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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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FORM 10-Q



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QUARTERLY REPORT

PURSUANT TO SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934



FOR THE
QUARTER ENDED SEPTEMBER 30, 2004



Commission File No.
1-12449



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SCPIE HOLDINGS INC.

(Exact name of
registrant as specified in its charter)



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



1888 Century Park
East, Los Angeles, California 90067

www.scpie.com

(Address of principal executive offices and internet site)



(310) 551-5900

(Registrants telephone number, including area code)



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Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No ̈



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



Indicate the number of shares outstanding of each of the issuers classes of stock, as
of the latest practicable date.



|                                           |  |                                
|------------------------------------------ |  | -------------------------------
|Class                                      |  | Outstanding at November 5, 2004
|Preferred stock, par value $l.00 per share |  | No shares outstanding          
|Common stock, par value $0.0001 per share  |  | 9,910,576 shares               



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PART I  FINANCIAL INFORMATION



ITEM 1. FINANCIAL STATEMENTS



SCPIE HOLDINGS INC. AND SUBSIDIARIES



CONSOLIDATED BALANCE SHEETS

(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)



|                                                                                                                                                                |  |                   |         |   |                  |   |         |  
|--------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----------------- | ------- | - | ---------------- | - | ------- | -
|                                                                                                                                                                |  | SEPTEMBER 30,2004 |         |   | DECEMBER 31,2003 |  
|                                                                                                                                                                |  | (unaudited)       |         |   |                  |  
|ASSETS                                                                                                                                                          |  |                   |         |   |                  |   |         |  
|Securities available-for-sale:                                                                                                                                  |  |                   |         |   |                  |   |         |  
|Fixed maturity investments, at fair value (amortized cost 2004 - $489,459; 2003 - $550,794)                                                                     |  | $                 | 491,787 |   |                  | $ | 554,141 |  
|Equity investments, at fair value (cost 2004 - $12,207; 2003 - $15,766)                                                                                         |  |                   | 15,953  |   |                  |   | 20,543  |  
|                                                                                                                                                                |  |                   |         |   |                  |   |         |  
|Total securities available-for-sale                                                                                                                             |  |                   | 507,740 |   |                  |   | 574,684 |  
|Mortgages                                                                                                                                                       |  |                   | 10,400  |   |                  |   | 10,400  |  
|Cash and cash equivalents                                                                                                                                       |  |                   | 54,318  |   |                  |   | 62,095  |  
|                                                                                                                                                                |  |                   |         |   |                  |   |         |  
|Total investments and cash and cash equivalents                                                                                                                 |  |                   | 572,458 |   |                  |   | 647,179 |  
|                                                                                                                                                                |  |                  
|Accrued investment income                                                                                                                                       |  |                   | 5,919   |   |                  |   | 7,526   |  
|Premiums receivable                                                                                                                                             |  |                   | 128,417 |   |                  |   | 120,112 |  
|Reinsurance recoverable                                                                                                                                         |  |                   | 176,988 |   |                  |   | 151,829 |  
|Deferred policy acquisition costs                                                                                                                               |  |                   | 8,423   |   |                  |   | 9,416   |  
|Deferred federal income taxes                                                                                                                                   |  |                   | 45,944  |   |                  |   | 43,725  |  
|Property and equipment, net                                                                                                                                     |  |                   | 3,147   |   |                  |   | 3,816   |  
|Other assets                                                                                                                                                    |  |                   | 7,453   |   |                  |   | 7,647   |  
|                                                                                                                                                                |  |                   |         |   |                  |   |         |  
|Total assets                                                                                                                                                    |  | $                 | 948,749 |   |                  | $ | 991,250 |  
|                                                                                                                                                                |  |                   |         |   |                  |   |         |  
|LIABILITIES                                                                                                                                                     |  |                   |         |   |                  |   |         |  
|Reserves:                                                                                                                                                       |  |                   |         |   |                  |   |         |  
|Losses and loss adjustment expenses                                                                                                                             |  | $                 | 613,277 |   |                  | $ | 643,046 |  
|Unearned premiums                                                                                                                                               |  |                   | 49,264  |   |                  |   | 50,707  |  
|                                                                                                                                                                |  |                   |         |   |                  |   |         |  
|Total reserves                                                                                                                                                  |  |                   | 662,541 |   |                  |   | 693,753 |  
|Amounts held for reinsurance                                                                                                                                    |  |                   | 72,660  |   |                  |   | 67,223  |  
|Other liabilities                                                                                                                                               |  |                   | 15,455  |   |                  |   | 26,086  |  
|                                                                                                                                                                |  |                   |         |   |                  |   |         |  
|Total liabilities                                                                                                                                               |  |                   | 750,656 |   |                  |   | 787,062 |  
|                                                                                                                                                                |  |                  
|Commitments and contingencies                                                                                                                                   |  |                   |         |   |                  |   |         |  
|                                                                                                                                                                |  |                  
|STOCKHOLDERS EQUITY                                                                                                                                            |  |                   |         |   |                  |   |         |  
|Preferred stock  par value $1.00, 5,000,000 shares authorized, no shares issued or outstanding                                                                 |  |                   |         |   |                  |   |         |  
|Common stock, par value $.0001, 30,000,000 shares authorized, 12,792,091 shares issued, 2004  9,410,576 shares outstanding 2003 
9,371,933 shares outstanding |  |                   | 1       |   |                  |   | 1       |  
|Additional paid-in capital                                                                                                                                      |  |                   | 36,750  |   |                  |   | 37,281  |  
|Retained earnings                                                                                                                                               |  |                   | 259,553 |   |                  |   | 264,063 |  
|Treasury stock, at cost 2004  2,881,515 shares and 2003  2,920,158 shares                                                                                     |  |                   | (97,356 | ) |                  |   | (98,006 | )
|Subscription notes receivable                                                                                                                                   |  |                   | (3,302  | ) |                  |   | (3,312  | )
|Accumulated other comprehensive income                                                                                                                          |  |                   | 2,447   |   |                  |   | 4,161   |  
|                                                                                                                                                                |  |                   |         |   |                  |   |         |  
|Total stockholders equity                                                                                                                                      |  |                   | 198,093 |   |                  |   | 204,188 |  
|                                                                                                                                                                |  |                   |         |   |                  |   |         |  
|Total liabilities and stockholders equity                                                                                                                      |  | $                 | 948,749 |   |                  | $ | 991,250 |  
|                                                                                                                                                                |  |                   |         |   |                  |   |         |  



See accompanying notes
to Consolidated Financial Statements.



2



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SCPIE HOLDINGS INC. AND SUBSIDIARIES



CONSOLIDATED STATEMENTS OF OPERATIONS

(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

(UNAUDITED)



|                                                          |  |                                |         |   |                                 |   |         |      |  |   |        |   |  |   |         |  
|--------------------------------------------------------- |  | ------------------------------ | ------- | - | ------------------------------- | - | ------- | ---- |  | - | ------ | - |  | - | ------- | -
|                                                          |  | NINE MONTHS ENDEDSEPTEMBER 30, |         |   | THREE MONTHS ENDEDSEPTEMBER 30, |  
|                                                          |  | 2004                           |         |   | 2003                            |   |         | 2004 |  |   | 2003   |  
|Revenues:                                                 |  |                                |         |   |                                 |   |         |      |  |   |        |   |  |   |         |  
|Net premiums earned                                       |  | $                              | 103,700 |   |                                 | $ | 129,602 |      |  | $ | 36,059 |   |  | $ | 35,602  |  
|Net investment income                                     |  |                                | 15,027  |   |                                 |   | 15,050  |      |  |   | 4,477  |   |  |   | 4,130   |  
|Realized investment gains (loss)                          |  |                                | 1,604   |   |                                 |   | (4,264  | )    |  |   | (111   | ) |  |   | (8,191  | )
|Other revenue (expense)                                   |  |                                | 600     |   |                                 |   | 1,528   |      |  |   | 235    |   |  |   | (492    | )
|                                                          |  |                                |         |   |                                 |   |         |      |  |   |        |   |  |   |         |  
|Total revenues                                            |  |                                | 120,931 |   |                                 |   | 141,916 |      |  |   | 40,660 |   |  |   | 31,049  |  
|                                                          |  |                                |         |  
|Expenses:                                                 |  |                                |         |   |                                 |   |         |      |  |   |        |   |  |   |         |  
|Losses and loss adjustment expenses                       |  |                                | 100,545 |   |                                 |   | 127,262 |      |  |   | 34,776 |   |  |   | 44,387  |  
|Underwriting and other operating expenses                 |  |                                | 22,998  |   |                                 |   | 38,533  |      |  |   | 6,192  |   |  |   | 9,255   |  
|                                                          |  |                                |         |   |                                 |   |         |      |  |   |        |   |  |   |         |  
|Total expenses                                            |  |                                | 123,543 |   |                                 |   | 165,795 |      |  |   | 40,968 |   |  |   | 53,642  |  
|                                                          |  |                                |         |  
|Loss before income taxes                                  |  |                                | (2,612  | ) |                                 |   | (23,879 | )    |  |   | (308   | ) |  |   | (22,593 | )
|Income tax expense (benefit)                              |  |                                | 1,898   |   |                                 |   | (8,453  | )    |  |   | 2,713  |   |  |   | (7,777  | )
|                                                          |  |                                |         |   |                                 |   |         |      |  |   |        |   |  |   |         |  
|Net loss                                                  |  | $                              | (4,510  | ) |                                 | $ | (15,426 | )    |  | $ | (3,021 | ) |  | $ | (14,816 | )
|                                                          |  |                                |         |   |                                 |   |         |      |  |   |        |   |  |   |         |  
|Basic loss per share                                      |  | $                              | (0.48   | ) |                                 | $ | (1.65   | )    |  | $ | (0.32  | ) |  | $ | (1.58   | )
|Diluted loss per share                                    |  | $                              | (0.48   | ) |                                 | $ | (1.65   | )    |  | $ | (0.32  | ) |  | $ | (1.58   | )
|Cash dividend declared and paid per share of common stock |  | $                              |        |   |                                 | $ | 0.30    |      |  | $ |       |   |  | $ | 0.10    |  



CONSOLIDATED STATEMENT
OF CHANGES IN STOCKHOLDERS EQUITY

(DOLLARS IN THOUSANDS)

(UNAUDITED)



|                                                                                                                                                                  |  |              |   |                            |   |        |                   |  |   |                |   |  |                                   |         |   |                                              |   |        |                            |  |   |        |   |  |   |         |  
|----------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------ | - | -------------------------- | - | ------ | ----------------- |  | - | -------------- | - |  | --------------------------------- | ------- | - | -------------------------------------------- | - | ------ | -------------------------- |  | - | ------ | - |  | - | ------- | -
|                                                                                                                                                                  |  | COMMON STOCK |   | ADDITIONAL PAID-IN CAPITAL |   |        | RETAINED EARNINGS |  |   | TREASURY STOCK |   |  | STOCK SUBSCRIPTON NOTESRECEIVABLE |         |   | ACCUMULATEDOTHER COMPREHENSIVE INCOME (LOSS) |   |        | TOTAL STOCKHOLDERS EQUITY | 
|BALANCE AT JANUARY 1, 2004                                                                                                                                        |  | $            | 1 |                            | $ | 37,281 |                   |  | $ | 264,063        |   |  | $                                 | (98,006 | ) |                                              | $ | (3,312 | )                          |  | $ | 4,161  |   |  | $ | 204,188 |  
|                                                                                                                                                                  |  |              |   |                            |   |        |                  
|Net loss                                                                                                                                                          |  |              |  |                            |   |       |                   |  |   | (4,510         | ) |  |                                   |        |   |                                              |   |       |                            |  |   |       |   |  |   | (4,510  | )
|Unrealized losses on securities, net of reclassification adjustments of $421 for gains included in net appreciation, net of applicable income
tax benefit of $814 |  |              |  |                            |   |       |                   |  |   |               |   |  |                                   |        |   |                                              |   |       |                            |  |   | (1,508 | ) |  |   | (1,508  | )
|Change in minimum pension liability, net of applicable income tax benefit of $157                                                                                 |  |              |  |                            |   |       |                   |  |   |               |   |  |                                   |        |   |                                              |   |       |                            |  |   | (293   | ) |  |   | (293    | )
|Unrealized foreign currency gain                                                                                                                                  |  |              |  |                            |   |       |                   |  |   |               |   |  |                                   |        |   |                                              |   |       |                            |  |   | 87     |   |  |   | 87      |  
|                                                                                                                                                                  |  |              |   |                            |   |        |                   |  |   |                |   |  |                                   |         |   |                                              |   |        |                            |  |   |        |   |  |   |         |  
|Comprehensive loss                                                                                                                                                |  |              |   |                            |   |        |                   |  |   |                |   |  |                                   |         |   |                                              |   |        |                            |  |   |        |   |  |   | (6,224  | )
|                                                                                                                                                                  |  |              |   |                            |   |        |                  
|Treasury stock reissued                                                                                                                                           |  |              |  |                            |   | (531   | )                 |  |   |               |   |  |                                   | 650     |   |                                              |   |       |                            |  |   |       |   |  |   | 119     |  
|Stock subscription notes repaid                                                                                                                                   |  |              |  |                            |   |       |                   |  |   |               |   |  |                                   |        |   |                                              |   | 10     |                            |  |   |       |   |  |   | 10      |  
|                                                                                                                                                                  |  |              |   |                            |   |        |                   |  |   |                |   |  |                                   |         |   |                                              |   |        |                            |  |   |        |   |  |   |         |  
|BALANCE AT SEPTEMBER 30, 2004                                                                                                                                     |  | $            | 1 |                            | $ | 36,750 |                   |  | $ | 259,553        |   |  | $                                 | (97,356 | ) |                                              | $ | (3,302 | )                          |  | $ | 2,447  |   |  | $ | 198,093 |  
|                                                                                                                                                                  |  |              |   |                            |   |        |                   |  |   |                |   |  |                                   |         |   |                                              |   |        |                            |  |   |        |   |  |   |         |  



See accompanying notes
to Consolidated Financial Statements.



3



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SCPIE HOLDINGS INC. AND SUBISIDIARIES



CONSOLIDATED STATEMENTS OF CASH FLOWS

(DOLLARS IN THOUSANDS)

(UNAUDITED)



|                                                                            |  |                                 |          |   |      |   |          |  
|--------------------------------------------------------------------------- |  | ------------------------------- | -------- | - | ---- | - | -------- | -
|                                                                            |  | NINE MONTHS ENDED SEPTEMBER 30, |         
|                                                                            |  | 2004                            |          |   | 2003 |  
|OPERATING ACTIVITIES                                                        |  |                                 |          |   |      |   |          |  
|Net loss                                                                    |  | $                               | (4,510   | ) |      | $ | (15,426  | )
|Adjustments to reconcile net loss to net cash used in operating activities: |  |                                 |          |   |      |   |          |  
|Provisions for amortization and depreciation                                |  |                                 | 5,379    |   |      |   | 7,246    |  
|Provision for deferred federal income taxes                                 |  |                                 | 1,898    |   |      |   | (8,453   | )
|Realized investment (gains) loss                                            |  |                                 | (1,604   | ) |      |   | 4,264    |  
|Changes in operating assets and liabilities:                                |  |                                 |          |   |      |   |          |  
|Deferred acquisition costs                                                  |  |                                 | 993      |   |      |   | (3,386   | )
|Accrued investment income                                                   |  |                                 | 1,607    |   |      |   | 1,315    |  
|Unearned premiums                                                           |  |                                 | (1,443   | ) |      |   | (10,668  | )
|Loss and loss adjustment expense reserves                                   |  |                                 | (29,769  | ) |      |   | 22,520   |  
|Reinsurance recoverable                                                     |  |                                 | (25,159  | ) |      |   | (31,407  | )
|Amounts held for reinsurance                                                |  |                                 | 5,437    |   |      |   | 7,591    |  
|Other liabilities                                                           |  |                                 | (10,631  | ) |      |   | (7,728   | )
|Premium receivable                                                          |  |                                 | (8,305   | ) |      |   | (13,125  | )
|Other assets                                                                |  |                                 | (3,314   | ) |      |   | 8,335    |  
|                                                                            |  |                                 |          |   |      |   |          |  
|Net cash used in operating activities                                       |  |                                 | (69,421  | ) |      |   | (38,922  | )
|                                                                            |  |                                
|INVESTING ACTIVITIES                                                        |  |                                 |          |   |      |   |          |  
|Purchasesfixed maturities                                                  |  |                                 | (172,882 | ) |      |   | (449,160 | )
|Salesfixed maturities                                                      |  |                                 | 222,931  |   |      |   | 416,720  |  
|Maturitiesfixed maturities                                                 |  |                                 | 7,391    |   |      |   | 1,600    |  
|Short-term purchases and sales  net                                        |  |                                 | 311      |   |      |   |         |  
|Salesequities                                                              |  |                                 | 3,764    |   |      |   | 3,926    |  
|                                                                            |  |                                 |          |   |      |   |          |  
|Net cash provided by (used in) investing activities                         |  |                                 | 61,515   |   |      |   | (26,914  | )
|                                                                            |  |                                
|FINANCING ACTIVITIES                                                        |  |                                 |          |   |      |   |          |  
|Reissuance of treasury shares                                               |  |                                 | 119      |   |      |   | 252      |  
|Repayment of stock subscription                                             |  |                                 | 10       |   |      |   | 279      |  
|Cash dividends                                                              |  |                                 |         |   |      |   | (2,953   | )
|                                                                            |  |                                 |          |   |      |   |          |  
|Net cash provided by (used) in financing activities                         |  |                                 | 129      |   |      |   | (2,422   | )
|                                                                            |  |                                 |          |   |      |   |          |  
|Decrease in cash and cash equivalents                                       |  |                                 | (7,777   | ) |      |   | (68,258  | )
|                                                                            |  |                                
|Cash and cash equivalents at beginning of period                            |  |                                 | 62,095   |   |      |   | 115,787  |  
|                                                                            |  |                                 |          |   |      |   |          |  
|Cash and cash equivalents at end of period                                  |  | $                               | 54,318   |   |      | $ | 47,529   |  
|                                                                            |  |                                 |          |   |      |   |          |  



See accompanying notes
to Consolidated Financial Statements.



4



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SCPIE HOLDINGS INC. AND SUBISIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)



SEPTEMBER 30, 2004



1. BASIS OF PRESENTATION



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



These financial statements have been prepared in accordance with generally accepted accounting principles (GAAP) for interim financial information and with instructions
to Form 10-Q and Article 7 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the nine-month period ended September 30, 2004 are not necessarily indicative of the results that may be expected for
the year ending December 31, 2004. For further information, refer to the consolidated financial statements and notes thereto included in the SCPIE Holdings Annual Report on Form 10-K for the year ended December 31, 2003.



Certain 2003 amounts have been reclassified to conform to the 2004 presentation.



2. LOSS PER SHARE



The following table sets forth the computation of basic and diluted loss per share:



|                                                                                                      |  |                                       |        |   |                                 |   |         |      |  |   |        |   |  |   |         |  
|----------------------------------------------------------------------------------------------------- |  | ------------------------------------- | ------ | - | ------------------------------- | - | ------- | ---- |  | - | ------ | - |  | - | ------- | -
|                                                                                                      |  | NINE MONTHS ENDED SEPTEMBER 30,       |        |   | THREE MONTHS ENDEDSEPTEMBER 30, |  
|                                                                                                      |  | 2004                                  |        |   | 2003                            |   |         | 2004 |  |   | 2003   |  
|                                                                                                      |  | (IN THOUSANDS, EXCEPT PER SHARE DATA) |       
|Numerator                                                                                             |  |                                       |        |   |                                 |   |         |      |  |   |        |   |  |   |         |  
|Net loss                                                                                              |  | $                                     | (4,510 | ) |                                 | $ | (15,426 | )    |  | $ | (3,021 | ) |  | $ | (14,816 | )
|                                                                                                      |  |                                       |        |  
|Numerator for:                                                                                        |  |                                       |        |   |                                 |   |         |      |  |   |        |   |  |   |         |  
|Basic loss per share of common stock                                                                  |  |                                       | (4,510 | ) |                                 |   | (15,426 | )    |  |   | (3,021 | ) |  |   | (14,816 | )
|Diluted loss per share of common stock                                                                |  |                                       | (4,510 | ) |                                 |   | (15,426 | )    |  |   | (3,021 | ) |  |   | (14,816 | )
|                                                                                                      |  |                                       |        |  
|Denominator                                                                                           |  |                                       |        |   |                                 |   |         |      |  |   |        |   |  |   |         |  
|Denominator for basic loss per share of common stock  weighted-average shares outstanding            |  |                                       | 9,390  |   |                                 |   | 9,347   |      |  |   | 9,411  |   |  |   | 9,364   |  
|                                                                                                      |  |                                       |        |  
|Effect of dilutive securities:                                                                        |  |                                       |        |   |                                 |   |         |      |  |   |        |   |  |   |         |  
|Stock options                                                                                         |  |                                       |       |   |                                 |   |        |      |  |   |       |   |  |   |        |  
|                                                                                                      |  |                                       |        |   |                                 |   |         |      |  |   |        |   |  |   |         |  
|Denominator for diluted loss per share of common stock adjusted  weighted-average shares outstanding |  |                                       | 9,390  |   |                                 |   | 9,347   |      |  |   | 9,411  |   |  |   | 9,364   |  
|                                                                                                      |  |                                       |        |  
|Basic loss per share of common stock                                                                  |  | $                                     | (0.48  | ) |                                 | $ | (1.65   | )    |  | $ | (0.32  | ) |  | $ | (1.58   | )
|                                                                                                      |  |                                       |        |  
|Diluted loss per share of common stock                                                                |  | $                                     | (0.48  | ) |                                 | $ | (1.65   | )    |  | $ | (0.32  | ) |  | $ | (1.58   | )



For the nine months ended September
30, 2004, no incremental shares related to stock options are included in the diluted number of shares outstanding as the impact would have been antidilutive.



5



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3. INVESTMENTS



The Companys investments in available-for-sale securities at September 30, 2004 are summarized as follows:



|                                 |  |                      |         |                      |   |                       |  |           |       |  |   |        
|-------------------------------- |  | -------------------- | ------- | -------------------- | - | --------------------- |  | --------- | ----- |  | - | -------
|                                 |  | COST ORAMORTIZEDCOST |         | GROSSUNREALIZEDGAINS |   | GROSSUNREALIZEDLOSSES |  | FAIRVALUE
|                                 |  | (IN THOUSANDS)      
|Fixed-maturity securities:       |  |                      |         |                      |   |                       |  |           |       |  |   |        
|Bonds:                           |  |                      |         |                      |   |                       |  |           |       |  |   |        
|U.S. government and agencies     |  | $                    | 144,547 |                      | $ | 2,693                 |  | $         | 214   |  | $ | 147,026
|Mortgage-backed and asset-backed |  |                      | 94,090  |                      |   | 410                   |  |           | 1,089 |  |   | 93,411 
|Corporate                        |  |                      | 250,822 |                      |   | 2,431                 |  |           | 1,903 |  |   | 251,350
|                                 |  |                      |         |                      |   |                       |  |           |       |  |   |        
|Total fixed-maturity securities  |  |                      | 489,459 |                      |   | 5,534                 |  |           | 3,206 |  |   | 491,787
|Common stocks                    |  |                      | 12,207  |                      |   | 3,746                 |  |           |      |  |   | 15,953 
|                                 |  |                      |         |                      |   |                       |  |           |       |  |   |        
|Total                            |  | $                    | 501,666 |                      | $ | 9,280                 |  | $         | 3,206 |  | $ | 507,740
|                                 |  |                      |         |                      |   |                       |  |           |       |  |   |        



The following table illustrates the
gross unrealized losses included in the Companys investment portfolio and the fair value of those securities, aggregated by investment category. The table also illustrates the length of time that they have been in a continuous unrealized loss
position as of September 30, 2004.



|                                 |  |                       |       |                   |   |                       |  |           |       |                       |   |           |  |   |       |  |   |        
|-------------------------------- |  | --------------------- | ----- | ----------------- | - | --------------------- |  | --------- | ----- | --------------------- | - | --------- |  | - | ----- |  | - | -------
|                                 |  | LESS THAN 12 MONTHS   |       | 12 MONTHS OR MORE |   | TOTAL                
|                                 |  | GROSSUNREALIZEDLOSSES |       | FAIRVALUE         |   | GROSSUNREALIZEDLOSSES |  | FAIRVALUE |       | GROSSUNREALIZEDLOSSES |   | FAIRVALUE
|                                 |  | (IN THOUSANDS)       
|Fixed-maturity securities:       |  |                       |       |                   |   |                       |  |           |       |                       |   |           |  |   |       |  |   |        
|Bonds:                           |  |                       |       |                   |   |                       |  |           |       |                       |   |           |  |   |       |  |   |        
|U.S. government and agencies     |  | $                     | 93    |                   | $ | 21,253                |  | $         | 121   |                       | $ | 4,060     |  | $ | 214   |  | $ | 25,313 
|Mortgage-backed and asset-backed |  |                       | 995   |                   |   | 65,076                |  |           | 94    |                       |   | 3,407     |  |   | 1,089 |  |   | 68,483 
|Corporate                        |  |                       | 1,048 |                   |   | 100,694               |  |           | 855   |                       |   | 24,660    |  |   | 1,903 |  |   | 125,354
|                                 |  |                       |       |                   |   |                       |  |           |       |                       |   |           |  |   |       |  |   |        
|Total fixed-maturity securities  |  |                       | 2,136 |                   |   | 187,023               |  |           | 1,070 |                       |   | 32,127    |  |   | 3,206 |  |   | 219,150
|Total common stock               |  |                       |      |                   |   |                      |  |           |      |                       |   |          |  |   |      |  |   |       
|                                 |  |                       |       |                   |   |                       |  |           |       |                       |   |           |  |   |       |  |   |        
|Total                            |  | $                     | 2,136 |                   | $ | 187,023               |  | $         | 1,070 |                       | $ | 32,127    |  | $ | 3,206 |  | $ | 219,150
|                                 |  |                       |       |                   |   |                       |  |           |       |                       |   |           |  |   |       |  |   |        



The unrealized losses are represented
by individual securities with unrealized losses of less than 20% of each securitys amortized cost.



The Company has the ability and intent to hold securities with unrealized losses until they recover their value. In the future, information may come to light or circumstances may change that would cause the Company to
write-down or sell these securities and incur a realized loss.



6



---

4. FEDERAL INCOME TAXES



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



|                                             |  |                                 |       |   |                                  |   |        |      |  |   |       |   |  |   |        |  
|-------------------------------------------- |  | ------------------------------- | ----- | - | -------------------------------- | - | ------ | ---- |  | - | ----- | - |  | - | ------ | -
|                                             |  | NINE MONTHS ENDED SEPTEMBER 30, |       |   | THREE MONTHS ENDED SEPTEMBER 30, |  
|                                             |  | 2004                            |       |   | 2003                             |   |        | 2004 |  |   | 2003  |  
|                                             |  | (IN THOUSANDS)                  |      
|Federal income tax benefit at 35%            |  | $                               | (914  | ) |                                  | $ | (8,358 | )    |  | $ | (108  | ) |  | $ | (7,908 | )
|Increase (decrease) in taxes resulting from: |  |                                 |       |   |                                  |   |        |      |  |   |       |   |  |   |        |  
|State Franchise tax                          |  |                                 | 2,600 |   |                                  |   |       |      |  |   | 2,600 |   |  |   |       |  
|Other                                        |  |                                 | 212   |   |                                  |   | (95    | )    |  |   | 221   |   |  |   | 131    |  
|                                             |  |                                 |       |   |                                  |   |        |      |  |   |       |   |  |   |        |  
|Total income tax expense (benefit)           |  | $                               | 1,898 |   |                                  | $ | (8,453 | )    |  | $ | 2,713 |   |  | $ | (7,777 | )
|                                             |  |                                 |       |   |                                  |   |        |      |  |   |       |   |  |   |        |  



5.
COMPREHENSIVE INCOME (LOSS)



The following table reconciles net loss and
comprehensive income (loss) for the periods presented:



|                                                   |  |                                 |        |   |                                  |   |         |      |  |   |        |   |  |   |         |  
|-------------------------------------------------- |  | ------------------------------- | ------ | - | -------------------------------- | - | ------- | ---- |  | - | ------ | - |  | - | ------- | -
|                                                   |  | NINE MONTHS ENDED SEPTEMBER 30, |        |   | THREE MONTHS ENDED SEPTEMBER 30, |  
|                                                   |  | 2004                            |        |   | 2003                             |   |         | 2004 |  |   | 2003   |  
|                                                   |  | (IN THOUSANDS)                  |       
|Net loss                                           |  | $                               | (4,510 | ) |                                  | $ | (15,426 | )    |  | $ | (3,021 | ) |  | $ | (14,816 | )
|Other comprehensive income (loss) before tax:      |  |                                 |        |   |                                  |   |         |      |  |   |        |   |  |   |         |  
|Unrealized gains (losses) on securities            |  |                                 | (2,322 | ) |                                  |   | 1,008   |      |  |   | 10,950 |   |  |   | (8,812  | )
|Unrealized foreign currency gains (losses)         |  |                                 | 87     |   |                                  |   | (1,787  | )    |  |   | (33    | ) |  |   | (2,007  | )
|Change in minimum pension liability                |  |                                 | (450   | ) |                                  |   | (450    | )    |  |   | (150   | ) |  |   | (150    | )
|                                                   |  |                                 |        |   |                                  |   |         |      |  |   |        |   |  |   |         |  
|Other comprehensive income (loss) before tax       |  |                                 | (7,195 | ) |                                  |   | (16,655 | )    |  |   | 7,746  |   |  |   | (25,785 | )
|                                                   |  |                                 |        |  
|Income tax (expense) benefit related to securities |  |                                 | 814    |   |                                  |   | (1,921  | )    |  |   | (3,833 | ) |  |   | 856     |  
|Income tax benefit related to pension liability    |  |                                 | 157    |   |                                  |   | 158     |      |  |   | 52     |   |  |   | 53      |  
|                                                   |  |                                 |        |   |                                  |   |         |      |  |   |        |   |  |   |         |  
|Comprehensive income (loss)                        |  | $                               | (6,224 | ) |                                  | $ | (18,418 | )    |  | $ | 3,965  |   |  | $ | (24,876 | )
|                                                   |  |                                 |        |   |                                  |   |         |      |  |   |        |   |  |   |         |  



6.
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. In December 2002, the Company entered into a 100% quota share reinsurance agreement with Rosemont Reinsurance Ltd. (Rosemont Re) (formerly known as GoshawK Re), a subsidiary of GoshawK Insurance
Holdings plc, a publicly held London-based insurer and reinsurer, that divested substantially all of the Companys ongoing assumed reinsurance operations. The Company had one ongoing assumed reinsurance treaty for the 2003 underwriting year.



7



---

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



|                                          |  |                                      |         |   |                    |   |         |       |  |   |         |   |  |   |           |  
|----------------------------------------- |  | ------------------------------------ | ------- | - | ------------------ | - | ------- | ----- |  | - | ------- | - |  | - | --------- | -
|NINE MONTHS ENDED SEPTEMBER 30, 2004      |  | DIRECT HEALTHCARE LIABILITYINSURANCE |         |   | ASSUMEDREINSURANCE |   |         | OTHER |  |   | TOTAL   |  
|Premiums written                          |  | $                                    | 102,296 |   |                    | $ | (39     | )     |  |   |         |   |  | $ | 102,257   |  
|                                          |  |                                      |         |   |                    |   |         |       |  |   |         |   |  |   |           |  
|Premiums earned                           |  | $                                    | 92,161  |   |                    | $ | 11,539  |       |  |   |         |   |  | $ | 103,700   |  
|Net investment income                     |  |                                      |        |   |                    |   |        |       |  | $ | 15,027  |   |  |   | 15,027    |  
|Realized investment gains                 |  |                                      |        |   |                    |   |        |       |  |   | 1,604   |   |  |   | 1,604     |  
|Other revenue                             |  |                                      |        |   |                    |   |        |       |  |   | 600     |   |  |   | 600       |  
|                                          |  |                                      |         |   |                    |   |         |       |  |   |         |   |  |   |           |  
|Total revenues                            |  |                                      | 92,161  |   |                    |   | 11,539  |       |  |   | 17,231  |   |  |   | 120,931   |  
|                                          |  |                                      |         |  
|Losses and loss adjustment expenses       |  |                                      | 83,580  |   |                    |   | 16,965  |       |  |   |        |   |  |   | 100,545   |  
|Other operating expenses                  |  |                                      | 19,515  |   |                    |   | 3,483   |       |  |   |        |   |  |   | 22,998    |  
|                                          |  |                                      |         |   |                    |   |         |       |  |   |         |   |  |   |           |  
|Total expenses                            |  |                                      | 103,095 |   |                    |   | 20,448  |       |  |   |        |   |  |   | 123,543   |  
|                                          |  |                                      |         |   |                    |   |         |       |  |   |         |   |  |   |           |  
|Segment income (loss) before income taxes |  | $                                    | (10,934 | ) |                    | $ | (8,909  | )     |  | $ | 17,231  |   |  | $ | (2,612    | )
|                                          |  |                                      |         |   |                    |   |         |       |  |   |         |   |  |   |           |  
|Segment assets                            |  | $                                    | 141,867 |   |                    | $ | 171,961 |       |  | $ | 634,921 |   |  | $ | 948,749   |  
|                                          |  |                                      |         |  
|NINE MONTHS ENDED SEPTEMBER 30, 2003      |  | DIRECT HEALTHCARE LIABILITYINSURANCE |         |   | ASSUMEDREINSURANCE |   |         | OTHER |  |   | TOTAL   |  
|Premiums written                          |  | $                                    | 107,350 |   |                    | $ | 12,410  |       |  |   |         |   |  | $ | 119,760   |  
|                                          |  |                                      |         |   |                    |   |         |       |  |   |         |   |  |   |           |  
|Premiums earned                           |  | $                                    | 100,153 |   |                    | $ | 29,449  |       |  |   |         |   |  | $ | 129,602   |  
|Net investment income                     |  |                                      |        |   |                    |   |        |       |  | $ | 15,050  |   |  |   | 15,050    |  
|Realized investment gains                 |  |                                      |        |   |                    |   |        |       |  |   | (4,264  | ) |  |   | (4,264    | )
|Other revenue                             |  |                                      |        |   |                    |   |        |       |  |   | 1,528   |   |  |   | 1,528     |  
|                                          |  |                                      |         |   |                    |   |         |       |  |   |         |   |  |   |           |  
|Total revenues                            |  |                                      | 100,153 |   |                    |   | 29,449  |       |  |   | 12,314  |   |  |   | 141,916   |  
|                                          |  |                                      |         |  
|Losses and loss adjustment expenses       |  |                                      | 95,555  |   |                    |   | 31,707  |       |  |   |        |   |  |   | 127,262   |  
|Other operating expenses                  |  |                                      | 21,001  |   |                    |   | 17,532  |       |  |   |        |   |  |   | 38,533    |  
|                                          |  |                                      |         |   |                    |   |         |       |  |   |         |   |  |   |           |  
|Total expenses                            |  |                                      | 116,556 |   |                    |   | 49,239  |       |  |   |        |   |  |   | 165,795   |  
|                                          |  |                                      |         |   |                    |   |         |       |  |   |         |   |  |   |           |  
|Segment income (loss) before income taxes |  | $                                    | (16,403 | ) |                    | $ | (19,790 | )     |  | $ | 12,314  |   |  | $ | (23,879   | )
|                                          |  |                                      |         |   |                    |   |         |       |  |   |         |   |  |   |           |  
|Segment assets                            |  | $                                    | 40,667  |   |                    | $ | 285,032 |       |  | $ | 723,642 |   |  | $ | 1,049,341 |  



8



---

|                                          |  |                                      |         |   |                    |   |         |       |  |   |         |   |  |   |           |  
|----------------------------------------- |  | ------------------------------------ | ------- | - | ------------------ | - | ------- | ----- |  | - | ------- | - |  | - | --------- | -
|THREE MONTHS ENDED SEPTEMBER 30, 2004     |  | DIRECT HEALTHCARE LIABILITYINSURANCE |         |   | ASSUMEDREINSURANCE |   |         | OTHER |  |   | TOTAL   |  
|Premiums written                          |  | $                                    | 6,803   |   |                    | $ | 3,239   |       |  |   |         |   |  | $ | 10,042    |  
|                                          |  |                                      |         |   |                    |   |         |       |  |   |         |   |  |   |           |  
|Premiums earned                           |  | $                                    | 30,227  |   |                    | $ | 5,832   |       |  |   |         |   |  | $ | 36,059    |  
|Net investment income                     |  |                                      |        |   |                    |   |        |       |  | $ | 4,477   |   |  |   | 4,477     |  
|Realized investment loss                  |  |                                      |        |   |                    |   |        |       |  |   | (111    | ) |  |   | (111      | )
|Other revenue                             |  |                                      |        |   |                    |   |        |       |  |   | 235     |   |  |   | 235       |  
|                                          |  |                                      |         |   |                    |   |         |       |  |   |         |   |  |   |           |  
|Total revenues                            |  |                                      | 30,227  |   |                    |   | 5,832   |       |  |   | 4,601   |   |  |   | 40,660    |  
|                                          |  |                                      |         |  
|Losses and loss adjustment expenses       |  |                                      | 27,747  |   |                    |   | 7,029   |       |  |   |        |   |  |   | 34,776    |  
|Other operating expenses                  |  |                                      | 6,844   |   |                    |   | (652    | )     |  |   |        |   |  |   | 6,192     |  
|                                          |  |                                      |         |   |                    |   |         |       |  |   |         |   |  |   |           |  
|Total expenses                            |  |                                      | 34,591  |   |                    |   | 6,377   |       |  |   |        |   |  |   | 40,968    |  
|                                          |  |                                      |         |   |                    |   |         |       |  |   |         |   |  |   |           |  
|Segment income (loss) before income taxes |  | $                                    | (4,364  | ) |                    | $ | (545    | )     |  | $ | 4,601   |   |  | $ | (308      | )
|                                          |  |                                      |         |   |                    |   |         |       |  |   |         |   |  |   |           |  
|Segment assets                            |  | $                                    | 141,867 |   |                    | $ | 171,961 |       |  | $ | 634,921 |   |  | $ | 948,749   |  
|                                          |  |                                      |         |  
|THREE MONTHS ENDED SEPTEMBER 30, 2003     |  | DIRECT HEALTHCARE LIABILITYINSURANCE |         |   | ASSUMEDREINSURANCE |   |         | OTHER |  |   | TOTAL   |  
|Premiums written                          |  | $                                    | 9,683   |   |                    | $ | 3,838   |       |  |   |         |   |  | $ | 13,521    |  
|                                          |  |                                      |         |   |                    |   |         |       |  |   |         |   |  |   |           |  
|Premiums earned                           |  | $                                    | 32,843  |   |                    | $ | 2,759   |       |  |   |         |   |  | $ | 35,602    |  
|Net investment income                     |  |                                      |        |   |                    |   |        |       |  | $ | 4,130   |   |  |   | 4,130     |  
|Realized investment loss                  |  |                                      |        |   |                    |   |        |       |  |   | (8,191  | ) |  |   | (8,191    | )
|Other revenue                             |  |                                      |        |   |                    |   |        |       |  |   | (492    | ) |  |   | (492      | )
|                                          |  |                                      |         |   |                    |   |         |       |  |   |         |   |  |   |           |  
|Total revenues                            |  |                                      | 32,843  |   |                    |   | 2,759   |       |  |   | (4,553  | ) |  |   | 31,049    |  
|                                          |  |                                      |         |  
|Losses and loss adjustment expenses       |  |                                      | 30,692  |   |                    |   | 13,695  |       |  |   |        |   |  |   | 44,387    |  
|Other operating expenses                  |  |                                      | 7,849   |   |                    |   | 1,406   |       |  |   |        |   |  |   | 9,255     |  
|                                          |  |                                      |         |   |                    |   |         |       |  |   |         |   |  |   |           |  
|Total expenses                            |  |                                      | 38,541  |   |                    |   | 15,101  |       |  |   |        |   |  |   | 53,642    |  
|                                          |  |                                      |         |   |                    |   |         |       |  |   |         |   |  |   |           |  
|Segment loss before income taxes          |  | $                                    | (5,698  | ) |                    | $ | (12,342 | )     |  | $ | (4,553  | ) |  | $ | (22,593   | )
|                                          |  |                                      |         |   |                    |   |         |       |  |   |         |   |  |   |           |  
|Segment assets                            |  | $                                    | 40,667  |   |                    | $ | 285,032 |       |  | $ | 723,642 |   |  | $ | 1,049,341 |  



Premiums written represents the
premiums charged on policies issued during a fiscal period. Premiums earned represents the portion of premiums written that is recognized as income in the financial statements for the periods presented and earned on a pro-rata basis over the term of
the policies.



7. COMMITMENTS AND
CONTINGENCIES



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



9



---

Highlands Insurance Group



Between January 1, 2000, and April 30, 2001, the Company issued endorsements to certain policyholders of the insurance company subsidiaries
of Highlands Insurance Group, Inc. (HIG). Under these endorsements, the Company agreed to assume the policy obligations of the HIG insurance company subsidiaries, if the subsidiaries became unable to pay their obligations by reason of having been
declared insolvent by a court of competent jurisdiction. The coverages included property, workers compensation, commercial automobile, general liability and umbrella. The gross premiums written by the HIG subsidiaries were approximately $88.0
million for the subject policies. In February 2002, the Texas Department of Insurance placed the principal HIG insurance company subsidiaries under its supervision while HIG voluntarily liquidated their claim liabilities.



During 2002 and 2003, all of the HIG insurance company subsidiaries (with the exception of a
California subsidiary) were merged into a single Texas domiciled subsidiary, Highlands Insurance Company (Highlands). Highlands has advised the Company that the HIG insurance company subsidiaries have paid losses and LAE under the subject policies
of more than $65.0 million and that at September 30, 2004 had established case loss reserves of $11.0 million, net of reinsurance. Based on a limited review of the exposures remaining, the Company estimates that incurred but not reported losses
range from $6.0 million to $7.0 million for a total loss and loss expense reserve of $17.0 million to $18.0 million. This estimate is not based on a full reserve analysis of the exposures. To the extent Highlands is declared insolvent at some future
date by a court of competent jurisdiction and is unable to pay losses under the subject policies, the Company would be responsible to pay the amount of the losses incurred and unpaid at such date and would be subrogated to the rights of the
policyholders as creditors of Highlands. The Company may also be entitled to indemnification of a portion of this loss from certain of Highlands reinsurers.



On November 6, 2003, the State of Texas obtained an order in the Texas District Court appointing the Texas Insurance Commissioner as the
permanent Receiver of Highlands and placing the Receiver in possession of all assets of Highlands. The order expressly provided that it did not constitute a finding of Highlands insolvency nor an authorization to liquidate Highlands. The
Receiver subsequently became involved in a large litigation matter, which precipitated the Receiver filing an application for a hearing to liquidate Highlands. That litigation has recently been settled, and no liquidation hearing is presently
pending. The Receiver continues to resolve Highlands claim liabilities and otherwise conduct its business, as part of his efforts to rehabilitate Highlands. If an order of liquidation is ultimately entered and becomes final, the Company would likely
be required to assume Highlands then remaining obligations under the subject policies.



Letters of Credit



The Company
has a letter of credit facility in the amount of $50 million with Barclays Bank PLC. Letters of credit issued under the facility fulfill the collateral requirements of Lloyds and guarantee loss reserves under certain other reinsurance
contracts. As of September 30, 2004, letter of credit issuance under the facility was approximately $49.4 million. Securities of $54.4 million are pledged as collateral under the facility.



California Franchise Tax Board



In the third quarter of 2002, the Company received a notice of assessment from the
California Franchise Tax Board (FTB) for the 1997 to 2000 tax years in the total amount of $15.4 million, not including the federal tax benefits from the payment of such assessment or interest that might be included on amounts, if any, ultimately
paid to the FTB. The assessment was the result of a memorandum issued by the FTB in April 2002. The memorandum, based partly on the California Court of Appeals Decision in Ceridian v. Franchise Tax Board, challenged the deduction from
California income tax of dividends received by holding companies from their insurance company subsidiaries during the tax years ended on or after December 1, 1997. The Company had protested these assessments.



On September 29, 2004, California enacted legislation reestablishing up to 80% of the
dividends received deduction for insurance holding companies. This new legislation reduced the previous potential assessments of the FTB to approximately $4.0 dollars, including interest. The Company has accrued this expense in the third quarter and
will no longer continue to protest the prior assessment.



10



---

8. STOCK-BASED COMPENSATION



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 Financial Accounting Standards Board Statement (FASB) No. 123, Accounting of Stock-Based Compensation:



|                                                                                                                                           |  |                                       |        |   |                                  |   |         |      |  |   |        |   |  |   |         |  
|------------------------------------------------------------------------------------------------------------------------------------------ |  | ------------------------------------- | ------ | - | -------------------------------- | - | ------- | ---- |  | - | ------ | - |  | - | ------- | -
|                                                                                                                                           |  | NINE MONTHS ENDED SEPTEMBER 30,       |        |   | THREE MONTHS ENDED SEPTEMBER 30, |  
|                                                                                                                                           |  | 2004                                  |        |   | 2003                             |   |         | 2004 |  |   | 2003   |  
|                                                                                                                                           |  | (IN THOUSANDS, EXCEPT PER SHARE DATA) |       
|Net loss as reported                                                                                                                       |  | $                                     | (4,510 | ) |                                  | $ | (15,426 | )    |  | $ | (3,021 | ) |  | $ | (14,816 | )
|                                                                                                                                           |  |                                       |        |  
|Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards net of related tax
effects |  |                                       | (510   | ) |                                  |   | (941    | )    |  |   | (170   | ) |  |   | (244    | )
|                                                                                                                                           |  |                                       |        |   |                                  |   |         |      |  |   |        |   |  |   |         |  
|Pro forma net loss                                                                                                                         |  | $                                     | (5,020 | ) |                                  | $ | (16,367 | )    |  | $ | (3,191 | ) |  | $ | (15,060 | )
|                                                                                                                                           |  |                                       |        |  
|Loss per share:                                                                                                                            |  |                                       |        |   |                                  |   |         |      |  |   |        |   |  |   |         |  
|Basic  as reported                                                                                                                        |  | $                                     | (0.48  | ) |                                  | $ | (1.65   | )    |  | $ | (0.32  | ) |  | $ | (1.58   | )
|Basic  pro forma                                                                                                                          |  | $                                     | (0.53  | ) |                                  | $ | (1.75   | )    |  | $ | (0.34  | ) |  | $ | (1.61   | )
|                                                                                                                                           |  |                                       |        |  
|Diluted  as reported                                                                                                                      |  | $                                     | (0.48  | ) |                                  | $ | (1.65   | )    |  | $ | (0.32  | ) |  | $ | (1.58   | )
|Diluted  pro forma                                                                                                                        |  | $                                     | (0.53  | ) |                                  | $ | (1.75   | )    |  | $ | (0.34  | ) |  | $ | (1.61   | )



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 3.625% to 4.25%; dividend yields ranging from 0.66% to 1.14%;
volatility factors of the expected market price of the Companys common stock of .5205 and a weighted average expected life of the options ranging from three to ten years.



ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS



Overview



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



The Companys insurance business is organized into two reportable business segments: direct healthcare liability insurance and assumed reinsurance operations. Primarily due to significant losses on medical
malpractice insurance outside of the state of California and assumed reinsurance business losses arising out of the September 11, 2001, World Trade Center terrorist attack, the Company incurred significant losses in the three fiscal years 2001, 2002
and 2003. The resulting reductions in surplus and corresponding decrease in capital adequacy ratios under both the A.M. Best Company (A.M. Best) and National Association of Insurance Commissioners (NAIC) capital adequacy models required the Company
to take actions to improve its long-term capital adequacy position. The primary actions taken by the Company have been 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.



The actions taken by the Company have reduced significantly capital
requirements related to premium writing to surplus ratios in both the A.M. Best and NAIC capital adequacy models. The capital requirements required by the reserve to surplus ratios continues to decline as the Company settles the claims in its
non-core businesses.



11



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Critical Accounting Policies



The Companys discussion and analysis of its financial condition and results of operations are based upon the Companys
consolidated financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles (GAAP). Preparation of financial statements in accordance with GAAP requires management to make estimates and judgments that
affect the reported amounts of assets, liabilities, revenues and expenses and the related notes. Management believes that the following critical accounting policies, among others, affect the more significant judgments and estimates used in the
preparation of the consolidated financial statements. Actual results may differ from these estimates under different assumptions or conditions.



Premium Revenue Recognition



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



Loss and Loss Adjustment Expense Reserves



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



The Company had a
growing volume of assumed reinsurance between 1999 and 2002. Assumed reinsurance is a line of business with inherent volatility. Ultimate loss experience for the assumed reinsurance operation is based primarily on reports received by the Company
from the underlying ceding insurers. Many losses take several years to be reported through the system. The Company relies heavily on the ceding entitys, especially Lloyds syndicates, estimates of ultimate incurred losses. Ceding
entities, representing over 65% of the reinsurance assumed business for the 1999 to 2003 underwriting years (based on gross written premiums), submit reports to the Company containing ultimate incurred loss estimates reviewed by independent or
internal actuaries of the ceding entities. These reported ultimate incurred losses are the primary basis for the Companys reserving estimates. In other cases, the Company relies on its own internal estimates determined primarily by experience
to date, individual knowledge of the specific reinsurance contract, industry experience and other actuarial techniques to determine reserve requirements.



12



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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 $440.3 million as of September 30, 2004, after considering both prospective and retrospective reinsurance. The net reserves
attributable to the operating segments of the Company are as follows:



Summary of Net Loss and LAE Reserves

By Segment



|                                      |  |                    |       |                   |   |      
|------------------------------------- |  | ------------------ | ----- | ----------------- | - | -----
|                                      |  | SEPTEMBER 30, 2004 |       | DECEMBER 31, 2003
|Direct Healthcare Liability Insurance |  |                    |       |                   |   |      
|Core                                  |  | $                  | 249.6 |                   | $ | 246.2
|Non-Core                              |  |                    | 112.0 |                   |   | 145.3
|Assumed Reinsurance Segment           |  |                    | 78.7  |                   |   | 106.3
|                                      |  |                    |       |                   |   |      
|Total net loss and LAE reserves       |  |                    | 440.3 |                   |   | 497.8
|                                      |  |                   
|Ceded loss reserves                   |  |                    | 155.6 |                   |   | 108.9
|Retrospective reserves                |  |                    | 17.4  |                   |   | 36.3 
|                                      |  |                    |       |                   |   |      
|Loss and LAE reserves                 |  | $                  | 613.3 |                   | $ | 643.0
|                                      |  |                    |       |                   |   |      



A 1% difference in the ultimate value
of reserves, net of reinsurance recoverable, would decrease or increase future pretax earnings by $4.4 million.



Deferred Policy Acquisition Costs



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



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. 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.



13



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Income taxes



At September 30, 2004, the Company had $45.9 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 $21.9 million for a net operating loss carryforward that will expire
in 2021. A net operating loss carryforward is a tax loss that may be carried forward into future years. It reduces taxable income in future years and the tax liability that would otherwise be incurred.



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



Forward Looking Statements



Certain statements in this report on Form 10-Q that are not historical in fact constitute forward-looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995. Such forward-looking statements involve known and unknown risks, uncertainties and other factors based on the Companys estimates and expectations concerning future events that may cause the actual
results of the Company to be materially different from historical results or from any results expressed or implied by such forward-looking statements. Actuarial estimates of losses and loss adjustment expenses (LAE), expectations concerning the
Companys ability to retain current insureds at profitable levels, successful withdrawal from the assumed reinsurance business, obtaining necessary rate change regulatory approvals, expansion of liability insurance business in its principal
market and improved performance and profitability are dependent upon a variety of factors, including future economic, competitive and market conditions, frequency and severity of catastrophic events, future legislative and regulatory actions,
uncertainties and potential delays in obtaining premium rate approvals, the level of ratings from recognized rating services, the inherent uncertainty of loss and LAE estimates in both the core and discontinued non-core businesses (including a
contingent liability related to Highlands Insurance Company), and the cyclical nature of the property and casualty insurance industry, all of which are difficult or impossible to predict accurately and many of which are beyond the control of the
Company. The Company is also subject to certain structural risks as an insurance holding company, including statutory restrictions on dividends and other intercompany transactions. In light of the significant uncertainties inherent in the
forward-looking information herein, the inclusion of such information should not be regarded as a representation by the Company or any other person that the Companys objectives or plans will be realized. 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 in the Companys Annual Report on Form 10-K for the fiscal year ended December 31, 2003.



Information Regarding Non-GAAP Measures



The Company has presented information in this report with respect to premiums written, an operating measure which in managements opinion provides investors useful
industry specific information to evaluate and perform meaningful comparisons of the Companys performance. 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, a comparable GAAP measure, represents the portion of premiums written that is recognized as income in the financial statements for the periods presented and
earned on a pro-rata basis over the term of the policies.



14



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RESULTS OF OPERATIONS



NINE MONTHS ENDED SEPTEMBER 30, 2004 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30, 2003



Direct Healthcare Liability Insurance Segment



The Company underwrites professional and related liability policy coverages for physicians (including oral and maxillofacial surgeons),
physician medical groups and clinics, hospitals, dentists, managed care organizations and other providers in the healthcare industry. As a result of the Companys withdrawal from certain segments of the healthcare industry, the premiums earned
are allocated between core and non-core premium. Core premium represents California and Delaware business excluding dentist and hospital business. Non-core business represents business related to physician and dental programs formerly conducted for
the Company primarily in states outside California and Delaware by a national independent insurance agency, other state non-standard physician programs and hospital programs including those in California.



The following table summarizes by core and non-core businesses the underwriting results of
the direct healthcare liability insurance segment for the periods indicated (dollars in thousands):



Direct Healthcare Liability Insurance Segment

Underwriting Results



|                                     |  |      |         |   |           |   |        |        |  |   |         |  
|------------------------------------ |  | ---- | ------- | - | --------- | - | ------ | ------ |  | - | ------- | -
|                                     |  | CORE |         |   | NON-CORE* |   |        | TOTAL* | 
|NINE MONTHS ENDED SEPTEMBER 30, 2004 |  |      |         |   |           |   |        |        |  |   |         |  
|Premiums written                     |  | $    | 103,557 |   |           | $ | (1,261 | )      |  | $ | 102,296 |  
|                                     |  |      |         |   |           |   |        |        |  |   |         |  
|Premiums earned                      |  | $    | 93,338  |   |           | $ | (1,177 | )      |  | $ | 92,161  |  
|                                     |  |      |        
|Losses and LAE incurred              |  |      | 76,621  |   |           |   | 6,959  |        |  |   | 83,580  |  
|Underwriting expenses                |  |      | 19,413  |   |           |   | 102    |        |  |   | 19,515  |  
|                                     |  |      |         |   |           |   |        |        |  |   |         |  
|Underwriting loss                    |  | $    | (2,696  | ) |           | $ | (8,238 | )      |  | $ | (10,934 | )
|                                     |  |      |         |   |           |   |        |        |  |   |         |  
|Loss ratio                           |  |      | 82.1    | % |           |   |        |        |  |   |         |  
|Expense ratio                        |  |      | 20.8    | % |           |   |        |        |  |   |         |  
|Combined ratio                       |  |      | 102.9   | % |           |   |        |        |  |   |         |  
|                                     |  |      |        
|NINE MONTHS ENDED SEPTEMBER 30, 2003 |  |      |         |   |           |   |        |        |  |   |         |  
|Premiums written                     |  | $    | 102,364 |   |           | $ | 4,986  |        |  | $ | 107,350 |  
|                                     |  |      |         |   |           |   |        |        |  |   |         |  
|Premiums earned                      |  | $    | 89,342  |   |           | $ | 10,811 |        |  | $ | 100,153 |  
|                                     |  |      |        
|Losses and LAE incurred              |  |      | 80,996  |   |           |   | 14,559 |        |  |   | 95,555  |  
|Underwriting expenses                |  |      | 17,567  |   |           |   | 3,434  |        |  |   | 21,001  |  
|                                     |  |      |         |   |           |   |        |        |  |   |         |  
|Underwriting loss                    |  | $    | (9,221  | ) |           | $ | (7,182 | )      |  | $ | (16,403 | )
|                                     |  |      |         |   |           |   |        |        |  |   |         |  
|Loss ratio                           |  |      | 90.7    | % |           |   |        |        |  |   |         |  
|Expense ratio                        |  |      | 19.7    | % |           |   |        |        |  |   |         |  
|Combined ratio                       |  |      | 110.4   | % |           |   |        |        |  |   |         |  

|* | The ratios for the segment total and non-core business are not meaningful due to the run-off status of non-core business.
|- | -------------------------------------------------------------------------------------------------------------------------



Core Business



Premiums written were $103.6 million and premiums earned were $93.3 million in the nine months ended September 30, 2004; compared to $102.4
million and $89.3 million in the nine months ended September 30, 2003. Premiums written and earned increased primarily due to a 9.9% rate increase effective October 1, 2003. This increase was partially offset by a decline in policies in-force.



The loss ratio (losses and LAE related to premiums earned) for the nine months
ended September 30, 2004 was 82.1% compared to 90.7% in the third quarter 2003. The decrease in the loss ratio is due primarily to the full effect on earned premiums of the 9.9% rate increase effective October 1, 2003, as well as lower loss
estimates for 2004.



15



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The underwriting expense ratio for the nine months ended September 30, (expenses related to premiums earned) increased to
20.8% in the first nine months of 2004 from 19.7% in the first nine months ended of 2003. The change is primarily attributable to a decline in premium in the non-core business. As a result of that decline, most underwriting expenses are attributable
to the core business.



During October 2004, the California Department of
Insurance approved a 6.5% rate increase in California for the Companys direct healthcare liability insurance business. The Company will implement this new increase for policies issued and renewed on and after January 1, 2005.



Non-Core Business



The negative premiums written and earned for the nine months ending September 30, 2004, represent reinsurance premium ceded in connection
with the reinstatement of excess of loss layers for older years. The $5.0 million written premium for the same period in 2003 resulted primarily from required extended reporting options exercised by cancelled insureds. After March 6, 2003, no new or
renewal business was written in the non-core programs, as the Company exited these markets. Premium earned in the non-core direct healthcare liability insurance business decreased as the written premium declined.



The underwriting loss incurred in the nine months ended September 30, 2004, is primarily due
to adverse litigation decisions on a few cases and reserve increases attributable to older years, primarily for dentists coverage. These losses are all from prior years activity and resulted from unusual circumstances not anticipated by the
normal actuarial process.



Assumed Reinsurance Segment



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.



The following table summarizes the underwriting results of the assumed reinsurance segment for the periods indicated (dollars in thousands):



|                                          |  |                                                  |        |   |      |   |         |  
|----------------------------------------- |  | ------------------------------------------------ | ------ | - | ---- | - | ------- | -
|                                          |  | Assumed Reinsurance Segment Underwriting Results |       
|FOR THE NINE MONTHS ENDED SEPTEMBER 30,   |  | 2004                                             |        |   | 2003 |  
|Premiums written                          |  | $                                                | (39    | ) |      | $ | 12,410  |  
|                                          |  |                                                  |        |   |      |   |         |  
|Premiums earned                           |  | $                                                | 11,539 |   |      | $ | 29,449  |  
|Underwriting expenses                     |  |                                                  |        |   |      |   |         |  
|Losses                                    |  |                                                  | 16,965 |   |      |   | 31,707  |  
|Underwriting and other operating expenses |  |                                                  | 3,483  |   |      |   | 17,532  |  
|                                          |  |                                                  |        |   |      |   |         |  
|Underwriting loss                         |  | $                                                | (8,909 | ) |      | $ | (19,790 | )
|                                          |  |                                                  |        |   |      |   |         |  



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



The
underwriting loss incurred in the nine months ended September 30, 2004 primarily results from upward development of losses in two of the three Lloyds of London syndicates in which the Company was a participant and capital provider for the 2001
underwriting year and which were only partially ceded under the Rosemont Re reinsurance treaty. In addition, certain other contracts had adverse development which was only partially offset by reductions in World Trade Center losses. The nine months
ended September 30, 2003 was adversely affected by significant losses of $8.5 million related to Lloyds Syndicate 102, in which the Company was a participant.



The Rosemont Re reinsurance treaty entered into in December 2002 effectively cedes all of the unearned premium and future reported premium
after June 30, 2002, for the assumed reinsurance business written for underwriting years 2001 and 2002 by the Company. This treaty relieves the Company of significant underwriting risk and written premium leverage and significantly improves the
Companys risk-based capital adequacy ratios under both the A.M. Best and NAIC models. The treaty has no limitations on loss recoveries and includes a profit-sharing provision should the combined ratios calculated on the base premium ceded be
below 100%. The treaty requires Rosemont Re to reimburse the Company for its acquisition and administrative expenses. In addition, the Company is required to pay Rosemont Re additional premium in excess of the base premium ceded of 14.3%. The
additional premium paid to Rosemont Re was $(0.4) million and $5.6 million for the nine month periods ending September 30, 2004 and 2003, respectively.



16



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The Rosemont Re reinsurance treaty 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 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



Net investment income remained flat at $15.0 million for the nine months ended September 30, 2004, and September 30, 2003, respectively.
Investment income reflects a reduction in invested assets offset by an increase in the average rate of return. The decline in invested assets was as a result of the claim payments related to the run-off of the non-core healthcare liability and
assumed reinsurance businesses. The average rate of return on invested assets was 3.6% and 3.4% for the nine months ended September 30, 2004, and September 30, 2003, respectively.



Realized investment gains of $1.6 million were recorded for the nine month period ended September 30, 2004 versus realized invested losses
of $4.3 million in the nine month period ended September 30, 2003. The realized investment losses for the nine month period ended September 30, 2003 includes a $9.6 million write down of the Companys investment in GoshawK Insurance Holdings
plc (the parent of Rosemont Re) following the failure of Lloyds Syndicate 102.



Net Loss



The net loss for the nine months ended September 30,
2004 was affected by a $4.0 million accrual for estimated California franchise taxes attributable to years ended on and after December 31, 1997. The additional taxes are the result of legislation enacted in California during the third quarter of
2004 that 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 effect of the legislation was to significantly reduce an
assessment made by the California Franchise Tax Board against the Company, which the Company and other companies in the industry had been contesting. The federal income tax expense for the nine months includes this one-time charge, net of federal
tax benefit. See Note 7 to Consolidated Financial Statements.



THREE MONTHS ENDED SEPTEMBER 30, 2004 COMPARED TO THREE MONTHS ENDED SEPTEMBER 30, 2003



Direct Healthcare Liability Insurance Segment



The following table summarizes by core and non-core businesses the underwriting results of the direct healthcare liability insurance segment for the periods indicated (dollars in thousands):



Direct Healthcare Liability Insurance Segment

Underwriting Results



|                                      |  |      |        |   |           |   |        |        |  |   |        |  
|------------------------------------- |  | ---- | ------ | - | --------- | - | ------ | ------ |  | - | ------ | -
|                                      |  | CORE |        |   | NON-CORE* |   |        | TOTAL* | 
|THREE MONTHS ENDED SEPTEMBER 30, 2004 |  |      |        |   |           |   |        |        |  |   |        |  
|Premiums written                      |  | $    | 7,368  |   |           | $ | (565   | )      |  | $ | 6,803  |  
|                                      |  |      |        |   |           |   |        |        |  |   |        |  
|Premiums earned                       |  | $    | 30,796 |   |           | $ | (569   | )      |  | $ | 30,227 |  
|                                      |  |      |       
|Losses and LAE incurred               |  |      | 24,558 |   |           |   | 3,189  |        |  |   | 27,747 |  
|Underwriting expenses                 |  |      | 6,842  |   |           |   | 2      |        |  |   | 6,844  |  
|                                      |  |      |        |   |           |   |        |        |  |   |        |  
|Underwriting loss                     |  | $    | (604   | ) |           | $ | (3,760 | )      |  | $ | (4,364 | )
|                                      |  |      |        |   |           |   |        |        |  |   |        |  
|Loss ratio                            |  |      | 79.7   | % |           |   |        |        |  |   |        |  
|Expense ratio                         |  |      | 22.2   | % |           |   |        |        |  |   |        |  
|Combined ratio                        |  |      | 101.9  | % |           |   |        |        |  |   |        |  
|                                      |  |      |       
|THREE MONTHS ENDED SEPTEMBER 30, 2003 |  |      |        |   |           |   |        |        |  |   |        |  
|Premiums written                      |  | $    | 9,784  |   |           | $ | (101   | )      |  | $ | 9,683  |  
|                                      |  |      |        |   |           |   |        |        |  |   |        |  
|Premiums earned                       |  | $    | 31,059 |   |           | $ | 1,784  |        |  | $ | 32,843 |  
|                                      |  |      |       
|Losses and LAE incurred               |  |      | 26,745 |   |           |   | 3,947  |        |  |   | 30,692 |  
|Underwriting expenses                 |  |      | 7,468  |   |           |   | 381    |        |  |   | 7,849  |  
|                                      |  |      |        |   |           |   |        |        |  |   |        |  
|Underwriting (loss) gain              |  | $    | (3,154 | ) |           | $ | (2,544 | )      |  | $ | (5,698 | )
|                                      |  |      |        |   |           |   |        |        |  |   |        |  
|Loss ratio                            |  |      | 86.1   | % |           |   |        |        |  |   |        |  
|Expense ratio                         |  |      | 24.0   | % |           |   |        |        |  |   |        |  
|Combined ratio                        |  |      | 110.1  | % |           |   |        |        |  |   |        |  

|* | The ratios for the segment total and non-core business are not meaningful due to the run-off status of non-core business.
|- | -------------------------------------------------------------------------------------------------------------------------



17



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Core Business



Premiums written were $7.4 million and premiums earned were $30.8 million in the three months ended September 30, 2004, compared to $9.8 million and $31.0 million in the
three months ended September 30, 2003. Premiums written and earned decreased primarily due to a decline in policies in-force, partially offset by a 9.9% rate increase effective October 1, 2003.



The loss ratio (losses and LAE related to premiums earned) for the third quarter 2004 was
79.7% compared to 86.1% in the third quarter 2003. The decrease in the loss ratio is due primarily to the full effect on earned premiums of the 9.9% rate increase effective October 1, 2003.



The underwriting expense ratio (expenses related to premiums earned) decreased to 22.2% in
the third quarter 2004 from 24.0% in the third quarter 2003. The third quarter 2003 ratio included extra expenses associated with the Companys 2003 rate filing hearings.



During October 2004, the California Department of Insurance approved a 6.5% rate increase in California for the Companys core direct
healthcare liability insurance business. The Company will implement this new increase for policies issued and renewed on and after January 1, 2005.



Non-Core Business



After March 6, 2003, no new or renewal business was written in the non-core programs as the Company exited these markets. Premium earned in the non-core direct healthcare liability insurance business decreased as the
written premium declined.



The underwriting loss incurred in the three months
ended September 30, 2004 is primarily due to reinstatement reinsurance premiums on older policy years. The reinstatement premiums are reported as negative premium. In addition, certain reserves related to older years, were increased that relate
primarily to dental liability.



Assumed Reinsurance Segment



The following table summarizes the underwriting results of the assumed
reinsurance segment for the periods indicated (dollars in thousands):



|                                          |  |                                                  |       |   |      |   |         |  
|----------------------------------------- |  | ------------------------------------------------ | ----- | - | ---- | - | ------- | -
|                                          |  | Assumed Reinsurance Segment Underwriting Results |      
|FOR THE THREE MONTHS ENDED SEPTEMBER 30,  |  | 2004                                             |       |   | 2003 |  
|Premiums written                          |  | $                                                | 3,239 |   |      | $ | 3,838   |  
|                                          |  |                                                  |       |   |      |   |         |  
|Premiums earned                           |  | $                                                | 5,832 |   |      | $ | 2,759   |  
|Underwriting expenses                     |  |                                                  |       |   |      |   |         |  
|Losses                                    |  |                                                  | 7,029 |   |      |   | 13,695  |  
|Underwriting and other operating expenses |  |                                                  | (652  | ) |      |   | 1,406   |  
|                                          |  |                                                  |       |   |      |   |         |  
|Underwriting loss                         |  | $                                                | (545  | ) |      | $ | (12,342 | )
|                                          |  |                                                  |       |   |      |   |         |  



18



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



The underwriting loss increased in the three months ended September 30, 2004,
primarily due to reserve development in a few contracts for the 2001 and 2002 underwriting years that were primarily offset by reductions in World Trade Center reserves. These contracts principally involve reinsured bail and immigration bonds issued
by a single company. The Rosemont Re reinsurance treaty only partially offset the losses reported. The three months ended September 30, 2003 was adversely affected by significant losses of $8.5 million related to Lloyds Syndicate 102.



The Rosemont Re reinsurance treaty entered into in December 2002 effectively
cedes all of the unearned premium and future reported premium after June 30, 2002, for the assumed reinsurance business written for underwriting years 2001 and 2002 by the Company. This treaty relieves the Company of significant underwriting risk
and written premium leverage in 2002 and 2003 and significantly improves the Companys risk-based capital adequacy ratios under both the A.M. Best and NAIC models. 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%. The additional premium paid to Rosemont Re was $0.3 million and $1.8 million for the three month periods ending September 30, 2004 and 2003, respectively.



The Rosemont Re reinsurance treaty 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 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



Net investment income increased to $4.5 million for the three months ended September 30, 2004, an increase of 8.4% from $4.1 million for the
three months ended September 30, 2003. The increase in investment income is a result of an increase in the average rate of return offset by a reduction in invested assets. The decline in invested assets was as a result of the claim payments related
to the run-off of the non-core healthcare liability and assumed reinsurance businesses. The average rate of return on invested assets was 3.5% and 2.7% for the three months ended September 30, 2004 and 2003, respectively.



Realized investment losses of $0.1 million were recorded for the three month period ended
September 30, 2004 versus realized invested losses of $8.2 million in the three month period ended September 30, 2003. The realized investment losses for the three month period ended September 30, 2003 includes a $9.6 million write down of the
Companys investment in GoshawK Insurance Holdings plc (the parent of Rosemont Re) following the failure of Lloyds Syndicate 102.



Net Loss



The net loss for the three months ended September 30, 2004 was affected by a $4.0 million accrual for estimated California franchise taxes attributable to years ended on and after December 31, 1997. The additional
taxes are the result of legislation enacted in California during the third quarter of 2004 that 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 effect of the legislation was to significantly reduce an assessment made by the California Franchise Tax Board against the Company, which the Company and other companies in the industry had been contesting. The federal
income tax expense for the three months includes this one-time charge, net of federal tax benefit. See Note 7 to Consolidated Financial Statements.



LIQUIDITY AND CAPITAL RESOURCES



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



Because of uncertainty related to the timing of the payment of claims, cash from operations for a property and casualty insurance company can vary substantially from period to period. During the first nine months of
2004, the Company had negative cash flow from operations of $69.4 million compared to a negative cash flow of $38.9 million in 2003. The negative cash flow in 2004 is primarily related to claims payments associated with the non-core physician and
assumed reinsurance programs, which are now in run-off. The Company maintains a portion of its investment portfolio in high-quality short-term securities and cash to meet short-term operating liquidity requirements, including the payment of losses
and LAE. Cash and cash equivalents investments totaled $54.3 million or 9.5% of invested assets, at September 30, 2004. The Company believes that all of its short-term and fixed-maturity securities are readily marketable and have scheduled
maturities in line with projected cash needs.



19



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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% of the total market value of its investments. The market value of the Companys portfolio of unaffiliated equity securities was
$16.0 million at September 30, 2004. The Company plans to continue its emphasis on fixed maturity securities investments for the indefinite future.



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



SCPIE Holdings is
an insurance holding company whose assets primarily consist of all of the capital stock of its insurance company subsidiaries. Its principal sources of funds are dividends from its subsidiaries and proceeds from the issuance of debt and equity
securities. The insurance company subsidiaries are restricted by state regulation in the amount of dividends they can pay in relation to earnings or surplus, without the consent of the applicable state regulatory authority, principally the
California Department of Insurance. SCPIE Holdings principal insurance company subsidiary, SCPIE Indemnity, may pay dividends to SCPIE Holdings in any 12-month period, without regulatory approval, to the extent such dividends do not exceed the
greater of (i) 10% of its statutory surplus at the end of the preceding year or (ii) its statutory net income for the preceding year. Applicable regulations further require that an insurers statutory surplus following a dividend or other
distribution be reasonable in relation to its outstanding liabilities and adequate to meet its financial needs, and permit the payment of dividends only out of statutory earned (unassigned) surplus unless the payment out of other funds receives
regulatory approval. The amount of dividends that SCPIE Indemnity is able to pay to SCPIE Holdings during 2004 without prior regulatory approval is approximately $14.0 million. As of September 30, 2004, no dividends had been paid to SCPIE Holdings.



Common stock dividends paid to stockholders were $0.10 per share in the third
quarter 2003. These dividends were funded through dividends from the Companys insurance subsidiaries received 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 September 30, 2004, SCPIE Holdings held cash and short-term
securities of $7.0 million of which approximately $4.0 million will be utilized to satisfy the California franchise tax liability recognized in the third quarter of 2004. Based on historical trends, market conditions and its business plans, the
Company believes that its sources of funds (including dividends from the insurance company 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 continuing losses in
the non-core business. On November 14, 2003, A.M. Best, after a review of the third quarter 2003 results, reduced the rating of the Insurance Subsidiaries to B (Fair), with a negative outlook. A.M. Best assigns this rating to companies that have, in
its opinion, a fair ability to meet their current obligations to policyholders, but are financially vulnerable to adverse changes in underwriting and economic conditions. The NAIC has developed a methodology for measuring the adequacy of an
insurers surplus which includes a 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, 2003, the RBC level of each insurance company subsidiary exceeded the threshold requiring the least regulatory attention. At December 31, 2003, SCPIE Indemnity exceeded this threshold by $47.6 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 believes it has, at best, only limited opportunities to raise capital, if that becomes necessary.



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 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK



The Company is subject to various market risk exposures,
including interest rate risk and equity price risk.



20



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The Company invests its assets primarily in fixed-maturity securities, which at September 30, 2004 comprised 85.9% of
total investments at market value. Corporate bonds represent 51.1% and U.S. government bonds represent 29.9% of the fixed-maturity investments, with the remainder consisting of mortgage-backed and asset-backed securities. Equity securities,
consisting primarily of common stocks, account for 2.8% of total investments at market value. Mortgage loans represent 1.8% of the investment portfolio. The remainder of the investment portfolio consists of cash and highly liquid short-term
investments, which are primarily overnight bank repurchase agreements and short-term money market funds.



The value of the fixed-maturity portfolio is subject to interest rate risk. As market interest rates decrease, the value of the portfolio increases with the opposite holding true in rising interest rate environments.
A common measure of the interest sensitivity of fixed-maturity 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 September 30, 2004 was 4.3 years.



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



At September 30, 2004, the carrying value of the investment portfolio included $6.1 million in net unrealized gains. At December 31, 2003,
the investment portfolio included $8.1 million in net unrealized gains.



ITEM 4. 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 Securities and Exchange Commission Rule 13a-15(b), the Company
carried out an evaluation, under the supervision and with the participation of its management, including its Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Companys disclosure
controls and procedures as of the end of the quarter covered by this report. Based on the foregoing, the Chief Executive Officer and Chief Financial Officer concluded that the Companys disclosure controls and procedures were effective at the
reasonable assurance level.



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



PART II  OTHER INFORMATION



ITEM 1. LEGAL PROCEEDINGS



None.



ITEM 2. CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUER
PURCHASES OF EQUITY SECURITIES



None.



ITEM 3. DEFAULTS UNDER SENIOR SECURITIES



None.



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



None.



ITEM 5. OTHER INFORMATION



None.



21



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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K



| | (a) | The following exhibits are included herewith.
| | --- | ---------------------------------------------



|       |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|------ |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NUMBER |  | DOCUMENT                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|10.78  |  | Second Amendment to Equity Participation Plan of SCPIE Holdings Inc.                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|       | 
|31.1   |  | Certifications of Registrants Chief Executive Officer and 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   |  | Certifications of Registrants Chief Executive Officer and 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. These certifications are being furnished solely to accompany this Quarterly Report on Form 10-Q and are not being filed for purposes of Section 18 of the Securities Exchange Act of 1934, as
amended, and are not to be incorporated by reference into any filing of the Company.



| | (b) | None.
| | --- | -----



SIGNATURES



Pursuant to the
requirements 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.
|                        |  |                    
|Date: November 12, 2004 |  | By:                 |  | /s/ Donald J. Zuk                                
|                        |  |                     |  | Donald J. Zuk                                    
|                        |  |                     |  | President and Chief Executive Officer            
|                        |  |                    
|Date: November 12, 2004 |  | By:                 |  | /s/ Robert B. Tschudy                            
|                        |  |                     |  | Robert B. Tschudy                                
|                        |  |                     |  | Senior Vice President and Chief Financial Officer



22