UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
SCHEDULE 14A
PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE SECURITIES
EXCHANGE ACT OF 1934
Filed by the Registrant
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Filed by a Party other than the Registrant
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Preliminary Proxy Statement
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Confidential, for Use of the Commission Only (as permitted by Rule 14a-6(e)(2))
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Definitive Proxy Statement
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Definitive Additional Materials
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Soliciting Material Pursuant to §240.14a-12
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FPIC INSURANCE GROUP, INC.
(Name of Registrant as Specified In Its Charter)
N/A
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
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No fee required.
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Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
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Title of each class of securities to which transaction applies:
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Aggregate number of securities to which transaction applies:
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Per unit price or other underlying value of transaction computed pursuant to
Exchange Act Rule 0-11 (set forth the amount on which the filing fee is
calculated and state how it was determined):
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Proposed maximum aggregate value of transaction:
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Total fee paid:
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Fee paid previously with preliminary materials.
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Check box if any part of the fee is offset as provided by Exchange Act Rule 0-11(a)(2) and identify the filing
for which the offsetting fee was paid previously. Identify the previous filing by registration statement
number, or the Form or Schedule and the date of its filing.
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Amount Previously Paid:
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Form, Schedule or Registration Statement No.:
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Date Filed:
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SUPPLEMENT
DATED AUGUST 9, 2011
TO REVISED DEFINITIVE PROXY STATEMENT DATED JULY 18, 2011
This is a supplement to the Revised Definitive Proxy Statement on Schedule 14A filed by FPIC
Insurance Group, Inc. (FPIC, we, our or the Company) with the Securities and Exchange
Commission (the SEC) on July 18, 2011 (the Revised Definitive Proxy Statement) that was
previously mailed to the Companys shareholders on or about July 18, 2011 in connection with the
solicitation of proxies for use at the special meeting of shareholders of the Company to be held at
the Companys principal office, located at 1000 Riverside Avenue, Suite 800, Jacksonville, Florida
32204, on August 12, 2011, at 10:00 a.m., Eastern Time. On May 23, 2011, the Company entered into
an Agreement and Plan of Merger (the Merger Agreement) by and among the Company, The Doctors
Company, a California domiciled reciprocal inter-insurance exchange (TDC), and Fountain
Acquisition Corp., a Florida corporation and a wholly owned subsidiary of TDC (Merger Sub),
pursuant to which Merger Sub will merge with and into the Company, and the Company will continue
as the surviving corporation and a wholly owned subsidiary of TDC (the Merger). Upon
consummation of the Merger, holders of the Companys common stock will be entitled to receive the
per share merger consideration of $42.00 in cash, without interest and less applicable withholding
taxes, for each share of common stock issued and outstanding immediately prior to the effective
time of the Merger. Capitalized terms used but not defined herein shall have the meanings set
forth in the Revised Definitive Proxy Statement.
The Companys Board of Directors (the Board) carefully reviewed and considered the terms and
conditions of the Merger Agreement and the transactions contemplated thereby, including the Merger,
and based on its review determined, by unanimous vote, that the Merger Agreement and the
transactions contemplated thereby (including the Merger) are advisable and fair to and in the best
interests of the shareholders of the Company.
The Board continues to unanimously recommend that
our shareholders vote FOR the proposal to approve and adopt the Merger Agreement, FOR the
Adjournment Proposal and FOR the proposal to approve, on a non-binding advisory basis, the
compensation that may be received by the Companys named executive officers in connection with the
Merger.
FPICs shareholders have the right to change or revoke their proxies at any time before the
vote taken at the special meeting, as further described on page 23 of the Revised Definitive Proxy
Statement.
TERMINATION OF GEORGIA PRE-ACQUISITION WAITING PERIOD
As previously disclosed on pages 6 and 58 of the Revised Definitive Proxy Statement with respect to the
Georgia pre-acquisition waiting period, the Office of the Commissioner of Insurance of Georgia (the Georgia Insurance Commissioner) communicated with TDC prior to the expiration of the applicable
30-day waiting period questioning information in TDCs pre-acquisition notice concerning market concentration and asserting that the Merger would appear to constitute a prima facie violation of the
competitive standards set forth in the Georgia Insurance Code. As a result of this communication, the Georgia pre-acquisition waiting period was extended until the earlier of the thirtieth day after
receipt of certain additional information by the Georgia Insurance Commissioner or termination of the waiting period by the Georgia Insurance Commissioner. On August 9, 2011, TDC received a letter
from the Georgia Insurance Commissioner confirming that the pre-acquisition waiting period has been terminated.
PROPOSED SETTLEMENT OF LITIGATION RELATING TO THE MERGER
As previously disclosed on page 58 of the Revised Definitive Proxy Statement in the section
entitled
The Merger Litigation Related to the Merger,
the Company, the Board, TDC and Merger
Sub were named in a putative shareholder class action complaint filed in the Circuit Court of the
Fourth Judicial Circuit, Duval County, Florida (the Court), by a purported shareholder of the
Company (the Action). The complaint generally alleges that the directors of the Company breached
their fiduciary duties by approving the Merger for an allegedly unfair price and as the result of
an allegedly unfair sale process. The complaint also alleges that the Company, TDC and Merger Sub
aided and abetted the directors alleged breaches of their fiduciary duties and that the Company
failed to provide material information to shareholders with respect to the Merger. The complaint
seeks, among other things, a declaration that the Action can proceed as a class action, an order
enjoining completion of the Merger, attorneys fees and such other relief as the Court deems just
and proper.
On
August 9, 2011, the parties in the Action entered into a memorandum of
understanding (the memorandum of understanding) in which they agreed on the terms of a proposed
settlement of the Action, which would include the dismissal with prejudice of all claims against
all of the defendants. The proposed settlement is conditional upon, among other things, the
execution of an appropriate stipulation of settlement, and final
approval of the proposed settlement by the Court. In addition, in connection with the settlement
and as provided in the memorandum of understanding, the parties contemplate that plaintiffs
counsel will seek an award of attorneys fees and expenses as part of the settlement. There can be
no assurance that the parties ultimately will enter into a
stipulation of settlement or that the Court will approve the settlement even if the parties enter
into such stipulation. In such event, the proposed settlement as contemplated by the memorandum of
understanding may be terminated. The proposed settlement will not affect the amount of the merger
consideration that our shareholders are entitled to receive in the Merger.
The defendants deny all liability with respect to the facts and claims alleged in the Action
and specifically deny that any further supplemental disclosure was or
is required under any applicable
rule, statute, regulation or law. However, (a) to avoid the risk of delaying or adversely
affecting the Merger and the related transactions, (b) to minimize the expense of defending the
Action and (c) to provide additional information to our shareholders at a time and in a manner that
would not cause any delay of the special meeting of shareholders or the Merger, the defendants have
agreed to the terms of the proposed
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settlement described above. The parties further considered it desirable that the Action be settled
to avoid the expense, risk, inconvenience and distraction of continued litigation and to fully and
finally resolve the settled claims.
SUPPLEMENTAL DISCLOSURE
As contemplated by the memorandum of understanding, the Company is providing certain
additional disclosures that are supplemental to those contained in the Revised Definitive Proxy
Statement. This supplemental information should be read in conjunction with the Revised Definitive
Proxy Statement, which we urge shareholders to read in its entirety. As noted above, none of the
defendants has admitted any wrongdoing of any kind, including but not limited to (a) inadequacies
in any disclosure, (b) the materiality of any disclosure that the plaintiff contends should have
been made, (c) any breach of fiduciary duties, or (d) aiding and abetting any breach of fiduciary
duties. The following information (changes marked with new text underlined and deleted text marked
with strikethrough) amends and supplements the information disclosed on pages 25 48 of the
Revised Definitive Proxy Statement under the headings
The Merger Background of the Merger,
The Merger Reasons for the Merger; Recommendation of Our Board of Directors, The Merger
Unaudited Financial Forecasts
and
The Merger Opinion of Sandler ONeill + Partners, L.P.
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THE MERGER
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The following is a description of the material aspects of the Merger. While the Company
believes that the following description covers the material terms of the Merger, the description
may not contain all of the information that is important to the Companys shareholders. The
Company encourages you to carefully read this entire proxy statement, including the annexes, for a
more complete understanding of the Merger.
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Background of the Merger
As part of its ongoing evaluation of business and strategic planning, the Board, from
time to time, has discussed and reviewed strategic goals and alternatives. These reviews have
included a full range of strategic alternatives, including consideration of potential acquisitions
and business combinations, as well as the Companys stand-alone business plans and prospects.
During the spring of 2008, in connection with an assessment of the Companys strategic
position and opportunities, the Board authorized the Companys management to assess with
investment bankers and financial advisors familiar with the Companys industry the possibility of
engaging in a business combination transaction, including the possible sale of the Company.
Partially as a result of the deterioration in financial markets later in 2008, the Board
determined not to actively pursue any such business combination at that time.
On July 30, 2009, the Company entered into a definitive agreement to acquire Advocate,
MD Financial Group Inc. for approximately $33.6 million (plus any applicable earn-out payments
pursuant to the terms of the transaction). This acquisition was completed in November 2009.
Sandler ONeill acted as financial advisor to the Company in connection with this acquisition.
In August 2009, at the regular meeting of the Strategic Planning Committee of the Board,
that committee reviewed and expressed support for the Companys 2009 Long Range Strategic Plan.
Among other things, the 2009 Long Range Strategic Plan addressed a range of strategic
alternatives, including the possible sale of the Company, and factors that might affect the
desirability and risks of a possible sale of the Company. The Strategic Planning Committee
determined that the Company would remain open to consideration of possible sale transactions.
Beginning in
In
September 2009,
the Company held discussions with
a potential
strategic buyer (referred to herein as Bidder A)
contacted Mr. Byers,
President and Chief Executive Officer of the Company,
concerning the
possible acquisition of the Company by Bidder A. Bidder A initially
conveyed to Mr. Byers,
President and Chief Executive Officer of
the Company,
a preliminary proposal to acquire the
Company for $30 per share in cash (as adjusted to reflect the Companys three-for-two stock split,
which became effective on March 8, 2010). Mr. Byers responded that he would need to convey the
substance of that conversation to the Board before providing a response.
On September 30, 2009, a special telephonic meeting of the Board was held. At this
meeting, Mr. Byers described the preliminary proposal conveyed to Mr. Byers by Bidder A. Also at
this meeting, the Board requested that Sandler ONeill and outside counsel assist the Board in
determining whether the Company should consider a sale at that time and how to respond to the
preliminary proposal from Bidder A.
3
On October 19, 2009, at a special meeting of the Board, after receiving a presentation
from Sandler ONeill and after discussions with Sandler ONeill, outside counsel and the Companys
management, the Board authorized the Companys management to explore Bidder As preliminary
proposal.
On October 23, 2009, representatives of the Company, Sandler ONeill and Bidder A met to
discuss the preliminary proposal and the Company entered into a confidentiality agreement with
Bidder A. Subsequently, the Company provided Bidder A with financial and other information
concerning the Company, and representatives of the Company and Sandler ONeill held various
discussions with representatives of Bidder A regarding the preliminary proposal. On November 3,
2009, Bidder A informed Mr. Byers that any definitive proposal Bidder A might be willing to make
would not be at a purchase price in excess of $30 per share (as adjusted to reflect the Companys
three-for-two stock split, which became effective on March 8, 2010).
On November 24, 2009, the Board held a special meeting with Sandler ONeill, outside
counsel and the Companys management in attendance. At this meeting, it was determined that a
price of $30 per share was inadequate and the Company should not devote further efforts to
exploring a transaction with Bidder A, provided that the possibility of reviving discussions with
Bidder A at a future time would not be foreclosed.
In February 2010, Bidder A contacted Mr. Byers and indicated that it might be willing to
acquire the Company at an increased price of $31.33 per share (as adjusted to reflect the
Companys three-for-two stock split, which became effective on March 8, 2010). At a telephonic
meeting held on March 2, 2010, the Board created a special committee (referred to herein as the
Special Committee) of the Board, comprised of Messrs. Kirschner
, Anderson and Byers, Dr. Baratta
and Ms. Ruffier,
(Chairman of the Board, Chair of the Governance Committee, Chair of the
Executive Committee), Anderson (Vice Chairman of the Board, Chair of the Audit Committee, Chair of
the Nominating Committee) and Byers (President and Chief Executive Officer), Dr. Baratta
(Immediate Past Chairman of the Board) and Ms. Ruffier (Chair of the Strategic Planning
Committee); these individuals were selected because of their significant current or past positions
on the Board and the respective committees thereof. The Special Committee was created for
purposes of expedience, efficiency and convenience in order
to consider and make a
recommendation to the Board on how to proceed in light of this communication.
Following meetings held on March 8 and March 18, 2010, the Special Committee
recommended, and at a meeting held on March 19, 2010, the Board authorized, the engagement of
Sandler ONeill to assist the Board in evaluating strategic alternatives for the Company,
including
but not limited to
potential acquisitions and joint venture opportunities and the
ramifications of the Companys continuing on a stand-alone basis, as well as
the possible
acquisition
sale
of the Company
by
Bidder A
.
Subsequent to March 19, 2010, representatives of Sandler ONeill and the Company
contacted Bidder A and indicated that the Company was not prepared to proceed with discussions at
the indicated price but would be willing to consider a higher offer price. Subsequent to this
communication, Bidder A declined to increase its indicated offering price of $31.33 per share.
Based on this refusal by Bidder A, the Board determined not to pursue further discussions with
Bidder A at that time.
In March 2010, Mr. Byers contacted the President of another medical professional
liability insurer (referred to herein as Company B) that had previously expressed to Mr. Divita,
the Companys Chief Financial Officer, an interest in considering
as part of its own strategic
review process
a business combination with the Company, to discuss the possibility of such a
transaction. In follow-up to that conversation, on May 20, 2010, Messrs. Byers and Divita and Mr.
White, the leader of the Companys insurance business segment, met with representatives of Company
B to further discuss the possibility of a stock-for-stock merger between the Company and Company
B. On May 26, 2010, the Company and Company B entered into a mutual confidentiality agreement and
began to exchange financial and other information. The possibility of a transaction with Company B
was discussed at a meeting of the Strategic Planning Committee of the Board held on June 4, 2010,
and Messrs. Byers and Divita met with the President and the Chief Financial Officer of Company B
during an investor conference on
June 8, 2010. From June through August, 2010, the Company continued to obtain and review
information concerning Company B and held in-depth discussions with management of Company B
concerning the possible terms of
a
the potential stock-for-stock
merger between the Company
and Company B. Shortly thereafter, Company B decided to pursue other strategic plans instead of a
potential business combination with the Company.
During April 2010,
without any prior outreach by the Company or Sandler ONeill,
Mr. Byers was contacted by another potential strategic buyer (referred to herein as Bidder
C), which indicated a preliminary interest in exploring a transaction with the Company.
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On May 12, 2010, a representative of Sandler ONeill met with a member of senior
management of another potential
strategic buyer (referred to herein as Bidder D)
to discuss whether Bidder D was
interested generally in pursuing acquisition or joint venture opportunities
. At this meeting,
Bidder D expressed an interest in meeting Mr. Byers.
On July 15, 2010, Mr. Byers and representatives of Sandler ONeill met in Jacksonville
with a senior executive of Bidder D to discuss Bidder Ds potential interest in a transaction with
the Company.
On July 20, 2010, Messrs. Byers and Divita met with senior management of Bidder C to
further discuss a possible business combination between the Company and Bidder C.
At
its
the
regular meeting
on August 27, 2010,
of
the Companys Strategic
Planning Committee
on August 27, 2010, at which all members of the Board were present in
person, the Board
received a presentation of the 2010 Long Range Strategic Plan developed by
the Company. The objectives of the presentation were to ensure a common understanding of the
Companys strategy and business priorities, to provide an understanding of and to assess critical
strategic imperatives, and to validate near-term and long-term strategies. Among the topics
presented were: the Companys current position (including an industry update, the Companys
position and outlook, and an analysis of the Companys strengths, weaknesses, opportunities and
threats); strategic imperatives (including a discussion of business development, both organic and
through mergers and acquisitions, the claims and regulatory environment, legislative and
regulatory matters, organizational capabilities and financial markets); financial projections
through 2013; and an executive summary and conclusion. During the presentation, emphasis was
placed on the continuing competitive market conditions; the potential impact of healthcare
reforms; the Companys decreasing target market as a result of consolidation in the medical
community; challenges inherent in the claims, regulatory and operating environment; the continuing
pressure on operating earnings; the importance of the Companys capital management initiatives;
the possible future decline in the level of the Companys favorable reserve development; and the
challenges of developing a successful program to market insurance to physicians operating in a
hospital setting or employed by hospitals. An important part of the presentation was an analysis
of the universe of potential acquisition targets and a discussion of the challenges in achieving
growth through acquisition.
At the August 27 meeting,
the Strategic Planning Committee also received the
presentation of
in connection with its engagement to assist the Board in evaluating strategic
alternatives,
Sandler ONeill
made a presentation to the Board
concerning recent
communications with Bidder
D
C
and Bidder
C
D
. Sandler ONeill also provided
information concerning each of Bidder
D
C
and Bidder
C
D
and discussed their
ability to complete a transaction and their presumed rationales for acquiring the Company. Sandler
ONeill also provided a list of
nine
other parties that could potentially be interested in
acquiring the Company. At the recommendation of Sandler ONeill, the Strategic Planning Committee
authorized Sandler ONeill and the Companys management to continue discussions with Bidder
D
C
and Bidder
C
D
and to approach other parties that might reasonably be interested
in acquiring the Company. Prior to and after the August 27 meeting, Sandler ONeill contacted
approximately 20 additional parties
, all of which were potential strategic buyers,
to
assess their general interest in mergers and acquisitions, interest in the medical professional
liability insurance sector and, in certain instances, their possible interest in the Company.
On August 31, 2010, Mr. Byers and a representative of Sandler ONeill met with senior
officers of Bidder D to provide Bidder D with additional information concerning the Company.
Discussions also continued between Sandler ONeill and representatives of Bidder C, during which
Bidder C indicated it would not be able to begin to evaluate the transaction until after its third
quarter financial results were released.
On September 7, 2010, Mr. Byers and Mr. Divita met with a member of Bidder Cs senior
management as part of the continuing discussions between the Company and Bidder C. During the
September 7 discussion, Bidder C continued to indicate that it would not be able to consider a
transaction with the Company until after the release of its third quarter financial results.
On October 1, 2010, representatives of Bidder D informed Sandler ONeill that Bidder Ds
preliminary valuation of the Company was in line with the then current trading value of the
Companys shares, or approximately $35 per share.
On November 3, 2010, a member of the senior management of another potential strategic
buyer (referred to herein as Bidder E),
who had previously contacted the Company without any
outreach by the Company,
met with Mr. Byers and a representative of Sandler ONeill and
indicated a preliminary interest in exploring a transaction with the Company.
The Special Committee met on November 12, 2010, to receive a presentation from Sandler
ONeill concerning its activities on the Companys behalf. Two other members of the Board attended
this meeting by telephone. At this meeting, Sandler ONeill reported on updated market and
financial data, including the Companys year-to-date stock price performance, a comparison of that
performance to other property casualty insurers, historical price/book value and other multiples
of the Company and its peers, and summary financial and operating statistics of the Company and
its peers. Sandler ONeill also reported on and analyzed recent merger and acquisition activity
involving property casualty insurers, including the announced acquisitions of American Physicians
Capital, Inc. (referred to herein as ACAP) by TDC and
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American Physicians Services Group, Inc. by ProAssurance Corporation. Also, Sandler ONeill
discussed the financial projections for the Company provided by the Companys management and the
indicated ranges of trading values for the Companys common stock under various methodologies.
Finally, Sandler ONeill discussed the preliminary discussions held by Sandler ONeill and the
Companys management with potential acquirors, including Bidder C, Bidder D and Bidder E, and the
anticipated future discussions with these parties. Sandler ONeill also reviewed an extensive list
of other contacts made by Sandler ONeill with various parties, including multi-line property
casualty insurers and medical professional liability insurers, and reported that these parties had
indicated little or no interest in the medical professional liability insurance sector or
acquiring the Company. The Board authorized management and Sandler ONeill to continue discussions
with Bidders C, D and E, including by providing them with confidential, non-public information
following their execution of confidentiality agreements with the Company.
On November 19, 2010, the Company and Bidder D entered into a confidentiality agreement,
after which the Companys management provided Bidder D with additional financial and other
information concerning the Company.
On December 6, 2010, the Company and Bidder E entered into a confidentiality agreement,
after which the Companys management provided Bidder E with financial and other information
concerning the Company.
Bidder C declined to enter into a confidentiality agreement with the Company.
At its regular meeting held on December 10, 2010, the Board received an update from the
Companys management on the status of discussions with Bidder D, Bidder C and Bidder E and the
lack of apparent interest by other parties in a possible transaction with the Company.
On December 21, 2010, Messrs. Byers, Divita and White and a representative of Sandler
ONeill attended a meeting with the senior management of Bidder E at Bidder Es offices. During
this meeting, the historical and future performance of the Company was discussed as well as the
implications of a potential business combination between the Company and Bidder E.
At a dinner held in Jacksonville on December 22, 2010, Messrs. Byers, White and Divita
and a representative of Sandler ONeill met with a senior executive of Bidder D, who indicated
that Bidder Ds view of the Companys value had not changed from that communicated to the Company
on October 1, 2010.
On January 13, 2011, Messrs. Byers, White and Divita and representatives of Sandler
ONeill met at Bidder Ds offices with senior executives of Bidder D to discuss the Companys
recent business performance and financial projections and the potential synergies that could be
generated through an acquisition of the Company by Bidder D.
On January 17, 2011, Bidder D provided to Sandler ONeill a transaction analysis that,
among other things, quantified the synergies to be expected by Bidder D from acquiring the Company
and Bidder Ds estimated return on investment, assuming a $40 per share purchase price.
On a conference call held on January 21, 2011, Sandler ONeill provided Bidder D with
feedback on the transaction analysis delivered by Bidder D on January 17. Discussions thereafter
continued on this and related subjects between representatives of Sandler ONeill and Bidder D.
On February 3, 2011, the Company received a written non-binding proposal from Bidder D
to purchase all of the Companys outstanding shares for $40 per share in cash. This was
communicated to the Board by telephone on February 4, 2011 and a special meeting of the Board was
set for February 22, 2011 to discuss this proposal and related matters with Sandler ONeill and
outside counsel. The key elements of Bidder Ds proposal included (i) consideration in a form to
be negotiated (all cash, all stock or a combination of the two), (ii) a due diligence period of
approximately 30 days, (iii) an expectation (or possibly a condition) that the Companys senior
management would remain in positions with the Company or Bidder D post-closing, and (iv) a 30-day
exclusivity period.
Promptly after this February 4 telephonic Board session, Sandler ONeill contacted the
investment bankers representing Bidder E, who had previously requested that Sandler ONeill inform
them of the need for Bidder E to accelerate its consideration of a possible transaction with the
Company, and informed them that, to the extent Bidder E had a continuing interest in the Company,
the Company would like to receive by February 18, 2011 a written preliminary proposal from Bidder
E. During the week of February 14, 2011, Sandler ONeill was informed by Bidder E that although
potentially still interested, Bidder E was not currently in a position to consider the possible
submission of a proposal.
By unanimous written consent, on February 10, 2011, the Special Committee approved the
retention of Weil, Gotshal & Manges LLP (referred to herein as Weil) to represent the Company
and the Board in connection with its consideration of strategic alternatives.
6
On February 10, 2011, Sandler ONeill had a meeting with management of TDC during which
they discussed TDCs
potential interest in pursuing a transaction with the Company.
This meeting was TDCs
first involvement in the sale process.
On February 18, 2011, TDC indicated to Sandler ONeill that it had been doing its
internal analysis with respect to a potential transaction with the Company and that it would
determine whether it would participate in the process by the end of the week of February 21, 2011.
TDC also indicated to Sandler ONeill that it would only participate in pursuing a transaction
with the Company if a process was already ongoing.
The Board met on February 22, 2011 at a special meeting in Jacksonville to receive and
discuss a report from Sandler ONeill regarding the evaluation of strategic alternatives to date
and to determine how to respond to Bidder Ds proposal. Representatives of Sandler ONeill and
Weil, and Messrs. Divita and White and T. Malcolm Graham, our General Counsel and Secretary, also
attended this meeting. Sandler ONeill presented a detailed update on its activities since
mid-2010 and, in particular, since the November 12, 2010 meeting of the Special Committee. Sandler
ONeill also discussed in detail the terms of Bidder Ds February 3 proposal letter. Sandler
ONeill reported that Bidder C had decided not to pursue a transaction with the Company and that
Bidder E had indicated that it was not currently in a position to consider the possible submission
of a proposal. Sandler ONeills conclusion was that Bidder D was likely the only viable potential
acquiror of the Company in the foreseeable future
because it was the only party, other than
Bidder A, that had submitted a proposal to date
, although Sandler ONeill stated that TDC had
indicated that it might be interested in pursuing a transaction with the Company. Sandler ONeill
next reported on (with particular reference to the attractiveness of Bidder Ds proposal) updated
market and financial data,
updated
financial projections for the Company provided by the Companys
management
updated
for the Companys actual financial results from the fourth quarter
of 2010 and the cost associated with additional reinsurance coverage purchased by the Company,
and
also discussed
some of the synergies that would be provided to Bidder D by
acquiring the Company. After deliberations and advice from Weil, the Board authorized the
Companys management and its advisors to (i) inform Bidder D that the Board was willing to permit
Bidder D to begin detailed due diligence and to begin working towards a definitive agreement, (ii)
inform Bidder D that the Board was not willing to grant exclusivity to Bidder D at this time,
(iii) pursue further discussions with TDC, and (iv) to take actions consistent with the
discussions at the meeting.
On February 23, 2011, representatives of Sandler ONeill contacted Bidder D and
communicated the determinations made by the Board at the February 22, 2011 meeting. Sandler
ONeill also communicated its view that the Board would respond positively to an offer of $44 to
$45 per share but that it was uncertain whether the Board could support an offer of $40 per share.
Bidder D responded that it would not be willing to offer $44 per share and requested that the
Company indicate the price at which it would enter into exclusive due diligence and transaction
negotiations. Bidder D also insisted that it be granted exclusivity as a pre-condition to its
commencement of detailed due diligence and negotiations toward a definitive agreement.
Also on February 23, 2011, another potential strategic buyer (referred to herein as
Bidder F), contacted Sandler ONeill and inquired as to whether the Company was involved in a
process to evaluate a potential sale of the Company.
Sandler ONeill had inquired in November
and December as to Bidder Fs interest in a potential transaction with the Company, but Bidder F
had indicated that it would only be interested in an acquisition at a price per share less than or
equal to the book value per share.
After the February 23 discussions with Bidder D, Sandler ONeill reported to Mr.
Kirschner, in his capacity as Chairman of the Board and Chairman of the Special Committee, Mr.
Anderson, in his capacity as Vice Chairman of the Board and a member of the Special Committee, and
Mr. Byers. Based on this report and on discussions among themselves and with Sandler ONeill, it
was determined by Messrs. Kirschner and Anderson that Sandler ONeill should contact Bidder D and
indicate that Messrs. Kirschner and Anderson felt confident that the Board would support an offer
from Bidder D at an offering price slightly in excess of $42 per share.
After several conversations between Sandler ONeill, Company representatives and
representatives of Bidder D, on February 24, 2011, Bidder D indicated that it would not be willing
to meet the $42 price. Bidder D further confirmed that it did not wish to proceed with due
diligence and transaction negotiations without the 30-day exclusivity period.
On a telephone conference held on the morning of February 28, 2011, representatives of
Sandler ONeill and Messrs. Kirschner and Byers determined to communicate to TDC and Bidder F that
the Company was willing to make financial and actuarial information available to them, under the
protection of confidentiality agreements, and to give them approximately two weeks to submit
written non-binding indications of their interest in acquiring the Company. Mr. Kirschner
communicated these developments to the Board later that day.
On March 1, 2011, Sandler ONeill communicated the above message to representatives of
TDC and Bidder F. Both TDC and Bidder F confirmed that they were interested in submitting a
proposal to acquire the Company and would be able to do so within approximately two weeks. Sandler
ONeill then provided TDC and Bidder F with draft confidentiality
agreements.
7
On March 2, 2011, the Company entered into confidentiality agreements with TDC and
Bidder F.
On March 3, 2011, Sandler ONeill delivered to TDC and Bidder F letters requesting, by
March 16, 2011, preliminary indications of interest in pursuing an acquisition of the Company,
including an indication of value and form of proposed consideration. In addition, Sandler ONeill
provided TDC and Bidder F with certain nonpublic information, including a draft of the Companys
fourth quarter 2010 earnings release, summary claims and actuarial information and drafts of
year-end external actuarial studies.
From March 3 through March 16, 2011, representatives of Sandler ONeill continued to
provide TDC and Bidder F with additional due diligence materials requested by them.
During a telephone call between Sandler ONeill and Bidder D on March 14, 2011, Bidder D
expressed its continued interest, but only on an exclusive basis and not at a price in excess of
$40 per share. Sandler ONeill offered to provide Bidder D with access to additional due diligence
materials and Company information, but Bidder D declined. Sandler ONeill and Bidder D agreed to
continue to discuss Bidder Ds interest.
On March 15, 2011, Macquarie Capital (referred to herein as Macquarie), financial
advisor to TDC, requested additional time for TDC to submit a proposal letter to Sandler ONeill.
TDC was granted an extension of its deadline to March 18, 2011.
On March 16, 2011, Bidder F delivered a letter to Sandler ONeill conveying Bidder Fs
non-binding indication of interest in pursuing discussions related to the acquisition of all of
the Companys outstanding shares for $38 per share in cash. Bidder Fs letter requested a 60-day
period to complete its due diligence and to negotiate a definitive agreement.
On March 16, 2011, Mr. White met with a senior executive of TDC at an industry
conference and discussed operational aspects of the possible acquisition of the Company by TDC.
On March 18, 2011, TDC delivered to Sandler ONeill a non-binding preliminary indication of
interest in acquiring all of the Companys outstanding shares for cash in a range of $39 to $42
per share. This letter also outlined the operational and financial due diligence contemplated by
TDC and stated that its review of the most critical due diligence area, review of actuarial
information, had already begun based on information provided to TDC. TDC also stated that it
believed that four weeks would be adequate for TDC to complete its due diligence investigation and
that TDC anticipated another two weeks to negotiate and enter into definitive agreements.
On March 18, 2011 and March 21, 2011, representatives of Sandler ONeill and members of
the Special Committee discussed how to proceed in light of the three indications of interest
received from Bidder F, TDC and Bidder D. Members of the Special Committee also conferred
separately by telephone. During the period after February 3 through March 21, 2011, the Board was
given weekly updates of the progress of discussions with Bidder D, TDC and Bidder F (as
applicable) and was provided with copies of the Bidder D, TDC and Bidder F proposal letters
promptly upon receipt.
During the March 18 and March 21, 2011 discussions, the Special Committee expressed its
reluctance to provide extensive access to sensitive Company information to any prospective
acquiror, unless it appeared that the prospective acquiror was reasonably anticipated to make a
competitive offer for the Company and to complete a transaction. As a result of these discussions,
on March 21, 2011, the Special Committee instructed Sandler ONeill to contact each of TDC and
Bidder F and to inform (i) TDC that the Company was willing, only if TDC believed it would be able
to refine its indicated offering price at the high end of its indicated range, to allow TDC to
commence a detailed due diligence investigation, and (ii) Bidder F that the Company was not
willing to allow Bidder F to commence a detailed due diligence investigation unless Bidder F
increased its offering price to a level competitive with that of the other prospective acquirors
and gave assurances of its intention to complete a transaction. Sandler ONeill communicated the
Companys responses to TDC and Bidder F on March 22, 2011.
During a telephone call with Bidder F on March 22, 2011, Sandler ONeill offered Bidder
F access to the Companys management and additional information to help it revise its indicated
offering price. Bidder F indicated that it was uncertain whether it would be willing to increase
its offering price but would discuss the matter internally and respond to Sandler ONeill after a
few days. During the next few weeks, Sandler ONeill communicated frequently with Bidder F.
Sandler ONeill informed Bidder F that Bidder Fs offer was not competitive, but that the
difference was not dramatic. Sandler ONeill also informed Bidder F that Bidder F would not be
given access to detailed due diligence information without it indicating a willingness to increase
its indicated offering price. Sandler ONeill also encouraged Bidder F to continue its analysis in
order to increase its indicated offering price to a competitive level.
8
On March 22, 2011, the Companys management and representatives of Sandler ONeill held
a conference call to receive an update from Sandler ONeill on its discussions with Bidder F and
TDC and to discuss the mechanics of setting up an on-line data site that would enable TDC and
possibly Bidder F to conduct documentary due diligence. After this call, the Company and Sandler
ONeill set up and began posting documents on the on-line data site.
On March 29, 2011, a senior executive of Bidder D telephoned Mr. Byers and communicated
Bidder Ds continuing interest in pursuing a transaction with the Company but that Bidder D did
not foresee that it would be able to increase its offering price. Conversations between Sandler
ONeill and Bidder D continued after that time. During these discussions, Sandler ONeill informed
Bidder D that the Company was involved in discussions with other parties.
Also, on March 29, 2011, Bidder F indicated to Sandler ONeill that it would not be able
to increase its proposal from $38 per share. Sandler ONeill informed Bidder F that it would not
be able to continue to participate in the process at the price it proposed.
On March 31, 2011, Sandler ONeill delivered a letter to TDC on behalf of the Company
requesting a revised proposal from TDC by April 20, 2011, indicating, among other things, the
value and form of consideration proposed to be offered, further due diligence required, plans with
respect to the Companys operations, management and employees, and required approvals and timing.
This letter also informed TDC that the Company would establish and provide TDC with access to an
on-line data site and would make the Companys senior management team (and, via conference call,
its consulting actuaries) available to TDC for a meeting in Jacksonville. This letter also
informed TDC that following receipt of TDCs revised proposal, the Company would determine whether
to grant TDC permission to conduct additional due diligence, including a review of the Companys
underwriting and claims files, and further meetings with key members of the Companys senior
management. The letter stated that the Company expected to provide TDC with a draft merger
agreement, and to ask TDC to submit its comments on the draft merger agreement along with its
definitive proposal by early May, 2011.
On April 1, 2011, after conversations with Sandler ONeill confirming that TDC believed
its refined indicated offering price would be in the high end of its indicated $39 to $42 range,
TDC was given access to the on-line data site.
During the weeks of April 4 and April 11, 2011, representatives of Sandler ONeill held
several conversations with representatives of Macquarie concerning information that TDC would like
to be able to review in the on-line data site and concerning the timing and location of a meeting
in Jacksonville with the Companys management team. As a result of these conversations, the time,
place, attendees and agenda for a meeting in Jacksonville between representatives of TDC,
Macquarie, the Company and Sandler ONeill were determined. During this time, Sandler ONeill and
the Companys management also prepared written materials to be provided to TDC and Macquarie at
the scheduled meeting. In a conversation on April 13, 2011, Macquarie informed Sandler ONeill
that TDC intended to submit a written proposal on April 20, 2011.
On April 14, 2011, Sandler ONeill indicated to Bidder D that the Company was in
non-exclusive discussions with one other party and invited Bidder D to participate in due
diligence.
On April 15, 2011, Sandler ONeill contacted Messrs. Kirschner and Anderson and informed
them of Sandler ONeills conversations with Bidder F, Bidder D and TDC. In a telephone message to
the Board later that day, Mr. Kirschner summarized the information provided by Sandler ONeill and
informed the members of the Board that there would be an informal information session by telephone
on April 18, 2011, at which time Sandler ONeill would provide an update directly to the members
of the Board
and all members of the Board would be afforded an opportunity to ask
questions
. Mr. Kirschner also informed the members of the Board that he contemplated that a
formal meeting of the Board would be held on April 21, 2011 to review and consider TDCs revised
indication of interest and to determine how to proceed. On the afternoon of April 18, 2011, the
informal information session was held. Representatives of Sandler ONeill and Weil participated in
the session and Sandler ONeills discussions with Bidder F, Bidder D and TDC were discussed. As a
result of Sandler ONeills report, it was tentatively determined that the Board would convene
formally on April 21, 2011, one day after the anticipated receipt of TDCs revised indication of
interest, to discuss next steps.
On April 19, 2011, representatives of TDC, Macquarie, the Company and Sandler ONeill
met in Jacksonville. In attendance were certain senior executives of TDC, representatives from
Macquarie and Sandler ONeill, and Messrs. Byers, Divita, White and Graham and Louis V. Sicilian,
Senior Vice President and Treasurer of the Companys principal insurance subsidiary. At this
meeting, the TDC representatives were provided with written materials prepared by the Company, and
Messrs. Byers, White and Divita made oral presentations on the Company generally; the medical
professional liability insurance marketplace; the Companys business strategy, financial
performance, claims results, reserve position, reinsurance programs, investment portfolio, and
financial projections; and potential synergies available to an acquiror of the Company. The TDC
representatives were given the opportunity to ask questions of the Companys management, and a
list of follow-up information desired by TDC was generated. During the time when this meeting was
being held, representatives of TDC, the Company and the Companys consulting actuaries met by
telephone to discuss the
9
Companys reserves and related actuarial matters. At the conclusion of
the April 19 meetings, recognizing that TDC would need additional time to consider the information
provided to TDC and its actuaries, the Company gave TDC a one-day extension (to April 21, 2011) to
submit its revised indication of interest.
On April 19, 2011, following up on its conversation with Sandler ONeill, Bidder D
declined to enter the on-line data site.
As a result of the extension given to TDC, notice was given of a meeting of the Board to be
held on April 25, 2011, instead of April 21 as previously contemplated.
On April 21, 2011, TDC delivered to Sandler ONeill a revised non-binding indication of
interest in acquiring all of the Companys outstanding shares for $40.50 in cash per share. This
letter also outlined TDCs tentative plans for the future operation of the Companys business and
described the additional confirmatory due diligence that it would need to complete. As a condition
to moving forward with its proposal, TDC requested a 21-day exclusivity period, which it stated it
believed would be adequate to complete due diligence and to negotiate and enter into a definitive
agreement.
On April 22, 2011, representatives of the Company, Weil and Sandler ONeill conferred by
telephone with respect to the revised TDC proposal and the upcoming meeting of the Board.
On April 25, 2011, the Board met in Jacksonville. Representatives of Sandler ONeill and
Weil also attended by teleconference. At this meeting, Sandler ONeill reported that it had
contacted representatives of Bidder D that morning and had informed Bidder D that the Company had
received a proposal from a qualified purchaser that was close but superior in price to the
proposal made by Bidder D in its February 3 proposal letter. Sandler ONeill also informed Bidder
D that Bidder D needed promptly to commence a serious due diligence effort if it wished to
continue to be considered a viable potential acquiror of the Company. Later that morning, Bidder D
contacted Sandler ONeill and confirmed that it desired access to the on-line data site.
After providing this update with respect to Bidder D to the Board, Sandler ONeill
reviewed the terms of TDCs revised proposal and gave a presentation, which included updated
valuation, market and financial data, projected financial information for the Company on a
stand-alone basis and a net present value analysis of the revised TDC proposal. At the conclusion
of this meeting, the Board authorized Sandler ONeill to continue discussions with both Bidder D
and TDC in an effort to obtain the highest and best offer for the Company and to negotiate the
terms of a definitive acquisition agreement as expeditiously as possible.
Later on April 25, 2011, Sandler ONeill contacted Bidder D, made arrangements for
Bidder Ds representatives to have access to the on-line data site, and reiterated the need for
Bidder D to perform and complete its due diligence and to increase its indicated offering price.
Sandler ONeill also contacted TDC and informed TDC that the Company was evaluating one other
offer, which was close in terms of price to that of TDC. Sandler ONeill also informed TDC that as
a result of the existence of a viable competing offer, the Company was not able to grant TDC the
exclusivity it had requested but would work with it expeditiously through final due diligence and
negotiation of a definitive merger agreement, a draft of which would be promptly supplied to TDC.
On April 26, 2011, Macquarie communicated an inquiry to Sandler ONeill about the price
at which the Company would enter into exclusive negotiations. As instructed by the Company based
upon the Boards prior deliberations, Sandler ONeill responded that a preemptive price would be
$42 per share. Macquarie agreed to discuss this with TDC.
On April 27, 2011, Macquarie informed Sandler ONeill that TDC was willing to continue
without an exclusivity arrangement at its current offer of $40.50 per share. On that date, Sandler
ONeill sent an email to Bidder D and TDC enclosing a form of definitive merger agreement prepared
by the Companys counsel and requested TDC and Bidder D to provide by May 13, 2011 the final terms
of their respective offers for the Company, as indicated by their markups of the form of
definitive merger agreement.
During the period from April 27 through May 13, 2011, representatives of the Company and
Sandler ONeill held numerous telephone conversations with representatives of TDC and Bidder D
concerning due diligence questions and requests, and the Company prepared and posted in the
on-line data site additional information requested by TDC and Bidder D.
On May 2 and 3, 2011, members of TDCs management and representatives of Macquarie met
with members of the Companys management and a representative of Sandler ONeill and reviewed
additional information requested by TDC at the Companys offices in Jacksonville. On May 4 and 5,
2011, members of Bidder Ds management met with members of the Companys management and
representatives of Sandler ONeill and reviewed additional information requested by Bidder D at
the Companys offices in Jacksonville.
10
On May 6, 2011, a member of Bidder Fs senior management called Sandler ONeill to
inquire about the status of the Companys sale process. Sandler ONeill informed Bidder F that the
process was ongoing, and asked Bidder F whether its indicated offer price remained at $38 per
share.
From May 9, 2011 through May 10, 2011, TDC conducted additional on-site due diligence.
During the same time period, Bidder F reconfirmed to Sandler ONeill its interest in the Company
at $38 per share but indicated no interest at a higher price.
On May 13, 2011, each of TDC and Bidder D delivered to Sandler ONeill letters
containing revised indications of interest in acquiring the Company and markups of the Companys
form of merger agreement. Bidder Ds letter indicated that after conducting more extensive due
diligence, Bidder D had concluded that the best price it could offer would be $38 per share in
cash, subject to certain conditions. TDCs letter contained TDCs final proposal to acquire all of
the Companys outstanding shares of common stock for $42 in cash, subject to its being granted a
seven-day exclusivity period and subject to limited confirmatory due diligence. After receipt of
these letters, Sandler ONeill contacted Bidder D and TDC and informed them that the Board had
scheduled a meeting for May 16, 2011 to consider the revised proposals, and that Sandler ONeill
would contact Bidder D and TDC promptly after the conclusion of the meeting to convey the
determinations of the Board.
On May 16, 2011, the Board met in Jacksonville. Representatives of Sandler ONeill and
Weil, as well as certain members of the Companys senior management, also attended. A written
presentation by Sandler ONeill to the Board had been previously provided to the Board. At this
meeting, Sandler ONeill reported that on May 13, 2011, it had received letters containing revised
non-binding indications of interest from Bidder D and TDC and described in detail the proposals
contained in those letters. Sandler ONeill gave a presentation, which included updated valuation,
market and financial data, including a comparison of implied transaction multiples, the Companys
relative stock price performance, the Companys preliminary first quarter financial results,
analyst estimates of the Companys future performance, historical price/book value and other
multiples of the Company and its peers, data concerning recent public company acquisitions in the
U.S. property and casualty insurance sector, transaction statistics for selected recent medical
professional liability insurance company acquisitions, projected financial information for the
Company on a stand-alone basis, and a net present value analysis of the revised Bidder D and TDC
proposals. At the conclusion of this meeting, the Board authorized the Companys execution and
delivery of TDCs proposal letter, solely for purposes of agreeing to the seven-day exclusivity
period and confidentiality obligations contained therein, and authorized Messrs. Kirschner and
Byers, in consultation with members of the Companys management and the Companys advisors, to
negotiate the terms of a merger agreement reflecting TDCs proposal, subject to review by and the
approval of the Board. The Board also authorized individual members of the Companys management,
to the extent required by TDC, to discuss with TDC employment and related matters in connection
with the TDC proposal, provided that such member or members of the Companys management kept the
Chairman of the Board and the Chairman of the Compensation Committee apprised of the content of
all such discussions.
TDC indicated an interest in employing Mr. White following
consummation of the Merger during the negotiation period leading up to the signing of the Merger
Agreement on May 23, 2011. Following the signing of the Merger Agreement, TDC also indicated an
interest in employing Mr. Sicilian following consummation of the Merger.
On May 17, 2011, Weil sent a revised draft of the merger agreement to TDCs legal
advisors, Farella Braun & Martel LLP (referred to herein as Farella). During the ensuing period,
Weil and representatives of the Company negotiated the terms of the merger agreement with
representatives of TDC and Farella. Revised drafts of the merger agreement were circulated early
in the morning on May 20, 2011 and late in the evening on May 20, 2011, by Farella and Weil
respectively. Farella provided a list of the remaining outstanding issues in the merger agreement
on May 21, 2011. Weil provided written responses to the issues raised by Farella on May 22, 2011,
and Weil, representatives of the Company and Farella discussed the remaining issues on a
teleconference held on May 22, 2011. Farella circulated a revised draft of the merger agreement in
the evening of May 22, 2011, reflecting these discussions.
On May 18, 2011, TDC conducted final on-site due diligence.
On May 23, 2011, the Board met to consider and review the terms of the proposed merger
agreement between TDC, Merger Sub and the Company. Representatives of Sandler ONeill, Weil and
the Companys management were also in attendance. At the meeting, representatives of Sandler
ONeill made a presentation as to their financial analyses with respect to TDCs proposed merger
consideration of $42 per share in cash. Sandler ONeill then delivered to the Board its oral
opinion, which was subsequently confirmed in writing, dated May 23, 2011, that as of such date,
and based on and subject to the various limitations and assumptions described in the opinion, the
$42 per share in cash to be paid to the holders of the outstanding shares of the Companys common
stock pursuant to the Merger Agreement was fair from a financial point of view to such holders (a
copy of the written opinion of Sandler ONeill is attached to this proxy statement as
Annex
B
). The Board then discussed with Company management and representatives of Sandler ONeill
and Weil the
proposed transaction with TDC, and Weils representative reviewed the terms of the proposed
merger agreement. In
11
addition, Weils representative reviewed with the Board its fiduciary duties
in connection with the review and, if applicable, approval of the proposed transaction with TDC.
After careful consideration and discussion, the Board unanimously voted to adopt
resolutions approving and declaring advisable the execution, delivery and performance of the
Merger Agreement and the transactions contemplated thereby, and determined that the Merger
Agreement and the transactions contemplated thereby (including the Merger) were advisable and in
the best interests of the Companys shareholders.
Following the Board meeting on May 23, 2011, the parties finalized the terms of the
Merger Agreement in accordance with the terms discussed with the Board, and TDC, Merger Sub, and
the Company executed the Merger Agreement. On the morning of May 24, 2011, TDC and the Company
issued a joint press release announcing the Merger.
Reasons for the Merger; Recommendation of Our Board of Directors
The Board, with the advice and assistance of the Companys management and its legal and
financial advisors, at a meeting on May 23, 2011, carefully evaluated the proposed Merger,
including the terms and conditions of the Merger Agreement. Following such evaluation, the Board
unanimously (i) determined that the Merger Agreement and the Merger are advisable and in the best
interests of the Company and its shareholders, (ii) approved the Merger Agreement and (iii)
resolved to recommend the approval and adoption of the Merger Agreement to the Companys
shareholders.
In the course of reaching its determination, the Board consulted with the Companys
management and its legal and financial advisors and considered a number of substantive factors and
potential benefits of the Merger. The Board believed that, taken as a whole, the following
factors, among others, supported its decision to approve and recommend the proposed Merger and the
Merger Agreement:
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the Boards familiarity with the Companys business, operations, assets, business
strategy and competitive position, as well as the nature of the medical professional
liability insurance industry, industry trends, and economic and market conditions, both
on a historical and on a prospective basis;
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the current and historical financial condition and results of operations of the Company;
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the financial projections of the Company and the risks associated with the Companys
ability to meet such projections;
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the current and historic market prices of the Companys
common stock, including the fact that the cash merger price
of $42.00 per share represents a premium of approximately
31% over the closing price of $32.10 on NASDAQ on May 23,
2011, the trading day prior to the announcement of the
Merger Agreement;
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the extensive analysis and sale process conducted by the
Company, with the assistance of Sandler ONeill, which
involved engaging in discussions with approximately 20
parties
, all of which were potential strategic
buyers,
to assess their general interest in mergers
and acquisitions, interest in the medical professional
liability insurance sector and, in certain instances, to
determine their potential interest in a business
combination transaction with the Company, entering into
non-disclosure agreements with five parties and the receipt
of preliminary indications of interest to acquire the
Company from four parties;
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the price offered by TDC represents the highest bid that the Company
received for the acquisition of the Company;
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the fact that the merger consideration is all cash, which will provide
certainty of value and immediate liquidity to the Companys
shareholders;
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the Boards belief that, after consideration of potential
alternatives, the Merger is expected to provide greater benefits to
the Companys shareholders than the range of possible alternatives to
the sale of the Company, including continuing to operate the Company
on a stand-alone basis;
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the Boards assessment, after consultation with the Companys
management and legal and financial advisors, of the risks of remaining
an independent company and the prospects of going forward as an
independent entity;
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TDCs track record in successfully acquiring and integrating companies;
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the Boards review, with the Companys legal and financial advisors,
of the structure of the Merger and the terms and conditions of the
Merger Agreement, including:
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12
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the limited number and nature of the conditions to the
obligation of TDC and Merger Sub to consummate the Merger,
including the absence of a financing condition, and the
relatively limited risk of non-satisfaction of such
conditions;
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the provisions of the Merger Agreement that allow the Board
to change or withdraw its recommendation that the Companys
shareholders vote in favor of the Merger if it determines
in good faith that failure to do so would be inconsistent
with its fiduciary duties to the Companys shareholders;
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the ability of the Board to withdraw or modify its
recommendation of the Merger or recommend, adopt or approve
an alternative Acquisition Proposal, upon receipt of a
Superior Proposal (as such terms are defined in the Merger
Agreement and described in the section of this proxy
statement entitled
The Merger Agreement Change of
Recommendation
);
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the provisions of the Merger Agreement that allow the
Board, under certain circumstances, to participate in
discussions or negotiations with, or provide non-public
information to, any person making an unsolicited
Acquisition Proposal if the Board has determined in good
faith that there is a reasonable likelihood that the
Acquisition Proposal will lead to a Superior Proposal (as
such terms are defined in the Merger Agreement and
described in the section of this proxy statement entitled
The Merger Agreement Restrictions on Solicitation of
Other Offers
);
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the Companys ability to terminate the Merger Agreement to
enter into an agreement providing for a Superior Proposal
(provided that such proposal was unsolicited and subject to
providing TDC with three business days notice, negotiating
with TDC in good faith and paying TDC the Termination Fee);
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the circumstances under which the Termination Fee is
payable by the Company to TDC and the size of such
Termination Fee, which the Board views as reasonable in
light of the size and expected benefits of the Merger and
not preclusive of a Superior Proposal, were one to emerge;
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the circumstances under which the Termination Fee is
payable by TDC to the Company and the size of such
Termination Fee (see the section of this proxy statement
entitled
The Merger Agreement Termination Fees
for
more information on the Termination Fee); and
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the requirement that the Company obtain shareholder
approval as a condition to consummation of the Merger;
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the financial analysis presented by Sandler ONeill to the
Board, including the written opinion of Sandler ONeill
dated May 23, 2011, to the effect that, as of the date
thereof and based upon and subject to the factors and
assumptions set forth therein, the $42.00 per share in cash
to be paid to the holders of the outstanding shares of the
Companys common stock pursuant to the Merger Agreement was
fair from a financial point of view to such holders (as
described in the section of this proxy statement entitled
The Merger Opinion of Sandler ONeill + Partners,
L.P.
). The full text of the opinion of Sandler ONeill is attached to this
proxy statement as
Annex B
;
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increasing uncertainty in the healthcare industry arising
from recent changes in federal laws and the potential
negative impact this might have on the Companys future
prospects resulting from changes by healthcare
professionals in insurance purchasing habits, pressures on
the profitability of providing healthcare services,
increasing claims resulting from changes in healthcare
delivery and other factors;
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continuing competitive pricing pressures on the Companys
insurance products and the potential negative impact this
might have on the Companys future prospects;
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decreased yields on the Companys investment portfolio
resulting from effects of the ongoing national economic
crisis and the potential that low investment yields might
continue for several years; and
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continuing exposure to significant claims costs with
respect to extracontractual damages and settlements in
excess of policy limits, especially in Florida.
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13
In addition, the Board was aware of and considered the interests that the Companys
directors and executive officers may have with respect to the Merger that may differ from, or may
be in addition to, their interests as shareholders of the Company, as described in the section of
this proxy statement entitled
The Merger Interests of Certain Persons in the Merger.
The Board also considered and balanced against the expected benefits of the Merger a
number of potential risks or adverse factors concerning the Merger, including but not limited to
the following:
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the risks and contingences relating to the announcement and
pendency of the Merger and the risks to the Company if the
Merger does not close or the closing is not timely,
including the effect of an announcement of termination of
the Merger Agreement on the trading price of the Companys
common stock;
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the Companys potential inability to attract and retain key personnel and the
risk of disrupting the Companys business and of diverting management focus and
resources from other strategic opportunities and from operational matters while
working towards implementation of the Merger;
|
|
|
|
|
the risk that the announcement of the Merger or the consummation thereof could
adversely affect the Companys relationships with its vendors, customers and
other parties;
|
|
|
|
|
the risks associated with various provisions of the Merger Agreement, including:
|
|
|
|
|
the restrictions on the conduct of the Companys business
prior to completion of the Merger, which require the
Company to conduct its business in the ordinary course and
prohibit the Company from taking certain specified actions
without TDCs consent, and the fact that these restrictions
might delay or prevent the Company from undertaking
business opportunities that may arise pending completion of
the Merger;
|
|
|
|
|
the risk that the required regulatory approvals from
various governmental authorities may not be obtained;
|
|
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|
|
the restrictions on the Companys ability to solicit or
engage in discussions or negotiations with third parties
regarding specified transactions involving the Company and
the requirement that the Company pay TDC the Termination
Fee in order to accept a Superior Proposal;
|
|
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|
|
the fact that if the Merger is consummated, the Company
will no longer exist as an independent company and the
Companys shareholders will not participate in any future
earnings or growth of the Company and will not benefit from
any future appreciation in value of the Company;
|
|
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|
|
the fact that the all cash merger consideration will be
taxable to the Companys shareholders that are U.S. holders
for U.S. federal income tax purposes; and
|
|
|
|
|
the fact that the Companys shareholders do not have the
right under Florida law to demand appraisal of the fair
value of their shares.
|
The Board also considered a number of factors relating to the procedures involved in the
negotiation of the Merger Agreement, including that the Board:
|
|
|
consists entirely of directors who, with the exception of
Mr. Byers, are not officers of the Company or affiliated
with TDC;
|
|
|
|
|
will not personally benefit from the consummation of the
Merger in a manner different from the unaffiliated
shareholders of the Company except as described in the
section of this proxy statement entitled
The Merger
Interests of Certain Persons in the Merger
; and
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|
|
among other things, (i) oversaw the negotiation process
with respect to the proposed Merger, (ii) communicated as
frequently as necessary with the Companys management and
the Companys legal and financial advisors with respect to
the negotiation and relevant terms of the Merger Agreement,
and (iii) considered alternative transaction opportunities
to determine whether the proposed Merger was fair to and in
the best interests of the Company and its shareholders.
|
The foregoing discussion of the information and factors considered by the Board is not
intended to be exhaustive but, we believe, includes all material factors considered by the Board
in considering the Merger. In view of the wide variety of factors and the amount of information
considered, as well as the complexity of these matters, the Board did not find it
practicable to, and did not attempt to, quantify or assign relative weights to the above
factors or the other factors considered
14
by it. In addition, the Board did not reach any specific
conclusion on each factor considered, but conducted an overall analysis of these factors.
Individual members of the Board may have given different weights to different factors.
The Board unanimously recommends that the Companys shareholders vote FOR the approval
and adoption of the Merger Agreement, FOR the Adjournment Proposal and FOR the proposal to
approve, on a non-binding advisory basis, the compensation that may be received by the Companys
named executive officers in connection with the Merger.
Unaudited Financial Forecasts
The Company is including in this proxy statement certain non-public financial forecasts
for the years ending December 31, 2011, 2012 and 2013, respectively (referred to herein as the
Company projections) that the Companys management prepared for the Board in connection with its
consideration of
strategic alternatives, including
the Merger. The Company
projections also were provided to the Companys financial advisor. See
The Merger Opinion of
Sandler ONeill + Partners, L.P.,
beginning on page 40. The Company projections were not prepared
with a view toward public disclosure or compliance with published guidelines of the SEC or the
American Institute of Certified Public Accountants for preparation and presentation of prospective
financial information or generally accepted accounting principles but, in the view of the
Companys management, were prepared on a reasonable basis and reflected the best then-currently
available estimates and judgments of the Companys management relevant to strategic planning and
budgeting. The inclusion of the Company projections in this document should not be regarded as an
indication that the Company or any other recipient of this information considered, or now
considers, this information to be necessarily predictive of actual future results. The inclusion
of the Company projections in this document does not constitute an admission or representation by
the Company that such information is material.
The Company projections were prepared by, and are the responsibility of, the Companys
management and are unaudited. Neither the Companys independent registered public accounting firm,
nor any other independent auditor, has compiled, examined or performed any procedures with respect
to the prospective financial information contained in the Company projections, nor have they
expressed any opinion or given any form of assurance on the Company projections or their
achievability. They assume no responsibility for, and disclaim any association with, the
prospective financial information contained therein. Furthermore, the Company projections:
|
|
|
were based upon numerous assumptions, including the key
assumptions identified in the table below, many of which
are beyond the control of the Company and may not prove to
be accurate;
|
|
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|
|
were originally prepared in April 2011;
|
|
|
|
|
do not necessarily reflect current estimates or assumptions the Companys management may have about
prospects for the Companys businesses, changes in general business or economic conditions, or any
other transaction or event that has occurred or that may occur and that was not anticipated at the
time the Company projections were prepared;
|
|
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|
|
are not necessarily indicative of current values or future performance, which may be significantly
more favorable or less favorable than as set forth below; and
|
|
|
|
|
are not, and should not be regarded as, a representation that the Company projections will be achieved.
|
The Company projections were prepared by the Companys management based on information
management had at the time of preparation and are not a guarantee of future performance. The
Company projections were, in general, prepared solely for use by the Board and the Companys
financial advisor and are subjective in many respects and thus subject to interpretation. The
Company cannot assure you that the Company projections will be realized or that its future
financial results will not materially vary from such projections. The Company projections cover
multiple years and such information by its nature becomes less predictive with each succeeding
year.
The Company projections do not necessarily take into account any circumstances or events
occurring after the date they were prepared. The Company has not updated or revised, and does not
intend to update or otherwise revise, the Company projections to reflect changes in circumstances
since the preparation of the Company projections, including changes in general economic or
industry conditions, or to reflect the occurrence of unanticipated events or changes in
assumptions underlying the Company projections, even in the event that any or all of the
underlying assumptions are shown to be in error. The Company projections are forward-looking
statements. For additional information on factors that may cause the Companys future financial
results to materially vary from the Company projections, see the section of this proxy statement
entitled
Cautionary Statement Concerning Forward-Looking Information
beginning on page 19.
15
The Company projections focused on measures relevant to the evaluation of performance of
a property and casualty insurance company, such as written premiums, revenues, loss ratio,
combined ratio, earnings and shareholders equity, as well as relevant per share measures. The
Company did not prepare free cash flow projections, which are not typically utilized to evaluate
performance for companies in its line of business.
Company Projections (Including Key Assumptions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of and for the Years Ending December 31,
|
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|
|
2011E
|
|
|
2012E
|
|
|
2013E
|
|
|
|
$ in millions, except per share data
|
|
Assumptions
|
|
|
|
|
|
|
|
|
|
|
|
|
Growth in Net Premiums Written
|
|
|
2.7
|
%
|
|
|
3.3
|
%
|
|
|
3.3
|
%
|
Growth in Net Premiums Earned
|
|
|
(1.0
|
)%
|
|
|
2.9
|
%
|
|
|
3.1
|
%
|
Loss Ratio (Accident Year)
|
|
|
72.0
|
%
|
|
|
71.9
|
%
|
|
|
71.9
|
%
|
|
|
|
|
|
|
|
|
|
|
Loss Ratio (Calendar Year)
|
|
|
60.5
|
%
|
|
|
60.8
|
%
|
|
|
61.1
|
%
|
Expense Ratio
|
|
|
29.2
|
%
|
|
|
28.8
|
%
|
|
|
28.4
|
%
|
Combined Ratio (Calendar Year)
|
|
|
89.8
|
%
|
|
|
89.6
|
%
|
|
|
89.5
|
%
|
Share Repurchases
|
|
$
|
40.0
|
|
|
$
|
40.0
|
|
|
$
|
30.0
|
|
Shares Outstanding at End of Period
|
|
|
7.94
|
|
|
|
6.99
|
|
|
|
6.36
|
|
|
|
|
|
|
|
|
|
|
|
% Repurchase of Beginning Shares Outstanding
|
|
|
12.0
|
%
|
|
|
12.9
|
%
|
|
|
10.0
|
%
|
Income Statement Data
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Premiums Written
|
|
$
|
168.3
|
|
|
$
|
173.9
|
|
|
$
|
179.7
|
|
Net Premiums Earned
|
|
|
166.3
|
|
|
|
171.2
|
|
|
|
176.5
|
|
Net Investment Income
|
|
|
23.7
|
|
|
|
23.6
|
|
|
|
23.7
|
|
Total Revenue
|
|
|
190.7
|
|
|
|
195.4
|
|
|
|
200.9
|
|
Net Operating Income
|
|
|
25.3
|
|
|
|
25.7
|
|
|
|
26.1
|
|
Operating EPS Diluted
|
|
$
|
2.92
|
|
|
$
|
3.34
|
|
|
$
|
3.79
|
|
Shareholders Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders Equity
|
|
$
|
260.7
|
|
|
$
|
247.1
|
|
|
$
|
244.0
|
|
Shareholders Equity Per Share
|
|
$
|
32.84
|
|
|
$
|
35.38
|
|
|
$
|
38.34
|
|
Return on
Average Equity ex. Accumulated Other Comprehensive Income
|
|
|
9.9
|
%
|
|
|
10.6
|
%
|
|
|
11.1
|
%
|
|
|
|
|
|
|
|
|
|
|
The Company also provided certain financial projections (for the years ending December 31,
2011, 2012 and 2013) to TDC in connection with TDCs evaluation of the proposed Merger. The
financial projections provided to TDC were prepared using the same assumptions, and contained
substantially the same projections, as the Company projections, except that the projections
provided to TDC assumed that the Companys share repurchases pursuant to its Rule 10b5-1 plan
would cease after the results of the first quarter of 2011 were reported. This specific assumption
was modified to reflect the Companys financial prospects going forward as a wholly owned
subsidiary of TDC (rather than on a stand-alone basis). This modified assumption with respect to
the Companys share repurchase plan impacted the Companys projections with respect to net
investment income (as a result of the increase in Company assets available for investment). The
impact on net investment income, as well as the decrease in total share repurchases, affected the
projections for certain items, including total revenues, operating earnings and book value per
share, that were provided to TDC, as reflected in the table below:
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|
|
|
|
|
|
|
|
|
|
|
|
|
As of and for the Years Ending December 31,
|
|
|
2011E
|
|
2012E
|
|
2013E
|
|
|
$ in millions, except per share data
|
Total Revenues
|
|
$
|
191.0
|
|
|
$
|
196.7
|
|
|
$
|
203.5
|
|
Operating Earnings
|
|
$
|
25.5
|
|
|
$
|
26.6
|
|
|
$
|
28.0
|
|
Book Value Per Share
|
|
$
|
33.16
|
|
|
$
|
36.11
|
|
|
$
|
39.17
|
|
Opinion of Sandler ONeill + Partners, L.P.
By letter dated March 31, 2010, the Company retained Sandler ONeill to act as its
financial advisor in connection with the Companys consideration of potential strategic
alternatives, including a possible sale of the Company. Sandler ONeill is a nationally recognized
investment banking firm whose principal business specialty is financial institutions. In the
ordinary course of its investment banking business, Sandler ONeill is regularly engaged in the
valuation of insurance companies and their securities in connection with mergers and acquisitions
and other corporate transactions.
16
Sandler ONeill acted as financial advisor to the Company in connection with the
proposed transaction and participated in certain of the negotiations leading to the execution of
the Merger Agreement. At the May 23, 2011 meeting at which the Board considered and approved the
Merger Agreement, Sandler ONeill delivered to the Board its oral opinion that, as of such date,
the merger consideration was fair to the holders of the Companys common stock from a financial
point of view.
The full text of Sandler ONeills opinion is attached hereto as
Annex B
. The
opinion outlines the procedures followed, assumptions made, matters considered and qualifications
and limitations on the review undertaken by Sandler ONeill in rendering its opinion. The
description of the opinion set forth below is qualified in its entirety by reference to the
opinion. The Companys shareholders are urged to read the entire opinion carefully in connection
with their consideration of the Merger.
Sandler ONeills opinion speaks only as of the date thereof. The opinion is directed to
the Board and is directed only to the fairness of the merger consideration to the Companys
shareholders from a financial point of view. It does not address the underlying business decision
of the Company to engage in the Merger or any other aspect of the Merger and is not a
recommendation to any Company shareholder as to how such shareholder should vote at the special
meeting with respect to the Merger or any other matter.
In connection with rendering its May 23, 2011 opinion, Sandler ONeill reviewed and
considered, among other things:
|
|
|
the Merger Agreement;
|
|
|
|
|
certain publicly available financial statements and other
historical financial information of the Company that
Sandler ONeill deemed relevant;
|
|
|
|
|
internal financial projections for the Company for the
years ending December 31, 2011 through 2013 as prepared by
senior management of the Company, including the Company
projections (see the section of this proxy statement
entitled
The Merger Unaudited Financial Forecasts
beginning on page 38);
|
|
|
|
|
the publicly reported historical stock price and trading
activity for the Companys common stock, including a
comparison of certain financial and stock market
information for the Company with similar publicly available
information for certain other companies the securities of
which are publicly traded;
|
|
|
|
|
to the extent publicly available, the financial terms of
certain recent business combinations in the medical
professional liability insurance sector and property and
casualty insurance industry;
|
|
|
|
|
the market premiums paid in certain recent business
combinations involving property and casualty insurance
companies;
|
|
|
|
|
the current property and casualty insurance environment
generally and the medical professional liability insurance
environment in particular; and
|
|
|
|
|
such other information, financial studies, analyses and
investigations and financial, economic and market criteria
as Sandler ONeill deemed relevant.
|
Sandler ONeill also discussed with certain members of the Companys senior management
the business, financial condition, results of operations and prospects of the Company.
In performing its review, Sandler ONeill relied upon the accuracy and completeness of
all of the financial and other information that was available to it from public sources, that was
provided to Sandler ONeill by the Company or its representatives or that was otherwise reviewed
by Sandler ONeill and assumed such accuracy and completeness for purposes of rendering its
opinion. Sandler ONeill further relied on the assurances of the Companys management that the
Companys management was not aware of any facts or circumstances that would make any of such
information inaccurate or misleading. Sandler ONeill was not asked to and did not undertake an
independent verification of any of such information, and it does not assume any responsibility or
liability for the accuracy or completeness thereof. Sandler ONeill did not make an independent
evaluation or appraisal of the specific assets, the collateral securing assets or the liabilities
(contingent or otherwise) of the Company or any of its subsidiaries, or the collectability of any
such assets, nor was Sandler ONeill furnished with any such evaluations or appraisals. Sandler
ONeill is not an expert in the evaluation of reserves for property and casualty insurance losses
and loss adjustment expenses, and it did not make an independent evaluation of the adequacy of the
loss and loss adjustment expense reserves of the Company. In that regard, Sandler ONeill made no
analysis of, and expressed no opinion as to, the adequacy of the loss and loss adjustment expense
reserves of the Company.
With respect to the internal financial projections as prepared by the Companys senior
management and used by Sandler ONeill in its analyses, the Companys management confirmed to
Sandler ONeill that they reflected the best currently available estimates and judgments of
management of the future financial performance of the Company, and Sandler ONeill assumed that
such financial results would be achieved. Sandler ONeill expressed no opinion as to such
financial projections or the assumptions on which they are based. Sandler ONeill also assumed
that there had been no material change in the Companys assets, financial condition, results of
operations, business or prospects since the date of
17
the most recent financial statements made available to it. Sandler ONeill assumed in
all respects material to its analysis that the Company would remain a going concern for all
periods relevant to its analyses, that all of the representations and warranties contained in the
Merger Agreement and all related agreements are true and correct, that each party to the
agreements will perform all of the covenants required to be performed by such party under the
agreements, and that the conditions precedent in the agreements would not be waived. Finally, with
the Companys consent, Sandler ONeill relied upon the advice the Company received from its legal,
accounting and tax advisors as to all legal, accounting and tax matters relating to the Merger and
the other transactions contemplated by the Merger Agreement.
Sandler ONeills opinion is necessarily based on financial, economic, market and other
conditions as in effect on, and the information made available to it as of, the date of its
opinion. Events occurring after the date of its opinion could materially affect its opinion.
Sandler ONeill did not undertake to update, revise, reaffirm or withdraw its opinion or otherwise
comment upon events occurring after the date thereof.
Sandler ONeills opinion is directed to the Board in connection with the Boards
consideration of the Merger and does not constitute a recommendation to any shareholder of the
Company as to how such shareholder should vote at any meeting of shareholders called to consider
and vote upon the Merger
. Sandler ONeills opinion is directed only to the fairness, from a
financial point of view, of the merger consideration to holders of the Companys common stock and
does not address the underlying business decision of the Company to engage in the Merger, the
relative merits of the Merger as compared to any other alternative business strategies that might
exist for the Company or the effect of any other transaction in which the Company might engage.
Summary of Proposal
Sandler ONeill reviewed the financial terms of the proposed transaction. Based on the
merger consideration of $42.00 per share in cash and using common shares, unvested restricted
shares, and options outstanding as of March 31, 2011, Sandler ONeill calculated an aggregate
transaction value(1) of $364.5 million, which was comprised of consideration related to common
shares outstanding of $350.7 million, unvested restricted shares of $4.2 million and outstanding
stock options of $9.6 million. Sandler ONeill calculated the following transaction ratios:
|
|
|
|
|
Transaction Value per Share
|
|
$42.00
|
|
3/31/11 Book Value Multiples:
|
|
|
|
|
Book Value
|
|
|
1.41 x
|
|
Book Value per Share
|
|
|
1.36 x
|
|
Book Value (ex-FAS 115)(2)
|
|
|
1.50 x
|
|
Tangible Book Value
|
|
|
1.57 x
|
|
Earnings Multiples:
|
|
|
|
|
LTM 3/31/11 Net Operating Income(3)
|
|
|
12.9 x
|
|
2011E Net Operating Income (Management Stand-Alone Case)
|
|
|
14.4 x
|
|
2012E Net Operating Income (Management Stand-Alone Case)
|
|
|
14.2 x
|
|
2011E First Call EPS Estimate
|
|
|
15.6 x
|
|
2012E First Call EPS Estimate
|
|
|
15.6 x
|
|
Transaction Value per Share as Premium to:
|
|
|
|
|
Last Sale Price
|
|
|
27.2
|
%
|
Trailing 5-Trading Day Average
|
|
|
26.1
|
%
|
Trailing 1-Month Average
|
|
|
20.3
|
%
|
Stock Price Prior to ACAP Announcement (7/7/10)
|
|
|
60.3
|
%
|
|
|
|
(1)
|
|
Reflects 8.350 million common shares outstanding, 0.100 million unvested restricted shares that will
vest in connection with the transaction and 0.410 million options (all were previously fully-vested)
with a weighted average exercise price of $18.62 as of March 31, 2011. Does not include estimated
change-in-control payments under employment and severance agreements of $12.6 million.
|
|
(2)
|
|
Excludes $14.9 million of net unrealized gains, after-tax.
|
|
(3)
|
|
Excludes additional contingent consideration of $2.4 million related to the Advocate, MD acquisition.
|
Historical Stock Price Performance Analysis
Sandler ONeill reviewed the stock price performance of the Companys common stock, the
Standard & Poors 500 Index, the Standard & Poors Property & Casualty Index and the stock price
performance of ProAssurance Corporation (referred to herein as ProAssurance) for the one and
three year periods ended May 20, 2011.
18
The results of these analyses are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
One
|
|
Three
|
|
|
Year(1)
|
|
Year(1)
|
|
FPIC Stock Price and Volume Data:
|
|
|
|
|
|
|
|
|
High
|
|
$
|
39.40
|
|
|
$
|
40.13
|
|
Low
|
|
$
|
25.17
|
|
|
$
|
18.61
|
|
Average
|
|
$
|
33.85
|
|
|
$
|
28.77
|
|
Average Daily Volume
|
|
|
37,631
|
|
|
|
51,224
|
|
Relative Stock Price Performance:
|
|
|
|
|
|
|
|
|
FPIC
|
|
|
22.4
|
%
|
|
|
8.1
|
%
|
ProAssurance
(2)
|
|
|
19.3
|
%
|
|
|
37.0
|
%
|
S&P 500
|
|
|
24.4
|
%
|
|
|
(5.7
|
)%
|
S&P P&C
|
|
|
15.5
|
%
|
|
|
(9.7
|
)%
|
|
|
|
(1)
|
|
Market data is as of May 20, 2011.
|
|
(2)
|
|
ProAssurance was singled out by Sandler ONeill in its analysis
as it is the only other publicly traded medical professional
liability focused insurer
.
|
Source: SNL Financial
Sandler ONeill reviewed the historical Price/Book Value Per Share multiples of the
Companys common stock, ProAssurance and a peer group, which Sandler ONeill determined, for the
period between July 9, 2007 and May 20, 2011.
The results of these analyses were summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3-Year Average
|
|
1-Year Average
|
|
|
|
|
|
|
Price/Book Value
|
|
Price/Book Value
|
|
|
|
|
|
|
per Share Prior to
|
|
per Share Prior to
|
|
Post-ACAP
|
|
|
|
|
ACAP Announcement
|
|
ACAP Announcement
|
|
Period
|
|
Current
|
FPIC
|
|
|
1.18 x
|
|
|
|
0.93 x
|
|
|
|
1.14 x
|
|
|
|
1.07 x
|
|
ProAssurance
|
|
|
1.24 x
|
|
|
|
1.08 x
|
|
|
|
1.03 x
|
|
|
|
1.12 x
|
|
Peer Group(1)
|
|
|
1.07 x
|
|
|
|
0.89 x
|
|
|
|
0.88 x
|
|
|
|
0.87 x
|
|
Premium to ProAssurance
|
|
|
(5.0
|
)%
|
|
|
(14.0
|
)%
|
|
|
10.8
|
%
|
|
|
(5.0
|
)%
|
Premium to Peer Group
|
|
|
10.1
|
%
|
|
|
4.7
|
%
|
|
|
29.6
|
%
|
|
|
22.0
|
%
|
|
|
|
(1)
|
|
Peer group consists of companies included in the Selected
Commercial P&C Companies Between $100 Million and $1 Billion
described in Comparable Company Analysis.
|
|
(2)
|
|
Market data is as of May 20, 2011.
|
Note: Announcement of ACAPs sale
(a comparable medical professional liability
insurer)
to The Doctors Company was on July 8, 2010.
Source: SNL Financial
Comparable Company Analysis
Sandler ONeill used publicly available information to perform a comparison of selected
financial and market trading information for the Company.
Sandler ONeill also used publicly available information to compare selected financial
and market trading information
for medical professional liability insurance companies consisting of the Company and
ProAssurance and a group of commercial property and casualty (referred to herein as P&C)
insurance companies between $100 million and $1 billion
of market capitalization
selected
by Sandler ONeill.
The selected commercial P&C companies
with market
capitalization
between $100 million and $1 billion consisted of the following publicly traded
insurance companies or holding companies thereof:
19
|
|
|
|
|
American Safety Insurance Holdings, Ltd.
|
|
|
|
Harleysville Group Inc.
|
AMERISAFE, Inc.
|
|
|
|
Meadowbrook Insurance Group, Inc.
|
Baldwin & Lyons, Inc.
|
|
|
|
Navigators Group, Inc.
|
Eastern Insurance Holdings, Inc.
|
|
|
|
SeaBright Holdings, Inc.
|
EMC Insurance Group Inc.
|
|
|
|
Selective Insurance Group, Inc.
|
Employers Holdings, Inc.(1)
|
|
|
|
United Fire & Casualty Company
|
Hallmark Financial Services, Inc.
|
|
|
|
|
|
|
|
(1)
|
|
Shareholders equity
includes deferred reinsurance gain
of $375 million. Net income measures
are taken prior to loss portfolio
transfer adjustments.
|
The analysis compared publicly available financial information for the Company and the
mean market data for the medical professional liability insurers and the mean and median market
data for the selected commercial P&C companies between $100 million and $1 billion
of
market capitalization
and for all companies included in the analysis as of or for the
twelve-month period ended March 31, 2011. The table below sets forth the data based on market data
as of May 20, 2011:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
|
|
|
|
|
|
|
Price/
|
|
|
Price/
|
|
|
Price/
|
|
|
|
|
|
|
|
|
|
|
Price/
|
|
|
Debt/
|
|
|
|
|
|
|
5/20/11
|
|
|
Price
|
|
|
Market
|
|
|
LTM
|
|
|
2011E
|
|
|
2012E
|
|
|
LTM
|
|
|
Price/
|
|
|
Tangible
|
|
|
Total
|
|
|
Dividend
|
|
Company
|
|
Price
|
|
|
Change
|
|
|
Cap.
|
|
|
EPS
|
|
|
EPS
(1)
|
|
|
EPS
(1)
|
|
|
ROAE
(2)
|
|
|
Book
|
|
|
Book
|
|
|
Capital
(3)
|
|
|
Yield
|
|
|
Medical Professional Liability Insurers
|
FPIC Insurance Group
|
|
|
$33.03
|
|
|
|
22.4%
|
|
|
|
$273.5
|
|
|
|
11.0x
|
|
|
|
12.3x
|
|
|
|
12.3x
|
|
|
|
11.0%
|
|
|
|
1.07x
|
|
|
|
1.19x
|
|
|
|
15.1%
|
|
|
|
0.0%
|
|
ProAssurance
|
|
|
$69.20
|
|
|
|
19.3%
|
|
|
|
$2,115.8
|
|
|
|
9.8x
|
|
|
|
12.0x
|
|
|
|
12.6x
|
|
|
|
12.9%
|
|
|
|
1.12x
|
|
|
|
1.27x
|
|
|
|
2.6%
|
|
|
|
0.0%
|
|
|
|
|
Mean
|
|
|
20.8%
|
|
|
|
|
|
|
|
10.4x
|
|
|
|
12.1x
|
|
|
|
12.4x
|
|
|
|
11.9%
|
|
|
|
1.09x
|
|
|
|
1.23x
|
|
|
|
8.9%
|
|
|
|
0.0%
|
|
Selected Commercial P&C Companies Between $100 Million and $1 Billion of Market Capitalization
|
|
Selective Insurance Group
|
|
|
$16.89
|
|
|
|
10.1%
|
|
|
|
$912.4
|
|
|
|
10.9x
|
|
|
|
12.1x
|
|
|
|
10.8x
|
|
|
|
8.1%
|
|
|
|
0.84x
|
|
|
|
0.85x
|
|
|
|
19.5%
|
|
|
|
3.1%
|
|
Harleysville Group
|
|
|
$31.53
|
|
|
|
1.1%
|
|
|
|
$854.2
|
|
|
|
13.0x
|
|
|
|
13.3x
|
|
|
|
10.4x
|
|
|
|
9.5%
|
|
|
|
1.10x
|
|
|
|
1.10x
|
|
|
|
13.3%
|
|
|
|
4.6%
|
|
Navigators Group
|
|
|
$45.70
|
|
|
|
14.0%
|
|
|
|
$712.4
|
|
|
NM
|
|
|
26.9x
|
|
|
|
14.9x
|
|
|
|
3.1%
|
|
|
|
0.87x
|
|
|
|
0.88x
|
|
|
|
12.3%
|
|
|
|
0.0%
|
|
Employers Holdings
(4)
|
|
|
$16.10
|
|
|
|
6.1%
|
|
|
|
$620.8
|
|
|
|
21.6x
|
|
|
NM
|
|
|
19.2x
|
|
|
|
3.8%
|
|
|
|
0.73x
|
|
|
|
0.77x
|
|
|
|
13.4%
|
|
|
|
1.5%
|
|
Meadowbook Insurance
|
|
|
$9.81
|
|
|
|
19.5%
|
|
|
|
$522.6
|
|
|
|
9.4x
|
|
|
|
9.2x
|
|
|
|
8.4x
|
|
|
|
11.1%
|
|
|
|
0.94x
|
|
|
|
1.29x
|
|
|
|
17.1%
|
|
|
|
1.6%
|
|
United Fire & Casualty Co.
|
|
|
$19.30
|
|
|
|
(9.0%)
|
|
|
|
$505.6
|
|
|
|
17.7x
|
|
|
|
27.6x
|
|
|
|
14.8x
|
|
|
|
4.5%
|
|
|
|
0.70x
|
|
|
|
0.74x
|
|
|
|
12.1%
|
|
|
|
3.1%
|
|
AMERISAFE
|
|
|
$23.00
|
|
|
|
36.8%
|
|
|
|
$423.1
|
|
|
|
15.1x
|
|
|
|
14.5x
|
|
|
|
12.5x
|
|
|
|
9.0%
|
|
|
|
1.27x
|
|
|
|
1.27x
|
|
|
|
9.8%
|
|
|
|
0.0%
|
|
Baldwin & Lyons
|
|
|
$21.83
|
|
|
|
(4.0%)
|
|
|
|
$323.7
|
|
|
NM
|
|
|
24.3x
|
|
|
|
14.6x
|
|
|
|
0.5%
|
|
|
|
0.91x
|
|
|
|
0.91x
|
|
|
|
2.7%
|
|
|
|
4.5%
|
|
EMC Insurance Group
|
|
|
$19.94
|
|
|
|
(11.1%)
|
|
|
|
$258.4
|
|
|
|
13.6x
|
|
|
NM
|
|
|
11.7x
|
|
|
|
5.6%
|
|
|
|
0.70x
|
|
|
|
0.70x
|
|
|
|
8.8%
|
|
|
|
3.8%
|
|
Seabright Insurance Holdings
|
|
|
$9.85
|
|
|
|
(6.4%)
|
|
|
|
$220.4
|
|
|
NM
|
|
NM
|
|
|
25.3x
|
|
|
|
(4.2%)
|
|
|
|
0.63x
|
|
|
|
0.63x
|
|
|
|
3.3%
|
|
|
|
2.0%
|
|
American Safety
|
|
|
$18.69
|
|
|
|
21.4%
|
|
|
|
$195.2
|
|
|
|
10.1x
|
|
|
|
17.0x
|
|
|
|
9.1x
|
|
|
|
7.3%
|
|
|
|
0.65x
|
|
|
|
0.67x
|
|
|
|
11.1%
|
|
|
|
0.0%
|
|
Hallmark Financial Services
|
|
|
$7.04
|
|
|
|
(31.9%)
|
|
|
|
$141.7
|
|
|
NM
|
|
NM
|
|
|
15.6x
|
|
|
|
(6.3%)
|
|
|
|
0.63x
|
|
|
|
0.94x
|
|
|
|
20.9%
|
|
|
|
0.0%
|
|
Eastern Insurance
|
|
|
$13.15
|
|
|
|
23.8%
|
|
|
|
$110.6
|
|
|
NM
|
|
|
23.9x
|
|
|
|
20.5x
|
|
|
|
1.2%
|
|
|
|
0.86x
|
|
|
|
0.99x
|
|
|
|
0.0%
|
|
|
|
2.1%
|
|
|
|
Mean
|
|
|
5.4%
|
|
|
|
|
|
|
|
13.9x
|
|
|
|
18.7x
|
|
|
|
14.5x
|
|
|
|
4.1%
|
|
|
|
0.83x
|
|
|
|
0.90x
|
|
|
|
11.1%
|
|
|
|
2.0%
|
|
|
|
Median
|
|
|
6.1%
|
|
|
|
|
|
|
|
13.3x
|
|
|
|
17.0x
|
|
|
|
14.6x
|
|
|
|
4.5%
|
|
|
|
0.84x
|
|
|
|
0.88x
|
|
|
|
12.1%
|
|
|
|
2.0%
|
|
All Companies
|
|
Mean
|
|
|
7.5%
|
|
|
|
|
|
|
|
13.2x
|
|
|
|
17.5x
|
|
|
|
14.2x
|
|
|
|
5.1%
|
|
|
|
0.87x
|
|
|
|
0.95x
|
|
|
|
10.8%
|
|
|
|
1.8%
|
|
|
|
Median
|
|
|
10.1%
|
|
|
|
|
|
|
|
12.0x
|
|
|
|
14.5x
|
|
|
|
12.6x
|
|
|
|
5.6%
|
|
|
|
0.86x
|
|
|
|
0.91x
|
|
|
|
12.1%
|
|
|
|
1.6%
|
|
20
|
|
|
(1)
|
|
Source: Earnings per share estimates for 2011E and 2012E are from First Call as of 5/20/11
.
|
|
(2)
|
|
Calculated as last twelve months net operating earnings divided by average equity excluding
Accumulated Other Comprehensive Income as of the most recent reporting period and the same
reporting period one year prior
.
|
|
(3)
|
|
Equals sum of total debt and preferred equity divided by the sum of total debt, common equity
and preferred equity
.
|
|
(4)
|
|
Shareholders equity includes deferred reinsurance gain of $375 million. Income measures are
taken prior to loss portfolio transfer adjustments
.
|
Note: Dollar values in millions, except per share data. NM means not meaningful
.
Source: Factset, Company filings
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Price/
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Last
|
|
|
|
|
|
|
|
|
|
Last
|
|
|
|
|
|
|
|
|
|
|
One
|
|
Twelve
|
|
Price/2011
|
|
Price/
|
|
Twelve
|
|
|
|
|
|
|
|
|
|
|
Year
|
|
Months
|
|
Estimated
|
|
2012
|
|
Months
|
|
|
|
|
|
|
|
|
|
|
Price
|
|
Earnings
|
|
Earnings
|
|
Estimated
|
|
Return on
|
|
Price/
|
|
Price/
|
|
|
|
|
|
|
Change
|
|
per Share
|
|
per Share(1)
|
|
Earnings
|
|
Average
|
|
Book Value
|
|
Tangible
|
|
Debt/
|
|
|
per Share
|
|
per Share
|
|
Capital(3)
|
|
Yield
|
|
per Share(1)
|
|
Equity(2)
|
|
|
|
Book Value
|
|
Total
|
|
Dividend.
|
FPIC
|
|
|
22.4
%
|
|
|
|
11.0
x
|
|
|
|
12.3
x
|
|
|
|
12.3
x
|
|
|
|
11.0
%
|
|
|
|
1.07
x
|
|
|
|
1.19
x
|
|
|
|
15.1
%
|
|
|
|
0.0
%
|
|
Medical Professional Liability Insurers
|
|
|
|
|
Mean
|
|
|
20.8
%
|
|
|
|
10.4
x
|
|
|
|
12.1
x
|
|
|
|
12.4
x
|
|
|
|
11.9
%
|
|
|
|
1.09
x
|
|
|
|
1.23
x
|
|
|
|
8.9
%
|
|
|
|
0.0
%
|
|
Selected Commercial P&C Companies Between $100 Million and $1 Billion
|
|
|
|
|
Mean
|
|
|
5.4
%
|
|
|
|
13.9
x
|
|
|
|
18.7
x
|
|
|
|
14.5
x
|
|
|
|
4.1
%
|
|
|
|
0.83
x
|
|
|
|
0.90
x
|
|
|
|
11.1
%
|
|
|
|
2.0
%
|
|
Median
|
|
|
6.1
%
|
|
|
|
13.3
x
|
|
|
|
17.0
x
|
|
|
|
14.6
x
|
|
|
|
4.5
%
|
|
|
|
0.84
x
|
|
|
|
0.88
x
|
|
|
|
12.1
%
|
|
|
|
2.0
%
|
|
All Companies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mean
|
|
|
7.5
%
|
|
|
|
13.2
x
|
|
|
|
17.5
x
|
|
|
|
14.2
x
|
|
|
|
5.1
%
|
|
|
|
0.87
x
|
|
|
|
0.95
x
|
|
|
|
10.8
%
|
|
|
|
1.8
%
|
|
Median
|
|
|
10.1
%
|
|
|
|
12.0
x
|
|
|
|
14.5
x
|
|
|
|
12.6
x
|
|
|
|
5.6
%
|
|
|
|
0.86
x
|
|
|
|
0.91
x
|
|
|
|
12.1
%
|
|
|
|
1.6
%
|
|
|
|
|
(1)
|
|
Source: Earnings per share estimates for 2011 and 2012 are from First Call as of May 20, 2011.
|
|
(2)
|
|
Calculated as last twelve months net operating earnings divided by average equity excluding Accumulated Other Comprehensive Income as of the most recent reporting period and the same reporting period one year prior.
|
|
(3)
|
|
Equals sum of total debt and preferred equity divided by the sum of total debt, common equity and preferred equity.
|
Analysis of Selected Merger Transactions
Sandler ONeill reviewed
all
nine merger transactions announced from January 1, 2010
through May 20, 2011 involving publicly traded U.S. P&C
insurers
insurance focused companies
. In each of the
comparable transactions, Sandler ONeill reviewed the following multiples: (i) transaction equity
value to the last twelve months of net operating income, (ii) purchase price per share to
estimated earnings per share, (iii) transaction equity value to book value and (iv) transaction
equity value to tangible book value, and computed the high, mean, median and low multiples for
these transactions. The transactions reviewed and the high, mean, median and low multiples for the
transactions are set forth in the following
table
two tables
:
|
|
|
Buyer
|
|
Target
|
CNA Financial Corp.
|
|
CNA Surety Corporation(1)
|
Auto Club Insurance
|
|
Fremont Michigan InsuraCorp
|
United Fire & Casualty Company
|
|
Mercer Insurance Group
|
Fairfax Financial Holdings, Ltd.
|
|
First Mercury Financial Corporation(2)
|
ProAssurance Corporation
|
|
American Physicians Service Group, Inc.
|
ProSight Specialty Insurance Group, Inc.
|
|
NYMAGIC, Inc.(3)(4)
|
The Doctors Company
|
|
American Physicians Capital, Inc.
|
Old Republic International Corporation
|
|
PMA Capital Corporation
|
Fairfax Financial Holdings, Ltd.
|
|
Zenith National Insurance Corp.
|
21
|
|
|
(1)
|
|
Transaction represented acquisition of the public minority stake CNA Financial did not already own, approximately 39% of shares outstanding.
|
|
(2)
|
|
Purchase price per share to estimated earnings per share multiple calculated using First Call mean estimate as of November 1, 2010.
|
|
(3)
|
|
Transaction equity value to the last twelve months of net operating income multiple calculated using last twelve months of net operating income as of June 30, 2010.
|
|
(4)
|
|
Purchase price per share to estimated earnings per share multiple based on 2011 estimated net operating income disclosed in definitive merger proxy.
|
Sources: SNL Financial; SEC Filings.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Value/
|
|
|
|
|
|
|
Total
|
|
|
Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LTM
|
|
|
Total
|
|
|
Equity
|
|
|
Value/
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GAAP
|
|
|
Equity
|
|
|
Value/
|
|
|
Tangible
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Price
|
|
|
Total
|
|
|
Net
|
|
|
Value/
|
|
|
GAAP
|
|
|
GAAP
|
|
Ann.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per
|
|
|
Equity
|
|
|
Op.
|
|
|
Est.
|
|
|
Book
|
|
|
Book
|
|
Date.
|
|
Acquiror
|
|
|
Target
|
|
|
Cons.
|
|
|
Share
|
|
|
Value
|
|
|
Income
(1)
|
|
|
EPS
(2)
|
|
|
Value
(3)
|
|
|
Value
|
|
04/21/11
|
|
CNA Financial Corp.
|
|
CNA Surety Corporation
(4)
|
|
Cash
|
|
|
$26.55
|
|
|
|
$1,200.6
|
|
|
|
9.0x
|
|
|
|
11.5x
|
|
|
|
1.12x
|
|
|
|
1.29x
|
|
04/18/11
|
|
Auto Club Insurance
|
|
Fremont Michigan InsuraCorp
|
|
Cash
|
|
|
$36.15
|
|
|
|
$67.7
|
|
|
NM
|
|
NA
|
|
|
1.38x
|
|
|
|
1.38x
|
|
11/30/10
|
|
United Fire & Casualty Co.
|
|
Mercer Insurance Group
|
|
Cash
|
|
|
$28.25
|
|
|
|
$191.5
|
|
|
|
14.1x
|
|
|
|
13.6x
|
|
|
|
1.06x
|
|
|
|
1.09x
|
|
10/28/10
|
|
Fairfax Financial
|
|
First Mercury Financial
|
|
Cash
|
|
|
$16.50
|
|
|
|
$294.3
|
|
|
|
24.3x
|
|
|
|
23.6x
(5)
|
|
|
|
0.98x
|
|
|
|
1.22x
|
|
09/01/10
|
|
ProAssurance
|
|
American Physicians Service Group
|
|
Cash
|
|
|
$32.50
|
|
|
|
$233.0
|
|
|
|
9.7x
|
|
|
|
11.1x
|
|
|
|
1.40x
|
|
|
|
1.42x
|
|
07/15/10
|
|
ProSight Specialty
|
|
NYMAGIC
|
|
Cash
|
|
|
$25.75
|
|
|
|
$231.8
|
|
|
|
14.9x
(6)
|
|
|
|
17.0x
(7)
|
|
|
|
1.04x
|
|
|
|
1.04x
|
|
07/08/10
|
|
The Doctors Company
|
|
American Physicians Capital
|
|
Cash
|
|
|
$41.50
|
|
|
|
$396.4
|
|
|
|
10.0x
|
|
|
|
12.5x
|
|
|
|
1.69x
|
|
|
|
1.69x
|
|
06/10/10
|
|
Old Republic
|
|
PMA Capital
|
|
Stock
|
|
|
$7.10
|
|
|
|
$229.4
|
|
|
|
5.7x
|
|
|
|
8.5x
|
|
|
|
0.55x
|
|
|
|
0.59x
|
|
02/18/10
|
|
Fairfax Financial
|
|
Zenith National
|
|
Cash
|
|
|
$38.00
|
|
|
|
$1,439.5
|
|
|
NM
|
|
NM
|
|
|
1.36x
|
|
|
|
1.39x
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
High
|
|
|
24.3x
|
|
|
|
23.6x
|
|
|
|
1.69x
|
|
|
|
1.69x
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mean
|
|
|
12.5x
|
|
|
|
14.0x
|
|
|
|
1.18x
|
|
|
|
1.24x
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Median
|
|
|
10.0x
|
|
|
|
12.5x
|
|
|
|
1.12x
|
|
|
|
1.29x
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Low
|
|
|
5.7x
|
|
|
|
8.5x
|
|
|
|
0.55x
|
|
|
|
0.59x
|
|
|
|
The Doctors Company
|
|
FPIC Insurance Group
|
|
Cash
|
|
|
$42.00
|
|
|
|
$364.5
|
|
|
|
12.9x
|
|
|
|
15.6x
|
|
|
|
1.41x
|
|
|
|
1.57x
|
|
22
|
|
|
(1)
|
|
LTM is the latest twelve months; net operating income is calculated using the twelve
months ending on the quarter preceding the announcement date.
|
|
(2)
|
|
Mean consensus estimates for the full calendar year following the announcement, as reported
on the day prior to announcement.
|
|
(3)
|
|
GAAP book value multiples are based on the aggregate GAAP book value not book value per
share.
|
|
(4)
|
|
Transaction represented acquisition of the public minority stake CNA Financial did not
already own, approximately 39% of shares outstanding.
|
|
(5)
|
|
Based on First Call mean estimate as of 11/1/10.
(6) As of 6/30/10.
|
|
(7)
|
|
Multiple based on 2011E net operating income disclosed in definitive merger proxy.
Note: Dollar values in millions, except per share data. NM means not meaningful, NA means
not available.
|
|
Note: Dollar values in millions, except per share data. NM means not meaningful, NA means
not available.
|
|
Source: SNL Financial, Company Filings
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transaction
|
|
|
|
|
|
|
|
|
Equity
|
|
Purchase Price
|
|
|
|
|
|
|
Value/Last
|
|
per Share/
|
|
Transaction
|
|
Transaction
|
|
|
Twelve Months
|
|
Estimated
|
|
Equity
|
|
Equity
|
|
|
Net Operating
|
|
Earnings
|
|
Value/Book
|
|
Value/Tangible
|
|
|
Income(1)
|
|
per Share(2)
|
|
Value(3)
|
|
Book Value
|
The Doctors Co./FPIC
|
|
|
12.9
x
|
|
|
|
15.6
x
|
|
|
|
1.41
x
|
|
|
|
1.57
x
|
|
High
|
|
|
24.3
x
|
|
|
|
23.6
x
|
|
|
|
1.69
x
|
|
|
|
1.69
x
|
|
Mean
|
|
|
12.5
x
|
|
|
|
14.0
x
|
|
|
|
1.18
x
|
|
|
|
1.24
x
|
|
Median
|
|
|
10.0
x
|
|
|
|
12.5
x
|
|
|
|
1.12
x
|
|
|
|
1.29
x
|
|
Low
|
|
|
5.7
x
|
|
|
|
8.5
x
|
|
|
|
0.55
x
|
|
|
|
0.59
x
|
|
|
|
|
(1)
|
|
Last twelve months net operating income is calculated using the twelve months ending on the quarter preceding the announcement date.
|
|
(2)
|
|
First Call mean consensus estimates for the full calendar year following the announcement, as reported on the day prior to announcement.
|
|
(3)
|
|
GAAP book value multiples are based on aggregate book value, not book value per share.
|
Sandler ONeill also reviewed nine merger transactions announced from January 1, 2005 through
May 20, 2011 involving medical professional liability
insurers
insurance targets
with
total equity values greater than $35 million.
Transactions below $35 million
were excluded since those transactions were not comparable to the size of the transaction being
evaluated.
In each of the comparable transactions involving medical
professional liability insurers, Sandler ONeill reviewed the following multiples: (i) transaction
equity value to the last twelve months of net operating income, (ii) purchase price per share to
estimated earnings per share, (iii) transaction equity value to book value and (iv) transaction
equity value to tangible book value, and computed the high, mean, median and low multiples for
these transactions. The transactions reviewed and the high, mean, median and low multiples for the
transactions are set forth in the following
table
two tables
:
|
|
|
Buyer
|
|
Target
|
ProAssurance Corporation
|
|
American Physicians Service Group
|
The Doctors Company
|
|
American Physicians Capital
|
FPIC Insurance Group
|
|
Advocate, MD Financial Group(1)
|
ProAssurance Corporation
|
|
PICA Group(2)
|
The Doctors Company
|
|
SCPIE Holdings Inc.(3)
|
American Physicians Service Group
|
|
American Physicians Insurance Exchange(4)
|
ProAssurance Corporation
|
|
Physicians Insurance Company of Wisconsin(5)
|
Berkshire Hathaway
|
|
Medical Protective (General Electric)
|
ProAssurance Corporation
|
|
NCRIC Group, Inc.
|
|
|
|
(1)
|
|
Total equity value consideration includes an earn-out of up to $12 million based on meeting certain performance targets during the two year period following the completion of the transaction.
|
|
(2)
|
|
Total equity value consideration includes $15 million in premium credits to be paid over three years.
|
|
(3)
|
|
Total equity value includes 500,000 shares owned by a subsidiary of SCPIE Holdings, Inc.
|
|
(4)
|
|
Multiples are calculated using 6/30/06 financial data.
|
|
(5)
|
|
GAAP multiples are estimated for the year ending December 31, 2005 as disclosed in the proxy dated 12/8/05.
|
Sources: SNL Financial; Company Filings.
23
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
Equity
|
|
|
|
|
|
|
Total
|
|
|
Equity
|
|
|
|
|
|
|
|
|
|
|
|
Value/
|
|
|
Total
|
|
|
Equity
|
|
|
Value/
|
|
|
|
|
|
|
|
|
|
|
|
LTM
|
|
|
Equity
|
|
|
Value/
|
|
|
Tangible
|
|
|
|
|
|
|
|
Total
|
|
|
GAAP Net
|
|
|
Value/
|
|
|
GAAP
|
|
|
GAAP
|
|
Ann.
|
|
|
|
|
|
Equity
|
|
|
Op.
|
|
|
Est.
|
|
|
Book
|
|
|
Book
|
|
Date.
|
|
Acquiror
|
|
Target
|
|
Value
|
|
|
Income
(1)
|
|
|
EPS
(2)
|
|
|
Value
(3)
|
|
|
Value
|
|
09/01/10
|
|
ProAssurance
|
|
American Physicians Service Group
|
|
|
$233.0
|
|
|
|
9.7x
|
|
|
|
11.1x
|
|
|
|
1.40x
|
|
|
|
1.42x
|
|
07/08/10
|
|
The Doctors Company
|
|
American Physicians Capital
|
|
|
$396.4
|
|
|
|
10.0x
|
|
|
|
12.5x
|
|
|
|
1.69x
|
|
|
|
1.69x
|
|
07/30/09
|
|
FPIC Insurance Group
|
|
Advocate, MD Financial Group
(4)
|
|
|
$45.6
|
|
|
|
4.9x
|
|
|
NA
|
|
|
|
1.72x
|
|
|
|
1.72x
|
|
10/28/08
|
|
ProAssurance
|
|
PICA Group
(5)
|
|
|
$135.0
|
|
|
NA
|
|
|
NA
|
|
|
|
1.54x
|
|
|
|
1.58x
|
|
10/16/07
|
|
The Doctors Company
|
|
SCPIE Holdings Inc.
(6)
|
|
|
$293.6
|
|
|
|
19.8x
|
|
|
NA
|
|
|
|
1.37x
|
|
|
|
1.37x
|
|
06/05/06
|
|
American Physicians Service Group
|
|
American Physicians Ins. Exchange
(7)
|
|
|
$39.0
|
|
|
|
2.7x
|
|
|
NA
|
|
|
|
1.47x
|
|
|
|
1.47x
|
|
12/08/05
|
|
ProAssurance
|
|
Physicians Insurance Co. Wisconsin
(8)
|
|
|
$98.7
|
|
|
|
32.3x
|
|
|
NA
|
|
|
|
1.19x
|
|
|
NA
|
|
05/05/05
|
|
Berkshire Hathaway
|
|
Medical Protective (GE)
|
|
|
$825.0
|
|
|
NA
|
|
|
NA
|
|
|
|
1.12x
|
|
|
NA
|
|
02/28/05
|
|
ProAssurance
|
|
NCRIC Group, Inc.
|
|
|
$70.1
|
|
|
NM
|
|
|
|
11.9x
|
|
|
|
0.97x
|
|
|
|
1.08x
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
High
|
|
|
32.3x
|
|
|
12.5x
|
|
|
1.72x
|
|
|
1.72x
|
|
|
|
|
|
|
|
Mean
|
|
|
13.2x
|
|
|
11.8x
|
|
|
1.38x
|
|
|
1.48x
|
|
|
|
|
|
|
|
Median
|
|
|
9.9x
|
|
|
11.9x
|
|
|
1.40x
|
|
|
1.47x
|
|
|
|
|
|
|
|
Low
|
|
|
2.7x
|
|
|
11.1x
|
|
|
0.97x
|
|
|
1.08x
|
|
|
|
The Doctors Company
|
|
FPIC Insurance Group
|
|
|
$364.5
|
|
|
|
12.9x
|
|
|
|
15.6x
|
|
|
|
1.41x
|
|
|
|
1.57x
|
|
|
|
|
(1)
|
|
LTM is the latest twelve months; net operating income is calculated using the twelve months
ending on the quarter preceding the announcement date.
|
|
(2)
|
|
Mean consensus estimates for the full calendar year following the announcement, as reported
on the day prior to announcement.
|
|
(3)
|
|
GAAP book value multiples are based on the aggregate GAAP book value not book value per
share.
|
|
(4)
|
|
Includes an earn-out of up to $12 million based on meeting certain performance targets
during the two year period following the completion of the transaction.
|
|
(5)
|
|
Includes $15 million in premium credits to be paid over three years.
|
|
(6)
|
|
Total equity value includes 500,000 shares owned by a subsidiary of SCPIE.
|
|
(7)
|
|
Based on 6/30/06 financial data.
|
|
(8)
|
|
GAAP multiples are estimated for the year ending December 31, 2005 as disclosed in the
proxy dated 12/8/2005.
|
|
Note: Excludes transaction with total equity value below $35 million.
|
|
Note: Dollar values in millions, except per share data. NM means not meaningful, NA means
not available.
|
|
|
|
Source: SNL, Company Filings
|
24
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transaction Equity
|
|
Purchase Price
|
|
|
|
|
|
|
Value/Last
|
|
per Share/
|
|
Transaction
|
|
Transaction
|
|
|
Twelve Months
|
|
Estimated
|
|
Equity
|
|
Equity
|
|
|
Net Operating
|
|
Earnings
|
|
Value/Book
|
|
Value/Tangible
|
|
|
Income(1)
|
|
per Share(2)
|
|
Value(3)
|
|
Book Value
|
The Doctors Co./FPIC
|
|
|
12.9
x
|
|
|
|
15.6
x
|
|
|
|
1.41
x
|
|
|
|
1.57
x
|
|
High
|
|
|
32.3
x
|
|
|
|
12.5
x
|
|
|
|
1.72
x
|
|
|
|
1.72
x
|
|
Mean
|
|
|
13.2
x
|
|
|
|
11.8
x
|
|
|
|
1.38
x
|
|
|
|
1.48
x
|
|
Median
|
|
|
9.9
x
|
|
|
|
11.9
x
|
|
|
|
1.40
x
|
|
|
|
1.47
x
|
|
Low
|
|
|
2.7
x
|
|
|
|
11.1
x
|
|
|
|
0.97
x
|
|
|
|
1.08
x
|
|
|
|
|
(1)
|
|
Last twelve months net operating income is calculated using the twelve months ending on the quarter preceding the announcement date.
|
|
(2)
|
|
First Call mean consensus estimates for the full calendar year following the announcement, as reported on the day prior to announcement.
|
|
(3)
|
|
GAAP book value multiples are based on aggregate book value, not book value per share.
|
Premiums Paid Analysis
Sandler ONeill reviewed premiums to stock price paid in the nine
public acquisition
transactions described in the Analysis of Selected Merger
Transactions.
transactions involving publicly traded P&C insurance
targets since January 1, 2010.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premium
|
|
|
Premium
|
|
Paid on
|
|
|
Paid on 1-Day
|
|
1-Month Prior
|
|
|
Closing Price
|
|
Closing Price
|
The Doctors Co./FPIC(1)
|
|
|
27.2
|
%
|
|
|
14.5
|
%
|
High
|
|
|
49.8
|
%
|
|
|
67.3
|
%
|
Mean
|
|
|
32.6
|
%
|
|
|
35.4
|
%
|
Median
|
|
|
31.4
|
%
|
|
|
35.1
|
%
|
Low
|
|
|
16.2
|
%
|
|
|
(2.9
|
)%
|
|
|
|
(1)
|
|
Premiums calculated using current market data. Based on the closing price on the day prior to the ACAP announcement, the premium to 1-day price and 1-month price would be 60.3% and 60.9%, respectively.
|
Note: For the CNA Financial/CNA Surety transaction, premiums calculated
relative to the closing price on the day prior to CNA announcement of an initial bid of $22.00 on
10/29/10.
Source: Pricing data from FactSet.
Present Value Analysis
Sandler ONeill performed an illustrative present value analysis to determine a range of
implied present values per share of the Companys common stock based on the Management Stand-Alone
Case prepared by the Companys management, which included the Company projections. Sandler ONeill
used discount rates of 10% to 14%, terminal values calculated using multiple ranges of 1.00x-1.40x
25
shareholders equity at December 31, 2013 and 10.0x-14.0x estimated net operating income for 2013
and assumed results were discounted back to March 31, 2011. This analysis resulted in a range of
implied present values per share of the Companys common stock of $25.90 to $42.09.
Present Value Per Share(1)(2)
|
|
|
|
|
|
|
Terminal Shareholders Equity Multiple at December 31, 2013
|
Discount Rate
|
|
1.00x
|
|
1.20x
|
|
1.40x
|
10.0%
|
|
$28.46
|
|
$33.93
|
|
$39.41
|
11.0%
|
|
27.79
|
|
33.13
|
|
38.47
|
12.0%
|
|
27.14
|
|
32.35
|
|
37.56
|
13.0%
|
|
26.51
|
|
31.59
|
|
36.68
|
14.0%
|
|
25.90
|
|
30.86
|
|
35.82
|
|
|
|
|
|
|
|
Terminal Estimated LTM Net Operating Income Multiple at 12/31/13E
|
Discount Rate
|
|
10.0x
|
|
12.0x
|
|
14.0x
|
10.0%
|
|
$30.38
|
|
$36.23
|
|
$42.09
|
11.0%
|
|
29.66
|
|
35.37
|
|
41.08
|
12.0%
|
|
28.96
|
|
34.53
|
|
40.11
|
13.0%
|
|
28.29
|
|
33.73
|
|
39.17
|
14.0%
|
|
27.64
|
|
32.95
|
|
38.25
|
|
|
|
(1)
|
|
Using data from Ibbotson Associates, the cost of equity (i.e., discount rate) was calculated to be approximately 12% based on the sum of the risk free rate (10-Year US Treasury Yield of 3.1%), the
60-year equity risk premium (6.1%), the $236 million to $478 million size premium (2.9%) and fire, marine and casualty insurance industry premium (-0.12%).
|
|
(2)
|
|
Based on
2013 net operating income of $26.1 million; 12/31/13 shareholders equity of $244.0 million;
6.363 million common shares projected to be outstanding at 12/31/13; 0.100 million of unvested restricted shares; 0.343 million options outstanding with cash proceeds from options exercised of $6.9 million; and 0.053 million
additional shares from options exercised after May 11, 2011 with cash proceeds of $0.6 million. Results are discounted back to 3/31/11.
|
As described above, Sandler ONeills opinion to the Board was among many factors taken into
consideration by the Board in making its determination to approve the Merger Agreement and
recommend the Merger. Such decisions were solely those of the Board. The opinion of Sandler
ONeill was provided to the Board and does not constitute a recommendation to any person,
including the holders of the Companys common stock, as to how such person should vote or act on
any matter related to the Merger proposal. Sandler ONeill did not recommend any specific amount
of consideration to the Company or the Board or that any specific amount of consideration
constituted the only appropriate consideration for the Merger.
Under the terms of Sandler ONeills engagement letter, the Company agreed to pay Sandler
ONeill a
transaction
fee of 1.2% of the aggregate equity
value of the transaction
or approximately $4.4 million
, of
which
a
$25,000
retainer fee
became payable upon execution of the engagement letter,
a
$20,000
quarterly retainer fee
became
payable for each quarter thereafter until completion of the Merger or the earlier termination of
the engagement,
a
$250,000
opinion fee
became payable upon the delivery of Sandler ONeills fairness opinion to the
Board and the balance of which is contingent upon consummation of the Merger. In addition, the
Company also agreed to reimburse Sandler ONeill for its out-of-pocket expenses, and to indemnify
Sandler ONeill against certain liabilities, in connection with its engagement.
The Company selected Sandler ONeill in connection with the preparation of the fairness
opinion due to Sandler ONeills reputation as a nationally recognized investment banking firm
with substantial experience in similar transactions. Pursuant to a letter agreement, dated March
31, 2010, the Company engaged Sandler ONeill to act as its financial advisor in connection with
evaluating the Companys strategic alternatives, including a possible sale of the Company. Sandler
ONeill is actively engaged in the investment banking business and regularly undertakes the
valuation of investment securities in connection with public offerings, private placements,
business combinations and similar transactions. In the ordinary course of Sandler ONeills
business, it may trade in the Companys securities for its own
account or for the
26
accounts of
Sandler ONeill customers, and may at any time hold a long or short position in such securities.
Sandler ONeill has also received investment banking fees from the Company in the past, including
for providing a fairness opinion to the Board
and receiving a fee of
$250,000
in connection with the sale of Administrators for the Professions,
Inc. to AJB Ventures Inc. during 2006 and serving as financial advisor to the
Company
and receiving a fee of approximately $350,000
for its
acquisition of Advocate, MD Insurance Group Inc. in 2009.
Sandler ONeill was not engaged by
TDC to provide any services within the past two years
. In the ordinary course of its business
as a broker-dealer, Sandler ONeill may purchase securities from and sell securities to the
Company and TDC and their respective affiliates.
27
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