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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

ANNUAL REPORT

PURSUANT TO SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

FOR THE FISCAL YEAR ENDED DECEMBER 31, 2004

Commission File No. 1-12449

SCPIE HOLDINGS INC.

(Exact name of registrant as specified in its charter)

1888 Century Park East, Los Angeles, California 90067

www.scpie.com

(Address of principal executive offices and Internet site)

(310) 551-5900

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(g) of the Act: None

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

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

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

The aggregate market value of the Registrant’s voting stock held by non-affiliates of the Registrant at June 30, 2004, was $82,823,560 (based upon the closing sales price of such date, as reported by The Wall Street Journal).

The number of shares of the Registrant’s Common Stock outstanding as of March 7, 2005, was 9,904,604.

DOCUMENTS INCORPORATED BY REFERENCE

Proxy statement for the Annual Meeting of Stockholders of Registrant to be held on May 24, 2005 (only portions of which are incorporated by reference).

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PART I

ITEM 1.    BUSINESS

GENERAL

SCPIE Holdings Inc. (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, oral surgeons, healthcare facilities and others engaged in the healthcare industry in California and Delaware. Previously, the Company had also been actively engaged in the medical malpractice insurance business and related products in other states and the global assumed reinsurance business. Since 2002, the Company has been engaged in completing its withdrawal from the assumed reinsurance markets and medical malpractice insurance outside its core states of California and Delaware.

The Company conducts its insurance business through three insurance company subsidiaries. The largest wholly owned subsidiary, SCPIE Indemnity Company (SCPIE Indemnity), is licensed to conduct direct insurance business only in California, its state of domicile. American Healthcare Indemnity Company (AHI), domiciled in Delaware, is licensed to transact insurance in 47 states and the District of Columbia. American Healthcare Specialty Insurance Company (AHSIC), domiciled in Arkansas, is eligible to write policies as an excess and surplus lines insurer in 20 states and the District of Columbia. AHI and AHSIC are wholly owned subsidiaries of SCPIE Indemnity. All three companies generally have the right to participate in domestic and international reinsurance treaties. The Company also has an insurance agency subsidiary, SCPIE Insurance Services, Inc., two subsidiary corporations providing management services, a corporate reinsurance intermediary and a corporate member of Lloyd’s of London (Lloyd’s), SCPIE Underwriting Limited.

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

Primarily due to significant losses on medical malpractice insurance outside the state of California and assumed reinsurance business losses arising out of the September 11, 2001, World Trade Center terrorist attack, the Company has incurred losses since 2001. The resulting reductions in surplus and corresponding decreases in capital adequacy ratios under both the A.M. Best Company (A.M. Best—the leading rating organization for the insurance industry) and National Association of Insurance Commissioners (NAIC) capital adequacy models required the Company to take actions to improve its long-term capital adequacy position. The primary actions taken by the Company were to withdraw from the healthcare liability insurance markets outside of its core markets in 2002 and to enter into a 100% quota share reinsurance agreement in December 2002 to retrocede to another insurer the majority of reinsurance business written in 2002 and 2001. See “Information about Segments.” The Company continues to “run-off” liabilities in these non-core markets.

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

The Company’s website address is www.scpie.com. The Company makes available free of charge through its website the annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to those reports as soon as reasonably practicable after such material has been electronically filed with or furnished to the Securities and Exchange Commission.

INFORMATION ABOUT SEGMENTS

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

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The following tables set forth information concerning the Company’s revenues, operating income and identifiable assets attributable to each of its business segments for the years ended December 31, 2004 and 2003.

The direct healthcare liability insurance segment is comprised of core and non-core business components. The Company’s core business principally represents its direct healthcare liability insurance business in California and Delaware, excluding a dental program managed by a national independent insurance agency Brown & Brown, Inc. (Brown & Brown), and hospital business. The Company’s non-core business represents its direct healthcare liability business outside of California and Delaware, the above mentioned dental program and all hospital business. The non-core business is in run-off and no new or renewal policies have been issued since March 6, 2003. The losses in the direct healthcare liability insurance segment in both 2003 and 2004 are principally attributable to losses and adverse loss development in the non-core business component. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

The assumed reinsurance operations were significantly reduced in 2003 and 2004 from previous periods. In December 2002, the Company entered into a quota share reinsurance transaction with Rosemont Reinsurance Ltd. (Rosemont Re) (formerly named GoshawK Reinsurance Limited), a Bermuda reinsurance subsidiary of GoshawK Insurance Holdings plc (GoshawK), a publicly held London-based Lloyd’s underwriter. Under the agreement, the Company ceded to Rosemont Re almost all of its unearned assumed reinsurance premiums as of June 30, 2002, together with written reinsurance premiums after that date, in each case related to the assumed reinsurance business for the 2001 and 2002 underwriting years. The effect of this transaction was to retrocede to Rosemont Re $129.3 million of written premium in

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2002, $38.0 million of written premium in 2003 and $(0.1) million of written premium in 2004. The Company retains certain losses related to the assumed reinsurance business, including those related to the World Trade Center terrorist attack, and the Company continued to participate in one Lloyd’s syndicate for the 2003 underwriting year. Other than net written premiums of $1.2 million and $18.3 million from this syndicate in 2004 and 2003, respectively, the Company had retained no significant premiums written from prior year contracts, in either 2004 or 2003.

Because of the effect the losses incurred in the Company’s non-core healthcare insurance and assumed reinsurance operations had on the capitalization of the Insurance Subsidiaries combined surplus, the relationship of premiums written in 2001 and 2002 to surplus (premium leverage), and the relationship of outstanding loss reserves to surplus (loss reserve leverage), A.M. Best in a series of downgrades reduced the Company’s rating from A (Excellent) at December 31, 2001 to its current rating of B (Fair) with a negative outlook on November 14, 2003. The Company’s current rating could have a material adverse impact on the ability of the Company to maintain its customer base and attract new business. See “Risk Factors—Importance of A.M. Best Rating.”

DIRECT HEALTHCARE LIABILITY INSURANCE SEGMENT

Overview and Developments During 2004—Core Business

The Company has been a leading provider of medical malpractice insurance in California for many years. The Company’s share of the medical malpractice premiums written in California in 2003 (latest data available) was approximately 17.1% and the Company was the third largest writer in the state. In 2001, the Company undertook the insurance of physicians in Delaware through a single Delaware broker. During 2004, the Company had net premiums earned under policies issued to California insureds representing 97.5% of the total net premiums earned in the core business component of the direct healthcare liability insurance segment.

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

Overview and Developments During 2004—Non-Core Business

Hospital Programs—In 1996, the Company undertook an expansion plan which included products that offered comprehensive hospital and related liability coverages for large healthcare systems. From 1997 through 1999, the Company added more than 75 hospitals to its program. These policies were written through national and regional brokers and covered facilities in four states, in addition to California.

The Company encountered intense price competition in its large hospital and other healthcare facility writings. During 2000, the Company incurred material adverse loss experience under many of these policies, including policies issued to hospitals that subsequently left the Company for lower rates offered by other insurers. As a result, the Company declined to renew a number of its hospital policies or offered renewal only at substantially increased premium rates. At the beginning of 2001, the Company insured only 15 hospitals. The number was reduced to 10 hospitals insured as of December 31, 2001, and the last hospital policy expired in December 2002. The Company did not incur material losses in its hospital program during 2002 and 2003. In 2004, the Company incurred a net loss of $4.2 million as a result of a significant adverse verdict against a Florida hospital insured by the Company in 2000, when the medical incident occurred.

Physician Programs Outside of California and Delaware—The Company undertook a major geographic expansion in the physician and small medical group market through an arrangement with Brown & Brown. This arrangement commenced January 1, 1998, and eventually encompassed nine states, the largest in terms of premium volume being Connecticut, Florida and Georgia. During 2000, the Company entered into a separate arrangement with Brown & Brown covering the California and Texas portion of a dental liability program developed by Brown & Brown. The Company also reinsured the entire risk of policies issued nationally by another insurer to oral and maxillofacial surgeons marketed by Brown & Brown.

In 2002, 2003 and 2004, the Company derived approximately 27%, 9% and .3% of its healthcare liability earned premium volume, respectively, from policies issued outside the states of California and Delaware (principally under the Brown & Brown and certain nonstandard physician programs). In 2001, the Company recognized that these programs were severely underpriced and implemented significant rate increases, averaging approximately 40% and 30% in 2001 and 2002, respectively, in its principal non-California markets, and instituted more stringent underwriting and pricing guidelines. Despite the significant price increases and more stringent underwriting guidelines, the non-California and non-Delaware programs produced significant underwriting losses.

The Company and Brown & Brown agreed in March 2002 to terminate both the physician and dental programs no later than March 6, 2003. During 2002, the Company continued to issue and renew those policies under the Brown & Brown programs that satisfied revised stringent

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underwriting standards. As of December 31, 2001, 2,997 policies were in force under the Brown & Brown program. That number was reduced to 813 and 379 policies as of December 31, 2002 and 2003, respectively. During 2002, 2003 and 2004, the Company had premiums earned under the non-core healthcare liability programs, other than hospitals, of $44.2 million, $12.3 and $0.3 million, respectively and as of March 6, 2004, all policies had expired.

The non-core business produced underwriting losses of $53.8 million, $19.0 million and $13.4 million in 2002, 2003 and 2004, respectively. During 2005, the Company will continue to concentrate its efforts on maintaining its core physician and medical group business in California and Delaware. The Company does not expect to initiate any significant new programs outside California during 2005.

Products

The Company underwrites professional and related liability policy coverages for physicians (including oral and maxillofacial surgeons), physician medical groups and clinics, hospitals, dentists, managed care organizations and other providers in the healthcare industry. As a result of the Company’s withdrawal from certain segments of the healthcare insurance industry, the premiums earned are allocated between core and non-core business premiums. Core business represents California and Delaware business excluding the Brown & Brown dental program and hospital business. Non-core business represents other state business, all hospital liability and all premiums related to the Brown & Brown programs. The following table summarizes the premiums earned by product in the Company’s core and non-core businesses for the periods indicated:

Physician and Medical Group Professional Liability—Professional liability insurance for sole practitioners and for medical groups provides protection against the legal liability of the insureds for such things as injury caused by, or as a result of, the performance of patient treatment, failure to treat a patient and failure to diagnose a patient. The Company offers separate policy forms for physicians who are sole practitioners and for those who practice as part of a medical group or clinic. The policy issued to sole practitioners includes coverage for professional liability that arises in the medical practice and may also include coverages for certain other “premises” liabilities that may arise in the non-professional operations of the medical practice, such as slip-and-fall accidents, and a limited defense reimbursement benefit for proceedings instituted by state licensing boards and other governmental entities.

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

The professional liability coverages are issued primarily on a “claims-made and reported” basis. Coverage is provided for claims reported to the Company during the policy period arising from incidents that occurred at any time the insured was covered by the policy. The Company

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

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

The Company offers standard limits of insurance up to $5.0 million per claim or occurrence, with up to a $10.0 million aggregate policy limit for all claims reported or occurrences for each calendar year or other 12-month policy period. The most common limit is $1.0 million per claim or occurrence, subject to a $3.0 million aggregate policy limit. The Company’s limit of liability under the excess personal liability insurance coverage is $1.0 million per occurrence with no aggregate limit. The defense reimbursement benefit for governmental proceedings is $25,000, and the medical payments benefit for persons injured in non-professional activities is $10,000.

Dental Liability—In 2000, the Company initiated dental liability insurance coverage primarily in Texas and California under a program developed by Brown & Brown. The program provided claims-made coverage to dentists and small dental groups. Brown & Brown marketed this program in other states through another insurance company. The Company withdrew from a significant portion of the program in July 2002 and ceased renewal of all policies under this program on March 6, 2003. The Company plans to introduce a new dental program in California during 2005.

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

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

Ancillary Liability Products—The Company offers a policy for managed care organizations, that provides coverage for liability arising from covered managed care incidents or vicarious liability for medical services rendered by non-employed physicians. Covered services include peer review, healthcare expense review, utilization management, utilization review and claims and benefit handling in the operation of the managed care organizations. These policies are generally issued on a claims-made and reported basis. The annual aggregate limit of coverage under the current managed care organization policies issued by the Company is $1.0 million. The Company offers directors and officers’ liability policies to medical providers. The directors and officers’ liability policies are generally issued on a claims-made and reported basis. The limit of coverage on directors and officers’ liability policies written by the Company is $1.0 million. In late 1999, the Company began offering a newly designed product that provides physicians and medical groups with protection for defense expenses and certain liabilities related to governmental investigations into billing errors and omissions to Medicare and other government-subsidized healthcare programs.

Marketing and Policyholder Services

Historically, the Company marketed its physician professional liability policies directly to physicians and medical groups in California. Infrequently, larger medical groups were written through insurance brokers. During the past few years, brokered business has become a more important source of new business in California. In Delaware, the Company markets its policies through a single broker.

The Company’s Marketing Department has approximately 16 employees who directly solicit prospective policyholders, maintain relationships with existing insureds and provide marketing support to brokers. The Company’s marketing efforts include sponsorship by local medical

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associations, educational seminars, advertisements in medical journals and direct mail solicitation to licensed physicians and members of physician medical specialty group organizations.

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

The Company’s current marketing emphasis is directed almost entirely toward California physicians and medical groups. The Company conducts its marketing efforts from its principal office in Los Angeles.

Underwriting

The Underwriting Department consists of a Senior Vice President in charge of Underwriting, three divisional underwriting managers, 12 underwriters and 11 technical and administrative assistants. The Company’s Underwriting Department is responsible for the evaluation of applicants for professional liability and other coverages, the issuance of policies and the establishment and implementation of underwriting standards for all of the coverages underwritten by the Company. Certain of these underwriters specialize in underwriting managed care organizations and directors and officers’ liability products.

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

Rates

The Company establishes, through its own actuarial staff and independent actuaries, rates and rating classifications for its physician and medical group insureds based on the Company’s loss and loss adjustment expense (LAE) experience developed over the past 10 years and upon rates charged by its competitors. The Company has various rating classifications based on practice, location, medical specialty, limits and other factors. The Company utilizes various discounts, including discounts for part-time practice, physicians just entering medical practice and large medical groups. The Company has developed nonstandard programs for physicians who have unfavorable loss history or practice characteristics, but whom the Company considers insurable. Policies issued in this program have significant surcharges. The Company has established its premium rates and rating classifications for managed care organizations utilizing data publicly filed by other insurers, and based in part on its recent experience. The data for managed care organization errors and omissions liability is extremely limited, as tort exposures for these organizations are only recently beginning to develop. The rates for directors and officers liability are developed using historical data publicly filed by other insurers, financial analysis and loss history. All rates for liability insurance in California are subject to the prior approval of the Insurance Commissioner.

The Company has consistently instituted annual overall rate increases in California during the past 10 years ranging from approximately 3.5% to 10.6%. Rate increases of 8.4%, 9.9% and 6.5% have been approved and implemented in California effective January 1, 2002, October 1, 2003, and January 1, 2005, respectively. Rate increases of 34.4% and 13.3% have been approved in Delaware effective July 1, 2003 and July 15, 2004, respectively. Approximately 20% of the Company’s in force premium as of December 31, 2004 is evaluated using experience rating formulas and therefore not necessarily subject to base rate changes. Experience rating formulas are sensitive to the individual loss experience of groups of physicians and may produce increases or decreases different than the change in the general base rate. See “Risk Factors—Rate Increases in California.”

Claims

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

The Claims Department staff includes a Senior Vice President in charge of Claims, an assistant claims manager, unit managers, litigation supervisors, investigators and other experienced professionals trained in the evaluation and resolution of medical professional liability and

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general liability claims. The Claims Department staff consists of approximately 34 employees. The Company has unit managers and branch managers responsible for specific geographic areas, and additional units for specialty areas such as healthcare facilities, birth injuries and policy coverage issues. The Company also occasionally uses independent claims adjusters, primarily to investigate claims in remote locations. The Company selects legal counsel from among a group of law firms in the geographic area in which the action is filed.

The Company vigorously defends its insureds against claims, but seeks to expediently resolve cases with high-exposure potential. The defense of a healthcare professional liability claim requires significant cooperation between the litigation supervisor or claims manager responsible for the claim and the insured physician. In certain states, the law requires that a healthcare professional liability claim cannot generally be settled without the consent of the insured. California law requires that the insurer report such settlements of more than $30,000 to a medical disciplinary board, and federal law requires that any claim payment, regardless of amount, be reported to a national data bank, which can be accessed by various state licensing and disciplinary boards and medical peer evaluation committees. Thus, the physician or other healthcare professional is often placed in a difficult position of knowing that a settlement may result in the initiation of a disciplinary proceeding or some other impediment to his or her ability to practice. The Claims Department supervisor must be able to fully evaluate considerations of settlement or trial and to communicate effectively the Company’s recommendation to its insured. If the insured will not consent to a settlement offer, the Company may be exposed to a larger judgment if the case proceeds to trial.

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

ASSUMED REINSURANCE SEGMENT

General

In August 1999, the Company established a separate Assumed Reinsurance Division under the direction of two senior officers. Net written premiums in the Assumed Reinsurance Segment decreased to $2.4 million in 2004 from $18.5 million in 2003 and from $112.8 million in 2002. The principal reinsurance programs included casualty, property, accident and health and workers’ compensation and marine programs.

Reinsurance is an arrangement in which an insurance company, the reinsurer or the assuming company, agrees to indemnify another insurance company, the reinsured or the ceding company, against all or a portion of the insurance risks underwritten by the ceding company under one or more insurance contracts. The Company has concentrated the majority of its assumed reinsurance portfolio on treaty reinsurance. Treaty reinsurers, including the Company, do not separately evaluate each of the individual risks assumed under their treaties and, consequently, after a review of the ceding company’s underwriting practices, are largely dependent on the original risk underwriting decisions made by the ceding company. The Company has focused on pro rata, or quota share, arrangements, in which the ceding company bears a proportional share of the risk and therefore the incentive to underwrite and price the business appropriately. The Company entered into treaties principally with those ceding companies with which the Company’s officers had past favorable experience.

In addition to the foregoing programs, in 2001 the Company formed SCPIE Underwriting Limited, a limited liability corporate underwriting syndicate member at Lloyd’s, which provided underwriting capacity to three syndicates during 2001 and 2002. In 2003, SCPIE Underwriting Limited reduced underwriting capacity to one syndicate and in 2004 ceased underwriting operations.

Divestiture of Most Reinsurance Operations

The Company suffered significant 2001 losses in non-California healthcare operations and in its assumed reinsurance operations from the World Trade Center terrorist attack. These losses impacted the capital adequacy ratios under the A.M. Best and NAIC capital adequacy models and resulted in the reduction in the A.M. Best rating assigned to the Insurance Subsidiaries. The Company unsuccessfully attempted to raise additional capital during the first six months of 2002 to provide capital to support the rapidly growing written premiums in the assumed reinsurance operations and to improve the Company’s A.M. Best rating. In the latter part of 2002, the Company focused its efforts on divesting the assumed reinsurance operations and thereby reducing its overall capital requirements. The Company engaged in ongoing discussions with a number of companies to accomplish the divestiture through one or more reinsurance transactions.

In December 2002, the Company entered into a 100% quota share reinsurance agreement with Rosemont Re, under which the Company ceded almost all of its assumed unearned reinsurance premiums as of June 30, 2002, for the 2001 and 2002 underwriting years, and almost all of its assumed reinsurance premiums written after that date for those underwriting years. The effect of this transaction was to divest the Company of almost all of its ongoing assumed reinsurance business. $129.3 million of premiums written in 2002, $38.0 million of premiums written in 2003 and $(0.1) million of premiums written in 2004 were ceded under the treaty. This treaty relieved the Company of significant premium leverage and significantly improved the Company’s risk-based capital adequacy ratios under both the A.M. Best and NAIC models.

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Under the terms of the treaty with Rosemont Re, there are no limitations on the amount of losses recoverable by the Company, and the treaty includes a profit-sharing provision should the combined ratio calculated on the base premium ceded be below 100%. The treaty requires Rosemont Re to reimburse the Company for its acquisition and administrative expenses. In addition, the Company is required to pay Rosemont Re additional premium in excess of the base premium ceded of 14.3%. The additional premium reduced earned premium by $18.5 million in 2002, $5.5 million in 2003 and $(0.01) million in 2004.

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

There are certain losses not included in the treaty with Rosemont Re, including any World Trade Center losses. Further, the treaty does not involve the assumption of any earned premium or losses attributable to periods prior to June 30, 2002, which remain the responsibility of the Company. GoshawK, the parent corporation of Rosemont Re, incurred significant losses in 2003 in its GoshawK 102 syndicate, which affected the Company. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” These losses did not materially affect Rosemont Re. Rosemont Re is currently rated A- by A.M. Best.

After consummation of the Rosemont reinsurance treaty, the Company continued to participate during 2003 in one Lloyd’s syndicate that specialized in underwriting professional liability excess insurance. The Company’s decision to continue to support this syndicate was primarily due to the attractive increases in reinsurance rates in this segment of the market, as well as the significant capital costs involved in running off the business if the syndicate were terminated. The Company ceded 35% of its exposure from this syndicate to an unrelated reinsurer.

Ongoing Assumed Reinsurance Operations

The Company continues to administer claims and other matters relating to the more than 100 existing reinsurance treaties and contracts entered into by the Company, including those subject to the 100% quota share reinsurance treaty with Rosemont Re. At December 31, 2004, the principal net loss reserves retained by the Company under these treaties involved (i) occupational accident coverage and excess workers compensation benefits, which typically provides lifetime medical and related benefits at high coverage levels, (ii) Lloyd’s syndicate participation, (iii) an excess of loss directors and officers liability reinsurance treaty, (iv) the GoshawK syndicate treaty and (v) three treaties reinsuring bail and immigration bonds and.

The assumed reinsurance operations encountered unexpected adverse loss development during 2004 principally in connection with the Lloyd’s syndicates, additional losses incurred under a single excess of loss directors and officers liability insurance treaty, and losses involving issuers of bail and immigration bonds.

The adverse development in the Lloyd’s syndicates arose because of the close out of the 2001 underwriting years at levels in excess of those previously reported to the Company and deteriorating results on the 2002 and 2003 underwriting years for the syndicate involved in professional liability excess insurance.

The excess of loss directors and officers liability insurance treaty involved a 4% participation by the Company in the excess layer that provided $25.0 million of coverage in excess of $10.0 million for each occurrence. The treaty covered 1999 through 2002 and the policyholders are primarily utilities. The Company increased its incurred loss estimate almost $4.8 million during 2004, based on information received from the primary insurer. Currently, none of these losses are subject to the Rosemont Re treaty.

The bail and immigration bond losses involve three treaties covering the 2001 and 2002 years. The treaties covered bonds issued by the primary insurers through a bonding company that operated nationally, but principally in the northeast. Under the program, the bonding company and its principals were responsible for all losses as part of their program administration. The Company had a 20% share of the 2001 treaty and a 25% share of two 2002 treaties. The major portion of the losses under the 2002 treaties are ceded to Rosemont Re, and a small portion is ceded to Rosemont Re under the 2001 treaty. Losses to the reinsurers under these treaties began to emerge in the middle of 2004 after the underlying bonding company collapsed and effectively ceased operations. The Company has received reports of paid and estimated losses from the three primary insurers covering 2001 and 2002. Based on these reports, the Company recorded losses during 2004, net of reinsurance, of $5.6 million, of which $2.1 million has been paid to the primary insurers and $3.5 million is included in loss reserves at December 31, 2004. The performance of the primary insurers under the treaty is being disputed by certain reinsurers and is

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currently the subject of a pending arbitration proceeding. The Company has engaged legal counsel to advise the Company regarding possible defenses and claims regarding these bonds.

The two senior officers in charge of the reinsurance division will continue to administer the assumed reinsurance division treaties from their New Jersey office until May 1, 2005. Financial personnel at the Company’s Los Angeles headquarters have assumed greater responsibilities in the administration of these treaties during the past 24 months, and do not expect any significant administrative difficulties after the May 2005 transition date.

LOSS AND LOSS ADJUSTMENT EXPENSE (LAE) RESERVES

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

The loss and LAE reserves included in the Company’s financial statements represent the Company’s best estimate of the amounts that the Company will ultimately pay on claims, and the related costs of adjusting those claims, as of the date of the financial statements. The uncertainties inherent in estimating ultimate losses on the basis of past experience have increased significantly in recent years principally as a result of judicial expansion of liability standards and expansive interpretations of insurance contracts. These uncertainties may be further affected by, among other factors, changes in the rate of inflation and changes in the propensities of individuals to file claims. The inherent uncertainty of establishing reserves is relatively greater for companies writing liability insurance, including medical malpractice insurance, due primarily to the longer-term nature of the resolution of claims. There can be no assurance that the ultimate liability of the Company will not exceed the amounts reserved.

The Company utilizes its internal actuarial staff, reports received from ceding insurers under assumed reinsurance contracts and independent consulting actuaries in establishing its reserves. The Company’s internal actuarial staff reviews reserve adequacy on a quarterly basis. The Company’s independent consulting actuaries review the Company’s reserves for losses and LAE at the end of each fiscal year and prepare a report that includes a recommended level of reserves. The Company considers this recommendation as well as other factors, such as known, anticipated or estimated changes in frequency and severity of claims, loss retention levels and premium rates, in establishing the amount of its reserves for losses and LAE. The Company continually refines reserve estimates as experience develops and further claims are reported and resolved. The Company reflects adjustments to reserves in the results of the periods in which such adjustments are made. Medical malpractice and assumed reinsurance insurance are lines of business for which the initial loss and LAE estimates may be adversely impacted by events occurring long after the reporting of the claim. Such events include sudden severe inflation or adverse judicial or legislative decisions in medical malpractice insurance and the inherent long reporting delays in assumed reinsurance.

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

The increase during 2004 and 2002 in estimated losses and LAE for claims occurring in prior years was primarily attributable to the adverse loss experience in the assumed reinsurance and the non-core direct healthcare liability insurance businesses. The decrease during 2003 in estimated losses and LAE for claims occurring in prior years was principally attributable to favorable loss experience in the core direct healthcare liability insurance and assumed reinsurance businesses partially offset by adverse development in the non-core healthcare liability insurance programs. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Overview.”

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

In evaluating the information in the table below, it should be noted that each amount includes the effects of all changes in amounts of prior periods. For example, if a loss determined in 2004 to be $100,000 was first reserved in 1994 at $150,000, the $50,000 redundancy (original estimate minus actual loss) would be included in the cumulative redundancy in each of the years 1994 through 2004 shown below. This table presents development data by calendar year and does not relate the data to the year in which the claim was reported or the incident actually occurred. Conditions and trends that have affected the development of these reserves in the past will not necessarily recur in the future.

Prior to 2000, the Company consistently experienced favorable development in loss and LAE reserves established for prior years. The Company believes that the favorable loss and LAE reserve development resulted from four factors: (i) the Company’s conservative approach of establishing reserves for medical malpractice insurance losses and LAE; (ii) the continuing benefits from the Medical Injury Compensation Reform Act (MICRA), the California tort reform legislation that was declared constitutional in a series of decisions by the California Supreme Court in the mid-1980s; (iii) benefits from California legislation requiring matters in litigation to proceed more expeditiously to trial; and (iv) improved results from a restructuring of the Company’s internal claims process. The Company believes, based on its analysis of annual statements filed with state regulatory authorities, that its principal California competitors experienced similar favorable loss and LAE reserve development in those years.

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The Company’s reserve analysis (and the independent consulting actuaries’ analysis) began to exhibit less variability related to the core California healthcare liability business from 1999 forward as the effects of the items mentioned in the preceding paragraph were reflected in the historical loss and LAE data which is the foundation of actuarial estimates. As this variability decreased, the Company’s core business reserve estimates, although still considered conservative, were inherently less conservative than before.

With the Company’s growth in non-core healthcare liability business outside of California and the assumed reinsurance business after 1999, the reserve estimation process became significantly more volatile. The healthcare liability business outside of California did not have the benefits of MICRA-type tort reform and assumed reinsurance business is, by its nature, extremely volatile.

During 2000, the Company experienced adverse loss development in prior year reserves for hospitals which resulted in less favorable loss development in 2000 than in prior years. In 2001 and 2002, the Company experienced its first deficiencies in its loss reserves for prior years. These deficiencies were due to significant adverse loss experience encountered in the assumed reinsurance and non-core direct healthcare liability insurance businesses. The adverse development in assumed reinsurance was principally the result of upward development in 2002 on September 11, 2001, terrorist attack losses. The adverse reserve development in non-core healthcare liability insurance in 2001 and 2002 was primarily attributable to a sharp increase in the severity and frequency of large claims. This sharp increase in large claim costs was not projected by the Company’s internal and independent actuaries at that time. Based upon the Company’s knowledge of claim severity outside of California and the current medical malpractice insurance crisis situation in several states, the Company believes that most medical malpractice insurance writers experienced a similar sharp increase in severity and frequency of large claims.

During 2003 and 2004, the Company experienced favorable development on its core direct healthcare liability insurance reserves as previously estimated trends in pure loss costs (the combination of frequency and average severity changes) related to malpractice coverage appear to be smaller when analyzing current data. The inherent pure loss cost trend included in the setting of the 2002, 2003 and 2004 reserves has been 6.7%, 4.4% and 3.3%, respectively. A 1% change in the pure loss costs trend produces a change in prior reserves of approximately $5.3 million. Such changes in estimates are reflected in the period of change. Reserves related to medical malpractice coverage account for 90% of core reserves.

The favorable development in the core healthcare liability business in 2004 was offset by a deterioration in the non-core healthcare liability business and the assumed reinsurance business. One large net legal verdict ($1.7 million), dental claims ($4.9 million) primarily in Texas and a general increase in bulk reserves ($3.0 million) represented the deterioration in non-core healthcare liability reserves.

The deterioration in the assumed reinsurance in 2004 came primarily from one bonding program ($5.6 million), one excess of loss directors and officers liability treaty ($4.8 million), and Lloyd’s syndicates ($3.7 million).

Because the medical malpractice liability insurance product generally has high limits ($1.0 to $3.0 million), and relatively low frequency, an increase in the frequency of large losses creates great variability in the reserve estimation process. While the Company believes that its reserves for losses and LAE are adequate, there can be no assurance that the Company’s ultimate losses and LAE will not deviate, perhaps substantially, from the estimates reflected in the Company’s financial statements. If the Company’s reserves should prove inadequate, the Company will be required to increase reserves, which could have a material adverse effect on the Company’s financial condition or results of operations.

CEDED REINSURANCE PROGRAMS

The Company follows customary industry practice by reinsuring a portion of its healthcare liability insurance risks. The Company cedes to reinsurers a portion of its risks and pays a fee based upon premiums received on all policies subject to such reinsurance. Insurance is ceded principally to reduce net liability on individual risks and to provide protection against large losses. Although reinsurance does not legally discharge the ceding insurer from its primary liability for the full amount of the policies reinsured, it does make the reinsurer liable to the insurer to the extent of the reinsurance ceded. The Company determines how much reinsurance to purchase based upon its evaluation of the risks it has insured, consultations with its reinsurance brokers and market conditions, including the availability and pricing of reinsurance. In 2004, the Company ceded $15.7 million of its healthcare liability earned premiums to reinsurers.

For 1999 and prior years, the Company retained the first $1.0 million of losses incurred per incident for its physician and medical group policies and had various reinsurance treaties covering losses in excess of $1.0 million up to $20.0 million per incident for physician coverage. The reinsurers also were obligated to bear their proportionate share of allocated loss adjustment expenses (LAE). For hospital coverage, the Company reinsured 90% of all losses incurred above a $1.0 million retention, and the Company retained all LAE. For 2000, the Company consolidated these treaties into a program in which the Company retained the first $2.0 million of losses and LAE per incident and the reinsurers covered losses in excess of this amount up to $70.0 million. For 2001, the Company retained the first $1.25 million of losses

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and LAE, and retention for non-hospital business was reduced to $1.25 million per incident. For both 2002 and 2003, the Company retained approximately the first $2.0 million of losses and LAE per incident for both physician and hospital coverages up to $20.0 million. The Company also had additional coverage in 2002 and 2003 for approximately 92% and 84%, respectively, of the losses in excess of $20.0 million up to $50.0 million. In addition, the Company was responsible for a blended annual aggregate deductible of $3.2 million, $3.0 million and $3.0 million, respectively, in 2002, 2003 and 2004, for losses in excess of the Company’s retentions. The Company’s reinsurance arrangement for 2004 was the same as 2003, except that reinsurance above $20.0 million was discontinued. The 2005 reinsurance program is the same as 2004.

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

In addition, in December 2002, the Company entered into the Rosemont Re retrocessional reinsurance agreement more fully described in “Note 4 to Consolidated Financial Statements.”

In general, reinsurance is placed under reinsurance treaties and agreements with a number of individual companies and syndicates at Lloyd’s to avoid concentrations of credit risk. The Rosemont Re 100% quota-share reinsurance agreement includes a trust fund arrangement to guarantee the collection of losses ceded under the treaty. The following table identifies the Company’s most significant reinsurers based upon receivable balances as of December 31, 2004 by Company and their Current A.M. Best ratings. No other single reinsurer’s percentage participation in 2004 exceeded 4% of total reinsurance premiums ceded.

The Company analyzes the credit quality of its reinsurers and relies on its brokers and intermediaries to assist in such analysis. To date, the Company has not experienced any material difficulties in collecting reinsurance recoverables. No assurance can be given, however, regarding the future ability of any of the Company’s reinsurers to meet their obligations. Should future events cause the Company to determine adjustments in the amounts recoverable from reinsurance are necessary, such adjustments would be reflected in the results of current operations.

INVESTMENT PORTFOLIO

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

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

The Company’s current policy is to limit its investment in equity securities and real estate to no more than 8.0% of the total market value of its investments. The Company’s investment portfolio of fixed-maturity securities consists primarily of intermediate-term, investment-grade securities. The Company’s investment policy provides that fixed-maturity investments are limited to purchases of investment-grade securities or unrated securities which, in the opinion of a national investment advisor, should qualify for such rating. The table below contains additional information concerning the investment ratings of the Company’s fixed-maturity investments at December 31, 2004:

The following table sets forth certain information concerning the maturities of fixed-maturity securities in the Company’s investment portfolio as of December 31, 2004:

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The average weighted maturity of the securities in the Company’s fixed-maturity portfolio as of December 31, 2004, was 4.8 years. The average duration of the Company’s fixed-maturity portfolio as of December 31, 2004, was 3.6 years.

The Company maintains cash and highly liquid short-term investments, which at December 31, 2004, totaled $94.4 million.

The following table summarizes the Company’s investment results for the three years ended December 31, 2004, 2003 and 2002:

The Company recognized significant capital gains in 2002 primarily to generate statutory surplus to improve its capital adequacy ratios. In addition, the Company moved its portfolio entirely into taxable securities over the 2002-2003 time frame to maximize its cash income based on its current tax position.

COMPETITION

The California physician professional liability insurance market is highly competitive. The Company competes principally with three physician-owned mutual or reciprocal insurance companies and a physician-owned mutual protection trust for physician and medical group insureds. Two of the companies and the trust solicit insureds in Southern California, the Company’s primary area of operations, and each has offered competitive rates during the past few years. The Company believes that the principal competitive factors, in addition to pricing, include financial stability, breadth and flexibility of coverage and the quality and level of services provided. In addition, large commercial insurance companies actively compete in this market, particularly for larger medical groups, hospitals and other healthcare facilities. The Company has considered its A.M. Best rating to be extremely important to its ability to compete. On February 21, 2002, A.M. Best reduced the Insurance Subsidiaries’ rating to B++ (Very Good) and on October 7, 2002, further reduced the Insurance Subsidiaries’ rating to B+ (Very Good). On November 14, 2003, A.M. Best, after a review of the Company’s third quarter financial results, further reduced the Insurance Subsidiaries’ rating to B (Fair) with a negative outlook. See “A.M. Best Rating” for a description of potential impact of these reductions. See also “Risk Factors—Importance of A.M. Best Rating.”

The Company encountered similar competition from local doctor-owned insurance companies and commercial companies in the other states in which it operated, principally under the Brown & Brown program. In Delaware, where the Company continues to operate, the Company competes principally through its relationship with a Delaware broker, who has considerable and long-standing relationships with Delaware physician insureds.

In the assumed reinsurance markets, the Company competed with numerous international and domestic reinsurance and insurance operations. The reduction in the Company’s A.M. Best rating below an “A-” level made it extremely difficult for the Company to compete in the assumed reinsurance business. The Company discontinued its one ongoing treaty at the end of 2003. See ”Assumed Reinsurance Segment.”

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REGULATION

General

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

Licenses

SCPIE Indemnity, AHI and AHSIC are licensed in their respective states of domicile––California, Delaware and Arkansas. AHI is also licensed to transact insurance and reinsurance in 47 states and the District of Columbia. This permits ceding company clients to take credit on their regulatory financial statements for reinsurance ceded to AHI in jurisdictions in which it is authorized as a reinsurer. AHSIC is licensed to write policies as an excess and surplus lines insurer in 20 states. SCPIE Indemnity is not licensed in any jurisdiction outside of California.

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

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

Insurance Guaranty Associations

Most states, including California, require admitted property and casualty insurers to become members of insolvency funds or associations that generally protect policyholders against the insolvency of such insurers. Members of the fund or association must contribute to the payment of certain claims made against insolvent insurers. Maximum contributions required by law in any one year vary by state, and California permits a maximum assessment of 2% of annual premiums written by a member in that state during the preceding year. However, such payments are recoverable by law through policy surcharges.

Holding Company Regulation

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

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

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

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Regulation of Dividends from Insurance Subsidiaries

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

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

Risk-Based Capital

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

At December 31, 2004, the adjusted surplus level of each Insurance Subsidiary exceeded the threshold requiring the least regulatory attention. At December 31, 2004, SCPIE Indemnity’s adjusted surplus level exceeded this threshold by $38.0 million.

Regulation of Investments

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

Prior Approval of Rates and Policies

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

The Insurance Subsidiaries filed for a 15.6% rate increase in California for 2003. The Foundation for Taxpayer and Consumer Rights, a California-based non-profit education and advocacy organization, intervened in the rate making process and the Department of Insurance commenced a rate hearing on March 11, 2003, related to this matter. The administrative law judge overseeing the hearing recommended a 9.9% increase and the Insurance Commissioner upheld the ruling. The rate increase was implemented on October 1, 2003. The Company filed for an overall 8.9% rate increase in California for 2004 and the same foundation, as allowed under Proposition 103, challenged this increase. The Insurance Subsidiaries withdrew their applications in order to avoid another lengthy and costly hearing. In May 2004, the Company filed for an overall 6.5% rate increase in California, which was again challenged by the same foundation. The Insurance Commissioner approved this application in its entirety, without a hearing, and the Insurance Subsidiaries implemented this rate increase on January 1, 2005.

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Medical Malpractice Tort Reform

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

Medical Malpractice Reports

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

Terrorism Risk Insurance Act of 2002

Under the Federal Terrorism Risk Insurance Act, effective November 26, 2002, each commercial property and casualty insurer is required to make terrorism coverage available in policies for property and liability coverages other than medical malpractice coverage (which is excluded under the Act). Any terrorism exclusion in a subject policy is rendered void by the Act to the extent it excludes losses covered by the Act. The federal government will pay a major share of the covered losses after a deductible is paid by the insurers. The Company provides other liability coverages in its various policies, in addition to medical malpractice insurance, and may be subject to the Act. The Company’s policy forms do not exclude coverage for acts of terrorism, except in a few instances. The Company has notified its policyholders of this coverage as provided by the Act, has removed any terrorism exclusion in its policies, and has informed its policyholders that no premium is currently charged for acts of terrorism coverage. The Company does not consider this coverage material to its policies, which protect its insureds principally against liability, not property losses.

Health Insurance Portability and Accountability Act

The Health Insurance Portability and Accountability Act of 1996 (“HIPAA”) was enacted by Congress to ultimately simplify the healthcare administrative process. HIPAA contains a variety of provisions, including privacy rules designed to maintain the confidentiality of “protected health information,” which became effective on April 14, 2003. Protected health information includes, among other things, medical and billing records relating to medical care provided by the Company’s insureds and loss descriptions and other information relating to medical liability claims asserted by patients against such insureds. The Company has developed various documents and procedures for use with its insureds and vendors to safeguard this information from disclosure and use not permitted under HIPAA.

A.M. BEST RATING

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

For a number of years, the Insurance Subsidiaries received an A.M. Best rating of A (Excellent), the third highest of thirteen rating classifications. On February 21, 2002, A.M. Best reduced the Insurance Subsidiaries’ rating two levels to B++ (Very Good), and on October

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7, 2002, A.M. Best further reduced the Company’s rating to B+ (Very Good). On November 14, 2003, A.M. Best, after a review of the Company’s third quarter financial results, further reduced the Insurance Subsidiaries’ rating to B (Fair) with a negative outlook. A rating of B (Fair) is the seventh highest of the A.M. Best rating classifications and is the highest classification A.M. Best rates as “Vulnerable.” A.M. Best assigns this rating to companies that have, in its opinion, a fair ability to meet their current obligations to policyholders, but are financially vulnerable to adverse changes in underwriting and economic conditions.

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

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

EMPLOYEES

As of December 31, 2004, the Company employed 149 persons. None of the employees are covered by a collective bargaining agreement. The Company believes that its employee relations are good.

EXECUTIVE OFFICERS

The Executive Officers of the Company and their ages as of March 4, 2005, are as follows:

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

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

Patrick S. Grant has been with the Company since 1990, serving initially as Vice President, Marketing. He was named Senior Vice President, Marketing in 1992. Prior to joining the Company, he served 20 years with Johnson & Higgins, insurance brokers. His last position there was Vice President, Professional Liability. Mr. Grant has worked on Company operations since 1976. Mr. Grant has notified the Company that he intends to retire in July 2005.

Joseph P. Henkes has been with the Company since 1990, serving initially as Vice President, Operations and Actuarial Services. He was named Senior Vice President, Operations and Actuarial Services in 1992. Prior to joining the Company, he served three years with Johnson &

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Higgins, insurance brokers, where his services were devoted primarily to the Company. He has been an Associate of the Casualty Actuarial Society since 1975 and a member of the American Academy of Actuaries since 1980.

Edward G. Marley joined the Company in December 2001 as Vice President and Controller. He was named Chief Accounting Officer in 2003. Prior to that time, he spent 14 years with CAMICO Mutual Insurance Company where he served as Chief Financial Officer, Secretary and Treasurer.

Margaret A. McComb has been with the Company since 1990. Prior to joining the Company, she served 14 years with Johnson & Higgins, insurance brokers. She assumed management responsibility for the Claims Department in 1985. Ms. McComb was named Senior Vice President in May 2002.

Donald P. Newell joined the Company in January 2001. Prior to that time, he was a partner at the law firm of Latham & Watkins in San Diego, California. Mr. Newell has worked on matters for the Company since 1975. Mr. Newell is a director of Mercury General Corporation, a publicly held personal lines insurance holding company.

Timothy C. Rivers has been with the Company since August 1999. Prior to that time, he spent 17 years with Guy Carpenter & Company, a reinsurance brokerage subsidiary of Marsh McLennan, and a predecessor business, Willcox & Company. Mr. Rivers’ employment will cease on May 1, 2005.

Robert B. Tschudy joined the Company in May 2002. From July 1995 to March 2001, Mr. Tschudy was Senior Vice President and Chief Financial Officer with 21st Century Insurance Group, a publicly held property casualty insurance company writing primarily personal automobile insurance in California. Prior to that time, Mr. Tschudy was a partner, specializing in insurance, in the Los Angeles Office of Ernst & Young LLP for over 10 years.

RISK FACTORS

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

Concentration of Business

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

Almost all of the Company’s 2005 premiums written will be generated in California. The revenues and profitability of the Company are therefore subject to prevailing regulatory, economic and other conditions in California, particularly Southern California. In addition, approximately 20% of premiums written were generated by groups of nine physicians or more. The largest group of physicians accounted for 2.4% of total premiums written in 2004 and one program of affiliated groups, accounted for 6.3% of premiums written in 2004.

Uncertainties of Future Expansion

From 1996 to 2001, the Company significantly expanded its healthcare liability insurance products into markets outside California. This expansion was not successful, and the Company is now “running off” this non-core healthcare liability business. At the present time, the Company has one continuing non-California program for physicians and medical groups in Delaware and may consider adding programs on a selective basis in the future. The Company cannot predict whether this remaining program will be ultimately successful or whether the Company will have the opportunity to add such programs, and, if so, whether any additional program will be successful.

Industry Factors

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

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The availability of healthcare liability insurance, or the industry’s underwriting capacity, is determined principally by the industry’s level of capitalization, historical underwriting results, returns on investment and perceived premium rate adequacy. Historically, the financial performance of the healthcare liability insurance industry has tended to fluctuate between a soft insurance market and a hard insurance market. In a soft insurance market, competitive conditions could result in premium rates and underwriting terms and conditions that may be below profitable levels. For a number of years, the healthcare liability insurance industry in California and nationally has faced a soft insurance market. Although the Company believes that the California insurance market is improved, there can be no assurance that this improvement will continue or its effect on the Company’s financial condition and results of operations.

Competition

The Company competes with numerous insurance companies in the California market. The Company’s principal competitors for physicians and medical groups in California consist of three physician-owned mutual or reciprocal insurance companies, several commercial companies and a physicians’ mutual protection trust, which levies assessments primarily on a “claims paid” basis. In addition, commercial insurance companies compete for the medical malpractice insurance business of larger medical groups and other healthcare providers. Several of these competitors have greater financial resources than the Company. Between 1993 and 2002, the Company instituted overall rate increases in order to improve its underwriting results. These rate increases were higher than those implemented by most of its competitors. As a result, the Company lost some of its policyholders, in part due to its rate increases. In 2003, the Company’s rates became more competitive, as its requested rate increase for that year was delayed until the fourth quarter. In October 2003, the Company instituted an average 9.9% rate increase for California physicians and medical groups and in January 2005, implemented an additional 6.5% rate increase. The effect of these rate increases on the Company’s ability to retain and expand its healthcare liability insurance business in California is uncertain. The Company believes its rates remain generally competitive with those of other companies, after giving effect to these rate increases.

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

The Company considers its A.M. Best rating to be extremely important to its ability to compete in its core markets. The Company’s current rating of B (Fair) with a negative outlook could aversely affect the Company’s ability to attract and retain policyholders in California and Delaware. See “Importance of A.M. Best Rating.”

Loss and LAE Reserves

The reserves for losses and LAE established by the Company are estimates of amounts needed to pay reported and unreported claims and related LAE. The estimates are based on assumptions related to the ultimate cost of settling such claims based on facts and interpretation of circumstances then known, predictions of future events, estimates of future trends in claims frequency and severity, judicial theories of liability, legislative activity, reports from ceding reinsurers and other factors. However, establishment of appropriate reserves is an inherently uncertain process involving estimates of future losses, and there can be no assurance that currently established reserves will prove adequate in light of subsequent actual experience.

The inherent uncertainty is greater for healthcare liability reserves where a longer period may elapse before a definite determination of ultimate claim liability is made, and where the judicial, political and regulatory climates are changing. Healthcare liability claims and expenses may be paid over a period of 10 or more years, which is longer than most property and casualty claims. Trends in losses on long-tail lines of business such as healthcare liability may be slow to appear, and accordingly, the Company’s reaction in terms of modifying underwriting practices and changing premium rates may lag underlying loss trends. The core healthcare liability net reserves account for $257.2 million or 58.1% of total net reserves as of December 31, 2004. This portion of the reserves has the most historical experience available for actuarial analysis, and therefore should be the most predictable. A subsequent change of 1% in estimated loss cost trends based on more recent experience would have an effect of approximately $5 million on estimated reserve levels.

The reserves related to the non-core healthcare liability business present additional problems in determining adequate reserves. As the size of these reserves decline and the number of underlying cases decrease, the ultimate losses become more related to specific case results. Therefore, unexpected legal results in healthcare liability cases can produce unexpected reserve development. This was evident in 2004 as one adverse verdict in a Florida hospital case and an unexpected rise in severe dental claims caused a material upward development of prior years reserves. Since some of the remaining cases in the non-core healthcare liability business will ultimately go to trial many years after the event of loss, adverse verdicts or settlements at trial may affect the accuracy of future reserving. As of December 31, 2004, non-core healthcare liability reserves accounted for $97.4 million or 22.0% of total net reserves. Outstanding claims have fallen from 739 at December 31, 2003 to 431 at December 31, 2004.

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In addition, assumed reinsurance reserves are based primarily on reports received by the Company from the underlying ceding insurers. Ultimate losses in the assumed reinsurance business may take years to be reported through the reinsurance system.

Assumed reinsurance net reserves as of December 31, 2004 accounted for $87.8 million or $19.8% of total net reserves. In addition, the major components of the assumed reinsurance net reserves are as follows:

Approximately 55% of the net reserves outstanding as of December 31, 2004 are primarily based on actuarial work performed by or for the ceding insurers. Since the length of time required for the losses to be reported through the world wide reinsurance system can be quite long, unexpected events are more difficult to predict. Examples of these would be the collapse of GoshawK Syndicate 102 in 2003 and the bail and immigration bonding company collapse in 2004. See “Business—Assumed Reinsurance Segment.”

While the Company believes that its reserves for losses and LAE are adequate, there can be no assurance that the Company’s ultimate losses and LAE will not deviate, perhaps substantially, from the estimates reflected in the Company’s financial statements. If the Company’s reserves should prove inadequate, the Company will be required to increase reserves, which could have a material adverse effect on the Company’s financial condition or results of operations.

Rate Increases in California

In September 2002, the Company filed an application with the California Department of Insurance for a rate increase for physicians and medical groups of approximately 15.6%, effective January 1, 2003. A self-styled consumer group objected to this proposed rate increase in November 2002, and requested a hearing on the application. The Department granted a hearing pursuant to state procedural rules. The hearing commenced on March 11, 2003, before an administrative law judge. The administrative law judge rendered her decision for a 9.9% increase and the California Insurance Commissioner upheld her ruling. The Company implemented the rate increase in the fourth quarter 2003. In September 2003, the Company filed another application for a rate increase of approximately 8.9%, effective January 1, 2004. The consumer group requested a hearing on the application in November 2003. In December 2003, in order to avoid another lengthy and costly hearing, the Company withdrew its application. In May 2004, the Company filed for an overall 6.5% rate increase in California, which was again challenged by the same foundation. The Insurance Commissioner approved this application in its entirety, without a hearing, and the Insurance Subsidiaries implemented this rate increase on January 1, 2005.

The Company plans to file applications for future rate increases in California that it considers justified by reason of its loss experience. The Company may encounter objections and delays in obtaining approval of any requested changes. If future rate requests are denied or significantly reduced, or if there are substantial delays in implementing a favorable decision, the Company’s operations could be adversely affected.

Necessary Capital and Surplus

The Insurance Subsidiaries have historically operated with ratios of net premiums written to statutory capital and surplus (policyholder surplus) of approximately 1 to 1, which the Company considers to be an appropriate measure of safety for the insurance segment in which it currently writes. At the end of 2002, this ratio was 1.6 to 1. As a result of the decreases in 2003 net written premiums in the non-core direct healthcare liability insurance business and the assumed reinsurance business, the ratio improved to 1.06 to 1 at December 31, 2003. Based on the Company’s premium writings in 2004, the ratio of net premiums written to statutory capital and surplus improved to .9 to 1. The other primary measure affecting financial strength ratios is the net reserves-to-statutory surplus ratio. At the end of 2004, this ratio was 3.3 to 1, which is an improvement on the 2003 ratio of 3.8 to 1, but is higher than the 3.0 to 1 standard generally followed in the industry. During 2005, the Company expects that there will be both decreases and increases in non-core healthcare liability and the assumed reinsurance reserves. Non-core healthcare liability reserves will be reduced through claim payments and settlements. However, in connection with the closing of the 2002 underwriting year into the one remaining Lloyds’ syndicate that the Company participated in in 2003, the Company will assume additional statutory liabilities and receive assets in the same amount, which will have the effect of

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increasing these reserves, even though it has no effect on surplus or income. Depending upon the amount of this increase versus other decreases, the ratio could worsen. The reserves for the remaining Lloyd’s syndicate will close into a syndicate in which the Company did not participate within the next 12 months, at which time these reserves and accompanying assets will be transferred to the assuming syndicate. In addition, the Company could experience unexpected losses and loss reserve increases similar to those experienced in recent years that would further decrease the ratio. The Company’s ability to write policies at current levels could be limited. Moreover, if these and similar leverage ratios do not improve, the Insurance Subsidiaries’ ratings from A.M. Best may not improve and if they worsen, the Insurance Subsidiaries’ ability to write business would be further reduced. At December 31, 2004, the Company’s principal insurance subsidiary, SCPIE Indemnity exceeded minimum requirements of an NAIC risk-based capital threshold (requiring some regulatory attention) by $38.0 million. If the Company incurs additional material losses, the Company could fall below this threshold. Any of the events discussed above could have a material adverse effect on the Company’s financial condition and results of operations.

Changes in Healthcare

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

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

Importance of A.M. Best Rating

A.M. Best ratings are an increasingly important factor in establishing the competitive position of insurance companies. The rating reflects A.M. Best’s opinion of an insurance company’s financial strength, operating performance and ability to meet its obligations to policyholders. Prior to 2002, each of the Insurance Subsidiaries held an A (Excellent) rating from A.M. Best. This is the same rating held by most of the Company’s principal competitors in the healthcare liability insurance market in California.