Edgar Filing: SCPIE HOLDINGS INC

Prepared by R.R. Donnelley Financial -- Form 10-K/A

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K/A

Amendment No. 1

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the Fiscal Year Ended December 31, 2001 Commission File No. 1-12449

SCPIE HOLDINGS INC.

(Exact name of registrant as specified in its charter)

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

1888 Century Park East, Los Angeles, California		90067
(Address of principal executive offices)		(Zip Code)

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

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

Securities registered pursuant to Section 12(g) of the Act

NONE

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

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

The aggregate market value of the Registrant’s voting stock held by non-affiliates of the Registrant at March 18, 2002, was approximately $172,633,763 (based upon the closing sales price of such date, as reported by the Wall Street Journal).

The number of shares of the Registrant’s Common Stock outstanding as of March 18, 2002, was 9,818,066.

Explanatory Note

Item 1 of Part I of Registrant’s Form 10-K for the fiscal year ended December 31, 2001 is hereby amended as follows solely to correct a typographical error contained in the table found at the top of page three of this amended and restated Item 1 of Part I.

PART I

ITEM 1. BUSINESS

GENERAL

SCPIE Holdings Inc. (the Company or SCPIE Holdings) is a holding company owning subsidiaries engaged in providing insurance and reinsurance products. The Company is a provider of medical malpractice insurance and related liability insurance products to physicians, healthcare facilities and others engaged in the healthcare industry. Since August 1999, the Company has also been actively engaged in developing a diverse portfolio of assumed reinsurance treaties to complement its direct insurance business. Reinsurance treaties have principally included professional and automobile liability coverages, commercial and residential property risks, accident and health and workers’ compensation coverages, and a broad spread of marine insurance.

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

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

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

INFORMATION ABOUT SEGMENTS

The Company’s insurance business is organized into two reportable business segments: direct healthcare liability insurance and assumed reinsurance operations. In direct (or primary) insurance activities, the insurer assumes the risk of loss from persons or organizations that are directly subject to the risks. Such risks may relate to liability (or casualty), property, life, accident, health, financial or other perils that may arise from an insurable event. In reinsurance activities, the reinsurer assumes defined portions of similar or dissimilar risks that primary insurers or other reinsurers have assumed in their own insuring activities.

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

The following table sets forth information concerning the Company’s revenues, operating income and identifiable assets attributable to each of its business segments for the year ended December 31, 2001.

YEAR ENDED DECEMBER 31, 2001	DIRECT HEALTHCARE LIABILITY INSURANCE			ASSUMED REINSURANCE			OTHER		TOTAL

	(In Thousands)
Premiums written	$	168,600		$	112,207		$	—	$	280,807

Premiums earned	$	156,442		$	79,493		$	—	$	235,895
Net investment income		—			—			35,895		35,895
Realized investment gains		—			—			5,707		5,707
Equity earnings from affiliates		—			—			1,327		1,327
Other revenue		—			—			875		875

Total revenues		156,442			79,493			43,804		279,739
Losses and loss adjustment expenses		220,311			84,162			—		304,473
Other operating expenses		45,820			18,912			—		64,732
Interest expense		—			—			1,416		1,416

Total expenses		266,131			103,074			1,416		370,621

Income (loss) before federal income tax	$	(109,689	)	$	(23,581	)	$	42,388	$	(90,882	)


Combined ratio		170.11	%		129.66	%		—		157.09	%
Segment assets	$	211,125		$	58,200		$	708,321	$	977,646

The Company incurred significant losses in both segments during 2001. The losses in the direct healthcare liability insurance segment were almost entirely attributable to adverse experience incurred by the Company under policies issued to physicians and medical groups in states outside California. Adverse experience included both losses incurred under policies issued and renewed during 2001 and increases in loss reserves for policies issued in prior years. The Company instituted a number of premium rate increases and stricter underwriting standards during 2001 in an attempt to improve results. The Company and the independent insurance agency for the principal non-California programs have recently agreed to terminate the Company’s participation no later than March 2003. In the meantime, the Company continues to apply very strict underwriting requirements and has the full advantage of the rate increases on policies issued and renewed under these programs. See Direct Healthcare Liability Insurance Segment Overview and Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The losses and loss adjustment expenses during 2001 in the assumed reinsurance segment include approximately $19.6 million of estimated net losses incurred as a result of the September 11, 2001, terrorist attack on the World Trade Center, Pentagon and certain airlines. These losses are estimated principally under various property, general liability, accident and health and workers’ compensation reinsurance treaties. In addition, the Company incurred a charge of $8.5 million against net premiums earned in its assumed reinsurance segment attributable to September 11 estimated losses under a 1996 letter of credit arrangement indexed to a portfolio of worldwide catastrophe excess of loss reinsurance business. See Management’s Discussion and Analysis of Financial Condition and Results of Operations and Note 4 to Consolidated Financial Statements. Excluding the impact of the September 11 attack, the 2001 combined ratio for the segment would have been 94.5%.

On February 21, 2002, A.M. Best & Co. (A.M. Best), the leading rating organization for the insurance industry, downgraded the financial strength rating of the Company’s insurance company subsidiaries to B++ (Very Good) from A (Excellent). The stated reason for the downgrade was the effect the losses for 2001 will have on the capitalization of the Company in relation to significant premium growth that occurred during 2001. This downgrade could have a material adverse effect on the ability of the Company to maintain its volume of premiums written and earned, particularly in the Assumed Reinsurance Segment. See Risk Factors—Importance of A.M. Best Rating.

DIRECT HEALTHCARE LIABILITY INSURANCE SEGMENT

Overview and Developments During 2001—The Company has been a leading provider of medical malpractice insurance in California for many years. Medical malpractice insurance, or medical professional liability insurance, insures the physician, dentist, hospital or other healthcare provider or facility against liabilities arising from the rendering of, or failure to render,

professional medical services. Based on data compiled by A.M. Best, total medical malpractice premiums in the United States in 2000 were approximately $6.3 billion. In California, the second largest market for medical malpractice insurance based on direct premiums written, approximately $584.4 million of medical malpractice premiums were written in 2000. The Company’s share of the medical malpractice premiums written in California in 2000 was approximately 17.6% and the Company was the second largest writer in the state. During 2001, the Company had premiums earned under policies issued to California insureds of approximately $116.8 million, or 70.6% of the total premiums earned in the direct healthcare liability insurance segment.

Expansion into Other Markets—Prior to 1996, the Company did not offer medical malpractice insurance outside California, and insured only a small number of hospitals and other healthcare facilities. In that year, the Company adopted a strategy to meet the needs of what it perceived to be a changing healthcare market, the growth of managed care and the emergence of multi-state integrated healthcare providers and delivery systems. The Company undertook a new strategy that included (i) expanding the types of products offered to include comprehensive hospital and related liability coverages for large healthcare systems and (ii) diversifying geographically into states other than California, while (iii) maintaining the Company’s historic relationship with its primary policyholder base of California physician and medical group insureds.

From 1997 through 1999, the Company added more than 75 hospitals to its program. These policies were written through national and regional brokers and covered facilities in four states, in addition to California. At approximately the same time, the Company undertook a major geographic expansion in the physician and small medical group market through an arrangement with Brown & Brown, Inc. (Brown & Brown), one of the nation’s top independent insurance agency organizations. This arrangement commenced January 1, 1998, and eventually encompassed nine states, the largest in terms of premium volume being Connecticut, Florida and Georgia.

During 2000, the Company entered into a separate arrangement with Brown & Brown covering the California and Texas portion of a dental liability program developed by Brown & Brown. The Company also reinsures the entire risk of policies issued nationally by another insurer to oral and maxillofacial surgeons marketed by Brown & Brown.

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

In 2001, the Company undertook the insurance of physicians in Delaware through a single Delaware broker. At December 31, 2001, the Company insured approximately 140 physicians under this program.

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

Discontinuance of Hospital Program—The Company encountered intense price competition in its efforts to significantly expand its large hospital and other healthcare facility writings. The Company was able to expand by offering policies at competitive rates for the coverage provided. During 2000, the Company incurred material adverse loss experience under many of these policies, including policies issued to hospitals that had already left the Company for lower rates offered by other insurers. The Company declined to renew a number of its hospital policies or offered renewal only at substantially increased premium rates. At the beginning of 2001, the Company insured only 15 hospitals. This number is now reduced to 10 hospitals insured, and the Company expects to completely withdraw from this business through nonrenewal of policies during 2002. The Company did not incur material losses in its hospital program during 2001.

Losses During 2001 in Non-California Physician Programs—In 2001, the Company derived approximately 30% of its healthcare liability premium volume from policies issued outside the state of California, principally under the Brown & Brown and nonstandard physician programs. In the second quarter of 2001, the Company recognized that it had seriously underestimated losses incurred under these programs for prior years and during the first quarter of 2001. The Company strengthened its prior-years’ loss reserves at mid-year approximately $18.7 million to reflect these higher estimates, and included an additional provision of $7.5 million for expected losses because of premium inadequacy on then current policies under these programs. The Company implemented significant premium increases, averaging approximately 40%, in its principal non-California markets, and immediately instituted more stringent underwriting and pricing guidelines in these states. The Company also commissioned an independent claims study to confirm the results of its reserve estimates. Throughout the remainder of 2001, the Company continued to evaluate its premiums rates in these markets and institute or apply for additional rate increases where appropriate.

At the end of 2001, significant additional losses emerged under these programs, principally involving adverse experience in the fourth quarter on policies in effect during 2001. The Company increased its reserves by an additional amount of approximately $27.3 million for the 2001 policy year and established a premium deficiency provision of $7.9 million at year end for expected losses on existing policies. These reserve actions resulted in a significant underwriting loss in the direct healthcare liability insurance segment.

The Company and Brown & Brown have an reached agreement to terminate both the physician and dental programs no later than March 6, 2003. In the interim, Brown & Brown will attempt to identify an insurance company or companies to replace the Company. The Company will continue to issue and renew those policies under the Brown & Brown programs that satisfy stringent underwriting standards now in place. The Company will also have the benefit of the increased rates for policies issued or renewed during the remainder of 2002 and early 2003. The Company is applying these same standards to the nonstandard physician policies renewed outside California. The Company is issuing no new nonstandard physician policies outside of California.

The Company expects the foregoing actions to decrease the number of physicians and medical groups insured outside of California throughout 2002. This decrease will be somewhat offset by higher premiums received from those physicians and medical groups that remain with the program. During 2001, the Company had net premiums earned under the Brown & Brown and non-California nonstandard physician programs of $37.0 million and $8.4 million, respectively.

During 2002, the Company will concentrate its efforts on maintaining its core physician and medical group business in California. The Company also intends to continue efforts to expand its physician and medical group business in Delaware and in selected other states. The Company does not expect to initiate any significant new programs outside California during 2002.

Products

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

FOR THE YEAR ENDED DECEMBER 31,	2001		2000		1999

	(In Thousands)
Physician and medical group liability:
Physician and medical group standard professional liability	$	138,756	$	122,288	$	124,092
Nonstandard physicians		9,591		7,657		5,617
Emergency medicine program		763		2,880		2,243
Urgent care centers		55		111		234

Subtotal medical liability		149,165		132,936		132,186
Excess personal liability		649		673		705

Subtotal physician and medical group liability		149,814		133,609		132,891
Hospital liability		5,848		13,618		12,351
Healthcare provider liability		1,580		1,575		1,051
Healthcare facility liability		6,161		4,634		1,707
Dentist liability		2,533		707		—
Managed care organization errors and omissions		1,327		665		699
Medicare billing errors and omissions		372		368		—
Directors and officers’ liability		832		662		699

Total	$	168,467	$	155,838	$	149,191

Physician and Medical Group Liability—The professional liability insurance for sole practitioners and for medical groups provides protection against the legal liability of the insureds for such things as injury caused by, or as a result of, the performance of patient treatment, failure to treat and failure to diagnose a patient. The Company offers separate policy forms for physicians who are sole practitioners and for those who practice as part of a medical group or clinic. The policy issued to

sole practitioners includes coverage for professional liability that arises in the medical practice and also for certain other “premises” liabilities that may arise in the non-professional operations of the medical practice, such as slip-and-fall accidents, and a limited defense reimbursement benefit for proceedings instituted by state licensing boards and other governmental entities.

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

The professional liability coverages are issued primarily on a “claims made and reported” basis. Coverage is provided for claims reported to the Company during the policy period arising from incidents that occurred at any time the insured was covered by the policy. The Company also offers “tail coverage” for claims reported after the expiration of the policy for occurrences during the coverage period. The price of the tail coverage is based on the length of time the insured has been covered under the Company’s claims made and reported policy. The Company provides free tail coverage for insured physicians who die or become disabled during the coverage period of the policy and those who have been insured by the Company for at least five consecutive years and retire completely from the practice of medicine. Free tail coverage is automatically provided to physicians with at least five consecutive years of coverage with the Company and who are also at least 65 years old.

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

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

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

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

Healthcare Provider Liability/Healthcare Facilities Liability—The Company offers its professional liability coverage to a variety of specialty provider organizations, including hospital emergency departments, outpatient surgery centers, medical urgent care facilities and hemodialysis, clinical and pathology laboratories. The Company also offers its professional liability coverage to healthcare providers such as chiropractors, podiatrists and nurse practitioners. These policies include the standard professional liability coverage provided to physicians and medical groups, with certain modifications to meet the special needs of these healthcare providers. The policies are generally issued on a claims made and reported basis with the limits of liability up to those offered to larger medical groups. The limits of coverage under the current healthcare provider policies issued by the Company are between $1.0 million and $5.0 million per incident, subject to $3.0 million to $10.0 million aggregate policy limits.

Dentist Liability—In 2000, the Company initiated dental liability insurance coverage under a program developed by Brown & Brown in Texas and California. The program provides claims-made coverage to dentists and small dental groups. Brown & Brown markets this program in other states through another insurance company. This program will also terminate no later than March 6, 2003.

Managed Care Organization Errors and Omissions—The Company offers a policy for managed care organizations. The policy provides coverage for liability arising from covered managed care incidents or vicarious liability for medical services rendered by non-employed physicians. Covered services include peer review, healthcare expense review, utilization management, utilization review and claims and benefit handling in the operation of the managed care organizations. These policies are generally issued on a claims made and reported basis. The annual aggregate limit of coverage under the current managed care organization policies issued by the Company is $1.0 million.

Directors and Officers’ Liability—In 1996, the Company began to directly write renewals of directors and officers’ liability policies previously underwritten by other companies. In 1999, the Company began offering a new directors and officers’ liability policy, and expanded its marketing of this program. The directors and officers’ liability policies are generally issued on a claims made and reported basis. The limit of coverage on directors and officers’ liability policies written by the Company is $1.0 million.

Billing Errors and Omissions—In late 1999, the Company began offering a newly designed product that provides physicians and medical groups with protection for defense expenses and certain liabilities related to governmental investigations into billing errors and omissions to Medicare and other government-subsidized healthcare programs.

Marketing and Policyholder Services

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

The Company’s marketing organization has approximately 30 employees who directly solicit prospective policyholders, maintain relationships with existing insureds and provide marketing support to brokers. The Company’s marketing efforts include sponsorship by local medical associations, educational seminars, advertisements in medical journals and direct mail solicitation to licensed physicians and members of physician medical specialty group organizations.

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

The Company’s current marketing emphasis is directed toward California physicians and medical groups. During 2001, the Company closed marketing offices in Texas, Florida and Arizona. These offices had principally serviced hospital insureds and solicited large group accounts.

Underwriting

The Underwriting Department consists of a Senior Vice President in charge of Underwriting, three divisional underwriting managers, 14 underwriters and 15 technical and administrative assistants. Certain of these underwriters specialize in underwriting managed care organizations and directors and officers’ liability products. The Company’s underwriting department is responsible for the evaluation of applicants for professional liability and other coverages, the issuance of policies and the establishment and implementation of underwriting standards for all of the coverages underwritten by the Company.

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

Brown & Brown had performed most of the underwriting functions with respect to policies issued by the Company under its arrangement with Brown & Brown for physician professional liability and other coverages. The parties are in the process of terminating this relationship and the Company has assumed greater control over the establishment and application of underwriting standards.

Rates

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

The Company has consistently instituted annual overall rate increases in California during the past 10 years ranging from approximately 3.5% to 10.6%. Rate volatility has been considerably greater in other states, particularly in the principal states in the Brown & Brown program. Since the beginning of 2001, the Company has instituted average aggregate rates increases in Florida, Georgia, Connecticut and Texas of approximately 70%.

Claims

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

The Claims Department staff includes managers, litigation supervisors, investigators and other experienced professionals trained in the evaluation and resolution of medical professional liability and general liability claims. The claims department staff consists of approximately 56 employees, including 16 clerical personnel. The Company has seven unit managers and three branch managers responsible for specific geographic areas, and additional units for specialty areas such as healthcare facilities, birth injuries and policy coverage issues. The Company also occasionally uses independent claims adjusters, primarily to investigate claims in remote locations. The Company selects legal counsel from among a group of law firms in the geographic area in which the action is filed.

The Company vigorously defends its insureds against claims, but seeks to resolve expediently cases with high exposure potential. The defense of a healthcare professional liability claim requires significant cooperation between the litigation supervisor or claims department manager responsible for the claim and the insured physician. The Company’s policies require that a healthcare professional liability claim cannot generally be settled without the consent of the physician or the professional insured. California law requires that the insurer report such settlements to a medical disciplinary board, and federal law requires that any claim payment, regardless of amount, be reported to a national data bank which can be accessed by various state licensing and disciplinary boards and medical peer evaluation committees. Thus, the physician or other healthcare professional is often placed in a difficult position of knowing that a settlement may result in the initiation of a disciplinary proceeding or some other impediment to his or her ability to practice. The claims department supervisor must be able to fully evaluate considerations of settlement or trial and to communicate effectively the Company’s recommendation to its insured. If the insured will not consent to a settlement offer, the Company may be exposed to a larger judgment if the case proceeds to trial.

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

ASSUMED REINSURANCE SEGMENT

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

Reinsurance Industry Overview

Reinsurance is an arrangement in which an insurance company, the reinsurer, agrees to indemnify another insurance company, the ceding company, against all or a portion of the insurance risks underwritten by the ceding company under one or more insurance contracts. Reinsurance can provide a ceding company with several benefits, including a reduction in net liability on individual risks, catastrophe protection from large or multiple losses and assistance in maintaining acceptable financial ratios. Reinsurance also provides a ceding company with additional underwriting capacity by permitting it to accept larger risks and write more business than would be possible without a concomitant increase in capital and surplus.

Reinsurance contracts are normally classified as treaty or facultative contracts. Treaty reinsurance refers to automatic reinsurance coverage for all or a portion of a specified class of risks ceded by the primary insurer or a reinsurer, while facultative reinsurance involves underwriting of individual risks. Coverage of the risks assumed under reinsurance contracts may be classified as quota-share or excess. Under quota-share (or pro rata) reinsurance, the reinsurer shares proportionally in the original premiums and losses of the primary insurer or reinsurer. Excess (or non-proportional) reinsurance provides for the indemnification of the primary insurer or reinsurer for all or a portion of the loss in excess of an agreed upon amount or “retention.” Both quota-share and excess reinsurance may provide for aggregate limits of indemnification.

Company Strategy

The Company has concentrated the majority of its assumed reinsurance portfolio on treaty reinsurance. Treaty reinsurers, including the Company, do not separately evaluate each of the individual risks assumed under their treaties and, consequently, after a review of the ceding company’s underwriting practices, are largely dependent on the original risk underwriting decisions made by the ceding company. Such dependence subjects reinsurers in general to the possibility that the ceding companies have not adequately evaluated the risks to be reinsured and, therefore, that the premiums ceded under the treaty may not adequately compensate the reinsurer for the risks assumed. The reinsurer’s evaluation of the ceding company’s risk management and underwriting practices will usually impact the pricing of the treaty.

The Company has focused its assumed reinsurance portfolio on pro rata agreements in which the ceding company bears a proportional share of the risk and therefore has the incentive to underwrite and price the business appropriately. Further, the Company’s pro rata participations are structured to take advantage of all reinsurance protections purchased by the ceding company. The Company has treaties principally with those ceding companies with which the Company’s officers have had past experience and can demonstrate that the ceding company has outperformed its peers in its areas of expertise. The Company also participates in excess of loss reinsurance arrangements, following the same approach outlined above, where the subject exposures can be completely identified, segmented geographically, priced accordingly and underwritten by specific individuals within the ceding company in whom the Company has confidence.

Reinsurance Programs

The principal reinsurance programs in which the Company is a participant are the following:

Casualty Programs—Approximately 41.5% of the Company’s expected assumed reinsurance premium written on treaties currently in effect is derived from a limited number of pro rata and excess of loss treaties for United States based ceding companies writing automobile, general liability, workers’ compensation and certain professional liability lines of business.

Property Programs—Approximately 20.8% of the Company’s expected assumed reinsurance premium written on treaties currently in effect is derived from a limited number of pro rata and excess of loss treaties for United States and international based ceding companies writing personal and commercial property coverage throughout the world.

Accident and Health and Workers’ Compensation Programs—Approximately 25.8% of the Company’s expected assumed reinsurance premium written on treaties currently in effect is derived from a limited number of pro rata treaties for United States based ceding companies coming from a single source, Reinsurance Management Group, Summit, New Jersey, in which the Company has a 20% ownership interest. Reinsurance Management Group is a specialist underwriting management firm writing various forms of accident and health reinsurance risks. In addition, the Company writes a small portfolio of international personal accident business on a pro rata treaty basis.

Marine Program—Approximately 11.9% of the Company’s expected assumed reinsurance premium written on treaties currently in effect is derived from pro rata treaties from a single Lloyd’s syndicate that specializes in writing marine insurance and reinsurance on a worldwide basis. The syndicate is managed by an affiliate of GoshawK Insurance Holdings plc (GoshawK). In November 1999, the Company purchased approximately 9.5% of the outstanding common stock of GoshawK, which is a publicly traded Lloyd’s underwriter. In 2001, Goshawk sold additional shares of its capital stock reducing the Company’s ownership to 4.1%. The Company entered into a quota share reinsurance treaty effective January 1, 2000, under which the Company has assumed 7.5% of GoshawK’s annual premium.

Corporate Name at Lloyd’s—In addition to the foregoing programs, effective January 1, 2001, the Company formed SCPIE Underwriting Limited, a limited liability corporate underwriting syndicate member at Lloyd’s which provides underwriting capacity to two Lloyd’s syndicates for the 2001 underwriting year. One syndicate wrote a varied portfolio of property and casualty insurance and reinsurance, while the other syndicate wrote a portfolio of professional liability risks.

Distribution

The Company’s predominant source of reinsurance business is through professional reinsurance intermediaries. At the present time, the Company writes through approximately 11 intermediaries located throughout the United States and in London.

Underwriting

All underwriting of the assumed reinsurance portfolio is the responsibility of the two senior officers who head the division. Likewise, these individuals are directly responsible for all on site audits of assumed reinsurance clients. The vast majority of assumed reinsurance treaties are written for a 12-month term and are subject to a process of reunderwriting at the end of each period prior to renewal agreement.

Claims

All individual excess of loss claims are reviewed by the two senior officers managing the reinsurance division, who recommend cash reserves and other action to be taken with respect to these claims. With respect to claims under pro rata treaties that are submitted in conjunction with monthly or quarterly premium accounts, these officers conduct periodic audits of these claims to confirm that they fall within the scope of the respective reinsurance treaties.

LOSS AND LAE RESERVES

The determination of loss reserves is a projection of ultimate losses through an actuarial analysis of the claims history of the Company and other professional liability insurers, subject to adjustments deemed appropriate by the Company due to changing circumstances. Included in its claims history are losses and LAE paid by the Company in prior periods and case reserves for anticipated losses and LAE developed by the Company’s Claims Department as claims are reported and investigated. Actuaries rely primarily on such historical loss experience in determining reserve levels on the assumption that historical loss experience provides a good indication of future loss experience despite the uncertainties in loss cost trends and the delays in reporting and settling claims. As additional information becomes available, the estimates reflected in earlier loss reserves may be revised. Any increase in the amount of reserves, including reserves for insured events of prior years, could have an adverse effect on the Company’s results for the period in which the adjustments are made.

The uncertainties inherent in estimating ultimate losses on the basis of past experience have grown significantly in recent years principally as a result of judicial expansion of liability standards and expansive interpretations of insurance contracts. These uncertainties may be further affected by, among other factors, changes in the rate of inflation and changes in the propensities of individuals to file claims. The inherent uncertainty of establishing reserves is relatively greater for companies writing long-tail casualty insurance, including medical malpractice insurance, due primarily to the longer-term nature of the resolution of claims. There can be no assurance that the ultimate liability of the Company will not exceed the amounts reserved.

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

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

DECEMBER 31,		2001		2000			1999

	(In Thousands)
Reserves for losses and LAE at beginning of year	$	433,541	$	449,864		$	477,631
Less reinsurance recoverables		40,152		45,007			24,899

Reserves for losses and LAE, net of related reinsurance recoverable, at beginning of year		393,389		404,857			452,732

Reclassification of reinsurance contract		3,840		—			—
Provision for losses and LAE for claims occurring in the current year, net of reinsurance		290,649		194,717			183,959
Increase (decrease) in estimated losses and LAE for claims occurring in prior years, net of reinsurance		13,824		(42,115	)		(61,179	)

Incurred losses during the year, net of reinsurance		304,473		152,602			122,780

Deduct losses and LAE payments for claims, net of reinsurance, occurring during:
Current year		36,006		15,181			13,742
Prior years		155,626		148,889			156,913

		191,632		164,070			170,655

Reserve for losses and LAE, net of related reinsurance recoverable, at end of year		502,390		393,389			404,857
Reinsurance recoverable for losses and LAE, at end of year		74,246		40,152			45,007

Reserves for losses and LAE, gross of reinsurance recoverable, at end of year	$	576,636	$	433,541		$	449,864

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

The increase during 2001 in estimated losses and LAE for claims occurring in prior years was attributable to the significant adverse loss experience encountered during 2001 in the physician and medical group business outside the state of California. See Management’s Discussion and Analysis of Financial Condition and Results of Operations—Overview.

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

the caption “Cumulative amount of liability paid through” shows the cumulative amounts paid related to the reserve as of the end of each subsequent year.

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

YEAR ENDED DECEMBER 31,	1991			1992			1993			1994			1995			1996			1997			1998			1999			2000		2001

	(In Thousands)
Loss and LAE reserves before reclassification																						$	452,732		$	403,197		$	390,600
Reclassification																						$	1,660		$	1,128		$	1,052
Loss and LAE reserves	$	439,908		$	465,423		$	472,129		$	449,566		$	446,627		$	440,302		$	433,441		$	451,072		$	402,069		$	389,548	$	502,390

Liability reestimated as of:
One year later		409,966			421,994			411,915			391,733			386,872			387,094			339,673			389,893			359,954			403,374
Two years later		364,105			368,521			363,562			337,441			337,760			301,795			283,276			351,238			356,298
Three years later		316,220			325,073			315,712			304,063			264,813			259,022			250,962			341,763
Four years later		282,291			292,801			293,711			254,004			236,609			237,059			243,561
Five years later		261,344			274,304			262,879			239,372			221,537			236,363
Six years later		252,077			257,864			254,502			231,129			221,014
Seven years later		243,216			252,353			248,522			230,799
Eight years later		240,306			248,420			246,889
Nine years later		238,546			246,615
Ten years later		236,828
Cumulative (redundancies) deficiencies		(203,080	)		(218,808	)		(225,240	)		(218,767	)		(225,613	)		(203,939	)		(189,880	)		(109,309	)		(45,771	)		13,826
Cumulative amount of liability paid through:
One year later		101,001			105,678			121,106			109,481			101,844			118,307			107,748			156,913			148,891			155,627
Two years later		171,429			184,883			192,519			170,603			170,932			181,116			179,016			246,835			238,718
Three years later		205,829			219,649			217,484			202,660			195,265			207,141			204,773			279,629
Four years later		221,884			232,379			231,794			213,431			207,454			217,460			216,448
Five years later		227,692			237,879			237,272			221,409			211,934			222,307
Six years later		231,277			240,363			241,904			224,555			213,257
Seven years later		232,416			242,698			242,736			224,882
Eight years later		233,784			242,818			242,875
Nine years later		233,552			242,850
Ten years later		233,567
Reserves before reclassification																							542,732			403,197			390,600
Reclassification																							1,660			1,128			1,052
Net reserves—December 31																	440,302			433,441			451,072			402,069			389,548		502,390
Reinsurance Recoverables																	19,267			21,529			24,898			45,007			40,152		74,246

Gross reserves																$	459,569		$	454,970		$	475,970		$	447,076		$	429,700	$	576,636

Prior to 2001, the Company consistently experienced favorable development in loss and LAE reserves established for prior years. During 2000, the Company experienced adverse loss development in its prior years reserves for hospitals and significant ongoing losses in this program, which resulted in less favorable loss development in 2000 than in prior years. In 2001, the Company experienced its first deficiency in its loss reserves for prior years. This deficiency was due to the significant adverse loss experience encountered in the physician and medical group business outside California. While the Company believes that its reserves for losses and LAE are adequate, there can be no assurance that the Company’s ultimate losses and LAE will not deviate, perhaps substantially, from the estimates reflected in the Company’s financial statements. If the Company’s reserves should prove inadequate, the Company will be required to increase reserves, which could have a material adverse effect on the Company’s financial condition or results of operations.

CEDED REINSURANCE—DIRECT HEALTHCARE LIABILITY INSURANCE

The Company follows customary industry practice by reinsuring a portion of its healthcare liability insurance risks. The Company cedes to reinsurers a portion of its risks and pays a fee based upon premiums received on all policies subject to such reinsurance. Insurance is ceded principally to reduce net liability on individual risks and to provide protection against large losses. Although reinsurance does not legally discharge the ceding insurer from its primary liability for the full amount of the policies reinsured, it does make the reinsurer liable to the insurer to the extent of the reinsurance ceded. The Company determines how much reinsurance to purchase based upon its evaluation of the risks it has insured, consultations with its reinsurance brokers and market conditions, including the availability and pricing of reinsurance. In 2001, the Company ceded $17.8 million of its earned premiums to reinsurers.

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

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

Reinsurance is placed under reinsurance treaties and agreements with a number of individual companies and syndicates at Lloyd’s to avoid concentrations of credit risk. The following table identifies the Company’s most significant reinsurers, their percentage participation in the Company’s aggregate reinsured risk based upon premiums paid by the Company and their rating as of December 31, 2001. No other single reinsurer’s percentage participation in 2001 exceeded 5% of total reinsurance premiums.

	PREMIUMS CEDED FOR YEAR ENDED DECEMBER 31, 2001		RATING (1)	PERCENTAGE OF TOTAL REINSURANCE PREMIUMS

	(In Thousands)
Hannover Ruckversicherungs	$	6,764	A+	39	%
Lloyd’s of London Syndicates		7,514	A	43	%
Zurich Re		1,889	A	11	%

(1)

All ratings are assigned by A.M. Best.

The Company analyzes the credit quality of its reinsurers and relies on its brokers and intermediaries to assist it in such analysis. To date, the Company has not experienced any material difficulties in collecting reinsurance recoverables. No assurance can be given, however, regarding the future ability of any of the Company’s reinsurers to meet their obligations. Among the reinsurers to which the Company cedes reinsurance are certain Lloyd’s syndicates. In recent years, Lloyd’s has reported substantial aggregate losses that have had adverse effects on Lloyd’s in general and on certain syndicates in particular. In addition, there has been a decrease in the underwriting capacity of Lloyd’s syndicates in recent years. The substantial losses and other adverse developments could affect the ability of certain syndicates to continue to trade and the ability of insureds to continue to place business with particular syndicates. It is not possible to predict what effects the circumstances described above may have on Lloyd’s and the Company’s contractual relationship with Lloyd’s syndicates in future years. The Company understands that Lloyd’s syndicates have created new trust funds to hold reserves for reinsurance purchased by United States reinsureds gross of outward reinsurance. This arrangement applies to all purchases on or after August 1, 1995.

INVESTMENT PORTFOLIO

An important component of the Company’s operating results has been the return on its invested assets. Investments of the Company are made by investment managers under policies established and supervised by the Board. The Company’s investment policy has placed primary emphasis on investment grade, fixed maturity securities and maximization of after-tax yields. The investment manager for the fixed maturity securities portfolio of the Company is Brown Brothers Harriman & Co.

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

	DECEMBER 31, 2001				DECEMBER 31, 2000
	COST OR AMORTIZED COST		FAIR VALUE		COST OR AMORTIZED COST		FAIR VALUE

	(In Thousands)
Fixed maturity securities:
U.S. government and agencies	$	175,608	$	177,718	$	185,559	$	187,873
State, municipalities and political subdivisions		126,431		126,516		180,528		181,880
Mortgage-backed securities, U.S. government		73,332		73,673		42,734		42,831
Corporate		189,854		191,237		158,345		153,682

Total fixed maturity securities		565,225		569,144		567,166		566,266
Common stocks		29,744		29,098		25,874		24,403

Total	$	594,969	$	598,242	$	593,040	$	590,669

The Company’s current policy is to limit its investment in equity securities and real estate to no more than 8% of the total market value of its investments. The Company’s portfolio of unaffiliated equity securities was $29.1 million at December 31, 2001.

The Company’s investment portfolio of fixed maturity securities consists primarily of intermediate-term, investment-grade securities. The Company’s investment policy provides that fixed maturity investments are limited to purchases of investment-grade securities or unrated securities which, in the opinion of a national investment advisor, should qualify for such rating. The table below contains additional information concerning the investment ratings of the Company’s fixed maturity investments at December 31, 2001:

TYPE/RATING OF INVESTMENT (1)	AMORTIZED COST		FAIR VALUE		PERCENTAGE OF FAIR VALUE

	(In Thousands)
AAA (including U.S. government and agencies)	$	313,519	$	317,320	55.8	%
AA		146,992		145,613	25.6
A		81,956		83,303	14.6
BBB		17,687		17,837	3.1
Non rated (2)		5,071		5,071	0.9

	$	565,225	$	569,144	100.0	%

(1)

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

(2)

Includes a credit note received from a catastrophe reinsurance limited liability company controlled by Hannover Re with an amortized cost and fair value of $5.0 million.

The following table sets forth certain information concerning the maturities of fixed maturity securities in the Company’s investment portfolio as of December 31, 2001:

	AMORTIZED COST		FAIR VALUE		PERCENTAGE OF FAIR VALUE

	(In Thousands)
Years to maturity:
One or less	$	8,163	$	8,256	1.5%
After one through five		88,656		90,453	15.9%
After five through ten		288,239		290,245	51.0%
After ten		106,835		106,517	18.7%
Mortgage-backed securities		73,332		73,673	12.9%

Totals	$	565,225	$	569,144	100.0%

The average weighted maturity of the securities in the Company’s fixed maturity portfolio as of December 31, 2001 was 5.6 years. The average duration of the Company’s fixed maturity portfolio as of December 31, 2001 was 4.8 years.

The Company also made a $15.0 million investment in a limited partnership, which in turn invests in a portfolio of offshore hedge funds, managed accounts and other professionally managed funds that pursue non-traditional investment strategies. The investment return depends on the performance of the portfolio. The investment had a value of $14.9 million at December 31, 2001. The financial advisor to the limited partnership is Credit Suisse First Boston International. See Notes 1 and 2 to Notes to Consolidated Financial Statements.

The Company maintains cash and highly liquid short-term investments, which at December 31, 2001 totaled $95.2 million.

The following table summarizes the Company’s investment results for the three years ended December 31:

FOR THE YEAR ENDED DECEMBER 31	2001			2000			1999

	(In Thousands)
FIXED MATURITY SECURITIES:
Average invested assets (includes short-term cash investments)(1)	$	650,915		$	648,156		$	672,403
Net investment income:
Before income taxes		34,122			33,152			36,404
After income taxes		24,251			24,531			28,357
Average annual return on investments:
Before income taxes		5.24	%		5.11	%		5.41	%
After income taxes		3.73	%		3.78	%		4.22	%
Net realized investment gains (losses) after income tax	$	3,708		$	(149	)	$	(255	)
EQUITY SECURITIES:
Average invested assets(2)	$	26,751		$	28,934		$	35,239
Net investment income:
Before income taxes		223			499			927
After income taxes		204			381			742
Average annual return on investments:
Before income taxes		0.83	%		1.73	%		2.63	%
After income taxes		0.76	%		1.32	%		2.11	%
Net realized investment gains (losses) after income tax	$	1		$	(112	)	$	63
OTHER SECURITIES:
Average invested assets(3)	$	23,410		$	16,306		$	16,633
Net investment income:
Before income taxes		1,550			500			307
After income taxes		1,008			325			199
Average annual return on investments:
Before income taxes		6.62	%		3.07	%		1.84	%
After income taxes		4.30	%		2.00	%		1.20	%
Net realized investment gains (losses) after income tax	$	0		$	0		$	0

(1)

Fixed maturity securities at cost.

(2)

Equities at market.

(3)

Principally real estate and the other investment.

COMPETITION

The property and casualty insurance and reinsurance markets in which the Company competes are highly competitive. All of these markets have experienced severe price competition and expanding terms of coverage over the past several years.

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

The Company encounters similar competition from local physician-owned insurance companies and commercial companies in other states. The Company competes in other states principally through independent agents and brokers, such as its relationship with Brown & Brown, and by offering superior policyholder services. All markets in which the Company now writes

insurance and in which it expects to enter have competitors with pre-existing relationships with prospective customers, name recognition in those states and in many cases greater financial and operating resources than the Company. At the present time the Company is substantially reducing its marketing efforts in states outside of California.

The Company competes in the United States and international reinsurance markets with numerous international and domestic reinsurance and insurance companies. These competitors include independent reinsurance companies, subsidiaries or affiliates of large established insurance companies, reinsurance departments of primary insurance companies and underwriting syndicates in Lloyd’s. A large majority of these competitors have greater financial resources than the Company, have been operating for considerably longer than the Company, and have established long-term and continuing business relationships throughout the industry. The Company competes in this large market through the relationships developed by its senior management over many years and the underwriting expertise and services that the Company provides. The Company has considered its A.M. Best “A (Excellent)” rating to be extremely important to its ability to compete in this segment. On February 21, 2002, A.M. Best reduced the Company’s rating to B++ (Very Good). This may adversely impact the Company’s ability to compete, particularly in the Assumed Reinsurance Segment. See A.M. Best Rating.

REGULATION

General

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

Licenses

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

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

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

Insurance Guaranty Associations

Most states, including California, require admitted property and casualty insurers to become members of insolvency funds or associations that generally protect policyholders against the insolvency of such insurers. Members of the fund or association must contribute to the payment of certain claims made against insolvent insurers. Maximum contributions required by law in any one year vary by state, and California permits a maximum assessment of 1% of annual premiums written by a member in that state during the preceding year. The largest assessment paid by the Company was $697,000 in 1994. However, such payments are recoverable through policy surcharges.

Holding Company Regulation

SCPIE Holdings is subject to the California Insurance Holding Company System Regulatory Act (the Holding Company Act). The Holding Company Act requires the Company periodically to file information with the California Department of Insurance and

other state regulatory authorities, including information relating to its capital structure, ownership, financial condition and general business operations. Certain transactions between an insurance company and its affiliates of an “extraordinary” type may not be effected if the California Commissioner disapproves the transaction within 30 days after notice. Such transactions include, but are not limited to, certain reinsurance transactions and sales, purchases, exchanges, loans and extensions of credit and investments, in the net aggregate, involving more than the lesser of 3% of the insurer’s admitted assets or 25% of surplus as to policyholders, as of the preceding December 31.

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

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

Regulation of Dividends from Insurance Subsidiaries

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

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

Risk-Based Capital

The National Association of Insurance Commissioners (NAIC) has developed a methodology for assessing the adequacy of statutory surplus of property and casualty insurers which includes a risk-based capital (RBC) formula that attempts to measure statutory capital and surplus needs based on the risks in a company’s mix of products and investment portfolio. The formula is designed to allow state insurance regulators to identify potentially under-capitalized companies. Under the formula, a company determines its authorized control level RBC by taking into account certain risks related to the insurer’s assets (including risks related to its investment portfolio and ceded reinsurance) and the insurer’s liabilities (including underwriting risks related to the nature and experience of its insurance business). The RBC rules provide for four different levels of regulatory attention depending on the ratio of a company’s total adjusted capital to its authorized control level RBC. The threshold requiring the least regulatory attention is a company action level when total adjusted capital is less than or equal to 200% of the authorized control level RBC and the level requiring the most regulatory involvement is a mandatory control level RBC when total adjusted capital is less than 70% of authorized control level RBC. At the mandatory control level the state insurance commissioner is required to restrict the writing of business or place the insurer under regulatory supervision or control.

At December 31, 2000, each of the Insurance Subsidiaries authorized control level RBC substantially exceeded the threshold requiring the least regulatory attention. At December 31, 2001, SCPIE Indemnity exceeded this threshold by $32.8 million, a significantly smaller amount than at the end of the prior year.

Regulation of Investments

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

Prior Approval of Rates and Policies

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

Medical Malpractice Tort Reform

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

Medical Malpractice Reports

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

A.M. BEST RATING

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

For a number of years, the Company received an A.M. Best rating of A (Excellent), the third highest of thirteen rating classifications. On February 21, 2002, A.M. Best reduced the Company’s classification two levels to B++ (Very Good). This classification is fifth of six classifications that A.M. Best rates as “Secure.” A.M. Best assigns this rating to companies that in its view have, on balance, very good balance sheet strength, operating performance and business profile and which have a good ability to meet their ongoing obligations to policyholders.

An A.M. Best rating of at least an A- classification is important to some consumers in the property/casualty insurance industry, particularly in the assumed reinsurance segment. Certain of the assumed reinsurance arrangements to which the Company is a party have clauses that give the ceding company or syndicate manager the right to terminate the Company’s participation if the rating falls below A-. At the present time, no party has requested that the Company withdraw from a contract. Such requests could occur, particularly at the time scheduled for renewal.

The Insurance Subsidiaries have entered into a pooling arrangement and each of the Insurance Subsidiaries has been assigned the same “pooled” “B++ (Very Good)” A.M. Best rating based on their consolidated performance.

EMPLOYEES

As of December 31, 2001, the Company employed 231 persons. None of the employees is covered by a collective bargaining agreement. The Company believes that its employee relations are good.

EXECUTIVE OFFICERS

The Executive Officers of the Company and their ages as of March 18, 2002, are as follows:

NAME	AGE	POSITION

Donald J. Zuk	65	President, Chief Executive Officer and Director
Ronald L. Goldberg	50	Senior Vice President, Underwriting
Patrick S. Grant	59	Senior Vice President, Marketing
Joseph P. Henkes	52	Secretary and Senior Vice President, Operations and Actuarial Services
Patrick T. Lo	49	Senior Vice President and Chief Financial Officer
Donald P. Newell	64	Senior Vice President and General Counsel
Timothy C. Rivers	53	Senior Vice President, Assumed Reinsurance

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

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

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

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

Patrick T. Lo has been Senior Vice President since 1999 and Chief Financial Officer of the Company since 1993. From 1990 to 1993 he served as Vice President and Controller of the Company. Prior to that time, he spent nine years as Assistant Controller, Assistant Vice President and Vice President at The Doctors Company, a California-based medical malpractice insurance company.

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

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

RISK FACTORS

Certain statements in this Form 10-K that are not historical fact constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause the actual results of the Company to be materially different from historical results or from any results expressed or implied by such forward-looking statements. Such risks, uncertainties and other factors include, but are not limited to, the following:

Concentration of Business

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

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

Disappointing Results in Expansion Efforts

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

The results of this expansion effort have been disappointing. During 2000, the Company encountered severe adverse loss experience under its hospital policies, and has almost entirely withdrawn from this market. In 2001, the Company incurred similar unacceptable losses in its principal physician and medical group programs outside California. The Company has agreed with Brown & Brown to terminate their relationship no later than March 6, 2003, and has ceased accepting new nonstandard insureds outside California.

Brown & Brown is attempting to identify another insurance company to replace the Company prior to the March 2003 termination date. In the interim, the Company is continuing to renew existing policies and issue new policies under very stringent underwriting standards and at significantly higher premiums. The Company is taking similar measures in its non-California nonstandard physician market. If these measures are not successful, the Company could continue to incur material losses under both the Brown & Brown program and the nonstandard program.

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

Industry Factors

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

The availability of healthcare liability insurance, or the industry’s underwriting capacity, is determined principally by the industry’s level of capitalization, historical underwriting results, returns on investment and perceived premium rate adequacy. Historically, the financial performance of the healthcare liability industry has tended to fluctuate between a soft insurance

market and a hard insurance market. In a soft insurance market, competitive conditions could result in premium rates and underwriting terms and conditions that may be below profitable levels. For a number of years, the healthcare liability insurance industry in California and nationally has faced a soft insurance market. There can be no assurance as to whether or when industry conditions will improve or the extent to which any improvement in industry conditions may improve the Company’s financial condition and results of operations.

Competition

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

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

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

Loss and LAE Reserves

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

The Company consistently experienced favorable development (i.e., redundancies) in reserves established for prior years until 2001. Redundant reserves, which have been recognized or released in every year since 1985, have contributed significantly to reported earnings. The Company reduced reserves for prior years by $42.1 million and $61.2 million in the years ended December 31, 2000 and 1999, respectively. During 2001, the Company experienced adverse loss development in its prior years’ reserves for physicians and medical groups outside California, and significant ongoing losses in these programs. The Company also experienced less favorable loss development in its other insurance lines than in prior years. In 2001 the Company recognized unfavorable development in prior years’ reserves of $13.8 million.

Necessary Capital and Surplus

The Insurance Subsidiaries have historically operated with ratios of net written premiums to statutory capital and surplus (policyholder surplus) of less than 1 to 1, which the Company considers to be an appropriate measure of safety for the combination of insurance segments in which it writes. At the end of 2000, this ratio was .84 to 1. As a result of the increase in net premiums written, particularly in the assumed reinsurance segment, and the substantial net loss the Company incurred during 2001, the ratio increased unfavorably to 1.54 to 1 at December 31, 2001. The Company does not expect a material

increase in net premiums written during 2002, as the projected increase in the assumed reinsurance segment is expected to be largely offset by a decrease in the direct healthcare liability insurance segment. Based on the Company’s expected premium writings in 2002, the ratio of net written premiums to statutory capital and surplus is not expected to decrease unless the Company generates significant statutory income or is able to obtain additional capital for the Insurance Subsidiaries. There is no assurance that either will occur. The Company’s ability to increase its premium writings may be limited if it is unable to generate significant profitability or obtain significant additional capital for the Insurance Subsidiaries. In addition, if the losses and loss reserve increases the Company has experienced in recent years continue and the Company is unable to obtain capital sufficient to offset them, the Company’s ability to write policies at its current expected levels will be limited. Moreover, if these and similar leverage ratios do not improve, the Insurance Subsidiaries’ ratings from A.M. Best may not improve and if they worsen, the Insurance Subsidiaries’ ratings may be further reduced. Any of the events discussed above could have a material adverse effect on the Company's financial condition and results of operations.

Changes in Healthcare

Significant attention has recently been focused on reforming the healthcare system at both the federal and state levels. A broad range of healthcare reform and patients’ rights measures have been suggested, and public discussion of such measures will likely continue in the future. Proposals have included, among others, spending limits, price controls, limits on increases in insurance premiums, limits on the liability of doctors and hospitals for tort claims, increased tort liabilities for managed care organizations and changes in the healthcare insurance system. The Company cannot predict which, if any, reform proposals will be adopted, when they may be adopted or what impact they may have on the Company. While some of these proposals could be beneficial to the Company, the adoption of others could have a material adverse effect on the Company’s financial condition or results of operations.

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

Importance of A.M. Best Rating

A.M. Best ratings are an increasingly important factor in establishing the competitive position of insurance companies. An A.M. Best rating reflects its opinion of an insurance company’s financial strength, operating performance and ability to meet its obligations to policyholders. Since 1996, the Company has held an A (Excellent) rating from A.M. Best. This is the same rating held by the Company’s principal competitors in the healthcare liability insurance market in California.

On February 21, 2002, A.M. Best reduced the Company’s rating to B++ (Very Good). This puts the Company at a competitive disadvantage with its principal California competitors. The Company relies heavily on its longstanding policyholder relations and reputation in California, and competes principally on this basis in the California market. In the Assumed Reinsurance market, a rating of A- or higher is considered important and in some cases necessary to participate in reinsurance syndicates of the type in which the Company is a participant. The Company has not been requested to withdraw from any reinsurance syndicate, but this could occur, particularly at such time as the contractual arrangements are scheduled for renewal.

Ceded Reinsurance

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

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

Recent Entry Into Assumed Reinsurance Market

The Company has rapidly expanded its assumed reinsurance operations since the division was formed in late 1999. Treaties include professional, commercial and personal liability coverages, commercial and residential property risks, accident and health coverages and marine coverages on a worldwide basis. During 2001, assumed reinsurance premiums earned were approximately $79.5 million, and the Company expects this premium volume to increase approximately 76% for 2002, based on treaties in existence. Except for September 11 losses, loss experience for the division is based almost entirely on actuarial estimates, as actual losses are still in the early stages of development. Actual experience could materially exceed or be less than these estimates. If the losses are excessive, there could be a significant adverse effect on the Company’s results of operations and financial condition at the premium volumes in 2001 and expected in 2002.

The strategic objective of the reinsurance division is to create a well-balanced portfolio of carefully underwritten assumed reinsurance lines of insurance to add diversity to the direct business of the Company. The Company has relied heavily on prior relationships with lead reinsurers and reinsurance intermediaries to gain access to attractive opportunities. In most instances, the Company is a treaty participant at a level in which the reinsured also has a significant share of the losses. In other instances, the Company has also invested in the company managing the reinsurance arrangement. Two officers experienced in this area, who joined the Company in 1999 to start the division, have developed these relationships. If these officers left the employ of the Company for any reason, the Company would have difficulty maintaining the relationships or the business of the division. There is no assurance that the Company will be successful in attracting appropriate reinsurance opportunities or that this business will be profitable.

Highlands Insurance Group Contingent Liability

Between January 1, 2000 and April 30, 2001, the Company issued endorsements to certain policyholders of the insurance company subsidiaries of Highlands Insurance Group, Inc. (HIG). Under these endorsements, the Company agreed to assume the policy obligations of the HIG insurance company subsidiaries, if the subsidiaries became unable to pay their obligations by reason of having been declared insolvent by a court of competent jurisdiction. The coverages included property, workers’ compensation, commercial automobile, general liability and umbrella. The gross premiums written by the HIG subsidiaries were approximately $88.0 million for the subject policies. In November 2001, HIG disclosed that its A.M. Best rating had been reduced to C- and that its financial plan might trigger some level of regulatory involvement. In December, HIG announced that it would cease issuing any new or renewal policies as soon as practical. HIG has advised the Company that at December 31, 2001, the HIG insurance company subsidiaries had paid losses and LAE under the subject policies of $30.7 million and had established case loss reserves of $27.9 million, net of reinsurance. Incurred but not reported losses are expected to emerge; however, the amount cannot be reasonably determined at this time. If the HIG insurance company subsidiaries are declared insolvent at some future date by a court of competent jurisdiction and unable to pay losses under the subject policies, the Company would be responsible to pay the amount of the losses incurred and unpaid at such date, and the Company would be entitled to indemnification of a portion of this loss from certain of the reinsurers of the HIG insurance company subsidiaries. The Company would also be subrogated to the rights of the policyholders as creditors of the HIG insurance company subsidiaries. The Annual Statements filed by the HIG insurance company subsidiaries with the applicable state regulatory authorities in March 2002 show combined policyholder surplus of approximately $36.3 million at December 31, 2001, which includes $152.6 million of reserve discounting. In its Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on November 19, 2001, HIG stated that the company's failure to meet certain capital requirements and targets would expose the HIG insurance company subsidiaries to regulatory sanctions that may include placing the insurance company subsidiaries under regulatory restrictions, supervision or control. The ultimate impact on the HIG insurance company subsidiaries of regulatory action, if any, is not currently determinable, but could be significant.

Holding Company Structure; Limitation on Dividends

SCPIE Holdings is an insurance holding company whose assets consist of all of the outstanding capital stock of the Insurance Subsidiaries. As an insurance holding company, SCPIE Holdings’ ability to meet its obligations and to pay dividends, if any, may depend upon the receipt of sufficient funds from its subsidiaries. The payment of dividends to SCPIE Holdings by the Insurance Subsidiaries is subject to general limitations imposed by applicable insurance laws. See Business—Regulation—Regulation of Dividends from Insurance Subsidiaries and Note 6 to Consolidated Financial Statements.

Anti-Takeover Provisions

SCPIE Holdings’ amended and restated certificate of incorporation (the Restated Certificate) and amended and restated bylaws (the Bylaws) include provisions that may be deemed to have anti-takeover effects and may delay, defer or prevent a takeover attempt that stockholders may consider to be in their best interests. These provisions include: a Board of Directors consisting of three classes; authorization to issue up to 5,000,000 shares of preferred stock, par value $1.00 per share (the Preferred Stock), in one or more series with such rights, obligations, powers and preferences as the Board of Directors of SCPIE Holdings (the SCPIE Holdings Board) may provide; a limitation which permits only the SCPIE Holdings Board, or the Chairman or the President of SCPIE Holdings to call a special meeting of stockholders; a prohibition against stockholders acting by written consent; provisions that provide that directors may be removed only for cause and only by the affirmative vote of holders of two-thirds (66²/3%) of the outstanding shares of voting securities; provisions which provide that the SCPIE Holdings Board may increase the size of the Board and may fill vacancies and newly created directorships; and certain advance notice procedures for nominating candidates for election to the SCPIE Holdings Board and for proposing business before a meeting of stockholders. In addition, state insurance holding company laws applicable to the Company in general provide that no person may acquire control of SCPIE Holdings without the prior approval of appropriate insurance regulatory authorities. See Business—Regulation—Holding Company Regulation.

In May 1997, the Board of Directors of the Company adopted a stockholder rights plan (the Rights Plan) to deter any attempted takeover of the Company on terms not approved by the Board of Directors. Pursuant to the Rights Agreement, dated May 13, 1997, with ChaseMellon Shareholder Services, LLC (the Rights Agreement), the Company declared a dividend of one preferred share purchase right (a Right) for each share of Company common stock, $.0001 par value (the Common Shares), of the Company outstanding at the close of business on June 3, 1997 (the Record Date). One Right attaches to each share of common stock, and, when exercisable, each Right will entitle the registered holder to purchase from the Company one one-hundredth of a share of Series A Junior Participating Preferred Stock, $1.00 par value per share (the Preferred Shares), at a price of $80.00 per one one-hundredth of a Preferred Share, subject to adjustment (the Purchase Price). Because of the nature of the Preferred Share’s dividend, liquidation and voting rights, the value of one one-hundredth of a Preferred Share purchasable upon exercise of each Right should approximate the value of one Common Share.

The Rights Plan operates by diluting the ownership of any person who acquires a number of Common Shares above the 20% threshold defined in the Rights Agreement (an Acquiring Person) or any person or group who commences or announces an intention to commence a tender or exchange offer that would result in beneficial ownership of 20% or more of the Common Shares. In the event that a person becomes an Acquiring Person or if the Company were the surviving corporation in a merger with an Acquiring Person or any affiliate or associate of an Acquiring Person and the Common Shares were not changed or exchanged, each holder of a Right, other than Rights that are or were acquired or beneficially owned by the 20% stockholder (which Rights will thereafter be void), thereafter have the right to receive upon exercise that number of Common Shares having a market value of two times the then current Purchase Price of the Right. In the event that, after a person has become an Acquiring Person, the Company were acquired in a merger or other business combination transaction or more than 50% of its assets or earning power were sold, proper provision shall be made so that each holder of a Right shall thereafter have the right to receive, upon the exercise thereof at the then current Purchase Price of the Right, that number of shares of common stock of the acquiring company that at the time of such transaction would have a market value of two times the then current Purchase Price of the Right.

The Rights will expire on May 12, 2007, subject to the Company’s right to extend such date, unless earlier redeemed or exchanged by the Company or terminated. The Rights may be redeemed in whole, but not in part, at a price of $.01 per Right by the Board of Directors at any time prior to the time a person becomes an Acquiring Person. The Rights may also be exchanged at any time after a person becomes an Acquiring Person and prior to the acquisition of 50% or more of the then-outstanding Common Shares (except for the Rights of the Acquiring Person) for that number of Common Shares having an aggregate value equal to the Spread (the excess of the value of the Common Shares issuable upon exercise of a Right after a Person becomes an Acquiring Person over the Purchase Price) per Right (subject to adjustment).

Any of the provisions of the Rights Agreement may be amended by the Board of Directors of the Company prior to the Distribution Date as defined in the Rights Agreement. After the Distribution Date, the Company and Rights Agent may amend or supplement the Rights Agreement without the approval of any holders of Right Certificates under certain circumstances provided that the interests of the holders of Right Certificates (other than an Acquiring Person or an affiliate or associate of an Acquiring Person) are not adversely affected thereby.

As the result of a Delaware court case, the Board of Directors adopted an amendment to the Rights Agreement which eliminated certain “Continuing Director” provisions from the Rights Agreement to bring the Rights Agreement squarely within the type of plan previously held to be valid by the Delaware Supreme Court. The Company does not believe this amendment dilutes the effectiveness of the Company’s Rights Plan or reduces the ability of the Company’s directors, in response to any likely set of circumstances, to redeem the Rights if required to properly exercise their fiduciary duties.

Regulatory and Related Matters

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

The Risk-Based Capital (RBC) rules provide for different levels of regulatory attention depending on the amount of a company’s total adjusted capital compared to its various RBC levels. At December 31, 2000, each of the Insurance Subsidiaries’ RBC substantially exceeded the threshold requiring the least regulatory attention. At December 31, 2001, SCPIE Indemnity exceeded this threshold by $32.8 million, which is a significantly smaller amount than at the end of 2000.

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

SIGNATURES

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

April 23, 2002

SCPIE HOLDINGS INC.

By:		/s/ PATRICK T. LO
		PATRICK T. LO Chief Financial Officer