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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, 2004



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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      |  | (I.R.S. Employer   
|of incorporation or organization) |  | 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
(§ 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 x  No  ̈



The aggregate market value of the Registrants voting stock held by non-affiliates of the Registrant at June 30, 2004, was $82,823,560 (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 7, 2005, was 9,904,604.



DOCUMENTS INCORPORATED BY REFERENCE



Proxy statement for the
Annual Meeting of Stockholders of Registrant to be held on May 24, 2005 (only portions of which are incorporated by reference).



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TABLE OF CONTENTS



|         |  |                                                                                                |  |   
|-------- |  | ---------------------------------------------------------------------------------------------- |  | --
|PART I  
|Item 1.  |  | Business                                                                                       |  | 3 
|Item 2.  |  | Properties                                                                                     |  | 27
|Item 3.  |  | Legal Proceedings                                                                              |  | 28
|Item 4.  |  | Submission of Matters to a Vote of Security Holders                                            |  | 28
|        
|PART II 
|Item 5.  |  | Market for Registrants Common Equity and Related Stockholder Matters                          |  | 29
|Item 6.  |  | Selected Consolidated Financial Data                                                           |  | 30
|Item 7.  |  | Managements Discussion and Analysis of Financial Condition and Results of Operations          |  | 31
|Item 7A. |  | Quantitative and Qualitative Disclosures About Market Risk                                     |  | 40
|Item 8.  |  | Financial Statements and Supplementary Data                                                    |  | 41
|Item 9.  |  | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure           |  | 41
|Item 9A. |  | Disclosure Controls and Procedures                                                             |  | 42
|Item 9B. |  | Other Information                                                                              |  | 43
|        
|PART III
|Item 10. |  | Directors and Executive Officers of the Registrant                                             |  | 44
|Item 11. |  | Executive Compensation                                                                         |  | 44
|Item 12. |  | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters |  | 44
|Item 13. |  | Certain Relationships and Related Transactions                                                 |  | 44
|Item 14. |  | Principal Accountant Fees and Services                                                         |  | 44
|        
|PART IV 
|Item 15. |  | Exhibits and Financial Statements Schedules                                                    |  | 45



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PART I



ITEM 1.    BUSINESS



GENERAL

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SCPIE Holdings Inc. (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 global
assumed reinsurance business. Since 2002, the Company has been engaged in completing its withdrawal from the assumed reinsurance markets and medical malpractice insurance outside its core states 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 20 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.



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 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 has incurred losses since 2001. The resulting reductions in surplus and corresponding decreases in capital adequacy ratios under both the A.M. Best Company (A.M.
Bestthe leading rating organization for the insurance industry) 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 withdraw from the healthcare liability insurance markets outside of its core markets 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. The Company continues to run-off liabilities in these non-core markets.



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



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



INFORMATION ABOUT SEGMENTS

---



The Companys insurance business is currently organized into two reportable business segments: direct healthcare liability insurance and assumed reinsurance. 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.



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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, 2004 and 2003.



|                                          |  |                                      |         |   |                    |   |         |       |  |       |         |  |   |         |  
|----------------------------------------- |  | ------------------------------------ | ------- | - | ------------------ | - | ------- | ----- |  | ----- | ------- |  | - | ------- | -
|YEAR ENDED DECEMBER 31, 2004              |  | DIRECT HEALTHCARE LIABILITYINSURANCE |         |   | ASSUMEDREINSURANCE |   |         | OTHER |  | TOTAL |        
|                                          |  | (In Thousands)                       |        
|Premiums written                          |  | $                                    | 126,834 |   |                    | $ | 2,376   |       |  |       |         |  | $ | 129,210 |  
|                                          |  |                                      |         |   |                    |   |         |       |  |       |         |  |   |         |  
|Premiums earned                           |  | $                                    | 121,478 |   |                    | $ | 14,628  |       |  |       |         |  | $ | 136,106 |  
|Net investment income                     |  |                                      |        |   |                    |   |        |       |  | $     | 19,174  |  |   | 19,174  |  
|Realized investment gains                 |  |                                      |        |   |                    |   |        |       |  |       | 1,502   |  |   | 1,502   |  
|Other revenue                             |  |                                      |        |   |                    |   |        |       |  |       | 540     |  |   | 540     |  
|                                          |  |                                      |         |   |                    |   |         |       |  |       |         |  |   |         |  
|Total revenues                            |  |                                      | 121,478 |   |                    |   | 14,628  |       |  |       | 21,216  |  |   | 157,322 |  
|Losses and loss adjustment expenses       |  |                                      | 110,590 |   |                    |   | 28,337  |       |  |       |        |  |   | 138,927 |  
|Other operating expenses                  |  |                                      | 26,134  |   |                    |   | 139     |       |  |       |        |  |   | 26,273  |  
|                                          |  |                                      |         |   |                    |   |         |       |  |       |         |  |   |         |  
|Total expenses                            |  |                                      | 136,724 |   |                    |   | 28,476  |       |  |       |        |  |   | 165,200 |  
|                                          |  |                                      |         |   |                    |   |         |       |  |       |         |  |   |         |  
|Segment income (loss) before income taxes |  | $                                    | (15,246 | ) |                    | $ | (13,848 | )     |  | $     | 21,216  |  | $ | (7,878  | )
|                                          |  |                                      |         |   |                    |   |         |       |  |       |         |  |   |         |  
|                                          |  |                                      |         |  
|Segment assets                            |  | $                                    | 142,270 |   |                    | $ | 196,853 |       |  | $     | 640,512 |  | $ | 979,635 |  



|                                          |  |                                      |         |   |                    |   |         |       |  |       |         |  |   |         |  
|----------------------------------------- |  | ------------------------------------ | ------- | - | ------------------ | - | ------- | ----- |  | ----- | ------- |  | - | ------- | -
|                                          |  |                                      |         |  
|YEAR ENDED DECEMBER 31, 2003              |  | DIRECT HEALTHCARE LIABILITYINSURANCE |         |   | ASSUMEDREINSURANCE |   |         | 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 | )
|                                          |  |                                      |         |   |                    |   |         |       |  |       |         |  |   |         |  
|                                          |  |                                      |         |  
|Segment assets                            |  | $                                    | 28,042  |   |                    | $ | 253,315 |       |  | $     | 709,893 |  | $ | 991,250 |  



The direct healthcare liability insurance
segment is comprised of core and non-core business components. The Companys core business principally represents its direct healthcare liability insurance business in California and Delaware, excluding a dental program managed by a national
independent insurance agency Brown & Brown, Inc. (Brown & Brown), and hospital business. The Companys non-core business represents its direct healthcare liability business outside of California and Delaware, the above mentioned 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 2003 and 2004 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 2003 and 2004 from previous periods.
In December 2002, the Company entered into a quota share reinsurance transaction with Rosemont Reinsurance Ltd. (Rosemont Re) (formerly named GoshawK Reinsurance Limited), 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 Rosemont 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 Rosemont Re $129.3 million of written premium in



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2002, $38.0 million of written premium in 2003 and $(0.1) million of written premium in 2004. The Company retains certain losses related to the assumed reinsurance
business, including those related to the World Trade Center terrorist attack, and the Company continued to participate in one Lloyds syndicate for the 2003 underwriting year. Other than net written premiums of $1.2 million and $18.3 million
from this syndicate in 2004 and 2003, respectively, the Company had retained no significant premiums written from prior year contracts, in either 2004 or 2003.



Because of the effect the losses incurred in the Companys non-core healthcare insurance and assumed reinsurance operations had on the capitalization of the Insurance
Subsidiaries combined surplus, the relationship of premiums written in 2001 and 2002 to surplus (premium leverage), and the relationship of outstanding loss reserves to surplus (loss reserve leverage), A.M. Best in a series of downgrades reduced the
Companys rating from A (Excellent) at December 31, 2001 to its current rating of B (Fair) with a negative outlook on November 14, 2003. The Companys current rating could have a material adverse impact on the ability of the Company to
maintain its customer base and attract new business. See Risk FactorsImportance of A.M. Best Rating.



DIRECT HEALTHCARE LIABILITY INSURANCE SEGMENT

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Overview and Developments During 2004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 2003 (latest data available) was approximately 17.1% and the Company was the third largest writer in the state. In 2001, the Company undertook the insurance of
physicians in Delaware through a single Delaware broker. During 2004, the Company had net premiums earned under policies issued to California insureds representing 97.5% 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 2004Non-Core Business

---



Hospital ProgramsIn 1996, the Company undertook an expansion plan which included products that 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.



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. In 2004, the Company incurred a net loss of $4.2 million as a result of a significant adverse
verdict against a Florida hospital insured by the Company in 2000, when the medical incident occurred.



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. 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, 2003 and 2004, the Company derived approximately 27%, 9% and .3%
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 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



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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, 2003 and 2004, the Company had premiums earned under the non-core healthcare liability programs, other than hospitals, of $44.2 million, $12.3 and $0.3 million, respectively and as of March
6, 2004, all policies had expired.



The non-core business produced underwriting losses of
$53.8 million, $19.0 million and $13.4 million in 2002, 2003 and 2004, respectively. During 2005, 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 2005.



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,                              |  | 2004           |         |   | 2003 |   | 2002   
|                                                              |  | (In Thousands)
|Core Business:                                                |  |                |         |   |      |   |         |  |   |        
|Physician and medical group professional liability            |  | $              | 111,692 |   |      | $ | 107,952 |  | $ | 107,090
|Healthcare provider and facility liability                    |  |                | 9,259   |   |      |   | 8,393   |  |   | 6,393  
|Ancillary liability products                                  |  |                | 1,698   |   |      |   | 2,229   |  |   | 2,056  
|Other                                                         |  |                | 545     |   |      |   | 574     |  |   | 587    
|                                                              |  |                |         |   |      |   |         |  |   |        
|Total core business                                           |  |                | 123,194 |   |      |   | 119,148 |  |   | 116,126
|Non-Core Business:                                            |  |                |         |   |      |   |         |  |   |        
|Physician and medical group and dental professional liability |  | $              | 310     |   |      | $ | 12,092  |  | $ | 41,946 
|Hospital liability                                            |  |                | (2,065  | ) |      |   |        |  |   | 3,210  
|Healthcare provider and facility liability                    |  |                |        |   |      |   | 7       |  |   | 1,398  
|Ancillary liability products                                  |  |                | 39      |   |      |   | 211     |  |   | 815    
|Other                                                         |  |                |        |   |      |   | 2       |  |   | 24     
|                                                              |  |                |         |   |      |   |         |  |   |        
|Total non-core business                                       |  |                | (1,716  | ) |      |   | 12,312  |  |   | 47,393 
|                                                              |  |                |         |   |      |   |         |  |   |        
|Total Premiums Earned                                         |  | $              | 121,478 |   |      | $ | 131,460 |  | $ | 163,519
|                                                              |  |                |         |   |      |   |         |  |   |        



Physician and Medical Group Professional
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 was covered by the policy. The Company



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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 are 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 provided 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. The Company plans to introduce a new dental program in California during 2005.



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 $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 16 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



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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 11 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.



The Company has consistently instituted annual overall rate increases in California during the past 10 years ranging from approximately 3.5% to 10.6%. Rate increases of 8.4%, 9.9%
and 6.5% have been approved and implemented in California effective January 1, 2002, October 1, 2003, and January 1, 2005, respectively. Rate increases of 34.4% and 13.3% have been approved in Delaware effective July 1, 2003 and July 15, 2004,
respectively. Approximately 20% of the Companys in force premium as of December 31, 2004 is evaluated using experience rating formulas and therefore not necessarily subject to base rate changes. Experience rating formulas are sensitive to the
individual loss experience of groups of physicians and may produce increases or decreases different than the change in the general base rate. 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, an assistant claims manager, unit managers, litigation supervisors, investigators and other experienced professionals trained in the evaluation and resolution of medical professional liability
and



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general liability claims. The Claims Department staff consists of approximately 34 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 of more than $30,000 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.



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 $2.4 million in 2004 from $18.5 million in 2003 and from $112.8 million in 2002. The principal reinsurance programs included casualty, property, accident and health and workers compensation and
marine programs.



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 with which the Companys officers had past
favorable experience.



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 and in 2004 ceased underwriting operations.



Divestiture of Most
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 Rosemont 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 premiums written in 2002, $38.0 million of premiums written in 2003 and $(0.1) million of premiums written
in 2004 were ceded under the treaty. This treaty relieved the Company of significant premium leverage and significantly improved the Companys risk-based capital adequacy ratios under both the A.M. Best and NAIC models.



9



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Under the terms of the treaty with Rosemont Re, there are no limitations on the amount of losses recoverable by the Company,
and the treaty includes a profit-sharing provision should the combined ratio calculated on the base premium ceded be below 100%. The treaty requires Rosemont Re to reimburse the Company for its acquisition and administrative expenses. In addition,
the Company is required to pay Rosemont 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, $5.5 million in 2003 and $(0.01) million in 2004.



The Rosemont 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.



There are certain losses not included in the treaty with Rosemont 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, the parent
corporation of Rosemont Re, incurred significant losses in 2003 in its GoshawK 102 syndicate, which affected the Company. See Managements Discussion and Analysis of Financial Condition and Results of Operations. These losses did
not materially affect Rosemont Re. Rosemont Re is currently rated A- by A.M. Best.



After
consummation of the Rosemont reinsurance treaty, the Company continued to participate during 2003 in one Lloyds syndicate that specialized in underwriting professional liability excess insurance. 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 were terminated. The Company
ceded 35% of its exposure from this syndicate to an unrelated reinsurer.



Ongoing
Assumed Reinsurance Operations

---



The Company continues to administer claims and other matters relating to the more than 100 existing reinsurance treaties and contracts entered into by the Company, including those subject to the 100% quota share reinsurance treaty with
Rosemont Re. At December 31, 2004, the principal net loss reserves retained by the Company under these treaties involved (i) occupational accident coverage and excess workers compensation benefits, which typically provides lifetime medical and
related benefits at high coverage levels, (ii) Lloyds syndicate participation, (iii) an excess of loss directors and officers liability reinsurance treaty, (iv) the GoshawK syndicate treaty and (v) three treaties reinsuring bail and
immigration bonds and.



The assumed reinsurance operations encountered unexpected adverse
loss development during 2004 principally in connection with the Lloyds syndicates, additional losses incurred under a single excess of loss directors and officers liability insurance treaty, and losses involving issuers of bail and immigration
bonds.



The adverse development in the Lloyds syndicates arose because of the close
out of the 2001 underwriting years at levels in excess of those previously reported to the Company and deteriorating results on the 2002 and 2003 underwriting years for the syndicate involved in professional liability excess insurance.



The excess of loss directors and officers liability insurance treaty involved a 4% participation by
the Company in the excess layer that provided $25.0 million of coverage in excess of $10.0 million for each occurrence. The treaty covered 1999 through 2002 and the policyholders are primarily utilities. The Company increased its incurred loss
estimate almost $4.8 million during 2004, based on information received from the primary insurer. Currently, none of these losses are subject to the Rosemont Re treaty.



The bail and immigration bond losses involve three treaties covering the 2001 and 2002 years. The treaties covered bonds issued by the primary
insurers through a bonding company that operated nationally, but principally in the northeast. Under the program, the bonding company and its principals were responsible for all losses as part of their program administration. The Company had a 20%
share of the 2001 treaty and a 25% share of two 2002 treaties. The major portion of the losses under the 2002 treaties are ceded to Rosemont Re, and a small portion is ceded to Rosemont Re under the 2001 treaty. Losses to the reinsurers under these
treaties began to emerge in the middle of 2004 after the underlying bonding company collapsed and effectively ceased operations. The Company has received reports of paid and estimated losses from the three primary insurers covering 2001 and 2002.
Based on these reports, the Company recorded losses during 2004, net of reinsurance, of $5.6 million, of which $2.1 million has been paid to the primary insurers and $3.5 million is included in loss reserves at December 31, 2004. The performance of
the primary insurers under the treaty is being disputed by certain reinsurers and is



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currently the subject of a pending arbitration proceeding. The Company has engaged legal counsel to advise the Company regarding possible defenses and claims regarding
these bonds.



The two senior officers in charge of the reinsurance division will continue
to administer the assumed reinsurance division treaties from their New Jersey office until May 1, 2005. Financial personnel at the Companys Los Angeles headquarters have assumed greater responsibilities in the administration of these treaties
during the past 24 months, and do not expect any significant administrative difficulties after the May 2005 transition date.



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 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.



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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,                                                                                            |  | 2004           |         | 2003 |   |         | 2002
|                                                                                                        |  | (In Thousands)
|Reserves for losses and LAE at beginning of year                                                        |  | $              | 643,046 |      | $ | 650,671 |      |  | $ | 576,636
|Less reinsurance recoverables                                                                           |  |                | 108,891 |      |   | 85,930  |      |  |   | 74,246 
|                                                                                                        |  |                |         |      |   |         |      |  |   |        
|Reserves for losses and LAE, net of related reinsurance recoverable, at beginning of year               |  |                | 534,155 |      |   | 564,741 |      |  |   | 502,390
|                                                                                                        |  |                |         |      |   |         |      |  |   |        
|Provision for losses and LAE for claims occurring in the current year, net of reinsurance               |  |                | 123,027 |      |   | 169,474 |      |  |   | 303,296
|Increase (decrease) in estimated losses and LAE for claims occurring in prior years, net of reinsurance |  |                | 15,900  |      |   | (8,108  | )    |  |   | 17,220 
|                                                                                                        |  |                |         |      |   |         |      |  |   |        
|Incurred losses during the year, net of reinsurance                                                     |  |                | 138,927 |      |   | 161,366 |      |  |   | 320,516
|                                                                                                        |  |                |         |      |   |         |      |  |   |        
|Deduct losses and LAE payments for claims, net of reinsurance, occurring during:                        |  |                |         |      |   |         |      |  |   |        
|Current year                                                                                            |  |                | 11,091  |      |   | 18,424  |      |  |   | 47,258 
|Prior years                                                                                             |  |                | 206,867 |      |   | 173,528 |      |  |   | 210,907
|                                                                                                        |  |                |         |      |   |         |      |  |   |        
|Total payments during the year, net of reinsurance                                                      |  |                | 217,958 |      |   | 191,952 |      |  |   | 258,165
|                                                                                                        |  |                |         |      |   |         |      |  |   |        
|Reserve for losses and LAE, net of related reinsurance recoverable, at end of year                      |  |                | 455,124 |      |   | 534,155 |      |  |   | 564,741
|Reinsurance recoverable for losses and LAE, at end of year                                              |  |                | 183,623 |      |   | 108,891 |      |  |   | 85,930 
|                                                                                                        |  |                |         |      |   |         |      |  |   |        
|Reserves for losses and LAE, gross of insurance recoverable, at end of year                             |  | $              | 638,747 |      | $ | 643,046 |      |  | $ | 650,671
|                                                                                                        |  |                |         |      |   |         |      |  |   |        



The increase during 2004 and 2002 in estimated
losses and LAE for claims occurring in prior years was primarily attributable to the adverse loss experience 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.



12



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



In evaluating the information in the table below, it should be noted that each amount includes the
effects of all changes in amounts of prior periods. For example, if a loss determined in 2004 to be $100,000 was first reserved in 1994 at $150,000, the $50,000 redundancy (original estimate minus actual loss) would be included in the cumulative
redundancy in each of the years 1994 through 2004 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,                      |  | 1994           |          |   | 1995 |   |          | 1996 |  |   | 1997     |   |  | 1998 |          |   | 1999 |   |          | 2000 |  | 2001 |         | 2002 |  | 2003 |         | 2004
|                                             |  | (In Thousands)
|Loss and LAE reserves, net                   |  | $              | 449,566  |   |      | $ | 446,627  |      |  | $ | 440,302  |   |  | $    | 433,441  |   |      | $ | 451,072  |      |  | $    | 404,857 |      |  | $    | 389,549 |      | $ | 502,390 |  | $ | 564,741 |  | $ | 534,155 |  | $ | 455,124
|Liability reestimated as of:                 |  |                |          |   |      |   |          |      |  |   |          |   |  |      |          |   |      |   |          |      |  |      |         |      |  |      |         |      |   |         |  |   |         |  |   |         |  |   |        
|One year later                               |  |                | 391,733  |   |      |   | 386,872  |      |  |   | 387,094  |   |  |      | 339,673  |   |      |   | 389,893  |      |  |      | 359,954 |      |  |      | 403,374 |      |   | 519,610 |  |   | 556,633 |  |   | 550,055 |  |   |        
|Two years later                              |  |                | 337,441  |   |      |   | 337,760  |      |  |   | 301,795  |   |  |      | 283,276  |   |      |   | 351,238  |      |  |      | 356,298 |      |  |      | 402,559 |      |   | 510,274 |  |   | 573,603 |  |   |         |  |   |        
|Three years later                            |  |                | 304,063  |   |      |   | 264,813  |      |  |   | 259,022  |   |  |      | 250,962  |   |      |   | 341,763  |      |  |      | 338,196 |      |  |      | 397,129 |      |   | 516,663 |  |   |         |  |   |         |  |   |        
|Four years later                             |  |                | 254,004  |   |      |   | 236,609  |      |  |   | 237,059  |   |  |      | 243,561  |   |      |   | 329,588  |      |  |      | 342,176 |      |  |      | 402,009 |      |   |         |  |   |         |  |   |         |  |   |        
|Five years later                             |  |                | 239,372  |   |      |   | 221,537  |      |  |   | 236,363  |   |  |      | 237,487  |   |      |   | 329,172  |      |  |      | 343,780 |      |  |      |         |      |   |         |  |   |         |  |   |         |  |   |        
|Six years later                              |  |                | 231,129  |   |      |   | 221,014  |      |  |   | 235,919  |   |  |      | 239,389  |   |      |   | 330,264  |      |  |      |         |      |  |      |         |      |   |         |  |   |         |  |   |         |  |   |        
|Seven years later                            |  |                | 230,799  |   |      |   | 220,566  |      |  |   | 236,434  |   |  |      | 238,918  |   |      |   |          |      |  |      |         |      |  |      |         |      |   |         |  |   |         |  |   |         |  |   |        
|Eight years later                            |  |                | 230,194  |   |      |   | 220,266  |      |  |   | 236,238  |   |  |      |          |   |      |   |          |      |  |      |         |      |  |      |         |      |   |         |  |   |         |  |   |         |  |   |        
|Nine years later                             |  |                | 230,060  |   |      |   | 220,588  |      |  |   |          |   |  |      |          |   |      |   |          |      |  |      |         |      |  |      |         |      |   |         |  |   |         |  |   |         |  |   |        
|Ten years later                              |  |                | 230,191  |   |      |   |          |      |  |   |          |   |  |      |          |   |      |   |          |      |  |      |         |      |  |      |         |      |   |         |  |   |         |  |   |         |  |   |        
|Cumulative (redundancies) deficiencies       |  |                | (219,375 | ) |      |   | (226,039 | )    |  |   | (204,064 | ) |  |      | (194,523 | ) |      |   | (120,808 | )    |  |      | (61,077 | )    |  |      | 12,460  |      |   | 14,273  |  |   | 8,862   |  |   | 15,900  |  |   |        
|Cumulative amount of liability paid through: |  |                |          |   |      |   |          |      |  |   |          |   |  |      |          |   |      |   |          |      |  |      |         |      |  |      |         |      |   |         |  |   |         |  |   |         |  |   |        
|One year later                               |  |                | 109,481  |   |      |   | 101,844  |      |  |   | 118,307  |   |  |      | 107,748  |   |      |   | 156,913  |      |  |      | 148,891 |      |  |      | 155,626 |      |   | 210,907 |  |   | 173,528 |  |   | 206,867 |  |   |        
|Two years later                              |  |                | 170,603  |   |      |   | 170,932  |      |  |   | 181,116  |   |  |      | 179,016  |   |      |   | 246,835  |      |  |      | 238,718 |      |  |      | 273,680 |      |   | 319,076 |  |   | 336,913 |  |   |         |  |   |        
|Three years later                            |  |                | 202,660  |   |      |   | 195,265  |      |  |   | 207,141  |   |  |      | 204,773  |   |      |   | 279,629  |      |  |      | 281,048 |      |  |      | 319,636 |      |   | 390,400 |  |   |         |  |   |         |  |   |        
|Four years later                             |  |                | 213,431  |   |      |   | 207,454  |      |  |   | 217,460  |   |  |      | 216,448  |   |      |   | 299,106  |      |  |      | 304,588 |      |  |      | 344,700 |      |   |         |  |   |         |  |   |         |  |   |        
|Five years later                             |  |                | 221,409  |   |      |   | 211,934  |      |  |   | 222,307  |   |  |      | 223,540  |   |      |   | 309,809  |      |  |      | 312,633 |      |  |      |         |      |   |         |  |   |         |  |   |         |  |   |        
|Six years later                              |  |                | 224,555  |   |      |   | 213,257  |      |  |   | 227,782  |   |  |      | 228,007  |   |      |   | 311,677  |      |  |      |         |      |  |      |         |      |   |         |  |   |         |  |   |         |  |   |        
|Seven years later                            |  |                | 224,882  |   |      |   | 216,121  |      |  |   | 230,648  |   |  |      | 229,213  |   |      |   |          |      |  |      |         |      |  |      |         |      |   |         |  |   |         |  |   |         |  |   |        
|Eight years later                            |  |                | 226,524  |   |      |   | 216,651  |      |  |   | 231,100  |   |  |      |          |   |      |   |          |      |  |      |         |      |  |      |         |      |   |         |  |   |         |  |   |         |  |   |        
|Nine years later                             |  |                | 227,001  |   |      |   | 216,823  |      |  |   |          |   |  |      |          |   |      |   |          |      |  |      |         |      |  |      |         |      |   |         |  |   |         |  |   |         |  |   |        
|Ten years later                              |  |                | 227,095  |   |      |   |          |      |  |   |          |   |  |      |          |   |      |   |          |      |  |      |         |      |  |      |         |      |   |         |  |   |         |  |   |         |  |   |        
|Net reservesDecember 31                     |  |                |          |   |      |   |          |      |  |   |          |   |  |      |          |   |      |   | 451,072  |      |  |      | 404,857 |      |  |      | 389,549 |      |   | 502,390 |  |   | 564,741 |  |   | 534,155 |  |   | 455,124
|Reinsurance recoverables                     |  |                |          |   |      |   |          |      |  |   |          |   |  |      |          |   |      |   | 24,898   |      |  |      | 45,007  |      |  |      | 40,151  |      |   | 74,246  |  |   | 85,930  |  |   | 108,891 |  |   | 183,623
|                                             |  |                |          |   |      |   |          |      |  |   |          |   |  |      |          |   |      |   |          |      |  |      |         |      |  |      |         |      |   |         |  |   |         |  |   |         |  |   |        
|Gross reserves                               |  |                |          |   |      |   |          |      |  |   |          |   |  |      |          |   |      | $ | 475,970  |      |  | $    | 449,864 |      |  | $    | 429,700 |      | $ | 576,636 |  | $ | 650,671 |  | $ | 643,046 |  | $ | 638,747
|                                             |  |                |          |   |      |   |          |      |  |   |          |   |  |      |          |   |      |   |          |      |  |      |         |      |  |      |         |      |   |         |  |   |         |  |   |         |  |   |        



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 core business reserve 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 significantly 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 and 2004, the Company experienced favorable development on its core direct healthcare liability insurance reserves as previously estimated trends in pure loss costs
(the combination of frequency and average severity changes) related to malpractice coverage appear to be smaller when analyzing current data. The inherent pure loss cost trend included in the setting of the 2002, 2003 and 2004 reserves has been
6.7%, 4.4% and 3.3%, respectively. A 1% change in the pure loss costs trend produces a change in prior reserves of approximately $5.3 million. Such changes in estimates are reflected in the period of change. Reserves related to medical malpractice
coverage account for 90% of core reserves.



The favorable development in the core
healthcare liability business in 2004 was offset by a deterioration in the non-core healthcare liability business and the assumed reinsurance business. One large net legal verdict ($1.7 million), dental claims ($4.9 million) primarily in Texas and a
general increase in bulk reserves ($3.0 million) represented the deterioration in non-core healthcare liability reserves.



The deterioration in the assumed reinsurance in 2004 came primarily from one bonding program ($5.6 million), one excess of loss directors and officers liability treaty ($4.8
million), and Lloyds syndicates ($3.7 million).



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 2004, the Company ceded $15.7 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 $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



14



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##### Table of Contents



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 $3.2 million, $3.0 million and $3.0 million, respectively, in 2002, 2003 and 2004, for losses in excess of the Companys retentions. The
Companys reinsurance arrangement for 2004 was the same as 2003, except that reinsurance above $20.0 million was discontinued. The 2005 reinsurance program is the same as 2004.



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
Rosemont Re 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 Rosemont Re 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
receivable balances as of December 31, 2004 by Company and their Current A.M. Best ratings. No other single reinsurers percentage participation in 2004 exceeded 4% of total reinsurance premiums ceded.



|                             |  |                                                    |         |                                              |   |           |  |                             |  |      |  
|---------------------------- |  | -------------------------------------------------- | ------- | -------------------------------------------- | - | --------- |  | --------------------------- |  | ---- | -
|                             |  | RECEIVABLE BALANCE FOR YEAR ENDED DECEMBER 31 2004 |         | PREMIUMS CEDEDFOR YEAR ENDEDDECEMBER 31,2004 |   | RATING(1) |  | PERCENTAGE OFPREMIUMS CEDED | 
|                             |  |                                                    |         | (In Thousands)                               |  
|Rosemont Re (Bermuda)        |  | $                                                  | 107,241 |                                              | $ | 387       |  | A-                          |  | 1.4  | %
|Lloyds of London Syndicates |  | $                                                  | 46,639  |                                              | $ | 5,795     |  | A                           |  | 21.4 | %
|Hannover Ruckversicherungs   |  | $                                                  | 13,576  |                                              | $ | 7,650     |  | A                           |  | 28.2 | %
|Arch Reinsurance (Bermuda)   |  | $                                                  | 6,761   |                                              | $ | 10,932    |  | A-                          |  | 40.3 | %



|(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.



15



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##### Table of Contents



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, 2004    |         | DECEMBER 31, 2003
|                                 |  | COST ORAMORTIZEDCOST |         | FAIRVALUE         |   | COST ORAMORTIZEDCOST |  | FAIRVALUE
|                                 |  | (In Thousands)      
|Fixed-maturity securities:       |  |                      |         |                   |   |                      |  |           |         |  |   |        
|Bonds:                           |  |                      |         |                   |   |                      |  |           |         |  |   |        
|U.S. government and agencies     |  | $                    | 145,463 |                   | $ | 146,945              |  | $         | 195,564 |  | $ | 198,284
|Mortgage-backed and asset-backed |  |                      | 89,609  |                   |   | 88,474               |  |           | 95,206  |  |   | 95,541 
|Corporate                        |  |                      | 219,206 |                   |   | 219,398              |  |           | 260,024 |  |   | 260,316
|                                 |  |                      |         |                   |   |                      |  |           |         |  |   |        
|Total fixed-maturity securities  |  |                      | 454,278 |                   |   | 454,817              |  |           | 550,794 |  |   | 554,141
|Common stocks                    |  |                      | 12,100  |                   |   | 16,173               |  |           | 15,766  |  |   | 20,543 
|                                 |  |                      |         |                   |   |                      |  |           |         |  |   |        
|Total                            |  | $                    | 466,378 |                   | $ | 470,990              |  | $         | 566,560 |  | $ | 574,684
|                                 |  |                      |         |                   |   |                      |  |           |         |  |   |        



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, 2004:



|                                             |  |                |         |           |   |                        |  |       |  
|-------------------------------------------- |  | -------------- | ------- | --------- | - | ---------------------- |  | ----- | -
|TYPE/RATING OF INVESTMENT(1)                 |  | AMORTIZEDCOST  |         | FAIRVALUE |   | PERCENTAGEOF FAIRVALUE | 
|                                             |  | (In Thousands) |        
|AAA (including U.S. government and agencies) |  | $              | 238,459 |           | $ | 238,914                |  | 52.5  | %
|AA                                           |  |                | 20,744  |           |   | 20,610                 |  | 4.5   | %
|A                                            |  |                | 162,039 |           |   | 161,842                |  | 35.6  | %
|BBB                                          |  |                | 33,036  |           |   | 33,451                 |  | 7.4   | %
|                                             |  |                |         |           |   |                        |  |       |  
|                                             |  | $              | 454,278 |           | $ | 454,817                |  | 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.
| | --- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



The following
table sets forth certain information concerning the maturities of fixed-maturity securities in the Companys investment portfolio as of December 31, 2004:



|                                            |  |                |         |           |   |                        |  |       |  
|------------------------------------------- |  | -------------- | ------- | --------- | - | ---------------------- |  | ----- | -
|                                            |  | AMORTIZEDCOST  |         | FAIRVALUE |   | PERCENTAGEOF FAIRVALUE | 
|                                            |  | (In Thousands) |        
|Years to maturity:                          |  |                |         |           |   |                        |  |       |  
|One or less                                 |  | $              | 10,824  |           | $ | 10,840                 |  | 2.4   | %
|After one through five                      |  |                | 160,661 |           |   | 160,626                |  | 35.3  | %
|After five through ten                      |  |                | 171,099 |           |   | 171,525                |  | 37.7  | %
|After ten                                   |  |                | 22,085  |           |   | 23,352                 |  | 5.1   | %
|Mortgage-backed and asset-backed securities |  |                | 89,609  |           |   | 88,474                 |  | 19.5  | %
|                                            |  |                |         |           |   |                        |  |       |  
|Totals                                      |  | $              | 454,278 |           | $ | 454,817                |  | 100.0 | %
|                                            |  |                |         |           |   |                        |  |       |  



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The average weighted maturity of the securities in the Companys fixed-maturity portfolio as of December 31, 2004, was 4.8
years. The average duration of the Companys fixed-maturity portfolio as of December 31, 2004, was 3.6 years.



The Company maintains cash and highly liquid short-term investments, which at December 31, 2004, totaled $94.4 million.



The following table summarizes the Companys investment results for the three years ended December
31, 2004, 2003 and 2002:



|                                                                                  |  |                |         |   |      |   |         |      |  |   |         |  
|--------------------------------------------------------------------------------- |  | -------------- | ------- | - | ---- | - | ------- | ---- |  | - | ------- | -
|FOR THE YEARS ENDED DECEMBER 31,                                                  |  | 2004           |         |   | 2003 |   |         | 2002 | 
|                                                                                  |  | (In Thousands) |        
|Average invested assets (includes short-term investments)(1)                      |  | $              | 600,996 |   |      | $ | 660,769 |      |  | $ | 702,053 |  
|                                                                                  |  |                |        
|Net investment income:                                                            |  |                |         |   |      |   |         |      |  |   |         |  
|Before income taxes                                                               |  |                | 19,174  |   |      |   | 21,954  |      |  |   | 32,231  |  
|After income taxes                                                                |  |                | 12,463  |   |      |   | 14,334  |      |  |   | 21,814  |  
|                                                                                  |  |                |        
|Average annual yield on investments:                                              |  |                |         |   |      |   |         |      |  |   |         |  
|Before income taxes                                                               |  |                | 3.2     | % |      |   | 3.3     | %    |  |   | 4.6     | %
|After income taxes                                                                |  |                | 2.1     | % |      |   | 2.2     | %    |  |   | 3.1     | %
|                                                                                  |  |                |        
|Net realized investment gains                                                     |  |                |         |   |      |   |         |      |  |   |         |  
|Before income taxes                                                               |  |                | 1,502   |   |      |   | 216     |      |  |   | 18,910  |  
|After income taxes                                                                |  |                | 976     |   |      |   | 141     |      |  |   | 12,292  |  
|Increase (decrease) in net unrealized gains on all investments after income taxes |  | $              | (2,283  | ) |      | $ | (7,484  | )    |  | $ | 10,637  |  



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



The Company recognized significant capital gains in 2002 primarily to generate statutory surplus to improve its capital adequacy ratios. In addition, the Company moved its
portfolio entirely into taxable securities 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. Two of the companies and the trust solicit 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 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 discontinued its one ongoing treaty at the end of 2003. See Assumed
Reinsurance Segment.



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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 20 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 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.



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Regulation of Dividends from Insurance Subsidiaries

---



The Holding Company Act also limits the ability of SCPIE Indemnity to pay dividends
to the Company. Without prior notice to and approval of the Insurance Commissioner, SCPIE Indemnity may not declare or pay an extraordinary dividend, which is defined as any dividend or distribution of cash or other property whose fair market value
together with other dividends or distributions made within the preceding 12 months exceeds the greater of such subsidiarys statutory net income of the preceding calendar year or 10% of statutory surplus as of the preceding December 31.
Applicable regulations further require that an insurers statutory surplus following a dividend or other distribution be reasonable in relation to its outstanding liabilities and adequate to meet its financial needs, and permit the payment of
dividends only out of statutory earned (unassigned) surplus unless the payment out of other funds is approved by the Insurance Commissioner. In addition, an insurance company is required to give the California Department of Insurance notice of any
dividend after declaration, but prior to payment.



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



Risk-Based Capital

---



The NAIC has developed a methodology for assessing the adequacy of statutory surplus of property and casualty insurers which includes a risk-based capital (RBC) formula that
attempts to measure statutory capital and surplus needs based on the risks in a companys mix of products and investment portfolio. The formula is designed to allow state insurance regulators to identify potentially under-capitalized companies.
Under the formula, a company determines its authorized control level RBC by taking into account certain risks related to the insurers assets (including risks related to its investment portfolio and ceded reinsurance) and the insurers
liabilities (including underwriting risks related to the nature and experience of its insurance business). The RBC rules provide for four different levels of regulatory attention depending on the ratio of a companys total adjusted capital to
its authorized control level RBC. The threshold requiring the least regulatory attention is a company action level when total adjusted capital is less than or equal to 200% of the authorized control level RBC and the level requiring the most
regulatory involvement is a mandatory control level RBC when total 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, 2004, the
adjusted surplus level of each Insurance Subsidiary exceeded the threshold requiring the least regulatory attention. At December 31, 2004, SCPIE Indemnitys adjusted surplus level exceeded this threshold by $38.0 million.



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. In May 2004, the Company filed for an overall 6.5% rate increase in California, which was again challenged by the same foundation. The Insurance Commissioner approved this application in its entirety, without a hearing, and the Insurance
Subsidiaries implemented this rate increase on January 1, 2005.



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Medical Malpractice Tort Reform

---



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



Medical Malpractice Reports

---



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



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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, 2004, the Company employed 149 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 4, 2005, are as follows:



|                   |  |     |  |                                                                       
|------------------ |  | --- |  | ----------------------------------------------------------------------
|NAME               |  | AGE |  | POSITION                                                              
|Donald J. Zuk      |  | 68  |  | President, Chief Executive Officer and Director                       
|Ronald L. Goldberg |  | 53  |  | Senior Vice President, Underwriting                                   
|Patrick S. Grant   |  | 62  |  | Senior Vice President, Marketing                                      
|Joseph P. Henkes   |  | 55  |  | Secretary and Senior Vice President, Operations and Actuarial Services
|Robert B. Tschudy  |  | 56  |  | Senior Vice President, Chief Financial Officer and Treasurer          
|Edward G. Marley   |  | 44  |  | Vice President and Chief Accounting Officer                           
|Donald P. Newell   |  | 67  |  | Senior Vice President, General Counsel and Director                   
|Timothy C. Rivers  |  | 56  |  | Senior Vice President, Assumed Reinsurance                            
|Margaret A. McComb |  | 60  |  | 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.



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 Travelers 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. Mr. Grant has notified the Company that he intends to retire in July 2005.



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 &



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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 holding 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 employment will cease on May 1, 2005.



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 in fact constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements involve known and unknown
risks, uncertainties and other factors which may cause the actual results of the Company to be materially different from historical results or from any results expressed or implied by such forward-looking statements. Such risks, uncertainties and
other factors include, but are not limited to, the following:



Concentration of
Business

---



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



Almost all of the Companys 2005 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. In addition, approximately 20% of premiums written were generated by groups of nine physicians or more. The largest group of physicians accounted for 2.4% of total premiums written in 2004 and one program of affiliated groups,
accounted for 6.3% of premiums written in 2004.



Uncertainties of Future Expansion

---



From 1996 to 2001,
the Company significantly expanded its healthcare liability insurance products into markets outside California. This expansion was not successful, and the Company is now running off this non-core healthcare liability business. At the
present time, the Company has one continuing non-California program for physicians and medical groups in Delaware and may consider adding programs on a selective basis in the future. The Company cannot predict whether this remaining program will be
ultimately 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.



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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 insurance 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 believes that the California insurance market is improved, there can be no assurance that this improvement will continue or
its effect on the Companys financial condition and results of operations.



Competition

---



The Company competes with numerous insurance companies in the California market. The Companys principal competitors for physicians and medical groups in California consist of three physician-owned mutual or reciprocal insurance
companies, several commercial companies and a physicians mutual protection trust, which levies assessments primarily on a claims paid basis. In addition, commercial insurance companies compete for the medical malpractice insurance
business of larger medical groups and other healthcare providers. Several of these competitors have greater financial resources than the Company. Between 1993 and 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 and in January 2005, implemented an
additional 6.5% rate increase. The effect of these rate increases 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 these rate increases.



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 considers its A.M. Best rating to be extremely important to its ability to compete in its core markets. The Companys current rating
of B (Fair) with a negative outlook 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, judicial theories of liability, legislative activity, reports from ceding reinsurers 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. The core healthcare liability net
reserves account for $257.2 million or 58.1% of total net reserves as of December 31, 2004. This portion of the reserves has the most historical experience available for actuarial analysis, and therefore should be the most predictable. A subsequent
change of 1% in estimated loss cost trends based on more recent experience would have an effect of approximately $5 million on estimated reserve levels.



The reserves related to the non-core healthcare liability business present additional problems in determining adequate reserves. As the size of these reserves decline and the
number of underlying cases decrease, the ultimate losses become more related to specific case results. Therefore, unexpected legal results in healthcare liability cases can produce unexpected reserve development. This was evident in 2004 as one
adverse verdict in a Florida hospital case and an unexpected rise in severe dental claims caused a material upward development of prior years reserves. Since some of the remaining cases in the non-core healthcare liability business will ultimately
go to trial many years after the event of loss, adverse verdicts or settlements at trial may affect the accuracy of future reserving. As of December 31, 2004, non-core healthcare liability reserves accounted for $97.4 million or 22.0% of total net
reserves. Outstanding claims have fallen from 739 at December 31, 2003 to 431 at December 31, 2004.



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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.



Assumed reinsurance net reserves as of December 31, 2004 accounted for $87.8 million or $19.8% of total net reserves. In addition, the major components of the assumed reinsurance
net reserves are as follows:



|                               |  |   |     
|------------------------------ |  | - | ----
|Occupational accident business |  | $ | 26.6
|Lloyds Syndicates             |  |   | 21.9
|Excess D&O liability           |  |   | 7.4 
|GoshawK 102                    |  |   | 5.0 
|Bail and immigration bonds     |  |   | 3.5 
|Other                          |  |   | 23.4
|                               |  |   |     
|                               |  | $ | 87.8
|                               |  |   |     



Approximately 55% of the net reserves
outstanding as of December 31, 2004 are primarily based on actuarial work performed by or for the ceding insurers. Since the length of time required for the losses to be reported through the world wide reinsurance system can be quite long,
unexpected events are more difficult to predict. Examples of these would be the collapse of GoshawK Syndicate 102 in 2003 and the bail and immigration bonding company collapse in 2004. See BusinessAssumed Reinsurance Segment.



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 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. In May 2004, the Company filed for an overall 6.5% rate increase in California, which was again challenged by the same foundation. The
Insurance Commissioner approved this application in its entirety, without a hearing, and the Insurance Subsidiaries implemented this rate increase on January 1, 2005.



The Company plans to file applications for future rate increases in California that it considers justified by reason of its loss experience. The
Company may encounter objections and delays in obtaining approval of any requested changes. If 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 premiums written 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 insurance segment
in which it currently writes. At the end of 2002, this ratio was 1.6 to 1. As a result of the decreases in 2003 net written premiums in the non-core direct healthcare liability insurance business and the assumed reinsurance business, the ratio
improved to 1.06 to 1 at December 31, 2003. Based on the Companys premium writings in 2004, the ratio of net premiums written to statutory capital and surplus improved to .9 to 1. The other primary measure affecting financial strength ratios
is the net reserves-to-statutory surplus ratio. At the end of 2004, this ratio was 3.3 to 1, which is an improvement on the 2003 ratio of 3.8 to 1, but is higher than the 3.0 to 1 standard generally followed in the industry. During 2005, the Company
expects that there will be both decreases and increases in non-core healthcare liability and the assumed reinsurance reserves. Non-core healthcare liability reserves will be reduced through claim payments and settlements. However, in connection with
the closing of the 2002 underwriting year into the one remaining Lloyds syndicate that the Company participated in in 2003, the Company will assume additional statutory liabilities and receive assets in the same amount, which will have the
effect of



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increasing these reserves, even though it has no effect on surplus or income. Depending upon the amount of this increase versus other decreases, the ratio could
worsen. The reserves for the remaining Lloyds syndicate will close into a syndicate in which the Company did not participate within the next 12 months, at which time these reserves and accompanying assets will be transferred to the assuming
syndicate. In addition, the Company could experience unexpected losses and loss reserve increases similar to those experienced in recent years that would further decrease the ratio. The Companys ability to write policies at 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. At December 31, 2004, the Companys principal insurance subsidiary, SCPIE Indemnity exceeded minimum requirements of an NAIC risk-based capital threshold (requiring some regulatory attention) by $38.0 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.



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 most of 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.



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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 2002, 2003 and 2004, assumed reinsurance premiums earned were $122.5 million, $32.4 million and $14.6
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 Rosemont Re 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 condition. 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 and there have been potentially conflicting lower court decisions. If the attack is ultimately determined to be more than
one occurrence, the Company could incur additional material losses, which are not determinable at this time.



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 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 the HIG insurance company subsidiaries have paid losses and LAE under the subject policies of more than $65.0 million and that at December 31, 2004
had established case loss reserves of $10.0 million, net of reinsurance. Based on a limited review of the exposures remaining, the Company estimates that incurred but not reported losses are $6.1 million, for a total loss and loss expense reserve of
$16.1 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 Highlands reinsurers.



In November 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 expressly provided that it did not
constitute a finding of Highlands insolvency nor an authorization to liquidate Highlands. The Receiver continues to resolve Highlands claim liabilities and otherwise conduct its business, as part of his efforts to rehabilitate Highlands. 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 ultimate impact to the Company of this regulatory control over 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, 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.



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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, the approval of policy forms, and
periodic examinations of the insurance companys financial statements and records. 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, 2004, each of the Insurance Subsidiaries RBC exceeded the threshold requiring the least
regulatory attention. At December 31, 2004, SCPIE Indemnity exceeded this threshold by $38.0 million. If the Company continues to incur material losses, the Company could fall below this threshold.



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



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.



27



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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 a 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 2004.



28



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PART II



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



Price Range of Common Stock

---



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



|                                  |  |      |       |     |   |     
|--------------------------------- |  | ---- | ----- | --- | - | ----
|2003                              |  | HIGH |       | LOW
|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                     |  | $    | 10.02 |     | $ | 7.08
|Second quarter                    |  | $    | 9.10  |     | $ | 8.01
|Third quarter                     |  | $    | 10.07 |     | $ | 8.73
|Fourth quarter                    |  | $    | 10.05 |     | $ | 8.10
|2005                              |  |      |       |    
|First quarter (January  March 7) |  | $    | 11.25 |     | $ | 9.34



On March 7, 2005, the closing price of the
Companys common stock was $11.11.



Stockholders of Record

---



The approximate number of stockholders
of record of the Companys Common Stock as of March 7, 2005, was 5,200.



Dividends

---



SCPIE Holdings paid cash dividends on its common stock of $0.40 per share in 2003. In March 2004, the Board of Directors suspended its quarterly dividends. Future 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 2005 to SCPIE Indemnity without regulatory approval. SCPIE
Indemnity paid no dividends in 2003 and 2004 to SCPIE Holdings and is entitled to pay dividends in 2005 of up to approximately $13.7 million to SCPIE Holdings. See BusinessRegulationRegulation of Dividends from Insurance
Subsidiaries and Note 6 to Consolidated Financial Statements.



29



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##### Table of Contents



ITEM 6.    SELECTED CONSOLIDATED FINANCIAL DATA



|                                                     |  |                                       |         |   |      |   |         |      |  |   |           |   |  |      |         |   |  |   |        
|---------------------------------------------------- |  | ------------------------------------- | ------- | - | ---- | - | ------- | ---- |  | - | --------- | - |  | ---- | ------- | - |  | - | -------
|AS OF OR FOR THE YEARS ENDED DECEMBER 31,            |  | 2004                                  |         |   | 2003 |   |         | 2002 |  |   | 2001      |   |  | 2000
|                                                     |  | (In Thousands, except per share data)
|INCOME STATEMENT DATA:                               |  |                                       |         |   |      |   |         |      |  |   |           |   |  |      |         |   |  |   |        
|Premiums written(1)                                  |  | $                                     | 129,210 |   |      | $ | 147,039 |      |  | $ | 251,750   |   |  | $    | 280,807 |   |  | $ | 208,203
|                                                     |  |                                       |         |   |      |   |         |      |  |   |           |   |  |      |         |   |  |   |        
|Premiums earned(1)                                   |  | $                                     | 136,106 |   |      | $ | 163,887 |      |  | $ | 286,063   |   |  | $    | 235,935 |   |  | $ | 176,502
|Net investment income                                |  |                                       | 19,174  |   |      |   | 21,954  |      |  |   | 32,231    |   |  |      | 35,895  |   |  |   | 34,152 
|Realized investment gains and other revenue          |  |                                       | 2,042   |   |      |   | 1,152   |      |  |   | 20,940    |   |  |      | 7,909   |   |  |   | 1,602  
|                                                     |  |                                       |         |   |      |   |         |      |  |   |           |   |  |      |         |   |  |   |        
|Total revenues                                       |  |                                       | 157,322 |   |      |   | 186,993 |      |  |   | 339,234   |   |  |      | 279,739 |   |  |   | 212,256
|                                                     |  |                                       |         |   |      |   |         |      |  |   |           |   |  |      |         |   |  |   |        
|Losses and loss adjustment expenses                  |  |                                       | 138,927 |   |      |   | 161,366 |      |  |   | 320,516   |   |  |      | 304,473 |   |  |   | 152,602
|Underwriting and other operating expenses            |  |                                       | 26,273  |   |      |   | 45,844  |      |  |   | 79,676    |   |  |      | 64,732  |   |  |   | 36,483 
|Interest expenses                                    |  |                                       |        |   |      |   |        |      |  |   | 66        |   |  |      | 1,416   |   |  |   | 780    
|                                                     |  |                                       |         |   |      |   |         |      |  |   |           |   |  |      |         |   |  |   |        
|Total expenses                                       |  |                                       | 165,200 |   |      |   | 207,210 |      |  |   | 400,258   |   |  |      | 370,621 |   |  |   | 189,865
|                                                     |  |                                       |         |   |      |   |         |      |  |   |           |   |  |      |         |   |  |   |        
|Income (loss) before income tax expense (benefit)    |  |                                       | (7,878  | ) |      |   | (20,217 | )    |  |   | (61,024   | ) |  |      | (90,882 | ) |  |   | 22,391 
|Income tax expense (benefit)                         |  |                                       | 8       |   |      |   | (7,411  | )    |  |   | (22,642   | ) |  |      | (32,906 | ) |  |   | 5,120  
|                                                     |  |                                       |         |   |      |   |         |      |  |   |           |   |  |      |         |   |  |   |        
|Net income (loss)                                    |  | $                                     | (7,886  | ) |      | $ | (12,806 | )    |  | $ | (38,382   | ) |  | $    | (57,976 | ) |  | $ | 17,271 
|                                                     |  |                                       |         |   |      |   |         |      |  |   |           |   |  |      |         |   |  |   |        
|BALANCE SHEET DATA:                                  |  |                                       |         |   |      |   |         |      |  |   |           |   |  |      |         |   |  |   |        
|Total investments and cash and cash equivalents      |  | $                                     | 575,780 |   |      | $ | 647,179 |      |  | $ | 719,106   |   |  | $    | 724,087 |   |  | $ | 701,664
|Total assets                                         |  |                                       | 979,635 |   |      |   | 991,250 |      |  |   | 1,063,766 |   |  |      | 977,646 |   |  |   | 854,645
|Total liabilities                                    |  |                                       | 785,113 |   |      |   | 787,062 |      |  |   | 836,600   |   |  |      | 718,258 |   |  |   | 538,104
|Total stockholders equity                           |  |                                       | 194,522 |   |      |   | 204,188 |      |  |   | 227,166   |   |  |      | 259,388 |   |  |   | 316,541
|                                                     |  |                                       |         |   |     
|ADDITIONAL DATA:                                     |  |                                       |         |   |      |   |         |      |  |   |           |   |  |      |         |   |  |   |        
|Basic earnings (loss) per share of common stock(2)   |  | $                                     | (0.84   | ) |      | $ | (1.37   | )    |  | $ | (4.12     | ) |  | $    | (6.22   | ) |  | $ | 1.84   
|Diluted earnings (loss) per share of common stock(2) |  | $                                     | (0.84   | ) |      | $ | (1.37   | )    |  | $ | (4.12     | ) |  | $    | (6.22   | ) |  | $ | 1.84   
|Dividends per share of common stock                  |  |                                       |        |   |      | $ | 0.40    |      |  | $ | 0.40      |   |  | $    | 0.40    |   |  | $ | 0.40   
|Book value per share                                 |  | $                                     | 20.68   |   |      | $ | 21.79   |      |  | $ | 24.34     |   |  | $    | 27.85   |   |  | $ | 33.92  
|Statutory capital and surplus                        |  | $                                     | 136,536 |   |      | $ | 140,216 |      |  | $ | 155,785   |   |  | $    | 181,916 |   |  | $ | 249,261



|(1) |  | Premiums written is a non-GAAP financial measure which represents the premiums charged on policies issued during a fiscal period less any reinsurance. Premiums written is a statutory measure
of production levels. Premiums earned, the most directly comparable GAAP measure, represents the portion of premiums written that is earned, on a pro-rata basis, as income in the financial statements for the periods presented. The change in unearned
premium reconciles the difference between the two measures.
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) |  | Basic earnings (loss) per share of common stock at December 31, 2004, 2003, 2002, 2001 and 2000 are computed using the weighted average number of common shares outstanding during the year of
9,387,556, 9,352,070, 9,322,249, 9,333,425, and 9,375,735, respectively. Diluted earnings per share of common stock at December 31, 2004, 2003, 2002, 2001 and 2000 are computed using the weighted average number of common shares outstanding during
the year of 9,387,556, 9,352,070, 9,322,249, 9,333,425, and 9,382,494, respectively. For further discussion of basic earnings per share and diluted earnings per share, see the Note 10 to Consolidated Financial Statements.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



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



Certain statements in this report on Form 10-K that are not historical in fact constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking
statements involve known and unknown risks, uncertainties and other factors based on the Companys estimates and expectations concerning future events that may cause the actual results of the Company to be materially different from historical
results or from any results expressed or implied by such forward-looking statements. These risks and uncertainties, as well as the Companys critical accounting policies, are discussed in more detail under BusinessRisk
Factors, Managements Discussion and AnalysisOverview, and Managements Discussion and AnalysisCritical Accounting Policies 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 has incurred losses since 2001. 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 effect an orderly withdrawal from healthcare liability insurance markets outside of California and Delaware and from the assumed reinsurance market in its entirety. At December 31, 2003, the Company had
only 379 healthcare liability insurance policies remaining in force in these other markets, all of which expired during the first quarter of 2004. In December 2002, the Company entered into a 100% quota share reinsurance agreement to retrocede to
another insurer the majority of reinsurance business written in 2002 and 2001. During 2003, the Company participated in only one ongoing reinsurance syndicate and had no ongoing reinsurance participation in 2004. The Company continues to settle and
pay claims incurred in the non-core healthcare and assumed reinsurance operations.



The
actions taken by the Company have significantly reduced capital requirements related to the premium written to surplus ratio in both the A.M. Best and NAIC capital adequacy models. The capital requirements associated with the reserve to surplus
ratio continue to decline as the Company settles the claims in its non-core businesses.



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 U.S. generally accepted
accounting principles (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 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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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 implicitly 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
estimates of ultimate incurred losses, especially those of Lloyds syndicates. 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. The Company has established net reserves of $442.4 million as of December 31, 2004, after considering both prospective and
retrospective reinsurance. The net reserves (including retrospective reserves ceded) attributable to the operating segments of the Company are as follows:



Summary of Loss and LAE Reserves

By Segment



|                                        |  |                   |       |                  |   |                  |  |   |      
|--------------------------------------- |  | ----------------- | ----- | ---------------- | - | ---------------- |  | - | -----
|                                        |  | DECEMBER 31, 2004 |       | DECEMBER 31,2003 |   | DECEMBER 31,2002
|                                        |  | (In Millions)    
|Direct Healthcare Liability Insurance   |  |                   |       |                  |   |                  |  |   |      
|Core                                    |  | $                 | 257.2 |                  | $ | 246.2            |  | $ | 235.1
|Non-Core                                |  |                   | 97.4  |                  |   | 145.3            |  |   | 180.4
|Assumed Reinsurance Segment             |  |                   | 87.8  |                  |   | 106.3            |  |   | 114.6
|                                        |  |                   |       |                  |   |                  |  |   |      
|Total net loss and LAE reserves         |  |                   | 442.4 |                  |   | 497.8            |  |   | 530.1
|                                        |  |                   |      
|Ceded loss reserves                     |  |                   | 183.6 |                  |   | 108.9            |  |   | 89.5 
|Retrospective reserves ceded            |  |                   | 12.7  |                  |   | 36.3             |  |   | 31.1 
|                                        |  |                   |       |                  |   |                  |  |   |      
|Loss and LAE reserves per balance sheet |  | $                 | 638.7 |                  | $ | 643.0            |  | $ | 650.7
|                                        |  |                   |       |                  |   |                  |  |   |      



A 1% difference in the ultimate value of total
loss and LAE reserves at December 31, 2004, net of reinsurance recoverable, would decrease or increase future pretax earnings by $4.4 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, future investment income, 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.



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Investments

---



The Company considers its fixed maturity and equity securities as available-for-sale securities.
Available-for-sale securities are sold in response to a number of issues, including the Companys liquidity needs, the Companys statutory surplus requirements and tax 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.



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 its 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, 2004, the Company had $48.5 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 $24.3 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. The Companys core operations have historically been profitable on both a GAAP and tax basis. The losses incurred in 2001 to 2004 have been primarily caused by losses in the non-core healthcare and assumed reinsurance
businesses. Since the core healthcare liability operation has remained strong and improved over the past years and the non-core healthcare liability and assumed operations are now in run-off, the Company believes it should return to a position of
taxable income, thus enabling it to utilize the net operating loss carryforward.



The
Companys estimate of future taxable income uses the same assumptions and projections as in its 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. Any valuation allowance 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.



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



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##### Table of Contents



significant ongoing losses in this program. 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 2002, 2003 and 2004, the Company derived approximately 27%, 9% and .3% 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 instituted more stringent underwriting and pricing guidelines in these states. Despite the significant price
increases and more stringent underwriting guidelines, the non-California programs produced significant underwriting losses in 2002, 2003 and 2004.



The Company and Brown & Brown agreed in early 2002 to terminate both the physician and dental programs no later than March 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, 2002,
813 policies were in force related to the Brown & Brown program. That number was reduced to 379 policies as of December 31, 2003. The Company has no active claims-made policies in force for the non-core healthcare liability insureds as of
December 31, 2004. The Company remains exposed under extended reporting policies required to be issued upon cancellation or non-renewal of the non-core insureds. This exposure is currently reserved and declines over time.



During 2005, the Company will continue to concentrate its efforts on its core physician and medical
group business in California and Delaware and settling outstanding claims in the non-core business. The Company does not expect to initiate any significant new programs outside California during 2005.



Assumed ReinsuranceBackground

---



The Company rapidly expanded its assumed reinsurance operations after the formation
of the division in late 1999. Written premiums were $2.4, $18.5 and $112.8 million, respectively for 2004, 2003 and 2002. Earned premiums, which lag behind written premiums, were $14.6, $32.4 and $122.5 million, respectively for 2004, 2003 and 2002.
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 an additional $15.4 million, $7.2 million, and $1.1 million in losses have been recorded in 2002, 2003, and 2004, respectively.



As a result of the Companys decline in capital and surplus from the World Trade Center losses and
losses incurred in healthcare insurance outside California, A. M. Best has reduced the Insurance Subsidiaries ratings below the A- (Excellent) rating. 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.



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 reinsurance transaction with Rosemont Reinsurance Ltd. (Rosemont Re) (formerly known as GoshawK Reinsurance Limited), a Bermuda reinsurance subsidiary of GoshawK Insurance Holdings plc, a
publicly held London-based Lloyds underwriter (GoshawK), under which the Company ceded to Rosemont 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 Rosemont Re $129.3 million of premiums written in 2002, $38.0 million of premiums written in 2003, and
($0.1) in 2004. The Company retains certain losses related to the assumed reinsurance business, including those related to the World Trade Center, and the Company continued to participate in one Lloyds syndicate for the 2003 underwriting year.
The Rosemont Re treaty relieved the Company of underwriting leverage and improved the Companys risk-based capital adequacy ratios under both the A.M. Best and NAIC models. Other than net premiums written of $18.3 million and $1.2 million from
the Lloyds syndicate in 2003 and 2004, respectively, the Company had no significant premiums written from prior year contracts.



GoshawK, the parent of Rosemont, suffered serious underwriting losses in late 2003. As a result, the Company incurred significant losses attributable to its participation in the
GoshawK underwriting syndicate and a $9.6 million loss in its holdings of GoshawK capital stock. The losses suffered by GoshawK did not materially affect the financial condition of Rosemont Re.



34



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##### Table of Contents



Results of Operations

---



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



|                                          |  |                                      |         |   |                    |   |         |       |  |       |         |  |   |         |  
|----------------------------------------- |  | ------------------------------------ | ------- | - | ------------------ | - | ------- | ----- |  | ----- | ------- |  | - | ------- | -
|YEAR ENDED DECEMBER 31, 2004              |  | DIRECT HEALTHCARE LIABILITYINSURANCE |         |   | ASSUMEDREINSURANCE |   |         | OTHER |  | TOTAL |        
|                                          |  | (In Thousands)                       |        
|Premiums written                          |  | $                                    | 126,834 |   |                    | $ | 2,376   |       |  |       |         |  | $ | 129,210 |  
|                                          |  |                                      |         |   |                    |   |         |       |  |       |         |  |   |         |  
|Premiums earned                           |  | $                                    | 121,478 |   |                    | $ | 14,628  |       |  |       |         |  | $ | 136,106 |  
|Net investment income                     |  |                                      |        |   |                    |   |        |       |  | $     | 19,174  |  |   | 19,174  |  
|Realized investment gains                 |  |                                      |        |   |                    |   |        |       |  |       | 1,502   |  |   | 1,502   |  
|Other revenue                             |  |                                      |        |   |                    |   |        |       |  |       | 540     |  |   | 540     |  
|                                          |  |                                      |         |   |                    |   |         |       |  |       |         |  |   |         |  
|Total revenues                            |  |                                      | 121,478 |   |                    |   | 14,628  |       |  |       | 21,216  |  |   | 157,322 |  
|                                          |  |                                      |         |  
|Losses and loss adjustment expenses       |  |                                      | 110,590 |   |                    |   | 28,337  |       |  |       |        |  |   | 138,927 |  
|Other operating expenses                  |  |                                      | 26,134  |   |                    |   | 139     |       |  |       |        |  |   | 26,273  |  
|                                          |  |                                      |         |   |                    |   |         |       |  |       |         |  |   |         |  
|Total expenses                            |  |                                      | 136,724 |   |                    |   | 28,476  |       |  |       |        |  |   | 165,200 |  
|                                          |  |                                      |         |   |                    |   |         |       |  |       |         |  |   |         |  
|Segment income (loss) before income taxes |  | $                                    | (15,246 | ) |                    | $ | (13,848 | )     |  | $     | 21,216  |  | $ | (7,878  | )
|                                          |  |                                      |         |   |                    |   |         |       |  |       |         |  |   |         |  
|Segment assets                            |  | $                                    | 142,270 |   |                    | $ | 196,853 |       |  | $     | 640,512 |  | $ | 979,635 |  



|                                          |  |                                      |         |   |                    |   |         |       |  |       |         |  |   |         |  
|----------------------------------------- |  | ------------------------------------ | ------- | - | ------------------ | - | ------- | ----- |  | ----- | ------- |  | - | ------- | -
|YEAR ENDED DECEMBER 31, 2003              |  | DIRECT HEALTHCARE LIABILITYINSURANCE |         |   | ASSUMEDREINSURANCE |   |         | 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 | )
|                                          |  |                                      |         |   |                    |   |         |       |  |       |         |  |   |         |  
|Segment assets                            |  | $                                    | 28,042  |   |                    | $ | 253,315 |       |  | $     | 709,893 |  | $ | 991,250 |  



|                                          |  |                                      |         |   |                    |   |         |       |  |       |         |  |   |           |  
|----------------------------------------- |  | ------------------------------------ | ------- | - | ------------------ | - | ------- | ----- |  | ----- | ------- |  | - | --------- | -
|YEAR ENDED DECEMBER 31, 2002              |  | DIRECT HEALTHCARE LIABILITYINSURANCE |         |   | ASSUMEDREINSURANCE |   |         | 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   | )
|                                          |  |                                      |         |   |                    |   |         |       |  |       |         |  |   |           |  
|Segment assets                            |  | $                                    | 105,689 |   |                    | $ | 171,439 |       |  | $     | 786,638 |  | $ | 1,063,766 |  



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##### Table of Contents



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 represents
business related to physician and dental programs formerly conducted for the Company primarily in states outside California and Delaware by a national independent insurance agency, other state non-standard physician programs and hospital programs
including those in California. The following tables summarize by core and non-core businesses the underwriting results of the direct healthcare liability insurance segment for the periods indicated:



Direct Healthcare Liability Insurance Segment

Underwriting Results

(In Thousands)



|                             |  |      |         |   |          |   |         |       |  |   |         |  
|---------------------------- |  | ---- | ------- | - | -------- | - | ------- | ----- |  | - | ------- | -
|YEAR ENDED DECEMBER 31, 2004 |  | CORE |         |   | NON-CORE |   |         | TOTAL | 
|                             |  |      |         |   |          |   |         |       |  |   |         |  
|Premiums written             |  | $    | 128,641 |   |          | $ | (1,807  | )     |  | $ | 126,834 |  
|                             |  |      |         |   |          |   |         |       |  |   |         |  
|Premiums earned              |  | $    | 123,194 |   |          | $ | (1,716  | )     |  | $ | 121,478 |  
|Losses and LAE incurred      |  |      | 99,302  |   |          |   | 11,288  |       |  |   | 110,590 |  
|Underwriting expenses        |  |      | 25,742  |   |          |   | 392     |       |  |   | 26,134  |  
|                             |  |      |         |   |          |   |         |       |  |   |         |  
|Underwriting loss            |  | $    | (1,850  | ) |          | $ | (13,396 | )     |  | $ | (15,246 | )
|                             |  |      |         |   |          |   |         |       |  |   |         |  
|Loss ratio                   |  |      | 80.6    | % |          |   |         |       |  |   |         |  
|Expense ratio                |  |      | 20.9    | % |          |   |         |       |  |   |         |  
|Combined ratio               |  |      | 101.5   | % |          |   |         |       |  |   |         |  
|Net reserves held            |  | $    | 257,230 |   |          | $ | 97,331  |       |  | $ | 354,561 |  
|                             |  |      |        
|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    | % |          |   |         |       |  |   |         |  
|Expense ratio                |  |      | 20.5    | % |          |   |         |       |  |   |         |  
|Combined ratio               |  |      | 109.1   | % |          |   |         |       |  |   |         |  
|Net reserves held            |  | $    | 246,189 |   |          | $ | 145,283 |       |  | $ | 391,472 |  
|                             |  |      |        
|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    | % |          |   |         |       |  |   |         |  
|Expense ratio                |  |      | 19.6    | % |          |   |         |       |  |   |         |  
|Combined ratio               |  |      | 110.8   | % |          |   |         |       |  |   |         |  
|Net reserves held            |  | $    | 235,089 |   |          | $ | 180,388 |       |  | $ | 415,477 |  



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##### Table of Contents



Core Business



Premiums written for the core direct healthcare liability insurance business increased 4.4%, 5.4% and 4.8%, in 2004, 2003 and 2002, respectively, as average rate increases of 7.4%,
2.5% and 8.4% in 2004, 2003 and 2002, respectively, were partially offset by a decline in the number of insureds. Premiums earned in the core business increased 3.4%, 2.6% and 9.0% in 2004, 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 has remained at 92% for 2004, 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 that provides for their insurance. These losses are offset by new sales activities. New policies written in 2004, 2003, and
2002 were 1,124, 1,225, and 1,463, respectively. The core business policies inforce were 10,684 policies, 11,137 policies and 11,530 policies at year end 2004, 2003 and 2002, respectively.



The loss ratio (losses and LAE related to premiums earned) for 2004 was 80.6% compared to a loss ratio
of 88.6% and 91.2% for 2003 and 2002, respectively. The change in loss ratio primarily reflected increases in average claim costs offset by a decline in the frequency of claims, favorable development on prior year reserves and the effect of the
average rate increases on earned premiums.



The underwriting expense ratio (expenses
related to premiums earned) remained relatively unchanged at 20.9% in 2004 compared to 20.5% in 2003. The expense ratio increased in 2003 compared to 2002, primarily due to additional expenses connected with the rate approval hearing and regulatory
triennial audit expenses in excess of amounts previously accrued.



Non-Core Business



The negative premiums written and earned in 2004 represent reinsurance premiums
paid by the Company in connection with the reinstatement of excess of loss layers for older years. Premiums written decreased in 2003 to $5.3 million from $21.9 million in 2002. This resulted from the significant decline 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 decline in insureds resulted from the Companys actions taken to withdraw from this business. After March 6, 2003, 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 underwriting loss incurred in 2004 is primarily due to two adverse litigation
decisions, reserve increases attributable to older years on dentists coverage and a general reserve increase of $3.0 million in the fourth quarter 2004.



The Company made good progress in 2004 in settling claims related to the non-core healthcare liability business in run-off. Total net reserves declined from $145.3 million at
December 31, 2003 to $97.4 million at December 31, 2004 and outstanding claims fell from 739 at December 31, 2003 to 431 at December 31, 2004. In total only 78 new claims were reported in 2004 compared to 244 in 2003.



As the reserves and cases of non-core healthcare claims continue to decline, it becomes more difficult
to establish reserve estimates for the remaining claims based on actuarial techniques. The ultimate losses become more related to specific case results, (including litigation) rather than estimates based on actuarial techniques. Unexpected legal
verdicts or settlements reached at trial can produce unexpected reserve development.



Assumed Reinsurance Segment

---



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



|                                          |  |                                                                |         |   |      |   |         |      |  |   |         |  
|----------------------------------------- |  | -------------------------------------------------------------- | ------- | - | ---- | - | ------- | ---- |  | - | ------- | -
|                                          |  | Assumed Reinsurance SegmentUnderwriting Results (In Thousands) |        
|FOR THE YEAR ENDED DECEMBER 31,           |  | 2004                                                           |         |   | 2003 |   |         | 2002 | 
|Premiums written                          |  | $                                                              | 2,376   |   |      | $ | 18,450  |      |  | $ | 112,849 |  
|                                          |  |                                                                |         |   |      |   |         |      |  |   |         |  
|Premiums earned                           |  | $                                                              | 14,628  |   |      | $ | 32,427  |      |  | $ | 122,544 |  
|Underwriting expenses                     |  |                                                                |         |   |      |   |         |      |  |   |         |  
|Losses                                    |  |                                                                | 28,337  |   |      |   | 28,332  |      |  |   | 123,060 |  
|Underwriting and other operating expenses |  |                                                                | 139     |   |      |   | 17,610  |      |  |   | 47,278  |  
|                                          |  |                                                                |         |   |      |   |         |      |  |   |         |  
|Underwriting loss                         |  | $                                                              | (13,848 | ) |      | $ | (13,515 | )    |  | $ | (47,794 | )
|                                          |  |                                                                |         |   |      |   |         |      |  |   |         |  
|Net reserves held                         |  | $                                                              | 87,808  |   |      | $ | 106,358 |      |  | $ | 114,652 |  



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##### Table of Contents



The earned premium in 2004 is a result of one ongoing assumed reinsurance program for the 2003 underwriting year.



The Assumed Reinsurance Segment premiums written declined 84% in 2003 from 2002 as the full impact
of the retrocession to Rosemont Re took effect. Premiums written in 2004 relate to the one remaining syndicate supported in 2003. Premiums earned decreased to $14.6 in 2004, from $32.4 million in 2003 and from $122.5 million in 2002 because of
reduction in treaty programs to one account and the cession of premiums written to Rosemont Re.



The underwriting loss was slightly higher for 2004 ($13.8 million) versus 2003 ($13.5 million).



The underwriting loss in 2004 was principally attributable to unexpected adverse loss development during 2004 principally in connection with the Lloyds syndicates, additional losses incurred under a single excess of loss
directors and officers liability insurance treaty, and losses involving issuers of bail and immigration bonds. The fall in the U.S. dollar compared to the British pound also contributed to the loss.



The underwriting loss in 2003 was principally attributable to the failure of Goshawk Syndicate 102 and
upward development on World Trade Center losses.



Net loss reserves related to the
assumed reinsurance segment declined from $106.3 million at December 31, 2003 to $87.8 million at December 31, 2004 as reserves were settled and 2001 underwriting years for the London syndicates closed and settlements were made in 2004.



The Rosemont Re reinsurance treaty entered into in December 2002 effectively cedes 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, $38.0 million in 2003 and $(0.1) million in 2004). This treaty relieves
the Company of significant underwriting risk and written premium leverage and significantly improves the Companys risk-based capital adequacy ratios under both the A.M. Best and NAIC models. The treaty has no limitations on loss recoveries and
includes a profit-sharing provision should the combined ratios calculated on the base premium ceded be below 100%. The treaty requires Rosemont Re to reimburse the Company for its acquisition and administrative expenses. In addition, the Company is
required to pay Rosemont Re additional premium in excess of the base premium ceded of 14.3% or an estimated $24.0 million. The additional premium reduced 2004, 2003 and 2002 earned premium by $(0.01), $5.5 and $18.5 million, respectively.



The Rosemont 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.



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



Other Operations

---



|                                    |  |                |         |   |      |   |         |      |  |   |         |  
|----------------------------------- |  | -------------- | ------- | - | ---- | - | ------- | ---- |  | - | ------- | -
|DECEMBER 31,                        |  | 2004           |         |   | 2003 |   |         | 2002 | 
|                                    |  | (In Thousands) |        
|Net investment income               |  | $              | 19,174  |   |      | $ | 21,954  |      |  | $ | 32,231  |  
|Net realized investment gains       |  |                | 1,502   |   |      |   | 216     |      |  |   | 18,910  |  
|Average invested assets             |  |                | 600,996 |   |      |   | 660,769 |      |  |   | 702,053 |  
|Average rate of return before taxes |  |                | 3.2     | % |      |   | 3.3     | %    |  |   | 4.6     | %



Net investment income decreased to $20.7 million
for 2004 from $22.2 million in 2003 and $32.2 million in 2002. The decrease in net investment income 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 in 2003 was impacted by a lower rate of return after tax on invested assets due to the significant realized gains recognized in the latter half of 2002. The lower
rate reflected the rates available for reinvestment at the time as the quality of the portfolio was maintained.



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##### Table of Contents



The net realized gains of 2003 includes a $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. The GoshawK stock was sold in early 2004.



Income Taxes

---



The Company had a minor income tax expense in 2004 compared to a benefit of $7.4 million and $22.6 million in 2003 and 2002, respectively. During the third quarter, the Company
settled with the California Franchise Tax Board (FTB) for $4.0 million, an assessment received in 2002. Legislation enacted in California during the third quarter of 2004 restored 80% of a deduction provision under which insurance holding companies
had for many years deducted all dividends received from their insurance company subsidiaries. The $4.0 million settlement is included in income taxes and offsets a federal tax benefit for the year of $3.9 million.



The Company currently has a net deferred tax asset of $48.5 million as of December 31, 2004, of which
$24.3 million relates to a net operating loss carryforward which expires in 2021. The Company will be able to utilize this carryforward to reduce taxes in future periods. The losses in recent years which gave rise to the operating loss carryforward
were primarily generated by underwriting losses in 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 2004, 2003 and 2002, the Company had negative cash flow from operations of $63.3 million, $46.8 million and $24.5 million, respectively. The negative cash
flow during this period is primarily related to the declining premium receipts and the increasing claims payments associated with the non-core physician and assumed reinsurance programs, which are now in run-off. 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 maintains a significant 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 $94.4 million, or 16.4% of invested assets, at December 31, 2004. The Company believes that all of its short-term and fixed-maturity
securities are readily marketable and have scheduled maturities in line with projected cash needs.



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 unaffiliated equity securities and mortgage loans to no more
than 8.0% of the total market value of its investments. The market value of the Companys portfolio of unaffiliated equity securities was $16.2 million at December 31, 2004 compared to $20.5 million at December 31, 2003. The Company plans to
continue its emphasis on fixed maturity securities investments for the indefinite future.



The Company leases approximately 95,000 square feet of office space for its headquarters. The lease is for a term of 10 years ending in 2009, and the Company has two options to renew the lease for a period of five years each.



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
2005 without prior regulatory approval is approximately $13.7 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. In March 2004, the Board of Directors suspended the Companys quarterly
dividends. The payment



39



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and amount of cash dividends will depend upon, among other factors, the Companys operating results, overall financial condition, capital requirements and general
business conditions. As of December 31, 2004, SCPIE Holdings held cash and short-terms securities of $8.0 million of which approximately $4.0 million was utilized to satisfy the California franchise tax liability in January 2005. 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.



The Companys capital adequacy position has been weakened by the losses in the
non-core business. The Companys current rating from A.M. Best is 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 risk-based capital (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, 2004, the RBC level of each Insurance Subsidiary exceeded the
threshold requiring the least regulatory attention. At December 31, 2004, SCPIE Indemnity exceeded this threshold by $38.0 million.



The Company believes that it has the ability to fund its continuing operations from its premiums written and investment income. The Company plans to continue its 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 adequacy
position should improve.



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 operating leases for 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, 2004, are as follows:



|                 |  |                                       |       |      |   |       |  |      |       |      |   |            |  |   |     |  |   |    
|---------------- |  | ------------------------------------- | ----- | ---- | - | ----- |  | ---- | ----- | ---- | - | ---------- |  | - | --- |  | - | ---
|                 |  | 2005                                  |       | 2006 |   | 2007  |  | 2008 |       | 2009 |   | Thereafter
|                 |  | Payments Due by Period (in thousands)
|Operating Leases |  | $                                     | 3,006 |      | $ | 3,035 |  | $    | 3,177 |      | $ | 2,640      |  | $ | -0- |  | $ | -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, 2004, letter of
credit issuance under the facility was approximately $45.4 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 Company is subject to various market risk exposures, including interest rate risk and equity price risk.



The Company invests its assets primarily in fixed-maturity securities, which at December 31, 2004, comprised 79.0% of total investments at market
value. Corporate bonds represent 38.1% and U.S. government bonds represent 25.5% of the fixed-maturity investments, with the remainder consisting of mortgage-backed and asset-backed securities. Equity securities, consisting primarily of common
stocks, account for 2.8% of total investments at market value. Mortgage loans represent 1.8% of the investment portfolio. The remainder of the investment portfolio consists of cash and highly liquid short-term investments, which are primarily
overnight bank repurchase agreements and short-term money market funds.



The value of the
fixed-maturity portfolio is subject to interest rate risk. As market interest rates decrease, the value of the portfolio increases with the opposite holding true in rising interest rate environments. A common measure of the interest sensitivity of
fixed-maturity



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##### Table of Contents



assets is modified or effective duration, a calculation that takes maturity, coupon rate, yield and call terms to calculate an average age of the expected cash flows.
The longer the duration, the more sensitive the asset is to market interest rate fluctuations. The effective duration of the fixed maturity portfolio at December 31, 2004 was 3.6 years.



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.



At December 31, 2004, the carrying value of the investment portfolio included $4.6 million in net unrealized gains. At December 31, 2003, the
investment portfolio included $8.1 million in net unrealized gains.



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.



|                                             |  |                |         |                                                 |   |                                                                     |  |   |        
|-------------------------------------------- |  | -------------- | ------- | ----------------------------------------------- | - | ------------------------------------------------------------------- |  | - | -------
|                                             |  | CarryingValue  |         | EstimatedFair Value atCurrentMarketRates/Prices |   | EstimatedFair Value atAdjusted MarketRates/Prices asIndicated Below
|                                             |  | (In Thousands)
|December 31, 2004                            |  |                |         |                                                 |   |                                                                     |  |   |        
|Interest rate risk*                          |  |                |         |                                                 |   |                                                                     |  |   |        
|Fixed-maturity securities available for sale |  | $              | 454,817 |                                                 | $ | 454,817                                                             |  | $ | 438,398
|Equity price risk**                          |  |                |         |                                                 |   |                                                                     |  |   |        
|Common stocks                                |  | $              | 16,173  |                                                 | $ | 16,173                                                              |  | $ | 14,556 
|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 



|* |  | 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 49 hereof.



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



None.



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##### Table of Contents



ITEM 9A.    DISCLOSURE CONTROLS AND PROCEDURES



Evaluation of Disclosure 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 SEC 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 period 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.



Managements Report
on Internal Control over Financial Reporting

---



The Companys management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rule 13a-15(f) under the Securities
Exchange Act of 1934.



The Company has conducted 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 its internal control over financial reporting as of December 31, 2004 based on the criteria related to internal
control over financial reporting described in Internal ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on that evaluation, the Companys management,
including its Chief Executive Officer and Chief Financial Officer, concluded that its internal control over financial reporting was effective as of December 31, 2004.



Managements assessment of the effectiveness of its internal control over financial reporting as of December 31, 2004 has been audited by Ernst
& Young LLP, an independent registered public accounting firm, as stated in their attestation report, a copy of which is included in this Annual Report on Form 10-K.



Report of Independent Registered Public Accounting Firm

---



Board of Directors and Stockholders

SCPIE Holdings Inc.



We have audited managements assessment,
included in the accompanying Managements Report on Internal Control over Financial Reporting, that SCPIE Holdings, Inc. and subsidiaries (the Company) maintained effective internal control over financial reporting as of December 31, 2004,
based on criteria established in Internal ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). The Companys management is responsible for maintaining effective
internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on managements assessment and an opinion on the effectiveness of
the Companys internal control over financial reporting based on our audit.



We
conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control
over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating managements assessment, testing and evaluating the design and operating
effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.



A companys internal control over financial reporting is a process designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting



42



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##### Table of Contents



principles. A companys internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in
reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance
with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisition, use, or disposition of the companys assets that could have a material effect on the financial statements.



Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any
evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.



In our opinion, managements assessment that SCPIE Holdings, Inc. and subsidiaries maintained
effective internal control over financial reporting as of December 31, 2004, is fairly stated, in all material respects, based on the COSO criteria. Also, in our opinion, SCPIE Holdings, Inc. and subsidiaries maintained, in all material respects,
effective internal control over financial reporting as of December 31, 2004, based on the COSO criteria.



We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of SCPIE Holdings, Inc. and
subsidiaries as of December 31, 2004 and 2003, and the related consolidated statements of operations, stockholders equity, and cash flows for each of the three years in the period ended December 31, 2004 of SCPIE Holdings, Inc. and
subsidiaries and our report dated March 14, 2005 expressed an unqualified opinion thereon.



/s/ ERNST & YOUNG LLP



Los Angeles, California

March 14, 2005



Changes in Internal Control over Financial Reporting

---



During the fiscal quarter ended December 31, 2004, there have been no changes in the Companys internal control over financial reporting that may have materially affected, or
are likely to materially affect, its internal control over financial reporting.



ITEM 9B.    OTHER INFORMATION



None.



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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 24, 2005 (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.



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PART IV



ITEM 15.    EXHIBITS AND FINANCIAL STATEMENTS SCHEDULES



(a)(1) and (a)(2) and (c) 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 49 of this Form
10-K report.



(a) (3) Exhibits:



|       |  |                                                                                                                                                                                                                                                                                                                                                                         
|------ |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NUMBER |  | DOCUMENT                                                                                                                                                                                                                                                                                                                                                                
|2.     |  | Amended and Restated Plan and Agreement of Merger by and among SCPIE Holdings Inc., SCPIE Indemnity Company and Southern California Physicians Insurance Exchange dated August 8, 1996, as amended
December 19, 1996 (filed with the Companys Registration Statement on Form S-1 (No. 33-4450) and incorporated herein by reference).                                  
|       | 
|3.1    |  | Amended and Restated Certificate of Incorporation (filed with the Companys Registration Statement on Form S-1 (No. 33-4450) and incorporated herein by reference).                                                                                                                                                                                                     
|       | 
|3.2    |  | Amended and Restated Bylaws (filed with the Companys Annual Report on Form 10-K on March 30, 2004 and incorporated herein by reference).                                                                                                                                                                                                                               
|       | 
|10.1*  |  | Amended and Restated Employment Agreement dated January 3, 2005, between SCPIE Management Company and Donald J. Zuk (filed with the Companys Current Report on Form 8-K on January 5, 2005 and
incorporated herein by reference).                                                                                                                                      
|       | 
|10.31* |  | SCPIE Management Company Retirement Income Plan, as amended and restated, effective January 1, 1989 (filed with the Companys Registration Statement on Form S-1 (No. 33-4450) and incorporated
herein by reference).                                                                                                                                                   
|       | 
|10.32* |  | The SMC Cash Accumulation Plan, dated July 1, 1991, as amended (filed with the Companys Registration Statement on Form S-1 (No. 33-4450) and incorporated herein by reference).                                                                                                                                                                                        
|       | 
|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).                                                                                                                                                        
|       | 
|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).



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|       |  |                                                                                                                                                                                                                                                                                                                         
|------ |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NUMBER |  | DOCUMENT                                                                                                                                                                                                                                                                                                                
|       | 
|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 3, 2005, by and between SCPIE Management Company and Donald P. Newell (filed with the Companys Current Report on Form 8-K on January 5, 2005
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 (now named Rosemont
Re) (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 (now named Rosemont Re) (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).                                                                                                    
|       | 
|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 (filed with the Companys Annual Report on Form 10-K on March 30, 2004 and incorporated herein by
reference).                                                                                                                                
|       | 
|10.73* |  | Amendment 2004-1 to the Supplemental Employee Retirement Plan for selected employees of SCPIE Management Company (filed with the Companys Annual Report on Form 10-K on March 30, 2004 and
incorporated herein by reference).                                                                                          
|       | 
|10.75  |  | Addendum No. 1 to Per Policy of Loss Reinsurance Agreement 8493-00-0003-00 with various subscribing reinsurers (filed with the Companys Annual Report on Form 10-K on March 30, 2004 and
incorporated herein by reference).                                                                                            
|       | 
|10.77  |  | Cover Note for Per Policy Excess of Loss Reinsurance Agreement 8493-3 with various subscribing reinsurers (filed with the Companys Annual Report on Form 10-K on March 30, 2004 and incorporated
herein by reference).                                                                                                 
|       | 
|10.78  |  | Second Amendment to the 2003 Equity Participation Plan of SCPIE Holdings Inc. (filed with the Companys Quarterly Report on Form 10-Q on November 12, 2004 and incorporated herein by
reference).                                                                                                                       
|       | 
|10.79* |  | Amendment #2 to the Southern California Physicians Insurance Exchange Retirement Plan for Outside Governors and Affiliated Directors (filed with the Companys Current Report on Form 8-K on
December 15, 2004 and incorporated herein by reference).                                                                   
|       | 
|10.80* |  | Form of Deferred Stock and Dividend Equivalent Agreement for Independent Directors.                                                                                                                                                                                                                                     
|       | 
|10.81  |  | Reinsurance to Close Administration and Management Agreement among the Company, KILN Underwriting Limited, KILN PLC, and Chaucer Syndicates Limited.                                                                                                                                                                    



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|       |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|------ |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NUMBER |  | DOCUMENT                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|       | 
|10.82  |  | FirstThird Excess of Loss Reinsurance Contract 8493-00-0009-00 with various subscribing reinsurers effective January 1, 2004.                                                                                                                                                                                                                                                                                                                                                             
|       | 
|10.83  |  | Cover note for FirstThird Excess of Loss Reinsurance Agreement 8493-00-0009-00 with various subscribing reinsurers effective January 1, 2005.                                                                                                                                                                                                                                                                                                                                             
|       | 
|23.1   |  | Consent of independent auditors.                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|       | 
|31.1   |  | Certification of Registrants Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934 and Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                                                                 
|       | 
|31.2   |  | Certification of Registrants Chief Financial Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934 and Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                                                                 
|       | 
|32.1   |  | Certification of Registrants Chief Executive Officer pursuant to Rule 13a-14(b) of the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350, as created by Section 906 of the Sarbanes-Oxley
Act of 2002. This certification is being furnished solely to accompany this Annual Report on Form 10-K and is not being filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and is not to be incorporated by reference
into any filing of the Company.
|       | 
|32.2   |  | Certification of Registrants Chief Financial Officer pursuant to Rule 13a-14(b) of the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350, as created by Section 906 of the Sarbanes-Oxley
Act of 2002. This certification is being furnished solely to accompany this Annual Report on Form 10-K and is not being filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and is 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.
|- |  | ------------------------------------------------------------------------------------------------------------------------------



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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 16, 2005



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 16, 2005
|                                                          |  |                                                                                         
|/s/    ROBERT B. TSCHUDYRobert B. Tschudy                 |  | Senior Vice President, Treasurer andChief Financial Officer(Principal Financial Officer) |  | March 16, 2005
|                                                          |  |                                                                                         
|/s/    EDWARD G. MARLEYEdward G. Marley                   |  | Vice President and Chief Accounting Officer (Principal Accounting Officer)               |  | March 16, 2005
|                                                          |  |                                                                                         
|/s/    MITCHELL S. KARLAN, M.D.Mitchell S. Karlan, M.D.   |  | Chairman of the Board and Director                                                       |  | March 16, 2005
|                                                          |  |                                                                                         
|/s/    WILLIS T. KING,
JR.Willis T. King, Jr.             |  | Director                                                                                 |  | March 16, 2005
|                                                          |  |                                                                                         
|/s/    LOUIS H. MASOTTI,
PH.D.Louis H. Masotti,
Ph.D.     |  | Director                                                                                 |  | March 16, 2005
|                                                          |  |                                                                                         
|/s/    JACK E. MCCLEARY,
M.D.Jack E. McCleary, M.D.       |  | Director                                                                                 |  | March 16, 2005
|                                                          |  |                                                                                         
|/s/    CHARLES B. MCELWEE,
M.D.Charles B. McElwee, M.D.   |  | Director                                                                                 |  | March 16, 2005
|                                                          |  |                                                                                         
|/s/    WENDELL L. MOSELEY, M.D.Wendell L. Moseley, M.D.   |  | Director                                                                                 |  | March 16, 2005
|                                                          |  |                                                                                         
|/s/    DONALD P. NEWELLDonald P. Newell                   |  | Director                                                                                 |  | March 16, 2005
|                                                          |  |                                                                                         
|/s/    WILLIAM A. RENERT, M.D.William A. Renert, M.D.     |  | Director                                                                                 |  | March 16, 2005
|                                                          |  |                                                                                         
|/s/    HENRY L. STOUTZ, M.D.Henry L. Stoutz, M.D.         |  | Director                                                                                 |  | March 16, 2005
|                                                          |  |                                                                                         
|/s/    REINHOLD A. ULLRICH, M.D.Reinhold A. Ullrich, M.D. |  | Director                                                                                 |  | March 16, 2005
|                                                          |  |                                                                                         
|/s/    RONALD H. WENDER, M.D.Ronald H. Wender, M.D.       |  | Director                                                                                 |  | March 16, 2005



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SCPIE HOLDINGS INC.



ITEM 15(c) FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES



ANNUAL REPORT ON FORM 10-K



|                                                                                                     |  |     
|---------------------------------------------------------------------------------------------------- |  | ----
|INDEX                                                                                                |  | PAGE
|Report of Independent Registered Public Accounting Firm                                              |  | 50  
|Financial Statements:                                                                                |  |     
|Consolidated Balance Sheets as of December 31, 2004 and 2003                                         |  | 51  
|Consolidated Statements of Operations for the years ended December 31, 2004, 2003 and 2002           |  | 52  
|Consolidated Statements of Stockholders Equity for the years ended December 31, 2004, 2003 and 2002 |  | 53  
|Consolidated Statements of Cash Flows for the years ended December 31, 2004, 2003 and 2002           |  | 54  
|Notes to Consolidated Financial Statements                                                           |  | 55  
|Schedule IICondensed Financial Information of Registrant                                            |  | 70  
|Schedule IIISupplementary Insurance Information                                                     |  | 74  



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.



49



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Report of Independent Registered Public Accounting Firm



Board of Directors and Stockholders

SCPIE Holdings Inc.



We have audited the accompanying consolidated balance sheets of SCPIE Holdings, Inc. and subsidiaries as of December 31, 2004 and 2003, and the related consolidated statements of
operations, stockholders equity, and cash flows for each of the three years in the period ended December 31, 2004. Our audits also included the financial statement schedules listed in the Index at Item 15(c). 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 the standards of the Public Company Accounting Oversight Board (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, 2004 and 2003, and the consolidated results of their operations and their cash flows for each of the three years
in the period ended December 31, 2004, in conformity with U.S. generally accepted accounting principles. 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.



We also have
audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of SCPIE Holding Inc.s internal control over financial reporting as of December 31, 2004, based on criteria
established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 14, 2005 expressed an unqualified opinion thereon.



/s/ ERNST & YOUNG LLP



Los Angeles, California

March 14, 2005



50



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SCPIE HOLDINGS INC. AND SUBSIDIARIES



CONSOLIDATED BALANCE SHEETS

(In thousands, except share data)



|                                                                                                                                                             |  |      |         |   |      |   |         |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | ---- | ------- | - | ---- | - | ------- | -
|DECEMBER 31,                                                                                                                                                 |  | 2004 |         |   | 2003 |  
|ASSETS                                                                                                                                                       |  |      |         |   |      |   |         |  
|Securities available-for-sale (Note 2):                                                                                                                      |  |      |         |   |      |   |         |  
|Fixed maturity investments, at fair value (amortized cost 2004$454,278; 2003$550,794)                                                                      |  | $    | 454,817 |   |      | $ | 554,141 |  
|Equity investments, at fair value (cost 2004$12,100; 2003$15,766)                                                                                          |  |      | 16,173  |   |      |   | 20,543  |  
|                                                                                                                                                             |  |      |         |   |      |   |         |  
|Total securities available-for-sale                                                                                                                          |  |      | 470,990 |   |      |   | 574,684 |  
|Mortgages                                                                                                                                                    |  |      | 10,400  |   |      |   | 10,400  |  
|Cash and cash equivalents                                                                                                                                    |  |      | 94,390  |   |      |   | 62,095  |  
|                                                                                                                                                             |  |      |         |   |      |   |         |  
|Total investments and cash and cash equivalents                                                                                                              |  |      | 575,780 |   |      |   | 647,179 |  
|                                                                                                                                                             |  |     
|Accrued investment income                                                                                                                                    |  |      | 5,849   |   |      |   | 7,526   |  
|Premiums receivable                                                                                                                                          |  |      | 12,603  |   |      |   | 15,257  |  
|Assumed reinsurance receivable                                                                                                                               |  |      | 119,937 |   |      |   | 104,855 |  
|Reinsurance recoverable (Note 4)                                                                                                                             |  |      | 197,520 |   |      |   | 151,829 |  
|Deferred policy acquisition costs                                                                                                                            |  |      | 9,063   |   |      |   | 9,416   |  
|Deferred federal income taxes, net (Note 5)                                                                                                                  |  |      | 48,454  |   |      |   | 43,725  |  
|Property and equipment, net                                                                                                                                  |  |      | 2,954   |   |      |   | 3,816   |  
|Other assets                                                                                                                                                 |  |      | 7,475   |   |      |   | 7,647   |  
|                                                                                                                                                             |  |      |         |   |      |   |         |  
|Total assets                                                                                                                                                 |  | $    | 979,635 |   |      | $ | 991,250 |  
|                                                                                                                                                             |  |      |         |   |      |   |         |  
|LIABILITIES                                                                                                                                                  |  |      |         |   |      |   |         |  
|Reserves:                                                                                                                                                    |  |      |         |   |      |   |         |  
|Losses and loss adjustment expenses (Note 3)                                                                                                                 |  | $    | 638,747 |   |      | $ | 643,046 |  
|Unearned premiums                                                                                                                                            |  |      | 43,811  |   |      |   | 50,707  |  
|                                                                                                                                                             |  |      |         |   |      |   |         |  
|Total reserves                                                                                                                                               |  |      | 682,558 |   |      |   | 693,753 |  
|Amounts held for reinsurance                                                                                                                                 |  |      | 77,519  |   |      |   | 67,223  |  
|Other liabilities                                                                                                                                            |  |      | 25,036  |   |      |   | 26,086  |  
|                                                                                                                                                             |  |      |         |   |      |   |         |  
|Total liabilities                                                                                                                                            |  |      | 785,113 |   |      |   | 787,062 |  
|Commitments and contingencies (Note 8)                                                                                                                       |  |      |         |   |      |   |         |  
|                                                                                                                                                             |  |     
|STOCKHOLDERS EQUITY                                                                                                                                         |  |      |         |   |      |   |         |  
|Preferred stockpar value $1.00, 5,000,000 shares authorized, no shares issued or outstanding                                                                |  |      |         |   |      |   |         |  
|Common stock, par value $.0001, 30,000,000 shares authorized, 12,792,091 shares issued, 20049,404,604 shares outstanding, 20039,371,933
shares outstanding |  |      | 1       |   |      |   | 1       |  
|Additional paid-in capital                                                                                                                                   |  |      | 37,127  |   |      |   | 37,281  |  
|Retained earnings                                                                                                                                            |  |      | 256,177 |   |      |   | 264,063 |  
|Treasury stock, at cost 20042,887,487 shares and 20032,920,158 shares                                                                                      |  |      | (97,654 | ) |      |   | (98,006 | )
|Subscription notes receivable                                                                                                                                |  |      | (3,018  | ) |      |   | (3,312  | )
|Accumulated other comprehensive income                                                                                                                       |  |      | 1,889   |   |      |   | 4,161   |  
|                                                                                                                                                             |  |      |         |   |      |   |         |  
|Total stockholders equity                                                                                                                                   |  |      | 194,522 |   |      |   | 204,188 |  
|                                                                                                                                                             |  |      |         |   |      |   |         |  
|Total liabilities and stockholders equity                                                                                                                   |  | $    | 979,635 |   |      | $ | 991,250 |  
|                                                                                                                                                             |  |      |         |   |      |   |         |  



See accompanying notes to
Consolidated Financial Statements.



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SCPIE HOLDINGS INC. AND SUBSIDIARIES



CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per-share data)



|                                                              |  |      |         |   |      |   |         |      |  |   |         |  
|------------------------------------------------------------- |  | ---- | ------- | - | ---- | - | ------- | ---- |  | - | ------- | -
|FOR THE YEARS ENDED DECEMBER 31,                              |  | 2004 |         |   | 2003 |   |         | 2002 | 
|REVENUES                                                      |  |      |         |   |      |   |         |      |  |   |         |  
|Net premiums earned (Note 4)                                  |  | $    | 136,106 |   |      | $ | 163,887 |      |  | $ | 286,063 |  
|Net investment income (Note 2)                                |  |      | 19,174  |   |      |   | 21,954  |      |  |   | 32,231  |  
|Realized investment gains (Note 2)                            |  |      | 1,502   |   |      |   | 216     |      |  |   | 18,910  |  
|Other revenue                                                 |  |      | 540     |   |      |   | 936     |      |  |   | 2,030   |  
|                                                              |  |      |         |   |      |   |         |      |  |   |         |  
|Total revenues                                                |  |      | 157,322 |   |      |   | 186,993 |      |  |   | 339,234 |  
|EXPENSES                                                      |  |      |         |   |      |   |         |      |  |   |         |  
|Losses and loss adjustment expenses (Note 3)                  |  |      | 138,927 |   |      |   | 161,366 |      |  |   | 320,516 |  
|Underwriting and other operating expenses (Note 1 and Note 4) |  |      | 26,273  |   |      |   | 45,844  |      |  |   | 79,676  |  
|Interest expenses                                             |  |      |        |   |      |   |        |      |  |   | 66      |  
|                                                              |  |      |         |   |      |   |         |      |  |   |         |  
|Total expenses                                                |  |      | 165,200 |   |      |   | 207,210 |      |  |   | 400,258 |  
|                                                              |  |      |         |   |      |   |         |      |  |   |         |  
|Loss before income tax expense (benefit)                      |  |      | (7,878  | ) |      |   | (20,217 | )    |  |   | (61,024 | )
|Income tax expense (benefit) (Note 5)                         |  |      | 8       |   |      |   | (7,411  | )    |  |   | (22,642 | )
|                                                              |  |      |         |   |      |   |         |      |  |   |         |  
|Net loss                                                      |  | $    | (7,886  | ) |      | $ | (12,806 | )    |  | $ | (38,382 | )
|                                                              |  |      |         |   |      |   |         |      |  |   |         |  
|Basic loss per share of common stock (Note 10)                |  | $    | (0.84   | ) |      | $ | (1.37   | )    |  | $ | (4.12   | )
|Diluted loss per share of common stock (Note 10)              |  | $    | (0.84   | ) |      | $ | (1.37   | )    |  | $ | (4.12   | )







See accompanying notes to Consolidated Financial Statements.



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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 |         |   | ACCUMULATEDOTHER COMPREHENSIVE INCOME (LOSS) |   |        | TOTAL STOCKHOLDERS EQUITY | 
|BALANCE AT DECEMBER 31, 2001                                                        |  | $            | 1 |                            | $ | 37,803 |                   |  | $ | 322,734        |   |  | $                                  | (98,983 | ) |                                              | $ | (4,050 | )                          |  | $ | 1,883  |   |  | $ | 259,388 |  
|Net loss                                                                            |  |              |  |                            |   |       |                   |  |   | (38,382        | ) |  |                                    |        |   |                                              |   |       |                            |  |   |       |   |  |   | (38,382 | )
|Unrealized gain on securities, net of income tax expense of $5,098                  |  |              |  |                            |   |       |                   |  |   |               |   |  |                                    |        |   |                                              |   |       |                            |  |   | 9,551  |   |  |   | 9,551   |  
|Change in minimum pension liability, net of applicable income tax benefit 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 | )
|Unrealized losses on securities, net of applicable income tax benefit of $2,828     |  |              |  |                            |   |       |                   |  |   |               |   |  |                                    |        |   |                                              |   |       |                            |  |   | (6,820 | ) |  |   | (6,820  | )
|Change in minimum pension liability, net of applicable income tax benefit 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 |  
|Net loss                                                                            |  |              |  |                            |   |       |                   |  |   | (7,886         | ) |  |                                    |        |   |                                              |   |       |                            |  |   |       |   |  |   | (7,886  | )
|Unrealized losses on securities, net of applicable income tax benefit of $1,229     |  |              |  |                            |   |       |                   |  |   |               |   |  |                                    |        |   |                                              |   |       |                            |  |   | (2,283 | ) |  |   | (2,283  | )
|Change in minimum pension liability, net of applicable income tax benefit of $105   |  |              |  |                            |   |       |                   |  |   |               |   |  |                                    |        |   |                                              |   |       |                            |  |   | (195   | ) |  |   | (195    | )
|Unrealized foreign currency gain                                                    |  |              |  |                            |   |       |                   |  |   |               |   |  |                                    |        |   |                                              |   |       |                            |  |   | 206    |   |  |   | 206     |  
|                                                                                    |  |              |   |                            |   |        |                   |  |   |                |   |  |                                    |         |   |                                              |   |        |                            |  |   |        |   |  |   |         |  
|Comprehensive loss                                                                  |  |              |   |                            |   |        |                   |  |   |                |   |  |                                    |         |   |                                              |   |        |                            |  |   |        |   |  |   | (10,158 | )
|Treasury stock reissued                                                             |  |              |  |                            |   | (154   | )                 |  |   |               |   |  |                                    | 352     |   |                                              |   |       |                            |  |   |       |   |  |   | 198     |  
|Stock subscription notes repaid                                                     |  |              |  |                            |   |       |                   |  |   |               |   |  |                                    |        |   |                                              |   | 294    |                            |  |   |       |   |  |   | 294     |  
|                                                                                    |  |              |   |                            |   |        |                   |  |   |                |   |  |                                    |         |   |                                              |   |        |                            |  |   |        |   |  |   |         |  
|BALANCE AT DECEMBER 31, 2004                                                        |  | $            | 1 |                            | $ | 37,127 |                   |  | $ | 256,177        |   |  | $                                  | (97,654 | ) |                                              | $ | (3,018 | )                          |  | $ | 1,889  |   |  | $ | 194,522 |  
|                                                                                    |  |              |   |                            |   |        |                   |  |   |                |   |  |                                    |         |   |                                              |   |        |                            |  |   |        |   |  |   |         |  



See accompanying notes to
Consolidated Financial Statements.



53



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SCPIE HOLDINGS INC. AND SUBSIDIARIES



CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)



|                                                                            |  |      |          |   |      |   |          |      |  |   |          |  
|--------------------------------------------------------------------------- |  | ---- | -------- | - | ---- | - | -------- | ---- |  | - | -------- | -
|FOR THE YEARS ENDED DECEMBER 31,                                            |  | 2004 |          |   | 2003 |   |          | 2002 | 
|OPERATING ACTIVITIES                                                        |  |      |          |   |      |   |          |      |  |   |          |  
|Net loss                                                                    |  | $    | (7,886   | ) |      | $ | (12,806  | )    |  | $ | (38,382  | )
|Adjustments to reconcile net loss to net cash used in operating activities: |  |      |          |   |      |   |          |      |  |   |          |  
|Provisions for amortization and depreciation                                |  |      | 7,061    |   |      |   | 11,037   |      |  |   | 5,207    |  
|Provision for deferred federal income taxes                                 |  |      | 8        |   |      |   | (7,411   | )    |  |   | (11,928  | )
|Realized investment gains                                                   |  |      | (1,502   | ) |      |   | (216     | )    |  |   | (18,910  | )
|Changes in operating assets and liabilities:                                |  |      |          |   |      |   |          |      |  |   |          |  
|Accrued investment income                                                   |  |      | 1,677    |   |      |   | 631      |      |  |   | 516      |  
|Premium receivable                                                          |  |      | (12,428  | ) |      |   | (2,777   | )    |  |   | (34,845  | )
|Reinsurance recoverable                                                     |  |      | (45,691  | ) |      |   | 1,760    |      |  |   | (74,341  | )
|Deferred policy acquisition costs                                           |  |      | 353      |   |      |   | (2,558   | )    |  |   | 12,607   |  
|Deferred federal income taxes                                               |  |      | (4,737   | ) |      |   | 10,944   |      |  |   | 614      |  
|Loss and loss adjustment expense reserves                                   |  |      | (4,299   | ) |      |   | (7,625   | )    |  |   | 74,035   |  
|Unearned premiums                                                           |  |      | (6,896   | ) |      |   | (16,849  | )    |  |   | (34,312  | )
|Amounts held for reinsurance                                                |  |      | 10,296   |   |      |   | (20,478  | )    |  |   | 87,701   |  
|Other assets                                                                |  |      | 1,794    |   |      |   | 4,162    |      |  |   | 7,652    |  
|Other liabilities                                                           |  |      | (1,050   | ) |      |   | (4,586   | )    |  |   | (82      | )
|                                                                            |  |      |          |   |      |   |          |      |  |   |          |  
|Net cash used in operating activities                                       |  |      | (63,300  | ) |      |   | (46,772  | )    |  |   | (24,468  | )
|                                                                            |  |      |         
|INVESTING ACTIVITIES                                                        |  |      |          |   |      |   |          |      |  |   |          |  
|Purchasesfixed maturities                                                  |  |      | (163,475 | ) |      |   | (644,318 | )    |  |   | (731,898 | )
|Salesfixed maturities                                                      |  |      | 229,526  |   |      |   | 617,153  |      |  |   | 784,220  |  
|Maturitiesfixed maturities                                                 |  |      | 25,288   |   |      |   | 4,480    |      |  |   | 4,914    |  
|Purchasesequities                                                          |  |      |         |   |      |   |         |      |  |   | (502     | )
|Salesequities                                                              |  |      | 3,764    |   |      |   | 3,925    |      |  |   | 500      |  
|Sale of other investments                                                   |  |      |         |   |      |   | 15,000   |      |  |   |         |  
|                                                                            |  |      |          |   |      |   |          |      |  |   |          |  
|Net cash provided by (used in) investing activities                         |  |      | 95,103   |   |      |   | (3,760   | )    |  |   | 57,234   |  
|                                                                            |  |      |         
|FINANCING ACTIVITIES                                                        |  |      |          |   |      |   |          |      |  |   |          |  
|Repayment of bank loan                                                      |  |      |         |   |      |   |         |      |  |   | (9,000   | )
|Purchase of treasury stock, net and repayment of stock subscription notes   |  |      | 492      |   |      |   | 580      |      |  |   | 613      |  
|Cash dividends                                                              |  |      |         |   |      |   | (3,740   | )    |  |   | (3,743   | )
|                                                                            |  |      |          |   |      |   |          |      |  |   |          |  
|Net cash provided by (used in) financing activities                         |  |      | 492      |   |      |   | (3,160   | )    |  |   | (12,130  | )
|                                                                            |  |      |          |   |      |   |          |      |  |   |          |  
|Increase (decrease) in cash and cash equivalents                            |  |      | 32,295   |   |      |   | (53,692  | )    |  |   | 20,636   |  
|Cash and cash equivalents at beginning of year                              |  |      | 62,095   |   |      |   | 115,787  |      |  |   | 95,151   |  
|                                                                            |  |      |          |   |      |   |          |      |  |   |          |  
|Cash and cash equivalents at end of year                                    |  | $    | 94,390   |   |      | $ | 62,095   |      |  | $ | 115,787  |  
|                                                                            |  |      |          |   |      |   |          |      |  |   |          |  



See accompanying notes to
Consolidated Financial Statements.



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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 Rosemont Reinsurance Ltd. (Rosemont Re) formerly named GoshawK Reinsurance Limited, 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 accordance with U.S. generally accepted accounting principles (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 capital provider to three underwriting syndicates. In 2003, the Company provided Lloyds capital in support of one syndicate.
No Lloyds syndicate was supported in 2004. The Company reports this subsidiarys operations on a one-quarter lag.



INVESTMENTS

---



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



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



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SCPIE HOLDINGS INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



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.



|                             |  |                |        |   |      |   |         |      |  |   |         |  
|---------------------------- |  | -------------- | ------ | - | ---- | - | ------- | ---- |  | - | ------- | -
|                             |  | 2004           |        |   | 2003 |   |         | 2002 | 
|                             |  | (In Thousands) |       
|Balance at beginning of year |  | $              | 9,416  |   |      | $ | 6,858   |      |  | $ | 19,465  |  
|Costs deferred               |  |                | 8,243  |   |      |   | 12,824  |      |  |   | 20,003  |  
|Costs amortized              |  |                | (8,596 | ) |      |   | (10,266 | )    |  |   | (32,610 | )
|                             |  |                |        |   |      |   |         |      |  |   |         |  
|Balance at end of year       |  | $              | 9,063  |   |      | $ | 9,416   |      |  | $ | 6,858   |  
|                             |  |                |        |   |      |   |         |      |  |   |         |  



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, 2003 and
2004. 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.



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, statistical analysis and reports from
ceding entities 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.



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SCPIE HOLDINGS INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



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:



|                            |  |                |        |   |      |   |        |  
|--------------------------- |  | -------------- | ------ | - | ---- | - | ------ | -
|                            |  | 2004           |        |   | 2003 |  
|                            |  | (In Thousands) |       
|Leasehold improvements      |  | $              | 5,445  |   |      | $ | 5,445  |  
|Furniture and equipment     |  |                | 2,200  |   |      |   | 4,186  |  
|                            |  |                |        |   |      |   |        |  
|                            |  |                | 7,645  |   |      |   | 9,631  |  
|Accumulated depreciation    |  |                | (4,691 | ) |      |   | (5,815 | )
|                            |  |                |        |   |      |   |        |  
|Property and equipment, net |  | $              | 2,954  |   |      | $ | 3,816  |  
|                            |  |                |        |   |      |   |        |  



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, 2004, approximately 95% of total reinsurance receivable were recoverable with reinsurance companies with an A.M. Best or
Insurance Solvency International rating of A- or better: including $107.2 million from Rosemont Re, $46.6 million with Lloyds of London syndicates, $13.6 million from Hannover Ruckversicherungs and $6.8 million from Arch Reinsurance.



STOCK-BASED COMPENSATION

---



As of December 31, 2004, the Company has a stock-based employee and nonemployee
compensation plan more fully described in Note 9.



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 for stock options granted as all stock options have an exercise price equal to the market price of the underlying
stock on the dates of grant.



NEW ACCOUNTING STANDARD

---



In December 2004, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standard No. 123R, Share-Based Payment (SFAS No. 123R) that will require compensation costs related to share-based payment transactions to be recognized in the financial statements.
With limited exceptions, the amount of compensation cost will be measured based on the grant-date fair value of the equity instrument issued. Compensation cost will be recognized over the period that an employee provides service in exchange for the
award. SFAS No. 123R replaces Statement of Financial Accounting Standard No. 123, Accounting for Stock-Based Compensation and supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees, the principles that the
Company currently employs to account and report its employee stock option awards. SFAS No. 123R is effective for the first interim reporting period that begins after June 15, 2005. The Company will implement this standard in the third quarter of
2005. The Company cannot estimate the impact of implementing this standard on future net income, but the standard would have increased recent net losses by approximately $0.06 - $0.12 per diluted share.





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SCPIE HOLDINGS INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



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 ORAMORTIZEDCOST |         | GROSSUNREALIZEDGAINS |   | GROSSUNREALIZEDLOSSES |  | FAIRVALUE
|                                 |  | (In Thousands)      
|December 31, 2004                |  |                      |         |                      |   |                       |  |           |       |  |   |        
|Fixed-maturity securities:       |  |                      |         |                      |   |                       |  |           |       |  |   |        
|Bonds:                           |  |                      |         |                      |   |                       |  |           |       |  |   |        
|U.S. government and agencies     |  | $                    | 145,463 |                      | $ | 2,141                 |  | $         | 659   |  | $ | 146,945
|Mortgage-backed and asset-backed |  |                      | 89,609  |                      |   | 309                   |  |           | 1,444 |  |   | 88,474 
|Corporate                        |  |                      | 219,206 |                      |   | 1,966                 |  |           | 1,774 |  |   | 219,398
|                                 |  |                      |         |                      |   |                       |  |           |       |  |   |        
|Total fixed-maturity securities  |  |                      | 454,278 |                      |   | 4,416                 |  |           | 3,877 |  |   | 454,817
|Common stocks                    |  |                      | 12,100  |                      |   | 4,073                 |  |           |      |  |   | 16,173 
|                                 |  |                      |         |                      |   |                       |  |           |       |  |   |        
|Total                            |  | $                    | 466,378 |                      | $ | 8,489                 |  | $         | 3,877 |  | $ | 470,990
|                                 |  |                      |         |                      |   |                       |  |           |       |  |   |        
|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
|                                 |  |                      |         |                      |   |                       |  |           |       |  |   |        



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



The amortized cost and fair value of the Companys investments in
fixed-maturity securities at December 31, 2004, are summarized by stated maturities as follows:



|                                            |  |                |         |           |   |        
|------------------------------------------- |  | -------------- | ------- | --------- | - | -------
|                                            |  | AMORTIZEDCOST  |         | FAIRVALUE
|                                            |  | (In Thousands)
|Years to maturity:                          |  |                |         |           |   |        
|One or less                                 |  | $              | 10,824  |           | $ | 10,841 
|After one through five                      |  |                | 160,661 |           |   | 160,626
|After five through ten                      |  |                | 171,099 |           |   | 171,525
|After ten                                   |  |                | 22,085  |           |   | 23,351 
|Mortgage-backed and asset-backed securities |  |                | 89,609  |           |   | 88,474 
|                                            |  |                |         |           |   |        
|Totals                                      |  | $              | 454,278 |           | $ | 454,817
|                                            |  |                |         |           |   |        



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SCPIE HOLDINGS INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



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



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



|                           |  |                |        |      |   |        |  |   |       
|-------------------------- |  | -------------- | ------ | ---- | - | ------ |  | - | ------
|YEAR ENDED DECEMBER 31,    |  | 2004           |        | 2003 |   | 2002  
|                           |  | (In Thousands)
|Fixed-maturity investments |  | $              | 20,196 |      | $ | 22,116 |  | $ | 31,993
|Equity investments         |  |                |       |      |   | 234    |  |   | 109   
|Other                      |  |                | 1,185  |      |   | 1,557  |  |   | 2,312 
|                           |  |                |        |      |   |        |  |   |       
|Total investment income    |  |                | 21,381 |      |   | 23,907 |  |   | 34,414
|Investment expenses        |  |                | 2,207  |      |   | 1,953  |  |   | 2,183 
|                           |  |                |        |      |   |        |  |   |       
|Net investment income      |  | $              | 19,174 |      | $ | 21,954 |  | $ | 32,231
|                           |  |                |        |      |   |        |  |   |       



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



|                                                 |  |                |        |   |      |   |         |      |  |   |        |  
|------------------------------------------------ |  | -------------- | ------ | - | ---- | - | ------- | ---- |  | - | ------ | -
|YEAR ENDED DECEMBER 31,                          |  | 2004           |        |   | 2003 |   |         | 2002 | 
|                                                 |  | (In Thousands) |       
|Fixed-maturity investments:                      |  |                |        |   |      |   |         |      |  |   |        |  
|Gross realized gains                             |  | $              | 4,061  |   |      | $ | 13,749  |      |  | $ | 22,484 |  
|Gross realized losses                            |  |                | (3,038 | ) |      |   | (2,757  | )    |  |   | (3,526 | )
|                                                 |  |                |        |   |      |   |         |      |  |   |        |  
|Net realized gains on fixed-maturity investments |  |                | 1,023  |   |      |   | 10,992  |      |  |   | 18,958 |  
|Equity InvestmentsGross realized gains (losses) |  |                | 475    |   |      |   | (10,172 | )    |  |   | (48    | )
|Net other gains (losses)                         |  |                | 4      |   |      |   | (604    | )    |  |   |       |  
|                                                 |  |                |        |   |      |   |         |      |  |   |        |  
|Total net realized gains                         |  | $              | 1,502  |   |      | $ | 216     |      |  | $ | 18,910 |  
|                                                 |  |                |        |   |      |   |         |      |  |   |        |  



Included in net other gains (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.



The change in the Companys unrealized appreciation (depreciation) on
fixed-maturity securities was $(2.8) million, $(11.8) million and $11.2 million for the years ended December 31, 2004, 2003 and 2002, respectively; the corresponding amounts for equity securities were $(0.7) million, $0.3 million and $4.4 million.



The Company held 228 investment positions with unrealized losses as of December 31,
2004. All of the investments are investment grade and the unrealized losses are primarily due to interest rate fluctuations. The Company held 20 securities that were in an unrealized loss position for 12 months or more.



|                                 |  |                       |       |                   |   |                       |  |           |       |                       |   |           |  |   |       |  |   |        
|-------------------------------- |  | --------------------- | ----- | ----------------- | - | --------------------- |  | --------- | ----- | --------------------- | - | --------- |  | - | ----- |  | - | -------
|                                 |  | LESS THAN 12 MONTHS   |       | 12 MONTHS OR MORE |   | TOTAL                
|                                 |  | GROSSUNREALIZEDLOSSES |       | FAIRVALUE         |   | GROSSUNREALIZEDLOSSES |  | FAIRVALUE |       | GROSSUNREALIZEDLOSSES |   | FAIRVALUE
|                                 |  | (In Thousands)       
|Fixed-maturity securities:       |  |                       |       |                   |   |                       |  |           |       |                       |   |           |  |   |       |  |   |        
|Bonds:                           |  |                       |       |                   |   |                       |  |           |       |                       |   |           |  |   |       |  |   |        
|U.S. government and agencies     |  | $                     | 415   |                   | $ | 63,840                |  | $         | 244   |                       | $ | 8,620     |  | $ | 659   |  | $ | 72,460 
|Mortgage-backed and asset-backed |  |                       | 1,349 |                   |   | 72,666                |  |           | 95    |                       |   | 3,364     |  |   | 1,444 |  |   | 76,030 
|Corporate                        |  |                       | 1,110 |                   |   | 94,124                |  |           | 664   |                       |   | 18,991    |  |   | 1,774 |  |   | 113,115
|                                 |  |                       |       |                   |   |                       |  |           |       |                       |   |           |  |   |       |  |   |        
|Total                            |  | $                     | 2,874 |                   | $ | 230,630               |  | $         | 1,003 |                       | $ | 30,975    |  | $ | 3,877 |  | $ | 261,605
|                                 |  |                       |       |                   |   |                       |  |           |       |                       |   |           |  |   |       |  |   |        



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SCPIE HOLDINGS INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



NOTE 3.    LOSSES AND LOSS ADJUSTMENT EXPENSES



The following table provides a reconciliation of the beginning and ending reserve balances, net of reinsurance recoverable, for 2004, 2003 and 2002.



|                                                                                                        |  |                |         |      |   |         |      |  |   |        
|------------------------------------------------------------------------------------------------------- |  | -------------- | ------- | ---- | - | ------- | ---- |  | - | -------
|DECEMBER 31,                                                                                            |  | 2004           |         | 2003 |   |         | 2002
|                                                                                                        |  | (In Thousands)
|Reserves for losses and LAE at beginning of year                                                        |  | $              | 643,046 |      | $ | 650,671 |      |  | $ | 576,636
|Less reinsurance recoverables                                                                           |  |                | 108,891 |      |   | 85,930  |      |  |   | 74,246 
|                                                                                                        |  |                |         |      |   |         |      |  |   |        
|Reserves for losses and LAE, net of related reinsurance recoverable, at beginning of year               |  |                | 534,155 |      |   | 564,741 |      |  |   | 502,390
|                                                                                                        |  |                |         |      |   |         |      |  |   |        
|Provision for losses and LAE for claims occurring in the current year, net of reinsurance               |  |                | 123,027 |      |   | 169,474 |      |  |   | 303,296
|Increase (decrease) in estimated losses and LAE for claims occurring in prior years, net of reinsurance |  |                | 15,900  |      |   | (8,108  | )    |  |   | 17,220 
|                                                                                                        |  |                |         |      |   |         |      |  |   |        
|Incurred losses during the year, net of reinsurance                                                     |  |                | 138,927 |      |   | 161,366 |      |  |   | 320,516
|                                                                                                        |  |                |         |      |   |         |      |  |   |        
|Deduct losses and LAE payments for claims, net of reinsurance, occurring during:                        |  |                |         |      |   |         |      |  |   |        
|Current year                                                                                            |  |                | 10,776  |      |   | 18,424  |      |  |   | 47,258 
|Prior years                                                                                             |  |                | 207,182 |      |   | 173,528 |      |  |   | 210,907
|                                                                                                        |  |                |         |      |   |         |      |  |   |        
|Total payments during the year, net of reinsurance                                                      |  |                | 217,958 |      |   | 191,952 |      |  |   | 258,165
|                                                                                                        |  |                |         |      |   |         |      |  |   |        
|Reserve for losses and LAE, net of related reinsurance recoverable, at end of year                      |  |                | 455,123 |      |   | 534,155 |      |  |   | 564,741
|Reinsurance recoverable for losses and LAE, at end of year                                              |  |                | 183,624 |      |   | 108,891 |      |  |   | 85,930 
|                                                                                                        |  |                |         |      |   |         |      |  |   |        
|Reserves for losses and LAE, gross of reinsurance recoverable, at end of year                           |  | $              | 638,747 |      | $ | 643,046 |      |  | $ | 650,671
|                                                                                                        |  |                |         |      |   |         |      |  |   |        



The increase during 2004 and 2002 in estimated
losses and LAE for claims occurring in prior years was primarily attributable to adverse loss experience 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.



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



The effect of reinsurance on premiums written and earned are as follows (in thousands):



|                        |  |         |         |        |   |         |  |        |         |         |   |         |  |   |         |  |   |        
|----------------------- |  | ------- | ------- | ------ | - | ------- |  | ------ | ------- | ------- | - | ------- |  | - | ------- |  | - | -------
|YEAR ENDED DECEMBER 31, |  | 2004    |         | 2003   |   | 2002   
|                        |  | WRITTEN |         | EARNED |   | WRITTEN |  | EARNED |         | WRITTEN |   | EARNED 
|Direct                  |  | $       | 142,509 |        | $ | 137,154 |  | $      | 147,085 |         | $ | 149,571 |  | $ | 161,656 |  | $ | 184,014
|Assumed                 |  |         | 13,815  |        |   | 41,107  |  |        | 74,236  |         |   | 102,866 |  |   | 174,436 |  |   | 155,902
|Ceded                   |  |         | 27,114  |        |   | 42,155  |  |        | 74,282  |         |   | 88,550  |  |   | 84,342  |  |   | 53,853 
|                        |  |         |         |        |   |         |  |        |         |         |   |         |  |   |         |  |   |        
|Net premiums            |  | $       | 129,210 |        | $ | 136,106 |  | $      | 147,039 |         | $ | 163,887 |  | $ | 251,750 |  | $ | 286,063
|                        |  |         |         |        |   |         |  |        |         |         |   |         |  |   |         |  |   |        



Reinsurance ceded reduced loss and loss
adjustment expenses incurred by $42.9 million, $29.9 million and $35.8 million in 2004, 2003 and 2002, respectively. Reinsurance ceded also reduced loss and loss adjustment expense reserves by $183.6 million, $108.9 million and $85.9 million in
2004, 2003 and 2002, 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 $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 $3.2 million, $3.0 million and $3.0 million in 2002, 2003 and 2004, respectively, for losses in excess of the Companys retentions. The Companys reinsurance program was the same for
2004 as 2003, except that reinsurance above $20 million was discontinued. The 2005 reinsurance program is the same as 2004.



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 Rosemont Re whereby they ceded the majority of the written and earned premium related to their assumed reinsurance program after July 1, 2002. The Rosemont 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 and $(0.1) million in 2004. Earned premiums ceded under this agreement were $71.4 million in 2002 and $89.2
million in 2003 and $6.6 million in 2004. In consideration of the premium ceded, the reinsurer will reimburse the Companies for losses occurring after June 30, 2002, on an unlimited basis and their direct acquisition costs. Losses related to
premiums earned prior to July 1, 2002, remain the responsibility of the Company. This includes losses related to the World Trade Center terrorist attack.



The Rosemont 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 Rosemont 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
Rosemont 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,



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



$5.5 million and $(0.01) million was expensed in 2002, 2003 and 2004, 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 Rosemont Re obligations under the agreement. As of December 31, 2004, the market value and assets held in the trust was $44.8
million. 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%.



NOTE 5.    INCOME TAXES



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



|                        |  |                |        |   |      |   |        |      |  |   |         |  
|----------------------- |  | -------------- | ------ | - | ---- | - | ------ | ---- |  | - | ------- | -
|YEAR ENDED DECEMBER 31, |  | 2004           |        |   | 2003 |   |        | 2002 | 
|                        |  | (In Thousands) |       
|Current                 |  | $              | (50    | ) |      | $ |       |      |  | $ | (10,714 | )
|Deferred                |  |                | (3,942 | ) |      |   | (7,411 | )    |  |   | (11,928 | )
|State franchise tax     |  |                | 4,000  |   |      |   |       |      |  |   |        |  
|                        |  |                |        |   |      |   |        |      |  |   |         |  
|Total                   |  | $              | 8      |   |      | $ | (7,411 | )    |  | $ | (22,642 | )
|                        |  |                |        |   |      |   |        |      |  |   |         |  



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



|                                             |  |                |        |   |      |   |        |      |  |   |         |  
|-------------------------------------------- |  | -------------- | ------ | - | ---- | - | ------ | ---- |  | - | ------- | -
|YEAR ENDED DECEMBER 31,                      |  | 2004           |        |   | 2003 |   |        | 2002 | 
|                                             |  | (In Thousands) |       
|Federal income tax benefit at 35%            |  | $              | (2,757 | ) |      | $ | (7,076 | )    |  | $ | (21,358 | )
|Increase (decrease) in taxes resulting from: |  |                |        |   |      |   |        |      |  |   |         |  
|Tax-exempt interest                          |  |                |       |   |      |   |       |      |  |   | (1,557  | )
|Dividends received deduction                 |  |                |       |   |      |   | (102   | )    |  |   | (70     | )
|State franchise tax (net of federal tax)     |  |                | 2,600  |   |      |   |       |      |  |   |        |  
|Other                                        |  |                | 165    |   |      |   | (233   | )    |  |   | 343     |  
|                                             |  |                |        |   |      |   |        |      |  |   |         |  
|Total federal income tax expense (benefit)   |  | $              | 8      |   |      | $ | (7,411 | )    |  | $ | (22,642 | )
|                                             |  |                |        |   |      |   |        |      |  |   |         |  

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,                               |  | 2004           |        |   | 2003
|                                           |  | (In Thousands)
|Deferred tax assets:                       |  |                |        |   |      |   |       
|Discounting of loss reserves               |  | $              | 20,065 |   |      | $ | 19,547
|Net operating loss carryforward            |  |                | 24,260 |   |      |   | 13,950
|AMT credit carryforward                    |  |                | 5,442  |   |      |   | 5,442 
|Unearned premium                           |  |                | 2,878  |   |      |   | 3,549 
|Equity investment impairment               |  |                |       |   |      |   | 3,366 
|Deferred compensation and retirement plans |  |                | 2,307  |   |      |   | 2,682 
|Other                                      |  |                | (1,712 | ) |      |   | 1,327 
|                                           |  |                |        |   |      |   |       
|Total deferred tax assets                  |  |                | 53,240 |   |      |   | 49,863
|Deferred tax liabilities:                  |  |                |        |   |      |   |       
|Deferred acquisition costs                 |  |                | 3,172  |   |      |   | 3,296 
|Unrealized investment gains                |  |                | 1,614  |   |      |   | 2,842 
|                                           |  |                |        |   |      |   |       
|Total deferred tax liabilities             |  |                | 4,786  |   |      |   | 6,138 
|                                           |  |                |        |   |      |   |       
|Net deferred tax assets                    |  | $              | 48,454 |   |      | $ | 43,725
|                                           |  |                |        |   |      |   |       



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SCPIE HOLDINGS INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



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



At December 31, 2004, the Company had $48.5 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 $24.3 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. The Companys core operations have historically been profitable on both a GAAP and tax basis. The losses
incurred in 2001 to 2004 have been primarily caused by losses in the non-core healthcare and assumed reinsurance businesses. Since the core healthcare liability operation has improved over the past years and the non-core healthcare liability and
assumed operations are now in run-off, the Company believes it should return to a position of taxable income, thus enabling it to utilize the net operating loss carryforward.



The Companys estimate of future taxable income uses the same assumptions and projections as in its 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. Any valuation allowance would reduce the Companys earnings.



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,                              |  | 2004           |         |   | 2003 |   |         | 2002 | 
|                                          |  | (In Thousands) |        
|Statutory net loss for the year ended     |  | $              | (6,436  | ) |      | $ | (19,874 | )    |  | $ | (23,164 | )
|Statutory capital and surplus at year end |  | $              | 136,536 |   |      | $ | 140,216 |      |  | $ | 155,785 |  



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, 2004, the amount of dividends available to SCPIE Holdings from its insurance subsidiaries during 2005
not limited by such restrictions is approximately $13.7 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.



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.



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SCPIE HOLDINGS INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



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



|                             |  |                |      |   |                   |   |      |      |  |   |      |   |      |   |      |  |   |     |  |   |    
|---------------------------- |  | -------------- | ---- | - | ----------------- | - | ---- | ---- |  | - | ---- | - | ---- | - | ---- |  | - | --- |  | - | ---
|                             |  | Qualified Plan |      |   | Supplemental Plan
|YEAR ENDED DECEMBER 31,      |  | 2004           |      |   | 2003              |   |      | 2002 |  |   | 2004 |   | 2003 |   | 2002
|                             |  | (In Thousands)
|Service cost                 |  |                |      |   |                   |   |      |      |  |   |      |   |      | $ | 78   |  | $ | 436 |  | $ | 272
|Interest cost                |  | $              | 275  |   |                   | $ | 271  |      |  | $ | 273  |   |      |   | 233  |  |   | 293 |  |   | 259
|Actual return on plan assets |  |                | (294 | ) |                   |   | (238 | )    |  |   | (257 | ) |      |   |     |  |   |    |  |   |   
|Amortization of:             |  |                |      |   |                   |   |      |      |  |   |      |   |      |   |      |  |   |     |  |   |    
|Transition asset             |  |                | (4   | ) |                   |   | (4   | )    |  |   | (4   | ) |      |   |      |  |   |     |  |   |    
|Prior service cost           |  |                |      |   |                   |   |      |      |  |   |      |   |      |   | 12   |  |   | 100 |  |   | 84 
|Actuarial loss               |  |                | 95   |   |                   |   | 110  |      |  |   | 40   |   |      |   | 10   |  |   |    |  |   | 16 
|                             |  |                |      |   |                   |   |      |      |  |   |      |   |      |   |      |  |   |     |  |   |    
|Net pension expense          |  | $              | 72   |   |                   | $ | 139  |      |  | $ | 52   |   |      | $ | 333  |  | $ | 829 |  | $ | 631
|                             |  |                |      |   |                   |   |      |      |  |   |      |   |      |   |      |  |   |     |  |   |    



Pension expense for all plans was $0.5, $1.9 and
$1.6 for the years ended December 31, 2004, 2003 and 2002, respectively.



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



|                                                                      |  |                |        |   |                  |   |        |               |  |   |                  |   |  |   |        |  
|--------------------------------------------------------------------- |  | -------------- | ------ | - | ---------------- | - | ------ | ------------- |  | - | ---------------- | - |  | - | ------ | -
|                                                                      |  | QualifiedPlan  |        |   | SupplementalPlan |   |        | QualifiedPlan |  |   | SupplementalPlan |  
|DECEMBER 31,                                                          |  | 2004           |        |   | 2004             |   |        | 2003          |  |   | 2003             |  
|                                                                      |  | (In Thousands) |       
|Change in Benefit Obligation                                          |  |                |        |   |                  |   |        |               |  |   |                  |   |  |   |        |  
|Net benefit obligation at beginning of year                           |  | $              | 4,690  |   |                  | $ | 5,068  |               |  | $ | 4,438            |   |  | $ | 4,296  |  
|Service cost                                                          |  |                |       |   |                  |   | 78     |               |  |   |                 |   |  |   | 436    |  
|Interest cost                                                         |  |                | 275    |   |                  |   | 233    |               |  |   | 271              |   |  |   | 293    |  
|Plan amendments                                                       |  |                |       |   |                  |   |       |               |  |   |                 |   |  |   | 88     |  
|Actuarial loss                                                        |  |                | 220    |   |                  |   | 407    |               |  |   | 106              |   |  |   | (45    | )
|Curtailment                                                           |  |                |       |   |                  |   | (759   | )             |  |   |                 |   |  |   |       |  
|Settlement                                                            |  |                |       |   |                  |   | (1,036 | )             |  |   |                 |   |  |   |       |  
|Gross benefits paid                                                   |  |                | (113   | ) |                  |   |       |               |  |   | (125             | ) |  |   |       |  
|                                                                      |  |                |        |   |                  |   |        |               |  |   |                  |   |  |   |        |  
|Net benefit obligation at end of year                                 |  | $              | 5,072  |   |                  | $ | 3,991  |               |  | $ | 4,690            |   |  | $ | 5,068  |  
|                                                                      |  |                |        |   |                  |   |        |               |  |   |                  |   |  |   |        |  
|Change in Plan Assets                                                 |  |                |        |   |                  |   |        |               |  |   |                  |   |  |   |        |  
|Fair value of plan assets at beginning of year                        |  | $              | 3,542  |   |                  |   |       |               |  | $ | 2,897            |   |  |   |       |  
|Actual return on plan assets                                          |  |                | 256    |   |                  |   |       |               |  |   | 595              |   |  |   |       |  
|Employer contributions                                                |  |                | 370    |   |                  |   |       |               |  |   | 175              |   |  |   |       |  
|Gross benefits paid                                                   |  |                | (113   | ) |                  |   |       |               |  |   | (125             | ) |  |   |       |  
|                                                                      |  |                |        |   |                  |   |        |               |  |   |                  |   |  |   |        |  
|Fair value of plan assets at end of year                              |  | $              | 4,055  |   |                  |   |       |               |  | $ | 3,542            |   |  |   |       |  
|                                                                      |  |                |        |   |                  |   |        |               |  |   |                  |   |  |   |        |  
|Funded status (underfunded)                                           |  | $              | (1,017 | ) |                  | $ | (3,991 | )             |  | $ | (1,149           | ) |  | $ | (5,068 | )
|Unrecognized actuarial loss                                           |  |                | 1,641  |   |                  |   | 170    |               |  |   | 1,479            |   |  |   | 561    |  
|Unrecognized prior service cost                                       |  |                |       |   |                  |   |       |               |  |   |                 |   |  |   | 80     |  
|Unrecognized net transition asset                                     |  |                |       |   |                  |   |       |               |  |   | (4               | ) |  |   |       |  
|                                                                      |  |                |        |   |                  |   |        |               |  |   |                  |   |  |   |        |  
|Accrued pension expense                                               |  | $              | 624    |   |                  | $ | (3,821 | )             |  | $ | 326              |   |  | $ | (4,427 | )
|                                                                      |  |                |        |   |                  |   |        |               |  |   |                  |   |  |   |        |  
|Amounts recognized in the statement of financial position consists of |  |                |        |   |                  |   |        |               |  |   |                  |   |  |   |        |  
|Prepaid benefit cost                                                  |  | $              |       |   |                  | $ |       |               |  | $ | 326              |   |  | $ |       |  
|Accrued benefit liability                                             |  |                | (1,017 | ) |                  |   | (3,991 | )             |  |   |                 |   |  |   | (4,427 | )
|Additional minimum liability                                          |  |                |       |   |                  |   |       |               |  |   | (1,475           | ) |  |   | (35    | )
|Intangible asset                                                      |  |                |       |   |                  |   |       |               |  |   |                 |   |  |   | 35     |  
|Accumulated other comprehensive income                                |  |                | 1,641  |   |                  |   | 170    |               |  |   | 1,475            |   |  |   |       |  
|                                                                      |  |                |        |   |                  |   |        |               |  |   |                  |   |  |   |        |  
|Net amount recognized                                                 |  | $              | 624    |   |                  | $ | (3,821 | )             |  | $ | 326              |   |  | $ | (4,427 | )
|                                                                      |  |                |        |   |                  |   |        |               |  |   |                  |   |  |   |        |  



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



|                               |  |                |   |  |                   |   |  |      |   |  |      |   |  |      |   |  |      |  
|------------------------------ |  | -------------- | - |  | ----------------- | - |  | ---- | - |  | ---- | - |  | ---- | - |  | ---- | -
|                               |  | Qualified Plan |   |  | Supplemental Plan |  
|DECEMBER 31,                   |  | 2004           |   |  | 2003              |   |  | 2002 |   |  | 2004 |   |  | 2003 |   |  | 2002 |  
|Weighted-average assumptions   |  |                |   |  |                   |   |  |      |   |  |      |   |  |      |   |  |      |  
|Discount rate                  |  | 5.75           | % |  | 6.0               | % |  | 6.5  | % |  | 5.75 | % |  | 6.0  | % |  | 6.5  | %
|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 promissory stock subscription notes in the aggregate amount
of $4.1 million to fund this purchase. As of December 31, 2004, $1.0 million 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.    COMMITMENTS AND CONTINGENCIES



In July 1998, the Company entered into 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, 2004, 2003 and 2002 was
$3.2 million, $3.1 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, 2005 (in thousands):



|                             |  |   |       
|---------------------------- |  | - | ------
|2005                         |  | $ | 3,006 
|2006                         |  |   | 3,035 
|2007                         |  |   | 3,177 
|2008                         |  |   | 2,640 
|2009                         |  |   |      
|                             |  |   |       
|Total minimum lease payments |  | $ | 11,858
|                             |  |   |       



The Company is named as a 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 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 the HIG insurance company subsidiaries have paid losses and LAE under the subject policies of more than
$65.0 million and that at December 31, 2004 had established case loss reserves of $10.0 million, net of reinsurance. Based on a limited review of the exposures remaining, the Company estimates that incurred but not reported losses are $6.1 million
for a total loss and loss expense reserve of $16.1 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 Highlands reinsurers.



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



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 expressly provided that it did not constitute a finding of Highlands insolvency nor an authorization to liquidate Highlands. The Receiver
continues to resolve Highlands claim liabilities and otherwise conduct its business, as part of his efforts to rehabilitate Highlands. 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.



Letters of
Credit

---



The Company
has a letter of credit facility in the amount of $50 million with Barclays Bank PLC. Letters of credit issued under the facility fulfill the collateral requirements of Lloyds and guarantee loss reserves under certain other reinsurance
contracts. As of December 31, 2004, letter of credit issuance under the facility was approximately $45.4 million. Securities of $52.1 million are pledged as collateral under the facility.



At December 31, 2004, the Companys investments in fixed-maturity securities with a fair value of $9.2 million were on deposit with state
insurance departments to satisfy regulatory requirements.



NOTE
9.    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 non-employee directors, grants of restricted shares to non-employee
directors and stock appreciation rights (SARs) to key employees 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:



|                                         |  |                  |  |                                |       |                  |           |                                |   |                  |  |                                |  |   |      
|---------------------------------------- |  | ---------------- |  | ------------------------------ | ----- | ---------------- | --------- | ------------------------------ | - | ---------------- |  | ------------------------------ |  | - | -----
|                                         |  | 2004             |  | 2003                           |       | 2002            
|                                         |  | Number ofOptions |  | Weighted-AverageExercise Price |       | Number ofOptions |           | Weighted-AverageExercise Price |   | Number ofOptions |  | Weighted-AverageExercise Price
|Options outstanding at beginning of year |  | 1,044,667        |  | $                              | 14.20 |                  | 1,129,127 |                                | $ | 22.86            |  | 1,203,490                      |  | $ | 23.48
|Granted during year                      |  | 10,000           |  | $                              | 8.74  |                  | 355,000   |                                | $ | 5.95             |  | 80,000                         |  | $ | 15.74
|Exercised during year                    |  |                 |  |                                |      |                  |          |                                |   |                  |  |                               |  |   |      
|Forfeited during year                    |  | 7,667            |  | $                              | 16.70 |                  | 439,460   |                                | $ | 29.77            |  | 154,363                        |  | $ | 24.03
|                                         |  |                  |  |                                |       |                  |           |                                |   |                  |  |                                |  |   |      
|Options outstanding at end of year       |  | 1,047,000        |  | $                              | 14.13 |                  | 1,044,667 |                                | $ | 14.20            |  | 1,129,127                      |  | $ | 22.86
|                                         |  |                  |  |                                |       |                  |           |                                |   |                  |  |                                |  |   |      



Forfeited during 2003 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, 2004, is summarized as follows:



|                                   |  |                     |  |                                          |  |                                |       |                   |         |                                |   |      
|---------------------------------- |  | ------------------- |  | ---------------------------------------- |  | ------------------------------ | ----- | ----------------- | ------- | ------------------------------ | - | -----
|                                   |  | Options Outstanding |  | Options Exercisable                     
|                                   |  | NumberOutstanding   |  | Weighted-AverageRemainingContractualLife |  | Weighted-AverageExercise Price |       | NumberExercisable |         | Weighted-AverageExercise Price
|Range of Exercise Prices:          |  |                     |  |                                          |  |                                |       |                   |         |                                |   |      
|$  5.10$12.90                     |  | 365,000             |  | 6.03                                     |  | $                              | 6.03  |                   | 134,333 |                                | $ | 5.63 
|$16.70$19.32                      |  | 612,000             |  | 6.85                                     |  | $                              | 16.73 |                   | 543,667 |                                | $ | 16.74
|$24.25$36.50                      |  | 70,000              |  | 3.79                                     |  | $                              | 33.54 |                   | 70,000  |                                | $ | 33.54
|                                   |  |                     |  |                                          |  |                                |       |                   |         |                                |   |      
|Options outstanding at end of year |  | 1,047,000           |  | 14.13                                    |  | $                              | 14.13 |                   | 748,000 |                                | $ | 16.32
|                                   |  |                     |  |                                          |  |                                |       |                   |         |                                |   |      



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



A summary of the Companys SARs activity and related information follows:



|                                      |  |               |  |                                |      |               |        |                                |   |               |  |                                |  |  
|------------------------------------- |  | ------------- |  | ------------------------------ | ---- | ------------- | ------ | ------------------------------ | - | ------------- |  | ------------------------------ |  | -
|                                      |  | 2004          |  | 2003                           |      | 2002         
|                                      |  | Number ofSARs |  | Weighted-AverageExercise Price |      | Number ofSARs |        | Weighted-AverageExercise Price |   | Number ofSARs |  | Weighted-AverageExercise Price
|SARs outstanding at beginning of year |  | 80,500        |  | $                              | 5.95 |               |       |                                |   |              |  |                               |  | 
|Granted during year                   |  |              |  |                                |     |               | 80,500 |                                | $ | 5.95          |  |                               |  | 
|Exercised during year                 |  | 4,667         |  | $                              | 5.95 |               |       |                                |   |              |  |                               |  | 
|Forfeited during year                 |  | 10,000        |  | $                              | 5.95 |               |       |                                |   |              |  |                               |  | 
|                                      |  |               |  |                                |      |               |        |                                |   |               |  |                                |  |  
|SARs outstanding at end of year       |  | 65,833        |  | $                              | 5.95 |               | 80,500 |                                | $ | 5.95          |  |                               |  | 
|                                      |  |               |  |                                |      |               |        |                                |   |               |  |                                |  |  



The Company expensed as compensation $0.1
million and $0.1 million for SARs in 2004 and 2003, respectively.



Information about SARs
outstanding at December 31, 2004, is summarized as follows:



|                                   |  |                     |  |                                          |  |                                |      |                   |        |                                |   |     
|---------------------------------- |  | ------------------- |  | ---------------------------------------- |  | ------------------------------ | ---- | ----------------- | ------ | ------------------------------ | - | ----
|                                   |  | Options Outstanding |  | Options Exercisable                     
|                                   |  | NumberOutstanding   |  | Weighted-AverageRemainingContractualLife |  | Weighted-AverageExercise Price |      | NumberExercisable |        | Weighted-AverageExercise Price
|Range of Exercise Prices:          |  |                     |  |                                          |  |                                |      |                   |        |                                |   |     
|$ 5.10$12.90                      |  | 65,833              |  | 7.99                                     |  | $                              | 5.95 |                   | 23,500 |                                | $ | 5.95
|$16.70$19.32                      |  |                    |  |                                         |  |                                |     |                   |       |                                |   |    
|$24.25$36.50                      |  |                    |  |                                         |  |                                |     |                   |       |                                |   |    
|                                   |  |                     |  |                                          |  |                                |      |                   |        |                                |   |     
|Options outstanding at end of year |  | 65,833              |  | 7.99                                     |  | $                              | 5.95 |                   | 23,500 |                                | $ | 5.95
|                                   |  |                     |  |                                          |  |                                |      |                   |        |                                |   |     



Non-employee directors of the Company receive a
grant of 2,000 restricted shares each year as part of their compensation. The restricted share grants vest on the one-year anniversary of the grant. In 2003 and 2004, the Company issued 22,000 and 20,000 restricted share grants to non-employee
directors and expensed as compensation $0.1 million and $0.2 million, respectively.



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



|                                                                                                                                           |  |      |        |   |      |   |         |      |  |   |         |  
|------------------------------------------------------------------------------------------------------------------------------------------ |  | ---- | ------ | - | ---- | - | ------- | ---- |  | - | ------- | -
|                                                                                                                                           |  | 2004 |        |   | 2003 |   |         | 2002 | 
|Net loss as reported                                                                                                                       |  | $    | (7,886 | ) |      | $ | (12,806 | )    |  | $ | (38,382 | )
|Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards net of related tax
effects |  | $    | (634   | ) |      |   | (861    | )    |  |   | (1,102  | )
|                                                                                                                                           |  |      |        |   |      |   |         |      |  |   |         |  
|Pro forma net loss                                                                                                                         |  | $    | (8,520 | ) |      | $ | (13,667 | )    |  | $ | (39,484 | )
|                                                                                                                                           |  |      |       
|Loss per share                                                                                                                             |  |      |        |   |      |   |         |      |  |   |         |  
|Basicas reported                                                                                                                         |  | $    | (0.84  | ) |      | $ | (1.37   | )    |  | $ | (4.12   | )
|Basicproforma                                                                                                                            |  | $    | (0.90  | ) |      | $ | (1.46   | )    |  | $ | (4.24   | )
|                                                                                                                                           |  |      |       
|Dilutedas reported                                                                                                                       |  | $    | (0.84  | ) |      | $ | (1.37   | )    |  | $ | (4.12   | )
|Dilutedproforma                                                                                                                          |  | $    | (0.90  | ) |      | $ | (1.46   | )    |  | $ | (4.24   | )



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.



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



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



NOTE
10.    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,                                                                                            |  | 2004 |        |   | 2003 |   |         | 2002 | 
|Numerator:                                                                                              |  |      |        |   |      |   |         |      |  |   |         |  
|Net loss                                                                                                |  | $    | (7,886 | ) |      | $ | (12,806 | )    |  | $ | (38,382 | )
|Numerator for:                                                                                          |  |      |        |   |      |   |         |      |  |   |         |  
|Basic loss per share of common stock                                                                    |  | $    | (7,886 | ) |      | $ | (12,806 | )    |  | $ | (38,382 | )
|Diluted loss per share of common stock                                                                  |  | $    | (7,886 | ) |      | $ | (12,806 | )    |  | $ | (38,382 | )
|Denominator:                                                                                            |  |      |        |   |      |   |         |      |  |   |         |  
|Denominator for basic earnings per share of common stockweighted-average shares outstanding            |  |      | 9,388  |   |      |   | 9,352   |      |  |   | 9,322   |  
|Effect of dilutive securities:                                                                          |  |      |        |   |      |   |         |      |  |   |         |  
|Stock options                                                                                           |  | $    |       |   |      | $ |        |      |  | $ |        |  
|                                                                                                        |  |      |        |   |      |   |         |      |  |   |         |  
|Denominator for diluted earnings per share of common stock adjustedweighted-average shares outstanding |  | $    | 9,388  |   |      | $ | 9,352   |      |  | $ | 9,322   |  
|                                                                                                        |  |      |        |   |      |   |         |      |  |   |         |  
|Basic loss per share of common stock                                                                    |  | $    | (0.84  | ) |      | $ | (1.37   | )    |  | $ | (4.12   | )
|                                                                                                        |  |      |        |   |      |   |         |      |  |   |         |  
|Diluted loss per share of common stock                                                                  |  | $    | (0.84  | ) |      | $ | (1.37   | )    |  | $ | (4.12   | )
|                                                                                                        |  |      |        |   |      |   |         |      |  |   |         |  



For the years ended December 31, 2004, 2003 and
2002 no incremental shares related to stock options are included in the diluted number of shares outstanding as the impact would have been antidilutive.



NOTE 11.    QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)



The unaudited quarterly results of operations for 2004 and 2003 are summarized as follows:



|                                                  |  |                                       |        |     |      |        |     |  |   |        |   |  |     |        |   |     |   |        |   |  |     |        |  |   |         |   |  |   |       
|------------------------------------------------- |  | ------------------------------------- | ------ | --- | ---- | ------ | --- |  | - | ------ | - |  | --- | ------ | - | --- | - | ------ | - |  | --- | ------ |  | - | ------- | - |  | - | ------
|                                                  |  | 2004                                  |        |     | 2003
|                                                  |  | 1ST                                   |        | 2ND |      |        | 3RD |  |   | 4TH    |   |  | 1ST |        |   | 2ND |   | 3RD    |   |  | 4TH
|                                                  |  | (In Thousands, Except Per-Share Data)
|Premiums earned and other revenues                |  | $                                     | 36,693 |     | $    | 31,313 |     |  | $ | 36,294 |   |  | $   | 32,346 |   |     | $ | 54,762 |   |  | $   | 41,258 |  | $ | 35,110  |   |  | $ | 33,693
|Net investment income                             |  |                                       | 5,432  |     |      | 5,118  |     |  |   | 4,477  |   |  |     | 4,147  |   |     |   | 5,590  |   |  |     | 5,330  |  |   | 4,130   |   |  |   | 6,904 
|Realized investment gains (losses)                |  |                                       | 2,346  |     |      | (631   | )   |  |   | (111   | ) |  |     | (102   | ) |     |   | 3,090  |   |  |     | 837    |  |   | (8,191  | ) |  |   | 4,480 
|Net income (loss)                                 |  |                                       | 827    |     |      | (2,316 | )   |  |   | (3,021 | ) |  |     | (3,376 | ) |     |   | (1,222 | ) |  |     | 612    |  |   | (14,816 | ) |  |   | 2,620 
|Basic earnings (loss) per share of common stock   |  | $                                     | 0.09   |     | $    | (0.25  | )   |  | $ | (0.32  | ) |  | $   | (0.36  | ) |     | $ | (0.13  | ) |  | $   | 0.07   |  | $ | (1.58   | ) |  | $ | 0.28  
|Diluted earnings (loss) per share of common stock |  | $                                     | 0.09   |     | $    | (0.25  | )   |  | $ | (0.32  | ) |  | $   | (0.36  | ) |     | $ | (0.13  | ) |  | $   | 0.07   |  | $ | (1.58   | ) |  | $ | 0.28  



NOTE 12.    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, and dentists, healthcare facilities 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 and accident and health, workers compensation 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.



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



The following tables present information about reportable segment income (loss) and segment assets as of and for the periods indicated:



|                                          |  |                                       |         |   |                    |   |         |       |  |       |         |  |   |           |  
|----------------------------------------- |  | ------------------------------------- | ------- | - | ------------------ | - | ------- | ----- |  | ----- | ------- |  | - | --------- | -
|Year Ended December 31, 2004              |  | Direct HealthcareLiability Insurance  |         |   | AssumedReinsurance |   |         | Other |  | Total |        
|                                          |  | (In Thousands)                        |        
|Premiums written                          |  | $                                     | 126,834 |   |                    | $ | 2,376   |       |  |       |         |  | $ | 129,210   |  
|                                          |  |                                       |         |   |                    |   |         |       |  |       |         |  |   |           |  
|Premiums earned                           |  | $                                     | 121,478 |   |                    | $ | 14,628  |       |  |       |         |  | $ | 136,106   |  
|Net investment income                     |  |                                       |        |   |                    |   |        |       |  | $     | 19,174  |  |   | 19,174    |  
|Realized investment gains                 |  |                                       |        |   |                    |   |        |       |  |       | 1,502   |  |   | 1,502     |  
|Other revenue                             |  |                                       |        |   |                    |   |        |       |  |       | 540     |  |   | 540       |  
|                                          |  |                                       |         |   |                    |   |         |       |  |       |         |  |   |           |  
|Total revenues                            |  |                                       | 121,478 |   |                    |   | 14,628  |       |  |       | 21,216  |  |   | 157,322   |  
|Losses and loss adjustment expenses       |  |                                       | 110,590 |   |                    |   | 28,337  |       |  |       |        |  |   | 138,927   |  
|Other operating expenses                  |  |                                       | 26,134  |   |                    |   | 139     |       |  |       |        |  |   | 26,273    |  
|                                          |  |                                       |         |   |                    |   |         |       |  |       |         |  |   |           |  
|Total expenses                            |  |                                       | 136,724 |   |                    |   | 28,476  |       |  |       |        |  |   | 165,200   |  
|                                          |  |                                       |         |   |                    |   |         |       |  |       |         |  |   |           |  
|Segment income (loss) before income taxes |  | $                                     | (15,246 | ) |                    | $ | (13,848 | )     |  | $     | 21,216  |  | $ | (7,878    | )
|                                          |  |                                       |         |   |                    |   |         |       |  |       |         |  |   |           |  
|Segment assets                            |  | $                                     | 142,270 |   |                    | $ | 196,853 |       |  | $     | 640,512 |  | $ | 979,635   |  
|                                          |  |                                       |         |  
|Year Ended December 31, 2003              |  | Direct Healthcare Liability Insurance |         |   | AssumedReinsurance |   |         | 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   | )
|                                          |  |                                       |         |   |                    |   |         |       |  |       |         |  |   |           |  
|Segment assets                            |  | $                                     | 28,042  |   |                    | $ | 253,315 |       |  | $     | 709,893 |  | $ | 991,250   |  
|                                          |  |                                       |         |  
|Year Ended December 31, 2002              |  | Direct Healthcare Liability Insurance |         |   | AssumedReinsurance |   |         | 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   | )
|                                          |  |                                       |         |   |                    |   |         |       |  |       |         |  |   |           |  
|Segment assets                            |  | $                                     | 105,689 |   |                    | $ | 171,439 |       |  | $     | 786,638 |  | $ | 1,063,766 |  



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Schedule IICondensed Financial Information of Registrant



SCPIE HOLDINGS INC.



CONDENSED BALANCE
SHEETS

(In Thousands, Except Share Data)



|                                                                                                                                                             |  |      |         |   |      |   |         |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | ---- | ------- | - | ---- | - | ------- | -
|DECEMBER 31,                                                                                                                                                 |  | 2004 |         |   | 2003 |  
|ASSETS                                                                                                                                                       |  |      |         |   |      |   |         |  
|Securities available for sale:                                                                                                                               |  |      |         |   |      |   |         |  
|Equity investments, at fair value (cost: 2004$1,496; 2003$1,871)                                                                                           |  | $    | 1,496   |   |      | $ | 1,871   |  
|Cash and cash equivalents                                                                                                                                    |  |      | 7,990   |   |      |   | 9,499   |  
|Investment in subsidiaries                                                                                                                                   |  |      | 177,852 |   |      |   | 186,379 |  
|                                                                                                                                                             |  |      |         |   |      |   |         |  
|Total investments                                                                                                                                            |  |      | 187,338 |   |      |   | 197,749 |  
|Deferred federal income taxes                                                                                                                                |  |      | 7,256   |   |      |   | 3,377   |  
|Other assets                                                                                                                                                 |  |      | 3,930   |   |      |   | 3,589   |  
|                                                                                                                                                             |  |      |         |   |      |   |         |  
|Total assets                                                                                                                                                 |  | $    | 198,524 |   |      | $ | 204,715 |  
|                                                                                                                                                             |  |      |         |   |      |   |         |  
|LIABILITIES                                                                                                                                                  |  |      |         |   |      |   |         |  
|Due to affiliates                                                                                                                                            |  | $    |        |   |      | $ | 527     |  
|Other liabilities                                                                                                                                            |  |      | 4,002   |   |      |   |        |  
|                                                                                                                                                             |  |      |         |   |      |   |         |  
|Total liabilities                                                                                                                                            |  |      | 4,002   |   |      |   | 527     |  
|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, 20049,404,604 shares outstanding; 20039,371,933
shares outstanding |  |      | 1       |   |      |   | 1       |  
|Additional paid-in capital                                                                                                                                   |  |      | 37,127  |   |      |   | 37,281  |  
|Retained earnings                                                                                                                                            |  |      | 256,177 |   |      |   | 264,063 |  
|Treasury stock at cost (20042,887,487 shares and 20032,920,158 shares)                                                                                     |  |      | (97,654 | ) |      |   | (98,006 | )
|Stock subscription notes receivable                                                                                                                          |  |      | (3,018  | ) |      |   | (3,312  | )
|Accumulated other comprehensive income                                                                                                                       |  |      | 1,889   |   |      |   | 4,161   |  
|                                                                                                                                                             |  |      |         |   |      |   |         |  
|Total stockholders equity                                                                                                                                   |  |      | 194,522 |   |      |   | 204,188 |  
|                                                                                                                                                             |  |      |         |   |      |   |         |  
|Total liabilities and stockholders equity                                                                                                                   |  | $    | 198,524 |   |      | $ | 204,715 |  
|                                                                                                                                                             |  |      |         |   |      |   |         |  



See accompanying notes to
Condensed Financial Statements.



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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 31,2004 |        |   | DECEMBER 31,2003 |   |         | DECEMBER 31,2002 | 
|Dividend from subsidiary                                                              |  | $                |       |   |                  | $ |        |                  |  | $ | 3,000   |  
|Net investment income (loss)                                                          |  |                  | 108    |   |                  |   | (330    | )                |  |   | 389     |  
|Realized investment losses                                                            |  |                  |       |   |                  |   | (2,750  | )                |  |   | (2,312  | )
|Other income                                                                          |  |                  |        |   |                  |   |        |                  |  |   | 180     |  
|Interest expenses                                                                     |  |                  |       |   |                  |   |        |                  |  |   | (66     | )
|Other expenses                                                                        |  |                  | (1,669 | ) |                  |   | (2,421  | )                |  |   | (4,881  | )
|                                                                                      |  |                  |        |   |                  |   |         |                  |  |   |         |  
|Loss before federal income tax expense (benefit) and equity in losses of subsidiaries |  |                  | (1,561 | ) |                  |   | (5,501  | )                |  |   | (3,690  | )
|Federal income tax expense (benefit)                                                  |  |                  | 6      |   |                  |   | (486    | )                |  |   | (2,341  | )
|                                                                                      |  |                  |        |   |                  |   |         |                  |  |   |         |  
|Loss before equity in losses of subsidiaries                                          |  |                  | (1,567 | ) |                  |   | (5,015  | )                |  |   | (1,349  | )
|Equity in losses of subsidiaries                                                      |  |                  | (6,319 | ) |                  |   | (7,791  | )                |  |   | (37,033 | )
|                                                                                      |  |                  |        |   |                  |   |         |                  |  |   |         |  
|Net loss                                                                              |  | $                | (7,886 | ) |                  | $ | (12,806 | )                |  | $ | (38,382 | )
|                                                                                      |  |                  |        |   |                  |   |         |                  |  |   |         |  







See accompanying notes to Condensed Financial Statements.



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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 31,2004 |        |   | DECEMBER 31,2003 |   |         | DECEMBER 31,2002 | 
|OPERATING ACTIVITIES                                                                      |  |                  |        |   |                  |   |         |                  |  |   |         |  
|Net loss                                                                                  |  | $                | (7,886 | ) |                  | $ | (12,806 | )                |  | $ | (38,382 | )
|Adjustments to reconcile net loss to net cash provided by (used in) operating activities: |  |                  |        |   |                  |   |         |                  |  |   |         |  
|Realized investment losses                                                                |  |                  |       |   |                  |   | 2,750   |                  |  |   | 2,312   |  
|Due to affiliates                                                                         |  |                  | (527   | ) |                  |   | 507     |                  |  |   | (410    | )
|Changes in other assets and liabilities                                                   |  |                  | (282   | ) |                  |   | (4,284  | )                |  |   | (110    | )
|Equity in undistributed loss of subsidiaries                                              |  |                  | 6,319  |   |                  |   | 7,791   |                  |  |   | 37,033  |  
|                                                                                          |  |                  |        |   |                  |   |         |                  |  |   |         |  
|Net cash provided by (used in) operating activities                                       |  |                  | (2,376 | ) |                  |   | (6,042  | )                |  |   | 443     |  
|                                                                                          |  |                  |       
|INVESTING ACTIVITIES                                                                      |  |                  |        |   |                  |   |         |                  |  |   |         |  
|Salesequities                                                                            |  |                  | 375    |   |                  |   | 8,245   |                  |  |   | 10,593  |  
|                                                                                          |  |                  |        |   |                  |   |         |                  |  |   |         |  
|Cash provided by investing activities                                                     |  |                  | 375    |   |                  |   | 8,245   |                  |  |   | 10,593  |  
|                                                                                          |  |                  |       
|FINANCING ACTIVITIES                                                                      |  |                  |        |   |                  |   |         |                  |  |   |         |  
|Repayment of bank loan                                                                    |  |                  |       |   |                  |   |        |                  |  |   | (9,000  | )
|Purchase of treasury stock, net and repayment of stock subscription notes                 |  |                  | 492    |   |                  |   | 580     |                  |  |   | 613     |  
|Cash dividends                                                                            |  |                  |       |   |                  |   | (3,740  | )                |  |   | (3,743  | )
|                                                                                          |  |                  |        |   |                  |   |         |                  |  |   |         |  
|Cash provided by (used in) financing activities                                           |  |                  | 492    |   |                  |   | (3,160  | )                |  |   | (12,130 | )
|                                                                                          |  |                  |        |   |                  |   |         |                  |  |   |         |  
|Decrease in cash and cash equivalents                                                     |  |                  | (1,509 | ) |                  |   | (957    | )                |  |   | (1,094  | )
|Cash and cash equivalents at beginning of period                                          |  |                  | 9,499  |   |                  |   | 10,456  |                  |  |   | 11,550  |  
|                                                                                          |  |                  |        |   |                  |   |         |                  |  |   |         |  
|Cash and cash equivalents at end of period                                                |  | $                | 7,990  |   |                  | $ | 9,499   |                  |  | $ | 10,456  |  
|                                                                                          |  |                  |        |   |                  |   |         |                  |  |   |         |  







See accompanying notes to Condensed Financial Statements.



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Schedule IICondensed Financial Information of Registrant (continued)



SCPIE HOLDINGS INC.



NOTES TO CONDENSED FINANCIAL STATEMENTS

December 31, 2004



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.



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Schedule IIISupplementary Insurance Information



SCPIE Holdings Inc., and Subsidiaries



|                             |  |                |  | 
|---------------------------- |  | -------------- |  | 
|Year Ended December 31, 2004 |  | (In Thousands) |  | 

---



|                                      |  |                                 |       |                                                       |   |                  |  |                |        |                     |   |                                              |  |                                                 |        |                        |   |         |                 |   |       |  |   |        |   |  |   |        
|------------------------------------- |  | ------------------------------- | ----- | ----------------------------------------------------- | - | ---------------- |  | -------------- | ------ | ------------------- | - | -------------------------------------------- |  | ----------------------------------------------- | ------ | ---------------------- | - | ------- | --------------- | - | ----- |  | - | ------ | - |  | - | -------
|Segments                              |  | Deferred PolicyAcquisition Cost |       | Future PolicyBenefits, Losses,Claims and LossExpenses |   | UnearnedPremiums |  | PremiumsEarned |        | NetInvestmentIncome |   | Benefits,Claims,Losses andSettlementExpenses |  | Amortization ofDeferred PolicyAcquisition Costs |        | OtherOperatingExpenses |   |         | PremiumsWritten
|Direct Healthcare Liability Insurance |  | $                               | 8,587 |                                                       | $ | 422,283          |  | $              | 42,406 |                     | $ | 121,478                                      |  |                                                 |        |                        | $ | 110,590 |                 | $ | 3,234 |  | $ | 22,901 |   |  | $ | 126,834
|Assumed Reinsurance (1)               |  |                                 | 476   |                                                       |   | 216,464          |  |                | 1,405  |                     |   | 14,628                                       |  |                                                 |        |                        |   | 28,337  |                 |   | 5,362 |  |   | (2,763 | ) |  |   | 2,376  
|Other                                 |  |                                 |      |                                                       |   |                 |  |                |       |                     |   |                                             |  | $                                               | 19,174 |                        |   |        |                 |   |      |  |   |       |   |  |   |       
|                                      |  |                                 |       |                                                       |   |                  |  |                |        |                     |   |                                              |  |                                                 |        |                        |   |         |                 |   |       |  |   |        |   |  |   |        
|Total                                 |  | $                               | 9,063 |                                                       | $ | 638,747          |  | $              | 43,811 |                     | $ | 136,106                                      |  | $                                               | 19,174 |                        | $ | 138,927 |                 | $ | 8,596 |  | $ | 20,138 |   |  | $ | 129,210
|                                      |  |                                 |       |                                                       |   |                  |  |                |        |                     |   |                                              |  |                                                 |        |                        |   |         |                 |   |       |  |   |        |   |  |   |        



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



|                             |  |                |  | 
|---------------------------- |  | -------------- |  | 
|Year Ended December 31, 2003 |  | (In Thousands) |  | 

---



|                                      |  |                                 |       |                                                       |   |                  |  |                |        |                     |   |                                              |  |                                                 |        |                        |   |                 |  |   |        |  |   |        |  |   |        
|------------------------------------- |  | ------------------------------- | ----- | ----------------------------------------------------- | - | ---------------- |  | -------------- | ------ | ------------------- | - | -------------------------------------------- |  | ----------------------------------------------- | ------ | ---------------------- | - | --------------- |  | - | ------ |  | - | ------ |  | - | -------
|Segments                              |  | Deferred PolicyAcquisition Cost |       | Future PolicyBenefits, Losses,Claims and LossExpenses |   | UnearnedPremiums |  | PremiumsEarned |        | NetInvestmentIncome |   | Benefits,Claims,Losses andSettlementExpenses |  | Amortization ofDeferred PolicyAcquisition Costs |        | OtherOperatingExpenses |   | PremiumsWritten
|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 |  | (In Thousands) |  | 

---



|                                      |  |                                 |       |                                                       |   |                  |  |                |        |                     |   |                                              |  |                                                 |        |                        |   |                 |  |   |        |  |   |        |  |   |        
|------------------------------------- |  | ------------------------------- | ----- | ----------------------------------------------------- | - | ---------------- |  | -------------- | ------ | ------------------- | - | -------------------------------------------- |  | ----------------------------------------------- | ------ | ---------------------- | - | --------------- |  | - | ------ |  | - | ------ |  | - | -------
|Segments                              |  | Deferred PolicyAcquisition Cost |       | Future PolicyBenefits, Losses,Claims and LossExpenses |   | UnearnedPremiums |  | PremiumsEarned |        | NetInvestmentIncome |   | Benefits,Claims,Losses andSettlementExpenses |  | Amortization ofDeferred PolicyAcquisition Costs |        | OtherOperatingExpenses |   | PremiumsWritten
|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.
|--- |  | --------------------------------------------------------------------------



74