting from: |  |                |        |   |      |   |         |      |  |   |         |  
|Tax-exempt interest                          |  |                |       |   |      |   | (1,557  | )    |  |   | (2,597  | )
|Dividends received deduction                 |  |                | (102   | ) |      |   | (70     | )    |  |   |        |  
|Goodwill                                     |  |                |       |   |      |   |        |      |  |   | 210     |  
|Other                                        |  |                | (233   | ) |      |   | 343     |      |  |   | 1,290   |  
|                                             |  |                |        |   |      |   |         |      |  |   |         |  
|Total federal income tax benefit reported    |  | $              | (7,411 | ) |      | $ | (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,                               |  | 2003           |        | 2002
|                                          
|                                           | 
|                                           |  | (In Thousands)
|Deferred tax assets:                       |  |                |        |      |   |       
|Discounting of loss reserves               |  | $              | 19,547 |      | $ | 20,873
|Net operating loss carryforward            |  |                | 13,950 |      |   | 9,447 
|AMT credit carryforward                    |  |                | 5,442  |      |   | 5,442 
|Unearned premium                           |  |                | 3,549  |      |   | 2,766 
|Equity investment impairment               |  |                | 3,366  |      |   |      
|Deferred compensation and retirement plans |  |                | 2,682  |      |   | 2,226 
|Other                                      |  |                | 1,327  |      |   | 1,033 
|                                           |  |                |        |      |   |       
|Total deferred tax assets                  |  |                | 49,863 |      |   | 41,787
|Deferred tax liabilities:                  |  |                |        |      |   |       
|Deferred acquisition costs                 |  |                | 3,296  |      |   | 2,401 
|Unrealized investment gains                |  |                | 2,842  |      |   | 7,030 
|                                           |  |                |        |      |   |       
|Total deferred tax liabilities             |  |                | 6,138  |      |   | 9,431 
|                                           |  |                |        |      |   |       
|Net deferred tax assets                    |  | $              | 43,725 |      | $ | 32,356
|                                           |  |                |        |      |   |       



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Federal income taxes recovered in 2003 and 2002 were $10.7 million and $20.9 million, respectively. Federal income taxes paid during 2001 were $1.0
million.



At December 31, 2003, the Company had a net operating loss carryforward of
$39.9 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 allowed 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. The Company fully utilized its
carryback with the Companys losses for 2001 and 2002.



A valuation allowance
against deferred tax assets is estimated and recorded if it is more likely than not that all or some portion of the benefits related to the deferred tax assets will not realized. Valuation allowances are based on estimates of taxable income and the
period over which deferred tax assets will be recoverable. The Companys future income estimates indicate that it is more likely than not that the deferred tax assets will be fully realized. The Companys non-core and reinsurance
operations that contributed to the losses incurred in 2001 through 2003 are now in run-off and the remaining core business of healthcare liability insurance written primarily in California has generated taxable income since inception.



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 and deferred income taxes.
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,                              |  | 2003           |         |   | 2002 |   |         | 2001 | 
|                                          | 
|                                          | 
|                                          |  | (In Thousands) |        
|Statutory net loss for the year ended     |  | $              | (19,874 | ) |      | $ | (23,164 | )    |  | $ | (83,268 | )
|Statutory capital and surplus at year end |  |                | 140,216 |   |      |   | 155,785 |      |  |   | 181,916 |  



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, 2003, the amount of dividends available to SCPIE Holdings from its insurance subsidiaries during 2004
not limited by such restrictions is approximately $14.0 million.



NOTE
7.    BENEFIT PLANS



The Company has 401(k) defined
contribution, supplemental executive retirement, and noncontributory defined benefit pension plans, which provide retirement benefits to its employees. Under the 401(k) plan, the Company contributes a 200% matching contribution based on the first 3%
of employees compensation plus a discretionary contribution of 1% of employees compensation.



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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.



In February 2004, the Company amended the supplemental executive retirement plan to freeze the benefits
accrued to vested participants as of the date of the amendment and cease any further vesting of benefits under the plan. There were four vested executives as of the date of the amendment.



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



|                             |  |                |      |   |                   |   |      |      |  |   |      |   |      |   |      |  |   |     |  |   |    
|---------------------------- |  | -------------- | ---- | - | ----------------- | - | ---- | ---- |  | - | ---- | - | ---- | - | ---- |  | - | --- |  | - | ---
|                             |  | Qualified Plan |      |   | Supplemental Plan
|YEAR ENDED DECEMBER 31,      |  | 2003           |      |   | 2002              |   |      | 2001 |  |   | 2003 |   | 2002 |   | 2001
|                            
|                             | 
|                             |  | (In Thousands)
|Service cost                 |  | $              |     |   |                   | $ |     |      |  | $ |     |   |      | $ | 436  |  | $ | 272 |  | $ | 199
|Interest cost                |  |                | 271  |   |                   |   | 273  |      |  |   | 268  |   |      |   | 293  |  |   | 259 |  |   | 226
|Actual return on plan assets |  |                | (238 | ) |                   |   | (257 | )    |  |   | (276 | ) |      |   |     |  |   |    |  |   |   
|Amortization of:             |  |                |      |   |                   |   |      |      |  |   |      |   |      |   |      |  |   |     |  |   |    
|Transition asset             |  |                | (4   | ) |                   |   | (4   | )    |  |   | (4   | ) |      |   |      |  |   |     |  |   |    
|Prior service cost           |  |                |      |   |                   |   |      |      |  |   |      |   |      |   | 100  |  |   | 84  |  |   | 84 
|Actuarial loss               |  |                | 110  |   |                   |   | 40   |      |  |   |     |   |      |   |     |  |   | 16  |  |   |   
|                             |  |                |      |   |                   |   |      |      |  |   |      |   |      |   |      |  |   |     |  |   |    
|Net pension expense (income) |  | $              | 139  |   |                   | $ | 52   |      |  | $ | (12  | ) |      | $ | 829  |  | $ | 631 |  | $ | 509
|                             |  |                |      |   |                   |   |      |      |  |   |      |   |      |   |      |  |   |     |  |   |    



Pension expense for all plans was $1.9, $1.6 and
$1.0 for the years ended December 31, 2002, 2002 and 2001, respectively.



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



|                                                                      |  |                |        |   |                   |   |        |  
|--------------------------------------------------------------------- |  | -------------- | ------ | - | ----------------- | - | ------ | -
|                                                                      |  | Qualified Plan |        |   | Supplemental Plan |  
|DECEMBER 31,                                                          |  | 2003           |        |   | 2003              |  
|                                                                      | 
|                                                                      | 
|                                                                      |  | (In Thousands) |       
|Change in Benefit Obligation                                          |  |                |        |   |                   |   |        |  
|Net benefit obligation at beginning of year                           |  | $              | 4,438  |   |                   | $ | 4,296  |  
|Service cost                                                          |  |                |       |   |                   |   | 436    |  
|Interest cost                                                         |  |                | 271    |   |                   |   | 293    |  
|Plan amendments                                                       |  |                |       |   |                   |   | 88     |  
|Actuarial loss                                                        |  |                | 106    |   |                   |   | (45    | )
|Gross benefits paid                                                   |  |                | (125   | ) |                   |   |       |  
|                                                                      |  |                |        |   |                   |   |        |  
|Net benefit obligation at end of year                                 |  | $              | 4,690  |   |                   | $ | 5,068  |  
|                                                                      |  |                |        |   |                   |   |        |  
|Change in Plan Assets                                                 |  |                |        |   |                   |   |        |  
|Fair value of plan assets at beginning of year                        |  | $              | 2,897  |   |                   |   |       |  
|Actual return on plan assets                                          |  |                | 595    |   |                   |   |       |  
|Employer contributions                                                |  |                | 175    |   |                   |   |       |  
|Gross benefits paid                                                   |  |                | (125   | ) |                   |   |       |  
|                                                                      |  |                |        |   |                   |   |        |  
|Fair value of plan assets at end of year                              |  | $              | 3,542  |   |                   |   |       |  
|                                                                      |  |                |        |   |                   |   |        |  
|Funded status (underfunded)                                           |  | $              | (1,149 | ) |                   | $ | (5,068 | )
|Unrecognized actuarial loss                                           |  |                | 1,479  |   |                   |   | 561    |  
|Unrecognized prior service cost                                       |  |                |       |   |                   |   | 80     |  
|Unrecognized net transition asset                                     |  |                | (4     | ) |                   |   |       |  
|                                                                      |  |                |        |   |                   |   |        |  
|Accrued pension expense                                               |  | $              | 326    |   |                   | $ | (4,427 | )
|                                                                      |  |                |        |   |                   |   |        |  
|Amounts recognized in the statement of financial position consists of |  |                |        |   |                   |   |        |  
|Prepaid benefit cost                                                  |  | $              | 326    |   |                   | $ |       |  
|Accrued benefit liability                                             |  |                |       |   |                   |   | (4,427 | )
|Additional minimum liability                                          |  |                | (1,475 | ) |                   |   | (35    | )
|Intangible asset                                                      |  |                |       |   |                   |   | 35     |  
|Accumulated other comprehensive income                                |  |                | 1,475  |   |                   |   |       |  
|                                                                      |  |                |        |   |                   |   |        |  
|Net amount recognized                                                 |  | $              | 326    |   |                   | $ | (4,427 | )
|                                                                      |  |                |        |   |                   |   |        |  



|                               |  |                |   |  |                   |   |  |      |   |  |      |   |  |      |   |  |      |  
|------------------------------ |  | -------------- | - |  | ----------------- | - |  | ---- | - |  | ---- | - |  | ---- | - |  | ---- | -
|                               |  | Qualified Plan |   |  | Supplemental Plan |  
|DECEMBER 31,                   |  | 2003           |   |  | 2002              |   |  | 2001 |   |  | 2003 |   |  | 2002 |   |  | 2001 |  
|                               | 
|Weighted-average assumptions   |  |                |   |  |                   |   |  |      |   |  |      |   |  |      |   |  |      |  
|Discount rate                  |  | 6.0            | % |  | 6.5               | % |  | 7.0  | % |  | 6.0  | % |  | 6.5  | % |  | 7.0  | %
|Expected return on plan assets |  | 8.0            | % |  | 8.0               | % |  | 8.0  | % |  | N/A  |   |  | N/A  |   |  | N/A  |  
|Rate of compensation increase  |  | N/A            |   |  | N/A               |   |  | N/A  |   |  | 5.0  | % |  | 5.0  | % |  | 5.0  | %



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



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promissory stock subscription notes in the aggregate amount of $4.1 million to fund this purchase. As of December 31, 2003, $738,000 of the promissory
stock subscription notes had 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



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. 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 and $1.4 million in 2002 and 2001, 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, 2003, 2002 and 2001 was $3.1 million, $3.5
million and $3.5 million, respectively. Future minimum payments under noncancelable operating leases with initial terms of one year or more consist of the following at December 31, 2004 (in thousands):



|                             |  |   |       
|---------------------------- |  | - | ------
|2004                         |  | $ | 2,934 
|2005                         |  |   | 3,006 
|2006                         |  |   | 3,035 
|2007                         |  |   | 3,177 
|2008                         |  |   | 2,640 
|                             |  |   |       
|Total minimum lease payments |  | $ | 14,792
|                             |  |   |       



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.



Highlands Insurance Group



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. In February 2002, the Texas
Department of Insurance placed the principal HIG insurance company subsidiaries under its supervision while HIG voluntarily liquidated their claim liabilities.



During 2002 and 2003, all of the HIG insurance company subsidiaries (with the exception of a California subsidiary) were merged into a single Texas domiciled subsidiary,
Highlands Insurance Company (Highlands). Highlands has advised the



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Company that at December 31, 2003, the HIG insurance company subsidiaries had paid losses and LAE under the subject policies of $65.0 million and had
established case loss reserves of $12.5 million, net of reinsurance. Based on a limited review of the exposures remaining, the Company estimates that incurred but not reported losses range from $6.7 million to $10.0 million for a total loss and loss
expense reserve of $19.2 million to $22.5 million. This estimate is not based on a full reserve analysis of the exposures. To the extent Highlands is declared insolvent at some future date by a court of competent jurisdiction and is 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 would be subrogated to the rights of the policyholders as creditors of Highlands. The Company may also be
entitled to indemnification of a portion of this loss from certain of the reinsurers of Highlands. The quarterly financial statement of Highlands filed with the Texas Department of Insurance as of September 30, 2003, showed $660.4 million in assets
and policyholder surplus of $5.2 million.



On November 6, 2003, the State of Texas
obtained an order in the Texas District Court appointing the Texas Insurance Commissioner as the permanent Receiver of Highlands and placing the Receiver in possession of all assets of Highlands. The order specifically enjoined various persons,
including the plaintiff in a California asbestos action (against Highlands and other insurers) who had obtained a $57.4 million judgment against Highlands, from taking any action against the assets of Highlands. The order expressly provided that it
did not constitute a finding of Highlands insolvency nor an authorization to liquidate Highlands. On December 1, 2003, however, the State of Texas filed an application to liquidate Highlands, to forestall certain actions taken by the plaintiff
in the California action to perfect a judgment lien on certain assets of Highlands. The State of Texas alleged that these actions would make it unfeasible to rehabilitate Highlands. The California plaintiff has disputed these allegations and filed
an opposition to the entry of any liquidation order. A hearing on the application for liquidation was scheduled for March 9, 2004 in the Texas District Court. On February 27, 2004, the State of Texas and the California plaintiff filed a stipulation
with the Texas court postponing the liquidation hearing to no earlier than August 9, 2004. If an order of liquidation is ultimately entered and becomes final, the Company would likely be required to assume Highlands then remaining obligations
under the subject policies.



The California domiciled HIG subsidiary has been the subject
of regulatory liquidation. On August 1, 2003, the Superior Court of the County of Orange, California, upon an application filed by the California Insurance Commissioner, declared the California domiciled HIG insurance company subsidiary insolvent
and appointed the Insurance Commissioner liquidator of the subsidiary. That subsidiary had established case loss reserves under the subject policies of $900,000 at December 31, 2003.



Letters of Credit



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, 2003, letter of credit issuance under the facility was approximately $47.3 million. Securities of $52.1 million are pledged as collateral under
the facility.



At December 31, 2003, the Companys investments in fixed-maturity
securities with a fair value of $9.1 million were on deposit with state insurance departments to satisfy regulatory requirements.



California Franchise Tax Board



In the third quarter of 2002, the Company received a notice of assessment from the California Franchise Tax Board (FTB) for the 1997 to 2000 tax years 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



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SCPIE HOLDINGS INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



dividends received by holding companies from their insurance company subsidiaries during the tax years ended on or after December 1, 1997. 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 2003 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.



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



|                                         |  |                   |  |                                  |       |                   |           |                                  |   |                   |  |                                  |  |   |      
|---------------------------------------- |  | ----------------- |  | -------------------------------- | ----- | ----------------- | --------- | -------------------------------- | - | ----------------- |  | -------------------------------- |  | - | -----
|                                         |  | 2003              |  | 2002                             |       | 2001             
|                                         |  | Number of Options |  | Weighted- Average Exercise Price |       | Number of Options |           | Weighted- Average Exercise Price |   | Number of Options |  | Weighted- Average Exercise Price
|                                        
|Options outstanding at beginning of year |  | 1,143,760         |  | $                                | 22.87 |                   | 1,211,490 |                                  | $ | 23.48             |  | 608,690                          |  | $ | 30.71
|Granted during year                      |  | 457,500           |  |                                  | 6.03  |                   | 80,000    |                                  |   | 15.74             |  | 629,000                          |  |   | 16.76
|Exercised during year                    |  |                  |  |                                  |       |                   |          |                                  |   |                   |  |                                 |  |   |      
|Forfeited during year                    |  | 454,093           |  | $                                | 29.77 |                   | 147,730   |                                  | $ | 24.03             |  | 26,200                           |  | $ | 30.34
|                                         |  |                   |  |                                  |       |                   |           |                                  |   |                   |  |                                  |  |   |      
|Options outstanding at end of year       |  | 1,147,167         |  | $                                | 13.42 |                   | 1,143,760 |                                  | $ | 22.87             |  | 1,211,490                        |  | $ | 23.48
|                                         |  |                   |  |                                  |       |                   |           |                                  |   |                   |  |                                  |  |   |      



Forfeited during the year in the table above
includes 417,200 options surrendered in connection with a tender offer in 2003 to purchase the options for $1.00 per option share. The purchase price of the surrendered options was expensed as compensation.



Information about stock options outstanding at December 31, 2003, is summarized as follows:



|                                   |  |                     |  |                                              |  |                                  |       |                    |         |                                  |   |      
|---------------------------------- |  | ------------------- |  | -------------------------------------------- |  | -------------------------------- | ----- | ------------------ | ------- | -------------------------------- | - | -----
|                                   |  | Options Outstanding |  | Options Exercisable                         
|                                   |  | Number Outstanding  |  | Weighted- Average Remaining Contractual Life |  | Weighted- Average Exercise Price |       | Number Exercisable |         | Weighted- Average Exercise Price
|                                  
|Range of Exercise Prices:          |  |                     |  |                                              |  |                                  |       |                    |         |                                  |   |      
|$ 5.10$12.90                      |  | 457,500             |  | 8.78                                         |  | $                                | 5.81  |                    | 25,334  |                                  | $ | 1.18 
|$16.70$19.32                      |  | 619,667             |  | 7.85                                         |  |                                  | 16.76 |                    | 346,995 |                                  |   | 16.78
|$24.25$36.50                      |  | 70,000              |  | 4.80                                         |  |                                  | 33.54 |                    | 70,000  |                                  |   | 33.45
|                                   |  |                     |  |                                              |  |                                  |       |                    |         |                                  |   |      
|Options outstanding at end of year |  | 1,147,167           |  | 8.08                                         |  | $                                | 13.42 |                    | 442,329 |                                  | $ | 18.53
|                                   |  |                     |  |                                              |  |                                  |       |                    |         |                                  |   |      



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SCPIE HOLDINGS INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



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:



|                                                                                                                                           |  |      |         |   |      |   |         |      |  |   |         |  
|------------------------------------------------------------------------------------------------------------------------------------------ |  | ---- | ------- | - | ---- | - | ------- | ---- |  | - | ------- | -
|                                                                                                                                           |  | 2003 |         |   | 2002 |   |         | 2001 | 
|Net loss as reported                                                                                                                       |  | $    | (12,806 | ) |      | $ | (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 |  |      | (861    | ) |      |   | (1,102  | )    |  |   | (1,865  | )
|                                                                                                                                           |  |      |         |   |      |   |         |      |  |   |         |  
|Pro forma net loss                                                                                                                         |  | $    | (13,667 | ) |      | $ | (39,484 | )    |  | $ | (59,841 | )
|Loss per share                                                                                                                             |  |      |         |   |      |   |         |      |  |   |         |  
|Basicas reported                                                                                                                         |  | $    | (1.37   | ) |      | $ | (4.12   | )    |  | $ | (6.22   | )
|Basicproforma                                                                                                                            |  | $    | (1.46   | ) |      | $ | (4.24   | )    |  | $ | (6.42   | )
|Dilutedas reported                                                                                                                       |  | $    | (1.37   | ) |      | $ | (4.12   | )    |  | $ | (6.22   | )
|Dilutedproforma                                                                                                                          |  | $    | (1.46   | ) |      | $ | (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.



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,                                                                                           |  | 2003 |         |   | 2002 |   |         | 2001 | 
|                                                                                                       | 
|Numerator:                                                                                             |  |      |         |   |      |   |         |      |  |   |         |  
|Net loss                                                                                               |  | $    | (12,806 | ) |      | $ | (38,382 | )    |  | $ | (57,976 | )
|Numerator for:                                                                                         |  |      |         |   |      |   |         |      |  |   |         |  
|Basic loss per share of common stock                                                                   |  | $    | (12,806 | ) |      | $ | (38,382 | )    |  | $ | (57,976 | )
|Diluted loss per share of common stock                                                                 |  | $    | (12,806 | ) |      | $ | (38,382 | )    |  | $ | (57,976 | )
|Denominator:                                                                                           |  |      |         |   |      |   |         |      |  |   |         |  
|Denominator for basic earnings per share of common stockweighted-average shares outstanding           |  |      | 9,352   |   |      |   | 9,322   |      |  |   | 9,333   |  
|Effect of dilutive securities:                                                                         |  |      |         |   |      |   |         |      |  |   |         |  
|Stock options                                                                                          |  | $    |        |   |      | $ |        |      |  | $ |        |  
|                                                                                                       |  |      |         |   |      |   |         |      |  |   |         |  
|Denominator for diluted earnings per share of common stockadjustedweighted-average shares outstanding |  | $    | 9,352   |   |      | $ | 9,322   |      |  | $ | 9,333   |  
|                                                                                                       |  |      |         |   |      |   |         |      |  |   |         |  
|Basic loss per share of common stock                                                                   |  | $    | (1.37   | ) |      | $ | (4.12   | )    |  | $ | (6.22   | )
|                                                                                                       |  |      |         |   |      |   |         |      |  |   |         |  
|Diluted loss per share of common stock                                                                 |  | $    | (1.37   | ) |      | $ | (4.12   | )    |  | $ | (6.22   | )
|                                                                                                       |  |      |         |   |      |   |         |      |  |   |         |  



For the years ended December 31, 2003, 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.



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SCPIE HOLDINGS INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



NOTE 12.    QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)



The unaudited quarterly results of operations for 2003 and 2002 are summarized as follows:



|                                                  |  |                                       |        |      |     |   |        |  |   |         |   |     |   |        |  |   |        |  |   |         |   |  |   |         |   |  |   |         |  
|------------------------------------------------- |  | ------------------------------------- | ------ | ---- | --- | - | ------ |  | - | ------- | - | --- | - | ------ |  | - | ------ |  | - | ------- | - |  | - | ------- | - |  | - | ------- | -
|                                                  |  | 2003                                  |        | 2002 |    
|                                                  |  | 1ST                                   |        |      | 2ND |   | 3RD    |  |   | 4TH     |   | 1ST |   | 2ND    |  |   | 3RD    |  |   | 4TH     |  
|                                                  | 
|                                                  | 
|                                                  |  | (In Thousands, Except Per-Share Data) |       
|Premiums earned and other revenues                |  | $                                     | 54,762 |      |     | $ | 41,258 |  | $ | 35,110  |   |     | $ | 33,693 |  | $ | 81,405 |  | $ | 79,686  |   |  | $ | 75,682  |   |  | $ | 51,320  |  
|Net investment income                             |  |                                       | 5,590  |      |     |   | 5,330  |  |   | 4,130   |   |     |   | 6,904  |  |   | 8,538  |  |   | 7,917   |   |  |   | 8,448   |   |  |   | 7,328   |  
|Realized investment gains (losses)                |  |                                       | 3,090  |      |     |   | 837    |  |   | (8,191  | ) |     |   | 4,480  |  |   | 335    |  |   | 1,041   |   |  |   | 4,003   |   |  |   | 13,531  |  
|Net income (loss)                                 |  |                                       | (1,222 | )    |     |   | 612    |  |   | (14,816 | ) |     |   | 2,620  |  |   | 926    |  |   | (11,989 | ) |  |   | (11,445 | ) |  |   | (15,874 | )
|Basic earnings (loss) per share of common stock   |  | $                                     | (0.13  | )    |     | $ | 0.07   |  | $ | (1.58   | ) |     | $ | 0.28   |  | $ | 0.10   |  | $ | (1.29   | ) |  | $ | (1.23   | ) |  | $ | (1.70   | )
|Diluted earnings (loss) per share of common stock |  | $                                     | (0.13  | )    |     | $ | 0.07   |  | $ | (1.58   | ) |     | $ | 0.28   |  | $ | 0.10   |  | $ | (1.29   | ) |  | $ | (1.23   | ) |  | $ | (1.70   | )



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.



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, 2003              |  | Direct Healthcare Liability Insurance |         |   | Assumed Reinsurance |   |         | Other |  | Total |        
|                                          | 
|                                          | 
|                                          |  | (In Thousands)                        |        
|Premiums written                          |  | $                                     | 128,589 |   |                     | $ | 18,450  |       |  |       |         |  | $ | 147,039 |  
|                                          |  |                                       |         |   |                     |   |         |       |  |       |         |  |   |         |  
|Premiums earned                           |  | $                                     | 131,460 |   |                     | $ | 32,427  |       |  |       |         |  | $ | 163,887 |  
|Net investment income                     |  |                                       |        |   |                     |   |        |       |  | $     | 21,954  |  |   | 21,954  |  
|Realized investment gains                 |  |                                       |        |   |                     |   |        |       |  |       | 216     |  |   | 216     |  
|Other revenue                             |  |                                       |        |   |                     |   |        |       |  |       | 936     |  |   | 936     |  
|                                          |  |                                       |         |   |                     |   |         |       |  |       |         |  |   |         |  
|Total revenues                            |  |                                       | 131,460 |   |                     |   | 32,427  |       |  |       | 23,106  |  |   | 186,993 |  
|Losses and loss adjustment expenses       |  |                                       | 133,034 |   |                     |   | 28,332  |       |  |       |        |  |   | 161,366 |  
|Other operating expenses                  |  |                                       | 28,234  |   |                     |   | 17,610  |       |  |       |        |  |   | 45,844  |  
|                                          |  |                                       |         |   |                     |   |         |       |  |       |         |  |   |         |  
|Total expenses                            |  |                                       | 161,268 |   |                     |   | 45,942  |       |  |       |        |  |   | 207,210 |  
|                                          |  |                                       |         |   |                     |   |         |       |  |       |         |  |   |         |  
|Segment income (loss) before income taxes |  | $                                     | (29,808 | ) |                     | $ | (13,515 | )     |  | $     | 23,106  |  | $ | (20,217 | )
|                                          |  |                                       |         |   |                     |   |         |       |  |       |         |  |   |         |  
|Combined ratio                            |  |                                       | 122.7   | % |                     |   | 141.7   | %     |  |       |        |  |   | 126.5   | %
|Segment assets                            |  | $                                     | 28,042  |   |                     | $ | 253,315 |       |  | $     | 709,893 |  | $ | 991,250 |  



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SCPIE HOLDINGS INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



|                                          |  |                                       |          |   |                     |   |         |       |  |       |         |  |   |           |  
|----------------------------------------- |  | ------------------------------------- | -------- | - | ------------------- | - | ------- | ----- |  | ----- | ------- |  | - | --------- | -
|Year Ended December 31, 2002              |  | Direct Healthcare Liability Insurance |          |   | Assumed Reinsurance |   |         | Other |  | Total |        
|                                          | 
|                                          | 
|                                          |  | (In Thousands)                        |         
|Premiums written                          |  | $                                     | 138,901  |   |                     | $ | 112,849 |       |  |       |         |  | $ | 251,750   |  
|                                          |  |                                       |          |   |                     |   |         |       |  |       |         |  |   |           |  
|Premiums earned                           |  | $                                     | 163,519  |   |                     | $ | 122,544 |       |  |       |         |  | $ | 286,063   |  
|Net investment income                     |  |                                       |         |   |                     |   |        |       |  | $     | 32,231  |  |   | 32,231    |  
|Realized investment gains                 |  |                                       |         |   |                     |   |        |       |  |       | 18,910  |  |   | 18,910    |  
|Other revenue                             |  |                                       |         |   |                     |   |        |       |  |       | 2,030   |  |   | 2,030     |  
|                                          |  |                                       |          |   |                     |   |         |       |  |       |         |  |   |           |  
|Total revenues                            |  |                                       | 163,519  |   |                     |   | 122,544 |       |  |       | 53,171  |  |   | 339,234   |  
|Losses and loss adjustment expenses       |  |                                       | 197,456  |   |                     |   | 123,060 |       |  |       |        |  |   | 320,516   |  
|Other operating expenses                  |  |                                       | 32,398   |   |                     |   | 47,278  |       |  |       |        |  |   | 79,676    |  
|Interest expense                          |  |                                       |          |   |                     |   |        |       |  |       | 66      |  |   | 66        |  
|                                          |  |                                       |          |   |                     |   |         |       |  |       |         |  |   |           |  
|Total expenses                            |  |                                       | 229,854  |   |                     |   | 170,338 |       |  |       | 66      |  |   | 400,258   |  
|                                          |  |                                       |          |   |                     |   |         |       |  |       |         |  |   |           |  
|Segment income (loss) before income taxes |  | $                                     | (66,335  | ) |                     | $ | (47,794 | )     |  | $     | 53,105  |  | $ | (61,024   | )
|                                          |  |                                       |          |   |                     |   |         |       |  |       |         |  |   |           |  
|Combined ratio                            |  |                                       | 140.6    | % |                     |   | 139.0   | %     |  |       |        |  |   | 139.9     | %
|Segment assets                            |  | $                                     | 105,689  |   |                     | $ | 171,439 |       |  | $     | 786,638 |  | $ | 1,063,766 |  
|                                          |  |                                       |          |  
|Year Ended December 31, 2001              |  | Direct HealthcareLiability Insurance  |          |   | AssumedReinsurance  |   |         | Other |  | Total |        
|                                          | 
|                                          | 
|                                          |  | (In Thousands)                        |         
|Premiums written                          |  | $                                     | 168,600  |   |                     | $ | 112,207 |       |  |       |         |  | $ | 280,807   |  
|                                          |  |                                       |          |   |                     |   |         |       |  |       |         |  |   |           |  
|Premiums earned                           |  | $                                     | 156,442  |   |                     | $ | 79,493  |       |  |       |         |  | $ | 235,935   |  
|Net investment income                     |  |                                       |         |   |                     |   |        |       |  | $     | 35,895  |  |   | 35,895    |  
|Realized investment gains                 |  |                                       |         |   |                     |   |        |       |  |       | 5,707   |  |   | 5,707     |  
|Other revenue                             |  |                                       |         |   |                     |   |        |       |  |       | 2,202   |  |   | 2,202     |  
|                                          |  |                                       |          |   |                     |   |         |       |  |       |         |  |   |           |  
|Total revenues                            |  |                                       | 156,442  |   |                     |   | 79,493  |       |  |       | 43,804  |  |   | 279,739   |  
|Losses and loss adjustment expenses       |  |                                       | 220,311  |   |                     |   | 84,162  |       |  |       |        |  |   | 304,473   |  
|Other operating expenses                  |  |                                       | 45,820   |   |                     |   | 18,912  |       |  |       |        |  |   | 64,732    |  
|Interest expense                          |  |                                       |         |   |                     |   |        |       |  |       | 1,416   |  |   | 1,416     |  
|                                          |  |                                       |          |   |                     |   |         |       |  |       |         |  |   |           |  
|Total expenses                            |  |                                       | 266,131  |   |                     |   | 103,074 |       |  |       | 1,416   |  |   | 370,621   |  
|                                          |  |                                       |          |   |                     |   |         |       |  |       |         |  |   |           |  
|Segment income (loss) before income taxes |  | $                                     | (109,689 | ) |                     | $ | (23,581 | )     |  | $     | 42,388  |  | $ | (90,882   | )
|                                          |  |                                       |          |   |                     |   |         |       |  |       |         |  |   |           |  
|Combined ratio                            |  |                                       | 170.1    | % |                     |   | 129.7   | %     |  |       |        |  |   | 156.5     | %
|Segment assets                            |  | $                                     | 123,003  |   |                     | $ | 58,200  |       |  | $     | 796,443 |  | $ | 977,646   |  



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Schedule IICondensed Financial Information of Registrant



SCPIE HOLDINGS INC.



CONDENSED BALANCE
SHEETS

(In Thousands, Except Share Data)



|                                                                                                                                                           |  |      |         |   |      |   |         |  
|---------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---- | ------- | - | ---- | - | ------- | -
|DECEMBER 31,                                                                                                                                               |  | 2003 |         |   | 2002 |  
|                                                                                                                                                           | 
|ASSETS                                                                                                                                                     |  |      |         |   |      |   |         |  
|Securities available for sale:                                                                                                                             |  |      |         |   |      |   |         |  
|Equity investments, at fair value (cost: 2003 $1,871; 2002 $6,771)                                                                                       |  | $    | 1,871   |   |      | $ | 6,611   |  
|Cash and cash equivalents                                                                                                                                  |  |      | 9,499   |   |      |   | 10,456  |  
|Investment in subsidiaries                                                                                                                                 |  |      | 186,379 |   |      |   | 207,436 |  
|                                                                                                                                                           |  |      |         |   |      |   |         |  
|Total investments                                                                                                                                          |  |      | 197,749 |   |      |   | 224,503 |  
|Federal income tax receivable                                                                                                                              |  |      |        |   |      |   | 1,338   |  
|Deferred federal income taxes                                                                                                                              |  |      | 3,377   |   |      |   | 1,004   |  
|Other assets                                                                                                                                               |  |      | 3,589   |   |      |   | 1,546   |  
|                                                                                                                                                           |  |      |         |   |      |   |         |  
|Total assets                                                                                                                                               |  | $    | 204,715 |   |      | $ | 228,391 |  
|                                                                                                                                                           |  |      |         |   |      |   |         |  
|LIABILITIES                                                                                                                                                |  |      |         |   |      |   |         |  
|Due to affiliates                                                                                                                                          |  | $    | 527     |   |      | $ | 20      |  
|Other liabilities                                                                                                                                          |  |      |        |   |      |   | 1,205   |  
|                                                                                                                                                           |  |      |         |   |      |   |         |  
|Total liabilities                                                                                                                                          |  |      | 527     |   |      |   | 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,20039,371,933 shares
outstanding;20029,333,807 shares outstanding |  |      | 1       |   |      |   | 1       |  
|Additional paid-in capital                                                                                                                                 |  |      | 37,281  |   |      |   | 37,805  |  
|Retained earnings                                                                                                                                          |  |      | 264,063 |   |      |   | 280,609 |  
|Treasury stock at cost (20032,920,158 shares and 20022,958,284 shares)                                                                                   |  |      | (98,006 | ) |      |   | (98,830 | )
|Stock subscription notes receivable                                                                                                                        |  |      | (3,312  | ) |      |   | (3,592  | )
|Accumulated other comprehensive income                                                                                                                     |  |      | 4,161   |   |      |   | 11,173  |  
|                                                                                                                                                           |  |      |         |   |      |   |         |  
|Total stockholders equity                                                                                                                                 |  |      | 204,188 |   |      |   | 227,166 |  
|                                                                                                                                                           |  |      |         |   |      |   |         |  
|Total liabilities and stockholders equity                                                                                                                 |  | $    | 204,715 |   |      | $ | 228,391 |  
|                                                                                                                                                           |  |      |         |   |      |   |         |  



See accompanying notes.



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Schedule IICondensed Financial Information of Registrant (continued)



SCPIE HOLDINGS INC.



CONDENSED STATEMENTS OF OPERATIONS

(In Thousands)



|                                                                            |  |                   |         |   |                   |   |         |                   |  |   |         |  
|--------------------------------------------------------------------------- |  | ----------------- | ------- | - | ----------------- | - | ------- | ----------------- |  | - | ------- | -
|FOR THE YEARS ENDED                                                         |  | DECEMBER 31, 2003 |         |   | DECEMBER 31, 2002 |   |         | DECEMBER 31, 2001 | 
|                                                                            | 
|Dividend from subsidiary                                                    |  | $                 |        |   |                   | $ | 3,000   |                   |  | $ |        |  
|Net investment income (loss)                                                |  |                   | (330    | ) |                   |   | 389     |                   |  |   | 1,585   |  
|Realized investment losses                                                  |  |                   | (2,750  | ) |                   |   | (2,312  | )                 |  |   |        |  
|Other income                                                                |  |                   |        |   |                   |   | 180     |                   |  |   | 1,564   |  
|Interest expenses                                                           |  |                   |        |   |                   |   | (66     | )                 |  |   | (1,416  | )
|Other expenses                                                              |  |                   | (2,421  | ) |                   |   | (4,881  | )                 |  |   | (1,743  | )
|                                                                            |  |                   |         |   |                   |   |         |                   |  |   |         |  
|Loss before federal income tax benefit and equity in losses of subsidiaries |  |                   | (5,501  | ) |                   |   | (3,690  | )                 |  |   | (10     | )
|Federal income tax benefit                                                  |  |                   | 486     |   |                   |   | 2,341   |                   |  |   | 535     |  
|                                                                            |  |                   |         |   |                   |   |         |                   |  |   |         |  
|Income (loss) before equity in losses of subsidiaries                       |  |                   | (5,015  | ) |                   |   | (1,349  | )                 |  |   | 525     |  
|Equity in losses of subsidiaries                                            |  |                   | (7,791  | ) |                   |   | (37,033 | )                 |  |   | (58,501 | )
|                                                                            |  |                   |         |   |                   |   |         |                   |  |   |         |  
|Net loss                                                                    |  | $                 | (12,806 | ) |                   | $ | (38,382 | )                 |  | $ | (57,976 | )
|                                                                            |  |                   |         |   |                   |   |         |                   |  |   |         |  







See accompanying notes.



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Schedule IICondensed Financial Information of Registrant (continued)



SCPIE HOLDINGS INC.



CONDENSED STATEMENTS OF CASH FLOWS

(In Thousands)



|                                                                                          |  |                   |         |   |                   |   |         |                   |  |   |         |  
|----------------------------------------------------------------------------------------- |  | ----------------- | ------- | - | ----------------- | - | ------- | ----------------- |  | - | ------- | -
|FOR THE YEARS ENDED                                                                       |  | DECEMBER 31, 2003 |         |   | DECEMBER 31, 2002 |   |         | DECEMBER 31, 2001 | 
|                                                                                          | 
|OPERATING ACTIVITIES                                                                      |  |                   |         |   |                   |   |         |                   |  |   |         |  
|Net loss                                                                                  |  | $                 | (12,806 | ) |                   | $ | (38,382 | )                 |  | $ | (57,976 | )
|Adjustments to reconcile net loss to net cash provided by (used in) operating activities: |  |                   |         |   |                   |   |         |                   |  |   |         |  
|Realized investment losses                                                                |  |                   | 2,750   |   |                   |   | 2,312   |                   |  |   |        |  
|Due to affiliates                                                                         |  |                   | 507     |   |                   |   | (410    | )                 |  |   | 795     |  
|Provision for amortization                                                                |  |                   |        |   |                   |   |        |                   |  |   | 670     |  
|Changes in other assets and liabilities                                                   |  |                   | (4,284  | ) |                   |   | (110    | )                 |  |   | 123     |  
|Equity in undistributed loss of subsidiaries                                              |  |                   | 7,791   |   |                   |   | 37,033  |                   |  |   | 56,573  |  
|                                                                                          |  |                   |         |   |                   |   |         |                   |  |   |         |  
|Net cash provided by (used in) operating activities                                       |  |                   | (6,042  | ) |                   |   | 443     |                   |  |   | 185     |  
|                                                                                          |  |                   |        
|INVESTING ACTIVITIES                                                                      |  |                   |         |   |                   |   |         |                   |  |   |         |  
|Salesequities                                                                            |  |                   | 8,245   |   |                   |   | 10,593  |                   |  |   |        |  
|Salesfixed maturities                                                                    |  |                   |        |   |                   |   |        |                   |  |   | 5,000   |  
|Purchaseequities                                                                         |  |                   |        |   |                   |   |        |                   |  |   | (2,500  | )
|                                                                                          |  |                   |         |   |                   |   |         |                   |  |   |         |  
|Cash provided by investing activities                                                     |  |                   | 8,245   |   |                   |   | 10,593  |                   |  |   | 2,500   |  
|                                                                                          |  |                   |        
|FINANCING ACTIVITIES                                                                      |  |                   |         |   |                   |   |         |                   |  |   |         |  
|Repayment of bank loan                                                                    |  |                   |        |   |                   |   | (9,000  | )                 |  |   | (18,000 | )
|Purchase of treasury stock, net and repayment of stock subscription notes                 |  |                   | 580     |   |                   |   | 613     |                   |  |   | (278    | )
|Cash dividends                                                                            |  |                   | (3,740  | ) |                   |   | (3,743  | )                 |  |   | (3,727  | )
|                                                                                          |  |                   |         |   |                   |   |         |                   |  |   |         |  
|Cash used in financing activities                                                         |  |                   | (3,160  | ) |                   |   | (12,130 | )                 |  |   | (22,005 | )
|                                                                                          |  |                   |        
|Decrease in cash and cash equivalents                                                     |  |                   | (957    | ) |                   |   | (1,094  | )                 |  |   | (19,320 | )
|Cash and cash equivalents at beginning of period                                          |  |                   | 10,456  |   |                   |   | 11,550  |                   |  |   | 30,870  |  
|                                                                                          |  |                   |         |   |                   |   |         |                   |  |   |         |  
|Cash and cash equivalents at end of period                                                |  | $                 | 9,499   |   |                   | $ | 10,456  |                   |  | $ | 11,550  |  
|                                                                                          |  |                   |         |   |                   |   |         |                   |  |   |         |  





See accompanying notes.



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Schedule IICondensed Financial Information of Registrant (continued)



SCPIE HOLDINGS INC.



NOTES TO CONDENSED FINANCIAL STATEMENTS

December 31, 2003



1. BASIS OF PRESENTATION



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



2. BANK LOAN



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. 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 $0.1 million
and $1.4 million in 2002 and 2001, respectively.



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Schedule III  Supplementary Insurance Information



SCPIE Holdings Inc. and Subsidiaries



Year Ended December
31, 2003

---



|                                      |  |                                  |       |                                                          |   |                   |  |                 |        |                       |   |                                                  |  |                                                   |        |                          |   |                  |  |   |        |  |   |        |  |   |        
|------------------------------------- |  | -------------------------------- | ----- | -------------------------------------------------------- | - | ----------------- |  | --------------- | ------ | --------------------- | - | ------------------------------------------------ |  | ------------------------------------------------- | ------ | ------------------------ | - | ---------------- |  | - | ------ |  | - | ------ |  | - | -------
|Segments                              |  | Deferred Policy Acquisition Cost |       | Future Policy Benefits, Losses, Claims and Loss Expenses |   | Unearned Premiums |  | 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 |  | $                                | 6,674 |                                                          | $ | 420,534           |  | $               | 37,050 |                       | $ | 131,460                                          |  | $                                                 |       |                          | $ | 133,034          |  | $ | 4,203  |  | $ | 24,031 |  | $ | 128,589
|Assumed Reinsurance (1)               |  |                                  | 2,742 |                                                          |   | 222,512           |  |                 | 13,657 |                       |   | 32,427                                           |  |                                                   |       |                          |   | 28,332           |  |   | 6,063  |  |   | 11,547 |  |   | 18,450 
|Other                                 |  |                                  |      |                                                          |   |                  |  |                 |       |                       |   |                                                 |  |                                                   | 21,954 |                          |   |                 |  |   |       |  |   |       |  |   |       
|                                      |  |                                  |       |                                                          |   |                   |  |                 |        |                       |   |                                                  |  |                                                   |        |                          |   |                  |  |   |        |  |   |        |  |   |        
|Total                                 |  | $                                | 9,416 |                                                          | $ | 643,046           |  | $               | 50,707 |                       | $ | 163,887                                          |  | $                                                 | 21,954 |                          | $ | 161,366          |  | $ | 10,266 |  | $ | 35,578 |  | $ | 147,039
|                                      |  |                                  |       |                                                          |   |                   |  |                 |        |                       |   |                                                  |  |                                                   |        |                          |   |                  |  |   |        |  |   |        |  |   |        

---

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



Year Ended December 31, 2002

---



|                                      |  |                                  |       |                                                          |   |                   |  |                 |        |                       |   |                                                  |  |                                                   |        |                          |   |                  |  |   |        |  |   |        |  |   |        
|------------------------------------- |  | -------------------------------- | ----- | -------------------------------------------------------- | - | ----------------- |  | --------------- | ------ | --------------------- | - | ------------------------------------------------ |  | ------------------------------------------------- | ------ | ------------------------ | - | ---------------- |  | - | ------ |  | - | ------ |  | - | -------
|Segments                              |  | Deferred Policy Acquisition Cost |       | Future Policy Benefits, Losses, Claims and Loss Expenses |   | Unearned Premiums |  | 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          |  | $ | 9,505  |  | $ | 22,893 |  | $ | 138,901
|Assumed Reinsurance (1)               |  |                                  |      |                                                          |   | 191,646           |  |                 | 27,635 |                       |   | 122,544                                          |  |                                                   |       |                          |   | 123,060          |  |   | 23,105 |  |   | 24,173 |  |   | 112,849
|Other                                 |  |                                  |      |                                                          |   |                  |  |                 |       |                       |   |                                                 |  |                                                   | 32,231 |                          |   |                 |  |   |       |  |   |       |  |   |       
|                                      |  |                                  |       |                                                          |   |                   |  |                 |        |                       |   |                                                  |  |                                                   |        |                          |   |                  |  |   |        |  |   |        |  |   |        
|Total                                 |  | $                                | 6,858 |                                                          | $ | 650,671           |  | $               | 67,556 |                       | $ | 286,063                                          |  | $                                                 | 32,231 |                          | $ | 320,516          |  | $ | 32,610 |  | $ | 47,066 |  | $ | 251,750
|                                      |  |                                  |       |                                                          |   |                   |  |                 |        |                       |   |                                                  |  |                                                   |        |                          |   |                  |  |   |        |  |   |        |  |   |        

---

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



Year Ended December 31, 2001

---



|                                      |  |                                  |        |                                                          |   |                   |  |                 |         |                       |   |                                                  |  |                                                   |        |                          |   |                  |  |   |        |  |   |        |  |   |        
|------------------------------------- |  | -------------------------------- | ------ | -------------------------------------------------------- | - | ----------------- |  | --------------- | ------- | --------------------- | - | ------------------------------------------------ |  | ------------------------------------------------- | ------ | ------------------------ | - | ---------------- |  | - | ------ |  | - | ------ |  | - | -------
|Segments                              |  | Deferred Policy Acquisition Cost |        | Future Policy Benefits, Losses, Claims and Loss Expenses |   | Unearned Premiums |  | 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          |  | $ | 28,712 |  | $ | 17,108 |  | $ | 168,600
|Assumed Reinsurance (1)               |  |                                  | 13,474 |                                                          |   | 113,360           |  |                 | 37,330  |                       |   | 79,493                                           |  |                                                   |       |                          |   | 84,162           |  |   | 17,452 |  |   | 1,460  |  |   | 112,207
|Other                                 |  |                                  |       |                                                          |   |                  |  |                 |        |                       |   |                                                 |  |                                                   | 35,895 |                          |   |                 |  |   |       |  |   |       |  |   |       
|                                      |  |                                  |        |                                                          |   |                   |  |                 |         |                       |   |                                                  |  |                                                   |        |                          |   |                  |  |   |        |  |   |        |  |   |        
|Total                                 |  | $                                | 19,465 |                                                          | $ | 576,636           |  | $               | 101,868 |                       | $ | 235,935                                          |  | $                                                 | 35,895 |                          | $ | 304,473          |  | $ | 46,164 |  | $ | 18,568 |  | $ | 280,807
|                                      |  |                                  |        |                                                          |   |                   |  |                 |         |                       |   |                                                  |  |                                                   |        |                          |   |                  |  |   |        |  |   |        |  |   |        

---

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



83