Edgar Filing: SCPIE HOLDINGS INC

Form 10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

QUARTERLY REPORT

PURSUANT TO SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2007

Commission File No. 1-12449

SCPIE HOLDINGS INC.

(Exact name of registrant as specified in its charter)

DELAWARE

95-4557980

(State or other jurisdiction

of incorporation or organization)

(I.R.S. Employer

Identification No.)

1888 Century Park East, Los Angeles, California 90067

www.scpie.com

(Address of principal executive offices and internet site)

(310) 551-5900

(Registrant’s telephone number, including area code)

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

Yes x No ¨

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

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

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

Yes ¨ No x

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


Class		Outstanding at November 7, 2007
Preferred stock, par value $l.00 per share		No shares outstanding
Common stock, par value $0.0001 per share		10,081,333 shares, including 500,000 shares of Common Stock that have been issued to a wholly owned subsidiary of Registrant.

PART I — FINANCIAL INFORMATION

ITEM 1.

FINANCIAL STATEMENTS

SCPIE HOLDINGS INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)


	SEPTEMBER 30, 2007			DECEMBER 31, 2006
ASSETS		(unaudited)
Securities available-for-sale:
Fixed maturity investments, at fair value (amortized cost 2007 - $336,715; 2006 -$397,553)	$	332,942		$	389,954
Equity investments, at fair value (cost 2007 - $1,501; 2006 – 1,723)		1,837			2,034

Total securities available-for-sale		334,779			391,988
Cash and cash equivalents		205,964			145,815

Total investments and cash and cash equivalents		540,743			537,803
Accrued investment income		4,569			5,330
Premiums receivable, net		22,655			18,697
Assumed reinsurance receivable		20,713			17,089
Reinsurance recoverable		41,145			45,564
Deferred policy acquisition costs		8,425			7,351
Deferred federal income taxes, net		37,507			44,661
Property and equipment, net		1,142			1,733
Other assets		7,056			7,281

Total assets	$	683,955		$	685,509

LIABILITIES
Reserves:
Losses and loss adjustment expenses	$	386,242		$	405,448
Unearned premiums		47,383			41,815

Total reserves		433,625			447,263
Amounts held for reinsurance		12,904			13,317
Other liabilities		15,938			18,285

Total liabilities		462,467			478,865
Commitments and contingencies
STOCKHOLDERS’ EQUITY
Preferred stock – par value $1.00, 5,000,000 shares authorized, no shares issued or outstanding
Common stock, par value $.0001, 30,000,000 shares authorized, 12,792,091 shares issued, 2007 – 9,581,333- shares outstanding 2006 – 9,553,906 shares outstanding		1			1
Additional paid-in capital		36,704			37,127
Retained earnings		283,379			271,925
Treasury stock, at cost 2007 – 2,710,758 shares and 2006 – 2,738,185 shares		(94,078	)		(95,278	)
Subscription notes receivable		(1,569	)		(1,849	)
Accumulated other comprehensive loss		(2,949	)		(5,282	)

Total stockholders’ equity		221,488			206,644

Total liabilities and stockholders’ equity	$	683,955		$	685,509

See accompanying notes to Consolidated Financial Statements.

SCPIE HOLDINGS INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

(UNAUDITED)


	NINE MONTHS ENDED SEPTEMBER 30,						THREE MONTHS ENDED SEPTEMBER 30,
	2007			2006			2007			2006
Revenues:
Net premiums earned	$	90,020		$	93,245		$	30,309		$	30,163
Net investment income		16,573			15,476			5,804			5,265
Realized investment losses		(111	)		(423	)		(227	)		(259	)
Other income (loss)		335			18			141			(41	)

Total revenues		106,817			108,316			36,027			35,128
Expenses:
Losses and loss adjustment expenses		67,379			74,584			21,176			23,678
Underwriting and other operating expenses		21,699			21,071			8,419			6,334

Total expenses		89,078			95,655			29,595			30,012
Income before income taxes		17,739			12,661			6,432			5,116
Income tax expense		6,058			4,364			2,173			1,833

Net income	$	11,681		$	8,297		$	4,259		$	3,283

Basic earnings per share	$	1.22		$	0.87		$	0.44		$	0.35
Diluted earnings per share	$	1.21		$	0.86		$	0.44		$	0.34
Cash dividend declared and paid per share of common stock	$	—		$	—		$	—		$	—

See accompanying notes to Consolidated Financial Statements.

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY

(DOLLARS IN THOUSANDS)

(UNAUDITED)


	COMMON STOCK		ADDITIONAL PAID-IN CAPITAL			RETAINED EARNINGS			TREASURY STOCK			STOCK SUBSCRIPTION NOTES RECEIVABLE			ACCUMULATED OTHER COMPREHENSIVE LOSS			TOTAL STOCK- HOLDERS’ EQUITY
BALANCE AT JANUARY 1, 2007	$	1	$	37,127		$	271,925		$	(95,278	)	$	(1,849	)	$	(5,282	)	$	206,644
Adoption of accounting principle, net of applicable income tax benefit of $123							(227	)											(227	)
Net income		—		—			11,681			—			—			—			11,681
Unrealized losses on securities, net of applicable income tax expense of $1,347		—		—			—			—			—			2,503			2,503
Change in minimum pension liability, net of applicable income tax benefit of $110		—		—			—			—			—			(205	)		(205	)
Unrealized foreign currency gain																35			35

Comprehensive income																			14,014
Stock subscription notes repaid		—		—			—			—			280			—			280
Treasury stock reissued		—		(423	)		—			1,200			—			—			777

BALANCE AT SEPTEMBER 30, 2007	$	1	$	36,704		$	283,379		$	(94,078	)	$	(1,569	)	$	(2,949	)	$	221,488


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

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

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

See accompanying notes to Consolidated Financial Statements.

SCPIE HOLDINGS INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(DOLLARS IN THOUSANDS)

(UNAUDITED)


	NINE MONTHS ENDED SEPTEMBER 30,
	2007			2006
OPERATING ACTIVITIES
Net income	$	11,681		$	8,297
Adjustments to reconcile net income to net cash Provided used in operating activities:
Provisions for amortization and depreciation		2,940			3,857
Provision for deferred federal income taxes		6,058			4,364
Realized investment losses		111			423
Changes in operating assets and liabilities:
Deferred acquisition costs		(1,074	)		(1,695	)
Accrued investment income		761			836
Unearned premiums		5,568			5,691
Loss and loss adjustment expense reserves		(19,206	)		(6,941	)
Reinsurance recoverable		4,419			5,126
Amounts held for reinsurance		(413	)		2,187
Other liabilities		(2,347	)		(3,983	)
Premium receivable, net		(7,582	)		(14,636	)
Other assets		(36	)		(1,176	)

Net cash provided by operating activities		880			2,350
INVESTING ACTIVITIES
Purchases—fixed maturities		(22,278	)		(10,777	)
Sales—fixed maturities		7,960			19,627
Maturities—fixed maturities		72,560			32,190
Purchase of furniture and equipment, net		(30	)		(87	)

Net cash provided by investing activities		58,212			40,953
FINANCING ACTIVITIES
Reissuance of treasury shares		777			1,836
Repayment of stock subscriptions		280			302

Net cash provided by financing activities		1,057			2,138

Increase in cash and cash equivalents		60,149			45,441
Cash and cash equivalents at beginning of period		145,815			68,783

Cash and cash equivalents at end of period	$	205,964		$	114,224

See accompanying notes to Consolidated Financial Statements.

SCPIE HOLDINGS INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

SEPTEMBER 30, 2007

1.	BASIS OF PRESENTATION

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

These financial statements have been prepared in accordance with U.S. generally accepted accounting principles (GAAP) for interim financial information and with the instructions to Form 10-Q and Article 7 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the nine month period ended September 30, 2007 are not necessarily indicative of the results that may be expected for the year ending December 31, 2007. For further information, refer to the consolidated financial statements and notes thereto included in the SCPIE Holdings Annual Report on Form 10-K/A for the year ended December 31, 2006.

Certain 2006 amounts have been reclassified to conform to the 2007 presentation.

2.	EARNINGS PER SHARE

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


	NINE MONTHS ENDED SEPTEMBER 30,				THREE MONTHS ENDED SEPTEMBER 30,
	2007		2006		2007		2006
	(IN THOUSANDS, EXCEPT PER SHARE DATA)
Net income	$	11,681	$	8,297	$	4,259	$	3,283
Numerator for:
Basic earnings per share of common stock		11,681		8,297		4,259		3,283
Diluted earnings per share of common stock		11,681		8,297		4,259		3,283
Denominator
Denominator for basic earnings per share of common stock – weighted-average shares outstanding		9,566		9,505		9,581		9,506
Effect of dilutive securities:
Stock options		123		114		123		114

Denominator for diluted earnings per share of common stock adjusted – weighted-average shares outstanding		9,689		9,619		9,704		9,620
Basic earnings per share of common stock	$	1.22	$	0.87	$	.44	$	0.35
Diluted earnings per share of common stock	$	1.21	$	0.86	$	.44	$	0.34

3.	INVESTMENTS

The Company’s investments in available-for-sale securities at September 30, 2007 are summarized as follows:


	COST OR AMORTIZED COST		GROSS UNREALIZED GAINS		GROSS UNREALIZED LOSSES		FAIR VALUE
	(IN THOUSANDS)
September 30, 2007
Fixed-maturity securities:
Bonds:
U.S. government and agencies	$	152,429	$	860	$	665	$	152,624
Mortgage-backed and asset-backed		58,465		246		1,179		57,532
Corporate		125,821		99		3,134		122,786

Total fixed-maturity securities		336,715		1,205		4,978		332,942
Common stocks		1,501		336		—		1,837

Total	$	338,216	$	1,541	$	4,978	$	334,779

The Company’s investments in available-for-sale securities at December 31, 2006 are summarized as follows:


	COST OR AMORTIZED COST		GROSS UNREALIZED GAINS		GROSS UNREALIZED LOSSES		FAIR VALUE
	(IN THOUSANDS)
December 31, 2006
Fixed-maturity securities:
Bonds:
U.S. government and agencies	$	176,032	$	224	$	2,936	$	173,320
Mortgage-backed and asset-backed		69,963		40		1,028		68,975
Corporate		151,558		83		3,982		147,659

Total fixed-maturity securities		397,553		347		7,946		389,954
Common stocks		1,723		311		—		2,034

Total	$	399,276	$	658	$	7,946	$	391,988

The following table illustrates the gross unrealized losses included in the Company’s investment portfolio and the fair value of those securities, aggregated by investment category. The table also illustrates the length of time that they have been in a continuous unrealized loss position as of September 30, 2007.


	LESS THAN 12 MONTHS				12 MONTHS OR MORE				TOTAL
	GROSS UNREALIZED LOSSES		FAIR VALUE		GROSS UNREALIZED LOSSES		FAIR VALUE		GROSS UNREALIZED LOSSES		FAIR VALUE
	(IN THOUSANDS)
September 30, 2007
Fixed-maturity securities:
Bonds:
U.S. government and agencies	$	3	$	1,679	$	662	$	68,369	$	665	$	70,048
Mortgage-backed and asset-backed		947		12,703		232		25,321		1,179		38,024
Corporate		42		6,212		3,092		110,777		3,134		116,989

Total fixed maturity securities	$	992	$	20,594	$	3,986	$	204,467	$	4,978	$	225,061

The Company held 81 investment positions with unrealized losses as of September 30, 2007. All of the investments are investment grade, and the unrealized losses are primarily due to interest rate fluctuations. The Company held 80 securities that were in an unrealized loss position for 12 months or more.

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

4.	FEDERAL INCOME TAXES

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


	NINE MONTHS ENDED SEPTEMBER 30,						THREE MONTHS ENDED SEPTEMBER 30,
	2007			2006			2007			2006
	(IN THOUSANDS)
Federal income tax expense at 35%	$	6,209		$	4,431		$	2,252		$	1,790
Increase (decrease) in taxes resulting from:
State franchise tax and other		(92	)		—			—			—
Foreign and miscellaneous		(59	)		(67	)		(79	)		43

Total income tax expense	$	6,058		$	4,364		$	2,173		$	1,833

Tax years after 2002 are subject to examination by the federal taxing authority. There are no income tax examinations currently in progress.

5.	COMPREHENSIVE INCOME (LOSS)

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


	NINE MONTHS ENDED SEPTEMBER 30,						THREE MONTHS ENDED SEPTEMBER 30,
	2007			2006			2007			2006
	(IN THOUSANDS)
Net income	$	11,681		$	8,297		$	4,259		$	3,283
Other comprehensive income (loss) before tax:
Unrealized (losses) gains on securities		3,850			(106	)		4,566			8,051
Unrealized foreign currency gains (losses)		35			137			11			(44	)
Change in minimum pension liability		(315	)		(315	)		(105	)		(105	)

Other comprehensive income before tax		15,251			8,013			8,731			11,185
Income tax (benefit) expense related to securities		1,347			(37	)		1,597			2,818
Income tax benefit related to pension liability		(110	)		(110	)		(37	)		(36	)

Comprehensive income	$	14,014		$	8,160		$	7,171		$	8,403

6.	BUSINESS SEGMENTS

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

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


NINE MONTHS ENDED SEPTEMBER 30, 2007	DIRECT HEALTHCARE LIABILITY INSURANCE		ASSUMED REINSURANCE			OTHER			TOTAL
	(IN THOUSANDS)
Net premiums written	$	95,817	$	(229	)				$	95,588

Net premiums earned	$	90,249	$	(229	)				$	90,020
Net investment income		—		—		$	16,573			16,573
Realized investment losses		—		—			(111	)		(111	)
Other income		—		—			335			335

Total revenues		90,249		(229	)		16,797			106,817
Losses and loss adjustment expenses		61,984		5,395			—			67,379
Underwriting and other operating expenses		18,764		782			2,153			21,699

Total expenses		80,748		6,177			2,153			89,078

Segment income (loss) before income taxes	$	9,501	$	(6,406	)	$	14,644		$	17,739

Segment assets	$	31,699	$	61,139		$	591,117		$	683,955


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

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

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

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

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

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


THREE MONTHS ENDED SEPTEMBER 30, 2007	DIRECT HEALTHCARE LIABILITY INSURANCE		ASSUMED REINSURANCE			OTHER			TOTAL
	(In Thousands)
Net premiums written	$	8,020	$	(9	)				$	8,011

Net premiums earned	$	30,318	$	(9	)				$	30,309
Net investment income		—		—		$	5,804			5,804
Realized investment losses		—		—			(227	)		(227	)
Other income		—		—			141			141

Total revenues		30,318		(9	)		5,718			36,027
Losses and loss adjustment expenses		20,147		1,029			—			21,176
Underwriting and other operating expenses		6,472		642			1,305			8,419

Total expenses		26,619		1,671			1,305			29,595

Segment income (loss) before income taxes	$	3,699	$	(1,680	)	$	4,413		$	6,432

Segment assets	$	31,699	$	61,139		$	591,117		$	683,955


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

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

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

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

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

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

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

7.	COMMITMENTS AND CONTINGENCIES

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

Highlands Insurance Group

The Company is obligated to assume certain policy obligations of Highlands Insurance Company (Highlands) in the event Highlands is declared insolvent by a court of competent jurisdiction and is unable to pay these obligations. The coverages principally involve workers’ compensation, commercial automobile and general liability. Highlands currently is under the jurisdiction of the Texas District Court which appointed the Texas Insurance Commissioner as a permanent Receiver of Highlands in November 2003. The Receiver, through a Special Deputy Receiver (“SDR”) continues to resolve Highlands claim liabilities and otherwise conduct its business as part of his efforts to rehabilitate Highlands. At September 30, 2007, Highlands had established case loss reserves of $3.1 million, net of reinsurance, for the subject policies. Based on a limited review of the exposures remaining, the Company estimates that incurred but not reported (“IBNR”) losses are $2.5 million, for a total loss and loss adjustment expenses (“LAE”) reserve of $5.6 million. This estimate is not based on a full reserve analysis of the exposures and is not recorded in the Company’s reserves. If Highlands is declared insolvent and liquidated by court order, the Company would likely be required to assume Highlands’ remaining obligations under the subject policies.

The receiver has filed a rehabilitation plan with the Texas Court. A hearing on that plan is scheduled for January 14, 2008. In the interim, Highlands continues to pay and settle claims as the Receivership remains in place. If a Rehabilitation Plan ultimately is not approved, Highlands could be placed in liquidation.

Letters of Credit

The Company had a letter of credit facility in the amount of $50.0 million with Barclays Bank PLC which was terminated on November 7, 2007. Effective July 18, 2007, the Company established a letter of credit facility in the amount of $25.0 million with Union Bank of California. Letters of credit issued under the facilities guarantee the payment of loss reserves assumed under certain reinsurance contracts. As of September 30, 2007, letter of credit issuance under the facilities was approximately $16.9 million and securities of approximately $18.6 million were pledged as collateral.

8.	STOCK-BASED COMPENSATION

At September 30, 2007, the Company maintains a stock-based compensation plan, the 2003 Amended and Restated Equity participation Plan of SCPIE Holdings Inc. (the Plan) which provides for grants of stock options to key employees and non-employee directors, grants of restricted shares to non-employee directors, and stock appreciation rights (SARS) to key employees of the Company.

The compensation cost that has been charged against income for this plan was $408,000 and $193,000 for the nine-month periods ended September 30, 2007 and September 30, 2006, respectively. The income tax benefit recognized in the income statement for share-based compensation was $143,000 and $68,000 for the nine-month periods ended September 30, 2007 and September 30, 2006, respectively.

Effective January 1, 2006, the Company adopted SFAS 123(R), “Share-Based Payment” which revised SFAS 123 “Accounting for Stock Based Compensation” (SFAS 123(R)) and superseded APB 25 “Accounting for Stock Issued to Employees.” SFAS 123(R) requires recognition of the cost of employee services received in exchange for an award of equity instruments in the financial statements based on the grant-date fair value of the award, recognized over the period the employee is required to perform services in exchange for the award (presumptively the vesting period.)

The Company adopted SFAS 123(R) using the modified-prospective transition method. Under the modified-prospective transition method, prior periods are not restated. However, for awards granted prior to the date of adoption that were unvested on the adoption date, compensation cost is recognized prospectively. In periods after adoption, compensation cost is recognized over the remaining service period related to the award, based on amounts previously reported in the pro forma disclosures required under SFAS 123. Compensation cost is also recognized for awards granted after the effective adoption date based on the grant-date fair value of the award, calculated and recognized under the measurement provisions of SFAS 123(R).

Option activity as of September 30, 2007 and changes during the nine months ended September 30, 2007 were as follows:


	Shares	Weighted Average Exercise Price		Weighted Average Remaining Contractual Term (years)	Aggregate Intrinsic Value
Outstanding at January 1, 2007	794,100	$	13.28	5.38	$	10,560,604
Granted	—
Exercised	19,000	$	16.70
Cancelled or expired	7,000	$	33.04

Outstanding at September 30, 2007	768,100	$	13.02	4.68	$	9,999,740

Exercisable at September 30, 2007	756,431	$	13.04	4.64	$	7,417,343

The aggregate intrinsic value in the table above represents the total pretax intrinsic value (the difference between the Company’s closing stock price and the exercise price, multiplied by the number of in-the-money-options) that would have been received by the option holders had such options been exercised on that date.

9.	ADOPTION OF ACCOUNTING PRINCIPLES

New accounting pronouncements that we have adopted or will adopt in the near future are as follows:

SFAS 157, “Fair Value Measurements” – In September 2006, the FASB issued SFAS 157, which establishes a framework for measuring fair value and requires expanded disclosure about the information used to measure fair value. The statement applies whenever other statements require, or permit, assets or liabilities to be measured at fair value. The statement does not expand the use of fair value in any new circumstances and is effective for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. The Company plans to adopt SFAS 157 on January 1, 2008. The Company does not expect the adoption of this statement to have a material impact on our financial condition or results of operations.

In June 2006, the FASB issued Financial Interpretation No. 48, Accounting for Uncertainty in Income Taxes – an Interpretation of FAS No. 109 (FIN 48). This interpretation clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with FAS 109, Accounting for Income Taxes. FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. This interpretation also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. As permitted by FIN 48, the Company also adopted a policy of classifying interest and penalties related to income taxes as elements of income tax expense in the consolidated financial statements. The effect of this adoption on January 1, 2007, resulted in a $227,000 decrease to retained earnings.

SFAS 159, “Fair Value Option for Financial Assets and Financial Liabilities” – In February 2007, the FASB issued SFAS 159, which permits entities to voluntarily choose to measure eligible items at fair value at specified election dates. The election is made on an instrument-by-instrument basis and is irrevocable. If the fair value option is elected for an instrument, the statement specifies that entities report unrealized gains and losses at each subsequent reporting date. The statement is effective as of the beginning of an entity’s first fiscal year that begins after November 15, 2007. The Company plans to adopt SFAS 159 on January 1, 2008. The Company does not expect the adoption of this statement to have a material impact on our financial condition or results of operations.

10.	EVENT SUBSEQUENT

On October 15, 2007, the Company agreed to be acquired by The Doctors Company for $28.00 in cash for each outstanding share of Company common stock in a merger transaction valued at approximately $281.1 million. The merger is subject to customary closing conditions, including, among others, (i) the approval of the merger by the holders of a majority in voting power of the outstanding common stock of the Company; (ii) the approval of the merger by the Departments of Insurance of California, Delaware and Arkansas; (iii) the receipt of antitrust approvals, or the expiration or termination of the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended; and (iv) the absence of any order or injunction prohibiting the consummation of the merger.

ITEM 2.

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

Overview

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

The Company’s insurance business is organized into two reportable business segments: direct healthcare liability insurance and assumed reinsurance operations. Primarily due to significant losses on medical malpractice insurance outside of the state of California and assumed reinsurance business losses arising out of the September 11, 2001, World Trade Center terrorist attack, the Company incurred significant losses. The resulting reductions in surplus and corresponding decrease in capital adequacy ratios under both the A.M. Best Company (A.M. Best) and National Association of Insurance Commissioners (NAIC) capital adequacy models required the Company to take actions to improve its long-term capital adequacy position. The primary actions taken by the Company were to effect an orderly withdrawal from healthcare liability insurance markets outside of California and Delaware and from the assumed reinsurance market in its entirety. All of the healthcare liability insurance policies in these other markets expired during the first quarter of 2004. In December 2002, the Company entered into a 100% quota share reinsurance agreement to retrocede to Rosemont Re the majority of reinsurance business written in 2002 and 2001.

In November, 2006, A.M. Best raised its financial strength rating of the Company’s insurance subsidiaries to B+ (good) from B (Fair). On October 29, 2007, following the announcement of acquisition by The Doctors Company, A.M. Best placed the ratings of the insurance subsidiaries under review with developing implications. The ratings are expected to remain under review pending the close of the transaction with The Doctors Company.

Critical Accounting Policies

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

Premium Revenue Recognition

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

Loss and Loss Adjustment Expense Reserves

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

The Company had a growing volume of assumed reinsurance business between 1999 and 2002. Assumed reinsurance is a line of business with inherent volatility. Ultimate loss experience for the assumed reinsurance operation is based primarily on reports received by the Company from the underlying ceding insurers. Many losses take several years to be reported through the system. The Company relies heavily on the ceding entity’s estimates of ultimate incurred losses. These reported ultimate incurred losses along with independent or internal actuarial reports are reviewed by the Company’s internal actuarial staff to determine their reasonableness. In other cases, the Company relies on its own internal estimates determined primarily by experience to date, individual knowledge of the specific reinsurance contract, industry experience and other actuarial techniques to determine reserve requirements.

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

Summary of Net Loss and LAE Reserves

(IN THOUSANDS)


	Case Reserves		Bulk & IBNR Reserves		Total Gross Reserves		Ceded Reserves		Total Net Reserves
September 30, 2007
Direct Healthcare
Core	$	63,662	$	231,104	$	294,766	$	9,785	$	284,981
Non-Core		13,526		12,905		26,431		1,006		25,425

		77,188		244,009		321,197		10,791		310,406
Assumed Reinsurance		42,886		22,159		65,045		22,702		42,343

	$	120,074	$	266,168	$	386,242	$	33,493	$	352,749

December 31, 2006
Direct Healthcare
Core	$	70,869	$	213,018	$	283,887	$	9,758	$	274,129
Non-Core		23,408		15,778		39,186		1,532		37,654

		94,277		228,796		323,073		11,290		311,783
Assumed Reinsurance		56,151		26,224		82,375		26,934		55,441

	$	150,428	$	255,020	$	405,448	$	38,224	$	367,224

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

Reserve Sensitivity

The primary factor affecting the adequacy of reserve estimates in the core direct healthcare area is the trend in pure loss costs (the combination of frequency and average severity changes) related to malpractice coverage. At September 30, 2007 reserve levels, a 1% change in pure loss costs trend produces a change in prior reserves of approximately $4.1 million. Such changes are reflected in the period of change. Reserves related to medical malpractice coverage account for over 95% of core reserves.

In the non-core direct healthcare area, the adequacy of reserves is primarily dependent upon achieving fair settlements with the injured parties and reasonable litigation results. As the individual cases mature and more information becomes available for evaluating individual cases, there is a declining need for bulk and IBNR reserves. While the Company believes its reserves are adequate, several jurisdictions where the Company issued policies allow extended periods of time to elapse before the judicial or settlement process is completed. Individual settlements or judgments will determine the final incurred losses and thus the adequacy of these reserves. The recent experience has been generally consistent with Company expectations, but no assurance can be given that the Company’s current experience will continue. The current average reserve (including bulk and IBNR reserves) is approximately $279,000 per outstanding case. If the average settlement ultimately achieved is different by $12,000 for the current average reserve, the ultimate reserves will be affected by approximately $1.1 million.

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

Deferred Policy Acquisition Costs

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

Investments

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

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

•

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

•

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

•

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

•

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

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

Income Taxes

At September 30, 2007, the Company had $37.5 million of net deferred income tax assets. Net deferred income tax assets consist of the net temporary differences created as a result of amounts deductible or revenue recognized in periods different for tax return purposes than for accounting purposes. These deferred income tax assets include an asset of $15.4 million for a net operating loss carryforward that will begin to expire in 2023. A net operating loss carryforward is a tax loss that may be carried forward into future years. It reduces taxable income in future years and the tax liability that would otherwise be incurred.

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

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

Forward Looking Statements

Certain statements in this quarterly report on Form 10-Q that are not historical in fact constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 (PSLRA). The PSLRA provides certain “safe harbor” provisions for forward-looking statements. All forward-looking statements made in this quarterly report on Form 10-Q are made pursuant to the PSLRA. Words such as, but not limited to, “believe,” “expect,” “anticipate,” “estimate,” “intend,” “plan,” and similar expressions are intended to identify forward-looking statements. Such forward-looking statements involve known and unknown risks, uncertainties and other factors based on the Company’s estimates and expectations concerning future events that may cause the actual results of the Company to be materially different from historical results or from any results expressed or implied by such forward-looking statements. Actuarial estimates of losses and loss adjustment expenses (LAE), expectations concerning the Company’s ability to retain current insureds at profitable levels, successful withdrawal from the assumed reinsurance business, continued solvency of the Company’s reinsurers, obtaining necessary rate change regulatory approvals, expansion of liability insurance business in its principal market and improved performance and profitability are dependent upon a variety of factors, including future economic, competitive and market conditions, frequency and severity of catastrophic events, future legislative and regulatory actions, uncertainties and potential delays in obtaining premium rate approvals, the level of ratings from recognized rating services, the importance of brokerage business to the Company’s growth, the inherent uncertainty of loss and LAE estimates in both the core and discontinued non-core businesses (including a contingent liability related to Highlands Insurance Company), and the cyclical nature of the property and casualty insurance industry, all of which are difficult or impossible to predict accurately and many of which are beyond the control of the Company. The Company is also subject to certain structural risks as an insurance holding company, including statutory restrictions on dividends and other intercompany transactions. In light of the significant uncertainties inherent in the forward-looking information herein, the inclusion of such information should not be regarded as a representation by the Company or any other person that the Company’s objectives or plans will be realized. These risks and uncertainties, as well as the Company’s critical accounting policies, are discussed in more detail under “Critical Accounting Policies,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Overview,” and in “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Policies” and “Risk Factors” in the Company’s Annual Report on Form 10-K/A for the fiscal year ended December 31, 2006. The Company undertakes no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise.

Information Regarding Non-GAAP Measures

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

RESULTS OF OPERATIONS

NINE MONTHS ENDED SEPTEMBER 30, 2007 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30, 2006

Direct Healthcare Liability Insurance Segment

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

The following table summarizes the core business underwriting results of the direct healthcare liability insurance segment for the periods indicated (dollars in thousands):


For The Nine Months Ended September 30,	2007			2006
Net premiums written	$	95,817		$	98,757

Net premiums earned	$	90,249		$	93,066
Underwriting expenses
Losses and LAE incurred		61,984			66,083
Underwriting and other operating expenses		18,764			19,294

Underwriting gain	$	9,501		$	7,689

Loss ratio		68.7	%		71.0	%
Expense ratio		20.8	%		20.7	%
Combined ratio		89.5	%		91.7	%
Net reserves held	$	284,981		$	271,475

Core Business

Premiums written were $95.8 million and premiums earned were $90.2 million in the nine months ended September 30, 2007; compared to $98.8 million and $93.1 million in the nine months ended September 30, 2006. Premiums written and earned decreased primarily due to lower premiums from loss-rated groups as a result of improved claim frequency and a decline in policies in-force of 2.3%.

The loss ratio (losses and LAE related to premiums earned) for the first nine months of 2007 was 68.7% compared to 71.0 % in the first nine months of 2006. The decrease in the loss ratio is due primarily to a continued improved trend in claim frequency.

The underwriting expense ratio (expenses related to net premiums earned) increased slightly to 20.8% in the nine months ended September 30, 2007 from 20.7% in the first nine months of 2006 primarily due to cost increases while premiums earned remained flat.

Non-Core Business

Outstanding reserves for the non-core healthcare declined to $25.4 million as of September 30, 2007 from $37.7 million at December 31, 2006 and the number of open claims decreased to 91 from 136 for the same period. No change in prior reserve estimates was required in the nine-month period ended September 30, 2007.

Assumed Reinsurance Segment

Assumed reinsurance represents the book of assumed worldwide reinsurance of professional, commercial and personal liability coverages, commercial and residential property risks and accident and health, workers’ compensation and marine coverages. The Company from time to time may commute certain of its assumed reinsurance contracts to settle all past and future obligations under such contracts. In some cases, the commutation settlement amount (net of reinsurance recoverables) may exceed the amount reserved (net of reinsurance recoverables) for the related assumed reinsurance.

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


	Assumed Reinsurance Segment Underwriting Results
FOR THE NINE MONTHS ENDED SEPTEMBER 30,	2007			2006
Net premiums written	$	(229	)	$	179

Net premiums earned	$	(229	)	$	179
Underwriting expenses
Losses and LAE incurred		5,395			8,501
Underwriting and other operating expenses		782			168

Underwriting loss	$	(6,406	)	$	(8,490	)

The net premiums written and earned in 2007 and 2006 are primarily from premium adjustments related to old underwriting years.

The underwriting losses for the nine months ended September 30, 2007 are primarily due to commutation of several treaties. For 2006, the loss was principally attributable to increases in reserve estimates for a small number of contracts.

The Rosemont Re reinsurance treaty entered into in December 2002 effectively ceded a significant portion of assumed reinsurance losses occurring after June 30, 2002, for the business written for underwriting years 2001 and 2002 by the Company. The treaty has no limitations on loss recoveries and includes a profit-sharing provision should the combined ratios calculated on the base premium ceded be below 100%.

As of September 30, 2007, the Company has ceded $28.5 million of assumed reinsurance reserves, including IBNR, to Rosemont Re. In accordance with the Rosemont Re reinsurance treaty, a trust is maintained for the benefit of the Company. The agreement requires the trust to have a minimum balance equal to 102% of loss reserves ceded under the treaty. The Trust was in compliance with this funding provision as of September 30, 2007. If the estimated recoveries were to increase in the future, the Company would have to rely on Rosemont Re’s continuing ability to fund these amounts. Rosemont Re, due to significant losses related to Hurricanes Katrina, Rita and Wilma, is in voluntary run-off and will be liquidated. As of December 31, 2006, Rosemont Re had $64.2 million in regulatory surplus.

Other Operations

Net investment income increased 7.1% to $16.6 million for the nine months ended September 30, 2007 from $15.5 million for the nine months ended September 30, 2006. The increase in investment income principally reflects an increase in the average annual rate of return on invested assets from 3.9% to 4.2% for the nine months ended September 30, 2006 and September 30, 2007 respectively.

Net realized investment loss of $111 thousand was recorded for the nine months ended September 30, 2007 versus realized investment losses of $423 thousand in the nine months ended September 30, 2006.

Expenses of $2.2 million included in Other operating expenses are costs associated with the strategic planning effort of SCPIE Holdings Inc. Expenses of $1.6 million included in 2006 Other operating expenses are costs related to the proxy challenge against the Company’s slate of director nominees.

THREE MONTHS ENDED SEPTEMBER 30, 2007 COMPARED TO THREE MONTHS ENDED SEPTEMBER 30, 2006

Direct Healthcare Liability Insurance Segment

The following table summarizes the core business underwriting results of the direct healthcare liability insurance segment for the periods indicated (dollars in thousands):


For The Three Months Ended September 30,	2007			2006
Net premiums written	$	8,020		$	6,703

Net premiums earned	$	30,318		$	30,494
Underwriting expenses
Losses and LAE incurred		20,147			21,679
Underwriting and other operating expenses		6,472			6,031

Underwriting gain	$	3,699		$	2,784

Loss ratio		66.5	%		71.1	%
Expense ratio		21.3	%		19.8	%
Combined ratio		87.8	%		90.9	%
Net reserves held	$	284,981		$	271,475

Core Business

Net premiums written were $8.0 million and net premiums earned were $30.3 million in the three months ended September 30, 2007; compared to $6.7 million and $30.5 million in the three months ended September 30, 2006. Net premiums earned decreased 0.6%, primarily due to a small decline in policies in-force and decreased premium from loss-rated groups as loss experience improved. Net premiums written increased slightly in the 2007 period, compared to the prior year.

The loss ratio (losses and LAE related to net premiums earned) for the third quarter 2007 was 66.5% compared to 71.1% in the third quarter 2006. The difference in the loss ratios was attributable to reduction in claim frequency in the core business, compared to the earlier periods in 2006.

The underwriting expense ratio (expenses related to net premiums earned) increased to 21.3% in the third quarter 2007 from 19.8% in the third quarter 2006 primarily due to cost increases while premiums earned remained flat.

Non-Core Business

Outstanding reserves for the non-core healthcare declined to $25.4 million as of September 30, 2007 from $28.6 million at June 30, 2007 and the number of open claims decreased to 91 from 100 for the same period.

Assumed Reinsurance Segment

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


	Assumed Reinsurance Segment Underwriting Results
FOR THE THREE MONTHS ENDED SEPTEMBER 30,	2007			2006
Net premiums written	$	(9	)	$	(331	)

Net premiums earned	$	(9	)	$	(331	)
Underwriting expenses
Losses and LAE incurred		1,029			1,999
Underwriting and other operating expenses		642			260

Underwriting loss	$	(1,680	)	$	(2,590	)

The net premiums written and earned in 2007 and 2006 are primarily from premium adjustments related to old underwriting years.

The underwriting loss for the three months ended September 30, 2007 and three months ended September 30, 2006 were primarily related to increased reserve estimates for a small number of contracts.

Other Operations

Net investment income increased 10.2% to $5.8 million for the three months ended September 30, 2007 from $5.3 million for the three months ended September 30, 2006. Investment income reflects an increase in the average rate of return on invested assets from 4.0% to 4.2% for the three months ended September 30, 2006 and 2007, respectively.

Net realized investment losses of $227 thousand were recorded for the third quarter 2007 versus net realized investment losses of $259 thousand in the third quarter 2006.

Expenses of $1.3 million included in Other operating expenses are costs associated with the strategic planning effort of SCPIE Holdings Inc. Expenses of $43,000 included in 2006 Other operating expenses related to a proxy challenge against the Company’s slate of director nominees.

LIQUIDITY AND CAPITAL RESOURCES

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

Because of uncertainty related to the timing of the payment of claims, cash from operations for a property and casualty insurance company can vary substantially from period to period. During the first nine months of 2007, the Company had positive cash flow from operations of $0.9 million compared to a positive cash flow of $2.4 million in 2006. The positive cash flow in 2007 is primarily related to reduced claims payments associated with the non-core physician and assumed reinsurance programs, which are now in run-off. The Company maintains a significant portion of its investment portfolio in high-quality short-term securities and cash to meet short-term operating liquidity requirements, including the payment of losses and LAE. Cash and cash equivalents investments totaled $206.0 million or 38.1% of invested assets, at September 30, 2007. The Company believes that all of its short-term and fixed maturity securities are readily marketable and have scheduled maturities in excess of projected cash needs. The Company has very little exposure to sub-prime mortgages. The majority of the $57.5 million mortgage and asset-backed portfolio is government-backed, credit card and auto-related securities, which are currently rated AAA. Premiums generated by the Company’s core operations have historically produced positive cash flow after consideration of investment income.

The Company invests its cash flow from operations principally in taxable fixed maturity securities. The Company’s current policy is to limit its investment in unaffiliated equity securities and mortgage loans to no more than 8% of the total market value of its investments. The market value of the Company’s portfolio of unaffiliated equity securities was $1.8 million at September 30, 2007. The Company plans to continue its emphasis on fixed maturity securities investments for the indefinite future.

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

SCPIE Holdings is an insurance holding company whose assets primarily consist of all of the capital stock of its insurance company subsidiaries. Its principal sources of funds are dividends from its subsidiaries and proceeds from the issuance of debt and equity securities. The insurance company subsidiaries are restricted by state regulation in the amount of dividends they can pay in relation to earnings or surplus, without the consent of the applicable state regulatory authority, principally the California Department of Insurance. SCPIE Holdings’ principal insurance company subsidiary, SCPIE Indemnity, may pay dividends to SCPIE Holdings in any 12-month period, without regulatory approval, to the extent such dividends do not exceed the greater of (i) 10% of its statutory surplus at the end of the preceding year or (ii) its statutory net income for the preceding year. Applicable regulations further require that an insurer’s statutory surplus following a dividend or other distribution be reasonable in relation to its outstanding liabilities and adequate to meet its financial needs, and permit the payment of dividends only out of statutory earned (unassigned) surplus unless the payment out of other funds receives regulatory approval. The amount of dividends that SCPIE Indemnity is able to pay to SCPIE Holdings during 2007 without prior regulatory approval is approximately $16.4 million. As of September 30, 2007, no dividends had been paid to SCPIE Holdings.

As of September 30, 2007, SCPIE Holdings held cash and short-term securities of $6.3 million. Based on historical trends, market conditions and its business plans, the Company believes that its sources of funds (including dividends from the insurance company subsidiaries) will be sufficient to meet the liquidity needs of SCPIE Holdings over the next 18 months.

The Company’s insurance subsidiaries current rating from A.M. Best is B+ (Good). On October 29, 2007, following the announcement of acquisition by The Doctors Company, A.M. Best placed the ratings of the insurance subsidiaries under review with developing implications. The ratings are expected to remain under review pending the close of the transaction with The Doctors Company. The NAIC has developed a different methodology for measuring the adequacy of an insurer’s surplus which includes a risk-based capital (RBC) formula designed to measure state statutory capital and surplus needs. The RBC rules provide for different levels of regulatory attention based on four thresholds determined under the formula. At December 31, 2006, the RBC level of insurance subsidiaries exceeded the threshold requiring the least regulatory attention. At December 31, 2006, SCPIE Indemnity’s adjusted surplus level of $164.4 million was 340% of this threshold.

The Company believes that it has the ability to fund its continuing operations from its premiums written and investment income. The Company plans to continue its focus on the efficient operation of its core business, while at the same time continuing to adjudicate and settle claims incurred in its discontinued non-core business.

As of September 30, 2007, the Company’s statutory surplus was approximately $183.4 million. The principal differences between statutory surplus and stockholders’ equity are deferred policyholder acquisition costs and the deferred federal income tax asset.

EFFECT OF INFLATION

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

ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

The Company invests its assets primarily in fixed maturity securities, which at September 30, 2007 comprised 61.6% of total investments at market value. Corporate bonds represent 36.9 % and U.S. government bonds represent 45.8% of the fixed-maturity investments, with the remainder consisting of mortgage-backed and asset-backed securities. Equity securities, consisting primarily of common stocks, account for less than 0.3% of total investments at market value. The remainder of the investment portfolio consists of cash and highly liquid short-term investments, which are primarily overnight bank repurchase agreements and short-term money market funds.

The value of the fixed maturity portfolio is subject to interest rate risk. As market interest rates decrease, the value of the portfolio increases with the opposite holding true in rising interest rate environments. A common measure of the interest sensitivity of fixed-maturity assets is modified or effective duration, a calculation that takes maturity, coupon rate, yield and call terms to calculate an average age of the expected cash flows. The longer the duration, the more sensitive the asset is to market interest rate fluctuations. The effective duration of the fixed maturity portfolio at September 30, 2007 was 3.0 years.

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

At September 30, 2007, the carrying value of the investment portfolio included $3.4 million in net unrealized losses. At December 31, 2006, the investment portfolio included $7.6 million in net unrealized losses.

ITEM 4.

CONTROLS AND PROCEDURES

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

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

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

PART II — OTHER INFORMATION

ITEM 1.

LEGAL PROCEEDINGS

General

Bail and Immigration Bond Proceedings

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

During 2004, CBC failed and a large number of bond losses emerged for 2000 and subsequent years. There were a number of disputes between the primary insurers and reinsurers in the CBC program. AHI has been engaged in arbitration proceedings with each of the primary insurers to resolve these disputes. The Sirius, Highlands and Aegis proceedings were instituted on June 13, 2005, August 31, 2005 and December 7, 2005, respectively. The Company’s arbitration proceeding with Aegis was concluded and the Company has commuted any future LAE and bail bond losses with Aegis. The Company paid to Aegis a total amount slightly in excess of the amount reserved for this agreement at December 31, 2005. The arbitration hearing with Sirius was concluded on April 12, 2007. As a result of the arbiter’s rulings in the Sirius proceeding, the Company recorded additional net losses and expenses of approximately $840,000 in the first quarter of 2007. The Highlands arbitration proceeding is still in its early stages.

The Company has recorded in the financial statements its best reserve estimate of $3.2 million to cover the ultimate net liability under the Sirius and Highlands reinsurance agreements. Highlands has provided claim information to the Company with respect to alleged losses during 2001 and 2002 under bail bonds issued in the State of New Jersey and alleged losses during 2001 under federal immigration bonds. Highlands has indicated in filings that it has additional exposure under bail bonds issued in states other than New Jersey. Highlands has not provided sufficient information to measurably quantify certain of these additional losses or allocate such losses among the 2001 and 2002 years in which AHI participated and the 2000 year in which the Company did not participate. Given the uncertainties of these actual and prospective bail bond and other claims, future loss development on the CBC program could be greater than the reserves estimated by the Company at September 30, 2007. The Company intends to vigorously contest the claims of Highlands.

ITEM 1A.

RISK FACTORS

Except for the risk factors set forth below, there have been no material changes in the risk factors disclosed in Item 1A of Part 1 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2006.

Proposed Merger with The Doctors Company

Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended; and (iv) the absence of any order or injunction prohibiting the consummation of the merger. The Company currently expects the merger to close during the first half of 2008. However, it is possible that factors outside of the Company’s control could require the parties to complete the proposed merger at a later time or not to complete it at all.

In addition, the announcement of the proposed merger may have a negative impact on the Company due to:

•

risks that the proposed merger disrupts current plans and operations and potential difficulties in employee retention as a result of the merger;

•

the effect of the announcement of the merger on the Company’s agent, broker and customer relationships, operating results and business generally; and

•

the amount of the costs, fees, expenses and charges related to the merger.

In the event that the proposed merger is not completed:

•

under specified circumstances, the Company may be required to pay a termination fee of up to 3% of the aggregate merger consideration; and

•

the market price of the Company’s common stock may decline to the extent that the current market price reflects a market assumption that the proposed merger will be completed.

Any of these events could have a negative impact on the Company’s results of operations and financial condition and could adversely affect the price of its common stock.

ITEM 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

None.

ITEM 3.

DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4.

SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None.

ITEM 5.

OTHER INFORMATION

Termination of Credit Agreement with Barclays Bank PLC.

On November 7, 2007 the Company terminated its Credit Agreement with Barclays Bank PLC which provided for the issuance of up to $50.0 million face amount of letters of credit on behalf of the Company. Securities pledged under the Barclays facility were fully released on October 16, 2007. Letters of Credit previously issued under the Barclays facility were replaced under the Credit Agreement with Union Bank of California which was established on July 18, 2007.

ITEM 6.

EXHIBITS

The following exhibits are included herewith.


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

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

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

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

SIGNATURES

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


	SCPIE HOLDINGS INC.

Date: November 7, 2007	By:	/s/ Donald J. Zuk
		Donald J. Zuk
		President and Chief Executive Officer

Date: November 7, 2007	By:	/s/ Robert B. Tschudy
		Robert B. Tschudy
		Senior Vice President and Chief Financial Officer