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SCPIE HOLDINGS INC.
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(Name of Registrant as Specified in its Charter)
STILWELL VALUE PARTNERS III, L.P.
STILWELL VALUE LLC
JOSEPH STILWELL
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(Name of Person(s) Filing Proxy Statement if Other Than the Registrant)
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The Stilwell Groups Presentation
to
Institutional Shareholder Services
RiskMetrics Group
March 12, 2008
Opposing
Bid From The Doctors Company
For SCPIE Holdings Inc.
Overview
I.
The $28 Cash Offer Was An Inadequate
Offer
M&A Edge Note,
March 5, 2008
SKPs stock price was depressed when TDC deal accepted
Net present value calculation
Price/tangible book value comparison
Normalized earnings
Earnings accretion available
II.
The Auction And Bidding Process
Was Flawed
Management bias towards a cash deal spoiled the process
Management, not board, drove the process
Only three types of likely purchasers
Ignored procedures to enhance best possible bid
Other fatal flaws
III.
SKP Greatly Exaggerated Risks of Alternate Deals
Risk of market volatility
Risk of loss of business
Deal protection terms prohibit ACAP from making best and highest offer
IV.
SKPs Directors Need to Discharge Their Fiduciary Duties
SKP directors will have to find a better offer if the TDC cash offer is voted down
2
I.
Inadequate Offer
M&A Edge Note,
March 5, 2008
Unlike the bumpitrage theme that prevailed in 2007, this year institutional
shareholders are reaching out to the
M&A Edge
team to discuss the allegedly
opportunistic low-ball bids made at a time when target shares are trading at a
temporary
market trough
As
M&A Edge
clients know, our analysis and vote
recs seek
to
maximize long-term shareholder value
. As such, we will evaluate
any allegedly opportunistic bid from the perspective of a target shareholder
who has owned shares for at least one year, and is expected, even if the
proposed transaction is never consummated, to own shares in the target
company for at least one year going forward. An important part of this
analysis is of course whether
the current market price reflects the true
intrinsic value of the company, or merely a distorted and temporary trading price.
continued on next page
3
Article mentions proposed SKP-TDC deal as a Selected Alleged
Opportunistic Offer
Proposed deal assigns no value to franchise and leaves shareholders no
upside
I.
Inadequate Offer
4
I.
Inadequate Offer
5
10/15/07
SKPs Stock Price Was Depressed When TDC Deal Accepted
I.
Inadequate Offer
Net present value calculation
The net present value of company assets as of December 31, 2007 was
$28.17 per share
TDC bid therefore assigns $(0.17) per share value to SKP franchise as of
December 31, 2007. We believe this is too low.
Gem of a franchise undervalued: despite three A.M. Best downgrades
(from A to B++, to B+, and then to B with a negative outlook) retention
rate never went below 92%
Calculations on following two slides
6
I.
Inadequate Offer
7
The $28 offer values the franchise at $(0.17) per share
Net Present Value of Balance Sheet
As of 12/31/07
(In Thousands)
Equity
232,039
Less: Discounted Value of Tax Asset
-3,553
31,946 * 4.3% * 2.5 years
Deferred Federal Income Taxes, Net
228,486
378,431
Loss and Loss Adjustment Expenses Reserve
* 4%
Conservative Estimate: @ 4% (below industry standard)
Reserve Redundancy
15,137
378,431
Loss and Loss Adjustment Expenses Reserve
* 1.5%
Estimate: @1.5%
Tail Value
5,676
378,431
Loss and Loss Adjustment Expenses Reserve
-36,194
Reinsurance Recoverable
-15,137
Reserve Redundancy
-5,676
Tail Value
321,424
Reserves to be Discounted
* 10%
Discount Rate @ 4.3% Yield with Average 2.5 Year Tail
Value of Reserve Discount
32,142
Data continued on next page
I.
Inadequate Offer
8
15,137
Reserve Redundancy
5,676
Tail Value
32,142
Value of Reserve Discount
Present Value of Reserves
52,955
52,955
Pre-tax Value of Reserves
* .649
Tax Rate @ 35.1%
After-Tax Value of Reserves
34,368
41,112
Unearned Premiums
* 26.5%
Using '07 Combined Ratio Plus Discount Rate @ 4.3% Yield
with Average 2.5 Year Tail
Value of Unearned Premiums
10,894
10,894
Value of Unearned Premiums
* .649
Tax Rate @ 35.1%
After-Tax Value of Unearned
Premiums
7,070
Net Present Value of Balance
Sheet
269,924
Shares Outstanding
9,583
NET PRESENT VALUE/
SHARE
28.17
I.
Inadequate Offer
9
WHERES THE SALE PREMIUM?
Company
Price/Tangible Book Value (%)
FPIC
144
ACAP
165
PRA
145
SKP at Proposed $28 Deal
116
I.
Inadequate Offer
10
WHERES THE SALE PREMIUM?
Company
Price/Earnings (last 12 mos.)
FPIC
8.8
ACAP
9.1
PRA
10.7
SKP (Normalized Earnings)
10.0
I.
Inadequate Offer
11
NORMALIZED EARNINGS
For Year Ending
12/31/2007
Reported Net Income:
17,939
5,622
Merger Expenses; Pre-tax
* .649
Tax Rate @ 35.1%
Plus: '07 Expenses related to proposed merger
3,648
After-tax
8,906
Non-Recurring Loss on Assumed Reinsurance
-1,892
Minus Earnings on Assumed Reinsurance Reserves
(Estimate 44,000 * 4.3%)
7,014
Net Loss on Assumed Reinsurance
* .649
Tax Rate @ 35.1%
Plus: Non-recurring loss for run-off assumed
reinsurance
4,552
After-tax
Normalized net income
26,139
÷ 9,583
Outstanding Shares
Per Share
$2.73
12
I.
Inadequate Offer
EARNINGS ACCRETION AVAILABLE
Expense savings available to acquirer: (No layoffs)
(in thousands)
1,000
Recurring Cost of Latham & Watkins as Corporate Counsel
(3 yr. avg.)
1,500
Board of Directors
1,750
Insurance Brokers, Money Management Fees, Professional Fees,
Consulting Fees
1,000
Public Co. Expenses: Outside Actuary, Auditor, Filings
1,500
CEO, CFO Compensation
1,250
Office Space (Moving Out of Century City--Current Lease
Expires Shortly)
1,000
I.T. Consolidations (AS400 System Old and Expensive to Use)
9,000
Revenue enhancements available to acquirer
(in thousands)
556,772
Total Investments
* 1%
(Improvement That Brings SKP Yield to Competitors' Levels)
5,567
Expense savings
9,000
Revenue enhancements
5,567
14,567
*.649
Tax Rate @ 35.1%
Deal accretions, after-tax
9,453
÷ 9,583
Outstanding Shares
Deal accretion
0.99 per share
+2.73
Normalized Earnings
Per share earnings available to acquirer
3.72
II.
Flawed Bidding Process
Management Bias Towards a Cash Deal Spoiled the Process
CEO Don Zuk: Cash is king
Sought cash deal because CEO wanted it from beginning
Zuk seeking to retire: change of control payment
Other directors nearing age to retire
13
Mitchell S. Karlan, M.D.
80
Chairman of the Board
Jack E. McCleary, M.D.
80
Director
Wendell L. Moseley, M.D.
80
Director
William A. Renert, M.D.
68
Director
Henry L. Stoutz, M.D.
75
Director
Ronald H. Wender, M.D.
61
Director
Donald J. Zuk
71
Director, President/CEO
Kaj Ahlmann
57
Director
Marshall S. Geller
69
Director
Willis T. King, Jr.
63
Director
Management, Not Board, Drove the Process
Boards strategic planning committee, consisting of independent
directors, removed from process early on and banker reported to
Management for the duration
Whose bread I eat, his song I sing
II.
Flawed Bidding Process
14
II.
Flawed Bidding Process
Only Three Types of Likely Purchasers
Management Favored the Type Least Able to Pay Highest Price
Three publicly-traded PL companies: ability to pay premium price using
stock
PL subsidiary of large AAA insurance company: ability to pay premium
price using cash and stock
Mutual professional liability insurers: limited ability to pay premium
price, cash only
15
II.
Flawed Bidding Process
Ignored Procedures to Enhance Best Possible Bid
ACAP was sandbagged and not called back after being told by investment
bankers it had highest offer
Professional liability subsidiary of AAA insurer repeatedly urged to enter
the auction process despite telling SKP its corporate policy was to avoid
auctions: AAA insurer needed only brief due diligence
and had been told
by SKP it would have opportunity to top final offer: SKP never called them
back
Another bidder able to pay premium price disqualified because it didnt
provide floor to offer: offer was higher than $28 per share as of
October 15, 2007
16
II.
Flawed Bidding Process
Other Fatal Flaws
Process ignored Companys improved performance and decreased risk
Management obsessed with expanding despite a balkanized professional
liability market in California
Ignored potential to increase shareholder value through capital allocation
until the market hardens (Don Zuk called returning capital to
shareholders, the biggest mistake of my career despite
two failed
expansions that cost
in excess of $100 million each
)
17
III.
SKP Greatly Exaggerated Risks
Risk of Market Volatility
SKP did not give the same consideration to a stock offer with upside
18
III.
SKP Greatly Exaggerated Risks
Risk of Loss of Business
Two stock bidders agreed to maintain SCPIE Insurance Co.,
sans
Zuk and
Tschudy, with the
same personnel servicing clients.
All bidders A.M. Best ratings were higher than SKPs.
Any buyer would have been legally obligated to honor all terms and
conditions of SCPIEs contracts.
SKP acted to diminish the probability of an ACAP merger.
ACAP felt compelled to put out Press Releases to its own shareholders to
refute SKPs letters and statements on February 27, 2008 & March 10,
2008.
19
III.
SKP Greatly Exaggerated Risks
Deal Protection Terms Prohibit ACAP From Making Best And Highest
Offer
Argument that ACAP couldnt bring floor above $28 false; foolish not to
have heard offer
20
IV.
SKP Directors Fiduciary Duties
It will be incumbent upon SKPs board of directors to consider a better
offer if the TDC $28 cash offer is voted down by shareholders.
Should have considered return of capital as all three other publicly traded
companies are doing
$60 million return consistent with capital component for A.M. Best A-
rating
21
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