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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, 2005



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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)
|
|
|
|



|                                                            |  |                                      
|----------------------------------------------------------- |  | -------------------------------------
|Securities registered pursuant To Section 12(b) of the Act: |  | Name of Exchange on which registered:
|                                                            | 
|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 is
a well known seasoned user as defined in Rule 405 of the Securities Act.  Yes  ̈  No x



Indicate by check mark if the Registrant is not required to file reports pursuant to § 13 or
§ 15(d) of the Act.  Yes  ̈  No x



Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by
§ 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 a large accelerated filer, an accelerated filer or a non-accelerated filer. See definition of
accelerated filer and large accelerated filer in Rule 12b-2 in the Exchange Act.



|                           |  |                      |  |                         
|-------------------------- |  | -------------------- |  | ------------------------
|Large accelerated filer   ̈ |  | Accelerated filer  x |  | Non-accelerated filer   ̈



|Indicate |  | by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act.)  Yes  ̈  No x
|-------- |  | -----------------------------------------------------------------------------------------------------------



The aggregate market value of the Registrants voting stock held by non-affiliates of the Registrant at June 30, 2005, was $104,654,680 (based upon the closing sales price of such date, as reported by The Wall
Street Journal).



The number of shares of the Registrants Common Stock
outstanding as of March 6, 2006, was 10,016,916 (including 500,000 shares of Common Stock that have been issued to a wholly owned subsidiary of the Registrant).



DOCUMENTS INCORPORATED BY REFERENCE



Portions of the Registrants definitive 2006 proxy statement, anticipated to be filed with the Securities and Exchange Commission within 120 days after the close of the
Registrants fiscal year, are incorporated by reference into Part III of this Form 10-K.



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TABLE OF CONTENTS



|         |  |                                                                                                              |  |   
|-------- |  | ------------------------------------------------------------------------------------------------------------ |  | --
|PART I  
|Item 1.  |  | Business                                                                                                     |  | 3 
|Item 1A. |  | Risk Factors                                                                                                 |  | 22
|Item 1B. |  | Unresolved Staff Comments                                                                                    |  | 28
|Item 2.  |  | Properties                                                                                                   |  | 28
|Item 3.  |  | Legal Proceedings                                                                                            |  | 28
|Item 4.  |  | Submission of Matters to a Vote of Security Holders                                                          |  | 29
|        
|PART II 
|Item 5.  |  | Market For Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities |  | 30
|Item 6.  |  | Selected Consolidated Financial Data                                                                         |  | 31
|Item 7.  |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                        |  | 32
|Item 7A. |  | Quantitative And Qualitative Disclosures About Market Risk                                                   |  | 43
|Item 8.  |  | Financial Statements And Supplementary Data                                                                  |  | 44
|Item 9.  |  | Changes In and Disagreements With Accountants On Accounting and Financial Disclosure                         |  | 45
|Item 9A. |  | Controls and Procedures                                                                                      |  | 45
|Item 9B. |  | Other Information                                                                                            |  | 46
|        
|PART III
|Item 10. |  | Directors and Executive Officers of the Registrant                                                           |  | 47
|Item 11. |  | Executive Compensation                                                                                       |  | 47
|Item 12. |  | Security Ownership Of Certain Beneficial Owners and Management and Related Stockholder Matters               |  | 47
|Item 13. |  | Certain Relationships and Related Transactions                                                               |  | 47
|Item 14. |  | Principal Accountant Fees and Services                                                                       |  | 47
|        
|PART IV 
|Item 15. |  | Exhibits, Financial Statements Schedules                                                                     |  | 48



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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 licensed to provide 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 hospital and dental liability insurance, medical malpractice insurance and related products in
other states and the global assumed reinsurance business. Since 2002, the assumed reinsurance business, hospital and dental business and medical malpractice insurance business outside its core states of California and Delaware have been in run-off.



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, and a corporate member of Lloyds of London (Lloyds), SCPIE Underwriting Limited, which is owned by SCPIE Indemnity.



The Company was founded in 1976 as the 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 losses, including losses arising out of the September 11, 2001 World Trade Center terrorist attack, the Company incurred losses from 2001 to 2004. 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 in 2002 were the withdrawal from the healthcare liability insurance markets outside of its core markets and entering into a 100% quota share
reinsurance agreement to retrocede to another insurer the majority of reinsurance business written in 2001 and 2002. See Information about Operations. The Company continues to settle liabilities in these non-core businesses.



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. The Company also makes available on its website its corporate charter
documents and corporate governance documents. Information contained on the Companys website is not incorporated into and does not constitute a part of this annual report on Form 10-K. The Companys website address referenced above is
intended to be an inactive textual reference only and not an active hyperlink to the Companys website.



INFORMATION ABOUT OPERATIONS

---



The Companys insurance operations have historically been reported in two business segments: direct healthcare liability insurance and assumed reinsurance. Since 2002, the Company has focused its business operations on
writing direct insurance in its core direct healthcare liability insurance markets of California and Delaware. In direct insurance activities, the insurer assumes the risk of liability or loss from persons or organizations that are directly subject
to the risks. In assumed reinsurance, the reinsurer assumes all or a portion of the risk directly covered by another insurer. Such risks may relate to liability (or casualty), property, life, accident, health, financial and other perils that may
arise from an insurable event. Since 2002, the Company has been actively disengaging from the assumed reinsurance business.



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The direct healthcare liability insurance operations are 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. See Managements Discussion and Analysis of Financial Conditions and Results of Operations.



DIRECT HEALTHCARE LIABILITY CORE INSURANCE OPERATIONS

---



Overview and Developments During 2005Core Business



The Company has been a leading provider of medical malpractice insurance to physicians, oral surgeons
and healthcare providers and facilities in California for many years. The Companys share of the medical malpractice premiums written in California in 2004 (latest data available) was approximately 13.7%, 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 2005, the Company had net premiums earned under policies issued to California insureds representing 97.5% of the
total net premiums earned in its core business component of the direct healthcare liability insurance operations.



The Company has also developed and markets 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.



The Companys core business operations have been steadily improving over the past three years due
primarily to the effect of rate increases and a significant decline in claim frequency. The following table displays the core business results for the years ended December 31, 2005, 2004 and 2003:



Core Direct Healthcare Liability Insurance Operations

Underwriting Results

(Dollars in Thousands)



|                         |  |      |         |   |      |   |         |      |  |   |         |  
|------------------------ |  | ---- | ------- | - | ---- | - | ------- | ---- |  | - | ------- | -
|YEAR ENDED DECEMBER 31,  |  | 2005 |         |   | 2004 |   |         | 2003 | 
|Net Premiums Written     |  | $    | 126,872 |   |      | $ | 128,641 |      |  | $ | 123,251 |  
|                         |  |      |         |   |      |   |         |      |  |   |         |  
|Net Premiums Earned      |  | $    | 127,556 |   |      | $ | 123,194 |      |  | $ | 119,148 |  
|Losses and LAE incurred  |  |      | 90,463  |   |      |   | 99,302  |      |  |   | 105,530 |  
|Underwriting Expenses    |  |      | 25,900  |   |      |   | 25,742  |      |  |   | 24,402  |  
|                         |  |      |         |   |      |   |         |      |  |   |         |  
|                         |  |      | 116,363 |   |      |   | 125,044 |      |  |   | 129,932 |  
|                         |  |      |         |   |      |   |         |      |  |   |         |  
|Underwriting Gain (loss) |  | $    | 11,193  |   |      | $ | (1,850  | )    |  | $ | (10,784 | )
|                         |  |      |         |   |      |   |         |      |  |   |         |  
|Loss Ratio               |  |      | 70.9    | % |      |   | 80.6    | %    |  |   | 88.6    | %
|Expense Ratio            |  |      | 20.3    | % |      |   | 20.9    | %    |  |   | 20.5    | %
|Combined Ratio           |  |      | 91.2    | % |      |   | 101.5   | %    |  |   | 109.1   | %



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Products



In its core direct healthcare liability operations, the Company underwrites professional and related liability policy coverages for physicians (including oral and maxillofacial
surgeons), physician medical groups and clinics, managed care organizations and other providers in the healthcare industry. The following table summarizes the premiums earned by product in the Companys core business for the periods indicated:



Premiums Earned in Core Business

(In Thousands)



|                                                   |  |      |         |      |   |         |  |   |        
|-------------------------------------------------- |  | ---- | ------- | ---- | - | ------- |  | - | -------
|YEAR ENDED DECEMBER 31,                            |  | 2005 |         | 2004 |   | 2003   
|Physician and medical group professional liability |  | $    | 116,834 |      | $ | 111,692 |  | $ | 107,952
|Healthcare provider and facility liability         |  |      | 8,400   |      |   | 9,259   |  |   | 8,393  
|Ancillary liability products                       |  |      | 1,785   |      |   | 1,698   |  |   | 2,229  
|Other                                              |  |      | 537     |      |   | 545     |  |   | 574    
|                                                   |  |      |         |      |   |         |  |   |        
|Total core premiums earned                         |  | $    | 127,556 |      | $ | 123,194 |  | $ | 119,148
|                                                   |  |      |         |      |   |         |  |   |        



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 an illness or injury. 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 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.



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



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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. The Company also offers a policy 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



Initially, 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 several years, brokered business has become a more important source of business in California. In
Delaware, the Company markets its policies through a single broker.



The following tables set forth core healthcare liability policies sold directly to the insured and through brokers:



Core Healthcare Liability

(In Thousands)



|                                                  |  |      |         |      |   |         |  |   |        
|------------------------------------------------- |  | ---- | ------- | ---- | - | ------- |  | - | -------
|YEAR ENDED DECEMBER 31,                           |  | 2005 |         | 2004 |   | 2003   
|Gross Premiums Written                            |  |      |         |      |   |         |  |   |        
|Direct                                            |  | $    | 89,751  |      | $ | 94,575  |  | $ | 92,224 
|Brokerage                                         |  |      | 51,721  |      |   | 47,918  |  |   | 45,665 
|                                                  |  |      |         |      |   |         |  |   |        
|                                                  |  | $    | 141,472 |      | $ | 142,493 |  | $ | 137,889
|                                                  |  |      |         |      |   |         |  |   |        
|New business written (annualized) during the year |  |      |         |      |   |         |  |   |        
|Direct                                            |  | $    | 1,901   |      | $ | 3,198   |  | $ | 1,806  
|Brokerage                                         |  |      | 6,284   |      |   | 3,377   |  |   | 6,217  
|                                                  |  |      |         |      |   |         |  |   |        
|                                                  |  | $    | 8,185   |      | $ | 6,575   |  | $ | 8,023  
|                                                  |  |      |         |      |   |         |  |   |        



The Companys Marketing Department consists
of a Senior Vice-President in charge of both marketing and underwriting, and 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 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.



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Underwriting



The Underwriting Department consists of the Senior Vice President, 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 own 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 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% were approved and implemented in California effective January 1, 2002, October 1, 2003, and
January 1, 2005, respectively. The Company did not request any rate change in California for 2006. Rate increases of 34.4%, 13.3% and 19.2% have been approved in Delaware effective July 1, 2003, July 15, 2004 and 2005,
respectively. Approximately 24% of the Companys in force premium as of December 31, 2005 is evaluated using experience rating formulas and therefore is 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 losses 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 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 California and other
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.



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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.



BUSINESS OPERATIONS IN RUN-OFF

---



Direct Healthcare Liability Insurance Operations in Run-Off



The Company formerly offered a number of direct healthcare liability insurance programs outside its core business. These programs were all discontinued and no policies were issued
or renewed after March 2003. However, there are outstanding policy claims to be resolved under these programs. The principal programs involved hospitals, some nonstandard physician programs and physician and dentist programs administered by
Brown & Brown.



Hospital ProgramsIn 1996, the Company undertook an
expansion plan which included products that offered comprehensive hospital and related liability coverages for individual hospitals and 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 and incurred material adverse loss experience under many of its large hospital and other healthcare facility policies. 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.



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 2001 and 2002, the Company derived approximately 32% and 29%
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 had
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 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 and as of March 6, 2004, all policies had expired.



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Current Status



The Company continues to settle and close the claims associated with the direct healthcare liability business in run-off. As of December 31, 2005, non-core healthcare
liability reserves accounted for 15.8% of the Companys total net reserves. The following table shows the progress the Company has achieved in the disposition of these claims.



Direct Healthcare Liability Claims in Run-Off:

(Dollars in Thousands, except Average Reserve)



|                                                       |  |      |         |   |      |   |         |  |   |        
|------------------------------------------------------ |  | ---- | ------- | - | ---- | - | ------- |  | - | -------
|YEAR ENDED DECEMBER 31,                                |  | 2005 |         |   | 2004 |   | 2003   
|Net Loss Reserves Outstanding                          |  |      |         |   |      |   |         |  |   |        
|Beginning of Period                                    |  | $    | 97,331  |   |      | $ | 145,283 |  | $ | 180,375
|Deduct Loss Payments                                   |  |      | 34,418  |   |      |   | 59,240  |  |   | 62,596 
|Increase (Decrease) in Estimates                       |  |      | (2,297  | ) |      |   | 11,288  |  |   | 27,504 
|                                                       |  |      |         |   |      |   |         |  |   |        
|Net Loss Reserves End of Period                        |  | $    | 60,616  |   |      | $ | 97,331  |  | $ | 145,283
|                                                       |  |      |         |   |      |   |         |  |   |        
|Number of Claims Outstanding                           |  |      |         |   |      |   |         |  |   |        
|Beginning of Period                                    |  |      | 431     |   |      |   | 739     |  |   | 1,033  
|Deduct Claims Closed During Period                     |  |      | 218     |   |      |   | 386     |  |   | 538    
|Add Claims Opened During Period                        |  |      | 16      |   |      |   | 78      |  |   | 244    
|                                                       |  |      |         |   |      |   |         |  |   |        
|Number of Claims Outstanding                           |  |      |         |   |      |   |         |  |   |        
|End of Period                                          |  |      | 229     |   |      |   | 431     |  |   | 739    
|                                                       |  |      |         |   |      |   |         |  |   |        
|Average Reserve (including IBNR on outstanding claims) |  | $    | 264,699 |   |      | $ | 225,826 |  | $ | 196,594



The number of claims opened has declined as the
number of policies declined. The Companys average reserve on open claims has increased as less meritorious claims settle earlier in the claims settlement process.



Assumed Reinsurance Operations In Run-Off



In August 1999, the Company established a separate Assumed Reinsurance Division under the direction of two senior officers. 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.



Exit From Most Reinsurance OperationsThe Rosemont Re Treaty



The Company suffered significant losses in 2001 in its 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.



9



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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. 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.



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 was required to
pay Rosemont Re additional premium in excess of the base premium ceded of 14.3%.



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. See Managements Discussion and Analysis of Financial Condition and Results of Operations.



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 the 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 contact.



After consummation of the Rosemont Re 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.



Remaining 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 year-end 2005, 2004 and 2003, the principal net loss reserves retained by the Company under these treaties involved (i) Lloyds syndicates for which the Company
provided capital, (ii) London based business including other Lloyds syndicates, (iii) occupational accident coverage and excess workers compensation benefits, which typically provides lifetime medical and related benefits at high
coverage levels, (iv) excess of loss directors and officers liability reinsurance, and (v) bail and immigration bonds.



The following table presents the net assumed reinsurance reserves (including retrospective reserves ceded under the Rosemont Re Treaty of $7.1 million, $12.7 million, and $36.3
million, respectively) by major component as of December 31:



|                               |  |                |        |     |      |   |        |  |   |        
|------------------------------ |  | -------------- | ------ | --- | ---- | - | ------ |  | - | -------
|                               |  | 2005           |        |     | 2004 |   | 2003  
|                               |  | (In Thousands)
|Lloyds Syndicates(1)          |  | $              |       |     |      | $ | 21,922 |  | $ | 39,091 
|London based business          |  |                | 24,427 |     |      |   | 18,873 |  |   | 23,176 
|Occupational accident business |  |                | 21,780 |     |      |   | 26,561 |  |   | 24,460 
|Excess D&O liability           |  |                | 6,375  |     |      |   | 7,375  |  |   | 3,778  
|Bail and immigration bonds     |  |                | 573    | (2) |      |   | 3,489  |  |   |       
|Other                          |  |                | 6,039  |     |      |   | 9,588  |  |   | 15,853 
|                               |  |                |        |     |      |   |        |  |   |        
|                               |  | $              | 59,194 |     |      | $ | 87,808 |  | $ | 106,358
|                               |  |                |        |     |      |   |        |  |   |        



| | (1) |  | Syndicates for which the Company provided capital.
| | --- |  | --------------------------------------------------

| | (2) |  | Additional net liabilities of $3.9 million representing payment requests made to the Company are included in other liabilities on the Companys balance sheet. These net liabilities are
being contested in pending arbitrations. (See Legal ProceedingsBail and Immigration Bond Proceedings.)
| | --- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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Effective December 31, 2005, the Company has arranged the closure of its last remaining syndicate at Lloyds for
which it provided 90% of the capital. The liabilities of the syndicate have been assumed in a transaction called Reinsurance to Close (RITC) into an unaffiliated syndicate in the Lloyds market. The transaction is the normal process whereby the
capital providers for a particular underwriting year of a Lloyds syndicate after 36 months are legally relieved of all policy obligations of the syndicate in which they participated. This transaction closed $49.5 million of net loss and LAE
reserves as of December 31, 2005 related to the syndicate at a cost of approximately $5.0 million. In conjunction with the RITC, the Company entered into a Stop Loss Reinsurance Agreement with the unaffiliated assuming syndicate whereby the
Company will not have to reimburse the assuming syndicate until reserve development exceeds approximately 112% of the reserves at the effective date of the RITC. The Stop Loss Agreement has a total limit of approximately $15 million. The net premium
the Company will receive for this Stop Loss Agreement is $2,150,000 of which 93.5% was recorded as deferred reserve. If no losses are incurred, under the treaty, the Company will return 93.5% of the premium to the assuming syndicate.



This transaction significantly improves the Companys capital adequacy under the A.M. Best Capital
adequacy model and the NAIC capital adequacy model.



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.



The Company and its internal and consulting actuaries use a variety of actuarial methodologies in
evaluating the adequacy of healthcare liability loss and LAE reserves. Loss development methods use historical loss development patterns by the year a claim is reported (the report year) and the valuation points of reported losses during ensuing
periods. Paid loss and reported incurred loss development projections are base methods and are used to support the other techniques. Report year claim count and severity (average claim size) projections are developed to provide alternative
projections using reported claim frequency and trended severity. Alternative reported projections are developed by adjusting the claims settlement rates so that these patterns are consistent from year to year. Trended pure premium projections are
developed by trending average losses per exposure from mature periods. The Company also uses the Bornhuetter-Ferguson method, a standard method which combines reported losses, loss development patterns and expected loss ratios.



11



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The indications derived under the various methodologies are analyzed by limit, resulting average loss trends, age of accident
year in which the medical incident occurred and known policy limit claims outstanding. An individual reserve level is selected by report year or accident year in the case of occurrence coverages.



Loss development methods based on historical patterns are very sensitive to small changes in the
pattern of loss payment or reported losses. Methods which determine trends from mature periods or use expected loss ratios are less sensitive to changes in loss payment or reporting patterns. In general, the Bornhuetter-Ferguson and trended pure
premium loss methodologies are given more weight in selecting the levels for the most recent report years. As more data emerges in payments and settled claims, the various methodologies begin to converge.



In the assumed reinsurance area, the Company and its consulting actuaries rely heavily on other work
performed by internal and independent actuaries of the ceding companies. This work, as well as general industry patterns applied to other data, is reviewed by the Companys actuaries when appropriate. The volatility is greatest in those areas
where claims take a long time, often many years, to be reported through the worldwide reinsurance market.



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,                                                                                            |  | 2005           |         |   | 2004 |   | 2003    | 
|                                                                                                        |  | (In thousands) |        
|Reserves for losses and LAEat beginning of year                                                        |  | $              | 638,747 |   |      | $ | 643,046 |  | $ | 650,671 |  
|Less reinsurance recoverablesat beginning of year                                                      |  |                | 183,623 |   |      |   | 108,891 |  |   | 85,930  |  
|                                                                                                        |  |                |         |   |      |   |         |  |   |         |  
|Reserves for losses and LAE, net of related reinsurance recoverableat beginning of year                |  |                | 455,124 |   |      |   | 534,155 |  |   | 564,741 |  
|                                                                                                        |  |                |         |   |      |   |         |  |   |         |  
|Provision for losses and LAE for claims occurring in the current year, net of reinsurance               |  |                | 113,128 |   |      |   | 123,027 |  |   | 169,474 |  
|Increase (decrease) in estimated losses and LAE for claims occurring in prior years, net of reinsurance |  |                | (1,972  | ) |      |   | 15,900  |  |   | (8,108  | )
|                                                                                                        |  |                |         |   |      |   |         |  |   |         |  
|Incurred losses during the year, net of reinsurance                                                     |  |                | 111,156 |   |      |   | 138,927 |  |   | 161,366 |  
|                                                                                                        |  |                |         |   |      |   |         |  |   |         |  
|Deduct losses and LAE payments for claims, net of reinsurance, occurring during:                        |  |                |         |   |      |   |         |  |   |         |  
|Current year                                                                                            |  |                | 24,466  |   |      |   | 11,091  |  |   | 18,424  |  
|Prior years                                                                                             |  |                | 158,034 |   |      |   | 206,867 |  |   | 173,528 |  
|                                                                                                        |  |                |         |   |      |   |         |  |   |         |  
|Total payments during the year, net of reinsurance                                                      |  |                | 182,500 |   |      |   | 217,958 |  |   | 191,952 |  
|                                                                                                        |  |                |         |   |      |   |         |  |   |         |  
|Reserve for losses and LAE, net of related reinsurance recoverableat end of year                       |  |                | 383,780 |   |      |   | 455,124 |  |   | 534,155 |  
|Reinsurance recoverable for losses and LAEat end of year                                               |  |                | 45,535  |   |      |   | 183,623 |  |   | 108,891 |  
|                                                                                                        |  |                |         |   |      |   |         |  |   |         |  
|Reserves for losses and LAE, gross of insurance recoverableat end of year                              |  | $              | 429,315 |   |      | $ | 638,747 |  | $ | 643,046 |  
|                                                                                                        |  |                |         |   |      |   |         |  |   |         |  



The decrease during 2005 in estimated losses and
LAE occurring in prior years was attributable to favorable loss experience in both core and non-core direct healthcare liability insurance, partially offset by adverse experience in the assumed reinsurance business. The increase during 2004 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 was principally attributable to favorable loss experience in the core direct
healthcare liability insurance partially offset by adverse development in both the non-core healthcare liability insurance programs and assumed reinsurance business. See Managements Discussion and Analysis of Financial Condition and
Results of OperationsOverview.



The following table reflects the development
of loss and LAE reserves for the periods indicated at the end of that year and each subsequent year. The line entitled Loss and LAE reserves reflects the reserves, net of reinsurance recoverables, as originally reported at the end of the
stated year. Each calendar year-end reserve includes the estimated unpaid liabilities for that report or accident year and for all prior report or accident years. The section under the caption Cumulative net paid as of shows the
cumulative amounts paid related to the reserve as of the end of each subsequent year. 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 Net cumulative redundancy (deficiency) reflects the difference between the latest reestimated reserve amount and the reserve
amount as originally established.



12



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The gross liability for losses before reinsurance, as shown on the balance sheet, and the reconciliation of that gross
liability to amounts net of reinsurance are reflected below the table.



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 2005 to be $100,000 was first reserved in 1995 at $150,000, the $50,000
redundancy (original estimate minus actual loss) would be included in the cumulative redundancy in each of the years 1995 through 2005 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 ENDEDDECEMBER 31,                     |  | 1995           |         |   | 1996 |   |         | 1997 |  |   | 1998    |   |  | 1999 |         |   | 2000 |   |         | 2001 |  |   | 2002    |   |  | 2003 |         |   | 2004 |   |          | 2005 | 
|                                           |  | (In Thousands) |        
|Loss and LAE Reserves, net                 |  | $              | 446,627 |   |      | $ | 440,302 |      |  | $ | 433,441 |   |  | $    | 451,072 |   |      | $ | 404,857 |      |  | $ | 389,549 |   |  | $    | 502,390 |   |      | $ | 564,741  |      |  | $ | 534,155  |   |  | $ | 455,124  |   |  | $ | 383,780 |  
|Cummulative net paid, as of:               |  |                |         |   |      |   |         |      |  |   |         |   |  |      |         |   |      |   |         |      |  |   |         |   |  |      |         |   |      |   |          |      |  |   |          |   |  |   |          |   |  |   |         |  
|One year later                             |  |                | 101,844 |   |      |   | 118,307 |      |  |   | 107,748 |   |  |      | 156,913 |   |      |   | 148,891 |      |  |   | 155,626 |   |  |      | 210,907 |   |      |   | 173,528  |      |  |   | 206,867  |   |  |   | 158,034  |   |  |   |         |  
|Two years later                            |  |                | 170,932 |   |      |   | 181,116 |      |  |   | 179,016 |   |  |      | 246,835 |   |      |   | 238,718 |      |  |   | 273,680 |   |  |      | 319,076 |   |      |   | 336,913  |      |  |   | 331,158  |   |  |   |          |   |  |   |         |  
|Three years later                          |  |                | 195,265 |   |      |   | 207,141 |      |  |   | 204,773 |   |  |      | 279,629 |   |      |   | 281,048 |      |  |   | 319,636 |   |  |      | 390,400 |   |      |   | 403,098  |      |  |   |          |   |  |   |          |   |  |   |         |  
|Four years later                           |  |                | 207,454 |   |      |   | 217,460 |      |  |   | 216,448 |   |  |      | 299,106 |   |      |   | 304,588 |      |  |   | 344,700 |   |  |      | 423,621 |   |      |   |          |      |  |   |          |   |  |   |          |   |  |   |         |  
|Five years later                           |  |                | 211,934 |   |      |   | 222,307 |      |  |   | 223,540 |   |  |      | 309,809 |   |      |   | 312,633 |      |  |   | 360,419 |   |  |      |         |   |      |   |          |      |  |   |          |   |  |   |          |   |  |   |         |  
|Six years later                            |  |                | 213,257 |   |      |   | 227,782 |      |  |   | 228,007 |   |  |      | 311,677 |   |      |   | 319,349 |      |  |   |         |   |  |      |         |   |      |   |          |      |  |   |          |   |  |   |          |   |  |   |         |  
|Seven years later                          |  |                | 216,121 |   |      |   | 230,648 |      |  |   | 229,213 |   |  |      | 315,923 |   |      |   |         |      |  |   |         |   |  |      |         |   |      |   |          |      |  |   |          |   |  |   |          |   |  |   |         |  
|Eight years later                          |  |                | 216,651 |   |      |   | 231,100 |      |  |   | 229,256 |   |  |      |         |   |      |   |         |      |  |   |         |   |  |      |         |   |      |   |          |      |  |   |          |   |  |   |          |   |  |   |         |  
|Nine years later                           |  |                | 216,823 |   |      |   | 231,029 |      |  |   |         |   |  |      |         |   |      |   |         |      |  |   |         |   |  |      |         |   |      |   |          |      |  |   |          |   |  |   |          |   |  |   |         |  
|Ten years later                            |  |                | 216,829 |   |      |   |         |      |  |   |         |   |  |      |         |   |      |   |         |      |  |   |         |   |  |      |         |   |      |   |          |      |  |   |          |   |  |   |          |   |  |   |         |  
|Liability reestimated as of:               |  |                |         |   |      |   |         |      |  |   |         |   |  |      |         |   |      |   |         |      |  |   |         |   |  |      |         |   |      |   |          |      |  |   |          |   |  |   |          |   |  |   |         |  
|One year later                             |  |                | 386,872 |   |      |   | 387,094 |      |  |   | 339,673 |   |  |      | 389,893 |   |      |   | 359,954 |      |  |   | 403,374 |   |  |      | 519,610 |   |      |   | 556,633  |      |  |   | 550,055  |   |  |   | 453,152  |   |  |   |         |  
|Two years later                            |  |                | 337,760 |   |      |   | 301,795 |      |  |   | 283,276 |   |  |      | 351,238 |   |      |   | 356,298 |      |  |   | 402,559 |   |  |      | 510,274 |   |      |   | 573,603  |      |  |   | 539,144  |   |  |   |          |   |  |   |         |  
|Three years later                          |  |                | 264,813 |   |      |   | 259,022 |      |  |   | 250,962 |   |  |      | 341,763 |   |      |   | 338,196 |      |  |   | 397,129 |   |  |      | 516,663 |   |      |   | 562,185  |      |  |   |          |   |  |   |          |   |  |   |         |  
|Four years later                           |  |                | 236,609 |   |      |   | 237,059 |      |  |   | 243,561 |   |  |      | 329,588 |   |      |   | 342,176 |      |  |   | 402,009 |   |  |      | 518,952 |   |      |   |          |      |  |   |          |   |  |   |          |   |  |   |         |  
|Five years later                           |  |                | 221,537 |   |      |   | 236,363 |      |  |   | 237,487 |   |  |      | 329,172 |   |      |   | 343,780 |      |  |   | 402,107 |   |  |      |         |   |      |   |          |      |  |   |          |   |  |   |          |   |  |   |         |  
|Six years later                            |  |                | 221,014 |   |      |   | 235,919 |      |  |   | 239,389 |   |  |      | 330,264 |   |      |   | 343,901 |      |  |   |         |   |  |      |         |   |      |   |          |      |  |   |          |   |  |   |          |   |  |   |         |  
|Seven years later                          |  |                | 220,566 |   |      |   | 236,434 |      |  |   | 238,918 |   |  |      | 330,148 |   |      |   |         |      |  |   |         |   |  |      |         |   |      |   |          |      |  |   |          |   |  |   |          |   |  |   |         |  
|Eight years later                          |  |                | 220,266 |   |      |   | 236,238 |      |  |   | 234,758 |   |  |      |         |   |      |   |         |      |  |   |         |   |  |      |         |   |      |   |          |      |  |   |          |   |  |   |          |   |  |   |         |  
|Nine years later                           |  |                | 220,588 |   |      |   | 234,240 |      |  |   |         |   |  |      |         |   |      |   |         |      |  |   |         |   |  |      |         |   |      |   |          |      |  |   |          |   |  |   |          |   |  |   |         |  
|Ten years later                            |  |                | 219,449 |   |      |   |         |      |  |   |         |   |  |      |         |   |      |   |         |      |  |   |         |   |  |      |         |   |      |   |          |      |  |   |          |   |  |   |          |   |  |   |         |  
|Net cumulative redundancy (deficiency)     |  |                | 227,178 |   |      |   | 206,062 |      |  |   | 198,683 |   |  |      | 120,924 |   |      |   | 60,956  |      |  |   | (12,558 | ) |  |      | (16,562 | ) |      |   | 2,556    |      |  |   | (4,989   | ) |  |   | 1,972    |   |  |   |         |  
|Original gross liabilityend of year       |  |                | 466,189 |   |      |   | 459,569 |      |  |   | 454,970 |   |  |      | 475,970 |   |      |   | 449,864 |      |  |   | 429,700 |   |  |      | 576,636 |   |      |   | 650,671  |      |  |   | 643,046  |   |  |   | 638,747  |   |  |   | 429,315 |  
|Less: Reinsurance recoverables             |  |                | (19,562 | ) |      |   | (19,267 | )    |  |   | (21,529 | ) |  |      | (24,898 | ) |      |   | (45,007 | )    |  |   | (40,151 | ) |  |      | (74,246 | ) |      |   | (85,930  | )    |  |   | (108,891 | ) |  |   | (183,623 | ) |  |   | (45,535 | )
|                                           |  |                |         |   |      |   |         |      |  |   |         |   |  |      |         |   |      |   |         |      |  |   |         |   |  |      |         |   |      |   |          |      |  |   |          |   |  |   |          |   |  |   |         |  
|Original Net Liabilityend of year         |  | $              | 446,627 |   |      | $ | 440,302 |      |  | $ | 433,441 |   |  | $    | 451,072 |   |      | $ | 404,857 |      |  | $ | 389,549 |   |  | $    | 502,390 |   |      | $ | 564,741  |      |  | $ | 534,155  |   |  | $ | 455,124  |   |  | $ | 383,780 |  
|                                           |  |                |         |   |      |   |         |      |  |   |         |   |  |      |         |   |      |   |         |      |  |   |         |   |  |      |         |   |      |   |          |      |  |   |          |   |  |   |          |   |  |   |         |  
|Gross re-estimated liabilitylatest period |  | $              | 231,947 |   |      | $ | 247,025 |      |  | $ | 250,308 |   |  | $    | 357,974 |   |      | $ | 378,993 |      |  | $ | 464,293 |   |  | $    | 588,204 |   |      | $ | 665,973  |      |  | $ | 671,162  |   |  | $ | 608,281  |   |  |   |         |  
|Less: Estimated reinsurance recoverables   |  |                | (12,498 | ) |      |   | (12,785 | )    |  |   | (15,550 | ) |  |      | (27,826 | ) |      |   | (35,092 | )    |  |   | (62,186 | ) |  |      | (69,252 | ) |      |   | (103,788 | )    |  |   | (132,018 | ) |  |   | (155,129 | ) |  |   |         |  
|                                           |  |                |         |   |      |   |         |      |  |   |         |   |  |      |         |   |      |   |         |      |  |   |         |   |  |      |         |   |      |   |          |      |  |   |          |   |  |   |          |   |  |   |         |  
|Net estimated Liabilitieslatest period    |  | $              | 219,449 |   |      | $ | 234,240 |      |  | $ | 234,758 |   |  | $    | 330,148 |   |      | $ | 343,901 |      |  | $ | 402,107 |   |  | $    | 518,952 |   |      | $ | 562,185  |      |  | $ | 539,144  |   |  | $ | 453,152  |   |  |   |         |  
|                                           |  |                |         |   |      |   |         |      |  |   |         |   |  |      |         |   |      |   |         |      |  |   |         |   |  |      |         |   |      |   |          |      |  |   |          |   |  |   |          |   |  |   |         |  
|Gross cumulative redundancy/(deficiency)   |  | $              | 234,242 |   |      | $ | 212,544 |      |  | $ | 204,662 |   |  | $    | 117,996 |   |      | $ | 70,871  |      |  | $ | (34,593 | ) |  | $    | (11,568 | ) |      | $ | (15,302  | )    |  | $ | (28,116  | ) |  | $ | 30,466   |   |  |   |         |  
|                                           |  |                |         |   |      |   |         |      |  |   |         |   |  |      |         |   |      |   |         |      |  |   |         |   |  |      |         |   |      |   |          |      |  |   |          |   |  |   |          |   |  |   |         |  



Prior to the Companys expansion outside of
its California healthcare liability markets beginning in 1997, the Company had historically experienced favorable development in loss and LAE reserves established for prior years on both a gross and net basis. 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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##### Table of Contents



Core Healthcare Business



The Companys reserve analysis (and its 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 variable than before.



During the last four years, the core California healthcare liability markets have seen significant decreases in the frequency of claims per exposure of a cumulative 21%. This has
been only partially offset by increases in the average severity of claims. The reduced frequency and the lack of significant policy limit claims have primarily generated the favorable development observed in the core-healthcare liability reserves.



The Companys core healthcare liability businesses have had favorable developments
of $8.3 million, $16.3 million, $11.2 million, $14.5 million and $19.8 million in 2001, 2002, 2003, 2004 and 2005 respectively. These favorable developments represented 3.4%, 6.7%, 4.8%, 5.9% and 7.7% of the preceding year end net reserves
respectively.



The primary trend affecting the adequacy of reserve estimates in the core
area is the trend in pure loss costs (the combination of frequency and average severity changes) related to malpractice coverage. The inherent pure loss cost trend included in the setting of the 2002, 2003, 2004 and 2005 reserves has been 6.7%,
4.4%, 3.3% and 2.2%, respectively. At 2005 reserve levels, a 1% change in the pure loss costs trend produces a change in prior reserves of approximately $5.2 million. Such changes in estimates are reflected in the period of change. Reserves related
to medical malpractice coverage account for 90% of core reserves.



Non-Core
Business



The cumulative deficiencies which have emerged for reserves held over
the past four years relate entirely to the Companys non-core healthcare liability and assumed reinsurance reserves which are now in run-off.



Beginning with the Companys expansion into hospital (1997) and healthcare liability outside of California (1998) and assumed reinsurance (mid 1999), the reserve
estimation process became significantly more volatile. The healthcare liability business outside of California did not have the benefits of MICRA-type reform and assumed reinsurance business is, by its nature, extremely volatile.



Because the Companys expansion into the hospital and the healthcare liability outside of
California represented new areas for which the Company had limited historical experience, the Company primarily utilized industry experience to estimate required reserve levels. There were significant increases in severity trends in these areas
beginning in 2000. Although the Company took significant rate action and underwriting restrictions were implemented, ultimately the Company withdrew from these markets (hospitals in 2001 and non-core healthcare physician business in 2002).



The non-core healthcare incurred losses have included unfavorable (favorable)
development of $21.2 million, $16.4 million, $7.1 million, $9.6 million and $(2.3) million for the years ended 2001, 2002, 2003, 2004 and 2005 respectively. These developments represented 39.5%, 9.6%, 4.0%, 4.1% and (2.4)% of the preceding year-end
net reserves respectively. The need for these reserve changes arose as the actual extent and size of increases in the frequency and severity of claims related to the non-core healthcare liability area emerged in the actuarial data used to project
these losses, most notably in 2001 and 2002. The Company believes similar increases were recognized by many companies in the industry at that time. The downward development in 2005 was the result of better than expected experience in 2005 resolving
out-of-state physician claims.



The Assumed Reinsurance operations encompassed various
risks in the worldwide reinsurance market. The Company has relied heavily on the ceding companies in establishing loss reserves including IBNR.



Unfavorable (favorable) development has occurred in the assumed reinsurance reserves of $17.1, $(4.0), $20.7 and $20.1 during 2002, 2003, 2004 and 2005. This represents 20.2%,
(2.7)%, 14.5% and 20% of the preceding years net reserves. The development in 2002 was principally as a result of unfavorable development in the reinsurance markets estimate and settlement of losses that related to the World Trade Center
terrorist attack in 2001. The unfavorable development in 2004 was principally due to the sudden collapse in 2004 of one bonding program, late reported losses in 2004 related to one excess of loss liability treaty which includes directors and
officers liability exposure, and changes in actuarial estimates of Lloyds syndicates in 2004. The unfavorable development in 2005 was principally due to increases in reserves associated with the London based business, including the syndicates
for which the Company provided capital, directors and officers liability and additional bonding losses.



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##### Table of Contents



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 2005, the Company ceded $14.4 million of its healthcare liability earned premiums to reinsurers.



From 2002 through 2006 the Company has reinsured losses above a retention of approximately $2.0 million to $20.0 million subject to an aggregate deductible of $3.0 million in each
respective year for losses in excess of the Companys retention. For 2003 and 2002 the Company also reinsured losses in excess of $20.0 million up to $50.0 million subject to 16% and 8% Company participation in these reinsurance layers,
respectively. For 2001 and 2000 the Company reinsured losses above a $1.25 million and $2.0 million retention respectively up to $70.0 million subject to a $3.0 million aggregate deductible for each year. Prior to 2000 the Company generally
reinsured losses up to $20.0 million above a $1 million retention subject to a $1 million aggregate deductible.



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 and Business Operations in Run-OffDivestitures of Most Reinsurance OperationsThe Rosemont Re Treaty.



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 following table identifies the Companys most significant reinsurers based upon recoverable balances as of December 31, 2005 by Company and their current
A.M. Best ratings. No other single reinsurers percentage participation in 2005 exceeded 7% of total reinsurance premiums ceded.



|                             |  |                                                |        |                                              |   |           |  |                             |  |      |  
|---------------------------- |  | ---------------------------------------------- | ------ | -------------------------------------------- | - | --------- |  | --------------------------- |  | ---- | -
|                             |  | RECOVERABLEBALANCES ATYEAR ENDDECEMBER 31,2005 |        | PREMIUMS CEDEDFOR YEAR ENDEDDECEMBER 31,2005 |   | RATING(1) |  | PERCENTAGE OFPREMIUMS CEDED | 
|                             |  | (In Thousands)                                 |       
|Rosemont Re (Bermuda)        |  | $                                              | 37,131 |                                              | $ |          |  | B                           |  |     | %
|Lloyds of London Syndicates |  | $                                              | 6,234  |                                              | $ | 6,168     |  | A                           |  | 42.4 | %
|Hannover Ruckversicherungs   |  | $                                              | 7,089  |                                              | $ | 5,139     |  | A                           |  | 35.3 | %



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



In December 2002, the Company entered into the 100% quota share arrangement with Rosemont Re. Rosemont Re, a subsidiary of GoshawK Insurance Holdings plc (GoshawK), is a Bermuda based property and casualty reinsurer. Rosemont
Re had shareholders equity at December 31, 2004, of $241.7 million and had been rated A- (Excellent) by A.M. Best. In a series of announcements between October 2005 and January 2006, GoshawK reported that Rosemont Re had incurred an
aggregate of estimated net property and marine reinsurance losses of approximately $130 million from Hurricanes Katrina, Rita and Wilma, that Rosemont Re had been unsuccessful in its efforts to raise additional capital, that A.M. Best had reduced
its rating to B (Fair) and that the company had been placed in run-off and would be liquidated. Assets approximately equal to Rosemont Res estimated liabilities under the reinsurance agreement with the Company are currently held in trust to
satisfy the liabilities under the agreement. The provisions of the trust are intended to comply with the requirements of the California Department of Insurance. If the estimated recoveries were to increase in the future, the Company would have to
rely on Rosemont Res continuing ability to fund these amounts.



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



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##### Table of Contents



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.



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, 2005    |         | DECEMBER 31, 2004
|                                 |  | COST ORAMORTIZEDCOST |         | FAIRVALUE         |   | COST ORAMORTIZEDCOST |  | FAIRVALUE
|                                 |  | (In Thousands)      
|Fixed-maturity securities:       |  |                      |         |                   |   |                      |  |           |         |  |   |        
|Bonds:                           |  |                      |         |                   |   |                      |  |           |         |  |   |        
|U.S. government and agencies     |  | $                    | 187,957 |                   | $ | 186,280              |  | $         | 145,463 |  | $ | 146,945
|Mortgage-backed and asset-backed |  |                      | 87,294  |                   |   | 85,466               |  |           | 89,609  |  |   | 88,474 
|Corporate                        |  |                      | 194,099 |                   |   | 189,734              |  |           | 219,206 |  |   | 219,398
|                                 |  |                      |         |                   |   |                      |  |           |         |  |   |        
|Total fixed-maturity securities  |  |                      | 469,350 |                   |   | 461,480              |  |           | 454,278 |  |   | 454,817
|Common stocks                    |  |                      | 1,934   |                   |   | 2,095                |  |           | 12,100  |  |   | 16,173 
|                                 |  |                      |         |                   |   |                      |  |           |         |  |   |        
|Total                            |  | $                    | 471,284 |                   | $ | 463,575              |  | $         | 466,378 |  | $ | 470,990
|                                 |  |                      |         |                   |   |                      |  |           |         |  |   |        



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, 2005:



|                                             |  |                |         |           |   |                        |  |       |  
|-------------------------------------------- |  | -------------- | ------- | --------- | - | ---------------------- |  | ----- | -
|TYPE/RATING OF INVESTMENT(1)                 |  | AMORTIZEDCOST  |         | FAIRVALUE |   | PERCENTAGEOF FAIRVALUE | 
|                                             |  | (In Thousands) |        
|AAA (including U.S. government and agencies) |  | $              | 280,601 |           | $ | 276,961                |  | 60.0  | %
|AA                                           |  |                | 45,374  |           |   | 44,265                 |  | 9.6   | %
|A                                            |  |                | 118,705 |           |   | 115,617                |  | 25.1  | %
|BBB                                          |  |                | 24,670  |           |   | 24,637                 |  | 5.3   | %
|                                             |  |                |         |           |   |                        |  |       |  
|                                             |  | $              | 469,350 |           | $ | 461,480                |  | 100.0 | %
|                                             |  |                |         |           |   |                        |  |       |  



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



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The following table sets forth certain information concerning the maturities of fixed-maturity securities in the Companys
investment portfolio as of December 31, 2005:



|                                            |  |                |         |           |   |                        |  |       |  
|------------------------------------------- |  | -------------- | ------- | --------- | - | ---------------------- |  | ----- | -
|                                            |  | AMORTIZEDCOST  |         | FAIRVALUE |   | PERCENTAGEOF FAIRVALUE | 
|                                            |  | (In Thousands) |        
|Years to maturity:                          |  |                |         |           |   |                        |  |       |  
|One or less                                 |  | $              | 46,986  |           | $ | 46,663                 |  | 10.1  | %
|After one through five                      |  |                | 169,953 |           |   | 167,084                |  | 36.2  | %
|After five through ten                      |  |                | 148,509 |           |   | 145,440                |  | 31.5  | %
|After ten                                   |  |                | 16,608  |           |   | 16,827                 |  | 3.7   | %
|Mortgage-backed and asset-backed securities |  |                | 87,294  |           |   | 85,466                 |  | 18.5  | %
|                                            |  |                |         |           |   |                        |  |       |  
|Totals                                      |  | $              | 469,350 |           | $ | 461,480                |  | 100.0 | %
|                                            |  |                |         |           |   |                        |  |       |  



The average weighted maturity of the securities
in the Companys fixed-maturity portfolio as of December 31, 2005, was 4.1 years. The average duration of the Companys fixed-maturity portfolio as of December 31, 2005, was 3.1 years.



The Company maintains cash and highly liquid short-term investments,
which at December 31, 2005, totaled $68.8 million.



The following table summarizes
the Companys investment results for the three years ended December 31, 2005, 2004 and 2003:



|                                                                                  |  |                |         |   |      |   |         |      |  |   |         |   |  | 
|--------------------------------------------------------------------------------- |  | -------------- | ------- | - | ---- | - | ------- | ---- |  | - | ------- | - |  | 
|FOR THE YEARS ENDED DECEMBER 31,                                                  |  | 2005           |         |   | 2004 |   |         | 2003 | 
|                                                                                  |  | (In Thousands) |        
|Average invested assets (includes short-term investments)(1)                      |  | $              | 545,881 |   |      | $ | 600,996 |      |  | $ | 660,769 |  
|Net investment income:                                                            |  |                |         |   |      |   |         |      |  |   |         |   |  | 
|Before income taxes                                                               |  |                | 17,818  |   |      |   | 19,174  |      |  |   | 21,954  |  
|After income taxes                                                                |  |                | 11,582  |   |      |   | 12,463  |      |  |   | 14,334  |  
|Average annual yield on investments:                                              |  |                |         |   |      |   |         |      |  |   |         |   |  | 
|Before income taxes                                                               |  |                | 3.3     | % |      |   | 3.2     | %    |  |   | 3.3     | %
|After income taxes                                                                |  |                | 2.1     | % |      |   | 2.1     | %    |  |   | 2.2     | %
|Net realized investment gains                                                     |  |                |         |   |      |   |         |      |  |   |         |   |  | 
|Before income taxes                                                               |  |                | 4,018   |   |      |   | 1,502   |      |  |   | 216     |  
|After income taxes                                                                |  |                | 2,612   |   |      |   | 976     |      |  |   | 141     |  
|Increase (decrease) in net unrealized gains on all investments after income taxes |  | $              | (8,009  | ) |      | $ | (2,283  | )    |  | $ | (7,484  | )



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



In 2001 and 2002 the Company recognized significant capital gains 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. As a result, the majority of securities in the Companys portfolio were purchased after 2002. The
Companys average yield may be less than other comparable insurance companies who have a portfolio of securities including securities purchased prior to 2002 when interest rates were, in general, higher.



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. In addition, two of these companies have announced that they will provide some dividends to their policyholders during this
next year. 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



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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.



In Delaware, the Company competes principally through its relationship with a Delaware broker, who has considerable and long-standing relationships with Delaware physician
insureds.



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 more than 10% of the voting securities of a California insurance company or of a



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person or entity that controls a California insurance company, such as SCPIE Holdings. A person or entity seeking to acquire control, directly or
indirectly, of the Company is generally required to file with the California Commissioner an application for change of control containing certain information required by statute and published regulations and provide a copy of the application to the
Company. The Holding Company Act also effectively restricts the Company from consummating certain reorganizations or mergers without prior regulatory approval.



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



Regulation of Dividends from Insurance Subsidiaries



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



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



Risk-Based Capital



The NAIC has developed a methodology for assessing the adequacy of statutory surplus of property and casualty insurers which includes a risk-based capital (RBC) formula that attempts to measure statutory capital and surplus
needs based on the risks in a companys mix of products and investment portfolio. The formula is designed to allow state insurance regulators to identify potentially under-capitalized companies. Under the formula, a company determines its
authorized control level RBC by taking into account certain risks related to the insurers assets (including risks related to its investment portfolio and ceded reinsurance) and the insurers liabilities (including underwriting risks
related to the nature and experience of its insurance business). The RBC rules provide for four different levels of regulatory attention depending on the ratio of a companys total adjusted capital to its authorized control level RBC. The
threshold requiring the least regulatory attention is a company action level when total adjusted capital is less than or equal to 200% of the authorized control level RBC and the level requiring the most regulatory involvement is a mandatory control
level RBC when total 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, 2005, the adjusted surplus level of each Insurance
Subsidiary exceeded the threshold requiring the least regulatory attention. At December 31, 2005, SCPIE Indemnitys adjusted surplus level of $145.6 million exceeded this threshold by $85.9 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 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.





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The Company has encountered challenges to its rate applications in recent years. See Risk FactorsRate Increases in
California. The Commissioner approved in its entirety the Companys most recent application, which was implemented on January 1, 2005. The Company has not requested any rate change in California for 2006.



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 professional liability 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 professional liability insurance, and may be
subject to the Act. The Companys policy forms do not exclude coverage for acts of terrorism. The Company has notified its policyholders of this coverage as provided by the Act, 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. The law was recently extended to remain in effect until
December 31, 2007.



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 and security rules designed to maintain the confidentiality, integrity and availability of
protected health information. 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



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presence. A.M. Bests ratings reflect its opinion of an insurance companys financial strength, operating performance and ability to meet its obligations to
policyholders and are not evaluations directed to purchasers of an insurance companys securities.



For a number of years, the Insurance Subsidiaries received an A.M. Best rating of A (Excellent), the third highest of thirteen rating classifications. On February 21, 2002, A.M. Best reduced the Insurance
Subsidiaries rating two levels to B++ (Very Good), and on October 7, 2002, A.M. Best further reduced the Companys rating to B+ (Very Good). On November 14, 2003, A.M. Best, after a review of the Companys third quarter
financial results, further reduced the Insurance Subsidiaries rating to B (Fair) with a negative outlook. A rating of B (Fair) is the seventh highest of the A.M. Best rating classifications and is the highest classification A.M. Best rates as
Vulnerable. A.M. Best assigns this rating to companies that have, in its opinion, a fair ability to meet their current obligations to policyholders, but are financially vulnerable to adverse changes in underwriting and economic
conditions.



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



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



EMPLOYEES

---



As of December 31, 2005, the Company employed 140 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 6, 2006, are as follows:



|                   |  |     |  |                                                                       
|------------------ |  | --- |  | ----------------------------------------------------------------------
|NAME               |  | AGE |  | POSITION                                                              
|Donald J. Zuk      |  | 69  |  | President, Chief Executive Officer and Director                       
|Ronald L. Goldberg |  | 54  |  | Senior Vice President, Underwriting and Marketing                     
|Joseph P. Henkes   |  | 56  |  | Secretary and Senior Vice President, Operations and Actuarial Services
|Robert B. Tschudy  |  | 57  |  | Senior Vice President, Chief Financial Officer and Treasurer          
|Edward G. Marley   |  | 45  |  | Vice President and Chief Accounting Officer                           
|Donald P. Newell   |  | 68  |  | Senior Vice President, General Counsel and Director                   
|Margaret A. McComb |  | 61  |  | 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.



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



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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.



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.



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.



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.



ITEM 1A.    RISK FACTORS



The
Companys business involves various risks and uncertainties, some of which are discussed in this section. The information discussed below should be considered carefully with the other information contained in this Annual Report on Form 10-K and
the other documents and materials filed by the Company with the SEC, as well as news releases and other information publicly disseminated by the Company from time to time.



The risks and uncertainties described below are not the only ones facing the Company. Additional risks and uncertainties not presently known to the
Company, or that it currently believes to be immaterial, may also adversely affect the Companys business. Any of the following risks or uncertainties that develop into actual events could have a materially adverse effect on the Companys
business, financial conditions or results of operations.



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 2006 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 24.1% of premiums written were
generated by groups of nine physicians or more. The largest group of physicians accounted for 2.5% of total premiums written in 2005 and one program of affiliated groups, accounted for 6.9% of premiums written in 2005.



Importance of Brokers



In the past few years, brokers have become increasingly important to the Companys growth. During 2005, the Company wrote approximately 37% of
its core healthcare liability business through independent brokers. The Company competes with other insurers for this brokerage business. To maintain its relationship with independent brokers, the Company must pay competitive commissions, be able to
respond to their needs quickly and adequately, and create a consistently high level of policyholder service and satisfaction. In addition, an insurers A.M. Best rating is an important factor. If a broker finds it preferable to do business with
the Companys competitors, it could be difficult to renew existing business written through such broker or attract new business.



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



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Company will have the opportunity to add such programs in Delaware or other jurisdictions, and, if so, whether any additional program will be successful. Success will
depend upon, among other things, the Companys access to sufficient capital for any future expansion and its ability to accurately underwrite the healthcare risks and adequately price its policies in these other jurisdictions in which the
Company does not have current experience.



Industry Factors



Many factors influence the financial results of the healthcare liability insurance industry, several
of which are beyond the control of the Company. These factors include, among other things, changes in severity and frequency of claims; changes in applicable law and regulatory reform; changes in judicial attitudes toward liability claims; and
changes in inflation, interest rates and general economic conditions.



The availability
of healthcare liability insurance, or the industrys underwriting capacity, is determined principally by the industrys level of capitalization, historical underwriting results, returns on investment and perceived premium rate adequacy.
Historically, the financial performance of the healthcare liability 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 as to 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 Company believes its rates remain generally competitive with those of other companies, after giving effect to these rate increases. The
effect of any future rate increases on the Companys ability to retain and expand its healthcare liability insurance business in California is uncertain.



In addition to pricing, competitive factors may include policyholder dividends, financial stability, breadth and flexibility of coverage and the quality and level of services
provided. Two of the Companys physician-owned competitors have recently announced their intention to institute or expand policyholder dividend programs in California.



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



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$256.9 million or 66.9% of total net reserves as of December 31, 2005. 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 $5.2 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, 2005,
non-core healthcare liability reserves accounted for $60.6 million or 15.8% of total net reserves. Outstanding claims have fallen from 739 at December 31, 2003 to 431 at December 31, 2004, and to 229 at December 31, 2005.



The following table presents the net assumed reinsurance reserves (including retrospective reserves
ceded under the Rosemont Re Treaty of $7.1 million, $12.7 million, and $36.3 million, respectively) by major component as of December 31:



|                               |  |                |        |     |      |   |        |  |   |        
|------------------------------ |  | -------------- | ------ | --- | ---- | - | ------ |  | - | -------
|                               |  | 2005           |        |     | 2004 |   | 2003  
|                               |  | (In Thousands)
|Lloyds Syndicates(1)          |  | $              |       |     |      | $ | 21,922 |  | $ | 39,091 
|London based business          |  |                | 24,427 |     |      |   | 18,873 |  |   | 23,176 
|Occupational accident business |  |                | 21,780 |     |      |   | 26,561 |  |   | 24,460 
|Excess D&O liability           |  |                | 6,375  |     |      |   | 7,375  |  |   | 3,778  
|Bail and immigration bonds     |  |                | 573    | (2) |      |   | 3,489  |  |   |       
|Other                          |  |                | 6,039  |     |      |   | 9,588  |  |   | 15,853 
|                               |  |                |        |     |      |   |        |  |   |        
|                               |  | $              | 59,194 |     |      | $ | 87,808 |  | $ | 106,358
|                               |  |                |        |     |      |   |        |  |   |        



| | (1) |  | Syndicates for which the Company provided capital.
| | --- |  | --------------------------------------------------

| | (2) |  | Additional net liabilities of $3.9 million representing payment requests made to the Company are included in other liabilities on the Companys balance sheet. These net liabilities are
being contested in pending arbitrations. (See Legal ProceedingsBail and Immigration Bond Proceedings.)
| | --- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Approximately 50% of the net assumed reinsurance reserves outstanding as of December 31, 2005 are primarily based on actuarial work performed by or for the ceding insurers.
Since the time required for the ultimate losses to be reported through the world wide reinsurance system may cover several years, unexpected events are more difficult to predict.



Establishing reserves in the assumed reinsurance area is complicated by the delay in reporting that naturally occurs as information passes through the
worldwide reinsurance network. In addition, sudden and catastrophic events do occur and further complicate the reserving process. Such events have caused the Company to revise upward its assumed reinsurance reserves over time. Examples of these
types of events include the World Trade Center terrorist attack in 2001, the sudden collapse of GoshawK Syndicate 102 in 2003 and the collapse of a large bonding company in 2004. (See Legal ProceedingsBail and Immigration Bond Proceedings). In
2005 a number of London based insureds including various Lloyds syndicates increased reserve estimates from 2000 and 2001 policy years. The Company believes that its current assumed reinsurance reserve levels are adequate, but they may vary as
the Company receives new information from the ceding insurers.



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 Changes 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%



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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 has not applied for any California rate changes for 2006.



The Company plans to file applications for future rate changes 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



Measures of capital and surplus are used in the casualty insurance industry to evaluate the safety and
financial strength of an insurer. Recognized guidelines in the Companys segment are that (i) an insurer should not operate at a ratio of net premiums written to statutory capital and surplus (policyholder surplus) greater than 1 to 1, and
(ii) an insurer should not have a ratio of net loss and LAE reserves to policyholder surplus greater than 3 to 1. In recent years the Company has unfavorably exceeded both these measures because of the losses incurred in the non-core healthcare
liability insurance and assumed reinsurance business. During 2004 and particularly in 2005, the Company has significantly improved its position. At December 31, 2005, the Company had a ratio of net premiums written to policyholder surplus of
..87 to 1 and a ratio of net loss and LAE reserves to policyholder surplus of 2.64 to 1. At these levels, however, the Company may have limited ability to materially expand its core business without exceeding one or both of these ratios. Moreover,
the Company cannot predict whether this improvement in policyholder surplus will be sufficient to result in an improved rating from A.M. Best. In addition, the Company could experience unexpected losses and loss reserve increases similar to those
experienced in recent years that would negatively impact these ratios and the Companys overall financial strength.



The Company may need to raise additional capital through financings to improve its financial position. Any equity or debt financing, if available at all, may not be available on
terms that are favorable to the Company. In the case of equity financings, dilution to the Companys stockholders could result, and in any case securities may have rights preferences and privileges that are senior to those of the Companys
current stockholders. If the Companys need for capital arises because of significant losses, the occurrence of these losses may make it more difficult to raise capital. If the Company cannot obtain adequate capital on favorable terms or at
all, its business, operating results and financial condition could be adversely affected.



Liquidity



The Companys investment portfolio primarily
consists of readily marketable fixed income securities. In addition, the Company holds a significant cash and short-term investment position as of December 31, 2005. Should cash needs of the Company, primarily loss reserve payments, require the
unplanned sale of a portion of the fixed income portfolio when the portfolios carrying value is in excess of current market rates, losses on security sales could impact the Companys earnings in the period of sale.



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



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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 A.M.
Best rating were to be further reduced, this 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. In general, the Companys reinsurance agreements are for a one year term. 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.



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. Rosemont Re, with which the Company had the largest receivable balance at December 31, 2005,
incurred substantial unexpected losses during 2005 as a result of hurricanes Katrina, Rita and Wilma. Rosemont Re has ceased writing any new business and is in run-off. Under the Companys reinsurance arrangement with Rosemont Re, Rosemont Re
assets approximately equal to the estimated liabilities are currently held in trust to satisfy the liabilities. If the liabilities increased materially in the future, the Company would have to look to Rosemonts Res general assets to
satisfy any liabilities not covered by the trust assets. See BusinessCeded Reinsurance Programs.



Highlands Insurance Group Contingent Liability



The Company is obligated to assume certain policy obligations of Highlands Insurance Company (Highlands) in the event Highlands is declared insolvent by a court of competent
jurisdiction and is unable to pay these obligations. The coverages principally involve workers compensation, commercial automobile and general liability. Highlands currently is under the jurisdiction of the Texas District Court which appointed
the Texas Insurance Commissioner as a permanent Receiver of Highlands in November 2003. The Receiver continues to resolve Highlands claim liabilities and otherwise conduct its business as part of his efforts to rehabilitate Highlands. At December
31, 2005, Highlands had established case loss reserves of $7.3 million, net of reinsurance, for the subject policies. Based on a limited review of the exposures remaining, the Company estimates that IBNR losses are $3.8 million, for a total loss and
LAE reserve of $11.1 million. This estimate is not based on a full reserve analysis of the exposures and is not recorded in the Companys reserves. If Highlands is declared insolvent and liquidated by court order, the Company would likely be
required to assume Highlands remaining obligations under the subject policies.



The
court order appointing the Receiver expressly provided that it did not constitute a finding of Highlands insolvency. On December 30, 2005, the Receiver filed a financial report for Highlands as of November 30, 2005. In the report, the Receiver filed
a financial report for Highlands as of November 30, 2005. In the report, the Receiver listed total assets of $354.2 million and total liabilities of $324.6 million, not including any IBNR reserves, which are currently under review by an independent
actuarial firm, nor any anticipated investment income associated with reserves.



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Bail and Immigration Bond Proceedings



The Companys Insurance Subsidiary, AHI, was a reinsurer during 2001 and 2002 under separate reinsurance agreements with Highlands and two other
primary insurers covering bail and immigration bond programs administered by a single bonding company. During 2004, the bonding company failed and the primary insurers have made claims against AHI that are now part of active arbitration proceedings.
The Company believes that its liability could amount to a potential loss of approximately $10.0 million. The Companys best estimate of $6.5 million is recorded in the financial statements. See Legal Proceedings  Bail and
Immigration Bond Proceedings. At least one of the primary insurers has not yet asserted all losses under the program, and the amount of the potential liability could be greater than presently estimated.



Holding Company StructureLimitation on Dividends



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



Anti-Takeover Provisions



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



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



| |  |  | 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;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------



| |  |  | provisions that do not permit cumulative voting in the election of directors; and
| | - |  | ---------------------------------------------------------------------------------



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



The Company is subject to Section 203 of the Delaware general corporation law which, in general,
prohibits a publicly held Delaware corporation from engaging in a business combination with an interested stockholder for a period of three years following the date the person became an interested stockholder, unless the business
combination or the transaction in which the person became an interested stockholder is approved in a prescribed manner. An interested stockholder is defined generally as a person who, together with affiliates and associates, owns or
within three years prior to the determination of interested stockholder status, did own, 15% or more of a corporations voting stock. The existence of this provision may have an anti-takeover effect with respect to transactions not approved in
advance by the board of directors.



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.



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Fluctuations in Stock Price



The market price of the Companys common stock price could be subject to significant fluctuations and/or may decline. Among the factors that
could affect the Companys stock price are:



| |  |  | variations in the Companys operating results;
| | - |  | ----------------------------------------------



| |  |  | actions or announcements by our competitors;
| | - |  | --------------------------------------------



| |  |  | actions by institutional and other stockholders;
| | - |  | ------------------------------------------------



| |  |  | general market conditions; and
| | - |  | ------------------------------



| |  |  | domestic and international economic factors unrelated to our performance.
| | - |  | -------------------------------------------------------------------------



The stock markets in general have recently experienced volatility that has sometimes been unrelated to the operating performance of particular companies. These broad market
fluctuations may cause the trading price of the Companys common stock to decline.



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, 2005 each of the Insurance Subsidiaries RBC exceeded the threshold requiring the least regulatory attention. At December 31, 2005, SCPIE Indemnity exceeded this threshold by $85.9 million. If the Company
incurred sustained 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 1B.    UNRESOLVED STAFF COMMENTS



Not applicable.



ITEM 2.    PROPERTIES



In July
1998, the Company entered into a lease covering approximately 95,000 square feet of office space for its Company headquarters. The lease is for a term of 10 years ending in 2009 and the Company has options to renew the lease for an additional 10
years. The Company moved its headquarters and principal operations to these offices in March 1999. The Company also leases office space for its claims offices in Reston, Virginia, and San Diego, California.



ITEM 3.    LEGAL PROCEEDINGS



General



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.



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##### Table of Contents



Bail and Immigration Bond Proceedings



The Companys Insurance Subsidiary, AHI, is a party to reinsurance agreements with Highlands Insurance Company, now in Receivership (Highlands),
Sirius America Insurance Company (Sirius) and Aegis Security Insurance Company (Aegis), each of which acted as a primary insurer for various periods under bail and immigration bond programs administered and guaranteed by Capital Bonding Corporation
(CBC), as managing general agent. As part of these programs, the primary insurers (through CBC) issued bail bonds in a number of states and also issued federal immigration bonds. AHI participated as a reinsurer of these programs during 2001 and
2002. The Companys reinsurance participation was 20% of the bond losses during 2001 and 25% during 2002. The Companys share of the losses under these treaties was substantially reinsured with Rosemont Re during 2002 and to a lesser
extent during 2001.



During 2004, CBC failed and a significant number of bond losses
emerged. There are a number of pending disputes between the primary insurers and reinsurers involved in the CBC program. AHI has been actively engaged in arbitration proceedings with each of the primary insurers to resolve these disputes. On
March 6, 2006, the arbitrators in the proceeding with Aegis made a final award, under which AHI was required to pay an amount slightly in excess of that reserved by the Company at December 31, 2005. To the extent there are future LAE and
bail bond losses, AHI will also be obligated to pay a ratable share. The Company does not believe that this award will result in any material net loss to the Company. The arbitration proceedings with Sirius and Highlands are ongoing.



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 2005.



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##### Table of Contents



PART II



ITEM 5.    MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES



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 closing price ranges per share in
each quarter, during the last two years:



|                                  |  |      |       |     |   |      
|--------------------------------- |  | ---- | ----- | --- | - | -----
|2004                              |  | HIGH |       | LOW
|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                     |  | $    | 11.42 |     | $ | 9.56 
|Second quarter                    |  | $    | 11.61 |     | $ | 10.90
|Third quarter                     |  | $    | 17.88 |     | $ | 11.43
|Fourth quarter                    |  | $    | 21.22 |     | $ | 13.88
|2006                              |  |      |       |    
|First quarter (January  March 6) |  | $    | 24.15 |     | $ | 21.41



On March 6, 2006, the closing price of the
Companys common stock was $24.15.



Stockholders of Record



The number of stockholders of record of the Companys Common
Stock as of March 6, 2006, was 5,034.



Dividends



SCPIE Holdings paid quarterly cash dividends on its common stock from 1997 to 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 2006 to SCPIE Indemnity without regulatory approval. SCPIE Indemnity paid no dividends in 2004 and 2005 to SCPIE Holdings and is entitled to pay dividends in 2006 of up to approximately $14.5 million to SCPIE
Holdings. See BusinessRegulationRegulation of Dividends from Insurance Subsidiaries and Note 6 to Consolidated Financial Statements.



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##### Table of Contents



ITEM 6.    SELECTED CONSOLIDATED FINANCIAL DATA



|                                                     |  |                                       |         |      |   |         |      |  |   |         |   |  |      |           |   |  |   |         |  
|---------------------------------------------------- |  | ------------------------------------- | ------- | ---- | - | ------- | ---- |  | - | ------- | - |  | ---- | --------- | - |  | - | ------- | -
|AS OF OR FOR THE YEARS ENDED DECEMBER 31,            |  | 2005                                  |         | 2004 |   |         | 2003 |  |   | 2002    |   |  | 2001 |          
|                                                     |  | (In Thousands, except per share data) |        
|INCOME STATEMENT DATA:                               |  |                                       |         |      |   |         |      |  |   |         |   |  |      |           |   |  |   |         |  
|Premiums written(1)                                  |  | $                                     | 126,331 |      | $ | 129,210 |      |  | $ | 147,039 |   |  | $    | 251,750   |   |  | $ | 280,807 |  
|                                                     |  |                                       |         |      |   |         |      |  |   |         |   |  |      |           |   |  |   |         |  
|Premiums earned(1)                                   |  | $                                     | 128,436 |      | $ | 136,106 |      |  | $ | 163,887 |   |  | $    | 286,063   |   |  | $ | 235,935 |  
|Net investment income                                |  |                                       | 17,818  |      |   | 19,174  |      |  |   | 21,954  |   |  |      | 32,231    |   |  |   | 35,895  |  
|Realized investment gains and other revenue          |  |                                       | 5,201   |      |   | 2,042   |      |  |   | 1,152   |   |  |      | 20,940    |   |  |   | 7,909   |  
|                                                     |  |                                       |         |      |   |         |      |  |   |         |   |  |      |           |   |  |   |         |  
|Total revenues                                       |  |                                       | 151,455 |      |   | 157,322 |      |  |   | 186,993 |   |  |      | 339,234   |   |  |   | 279,739 |  
|                                                     |  |                                       |         |      |   |         |      |  |   |         |   |  |      |           |   |  |   |         |  
|Losses and loss adjustment expenses                  |  |                                       | 111,156 |      |   | 138,927 |      |  |   | 161,366 |   |  |      | 320,516   |   |  |   | 304,473 |  
|Underwriting and other operating expenses            |  |                                       | 34,807  |      |   | 26,273  |      |  |   | 45,844  |   |  |      | 79,676    |   |  |   | 64,732  |  
|Interest expenses                                    |  |                                       |        |      |   |        |      |  |   |        |   |  |      | 66        |   |  |   | 1,416   |  
|                                                     |  |                                       |         |      |   |         |      |  |   |         |   |  |      |           |   |  |   |         |  
|Total expenses                                       |  |                                       | 145,963 |      |   | 165,200 |      |  |   | 207,210 |   |  |      | 400,258   |   |  |   | 370,621 |  
|                                                     |  |                                       |         |      |   |         |      |  |   |         |   |  |      |           |   |  |   |         |  
|Income (loss) before income tax expense (benefit)    |  |                                       | 5,492   |      |   | (7,878  | )    |  |   | (20,217 | ) |  |      | (61,024   | ) |  |   | (90,882 | )
|Income tax expense (benefit)                         |  |                                       | 2,024   |      |   | 8       |      |  |   | (7,411  | ) |  |      | (22,642   | ) |  |   | (32,906 | )
|                                                     |  |                                       |         |      |   |         |      |  |   |         |   |  |      |           |   |  |   |         |  
|Net income (loss)                                    |  | $                                     | 3,468   |      | $ | (7,886  | )    |  | $ | (12,806 | ) |  | $    | (38,382   | ) |  | $ | (57,976 | )
|                                                     |  |                                       |         |      |   |         |      |  |   |         |   |  |      |           |   |  |   |         |  
|BALANCE SHEET DATA:                                  |  |                                       |         |      |   |         |      |  |   |         |   |  |      |           |   |  |   |         |  
|Total investments and cash and cash equivalents      |  | $                                     | 532,358 |      | $ | 575,780 |      |  | $ | 647,179 |   |  | $    | 719,106   |   |  | $ | 724,087 |  
|Total assets                                         |  |                                       | 686,964 |      |   | 979,635 |      |  |   | 991,250 |   |  |      | 1,063,766 |   |  |   | 977,646 |  
|Total liabilities                                    |  |                                       | 496,171 |      |   | 785,113 |      |  |   | 787,062 |   |  |      | 836,600   |   |  |   | 718,258 |  
|Total stockholders equity                           |  |                                       | 190,793 |      |   | 194,522 |      |  |   | 204,188 |   |  |      | 227,166   |   |  |   | 259,388 |  
|                                                     |  |                                       |         |      |  
|ADDITIONAL DATA:                                     |  |                                       |         |      |   |         |      |  |   |         |   |  |      |           |   |  |   |         |  
|Basic earnings (loss) per share of common stock(2)   |  | $                                     | 0.37    |      | $ | (0.84   | )    |  | $ | (1.37   | ) |  | $    | (4.12     | ) |  | $ | (6.22   | )
|Diluted earnings (loss) per share of common stock(2) |  | $                                     | 0.36    |      | $ | (0.84   | )    |  | $ | (1.37   | ) |  | $    | (4.12     | ) |  | $ | (6.22   | )
|Dividends per share of common stock                  |  |                                       |        |      |   |        |      |  | $ | 0.40    |   |  | $    | 0.40      |   |  | $ | 0.40    |  
|Book value per share                                 |  | $                                     | 20.05   |      | $ | 20.68   |      |  | $ | 21.79   |   |  | $    | 24.34     |   |  | $ | 27.85   |  
|Statutory capital and surplus                        |  | $                                     | 145,614 |      | $ | 136,536 |      |  | $ | 140,216 |   |  | $    | 155,785   |   |  | $ | 181,916 |  



|(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, 2005, 2004, 2003, 2002, and 2001 are computed using the weighted average number of common shares outstanding during the year of
9,455,391, 9,387,556, 9,352,070, 9,322,249, and 9,333,425 respectively. Diluted earnings per share of common stock at December 31, 2005, 2004, 2003, 2002, and 2001 are computed using the weighted average number of common shares outstanding during
the year of 9,549,353, 9,387,556, 9,352,070, 9,322,249, and 9,333,425 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 (PSLRA). The PSLRA
provides certain safe harbor provisions for forward-looking statements. All forward-looking statements made in this annual report on Form 10-K are made pursuant to the PSLRA. Words such as, but not limited to, believe,
expect, anticipate, estimate, intend, plan, and similar expressions are intended to identify forward-looking statements. 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. The Company undertakes no obligation to publicly update
any forward-looking statements, whether as a result of new information, future events or otherwise.



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 in the
assumed reinsurance business. During 2002 and 2003, the Company largely completed its withdrawal from the assumed reinsurance market and medical malpractice insurance outside of California and Delaware.



The Companys insurance business is organized into two reportable business segments: direct
healthcare liability insurance and assumed reinsurance operations. Primarily due to significant losses on medical malpractice insurance outside of the state of California and assumed reinsurance business losses arising out of the September 11,
2001 World Trade Center terrorist attack, the Company incurred significant losses from 2001 to 2004. 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 net 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.



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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.



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 Bulk Reserves for 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 61.5% 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 $383.8 million and gross reserves of $429.3 million as of
December 31, 2005 respectively, not including the retrospective reserves ceded under the Rosemont Re treaty. Reserves attributable to the operating segments of the Company are as follows:



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SCPIE Holdings Inc.

Summary of Loss and LAE Reserves by Segment



|                    |  |              |         |                    |   |                    |  |               |         |                  |   |         |  |   |        
|------------------- |  | ------------ | ------- | ------------------ | - | ------------------ |  | ------------- | ------- | ---------------- | - | ------- |  | - | -------
|DECEMBER 31, 2005   |  | CASERESERVES |         | BULK &IBNRRESERVES |   | TOTALGROSSRESERVES |  | CEDEDRESERVES |         | TOTALNETRESERVES
|Direct Healthcare   |  |              |         |                    |   |                    |  |               |         |                  |   |         |  |   |        
|Core                |  | $            | 76,726  |                    | $ | 194,114            |  | $             | 270,840 |                  | $ | 13,935  |  | $ | 256,905
|Non-Core            |  |              | 42,730  |                    |   | 20,523             |  |               | 63,253  |                  |   | 2,637   |  |   | 60,616 
|                    |  |              |         |                    |   |                    |  |               |         |                  |   |         |  |   |        
|                    |  |              | 119,456 |                    |   | 214,637            |  |               | 334,093 |                  |   | 16,572  |  |   | 317,521
|Assumed Reinsurance |  |              | 59,804  |                    |   | 35,418             |  |               | 95,222  |                  |   | 28,963  |  |   | 66,259 
|                    |  |              |         |                    |   |                    |  |               |         |                  |   |         |  |   |        
|                    |  | $            | 179,260 |                    | $ | 250,055            |  | $             | 429,315 |                  | $ | 45,535  |  | $ | 383,780
|                    |  |              |         |                    |   |                    |  |               |         |                  |   |         |  |   |        
|                    |  |              |         |                    |  
|December 31, 2004   |  |              |         |                    |   |                    |  |               |         |                 
|Direct Healthcare   |  |              |         |                    |   |                    |  |               |         |                  |   |         |  |   |        
|Core                |  | $            | 93,331  |                    | $ | 182,742            |  | $             | 276,073 |                  | $ | 18,842  |  | $ | 257,231
|Non-Core            |  |              | 72,365  |                    |   | 30,819             |  |               | 103,184 |                  |   | 5,853   |  |   | 97,331 
|                    |  |              |         |                    |   |                    |  |               |         |                  |   |         |  |   |        
|                    |  |              | 165,696 |                    |   | 213,561            |  |               | 379,257 |                  |   | 24,695  |  |   | 354,562
|Assumed Reinsurance |  |              | 66,054  |                    |   | 193,436            |  |               | 259,490 |                  |   | 158,928 |  |   | 100,562
|                    |  |              |         |                    |   |                    |  |               |         |                  |   |         |  |   |        
|                   |  | $            | 231,750 |                    | $ | 406,997            |  | $             | 638,747 |                  | $ | 183,623 |  | $ | 455,124
|                    |  |              |         |                    |   |                    |  |               |         |                  |   |         |  |   |        
|                    |  |              |         |                    |  
|DECEMBER 31, 2003   |  |              |         |                    |   |                    |  |               |         |                 
|Direct Healthcare   |  |              |         |                    |   |                    |  |               |         |                  |   |         |  |   |        
|Core                |  | $            | 91,385  |                    | $ | 175,743            |  | $             | 267,128 |                  | $ | 20,940  |  | $ | 246,188
|Non-Core            |  |              | 92,501  |                    |   | 60,905             |  |               | 153,406 |                  |   | 8,123   |  |   | 145,283
|                    |  |              |         |                    |   |                    |  |               |         |                  |   |         |  |   |        
|                    |  |              | 183,886 |                    |   | 236,648            |  |               | 420,534 |                  |   | 29,063  |  |   | 391,471
|Assumed Reinsurance |  |              | 69,414  |                    |   | 153,098            |  |               | 222,512 |                  |   | 79,828  |  |   | 142,684
|                    |  |              |         |                    |   |                    |  |               |         |                  |   |         |  |   |        
|                    |  | $            | 253,300 |                    | $ | 389,746            |  | $             | 643,046 |                  | $ | 108,891 |  | $ | 534,155
|                    |  |              |         |                    |   |                    |  |               |         |                  |   |         |  |   |        



For most, if not all medical malpractice and
other long tail liability lines of business, Bulk and IBNR reserves (which include loss adjustment expense reserves not allocated to specific cases) are the mathematical result of subtracting tabular case reserves from projected ultimate losses
derived by the actuarial process. Bulk and IBNR reserves in the case of medical malpractice insurance written on a claims-made reporting policy do not generally represent late reported claims but rather expected upward case reserve movement which
will be recognized as additional information develops on individual cases. In addition, Bulk and IBNR reserves relating to the assumed reinsurance business include the Lloyds Syndicates balances for which the Company provided capital. The
Company does not possess the detailed information necessary to allocate these reserves between case reserves and bulk reserves. As of the years ended 2005, 2004 and 2003, the net reserves for these syndicates were $-0-, $21.9, and $39.1 million
respectively.



The relationship between Bulk and IBNR reserves and case reserves can be
significantly different between lines of insurance as well as between individual companies. These differences may result from the length of time required to adequately investigate and evaluate individual cases, a companys individual case
reserving philosophy or other reasons.



Reserve Sensitivity



Core Healthcare Reserves





The primary factor
affecting the adequacy of reserve estimates in the core area is the trend in pure loss costs (the combination of frequency and average severity changes) related to malpractice coverage. The inherent pure loss cost trend included in the setting of
the 2003, 2004 and 2005 reserves has been 4.4%, 3.3% and 2.2%, respectively. At 2005 reserve levels, a 1% change in pure loss costs trend produces a change in prior reserves of approximately $5.2 million. Such changes are reflected in the period of
change. Reserves related to medical malpractice coverage account for over 90% of core reserves.



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##### Table of Contents



Non-Core Healthcare Reserves



The sensitivity of the Companys reserves for non-core healthcare operations is impacted by two
factors: frequency and severity. Because the non-core healthcare operations are comprised of claims-made policies that are in run-off, no significant number of new claims are expected. The severity of existing reported claims will be the principal
determinant of ultimate reported losses. A change in the average severity of existing claims will have a proportional increase or decrease in reported reserves.



The net reserves as of December 31, 2005 consist of the following:



|          |  |                           |  |                        |        |                         |   |                  |  |   |       
|--------- |  | ------------------------- |  | ---------------------- | ------ | ----------------------- | - | ---------------- |  | - | ------
|          |  | Number ofOutstandingCases |  | Net Case Reserves      |        | Net BulkandIBNRReserves |   | NetTotalReserves
|          |  |                           |  | (Dollars In Thousands)
|Physician |  | 157                       |  | $                      | 3,426  |                         | $ | 44,141           |  | $ | 47,567
|Hospital  |  | 51                        |  |                        | 6,893  |                         |   | 3,665            |  |   | 10,558
|Dental    |  | 21                        |  |                        | 1,903  |                         |   | 588              |  |   | 2,491 
|          |  |                           |  |                        |        |                         |   |                  |  |   |       
|Total     |  | 229                       |  | $                      | 12,222 |                         | $ | 48,394           |  | $ | 60,616
|          |  |                           |  |                        |        |                         |   |                  |  |   |       



During 2005 the Company closed 218 cases and
opened 16 new cases. The adequacy of these reserves is primarily dependent upon achieving fair settlements with the injured parties and reasonable litigation results.



As the individual cases mature and more information becomes available for evaluating individual cases, there is a declining need for Bulk and IBNR
reserves. While the Company believes its reserves are adequate, several jurisdictions where the Company issued policies allow extended periods of time to elapse before the judicial or settlement process is completed. Individual settlements or
judgments will determine the final incurred losses and thus the adequacy of these reserves. The recent experience has been generally consistent with Company expectations, but no assurance can be given that the Companys current experience will
continue. The current average reserve (including Bulk and IBNR reserves) is approximately $260,000 per outstanding case. If the average settlement ultimately achieved is different by $12,000 for the current average reserve, the ultimate reserves
will be affected by approximately $2.5 million.



Assumed Reinsurance
ReservesSensitivity



General



The sensitivity of the Companys reserves for Assumed Reinsurance is impacted primarily by three
factors: the accuracy of independent actuarial reviews of particular contracts; timely reporting of losses through the worldwide reinsurance system; and the ultimate severity of large excess of loss claims.



The Company holds net reserves (including retrospective reserves ceded under the Rosemont Re treaty of
$7.1 million) of $59.2 million as of December 31, 2005. The net reserves consist of the following (in thousands):



|                               |  |      |        |    
|------------------------------ |  | ---- | ------ | ---
|                               |  | 2005 |       
|Lloyds Syndicates(1)          |  | $    | -0-    |    
|London based business          |  |      | 24,427 |    
|Occupational accident business |  |      | 21,780 |    
|Excess D&O liability           |  |      | 6,375  |    
|Bail and immigration bonds     |  |      | 573    | (2)
|Other                          |  |      | 6,039  |    
|                               |  |      |        |    
|                               |  | $    | 59,194 |    
|                               |  |      |        |    



| | (1) |  | Syndicates for which the Company provided capital.
| | --- |  | --------------------------------------------------

| | (2) |  | Additional net liabilities of $3.9 million representing payment requests made to the Company are included in other liabilities on the Companys balance sheet. These net liabilities are
being contested in pending arbitrations. (See Legal ProceedingsBail and Immigration Bond Proceedings.)
| | --- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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The Occupational and Accident reserves are provided to the Company by the internal actuary for the managing general agent in
charge of the programs. The Company and its independent actuaries periodically review the resulting estimates of the managing general agents actuary for concurrence with his estimates. The remaining reserves involve approximately 40 separate
contracts primarily involving high level excess of loss contracts, both property and casualty. These contracts are subject to periodic review by the Companys internal and independent actuaries.



The Company believes that Occupational and Accident reserves should be relatively stable at this point
and the remaining reserves are based on amounts currently reported to the Company. As time passes, the ability of the underlying insureds to accurately reserve the large excess of loss type cases should improve. However, since the reporting of
losses through the worldwide reinsurance market is often slow and is dependent upon the reporting by the ceding companies, the adequacy of these reserves has a potential for volatility and no assurances can be given that further adverse development
will not occur.



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.



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, 2005, the Company
had $51.2 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 $24.9 million for a net operating loss carryforward that will begin to 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 were primarily caused by losses in the non-core healthcare and assumed reinsurance



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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 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 2001, the Company recognized that the Brown & Brown and non-standard physician programs were seriously underpriced and implemented
significant premium increases 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. All claims-made policies in force for the non-core healthcare liability insureds expired by 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 2006, 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.



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##### Table of Contents



Results of OperationsDirect Healthcare Liability Insurance



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 Brown & Brown, 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

(Dollars In Thousands)



|                             |  |      |         |   |          |   |        |       |  |   |        
|---------------------------- |  | ---- | ------- | - | -------- | - | ------ | ----- |  | - | -------
|YEAR ENDED DECEMBER 31, 2005 |  | CORE |         |   | NON-CORE |   |        | TOTAL
|Premiums written             |  | $    | 126,872 |   |          | $ | 377    |       |  | $ | 127,249
|                             |  |      |         |   |          |   |        |       |  |   |        
|Premiums earned              |  | $    | 127,556 |   |          | $ | 393    |       |  | $ | 127,949
|Losses and LAE incurred      |  |      | 90,463  |   |          |   | (2,297 | )     |  |   | 88,166 
|Underwriting expenses        |  |      | 25,900  |   |          |   | 78     |       |  |   | 25,978 
|                             |  |      |         |   |          |   |        |       |  |   |        
|Underwriting profit          |  | $    | 11,193  |   |          | $ | 2,612  |       |  | $ | 13,805 
|                             |  |      |         |   |          |   |        |       |  |   |        
|Loss ratio                   |  |      | 70.9    | % |          |   |        |       |  |   |        
|Expense ratio                |  |      | 20.3    | % |          |   |        |       |  |   |        
|Combined ratio               |  |      | 91.2    | % |          |   |        |       |  |   |        
|Net reserves held            |  | $    | 256,905 |   |          | $ | 60,616 |       |  | $ | 317,521



|                             |  |   |         |   |  |   |         |   |  |   |         |  
|---------------------------- |  | - | ------- | - |  | - | ------- | - |  | - | ------- | -
|YEAR ENDED DECEMBER 31, 2004 |  |   |         |   |  |   |         |   | 
|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            |  | $ | 257,231 |   |  | $ | 97,331  |   |  | $ | 354,562 |  



|                             |  |   |         |   |  |   |         |   |  |   |         |  
|---------------------------- |  | - | ------- | - |  | - | ------- | - |  | - | ------- | -
|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            |  | $ | 246,188 |   |  | $ | 145,283 |   |  | $ | 391,471 |  



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Core Business



Premiums written for the core direct healthcare liability insurance business decreased 1.4% in 2005 due to a decrease in the number of insureds that was not offset by the rate
increase of 6.5% in 2005. Premiums written increased 4.4% and 5.4% in 2004 and 2003, respectively, due to a rate increase of 9.9% in October 2003 that more than offset a decrease in the number of insureds in both these years. Premiums earned in the
core business increased 3.5%, 3.4% and 2.6% in 2005, 2004 and 2003, respectively, primarily due to the rate increases. The Company has historically had a high renewal rate in its core business. The renewal rates of insureds who were offered renewal
was 95% for 2005 and 92% for 2004 and 2003. 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 2005, 2004, and 2003 were 1,077, 1,124, and 1,225, respectively. The core business policies inforce at year end 2005, 2004, and 2003 were 10,397, 10,684, and 11,137
policies, respectively.



The loss ratio (losses and LAE related to premiums earned) for
2005 was 70.9% compared to a loss ratio of 80.6% and 88.6% for 2004 and 2003, respectively. The change in loss ratio primarily reflected increases in average claim costs offset by a significant 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 20.3% in 2005 compared to 20.9% and 20.5% in 2004 and 2003.



Non-Core Business



The premiums written and earned in 2005 are generated by policyholders exercising their right to purchase tail coverage. 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.



The
underwriting gain in 2005 is primarily the result of reserve reductions for prior losses. 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 underwriting loss in 2003 arose primarily due to reserve increases for prior losses.



The Company made significant progress in 2005 in settling claims related to non-core healthcare liability business in run-off. Total net reserves
declined from $97.3 million at December 31, 2004 to $60.6 million at December 31, 2005, and outstanding claims decreased from 431 at December 31, 2004 to 229 at December 31, 2005. Sixteen new claims were reported in 2005 compared
to 78 in 2004.



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Background



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.



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 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



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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 Company retained 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 one 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 at that time. However, due to significant hurricane losses reported in 2005, A.M. Best has reduced its rating of Rosemont Re to B (Fair) and the company has been placed in run-off and will be liquidated. Assets approximately
equal to Rosemont Res estimated liabilities under its reinsurance agreement with the Company are currently held in trust to satisfy the liabilities under the agreement. If the estimated recoveries were to increase in the future, the Company
would have to rely on Rosemont Res continuing ability to fund these amounts.



Results of OperationsAssumed Reinsurance Segment



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



|                                                           |  |                                                                 |         |   |      |   |         |      |  |   |         |  
|---------------------------------------------------------- |  | --------------------------------------------------------------- | ------- | - | ---- | - | ------- | ---- |  | - | ------- | -
|                                                           |  | Assumed Reinsurance Segment Underwriting Results (In Thousands) |        
|FOR THE YEAR ENDED DECEMBER 31,                            |  | 2005                                                            |         |   | 2004 |   |         | 2003 | 
|Premiums written                                           |  | $                                                               | (918    | ) |      | $ | 2,376   |      |  | $ | 18,450  |  
|                                                           |  |                                                                 |         |   |      |   |         |      |  |   |         |  
|Premiums earned                                            |  | $                                                               | 487     |   |      | $ | 14,628  |      |  | $ | 32,427  |  
|Underwriting expenses                                      |  |                                                                 |         |   |      |   |         |      |  |   |         |  
|Losses                                                     |  |                                                                 | 22,990  |   |      |   | 28,337  |      |  |   | 28,332  |  
|Underwriting and other operating expenses                  |  |                                                                 | 8,829   |   |      |   | 139     |      |  |   | 17,610  |  
|                                                           |  |                                                                 |         |   |      |   |         |      |  |   |         |  
|Underwriting loss                                          |  | $                                                               | (31,332 | ) |      | $ | (13,848 | )    |  | $ | (13,515 | )
|                                                           |  |                                                                 |         |   |      |   |         |      |  |   |         |  
|Net reserves (including retrospective reserves ceded) held |  | $                                                               | 59,194  |   |      | $ | 87,808  |      |  | $ | 106,358 |  



The Company ceased writing assumed reinsurance
business at the end of the 2003 underwriting year. The premiums written in 2003 and 2004 are almost entirely attributable to the one Lloyds syndicate that the Company supported in 2003. The premiums earned in 2005 are also attributable to this
syndicate. Premiums earned in 2004 and 2003 also include some premiums written in earlier periods that were not ceded to Rosemont Re.



The underwriting loss incurred in 2005 in the assumed reinsurance segment was primarily attributable to adjustments made to amounts ceded to Rosemont Re following a review by the
parties in the third quarter, costs associated with closing the last syndicate at Lloyds for which the Company provided capital, and upward development on London based business, including Lloyds syndicates.



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 2003
underwriting loss was principally attributed to the failure of GoshawK Syndicate 102 and upward development in World Trade Center losses.



Net loss reserves related to the assumed reinsurance segment declined from $87.8 million at December 31, 2004 to $59.2 million in 2005 as reserves were settled and 2002 and
2003 underwriting years for the London syndicates closed and settlements were made in 2005.



The Rosemont Re reinsurance treaty entered into in December 2002 effectively ceded 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 ($38.0 million in 2003, $(0.1) million in 2004 and $(0.4) million in 2005). This treaty relieved 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.



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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 2003, 2004 and 2005 earned premium by $5.5, $(0.4), and $(0.01) 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.



Other Operations



|                                    |  |                  |         |   |      |   |         |      |  |   |         |  
|----------------------------------- |  | ---------------- | ------- | - | ---- | - | ------- | ---- |  | - | ------- | -
|YEAR ENDED DECEMBER 31,             |  | 2005             |         |   | 2004 |   |         | 2003 | 
|                                    |  | ($ in Thousands) |        
|Net investment income               |  | $                | 17,818  |   |      | $ | 19,174  |      |  | $ | 21,954  |  
|Net realized investment gains       |  |                  | 4,018   |   |      |   | 1,502   |      |  |   | 216     |  
|Average invested assets             |  |                  | 545,881 |   |      |   | 600,996 |      |  |   | 660,769 |  
|Average rate of return before taxes |  |                  | 3.3     | % |      |   | 3.2     | %    |  |   | 3.3     | %



Net investment income decreased to $17.8 million
for 2005 from $19.2 million in 2004 and $22.0 million in 2003. The decrease in net investment income is primarily related to the reduction in invested assets as losses are settled and paid in the non-core areas.



In 2005 the Company sold its stock interest in a privately held
insurance company for a $4.4 million dollar gain.



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 an income tax expense in 2005 and 2004 compared to a benefit in 2003. During the third quarter 2004, 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 $51.2 million as of December 31, 2005, of
which $24.9 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 2005, 2004 and 2003, the Company had negative cash flow from operations of $20.2 million, $63.3 million and $46.8 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.



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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 $68.8 million, or 12.9% of invested assets, at December 31, 2005. 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 $2.1 million at December 31, 2005 compared to $16.2
million at December 31, 2004. The Company plans to continue its emphasis on fixed maturity securities investments.



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 $14.5 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 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, 2005, SCPIE Holdings held cash and short-terms securities of $3.4 million. Based on historical trends, market conditions and its business plans, the Company believes that its
sources of funds (including dividends from the Insurance Subsidiaries) will be sufficient to meet the liquidity needs of SCPIE Holdings over the next 18 months.



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
Company believes that it has strengthened its capital adequacy position at December 31, 2005, under the methodology followed by A.M. Best, but does not know whether this will result in a rating change. The NAIC has developed a different
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, 2005, the RBC level of each Insurance Subsidiary exceeded the threshold requiring the least regulatory attention. At December 31, 2005, SCPIE Indemnity exceeded this
threshold by $85.9 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.



The Company may determine that it is in its best interests to raise additional capital through financings to improve its financial position and grow its business. Any equity or
debt financing, if available at all, may not be available on terms that are favorable to the Company.



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CONTRACTUAL COMMITMENTS

---



The Company has certain contractual obligations and commercial commitments principally for providing
for the payments of loss and LAE expenses, operating leases for office space for its headquarters and letters of credit to provide security in connection with the assumed reinsurance segment. The table below presents the contractual payments
estimated to be due by period or expiration period for each obligation or commitment:



Contractual commitments as of December 31, are as follows:



|                              |  |                                       |         |      |   |        |  |      |        |      |   |            |  |   |        |  |   |       
|----------------------------- |  | ------------------------------------- | ------- | ---- | - | ------ |  | ---- | ------ | ---- | - | ---------- |  | - | ------ |  | - | ------
|                              |  | 2006                                  |         | 2007 |   | 2008   |  | 2009 |        | 2010 |   | Thereafter
|                              |  | Payments Due by Period (In Thousands) |         |     
|Loss and LAE Reserve Payments |  | $                                     | 139,715 |      | $ | 93,891 |  | $    | 54,701 |      | $ | 33,289     |  | $ | 23,394 |  | $ | 38,790
|Operating Leases              |  |                                       | 2,989   |      |   | 3,141  |  |      | 2,627  |      |   | 58         |  |   | 55     |  |   | -0-   
|                              |  |                                       |         |      |   |        |  |      |        |      |   |            |  |   |        |  |   |       
|                              |  | $                                     | 142,704 |      | $ | 97,032 |  | $    | 57,328 |      | $ | 33,347     |  | $ | 23,449 |  | $ | 38,790
|                              |  |                                       |         |      |   |        |  |      |        |      |   |            |  |   |        |  |   |       



Unlike many other forms of contractual
obligations, loss and LAE reserves do not have definitive due dates, and the ultimate payment dates are subject to a number of variables and uncertainties. The liability shown in the table represents the Companys best estimate of the unpaid
cost of settling claims, including claims that have been incurred but not yet reported, and the time period in which such claims will be resolved. The amounts shown are net of any reinsurance that the Company estimates will be recoverable on
resolution of the claims. A portion of the assumed reinsurance business, principally the occupational and accident reserves, are on a funds withheld basis and therefore the projected reserve payments ($21.8 million after 2010) in the preceding table
will be settled by a draw down of funds withheld balances rather than cash.



In November
2001, the Company arranged a letter of credit facility in the amount of $50 million with Barclays Bank PLC. This facility was amended in June, 2005. Letters of credit issued under the facility fulfill the requirements of Lloyds and guarantee
loss reserves under reinsurance contracts. As of December 31, 2005, letter of credit issuance under the facility was approximately $44.5 million. Securities of $48.9 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, 2005,
comprised 86.7% of total investments at market value. Corporate bonds represent 41.1% and U.S. government bonds represent 40.4% 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 .4% of total investments at market value. 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
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, 2005 was 3.1 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.



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At December 31, 2005, the investment portfolio included $7.7 million in net unrealized losses. At December 31, 2004,
the carrying value of the investment portfolio included $4.6 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, 2005                            |  |                |         |                                                 |   |                                                                     |  |   |        
|Interest rate risk*                          |  |                |         |                                                 |   |                                                                     |  |   |        
|Fixed-maturity securities available for sale |  | $              | 461,480 |                                                 | $ | 461,480                                                             |  | $ | 447,912
|Equity price risk**                          |  |                |         |                                                 |   |                                                                     |  |   |        
|Common stocks                                |  | $              | 2,095   |                                                 | $ | 2,095                                                               |  | $ | 1,886  
|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 



|* |  | 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



In connection with the preparation of this Annual Report on Form 10-K and the audit of the Companys consolidated financial statements, Ernst & Young LLP (E&Y) identified a matter that might reasonably
be thought to bear on its independence. Seven years before joining the Company in May 2002, Robert Tschudy, Chief Financial Officer, was a partner with E&Y. After leaving E&Y in 1995, Mr. Tschudy was the chief financial officer of another
public company until 2001. Based on his prior service with E&Y, Mr. Tschudy was entitled to standard E&Y retirement benefits consisting of fixed annual payments payable at a future date. To date, Mr. Tschudy has not received any E&Y
retirement benefit payments as he has not met the requisite age. A portion of the fixed future payments, actuarially estimated to be those expected to be paid in 2016 and thereafter, was not fully funded and therefore could have been viewed as
dependent on the revenues, profits or earnings of E&Y, which is inconsistent with the auditor independence rules of the Securities and Exchange Commission. On March 9, 2006, Mr. Tschudy and E&Y addressed this matter by
transferring the previously unfunded portion of Mr. Tschudys retirement benefits into a rabbi trust. The fixed annual amount to be paid to Mr. Tschudy in respect of his E&Y retirement benefits remains unchanged. As a result of the transfer
of funds to the rabbi trust, Mr. Tschudys E&Y retirement benefit is now fully funded.



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After reviewing this matter, E&Y concluded that there was no impairment of its independence for its audits of the fiscal
years 2002 through 2005. The Board of Directors and the Audit Committee of the Company concluded that E&Ys capacity for objective judgment was not and is not diminished and that a reasonable investor would not perceive that an impairment
of independence affecting the integrity of the financial statements has occurred.



The
Companys Consolidated Financial Statements and related notes, including supplementary data, are set forth in the Index on page 52 hereof.



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



None.



ITEM 9A.    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, 2005 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, 2005.



Managements assessment of the effectiveness of its
internal control over financial reporting as of December 31, 2005 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



The Board of Directors and Stockholders of SCPIE Holdings Inc.



We have audited managements assessment, included in the accompanying report from management,
that SCPIE Holdings, Inc. maintained effective internal control over financial reporting as of December 31, 2005, based on criteria established in Internal ControlIntegrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission. SCPIE Holdings, Inc.s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control



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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 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. maintained effective internal control over financial reporting as of December 31, 2005, 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, 2005, 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, 2005 and 2004, and the related consolidated statements of operations, stockholders equity and cash flows for each of the three years in the period ended December 31, 2005 of SCPIE Holdings, Inc. and our
report dated March 9, 2006 expressed an unqualified opinion thereon.



/s/ ERNST & YOUNG LLP



March 9, 2006

Los Angeles, California



Changes in Internal Control over Financial Reporting



During the fiscal quarter ended December 31, 2005, there have been no changes in the Companys internal control over financial reporting
that may have materially affected, or are reasonably likely to materially affect, its internal control over financial reporting.



ITEM 9B.    OTHER INFORMATION



None.



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PART III



ITEM 10.    DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT



The names of the executive officers of the Company and their ages, titles and biographies as of the date hereof are incorporated by reference from Part I, Item 1, above.



The following information is included in the Companys Notice of Annual Meeting of
Stockholders and Proxy Statement to be filed within 120 days after the Companys fiscal year end of December 31, 2005 (the Proxy Statement) and is incorporated herein by reference:



| |  |  | Information regarding directors of the Company is set forth under Election of Directors.
| | - |  | ------------------------------------------------------------------------------------------



| |  |  | Information regarding the Companys Audit Committee and designated audit committee financial expert is set forth under Election of DirectorsMeetings and
Committees of the Board.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Information on the Companys code of business conduct and ethics for directors, officers and employees, is set forth under Election of DirectorsCode of Business Conduct and
Ethics.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Information under Section 16A beneficial ownership reporting compliance is set forth under Stock Ownership and Section 16(A) Beneficial Ownership Reporting
Compliance.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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.



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, 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 SchedulesAnnual Report on Form 10-K filed on page 52 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 effective as of January 2, 2006, between Donald J. Zuk and SCPIE Management Company and Guaranty by SCPIE Holdings Inc. dated as of January 2, 2006 (filed with
the Companys Current Report on Form 8-K on December 9, 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  |  | Amendment and Restatement Agreement dated June 28, 2005, relating to an 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, American Healthcare Specialty Healthcare Company and SCPIE Underwriting, Limited.
|       | 
|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).                                                                                      



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|       |  |                                                                                                                                                                                                                                                                                                                                                                         
|------ |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NUMBER |  | DOCUMENT                                                                                                                                                                                                                                                                                                                                                                
|10.57  |  | Amendment to Program Administrators Agreement dated as of March 6, 2002 by and between the Professional Programs Division of Brown & Brown, Inc., on the one hand, and SCPIE Indemnity Company and
American Healthcare Indemnity Company, on the other hand (filed with the Companys Annual Report on Form 10-K on April 1, 2002 and incorporated herein by reference).
|       | 
|10.59* |  | 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. 3 to Per Policy of Loss Reinsurance Agreement 8493-00-0003-00 with various subscribing reinsurers effective through 2005.                                                                                                                                                                                                                                  
|       | 
|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 (filed with the companys Annual Report on Form 10-K on March 30, 2004 and incorporated herein by
reference).                                                                                                                                                                        
|       | 
|10.81  |  | Termination Agreement dated March 8, 2006, relating to Reinsurance to Close Administration and Management Agreement among the Company, KILN Underwriting Limited, KILN PLC, and Chaucer Syndicates
Limited.                                                                                                                                                             



49



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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 (filed with the Companys Annual Report on Form 10-K on March 16,
2005 and incorporated herein by reference.                                                                                                                                                                                                                                                 
|       | 
|10.83  |  | FirstThird Excess of Loss Reinsurance Agreement 8493-00-0009-00 with various subscribing reinsurers effective January 1, 2005.                                                                                                                                                                                                                                                                                                                                                            
|       | 
|10.84  |  | Deferred Compensation Agreement dated as of December 8, 2005 between Donald J. Zuk and SCPIE Management Company and Guaranty by SCPIE Holdings, Inc. dated as of December 8, 2005 (filed with the
Companys current report on Form 8-K on December 9, 2005 and incorporated herein by reference).                                                                                                                                                                                          
|       | 
|10.85  |  | Deferred Compensation Agreement dated as of December 8, 2005 between Donald P. Newell and SCPIE Management Company and Guaranty by SCPIE Holdings, Inc. dated as of December 8, 2005 (filed with the
Companys current report on Form 8-K on December 9, 2005 and incorporated herein by reference).                                                                                                                                                                                       
|       | 
|10.86  |  | Amendment to Employment Arrangement dated as of December 8, 2005 between Donald P. Newell and SCPIE Holdings, Inc. (filed with the Companys current report on Form 8-K on December 9, 2005 and
incorporated herein by reference).                                                                                                                                                                                                                                                         
|       | 
|10.87  |  | Deferred Compensation Agreement dated as of January 1, 2001, between Donald P. Newell and SCPIE Management Company and Guaranty by SCPIE Holdings, Inc. dated October 23, 2002 (filed with the
Companys Annual Report on 10-K on March 31, 2003 and incorporated herein by reference).                                                                                                                                                                                                    
|       | 
|10.88  |  | FirstThird Excess of Loss Reinsurance Agreement 8493-00-0009-00 with various subscribing reinsurers effective January 1, 2006.                                                                                                                                                                                                                                                                                                                                                            
|       | 
|23.1   |  | Consent of independent registered public accounting firm.                                                                                                                                                                                                                                                                                                                                                                                                                                  
|       | 
|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.
|- |  | ------------------------------------------------------------------------------------------------------------------------------



50



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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 23, 2006



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 23, 2006
|                                                          |  |                                                                                          
|/s/    ROBERT B. TSCHUDYRobert B. Tschudy                 |  | Senior Vice President, Treasurer and Chief Financial Officer(Principal Financial Officer) |  | March 23, 2006
|                                                          |  |                                                                                          
|/s/    EDWARD G. MARLEYEdward G. Marley                   |  | Vice President and Chief Accounting Officer (Principal Accounting Officer)                |  | March 23, 2006
|                                                          |  |                                                                                          
|/s/    MITCHELL S. KARLAN, M.D.Mitchell S. Karlan, M.D.   |  | Chairman of the Board and Director                                                        |  | March 23, 2006
|                                                          |  |                                                                                          
|/s/    WILLIS T. KING,
JR.Willis T. King,
Jr.             |  | Director                                                                                  |  | March 23, 2006
|                                                          |  |                                                                                          
|/s/    LOUIS H. MASOTTI,
PH.D.Louis H. Masotti,
Ph.D.     |  | Director                                                                                  |  | March 23, 2006
|                                                          |  |                                                                                          
|/s/    JACK E. MCCLEARY,
M.D.Jack E. McCleary, M.D.       |  | Director                                                                                  |  | March 23, 2006
|                                                          |  |                                                                                          
|/S/    CHARLES B. MCELWEE,
M.D.Charles B. McElwee, M.D.   |  | Director                                                                                  |  | March 23, 2006
|                                                          |  |                                                                                          
|/s/    WENDELL L. MOSELEY, M.D.Wendell L. Moseley, M.D.   |  | Director                                                                                  |  | March 23, 2006
|                                                          |  |                                                                                          
|/s/    DONALD P. NEWELLDonald P. Newell                   |  | Director                                                                                  |  | March 23, 2006
|                                                          |  |                                                                                          
|/s/    WILLIAM A. RENERT, M.D.William A. Renert, M.D.     |  | Director                                                                                  |  | March 23, 2006
|                                                          |  |                                                                                          
|/s/    HENRY L. STOUTZ, M.D.Henry L. Stoutz, M.D.         |  | Director                                                                                  |  | March 23, 2006
|                                                          |  |                                                                                          
|/s/    REINHOLD A. ULLRICH,
M.D.Reinhold A. Ullrich, M.D. |  | Director                                                                                  |  | March 23, 2006
|                                                          |  |                                                                                          
|/s/    RONALD H. WENDER, M.D.Ronald H. Wender, M.D.       |  | Director                                                                                  |  | March 23, 2006



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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                                              |  | 53  
|Financial Statements:                                                                                |  |     
|Consolidated Balance Sheets as of December 31, 2005 and 2004                                         |  | 54  
|Consolidated Statements of Operations for the years ended December 31, 2005, 2004 and 2003           |  | 55  
|Consolidated Statements of Stockholders Equity for the years ended December 31, 2005, 2004 and 2003 |  | 56  
|Consolidated Statements of Cash Flows for the years ended December 31, 2005, 2004 and 2003           |  | 57  
|Notes to Consolidated Financial Statements                                                           |  | 58  
|Schedule II  Condensed Financial Information of Registrant                                          |  | 74  
|Schedule III  Supplementary Insurance Information                                                   |  | 78  



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.



52



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##### Table of Contents



Report of Independent Registered Public Accounting Firm



The Board of Directors and Stockholders of SCPIE Holdings Inc.



We have audited the accompanying consolidated balance sheets of SCPIE Holdings, Inc. and subsidiaries (the Company) as of December 31, 2005 and
2004, and the related consolidated statements of operations, stockholders equity, and cash flows for each of the three years in the period ended December 31, 2005. 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 its subsidiaries at December 31, 2005 and 2004, and the consolidated results of their operations
and their cash flows for each of the three years in the period ended December 31, 2005, 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 the Companys internal control
over financial reporting as of December 31, 2005, 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 9, 2006
expressed an unqualified opinion thereon.



/s/
ERNST & YOUNG LLP



Los Angeles, California

March 9, 2006



53



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SCPIE HOLDINGS INC. AND SUBSIDIARIES



CONSOLIDATED BALANCE SHEETS

(In thousands, except share data)



|                                                                                                                                         |  |      |         |   |      |   |         |  
|---------------------------------------------------------------------------------------------------------------------------------------- |  | ---- | ------- | - | ---- | - | ------- | -
|FOR THE YEARS ENDED DECEMBER 31,                                                                                                         |  | 2005 |         |   | 2004 |  
|ASSETS                                                                                                                                   |  |      |         |   |      |   |         |  
|Securities available-for-sale (Note 2):                                                                                                  |  |      |         |   |      |   |         |  
|Fixed maturity investments, at fair value (amortized cost 2005$469,350; 2004$454,278)                                                  |  | $    | 461,480 |   |      | $ | 454,817 |  
|Equity investments, at fair value (cost 2005$1,934; 2004$12,100)                                                                       |  |      | 2,095   |   |      |   | 16,173  |  
|                                                                                                                                         |  |      |         |   |      |   |         |  
|Total securities available-for-sale                                                                                                      |  |      | 463,575 |   |      |   | 470,990 |  
|Mortgages                                                                                                                                |  |      |        |   |      |   | 10,400  |  
|Cash and cash equivalents                                                                                                                |  |      | 68,783  |   |      |   | 94,390  |  
|                                                                                                                                         |  |      |         |   |      |   |         |  
|Total investments and cash and cash equivalents                                                                                          |  |      | 532,358 |   |      |   | 575,780 |  
|Accrued investment income                                                                                                                |  |      | 5,874   |   |      |   | 5,849   |  
|Premiums receivable                                                                                                                      |  |      | 18,731  |   |      |   | 12,603  |  
|Assumed reinsurance receivable                                                                                                           |  |      | 6,960   |   |      |   | 119,937 |  
|Reinsurance recoverable (Note 4)                                                                                                         |  |      | 55,933  |   |      |   | 197,520 |  
|Deferred policy acquisition costs                                                                                                        |  |      | 7,120   |   |      |   | 9,063   |  
|Deferred federal income taxes, net (Note 5)                                                                                              |  |      | 51,214  |   |      |   | 48,454  |  
|Property and equipment, net                                                                                                              |  |      | 2,449   |   |      |   | 2,954   |  
|Other assets                                                                                                                             |  |      | 6,325   |   |      |   | 7,475   |  
|                                                                                                                                         |  |      |         |   |      |   |         |  
|Total assets                                                                                                                             |  | $    | 686,964 |   |      | $ | 979,635 |  
|                                                                                                                                         |  |      |         |   |      |   |         |  
|LIABILITIES                                                                                                                              |  |      |         |   |      |   |         |  
|Reserves:                                                                                                                                |  |      |         |   |      |   |         |  
|Losses and loss adjustment expenses (Note 3)                                                                                             |  | $    | 429,315 |   |      | $ | 638,747 |  
|Unearned premiums                                                                                                                        |  |      | 41,705  |   |      |   | 43,811  |  
|                                                                                                                                         |  |      |         |   |      |   |         |  
|Total reserves                                                                                                                           |  |      | 471,020 |   |      |   | 682,558 |  
|Amounts held for reinsurance                                                                                                             |  |      | 4,818   |   |      |   | 77,519  |  
|Other liabilities                                                                                                                        |  |      | 20,333  |   |      |   | 25,036  |  
|                                                                                                                                         |  |      |         |   |      |   |         |  
|Total liabilities                                                                                                                        |  |      | 496,171 |   |      |   | 785,113 |  
|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 sharesissued, 20059,516,916; 20049,404,604 shares
outstanding |  |      | 1       |   |      |   | 1       |  
|Additional paid-in capital                                                                                                               |  |      | 37,127  |   |      |   | 37,127  |  
|Retained earnings                                                                                                                        |  |      | 259,645 |   |      |   | 256,177 |  
|Treasury stock, at cost 20052,775,175 shares and 20042,887,487 shares                                                                  |  |      | (97,063 | ) |      |   | (97,654 | )
|Subscription notes receivable                                                                                                            |  |      | (2,649  | ) |      |   | (3,018  | )
|Accumulated other comprehensive income (loss)                                                                                            |  |      | (6,268  | ) |      |   | 1,889   |  
|                                                                                                                                         |  |      |         |   |      |   |         |  
|Total stockholders equity                                                                                                               |  |      | 190,793 |   |      |   | 194,522 |  
|                                                                                                                                         |  |      |         |   |      |   |         |  
|Total liabilities and stockholders equity                                                                                               |  | $    | 686,964 |   |      | $ | 979,635 |  
|                                                                                                                                         |  |      |         |   |      |   |         |  





See accompanying notes to Consolidated Financial Statements.



54



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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,                              |  | 2005 |         | 2004 |   |         | 2003 | 
|REVENUES                                                      |  |      |         |      |   |         |      |  |   |         |  
|Net premiums earned (Note 4)                                  |  | $    | 128,436 |      | $ | 136,106 |      |  | $ | 163,887 |  
|Net investment income (Note 2)                                |  |      | 17,818  |      |   | 19,174  |      |  |   | 21,954  |  
|Realized investment gains (Note 2)                            |  |      | 4,018   |      |   | 1,502   |      |  |   | 216     |  
|Other revenue                                                 |  |      | 1,183   |      |   | 540     |      |  |   | 936     |  
|                                                              |  |      |         |      |   |         |      |  |   |         |  
|Total revenues                                                |  |      | 151,455 |      |   | 157,322 |      |  |   | 186,993 |  
|EXPENSES                                                      |  |      |         |      |   |         |      |  |   |         |  
|Losses and loss adjustment expenses (Note 3)                  |  |      | 111,156 |      |   | 138,927 |      |  |   | 161,366 |  
|Underwriting and other operating expenses (Note 1 and Note 4) |  |      | 34,807  |      |   | 26,273  |      |  |   | 45,844  |  
|                                                              |  |      |         |      |   |         |      |  |   |         |  
|Total expenses                                                |  |      | 145,963 |      |   | 165,200 |      |  |   | 207,210 |  
|                                                              |  |      |         |      |   |         |      |  |   |         |  
|Income (loss) before income tax expense (benefit)             |  |      | 5,492   |      |   | (7,878  | )    |  |   | (20,217 | )
|Income tax expense (benefit) (Note 5)                         |  |      | 2,024   |      |   | 8       |      |  |   | (7,411  | )
|                                                              |  |      |         |      |   |         |      |  |   |         |  
|Net income (loss)                                             |  | $    | 3,468   |      | $ | (7,886  | )    |  | $ | (12,806 | )
|                                                              |  |      |         |      |   |         |      |  |   |         |  
|Basic income (loss) per share of common stock (Note 10)       |  | $    | 0.37    |      | $ | (0.84   | )    |  | $ | (1.37   | )
|Diluted income (loss) per share of common stock (Note 10)     |  | $    | 0.36    |      | $ | (0.84   | )    |  | $ | (1.37   | )







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 JANUARY 1, 2003                                                        |  | $            | 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 taxes of ($154)     |  |              |  |                            |   |       |                   |  |   |               |   |  |                                    |        |   |                                              |    |       |                            |  |    | 286    |   |  |   | 286     |  
|Unrealized foreign currency loss                                                  |  |              |  |                            |   |       |                   |  |   |               |   |  |                                    |        |   |                                              |    |       |                            |  |    | (478   | ) |  |   | (478    | )
|                                                                                  |  |              |   |                            |   |        |                   |  |   |                |   |  |                                    |         |   |                                              |    |        |                            |  |    |        |   |  |   |         |  
|Comprehensive loss                                                                |  |              |   |                            |   |        |                   |  |   |                |   |  |                                    |         |   |                                              |    |        |                            |  |    |        |   |  |   | (19,818 | )
|Treasury stock reissued                                                           |  |              |  |                            |   |       |                   |  |   |               |   |  |                                    | 824     |   |                                              |    |       |                            |  |    |       |   |  |   | 824     |  
|Cash dividends                                                                    |  |              |  |                            |   |       |                   |  |   | (3,740         | ) |  |                                    |        |   |                                              |    |       |                            |  |    |       |   |  |   | (3,740  | )
|Stock subscription notes repaid                                                   |  |              |  |                            |   |       |                   |  |   |               |   |  |                                    |        |   |                                              |    | 280    |                            |  |    |       |   |  |   | 280     |  
|Other                                                                             |  |              |  |                            |   | (524   | )                 |  |   |               |   |  |                                    |        |   |                                              |    |       |                            |  |    |       |   |  |   | (524    | )
|                                                                                  |  |              |   |                            |   |        |                   |  |   |                |   |  |                                    |         |   |                                              |    |        |                            |  |    |        |   |  |   |         |  
|BALANCE AT DECEMBER 31, 2003                                                      |  |              | 1 |                            |   | 37,281 |                   |  |   | 264,063        |   |  |                                    | (98,006 | ) |                                              |    | (3,312 | )                          |  |    | 4,161  |   |  |   | 204,188 |  
|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 |  
|Net Income                                                                        |  |              |  |                            |   |       |                   |  |   | 3,468          |   |  |                                    |        |   |                                              |    |       |                            |  |    |       |   |  |   | 3,468   |  
|Unrealized losses on securities, net of applicable income tax benefit of $4,312   |  |              |  |                            |   |       |                   |  |   |               |   |  |                                    |        |   |                                              |    |       |                            |  |    | (8,009 | ) |  |   | (8,009  | )
|Change in minimum pension liability, net of applicable income taxes of ($25)      |  |              |  |                            |   |       |                   |  |   |               |   |  |                                    |        |   |                                              |    |       |                            |  |    | 47     |   |  |   | 47      |  
|Unrealized foreign currency gain                                                  |  |              |  |                            |   |       |                   |  |   |               |   |  |                                    |        |   |                                              |    |       |                            |  |    | (195   | ) |  |   | (195    | )
|                                                                                  |  |              |   |                            |   |        |                   |  |   |                |   |  |                                    |         |   |                                              |    |        |                            |  |    |        |   |  |   |         |  
|Comprehensive loss                                                                |  |              |   |                            |   |        |                   |  |   |                |   |  |                                    |         |   |                                              |    |        |                            |  |    |        |   |  |   | (4,689  | )
|Treasury stock reissued                                                           |  |              |  |                            |   |       |                   |  |   |               |   |  |                                    | 591     |   |                                              |    |       |                            |  |    |       |   |  |   | 591     |  
|Stock subscription notes repaid                                                   |  |              |  |                            |   |       |                   |  |   |               |   |  |                                    |         |   |                                              |    | 369    |                            |  |    |       |   |  |   | 369     |  
|                                                                                  |  |              |   |                            |   |        |                   |  |   |                |   |  |                                    |         |   |                                              |    |        |                            |  |    |        |   |  |   |         |  
|BALANCE AT DECEMBER 31, 2005                                                      |  | $            | 1 |                            | $ | 37,127 |                   |  | $ | 259,645        |   |  | ($                                 | 97,063  | ) |                                              | ($ | 2,649  | )                          |  | ($ | 6,268  | ) |  | $ | 190,793 |  
|                                                                                  |  |              |   |                            |   |        |                   |  |   |                |   |  |                                    |         |   |                                              |    |        |                            |  |    |        |   |  |   |         |  





See accompanying notes to Consolidated Financial Statements.



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SCPIE HOLDINGS INC. AND SUBSIDIARIES



CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)



|                                                                                     |  |      |          |   |      |   |          |      |  |   |          |  
|------------------------------------------------------------------------------------ |  | ---- | -------- | - | ---- | - | -------- | ---- |  | - | -------- | -
|FOR THE YEARS ENDED DECEMBER 31,                                                     |  | 2005 |          |   | 2004 |   |          | 2003 | 
|OPERATING ACTIVITIES                                                                 |  |      |          |   |      |   |          |      |  |   |          |  
|Net Income (Loss)                                                                    |  | $    | 3,468    |   |      | $ | (7,886   | )    |  | $ | (12,806  | )
|Adjustments to reconcile net income (loss) to net cash used in operating activities: |  |      |          |   |      |   |          |      |  |   |          |  
|Provisions for amortization and depreciation                                         |  |      | 15,280   |   |      |   | 7,061    |      |  |   | 11,037   |  
|Provision for deferred federal income taxes                                          |  |      | 2,024    |   |      |   | 8        |      |  |   | (7,411   | )
|Realized investment gains                                                            |  |      | (4,018   | ) |      |   | (1,502   | )    |  |   | (216     | )
|Changes in operating assets and liabilities:                                         |  |      |          |   |      |   |          |      |  |   |          |  
|Accrued investment income                                                            |  |      | (25      | ) |      |   | 1,677    |      |  |   | 631      |  
|Premium receivable                                                                   |  |      | 106,849  |   |      |   | (12,428  | )    |  |   | (2,777   | )
|Reinsurance recoverable                                                              |  |      | 141,587  |   |      |   | (45,691  | )    |  |   | 1,760    |  
|Deferred policy acquisition costs                                                    |  |      | 1,943    |   |      |   | 353      |      |  |   | (2,558   | )
|Deferred federal income taxes                                                        |  |      | (4,784   | ) |      |   | (4,737   | )    |  |   | 10,944   |  
|Loss and loss adjustment expense reserves                                            |  |      | (209,432 | ) |      |   | (4,299   | )    |  |   | (7,625   | )
|Unearned premiums                                                                    |  |      | (2,106   | ) |      |   | (6,896   | )    |  |   | (16,849  | )
|Amounts held for reinsurance                                                         |  |      | (72,701  | ) |      |   | 10,296   |      |  |   | (20,478  | )
|Other assets                                                                         |  |      | 6,372    |   |      |   | 1,794    |      |  |   | 4,162    |  
|Other liabilities                                                                    |  |      | (4,703   | ) |      |   | (1,050   | )    |  |   | (4,586   | )
|                                                                                     |  |      |          |   |      |   |          |      |  |   |          |  
|Net cash used in operating activities                                                |  |      | (20,246  | ) |      |   | (63,300  | )    |  |   | (46,772  | )
|                                                                                     |  |      |         
|INVESTING ACTIVITIES                                                                 |  |      |          |   |      |   |          |      |  |   |          |  
|Purchasesfixed maturities                                                           |  |      | (118,532 | ) |      |   | (163,475 | )    |  |   | (644,318 | )
|Salesfixed maturities                                                               |  |      | 66,422   |   |      |   | 229,526  |      |  |   | 617,153  |  
|Maturitiesfixed maturities                                                          |  |      | 31,171   |   |      |   | 25,288   |      |  |   | 4,480    |  
|Salesequities                                                                       |  |      | 14,618   |   |      |   | 3,764    |      |  |   | 3,925    |  
|Sale of other investments                                                            |  |      |         |   |      |   |         |      |  |   | 15,000   |  
|                                                                                     |  |      |          |   |      |   |          |      |  |   |          |  
|Net cash (used in) provided by investing activities                                  |  |      | (6,321   | ) |      |   | 95,103   |      |  |   | (3,760   | )
|                                                                                     |  |      |         
|FINANCING ACTIVITIES                                                                 |  |      |          |   |      |   |          |      |  |   |          |  
|Purchase of treasury stock, net and repayment of stock subscription notes            |  |      | 960      |   |      |   | 492      |      |  |   | 580      |  
|Cash dividends                                                                       |  |      |         |   |      |   |         |      |  |   | (3,740   | )
|                                                                                     |  |      |          |   |      |   |          |      |  |   |          |  
|Net cash provided by (used in) financing activities                                  |  |      | 960      |   |      |   | 492      |      |  |   | (3,160   | )
|                                                                                     |  |      |          |   |      |   |          |      |  |   |          |  
|(Decrease) increase in cash and cash equivalents                                     |  |      | (25,607  | ) |      |   | 32,295   |      |  |   | (53,692  | )
|Cash and cash equivalents at beginning of year                                       |  |      | 94,390   |   |      |   | 62,095   |      |  |   | 115,787  |  
|                                                                                     |  |      |          |   |      |   |          |      |  |   |          |  
|Cash and cash equivalents at end of year                                             |  | $    | 68,783   |   |      | $ | 94,390   |      |  | $ | 62,095   |  
|                                                                                     |  |      |          |   |      |   |          |      |  |   |          |  





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 held a $10.4 million, 6.125% 7-year mortgage note at December 31, 2004.
The mortgage note was paid in full in 2005



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.



|                             |  |                |        |   |      |   |        |      |  |   |         |  
|---------------------------- |  | -------------- | ------ | - | ---- | - | ------ | ---- |  | - | ------- | -
|                             |  | 2005           |        |   | 2004 |   |        | 2003 | 
|                             |  | (In Thousands) |       
|Balance at beginning of year |  | $              | 9,063  |   |      | $ | 9,416  |      |  | $ | 6,858   |  
|Costs deferred               |  |                | 6,348  |   |      |   | 8,243  |      |  |   | 12,824  |  
|Costs amortized              |  |                | (8,291 | ) |      |   | (8,596 | )    |  |   | (10,266 | )
|                             |  |                |        |   |      |   |        |      |  |   |         |  
|Balance at end of year       |  | $              | 7,120  |   |      | $ | 9,063  |      |  | $ | 9,416   |  
|                             |  |                |        |   |      |   |        |      |  |   |         |  



As the Company has reduced its assumed
reinsurance operations and operations in other states, the corresponding commissions and fronting fee arrangements have resulted in an overall decrease in acquisition costs during 2003, 2004 and 2005.



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:



|                            |  |                |        |   |      |   |        |  
|--------------------------- |  | -------------- | ------ | - | ---- | - | ------ | -
|YEAR END DECEMBER 31,       |  | 2005           |        |   | 2004 |  
|                            |  | (In Thousands) |       
|Leasehold improvements      |  | $              | 5,489  |   |      | $ | 5,445  |  
|Furniture and equipment     |  |                | 2,008  |   |      |   | 2,200  |  
|                            |  |                |        |   |      |   |        |  
|                            |  |                | 7,497  |   |      |   | 7,645  |  
|Accumulated depreciation    |  |                | (5,048 | ) |      |   | (4,691 | )
|                            |  |                |        |   |      |   |        |  
|Property and equipment, net |  | $              | 2,449  |   |      | $ | 2,954  |  
|                            |  |                |        |   |      |   |        |  



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, 2005, approximately 23.8% of total reinsurance receivable were recoverable with reinsurance companies with an A.M. Best or
Insurance Solvency International rating of A- or better: including $6.2 million from Lloyds of London syndicates, and $7.1 million from Hannover Ruckversicherungs. The Company has a reinsurance receivable as of December 31, 2005 of $37.1
million from Rosemont Re, a company with an A.M. Best rating of B. The receivable is fully collateralized by funds held in trust for the benefit of the Company.



STOCK-BASED COMPENSATION

---



As of December 31, 2005, 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 STANDARDS

---



In December 2004, the Financial Accounting Standards Board (FASB) issued Statement of Financial
Accounting Standards No. 123 (revised 2004), 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 Standards No. 123, Accounting for Stock-Based Compensation and supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees and its related
implementation guidance; the principles that the Company currently employs to account and report its employee stock option awards. On April 14, 2005, the Securities and Exchange Commission issued a Final Rule amending Regulation S-X to revise
the date for compliance with SFAS No. 123R so that each registrant that is not a small business owner will be required to prepare financial statements in accordance with SFAS No. 123R beginning with the first interim reporting period of
the registrants first fiscal year beginning on or after June 15, 2005. The Company has adopted the provisions of SFAS No. 123R in January 2006. The Company does not believe that the adoption of 123R will have a material impact on its
consolidated financial statements.



In May 2005, the FASB issued Statement of Financial
Accounting Standards No. 154, Accounting Changes and Error Corrections (SFAS No, 154). SFAS 154 establishes, unless impracticable, retrospective application as the required method for reporting a change In accounting
principle in the absence of explicit transition requirements specific to a newly adopted accounting principle. The statement will be effective for the Company for all accounting changes and any error corrections occurring after January 1, 2006.



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SCPIE HOLDINGS INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



There were no other accounting standards issued during 2005 that are expected to have a material impact on the Companys consolidated financial
statements.



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
|Year End December 31, 2005       |  | (In Thousands)      
|Fixed-maturity securities:       |  |                      |         |                      |   |                       |  |           |       |  |   |        
|Bonds:                           |  |                      |         |                      |   |                       |  |           |       |  |   |        
|U.S. government and agencies     |  | $                    | 187,957 |                      | $ | 447                   |  | $         | 2,124 |  | $ | 186,280
|Mortgage-backed and asset-backed |  |                      | 87,294  |                      |   | 79                    |  |           | 1,907 |  |   | 85,466 
|Corporate                        |  |                      | 194,099 |                      |   | 266                   |  |           | 4,631 |  |   | 189,734
|                                 |  |                      |         |                      |   |                       |  |           |       |  |   |        
|Total fixed-maturity securities  |  |                      | 469,350 |                      |   | 792                   |  |           | 8,662 |  |   | 461,480
|Common stocks                    |  |                      | 1,934   |                      |   | 161                   |  |           |      |  |   | 2,095  
|                                 |  |                      |         |                      |   |                       |  |           |       |  |   |        
|Total                            |  | $                    | 471,284 |                      | $ | 953                   |  | $         | 8,662 |  | $ | 463,575
|                                 |  |                      |         |                      |   |                       |  |           |       |  |   |        
|                                 | 
|Year End 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
|                                 |  |                      |         |                      |   |                       |  |           |       |  |   |        



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, 2005, are summarized by stated maturities as follows:



|                                            |  |                |         |           |   |        
|------------------------------------------- |  | -------------- | ------- | --------- | - | -------
|                                            |  | AMORTIZEDCOST  |         | FAIRVALUE
|                                            |  | (In Thousands)
|Years to maturity:                          |  |                |         |           |   |        
|One or less                                 |  | $              | 46,986  |           | $ | 46,663 
|After one through five                      |  |                | 169,953 |           |   | 167,084
|After five through ten                      |  |                | 148,509 |           |   | 145,440
|After ten                                   |  |                | 16,608  |           |   | 16,827 
|Mortgage-backed and asset-backed securities |  |                | 87,294  |           |   | 85,466 
|                                            |  |                |         |           |   |        
|Totals                                      |  | $              | 469,350 |           | $ | 461,480
|                                            |  |                |         |           |   |        



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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,    |  | 2005           |        | 2004 |   | 2003  
|                           |  | (In Thousands)
|Fixed-maturity investments |  | $              | 16,518 |      | $ | 20,196 |  | $ | 22,116
|Equity investments         |  |                |       |      |   |       |  |   | 234   
|Other                      |  |                | 3,297  |      |   | 1,185  |  |   | 1,557 
|                           |  |                |        |      |   |        |  |   |       
|Total investment income    |  |                | 19,815 |      |   | 21,381 |  |   | 23,907
|Investment expenses        |  |                | 1,997  |      |   | 2,207  |  |   | 1,953 
|                           |  |                |        |      |   |        |  |   |       
|Net investment income      |  | $              | 17,818 |      | $ | 19,174 |  | $ | 21,954
|                           |  |                |        |      |   |        |  |   |       



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



|                                                          |  |                |        |   |      |   |        |      |  |   |         |  
|--------------------------------------------------------- |  | -------------- | ------ | - | ---- | - | ------ | ---- |  | - | ------- | -
|YEAR ENDED DECEMBER 31,                                   |  | 2005           |        |   | 2004 |   |        | 2003 | 
|                                                          |  | (In Thousands) |       
|Fixed-maturity investments:                               |  |                |        |   |      |   |        |      |  |   |         |  
|Gross realized gains                                      |  | $              | 1,336  |   |      | $ | 4,061  |      |  | $ | 13,749  |  
|Gross realized losses                                     |  |                | (1,936 | ) |      |   | (3,038 | )    |  |   | (2,757  | )
|                                                          |  |                |        |   |      |   |        |      |  |   |         |  
|Net realized (losses) gains on fixed-maturity investments |  |                | (600   | ) |      |   | 1,023  |      |  |   | 10,992  |  
|Equity investmentsgross realized gains (losses)          |  |                | 4,618  |   |      |   | 475    |      |  |   | (10,172 | )
|Net other gains (losses)                                  |  |                |       |   |      |   | 4      |      |  |   | (604    | )
|                                                          |  |                |        |   |      |   |        |      |  |   |         |  
|Total net realized gains                                  |  | $              | 4,018  |   |      | $ | 1,502  |      |  | $ | 216     |  
|                                                          |  |                |        |   |      |   |        |      |  |   |         |  



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 $(8.4) million, $(2.8) million and $11.8 million for the years ended December 31, 2005, 2004 and 2003, respectively; the corresponding amounts for equity securities were $(3.9) million, $(0.7) million and $0.3
million.



The Company held 125 investment positions with unrealized losses as of
December 31, 2005. All of the investments are investment grade and the unrealized losses are primarily due to interest rate fluctuations. The Company held 67 securities that were in an unrealized loss position for 12 months or more.



|                                 |  |                       |       |                  |   |                       |  |           |       |                       |   |           |  |   |       |  |   |        
|-------------------------------- |  | --------------------- | ----- | ---------------- | - | --------------------- |  | --------- | ----- | --------------------- | - | --------- |  | - | ----- |  | - | -------
|                                 |  | LESS THAN12 MONTHS    |       | 12 MONTHSOR MORE |   | TOTAL                
|                                 |  | GROSSUNREALIZEDLOSSES |       | FAIRVALUE        |   | GROSSUNREALIZEDLOSSES |  | FAIRVALUE |       | GROSSUNREALIZEDLOSSES |   | FAIRVALUE
|                                 |  | (In Thousands)       
|Fixed-maturity securities:       |  |                       |       |                  |   |                       |  |           |       |                       |   |           |  |   |       |  |   |        
|Bonds:                           |  |                       |       |                  |   |                       |  |           |       |                       |   |           |  |   |       |  |   |        
|U.S. government and agencies     |  | $                     | 976   |                  | $ | 92,858                |  | $         | 1,148 |                       | $ | 61,492    |  | $ | 2,124 |  | $ | 154,350
|Mortgage-backed and asset-backed |  |                       | 36    |                  |   | 12,553                |  |           | 1,871 |                       |   | 67,876    |  |   | 1,907 |  |   | 80,429 
|Corporate                        |  |                       | 1,817 |                  |   | 104,892               |  |           | 2,814 |                       |   | 74,280    |  |   | 4,631 |  |   | 179,172
|                                 |  |                       |       |                  |   |                       |  |           |       |                       |   |           |  |   |       |  |   |        
|Total                            |  | $                     | 2,829 |                  | $ | 210,303               |  | $         | 5,833 |                       | $ | 203,648   |  | $ | 8,662 |  | $ | 413,951
|                                 |  |                       |       |                  |   |                       |  |           |       |                       |   |           |  |   |       |  |   |        



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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 2005, 2004 and 2003.



|                                                                                                        |  |                |         |   |      |   |         |  |   |         |  
|------------------------------------------------------------------------------------------------------- |  | -------------- | ------- | - | ---- | - | ------- |  | - | ------- | -
|DECEMBER 31,                                                                                            |  | 2005           |         |   | 2004 |   | 2003    | 
|                                                                                                        |  | (In Thousands) |        
|Reserves for losses and LAEat beginning of year                                                        |  | $              | 638,747 |   |      | $ | 643,046 |  | $ | 650,671 |  
|Less reinsurance recoverablesat beginning of year                                                      |  |                | 183,623 |   |      |   | 108,891 |  |   | 85,930  |  
|                                                                                                        |  |                |         |   |      |   |         |  |   |         |  
|Reserves for losses and LAE, net of related reinsurance recoverableat beginning of year                |  |                | 455,124 |   |      |   | 534,155 |  |   | 564,741 |  
|                                                                                                        |  |                |         |   |      |   |         |  |   |         |  
|Provision for losses and LAE for claims occurring in the current year, net of reinsurance               |  |                | 113,128 |   |      |   | 123,027 |  |   | 169,474 |  
|Increase (decrease) in estimated losses and LAE for claims occurring in prior years, net of reinsurance |  |                | (1,972  | ) |      |   | 15,900  |  |   | (8,108  | )
|                                                                                                        |  |                |         |   |      |   |         |  |   |         |  
|Incurred losses during the year, net of reinsurance                                                     |  |                | 111,156 |   |      |   | 138,927 |  |   | 161,366 |  
|                                                                                                        |  |                |         |   |      |   |         |  |   |         |  
|Deduct losses and LAE payments for claims, net of reinsurance, occurring during:                        |  |                |         |   |      |   |         |  |   |         |  
|Current year                                                                                            |  |                | 24,466  |   |      |   | 10,776  |  |   | 18,424  |  
|Prior years                                                                                             |  |                | 158,034 |   |      |   | 207,182 |  |   | 173,528 |  
|                                                                                                        |  |                |         |   |      |   |         |  |   |         |  
|Total payments during the year, net of reinsurance                                                      |  |                | 182,500 |   |      |   | 217,958 |  |   | 191,952 |  
|                                                                                                        |  |                |         |   |      |   |         |  |   |         |  
|Reserve for losses and LAE, net of related reinsurance recoverableat end of year                       |  |                | 383,780 |   |      |   | 455,124 |  |   | 534,155 |  
|Reinsurance recoverable for losses and LAEat end of year                                               |  |                | 45,535  |   |      |   | 183,623 |  |   | 108,891 |  
|                                                                                                        |  |                |         |   |      |   |         |  |   |         |  
|Reserves for losses and LAE, gross of reinsurance recoverableat end of year                            |  | $              | 429,315 |   |      | $ | 638,747 |  | $ | 643,046 |  
|                                                                                                        |  |                |         |   |      |   |         |  |   |         |  



The decrease during 2005 in estimated losses and
LAE occurring in prior years was attributable to favorable loss experience in both core and non-core direct healthcare liability insurance, partially offset by adverse experience in the assumed reinsurance business. The increase during 2004 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 was principally attributable to favorable loss experience in the core direct
healthcare liability insurance partially offset by adverse development in both the non-core healthcare liability insurance programs and assumed reinsurance business.



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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SCPIE HOLDINGS INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



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



|                        |  |         |         |   |        |   |         |         |  |        |         |         |   |         |  |   |         |  |   |        
|----------------------- |  | ------- | ------- | - | ------ | - | ------- | ------- |  | ------ | ------- | ------- | - | ------- |  | - | ------- |  | - | -------
|YEAR ENDED DECEMBER 31, |  | 2005    |         |   | 2004   |   | 2003   
|                        |  | WRITTEN |         |   | EARNED |   |         | WRITTEN |  | EARNED |         | WRITTEN |   | EARNED 
|Direct                  |  | $       | 141,648 |   |        | $ | 142,348 |         |  | $      | 142,509 |         | $ | 137,154 |  | $ | 147,085 |  | $ | 149,571
|Assumed                 |  |         | (3,966  | ) |        |   | (1,380  | )       |  |        | 13,815  |         |   | 41,107  |  |   | 74,236  |  |   | 102,866
|Ceded                   |  |         | 11,351  |   |        |   | 12,532  |         |  |        | 27,114  |         |   | 42,155  |  |   | 74,282  |  |   | 88,550 
|                        |  |         |         |   |        |   |         |         |  |        |         |         |   |         |  |   |         |  |   |        
|Net premiums            |  | $       | 126,331 |   |        | $ | 128,436 |         |  | $      | 129,210 |         | $ | 136,106 |  | $ | 147,039 |  | $ | 163,887
|                        |  |         |         |   |        |   |         |         |  |        |         |         |   |         |  |   |         |  |   |        



Reinsurance ceded reduced loss and loss
adjustment expenses incurred by $(15.0) million, $42.9 million, and $29.9 million in 2005, 2004 and 2003, respectively. Reinsurance ceded also reduced loss and loss adjustment expense reserves by $45.5 million, $183.6 million, and $108.9 million in
2005, 2004 and 2003, respectively.



From 2002 through 2006 the Company has reinsured
losses above a retention of approximately $2.0 million to $20.0 million subject to an aggregate deductible of $3.0 million in each respective year for losses in excess of the Companys retention. For 2003 and 2002 the Company also reinsured
losses in excess of $20.0 million up to $50.0 million subject to 16% and 8% Company participation in these reinsurance layers, respectively. For 2001 and 2000 the Company reinsured losses above a $1.25 million and $2.0 million retention respectively
up to $70.0 million subject to a $3.0 million aggregate deductible for each year. Prior to 2000 the Company generally reinsured losses up to $20.0 million above a $1 million retention subject to a $1 million aggregate deductible.



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. Under the agreement, 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, $5.5 million, $(0.01) million and $0.4 million was expensed in 2003, 2004 and 2005, 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, 2005, the market value and assets held in the trust was $45.7 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%.



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SCPIE HOLDINGS INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



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, |  | 2005           |       | 2004 |   |        | 2003 | 
|                        |  | (In Thousands) |      
|Current                 |  | $              |      |      | $ | (50    | )    |  | $ |       |  
|Deferred                |  |                | 2,024 |      |   | (3,942 | )    |  |   | (7,411 | )
|State franchise tax     |  |                |      |      |   | 4,000  |      |  |   |       |  
|                        |  |                |       |      |   |        |      |  |   |        |  
|Total                   |  | $              | 2,024 |      | $ | 8      |      |  | $ | (7,411 | )
|                        |  |                |       |      |   |        |      |  |   |        |  



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,                      |  | 2005           |       | 2004 |   |        | 2003 | 
|                                             |  | (In Thousands) |      
|Federal income tax benefit at 35%            |  | $              | 1,922 |      | $ | (2,757 | )    |  | $ | (7,076 | )
|Increase (decrease) in taxes resulting from: |  |                |       |      |   |        |      |  |   |        |  
|Dividends received deduction                 |  |                |      |      |   |       |      |  |   | (102   | )
|State franchise tax (net of federal tax)     |  |                |      |      |   | 2,600  |      |  |   |       |  
|Other                                        |  |                | 102   |      |   | 165    |      |  |   | (233   | )
|                                             |  |                |       |      |   |        |      |  |   |        |  
|Total federal income tax expense (benefit)   |  | $              | 2,024 |      | $ | 8      |      |  | $ | (7,411 | )
|                                             |  |                |       |      |   |        |      |  |   |        |  



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,                               |  | 2005           |        | 2004 |  
|                                           |  | (In Thousands) |       
|Deferred tax assets:                       |  |                |        |      |   |        |  
|Discounting of loss reserves               |  | $              | 15,481 |      | $ | 20,065 |  
|Net operating loss carryforward            |  |                | 24,932 |      |   | 24,260 |  
|AMT credit carryforward                    |  |                | 5,442  |      |   | 5,442  |  
|Unearned premium                           |  |                | 2,748  |      |   | 2,878  |  
|Unrealized investment losses               |  |                | 2,698  |      |   |       |  
|Deferred compensation and retirement plans |  |                | 2,338  |      |   | 2,307  |  
|Other                                      |  |                | 67     |      |   | (1,712 | )
|                                           |  |                |        |      |   |        |  
|Total deferred tax assets                  |  |                | 53,706 |      |   | 53,240 |  
|Deferred tax liabilities:                  |  |                |        |      |   |        |  
|Deferred acquisition costs                 |  |                | 2,492  |      |   | 3,172  |  
|Unrealized investment gains                |  |                |       |      |   | 1,614  |  
|                                           |  |                |        |      |   |        |  
|Total deferred tax liabilities             |  |                | 2,492  |      |   | 4,786  |  
|                                           |  |                |        |      |   |        |  
|Net deferred tax assets                    |  | $              | 51,214 |      | $ | 48,454 |  
|                                           |  |                |        |      |   |        |  



At December 31, 2005, the Company had $51.2
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 $24.9 million for a net operating loss carryforward that will begin expiring 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.





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SCPIE HOLDINGS INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



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:



The Company has been issued a permitted practice letter by the California Department of Insurance
allowing the Company to admit, on a statutory basis, assets pledged by the insurance subsidiaries as security for the letter of credit used to support the Lloyds capital requirement of SCPIE Underwriting Limited. The effect of treating the
pledged assets as non-admitted as of December 31, 2005 and 2004 would have been to reduce statutory surplus of SCPIE Indemnity by approximately $30.3 million as of both dates to approximately, $115 million and $106 million respectively.



|                                               |  |                |         |      |   |         |      |  |   |         |  
|---------------------------------------------- |  | -------------- | ------- | ---- | - | ------- | ---- |  | - | ------- | -
|DECEMBER 31,                                   |  | 2005           |         | 2004 |   |         | 2003 | 
|                                               |  | (In Thousands) |        
|Statutory net income (loss) for the year ended |  | $              | 8,935   |      | $ | (6,436  | )    |  | $ | (19,874 | )
|Statutory capital and surplus at year end      |  | $              | 145,614 |      | $ | 136,536 |      |  | $ | 140,216 |  



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, 2005, the amount of dividends available to SCPIE Holdings from its insurance subsidiaries during
2005 not limited by such restrictions is approximately $14.5 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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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,      |  | 2005           |      |   | 2004              |   |      | 2003 |  |   | 2005 |   |  | 2004 |     | 2003
|                             |  | (In Thousands)
|Service cost                 |  |                |      |   |                   |   |      |      |  |   |      |   |  |      |     |      |  | $ | 78  |  | $ | 436
|Interest cost                |  | $              | 284  |   |                   | $ | 275  |      |  | $ | 271  |   |  | $    | 188 |      |  |   | 233 |  |   | 293
|Actual return on plan assets |  |                | (320 | ) |                   |   | (294 | )    |  |   | (238 | ) |  |      |    |      |  |   |    |  |   |   
|Amortization of:             |  |                |     |   |                   |   |     |      |  |   |     |   |  |      |    |      |  |   |    |  |   |   
|Transition asset             |  |                |     |   |                   |   | (4   | )    |  |   | (4   | ) |  |      |    |      |  |   |    |  |   |   
|Prior service cost           |  |                |     |   |                   |   |     |      |  |   |     |   |  |      |    |      |  |   | 12  |  |   | 100
|Actuarial loss               |  |                | 114  |   |                   |   | 95   |      |  |   | 110  |   |  |      | (21 | )    |  |   | 10  |  |   |   
|                             |  |                |      |   |                   |   |      |      |  |   |      |   |  |      |     |      |  |   |     |  |   |    
|Net pension expense          |  | $              | 78   |   |                   | $ | 72   |      |  | $ | 139  |   |  | $    | 167 |      |  | $ | 333 |  | $ | 829
|                             |  |                |      |   |                   |   |      |      |  |   |      |   |  |      |     |      |  |   |     |  |   |    



Pension expense for all plans was $1.1, $0.5,
and $1.9 for the years ended December 31, 2005, 2004 and 2003, respectively.



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



|                                                                      |  |                |        |   |                  |   |        |               |  |   |                  |   |  |   |        |  
|--------------------------------------------------------------------- |  | -------------- | ------ | - | ---------------- | - | ------ | ------------- |  | - | ---------------- | - |  | - | ------ | -
|                                                                      |  | QualifiedPlan  |        |   | SupplementalPlan |   |        | QualifiedPlan |  |   | SupplementalPlan |  
|DECEMBER 31,                                                          |  | 2005           |        |   | 2005             |   |        | 2004          |  |   | 2004             |  
|                                                                      |  | (In Thousands) |       
|Change in Benefit Obligation                                          |  |                |        |   |                  |   |        |               |  |   |                  |   |  |   |        |  
|Net benefit obligation at beginning of year                           |  | $              | 5,072  |   |                  | $ | 3,991  |               |  | $ | 4,690            |   |  | $ | 5,068  |  
|Service cost                                                          |  |                |       |   |                  |   |       |               |  |   |                 |   |  |   | 78     |  
|Interest cost                                                         |  |                | 284    |   |                  |   | 188    |               |  |   | 275              |   |  |   | 233    |  
|Plan amendments                                                       |  |                |       |   |                  |   |       |               |  |   |                 |   |  |   |       |  
|Actuarial loss (gain)                                                 |  |                | 172    |   |                  |   | (523   | )             |  |   | 220              |   |  |   | 407    |  
|Curtailment                                                           |  |                |       |   |                  |   |       |               |  |   |                 |   |  |   | (759   | )
|Settlement                                                            |  |                |       |   |                  |   |       |               |  |   |                 |   |  |   | (1,036 | )
|Gross benefits paid                                                   |  |                | (107   | ) |                  |   | (299   | )             |  |   | (113             | ) |  |   |       |  
|                                                                      |  |                |        |   |                  |   |        |               |  |   |                  |   |  |   |        |  
|Net benefit obligation at end of year                                 |  | $              | 5,421  |   |                  | $ | 3,357  |               |  | $ | 5,072            |   |  | $ | 3,991  |  
|                                                                      |  |                |        |   |                  |   |        |               |  |   |                  |   |  |   |        |  
|Change in Plan Assets                                                 |  |                |        |   |                  |   |        |               |  |   |                  |   |  |   |        |  
|Fair value of plan assets at beginning of year                        |  | $              | 4,055  |   |                  | $ |       |               |  | $ | 3,542            |   |  | $ |       |  
|Actual return on plan assets                                          |  |                | 281    |   |                  |   |       |               |  |   | 256              |   |  |   |       |  
|Employer contributions                                                |  |                | 22     |   |                  |   | 299    |               |  |   | 370              |   |  |   |       |  
|Gross benefits paid                                                   |  |                | (107   | ) |                  |   | (299   | )             |  |   | (113             | ) |  |   |       |  
|                                                                      |  |                |        |   |                  |   |        |               |  |   |                  |   |  |   |        |  
|Fair value of plan assets at end of year                              |  | $              | 4,251  |   |                  | $ |       |               |  | $ | 4,055            |   |  | $ |       |  
|                                                                      |  |                |        |   |                  |   |        |               |  |   |                  |   |  |   |        |  
|Funded status (underfunded)                                           |  | $              | (1,170 | ) |                  | $ | (3,357 | )             |  | $ | (1,017           | ) |  | $ | (3,991 | )
|Unrecognized actuarial loss (gain)                                    |  |                | 1,739  |   |                  |   | (332   | )             |  |   | 1,641            |   |  |   | 170    |  
|Unrecognized prior service cost                                       |  |                |       |   |                  |   |       |               |  |   |                 |   |  |   |       |  
|Unrecognized net transition asset                                     |  |                |       |   |                  |   |       |               |  |   |                 |   |  |   |       |  
|                                                                      |  |                |        |   |                  |   |        |               |  |   |                  |   |  |   |        |  
|Accrued pension expense                                               |  | $              | 569    |   |                  | $ | (3,689 | )             |  | $ | 624              |   |  | $ | (3,821 | )
|                                                                      |  |                |        |   |                  |   |        |               |  |   |                  |   |  |   |        |  
|Amounts recognized in the statement of financial position consists of |  |                |        |   |                  |   |        |               |  |   |                  |   |  |   |        |  
|Prepaid benefit cost                                                  |  | $              |       |   |                  | $ |       |               |  | $ |                 |   |  | $ |       |  
|Accrued benefit liability                                             |  |                | (1,170 | ) |                  |   | (3,689 | )             |  |   | (1,017           | ) |  |   | (3,991 | )
|Additional minimum liability                                          |  |                |       |   |                  |   |       |               |  |   |                 |   |  |   |       |  
|Intangible asset                                                      |  |                |       |   |                  |   |       |               |  |   |                 |   |  |   |       |  
|Accumulated other comprehensive income                                |  |                | 1,739  |   |                  |   |       |               |  |   | 1,641            |   |  |   | 170    |  
|                                                                      |  |                |        |   |                  |   |        |               |  |   |                  |   |  |   |        |  
|Net amount recognized                                                 |  | $              | 569    |   |                  | $ | (3,689 | )             |  | $ | 624              |   |  | $ | (3,821 | )
|                                                                      |  |                |        |   |                  |   |        |               |  |   |                  |   |  |   |        |  



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SCPIE HOLDINGS INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



|                               |  |                |   |  |                   |   |  |      |   |  |      |   |  |      |   |  |      |  
|------------------------------ |  | -------------- | - |  | ----------------- | - |  | ---- | - |  | ---- | - |  | ---- | - |  | ---- | -
|                               |  | Qualified Plan |   |  | Supplemental Plan |  
|DECEMBER 31,                   |  | 2005           |   |  | 2004              |   |  | 2003 |   |  | 2005 |   |  | 2004 |   |  | 2003 |  
|Weighted-average assumptions   |  |                |   |  |                   |   |  |      |   |  |      |   |  |      |   |  |      |  
|Discount rate                  |  | 5.50           | % |  | 5.75              | % |  | 6.0  | % |  | 5.50 | % |  | 5.75 | % |  | 6.0  | %
|Expected return on plan assets |  | 8.0            | % |  | 8.0               | % |  | 8.0  | % |  | N/A  |   |  | N/A  |   |  | N/A  |  
|Rate of compensation increase  |  | N/A            |   |  | N/A               |   |  | N/A  |   |  | N/A  |   |  | 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, 2005, $1.8 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, 2005,
2004 and 2003 was $3.1 million, $3.2 million, and $3.1 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):



|                             |  |   |      
|---------------------------- |  | - | -----
|2006                         |  | $ | 2,989
|2007                         |  |   | 3,141
|2008                         |  |   | 2,627
|2009                         |  |   | 58   
|2010                         |  |   | 55   
|                             |  |   |      
|Total minimum lease payments |  | $ | 8,870
|                             |  |   |      



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



The Company is obligated to assume certain policy obligations of Highlands Insurance Company (Highlands) in the event Highlands is declared insolvent by a court of competent jurisdiction and is unable to pay these obligations.
The coverages principally involve workers compensation, commercial automobile and general liability. Highlands currently is under the jurisdiction of the Texas District Court which appointed the Texas Insurance Commissioner as a permanent
Receiver of Highlands in November 2003. The Receiver continues to resolve Highlands claim liabilities and otherwise conduct its business as part of his efforts to rehabilitate Highlands. At December 31, 2005, Highlands had established case loss
reserves of $7.3 million, net of reinsurance, for the subject policies. Based on a limited review of the exposures remaining, the Company estimates that IBNR losses are $3.8 million, for a total loss and LAE reserve of $11.1 million. This estimate
is not based on a full reserve analysis of the exposures and is not recorded in the Companys reserves. If Highlands is declared insolvent and liquidated by court order, the Company would likely be required to assume Highlands remaining
obligations under the subject policies.



The court order appointing the Receiver
expressly provided that it did not constitute a finding of Highlands insolvency. On December 30, 2005, the Receiver filed a financial report for Highlands as of November 30, 2005. In the report, the Receiver listed total assets of $354.2 million and
total liabilities of $324.6 million, not including any IBNR reserves, which are currently under review by an independent actuarial firm, nor any anticipated investment income associated with reserves.



68



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SCPIE HOLDINGS INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



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, 2005, letter of credit issuance under the facility was approximately $44.4 million. Securities of $48.9 million are pledged as collateral
under the facility.



At December 31, 2005, 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:



|                                         |  |                  |  |                                |       |                  |           |                                |   |                  |  |                                |  |   |      
|---------------------------------------- |  | ---------------- |  | ------------------------------ | ----- | ---------------- | --------- | ------------------------------ | - | ---------------- |  | ------------------------------ |  | - | -----
|                                         |  | 2005             |  | 2004                           |       | 2003            
|                                         |  | Number ofOptions |  | Weighted-AverageExercise Price |       | Number ofOptions |           | Weighted-AverageExercise Price |   | Number ofOptions |  | Weighted-AverageExercise Price
|Options outstanding at beginning of year |  | 1,047,000        |  | $                              | 14.13 |                  | 1,044,667 |                                | $ | 14.20            |  | 1,129,127                      |  | $ | 22.86
|Granted during year                      |  | 50,000           |  | $                              | 11.44 |                  | 10,000    |                                | $ | 8.74             |  | 355,000                        |  | $ | 5.95 
|Exercised during year                    |  | 43,000           |  | $                              | 6.63  |                  |          |                                |   |                 |  |                               |  |   |      
|Forfeited during year                    |  | 161,966          |  | $                              | 17.73 |                  | 7,667     |                                | $ | 16.70            |  | 439,460                        |  | $ | 29.77
|                                         |  |                  |  |                                |       |                  |           |                                |   |                  |  |                                |  |   |      
|Options outstanding at end of year       |  | 892,034          |  | $                              | 13.69 |                  | 1,047,000 |                                | $ | 14.13            |  | 1,044,667                      |  | $ | 14.20
|                                         |  |                  |  |                                |       |                  |           |                                |   |                  |  |                                |  |   |      



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.



69



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SCPIE HOLDINGS INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Information about stock options outstanding at December 31, 2005, 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                      |  | 377,000             |  | 7.33                                     |  | $                              | 6.90  |                   | 326,462 |                                | $ | 6.09 
|$16.70$19.32                      |  | 454,700             |  | 5.79                                     |  | $                              | 16.70 |                   | 430,700 |                                | $ | 16.03
|$24.25$36.50                      |  | 60,334              |  | 2.82                                     |  | $                              | 32.86 |                   | 60,334  |                                | $ | 32.86
|                                   |  |                     |  |                                          |  |                                |       |                   |         |                                |   |      
|Options outstanding at end of year |  | 892,034             |  | 6.32                                     |  | $                              | 13.69 |                   | 817,496 |                                | $ | 13.30
|                                   |  |                     |  |                                          |  |                                |       |                   |         |                                |   |      



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



|                                      |  |               |  |                                |      |               |        |                                |   |               |  |                                |  |   |     
|------------------------------------- |  | ------------- |  | ------------------------------ | ---- | ------------- | ------ | ------------------------------ | - | ------------- |  | ------------------------------ |  | - | ----
|                                      |  | 2005          |  | 2004                           |      | 2003         
|                                      |  | Number ofSARs |  | Weighted-AverageExercise Price |      | Number ofSARs |        | Weighted-AverageExercise Price |   | Number ofSARs |  | Weighted-AverageExercise Price
|SARs outstanding at beginning of year |  | 65,833        |  | $                              | 5.95 |               | 80,500 |                                | $ | 5.95          |  |                               |  |   |    
|Granted during year                   |  |              |  |                                |     |               |       |                                |   |              |  | 80,500                         |  | $ | 5.95
|Exercised during year                 |  | 42,336        |  | $                              | 5.95 |               | 4,667  |                                | $ | 5.95          |  |                               |  |   |     
|Forfeited during year                 |  | 1,834         |  | $                              | 5.95 |               | 10,000 |                                | $ | 5.95          |  |                               |  |   |    
|                                      |  |               |  |                                |      |               |        |                                |   |               |  |                                |  |   |     
|SARs outstanding at end of year       |  | 21,663        |  | $                              | 5.95 |               | 65,833 |                                | $ | 5.95          |  | 80,500                         |  | $ | 5.95
|                                      |  |               |  |                                |      |               |        |                                |   |               |  |                                |  |   |     



The Company expensed as compensation $0.5
million, $0.1 million, and $0.1 million for SARs in 2005, 2004 and 2003, respectively.



Information about SARs outstanding at December 31, 2005, is summarized as follows:



|                    |  |                          |  |                |  |                   |  |               
|------------------- |  | ------------------------ |  | -------------- |  | ----------------- |  | --------------
|Options Outstanding |  | Options Exercisable     
|NumberOutstanding   |  | RemainingContractualLife |  | Exercise Price |  | NumberExercisable |  | Exercise Price
|21,663              |  | 7.21                     |  | $5.95          |  | 21,663            |  | $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 2005, 2004 and 2003, the Company issued 20,000, 20,000 and 22,000 restricted share grants to
non-employee directors and expensed as compensation $0.3 million, $0.2 million and $0.1 million, respectively.



70



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SCPIE HOLDINGS INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



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



|                                                                                                                                           |  |      |       |   |      |   |        |      |  |   |         |  
|------------------------------------------------------------------------------------------------------------------------------------------ |  | ---- | ----- | - | ---- | - | ------ | ---- |  | - | ------- | -
|                                                                                                                                           |  | 2005 |       |   | 2004 |   |        | 2003 | 
|Net income (loss) as reported                                                                                                              |  | $    | 3,468 |   |      | $ | (7,886 | )    |  | $ | (12,806 | )
|Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards net of related tax
effects |  |      | (296  | ) |      |   | (634   | )    |  |   | (861    | )
|                                                                                                                                           |  |      |       |   |      |   |        |      |  |   |         |  
|Pro forma net income (loss)                                                                                                                |  | $    | 3,172 |   |      | $ | (8,520 | )    |  | $ | (13,667 | )
|                                                                                                                                           |  |      |      
|Loss per share                                                                                                                             |  |      |       |   |      |   |        |      |  |   |         |  
|Basicas reported                                                                                                                         |  | $    | 0.37  |   |      | $ | (0.84  | )    |  | $ | (1.37   | )
|Basicproforma                                                                                                                            |  | $    | 0.34  |   |      | $ | (0.90  | )    |  | $ | (1.46   | )
|                                                                                                                                           |  |      |      
|Dilutedas reported                                                                                                                       |  | $    | 0.36  |   |      | $ | (0.84  | )    |  | $ | (1.37   | )
|Dilutedproforma                                                                                                                          |  | $    | 0.33  |   |      | $ | (0.90  | )    |  | $ | (1.46   | )



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



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



NOTE
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,                                                                                           |  | 2005 |       | 2004 |   |        | 2003 | 
|Numerator:                                                                                             |  |      |       |      |   |        |      |  |   |         |  
|Net income (loss)                                                                                      |  | $    | 3,468 |      | $ | (7,886 | )    |  | $ | (12,806 | )
|Numerator for:                                                                                         |  |      |       |      |   |        |      |  |   |         |  
|Basic income (loss) per share of common stock                                                          |  | $    | 3,468 |      | $ | (7,886 | )    |  | $ | (12,806 | )
|Diluted income (loss) per share of common stock                                                        |  | $    | 3,468 |      | $ | (7,886 | )    |  | $ | (12,806 | )
|Denominator:                                                                                           |  |      |       |      |   |        |      |  |   |         |  
|Denominator for basic earnings per share of common stock weighted-average shares outstanding          |  |      | 9,455 |      |   | 9,388  |      |  |   | 9,352   |  
|Effect of dilutive securities:                                                                         |  |      |       |      |   |        |      |  |   |         |  
|Stock options                                                                                          |  |      | 94    |      |   |       |      |  |   |        |  
|                                                                                                       |  |      |       |      |   |        |      |  |   |         |  
|Denominator for diluted earnings per share of common stock adjustedweighted-averageshares outstanding |  |      | 9,549 |      |   | 9,388  |      |  |   | 9,352   |  
|                                                                                                       |  |      |       |      |   |        |      |  |   |         |  
|Basic income (loss) per share of common stock                                                          |  | $    | 0.37  |      | $ | (0.84  | )    |  | $ | (1.37   | )
|                                                                                                       |  |      |       |      |   |        |      |  |   |         |  
|Diluted income (loss) per share of common stock                                                        |  | $    | 0.36  |      | $ | (0.84  | )    |  | $ | (1.37   | )
|                                                                                                       |  |      |       |      |   |        |      |  |   |         |  



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



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SCPIE HOLDINGS INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



NOTE 11.    QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)



The unaudited quarterly results of operations for 2005 and 2004 are summarized as follows:



|                                                  |  |                                       |        |      |   |        |     |  |   |        |   |     |   |        |  |   |        |  |   |        |   |  |   |        |   |  |   |        |  
|------------------------------------------------- |  | ------------------------------------- | ------ | ---- | - | ------ | --- |  | - | ------ | - | --- | - | ------ |  | - | ------ |  | - | ------ | - |  | - | ------ | - |  | - | ------ | -
|                                                  |  | 2005                                  |        | 2004 |  
|                                                  |  | 1ST                                   |        | 2ND  |   |        | 3RD |  |   | 4TH    |   | 1ST |   | 2ND    |  |   | 3RD    |  |   | 4TH    |  
|                                                  |  | (In Thousands, Except Per-Share Data) |       
|Premiums earned and other revenues                |  | $                                     | 32,700 |      | $ | 32,511 |     |  | $ | 32,719 |   |     | $ | 31,689 |  | $ | 36,693 |  | $ | 31,313 |   |  | $ | 36,294 |   |  | $ | 32,346 |  
|Net investment income                             |  |                                       | 4,667  |      |   | 4,132  |     |  |   | 4,556  |   |     |   | 4,463  |  |   | 5,432  |  |   | 5,118  |   |  |   | 4,477  |   |  |   | 4,147  |  
|Realized investment gains (losses)                |  |                                       | 16     |      |   | (10    | )   |  |   | (264   | ) |     |   | 4,276  |  |   | 2,346  |  |   | (631   | ) |  |   | (111   | ) |  |   | (102   | )
|Net income (loss)                                 |  |                                       | 1,671  |      |   | 1,705  |     |  |   | (3,122 | ) |     |   | 3,214  |  |   | 827    |  |   | (2,316 | ) |  |   | (3,021 | ) |  |   | (3,376 | )
|Basic earnings (loss) per share of common stock   |  | $                                     | 0.18   |      | $ | 0.18   |     |  | $ | (0.33  | ) |     | $ | 0.34   |  | $ | 0.09   |  | $ | (0.25  | ) |  | $ | (0.32  | ) |  | $ | (0.36  | )
|Diluted earnings (loss) per share of common stock |  | $                                     | 0.18   |      | $ | 0.18   |     |  | $ | (0.33  | ) |     | $ | 0.33   |  | $ | 0.09   |  | $ | (0.25  | ) |  | $ | (0.32  | ) |  | $ | (0.36  | )



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.



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



|                                          |  |                                      |         |                    |   |         |       |  |       |         |  |   |        
|----------------------------------------- |  | ------------------------------------ | ------- | ------------------ | - | ------- | ----- |  | ----- | ------- |  | - | -------
|Year Ended December 31, 2005              |  | Direct HealthcareLiability Insurance |         | AssumedReinsurance |   |         | Other |  | Total
|                                          |  | (In Thousands)                      
|Premiums written                          |  | $                                    | 127,249 |                    | $ | (918    | )     |  |       |         |  | $ | 126,331
|                                          |  |                                      |         |                    |   |         |       |  |       |         |  |   |        
|Premiums earned                           |  | $                                    | 127,949 |                    | $ | 487     |       |  |       |         |  | $ | 128,436
|Net investment income                     |  |                                      |         |                    |   |         |       |  | $     | 17,818  |  |   | 17,818 
|Realized investment gains                 |  |                                      |         |                    |   |         |       |  |       | 4,018   |  |   | 4,018  
|Other revenue                             |  |                                      |         |                    |   |         |       |  |       | 1,183   |  |   | 1,183  
|                                          |  |                                      |         |                    |   |         |       |  |       |         |  |   |        
|Total revenues                            |  | $                                    | 127,949 |                    |   | 487     |       |  |       | 23,019  |  |   | 151,455
|Losses and loss adjustment expenses       |  |                                      | 88,166  |                    |   | 22,990  |       |  |       |        |  |   | 111,156
|Other operating expenses                  |  |                                      | 25,978  |                    |   | 8,829   |       |  |       |        |  |   | 34,807 
|                                          |  |                                      |         |                    |   |         |       |  |       |         |  |   |        
|Total expenses                            |  |                                      | 114,144 |                    |   | 31,819  |       |  |       |        |  |   | 145,963
|                                          |  |                                      |         |                    |   |         |       |  |       |         |  |   |        
|Segment income (loss) before income taxes |  | $                                    | 13,805  |                    | $ | (31,332 | )     |  | $     | 23,019  |  | $ | 5,492  
|                                          |  |                                      |         |                    |   |         |       |  |       |         |  |   |        
|Segment assets                            |  | $                                    | 29,184  |                    | $ | 59,560  |       |  | $     | 598,220 |  | $ | 686,964



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SCPIE HOLDINGS INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



|                                          |  |                                      |         |   |                    |   |         |       |  |       |         |  |   |         |  
|----------------------------------------- |  | ------------------------------------ | ------- | - | ------------------ | - | ------- | ----- |  | ----- | ------- |  | - | ------- | -
|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 HealthcareLiability 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 |  



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Schedule IICondensed Financial Information of Registrant



SCPIE HOLDINGS INC.



CONDENSED BALANCE
SHEETS

(In Thousands, Except Share Data)



|                                                                                                                                                             |  |      |         |   |      |   |         |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | ---- | ------- | - | ---- | - | ------- | -
|DECEMBER 31,                                                                                                                                                 |  | 2005 |         |   | 2004 |  
|ASSETS                                                                                                                                                       |  |      |         |   |      |   |         |  
|Securities available for sale:                                                                                                                               |  |      |         |   |      |   |         |  
|Equity investments, at fair value (cost: 2005 $1,330; 2004 $1,496)                                                                                         |  | $    | 1,330   |   |      | $ | 1,496   |  
|Cash and cash equivalents                                                                                                                                    |  |      | 3,350   |   |      |   | 7,990   |  
|Investment in subsidiaries                                                                                                                                   |  |      | 177,634 |   |      |   | 177,852 |  
|                                                                                                                                                             |  |      |         |   |      |   |         |  
|Total investments                                                                                                                                            |  |      | 182,314 |   |      |   | 187,338 |  
|Deferred federal income taxes                                                                                                                                |  |      | 3,947   |   |      |   | 7,256   |  
|Other assets                                                                                                                                                 |  |      | 4,532   |   |      |   | 3,930   |  
|                                                                                                                                                             |  |      |         |   |      |   |         |  
|Total assets                                                                                                                                                 |  | $    | 190,793 |   |      | $ | 198,524 |  
|                                                                                                                                                             |  |      |         |   |      |   |         |  
|LIABILITIES                                                                                                                                                  |  |      |         |   |      |   |         |  
|Other liabilities                                                                                                                                            |  |      |        |   |      |   | 4,002   |  
|                                                                                                                                                             |  |      |         |   |      |   |         |  
|Total liabilities                                                                                                                                            |  |      |        |   |      |   | 4,002   |  
|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, 20059,516,916 shares outstanding; 20049,404,604
shares outstanding |  |      | 1       |   |      |   | 1       |  
|Additional paid-in capital                                                                                                                                   |  |      | 37,127  |   |      |   | 37,127  |  
|Retained earnings                                                                                                                                            |  |      | 259,645 |   |      |   | 256,177 |  
|Treasury stock at cost (20052,775,175 shares and 20042,887,487 shares)                                                                                     |  |      | (97,063 | ) |      |   | (97,654 | )
|Stock subscription notes receivable                                                                                                                          |  |      | (2,649  | ) |      |   | (3,018  | )
|Accumulated other comprehensive income                                                                                                                       |  |      | (6,268  | ) |      |   | 1,889   |  
|                                                                                                                                                             |  |      |         |   |      |   |         |  
|Total stockholders equity                                                                                                                                   |  |      | 190,793 |   |      |   | 194,522 |  
|                                                                                                                                                             |  |      |         |   |      |   |         |  
|Total liabilities and stockholders equity                                                                                                                   |  | $    | 190,793 |   |      | $ | 198,524 |  
|                                                                                                                                                             |  |      |         |   |      |   |         |  





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 31,2005 |        |   | DECEMBER 31,2004 |   |        | DECEMBER 31,2003 | 
|Net investment income (loss)                                                          |  | $                | 166    |   |                  | $ | 108    |                  |  | $ | (330    | )
|Realized investment losses                                                            |  |                  |       |   |                  |   |       |                  |  |   | (2,750  | )
|Other expenses                                                                        |  |                  | (1,803 | ) |                  |   | (1,669 | )                |  |   | (2,421  | )
|                                                                                      |  |                  |        |   |                  |   |        |                  |  |   |         |  
|Loss before federal income tax expense (benefit) and equity in losses of subsidiaries |  |                  | (1,637 | ) |                  |   | (1,561 | )                |  |   | (5,501  | )
|Federal income tax expense (benefit)                                                  |  |                  | 2,020  |   |                  |   | 6      |                  |  |   | (486    | )
|                                                                                      |  |                  |        |   |                  |   |        |                  |  |   |         |  
|Loss before equity in income (losses) of subsidiaries                                 |  |                  | (3,657 | ) |                  |   | (1,567 | )                |  |   | (5,015  | )
|Equity income (losses) of subsidiaries                                                |  |                  | 7,125  |   |                  |   | (6,319 | )                |  |   | (7,791  | )
|                                                                                      |  |                  |        |   |                  |   |        |                  |  |   |         |  
|Net income (loss)                                                                     |  | $                | 3,468  |   |                  | $ | (7,886 | )                |  | $ | (12,806 | )
|                                                                                      |  |                  |        |   |                  |   |        |                  |  |   |         |  









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 31,2005 |        |   | DECEMBER 31,2004 |   |        | DECEMBER 31,2003 | 
|OPERATING ACTIVITIES                                                                 |  |                  |        |   |                  |   |        |                  |  |   |         |  
|Net income (loss)                                                                    |  | $                | 3,468  |   |                  | $ | (7,886 | )                |  | $ | (12,806 | )
|Adjustments to reconcile net income (loss) to net cash used in operating activities: |  |                  |        |   |                  |   |        |                  |  |   |         |  
|Realized investment losses                                                           |  |                  |       |   |                  |   |       |                  |  |   | 2,750   |  
|Due to affiliates                                                                    |  |                  |       |   |                  |   | (527   | )                |  |   | 507     |  
|Changes in other assets and liabilities                                              |  |                  | (2,109 | ) |                  |   | (282   | )                |  |   | (4,284  | )
|Equity in undistributed (income)/loss of subsidiaries                                |  |                  | (7,125 | ) |                  |   | 6,319  |                  |  |   | 7,791   |  
|                                                                                     |  |                  |        |   |                  |   |        |                  |  |   |         |  
|Net cash used in operating activities                                                |  |                  | (5,766 | ) |                  |   | (2,376 | )                |  |   | (6,042  | )
|                                                                                     |  |                  |       
|INVESTING ACTIVITIES                                                                 |  |                  |        |   |                  |   |        |                  |  |   |         |  
|Salesequities                                                                      |  |                  | 166    |   |                  |   | 375    |                  |  |   | 8,245   |  
|                                                                                     |  |                  |        |   |                  |   |        |                  |  |   |         |  
|Cash provided by investing activities                                                |  |                  | 166    |   |                  |   | 375    |                  |  |   | 8,245   |  
|                                                                                     |  |                  |       
|FINANCING ACTIVITIES                                                                 |  |                  |        |   |                  |   |        |                  |  |   |         |  
|Purchase of treasury stock, net and repayment of stock subscription notes            |  |                  | 960    |   |                  |   | 492    |                  |  |   | 580     |  
|Cash dividends                                                                       |  |                  |       |   |                  |   |       |                  |  |   | (3,740  | )
|                                                                                     |  |                  |        |   |                  |   |        |                  |  |   |         |  
|Cash provided by (used in) financing activities                                      |  |                  | 960    |   |                  |   | 492    |                  |  |   | (3,160  | )
|                                                                                     |  |                  |        |   |                  |   |        |                  |  |   |         |  
|Decrease in cash and cash equivalents                                                |  |                  | (4,640 | ) |                  |   | (1,509 | )                |  |   | (957    | )
|Cash and cash equivalents at beginning of period                                     |  |                  | 7,990  |   |                  |   | 9,499  |                  |  |   | 10,456  |  
|                                                                                     |  |                  |        |   |                  |   |        |                  |  |   |         |  
|Cash and cash equivalents at end of period                                           |  | $                | 3,350  |   |                  | $ | 7,990  |                  |  | $ | 9,499   |  
|                                                                                     |  |                  |        |   |                  |   |        |                  |  |   |         |  







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, 2005



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, 2005 |  | (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 |  | $                               | 7,120 |                                                       | $ | 334,093          |  | $              | 41,705 |                     | $ | 127,949                                      |  |                                                 |       |                        | $ | 88,166          |  | $ | 3,710 |  | $ | 22,268 |  | $ | 127,249 |  
|Assumed Reinsurance (1)               |  |                                 |      |                                                       |   | 95,222           |  |                |       |                     |   | 487                                          |  |                                                 |       |                        |   | 22,990          |  |   | 4,581 |  |   | 4,248  |  |   | (918    | )
|Other                                 |  |                                 |      |                                                       |   |                 |  |                |       |                     |   |                                             |  | $                                               | 17,818 |                        |   |                |  |   |      |  |   |       |  |   |        |  
|                                      |  |                                 |       |                                                       |   |                  |  |                |        |                     |   |                                              |  |                                                 |        |                        |   |                 |  |   |       |  |   |        |  |   |         |  
|Total                                 |  | $                               | 7,120 |                                                       | $ | 429,315          |  | $              | 41,705 |                     | $ | 128,436                                      |  | $                                               | 17,818 |                        | $ | 111,156         |  | $ | 8,291 |  | $ | 26,516 |  | $ | 126,331 |  
|                                      |  |                                 |       |                                                       |   |                  |  |                |        |                     |   |                                              |  |                                                 |        |                        |   |                 |  |   |       |  |   |        |  |   |         |  



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



|                             |  |                |  | 
|---------------------------- |  | -------------- |  | 
|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 |                                                       | $ | 379,257          |  | $              | 42,406 |                     | $ | 121,478                                      |  |                                                 |        |                        | $ | 110,590 |                 | $ | 3,234 |  | $ | 22,900 |   |  | $ | 126,834
|Assumed Reinsurance (1)               |  |                                 | 476   |                                                       |   | 259,490          |  |                | 1,405  |                     |   | 14,628                                       |  |                                                 |        |                        |   | 28,337  |                 |   | 5,362 |  |   | (5,223 | ) |  |   | 2,376  
|Other                                 |  |                                 |      |                                                       |   |                 |  |                |       |                     |   |                                             |  | $                                               | 19,174 |                        |   |        |                 |   |      |  |   |       |   |  |   |       
|                                      |  |                                 |       |                                                       |   |                  |  |                |        |                     |   |                                              |  |                                                 |        |                        |   |         |                 |   |       |  |   |        |   |  |   |        
|Total                                 |  | $                               | 9,063 |                                                       | $ | 638,747          |  | $              | 43,811 |                     | $ | 136,106                                      |  | $                                               | 19,174 |                        | $ | 138,927 |                 | $ | 8,596 |  | $ | 17,677 |   |  | $ | 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.
|--- |  | --------------------------------------------------------------------------



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