SCPIE HOLDINGS INC - 10-Q Quarterly Report

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTER ENDED SEPTEMBER 30, 2002	COMMISSION FILE NO. 1-12449

SCPIE HOLDINGS INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

DELAWARE		95-4457980
(STATE OR OTHER JURISDICTION OF INCORPORATION OR ORGANIZATION)		(I.R.S. EMPLOYER IDENTIFICATION NO.)

1888 CENTURY PARK EAST, STE. 800 LOS ANGELES, CALIFORNIA		90067
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)		(ZIP CODE)

REGISTRANT’S TELEPHONE NUMBER, INCLUDING AREA CODE:
(310) 551-5900

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

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 13, 2002

Preferred stock, par value $l.00 per share		No shares outstanding
Common stock, par value $0.0001 per share		9,826,053 shares

PART I -- FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS:

SCPIE HOLDINGS INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)

			SEPTEMBER 30, 2002			DECEMBER 31 2001

			(unaudited)
	ASSETS
Securities available-for-sale:
	Fixed maturity investments, at fair value (amortized cost 2002 - $540,971; 2001 - $565,225)		$	571,887		$	569,144
	Equity investments, at fair value (cost 2002 - $29,786; 2001 - $29,744)			28,740			29,098

		Total securities available-for-sale		600,627			598,242
Other Investment				15,000			14,928
Short-term investments				95,649			84,989
Real estate				15,497			15,766

		Total investments		726,773			713,925
Cash				10,366			10,162
Accrued investment income				8,763			8,673
Premiums receivable				118,657			82,490
Reinsurance recoverable on paid and unpaid claims				82,381			79,248
Deferred policy acquisition costs				21,322			19,465
Federal income taxes receivable				230			11,558
Deferred federal income taxes				30,050			36,661
Costs in excess of net assets acquired				5,324			5,324
Property and equipment, net				5,602			6,839
Other assets				7,072			3,301

		Total assets	$	1,016,540		$	977,646

	LIABILITIES
Reserves:
	Losses and loss adjustment expenses		$	631,168		$	576,636
	Unearned premiums			107,571			101,868

		Total reserves		738,739			678,504
	Bank loan payable			0			9,000
	Other liabilities			26,338			30,754

		Total liabilities		765,077			718,258

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, 2002– 9,326,053 shares outstanding 2001 – 9,318,066 shares outstanding				1			1
Additional paid-in capital				37,805			37,803
Retained Earnings				297,365			322,734
Treasury stock, at cost 2002 – 2,966,068 shares and 2001 – 2,974,025 shares				(98,654	)		(98,983	)
Subscription notes receivable				(3,771	)		(4,050	)
Accumulated other comprehensive income				18,717			1,883

		Total stockholders’ equity		251,463			259,388

		Total liabilities and stockholders’ equity	$	1,016,540		$	977,646

See accompanying notes to Consolidated Financial Statements.

SCPIE HOLDINGS INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)

				THREE MONTHS ENDED SEPTEMBER 30,						NINE MONTHS ENDED SEPTEMBER 30,

				2002				2001		2002			2001

Revenues:
	Premiums earned				$	75,498		$	58,920	$	235,377		$	164,095
	Net investment income					8,448			9,627		24,903			27,339
	Realized investment gains					4,003			2,947		5,379			4,140
	Income from affiliates					42			439		374			1,039
	Other revenue					142			173		1,022			415

		Total revenues				88,133			72,106		267,055			197,028
Expenses:
	Losses and loss adjustment expenses					88,045			54,105		245,072			195,221
	Other operating expenses					18,162			14,695		58,109			40,452
	Interest expense					—			310		66			1,240

		Total expenses				106,207			69,110		303,247			236,913

Income (loss) before federal income taxes						(18,074	)		2,996		(36,192	)		(39,885	)
Federal income taxes						(6,629	)		635		(13,684	)		(15,407	)

			Net income (loss)		$	(11,445	)	$	2,361	$	(22,508	)	$	(24,478	)

Basic earnings (loss) per share					$	(1.23	)	$	0.25	$	(2.41	)	$	(2.62	)
Diluted earnings (loss) per share						(1.23	)		0.25		(2.41	)		(2.62	)
Cash dividend declared per share of common stock					$	0.10		$	0.10	$	0.30		$	0.30

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY
(DOLLARS IN THOUSANDS)
(UNAUDITED)

			COMMON STOCK		ADDITIONAL PAID-IN CAPITAL		ACCUMULATED OTHER COMPREHENSIVE INCOME		RETAINED EARNINGS			TREASURY STOCK			STOCK SUBSCRIPTION NOTES RECEIVABLE			TOTAL STOCK- HOLDERS’ EQUITY

BALANCE AT JANUARY 1, 2002			$	1	$	37,803	$	1,883	$	322,734		$	(98,983	)	$	(4,050	)	$	259,388
	Net loss			—		—		—		(22,508	)		—			—			(22,508	)
	Other comprehensive income for unrealized gains on securities sold, net of reclassification adjustments of $433 for losses included in net income			—		—		16,834		—			—			—			16,834

		Comprehensive loss		—		—		—		—						—			(5,674	)
	Treasury stock reissued			—		—		—		—			329			—			329
	Repayment of stock subscription note			—		—		—		—			—			279			279
	Cash dividends			—		—		—		(2,861	)		—			—			(2,861	)
	Other			—		2		—		—			—			—			2

BALANCE AT SEPTEMBER 30, 2002			$	1	$	37,805	$	18,717	$	297,365		$	(98,654	)	$	(3,771	)	$	251,463

See accompanying notes to Consolidated Financial Statements.

SCPIE HOLDINGS INC. AND SUBISIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
(UNAUDITED)

			NINE MONTHS ENDED SEPTEMBER 30,

			2002			2001

OPERATING ACTIVITIES
Net loss			$	(22,508)		$	(24,478)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
	Provisions for amortization and depreciation			3,709			3,050
	Provision for deferred federal income taxes			(13,684	)		(15,095	)
	Realized investment gains			(5,379	)		(4,140	)
	Equity in earnings of affiliate			(374	)		(1,039	)
Changes in operating assets and liabilities:
	Deferred acquisition costs			(1,857	)		—
	Accrued investment income			(90	)		341
	Federal income tax receivable			22,031			—
	Unearned premiums			5,703			30,168
	Loss and loss adjustment expense reserves			54,532			59,252
	Reinsurance recoverable on paid and unpaid claims			(3,133	)		(14,080	)
	Other liabilities			(4,416	)		18,533
	Premium receivable			(36,167	)		(32,020	)
	Other assets			(3,770	)		(43	)

		Net cash provided by (used in) operating activities		(5,403	)		20,449
INVESTING ACTIVITIES
	Purchases—fixed maturities			(279,959	)		(382,970	)
	Sales—fixed maturities			307,479			387,482
	Maturities—fixed maturities			—			12,197
	Purchases—equities			—			(2,500	)
	Sales—equities			—			27
	Change in short-term investments, net			(10,660	)		(34,103	)
	Change in funds held by reinsured			—			(2,023	)

		Net cash provided by (used in) investing activities		16,860			(21,890	)

FINANCING ACTIVITIES
	Purchase of treasury stock			—			(516	)
	Reissue of treasury shares			329			238
	Repayment of stock subscription note			279			—
	Cash dividends			(2,861	)		(2,792	)
	Bank loan payment			(9,000	)		—

		Net cash used in financing activities		(11,253	)		(3,070	)

Increase (decrease) in cash				204			(4,511	)
Cash at beginning of period				10,162			10,418

Cash at end of period			$	10,366		$	5,907

See accompanying notes to Consolidated Financial Statements.

SCPIE HOLDINGS INC. AND SUBISIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

SEPTEMBER 30, 2002

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 wholly-owned subsidiaries, principally SCPIE Indemnity Company (SCPIE Indemnity), American Healthcare Indemnity Company (AHI), American Healthcare Specialty Insurance Company (AHSIC), SCPIE Underwriting Limited (SUL) and SCPIE Management Company (SMC), collectively, the Company.

These financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with instructions to Form 10-Q and Article 7 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the nine-month period ended September 30, 2002 are not necessarily indicative of the results that may be expected for the year ending December 31, 2002. For further information, refer to the consolidated financial statements and notes thereto included in SCPIE Holdings Inc.’s Annual Report on Form 10-K for the year ended December 31, 2001.

Certain 2001 amounts have been reclassified to conform to the 2002 presentation.

2. EARNINGS PER SHARE

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

		THREE MONTHS ENDED SEPTEMBER 30,					NINE MONTHS ENDED SEPTEMBER 30,

(IN THOUSANDS, EXCEPT PER SHARE DATA)		2002			2001		2002			2001

Numerator
	Net income (loss)	$	(11,445	)	$	2,361	$	(22,508	)	$	(24,478	)
Numerator for:
	Basic earnings (loss) per share of common stock		(11,445	)		2,361		(22,508	)		(24,478	)
	Diluted earnings (loss) per share of common stock		(11,445	)		2,361		(22,508	)		(24,478	)
Denominator:
	Denominator for basic earnings (loss) per share of common stock – weighted-average shares outstanding		9,326			9,342		9,321			9,340
Effect of dilutive securities:
	Stock options		—			—		—			—

	Denominator for diluted earnings (loss) per share of common stock adjusted – weighted-average shares outstanding		9,326			9,342		9,321			9,340

Basic earnings (loss) per share of common stock		$	(1.23	)	$	0.25	$	(2.41	)	$	(2.62	)
Diluted earnings (loss) per share of common stock		$	(1.23	)	$	0.25	$	(2.41	)	$	(2.62	)

For the quarter and nine months ended September 30, 2002, no incremental shares related to stock options are included in the diluted number of shares outstanding as the impact would have been antidilutive.

3. INVESTMENTS

The Company’s investments in available-for-sale securities at September 30, 2002 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			125,375	$	10,699	$	2	$	136,072
		State, Municipalities and Political Subdivisions			85,870		5,179				91,049
		Mortgage-backed securities, Collateralized mortgage obligations, and Asset-backed securities			57,982		3,506		—		61,488
			Corporate		271,744		12,897		1,363		283,278

Total fixed-maturity securities					540,971		32,281		1,365		571,887
Equity securities					29,786		1,821		2,867		28,740

Total				$	570,757	$	34,102	$	4,232	$	600,627

4. FEDERAL INCOME TAXES

A reconciliation of income tax benefit in the accompanying statements of income are summarized as follows:

		NINE MONTHS ENDED SEPTEMBER 30,

		2002			2001

		(IN THOUSANDS)
Federal income tax at 35%		$	(12,668	)	$	(13,960	)
Increase (decrease) in taxes resulting from:
	Tax-exempt interest		(1,120	)		(1,680	)
	Goodwill		—			158
	Other		104			75

Total		$	(13,684	)	$	(15,407	)

5. 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, 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 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 Company announced after the end of the second quarter 2002 that it planned to exit the assumed reinsurance business through a series of reinsurance agreements. These agreements have not been completed as of November 13, 2002.

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

Nine Months Ended September 30, 2002	Direct Healthcare Liability Insurance			Assumed Reinsurance			Other		Total

Premiums earned	$	124,083		$	111,294		$	—	$	235,377
Net investment income		—			—			24,903		24,903
Realized investment gains		—			—			5,379		5,379
Equity in earnings from affiliate		—			—			374		374
Other revenue		—			—			1,022		1,022

Total revenues		124,083			111,294			31,678		267,055
Losses and loss adjustment expenses	$	137,268		$	107,804			—		245,072
Amortization of deferred policy acquisition costs		12,487			30,545			—		43,032
Other operating expenses		13,770			1,307			—		15,077
Interest expenses		—			—			66		66

Total expenses		163,525			139,656			66		303,247

Segment (loss) income before income taxes	$	(39,442	)	$	(28,362	)	$	31,612	$	(36,192	)

Combined ratio		131.79	%		125.48	%		—		128.83	%
Segment assets	$	176,098		$	103,303		$	737,139	$	1,016,540

Nine Months Ended September 30, 2001	Direct Healthcare Liability Insurance			Assumed Reinsurance			Other		Total


Premiums earned	$	112,851		$	51,244		$	—	$	164,095
Net investment income		—			—			27,339		27,339
Realized investment gains		—			—			4,140		4,140
Equity in earnings from affiliate		—			—			1,039		1,039
Other revenue		—			—			415		415

Total revenues	$	112,851			51,244			32,933		197,028
Losses and loss adjustment expenses		150,477			44,744			—		195,221
Amortization of deferred policy acquisition costs		21,801			4,709			—		26,510
Other operating expenses		12,852			1,090			—		13,942
Interest expenses		—			—			1,240		1,240

Total expenses		185,130			50,543			1,240		236,913

Segment (loss) income before income taxes	$	(72,279	)	$	701		$	31,693	$	(39,885	)

Combined ratio		164.05	%		98.63	%				144.38	%
Segment assets	$	164,596		$	45,606		$	733,187	$	943,389

Three Months Ended September 30, 2002	Direct Healthcare Liability Insurance			Assumed Reinsurance			Other		Total

Premiums earned	$	38,729		$	36,769		$	—	$	75,498
Net investment income		—			—			8,448		8,448
Realized investment losses		—			—			4,003		4,003
Equity in earnings from affiliate		—			—			42		42
Other revenue		—			—			142		142

Total revenues		38,729			36,769			12,635		88,133

Losses and loss adjustment expenses		48,978			39,067			—		88,045
Amortization of deferred policy acquisition costs		3,920			10,036			—		13,956
Other operating expenses		3,783			423			—		4,206
Interest expenses		—			—			—		—

Total expenses		56,681			49,526			—		106,207

Segment (loss) income before income taxes	$	(17,952	)	$	(12,757	)	$	12,635	$	(18,074	)

Combined ratio		146.35	%		134.69	%		—		140.68	%
Segment assets	$	176,098		$	103,303		$	737,139	$	1,016,540

Three Months Ended September 30, 2001	Direct Healthcare Liability Insurance			Assumed Reinsurance			Other		Total

Premiums earned	$	35,551		$	23,369		$	—	$	58,920
Net investment income		—			—			9,627		9,627
Realized investment gains		—			—			2,947		2,947
Equity in earnings from affiliate		—			—			439		439
Other revenue		—			—			173		173

Total revenues		35,551			23,369			13,186		72,106

Losses and loss adjustment expenses		34,012			20,093			—		54,105
Amortization of deferred policy acquisition costs		6,508			2,542			—		9,050
Other operating expenses		5,300			345			—		5,645
Interest expenses		—			—			310		310

Total expenses		45,820			22,980			310		69,110

Segment (loss) income before income taxes	$	(10,269	)	$	389		$	12,876	$	2,996

Combined ratio		128.89	%		98.33	%		—		117.29	%
Segment assets	$	164,596		$	45,606		$	733,187	$	943,389

6. COMMITMENTS AND CONTINGENCIES

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

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 2001, HIG announced that it would cease issuing any new or renewal policies as soon as practical. HIG has advised the Company that at September 30, 2002, the HIG insurance company subsidiaries had paid losses and LAE under the subject policies of $47.1 million and had established case loss reserves of $19.1 million, net of reinsurance. Incurred but not reported losses are expected to emerge; however, the amount cannot be reasonably estimated 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; however, 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 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 $41.2 million at December 31, 2001, which includes $152.6 million of reserve discounting. In February 2002, the Texas Department of Insurance issued Supervisory Orders to the Texas HIG Insurance Company subsidiaries. By their terms, the Orders are also binding on all of the HIG affiliates. Under these and similar orders in other jurisdictions, the HIG Insurance Company subsidiaries are effectively restricted to the “run off” payment of losses.

On October 31, 2002, HIG announced that the holding company and five of its non-insurance company subsidiaries have commenced Chapter 11 bankruptcy proceedings in the United States Bankruptcy Court for the District of Delaware. According to the Disclosure Statement dated October 31, 2002 filed by HIG in the bankruptcy proceeding, HIG believes that the bankruptcy filing, in and of itself, will not cause any of the state regulatory authorities “to either seize control of any material Insurance Company Subsidiary’s assets or take any other action materially detrimental” to HIG. This Disclosure Statement includes proforma financial projections for the insurance subsidiaries which project continued liquidation operations for five years.

The Company has received notification that it will be assessed California franchise taxes on dividends distributed to the Company from its insurance subsidiary relating to calendar years 1997 to 2000 based upon the decision in Ceridian v. FTB, (2001) 85 Cal.App. 4^th 875 (as modified 86 Cal.App. 4^th 383). The Company believes it has meritorious defenses and on November 1, 2002, filed an appeal with the Franchise Tax Board protesting the assessment. The company believes other California domiciled insurance holding companies have or will appeal several assessments made to their respective companies. The ultimate resolution of the matter could result in additional taxes of up to $15 million. No amount has been reported in the Company’s financial statements pending the outcome of the appeal.

7. ACCOUNTING PRONOUNCEMENTS

During 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets (FAS 142), which requires that, effective January 1, 2002, goodwill and certain other intangible assets deemed to have an indefinite useful life, cease amortizing. The following table illustrates the financial statement impact as though FAS 142 was in effect beginning January 1, 2001 (in thousands, except earning per share amounts):

	THREE MONTHS ENDED SEPTEMBER 30		NINE MONTHS ENDED SEPTEMBER 30

	2001		2001

Reported net income (loss)	$	2,361	$	(24,478	)
Add back: intangible amortization		207		621

Adjusted net income (loss)		2,568		(23,857	)
Basic and diluted income per share:
Reported net loss per share	$	0.25	$	(2.62	)
Intangible amortization	$	.02	$	.06

Adjusted net income (loss) per share	$	0.27	$	(2.56	)

ITEM 2.

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

GENERAL

The Company currently conducts its insurance business in two segments: direct healthcare liability insurance and assumed reinsurance operations. 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, accident and health and workers’ compensation coverages and marine coverages.

The Company reported a net loss of $58 million for the fiscal year 2001 primarily as a result of direct healthcare losses outside of California and the September 11, 2001 World Trade Center loss in its assumed reinsurance operations. This loss and the resulting decrease in statutory surplus combined with an increase in written premiums caused the capital adequacy ratios for the Company to decline significantly. As a result, on February 21, 2002, AM Best & Co., the leading rating organization for the industry, downgraded the financial strength rating of the Company’s insurance subsidiaries to B++ (very good) from A (excellent). The Company reported a year to date net loss as of June 30, 2002, primarily resulting from additional losses related to the direct healthcare business outside of California and its assumed reinsurance, of $11.1 million, and on October 7, 2002, AM Best further reduced its rating to B+(very good). In order to improve its capital adequacy ratios, the Company needs to either raise additional capital or reduce its written premium leverage. Because of current market conditions and the current price of SCPIE stock, raising additional capital is not considered a viable option. Therefore, the Company is pursuing an initiative to divest its reinsurance operations through one or more reinsurance transactions. The Company continues to hold discussions with interested parties and intends to complete the transactions to reduce its net premium writings and its balance sheet exposures related to the assumed reinsurance operations in the fourth quarter 2002. If a transaction is completed on satisfactory terms, the Company’s capital adequacy ratios will improve from current levels. The Company can make no assurance that a transaction will be completed, but if one is completed, given current reinsurance market conditions, it will result in additional charges to operating results.

Certain statements in this report on Form 10-Q that are not historical in fact constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements involve known and unknown risks, uncertainties and other factors based on the Company’s estimates and expectations concerning future events that may cause the actual results of the Company to be materially different from historical results or from any results expressed or implied by such forward-looking statements. Actuarial estimates of losses and loss expenses and expectations concerning the Company’s ability to retain current insureds at profitable levels, maintain its existing reinsurance relationships, expand its healthcare liability insurance business in its principal market, and divest its assumed reinsurance operations are dependent upon a variety of factors, including future economic, competitive and market conditions, frequency and severity of catastrophic events, future legislative and regulatory changes, the level of ratings established by national rating organizations, the inherent uncertainty of loss and loss expense estimates, and the cyclical nature of the property and casualty 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, including statutory restrictions on dividends and other intercompany transactions within the Company’s holding structure. These risks and uncertainties are discussed in more detail under “Business – Risk Factors,” and “ Management’s Discussion and Analysis – General” in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2001.

RESULTS OF OPERATIONS

THREE MONTHS ENDED SEPTEMBER 30, 2002 COMPARED TO THREE MONTHS ENDED SEPTEMBER 30, 2001

Consolidated Operating Results

Total revenues were $88.1 million for the three months ended September 30, 2002, an increase of 22.2% over total revenues of $72.1 million for the same period in 2001. Premiums earned increased from $58.9 million to $75.5 million for the third quarter ended September 30, 2002, an increase of 16.6 million, of which $13.4 million was produced by the assumed reinsurance segment and $3.2 million by the direct healthcare liability segment.

Net investment income decreased to $8.4 million for the three months ended September 30, 2002, a decrease of 12.5% from $9.6 million a year ago. Variation in investment returns occur due to interest rate fluctuations, the allocation of investments between taxable and nontaxable securities and general conditions in the securities markets that are evaluated by the Company in accordance with its investment guidelines. The average rate of return on invested assets was 4.82% and 5.41% for the three months ended September 30, 2002 and 2001, respectively.

Total expenses were $106.2 million for the three months ended September 30, 2002, an increase of $37.1 million over total expenses of $69.1 million for the same period in 2001. The loss ratios were 116.6% and 91.8% in the third quarter of 2002 and 2001 respectively. The 2002 third quarter results include additional recorded losses of $19.4 million due to increases in estimates of losses incurred in prior years for healthcare business primarily outside of California and for the Company’s assumed reinsurance operations. This amount was partially offset by $4.4 million of reductions in estimates of losses incurred in prior years for healthcare business in California.

The Company recorded a net loss of $11.4 million for the three months ended September 30, 2002 as compared to net income of $2.4 million for the corresponding period in 2001.

Direct Healthcare Liability Insurance Segment

Premiums Earned. Premiums earned in the direct healthcare liability insurance segment increased by approximately $3.2 million, or 8.7% to $38.7 million for the three months ended September 30, 2002 from $35.5 million for the same period in 2001. In the 2002 third quarter, gross premiums written were $14.3 million and net premiums written were $8.6 million. In the same period in 2001, gross premiums written were $22.7 million, and net premiums written were $17.6 million. The decrease in premiums written is primarily attributable to the planned decrease in the physician business written outside of California. Premiums written in the third quarter were almost entirely generated from business outside of California, as almost all policies issued in California are written during the first quarter.

The Company has instituted healthcare liability rate increases in the principal states outside of California in which it does business. These increases have averaged approximately 75% since the second quarter of 2001. The Company has also adopted stricter underwriting standards in these states, and has placed moratoriums on underwriting new business in certain states.

Losses and LAE. Losses and LAE in the direct healthcare liability insurance segment increased to $49.0 million in the third quarter of 2002 from $34.0 million for the same period in 2001. The loss ratios were 126.5% and 95.7% in the third quarter of 2002 and 2001, respectively. Loss ratio is defined as the ratio of losses and LAE incurred to net premiums earned. The 2002 third quarter results include additional recorded losses of $11.2 million due to increases in estimates of losses incurred in prior years for healthcare business primarily outside of California, offset by $4.4 million of reductions in estimates of losses incurred in prior years for healthcare business in California.

Policy acquisition costs. The acquisition cost ratio in the direct healthcare liability insurance segment decreased to 10.1 % of premiums earned, for the third quarter 2002 from 18.3% of premiums earned a year ago. The decrease in policy acquisition costs in 2002 is due to a decrease in higher cost broker-produced premium written. Most acquisition costs related to physician business outside of California was directly expensed during 2002 as it was written due to the unprofitable status of the business.

Other underwriting and operating expenses. Other underwriting and operating expenses in the direct healthcare liability insurance segment decreased to $3.8 million in the 2002 third quarter from $5.3 million in 2001. The decrease in 2002 is principally attributable to reduced employee related expenses resulting from the elimination of 41 positions in May, 2002.

Assumed Reinsurance Segment

Premiums Earned. Premiums earned in the assumed reinsurance segment increased to $36.8 million for the three months ended September 30, 2002 from $23.4 million for the same period in 2001. The increase of $13.4 million in the third quarter of 2002 reflects the anticipated growth in this segment. Premiums earned included approximately $11.4 million under casualty programs, $13.4 million under property programs, $11.3 million under accident and health programs and $.7 million under its marine program. Gross written premiums for the three months ended September 30, 2002 were $46.7 million, and net written premiums were $40.1 million compared to $37.9 million and $35.2 million in 2001.

Losses and LAE. Losses and LAE in the assumed reinsurance segment increased to $39.1 million for the three months ended September 30, 2002 from $20.1 million for the same period in 2001. The loss ratio increased to 106.3% in 2002 from 86.0% a year ago. The 2002 incurred losses include additional recorded losses of $8.2 million due to increases in estimates of losses incurred in prior years, including $1.8 million in upward development on losses related to the September 11, 2001 World Trade Center loss.

Policy acquisition costs. The acquisition cost ratio in the assumed reinsurance segment was 27.3% of premiums earned in the 2002 third quarter, compared to 10.9% in the prior year. The increase in 2002 is attributable to the Company’s greater participation in Lloyd’s of London (Lloyd’s) syndicates, which have significantly higher commission expenses.

Other underwriting and operating expenses. Other underwriting and operating expenses for the assumed reinsurance segment increased slightly to $0.4 million for the 2002 third quarter from $0.3 million a year ago.

NINE MONTHS ENDED SEPTEMBER 30, 2002 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30, 2001

Consolidated Operating Results

Total revenues were $267.1 million for the nine months ended September 30, 2002, an increase of $70.1 million or 35.5% over total revenues of $197.0 million for the same period in 2001. Premiums earned increased $71.3 million, or 43.4% during the first nine months in 2002 as compared to the corresponding period a year ago. The assumed reinsurance and direct healthcare liability segments reported increased earned premium of $60.1 million and $11.2 million, respectively.

Net investment income decreased to $24.9 million for the nine months ended September 30, 2002, a decrease of 8.9 % from $27.3 million a year ago. Variation in investment returns occur due to interest rate fluctuations, the allocation of investments between taxable and nontaxable securities and general conditions in the securities markets that are evaluated by the Company in accordance with its investment guidelines. The average rate of return on invested assets was 4.72% and 5.17% for the nine months ended September 30, 2002 and 2001 respectively.

Total expenses were $303.2 million for the nine months ended September 30, 2002, an increase of 28.0% over total expenses of $236.9 million for the same period in 2001. The 2002 third quarter results include additional recorded losses of $38.4 million due to increases in estimates of losses incurred in prior years for healthcare business primarily outside of California and for the Company’s assumed reinsurance operations, partially offset by $18.1 million of reductions in estimates of losses incurred in prior years for healthcare business in California.

Net loss for the nine months ended September 30, 2002 was $22.5 million, compared with a net loss of $24.5 million for the corresponding period in 2001.

Direct Healthcare Liability Insurance Segment

Premiums Earned. Premiums earned in the direct healthcare liability insurance segment increased to $124.1 million for the nine months ended September 30, 2002 compared to $112.9 million for the same period in 2001.

Gross written premiums were $129.1 million, and net written premiums were $112.8 million in the nine months ended September 30, 2002 in the healthcare liability insurance segment. In the same period in 2001, gross premiums written were $136.7 million and net premiums written were $123.8 million.

Losses and LAE. Losses and LAE in the direct healthcare liability insurance segment decreased to $137.3 million for the nine months ended September 30, 2002 from $150.5 million in the same period of 2001. The loss ratios were 110.6 % and 133.3% in the nine months ended September 30, 2002 and 2001, respectively. The 2002 third quarter

results include additional recorded losses of $20.2 million due to increases in estimates of losses incurred in prior years for healthcare business primarily outside of California, partially offset by $18.1 million of reductions in estimates of losses incurred in prior years for healthcare business in California. During the first nine months of 2001, the Company strengthened its prior years’ loss reserves and included an additional reserve for premium inadequacy on current policies, in the aggregate amount of $26.4 million due almost entirely to adverse loss developments in its physician healthcare liability insurance business outside the state of California. In 2001, the Company also reevaluated and increased its estimates of expected losses during the 2001 accident year in relation to premiums earned, again related substantially to the adverse experience outside of California.

Policy acquisition costs. The acquisition cost ratio in the direct healthcare liability insurance segment decreased to 10.1% of premiums earned for the nine months ended September 30, 2002, from 19.3% in 2001. The decrease in 2002 is due to a decrease in broker-produced premium written. Most acquisition costs related to physician business outside of California was directly expensed during 2002 as it was written due to the unprofitable status of the business. 2001 expenses also included the write-off of $3.6 million of deferred policy acquisition costs related to physician business outside of California.

Other underwriting and operating expenses. Other underwriting operating expenses for the direct healthcare liability insurance segment increased to $13.8 million for the nine months ended September 30, 2002 as compared to $12.9 million for the same period in 2001. The slight increase in 2002 is primarily attributable to higher employee-related expenses, investment banking activities and other general operating expenses.

Assumed Reinsurance Segment

Premiums Earned. Premiums earned in the assumed reinsurance segment increased to $111.3 million for the nine months ended September 30, 2002 from $51.2 million for the same period in 2001. The increase of $60.1 million in the nine months ended September 30, 2002 reflects the anticipated growth in this segment. Premiums earned included approximately $32.6 million under casualty programs, $37.6 million under property programs, $ 31.1 million under accident and health programs and $10 million under its marine program. Gross written premiums were $151.3 million, and net written premiums were $128.2 million. For the same period in 2001, gross written premiums were $74.6 million, and net written premiums were $70.5 million.

Losses and LAE. Losses and LAE in the assumed reinsurance segment increased to $107.8 million for the nine months ended September 30, 2002 from $44.7 million for the same period in 2001. The loss and LAE ratio increased to 96.9% in 2002 from 87.3% a year ago. 2002 incurred losses include additional recorded losses of $18.1 million due to increases in estimates of losses incurred in prior periods, which includes upward development on the World Trade Center loss of $6.5 million.

Policy acquisition costs. The acquisition cost ratio in the assumed reinsurance segment increased to 27.4% of premiums earned for the nine months ended September 30, 2002, from 9.2% a year ago. The increase in 2002 is attributable to the Company’s greater participation in Lloyd’s syndicates, which include significantly higher commission expenses.

Other underwriting and operating expenses. Other underwriting and operating expenses for the assumed reinsurance segment increased slightly to $1.3 million for the nine months ended September 30, 2002 from $1.1 million for the same period in 2001.

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 2002, the Company had negative cash flow from operations of $5.5 million compared to a positive cash flow of $20.4 million in 2001. The negative cash flow in 2002 is related to claims payments associated with the physician programs outside of California which the Company is winding down toward elimination in 2003. The positive cash flow in 2001 was principally due to the receipt of increased assumed reinsurance premiums for which incurred losses had not yet been paid. The Company maintains sufficient liquidity in its investment portfolio to meet fluctuations in payment needs.

The Company invests its cash flow from operations in both fixed maturity securities and equity securities. 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. Accordingly, the Company’s portfolio of unaffiliated equity securities was $28.7 million at September 30, 2002. The Company plans to continue its emphasis on fixed maturity securities investments for the indefinite future.

The Company has made limited investments in real estate, which have been used almost entirely in the Company’s operating activities, with the remainder leased to third parties. The Company leases approximately 95,000 square feet of office space for its headquarters. The lease is for a term of 10 years ending in 2009, and the Company has two options to renew the lease for a period of five years each. The Company leased its two former headquarters buildings to third parties during 2000.

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 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 the insurance company subsidiaries are able to pay to SCPIE Holdings during 2002 without prior regulatory approval is approximately $12.4 million. As of September 30, 2002, $3.0 million in dividends had been paid by one insurance company subsidiary to SCPIE Holdings.

Common stock dividends paid to stockholders were $0.40 per share in 2001. These dividends were funded through dividends from the Company’s insurance subsidiaries received in prior years. During the nine months ended September 30, 2002, the Company paid a dividend of $0.30 per share. The Company has declared a regular quarterly dividend of $0.10 per share, payable on December 31, 2002. Payment of future dividends is subject to Board approval, earnings and the financial condition of the Company.

According to regulations governing insurance companies, the insurance company subsidiaries are required to maintain sufficient statutory capital and surplus to cover the risks associated with the policies they write. Due to losses and strengthening of loss reserves in 2001and 2002, the statutory capital and surplus of the insurance company subsidiaries declined significantly, while premiums increased. In order to improve the Company’s capital adequacy ratio under the Risk Based Capital formulas of the NAIC and the Best Capital Adequacy Ratio used by AM Best, the Company needs to raise additional capital or reduce its premium writing leverage. Because of current market conditions and the price of SCPIE stock, raising additional capital is not considered a viable option. Therefore the Company is pursuing an initiative to divest its reinsurance operations. The Company intends to complete one or more reinsurance transactions to reduce its net premium writings related to the assumed reinsurance operations in the fourth quarter 2002. The Company can make no assurance that a transaction will be completed, but if one is completed, given current reinsurance market conditions, it will result in additional charges to operating results.

The Company had borrowings of $9.0 million outstanding at December 31, 2001, under a Credit Agreement with three bank lenders. On February 28, 2002, the Company fully repaid the outstanding balance, and the parties terminated the Credit Agreement.

Based on historical trends, market conditions and its business plans, the Company believes that it has sufficient liquid investments to meet its needs over the next 18 months and beyond. However, because economic, market and regulatory conditions may change, there can be no assurance that the Company’s sources of funds will be sufficient to meet these liquidity needs. The short- and long-term liquidity requirements of the Company may vary because of the uncertainties regarding the settlement dates for unpaid claims.

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, 2002 comprised 78.7% of total investments at market value. Corporate bonds represent 49.5% and U.S. government and tax-exempt bonds represent 39.7% of the fixed-maturity investments, with the remainder consisting of mortgage-backed and asset-backed securities. Equity securities, consisting primarily of common stocks, account for 4.0% of total investments at market value. The other investment, which is comprised of a mutual fund investment that contains derivative instruments, accounts for 2.0% of total investments at market value. The remaining 15.3% of the investment portfolio consists of real estate investments 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 goes up with the opposite holding true in rising interest rate environments. A common measure of the interest sensitivity of fixed-maturity assets is modified 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 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, 2002, the carrying value of the investment portfolio included $29.9 million in net unrealized gains. At December 31, 2001, the investment portfolio included $3.3 million in net unrealized gains.

ITEM 4. DISCLOSURE CONTROLS AND PROCEDURES

The Company maintains disclosure controls and procedures designed to ensure that information required to be disclosed in the Company’s reports filed under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission rules and forms, 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 for 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.

Within 90 days prior to the date of this report, the Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and the Company’s Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures. Based on the foregoing, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective.

There have been no significant changes in the Company’s internal controls or in other factors that could significantly affect the internal controls subsequent to the date the Company completed its evaluation.

PART II -- OTHER INFORMATION

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a)	The following exhibits are included herewith.

None

(b)	The Company filed no reports on Form 8-K during the quarterly period ended September 30, 2002.

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 13, 2002	By:	/s/ DONALD J. ZUK

		Donald J. Zuk President and Chief Executive Officer

Date: November 13, 2002	By:	/s/ ROBERT B. TSCHUDY

		Robert B. Tschudy Senior Vice President and Chief Financial Officer

CERTIFICATION OF CHIEF EXECUTIVE OFFICER

I, DONALD J. ZUK, certify that:

	1.	I have reviewed this quarterly report on Form 10-Q of SCPIE Holdings Inc;
	2.	Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
	3.	Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;
	4.	The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

		a)	designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;
		b)	evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and
		c)	presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

	5.	The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):

		a)	all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and
		b)	any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

	6.	The registrant’s other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

				Date: November 13, 2002	/s/ DONALD J. ZUK

					Donald J. Zuk President and Chief Executive Officer

CERTIFICATION OF CHIEF FINANCIAL OFFICER

I, ROBERT B. TSCHUDY, certify that:

1.	I have reviewed this quarterly report on Form 10-Q of SCPIE Holdings Inc;
2.	Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
3.	Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;
4.	The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-140 for the registrant and we have:

	a)		designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;
	b)		evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and
	c)		presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

5.	The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent function):

		a)	All significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

		b)		Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

6.	The registrant’s other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including nay corrective actions with regard to significant deficiencies and material weaknesses.

			Date: November 13, 2002		/s/ ROBERT B. TSCHUDY

					Robert B. Tschudy Senior Vice President and Chief Financial Officer