The proposed $281 million sale of medical malpractice insurer SCPIE Holdings Inc. to a Northern California competitor might be a hard sell to investors.
Joseph Stilwell, a New York-based activist investor who negotiated his way onto the Century City company’s board in January, resigned in disgust after the rest of the board accepted the all-cash offer from Doctors Co. for an amount he believes significantly undervalues the insurer.
In his resignation letter dated Oct. 16, the day the deal was announced, Stilwell aimed most of his anger at Donald Zuk, Scipie’s CEO since 1989 and the company’s second largest individual shareholder with 0.67 percent of shares.
“Your repeated tendency to be swayed by a CEO who has done so poorly over the years speaks to your inability to adequately represent the interests of the owners of this company,” wrote Stilwell, who through his Stilwell Group is the company’s largest shareholder with 8.52 percent of outstanding shares.
Stilwell told the Business Journal last week that when the institutions that comprise the bulk of SCPIE shareholders learn details of the transaction, they are apt to soundly reject the deal even though the $28 per share cash purchase price represents a 27 percent premium over the closing price of the stock on the day before the deal was announced. SCPIE shares closed at $27.37 on Oct. 24.
“SCPIE is a value franchise, but it’s being run by idiots,” said Stilwell, who specializes in turning around companies burdened with what he considers poor management.
Only a few years ago, Century City-based SCPIE was a money-losing operation that had overextended itself with a failed national expansion and a disastrous foray into the reinsurance business. But since then the company retrenched into its core competency as a regional liability insurer of around 8,000 physicians and oral surgeons, plus physician medical groups and clinics, managed care organizations and other healthcare providers. It is one of the five largest medical malpractice insurers statewide.
After four successive years of losses, SCPIE reported a small profit in 2005 and net income of $12.3 million in 2006. The company had net income for the first half of this year of $7.4 million, a 48 percent improvement from the year before. It’s set to report its third quarter on Nov. 1.
Chief Executive Donald Zuk, citing the Securities and Exchange Commission mandated quiet period after a deal is announced, declined to directly respond to Stilwell’s criticism. But he was willing to discuss in general terms why he favored the deal.
Zuk noted that while SCPIE had made great progress in its turnaround, it faced increasing challenges to grow in a market in which at least four of its main California-based competitors, including Doctor’s Co., are private. Private insurers have more flexibility to cut rates and take a short-term hit to profits, while he has to answer to shareholders. SCPIE hasn’t raised rates in two years and no increases are planned in 2008.
“When you have institutional investors who are not keen to have us go out of state and you have private competitors that are cutting rates, you have some problems, don’t you? This was probably was the best time to consider being acquired by someone bigger and stronger than we are,” he said.
Zuk added that SCPIE has been at a market disadvantage because of its “good” B+ financial rating from insurance industry rating firm A.M. Best Co. By comparison, Doctors Co., which insures 32,000 doctors nationwide, has an “excellent” A- rating.
He also noted that aside from Stilwell, the rest of SCPIE’s directors agreed with his argument that taking a cash offer from a respected, in-state company was the best deal for shareholders. The other option would have been taking chances on a cash-and-stock offer where the share price could swing wildly in a volatile market before the deal closed.
“Vegas is where I do my gambling,” said Zuk, 70, who has been CEO since 1989.
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. A subsequent move into reinsurance, where insurers share risk on policies to reduce each other’s exposure, cost the company dearly in the wake of the 2001 terrorist attack on the World Trade Center
It has since returned to its core medical malpractice business and has its biggest market share in Southern California.
