Malpractice insurer SCPIE has healed itself into a turnaround.

More than four years of management efforts to dig out from an ambitious national expansion that went awry appears to be paying off for shareholders of SCPIE Holdings Inc.

Even as the Century City-based medical malpractice insurer continues to report quarterly losses, its stock saw one of the best run-ups in its sector last year when it soared 113 percent to $20.80. Shares closed at $22.99 on Jan. 18.

Even industry rating service A.M. Best Co., which has downgraded the company three times since early 2002, called SCPIE's performance one of the brightest spots last year in the property/casualty sector, which otherwise was hard hit by record hurricane losses.

"We're very pleased with the turnaround of the company." said Dr. Mitchell Karlan, longtime chairman of SCPIE and a surgeon at Cedars-Sinai Medical Center. "There's a recognition of how strong SCPIE is, that we're very liquid, and that we've taken many steps to assist physicians with risk management."

SCPIE started as an inter-insurance exchange--in which policyholders pool their money to cover claims on a non-profit basis--for Southern California physicians in 1976 and went public in 1997. Until 2001, SCPIE had been profitable in large part because of tort reforms the state approved in the 1970s that limited awards for pain and suffering to $250,000.

However, SCPIE began seeing problems after an aggressive expansion that started in the 1990s into states with fewer controls on malpractice jury awards than in California. That went sour, and a move into re-insurance, where insurers share risk on policies to reduce each other's exposure, cost it dearly in the wake of the 2001 terrorist attack on the World Trade Center.

SCPIE learned its lesson.

After reporting a 2001 loss of $57.9 million following a $17.3 million profit the previous year, the board began cutting its losses and concentrating on its more profitable markets in California and Delaware. It also backed out of most of the re-insurance business, which required maintaining a significantly higher surplus of cash.

The return to its roots are starting to show. In fiscal 2004, SCPIE reported a net loss of $7.9 million, narrower than its $12.8 million loss in 2003.

The company, which has not yet reported financials for 2005, reported a third-quarter net loss of $3.1 million. The blow was softened by a third-quarter underwriting profit of $4.4 million in its California and Delaware markets, fueled in part by a 6.5 percent California premium increase effective last January. The underwriting profit was a significant improvement from the $604,000 loss for the same year-ago period.

The company's loss ratios--which compare premiums collected with claims payouts and other expenses--also have improved over time. Karlan attributes that in part to the high level of risk management consulting the insurer gives policyholders, including a soon-to-launch Web-based coaching program.

The risk management consulting suggests ways for doctors to avoid malpractice claims, and Karlan noted that the percentage of policyholders involved in lawsuits dropped from 24 percent four years ago to 13 percent today.

Dr. Tom Horowitz, a downtown L.A. family physician who has been a policyholder since he went into practice 20 years ago, says SCPIE's customer service likely contributes significantly to a high retention rate, which the company reported was 94 percent in its core markets for the 12 months ending Sept. 30.

"They're like a good firefighter, and I'm sure that their advice bas saved me from overly antagonizing a patient and creating a larger problem," Horowitz said.

SCPIE policyholders include more than 17,000 physicians and surgeons, other health care providers and organizations. A key marketing technique is fostering relationships with professional associations, such as the Los Angeles County Medical Association, which agreed to endorse the insurer in exchange for discounts for its members.

And unlike many companies that often change leadership in crisis, SCPIE stuck with most of the officers who had built the company. Chief Executive Donald Zuk, who was traveling and couldn't be reached for comment, has been with company since 1989.

Karlan himself joined the board in 1985 and has served as chairman 13 years. He notes 80 percent of his fellow board members have a medical backgrotmd, and he speculates that many longtime policyholders remained loyal because after the company went public, they received stock equivalent to their premiums for the previous three years.

"That was pretty unique at the time," he said. "It showed them that we were a company in partnership with them."

SCPIE Holdinqs Inc. (SKP)

YEAR (Dec. 31)                   2004          2003

Revenue (millions)             $157.3        $186.9
Total Expenses (millions)       165.2         207.2
Operating Loss (millions)       (7.9)        (20.2)
Net Loss (millions)             (7.9)        (12.8)
Loss Per Share                $(0.84)       $(1.37)

SUMMARY

Business: Medical malpractice insurer
Headquarters: Los Angeles
CEO: Donald Zuk
Market Cap: $239.4 million Dividend Yield: N/A
Total Liabilities: $785 million P/E Ratio: N/A
Long-Term Debt: $0