Edgar Filing: SCPIE HOLDINGS INC

Form 10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

QUARTERLY REPORT

PURSUANT TO SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTER ENDED SEPTEMBER 30, 2006

Commission File No. 1-12449

SCPIE HOLDINGS INC.

(Exact name of registrant as specified in its charter)

DELAWARE

95-4557980

(State or other jurisdiction

of incorporation or organization)

(I.R.S. Employer

Identification No.)

1888 Century Park East, Los Angeles, California 90067

www.scpie.com

(Address of principal executive offices and internet site)

(310) 551-5900

(Registrant’s telephone number, including area code)

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes x No ¨

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 in the Exchange Act.

Large accelerated filer ¨ Accelerated filer x Non-accelerated filer ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes ¨ No x

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


Class		Outstanding at November 3, 2006
Preferred stock, par value $l.00 per share		No shares outstanding
Common stock, par value $0.0001 per share		10,041,303 shares, including 500,000 shares of Common Stock that have been issued to a wholly owned subsidiary of Registrant.

PART I — FINANCIAL INFORMATION

ITEM 1.

FINANCIAL STATEMENTS

SCPIE HOLDINGS INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)


	SEPTEMBER 30, 2006			DECEMBER 31, 2005
ASSETS		(unaudited	)
Securities available-for-sale:
Fixed maturity investments, at fair value (amortized cost 2006 - $424,653; 2005 - $469,350)	$	416,517		$	461,480
Equity investments, at fair value (cost 2006 - $1,779; 2005 - $1,934)		2,030			2,095

Total securities available-for-sale		418,547			463,575
Cash and cash equivalents		114,224			68,783

Total investments and cash and cash equivalents		532,771			532,358
Accrued investment income		5,038			5,874
Premiums receivable		23,510			18,731
Assumed reinsurance receivable		16,817			6,960
Reinsurance recoverable		50,807			55,933
Deferred policy acquisition costs		8,815			7,120
Deferred federal income taxes		47,874			51,214
Property and equipment, net		1,913			2,449
Other assets		6,671			6,325

Total assets	$	694,216		$	686,964

LIABILITIES
Reserves:
Losses and loss adjustment expenses	$	422,374		$	429,315
Unearned premiums		47,396			41,705

Total reserves		469,770			471,020
Amounts held for reinsurance		7,005			4,818
Other liabilities		16,350			20,333

Total liabilities		493,125			496,171
Commitments and contingencies
STOCKHOLDERS’ EQUITY
Preferred stock – par value $1.00, 5,000,000 shares authorized, no shares issued or outstanding
Common stock, par value $.0001, 30,000,000 shares authorized, 12,792,091 shares issued, 2006 – 9,541,303- shares outstanding 2005 – 9,456,916 shares outstanding		1			1
Additional paid-in capital		37,127			37,127
Retained earnings		267,942			259,645
Treasury stock, at cost 2006 – 2,750,788 shares and 2005 – 2,835,175 shares		(95,227	)		(97,063	)
Subscription notes receivable		(2,347	)		(2,649	)
Accumulated other comprehensive (loss) income		(6,405	)		(6,268	)

Total stockholders’ equity		201,091			190,793

Total liabilities and stockholders’ equity	$	694,216		$	686,964

See accompanying notes to Consolidated Financial Statements.

SCPIE HOLDINGS INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

(UNAUDITED)


	NINE MONTHS ENDED SEPTEMBER 30,						THREE MONTHS ENDED SEPTEMBER 30,
	2006			2005			2006			2005
Revenues:
Net premiums earned	$	93,245		$	96,408		$	30,163		$	31,371
Net investment income		15,476			13,355			5,265			4,556
Realized investment losses		(423	)		(258	)		(259	)		(264	)
Other income (loss)		18			1,522			(41	)		1,348

Total revenues		108,316			111,027			35,128			37,011
Expenses:
Losses and loss adjustment expenses		74,584			86,016			23,678			32,958
Underwriting and other operating expenses		21,071			24,501			6,334			8,782

Total expenses		95,655			110,517			30,012			41,740
Income (loss) before income taxes		12,661			510			5,116			(4,729	)
Income tax expense (benefit)		4,364			256			1,833			(1,607	)

Net income (loss)	$	8,297		$	254		$	3,283		$	(3,122	)

Basic earnings (loss) per share	$	0.87		$	0.03		$	0.35		$	(0.33	)
Diluted earnings (loss) per share	$	0.86		$	0.03		$	0.34		$	(0.33	)
Cash dividend declared and paid per share of common stock	$	—		$	—		$	—		$	—

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY

(DOLLARS IN THOUSANDS)

(UNAUDITED)


	COMMON STOCK		ADDITIONAL PAID-IN CAPITAL		RETAINED EARNINGS		TREASURY STOCK			STOCK SUBSCRIPTON NOTES RECEIVABLE			ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)			TOTAL STOCK- HOLDERS’ EQUITY
BALANCE AT JANUARY 1, 2006	$	1	$	37,127	$	259,645	$	(97,063	)	$	(2,649	)	$	(6,268	)	$	190,793
Net income		—		—		8,297		—			—			—			8,297
Unrealized losses on securities, net of applicable income tax benefit of $37		—		—		—		—			—			(69	)		(69	)
Change in minimum pension liability, net of applicable income tax benefit of $110		—		—		—		—			—			(205	)		(205	)
Unrealized foreign currency gain														137			137

Comprehensive income																	8,160
Stock subscription notes repaid		—		—		—		—			302			—			302
Treasury stock reissued		—		—		—		1,836			—			—			1,836

BALANCE AT SEPTEMBER 30, 2006	$	1	$	37,127	$	267,942	$	(95,227	)	$	(2,347	)	$	(6,405	)	$	201,091

See accompanying notes to Consolidated Financial Statements.


	COMMON STOCK		ADDITIONAL PAID-IN CAPITAL		RETAINED EARNINGS			TREASURY STOCK			STOCK SUBSCRIPTON NOTES RECEIVABLE			ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)			TOTAL STOCKHOLDERS’ EQUITY
BALANCE AT JANUARY 1, 2005	$	1	$	37,127	$	256,177		$	(97,654	)	$	(3,018	)	$	1,889		$	194,522
Net income		—		—		254			—			—			—			254
Unrealized losses on securities, net of applicable income tax benefit of $2,179		—		—		—			—			—			(4,048	)		(4,048	)
Change in minimum pension liability, net of applicable income tax benefit of $110		—		—		—			—			—			(205	)		(205	)
Unrealized foreign currency loss		—		—		—			—			—			(173	)		(173	)

Comprehensive loss																		(4,172	)
Treasury stock reissued						(1,161	)		1,631									470
Stock subscription notes repaid		—		—		—						370			—			370

BALANCE AT SEPTEMBER 30, 2005	$	1	$	37,127	$	255,270		$	(96,023	)	$	(2,648	)	$	(2,537	)	$	191,190

SCPIE HOLDINGS INC. AND SUBISIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(DOLLARS IN THOUSANDS)

(UNAUDITED)


	NINE MONTHS ENDED SEPTEMBER 30,
	2006			2005
OPERATING ACTIVITIES
Net income	$	8,297		$	254
Adjustments to reconcile net income to net cash provided used in operating activities:
Provisions for amortization and depreciation		3,857			4,760
Provision for deferred federal income taxes		4,364			256
Realized investment losses		423			259
Changes in operating assets and liabilities:
Deferred acquisition costs		(1,695	)		410
Accrued investment income		836			645
Unearned premiums		5,691			4,535
Loss and loss adjustment expense reserves		(6,941	)		(115,437	)
Reinsurance recoverable		5,126			105,252
Amounts held for reinsurance		2,187			(71,023	)
Other liabilities		(3,983	)		(9,118	)
Premium receivable		(14,636	)		43,597
Other assets		(1,176	)		(208	)


Net cash provided by (used in) operating activities		2,350			(35,818	)
INVESTING ACTIVITIES
Purchases—fixed maturities		(10,777	)		(50,767	)
Sales—fixed maturities		19,627			55,706
Maturities—fixed maturities		32,190			31,171
Purchases – Furniture & Equipment		(92	)		(230	)
Sale/Retirement– Furniture & Equipment		5			—

Net cash provided by investing activities		40,953			35,880
FINANCING ACTIVITIES
Reissuance of treasury shares		1,836			470
Repayment of stock subscriptions		302			370

Net cash provided by financing activities		2,138			840

Increase in cash and cash equivalents		45,441			902
Cash and cash equivalents at beginning of period		68,783			94,390

Cash and cash equivalents at end of period	$	114,224		$	95,292

See accompanying notes to Consolidated Financial Statements.

SCPIE HOLDINGS INC. AND SUBISIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

SEPTEMBER 30, 2006

1.	BASIS OF PRESENTATION

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

These financial statements have been prepared in accordance with U.S. generally accepted accounting principles (GAAP) for interim financial information and with instructions to Form 10-Q and Article 7 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the nine month period ended September 30, 2006 are not necessarily indicative of the results that may be expected for the year ending December 31, 2006. For further information, refer to the consolidated financial statements and notes thereto included in the SCPIE Holdings Annual Report on Form 10-K for the year ended December 31, 2005.

2.	NEW ACCOUNTING STANDARDS

In June 2006, the Financial Accounting Standards Board (“FASB”) issued interpretation of FASB Statement No. 109, Accounting for Uncertainty in Income Taxes (“FIN 48”). This interpretation clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with FASB Statement No. 109, Accounting for Income Taxes. FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. This interpretation also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. This interpretation will be effective January 1, 2007. The Company currently expects the effect of implementing to be minimal.

Certain 2005 amounts have been reclassified to conform to the 2006 presentation.

3.	EARNINGS PER SHARE

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


	NINE MONTHS ENDED SEPTEMBER 30,				THREE MONTHS ENDED SEPTEMBER 30,
	2006		2005		2006		2005
	(IN THOUSANDS, EXCEPT PER SHARE DATA)
Net income (loss)	$	8,297	$	254	$	3,283	$	(3,122	)
Numerator for:
Basic earnings (loss) per share of common stock		8,297		254		3,283		(3,122	)
Diluted earnings (loss) per share of common stock		8,297		254		3,283		(3,122	)
Denominator
Denominator for basic earnings per share of common stock – weighted-average shares outstanding		9,505		9,436		9,506		9,475
Effect of dilutive securities:
Stock options		114		177		114		—

Denominator for diluted earnings per share of common stock adjusted – weighted-average shares outstanding		9,619		9,613		9,620		9,475
Basic earnings (loss) per share of common stock	$	0.87	$	0.03	$	0.35	$	(0.33	)
Diluted earnings (loss) per share of common stock	$	0.86	$	0.03	$	0.34	$	(0.33	)

4.	INVESTMENTS

The Company’s investments in available-for-sale securities at September 30, 2006 are summarized as follows:


	COST OR AMORTIZED COST		GROSS UNREALIZED GAINS		GROSS UNREALIZED LOSSES		FAIR VALUE
	(IN THOUSANDS)
Fixed-maturity securities:
Bonds:
U.S. government and agencies	$	177,611	$	310	$	2,702	$	175,219
Mortgage-backed and asset-backed		75,978		46		1,333		74,691
Corporate		171,064		106		4,563		166,607

Total fixed-maturity securities		424,653		462		8,598		416,517
Common stocks		1,779		251		—		2,030

Total	$	426,432	$	713	$	8,598	$	418,547

The following table illustrates the gross unrealized losses included in the Company’s investment portfolio and the fair value of those securities, aggregated by investment category. The table also illustrates the length of time that they have been in a continuous unrealized loss position as of September 30, 2006.


	LESS THAN 12 MONTHS				12 MONTHS OR MORE				TOTAL
	GROSS UNREALIZED LOSSES		FAIR VALUE		GROSS UNREALIZED LOSSES		FAIR VALUE		GROSS UNREALIZED LOSSES		FAIR VALUE
	(IN THOUSANDS)
Fixed-maturity securities:
Bonds:
U.S. government and agencies	$	322	$	44,429	$	2,380	$	109,715	$	2,702	$	154,144
Mortgage-backed and asset-backed		88		11,690		1,245		58,683		1,333		70,373
Corporate		84		5,408		4,479		154,645		4,563		160,053

Total fixed maturity securities	$	494	$	61,527	$	8,104	$	323,043	$	8,598	$	384,570

The Company held 114 investment positions with unrealized losses as of September 30, 2006. All of the investments are investment grade, and the unrealized losses are primarily due to interest rate fluctuations. The Company held 98 securities that were in an unrealized loss position for 12 months or more.

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

5.	FEDERAL INCOME TAXES

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


	NINE MONTHS ENDED SEPTEMBER 30,					THREE MONTHS ENDED SEPTEMBER 30,
	2006			2005		2006		2005
	(IN THOUSANDS)					(IN THOUSANDS)
Federal income tax expense (benefit) at 35%	$	4,431		$	179	$	1,790	$	(1,655	)
Increase (decrease) in taxes resulting from:
Foreign and miscellaneous		(67	)		77		43		48

Total income tax expense (benefit)	$	4,364		$	256	$	1,833	$	(1,607	)

6.	COMPREHENSIVE INCOME (LOSS)

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


	NINE MONTHS ENDED SEPTEMBER 30,						THREE MONTHS ENDED SEPTEMBER 30,
	2006			2005			2006			2005
	(IN THOUSANDS)
Net income (loss)	$	8,297		$	254		$	3,283		$	(3,122	)
Other comprehensive income (loss) before tax:
Unrealized (losses) gains on securities		(106	)		(6,227	)		8,051			(5,036	)
Unrealized foreign currency gains (losses)		137			(173	)		(44	)		(145	)
Change in minimum pension liability		(315	)		(315	)		(105	)		(105	)

Other comprehensive income (loss) before tax		8,013			(6,461	)		11,185			(8,408	)
Income tax (benefit) expense related to securities		(37	)		(2,179	)		2,818			(1,762	)
Income tax benefit related to pension liability		(110	)		(110	)		(36	)		(37	)

Comprehensive income (loss)	$	8,160		$	(4,172	)	$	8,403		$	(6,609	)

7.	BUSINESS SEGMENTS

The Company classifies its business into two segments: Direct Healthcare Liability Insurance and Assumed Reinsurance. Segments are designated based on the types of products provided and based on the risks associated with the products. Direct healthcare liability insurance represents professional liability insurance for physicians, oral and maxillofacial surgeons and dentists, healthcare facilities and other healthcare providers. Assumed reinsurance represents the book of assumed worldwide reinsurance of professional, commercial and personal liability coverages, commercial and residential property risks and accident and health, workers’ compensation and marine coverages. Other includes items not directly related to the operating segments such as net investment income, realized investment gains and losses, and other revenue. In December 2002, the Company entered into a 100% quota share reinsurance agreement with Rosemont Reinsurance Ltd. (Rosemont Re) (formerly known as GoshawK Re), a subsidiary of GoshawK Insurance Holdings plc, a publicly held London-based insurer and reinsurer, that divested substantially all of the Company’s ongoing assumed reinsurance operations.

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


NINE MONTHS ENDED SEPTEMBER 30, 2006	DIRECT HEALTHCARE LIABILITY INSURANCE		ASSUMED REINSURANCE			OTHER			TOTAL
Net premiums written	$	98,757	$	179					$	98,936

Net premiums earned	$	93,066	$	179					$	93,245
Net investment income		—		—		$	15,476			15,476
Realized investment losses		—		—			(423	)		(423	)
Other income		—		—			18			18

Total revenues		93,066		179			15,071			108,316
Losses and loss adjustment expenses		66,083		8,501			—			74,584
Underwriting and other operating expenses		19,294		168			1,609			21,071

Total expenses		85,377		8,669			1,609			95,655

Segment income (loss) before income taxes	$	7,689	$	(8,490	)	$	13,462		$	12,661

Segment assets	$	33,436	$	66,513		$	594,267		$	694,216

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


NINE MONTHS ENDED SEPTEMBER 30, 2005	DIRECT HEALTHCARE LIABILITY INSURANCE		ASSUMED REINSURANCE			OTHER			TOTAL
Net premiums written	$	102,343	$	(1,524	)				$	100,819

Net premiums earned	$	96,547	$	(139	)				$	96,408
Net investment income		—		—		$	13,355			13,355
Realized investment losses		—		—			(258	)		(258	)
Other income		—		—			1,522			1,522

Total revenues		96,547		(139	)		14,619			111,027
Losses and loss adjustment expenses		67,617		18,399			—			86,016
Underwriting and other operating expenses		20,211		4,290			—			24,501

Total expenses		87,828		22,689			—			110,517

Segment income (loss) before income taxes	$	8,719	$	(22,828	)	$	14,619		$	510

Segment assets	$	36,146	$	153,718		$	595,396		$	785,260


THREE MONTHS ENDED SEPTEMBER 30, 2006	DIRECT HEALTHCARE LIABILITY INSURANCE		ASSUMED REINSURANCE			OTHER			TOTAL
Net premiums written	$	6,703	$	(331	)				$	6,372

Net premiums earned	$	30,494	$	(331	)				$	30,163
Net investment income		—		—		$	5,265			5,265
Realized investment losses		—		—			(259	)		(259	)
Other losses		—		—			(41	)		(41	)

Total revenues		30,494		(331	)		4,965			35,128
Losses and loss adjustment expenses		21,679		1,999			—			23,678
Underwriting and other operating expenses		6,031		260			43			6,334

Total expenses		27,710		2,259			43			30,012

Segment income (loss) before income taxes	$	2,784	$	(2,590	)	$	4,922		$	5,116

Segment assets	$	33,436	$	66,513		$	594,267		$	694,216


THREE MONTHS ENDED SEPTEMBER 30, 2005	DIRECT HEALTHCARE LIABILITY INSURANCE		ASSUMED REINSURANCE			OTHER			TOTAL
Net premiums written	$	6,809	$	(675	)				$	6,134

Net premiums earned	$	31,920	$	(549	)				$	31,371
Net investment income		—		—		$	4,556			4,556
Realized investment losses		—		—			(264	)		(264	)
Other income		—		—			1,348			1,348

Total revenues		31,920		(549	)		5,640			37,011
Losses and loss adjustment expenses		18,863		14,095			—			32,958
Underwriting and other operating expenses		6,104		2,678			—			8,782

Total expenses		24,967		16,773			—			41,740

Segment income (loss) before income taxes	$	6,953	$	(17,322	)	$	5,640		$	(4,729	)

Segment assets	$	36,146	$	153,718		$	595,396		$	785,260

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

8.	COMMITMENTS AND CONTINGENCIES

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

Highlands Insurance Group

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

During 2002 and 2003, all of the HIG insurance company subsidiaries (with the exception of a California subsidiary) were merged into a single Texas domiciled subsidiary, Highlands Insurance Company (Highlands). In November 2003, the State of Texas obtained an order in the Texas District Court appointing the Texas Insurance Commissioner as the permanent Receiver of Highlands. The Receiver, through a Special Deputy Receiver (SDR), has continued to resolve Highlands claim liabilities and to pay its losses and loss adjustment expenses (LAE), including those under the subject policies. The SDR has advised the Company that Highlands has paid losses and LAE under the subject policies of more than $67.0 million and that as of September 30, 2006 has established case loss reserves of $4.7 million, net of reinsurance. Based on a limited review of the exposures remaining, the Company estimates that incurred but not reported losses are $3.0 million, for a total loss and loss expense reserve of $7.7 million. This estimate is not based on a full reserve analysis of the exposures.

On July 24, 2006, the SDR filed an Application for Approval of Rehabilitation Plan with the Texas District Court. Under the Plan, if approved, the SDR would continue to pay initially all allowed administrative and policy claims (including those under the subject policies), and then to pay other claims with any remaining funds. The Plan requires policyholders and others to submit claims in the proceeding, and envisions that all of these claims would be resolved and paid over a number of years. As long as the Rehabilitation Proceeding is in effect, there would be no liquidation of Highlands and, therefore, no obligation on the part of the Company under the subject policies. The Plan is subject to approval of the Texas Court. Certain creditors have filed objections to aspects of the Plan and, in some cases, to the Plan in its entirety. An extended hearing is in progress on these objections.

Letters of Credit

The Company has a letter of credit facility in the amount of $50 million with Barclays Bank PLC. Letters of credit issued under the facility fulfill the collateral requirements of Lloyd’s and guarantee loss reserves under certain other reinsurance contracts. As of September 30, 2006, letter of credit issuance under the facility was approximately $48.6 million. Securities of $53.5 million are pledged as collateral under the facility.

9.	STOCK-BASED COMPENSATION

At September 30, 2006, the Company maintains a stock-based compensation plan, the 2003 Amended and Restated Equity Participation Plan of SCPIE Holdings, Inc. (the Plan) which provides for grants of stock options to key employees and non-employee directors, grants of restricted shares to non-employee directors, and stock appreciation rights (SARS) to key employees of the Company.

The compensation cost that has been charged against income for this plan was $193,000 and $175,000 for the nine month periods ended September 30, 2006 and September 30, 2005, respectively. The income tax benefit recognized in the income statement for share-based compensation was $68,000 and $61,000 for the nine month periods ended September 30, 2006 and September 30, 2005, respectively.

Prior to January 1, 2006, the Company accounted for stock options under the recognition and measurement provisions of APB Opinion No. 25, “Accounting for Stock Issued to Employees.” The Company provided pro forma disclosure amounts as if the fair value method defined by SFAS No. 123 “Accounting for Stock-Based Compensation,” had been applied to its stock-based compensation. Effective January 1, 2006, the Company adopted the fair value recognition provisions of SFAS No. 123(R) “Share-Based Payment,” using the modified prospective transition method and therefore had not restated prior period’s results. Under this transition method, stock-based compensation expense for 2006 included compensation expense for all stock-based compensation awards granted prior to, but not yet vested as of, January 1, 2006, based on the grant-date fair value estimated in accordance with the original provisions of SFAS No. 123. Stock-based compensation expense for all share-based payment awards granted after January 1, 2006 is based on the grant-date fair value estimated in accordance with the provisions of SFAS No. 123(R). The Company recognizes these compensation costs for only those shares expected to vest on a straight-line basis over the requisite service period of the award, which is the option vesting term of three years. The cash flows resulting from the tax benefits in excess of the compensation expense recorded for these options is classified as cash provided by financing activities.

As a result of adopting SFAS 123(R) on January 1, 2006, the Company’s income before income taxes and net income for the nine months ended September 30, 2006 are $122,000 and $79,000 lower, respectively, than if it had continued to account for share-based compensation under Opinion 25. Basic and diluted earnings per share for the nine months ended September 30, 2006 are $0.01 and $0.02 lower, respectively, than if the Company had continued to account for share-based compensation under Opinion 25.

Option activity as of September 30, 2006 and changes during the nine months ended September 30, 2006 were as follows:


	Shares	Weighted Average Exercise Price		Weighted Average Remaining Contractual Term (years)	Aggregate Intrinsic Value
Outstanding at January 1, 2006	892,034	$	13.69
Granted	—
Exercised	79,600	$	14.93
Cancelled or Expired	18,334

Outstanding at September 30, 2006	794,100	$	13.25	5.64	$	8,648,910

Exercisable at September 30, 2006	751,095	$	13.24	5.55	$	8,218,729

The aggregate intrinsic value in the table above represents the total pretax intrinsic value (the difference between the Company’s closing stock price on September 30, 2006 and the exercise price, multiplied by the number of in-the-money-options) that would have been received by the option holders had all options been exercised on September 30, 2006. Total intrinsic value of options exercised during the nine months ended September 30, 2006 was $686,000.

As of September 30, 2006, $190,000 of total unrecognized compensation cost related to non-vested stock options is expected to be recognized over a weighted-average period of 1.6 years.

ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Overview

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

The Company’s insurance business is organized into two reportable business segments: direct healthcare liability insurance and assumed reinsurance operations. Primarily due to significant losses on medical malpractice insurance outside of the state of California and assumed reinsurance business losses arising out of the September 11, 2001, World Trade Center terrorist attack, the Company incurred significant losses. The resulting reductions in surplus and corresponding decrease in capital adequacy ratios under both the A.M. Best Company (A.M. Best) and National Association of Insurance Commissioners (NAIC) capital adequacy models required the Company to take actions to improve its long-term capital adequacy position. The primary actions taken by the Company were to effect an orderly withdrawal from healthcare liability insurance markets outside of California and Delaware and from the assumed reinsurance market in its entirety. All of the healthcare liability insurance policies in these other markets expired during the first quarter of 2004. In December 2002, the Company entered into a 100% quota share reinsurance agreement to retrocede to Rosemont Re the majority of reinsurance business written in 2002 and 2001. During 2003, the Company participated in only one ongoing reinsurance syndicate and had no ongoing reinsurance participations thereafter. The Company continues to settle and pay claims incurred in the non-core healthcare and assumed reinsurance operations.

The actions taken by the Company have significantly reduced capital requirements related to written premium and reserve to surplus ratios in both the A.M. Best and NAIC capital adequacy models. On November 3, 2006, A.M. Best raised its financial strength rating of the Company’s insurance subsidiaries to B+ (Very Good) from B (Fair). A.M. Best assigns a B+ rating to companies that have, in its opinion, a good ability to meet their ongoing obligations to policyholders. The outlook for this rating is stable. As the Company settles the claims in its non-core business, the capital adequacy position of the Company should continue to improve.

Critical Accounting Policies

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

Premium Revenue Recognition

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

Loss and Loss Adjustment Expense Reserves

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

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

Because the reserve establishment process is by definition an estimate, actual results will vary from amounts established in earlier periods. The Company recognizes such differences in the periods they are determined. Since reserves accumulate on the balance sheet over several years until all claims are settled, a determination of inadequacy or redundancy could easily have a significant impact on earnings and therefore stockholders’ equity. The Company has established net reserves of $380.0 million as of September 30, 2006. The reserves attributable to the operating segments of the Company are as follows:

Summary of Net Loss and LAE Reserves

(IN THOUSANDS)


	Case Reserves		Bulk & IBNR Reserves		Total Gross Reserves		Ceded Reserves		Total Net Reserves
September 30, 2006
Direct Healthcare
Core	$	74,943	$	210,788	$	285,731	$	14,256	$	271,475
Non-Core		32,660		14,161		46,821		1,519		45,302

		107,603		224,949		332,552		15,775		316,777
Assumed Reinsurance		57,964		31,858		89,822		26,675		63,147

	$	165,567	$	256,807	$	422,374	$	42,450	$	379,924

December 31, 2005
Direct Healthcare
Core	$	76,726	$	194,114	$	270,840	$	13,934	$	256,906
Non-Core		42,730		20,523		63,253		2,638		60,615

		119,456		214,637		334,093		16,572		317,521
Assumed Reinsurance		59,804		35,418		95,222		28,962		66,260

	$	179,260	$	250,055	$	429,315	$	45,534	$	383,781

For most, if not all medical malpractice and other long tail liability lines of business, Bulk and IBNR reserves (which include loss adjustment expense reserves not allocated to specific cases) are the mathematical result of subtracting tabular case reserves from projected ultimate losses derived by the actuarial process. Bulk and IBNR reserves in the case of medical malpractice insurance written on a claims-made reporting policy do not generally represent late reported claims but rather expected upward case reserve movement which will be recognized as additional information develops on individual cases. The relationship between Bulk and IBNR reserves and case reserves can be significantly different between lines of insurance as well as between individual companies. These differences may result from the length of time required to adequately investigate and evaluate individual cases, a company’s individual case reserving philosophy or other reasons.

Reserve Sensitivity

The primary factor affecting the adequacy of reserve estimates in the core direct healthcare area is the trend in pure loss costs (the combination of frequency and average severity changes) related to malpractice coverage. At September 30, 2006 reserve levels, a 1% change in pure loss costs trend produces a change in prior reserves of approximately $8.9 million. Such changes are reflected in the period of change. Reserves related to medical malpractice coverage account for over 90% of core reserves.

In the non-core direct healthcare area, the adequacy of reserves is primarily dependent upon achieving fair settlements with the injured parties and reasonable litigation results. As the individual cases mature and more information becomes available for evaluating individual cases, there is a declining need for Bulk and IBNR reserves. While the Company believes its reserves are adequate, several jurisdictions where the Company issued policies allow extended periods of time to elapse before the judicial or settlement process is completed. Individual settlements or judgments will determine the final incurred losses and thus the adequacy of these reserves. The recent experience has been generally consistent with Company expectations, but no assurance can be given that the Company’s current experience will continue. The current non-core direct healthcare average reserve (including Bulk and IBNR reserves) is approximately $290,000 per outstanding case. If the average settlement ultimately achieved is different by $15,000 for the current average reserve, the ultimate reserves will be affected by approximately $2.3 million.

The sensitivity of the Company’s reserves for Assumed Reinsurance is impacted primarily by three factors: the accuracy of independent actuarial reviews of particular contracts; timely reporting of losses through the worldwide reinsurance system; and the ultimate severity of large excess of loss claims. As time passes, the ability of the underlying insureds to accurately reserve the large excess of loss type cases should improve. However, since the reporting of losses through the worldwide reinsurance market is often slow and is dependent upon the reporting by the ceding companies, the adequacy of these reserves has a potential for volatility and no assurances can be given that further adverse development will not occur.

Deferred Policy Acquisition Costs

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

Investments

The Company considers its fixed maturity and equity securities as available-for-sale securities. Available-for-sale securities are sold in response to a number of issues, including the Company’s liquidity needs, the Company’s statutory surplus requirements and tax management strategies, among others. Available-for-sale securities are recorded at fair value. The related unrealized gains and losses, net of income tax effects, are excluded from net income and reported as a component of stockholders’ equity.

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

•

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

•

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

•

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

•

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

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

Income taxes

At September 30, 2006, the Company had $47.9 million of net deferred income tax assets. Net deferred income tax assets consist of the net temporary differences created as a result of amounts deductible or revenue recognized in periods different for tax return purposes than for accounting purposes. These deferred income tax assets include an asset of $22.2 million for a net operating loss carryforward that will expire in 2021. A net operating loss carryforward is a tax loss that may be carried forward into future years. It reduces taxable income in future years and the tax liability that would otherwise be incurred.

The Company believes it is more likely than not that the deferred income tax assets will be realized through its future earnings. As a result, the Company has not recorded a valuation allowance. The Company’s core operations have historically been profitable on both a GAAP and tax basis. The losses incurred in 2001 to 2004 have been primarily caused by losses in the non-core healthcare and assumed reinsurance businesses. Since the core healthcare liability operation has remained strong and improved over the past years and the non-core healthcare liability and assumed operations are now in run-off, the Company has returned to a position of taxable income.

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

Forward Looking Statements

Certain statements in this quarterly report on Form 10-Q that are not historical in fact constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 (PSLRA). The PSLRA provides certain “safe harbor” provisions for forward-looking statements. All forward-looking statements made in this quarterly report on Form 10-Q are made pursuant to the PSLRA. Words such as, but not limited to, “believe,” “expect,” “anticipate,” “estimate,” “intend,” “plan,” and similar expressions are intended to identify forward-looking statements. Such forward-looking statements involve known and unknown risks, uncertainties and other factors based on the Company’s estimates and expectations concerning future events that may cause the actual results of the Company to be materially different from historical results or from any results expressed or implied by such forward-looking statements. Actuarial estimates of losses and loss adjustment expenses (LAE), expectations concerning the Company’s ability to retain current insureds at profitable levels, successful withdrawal from the assumed reinsurance business, continued solvency of the Company’s reinsurers, obtaining necessary rate change regulatory approvals, expansion of liability insurance business in its principal market and improved performance and profitability are dependent upon a variety of factors, including future economic, competitive and market conditions, frequency and severity of catastrophic events, the level of ratings from recognized rating services, future legislative and regulatory actions, uncertainties and potential delays in obtaining premium rate approvals, the Company’s relationships with independent brokers, the inherent uncertainty of loss and LAE estimates in both the core and discontinued non-core businesses (including a contingent liability related to Highlands Insurance Company), and the cyclical nature of the property and casualty insurance industry, all of which are difficult or impossible to predict accurately and many of which are beyond the control of the Company. The Company is also subject to certain structural risks as an insurance holding company, including statutory restrictions on dividends and other intercompany transactions. In light of the significant uncertainties inherent in the forward-looking information herein, the inclusion of such information should not be regarded as a representation by the Company or any other person that the Company’s objectives or plans will be realized. These risks and uncertainties, as well as the Company’s critical accounting policies, are discussed in more detail under “Risk Factors,” “Management’s Discussion and Analysis – Overview,” and “Management’s Discussion and Analysis – Critical Accounting Policies” in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2005. The Company undertakes no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise.

Information Regarding Non-GAAP Measures

The Company has presented information in this report with respect to premiums written, an operating measure which in management’s opinion provides investors useful industry specific information to evaluate and perform meaningful comparisons of the Company’s performance. Premiums written is a non-GAAP financial measure which represents the premiums charged on policies issued during a fiscal period less any reinsurance. Premiums written is a statutory measure of production levels. Premiums earned, the most directly comparable GAAP measure, represents the portion of premiums written that is recognized as income in the financial statements for the periods presented and earned on a pro-rata basis over the term of the policies. The change in unearned premium reconciles the difference between the two measures.

RESULTS OF OPERATIONS

NINE MONTHS ENDED SEPTEMBER 30, 2006 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30, 2005

Direct Healthcare Liability Insurance Segment

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

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

Direct Healthcare Liability Insurance Segment

Underwriting Results


	CORE			NON-CORE*			TOTAL*
NINE MONTHS ENDED SEPTEMBER 30, 2006
Net premiums written	$	98,757		$	—		$	98,757

Net premiums earned	$	93,066		$	—		$	93,066
Losses and LAE incurred		66,083						66,083
Underwriting expenses		19,294						19,294

Underwriting gain	$	7,689		$	—		$	7,689

Loss ratio		71.0	%
Expense ratio		20.7	%
Combined ratio		91.7	%
NINE MONTHS ENDED SEPTEMBER 30, 2005
Net premiums written	$	102,287		$	56		$	102,343

Net premiums earned	$	96,474		$	73		$	96,547
Losses and LAE incurred		70,229			(2,612	)		67,617
Underwriting expenses		20,161			50			20,211

Underwriting gain	$	6,084		$	2,635		$	8,719

Loss ratio		72.8	%
Expense ratio		20.9	%
Combined ratio		93.7	%

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

Core Business

The Company has realized improvement in its core business throughout the nine months of 2006, including the third quarter of 2006. This represents a continuation of the improvement that began early in 2005. During the past 18 months the frequency of loss in the core operations has declined more than 20%. Although there has been an increase in the severity of losses during this period, it has not offset the effects of the decrease in frequency. The Company continues to realize a loss ratio (losses and LAE to related net premiums earned) of approximately 71% in the core business, which it expects to continue in the near term.

The Company has historically instituted premium rate increases on it policies in California at the beginning of a calendar year. The Company did not have a rate increase in 2006, and does not expect to have a rate increase in 2007, as a result of the performance of its core business during the past two years. In Delaware, the Company implemented a 15% rate increase effective July 1, 2006.

Net premiums written were $98.8 million and net premiums earned were $93.1 million in the nine months ended September 30, 2006; compared to $102.3 million and $ 96.5 million in the nine months ended September 30, 2005. Net premiums earned decreased primarily due to a small decline in policies in-force and decreased premiums from loss-rated groups, as loss experience has improved.

The loss ratio for the nine months ended September 30, 2006 was 71.0% compared to 72.8% in the nine months ended September 30, 2005. The decrease in the loss ratio is due primarily to lower loss estimates for 2006, principally due to a decline in claim frequency.

The underwriting expense ratio (expenses related to net premiums earned) decreased slightly to 20.7% in the first nine months ended September 30, 2006 from 20.9% in the first nine months of 2005.

Non-Core Business

Outstanding reserves for the non-core healthcare business declined to $45.3 million at September 30, 2006 from $60.6 million at December 31, 2005, and the number of open claims decreased to 156 from 229.

The underwriting results during the first nine months of 2006 were diminimus and reflect the fact that no significant changes in reserve levels were required during that period. In 2005, during the third quarter, the Company realized better than expected experience in resolving claims in the run-off of the non-core healthcare business, including fewer than expected claims reported that year. The Company reduced reserves by approximately $2.6 million during that quarter, which resulted in the underwriting gain for the nine months ended September 30, 2005.

Assumed Reinsurance Segment

Assumed reinsurance represents the book of assumed worldwide reinsurance of professional, commercial and personal liability coverages, commercial and residential property risks and accident and health, workers’ compensation and marine coverages.

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


	Assumed Reinsurance Segment Underwriting Results
	2006			2005
FOR THE NINE MONTHS ENDED SEPTEMBER 30,
Net premiums written	$	179		$	(1,524	)

Net premiums earned	$	179		$	(139	)
Underwriting expenses
Losses and LAE incurred		8,501			18,399
Underwriting and other operating expenses		168			4,290

Underwriting loss	$	(8,490	)	$	(22,828	)

The net premiums written and earned in 2006 and 2005 are primarily from premium adjustments related to old underwriting years.

The underwriting losses for the nine months ended September 30, 2006 are primarily related to increases in reserve estimates for a small number of contracts. For 2005, the loss was principally attributable to adjustments made during the third quarter to amounts ceded by the Company to Rosemont Re, its principal reinsurer, in connection with a review by the parties, additional reported claims and increased loss estimates received by the Company during that quarter from its reinsureds, including in large part London based insurers and reinsurers, and additional losses and LAE recorded under certain bail bond treaties.

The Rosemont Re reinsurance treaty entered into in December 2002 effectively cedes all of the unearned premium and future reported premium after June 30, 2002, for the assumed reinsurance business written by the Company for underwriting years 2001 and 2002. This treaty relieves the Company of significant underwriting risk and written premium leverage and significantly improves the Company’s risk-based capital adequacy ratios under both the A.M. Best and NAIC models. The treaty has no limitations on loss recoveries and includes a profit-sharing provision should the combined ratios calculated on the base premium ceded be below 100%. The treaty requires Rosemont Re to reimburse the Company for its acquisition and administrative expenses.

The Rosemont Re reinsurance treaty has both prospective and retroactive elements as defined in FASB No. 113, Accounting and Reporting for Reinsurance of Short-Duration and Long-Duration Contracts. As such, any gains under the contract will be deferred and amortized to income based upon the expected recovery. No gains are anticipated currently. Losses related to future earned premium ceded, as well as development on losses related to existing earned premium ceded after June 30, 2002, will ultimately determine whether a gain will be recorded under the contract. The retroactive accounting treatment required under FASB 113 requires that a charge to income be recorded to the extent premiums ceded under the contract are in excess of the estimated losses and expenses ceded under the contract.

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

Other Operations

Net investment income increased 15.7% to $15.5 million for the nine months ended September 30, 2006 from $13.4 million for the nine months ended September 30, 2005. The increase in investment income principally reflects an increase in the average annual rate of return on invested assets from 3.3% to 3.9% for the nine months ended September 30, 2005 and September 30, 2006 respectively.

Net realized investment loss of $423 thousand was recorded for the nine months ended September 30, 2006 versus realized investment losses of $258 thousand in the nine months ended September 30, 2005.

Expenses of $1.6 million included in Other operating expenses are costs related to the proxy challenge against the Company’s slate of director nominees for 2006.

THREE MONTHS ENDED SEPTEMBER 30, 2006 COMPARED TO THREE MONTHS ENDED SEPTEMBER 30, 2005

Direct Healthcare Liability Insurance Segment

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

Direct Healthcare Liability Insurance Segment

Underwriting Results


	CORE			NON-CORE*			TOTAL*
THREE MONTHS ENDED SEPTEMBER 30, 2006
Net premiums written	$	6,703		$	—		$	6,703

Net premiums earned	$	30,494		$	—		$	30,494
Losses and LAE incurred		21,679			—			21,679
Underwriting expenses		6,031			—			6,031

Underwriting gain	$	2,784		$	—		$	2,784

Loss ratio		71.1	%
Expense ratio		19.8	%
Combined ratio		90.9	%
THREE MONTHS ENDED SEPTEMBER 30, 2005
Net premiums written	$	6,911		$	(102	)	$	6,809

Net premiums earned	$	32,017		$	(97	)	$	31,920
Losses and LAE incurred		21,467			(2,604	)		18,863
Underwriting expenses		6,131			(27	)		6,104

Underwriting gain	$	4,419		$	2,534		$	6,953

Loss ratio		67.0	%
Expense ratio		19.1	%
Combined ratio		86.1	%

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

Core Business

Net premiums written were $6.7 million and net premiums earned were $30.5 million in the three months ended September 30, 2006; compared to $6.9 million and $32.0 million in the three months ended September 30, 2005. Net premiums earned decreased 4.7%, primarily due to a small decline in policies in-force and decreased premium from loss-rated groups as loss experience improved. Net premiums written decreased only slightly in the 2006 period, compared to the prior year.

The loss ratio (losses and LAE related to net premiums earned) for the third quarter 2006 was 71.1% compared to 67.0% in the third quarter 2005. The difference in the loss ratios was attributable to recognition in the 2005 third quarter of a significant reduction in claim frequency in the core business, compared to the earlier periods in 2005.

The underwriting expense ratio (expenses related to net premiums earned) increased to 19.8% in the third quarter 2006 from 19.1% in the third quarter 2005.

Non-Core Business

Outstanding reserves for the non-core healthcare declined to $45.3 million as of September 30, 2006 from $48.7 million at June 30, 2006 and the number of open claims decreased to 156 from 170 for the same period. The underwriting results in the third quarters of 2006 were diminimus and reflect the fact that no significant changes in reserve levels were required during the quarter. In the 2005 third quarter, the Company realized better than expected experience in resolving claims in the run-off of the non-core healthcare business, including fewer than expected claims reported that year. The Company reduced reserves by approximately $2.6 million during that quarter, which resulted in the underwriting gain for the non-core healthcare business for the three months ended September 30, 2005.

Assumed Reinsurance Segment

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


	Assumed Reinsurance Segment Underwriting Results
	2006			2005
FOR THE THREE MONTHS ENDED SEPTEMBER 30,
Net premiums written	$	(331	)	$	(675	)

Net premiums earned	$	(331	)	$	(549	)
Underwriting expenses
Losses and LAE incurred		1,999			14,095
Underwriting and other operating expenses		260			2,678

Underwriting loss	$	(2,590	)	$	(17,322	)

The net premiums written and earned in 2006 and 2005 are primarily from premium adjustments related to old underwriting years.

The underwriting loss for the three months ended September 30, 2006 was primarily related to increased reserve estimates for a small number of contracts. The 2005 third quarter underwriting loss was principally attributable to adjustments made during the third quarter to amounts ceded by the Company to Rosemont Re, its principal reinsurer, in connection with a review by the parties, additional reported claims and increased loss estimates received by the Company during the quarter from its reinsureds, including in large part London based insurers and reinsurers, and additional losses and LAE recorded for the bail and immigration bond treaties.

Other Operations

Net investment income increased 15.6% to $5.3 million for the three months ended September 30, 2006 from $4.6 million for the three months ended September 30, 2005. Investment income reflects an increase in the average rate of return on invested assets from 3.4% to 4.0% for the three months ended September 30, 2005 and 2006, respectively.

Net realized investment losses of $259 thousand were recorded for the third quarter 2006 versus net realized investment losses of $264 thousand in the third quarter 2005.

Expenses of $43,000 included in Other operating expenses related to a proxy challenge against the Company’s slate of director nominees for 2006.

LIQUIDITY AND CAPITAL RESOURCES

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

Because of uncertainty related to the timing of the payment of claims, cash from operations for a property and casualty insurance company can vary substantially from period to period. During the first nine months of 2006, the Company had positive cash flow from operations of $2.4 million compared to a negative cash flow of $35.8 million in 2005. The positive cash flow in 2006 is primarily related to reduced claims payments associated with the non-core physician and assumed reinsurance programs, which are now in run-off. The Company maintains a significant portion of its investment portfolio in high-quality short-term securities and cash to meet short-term operating liquidity requirements, including the payment of losses and LAE. Cash and cash equivalents investments totaled $114.2 million or 21.4% of invested assets, at September 30, 2006. The Company believes that all of its short-term and fixed maturity securities are readily marketable and have scheduled maturities in line with projected cash needs. Premiums generated by the Company’s core operations have historically produced positive cash flow after consideration of investment income.

The Company invests its cash flow from operations principally in taxable fixed maturity securities. The Company’s current policy is to limit its investment in unaffiliated equity securities and mortgage loans to no more than 8% of the total market value of its investments. The market value of the Company’s portfolio of unaffiliated equity securities was $2.0 million at September 30, 2006. The Company plans to continue its emphasis on fixed maturity securities investments for the indefinite future.

The Company leases approximately 95,000 square feet of office space for its headquarters. The lease is for a term ending in 2008, and the Company has two options to renew the lease for a period of five years each.

SCPIE Holdings is an insurance holding company whose assets primarily consist of all of the capital stock of its insurance company subsidiaries. Its principal sources of funds are dividends from its subsidiaries and proceeds from the issuance of debt and equity securities. The insurance company subsidiaries are restricted by state regulation in the amount of dividends they can pay in relation to earnings or surplus, without the consent of the applicable state regulatory authority, principally the California Department of Insurance. SCPIE Holdings’ principal insurance company subsidiary, SCPIE Indemnity, may pay dividends to SCPIE Holdings in any 12-month period, without regulatory approval, to the extent such dividends do not exceed the greater of (i) 10% of its statutory surplus at the end of the preceding year or (ii) its statutory net income for the preceding year. Applicable regulations further require that an insurer’s statutory surplus following a dividend or other distribution be reasonable in relation to its outstanding liabilities and adequate to meet its financial needs, and permit the payment of dividends only out of statutory earned (unassigned) surplus unless the payment out of other funds receives regulatory approval. The amount of dividends that SCPIE Indemnity is able to pay to SCPIE Holdings during 2006 without prior regulatory approval is approximately $14.6 million. As of September 30, 2006, no dividends had been paid to SCPIE Holdings.

As of September 30, 2006, SCPIE Holdings held cash and short-term securities of $3.3 million. The Company also expects to receive a dividend from SCPIE Indemnity of approximately $3.0 million in 2006. Based on historical trends, market conditions and its business plans, the Company believes that its sources of funds (including dividends from the insurance company subsidiaries) will be sufficient to meet the liquidity needs of SCPIE Holdings over the next 18 months.

The NAIC has developed a methodology for measuring the adequacy of an insurer’s surplus which includes a risk-based capital (RBC) formula designed to measure state statutory capital and surplus needs. The RBC rules provide for different levels of regulatory attention based on four thresholds determined under the formula. At December 31, 2005, the RBC level of each insurance company subsidiary exceeded the threshold requiring the least regulatory attention. At December 31, 2005, SCPIE Indemnity exceeded this threshold by $85.9 million.

The Company believes that it has the ability to fund its continuing operations from its premiums written and investment income. The Company plans to continue its focus on the efficient operation of its core business, while at the same time continuing to adjudicate and settle claims incurred in its discontinued non-core business. As the Company continues to run-off the non-core loss and LAE reserves, its capital adequacy position should improve.

As of September 30, 2006, the Company’s statutory surplus was approximately $160.5 million. The principal differences between statutory surplus and stockholders’ equity are deferred policyholder acquisition costs and the deferred federal income tax asset.

EFFECT OF INFLATION

The primary effect of inflation on the Company is considered in pricing and estimating reserves for unpaid losses and LAE for claims in which there is a long period between reporting and settlement, such as medical malpractice claims. The actual effect of inflation on the Company’s results cannot be accurately known until claims are ultimately settled. Based on actual results to date, the Company believes that loss and LAE reserve levels and the Company’s rate making process adequately incorporate the effects of inflation.

ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

The Company invests its assets primarily in fixed maturity securities, which at September 30, 2006 comprised 78.2.% of total investments at market value. Corporate bonds represent 40.0% and U.S. government bonds represent 42.1% of the fixed-maturity investments, with the remainder consisting of mortgage-backed and asset-backed securities. Equity securities, consisting primarily of common stocks, account for less than 1.0% of total investments at market value. The remainder of the investment portfolio consists of cash and highly liquid short-term investments, which are primarily overnight bank repurchase agreements and short-term money market funds.

The value of the fixed maturity portfolio is subject to interest rate risk. As market interest rates decrease, the value of the portfolio increases with the opposite holding true in rising interest rate environments. A common measure of the interest sensitivity of fixed-maturity assets is modified or effective duration, a calculation that takes maturity, coupon rate, yield and call terms to calculate an average age of the expected cash flows. The longer the duration, the more sensitive the asset is to market interest rate fluctuations. The effective duration of the fixed maturity portfolio at September 30, 2006 was 3.0 years.

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

At September 30, 2006, the carrying value of the investment portfolio included $7.9 million in net unrealized losses. At December 31, 2005, the investment portfolio included $7.7 million in net unrealized losses.

ITEM 4.

CONTROLS AND PROCEDURES

The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in its reports under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission (SEC), and that such information is accumulated and communicated to the Company’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

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

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

PART II — OTHER INFORMATION

ITEM 1.

LEGAL PROCEEDINGS

General

Bail and Immigration Bond Proceedings

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

During 2004, CBC failed and a large number of bond losses emerged for 2000 and subsequent years. There are a number of pending disputes between the primary insurers and reinsurers in the CBC program. AHI has been engaged in arbitration proceedings with each of the primary insurers to resolve these disputes. The Company’s arbitration proceeding with Aegis is concluded and the Company has commuted any future LAE and bail bond losses with Aegis. The Company paid to Aegis a total amount slightly in excess of the amount reserved for this agreement at December 31, 2005. The arbitration hearing with Sirius is scheduled for March 2007, and the Highlands arbitration proceeding is still in its early stages.

The Company has recorded in the financial statements its best reserve estimate of $3.7 million to cover the ultimate net liability under the Sirius and Highlands reinsurance agreements. Highlands has provided claim information to the Company only with respect to alleged losses during 2001 and 2002 under bail bonds issued in the State of New Jersey. Highlands has indicated in filings that it has significant additional exposure under federal immigration bonds, bail bonds issued in states other than New Jersey, and federal court bonds. Highlands has not provided sufficient information to measurably quantify these additional losses or allocate such losses among the 2001 and 2002 years in which AHI participated and the 2000 year in which the Company did not participate. Given the uncertainties of these actual and prospective bail bond and other claims, future loss development on the CBC program could be materially greater than the reserves estimated by the Company at September 30, 2006. The Company intends to vigorously contest the claims of both Sirius and Highlands.

ITEM 1a.

RISK FACTORS

There have been no material changes in the risk factors as previously disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2005, under the caption “Risk Factors.”

ITEM 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

None.

ITEM 3.

DEFAULTS UNDER SENIOR SECURITIES

None.

ITEM 4.

SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None

ITEM 5.

OTHER INFORMATION

None

ITEM 6.

EXHIBITS

The following exhibits are included herewith.


NUMBER		DOCUMENT

31.1		Certification of Registrant’s Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934 and Section 302 of the Sarbanes-Oxley Act of 2002.

31.2		Certification of Registrant’s Chief Financial Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934 and Section 302 of the Sarbanes-Oxley Act of 2002.

32.1		Certification of Registrant’s Chief Executive Officer pursuant to Rule 13a-14(b) of the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350, as created by Section 906 of the Sarbanes-Oxley Act of 2002. This certification is being furnished solely to accompany this Quarterly Report on Form 10-Q and is not being filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and is not to be incorporated by reference into any filing of the Company.

32.2		Certification of Registrant’s Chief Financial Officer pursuant to Rule 13a-14(b) of the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350, as created by Section 906 of the Sarbanes-Oxley Act of 2002. This certification is being furnished solely to accompany this Quarterly Report on Form 10-Q and is not being filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and is not to be incorporated by reference into any filing of the Company.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


	SCPIE HOLDINGS INC.

Date: November 7, 2006	By:	/s/ Donald J. Zuk
		Donald J. Zuk
		President and Chief Executive Officer

Date: November 7, 2006	By:	/s/ Robert B. Tschudy
		Robert B. Tschudy
		Senior Vice President and Chief Financial Officer