<PAGE> 1
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(A) OF THE SECURITIES
EXCHANGE ACT OF 1934 (AMENDMENT NO. )
Filed by the Registrant /X/
Filed by a Party other than the Registrant / /
Check the appropriate box:
<TABLE>
<S> <C>
/ / Preliminary Proxy Statement / / Confidential, for Use of the Commission
/X/ Definitive Proxy Statement Only (as permitted by Rule 14a-6(e)(2))
/ / Definitive Additional Materials
/ / Soliciting Material Pursuant to sec.240.14a-11(c) or sec.240.14a-12
</TABLE>
SCPIE HOLDINGS INC.
- - --------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
- - --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
/ / $125 per Exchange Act Rules 0-11(c)(1)(ii), or 14a-6(i)(1), or 14a-6(i)(2)
or Item 22(a)(2) of Schedule 14A.
/ / $500 per each party to the controversy pursuant to Exchange Act Rule
14a-6(i)(3).
/ / Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
(1) Title of each class of securities to which transaction applies:
----------------------------------------------------------------------
(2) Aggregate number of securities to which transaction applies:
----------------------------------------------------------------------
(3) 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):
----------------------------------------------------------------------
(4) Proposed maximum aggregate value of transaction:
----------------------------------------------------------------------
(5) Total fee paid:
----------------------------------------------------------------------
/X/ Fee paid previously with preliminary materials.
/ / 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.
(1) Amount Previously Paid:
----------------------------------------------------------------------
(2) Form, Schedule or Registration Statement No.:
----------------------------------------------------------------------
(3) Filing Party:
-----------------------------------------------------------------------
(4) Date Filed:
----------------------------------------------------------------------
<PAGE> 2
SOUTHERN CALIFORNIA PHYSICIANS INSURANCE EXCHANGE
9441 WEST OLYMPIC BOULEVARD
P. O. BOX 4015
BEVERLY HILLS, CALIFORNIA 90213-4015
Dear Member: September 17, 1996
You are cordially invited to attend a special meeting (the "Special
Meeting") of the members of Southern California Physicians Insurance Exchange, a
California reciprocal insurer (the "Exchange"), to be held on November 5, 1996,
at 3:00 p.m., Pacific time, at the Sheraton Grande Hotel, 333 South Figueroa
Street, Los Angeles, California 90071.
At this important meeting you will be asked to consider and vote upon a
proposal to approve an Amended and Restated Plan and Agreement of Merger, dated
as of August 8, 1996 (the "Merger Agreement"), pursuant to which the Exchange
will merge (the "Merger") with and into SCPIE Indemnity Company, a California
stock insurer and the surviving corporation of the Merger ("SCPIE Indemnity").
Following the Merger, SCPIE Indemnity will be a wholly owned subsidiary of SCPIE
Holdings Inc., a Delaware corporation ("SCPIE Holdings"). In the Merger, each
member of the Exchange on September 16, 1996 (an "Eligible Member") will receive
shares of common stock, par value $.0001 per share, of SCPIE Holdings (the
"Common Stock"). Pursuant to the Merger Agreement, 10,000,000 shares of Common
Stock will be allocated to Eligible Members in accordance with the following
formula: (i) each Eligible Member shall be allocated a number of shares of
Common Stock equal to the product of x and y, where "x" equals 9,000,000 shares
of Common Stock and "y" equals the ratio of the Earned Premiums (as defined) of
such Eligible Member on Eligible Policies (as defined) to the total Earned
Premiums of all Eligible Members on Eligible Policies during the period
beginning on January 1, 1993 and ending on but including September 16, 1996,
plus (ii) each Eligible Member who was also a member on March 21, 1996, shall be
allocated a number of shares of Common Stock equal to 1,000,000 shares of Common
Stock divided by the total number of Eligible Members who were also members on
March 21, 1996. The total amount of Earned Premiums for the January 1, 1993
through September 16, 1996 period is approximately $357.1 million, or $39.68 of
Earned Premiums for each of the 9,000,000 shares of Common Stock to be allocated
based on Earned Premiums. 10,407 Eligible Members were also Members on March 21,
1996 and will be eligible to participate in the allocation of the 1,000,000
shares of Common Stock on the basis of 96.089 shares to each such Eligible
Member. It is contemplated that, substantially concurrent with the consummation
of the Merger, SCPIE Holdings will complete an underwritten public offering of
approximately 2,000,000 shares of Common Stock.
The accompanying Proxy Statement/Prospectus describes in detail the
proposed Merger. Please review carefully the information in the attached Proxy
Statement/Prospectus.
THE ENCLOSED GREEN RECORD CARD CONTAINS YOUR NAME AND SHOWS THE ESTIMATED
WHOLE NUMBER OF SHARES OF COMMON STOCK YOU WILL RECEIVE PURSUANT TO THE MERGER
AGREEMENT IF THE MERGER IS APPROVED AND CONSUMMATED.
THE BOARD OF GOVERNORS OF THE EXCHANGE HAS DETERMINED THAT THE MERGER IS
FAIR TO AND IN THE BEST INTERESTS OF THE EXCHANGE AND ITS MEMBERS AND RECOMMENDS
THAT YOU VOTE FOR APPROVAL OF THE MERGER AGREEMENT.
Whether or not you plan to attend the Special Meeting in person, your vote
is important. Accordingly, I urge you to review carefully the enclosed
materials, then please sign, date and mail the enclosed proxy card promptly in
the postage-paid envelope that has been provided to you for your convenience. If
you wish to vote in accordance with the recommendations of the Board of
Governors of the Exchange, it is not necessary to specify your choices, you may
merely sign, date and return the enclosed proxy. If you attend the Special
Meeting, you may revoke your proxy by voting in person. Your prompt cooperation
is greatly appreciated.
Sincerely,
LOGO
Allan K. Briney, M.D.
Chairman of the Board
<PAGE> 3
SOUTHERN CALIFORNIA PHYSICIANS INSURANCE EXCHANGE
9441 WEST OLYMPIC BOULEVARD
P.O. BOX 4015
BEVERLY HILLS, CALIFORNIA 90213-4015
NOTICE OF SPECIAL MEETING
A special meeting (the "Special Meeting") of the members of Southern
California Physicians Insurance Exchange, a California reciprocal insurer (the
"Exchange"), will take place at the Sheraton Grande Hotel, 333 South Figueroa
Street, Los Angeles, California 90071 at 3:00 p.m., Pacific time, on November 5,
1996, to consider and vote upon:
1. A proposal to approve an Amended and Restated Plan and Agreement
of Merger, dated as of August 8, 1996 (the "Merger Agreement"), pursuant to
which the Exchange will merge (the "Merger"), with and into SCPIE Indemnity
Company, a California stock insurer and the surviving corporation of the
Merger ("SCPIE Indemnity"). Following the Merger, SCPIE Indemnity will be a
wholly owned subsidiary of SCPIE Holdings Inc., a Delaware corporation
("SCPIE Holdings"). In the Merger, each member of the Exchange on September
16, 1996 (an "Eligible Member") will receive shares of common stock, par
value $.0001 per share, of SCPIE Holdings (the "Common Stock"). Pursuant to
the Merger Agreement, 10,000,000 shares of Common Stock will be allocated
to Eligible Members in accordance with the following formula: (i) each
Eligible Member shall be allocated a number of shares of Common Stock equal
to the product of x and y, where "x" equals 9,000,000 shares of Common
Stock and "y" equals the ratio of the Earned Premiums (as defined) of such
Eligible Member on Eligible Policies (as defined) to the total Earned
Premiums of all Eligible Members on Eligible Policies during the period
beginning on January 1, 1993 and ending on but including September 16,
1996, plus (ii) each Eligible Member who was also a member on March 21,
1996, shall be allocated a number of shares of Common Stock equal to
1,000,000 shares of Common Stock divided by the total number of Eligible
Members who were also members on March 21, 1996. The total amount of Earned
Premiums for the January 1, 1993 through September 16, 1996 period is
approximately $357.1 million, or $39.68 of Earned Premiums for each of the
9,000,000 shares of Common Stock to be allocated based on Earned Premiums.
10,407 Eligible Members were also Members on March 21, 1996 and will be
eligible to participate in the allocation of the 1,000,000 shares of Common
Stock on the basis of 96.089 shares to each such Eligible Member.
2. Such other business as may lawfully come before the Special
Meeting.
Eligible Members are entitled to notice of, and to vote at, the Special
Meeting. Each Eligible Member is requested to complete, date and sign the
enclosed proxy card and Taxpayer Identification Card and return them promptly in
the enclosed pre-paid envelope whether or not you intend to attend the Special
Meeting. Your proxy may be revoked in the manner described in the accompanying
Proxy Statement/Prospectus at any time before it has been voted at the Special
Meeting.
Approval and adoption of the Merger Agreement require the affirmative vote
of two-thirds (66 2/3%) of the Eligible Members.
By Order of the Board of Governors of
Southern California Physicians
Insurance Exchange
LOGO
Henry L. Stoutz, M.D.
Secretary
Beverly Hills, California
September 17, 1996
PLEASE PROMPTLY EXECUTE THE ENCLOSED PROXY CARD AND TAXPAYER IDENTIFICATION
CARD AND RETURN THEM TO THE EXCHANGE IN THE ENCLOSED POSTAGE-PAID ENVELOPE AS
SOON AS POSSIBLE WHETHER OR NOT YOU INTEND TO BE PRESENT AT THE SPECIAL MEETING.
<PAGE> 4
SOUTHERN CALIFORNIA PHYSICIANS INSURANCE EXCHANGE
PROXY STATEMENT
FOR A SPECIAL MEETING OF MEMBERS
TO BE HELD ON NOVEMBER 5, 1996
------------------------
SCPIE HOLDINGS INC.
PROSPECTUS FOR COMMON STOCK
This Proxy Statement/Prospectus is being furnished to Members of Southern
California Physicians Insurance Exchange, a California reciprocal insurer (the
"Exchange"), in connection with the solicitation of proxies by the Board of
Governors of the Exchange to be used at a special meeting of Members (the
"Special Meeting") to take place at the Sheraton Grande Hotel, 333 South
Figueroa Street, Los Angeles, California 90071 at 3:00 p.m., Pacific time, on
November 5, 1996.
At the Special Meeting, each Member of the Exchange on September 16, 1996
(an "Eligible Member") will be asked to consider and vote upon a proposal to
approve an Amended and Restated Plan and Agreement of Merger, dated as of August
8, 1996 (the "Merger Agreement"), pursuant to which the Exchange will merge (the
"Merger") with and into SCPIE Indemnity Company, a California stock insurer and
the surviving corporation of the Merger ("SCPIE Indemnity"). Following the
Merger, SCPIE Indemnity will be a wholly owned subsidiary of SCPIE Holdings
Inc., a Delaware corporation ("SCPIE Holdings" or the "Company"). In the Merger,
each Eligible Member will receive shares of common stock, par value $.0001 per
share, of SCPIE Holdings (the "Common Stock"). This Proxy Statement/Prospectus
constitutes the Prospectus of SCPIE Holdings with respect to the shares of
Common Stock to be issued in connection with the Merger. Pursuant to the Merger
Agreement, 10,000,000 shares of Common Stock (the "Merger Shares") will be
allocated to Eligible Members in accordance with the following formula: (i) each
Eligible Member shall be allocated a number of shares of Common Stock equal to
the product of x and y, where "x" equals 9,000,000 shares of Common Stock and
"y" equals the ratio of the Earned Premiums (as defined) of such Eligible Member
on Eligible Policies (as defined) to the total Earned Premiums of all Eligible
Members on Eligible Policies during the period beginning on January 1, 1993 and
ending on but including September 16, 1996, plus (ii) each Eligible Member who
was also a Member on March 21, 1996, shall be allocated a number of shares of
Common Stock equal to 1,000,000 shares of Common Stock divided by the total
number of Eligible Members who were also Members on March 21, 1996. The total
amount of Earned Premiums for the January 1, 1993 through September 16, 1996
period is approximately $357.1 million, or $39.68 of Earned Premiums for each of
the 9,000,000 shares of Common Stock to be allocated based on Earned Premiums.
10,407 Eligible Members were also Members on March 21, 1996 and will be eligible
to participate in the allocation of the 1,000,000 shares of Common Stock on the
basis of 96.089 shares to each such Eligible Member.
It is contemplated that, substantially concurrent with the consummation of
the Merger, SCPIE Holdings will complete an underwritten public offering of
approximately 2,000,000 shares of Common Stock (the "Initial Public Offering").
Approval and adoption of the Merger Agreement require the affirmative vote
at the Special Meeting of two-thirds (66 2/3%) of all Eligible Members.
------------------------
SEE "RISK FACTORS" COMMENCING ON PAGE 9 HEREIN FOR A DISCUSSION OF CERTAIN
FACTORS WHICH SHOULD BE CONSIDERED BEFORE VOTING.
------------------------
THE SECURITIES TO BE ISSUED HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION,
NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE
SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF
THIS PROXY STATEMENT/PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
------------------------
THE DATE OF THIS PROXY STATEMENT/PROSPECTUS IS SEPTEMBER 17, 1996.
<PAGE> 5
All proxies that are properly executed and returned will be voted in
accordance with the instructions noted thereon. ANY PROXY NOT SPECIFYING THE
CONTRARY WILL BE VOTED IN FAVOR OF THE MERGER AGREEMENT. An Eligible Member who
has given a proxy may revoke it at any time prior to its exercise at such
meeting by delivering an instrument of revocation or a duly executed proxy
bearing a later date to the Exchange or by attending the Special Meeting and
voting in person.
------------------------
This Proxy Statement/Prospectus and the accompanying form of proxy are
first being mailed or delivered to the Members of the Exchange on or about
September 26, 1996.
STATE INSURANCE HOLDING COMPANY LAWS AND REGULATIONS APPLICABLE TO SCPIE
HOLDINGS IN GENERAL PROVIDE THAT NO PERSON MAY ACQUIRE CONTROL OF THE COMPANY,
AND THUS INDIRECT CONTROL OF ITS INSURANCE SUBSIDIARIES, UNLESS SUCH PERSON HAS
PROVIDED CERTAIN REQUIRED INFORMATION TO, AND SUCH ACQUISITION IS APPROVED (OR
NOT DISAPPROVED) BY, THE APPROPRIATE INSURANCE REGULATORY AUTHORITIES.
GENERALLY, ANY PERSON ACQUIRING BENEFICIAL OWNERSHIP OF 10% OR MORE OF THE
COMMON STOCK WOULD BE PRESUMED TO HAVE ACQUIRED SUCH CONTROL, UNLESS THE
APPROPRIATE INSURANCE REGULATORY AUTHORITIES UPON ADVANCE APPLICATION DETERMINE
OTHERWISE.
------------------------
AVAILABLE INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement (together with all amendments, exhibits,
schedules and supplements thereto, the "Registration Statement"), on Form S-4
(Registration No. 333-4454) under the Securities Act of 1933, as amended (the
"Securities Act"), with respect to the shares of Common Stock to be issued
pursuant to the Merger Agreement. As permitted by the rules and regulations of
the Commission, this Proxy Statement/Prospectus, which constitutes a part of the
Registration Statement, does not contain all information set forth in the
Registration Statement. For further information with respect to the Company and
the Common Stock offered hereby, please refer to the Registration Statement,
including the exhibits thereto. The Registration Statement, as well as reports,
proxy statements and other information filed by the Company can be inspected and
copied at the Commission's Public Reference Room, Judiciary Plaza, 450 Fifth
Street, N.W., Room 1024, Washington, D.C. 20549, and at the public reference
facilities maintained by the Commission at its regional offices located at
Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661
and Seven World Trade Center, Suite 1300, New York, New York 10048. Copies of
such materials can be obtained from the Commission at prescribed rates from the
Public Reference Room of the Commission at 450 Fifth Street, N.W., Washington,
D.C. 20549. Additionally, material filed by the Company can be inspected at the
offices of the New York Stock Exchange at 20 Broad Street, New York, New York
10005. In addition, the Commission maintains a Web site (http://www.sec.gov)
that contains reports, proxy and information statements and other information
regarding registrants that file electronically with the Commission, including
the Company. Statements contained in this Proxy Statement/Prospectus relating to
the contents of any contract or other document referred to herein are not
necessarily complete, and, in each instance, reference is made to the copy of
such contract or other document filed as an exhibit to the Registration
Statement and each such statement shall be deemed qualified in its entirety by
such reference.
No person is authorized to give any information or to make any
representation with respect to the matters described in this Proxy
Statement/Prospectus other than those contained herein and, if given or made,
such information or representation should not be relied upon as having been
authorized by the Company or any other person. This Proxy Statement/Prospectus
does not constitute an offer to sell, or a solicitation of an offer to purchase,
the securities offered by this Proxy Statement/Prospectus, or make a
solicitation of a proxy, in any jurisdiction in which, or to or from any person
to or from whom, it is unlawful to make such an offer or solicitation. Neither
the delivery of this Proxy Statement/Prospectus nor any distribution of
securities hereunder shall under any circumstances be deemed to imply that there
has been no change in the assets, properties or affairs of the Company since the
date hereof or that the information set forth herein is correct as of any time
subsequent to the date hereof.
------------------------
As a result of the offering of Common Stock to be issued pursuant to the
Merger Agreement, the Company will be subject to the information requirements of
the Securities Exchange Act of 1934, as amended (the "Exchange Act"). The
Company will fulfill its obligations with respect to such requirements by filing
periodic reports and other information with the Commission. The Company intends
to furnish its stockholders with annual reports containing audited consolidated
financial statements reported upon by its independent auditors and quarterly
reports containing unaudited consolidated financial information for each of the
first three quarters of each fiscal year.
<PAGE> 6
TABLE OF CONTENTS
<TABLE>
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PAGE
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<S> <C>
SUMMARY.............................. 1
Purpose of the Merger.............. 2
The Company........................ 2
The Special Meeting................ 4
Actions to be Taken by Eligible
Members......................... 5
The Plan and the Initial Public
Offering........................ 5
The Merger......................... 5
Certain Federal Income Tax
Considerations.................. 7
Risk Factors....................... 7
Summary Financial and Operating
Data............................ 8
RISK FACTORS......................... 9
Concentration of Business.......... 9
Industry Factors................... 9
Competition........................ 9
Loss and LAE Reserves.............. 10
Changes in Healthcare.............. 11
Entry into New Markets............. 11
Physician and Medical Association
Relationships................... 12
Importance of Ratings.............. 12
Reinsurance........................ 13
Holding Company Structure;
Limitation on Dividends......... 13
Anti-takeover Provisions........... 13
Regulatory and Related Matters..... 14
Shares Eligible for Future Sale.... 14
Lack of Prior Public Market for
Common Stock and Possible
Volatility of Stock Price; No
Initial Public Offering......... 14
INFORMATION CONCERNING THE SPECIAL
MEETING............................ 15
Time, Date and Place............... 15
Record Date, Quorum and Vote
Required........................ 15
Recommendation of the Board of
Governors....................... 15
Interests of Members of the Board
of Governors in the Merger...... 15
<CAPTION>
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<S> <C>
Proxies............................ 16
Proxy Solicitation................. 16
THE MERGER........................... 16
Introduction....................... 16
Background of the Merger........... 17
History; Structure of the Merger
Transactions.................... 18
Determination of Eligible
Members......................... 19
Exchange of Members' Membership
Interests....................... 20
Consideration...................... 20
Opinion of Financial Advisor....... 21
Recommendation of the Board of
Governors....................... 24
The Initial Public Offering........ 26
Description of the Merger
Agreement....................... 27
Conditions to Effectiveness of the
Merger.......................... 28
Additional Aspects of the Merger
and the Plan.................... 29
COMPARISON OF CERTAIN RIGHTS OF
MEMBERS BEFORE AND AFTER THE
MERGER............................. 30
MARKET FOR COMMON STOCK.............. 43
DIVIDEND POLICY...................... 43
CAPITALIZATION....................... 44
CERTAIN FEDERAL INCOME TAX
CONSEQUENCES OF THE MERGER......... 45
General............................ 45
Eligible Members................... 45
The Exchange and SCPIE Indemnity... 46
Consequence of a Taxable Exchange.. 46
Issuance of Rules Dealing with
Inversions...................... 46
Possible Policyholder Dividend
Treatment....................... 46
Taxpayer Identification Number..... 47
Merger Tax Opinion................. 47
SELECTED FINANCIAL AND OPERATING
DATA............................... 48
</TABLE>
i
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<TABLE>
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<S> <C>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS...................... 49
General............................ 49
Results of Operations.............. 51
Liquidity and Capital Resources.... 53
Effect of Inflation................ 54
BUSINESS............................. 55
Overview........................... 55
Products........................... 57
Marketing and Policyholder
Services........................ 59
Underwriting....................... 60
Rates and Dividends................ 61
Claims............................. 61
Loss Reserves...................... 63
Reinsurance........................ 66
Investment Portfolio............... 68
Competition........................ 70
Regulation......................... 71
A.M. Best Rating................... 74
Employees.......................... 74
Properties......................... 74
Litigation......................... 74
MANAGEMENT........................... 76
Directors and Executive Officers... 76
Committees of the SCPIE Holdings
Board........................... 78
Director Compensation.............. 78
Executive Compensation............. 79
Employment Agreement............... 79
Compensation Plans................. 79
Limitation of Liability and
Indemnification................. 81
Certain Relationships and Related
Transactions.................... 81
PAGE
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OWNERSHIP OF COMMON STOCK............ 82
DESCRIPTION OF CAPITAL STOCK......... 83
General............................ 83
Common Stock....................... 83
Preferred Stock.................... 83
Delaware Law and Certain Charter
and Bylaw Provisions............ 84
Transfer Agent and Registrar....... 85
LEGAL MATTERS........................ 85
EXPERTS.............................. 86
GLOSSARY OF SELECTED INSURANCE
TERMS.............................. 87
GLOSSARY OF MERGER RELATED TERMS..... 90
INDEX TO FINANCIAL STATEMENTS........ F-1
ANNEX I PLAN AND AGREEMENT OF MERGER
ANNEX II OPINION OF THE FINANCIAL ADVISOR
ANNEX III AMENDED AND RESTATED CERTIFICATE
OF INCORPORATION OF SCPIE
HOLDINGS
ANNEX IV AMENDED AND RESTATED BYLAWS OF
SCPIE HOLDINGS
ANNEX V INSTRUCTIONS FOR COMPLETING THE
TAXPAYER IDENTIFICATION NUMBER
("TIN") CERTIFICATION CARD
ANNEX VI APPROVAL OF CALIFORNIA DE-
PARTMENT OF INSURANCE OF SUB-
MISSION TO A VOTE OF MEMBERS OF
THE CONVERSION MERGER WITH AND
INTO SCPIE INDEMNITY COMPANY
</TABLE>
ii
<PAGE> 8
SUMMARY
The following summary is qualified in its entirety by, and should be read
in conjunction with, the more detailed information and financial statements
appearing elsewhere in this Proxy Statement/Prospectus. Financial data and
ratios set forth in this Proxy Statement/Prospectus have been presented in
accordance with generally accepted accounting principles ("GAAP"), unless
otherwise indicated. See "Glossary of Selected Insurance Terms" and "Glossary of
Merger Related Terms" for definitions of certain terms used in this Proxy
Statement/Prospectus. Members are urged to read this Proxy Statement/Prospectus,
including the Annexes hereto, in its entirety. For purposes of this Proxy
Statement/Prospectus, the terms "SCPIE" and the "Company" refer, at all times
prior to the Effective Date, to the Exchange and its subsidiaries, collectively,
and at all times on or after the Effective Date, to SCPIE Holdings Inc. and its
subsidiaries, collectively; the term "SCPIE Holdings" refers at all times, to
SCPIE Holdings Inc., excluding its subsidiaries; and the term "Insurance
Subsidiaries" refers, at all times prior to the Effective Date, to the Exchange,
SCPIE Indemnity and two currently inactive insurance companies, and at all times
on or after the Effective Date, to SCPIE Indemnity and such inactive insurance
companies.
This Proxy Statement/Prospectus is being furnished to Eligible Members in
connection with the solicitation of proxies from Eligible Members by the Board
of Governors of the Exchange (the "Board of Governors"). The proxies are for use
at the Special Meeting of the Members of the Exchange scheduled to be held on
November 5, 1996, at 3:00 p.m., Pacific time, at the Sheraton Grande Hotel, 333
South Figueroa Street, Los Angeles, California 90071.
At the Special Meeting, Eligible Members will consider and vote upon a
proposal to approve the Merger Agreement, a copy of which is attached hereto as
Annex I, pursuant to which the Exchange would merge with and into SCPIE
Indemnity. As a result of the Merger, SCPIE Indemnity would be the surviving
corporation and a wholly owned subsidiary of SCPIE Holdings, membership rights
in the Exchange would be extinguished, and Eligible Members of the Exchange
would be entitled to receive shares of the Common Stock. Pursuant to the Merger
Agreement, 10,000,000 shares of Common Stock (the "Merger Shares") will be
allocated to Eligible Members in accordance with the following formula: (i) each
Eligible Member will be allocated a number of shares of Common Stock equal to
the product of x and y, where "x" equals 9,000,000 shares of Common Stock and
"y" equals the ratio of the Earned Premiums (as defined) of such Eligible Member
on Eligible Policies (as defined) to the total Earned Premiums of all Eligible
Members on Eligible Policies during the period beginning on January 1, 1993 and
ending on but including September 16, 1996, plus (ii) each Eligible Member who
was also a Member on March 21, 1996, shall be allocated a number of shares of
Common Stock equal to 1,000,000 shares of Common Stock divided by the total
number of Eligible Members who were also Members on March 21, 1996. The total
amount of Earned Premiums for the January 1, 1993 through September 16, 1996
period is approximately $357.1 million, or $39.68 of Earned Premiums for each of
the 9,000,000 shares of Common Stock to be allocated based on Earned Premiums.
10,407 Eligible Members were also Members on March 21, 1996 and will be eligible
to participate in the allocation of the 1,000,000 shares of Common Stock on the
basis of 96.089 shares to each such Eligible Member. Based upon the foregoing
allocation formula, an Eligible Member who joined the Exchange prior to January
1, 1993 and who paid average annual premiums since that date of $8,702 would be
allocated approximately 910 Merger Shares. Of such Merger Shares, 814 would be
allocable based on Earned Premiums and 96 would be allocable by virtue of the
fact that such Eligible Member was also a Member on March 21, 1996. In addition,
500,000 shares of Common Stock will be issued to SCPIE Indemnity in the Merger
in consideration of the cancellation of the outstanding shares of Common Stock
of SCPIE Holdings currently held by the Exchange which will be cancelled in the
Merger.
It is contemplated that, substantially concurrent with the consummation of
the Merger, SCPIE Holdings will complete an underwritten public offering of
approximately 2,000,000 shares of Common Stock (the "Initial Public Offering").
1
<PAGE> 9
The Merger will not affect any Eligible Member's policy coverages or
premium and experience credits for 1996 or 1997.
PURPOSE OF THE MERGER
The Merger is part of a plan of reorganization (the "Plan"), which the
Board of Governors unanimously adopted on March 21, 1996, to convert the
Exchange from a reciprocal insurer to a stock insurance company. The principal
purpose of this reorganization is to improve the Company's access to the capital
markets and to raise capital to permit the growth of existing business and
develop new business opportunities in the professional liability insurance
industry. See "The Merger -- History; Structure of the Merger Transactions."
THE COMPANY
Overview and Strategy. The Company is the largest provider of medical
malpractice insurance in California, based on direct premiums written in 1995.
SCPIE currently insures approximately 10,200 California physicians and oral and
maxillofacial surgeons practicing alone or in medical groups or clinics or other
healthcare organizations. The Company also insures a variety of other healthcare
providers, including hospitals, emergency department facilities, outpatient
surgery centers and hemodialysis, clinical and pathology laboratories.
The Company's total revenues and net income were $165.0 million and $24.4
million, respectively, for the year ended December 31, 1995 and were $93.7
million and $14.1 million, respectively, for the six months ended June 30, 1996.
As of June 30, 1996, the Company had $786.6 million of total assets and $264.8
million of total equity.
Medical malpractice insurance, or medical professional liability insurance,
insures the physician, hospital or other healthcare provider against liabilities
arising from the rendering of or failure to render professional medical
services. Under the typical medical malpractice insurance policy, the insurer
also defends the insured against potentially covered claims. Based on data
compiled by A.M. Best Company, Inc. ("A.M. Best"), in 1995, total medical
malpractice premiums in the United States exceeded $6.0 billion. In California,
the second largest market for medical malpractice insurance based on premiums
written, approximately $590.0 million of medical malpractice premiums were
written in 1995. The Company's share of the medical malpractice premiums written
in California in 1995 was approximately 21%. The Company's market share is
substantially higher in Southern California where more than 95% of the Company's
insureds are located.
The Company believes that its leading market share for medical malpractice
insurance in California is, in large part, due to the loyalty of its insured
physicians. The Company attributes this loyalty to the high quality,
personalized service it provides and its traditional focus on the California
physician marketplace. The medical malpractice insurance offered by the Company
has been endorsed by twelve county medical associations and specialty societies
in California.
The Company believes that the growth in managed healthcare and the
emergence of multi-state integrated healthcare providers and delivery systems
will lead to major changes in the medical malpractice insurance industry.
Practice management organizations, hospitals, administrators of large group
practices and managed care organizations have had an increasing influence over
the purchasing decision for the medical malpractice insurance coverages of their
affiliated physicians. As the consolidation of healthcare providers continues,
the number of physicians insured through such organizations will increase and
the Company believes that such organizations increasingly will seek
well-capitalized medical malpractice insurers that can provide a full range of
products and a high level of service in each state in which such organizations
conduct business.
To position the Company to compete and grow its business successfully in
this changing environment, the Company has adopted a strategy that includes: (i)
expanding the types of products offered to include hospital coverage, directors
and officers liability insurance for healthcare professional organiza-
2
<PAGE> 10
tions and errors and omissions insurance for managed care and related
organizations; (ii) diversifying geographically by increasing writings of
medical malpractice insurance in states other than California; (iii) positioning
the Company to take advantage of acquisition and consolidation opportunities
relating to medical malpractice insurance; (iv) maintaining the Company's
relationship with its primary policyholder base of California physician and
medical group insureds; and (v) maintaining sufficient capital to take advantage
of future market opportunities and to retain strong insurance ratings.
The Company has taken the following steps to implement its strategy:
New Product Introductions. In 1994, the Company began offering malpractice
insurance to California hospitals and, in 1995, began offering errors and
omissions coverage to managed care organizations. The Company currently insures
six hospitals and 23 managed care organizations. The Company believes that such
organizations represent an increasing share of the market for malpractice
insurance and provide the Company with a significant area for future growth.
Relationship with Sullivan, Kelly. The Company has entered into an
exclusive marketing agreement with Sullivan, Kelly and Associates, Inc. ("SKA"),
one of the leading hospital malpractice insurance brokers in the Western United
States. SKA has relationships with approximately 600 healthcare entities in 15
states which generated more than $80.0 million of malpractice insurance premiums
for a large insurance group in 1995. Following the recent termination by the
insurance group of this relationship, SKA and SCPIE are actively working to
obtain all or a portion of this business for SCPIE. In addition, SKA has the
exclusive right to market SCPIE's malpractice coverage for hospitals in all
states, and SCPIE recognizes SKA as the exclusive broker for medical group
coverage in all states other than California.
The Company believes that its marketing relationship with SKA will provide
(i) a significant advantage in marketing to hospitals and other healthcare
entities and (ii) a cost-effective means of entering new geographic markets.
Entering New States. To facilitate its geographic expansion, in March 1996,
SCPIE acquired the outstanding stock of two inactive property and casualty
insurance companies, one of which is licensed in 44 states plus the District of
Columbia and the other of which is licensed in one state. The Company will
capitalize these companies with a portion of the proceeds of its proposed
Initial Public Offering, and will attempt to ensure that they are fully licensed
and able to underwrite medical malpractice insurance as quickly as possible. In
the meantime, the Company is in the process of finalizing a fronting arrangement
to allow the Company to accommodate SKA in all of the markets in which SKA
operates.
The Company believes that the medical malpractice insurance industry in
California is currently experiencing a "soft insurance market," that is, an
insurance market in which the underwriting capacity exceeds current demand and
premium rates are relatively low. The Company believes that its strategy will
position it to expand premium writings and market share when the market
"hardens," that is, when demand coincides more closely with capacity and premium
rates increase to more appropriate levels.
In addition to its current direct insurance operations, SCPIE also assumes
reinsurance of medical malpractice insurance. The Company intends to expand its
reinsurance business and believes participation in reinsurance and excess
casualty insurance programs will become an increasingly important aspect of its
operations as healthcare entities become larger and obtain higher policy limits.
History and Structure. The Exchange is a California reciprocal insurer
organized in 1976 to provide medical malpractice insurance to its physician and
other healthcare provider members. The business of the Exchange is managed by
SCPIE Management Company, the attorney-in-fact for the Exchange, which is a
wholly owned subsidiary of the Exchange. SCPIE Management Company also conducts
an insurance agency business through its wholly owned subsidiary corporation,
SCPIE Insurance Services, Inc., and plans to provide risk management and claims
management services through another subsidiary corporation, SCPIE Management
Services, Inc. Prior to July 1996, SCPIE Management Company was a wholly owned
subsidiary of the Organization of Southern California Physicians, Inc., a
California mutual benefit corporation indirectly controlled by the Exchange
("OSCAP"). In July 1996, OSCAP was liquidated into the Exchange and SCPIE
Management Company and its subsidiaries became subsidiaries of the Exchange.
3
<PAGE> 11
SCPIE Holdings is a Delaware corporation which is a wholly owned subsidiary
of the Exchange. SCPIE Holdings has no historic operations and was organized in
February 1996, as part of the Exchange's plan to reorganize its corporate
structure. SCPIE Indemnity, a wholly owned subsidiary of SCPIE Holdings, is a
California stock insurance corporation that is licensed to write most property
and casualty insurance lines in the State of California. It has conducted no
business prior to the transaction contemplated herein in which the Exchange will
be merged into and become part of SCPIE Indemnity. SCPIE Holdings' principal
executive and business offices are located at 9441 West Olympic Boulevard,
Beverly Hills, California 90213-4015, and its telephone number is (310)
551-5900.
The following diagram summarizes the Company's structure after the Merger:
[DIAGRAM]
If the Initial Public Offering described below is consummated, the stockholders
of SCPIE Holdings will include purchasers of Common Stock in the Initial Public
Offering, in addition to the Eligible Members and SCPIE Indemnity.
THE SPECIAL MEETING
Time, Date and Place. The Special Meeting will be held on November 5, 1996,
at 3:00 p.m., Pacific time, at the Sheraton Grande Hotel, 333 South Figueroa
Street, Los Angeles, California 90071.
Record Date. Members of the Exchange on September 16, 1996 (the "Record
Date") will be entitled to notice of, and to vote at, the Special Meeting. Such
Members are defined herein as the "Eligible Members." Pursuant to the Merger
Agreement, the Record Date is the date that the Commissioner of the Department
of Insurance of the State of California (the "Insurance Commissioner") approved
the Merger Agreement for submission to the Exchange's members for approval (the
"Approval Date"). See "Information Concerning the Special Meeting -- Record
Date, Quorum and Vote Required."
Quorum. The presence, either in person or by proxy, of a majority of the
Eligible Members entitled to vote at the Special Meeting is necessary to
constitute a quorum.
Vote Required. The affirmative vote of two-thirds (66 2/3%) of all Eligible
Members is required to approve the Merger Agreement on behalf of the Exchange.
4
<PAGE> 12
On the Record Date, there were 11,054 Eligible Members. Each Eligible
Member is entitled to one vote at the Special Meeting.
ACTIONS TO BE TAKEN BY ELIGIBLE MEMBERS
This Proxy Statement/Prospectus is part of a package designed to enable
Eligible Members to understand and evaluate the Exchange's plan to merge with
SCPIE Indemnity. In addition to the Proxy Statement/Prospectus, this package
contains:
- a blue PROXY CARD (card 1) to be used to vote for or against the Merger
Agreement.
- a yellow TAXPAYER IDENTIFICATION CARD (card 2) which shows the Eligible
Member's social security number (or identification number), if known to
the Exchange, and which is required by the Internal Revenue Service (the
"Service").
- a green RECORD CARD (card 3) showing the estimated whole number of
Merger Shares that an Eligible Member is entitled to receive pursuant to
the Merger Agreement.
PLEASE CAREFULLY REVIEW ALL OF THE MATERIALS THE COMPANY HAS SENT. AFTER DOING
SO, PLEASE:
- Complete, date and sign the enclosed blue PROXY CARD (card 1).
- Fill out and sign the enclosed yellow TAXPAYER IDENTIFICATION CARD (card
2) by including the Eligible Member's taxpayer identification number
(for most individuals, the Eligible Member's taxpayer identification
number is the Eligible Member's social security number).
- Return the completed PROXY CARD and TAXPAYER IDENTIFICATION CARD to the
Exchange in the enclosed postage-paid envelope. THE PROXY CARD MUST BE
RECEIVED BY THE EXCHANGE NO LATER THAN 3:00 P.M., PACIFIC TIME, ON
NOVEMBER 5, 1996 (THE TIME OF THE SPECIAL MEETING). EACH ELIGIBLE MEMBER
HAS THE RIGHT TO APPEAR AT THE SPECIAL MEETING AND VOTE IN PERSON OR TO
GIVE THE ELIGIBLE MEMBER'S PROXY CARD TO ANOTHER PERSON.
IF ANY ELIGIBLE MEMBER HAS ANY QUESTIONS OR NEEDS HELP IN COMPLETING THE
PROXY CARD OR THE TAXPAYER IDENTIFICATION CARD, PLEASE CALL THE EXCHANGE'S
MERGER INFORMATION CENTER AT 1-800-953-2491 (TOLL FREE).
THE PLAN AND THE INITIAL PUBLIC OFFERING
The Merger is part of the Plan which includes the Initial Public Offering
and the consolidation of the Exchange and its affiliates under SCPIE Holdings.
See "The Merger" and "Comparison of Certain Rights of Members Before and After
the Merger."
The Merger is not conditioned upon completion of the Initial Public
Offering. The Merger will be consummated substantially concurrent with the
Initial Public Offering or on such earlier date as the Board of Governors, the
SCPIE Holdings Board of Directors (the "SCPIE Holdings Board") and the SCPIE
Indemnity Board of Directors (the "SCPIE Indemnity Board"), in their discretion,
shall determine. See "The Merger."
IF THE MERGER AGREEMENT IS NOT APPROVED, THE PLAN AS PRESENTLY
CONTEMPLATED, INCLUDING THE INITIAL PUBLIC OFFERING, WILL NOT PROCEED ON THE
BASIS DESCRIBED IN THIS PROXY STATEMENT/PROSPECTUS AND MAY BE ABANDONED.
ACCORDINGLY, A VOTE IN FAVOR OF THE MERGER AGREEMENT IS EFFECTIVELY A VOTE IN
FAVOR OF THE ENTIRE PLAN AND A VOTE AGAINST THE MERGER AGREEMENT IS EFFECTIVELY
A VOTE AGAINST THE ENTIRE PLAN.
THE MERGER
Background of the Merger. The Board of Governors determined that the
reorganization of the Exchange into a stock insurance company which is a wholly
owned subsidiary of a publicly held holding company would enable the Company to
obtain increased financial and structural flexibility and greater
5
<PAGE> 13
access to capital resources than are currently available to the Exchange as a
reciprocal insurer. See "The Merger."
Opinion of Financial Advisor. On June 23, 1995, the Exchange retained
Salomon Brothers Inc (the "Financial Advisor"), to assist it in the
investigation and possible execution of a reorganization of the Exchange from a
California reciprocal insurer to a stockholder-owned company or in some other
transaction involving the issuance of debt and/or equity securities in order to
secure and strengthen the Exchange's position and growth in the future.
On September 17, 1996, the Financial Advisor delivered a fairness opinion
with respect to the Merger. This opinion is subject to certain limitations and
assumptions stated therein. The Financial Advisor's written opinion, dated
September 17, 1996, is set forth fully as Annex II to this Proxy
Statement/Prospectus and should be read in its entirety. Any description of or
reference to the Financial Advisor's opinion is subject, and qualified in its
entirety by reference, to the full text of such opinion. See "The
Merger -- Opinion of Financial Advisor."
Recommendations of the Exchange's Board of Governors. The Board of
Governors has unanimously approved the Merger Agreement and recommends that
Eligible Members vote in favor of the proposal to approve the Merger Agreement.
The SCPIE Holdings Board and the SCPIE Indemnity Board, based upon the unanimous
approval of the Board of Governors, each has approved the Merger Agreement. In
making the determinations described above, the Board of Governors, among other
things, had access to the analysis and advice referred to in "The
Merger -- Background of the Merger" and relied on the advice of the Financial
Advisor regarding the fairness, from a financial point of view, of the aggregate
consideration to be paid in the Merger to the Eligible Members as a group.
Effective Time. On such date as the Board of Governors and the SCPIE
Holdings Board and the SCPIE Indemnity Board determine is appropriate after the
conditions to consummation of the Merger are satisfied or waived (see "The
Merger -- Conditions to Effectiveness of the Merger"), the Merger Agreement,
filed in accordance with the General Corporations Law of the State of California
(the "California Corporations Law") and the Insurance Law of the State of
California (the "California Insurance Law"), shall become effective (the
"Effective Time") in accordance with its terms. If the Board of Governors, the
SCPIE Indemnity Board and the SCPIE Holdings Board determine that the Initial
Public Offering will close substantially concurrent with the consummation of the
Merger, then the Effective Time will occur immediately prior to consummation of
the Initial Public Offering. It is currently contemplated that the Initial
Public Offering will be consummated in 1996. If the Merger has not been
consummated by December 31, 1996, the Merger Agreement shall, unless extended in
accordance with its terms, automatically terminate.
Accounting Treatment. The Merger and related transactions involve a
reorganization of entities under common control, and the assets and liabilities
transferred to effect the Merger and related transactions will be accounted for
at historical cost in a manner similar to that in pooling of interests
accounting. See "The Merger -- Additional Aspects of the Merger and the
Plan -- Accounting Treatment."
Regulatory Approvals. Except for the approval of the Merger Agreement by
the Insurance Commissioner, the filing of the Merger Agreement with the
Secretary of State of the State of California after approval and adoption of the
Merger Agreement pursuant to the California Insurance Law and the California
Corporations Law, and compliance with Federal and state securities laws, the
Company is not aware of any material United States Federal or state regulatory
requirements necessary to be complied with or approval that must be obtained in
connection with the Merger. See "Risk Factors -- Regulatory and Related
Matters."
Compensation to Directors and Officers. Except for the Merger Shares
allocated to members of the Board of Governors in their capacity as Eligible
Members of the Exchange, no compensation or other benefits will be paid to the
Board of Governors or officers of the Exchange in connection with the Merger.
See "Information Concerning the Special Meeting -- Interests of Members of the
Board of Governors in the Merger."
6
<PAGE> 14
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
ELIGIBLE MEMBERS SHOULD CAREFULLY REVIEW THE MORE DETAILED DISCUSSION UNDER
"CERTAIN FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER" AND ARE URGED TO CONSULT
THEIR PERSONAL TAX ADVISORS WITH RESPECT TO THE FEDERAL INCOME TAX IMPACT ON
THEM OF THE CONSUMMATION OF THE MERGER.
RISK FACTORS
Eligible Members should carefully consider the matters set forth herein
under "Risk Factors" commencing on page 9, as well as the other information
contained in this Proxy Statement/Prospectus.
7
<PAGE> 15
SUMMARY FINANCIAL AND OPERATING DATA
The following table sets forth selected combined financial data for the
Exchange and OSCAP. The selected combined income statement data set forth below
for each of the years in the three-year period ended December 31, 1995 and the
selected combined balance sheet data as of December 31, 1995 and 1994 are
derived from the combined financial statements audited by Ernst & Young LLP,
independent auditors, included elsewhere herein and should be read in
conjunction with, and are qualified by reference to such statements and the
related notes thereto. The selected combined income statement data for the years
ended December 31, 1992 and 1991 and for the six months ended June 30, 1996 and
1995 and the selected combined balance sheet data as of December 31, 1993, 1992
and 1991 and as of June 30, 1996 and 1995, are derived from unaudited combined
financial statements of the Exchange and OSCAP which management believes
incorporate all of the adjustments necessary for the fair presentation of the
financial condition and results of operations for such periods.
<TABLE>
<CAPTION>
AS OF OR FOR THE
SIX MONTHS
ENDED JUNE 30, AS OF OR FOR THE YEAR ENDED DECEMBER 31,
------------------- ----------------------------------------------------
1996 1995 1995 1994 1993 1992 1991
-------- -------- -------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
COMBINED INCOME STATEMENT DATA:
Direct premiums written................... $ 62,659 $ 62,216 $122,277 $120,024 $112,459 $107,126 $112,085
======== ======== ======== ======== ======== ======== ========
Premiums earned........................... $ 61,128 $ 59,453 $116,354 $111,659 $113,194 $112,122 $108,895
Net investment income..................... 20,939 20,032 40,424 39,663 39,738 44,044 47,091
Realized investment gains and other
revenue................................. 11,620 4,801 8,231 755 16,254 18,950 11,946
-------- -------- -------- -------- -------- -------- --------
Total revenues.................... 93,687 84,286 165,009 152,077 169,186 175,116 167,932
-------- -------- -------- -------- -------- -------- --------
Losses and loss adjustment expenses....... 58,247 57,533 118,023 108,720 125,354 135,959 124,280
Other operating expenses.................. 6,764 6,270 12,561 11,844 9,734 8,520 8,394
-------- -------- -------- -------- -------- -------- --------
Total expenses.................... 65,011 63,803 130,584 120,564 135,088 144,479 132,674
-------- -------- -------- -------- -------- -------- --------
Income before policyholder dividends and
Federal income taxes.................... 28,676 20,483 34,425 31,513 34,098 30,637 35,258
Policyholder dividends(1)................. 9,000 0 0 0 0 2,366 31,726
Federal income taxes (benefit)............ 5,599 6,167 10,056 9,212 8,618 7,899 (1,375)
-------- -------- -------- -------- -------- -------- --------
Net income........................ $ 14,077 $ 14,316 $ 24,369 $ 22,301 $ 25,480 $ 20,372 $ 4,907
======== ======== ======== ======== ======== ======== ========
COMBINED BALANCE SHEET DATA:
Total investments(2)...................... $685,562 $674,564 $695,021 $636,909 $679,257 $629,289 $592,192
Total assets.............................. 786,620 763,052 781,358 751,605 775,667 722,563 694,347
Total liabilities......................... 521,798 510,192 507,539 542,069 548,268 540,920 534,294
Equity(2)................................. 264,822 252,860 273,819 209,536 227,399 181,643 160,053
ADDITIONAL DATA:
Earnings per share(3)..................... $ 1.41 $ 1.43 $ 2.44 $ 2.23 $ 2.55 $ 2.04 $ 0.49
Book value per share(3)................... 26.48 25.29 27.38 20.95 22.74 18.16 16.01
GAAP ratios:
Loss ratio.............................. 95.3% 96.8% 101.4% 97.4% 110.7% 121.3% 114.1%
Expense ratio........................... 11.1 10.5 10.8 10.6 8.6 7.6 7.7
Combined ratio.......................... 106.4 107.3 112.2 108.0 119.3 128.9 121.8
Statutory combined ratio.................. 106.8 108.0 112.8 108.2 120.2 129.6 122.6
Statutory surplus......................... $246,555 $208,742 $235,352 $187,299 $171,589 $154,675 $146,765
</TABLE>
- - ---------------
(1) Includes $31.0 million of Proposition 103 refunds in 1991. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- General." In the second quarter of 1996, the Company estimated
an additional $9.0 million of policyholder dividends would be paid due to
favorable loss experience related to policy years 1987 through 1992. This
$9.0 million policyholder dividend will be paid to Members in the form of
premium credits in 1997. Except for this final dividend, after the Merger,
the Company will cease paying such dividends to its policyholders.
(2) Due to the adoption of Statement of Financial Accounting Standards No. 115,
"Accounting for Certain Investments in Debt and Equity Securities," on
December 31, 1993, total investments and equity were adjusted to reflect
changes in market values. This change resulted in a decrease to total
investments of $5.2 million, an increase of $10.8 million, an increase of
$24.0 million, a decrease of $28.8 million and an increase of $30.1 million
as of June 30, 1996 and 1995 and as of December 31, 1995, 1994 and 1993,
respectively, and which resulted in a decrease to equity of $3.4 million, an
increase of $7.0 million, an increase of $15.6 million, a decrease of $18.7
million and an increase of $19.6 million as of June 30, 1996 and 1995 and as
of December 31, 1995, 1994 and 1993, respectively.
(3) Gives effect in all periods to the issuance of approximately 10,000,000
shares of Common Stock to Eligible Members. Does not give effect to the sale
of Common Stock in the Initial Public Offering. The 500,000 shares of Common
Stock issued to SCPIE Indemnity are not considered outstanding for purposes
of determining the per share amounts.
8
<PAGE> 16
RISK FACTORS
In considering the matters set forth in this Proxy Statement/Prospectus,
Eligible Members should carefully consider, among other things, the significant
factors described below and under "Comparison of Certain Rights of Members
Before and After the Merger" that may adversely affect Eligible Members if the
Merger Agreement is approved or that may generally adversely affect the value of
an investment in Common Stock.
Certain statements in this Proxy Statement/Prospectus that are not
historical fact constitute "forward-looking statements" within the meaning of
the Private Securities Litigation Reform Act of 1995. Such forward-looking
statements involve known and unknown risks, uncertainties and other factors
which may cause the actual results of the Company to be materially different
from historical results or from any results expressed or implied by such
forward-looking statements. Such risks, uncertainties and other factors include,
but are not limited to, the following risks:
CONCENTRATION OF BUSINESS
Substantially all of the Company's premiums written are generated from
medical malpractice insurance policies issued to physicians and medical groups.
As a result, negative developments in the economic, competitive or regulatory
conditions affecting the medical malpractice insurance industry, particularly as
such developments might affect medical malpractice insurance for physicians,
could have a material adverse effect on the Company's results of operations.
Substantially all of the Company's direct premiums written are generated in
Southern California. The revenues and profitability of the Company are therefore
subject to prevailing regulatory, economic and other conditions in Southern
California. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Results of Operations."
The Company's strategy includes expanding and diversifying its insurance
products and geographic operations. There can be no assurance that the Company
will be successful in implementing this strategy. See "-- Entry into New
Markets."
INDUSTRY FACTORS
Many factors influence the financial results of the medical malpractice
insurance industry, several of which are beyond the control of the Company.
These factors include, among other things: changes in severity and frequency of
claims; changes in applicable law and regulatory reform; changes in judicial
attitudes toward liability claims; and changes in inflation, interest rates and
general economic conditions.
The availability of medical malpractice insurance, or the industry's
underwriting capacity, is determined principally by the industry's level of
capitalization, historical underwriting results, returns on investment and
perceived premium rate adequacy. Historically, the financial performance of the
medical malpractice industry has tended to fluctuate in cyclical patterns
characterized by periods of greater competition in pricing and underwriting
terms and conditions (a "soft insurance market") followed by periods of capital
shortage and lesser competition (a "hard insurance market"). In a soft insurance
market, competitive conditions could result in premium rates and underwriting
terms and conditions which may be below profitable levels. For a number of
years, the medical malpractice insurance industry in California has faced a soft
insurance market. There can be no assurance as to whether or when industry
conditions will improve or the extent to which any improvement in industry
conditions may improve the Company's results of operations.
COMPETITION
The Company competes with numerous insurance companies in the California
market. The Company's principal competitors for physicians and medical groups
consist of three physician-owned mutual or reciprocal insurance companies,
several commercial companies and a physicians' mutual protection trust, which
levies assessments primarily on a "claims paid" basis. In addition, commercial
insurance
9
<PAGE> 17
companies such as Farmers Group, Inc. and MMI Companies, Inc. compete for the
medical malpractice insurance business of larger medical groups, hospitals and
other healthcare providers. Several of these competitors have greater financial
resources than the Company. In the last several years, the Company has increased
premium rates, while its competitors have maintained their rates or instituted
smaller increases. The Company has lost some of its policyholders, in part due
to these rate increases, but has realized a modest increase in its premium
volume and improved its underwriting results. See "Management's Discussion and
Analysis of Financial Condition and Results of
Operations -- General -- Competitive Environment" and "Business -- Rates and
Dividends." In addition to pricing, competitive factors include dividend policy,
financial stability, breadth and flexibility of coverage and the quality and
level of services provided. The Company paid dividends to its Members of $9.5
million, $11.2 million and $18.6 million in 1995, 1994 and 1993, respectively,
in the form of premium credits. Such dividends were paid primarily to insureds
who were Members of the Exchange in 1990 and prior policy years and were based
primarily on underwriting results in such years. The Board of Governors has
declared a final dividend to its Members of $9.0 million which will be paid in
the form of premium credits in 1997. Except for this final dividend, after the
Merger, the Company will cease paying such premium credit dividends to its
policyholders. Therefore, the Company may find it more difficult to compete with
other insurance companies offering such dividends. The competitive environment
could also result in lower premium rates and fees, reduced profitability and
loss of market share. As the Company expands into new product lines and new
geographic markets, it will need to compete with established companies in such
markets, many of which will have existing relationships with the doctors and
medical groups that the Company will be seeking to insure. See
"Business -- Competition"
LOSS AND LAE RESERVES
The reserves for losses and loss adjustment expenses ("LAE") established by
the Company are estimates of amounts needed to pay reported and unreported
claims and related LAE. The estimates are based on assumptions related to the
ultimate cost of settling such claims based on facts and interpretation of
circumstances then known, predictions of future events, estimates of future
trends in claims frequency and severity and judicial theories of liability,
legislative activity and other factors. However, establishment of appropriate
reserves is an inherently uncertain process involving estimates of future losses
and there can be no assurance that currently established reserves will prove
adequate in light of subsequent actual experience. The inherent uncertainty is
greater for certain types of insurance, such as medical malpractice, where a
longer period may elapse before a definite determination of ultimate liability
is made, and where the judicial, political and regulatory climates are changing.
Medical malpractice claims and expenses may be paid over a period of ten or more
years, which is longer than most property and casualty claims. Trends in losses
on long-tail lines of business such as medical malpractice may be slow to appear
and, accordingly, the Company's reaction in terms of modifying underwriting
practices and changing premium rates may lag underlying loss trends. In
addition, emerging changes in the practice of medicine, such as the emergence of
new, larger medical groups that do not have an established claims history and
additional claims resulting from restrictions on treatment by managed care
organizations, may require the Company to adjust its underwriting and reserving
practices. See "-- Changes in Healthcare." While the Company believes that its
reserves for losses and LAE are adequate, there can be no assurance that the
Company's ultimate losses and LAE will not deviate, perhaps substantially, from
the estimates reflected in the Company's financial statements. If the Company's
reserves should prove inadequate, the Company will be required to increase
reserves, which could have a material adverse effect on the Company's financial
condition or results of operations.
The Company believes it has been conservative in the establishing loss and
LAE reserves. In recent years, the Company has revised estimates of loss
severity and determined that certain of its reserves were redundant. Redundant
reserves, which have been released in every year since 1985, have contributed
significantly to reported earnings in 1995, 1994 and 1993. The Company reduced
reserves for prior years by $57.8 million, $60.4 million and $43.4 million in
the years ending December 31, 1995, 1994 and 1993, respectively, and by $27.9
million for the six months ended June 30, 1996. See Note 3 of Notes to Combined
Financial Statements. The Company cannot predict whether similar redundancies
will
10
<PAGE> 18
be experienced in future years. The Company continues to establish its loss and
LAE reserves at what it believes is the upper end of a reasonable range of
reserve estimates, but there is no assurance that such reserves will ultimately
prove to be redundant. If reserves ultimately prove to be redundant, then the
redundant amount will become income in the period such amount is released from
reserves and will be included in stockholders' equity. If such redundancies do
not occur or loss and LAE experience does not improve, the Company's net income
could be significantly reduced or a net loss could occur. To the extent that
reserves prove to be inadequate in the future, the Company would have to
increase such reserves and incur a charge to earnings in the period that such
reserves are increased, which could have a material adverse effect on the
Company's results of operations and financial condition. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- General -- Loss and LAE Reserves" and "-- Results of Operations"
and "Business -- Loss Reserves."
CHANGES IN HEALTHCARE
Significant attention has recently been focused on reforming the healthcare
system at both the Federal and state levels. A broad range of healthcare reform
measures have been suggested, and public discussion of such measures will likely
continue in the future. Proposals have included, among others, spending limits,
price controls, limits on increases in insurance premiums, limits on the
liability of doctors and hospitals for tort claims and changes in the healthcare
insurance system. The Company cannot predict which, if any, reform proposals
will be adopted, when they may be adopted or what impact they may have on the
Company. While some of these proposals could be beneficial to the Company, the
adoption of others could have a material adverse effect on the Company's
financial condition or results of operations.
In addition to regulatory and legislative efforts, there have been
significant market driven changes in the healthcare environment. In recent
years, a number of factors related to the emergence of "managed care" have
negatively impacted or threatened to impact the medical practice and economic
independence of physicians. Physicians have found it more difficult to conduct a
traditional fee for service practice and many have been driven to join or
contractually affiliate with managed care organizations, healthcare delivery
systems or practice management organizations. This consolidation could result in
the elimination or significant decrease in the role of the physician and the
medical group from the medical professional liability purchasing decision. In
addition, this consolidation could reduce primary medical malpractice insurance
premiums paid by healthcare systems, as larger healthcare systems generally
retain more risk by accepting higher deductibles and self-insured retentions or
form their own captive insurance companies.
ENTRY INTO NEW MARKETS
The Company's strategy is to expand and diversify its products and
operations to meet the insurance needs of large healthcare organizations, while
maintaining its traditional personalized service for physicians and medical
groups, both large and small. SCPIE has recently introduced policies providing
hospital professional liability, managed care organization errors and omissions
and directors and officers liability insurance for healthcare organizations.
SCPIE has also participated in recent years as a reinsurer in the excess medical
professional liability market. There is no assurance, however, that this
diversification will be successful.
Another aspect of the Company's strategy is to expand its market by
offering a variety of healthcare related liability insurance products to
hospitals, large medical groups and managed care and other healthcare systems
outside California. After the Merger, the Company will be licensed to write
liability insurance only in California. In March 1996, SCPIE Holdings acquired
two inactive insurance companies, one of which is licensed in 44 states plus the
District of Columbia and the other of which is licensed in one state. The
licenses will have to be modified in a number of states and certain rate filings
will need to be made to permit the writing of medical malpractice insurance. The
Company could encounter delays in meeting such regulatory requirements, and
plans to market certain of its policies through licensed "fronting" insurers
under arrangements whereby the Company would reinsure all or substantially all
of the policy risks under the policies. There is no assurance that such
arrangements can be successfully implemented.
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In August 1995, SCPIE entered into a marketing agreement with SKA, a
leading healthcare insurance broker in the Western United States. Under the
agreement, SKA has the exclusive right to market SCPIE's malpractice coverage
for hospitals in all states, and SCPIE recognizes SKA as the exclusive broker
for medical group coverage in all states other than California. The agreement
with SKA has been renewed until October 1997 and will continue to renew on an
annual basis unless terminated by either party on 90 days' notice. SKA has
offices in the states of California, Arizona, Florida, Hawaii, Illinois,
Maryland, Oregon, Tennessee, Texas and Washington. SKA has historically offered
competing programs, including a well-established hospital professional liability
insurance program for a large insurance group which involved approximately 600
healthcare entities and which generated more than $80.0 million of malpractice
insurance premiums in 1995. Following the recent termination by the insurance
group of this relationship, SKA and SCPIE are actively working to obtain all or
a significant portion of this business for SCPIE. SKA and the insurance group
are currently engaged in litigation in the California state court regarding
rights to certain insurance information and the ability to solicit professional
liability insurance from hospitals and medical groups currently insured by the
insurance group through SKA. On September 13, 1996, the court entered a
preliminary injunction placing some restrictions on the ability of the insurance
group to solicit renewals of these policies and ordering certain information
returned to SKA. SCPIE has entered into a financing transaction with SKA under
which SCPIE has loaned $5.0 million to SKA, which SKA has used to post a bond as
security for the preliminary injunction. The Company does not know what effect,
if any, this litigation or the termination of the current relationship will have
on its efforts to obtain the business currently underwritten by the insurance
group. There is no assurance that SCPIE will obtain any of such business or that
any business written pursuant to its arrangements with SKA will ultimately be
profitable for the Company. Through June 30, 1996, the Company had issued one
policy through SKA. If SKA is not successful in marketing SCPIE's products to
hospitals in California or to hospitals and medical groups in other states, or
if the SKA arrangement is not renewed, SCPIE may have difficulty in directly
marketing its own products in other states or developing an alternative
marketing relationship.
PHYSICIAN AND MEDICAL ASSOCIATION RELATIONSHIPS
The Exchange was organized in 1976 by physicians, received the exclusive
endorsement and active support of a number of local county medical associations
in building its physician and medical group policyholder base and, as a
reciprocal insurance company, has been wholly owned and governed by its members.
The Exchange has relied on its relationship with physicians and medical
associations in marketing its policies in competition with commercial insurance
companies and other physician-owned companies. The Company will endeavor to
maintain its medical association endorsements and to continue its close
relationship with physicians and medical groups through personalized service.
There can be no assurance that the Company will be able to maintain these
relationships.
The members of the Exchange currently have the power to elect all members
of the Board of Governors and otherwise exercise ultimate control over the
Exchange. After the Merger, the voting power of such members will be diluted and
they may have less influence and control over the management and affairs of the
Company. Although immediately following the Merger all nine physician members of
the Exchange's Board of Governors will constitute more than a majority of the
directors of the Company, there is no assurance that this control will continue
for any period of time. See "Management -- Directors and Executive Officers."
IMPORTANCE OF RATINGS
Ratings have become an increasingly important factor in establishing the
competitive position of insurance companies. SCPIE is rated "A (Excellent)" by
A.M. Best, the third highest rating of 13 ratings assigned to solvent insurance
companies, which currently range from "A++ (Superior)" to "D (Very Vulnerable)."
A.M. Best's ratings reflect its opinion of an insurance company's financial
strength, operating performance and ability to meet its obligations to
policyholders and are not evaluations directed to purchasers of an insurance
company's securities. In June 1996, A.M. Best reduced the Company's
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rating from "A+ (Superior)," citing significant uncertainty in the medical
malpractice marketplace, caused, in part, by evolving managed care issues, the
Company's narrow product line and geographic concentration, and intense
competition and weakening premium rates in the medical malpractice industry.
A.M. Best similarly reduced the ratings of three other medical malpractice
insurance companies domiciled in California. The Company's ability to maintain
or improve its rating by A.M. Best may depend on its ability to implement
successfully its business strategy. See "Business -- A.M. Best Rating." If
SCPIE's rating is materially reduced from its current level by A.M. Best, the
Company's results of operations could be adversely affected. The Insurance
Subsidiaries have entered into a reinsurance pooling arrangement and each of the
Insurance Subsidiaries has been assigned the same "pooled" "A (Excellent)" A.M.
Best rating based on their consolidated performance.
REINSURANCE
The amount and cost of reinsurance available to companies specializing in
medical professional liability insurance are subject, in large part, to
prevailing market conditions beyond the control of the Company. The Company's
ability to provide professional liability insurance at competitive premium rates
and coverage limits on a continuing basis will depend in part upon its ability
to secure adequate reinsurance in amounts and at rates that are commercially
reasonable. Although the Company anticipates that it will continue to be able to
obtain such reinsurance, there can be no assurance that this will be the case.
Further, the Company is subject to a credit risk with respect to its reinsurers
because reinsurance does not relieve the Company of liability to its insureds
for the risks ceded to reinsurers. Although the Company places its reinsurance
with reinsurers it believes to be financially stable, a significant reinsurer's
inability to make payment under the terms of a reinsurance treaty could have a
material adverse effect on the Company. See "Business -- Reinsurance."
HOLDING COMPANY STRUCTURE; LIMITATION ON DIVIDENDS
Following the Effective Date, SCPIE Holdings will be an insurance holding
company whose assets will consist of all of the outstanding capital stock of the
Insurance Subsidiaries and, following the Initial Public Offering, will include
a portion of the net proceeds of the Initial Public Offering, if any. As an
insurance holding company, SCPIE Holdings' ability to meet its obligations and
to pay dividends, if any, may depend upon the receipt of sufficient funds from
its subsidiaries. The payment of dividends to SCPIE Holdings by the Insurance
Subsidiaries is subject to general limitations imposed by applicable insurance
laws. See "Business -- Regulation -- Regulation of Dividends from Insurance
Subsidiaries."
ANTI-TAKEOVER PROVISIONS
SCPIE Holdings' amended and restated certificate of incorporation (the
"Restated Certificate") and amended and restated bylaws (the "Bylaws") include
provisions that may be deemed to have anti-takeover effects and may delay, defer
or prevent a takeover attempt that stockholders may consider to be in their best
interests. These provisions include: a Board of Directors consisting of three
classes; authorization to issue up to 5,000,000 shares of preferred stock, par
value $1.00 per share (the "Preferred Stock"), in one or more series with such
rights, obligations, powers and preferences as the SCPIE Holdings Board may
provide; a limitation which permits only the SCPIE Holdings Board or the
Chairman or the President of SCPIE Holdings to call a special meeting of
stockholders; a prohibition against stockholders acting by written consent;
provisions which provide that directors may be removed only for cause and only
by the affirmative vote of holders of two-thirds (66 2/3%) of the outstanding
shares of voting securities; provisions which provide that the SCPIE Holdings
Board may increase the size of the board and may fill vacancies and newly
created directorships; and certain advance notice procedures for nominating
candidates for election to the SCPIE Holdings Board and for proposing business
before a meeting of stockholders. In addition, California law prohibits a person
from acquiring control of SCPIE Holdings without the prior approval of the
Insurance Commissioner. The Company will also be subject to insurance holding
company laws in other states that contain similar regulatory approval
requirements.
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See "Management" and "Description of Capital Stock -- Delaware Law and Certain
Charter and Bylaw Provisions."
REGULATORY AND RELATED MATTERS
Insurance companies are subject to supervision and regulation by the state
insurance authority in each state in which they transact business. Such
supervision and regulation relate to numerous aspects of an insurance company's
business and financial condition, including limitations on lines of business,
underwriting limitations, the setting of premium rates, the establishment of
standards of solvency, statutory surplus requirements, the licensing of insurers
and agents, concentration of investments, levels of reserves, the payment of
dividends, transactions with affiliates, changes of control and the approval of
policy forms. Such regulation is concerned primarily with the protection of
policyholders' interests rather than stockholders' interests. See
"Business -- Regulation."
State regulatory oversight and various proposals at the Federal level may
in the future adversely affect the Company's results of operations. In recent
years, the state insurance regulatory framework has come under increased Federal
scrutiny, and certain state legislatures have considered or enacted laws that
alter and, in many cases, increase state authority to regulate insurance
companies and insurance holding company systems. Further, the National
Association of Insurance Commissioners (the "NAIC") and state insurance
regulators are reexamining existing laws and regulations, which in many states
has resulted in the adoption of certain laws that specifically focus on
insurance company investments, issues relating to the solvency of insurance
companies, risk-based capital ("RBC") guidelines, interpretations of existing
laws, the development of new laws and the definition of extraordinary dividends.
See "Business -- Regulation -- Regulation of Dividends from Insurance
Subsidiaries," "-- Risk-Based Capital" and "-- Regulation of Investments."
SHARES ELIGIBLE FOR FUTURE SALE
Approximately 12,000,000 of the 12,500,000 shares of Common Stock,
including the 10,000,000 shares of Common Stock issued to Eligible Members as
Merger Shares (less fractional shares, which will be paid in cash) and
approximately 2,000,000 shares of Common Stock sold to the public in the Initial
Public Offering, will be eligible for immediate sale in the public market. No
prediction can be made as to the effect, if any, that future sales of shares, or
the availability of shares for future sale, will have on the market price of the
Common Stock prevailing from time to time. Sales of substantial amounts of such
shares of Common Stock in the public market following effectiveness of the
Merger and the Initial Public Offering or the perception that such sales could
occur could adversely affect the market price of the Common Stock and could
impair the Company's future ability to raise capital through an offering of its
equity securities.
LACK OF PRIOR PUBLIC MARKET FOR COMMON STOCK AND POSSIBLE VOLATILITY OF STOCK
PRICE; NO INITIAL PUBLIC OFFERING
Prior to the Merger, there has been no public market for the Common Stock
and there can be no assurance that an active trading market will develop or be
sustained, or that shares of Common Stock will be able to be resold at or above
the offering price in the Initial Public Offering, if such Initial Public
Offering occurs. The Common Stock has been approved for listing, subject to
official notice of issuance, on the New York Stock Exchange. The Initial Stock
Price for the Common Stock to be sold by the Company will be determined by
agreement between the Company and the underwriters of the Initial Public
Offering, and may bear no relationship to the price at which the Common Stock
will trade after completion of the Initial Public Offering.
Completion of the Initial Public Offering is not a condition to
consummation of the Merger. If the Merger is consummated and the Initial Public
Offering does not occur, the shares of Common Stock distributed to Eligible
Members are expected to be listed on the New York Stock Exchange; however, in
the absence of the Initial Public Offering, there can be no assurance that
either an active or an orderly
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trading market for the Common Stock will develop. The absence of an active and
orderly trading market could have an adverse effect on the market price of the
Common Stock subsequent to the Merger. See "Market for Common Stock."
INFORMATION CONCERNING THE SPECIAL MEETING
This Proxy Statement/Prospectus is furnished in connection with the
solicitation by the Board of Governors of proxies in the accompanying form to be
used at the Special Meeting and any adjournment or postponement thereof.
TIME, DATE AND PLACE
The Special Meeting will be held on November 5, 1996, at 3:00 p.m., Pacific
time, at the Sheraton Grande Hotel, 333 South Figueroa Street, Los Angeles,
California 90071. At the Special Meeting, including any adjournment or
postponement thereof to the next business day, all Eligible Members will
consider and vote upon a proposal to approve and adopt the Merger Agreement.
RECORD DATE, QUORUM AND VOTE REQUIRED
Eligible Members will be entitled to notice of, and to vote at, the Special
Meeting. Pursuant to the Merger Agreement, the Record Date for the Special
Meeting is September 16, 1996, the date that the Insurance Commissioner approved
the Merger Agreement for submission to the Exchange's Members for approval (the
"Approval Date"). The presence, either in person or by proxy, of a majority of
the Eligible Members entitled to vote at the Special Meeting is necessary to
constitute a quorum. The affirmative vote of not less than two-thirds (66 2/3%)
of all Eligible Members is required to approve the Merger Agreement on behalf of
the Exchange. The SCPIE Holdings Board and the SCPIE Indemnity Board, based upon
the unanimous approval of the Board of Governors, each approved the Merger
Agreement on March 21, 1996, and August 8, 1996.
On the Record Date, there were 11,054 Eligible Members. Each Eligible
Member is entitled to one vote at the Special Meeting regardless of the size of
the Policy owned or held by the Eligible Member.
RECOMMENDATION OF THE BOARD OF GOVERNORS
The Board of Governors has unanimously approved the Merger Agreement and
recommends that Eligible Members vote in favor of the proposal to approve such
Merger Agreement. In making the determination described above, the Board of
Governors, among other things, had access to the analysis and advice referred to
in "The Merger -- Background of the Merger" and relied on the fairness opinion
of the Financial Advisor with respect to the Merger. The Board of Governors also
considered, among other things, the proposed terms and conditions of the Merger,
its fiduciary responsibilities, possible alternative transactions, and
information with respect to the financial condition, assets, liabilities,
businesses, results of operations and prospects of the Exchange on a historical,
prospective and current value basis.
The Board of Governors believes that the Merger is in the best interest of,
and is fair to, the Members. ACCORDINGLY, THE BOARD OF GOVERNORS HAS UNANIMOUSLY
APPROVED THE MERGER AGREEMENT AND UNANIMOUSLY RECOMMENDS THAT MEMBERS VOTE IN
FAVOR OF THE PROPOSAL TO APPROVE THE MERGER AGREEMENT.
INTERESTS OF MEMBERS OF THE BOARD OF GOVERNORS IN THE MERGER
Pursuant to the Exchange's Bylaws, members of the Board of Governors must
be Members of the Exchange in order to serve on the Board of Governors.
Accordingly, each member of the Board of Governors is an Eligible Member who
will be entitled to vote upon the Merger Agreement and to receive Merger Shares.
The estimated number of Merger Shares to be allocated to members of the Board of
Governors is set forth under "Ownership of Common Stock." Such Merger Shares
will be allocated to members of the Board of Governors solely in their capacity
as Eligible Members and no additional shares
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of Common Stock will be allocated in the Merger to members of the Board of
Governors or to management.
PROXIES
Each Eligible Member entitled to vote at the Special Meeting will be
entitled to one vote in connection with the approval of the Merger Agreement as
well as any other matter which may properly come before the Special Meeting.
Eligible Members entitled to vote at the Special Meeting which are represented
by properly executed proxies, will, unless such proxies have been revoked, be
voted in accordance with the instructions indicated on such proxies. If no
contrary instructions are indicated, such Eligible Member entitled to vote at
the Special Meeting represented by properly executed proxy will be voted in
favor of approval of the Merger Agreement and, in the discretion of the proxy
holder, as to any other matter which may properly come before the Special
Meeting and as to which such Eligible Member is entitled to vote. An Eligible
Member who has given a proxy may revoke it at any time prior to its exercise at
such meeting by delivering to the Exchange an instrument of revocation or a duly
executed proxy bearing a later date or by attending the Special Meeting and
voting in person.
PROXY SOLICITATION
The Exchange will bear the cost of soliciting proxies to its Members. In
addition to solicitation by mail, proxies may be solicited by the directors,
officers and certain employees of the Exchange, who will not be specifically
compensated for such services, by personal interview, telephone or other
telecommunication. In addition, the Exchange has retained ChaseMellon
Shareholder Services, L.L.C. to assist in soliciting proxies for the Special
Meeting at a fee of approximately $32,000 plus out-of-pocket expenses.
THE MERGER
Eligible Members who have questions regarding the Merger or who need help
with any of the accompanying materials may call the Exchange's Merger
Information Center at 1-800-953-2491 (toll-free).
Persons wishing to comment to the Department of Insurance of the State of
California (the "California Department") regarding the Merger may write to:
Department of Insurance, 45 Fremont Street, 24th Floor, San Francisco,
California 94105, Attn: James Holmes, Esq., or may send comments to the
California Department via facsimile at (415) 904-5729, Attn: James Holmes, Esq.
Such comments will be lodged in the California Department's public application
file unless confidential treatment is requested.
INTRODUCTION
This general information section describes certain aspects of the Merger
Agreement and the proposed Merger. A copy of the Merger Agreement is included in
this Proxy Statement/Prospectus as Annex I. This Proxy Statement/Prospectus
contains information about the Company and its business, including financial
statements, certain considerations relevant to the ownership of Common Stock and
additional information about the Merger and other matters. Members are urged to
read this Proxy Statement/Prospectus in its entirety.
Overview of the Merger. The Board of Governors approved the Merger on March
21, 1996 and on August 8, 1996. If the Merger Agreement is approved, the
Exchange will merge into a stock insurance company. See "Summary -- Purpose of
the Merger" and "-- History; Structure of the Merger Transactions." The
principal purpose of the Merger is to enable the Company to obtain increased
financial and structural flexibility and greater access to capital resources
than are currently available to the Exchange as a reciprocal insurer to help
position it for long-term growth. Pursuant to the Merger Agreement, the Exchange
will merge with and into SCPIE Indemnity. As a result of the Merger, SCPIE
Indemnity would be the surviving corporation, membership rights in the Exchange
would be extinguished and Eligible
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Members would be entitled to receive shares of Common Stock. See "Comparison of
Certain Rights of Members Before and After the Merger." The Merger will not
affect any Eligible Member's policy coverage, premium, or premium credit
dividends for 1996 or 1997. After the Merger, SCPIE Indemnity would remain a
wholly owned subsidiary of SCPIE Holdings, and SCPIE Indemnity will have access
to capital markets through SCPIE Holdings.
If the conditions to the Merger are met, the Effective Date of the Merger
Agreement is expected to occur during 1996. For further details about these
conditions, see "-- Conditions to Effectiveness of the Merger."
BACKGROUND OF THE MERGER
As a result of intense competition in the medical malpractice industry in
the late 1980s premium rates fell. In the 1990s, premium rates have remained at
low levels, while the severity of claims has continued to increase. The Company
believes that these market conditions favor larger, well-capitalized companies
with multi-state operations and broad distribution systems that offer a variety
of products and that companies with one state and one line of business
operations will be the most negatively affected. In light of this competitive
environment, on June 23, 1995, the Exchange engaged the Financial Advisor to
serve as its financial advisor in the investigation and possible execution of a
reorganization of the Exchange from a California reciprocal insurer to a
stockholder-owned company or in some other transaction involving the issuance of
debt and/or equity securities in order to secure and strengthen the Exchange's
market position and growth in the future. No decision was made by the Exchange
with respect to converting the Exchange into a stockholder-owned company or to
participate in any other transaction involving the issuance of debt and/or
equity securities, but it engaged the Financial Advisor in order to explore the
capital raising alternatives available to the Exchange.
At a meeting of the Board of Governors on September 14, 1995, the Financial
Advisor reviewed in detail with the Board of Governors several capital raising
alternatives for the Exchange. The purpose of the Financial Advisor's report was
to analyze the financial position and operations of the Exchange and alternative
sources for raising capital for a reciprocal insurance company, including a
feasibility and preliminary evaluation analysis of a public securities offering
by the Exchange in the event it is restructured and reorganized as a stock
corporation. The Financial Advisor discussed the following matters with the
Board of Governors: (i) trends in the insurance industry, including the
acquisitions and pending acquisitions of smaller malpractice insurance companies
by publicly held insurers; (ii) projections of operating income for the
Exchange, including the effect of projected reductions in prior years' reserve
estimates; (iii) capital raising alternatives available to reciprocal insurance
companies, including financial reinsurance, the sale of surplus note securities,
the long-term utilization of a downstream holding company and the conversion to
a corporate structure; and (iv) constraints inherent in a single state, single
line of business insurance company.
The Financial Advisor emphasized the need for financial flexibility to
effect strategic initiatives, even though additional capital is not an immediate
need of the Exchange. The Financial Advisor also presented an analysis of the
feasibility of a public stock offering if the Exchange reorganized to a
corporate form, and the Financial Advisor presented different scenarios and the
potential for dilution of the Members' ownership of the Exchange under these
scenarios, including a discussion of both primary and secondary offering
components. The Financial Advisor's conclusion was that it is feasible for the
Exchange to access the public markets and to proceed as a publicly held
corporate insurer. The Financial Advisor also expressed its view that a holding
company structure (under which the Exchange would become a wholly owned
subsidiary of a publicly held holding company) would be ideal, but that if this
structure is not legally possible at the outset, the Exchange could nevertheless
operate as a publicly held insurance company.
The Board of Governors asked questions throughout the presentation and then
discussed various issues related to conversion to a publicly held stock company,
including different methods of valuing the respective interests of the Members
and the appropriate corporate structure. Based on the Board of
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Governors' conclusions that it is in the best interest of the Exchange and its
Members that the Board of Governors consider a plan of reorganization of the
Exchange to a stock corporation, the Board of Governors instructed management,
in conjunction with the Exchange's professional advisors, to develop and prepare
a detailed plan of reorganization for the Exchange, pursuant to which the
Exchange, by merger or otherwise, would become a stock corporation, and to
present the plan of corporate reorganization to the Board of Governors for its
consideration at a future meeting. The Board of Governors directed management to
include in the plan of corporate reorganization a detailed analysis and
evaluation of the method of converting the Members' membership interests in the
Exchange to interests in the stock corporation.
Following the September 14, 1995 meeting, numerous drafts of the proposed
Plan were created and exchanged between the Exchange, its attorneys and the
Financial Advisor. Representatives of the Company's management, the Financial
Advisor, and legal counsel to the Company and to the Financial Advisor held
several meetings with the Insurance Commissioner's staff to discuss the
development of the Plan. Meetings were held with the members of the Insurance
Commissioner's legal division on December 1, 1995, with members of the Insurance
Commissioner's financial services division on January 4, 1996, and with members
of both the legal and financial services divisions on January 24, 1996. On March
21, 1996, the Board of Governors met with management, legal counsel and the
Financial Advisor to consider the Plan and the Merger Agreement. The Financial
Advisor advised the Board of Governors that, based upon current market
conditions, the Financial Advisor's due diligence and the current structure of
the Merger, the Financial Advisor was not aware of any reason that it would not
be able to render a fairness opinion with respect to the Merger at the date of
the proxy statement. See "-- Opinion of Financial Advisor." After discussion of
the proposed Merger and the verbal advice of the Financial Advisor referred to
above, the Board of Governors unanimously determined the Merger to be fair to
and in the best interest of the Exchange and its Members and recommended that
Eligible Members vote to approve the Merger Agreement. On such date, the Board
of Governors, the SCPIE Holdings Board and the SCPIE Indemnity Board executed
and delivered the Merger Agreement. On August 8, 1996, the Board of Governors
amended the Plan and the Merger Agreement. The Financial Advisor subsequently
delivered to the Board of Governors its opinion, dated September 17, 1996.
HISTORY; STRUCTURE OF THE MERGER TRANSACTIONS
The Exchange is a California reciprocal insurer organized in 1976 to
provide medical malpractice insurance to its physician and other healthcare
provider members. The business of the Exchange is managed by SCPIE Management
Company, the attorney-in-fact for the Exchange, which is a wholly owned
subsidiary of the Exchange. SCPIE Management Company also conducts an insurance
agency business through its wholly owned subsidiary corporation, SCPIE Insurance
Services, Inc., and plans to provide risk management and claims management
services through another subsidiary corporation, SCPIE Management Services, Inc.
Prior to July 1996, SCPIE Management Company was a wholly owned subsidiary of
OSCAP, a California mutual benefit corporation indirectly controlled by the
Exchange. In July 1996, OSCAP was liquidated into the Exchange and SCPIE
Management Company and its subsidiaries became subsidiaries of the Exchange.
SCPIE Holdings is a Delaware corporation which is a wholly owned subsidiary
of the Exchange. SCPIE Holdings has no historic operations and was organized in
February 1996, as part of the Exchange's plan to reorganize its corporate
structure. SCPIE Indemnity, a wholly owned subsidiary of SCPIE Holdings, is a
California stock insurance corporation that is licensed to write most property
and casualty insurance lines in the State of California. It has conducted no
business prior to the Merger contemplated herein, pursuant to which the Exchange
will be merged with and into SCPIE Indemnity.
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The following diagram summarizes the Company's structure after the Merger:
If the Initial Public Offering described below is consummated, the stockholders
of SCPIE Holdings will include purchasers of Common Stock in the Initial Public
Offering, in addition to the Eligible Members and SCPIE Indemnity.
DETERMINATION OF ELIGIBLE MEMBERS
A Member's right to vote on the proposal to approve the Merger Agreement is
based on whether a Member was a Member on the Approval Date. Such Members are
referred to herein as "Eligible Members."
Determination of Membership. An individual, corporation, joint venture,
limited liability company, partnership, association, trust, trustee,
unincorporated entity, organization or government or any department or agency of
any kind (a "Person") is a Member of the Exchange if such Person is a subscriber
who is an "insured person" under the name of the Exchange through the facilities
of the attorney-in-fact acting on behalf of the several subscribers. The term
"subscriber" shall include those Persons who have executed a Subscription
Agreement and Power of Attorney or any like agreement of the Exchange. The term
"insured person" shall include (a) each individual physician, surgeon, nurse
anesthetist, professional medical partnership, professional medical corporation
or other healthcare provider to whom or which a policy of insurance has been
issued by the Exchange as "named insured," and (b) each physician, surgeon,
nurse anesthetist or other healthcare provider to whom a certificate insert
(naming such person as a "physician member" or "certificate holder") has been
issued as part of a policy of insurance issued by the Exchange to a professional
medical partnership, professional medical corporation or other healthcare
provider. A "named insured" under a policy of insurance ceases to be an insured
person, subscriber and Member when the "policy period" of such policy terminates
by expiration of time, cancellation or any other reason and a "physician member"
or "certificate holder" ceases to be an insured person, subscriber and Member
when the "coverage period" or "certificate period" under the applicable policy
terminates by expiration of time, cancellation or any other reason.
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Whether or not a Member is an Eligible Member for purposes of voting and
receiving consideration is determined by the Exchange's records.
EXCHANGE OF MEMBERS' MEMBERSHIP INTERESTS
Members have certain rights which for purposes of the Merger are called
"Membership Interests." Membership Interests consist of the rights arising under
the Exchange's Subscription Agreements and Bylaws, the California Insurance Law
and otherwise, including, without limitation, the right to vote for the election
of members of the Board of Governors and on other matters and to participate in
any distribution of surplus upon liquidation, but not including contractual
rights arising under Policies. Upon consummation of the Merger, the Membership
Interests of Eligible Members will be cancelled and extinguished and converted
into the right to receive the consideration to be distributed in the Merger, as
described in "-- Consideration." For a comparison of the rights of Members
before and after the Merger, see "Comparison of Certain Rights of Members Before
and After the Merger."
CONSIDERATION
If the Merger becomes effective, Eligible Members will receive
consideration in the form of Common Stock and cash in lieu of fractional shares.
See "-- Exchange of Members' Membership Interests."
Eligible Members. A Person is an Eligible Member if such Person was a
Member on the Approval Date. For more information about this requirement, see
"-- Determination of Eligible Members."
Allocation of Shares. The amount of consideration received by Eligible
Members pursuant to the Merger Agreement will be based on an allocation of
Merger Shares. The Merger Shares will be allocated to Eligible Members pursuant
to the Merger Agreement as follows:
(i) each Eligible Member shall be allocated a number of shares of
Common Stock equal to the product of x and y, where "x" equals 9,000,000
shares of Common Stock and "y" equals the ratio of the Earned Premiums of
such Eligible Member on Eligible Policies to the total Earned Premiums of
all Eligible Members on Eligible Policies during the period beginning on
January 1, 1993 and ending on but including the Approval Date, plus
(ii) each Eligible Member who was also a Member on March 21, 1996,
shall be allocated a number of shares of Common Stock equal to 1,000,000
shares of Common Stock divided by the total number of Eligible Members who
were also Members on March 21, 1996.
The total amount of Earned Premiums for the January 1, 1993 through
September 16, 1996 period is approximately $357.1 million, or $39.68 of Earned
Premiums for each of the 9,000,000 shares of Common Stock to be allocated based
on Earned Premiums. 10,407 Eligible Members were also Members on March 21, 1996
and will be eligible to participate in the allocation of the 1,000,000 shares of
Common Stock on the basis of 96.089 shares to each such Eligible Member. Based
upon the foregoing allocation formula, an Eligible Member who joined the
Exchange prior to January 1, 1993 and who paid average annual premiums since
that date of $8,702 would be allocated approximately 910 Merger Shares. Of such
Merger Shares, 814 would be allocable based on Earned Premiums and 96 would be
allocable by virtue of the fact that such Eligible Member was also a Member on
March 21, 1996.
This allocation formula reflects the Board of Governor's determination that
the Merger Shares be allocated based principally upon Eligible Members'
respective recent contributions (measured in terms of premiums) to the Exchange,
and that the remaining Merger Shares be allocated based upon Eligible Members'
rights to vote for the election of members of the Board of Governors and on
other matters and to participate in any distribution of surplus upon
liquidation.
With respect to a Policy issued to an Eligible Member who was not a Member
on March 21, 1996, Earned Premiums for such a Policy shall consist only of
earned premiums following March 21, 1996, and not earned premiums at any point
prior to such date.
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For more information about the allocation of the Merger Shares among
Eligible Members, see Section 2.3 of the Merger Agreement, a copy of which is
included in this Proxy Statement/Prospectus as Annex I.
For information about the number of Merger Shares that will be allocated to
each Eligible Member, see the green RECORD CARD (card 3) distributed with this
Proxy Statement/Prospectus and "-- Estimated Allocation of Shares."
Fractional Shares. No fractional shares shall be issued to any Eligible
Member. In lieu of fractional shares, each Eligible Member who would otherwise
have been entitled to a fraction of a share of Common Stock shall receive cash
based upon the amount of such fraction of a share multiplied by the price per
share at which the Common Stock is sold to the public in the Initial Public
Offering (the "Initial Stock Price") or, in the event that the Initial Public
Offering is not consummated substantially concurrent with the Merger, based upon
the amount of such fraction of a share multiplied by the Fair Market Value of
the Merger Shares, where Fair Market Value is (i) the average closing price of a
share of the Common Stock on the principal exchange on which the Common Stock is
then trading, if any, on the first five trading days following the Effective
Date; or (ii) if the Common Stock is not traded on an exchange but is quoted on
the Nasdaq Stock Market ("Nasdaq") or a successor quotation system, (1) the
average last sales price (if the Common Stock is then listed as a National
Market Issue under the NASD National Market System) or (2) the average of the
mean between the closing representative bid and asked prices (in all other
cases) for the Common Stock on the first five trading days following the
Effective Date as reported by Nasdaq or such successor quotation system.
Estimated Allocation of Shares. Printed on each green RECORD CARD is
information about the number of Merger Shares on which each Eligible Member's
consideration will be based. The green RECORD CARD indicates the estimated whole
number of Merger Shares that an Eligible Member is entitled to receive pursuant
to the Merger Agreement.
Form of Consideration. Each Eligible Member will be entitled to receive the
Merger Shares allocable to such Eligible Member.
Payment of Consideration. After the Effective Date, Eligible Members will
be sent (i) a stock certificate for their shares of Common Stock and (ii) a
check (net of withholding tax required by law, if any) representing the cash
paid in lieu of fractional shares.
OPINION OF FINANCIAL ADVISOR
On June 23, 1995, the Exchange retained the Financial Advisor to assist it
in the investigation and possible execution of a reorganization of the Exchange
from a California reciprocal insurer to a stockholder-owned company or in some
other transaction involving the issuance of debt and/or equity securities in
order to secure and strengthen the Exchange's market position and growth in the
future. See "-- Background of the Merger." In connection with such engagement,
the Exchange instructed the Financial Advisor to evaluate the fairness, from a
financial point of view, to the Eligible Members, as a group, of the exchange of
the aggregate membership interests for shares of Common Stock, pursuant to the
Plan. The Company imposed no limitations on the Financial Advisor with respect
to the investigation made, or the procedures followed, by it in rendering its
opinion. The Exchange selected the Financial Advisor because of its reputation
and expertise as a nationally recognized investment banking firm. The Financial
Advisor, as part of its investment banking services, is regularly engaged in the
valuation of businesses and securities in connection with stock repurchases,
mergers, acquisitions, underwritings, sales and distributions of listed and
unlisted securities, private placements and valuations for estate, corporate and
other purposes.
The Financial Advisor has delivered its written opinion, dated September
17, 1996, to the Board of Governors stating that, on and as of the date of such
opinion, and based upon the procedures and subject to the assumptions and
qualifications described in such opinion, the exchange of the aggregate
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membership interests for shares of Common Stock and for cash in lieu of
fractional shares, pursuant to the Plan, is fair, from a financial point of
view, to the Eligible Members as a group.
THE FULL TEXT OF THE FINANCIAL ADVISOR'S OPINION, DATED SEPTEMBER 17, 1996,
WHICH SETS FORTH THE MATTERS REVIEWED, ASSUMPTIONS MADE, FACTORS CONSIDERED,
RELIANCE UPON OTHERS AND LIMITATIONS AS TO THE REVIEW UNDERTAKEN BY IT, IS
ATTACHED HERETO AS ANNEX II AND IS INCORPORATED BY REFERENCE HEREIN. ELIGIBLE
MEMBERS ARE URGED TO READ CAREFULLY THE OPINION OF THE FINANCIAL ADVISOR IN ITS
ENTIRETY. ANY DESCRIPTION OF OR REFERENCE TO THE FINANCIAL ADVISOR'S OPINION IS
SUBJECT TO, AND QUALIFIED IN ITS ENTIRETY BY REFERENCE TO, THE FULL TEXT OF SUCH
OPINION. THE PREPARATION OF A FAIRNESS OPINION IS A COMPLEX PROCESS AND IS NOT
NECESSARILY SUBJECT TO PARTIAL ANALYSIS OR SUMMARY DESCRIPTION. THE FINANCIAL
ADVISOR'S OPINION IS DIRECTED TO THE BOARD OF GOVERNORS AND DOES NOT CONSTITUTE
A RECOMMENDATION TO ANY ELIGIBLE MEMBER AS TO WHETHER SUCH ELIGIBLE MEMBER
SHOULD VOTE TO APPROVE THE MERGER.
The Financial Advisor was not requested to opine as to, and its opinion
does not address, the underlying business decision of the Board of Governors to
proceed with or effect the Merger. In addition, the Financial Advisor's opinion
expressly excludes any opinion as to: (1) which of the Exchange's policyholders
are to be included among the Eligible Members; (2) the fairness of the proposed
consideration to be paid to any Eligible Member or class of Eligible Members in
connection with the reorganization, including any provisions of the Plan
relating to which Eligible Members receive Common Stock and other provisions of
the Plan which distinguish among Eligible Members; and (3) the price at which
the Common Stock is sold in the Initial Public Offering (the "IPO Price") or the
fair market value of any shares of Common Stock to be issued pursuant to the
Plan or the price at which the Common Stock issued in connection with the Plan
or pursuant to the Initial Public Offering will trade. The Financial Advisor
noted that the IPO Price, if the Initial Public Offering is consummated, will be
a factor of market conditions and the recent performance of and outlook for the
Company at that time. Further, the Financial Advisor noted its belief that
trading in the Common Stock for a period following the Effective Date would be
characterized by a redistribution of the Common Stock and that the Common Stock
may trade during such redistribution below the prices at which it would trade on
a fully distributed basis.
In arriving at its opinion, the Financial Advisor reviewed, analyzed and
relied upon material bearing upon the financial and operating condition and
prospects of the Exchange and material prepared in connection with the Plan and
the reorganization. The Financial Advisor considered such financial and other
factors it deemed appropriate under the circumstances, including, among other
things: (1) the statutory annual statements provided by the Exchange for the
years 1991 through 1995; (2) certain GAAP financial data provided by the
Exchange, including the unaudited income statement and balance sheet for the six
month period ended June 30, 1996, the audited income statements for each year of
the three-year period ended December 31, 1995, the audited balance sheets for
each year of the two-year period ended December 31, 1995, the unaudited income
statements for each year of the two-year period ended December 31, 1992, and the
unaudited balance sheets for each year of the three-year period ended December
31, 1993; (3) certain consolidated financial projections for SCPIE Holdings and
its subsidiaries after the Reorganization provided to the Financial Advisor by
the Exchange; (4) the Registration Statement on Form S-1 of SCPIE Holdings dated
May 3, 1996, as amended by Amendment No. 1 dated August 8, 1996 and Amendment
No. 2 dated August 28, 1996; (5) the Registration Statement on Form S-4 of SCPIE
Holdings, dated May 3, 1996, as amended by Amendment No. 1 dated August 8, 1996,
Amendment No. 2 dated August 28, 1996, Amendment No. 3 dated September 12, 1996
and Amendment No. 4 dated September 16, 1996; (6) a copy of the Plan dated March
21, 1996, as amended on August 8, 1996; (7) certain financial data of the
Exchange which the Financial Advisor compared with publicly available financial
information and market data of other companies which it believed to be
comparable; (8) the aggregate ownership interests of the Company represented by
the Common Stock to be distributed to Eligible Members in exchange for their
Membership Interests, which the Financial Advisor compared with the exchange of
ownership interests in other transactions that the Financial Advisor deemed to
be relevant; and (9) certain discussions with management and advisors of
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the Exchange relating to the business of the Exchange and certain financial and
other aspects of the Plan and the reorganization and such other matters believed
to be relevant to its inquiry. In addition, the Financial Advisor took into
account its assessment of general economic, market and financial conditions and
its knowledge of the insurance industry generally.
The Financial Advisor compared publicly available financial information and
market data of comparable companies with certain financial data of the Exchange
not for the purposes of comparative valuation but primarily to determine that
the Company would have an appropriate capital structure and the requisite size
to be viable as a publicly traded company upon the consummation of the Merger.
The Financial Advisor compared the exchange of ownership interests in
recent demutualizations with the exchange of Membership Interests for shares of
Common Stock. The transactions reviewed consisted of the demutualizations of
State Mutual Life Assurance Company of America, Guarantee Mutual Life Insurance
Company and Farm Family Mutual Insurance Company. In each, as will be the case
in the Merger, at the time of the demutualization all of the capital stock of
the converted stock insurer's holding company was allocated to eligible policy
holders in exchange for their membership interests.
In preparing its opinion, the Financial Advisor assumed, at the Exchange's
instruction, that: (1) the Reorganization will meet all applicable legal and
regulatory requirements and that all necessary action will have been taken to
comply with all applicable laws and requirements, including the receipt of all
required approvals by policyholders, regulators and otherwise; (2) the terms of
the Initial Public Offering (which have not yet been determined) will not affect
the legal or tax treatment of the Plan or the reorganization; and (3) the
reorganization will be completed on the basis described in the Plan. The
Financial Advisor has been advised as to certain legal and tax matters by
counsel to the Exchange and, with respect to such matters, has relied upon such
counsel.
In preparing its opinion, the Financial Advisor considered a number of
factors including, among other things (in no particular order): (1) the fact
that the Exchange advised the Financial Advisor that growth is extremely
important to remain an effective and competitive insurer in the future; (2) the
fact that the Exchange advised the Financial Advisor that it is of significant
strategic importance that the Exchange have broader access to external capital
to finance this growth; (3) the A (Excellent) rating of the Exchange by A.M.
Best and the considerations on which such rating is based; (4) that in its
present form as a reciprocal insurer, the Exchange has limited access to the
capital markets for new capital; (5) that following the Reorganization the
Exchange will have a capital structure potentially enabling it to access the
capital markets for new capital; and (6) the illiquidity of Membership
Interests.
In preparing its opinion, the Financial Advisor relied on and assumed the
accuracy and completeness of the financial and other information that was
provided by the Exchange or was publicly available and did not attempt to
independently verify the same. The Financial Advisor assumed that forecasts
provided by the Exchange were reasonably prepared on a basis reflecting the best
currently available estimates and judgments of the Exchange, and noted that it
expressed no opinion with respect to such forecasts or the assumptions on which
they are based. In addition, the Financial Advisor did not make or obtain any
evaluations or appraisals of the properties, assets, liabilities, reserves or
surplus of the Exchange.
The Exchange retained the Financial Advisor pursuant to an engagement
letter dated June 23, 1995. The Exchange paid the Financial Advisor an aggregate
fee of $300,000 pursuant to such engagement letter. The Exchange also agreed to
reimburse the Financial Advisor for all reasonable out-of-pocket expenses,
including fees and expenses of counsel, in connection with rendering such
services as contemplated in the engagement letter. The foregoing fees and
expenses were payable whether or not the Financial Advisor gave the Exchange a
favorable fairness opinion. The Company has agreed to indemnify the Financial
Advisor and its affiliated entities, directors, officers, employees, legal
counsel, agents and controlling persons against certain costs, expenses and
liabilities to which they may become subject arising out of or in connection
with their engagement. The Company has also retained the Financial Advisor to
act as lead underwriter in connection with the Initial Public Offering, and the
Financial Advisor will receive fees in connection therewith.
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RECOMMENDATION OF THE BOARD OF GOVERNORS
The Board of Governors believes that the terms of the Merger are in the
best interests of the Exchange and are fair to its Members. Accordingly, the
members of the Board of Governors have unanimously adopted and approved the
Plan, the Merger Agreement and the transactions contemplated thereby. The Board
of Governors unanimously recommends that the Eligible Members of the Exchange
vote FOR the approval of the Merger Agreement at the Special Meeting.
The terms of the Merger Agreement were approved unanimously by the Board of
Governors at a meeting held August 8, 1996. At that meeting and at a meeting
held March 21, 1996, members of the Exchange's senior management, together with
its legal and financial advisors, reviewed with the Board of Governors the
background of the proposed transaction, the potential benefits of the
transaction and the terms of the proposed Merger Agreement. On September 17,
1996, the Financial Advisor provided its opinion as to the fairness, from a
financial point of view, to the Members of the Exchange, of the exchange of
membership interests for shares of Common Stock and cash in lieu of fractional
shares to be allocated in the Merger. A summary of such opinion and the
procedures followed in preparing the opinion are set forth in "-- Opinion of
Financial Advisor."
Determination that the Terms of the Merger Agreement are in the Exchange's
Best Interests and are Fair to its Members. In reaching its determination at the
March 21, 1996 and August 8, 1996, meeting that the terms of the Merger
Agreement are in the best interests of the Exchange and are fair to its Members,
the Board of Governors consulted with the Exchange's management and its legal
and financial advisors, and considered:
1. The Board of Governor's belief that growth and diversification are
important for the Exchange to remain an effective and competitive insurer
in the future and that such growth and diversification can be best
accomplished in a corporate form.
2. The Board of Governor's belief that it is of strategic importance
that the Exchange have broader access to external capital to achieve this
growth, and that in its present form as a reciprocal insurer, the Exchange
has limited access to the capital markets for new capital.
3. The opinion of the Financial Advisor that the exchange of the
aggregate membership interests for shares of Common Stock and for cash in
lieu of fractional shares, pursuant to the Plan, is fair, from a financial
point of view, to the Eligible Members as a group.
4. The fact that the Merger will be a tax free reorganization and that
Eligible Members will not recognize gain or loss for Federal income tax
purposes in the Merger.
5. The fact that the membership interests of Eligible Members are
illiquid, and that the Common Stock, in contrast, will be freely tradable
and will be listed on the New York Stock Exchange.
6. The fact that other professional liability insurance companies have
become publicly held and have, as public companies, been able to grow and
diversify through mergers and acquisitions.
7. The Board of Governor's familiarity with and review of, in
consultation with the Financial Advisor, the business, operations,
earnings, assets, liabilities and financial condition of the Exchange, on
both a historical and prospective basis.
8. Comments from A.M. Best relating to the Exchange's narrow product
line and geographic concentration, and to the intense competition in the
medical malpractice industry.
9. The fact that, as a result of the Merger, the Eligible Members
would become stockholders of SCPIE Holdings, a Delaware corporation.
Delaware corporate law is widely regarded as the most extensive and well
defined body of corporate law in the United States, and a substantial body
of case law and public policies have developed with respect to Delaware
corporations.
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Determining the Allocation Among Eligible Members. In determining Eligible
Members and the apportionment of consideration among Eligible Members, the Board
of Governors further considered the terms of other insurance company conversion
transactions, the provisions of applicable California statutes, prior premium
credit dividends to Members, the nature and value of the Membership Interests
being exchanged, the financial results of recent years, and certain analyses
prepared by management. These factors are described in more detail below. The
Board of Governors did not find it practicable to, and did not, quantify or
otherwise assign relative weights to the individual factors considered in
reaching its determinations.
With respect to the allocation among Eligible Members, there is no
California statutory provision for the guidance of the Board. The Board of
Governors was of the view that two components of value should be given
consideration when allocating the Merger Shares: (1) the relative contribution
of Members to the Exchange, and (2) the intangible membership interest itself,
i.e., the right to vote on significant transactions and for election of the
governing board, irrespective of the contribution to the assets and surplus of
the Exchange.
The Board of Governors considered the direct premiums earned from the
respective members to be the predominant factor in determining contribution to
surplus. Such premiums contribute to surplus of the Exchange in two ways. First,
pending the payment of expenses and claims, premiums are invested and generate
investment income to increase the Exchange's surplus. Second, to the extent the
losses and expenses are ultimately less than the aggregate premiums, some
underwriting profit is realized to further increase surplus. Any meaningful
analysis of contributions to surplus on an individual policy basis was
considered impracticable for a property and casualty company such as the
Exchange. The Board of Governors concluded that the respective direct earned
premiums themselves were the best indicator of contribution to the Exchange.
This approach has been used by other property and casualty companies in
allocating interests in connection with conversion to stock companies. The Board
of Governors has made similar determinations since 1981 in distributing profits
to its Members in the form of premium credit dividends. The measurement base
used by the Board of Governors in connection with such distributions has been
the respective direct premium earned on the Eligible Member's respective
premiums. The Board of Governors concluded that the allocation formula should
therefore be principally based on the respective premiums paid by an Eligible
Member in proportion to the premiums paid by all Eligible Members during a
specified period. The Board of Governors further concluded that premiums should
be "net" of any discounts and should include any surcharges. This approach is
consistent with the approach adopted by the Exchange for the respective
distribution of premium credit dividends.
The Board of Governors considered various measurement periods for
determining the amount of premiums to be included in the allocation formula. The
Exchange considered measurement periods used by other companies in similar
conversions and also considered periods for which it had already paid
substantial dividends. The Exchange concluded that periods of three to five
years seemed the most common measurement periods. The Exchange selected a
measuring period for earned premiums beginning on January 1, 1993 and continuing
through the Approval Date; a measurement period of approximately 3 1/2 years. In
adopting this period, the Exchange considered the fact that almost $170 million
had already been returned as premium credit dividends to Members of the Exchange
since 1982. These dividends have been paid to Members who paid premiums to the
Exchange during policy years 1976 through 1992. In 1996, the Exchange declared a
final dividend based on premiums earned in policy years 1987 through 1992. No
dividends whatsoever had been paid to Members who joined the Exchange after
January 1, 1993. The Exchange also determined that a period of approximately
3 1/2 years seemed to provide an appropriate weighing of the interests of both
long-time and newer Members.
The Board of Governors also considered the "intangible" membership interest
itself and what value should be attributed to this interest independent of
premiums paid by the Member. The intangible value, independent of premiums, was
deemed to be the right to vote and the right to share in the assets of the
Exchange in the event of the Exchange's liquidation. The bylaws of the Exchange
give one vote to each Member regardless of longevity with the Exchange and give
each Member some share in the assets of the Exchange, as determined by the Board
of Governors in its discretion, in the event of the Exchange's
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liquidation. See "Comparison of Certain Rights of Members Before and After the
Merger -- Description of Certain Rights of Members of the
Exchange -- Distributions." Since the Merger could not be effected under
California law and under the bylaws without the "vote" of the members, the
Exchange concluded that there is value to the intangible membership interests
that should be recognized in the formula.
In considering a value for the membership interest, the Board of Governors
concluded that no value should be attributable to the membership interest for
those members who joined after the transaction was publicly announced, as this
would encourage health care providers to seek a windfall by joining the Exchange
solely for the purpose of obtaining stock ownership attributable to the
membership interest. The Exchange therefore adopted the public announcement
date, March 21, 1996, as the record date for receiving any stock distribution
attributable to the membership interest itself. (The premiums earned from these
post-announcement members prior to the Approval Date would be counted for the
premium component of the formula, but there would be no value attributable to
the membership interest itself.)
The Board of Governors considered what portion of the stock distribution
should be attributable to the "intangible" membership interests. The Exchange
reviewed other transactions and considered the measurement periods used for the
earned premium component of the distribution and the absence of any independent
value attributed to the membership interest in such transactions. Because, as
discussed above, the Board of Governors concluded that there is value to the
intangible membership interests, the Board of Governors determined that it would
be appropriate to adopt an allocation formula which gave some value to the
membership interests. The Exchange analyzed allocation formulas with 10%, 20%
and 30% of the value based upon the membership interests and considered the
effect that such allocation formulas had upon the distribution of consideration
to Members. The Exchange concluded that attributing 20% or 30% of the
consideration to the membership interests provided a disproportionately large
amount of consideration to newer Members of the Exchange, and did not give
adequate weight to the premiums contributed by Eligible Members who had been
Members of the Exchange since the beginning of the premium measurement period.
The Board of Governors also concluded such an allocation formula should provide
those persons who were Members of the Exchange at the time the Merger was
announced with a meaningful ownership interest in the Company. Accordingly, the
Board of Governors determined, after consideration of the various analyses, that
a 10% interest, combined with a premium measurement period commencing January 1,
1993, was appropriate to measure the value to be received by the Members.
Based on all of the factors described above, the Board of Governors
believes that the Merger is in the best interest of, and is fair to, the
Eligible Members as a group. Accordingly, the Board of Governors has unanimously
approved the Merger Agreement and unanimously recommends that the Eligible
Members vote in favor of the proposal to approve and adopt the Merger Agreement.
THE INITIAL PUBLIC OFFERING
SCPIE Holdings has filed with the Commission a registration statement under
the Securities Act (the "IPO Registration Statement") pertaining to the shares
of Common Stock to be sold by the Company in the Initial Public Offering. The
IPO Registration Statement will contain a prospectus which will include
information substantially similar to that which appears in this Proxy
Statement/Prospectus. It is anticipated that the Company will issue
approximately 2,000,000 shares of Common Stock in the Initial Public Offering.
The net proceeds to the Company from the Initial Public Offering are estimated
to be approximately $36.7 million. The Company expects to contribute
approximately $34.0 million to the Insurance Subsidiaries to support the
continued growth of the Company's business and to retain the balance for general
corporate purposes.
Several months may elapse as the Commission reviews the IPO Registration
Statement and marketing by the underwriters is completed. The ability to effect
an Initial Public Offering at any time is uncertain. During many periods in the
past it has been effectively impossible for many companies to accomplish Initial
Public Offerings at attractive prices or at all. Accordingly, even if the Merger
is approved, the Initial Public Offering may not occur because, due to market or
other conditions, the Common Stock cannot be sold at an acceptable price, or at
all. When and if the marketing of the
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Common Stock is successfully completed the SCPIE Holdings Board will determine,
in consultation with the underwriters, the price at which the shares of the
Common Stock to be included in the Initial Public Offering can then be sold. The
Company believes that investors, in determining the price which they are willing
to pay for the Common Stock, will consider factors such as prevailing market
conditions, the Company's historical financial performance, estimates of the
business potential and earnings prospects of the Company, an assessment of the
Company's management and consideration of the above factors in relation to
market valuations of companies in related businesses. The SCPIE Holdings Board
may accept the price or request a delay to determine if conditions and the price
will improve. The price at which the Common Stock will be sold to the public
will not be determined until the Initial Public Offering process is complete.
Although the underwriters will recommend a proposed price range which will be
included in the preliminary prospectus, it is not unusual that the price at
which shares of Common Stock are sold in an initial public offering is outside
that range. See "Market for Common Stock."
The SCPIE Holdings Board will have exclusive authority to determine if the
price recommended by the underwriters is acceptable. In any event, the Merger
will close in accordance with the Merger Agreement, subject to satisfaction or
waiver of all the conditions therein, regardless of the occurrence or
non-occurrence of the Initial Public Offering. Completion of the Initial Public
Offering is not a condition precedent to the Merger. See "-- Conditions to
Effectiveness of the Merger."
SCPIE Holdings will register the Common Stock under the Exchange Act, on or
prior to the Effective Date, and in accordance with the Exchange Act thereafter
will be required to file reports, proxy statements and other information with
the Commission. SCPIE Holdings intends to furnish holders of Common Stock with
annual reports containing audited consolidated financial statements reported
upon by independent auditors and quarterly reports for the first three quarters
of each fiscal year containing unaudited quarterly consolidated financial
statements. See "Available Information."
THE FOREGOING DOES NOT CONSTITUTE EITHER AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY COMMON STOCK IN THE INITIAL PUBLIC OFFERING.
SUCH OFFERING WILL BE MADE ONLY BY THE PROSPECTUS FOR THE INITIAL PUBLIC
OFFERING.
DESCRIPTION OF THE MERGER AGREEMENT
The following is a summary of certain provisions of the Merger Agreement, a
copy of which is attached hereto as Annex I and incorporated by reference
herein. The summary contains all the material information concerning the Merger
Agreement, however, the summary is qualified in its entirety by reference to the
full text of the Merger Agreement.
The Merger Agreement was executed by and among the Exchange, SCPIE Holdings
and SCPIE Indemnity on August 8, 1996 and provides that, following the
satisfaction or waiver of certain conditions, in accordance with and subject to
the provisions of the Merger Agreement, the California Insurance Law and the
California Corporations Law, the Exchange shall be merged with and into SCPIE
Indemnity. See "-- Conditions to Effectiveness of the Merger." At and after the
Effective Date, the separate existence of the Exchange shall cease, and SCPIE
Indemnity shall continue as the surviving corporation. The Merger Agreement
further provides that the Merger shall have the effect set forth in the
California Insurance Law and the California Corporations Law.
The Merger Agreement provides that at the Effective Date, by virtue of the
Merger and without any further action on the part of the Exchange or SCPIE
Indemnity or any of the Members or SCPIE Holdings, (i) the Membership Interests
of all Members shall be terminated, (ii) each Eligible Member shall be allocated
and will receive Merger Shares in accordance with the provisions set forth in
"-- Consideration -- Allocation of Shares" and "-- Consideration -- Form of
Consideration" and (iii) SCPIE Indemnity will receive 500,000 Merger Shares.
The Merger Agreement may not be amended except by an instrument in writing
signed on behalf of each of the parties thereto; provided, however, that after
approval and adoption of the Merger Agreement
27
<PAGE> 35
by the Members entitled to vote at the Special Meeting, no amendment may be made
which under applicable law requires further approval of Eligible Members without
such further approval of Eligible Members.
The Merger Agreement may be terminated and the Merger may be abandoned, at
any time prior to the Effective Date, whether prior to or after approval of the
Merger Agreement by the Members eligible to vote at the Special Meeting: (i) by
mutual written consent of the Board of Governors, the SCPIE Holdings Board and
the SCPIE Indemnity Board; (ii) by the Exchange, if SCPIE Indemnity or SCPIE
Holdings breaches in any material respect any of its covenants or agreements
contained in the Merger Agreement; (iii) by SCPIE Holdings, if the Exchange
breaches in any material respect any of its covenants or agreements contained in
the Merger Agreement; or (iv) by either SCPIE Holdings or the Exchange if: (a)
the Merger has not been consummated prior to December 31, 1996; or (b) any court
of competent jurisdiction or any other governmental body shall have issued an
order, decree or ruling, or taken any other action restraining, enjoining or
otherwise prohibiting the Merger and such order, decree, ruling or other action,
shall have become final and non-appealable.
CONDITIONS TO EFFECTIVENESS OF THE MERGER
In order for the Merger to become effective, the Merger Agreement must be
approved by the Eligible Members and by the Insurance Commissioner and certain
required tax rulings or opinions of tax counsel must be received. THE OCCURRENCE
OF THE INITIAL PUBLIC OFFERING IS NOT A CONDITION TO THE EFFECTIVENESS OF THE
MERGER. See "-- Introduction" and "-- The Initial Public Offering."
Approval by Eligible Members. One of the conditions for the Merger to
become effective is that the Merger Agreement must be approved by a vote of the
Eligible Members at the Special Meeting. The affirmative vote of two-thirds
(66 2/3%) of the Eligible Members is required to approve the Merger Agreement on
behalf of the Exchange. The presence, either in person or by proxy, of a
majority of the Eligible Members is necessary to constitute a quorum. For more
information about the requirements to be an Eligible Member entitled to vote at
the Special Meeting, see "-- Determination of Eligible Members." For more
information about the Special Meeting, see "Information Concerning the Special
Meeting -- Time, Date and Place" and "-- Record Date, Quorum and Vote Required."
Approval by the Insurance Commissioner. Pursuant to the California
Insurance Law, the Merger must be approved by the Insurance Commissioner for
submission to a vote of Eligible Members entitled to vote at the Special
Meeting. The Insurance Commissioner issued such approval on the Approval Date,
September 16, 1996 a copy of which is attached hereto as Annex VI. Eligible
Members are encouraged to review the Insurance Commissioner's approval letter,
which is attached at the beginning of this Proxy Statement/Prospectus. The
Insurance Commissioner must also issue a final approval of the Merger Agreement
prior to the Effective Date.
Tax Rulings. Under the Merger Agreement, tax rulings of the Service or
opinions of tax counsel regarding certain Federal income tax consequences of the
Merger are required to be received in order for the Merger to become effective.
As more fully discussed in "Certain Federal Income Tax Consequences of the
Merger," rulings of the Service or an opinion of tax counsel have been received
regarding all of these matters (although the opinion of tax counsel covering
certain of these matters must be reconfirmed on or before the Effective Date).
Effective Date. The Effective Time shall be when the Merger Agreement is
filed in accordance with the California Corporations Law and the California
Insurance Law. The Effective Date shall be such date as the Board of Governors,
the SCPIE Holdings Board and the SCPIE Indemnity Board determine is appropriate
after the conditions set forth in the Merger Agreement have been satisfied or
waived. If the Merger has not been consummated by December 31, 1996, the Merger
Agreement shall, unless extended in accordance with its terms, automatically
terminate.
28
<PAGE> 36
ADDITIONAL ASPECTS OF THE MERGER AND THE PLAN
Accounting Treatment. The Merger and related transactions involve a
reorganization of entities under common control, and the assets and liabilities
transferred to effect the Merger and related transactions will be accounted for
at historical cost in a manner similar to that in pooling of interests
accounting.
Expenses of the Merger. All reasonable costs, including those costs
attributable to the use of the staff personnel of the California Department
related to the Merger, shall be borne by the Exchange.
Regulatory Approvals. Except for approval by the Insurance Commissioner,
the filing of the Merger Agreement with the Secretary of State of the State of
California after approval and adoption of the Merger Agreement pursuant to the
California Insurance Law and the California Corporations Law, and compliance
with Federal and state securities laws, the Company is not aware of any material
United States Federal or state regulatory requirement necessary to be complied
with or approval that must be obtained in connection with the Merger. See "Risk
Factors -- Regulatory and Related Matters."
Insurance Coverage. Following the Merger, each Eligible Member will become
a policyholder of SCPIE Indemnity. The Merger will not affect any Eligible
Member's policy coverage or premium credit dividends for 1996 or 1997.
Issuance of Shares to SCPIE Indemnity. The Merger Agreement provides that
SCPIE Holdings will issue SCPIE Indemnity 500,000 shares of Common Stock. Such
shares will be issued in consideration of the cancellation of the outstanding
shares of Common Stock of SCPIE Holdings currently held by the Exchange which
will be cancelled in the Merger. The Board of Governors and the SCPIE Holdings
Board may adjust the number of shares of Common Stock issuable to SCPIE
Indemnity in the Merger in order to ensure that the Merger Shares issued to
SCPIE Indemnity have a fair market value equivalent to the fair market value of
the shares of Common Stock currently held by the Exchange which are to be
cancelled in the Merger.
These shares of Common Stock will be issued to SCPIE Indemnity in order to
ensure that the Merger will have the tax consequences set forth in "Certain
Federal Income Tax Consequences of the Merger -- The Exchange and SCPIE
Indemnity." Pursuant to the Delaware General Corporation Law (the "DGCL"), SCPIE
Indemnity will not be entitled to vote the shares of Common Stock it is issued
in the Merger, but such shares will be entitled to receive dividends. Under GAAP
these 500,000 shares will be treated as issued but not outstanding. See
"Capitalization."
29
<PAGE> 37
COMPARISON OF CERTAIN RIGHTS OF MEMBERS BEFORE AND AFTER THE MERGER
Members of the Exchange, a reciprocal insurer, have certain rights as
members which are described herein as "Membership Interests." Membership
Interests consist of the rights arising under the Exchange's Subscription
Agreements and Bylaws, the California Insurance Law and otherwise, including,
without limitation, the right to vote for the election of members of the Board
of Governors and on other matters and to participate in any distribution of
surplus upon liquidation, but not including contractual rights under Policies.
Upon consummation of the Merger, the Membership Interests of Eligible Members
will be cancelled and extinguished and converted into the right to receive
Merger Shares, and members of the Exchange will become stockholders of SCPIE
Holdings.
The following is a comparison of certain rights of Members of the Exchange
and holders of SCPIE Holdings' Common Stock. This comparison contains all the
material information concerning the rights of members and shareholders set forth
below, however, it is not intended to be complete and is qualified in its
entirety by reference to the Exchange's Bylaws, copies of which are available
for inspection at the executive offices of the Exchange and will be sent to
Members upon request, and by reference to the Restated Certificate and the
Bylaws, copies of which are attached hereto as Annexes III and IV, respectively.
<TABLE>
<CAPTION>
DESCRIPTION OF CERTAIN RIGHTS OF MEMBERS OF DESCRIPTION OF CERTAIN RIGHTS OF HOLDERS OF
THE EXCHANGE SCPIE HOLDINGS STOCK AFTER THE MERGER
<S> <C>
General. Membership in the Exchange is General. The authorized capital stock of
limited to and comprised of those persons SCPIE Holdings consists of (i) 30,000,000
who are "insured persons" of the Exchange. shares of Common Stock, par value $.0001 per
As of the Record Date, there were 11,054 share, and (ii) 5,000,000 shares of
Members of the Exchange. Each "insured Preferred Stock, par value $1.00 per share.
person" under a policy of insurance issued Immediately after the consummation of the
by the Exchange becomes a Member when the Merger but before the Initial Public
policy is issued and the period of coverage Offering, it is expected that there will be
commences under the policy. "Insured approximately 10,500,000 shares of Common
persons" include each individual physician, Stock outstanding (less fractional shares,
surgeon, nurse anesthetist, professional which, pursuant to the Merger Agreement,
medical partnership, professional medical will be paid in cash) and no shares of
corporation or other healthcare provider to Preferred Stock outstanding, and immediately
whom a policy or certificate insert under a upon consummation of the Initial Public
policy has been issued by the Exchange. Offering, it is expected that there will be
Membership interests in the Exchange approximately 12,500,000 shares of Common
have no preemptive or conversion rights, Stock outstanding (less fractional shares,
redemption rights, or sinking fund which, pursuant to the Merger Agreement,
provisions. will be paid in cash).
Shares of Common Stock have no preemptive
rights, conversion rights, or redemption
rights. No shares of Preferred Stock will be
issued or outstanding immediately following
the Merger or Initial Public Offering. When,
and if, issued the Preferred Stock will have
such rights, powers and preferences as may
be established by the SCPIE Holdings Board.
See "Description of Capital
Stock -- Preferred Stock."
</TABLE>
30
<PAGE> 38
<TABLE>
<CAPTION>
DESCRIPTION OF CERTAIN RIGHTS OF MEMBERS OF DESCRIPTION OF CERTAIN RIGHTS OF HOLDERS OF
THE EXCHANGE SCPIE HOLDINGS STOCK AFTER THE MERGER
<S> <C>
Liquidity/Marketability. A Membership Liquidity/Marketability. SCPIE Holdings
Interest is not transferable and ceases and has applied for listing of the shares of Common
terminates when the coverage period or Stock on the New York Stock Exchange. As a
certificate period of the Member under the result SCPIE Holdings anticipates that there
policy issued by the Exchange terminates by will be a public market for the shares of
expiration of time, cancellation or Common Stock.
otherwise.
Distributions. If the Board of Distributions. Subject to the rights of
Governors, in its reasonable discretion, holders of Preferred Stock, if any, holders
determines that the surplus of the Exchange of Common Stock will be entitled to
is adequate to meet estimated operating participate equally in dividends if, as and
requirements and provide protection for when declared by the SCPIE Holdings Board,
Members and that there is additional surplus and in the distribution of assets in the
available for distribution to Members, the event of dissolution. See "Dividend Policy."
Board may distribute all or a portion of At the present time, the dividends that
this additional surplus to Members. Each the Company intends to pay to its stockholders
Member's share of such distribution is are significantly lower than the dividends
determined by the Board of Governors in its that the Exchange historically paid to
reasonable discretion. When a person ceases certain of its Members. See "Dividend
to be a Member, such person loses rights to Policy." Accordingly, Eligible Members who
future dividends or other distributions. have received premium credit dividends
The Board has declared premium credit (principally Eligible Members who joined the
dividends to Members each year since 1981 Exchange in 1990 or earlier), may experience
based upon the results of operations for an increase in the net premium amount
particular policy years and each continuing payable to the Company following the Merger.
Member's proportionate share of the premiums
paid by all continuing Members for each such
policy year.
If the Exchange is liquidated, the
assets remaining after payment of all
liabilities would be distributed to the
persons who are Members at the time of such
liquidation, with each Member's share
determined by the Board of Governors in its
reasonable discretion or by a court having
jurisdiction in the event a conservator or
liquidator is appointed.
Income Taxation. The Exchange, as a Income Taxation. SCPIE Holdings is a
reciprocal insurance company, is taxable taxable entity. A holder of Common Stock or
under the Internal Revenue Code as a "mutual Preferred Stock will not be taxed with
insurance company." A holder of a Membership respect to SCPIE Holdings' income, but will
Interest will not be taxed with respect to realize taxable income to the extent that
the Exchange's income, but will realize SCPIE Holdings makes actual distributions to
taxable income to the extent that the such holder that are out of current or
Exchange makes actual distributions (in the accumulated earnings and profits or that are
form of premium credits or other dividends) in excess of the basis in such holder's
to such holder that are out of current or Common Stock or Preferred Stock. As a stock
accumulated earnings and profits of the Ex- corporation, SCPIE Holdings will not receive
change. As a "mutual insurance company" for a deduction for such distributions.
Federal income tax purposes, the Exchange Accordingly, to the extent distributed,
will receive a deduction in the amount of earnings and profits of SCPIE Holdings
such distributions when accrued. generally will be subject to two levels of
Federal income tax.
</TABLE>
31
<PAGE> 39
<TABLE>
<CAPTION>
DESCRIPTION OF CERTAIN RIGHTS OF MEMBERS OF DESCRIPTION OF CERTAIN RIGHTS OF HOLDERS OF
THE EXCHANGE SCPIE HOLDINGS STOCK AFTER THE MERGER
<S> <C>
Assessments. The Exchange has obtained Assessments. Shares of Common Stock and
an order from the Insurance Commissioner Preferred Stock will not be subject to
that Members are permanently nonassessable further calls or assessments by SCPIE
on policies issued or renewed by the Holdings.
Exchange.
Meetings and Actions. Any actions Meetings and Actions. Any action required
required to be taken by the Members may be or permitted to be taken by the stockholders of
taken at a duly called annual or special SCPIE Holdings must be taken by vote of the
meeting of members of the Exchange or by stockholders at a duly called annual or
unanimous written consent of all Members. special meeting of stockholders and not by
Special meetings of the Members may be written consent. Special meetings of
called only by (i) a majority of the Board stockholders may be called only by (i) a
of Governors, (ii) the Chairman of the Board majority of the SCPIE Holdings Board, (ii)
of Governors or (iii) 20% or more of the the Chairman of the SCPIE Holdings Board, or
Members. (iii) the President of SCPIE Holdings.
Special Meetings may be called for any The business transacted at any special
purpose or purposes. The business transacted meeting of stockholders is confined to
at any special meeting of the Members is matters specified in the notice of meeting.
confined to matters specified in the notice The SCPIE Holdings Bylaws establish an
of meeting. advance notice procedure with regard to the
The Bylaws of the Exchange provide for nomination by stockholders of candidates for
an advance notice procedure with respect to election as directors and with regard to
the nomination by Members of candidates for proposals of business to be brought before
election as members of the Board of an annual meeting of stockholders of SCPIE
Governors and with respect to certain Holdings. Notice as to any such stockholder
matters to be brought before an annual nomination or other proper proposal must be
meeting of Members. Nominations by Members received by SCPIE Holdings not less than 60
require a nominee to be nominated by 10% of days nor more than 90 days prior to the
the Members in writing at least 60 days anniversary date of the immediately preced-
prior to the date of the meeting. Members ing annual meeting. In the event that the
eligible to make such nominations must be date of the annual meeting is more than 30
members both at the date the nominations are days before or more than 60 days after such
made and at December 31 of the preceding anniversary date, however, the Bylaws
year. provide additional time for notice. In
Bylaws of the Exchange may be amended addition, such notice must contain certain
by the proposal of a Member at an annual specified information concerning the person
meeting only if the text of the proposed to be nominated or the matters to be brought
bylaw amendment has been filed with the before the meeting as well as the name and
Secretary of the Exchange at least 60 days address of the stockholder and the class and
prior to the date of the meeting. number of shares beneficially owned by the
stockholder submitting the proposal.
Domiciliary State. California Domiciliary State. Delaware
</TABLE>
32
<PAGE> 40
<TABLE>
<CAPTION>
DESCRIPTION OF CERTAIN RIGHTS OF MEMBERS OF DESCRIPTION OF CERTAIN RIGHTS OF HOLDERS OF
THE EXCHANGE SCPIE HOLDINGS STOCK AFTER THE MERGER
<S> <C>
Voting. Each Member is entitled to one Voting. Holders of Common Stock are
vote on all matters submitted to the Members entitled to one vote per share on all matters
for action or approval, regardless of the with respect to which the holders of Common
number of insurance policies or certificate Stock are entitled to vote (including the
inserts of the Exchange that may be held by election of directors) and, except as
such Member. The Bylaws generally require otherwise required by law or by the terms of
the affirmative vote of a majority of any series of Preferred Stock then
members to approve matters submitted to the outstanding, the holders of Common Stock
Members unless a higher vote is required by will exclusively possess all voting power.
such Bylaws. The Bylaws require that the Under DGCL in the absence of specific
Exchange may be liquidated only with the requirements in a corporation's certificate
affirmative vote of two-thirds (66 2/3%) of of incorporation or bylaws, all matters
the Members and that Bylaws of the Exchange submitted to stockholders for approval must
may be amended or repealed only by the be approved by the affirmative vote of the
affirmative vote of a majority of the holders of a majority of the outstanding
Members entitled to vote. In the election of shares entitled to vote except for election
members of the Board of Governors, there is of directors, which requires a plurality
no cumulative voting, which means that a vote, and certain matters governed by Sec-
majority of the Members voting at the tion 203 of the DGCL, which requires the ap-
meeting will be entitled to elect all of the proval of the Board of Directors and of
members of the Board of Governors to be two-thirds (66 2/3%) vote of disinterested
elected at such meeting if they choose to do stockholders to approve certain types of
so. In that event, any other members will business combinations. See "-- Anti-takeover
not be able to elect any members of the Provisions." Pursuant to the Restated
Board of Governors. Certificate, certain matters require a
two-thirds (66 2/3%) vote of outstanding
Common Stock, including provisions described
under "-- Removal of Directors,"
"-- Amendments to Governing Documents,"
"-- Business Combinations" and
"-- Anti-takeover Provisions." In the
election of members of the Board of
Directors, there is no cumulative voting,
which means that the holders of a majority
of Common Stock entitled to vote and voting
at the meeting will be entitled to elect all
of the members of the Board of Directors to
be elected at such meeting if they choose to
do so.
</TABLE>
33
<PAGE> 41
<TABLE>
<CAPTION>
DESCRIPTION OF CERTAIN RIGHTS OF MEMBERS OF DESCRIPTION OF CERTAIN RIGHTS OF HOLDERS OF
THE EXCHANGE SCPIE HOLDINGS STOCK AFTER THE MERGER
<S> <C>
Preferred Stock. Not applicable. Preferred Stock. The SCPIE Holdings Board
is authorized, subject to any limitations pre-
scribed by law, without further action by
stockholders, to issue up to 5,000,000
shares of Preferred Stock, from time to
time, in one or more series and, with
respect to each series, to determine the
terms thereof, including the number of
shares, dividend rates, redemption rights,
conversion rights, voting rights and rights
on liquidation. See "Description of Capital
Stock -- Preferred Stock." Because the SCPIE
Holdings Board has the power to establish
the preferences, powers and rights of each
series, it may afford the holders of any
particular series of Preferred Stock prefer-
ences, powers and rights (including dividend
rights, voting powers and liquidation
preferences) senior to the rights of the
holders of Common Stock. No shares of
Preferred Stock will be outstanding
immediately following the Merger and the
Initial Public Offering, and the Company has
no immediate plans to issue any series of
Preferred Stock. The issuance of a series of
Preferred Stock could, depending on the
terms of such series, have the effect of
discouraging, delaying or preventing a third
party from acquiring or proposing to acquire
a majority of the outstanding voting stock
of SCPIE Holdings. See "Description of
Capital Stock -- Delaware Law and Certain
Charter and Bylaw Provisions."
Limited Liability. The liability of a Limited Liability. The liability of
Member is generally limited to the premiums holders of Common Stock is generally limited
accrued under the current policies of to the price paid for such Common Stock by the
insurance issued by the Exchange to such holder.
Member. Members of the Exchange are not
subject to assessment.
</TABLE>
34
<PAGE> 42
<TABLE>
<CAPTION>
DESCRIPTION OF CERTAIN RIGHTS OF MEMBERS OF DESCRIPTION OF CERTAIN RIGHTS OF HOLDERS OF
THE EXCHANGE SCPIE HOLDINGS STOCK AFTER THE MERGER
<S> <C>
Management. The Exchange is a Management. The SCPIE Holdings Board has
reciprocal insurance company and management the power and duty to manage the business and
responsibility is divided between the Board affairs of SCPIE Holdings and, indirectly,
of Governors and its attorney-in-fact, SCPIE all its subsidiaries. The SCPIE Holdings
Management Company (the "Manager"), Board may designate committees, each
appointed by each subscriber when the committee to consist of one or more
subscriber becomes a Member. The Manager is directors, and has established an audit
designated as the attorney-in-fact for each committee, a compensation committee and an
subscriber under a Subscriber Agreement and executive committee. Directors are elected
Power of Attorney (the "Subscriber Agree- by the stockholders of SCPIE Holdings. See
ment") which each subscriber must sign when "-- Voting" and "-- Election of Directors."
making application for insurance. The The officers of the Company serve at
Subscriber Agreement describes the general the discretion of the SCPIE Holdings Board.
allocation of powers and duties between the
Manager and the Board of Governors. A more
detailed definition of these matters is set
forth in the Management Agreement between
the Manager and the Exchange (the
"Management Agreement"), which is subject to
renewal annually. If the Management
Agreement is terminated, the Board of
Governors has the right to name a new
attorney-in-fact for the Members.
Under the Subscriber Agreement and the
Management Agreement, the Manager operates
the business of the Exchange, accepts or
rejects applications, formulates the form of
insurance policies, handles and disposes of
claims, and performs all related functions.
The Board of Governors, on the other hand,
retains broad supervisory powers over the
financial aspects of the Exchange, including
investments, and establishes guidelines to
be followed by the Manager in certain key
areas such as policy forms, rates,
underwriting rules, surplus requirements and
dividend policies.
</TABLE>
35
<PAGE> 43
<TABLE>
<CAPTION>
DESCRIPTION OF CERTAIN RIGHTS OF MEMBERS OF DESCRIPTION OF CERTAIN RIGHTS OF HOLDERS OF
THE EXCHANGE SCPIE HOLDINGS STOCK AFTER THE MERGER
<S> <C>
Board of Governors. The Bylaws of the Board of Directors. The SCPIE Holdings
Exchange provide that the Board of Governors Board consists of a minimum of seven and a
shall consist of nine members, each of whom maximum of thirteen directors (not including
must be a Member, and that this bylaw may be directors who may be selected from time to
amended only by the affirmative vote of a time by holders of Preferred Stock), such
majority of the Members. The Board of actual number of directors to be fixed from
Governors is divided into three classes who time to time by the affirmative vote of a
serve for staggered terms. Each class is majority of the SCPIE Holdings Board.
comprised of three governors, who serve for Accordingly, the SCPIE Holdings Board, and
a term of three years, with one class being not the stockholders, has the authority to
elected at each annual meeting. determine the number of directors, within
certain limits.
Immediately following the consummation of
the Merger, the SCPIE Holdings Board will consist
of twelve members. The Board of Directors is
divided into three classes who serve staggered
terms (not including directors who may be
selected from time to time by holders of
Preferred Stock). Each class is comprised of
four directors, who serve for a term of three
years, with one class being elected at each
annual meeting. See "Management -- Directors
and Executive Officers."
In the future, if a number of vacancies
existed on the SCPIE Holdings Board, the
Board's ability to determine the number of
directors could delay any stockholder from
obtaining majority representation on the
SCPIE Holdings Board and filling the new
vacancies with its own nominees until the
next stockholder election.
Election of Governors. The Exchange's Election of Directors. The SCPIE Holdings
Bylaws provide that nominations for election Bylaws provide that nominations for election
of members of the Board of Governors may be of directors may be made only by or at the
made only by the Board of Governors or by direction of the SCPIE Holdings Board or by
10% of the Members. See "-- Meetings and any stockholders of SCPIE Holdings entitled
Actions." to vote on the election of directors who
comply with certain notice procedures and
who were stockholders of record at the time
of giving such notice. See "-- Meetings and
Actions." Directors are elected at the
annual meeting of stockholders except when
filling vacancies or newly-created vacan-
cies. See "-- Vacancies." A plurality of
votes present in person or by proxy and
entitled to vote on the election of
directors is required for election.
</TABLE>
36
<PAGE> 44
<TABLE>
<CAPTION>
DESCRIPTION OF CERTAIN RIGHTS OF MEMBERS OF DESCRIPTION OF CERTAIN RIGHTS OF HOLDERS OF
THE EXCHANGE SCPIE HOLDINGS STOCK AFTER THE MERGER
<S> <C>
Removal of Governors. The Exchange's Removal of Directors. The Restated Certifi-
Bylaws provide that a member of the Board of cate provides that directors can be removed
Governors may be removed only by the vote of from office only for cause and only with the
a majority of the Members, and that such vote of two- thirds (66 2/3%) of the voting
removal may be voted upon only at a special power of the then outstanding shares of
meeting of the Members called for that voting stock of SCPIE Holdings, voting
purpose. together as a single class.
Vacancies. Vacancies in the Board of Vacancies. The Restated Certificate pro-
Governors may be filled by a majority of the vides that vacancies on the SCPIE Holdings
remaining governors, though less than a Board and any newly-created directorships
quorum. Any vacancy not filled by the Board resulting from an increase in the authorized
of Governors may be filled by the Members. number of directors may be filled for the
remainder of a term only by an affirmative
vote of a majority of the remaining
directors (even though less than a quorum)
and not by the stockholders of SCPIE
Holdings. The provisions of the Restated
Certificate governing removal of directors
and the filling of vacancies would preclude
a third party from removing incumbent
directors and simultaneously gaining control
of the SCPIE Holdings Board by filling
vacancies created by such removal with its
own nominees unless, among other things,
such third party controls at least
two-thirds (66 2/3%) of the combined voting
power of SCPIE Holdings' voting stock.
</TABLE>
37
<PAGE> 45
<TABLE>
<CAPTION>
DESCRIPTION OF CERTAIN RIGHTS OF MEMBERS OF DESCRIPTION OF CERTAIN RIGHTS OF HOLDERS OF
THE EXCHANGE SCPIE HOLDINGS STOCK AFTER THE MERGER
<S> <C>
Indemnification. The Exchange's Bylaws Indemnification. The SCPIE Holdings Bylaws
provide that the Exchange shall indemnify provide that SCPIE Holdings shall indemnify
and hold harmless the members of the Board its directors and officers and may indemnify
of Governors, the officers of the Exchange, its employees and agents, who are parties or
and members of any committees appointed by threatened to be made parties to any action,
the Board of Governors from and against suit or proceeding by reason of such
judgments, fines, amounts paid in person's capacity as a director, officer,
settlement, and reasonable expenses incurred employee or agent of SCPIE Holdings, from
in the defense of any actions, suits or and against expenses (including legal fees),
proceedings relating to claims or judgments, fines and settlements arising
liabilities asserted against the management from such action, suit or proceeding to the
or operations of the Exchange, including any fullest extent permitted by applicable law.
derivative actions brought in the name of or Section 145(a) of the DGCL provides that a
on behalf of the Exchange. However, no corporation may indemnify a director,
indemnification may be made for any claim, officer, employee or agent if such person
obligation or liability which arose out of acted in good faith and in a manner
such person's active and deliberate reasonably believed to be in, or not opposed
dishonesty or fraud. to, the best interests of the corporation
The Management Agreement provides for and, with respect to any criminal
similar rights of indemnification by the proceeding, had no reasonable cause to
Exchange of the Manager, its officers, believe the conduct was unlawful. In
directors, employees and shareholders with addition, effective upon consummation of the
respect to acts or omissions of such persons Merger, SCPIE Holdings will enter into
on behalf of the Exchange, the Board of indemnification agreements with each of its
Governors and the Members. However, no directors and certain of its executive
indemnification may be made for any claim, officers that generally provide for similar
obligation or liability which arose out of indemnification. As permitted by the DGCL,
such person's active and deliberate the Restated Certificate eliminates in
dishonesty or fraud. certain circumstances the monetary liability
of the directors of SCPIE Holdings for a
breach of their fiduciary duties as
directors.
Amendments to Governing Documents. Amendments to Governing Documents.
Members of the Exchange may adopt, alter, Stockholders of SCPIE Holdings are entitled
amend or repeal provisions of the Exchange's to adopt, alter, amend, rescind or repeal
Bylaws by the vote of a majority of the provisions of the SCPIE Holdings Bylaws by
Members at an annual or special meeting or the affirmative vote of two-thirds (66 2/3%)
by the unanimous written consent of the of the total voting power of the then
Members. A Member may not propose a new outstanding voting stock, voting together as
bylaw or the amendment or repeal of an a single class. The SCPIE Holdings Board is
existing bylaw at an annual meeting unless also entitled to alter, amend, change or
the text of the proposed change has been repeal provisions of the SCPIE Holdings
filed with the Secretary of the Exchange at Bylaws by majority vote. Generally, under
least 60 days prior to the date of the Section 242 of the DGCL, an amendment to the
annual meeting. Restated Certificate requires adoption by
the SCPIE Holdings Board of a resolution
setting forth the proposed amendment and the
approval thereof by a majority vote of the
Common Stock issued, outstanding and
entitled to vote.
</TABLE>
38
<PAGE> 46
<TABLE>
<CAPTION>
DESCRIPTION OF CERTAIN RIGHTS OF MEMBERS OF DESCRIPTION OF CERTAIN RIGHTS OF HOLDERS OF
THE EXCHANGE SCPIE HOLDINGS STOCK AFTER THE MERGER
<S> <C>
Financial Reporting. The Exchange is Financial Reporting. SCPIE Holdings will
not required to provide the Members with any be subject to the reporting requirements of
annual or quarterly income and expense the Exchange Act, and will file annual and
statements or balance sheets. The Exchange quarterly reports with the Commission and
is required to file annual and quarterly with the New York Stock Exchange. SCPIE
financial statements prepared in accordance Holdings will also provide to the holders of
with statutory accounting practices ("SAP") Common Stock annual and quarterly reports of
with the California Department, which are its financial condition and results of
open to public inspection. The Exchange has operations, prepared in accordance with GAAP
provided to Members since its inception an and, with respect to the annual reports,
annual report of its financial condition and audited by independent accountants. Fol-
results of operations, prepared in accor- lowing the Merger, the Insurance
dance with SAP and audited by independent Subsidiaries will file annual and quarterly
accountants. financial statements under SAP with the
departments of insurance of their respective
domiciliary states.
Business Combinations. The Bylaws of Business Combinations. The DGCL generally
the Exchange require that the Board of requires that a majority of the stockholders
Governors may elect to voluntarily liquidate approve a merger, consolidation or the sale,
the Exchange only with the affirmative vote lease or exchange of all or substantially
of two-thirds (66 2/3%) of the Members. This all of a corporation's property and assets.
may limit or restrict the Board from taking The DGCL contains additional restrictions
action to sell or transfer the business or where such action or transaction is with, or
assets of the Exchange or to merge the proposed by or on behalf of, an "Interested
Exchange with another insurance company in a Stockholder" (defined generally as a person
transaction in which SCPIE is not the owning 15% or more of SCPIE Holdings'
surviving entity. outstanding voting stock). See
"-- Anti-takeover Provisions" and
"Description of Capital Stock -- Delaware
Law and Certain Charter and Bylaw
Provisions."
</TABLE>
39
<PAGE> 47
<TABLE>
<CAPTION>
DESCRIPTION OF CERTAIN RIGHTS OF MEMBERS OF DESCRIPTION OF CERTAIN RIGHTS OF HOLDERS OF
THE EXCHANGE SCPIE HOLDINGS STOCK AFTER THE MERGER
<S> <C>
Anti-takeover Provisions. The Board of Anti-takeover Provisions. SCPIE Holdings
Governors is divided into three classes of is a Delaware corporation and is subject to the
directors, serving staggered three-year provisions of Section 203 of the DGCL. In
terms. As a result, one third of the Board general, Section 203 prevents an "interested
of Governors is elected each year. This stockholder" (defined generally as a person
classified board provision could delay a owning 15% or more of SCPIE Holdings'
majority of Members who do not like the outstanding voting stock) from engaging in a
policies of the Board of Governors from "business combination" (as defined in
removing a majority of the Board of Section 203) with SCPIE Holdings for three
Governors for two years. years following the date that person became
an interested stockholder unless: (i) before
that person became an interested
stockholder, the SCPIE Holdings Board
approved the transaction in which the
interested stockholder became an interested
stockholder or approved the business
combination; (ii) upon completion of the
transaction that resulted in the interested
stockholder becoming an interested
stockholder, the interested stockholder
owned at least 85% of the voting stock of
SCPIE Holdings outstanding at the time the
transaction commenced (excluding stock held
by directors who are also officers of SCPIE
Holdings and by employee stock plans that do
not provide employees with the right to
determine confidentially whether shares held
subject to the plan will be tendered in a
tender or exchange offer); or (iii) on or
following the date on which that person
became an interested stockholder, the
business combination is approved by the
SCPIE Holdings Board and authorized at a
meeting of stockholders by the affirmative
vote of the holders of at least two-thirds
(66 2/3%) of the outstanding voting stock of
SCPIE Holdings not owned by the interested
stockholder.
Under Section 203, these restrictions
also do not apply to certain business
combinations proposed by an interested
stockholder following the announcement or
notification of one of certain extraordinary
transactions involving SCPIE Holdings and a
person who was not an interested stockholder
during the previous three years or who
became an interested stockholder with the
approval of a majority of SCPIE Holdings'
directors, if that extraordinary transaction
is approved or not opposed by a majority of
the directors (but not less than one) who
were directors before any person became an
interested stockholder in the previous three
years or who were recommended for election
or elected to succeed such directors by a
majority of such directors then in office.
</TABLE>
40
<PAGE> 48
<TABLE>
<CAPTION>
DESCRIPTION OF CERTAIN RIGHTS OF MEMBERS OF DESCRIPTION OF CERTAIN RIGHTS OF HOLDERS OF
THE EXCHANGE SCPIE HOLDINGS STOCK AFTER THE MERGER
<S> <C>
The SCPIE Holdings Board of Directors is
divided into three classes of directors,
serving staggered three-year terms. The
classified board provisions could have the
effect of discouraging a third party from
making a tender offer or otherwise
attempting to gain control of SCPIE Hold-
ings. The Restated Certificate of SCPIE and
SCPIE Holdings' Bylaws will also contain
certain provisions that may delay, defer or
prevent a change of control of SCPIE
Holdings and make removal of management more
difficult. These provisions are intended to
(i) enhance the likelihood of continuity and
stability in the composition of the SCPIE
Holdings Board and in the policies
formulated by the SCPIE Holdings Board, (ii)
discourage certain types of transactions
which may involve an actual or threatened
change of control of SCPIE Holdings, (iii)
reduce the vulnerability of SCPIE Holdings
to an unsolicited proposal for a takeover of
the Company that does not contemplate the
acquisition of all its outstanding shares or
an unsolicited proposal for the
restructuring or sale of all or part of
SCPIE Holdings, and (iv) discourage certain
tactics that may be used in proxy fights.
In addition, the issuance of shares of
Preferred Stock by SCPIE Holdings (or the
issuance of rights to purchase such shares)
could be used to discourage an unsolicited
acquisition proposal. For instance, the
issuance of a series of Preferred Stock
might (i) impede a business combination by
including class voting rights that would
enable the holders to block such a
transaction or (ii) facilitate a business
combination by including voting rights that
would provide a required percentage vote of
the stockholders. Also, under certain
circumstances, the issuance of Preferred
Stock could adversely affect the voting
power of the holders of Common Stock.
The provisions described in "-- Meetings
and Actions," "-- Board of Directors,"
"Election of Directors," "-- Removal of
Directors," "-- Vacancies," and
"-- Amendments to Governing Documents,"
together with the ability of the SCPIE
Holdings Board to authorize the issuance of
Preferred Stock without further stockholder
action, could delay or frustrate the removal
of incumbent directors or the assumption of
control of SCPIE Holdings by the holder of a
large
</TABLE>
41
<PAGE> 49
<TABLE>
<CAPTION>
DESCRIPTION OF CERTAIN RIGHTS OF MEMBERS OF DESCRIPTION OF CERTAIN RIGHTS OF HOLDERS OF
THE EXCHANGE SCPIE HOLDINGS STOCK AFTER THE MERGER
<S> <C>
block of Common Stock. These provisions
could also discourage or make more difficult
a merger, tender offer or proxy contest even
if a majority of the stockholders might
consider such event to be in their best
interest. See "Description of Capital Stock
-- Delaware Law and Certain Charter and
Bylaw Provisions."
</TABLE>
42
<PAGE> 50
MARKET FOR COMMON STOCK
Prior to the Merger, as a reciprocal insurer, the Exchange has not issued
any capital stock. SCPIE Holdings has been organized for the purpose of becoming
the parent company of the Insurance Subsidiaries upon consummation of the
Merger. Prior to the Merger, there has not been any market for the Common Stock.
The Common Stock has been approved for listing, subject to official notice of
issuance, on the New York Stock Exchange under the symbol "SKP." There can be no
assurance that an active market for the Common Stock will develop after such
listing or, if developed, will continue. Regardless of whether a public market
for such stock develops, if a substantial number of shares of Common Stock are
sold by Eligible Members or any other stockholders, the market price of the
Common Stock may be adversely affected.
Completion of the Initial Public Offering is not a condition to
consummation of the Merger. If the Merger is consummated and the Initial Public
Offering does not occur, the shares of Common Stock distributed to Eligible
Members would still be listed on the New York Stock Exchange; however, in the
absence of the Initial Public Offering, there is no assurance that either an
active or an orderly trading market for the Common Stock will develop. The
absence of an active and orderly trading market could have an adverse effect on
the market price of the Common Stock subsequent to the Merger. See "Risk
Factors -- Lack of Prior Public Market for Common Stock and Possible Volatility
of Stock Price; No Initial Public Offering" and "Risk Factors -- Shares Eligible
for Future Sale."
DIVIDEND POLICY
The Company currently intends to pay regular quarterly cash dividends. The
Company initially expects to pay a quarterly cash dividend of $.05 per share
commencing in the first quarter of 1997. The declaration and payment of
dividends to holders of Common Stock will be at the discretion of the SCPIE
Holdings Board and will be dependent upon SCPIE Holdings' financial condition,
results of operations, cash requirements, future prospects, regulatory
restrictions on the payment of dividends to SCPIE Holdings by the Insurance
Subsidiaries and other factors deemed relevant by the SCPIE Holdings Board.
There can be no assurance that SCPIE Holdings will declare and pay any
dividends. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Liquidity and Capital Resources." At the present time,
the dividends that the Company intends to pay to its stockholders are
significantly lower than the premium credit dividends that the Exchange
historically paid to certain of its Members. See "Comparison of Certain Rights
of Members Before and After the Merger -- Distributions."
Following the Effective Date, SCPIE Holdings will be an insurance holding
company whose assets will consist primarily of all of the outstanding shares of
the common stock of the Insurance Subsidiaries. Although SCPIE Holdings intends
to retain approximately $2.7 million of the net proceeds from the Initial Public
Offering for general corporate purposes, SCPIE Holdings' ability to pay
dividends to its stockholders and meet its other obligations, including
operating expenses and any debt service, will depend primarily upon the receipt
of sufficient funds from the Insurance Subsidiaries. The payment of dividends by
the Insurance Subsidiaries to SCPIE Holdings will be restricted by applicable
insurance law. See "Risk Factors -- Holding Company Structure; Limitation on
Dividends," "Business -- Regulation -- Regulation of Dividends from Insurance
Subsidiaries" and "Description of Capital Stock."
43
<PAGE> 51
CAPITALIZATION
The information set forth in the table presented below is derived from the
combined financial statements and the related notes thereto included elsewhere
in this Proxy Statement/Prospectus. The table presents the capitalization at
June 30, 1996 of: (i) the Exchange and OSCAP on a combined basis; (ii) SCPIE
Holdings, adjusted to reflect, on a pro forma basis, the Merger and the issuance
of 10,000,000 shares of Common Stock (less fractional shares, which will be paid
in cash) in connection therewith to Eligible Members and 500,000 shares of
Common Stock issued to SCPIE Indemnity; and (iii) SCPIE Holdings as adjusted
further to reflect the sale of 2,000,000 shares of Common Stock in the Initial
Public Offering at an assumed Initial Stock Price of $20.00 per share, and the
application of the estimated net proceeds therefrom. See "The Merger." The table
should be read in conjunction with the historical combined financial statements
and the related notes thereto appearing elsewhere in this Proxy
Statement/Prospectus.
<TABLE>
<CAPTION>
AT JUNE 30, 1996
-----------------------------------------
AS FURTHER
ACTUAL AS ADJUSTED ADJUSTED
-------- ----------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Total debt.......................................... $ -- $ -- $ --
Equity:
Preferred Stock, $1.00 par value, 5,000,000 shares
authorized; no shares issued and outstanding... -- -- --
Common Stock, $0.0001 par value, 30,000,000 shares
authorized; 0 shares issued and outstanding;
10,500,000 issued and 10,000,000 outstanding,
as adjusted; and 12,500,000 issued and
12,000,000 outstanding, as further
adjusted(1).................................... -- 1 1
Additional paid-in capital........................ -- 262,372(2) 299,572(2)
Surplus........................................... 264,673 -- --
Net unrealized appreciation of invested assets.... 149 149 149
-------- -------- -------
Total equity.............................. 264,822 262,522 299,722(3)
-------- -------- -------
Total capitalization................................ $264,822 $ 262,522 $299,722(3)
======== ======== =======
</TABLE>
- - ---------------
(1) The 500,000 shares issued to SCPIE Indemnity in the Merger are treated as
issued but not outstanding under GAAP. See "The Merger -- Additional Aspects
of the Merger and the Plan -- Issuance of Shares to SCPIE Indemnity."
(2) Additional paid-in capital in the As Adjusted column is reduced by $2.3
million to reflect the estimated expenses related to the transactions which
would be charged to operations at consummation of the Merger, if the Initial
Public Offering does not occur. The As Further Adjusted column reflects the
estimated underwriting discounts and expenses of the Initial Public Offering
of $3.35 million and estimated expenses related to the Merger of $1.75
million.
(3) As noted above, Total equity and Total capitalization are based upon an
assumed Initial Stock Price of $20.00 per share. Such price per share is
solely an estimate. The actual Initial Stock Price will not be determined
until after the Special Meeting, and it could vary significantly from the
estimate shown above. For example, if the Initial Stock Price is $16.00 per
share, Total equity and Total capitalization as Further Adjusted would be
$292,282. If the Initial Stock Price per share is $24.00 per share, the
Total equity and Total capitalization as Further Adjusted would be $307,162.
Completion of the Initial Public Offering is not a condition to consummation
of the Merger. See "Risk Factors -- Lack of Prior Public Market for Common
Stock and Possible Volatility of Stock Price; No Initial Public Offering."
44
<PAGE> 52
CERTAIN FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER
The following discussion is a summary of the material Federal income tax
consequences which are expected to result from the Merger and the related
transactions, and is based on the opinion of Latham & Watkins, tax counsel to
the Company ("Tax Counsel"). This summary is based on the current provisions of
the Internal Revenue Code of 1986, as amended (the "Code"), existing Treasury
Regulations thereunder and administrative rulings and court decisions, all of
which are subject to changes that can be retroactively applied. The following
discussion is limited to those persons who are citizens or residents of the
U.S., corporations or partnerships organized in or under the laws of the U.S.,
and an estate or trust the income of which is subject to Federal income taxation
regardless of its source.
It is impractical to comment on all aspects of Federal, state, local and
foreign laws that may affect the tax consequences of the Merger as they relate
to the particular circumstances of each Eligible Member. This discussion does
not address any aspect of foreign, state or local law or Federal estate or gift
tax considerations. In addition, the following discussion does not address how
the Federal income tax rules affect all of the possible types of Eligible
Members, some of whom (e.g., tax-exempt entities) may be subject to special
rules not discussed herein.
THE DISCUSSION SET FORTH BELOW ADDRESSES ONLY THE MATERIAL FEDERAL INCOME
TAX CONSEQUENCES OF GENERAL APPLICATION WHICH ARE EXPECTED TO RESULT FROM THE
MERGER. ELIGIBLE MEMBERS SHOULD CONSULT THEIR TAX ADVISORS TO DETERMINE THE TAX
CONSEQUENCES OF THE MERGER, AND HOLDING AND DISPOSITION OF MERGER SHARES TO BE
RECEIVED IN CONNECTION THEREWITH, INCLUDING THE APPLICABILITY AND EFFECT OF
FEDERAL, STATE, LOCAL AND FOREIGN INCOME AND OTHER TAX LAWS WITH RESPECT TO
THEIR OWN PARTICULAR CIRCUMSTANCES.
GENERAL
Assuming that the Merger and the related transactions will take place as
described elsewhere in this Proxy Statement/Prospectus and that certain factual
matters represented by the Exchange are true and correct, it is the opinion of
Tax Counsel that (i) the Merger will constitute a reorganization within the
meaning of Section 368(a) of the Code, (ii) the Eligible Members will recognize
no gain or loss for Federal income tax purposes by reason of the exchange of
their Membership Interests for the Merger Shares, except to the extent of any
cash received in lieu of fractional Merger Shares and (iii) no gain or loss will
be recognized by the Exchange, SCPIE Holdings or SCPIE Indemnity, as further
discussed below.
ELIGIBLE MEMBERS
Eligible Members will not recognize gain or loss for Federal income tax
purposes upon their exchange of Membership Interests for Merger Shares pursuant
to the Merger. The tax basis in their Merger Shares will be equal to their tax
basis in their exchanged Membership Interests, which is deemed to be zero for
Federal income tax purposes. The holding period for the Merger Shares received
by an Eligible Member generally will include the holding period for the
exchanged Membership Interest. Eligible Members who receive cash for fractional
Merger Shares will generally recognize capital gain or loss equal to the amount
of the cash received.
Upon a subsequent sale or other taxable disposition of Merger Shares,
Eligible Members will recognize gain in an amount equal to the amount of cash
and fair market value of any property received upon such sale or other taxable
disposition minus their tax basis in such Merger Shares. Since their tax basis
in the Merger Shares would be zero (as discussed above), the entire amount of
cash and fair market value of any property received would be the amount of gain
subject to tax. Such gain will generally be long-term capital gain if the
holding period of the Merger Shares (which includes the holding period of the
exchanged Membership Interest) is more than one year.
Policies issued by the Exchange before the Merger will not be deemed
reissued or newly issued in
45
<PAGE> 53
exchange for existing policies as a result of the Merger. Accordingly, the
Federal income tax rules that currently apply to each policy will generally
continue to apply after the Merger.
THE EXCHANGE AND SCPIE INDEMNITY
Subject to the discussion below under "-- Issuance of Rules Dealing with
Inversions," no gain or loss will be recognized by the Exchange and SCPIE
Indemnity as a result of the Merger. SCPIE Indemnity's tax basis in the assets
of the Exchange acquired pursuant to the Merger will be equal to the tax basis
of such assets in the hands of the Exchange immediately prior to the Merger.
CONSEQUENCE OF A TAXABLE EXCHANGE
If the Merger were not to qualify as a tax-free reorganization under
Section 368(a) of the Code, Eligible Members would recognize gain equal to the
fair market value of the Merger Shares received in the Merger minus their tax
basis in their exchanged Membership Interests (which, as discussed above, would
be zero). Such gain would generally be capital gain, and would be long-term
capital gain if the Eligible Member has held the Membership Interest for more
than one year. The tax basis of the Merger Shares received pursuant to the
Merger Agreement would generally be equal to the fair market value of that stock
at the Effective Time, and the holding period of the exchanged Membership
Interest would not be included in the holding period of the Merger Shares
received.
In addition, if the Merger were not to qualify as a tax-free
reorganization, the Exchange would recognize, in a taxable transaction, gain
equal to the excess of the fair market value of the total Merger Shares that the
Eligible Members are entitled to receive pursuant to the Merger over the
Exchange's aggregate tax basis in its assets transferred to SCPIE Indemnity in
the Merger.
ISSUANCE OF RULES DEALING WITH INVERSIONS
There is a pending project at the Service dealing with the tax consequences
of a transaction involving an "inversion" of members of an affiliated group
(i.e., the positions of such members are inverted or otherwise reversed). The
Service has announced in Notice 94-93 that any Treasury Regulations addressing
inversion transactions will apply to certain transactions occurring on or after
September 22, 1994. Notice 94-93 provides that future Treasury Regulations may
require, where appropriate, "recognition of income or gain at the time of an
inversion transaction" or "reductions to the basis (or increases in gain on the
sale or other disposition) of the stock of one or more corporations that are
involved in inversion transactions." While the potential scope of any future
Treasury Regulations or other Service positions applicable to inversion
transactions is unclear, Tax Counsel does not believe that income or gain
recognition should be required in connection with the Merger and the related
transactions.
POSSIBLE POLICYHOLDER DIVIDEND TREATMENT
Eligible Members should be aware that a Federal district court recently
rejected a claim by a life insurance company that its distribution to its
policyholders of stock and cash pursuant to its plan of demutualization should
be treated as a policyholder dividend distribution, rather than as part of an
exchange. UNUM Corp. v. United States, 929 F. Supp. 15 (D. Maine 1996). This
case is on appeal to the Federal Court of Appeals for the First Circuit. If the
distribution were treated for Federal income tax purposes as a dividend
distribution, such company would be entitled to a policyholder dividend
deduction equal to the amount of cash and the fair market value of any stock
distributed, and each policyholder receiving stock or cash would likely be
treated for Federal income tax purposes as if the policyholder had received a
policyholder dividend equal to the amount of cash or the fair market value of
the stock received. The Exchange plans to treat the Merger Shares (and cash in
lieu of a fractional share) as issued in exchange for the Membership Interests
pursuant to a tax-free reorganization and not as a policyholder dividend.
In the event that any portion of the consideration received by an Eligible
Member pursuant to the Merger were treated as a policyholder dividend (an event
which Tax Counsel believes is highly unlikely),
46
<PAGE> 54
the normal tax consequences of the receipt of a policyholder dividend would
apply (rather than the rules generally summarized above). The tax basis of the
Merger Shares received pursuant to the Merger Agreement would generally be equal
to the fair market value of that stock at the Effective Time, and the holding
period of the exchanged Membership Interest would not be included in the holding
period of the Merger Shares received.
TAXPAYER IDENTIFICATION NUMBER
It is important that each Eligible Member complete, sign and return the
Taxpayer Identification Card accompanying the Eligible Member's Proxy card. (For
most individuals, the Eligible Member's taxpayer identification number is the
Eligible Member's Social Security number.) IF THE ELIGIBLE MEMBER FAILS TO
COMPLETE, SIGN AND RETURN THIS CARD, THE ELIGIBLE MEMBER MAY BE SUBJECT TO A $50
PENALTY AND THE EXCHANGE (OR SCPIE INDEMNITY) MAY BE REQUIRED TO WITHHOLD FOR
FEDERAL INCOME TAXES 31% OF ANY CASH PAYMENT, INCLUDING ANY FUTURE DIVIDENDS ON
MERGER SHARES, THE ELIGIBLE MEMBER WOULD OTHERWISE RECEIVE. This 31% withholding
is not an additional tax and any amount withheld may be claimed on the Eligible
Member's Federal income tax return as a credit against the Eligible Member's
Federal income tax liability. Detailed instructions for completing the Taxpayer
Identification Card are included at Annex V hereto.
MERGER TAX OPINION
It is a condition to the Company's obligation to effect the Merger that the
Company shall have received a private letter ruling from the Service or an
opinion from a law firm of recognized standing (the "Merger Tax Opinion") that,
for federal income tax purpose, the Eligible Members generally will recognize no
gain or loss on the exchange of their Membership Interests for shares of Common
Stock pursuant to the Merger. The Exchange has requested a ruling from the
Service that the Merger will constitute a tax-free reorganization for Federal
income tax purposes, and, if the Service does not so rule or does not so rule
prior to the Effective Time, Tax Counsel will render the Merger Tax Opinion in
satisfaction of the conditions of the Merger Agreement. Tax Counsel's opinion
will be based on current law, certain assumptions set forth therein, certain
representations from the Exchange and certain other information, data,
documentation and materials Tax Counsel deems necessary. While a private letter
ruling issued by the Service generally is binding on the Service and a taxpayer,
an opinion of counsel (although such opinion would represent the best
interpretation of applicable law by counsel) is not binding on the Service, and,
therefore, no assurance can be given that such an opinion will not be challenged
by the Service or would be sustained by a court if so challenged.
47
<PAGE> 55
SELECTED FINANCIAL AND OPERATING DATA
The following table sets forth selected combined financial data for the
Exchange and OSCAP. The selected combined income statement data set forth below
for each of the years in the three year period ended December 31, 1995 and the
selected combined balance sheet data as of December 31, 1995 and 1994 are
derived from the combined financial statements audited by Ernst & Young LLP,
independent auditors, included elsewhere herein and should be read in
conjunction with, and are qualified by reference to such statements and the
related notes thereto. The selected combined income statement data for the years
ended December 31, 1992 and 1991 and for the six months ended June 30, 1996 and
1995 and the selected combined balance sheet data as of December 31, 1993, 1992
and 1991 and as of June 30, 1996 and 1995, are derived from unaudited combined
financial statements of the Exchange and OSCAP which management believes
incorporate all of the adjustments necessary for the fair presentation of the
financial condition and results of operations for such periods.
<TABLE>
<CAPTION>
AS OF OR FOR THE
SIX MONTHS ENDED
JUNE 30, AS OF OR FOR THE YEAR ENDED DECEMBER 31,
------------------- ----------------------------------------------------
1996 1995 1995 1994 1993 1992 1991
-------- -------- -------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
COMBINED INCOME STATEMENT DATA:
Direct premiums written.............................. $ 62,659 $ 62,216 $122,277 $120,024 $112,459 $107,126 $112,085
======== ======== ======== ======== ======== ======== ========
Premiums earned...................................... $ 61,128 $ 59,453 $116,354 $111,659 $113,194 $112,122 $108,895
Net investment income................................ 20,939 20,032 40,424 39,663 39,738 44,044 47,091
Realized investment gains and other revenue.......... 11,620 4,801 8,231 755 16,254 18,950 11,946
-------- -------- -------- -------- -------- -------- --------
Total revenues................................... 93,687 84,286 165,009 152,077 169,186 175,116 167,932
-------- -------- -------- -------- -------- -------- --------
Losses and loss adjustment expenses.................. 58,247 57,533 118,023 108,720 125,354 135,959 124,280
Other operating expenses............................. 6,764 6,270 12,561 11,844 9,734 8,520 8,394
-------- -------- -------- -------- -------- -------- --------
Total expenses................................... 65,011 63,803 130,584 120,564 135,088 144,479 132,674
-------- -------- -------- -------- -------- -------- --------
Income before policyholder dividends and Federal
income taxes....................................... 28,676 20,483 34,425 31,513 34,098 30,637 35,258
Policyholder dividends(1)............................ 9,000 0 0 0 0 2,366 31,726
Federal income taxes (benefit)....................... 5,599 6,167 10,056 9,212 8,618 7,899 (1,375)
-------- -------- -------- -------- -------- -------- --------
Net income....................................... $ 14,077 $ 14,316 $ 24,369 $ 22,301 $ 25,480 $ 20,372 $ 4,907
======== ======== ======== ======== ======== ======== ========
COMBINED BALANCE SHEET DATA:
Total investments(2)................................. $685,562 $674,564 $695,021 $636,909 $679,257 $629,289 $592,192
Total assets......................................... 786,620 763,052 781,358 751,605 775,667 722,563 694,347
Total liabilities.................................... 521,798 510,192 507,539 542,069 548,268 540,920 534,294
Equity(2)............................................ 264,822 252,860 273,819 209,536 227,399 181,643 160,053
ADDITIONAL DATA:
Earnings per share(3)................................ $ 1.41 $ 1.43 $ 2.44 $ 2.23 $ 2.55 $ 2.04 $ 0.49
Book value per share(3).............................. 26.48 25.29 27.38 20.95 22.74 18.16 16.01
GAAP ratios:
Loss ratio......................................... 95.3% 96.8% 101.4% 97.4% 110.7% 121.3% 114.1%
Expense ratio...................................... 11.1 10.5 10.8 10.6 8.6 7.6 7.7
Combined ratio..................................... 106.4 107.3 112.2 108.0 119.3 128.9 121.8
Statutory combined ratio............................. 106.8 108.0 112.8 108.2 120.2 129.6 122.6
Statutory surplus.................................... $246,555 $208,742 $235,352 $187,299 $171,589 $154,675 $146,765
</TABLE>
- - ---------------
(1) Includes $31.0 million of Proposition 103 refunds in 1991. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- General." In the second quarter of 1996, the Company estimated
an additional $9.0 million of policyholder dividends would be paid due to
favorable loss experience related to policy years 1987 through 1992. This
$9.0 million policyholder dividend will be paid to Members in the form of
premium credits in 1997. Except for this final dividend, after the Merger,
the Company will cease paying such dividends to its policyholders.
(2) Due to the adoption of Statement of Financial Accounting Standards No. 115,
"Accounting for Certain Investments in Debt and Equity Securities," on
December 31, 1993, total investments and equity were adjusted to reflect
changes in market values. This change resulted in a decrease to total
investments of $5.2 million, an increase of $10.8 million, an increase of
$24.0 million, a decrease of $28.8 million and an increase of $30.1 million
as of June 30, 1996 and 1995 and as of December 31, 1995, 1994 and 1993,
respectively, and which resulted in a decrease to equity of $3.4 million, an
increase of $7.0 million, an increase of $15.6 million, a decrease of $18.7
million and an increase of $19.6 million as of June 30, 1996 and 1995 and as
of December 31, 1995, 1994 and 1993, respectively.
(3) Gives effect in all periods to the issuance of approximately 10,000,000
shares of Common Stock to Eligible Members. Does not give effect to the sale
of Common Stock in the Initial Public Offering. The 500,000 shares of Common
Stock issued to SCPIE Indemnity are not considered outstanding for purposes
of determining per share amounts.
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MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the combined
financial statements and the related notes thereto appearing elsewhere in this
Proxy Statement/Prospectus.
GENERAL
Cyclical Nature of Medical Malpractice Insurance Industry. Many factors
influence the financial results of the medical malpractice insurance industry,
several of which are beyond the control of the Company. These factors include,
among other things, changes in severity and frequency of claims; changes in
applicable law and regulatory reform; changes in judicial attitudes toward
liability claims; and changes in inflation, interest rates and general economic
conditions.
The availability of medical malpractice insurance, or the industry's
underwriting capacity, is determined principally by the industry's level of
capitalization, historical underwriting results, returns on investment and
perceived premium rate adequacy. Historically, the financial performance of the
medical malpractice industry has tended to fluctuate between a soft insurance
market and a hard insurance market. In a soft insurance market, competitive
conditions could result in premium rates and underwriting terms and conditions
which may be below profitable levels. For a number of years, the medical
malpractice insurance industry in California has faced a soft insurance market.
There can be no assurance as to whether or when industry conditions will improve
or the extent to which any improvement in industry conditions may improve the
Company's financial condition and results of operations.
Changing Nature of SCPIE's Business. The vast majority of the Company's
business is professional liability insurance for physicians written on a claims
made and reported basis. The Company believes that the integration of healthcare
delivery in recent years, particularly in California, will result in the growing
importance of large medical groups and other healthcare entities, and a
corresponding change in the entities that make professional liability purchasing
decisions. The Company believes that these changes have created a need for the
Company to further diversify. As a result, the Company has adopted a strategy
that includes expanding the type of products offered by the Company and
diversifying geographically by offering products in states other than
California. The Company began to implement its strategy in 1994 by offering
professional liability insurance to hospitals in California and, in 1995, began
offering errors and omissions coverage for managed care organizations. In
addition, the Company has entered into a marketing arrangement with SKA to
expand its business to other states. See "Business -- Overview."
Competitive Environment. The California medical malpractice insurance
market for medical groups and physicians has become extremely competitive in
recent years. SCPIE's principal competitors are three other physician-owned
companies and a physicians' mutual protection trust. In addition, commercial
insurance companies have recently returned to the California market to insure
medical groups and physicians.
In the late 1980s, many medical malpractice insurance companies began to
experience significantly improved claims cost trends and attempted to attract
medical groups and physicians insured by other companies by reducing premium
rates. Beginning in 1990, the Company implemented annual rate decreases
aggregating more than 25% during the next three years, which resulted in a
reduction in premium volume to approximately $107.1 million in 1992, and a
deterioration of underwriting results. Since 1993, however, SCPIE has instituted
annual overall rate increases ranging from 4.4% to 9.2% in order to improve its
underwriting results. These rate increases have been higher than those
implemented by most of its competitors. As a result, the Company has lost some
of its policyholders, in part due to these rate increases, but has realized a
modest increase in its premium volume and has improved its underwriting results.
See "Risk Factors -- Competition" and "Business -- Rates and Dividends."
Policyholder Dividends. Since 1981, SCPIE has followed a practice of paying
discretionary dividends to its physician and other healthcare provider members
in the form of premium credits on the basis
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of the results of prior policy years, as the actual experience for such years
becomes known. The Company paid dividends to its Members of $9.5 million, $11.2
million and $18.6 million in 1995, 1994 and 1993, respectively, in the form of
premium credits. Such dividends were paid primarily to insureds who were Members
of the Exchange in 1990 and prior policy years and were based primarily on
underwriting results in such years. These dividends have been accrued as an
expense for the year in which the related premiums were earned and not the year
paid or declared. The Board of Governors has declared a final dividend of $9.0
million to Members of record on the earlier of the date of the Special Meeting
or November 5, 1996, which will be paid in the form of premium credits in 1997.
This dividend is reflected as an expense in the six month period ended June 30,
1996. See "-- Results of Operations -- Six Months Ended June 30, 1996 Compared
to Six Months Ended June 30, 1995." Except for this final dividend, after the
Merger, the Company will cease paying such premium credit dividends to its
policyholders. Therefore, the Company may find it more difficult to compete with
other insurance companies offering such dividends to their members. See "Risk
Factors -- Competition."
Loss and LAE Reserves. Medical malpractice and other property and casualty
loss and LAE reserves are established based on known facts and interpretation of
circumstances, including the company's experience with similar cases and
historical trends involving claim payment patterns, loss payments and pending
levels of unpaid claims, as well as court decisions and economic conditions. The
effects of inflation are considered in the reserving process. Establishment of
appropriate reserves is an inherently uncertain process, and there can be no
assurance that currently established reserves will prove adequate in light of
subsequent actual experience. The Company follows a practice of conservatively
estimating its future liabilities relating to losses already incurred and has
attempted to establish its loss and LAE reserves at the upper end of a
reasonable range of reserve estimates. The Company believes that it has been
particularly difficult to make such estimates for medical malpractice claims in
California because of the uncertain benefits of tort reform measures and more
recently a change in the judicial process. The tort reform measures, known as
the Medical Injury Compensation Reform Act of 1975 ("MICRA"), were not declared
constitutional by the California Supreme Court until the mid-1980s and their
impact on settlements was difficult to evaluate until some years later. The
change in judicial process, known as "fast-track," became fully effective for
most California counties in 1992 and requires, among other things, that all
non-complex civil actions, including most medical malpractice actions, proceed
to trial within approximately one year after filing. Prior to this rule, in some
of California's larger counties, a trial typically did not occur until more than
four years after the related complaint had been filed. "Fast-track" has
accelerated costs and expenses of investigation and defense, but has also led to
more rapid settlements, judicial resolutions and, the Company believes, overall
cost reductions. The Company believes that it has now realized virtually all of
the benefits from the past tort reform legislation and from the institution of
"fast-track."
Beginning in 1988, the Company implemented several changes to its claims
procedures including the establishment of increased levels of authority within
the claims department for approval of reserves and settlement of claims. The
Company believes that these changes resulted in (i) earlier recognition of
liability, and therefore higher case reserves and (ii) faster settlement of
claims, ultimately resulting in lower indemnity payments and reduced legal
expenses.
The Company believes that a combination of the factors discussed above and
other factors have contributed to the recent redundancies in reserves
established by SCPIE for prior years. The original reserves were established
without full knowledge of the effect of these factors. Redundant reserves, which
have been released in every year since 1985, have contributed significantly to
reported earnings in 1995, 1994 and 1993. The Company reduced reserves for prior
years by $57.8 million, $60.4 million and $43.4 million in the years ended
December 31, 1995, 1994 and 1993, respectively. See Note 3 of Notes to Combined
Financial Statements. The Company continues to establish its loss and LAE
reserves at what it believes is the upper end of a reasonable range of reserve
estimates, but there is no assurance that such reserves will ultimately prove to
be redundant. The Company believes that some reduction in the amount of the
redundancies recently experienced is reasonably likely. The Company cannot
predict whether similar redundancies will be experienced in future years. If
such redundancies do not occur or
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loss and LAE experience does not improve, the Company's net income could be
significantly reduced or a net loss could occur. See "Business -- Loss
Reserves."
Operating Expenses. The Company's planned expansion into other states and
markets may increase operating expense levels to achieve and service this
expansion. The Company believes that its relationship with SKA will increase its
marketing expenses, but it also believes that this relationship will reduce the
need to make other significant expenditures in order to expand into other
states. Commissions for hospital and other healthcare provider liability
policies, which are sold on a brokerage basis through SKA and other brokers,
typically range from 7.5% to 15.0% of premiums, whereas the Company does not
incur commissions on products sold directly. To the extent that hospital and
other healthcare provider policies represent an increased percentage of the
Company's business in the future, expense ratios will increase. See
"Business -- Marketing and Policyholder Services."
RESULTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1996 COMPARED TO SIX MONTHS ENDED JUNE 30, 1995
Premiums Earned. Premiums earned increased approximately $1.6 million, or
2.8%, to $61.1 million for the six months ended June 30, 1996 from $59.5 million
for the same period in 1995. The increase was principally attributable to an
average 4.4% increase in premium rates in effect during the 1996 period, which
was partially offset by a 3.9% decrease in the average number of policies in
force during the 1996 period as compared to the 1995 period. Medical malpractice
premiums from physicians and medical groups were approximately $58.3 million for
the six months ended June 30, 1996 compared to $58.1 million for the same period
in 1995. Hospital medical malpractice premiums were approximately $0.8 million
for the six months ended June 30, 1996 compared to $0.5 million for the same
period in 1995. Assumed reinsurance premiums were approximately $1.6 million for
the six months ended June 30, 1996 compared to $0.4 million for the same period
in 1995.
Net Investment Income. Net investment income increased approximately $0.9
million, or 4.5%, to $20.9 million for the six months ended June 30, 1996 from
$20.0 million for the same period in 1995. Average invested assets increased to
$690.0 million during the six months ended June 30, 1996 compared to $653.6
million for the same period in 1995. The average pre-tax yield on the investment
portfolio increased to 6.3% for the six months ended June 30, 1996 compared to
5.9% for the same period in 1995. See "Business -- Investment Portfolio."
Realized Investment Gains and Other Revenue. Realized investment gains were
approximately $11.5 million for the six months ended June 30, 1996 compared to
$4.7 million for the same period in 1995. Approximately $10.0 million of the
gains from 1996 resulted from the sale of equity securities in connection with
the Company's decision in the first quarter to increase the focus of its
investment portfolio on fixed maturity securities. The remainder were
attributable to sales made in the fixed maturity portion of the investment
portfolio to take advantage of more favorable yields or to reposition the
maturity of the portfolio.
Losses and LAE. Losses and LAE increased $0.7 million, or 1.2%, to $58.2
million for the six months ended June 30, 1996 from $57.5 million for the same
period in 1995. As a percentage of premiums earned, losses and LAE decreased to
95.3% for the six months ended June 30, 1996 from 96.8% for the same period in
1995. In the six months ended June 30, 1996, the Company increased its reserves
by $1.1 million for free tail coverage to be provided by the Company to
currently insured physicians at the time of their death, disability or
retirement. See "Business -- Products." This additional expense was more than
offset by a decrease of approximately $27.9 million in loss and LAE reserves for
the six months ended June 30, 1996 for claims incurred in prior policy years,
compared to a decrease in reserves of $31.7 million for the same period in 1995
for claims incurred in prior policy years.
Other Operating Expenses. Other operating expenses increased $0.5 million,
or 7.9%, to $6.8 million for the six months ended June 30, 1996 from $6.3
million for the same period in 1995. This increase was principally attributable
to increases in policy acquisition expenses and payroll of $0.4 million and $0.2
million, respectively. The ratio of other operating expenses to premiums earned
is referred to as the expense ratio, which was 11.1% for the six months ended
June 30, 1996 and 10.5% for the same period in 1995.
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Policyholder Dividends. In the second quarter of 1996, the Company
estimated an additional $9.0 million of policyholder dividends would be paid due
to favorable loss experience related to policy years 1987 through 1992. The
Board of Governors declared a final dividend of $9.0 million to Members of
record on the earlier of the date of the Special Meeting or November 5, 1996 who
were also Members during policy years 1987 through 1992. Such dividend will be
paid in the form of premium credits during 1997. This dividend is reflected as
an expense for the six months ended June 30, 1996. Dividends declared in prior
years have been accrued as an expense for the period in which the related
premiums were earned and not the year paid or declared. Accordingly, there is no
expense reflected for the comparable period in 1995.
Federal Income Taxes. Federal income taxes decreased $0.6 million, or 9.2%
to $5.6 million for the six months ended June 30, 1996 from $6.2 million for the
same period in 1995. The effective tax rate increased to 28.5% for the six
months ended June 30, 1996 from 30.1% for the same period in 1995, due primarily
to an increase in tax-exempt interest for the six months ended June 30, 1996.
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994
Premiums Earned. Premiums earned increased $4.7 million, or 4.2%, to $116.4
million in 1995 from $111.7 million in 1994. The increase was principally
attributable to an average 8.9% increase in premium rates in effect throughout
1995, which was partially offset by a 3.4% decrease in the average number of
policies in force during 1995. Medical malpractice premiums from physicians and
medical groups were approximately $113.3 million in 1995 compared to $109.7
million in 1994, while the Company had hospital medical malpractice premiums of
$1.3 million in 1995 compared to $0.3 million in 1994. Assumed reinsurance
premiums were less than $1.0 million in both years.
Net Investment Income. Net investment income increased approximately $0.7
million, or 1.9%, to $40.4 million in 1995 from $39.7 million in 1994. Average
invested assets increased $7.9 million, or 1.2%, to $666.0 million in 1995 from
$658.1 million in 1994. The average pre-tax yield on the investment portfolio
was virtually unchanged at 5.9% in both 1995 and 1994. The increase in
investment income resulted from additional interest of approximately $1.9
million on a Federal income tax refund due the Company and was partially offset
by lower rates available on fixed maturity investments purchased since 1994.
Realized Investment Gains and Other Revenue. Net realized gains were
approximately $8.0 million in 1995 compared to $0.5 million in 1994.
Approximately $4.6 million of the 1995 gains were net gains realized from the
sale of equity securities to take advantage of appreciation in the market price
of those securities. The remainder of the net gains were attributable to sales
made in the fixed maturities portion of the investment portfolio to take
advantage of more favorable yields or to reposition the maturity of the
portfolio.
Losses and LAE. Losses and LAE increased $9.3 million, or 8.6%, to $118.0
million in 1995 from $108.7 million in 1994. As a percentage of premiums earned,
losses and LAE increased to 101.4% in 1995 from 97.4% in 1994. In 1995, SCPIE
increased its prior accident years' reserves by $23.9 million for free tail
coverage to be provided by the Company to currently insured physicians at the
time of their death, disability or retirement. The increase was the result of a
refinement in the actuarial methodology used to calculate this reserve. See
"Business -- Products." This additional expense was more than offset by a
decrease of approximately $81.7 million in loss and LAE reserves in 1995 for
claims incurred in prior accident years, compared to a reserve decrease of $60.4
million in 1994 for claims incurred in prior accident years.
Other Operating Expenses. Other operating expenses increased $0.8 million,
or 6.1%, to $12.6 million in 1995 from $11.8 million in 1994. This increase was
principally attributable to legal and consulting fees incurred in 1995 relating
to an employment law matter in litigation, which the Company successfully
defended, and a small increase in personnel and compensation levels. The expense
ratio was 10.8% in 1995 and 10.6% in 1994.
Federal Income Taxes. Federal income taxes increased $0.9 million, or 9.2%,
to $10.1 million in 1995 from $9.2 million in 1994. The effective tax rate was
29.2% in both years.
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YEAR ENDED DECEMBER 31, 1994 COMPARED TO YEAR ENDED DECEMBER 31, 1993
Premiums Earned. Premiums earned decreased by $1.5 million, or 1.4%, to
$111.7 million in 1994 from $113.2 million in 1993. The decrease in premiums
earned is due to the fact that reinsurance premiums ceded in 1994 were
approximately $7.5 million, while they were negligible in 1993. Reinsurance
premiums in 1993 included an offset of $7.2 million in profits realized on the
1993 commutation of certain reinsurance by SCPIE attributable to prior years.
There was no comparable offset in 1994. Direct premiums written in 1994
increased by approximately $7.5 million, or 6.7%, to $120.0 million in 1994 from
$112.5 million in 1993, due primarily to an average 9.0% rate increase in effect
during 1994, which was partially offset by a 3.3% decrease in the number of
policyholders.
Net Investment Income. Net investment income was virtually unchanged in
1994 as compared to 1993, remaining at approximately $39.7 million. Average
invested assets decreased $5.0 million, or 0.8%, to $658.1 million in 1994 from
$663.1 million in 1993. The average pre-tax yield on the investment portfolio
decreased to 5.9% in 1994 from 6.2% in 1993.
Realized Investment Gains and Other Revenue. Net realized gains were $0.5
million in 1994 compared to $16.0 million in 1993. The Company realized
significant gains in 1993 primarily due to changes in investment mix that
occurred as the Company changed its investment allocation in response to market
conditions and the Company's expected Federal income tax position based on its
underwriting results. These changes were in the fixed maturities portion of the
portfolio, which produced a net gain of $13.2 million. Sale of equity securities
produced a gain of approximately $2.8 million.
Losses and LAE. Losses and LAE decreased $16.7 million, or 13.3%, to $108.7
million in 1994 from $125.4 million in 1993. As a percentage of premiums earned,
losses and LAE also decreased to 97.4% in 1994 from 110.7% in 1993. In 1994,
there was a decrease of approximately $60.4 million in estimated losses and LAE
incurred in prior years compared to a decrease of $43.4 million in 1993. Both
years reflect favorable changes in reserve estimates made in prior years, as
more experience became available for analysis by management.
Other Operating Expenses. Other operating expenses increased $2.1 million,
or 21.7%, to $11.8 million in 1994 from $9.7 million in 1993. This increase was
attributable to general increases in most expense categories, as SCPIE expanded
into hospital liability insurance and other products. The expense ratio was
10.6% in 1994 and 8.6% in 1993.
Federal Income Taxes. Federal income taxes increased $0.6 million, or 6.9%,
to $9.2 million in 1994 from $8.6 million in 1993. The effective tax rate
increased to 29.2% in 1994 from 25.3% in 1993, principally due to an increase in
the Federal income tax marginal rate to 35.0% in 1994 from 34.0% in 1993.
LIQUIDITY AND CAPITAL RESOURCES
The primary sources of the Company's liquidity are insurance premiums, net
investment income, recoveries from reinsurers and proceeds from the maturity or
sale of invested assets. Funds are used to pay claims, LAE, operating expenses,
reinsurance premiums and taxes. SCPIE has also paid significant dividends, in
the form of premium credits, to its members in each year since 1980. These
premium credit dividends paid to members have totalled more than $160.0 million,
of which SCPIE paid approximately $9.5 million, $11.2 million and $18.6 million
during the years ended December 31, 1995, 1994 and 1993, respectively, and $4.7
million during the first six months of 1996. The Board of Governors has declared
a final dividend to Members of $9.0 million, which will be paid in the form of
premium credits during 1997. Except for this final dividend, after the Merger,
the Company will cease such dividends to its policyholders.
SCPIE had positive cash flow from operations in each of the last three
years. Positive cash flow has resulted from long-term timing differences between
the collection of premiums and payment of claims. Because of uncertainty related
to the timing of the payment of claims, cash from operations for a property and
casualty insurance company can vary substantially from year to year. Cash
provided by operating
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activities for SCPIE, before the payment of dividends to policyholders, was
$21.0 million in 1995 and $14.9 million in 1994. The smaller amount of cash flow
from operations in 1994 compared to 1995 was due to significantly higher
payments of losses and LAE in that year. The Company believes that the greater
amount of paid claims and LAE in 1994 was the result of accelerated payout
patterns due principally to developments in California's "fast-track" rules and
changes in the Company's claims management procedures, emphasizing early
resolution of claims. The Company believes that the trend in accelerated payout
patterns may, over time, favorably impact results of operations, as claims
settled relatively quickly may result in lower losses and LAE. Any such
reductions in loss and LAE payments, however, may be offset entirely or
partially by lower investment income, as loss and LAE reserves are held for
shorter periods.
The Company invests its positive cash flow from operations in both fixed
maturity securities and equity securities. A change in SCPIE's investment
philosophy in 1993 resulted in an increase in the purchase of equity securities
and a reduction in the purchase of fixed maturity securities. The Company's
current policy is to limit its investment in equity securities and real estate
to no more than 8.0% of the total market value of its investments. Accordingly,
the SCPIE portfolio of unaffiliated equity securities was reduced from $61.1
million at December 31, 1995 to less than $21.0 million at June 30, 1996. The
Company plans to continue this focus on fixed maturity securities investments
for the indefinite future. The Company has made limited investments in real
estate which is used almost entirely in the Company's operating activities, with
the remainder leased to third parties.
The Company maintains a portion of its investment portfolio in high
quality, short-term securities to meet short-term operating liquidity
requirements, including the payment of losses and LAE. Short-term investments
totalled $27.8 million, or 4.0% of invested assets at December 31, 1995. The
Company believes that all of its short-term and fixed maturity securities are
readily marketable.
As a holding company, SCPIE Holdings' assets will consist primarily of the
stock of the Insurance Subsidiaries and a portion of the proceeds of the Initial
Public Offering, if any. The Company's principal sources of funds will be
dividends from its subsidiaries and proceeds from the issuance of debt and
equity securities. The Insurance Subsidiaries are restricted by state regulation
in the amount of dividends they can pay in relation to earnings or surplus,
without the consent of the applicable state regulatory authority. See
"Business -- Regulation -- Regulation of Dividends from Insurance Subsidiaries."
SCPIE Holdings' direct subsidiary, SCPIE Indemnity, may pay dividends to SCPIE
Holdings in any year, without regulatory approval, to the extent of the greater
of (i) 10% of its statutory surplus at the end of the preceding year or (ii) its
net income for the preceding year. If SCPIE had been a stock insurer on December
31, 1995, the amount of dividends it would be able to pay during 1996 without
approval from the California Department would have been approximately $23.5
million.
Based on historical trends, market conditions and its business plans, the
Company believes that its sources of funds will be sufficient to meet its
liquidity needs over the next 18 months and beyond. However, because economic,
market and regulatory conditions may change, there can be no assurance that the
Company's sources of funds will be sufficient to meet these liquidity needs. The
short- and long-term liquidity requirements of the Company may vary because of
the uncertainties regarding the settlement dates for unpaid claims.
The Company has no planned material expenditures for property or equipment.
EFFECT OF INFLATION
The primary effect of inflation on the Company is considered in pricing and
estimating reserves for unpaid losses and LAE for claims in which there is a
long period between reporting and settlement, such as medical malpractice
claims. The actual effect of inflation on the Company's results cannot be
accurately known until claims are ultimately settled. Based on actual results to
date, the Company believes that loss and LAE reserve levels and the Company's
ratemaking process adequately incorporate the effects of inflation.
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BUSINESS
OVERVIEW
The Company is the largest provider of medical malpractice insurance in
California, based on direct premiums written in 1995. SCPIE currently insures
approximately 10,200 California physicians and oral and maxillofacial surgeons
practicing alone or in medical groups or clinics or other healthcare
organizations. The Company also insures a variety of other healthcare providers,
including hospitals, emergency department facilities, outpatient surgery centers
and hemodialysis, clinical and pathology laboratories.
The Company's total revenues and net income were $165.0 million and $24.4
million, respectively, for the year ended December 31, 1995 and were $93.7
million and $14.1 million, respectively, for the six months ended June 30, 1996.
As of June 30, 1996, the Company had $786.6 million of total assets and $264.8
million of total equity.
Medical malpractice insurance, or medical professional liability insurance,
insures the physician, hospital or other healthcare provider against liabilities
arising from the rendering of, or failure to render, professional medical
services. Under the typical medical malpractice insurance policy, the insurer
also defends the insured against potentially covered claims. Based on data
compiled by A.M. Best, in 1995, total medical malpractice premiums in the United
States exceeded $6.0 billion. In California, the second largest market for
medical malpractice insurance based on premiums written, approximately $590.0
million of medical malpractice premiums were written in 1995. The Company's
share of the medical malpractice premiums written in California in 1995 was
approximately 21%. The Company's market share is substantially higher in
Southern California where more than 95% of the Company's insureds are located.
The Company believes that its leading market share for medical malpractice
insurance in California is in large part due to the loyalty of its insured
physicians. The Company attributes this loyalty to the high quality,
personalized service it provides and its traditional focus on the California
physician marketplace. The medical malpractice insurance offered by the Company
has been endorsed by twelve county medical associations and specialty societies
in California.
The Company believes that the growth in managed healthcare and the
emergence of multi-state integrated healthcare providers and delivery systems
will lead to major changes in the medical malpractice insurance industry.
Practice management organizations, hospitals, administrators of large group
practices and managed care organizations have an increasing influence over the
purchasing decision for the medical malpractice insurance coverages of their
affiliated physicians. As the consolidation of healthcare providers continues,
the number of physicians insured through such organizations will increase and
the Company believes that such organizations increasingly will seek
well-capitalized medical malpractice insurers that can provide a full range of
products and a high level of service in each state in which such organizations
conduct business.
To position the Company to compete and grow its business successfully in
this changing environment, the Company has adopted a strategy that includes: (i)
expanding the types of products offered to include hospital coverage, directors
and officers liability insurance for healthcare professional organizations and
errors and omissions insurance for managed care and related organizations; (ii)
diversifying geographically by increasing writings of medical malpractice
insurance in states other than California; (iii) positioning the Company to take
advantage of acquisition and consolidation opportunities relating to medical
malpractice insurance; (iv) maintaining the Company's relationship with its
primary policyholder base of California physician and medical group insureds;
and (v) maintaining sufficient capital to take advantage of future market
opportunities and to retain strong insurance ratings.
The Company has taken the following steps to implement its strategy:
New Product Introductions. In 1994, the Company began offering malpractice
insurance to California hospitals, and, in 1995, began offering errors and
omissions coverage to managed care organizations. The Company currently insures
six hospitals and 23 managed care organizations. The Company believes
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that such organizations represent an increasing share of the market for
malpractice insurance and provide the Company with a significant area for future
growth.
Relationship with Sullivan, Kelly. The Company has entered into an
exclusive marketing agreement with Sullivan, Kelly and Associates, Inc. ("SKA"),
one of the leading hospital malpractice insurance brokers in the Western United
States. SKA has relationships with approximately 600 healthcare entities in 15
states which generated more than $80.0 million of malpractice insurance premiums
for a large insurance group in 1995. Following the recent termination by the
insurance group of this relationship, SKA and SCPIE are actively working to
obtain all or a significant portion of this business for SCPIE. In addition, SKA
has the exclusive right to market SCPIE's malpractice coverage for hospitals in
all states, and SCPIE recognizes SKA as the exclusive broker for medical group
coverage in all states other than California.
The Company believes that its marketing relationship with SKA will provide
(i) a significant advantage in marketing to hospitals and other healthcare
entities and (ii) a cost-effective means of entering new geographic markets.
Entering New States. To facilitate its geographic expansion, in March 1996,
SCPIE acquired the outstanding stock of two inactive property and casualty
insurance companies, one of which is licensed in 44 states plus the District of
Columbia and the other of which is licensed in one state. The Company will
capitalize these companies with a portion of the proceeds of its proposed
Initial Public Offering, and will attempt to ensure that they are fully licensed
and able to underwrite medical malpractice insurance as quickly as possible. In
the meantime, the Company has entered into a fronting arrangement to allow the
Company to accommodate SKA in all of the markets in which SKA operates.
The Company believes that the medical malpractice insurance industry in
California is currently experiencing a "soft insurance market," that is, an
insurance market in which the underwriting capacity exceeds current demand and
premium rates are relatively low. The Company believes that its strategy will
position it to expand premium writings and market share when the market
"hardens," that is, when demand coincides more closely with capacity and premium
rates increase to more appropriate levels.
In addition to its current direct insurance operations, SCPIE also assumes
reinsurance of medical malpractice insurance. The Company intends to expand its
reinsurance business and believes participation in reinsurance and excess
casualty insurance programs will become an increasingly important aspect of its
operations as healthcare entities become larger and obtain higher policy limits.
56
<PAGE> 64
PRODUCTS
SCPIE underwrites professional and related liability policy coverages for
physicians (including oral and maxillofacial surgeons), physician medical groups
and clinics, hospitals, managed care organizations and other providers in the
healthcare industry. The following table summarizes, by product, the direct
premiums written by the Company for the periods indicated:
<TABLE>
<CAPTION>
FOR THE
SIX MONTHS ENDED
JUNE 30, FOR THE YEAR ENDED DECEMBER 31,
----------------------- --------------------------------------
1996 1995 1995 1994 1993
--------- --------- --------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Physician and medical group
liability:
Physician and medical group
standard professional
liability................... $ 59,121 $ 60,251 $ 116,894 $ 116,425 $ 110,154
Special risk physicians........ 769 181 674 261 164
Emergency medicine program..... 294 275 596 322 113
Urgent care centers............ 119 104 224 263 226
-------- -------- -------- -------- --------
Subtotal medical
liability............ 60,303 60,811 118,388 117,271 110,657
Excess personal liability...... 416 456 877 957 1,012
-------- -------- -------- -------- --------
Subtotal physician and
medical groups....... 60,719 61,267 119,265 118,228 111,669
--------
Hospital liability............... 1,171 528 2,103 960 --
Healthcare provider liability.... 399 351 757 800 790
Managed care organization errors
and omissions.................. 182 34 105 -- --
Directors and officers
liability...................... 188 36 47 36 --
-------- -------- -------- -------- --------
Total.................. $ 62,659 $ 62,216 $ 122,277 $ 120,024 $ 112,459
======== ======== ======== ======== ========
</TABLE>
An affiliated insurance agency allows the Company to meet a wide range of
insurance needs of its customers by offering, on a brokerage basis, coverages
not underwritten by SCPIE, including a comprehensive property protection program
and stop loss insurance related to the provision of managed care services. The
Company intends, in the future, to directly underwrite its own property lines as
part of its overall strategy to meet the principal insurance needs of healthcare
providers.
Physician and Medical Group Liability. SCPIE offers separate policy forms
for physicians who are sole practitioners and for those who practice as part of
a medical group or clinic. The policy issued to sole practitioners includes
coverage for professional liability that arises in the medical practice and also
for certain other "premises" liabilities that may arise in the non-professional
operations of the medical practice, such as slip and fall accidents, and a
limited defense reimbursement benefit for proceedings by governmental
disciplinary boards. The professional liability insurance for sole practitioners
and for medical groups provides protection against the legal liability of the
insureds for such things as injury caused by or as a result of the performance
of patient treatment, failure to treat and failure to diagnose.
The policy issued to medical groups and their physician members includes
not only professional liability coverage and defense reimbursement benefits, but
also substantially more comprehensive coverages for commercial general liability
and employee benefit programs liability and also provides a small medical
payments benefit to injured persons. The comprehensive general liability
coverage included in the medical group policy does not exclude coverage for
certain employment related liabilities and for pollution, which are normally
excluded under a standard commercial general liability form. SCPIE also offers,
as part of its standard policy forms for both sole and group practitioners,
optional excess personal liability for the insured physicians. Excess personal
liability insurance provides coverage to the physician for personal liabilities
in excess of amounts covered under the physician's homeowners and automobile
policies.
The professional liability coverages are issued primarily on a "claims made
and reported" basis. Coverage is provided for claims reported to the Company
during the policy period arising from incidents that occurred at any time the
insured was covered by the policy. The Company also offers "tail coverage"
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<PAGE> 65
for claims reported after the expiration of the policy for occurrences during
the coverage period. The price of the tail coverage is based on the length of
time the insured has been covered under the Company's claims made and reported
form. SCPIE provides free tail coverage for insured physicians who die or become
disabled during the coverage period of the policy and those who have been
insured by SCPIE for at least five consecutive years and retire completely from
the practice of medicine. Free tail coverage is automatically provided to
physicians with at least five consecutive years of coverage who are also at
least 65 years old.
Comprehensive general liability coverage for medical groups and clinics and
the excess personal liability insurance is underwritten on an occurrence basis.
Under occurrence coverage, the coverage is provided for incidents that occur at
any time the policy is in effect, regardless of when the claim is reported. With
occurrence coverage, there is no need to purchase tail coverage.
The Company offers limits of insurance up to $5.0 million per claim or
occurrence, with up to a $10.0 million aggregate policy limit for all claims
reported or occurrences for each calendar year or other 12-month policy period.
The most common limit is $1.0 million per claim or occurrence, subject to a $3.0
million aggregate policy limit. The Company's limit of liability under the
excess personal liability insurance coverage is $1.0 million per occurrence with
no aggregate limit. The defense reimbursement benefit for governmental
disciplinary proceedings is $25,000, and the medical payments benefit for
persons injured in non-professional activities is $10,000.
The following table summarizes the Company's physician and medical group
professional liability direct premiums written for the year ended December 31,
1995:
<TABLE>
<CAPTION>
DIRECT
PREMIUMS PERCENTAGE
GROUP SIZE WRITTEN OF TOTAL
------------------------------------------ -------------- ----------
(IN THOUSANDS)
<S> <C> <C>
Sole practitioner physicians.............. $ 73,436 62.0%
Group with less than five physicians...... 17,322 14.6
Group with five through eight
physicians.............................. 8,890 7.5
Group with nine or more physicians........ 18,740 15.9
-------- -----
Total........................... $ 118,388 100.0%
======== =====
</TABLE>
Hospital Liability. The Company writes primary liability insurance on both
a claims made and reported basis and a modified occurrence basis that in effect
includes tail coverage for up to seven years after the policy terminates. The
policy issued to hospitals provides protection for professional liabilities
related to the operation of a hospital and its various staff committees,
together with the same comprehensive general liability, medical payments and
employee benefit program liability coverages included in the policy for large
medical groups. The limits of coverage under the hospital policies issued by
SCPIE, net of reinsurance, are $500,000 for each claim or occurrence, with no
aggregate limit.
Healthcare Provider Liability. SCPIE offers its professional liability
coverage to a variety of specialty provider organizations, including hospital
emergency departments, outpatient surgery centers, medical urgent care
facilities and hemodialysis, clinical and pathology laboratories. These policies
include the standard professional liability coverage provided to physicians and
medical groups, with certain modifications to meet the special needs of these
healthcare providers. The policies are generally issued on a claims made and
reported basis with the limits of liability up to those offered to larger
medical groups. The limits of coverage under the current healthcare provider
policies issued by SCPIE are between $1.0 million and $5.0 million per incident,
subject to $3.0 million to $10.0 million aggregate policy limits.
Managed Care Organization Errors and Omissions. SCPIE has recently
introduced a policy for managed care organizations that provides coverage for
liability arising from the errors and omissions in managed care operations, for
the vicarious liability of a managed care organization for the acts or omissions
of non-employed physician providers and for liability of directors and officers
of a managed care organization. These policies are generally issued on a claims
made and reported basis. The annual
58
<PAGE> 66
aggregate limits of coverage under the current managed care organization
policies issued by SCPIE are between $1.0 million and $5.0 million.
Directors and Officers Liability. The Company historically has brokered
directors and officers liability coverage through its affiliated agency, which
will become a wholly owned subsidiary of the Company after the Merger. See
"History; Structure of the Merger Transactions." This agency produced
approximately $293,000, $271,000 and $240,000 in premiums for other insurers in
1995, 1994 and 1993, respectively. In 1995, the Company directly wrote one
directors and officers liability policy, accounting for approximately $47,000 of
direct premiums written. Currently, the Company is seeking to write renewals of
the business it produces for other insurers and is marketing its product to
prospective new insureds. The directors and officers liability policies are
generally issued on a claims made and reported basis. The limits of coverage on
directors and officers liability policies written by SCPIE are between $1.0
million and $5.0 million.
MARKETING AND POLICYHOLDER SERVICES
The Company markets directly to its insureds through a marketing
organization with approximately 25 employees providing sales solicitation and
communications services. SCPIE markets to sole practitioner physicians and other
prospective policyholders through its relationships with medical associations,
referrals by existing policyholders, advertisements in medical journals, the
presentation of seminars on timely topics for physicians, telemarketing and
direct mail solicitation to licensed physicians and members of specialty group
organizations. SCPIE attracts new physicians through special rates for medical
residents and discounts for physicians just entering medical practice. In
addition, SCPIE participates as a sponsor and participant in various medical
group and hospital administrators' programs, medical association and specialty
society conventions and similar programs. The Company believes that this
personal, comprehensive approach to marketing is essential to providing
professional liability insurance, where special knowledge and experience is a
prerequisite.
The SCPIE professional liability program is endorsed by ten Southern
California county medical associations and the statewide associations of oral
and maxillofacial surgeons and osteopathic physicians. SCPIE considers these
endorsements to be helpful in its marketing efforts. The county medical
associations also perform certain limited information verification services for
SCPIE.
SCPIE commenced marketing its own hospital professional liability policies
during 1994 and currently underwrites coverage for six hospitals. In August
1995, SCPIE entered into a marketing agreement with SKA, one of the leading
insurance brokers of hospital and large medical group coverages in the Western
United States. Under the agreement, SKA has the exclusive right to market
SCPIE's malpractice coverage for hospitals in all states, and SCPIE recognizes
SKA as the exclusive broker for medical group coverage in all states other than
California. SKA has historically offered competing programs, including a
well-established hospital professional liability insurance program for a large
insurance group of companies which involved approximately 600 healthcare
entities and which generated more than $80.0 million of malpractice insurance
premiums in 1995. Following the recent termination by the insurance group of
this relationship, SKA and SCPIE are actively working to obtain all or a
significant portion of this business for SCPIE. SKA and the insurance group are
currently engaged in litigation in the California state court regarding rights
to certain insurance information and the ability to solicit professional
liability insurance from hospitals and medical groups currently insured by the
insurance group through SKA. On September 13, 1996, the court entered a
preliminary injunction placing some restrictions on the ability of the insurance
group to solicit renewals of these policies and ordering certain information
returned to SKA. SCPIE has entered into a financing transaction with SKA under
which SCPIE has loaned $5.0 million to SKA, which SKA has used to post a bond as
security for the preliminary injunction. The Company does not know what effect,
if any, this litigation or the termination of the current relationship will have
on its efforts to obtain hospital business currently underwritten by the
insurance group. The Company believes that its marketing relationship with SKA
will provide (i) a significant advantage in marketing to hospitals and other
healthcare entities and (ii) a cost-effective means of entering new geographic
markets.
59
<PAGE> 67
SCPIE also has a policyholder services department that provides account
information to all insureds and maintains relationships with the small medical
groups and sole practitioners insured by SCPIE. Each of these smaller insureds
has a designated client service representative who can answer most inquiries
and, in other instances, can provide the insured with immediate access to the
person with expertise in a particular department. For hospitals and large and
mid-size medical groups, SCPIE has an account manager assigned to each group who
heads a service team comprised of underwriting, risk management and claims
management representatives, each of whom may be contacted directly by the
policyholder for prompt response. SCPIE also provides online computer access to
the large groups and hospitals so that loss and LAE information can be accessed
immediately.
SCPIE provides comprehensive risk management services designed to heighten
its insureds' awareness of situations giving rise to potential loss exposures,
to educate its insureds as to ways to improve their medical practice procedures,
and to assist its insureds in implementing risk modification measures. The
Company maintains a 24-hour hotline to provide immediate access to its risk
management personnel. SCPIE conducts surveys for hospitals and large medical
groups both to review their practice procedures generally and to focus on
specific areas in which there may be some concern. Complete reports that specify
areas of the insured's medical practice that may need attention are provided to
the policyholder. SCPIE also provides an annual program review for each of its
medical groups. SCPIE presents periodic seminars and evening "town hall"
meetings at medical societies at which pertinent subjects are presented. SCPIE
risk management representatives also regularly participate in programs presented
by healthcare related societies. These educational offerings are designed to
increase risk awareness and the effectiveness of various healthcare
professionals. Additionally, the Company provides risk management and claims
administration services to certain entities on a fee-for-service basis.
UNDERWRITING
The underwriting department consists of a vice president in charge of
underwriting, an assistant underwriting manager, six other underwriters and five
technical and administrative assistants. Certain of these underwriters
specialize in underwriting hospitals, managed care organizations and directors
and officers liability products. The Company's underwriting department is
responsible for the evaluation of applicants for professional liability and
other coverages, the issuance of policies and the establishment and
implementation of underwriting standards for all of the coverages underwritten
by SCPIE.
The Company follows a strict procedure with respect to the issuance of all
physician professional liability policies. Each applicant or member of an
applicant medical group is required to complete a detailed application that
provides a personal and professional history, the type and nature of the
applicant's professional practice, certain information relating to specific
practice procedures, hospital and professional affiliations and a complete
history of any prior claims and incidents. The application is forwarded to the
county medical association for verification of educational and professional
information. The Company performs its own independent verification of these
matters and conducts an investigation to determine if there are any lawsuits
that may not have been disclosed in the application.
SCPIE performs a continuous process of reunderwriting its insured
physicians. Information concerning physicians with large losses, a high
frequency of claims or unusual practice characteristics is developed through
online claims and risk management reports. Each year, SCPIE also sends current
practice questionnaires to approximately 15% of its insured physicians. These
questionnaires request information similar to that submitted in connection with
the physician's original application for insurance, and are designed to detect
any changes in the specialty or practice characteristics of the physician that
may require a higher or lower premium rate or possible removal from the program.
The underwriting department submits all recommendations for premium
surcharges or non-renewal to the underwriting committee of SCPIE, which is
comprised solely of physicians many of whom are insureds or retired insureds of
the Company and members of the Board of Governors. Members of the underwriting
committee are not employees of the Company, but receive compensation for their
services on the committee. Physicians have the right to seek reconsideration of
surcharges from the committee.
60
<PAGE> 68
SCPIE has found that physician interchange with the committee is often helpful
in improving the practice characteristics of the insured.
Although SKA performs the principal hospital marketing functions for the
Company, SCPIE makes all underwriting and rating decisions on this and all of
its direct business. Except as set forth below, each hospital is required to
submit an application that provides detailed information on operations,
financial position and risk factors. The Company reviews loss experience for at
least the past five years, prior insurance policies and endorsements, financial
reports and reports from the principal accreditation agencies for the hospital
industry. Risk management surveys are performed as needed to supplement this
information.
For hospitals currently insured with the insurance group that recently
terminated its relationship with SKA, the Company has agreed to issue its
policies as if the hospitals were continuing with the insurance group. At the
present time, the Company will utilize schedules of coverage, limits, rating
factors and other pertinent information supplied to the Company by SKA. The
Company will perform its normal renewal underwriting at the first renewal date
of each such policy.
RATES AND DIVIDENDS
SCPIE establishes, through its own actuarial staff and independent
actuaries, rates and rating classifications for its physician and medical group
insureds based on the loss and LAE experience it has developed over the past 20
years and upon rates charged by its competitors. The Company has various rating
classifications based on practice location, medical specialty and other factors.
SCPIE utilizes various discounts, including discounts for part-time practice,
physicians just entering medical practice and large medical groups. SCPIE has
developed a special risk program for physicians who have unfavorable loss
history or practice characteristics, but whom SCPIE considers insurable.
Policies issued in this program have significant surcharges. SCPIE has
established its premium rates and rating classifications for hospitals and
managed care organizations utilizing data publicly filed by other insurers. The
data for managed care organization errors and omissions liability is extremely
limited, as tort exposures for these organizations are only recently beginning
to develop. All rates for liability insurance in California are subject to the
prior approval of the Insurance Commissioner.
SCPIE instituted annual average rate increases of 4.4%, 8.9%, 9.2% and 7.3%
in 1996, 1995, 1994 and 1993, respectively, on its physician professional
liability policies in order to improve its underwriting results. These rate
increases have been higher than those implemented by most of its competitors.
The number of policyholders insured by the Company has declined by a small
percentage in each of these years, in part due to these rate increases, but the
Company has realized a modest increase in its premium volume and has improved
its underwriting results. See "Risk Factors -- Competition" and "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- General -- Competitive Environment."
The Company paid dividends of $9.5 million, $11.2 million and $18.6 million
in 1995, 1994 and 1993, respectively, in the form of premium credits. Such
dividends were paid primarily to insureds who were Members of the Exchange in
1990 and prior policy years and were based primarily on underwriting results in
such years. After the Merger, the Company will cease paying such dividends to
its policyholders. Therefore, the Company may find it more difficult to compete
with other insurance companies offering such dividends.
CLAIMS
The claims department of the Company is responsible for claims
investigation, establishment of appropriate case reserves for loss and LAE,
defense planning and coordination, control of attorneys engaged by the Company
to defend a claim and negotiation of the settlement or other disposition of a
claim. Under most of the Company's policies, except managed care organization
errors and omissions policies and directors and officers liability policies, the
Company is obligated to defend its insureds, which is in addition to the limit
of liability under the policy. Medical malpractice claims often involve the
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<PAGE> 69
evaluation of highly technical medical issues, severe injuries and conflicting
expert opinions. In almost all cases, the person bringing the claim against the
physician is already represented by legal counsel when SCPIE learns of the
potential claim.
The claims department staff includes managers, litigation supervisors,
investigators and other experienced professionals trained in the evaluation and
resolution of medical professional liability and general liability claims. The
claims department staff consists of approximately 48 employees, including twelve
clerical personnel. SCPIE has five unit managers responsible for specific
geographic areas, and additional units for specialty areas such as hospitals,
birth injuries and policy coverage issues. The Company also occasionally uses
independent claims adjusters, primarily to investigate claims in remote
locations. SCPIE selects legal counsel from among a group of law firms in the
geographic area in which the action is filed.
California has adopted a standard of judicial administration that requires
its trial courts to set goals to dispose of 90% of all cases within twelve
months after filing and 100% of cases within 24 months. The courts in the
various counties in which SCPIE defends claims have sought to comply with these
"fast-track" standards during the past few years. The effect of this change has
been significant. Before this requirement was implemented, cases in certain
counties did not proceed to trial for many years after filing. The claims
department staff now must make earlier evaluations and reserve estimates,
authorize discovery expenses early in the litigation process and be prepared to
settle the case or proceed to trial within one year.
SCPIE emphasizes early evaluation and aggressive management of claims.
Claims department professionals complete a full evaluation and reserving of
claims under "fast-track" within six months of the filing of a claim and on all
other cases within twelve months after filing. The Company has established
different levels of authority within the claims department for approval of
reserves and settlement of claims. SCPIE has a claims committee comprised solely
of physicians which meets bi-monthly with the vice president in charge of claims
and other claims managers to consider and evaluate cases that have complex
medical issues and subject the Company to large exposures. At June 30, 1996, the
Company had 3,368 open claims.
SCPIE vigorously defends its insureds against claims, but seeks to resolve
expediently cases with high exposure potential. The defense of a medical
professional liability claim requires significant cooperation between the
litigation supervisor or claims department manager responsible for the claim and
the insured physician. California law requires that a medical professional
liability claim cannot be settled for an amount in excess of $30,000 without the
consent of the physician insured. California law further requires that the
insurer report all such settlements to a medical disciplinary board, and Federal
law requires that any claim payment, regardless of amount, be reported to a
national data bank which can be accessed by various state licensing and
disciplinary boards and medical peer evaluation committees. Thus, the physician
is often placed in a difficult position of knowing that a settlement may result
in the initiation of a disciplinary proceeding or some other impediment to the
physician's ability to practice. The claims department supervisor must be able
to fully evaluate considerations of settlement or trial and to communicate
effectively SCPIE's recommendation to its insured. If the insured will not
consent to a settlement offer, the Company may be exposed to a larger judgment
if the case proceeds to trial.
The claims department staff utilizes structured settlements to resolve
certain large claims. In a structured settlement, the Company will typically
purchase an annuity from another insurance company that will satisfy periodic
payments owed to the claimant as part of the settlement. The Company typically
obtains a release from the claimant for its insured and itself and assigns the
annuity to a third party for payment. The Company purchased annuities during the
early 1980s from a life insurance company that subsequently became insolvent and
could not satisfy its obligations. In some instances, SCPIE has concluded that
it is obligated to satisfy any shortfall in these periodic payments and is
making these shortfall payments. The Company has established a reserve to cover
these expected shortfall obligations. See Note 8 of Notes to Combined Financial
Statements.
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<PAGE> 70
LOSS RESERVES
The determination of loss reserves is a projection of ultimate losses
through an actuarial analysis of the claims history of the Company and other
professional liability insurers, subject to adjustments deemed appropriate to
the Company due to changing circumstances. Included in its claims history are
losses and LAE paid by the Company in prior periods and case reserves for
anticipated losses and LAE developed by the Company's claims department as
claims are reported and investigated. Actuaries rely primarily on such
historical loss experience in determining reserve levels on the assumption that
historical loss experience provides a good indication of future loss experience
despite the uncertainties in loss cost trends and the delays in reporting and
settling claims. As additional information becomes available, the estimates
reflected in earlier loss reserves may be revised. Any increase in the amount of
reserves, including reserves for insured events of prior years, could have an
adverse effect on the Company's results for the period in which the adjustments
are made.
The uncertainties inherent in estimating ultimate losses on the basis of
past experience have grown significantly in recent years principally as a result
of judicial expansion of liability standards and expansive interpretations of
insurance contracts. These uncertainties may be further affected by, among other
factors, changes in the rate of inflation and changes in the propensities of
individuals to file claims. The inherent uncertainty of establishing reserves is
relatively greater for companies writing long-tail casualty insurance, including
medical malpractice insurance, due primarily to the longer-term nature of the
resolution of claims.
The Company utilizes both its internal actuarial staff and independent
actuaries in establishing its reserves. The Company's independent actuaries
review the Company's reserves for losses and LAE at the end of each fiscal year
and prepare a report that includes a recommended level of reserves. The Company
considers this recommendation as well as other factors, such as known,
anticipated or estimated changes in frequency and severity of claims, loss
retention levels and premium rates, in establishing the amount of its reserves
for losses and LAE. The Company continually refines reserve estimates as
experience develops and further claims are reported and settled. The Company
reflects adjustments to reserves in the results of the periods in which such
adjustments are made. Since medical malpractice insurance is a long-tail line of
business for which the initial loss and LAE estimates may be adversely impacted
by events occurring long after the reporting of the claim, such as sudden severe
inflation or adverse judicial or legislative decisions, SCPIE has attempted to
establish its loss and LAE reserves at the upper end of a reasonable range of
reserve estimates.
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<PAGE> 71
SCPIE's loss reserve experience is shown in the following table, which sets
forth a reconciliation of beginning and ending reserves for unpaid losses and
LAE for the periods indicated:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, YEAR ENDED DECEMBER 31,
------------------- --------------------------------
1996 1995 1995 1994 1993
-------- -------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Reserves for losses and LAE at
beginning of period................. $466,187 $468,743 $468,743 $490,773 $492,004
Less reinsurance recoverables......... 19,560 19,177 19,177 18,644 26,580
-------- -------- -------- -------- --------
Net reserves for losses and LAE at
beginning of period................. 446,627 449,566 449,566 472,129 465,424
-------- -------- -------- -------- --------
Provision for losses and LAE for
claims, net of reinsurance,
occurring in:
The current period.................. 86,160 89,203 175,856 169,143 168,784
Prior periods(1).................... (27,913) (31,670) (57,833) (60,423) (43,430)
-------- -------- -------- -------- --------
Total incurred losses and LAE....... 58,247 57,533 118,023 108,720 125,354
-------- -------- -------- -------- --------
Less Loss and LAE payments for claims,
net of reinsurance, occurring in:
The current period.................. 1,257 988 11,481 10,178 12,971
Prior periods....................... 51,305 59,538 109,481 121,105 105,678
-------- -------- -------- -------- --------
Total payments...................... 52,562 60,526 120,962 131,283 118,649
-------- -------- -------- -------- --------
Net reserves for losses and LAE at end
of period........................... 452,312 446,573 446,627 449,566 472,129
Add reinsurance recoverables.......... 22,086 17,112 19,560 19,177 18,644
-------- -------- -------- -------- --------
Reserves for losses and LAE at end of
period.............................. $474,398 $463,685 $466,187 $468,743 $490,773
======== ======== ======== ======== ========
</TABLE>
- - ---------------
(1) Consists of a reduction in estimated losses and LAE for prior years of $52.0
million at June 30, 1995 and $81.7 million at December 31, 1995 and an
increase in prior years' reserves for free tail coverage provided by the
Company in the amount of $20.3 million at June 30, 1995 and $23.9 million at
December 31, 1995. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Results of Operations -- Year Ended
December 31, 1995 Compared to Year Ended December 31, 1994 -- Losses and
LAE."
The following table reflects the development of losses and LAE reserves for
the periods indicated at the end of that year and each subsequent year. The
first line shows the reserves, net of reinsurance recoverables, as originally
reported at the end of the stated year. Each calendar year-end reserve includes
the estimated unpaid liabilities for that report or accident year and for all
prior report or accident years. The section under the caption "Liability
reestimated as of" shows the original recorded reserve as adjusted as of the end
of each subsequent year to reflect the cumulative amounts paid and all other
facts and circumstances discovered during each year. The line "Cumulative
redundancy" reflects the difference between the latest reestimated reserve
amount and the reserve amount as originally established. The section under the
caption "Cumulative amount of liability paid through" shows the cumulative
amounts paid related to the reserve as of the end of each subsequent year.
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<PAGE> 72
In evaluating the information in the table below, it should be noted that
each amount includes the effects of all changes in amounts of prior periods. For
example, if a loss determined in 1993 to be $100,000 was first reserved in 1985
at $150,000, the $50,000 redundancy (original estimate minus actual loss) would
be included in the cumulative redundancy in each of the years 1985 through 1995
shown below. This table presents development data by calendar year and does not
relate the data to the year in which the claim was reported or the accident
actually occurred. Conditions and trends that have affected the development of
these reserves in the past will not necessarily recur in the future.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------------------------------------------------------------------
1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995
-------- -------- -------- -------- -------- -------- -------- -------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Loss and LAE
reserves..............$218,988 $282,805 $329,369 $389,404 $412,679 $427,049 $439,908 $465,423 $472,129 $449,566 $446,627
Liability reestimated
as of:
One year later........ 205,016 261,970 327,627 362,058 375,764 401,878 409,966 421,994 411,915 391,733
Two years later....... 194,668 269,855 312,956 337,901 348,781 368,124 364,105 368,521 363,562
Three years later..... 204,583 260,089 295,438 315,718 320,319 324,370 316,220 325,073
Four years later...... 198,365 248,613 278,339 299,308 294,992 284,628 282,291
Five years later...... 191,809 234,449 267,880 284,972 266,649 264,582
Six years later....... 185,373 228,628 260,544 266,423 256,900
Seven years later..... 180,714 229,152 249,644 262,642
Eight years later..... 182,897 223,055 248,595
Nine years later...... 181,127 222,460
Ten years later....... 180,221
Cumulative redundancy... 38,767 60,345 80,774 126,762 155,779 162,467 157,617 140,350 108,567 57,833
Cumulative amount of
liability paid
through:
One year later........ 41,764 59,435 78,951 93,607 85,771 103,983 101,001 105,678 121,106 109,481
Two years later....... 84,979 121,037 147,865 155,505 162,264 171,327 171,429 184,883 192,519
Three years later..... 126,658 167,331 188,038 206,413 204,129 206,499 205,829 219,649
Four years later...... 156,074 190,148 220,575 232,777 221,479 221,654 221,884
Five years later...... 167,783 205,362 233,807 242,140 228,922 230,606
Six years later....... 171,861 211,665 236,809 244,587 234,202
Seven years later..... 173,446 214,314 238,105 248,319
Eight years later..... 174,117 215,155 239,652
Nine years later...... 174,699 215,647
Ten years later....... 175,121
Net reserves --
December 31........... $449,566 $446,627
Reinsurance recoverables 19,177 19,560
-------- --------
Gross reserves.......... $468,743 $466,187
======== ========
</TABLE>
65
<PAGE> 73
SCPIE has historically experienced favorable loss and LAE reserve
development. The Company believes that the favorable loss and LAE reserve
development since 1985 has resulted from four factors: (i) SCPIE's conservative
approach to establishing reserves for medical malpractice insurance losses and
LAE; (ii) the continuing benefits from MICRA, the California tort reform
legislation that was declared constitutional in a series of decisions by the
California Supreme Court in the mid-1980s; (iii) benefits from California's
"fast-track" legislation; and (iv) improved results from a restructuring of
SCPIE's internal claims process. See "-- Regulation -- Medical Malpractice Tort
Reform" and "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- General." The Company believes, based on its analysis
of annual statements filed with state regulatory authorities, that its principal
California competitors have experienced similar favorable loss and LAE reserve
development in past years.
General liability losses have been less than 2.9% of medical malpractice
losses in the last five years. The Company does not have material reserves for
pollution claims and the Company's claims experience for pollution coverage has
been negligible.
While the Company believes that its reserves for losses and LAE are
adequate, there can be no assurance that the Company's ultimate losses and LAE
will not deviate, perhaps substantially, from the estimates reflected in the
Company's financial statements. If the Company's reserves should prove
inadequate, the Company will be required to increase reserves, which could have
a material adverse effect on the Company's financial condition or results of
operation.
REINSURANCE
Reinsurance Ceded. SCPIE follows customary industry practice by reinsuring
a portion of its risks. SCPIE cedes to reinsurers a portion of its risks and
pays a fee based upon premiums received on all policies subject to such
reinsurance. Insurance is ceded principally to reduce net liability on
individual risks and to provide protection against large losses. Although
reinsurance does not legally discharge the ceding insurer from its primary
liability for the full amount of the policies reinsured, it does make the
reinsurer liable to the insurer to the extent of the reinsurance ceded. SCPIE
determines how much reinsurance to purchase based upon its evaluation of the
risks it has insured, consultations with its reinsurance brokers and market
conditions, including the availability and pricing of reinsurance. In 1995,
SCPIE ceded $8.5 million of its earned premiums to reinsurers.
SCPIE's reinsurance arrangements are generally placed through its exclusive
reinsurance broker, Willcox Incorporated Reinsurance Intermediaries. The Company
retains the first $1.0 million of loss incurred per incident and has various
reinsurance treaties covering losses in excess of $1.0 million up to $20.0
million per incident. Losses in excess of $20.0 million would be retained by the
Company. SCPIE often has more than one insured named as a defendant in a lawsuit
or claim arising from the same incident, and therefore multiple policies and
limits of liability may be involved. The Company's reinsurance program is
purchased in several layers, the limits of which may be reinstated under certain
circumstances at the Company's option subject to the payment of additional
premium. SCPIE also reinsures a portion of the reinstatement premiums under a
separate treaty, together with certain other miscellaneous liability exposures,
including retroactive liability for two insurance layers from several past years
and aggregate extension coverage which provides additional aggregate loss limits
for the layer $1.0 million excess of $1.0 million, each occurrence, for
specified years. The reinsurers also bear their proportionate share of loss
expenses for claims in which they have an indemnity obligation.
The Company has a separate quota share reinsurance treaty for 1996 with
respect to its managed care organization errors and omissions policies and any
directors and officers liability policies it may write. Under this treaty, the
reinsurers bear 80% of all losses and LAE under these policies.
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<PAGE> 74
Reinsurance is placed under reinsurance treaties and agreements with a
number of individual companies and syndicates at Lloyd's of London ("Lloyd's")
to avoid concentrations of credit risk. The following table identifies the
Company's most significant reinsurers, their percentage participation in the
Company's aggregate reinsured risk based upon premiums paid by the Company and
their rating as of December 31, 1995. No other single reinsurer's percentage
participation in 1995 exceeded 5% of total reinsurance premiums:
<TABLE>
<CAPTION>
PREMIUMS CEDED PERCENTAGE OF TOTAL
FOR YEAR ENDED REINSURANCE
DECEMBER 31, 1995 RATING(1) PREMIUMS
----------------- --------- -------------------
(IN THOUSANDS)
<S> <C> <C> <C>
Hannover Ruckversicherungs.......... $ 2,389 A+ 30.6%
Lloyd's Syndicates.................. 2,075 NR 26.5
Transatlantic Reinsurance Co. ...... 705 A+ 9.0
Eisen und Stahl Ruckversicherungs... 597 A+ 7.6
Swiss Reinsurance Co. U.S. Branch... 547 A+ 7.0
Zurich Reinsurance (UK) Ltd......... 417 BBB 5.3
Underwriters Reinsurance Co......... 408 A 5.2
-------- -----
$ 7,138 91.2%
=============== ===============
</TABLE>
- - ---------------
(1) All ratings are assigned by A.M. Best, except for Zurich Reinsurance (UK)
Ltd., which is a rating by Insurance Services International ("ISI"). The
Company's minimum requirement for ratings of its reinsurers is B or better
from A.M. Best and BB or better from ISI.
The Company analyzes the credit quality of its reinsurers and relies on its
brokers and intermediaries to assist it in such analysis. To date, the Company
has not experienced any material difficulties in collecting reinsurance
recoverables. No assurance can be given, however, regarding the future ability
of any of the Company's reinsurers to meet their obligations. Among the
reinsurers to which the Company cedes reinsurance are certain Lloyd's
syndicates. In recent years, Lloyd's has reported substantial aggregate losses
which have had adverse effects on Lloyd's in general and on certain syndicates
in particular. In addition, there has been a decrease in the underwriting
capacity of Lloyd's syndicates in recent years. The substantial losses and other
adverse developments could affect the ability of certain syndicates to continue
to trade and the ability of insureds to continue to place business with
particular syndicates. It is not possible to predict what effects the
circumstances described above may have on Lloyd's and the Company's contractual
relationship with Lloyd's syndicates in future years.
Reinsurance and Excess Liability Insurance Assumed. SCPIE assumes a small
amount of reinsurance covering medical professional liability risks primarily in
the United States. The principal reinsurance treaty, which has been in effect
since 1988, is with a Lloyd's syndicate. Under this surplus share treaty, the
Company assumes 50% of one or more layers of coverage above $1.0 million, which
must be retained by the primary insurer. The reinsured receives a ceding
commission and a profit share. The maximum amount of SCPIE's liability for any
one risk is $500,000, and SCPIE does not participate as a reinsurer in any of
its own policies. The annual premiums earned under this treaty have ranged from
$106,000 in 1989 to $674,000 in 1995. In 1996, this treaty will also include
reinsurance of excess layers of workers' compensation and clash casualty risks.
SCPIE's liability for any one risk is limited to $500,000 above a $1.5 million
layer assumed by other members of the syndicate.
The Company also entered into a reinsurance treaty for 1995 with Hannover
Ruckversicherungs ("Hannover Re"). The treaty is a quota share treaty, under
which SCPIE reinsures up to $500,000 for each physician medical malpractice
claim and up to $750,000 for each hospital professional liability claim on
policies or contracts with limits in excess of $2.0 million. The reinsured
receives an override commission earned and is required to retain not less than
20% of the risk, subject to a minimum retention of $1.0 million. Premiums under
this treaty were $106,000 for 1995.
SCPIE is a participant in a program for which SKA is the exclusive broker
that provides excess liability insurance for approximately 600 healthcare
facilities throughout the United States. The program
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<PAGE> 75
provides excess coverage in layers up to $40.0 million above a primary insurance
layer of $500,000. SCPIE has assumed, as a reinsurer, a 2% share of each loss
above $500,000 up to $2.0 million and 3% of all losses in the higher layers of
coverage.
SCPIE has an indirect quota share participation in a reinsurance program of
Hannover Re that provides high layer excess of loss property catastrophe
coverage for international risks, other than in the United States and Japan.
SCPIE has participated in this program since 1994 through the purchase of a $5.0
million Credit Note issued by a limited liability company organized by Hannover
Re to underwrite a portion of this coverage. SCPIE purchased this note through
the issuance of a letter of credit, which can be drawn to cover SCPIE's
proportionate share of losses in this program. Interest on the note is based
upon profits, if any, of the limited liability company. The outstanding Credit
Note is held by SCPIE in its investment portfolio, and the amount of the letter
of credit is included in "Other Liabilities in the Combined Balance Sheets." See
"-- Investment Portfolio."
The Company intends to seek additional assumed reinsurance arrangements in
future years. The Company believes that as more managed care organizations and
integrated healthcare delivery systems retain a larger part of their own
exposure directly or through captive insurance arrangements, they will need to
obtain excess insurance or reinsurance for the potentially larger losses.
INVESTMENT PORTFOLIO
An important component of the operating results of the Company has been the
return on its invested assets. Investments of the Company are made by investment
managers under policies established and supervised by the Board of Governors.
The Company's investment policy has placed primary emphasis on investment grade,
fixed maturity securities and maximization of after-tax yields. The investment
manager since 1978 for the portfolio of fixed maturity securities is Brown
Brothers Harriman & Co., and the investment manager for the equity securities
portion of the portfolio is Hotchkis & Wiley.
The following table sets forth the composition of the investment portfolio
of the Company at the dates indicated. All of the fixed maturity securities are
held as available-for-sale.
<TABLE>
<CAPTION>
JUNE 30, 1996 DECEMBER 31, 1995 DECEMBER 31, 1994
------------------------ ------------------------ ------------------------
COST OR COST OR COST OR
AMORTIZED AMORTIZED AMORTIZED
COST FAIR VALUE COST FAIR VALUE COST FAIR VALUE
--------- ---------- --------- ---------- --------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Fixed maturity securities:
Bonds:
U.S. Government and
Agencies.............. $334,341 $331,034 $304,091 $319,119 $300,131 $281,931
State, municipalities
and political
subdivisions.......... 220,771 219,322 149,693 155,118 110,423 109,392
Mortgage-backed
securities, U.S.
Government.............. 88,586 88,240 80,279 81,898 51,175 47,033
Corporate................. 12,696 12,635 46,951 48,889 120,353 115,256
Other..................... 105 105 105 105 2,644 2,284
-------- -------- -------- -------- -------- --------
Total bonds........ 656,499 651,336 581,119 605,129 584,726 555,896
Redeemable preferred
stock................... -- -- 996 1,026 3,018 3,018
-------- -------- -------- -------- -------- --------
Total fixed
maturity
securities....... 656,499 651,336 582,115 606,155 587,744 558,914
-------- -------- -------- -------- -------- --------
Equity securities:
Non-redeemable preferred
stock................... -- -- -- -- 1,061 1,036
Common stock.............. 15,099 20,491 49,396 61,083 42,228 45,404
-------- -------- -------- -------- -------- --------
Total equity
securities....... 15,099 20,491 49,396 61,083 43,289 46,440
-------- -------- -------- -------- -------- --------
Total....................... $671,598 $671,827 $631,511 $667,238 $631,033 $605,354
======== ======== ======== ======== ======== ========
</TABLE>
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In February 1996, the Company sold all equity securities in the portfolio
with the exception of approximately $20.0 million of publicly traded common
stocks. The Board of Governors has adopted a policy that no more than 8.0% of
the total market value of invested assets may be held in equity securities and
real estate.
The Company's investment portfolio of fixed maturity securities consists
primarily of intermediate-term, investment-grade securities. The Company's
investment policy provides that fixed maturity securities investments are
limited to purchases of investment-grade securities or unrated securities which,
in the opinion of a national investment advisor, should qualify for such rating.
The table below contains additional information concerning the investment
ratings of the Company's fixed maturity investments at June 30, 1996:
<TABLE>
<CAPTION>
AMORTIZED PERCENTAGE OF
TYPE/RATING OF INVESTMENT(1) COST FAIR VALUE FAIR VALUE
---------------------------------------------- --------- ---------- -------------
(IN THOUSANDS)
<S> <C> <C> <C>
AAA (including U.S. Government and
Agencies)................................... $ 534,023 $ 529,490 81.3%
AA............................................ 78,323 77,504 11.9
A............................................. 39,048 39,237 6.0
Non rated(2).................................. 5,105 5,105 .8
-------- -------- -----
$ 656,499 $ 651,336 100.0%
======== ======== =====
</TABLE>
- - ---------------
(1) The ratings set forth above are based on the ratings, if any, assigned by
Standard & Poor's Corporation ("S&P"). If S&P's ratings were unavailable,
the equivalent ratings supplied by Moody's Investors Services, Inc. were
used.
(2) Includes a credit note received from a catastrophe reinsurance limited
liability company controlled by Hannover Re with an amortized cost and fair
value of $5.0 million and redeemable preferred stock with an amortized cost
of $1.0 million and fair value of $1.0 million. See "-- Reinsurance."
The following table sets forth certain information concerning the
maturities of fixed maturity securities in the Company's investment portfolio as
of June 30, 1996:
<TABLE>
<CAPTION>
PERCENTAGE OF
AMORTIZED COST FAIR VALUE FAIR VALUE
-------------- ---------- -------------
(IN THOUSANDS)
<S> <C> <C> <C>
Years to maturity:
One or less............................. $ 13,637 $ 13,504 2.1%
After one through five.................. 118,488 118,530 18.2
After five through ten.................. 194,668 194,434 29.9
After ten............................... 241,120 236,628 36.3
Mortgage-backed securities................ 88,586 88,240 13.5
-------- -------- -----
Totals.......................... $656,499 $ 651,336 100.0%
======== ======== =====
</TABLE>
The average maturity of the securities in the Company's fixed maturity
portfolio as of June 30, 1996 was 6.4 years. The average duration of the
Company's fixed maturity portfolio as of June 30, 1996 was 5.1 years.
The Company also maintains cash and highly liquid equivalent short-term
investments, which at June 30, 1996 totalled $20.3 million.
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<PAGE> 77
The following table summarizes the Company's investment results for the
three years ended December 31, 1995 and for the six months ended June 30, 1996
and 1995:
<TABLE>
<CAPTION>
AS OF OR FOR THE SIX
MONTHS ENDED AS OF OR FOR THE YEAR ENDED
JUNE 30, DECEMBER 31,
-------------------- --------------------------------
1996 1995 1995 1994 1993
-------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
FIXED MATURITY SECURITIES:
Average invested assets (includes
short-term cash investments)(1)... $639,730 $612,653 $614,492 $614,005 $595,192
Net investment income:
Before income taxes............... 20,817 18,968 37,471 37,705 38,148
After income taxes................ 14,845 13,344 26,481 26,379 27,017
Average annual return on
investments:
Before income taxes............... 6.51% 6.19% 6.10% 6.14% 6.41%
After income taxes................ 4.64% 4.36% 4.31% 4.30% 4.54%
Net realized investment gains after
income tax........................ $ 1,000 $ 1,655 $ 2,202 $ 165 $ 8,579
Net increase (decrease) in
unrealized gains on all fixed
maturity investments after income
taxes............................. (18,982) 25,781 34,366 (38,546) 8,276
EQUITY SECURITIES:
Average invested assets(2).......... $ 37,952 $ 47,123 $ 50,927 $ 43,338 $ 43,983
Net investment income:
Before income taxes............... 530 328 1,506 1,063 1,042
After income taxes................ 480 306 1,189 972 952
Average annual return on
investments:
Before income taxes............... 5.58% 2.79% 2.96% 2.45% 2.37%
After income taxes................ 5.05% 2.60% 2.33% 2.24% 2.17%
Net realized investment gains after
income tax........................ $ 6,473 $ 1,390 $ 2,965 $ 191 $ 1,812
Net increase in unrealized gains on
all equity investments after
income taxes...................... (4,092) 3,257 5,548 (1,618) 4,028
</TABLE>
- - ---------------
(1) Fixed maturity securities at cost.
(2) Equities at market.
COMPETITION
The physician professional liability insurance market in California is
highly competitive. The Company competes principally with three physician-owned
mutual or reciprocal insurance companies, Norcal Mutual Insurance Company, The
Doctors' Company and Medical Insurance Exchange of California, with several
commercial insurers, including CNA Insurance Companies and Fremont Indemnity
Company, and also with a physicians' mutual protection trust, Mutual Protection
Trust. The physician-owned insurance companies were organized at approximately
the same time as SCPIE and all of these companies have expanded their operations
in California. Each of these companies is actively engaged in soliciting
insureds in Southern California, SCPIE's primary area of operations, and each
has offered assessments or premiums at very competitive rates during the past
few years. The Company believes that the principal competitive factors, in
addition to pricing, include dividend policy, financial stability, breadth and
flexibility of coverage and the quality and level of services provided. In
addition, commercial insurance companies such as Farmers Group, Inc. and MMI
Companies, Inc. now actively compete for larger medical groups in
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<PAGE> 78
the California market, and companies endorsed by specialty medical societies are
also entering the market.
The Company believes that SCPIE's dividend policy has been an important
competitive factor in the past. On August 8, 1996, the Board of Governors
declared a dividend to its Members of $9.0 million which will be paid in the
form of premium credits in 1997. However, other than this $9.0 million dividend,
after the Merger, the Company will cease paying dividends in the form of premium
credits to its policyholders. Therefore, the Company may find it more difficult
to compete with other insurance companies offering such dividends. See "Risk
Factors -- Competition" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- General -- Policyholder Dividends."
The hospital professional liability insurance market is also extremely
competitive. Most of the Company's principal insurance company competitors for
physicians and medical groups, as well as a hospital industry sponsored captive
insurance company, also now actively compete in the hospital professional
liability insurance market. The largest writer of malpractice insurance for
hospitals in California is an affiliate of Farmers Group, Inc., which until
recently underwrote its coverage through SKA. The Company believes that the
Company's current relationship with SKA will enable it to expand its hospital
policyholders in California and other states.
The Company expects to encounter similar competition from local
doctor-owned insurance companies and commercial companies in other states as it
carries out its expansion plans. The Company plans to compete in other states
principally through its relationship with SKA and by offering superior
policyholder services. All markets in which the Company now writes insurance and
in which it expects to enter have certain competitors with substantially greater
financial and operating resources than the Company. See "Risk
Factors -- Competition."
REGULATION
General. Insurance companies are regulated by government agencies in
states in which they transact insurance. The extent of regulation varies by
state, but such regulation usually includes: (i) regulating premium rates and
policy forms; (ii) setting minimum capital and surplus requirements; (iii)
regulating guaranty fund assessments; (iv) licensing companies and agents; (v)
approving accounting methods and methods of setting statutory loss and expense
reserves; (vi) setting requirements for and limiting the types and amounts of
investments; (vii) establishing requirements for the filing of annual statements
and other financial reports; (viii) conducting periodic statutory examinations
of the affairs of insurance companies; (ix) approving proposed changes of
control; and (x) limiting the amounts of dividends that may be paid without
prior regulatory approval. Such regulation and supervision are primarily for the
benefit and protection of policyholders and not for the benefit of investors.
The Company has written all of its insurance in California, and SCPIE
Indemnity will be domiciled in that state. California laws and regulations,
including the tort liability laws, and laws relating to professional liability
exposures and reports, have the most significant impact on the Company and its
operations.
Insurance Guaranty Associations. Most states, including California,
require admitted property and casualty insurers to become members of insolvency
funds or associations which generally protect policyholders against the
insolvency of such insurers. Members of the fund or association must contribute
to the payment of certain claims made against insolvent insurers. Maximum
contributions required by law in any one year vary by state, and California
permits a maximum assessment of 1.0% of annual premiums written by a member in
that state during the preceding year. The largest assessment paid by SCPIE was
$697,000 in 1994. However, such payments are recoverable through policy
surcharges.
Holding Company Regulation. SCPIE Holdings will be subject to the
California Insurance Holding Company System Regulatory Act (the "Holding Company
Act"). The Holding Company Act requires the Company periodically to file
information with the California Department and other state regulatory
authorities, including information relating to its capital structure, ownership,
financial condition and general business operations. Certain transactions
between an insurance company and its affiliates,
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<PAGE> 79
including sales, loans or investments which in any twelve-month period aggregate
at least 5% of its admitted assets or 25% of its statutory capital and surplus,
whichever is less, also are subject to prior approval by the California
Department.
The Holding Company Act also provides that the acquisition or change of
"control" of a California insurance company or of any person or entity that
controls such an insurance company cannot be consummated without the prior
approval of the Insurance Commissioner. There is legislation pending in
California which, if adopted, would require 30 days advance notice to the
California Department of a material transaction, rather than prior approval, and
would increase the types of transactions subject to the notice requirement. In
general, a presumption of "control" arises from the ownership of voting
securities and securities that are convertible into voting securities, which in
the aggregate constitute 10% or more of the voting securities of a California
insurance company or of a person or entity that controls a California insurance
company, such as SCPIE Holdings. A person or entity seeking to acquire
"control," directly or indirectly, of the Company is generally required to file
with the Insurance Commissioner an application for change of control containing
certain information required by statute and published regulations and provide a
copy of the application to the Company. The Holding Company Act also effectively
restricts the Company from consummating certain reorganizations or mergers
without prior regulatory approval.
The Company will also be subject to insurance holding company laws in other
states that contain similar provisions and restrictions.
Regulation of Dividends from Insurance Subsidiaries. The Holding Company
Act also limits the ability of SCPIE Indemnity to pay dividends to the Company.
Without prior notice to and approval of the Insurance Commissioner, SCPIE
Indemnity may not declare or pay an extraordinary dividend, which is defined as
any dividend or distribution of cash or other property whose fair market value
together with other dividends or distributions made within the preceding 12
months exceeds the greater of such subsidiary's statutory net income of the
preceding calendar year or 10% of statutory surplus as of the preceding December
31. Applicable regulations further require that an insurer's statutory surplus
following a dividend or other distribution be reasonable in relation to meet its
outstanding liabilities and adequate to meet its financial needs, and permit the
payment of dividends only out of statutory earned (unassigned) surplus unless
the payment out of other funds is approved by the Insurance Commissioner. In
addition, an insurance company is required to give the California Department
notice of any dividend after declaration, but prior to payment.
The other insurance subsidiaries will be subject to similar provisions and
restrictions under the insurance holding company laws of other states.
Risk-Based Capital. The NAIC has developed a new methodology for assessing
the adequacy of statutory surplus of property and casualty insurers which
includes a risk-based capital ("RBC") formula that attempts to measure statutory
capital and surplus needs based on the risks in a company's mix of products and
investment portfolio. The formula is designed to allow state insurance
regulators to identify potentially under-capitalized companies. Under the
formula, a company determines its RBC by taking into account certain risks
related to the insurer's assets (including risks related to its investment
portfolio and ceded reinsurance) and the insurer's liabilities (including
underwriting risks related to the nature and experience of its insurance
business). The RBC rules provide for different levels of regulatory attention
depending on the ratio of a company's total adjusted capital to its "authorized
control level" of RBC. At December 31, 1995, SCPIE's RBC was $87.7 million,
exceeding the threshold requiring the least regulatory attention, which was
$39.4 million.
NAIC-IRIS Ratios. The NAIC Insurance Regulatory Information System
("IRIS") was developed by a committee of state insurance regulators and is
primarily intended to assist state insurance departments in executing their
statutory mandates to oversee the financial condition of insurance companies
operating in their respective states. IRIS identifies 12 ratios for the property
and casualty insurance industry and specifies a range of "usual values" for each
ratio. Departure from the "usual value" range on four or more ratios may lead to
increased regulatory oversight from individual state insurance commissioners. In
1993,
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<PAGE> 80
SCPIE had one ratio outside the usual value range, which resulted from a large
Proposition 103 refund. No ratios outside the usual value range resulted in 1994
or 1995.
Regulation of Investments. The Insurance Subsidiaries are subject to state
laws and regulations that require diversification of their investment portfolios
and limit the amount of investments in certain investment categories such as
below investment grade fixed income securities, real estate and equity
investments. Failure to comply with these laws and regulations would cause
investments exceeding regulatory limitations to be treated as nonadmitted assets
for purposes of measuring statutory surplus and, in some instances, would
require divestiture of such non-qualifying investments over specified time
periods unless otherwise permitted by the state insurance authority under
certain conditions.
Prior Approval of Rates and Policies. Pursuant to the California Insurance
Code the Company must submit rating plans, rates, policies and endorsements to
the Insurance Commissioner for prior approval. The possibility exists that the
Company may be unable to implement desired rates, policies, endorsements, forms,
or manuals if such items are not approved by the Insurance Commissioner. See
"Risk Factors -- Regulatory and Related Matters." In the past, all of the
Company's rate applications have been approved in the normal course of review.
The Company recently acquired two inactive insurance companies, one of which is
licensed in 44 states plus the District of Columbia and the other of which is
licensed in one state. Certain licenses will have to be modified in certain
states and certain rate filings will need to be made to permit the writing of
medical malpractice insurance.
Medical Malpractice Tort Reform. MICRA, enacted in 1975, has been one of
the most comprehensive medical malpractice tort reform measures in the United
States. MICRA currently provides for limitations on damages for pain and
suffering of $250,000, limitations on fees for plaintiffs' attorneys according
to a specified formula, periodic payment of medical malpractice judgments and
the introduction of evidence of collateral source benefits payable to the
injured plaintiff. The Company believes that this legislation has brought
stability to the medical malpractice insurance marketplace in California by
making it more feasible for insurers to assess the risks involved in
underwriting this line of business.
The constitutionality of the various provisions of MICRA were judicially
challenged soon after its enactment, and California trial courts and
intermediate appellate courts reached conflicting decisions. The California
Supreme Court, in a series of decisions rendered during 1984 and 1985, upheld
the constitutionality of MICRA. Bills have been introduced in the California
Legislature from time to time to modify or limit certain of the tort reform
benefits provided to physicians and other healthcare providers by MICRA. In
1987, the principal proponents and opponents of MICRA signed an agreement under
which the parties agreed to a five-year moratorium on amendments to MICRA,
except for an increase in the limits on plaintiffs' attorneys' fees, which was
enacted at the time of this agreement. This moratorium expired by its terms on
December 31, 1992. Neither the proponents or opponents have attempted to enact
significant changes since that time. The Company cannot predict what changes, if
any, to MICRA may be enacted during the next few years or what effect such
changes might have on the Company's medical malpractice insurance operations.
Medical Malpractice Reports. SCPIE is required to report detailed
information with regard to settlements or judgments against its California
physician insureds in excess of $30,000 to the Medical Board of California,
which has responsibility for investigations and initiation of proceedings
relating to professional medical conduct in California. In addition, all
payments must also be reported to the Federal National Practitioners' Data Bank
and such reports are accessible by state licensing and disciplinary authorities,
hospital and other peer review committees and other providers of medical care. A
California statute also requires that defendant physicians must consent to all
medical professional liability settlements in excess of $30,000, unless the
physician waives this requirement. The SCPIE policy provides the physician with
the right to consent to any such settlement, regardless of the amount, but that
the matter of consent may be submitted to a county medical review board by
either party. In virtually all instances, the Company must obtain the consent of
the insured physician prior to any settlement.
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<PAGE> 81
A.M. BEST RATING
A.M. Best, which rates insurance companies based on factors of concern to
policyholders, currently assigns SCPIE an "A (Excellent)" rating. Such rating is
the third highest rating of 13 ratings that A.M. Best assigns to solvent
insurance companies, which currently range from "A++ (Superior)" to "D (Very
Vulnerable)." Publications of A.M. Best indicate that the A rating is assigned
to those companies that in A.M. Best's opinion have a strong ability to meet
their obligations to policyholders over a long period of time. In evaluating a
company's financial and operating performance, A.M. Best reviews the company's
profitability, leverage and liquidity, as well as its book of business, the
adequacy and soundness of its reinsurance, the quality and estimated market
value of its assets, the adequacy of its loss reserves, the adequacy of its
surplus, its capital structure, the experience and competence of its management
and its market presence. A.M. Best's ratings reflect its opinion of an insurance
company's financial strength, operating performance and ability to meet its
obligations to policyholders and are not evaluations directed to purchasers of
an insurance company's securities.
In June 1996, A.M. Best reduced the Company's rating from "A+ (Superior),"
citing significant uncertainty in the medical malpractice marketplace, caused,
in part, by evolving managed care issues, the Company's narrow product line and
geographic concentration, and intense competition and weakening premium rates in
the medical malpractice industry. A.M. Best similarly reduced the ratings of
three other medical malpractice insurance companies domiciled in California. See
"Risk Factors -- Importance of Ratings." A.M. Best also noted, however, the
Company's "strong capitalization, favorable loss reserve development and
leadership position in its principal market." No assurance can be given that
A.M. Best will not reduce its current rating of the Company in the future. The
Insurance Subsidiaries have entered into a pooling arrangement and each of the
Insurance Subsidiaries has been assigned the same "pooled" "A (Excellent)" A.M.
Best rating based on their consolidated performance.
EMPLOYEES
As of June 30, 1996, the Company employed 161 persons. None of the
employees is covered by a collective bargaining agreement. The Company believes
that its employee relations are good.
PROPERTIES
The Company is the owner of two office buildings, both located in Beverly
Hills, California. One building contains approximately 25,000 square feet of
office space and is used by the Company and its subsidiaries as a home office.
The other office building contains approximately 24,000 square feet, of which
the Company and its subsidiaries occupy approximately 17,000 square feet and the
remaining 7,000 square feet of the space in this office building are leased to
unaffiliated persons. Both office buildings owned by the Company are currently
unencumbered. The Company leases office space for a claims office in San Diego,
California and a sales office in Oakland, California. The Company believes that
its office space is adequate for its present needs and that it will be able to
secure additional office space in the future if necessary.
LITIGATION
The Company is a defendant in one material litigation, currently on appeal
by SCPIE in the California District Court of Appeal, in which an adverse
judgment was rendered for $4.21 million of compensatory damages and $14.0
million of punitive damages. The case involves an action against SCPIE by the
bankruptcy estate of an uninsured physician who incurred an adverse jury verdict
in a medical malpractice case. The physician's bankruptcy estate alleged that
SCPIE had an undisclosed conflict of interest when it provided the physician
with a free courtesy defense by an attorney who had represented the interests of
SCPIE insureds in other cases. The plaintiff in the malpractice action was an
infant who had suffered severe injuries at birth, and had obtained a judgment
against two SCPIE insured physicians as well as the uninsured physician. The
jury originally rendered a verdict that included $65.0 million in punitive
damages, which was reduced to $14.0 million by the trial judge. SCPIE believes
that the action is entirely without merit and plans to pursue aggressively its
rights on appeal.
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The Company is from time to time named as a defendant in various lawsuits
incidental to its insurance business. In many of these actions, plaintiffs
assert claims for exemplary and punitive damages which are not insurable under
California judicial decisions. The Company vigorously defends these actions,
unless a reasonable settlement appears appropriate. The Company believes that
adverse results, if any, in the actions currently pending should not have a
material adverse effect on the Company's consolidated financial condition.
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<PAGE> 83
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth information concerning the individuals who
serve as directors and executive officers of SCPIE Holdings. Messrs. Karlan,
Briney, Moseley and Zuk are currently also directors of SCPIE Indemnity Co., and
each of the physician directors is also a member of the Exchange's Board of
Governors.
<TABLE>
<CAPTION>
NAME POSITION
- - --------------------------------- ----------------------------------------
<S> <C>
Mitchell S. Karlan, M.D. Chairman of the Board
Donald J. Zuk President, Chief Executive Officer and
Director
Patrick S. Grant Senior Vice President, Marketing
Joseph P. Henkes Senior Vice President, Operations and
Actuarial Services
Patrick T. Lo Vice President and Chief Financial
Officer
Jack E. McCleary, M.D. Treasurer and Director
Wendell L. Moseley, M.D. Secretary and Director
Allan K. Briney, M.D. Director
Willis T. King, Jr. Director
Charles B. McElwee, M.D. Director
Donald P. Newell Director
Harriet M. Opfell, M.D. Director
William A. Renert, M.D. Director
Henry L. Stoutz, M.D. Director
Reinhold A. Ullrich, M.D. Director
</TABLE>
The Company's Board of Directors consists of twelve persons, divided into
three classes of directors and elected for staggered terms as follows: Class I,
comprised of four persons and elected for a term expiring at the 1997 Annual
Meeting of stockholders; Class II, comprised of four persons and elected for a
term expiring at the 1998 Annual Meeting of stockholders; and Class III,
comprised of four persons and elected for a term expiring at the 1999 Annual
Meeting of stockholders. Class I directors are Messrs. Briney, King, Ullrich and
Ms. Opfell. Class II directors are Messrs. Karlan, Moseley, McCleary and Newell.
Class III directors are Messrs. Zuk, McElwee, Renert and Stoutz. Following the
expiration of the initial term as described above, directors will serve for
three-year terms.
Mitchell S. Karlan, M.D., 68, has been a member of the Board of Governors
of the Exchange since 1986 and Vice Chairman since 1991. He has been a
board-certified general surgeon in Beverly Hills, California, for more than five
years. He is a former President of the Los Angeles County Medical Association
("LACMA"), a former Chairman of LACMA's Board of Trustees and a recent past
member of the California Medical Association's ("CMA") Board of Trustees. He is
also Chairman of the SCPIE Management Company Board of Directors.
Donald J. Zuk, 60, has been President and Chief Executive Officer of SCPIE
Management Company since 1989. Prior to joining SCPIE Management Company, he
served 22 years with Johnson & Higgins, insurance brokers. His last position
there was Senior Vice President in charge of its Los Angeles Health Care
operations, which included the operations of SCPIE under a contract that then
existed with SCPIE Management Company. Since 1993, Mr. Zuk has served on the
Board of Directors of GCR Holdings Limited, a catastrophe property reinsurance
company.
Patrick S. Grant, 54, has been with SCPIE since 1990 serving initially as
Vice President, Marketing. He was named Senior Vice President, Marketing in
1992. Prior to that time, he spent almost 20 years with the insurance brokerage
firm of Johnson & Higgins. His last position there was Vice President,
Professional Liability. Mr. Grant has worked on SCPIE operations since 1976.
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<PAGE> 84
Joseph P. Henkes, 47, has been with SCPIE since 1990 serving initially as
Vice President, Operations and Actuarial Services. He was named Senior Vice
President, Operations and Actuarial Services in 1992. Prior to that time he
spent almost five years with Johnson & Higgins, where his services were devoted
primarily to SCPIE operations. He has been an Associate of the Casualty
Actuarial Society since 1975, and a member of the American Academy of Actuaries
since 1980.
Patrick T. Lo, 44, has been Vice President and Chief Financial Officer of
SCPIE since 1993. From 1990 to 1993 he served as Vice President and Controller
of SCPIE. Prior to that time, he spent nine years as Assistant Controller,
Assistant Vice President and Vice President at The Doctors' Company, a
California medical malpractice insurance company.
Jack E. McCleary, M.D., 69, has been a member of the Board of Governors of
the Exchange since 1982. He has been a board-certified dermatologist in Sherman
Oaks, California, for more than five years. Dr. McCleary is currently the
President of the CMA. He is a former LACMA President and Speaker of the CMA
House of Delegates.
Wendell L. Moseley, M.D., 68, has been a member of the Board of Governors
of the Exchange since 1983. He has been a board-certified family practitioner in
San Bernardino, California, for more than five years, and is currently on the
clinical faculty of the Loma Linda University School of Medicine. Dr. Moseley is
a past President of the San Bernardino County Medical Society. Dr. Moseley has
served as a CMA delegate for 26 years. He is also a Director of the SCPIE
Management Company.
Allan K. Briney, M.D., 74, has been Chairman of the Board of Governors of
the Exchange since 1976. He has been a board-certified radiologist in Whittier,
California, for more than five years. He is a past President of the LACMA, and
is a former Chairman of the LACMA's Board of Trustees. Dr. Briney has been Vice
Chairman of the SCPIE Management Company Board of Directors since 1981.
Willis T. King, Jr., 52, has been a director and officer of Johnson &
Higgins for more than five years, and since 1986 has been Chairman and Chief
Executive Officer of Willcox Incorporated Reinsurance Intermediaries, a
subsidiary of Johnson & Higgins engaged in reinsurance.
Charles B. McElwee, M.D., 66, has been a member of the Board of Governors
of the Exchange since 1995. He has been a board-certified orthopedic surgeon in
Covina, California, for more than five years, and is also affiliated with the
University of Southern California School of Medicine. Dr. McElwee is a former
President of the LACMA, Chairman of the Board of Trustees of the LACMA and a
member of the Board of Trustees of the CMA. He is also Vice Chairman of the
CALPAC, the legislative arm of the CMA.
Donald P. Newell, 58, has been a partner at the law firm of Latham &
Watkins in San Diego, California, for more than five years. Mr. Newell is also a
director of Mercury General Corporation, an insurance holding company.
Harriet M. Opfell, M.D., 72, has been a member of the Board of Governors of
the Exchange since 1981. She has been a board-certified pediatrician in Orange,
California, for more than five years, and is a clinical professor of pediatrics
at the University of California at Irvine. Dr. Opfell is a former President of
the Orange County Medical Association and served as President of the medical
staff at Children's Hospital of Orange County.
William A. Renert, M.D., 56, has been a member of the Board of Governors of
the Exchange since 1990. He has been a board-certified radiologist in La Mesa,
California, for more than five years. Dr. Renert is a past President of the San
Diego County Medical Society, and is a CMA delegate and an American Medical
Association delegate.
Henry L. Stoutz, M.D., 64, has been a member of the Board of Governors of
the Exchange since 1976. He has been a board-certified urologist in Ventura,
California, for more than five years, and is a clinical instructor, Department
of Urology, at the University of California at Los Angeles ("UCLA") School of
Medicine. He is Chairman of the Ventura County Medical Society Professional
Liability Committee.
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<PAGE> 85
Reinhold A. Ullrich, M.D., 69, has been a member of the Board of Governors
of the Exchange since 1991. He has been a board-certified obstetrician and
gynecologist in Torrance, California, for more than five years, and has been on
the clinical faculty at the UCLA School of Medicine since 1954. Dr. Ullrich is a
former President of the LACMA, and is the immediate past Chairman of its Board
of Trustees. He served on the CMA Board of Trustees from 1989 to 1995.
COMMITTEES OF THE SCPIE HOLDINGS BOARD
The SCPIE Holdings Board will have the following standing committees
immediately after the Merger.
Executive Committee. The Executive Committee will have the authority to
exercise all powers of the SCPIE Holdings Board between meetings of the SCPIE
Holdings Board, except in cases where action of the entire SCPIE Holdings Board
is required by the Restated Certificate, the Bylaws or applicable law. The
Executive Committee will consist of four members, one of whom is required to be
the Chairman of the SCPIE Holdings Board. The members of the Executive Committee
will be Messrs. Karlan (Chairman), Briney, Moseley and Zuk.
Audit Committee. The Audit Committee will make recommendations concerning
the engagement of independent public accountants, review the scope of audit
engagement, review letter of comments of such accountants and management's
response thereto, approve professional services provided by such accountants,
review the independence of such accountants, review any major accounting changes
made or contemplated, consider the range of audit and non-audit fees and review
the adequacy of the Company's internal accounting controls. The Audit Committee
will consist of three members, all of whom are independent directors. The
members of the Audit Committee will be Messrs. Moseley (Chairman), Karlan and
McCleary.
Compensation Committee. The Compensation Committee will establish
remuneration levels for the Chief Executive Officer, Chief Financial Officer and
Senior Vice Presidents of the Company, review significant employee benefit
programs and establish, as it deems appropriate, and administer executive
compensation programs, including bonus plans, stock option and other
equity-based programs, deferred compensation plans and any other such cash or
stock incentive programs. The Chief Executive Officer of the Company will
establish remuneration levels for other employees of the Company. The
Compensation Committee will consist of three members. The members of the
Compensation Committee will be Messrs. Karlan (Chairman), Moseley and King.
The SCPIE Holdings Board may from time to time establish certain other
committees to facilitate the management of SCPIE Holdings.
DIRECTOR COMPENSATION
Each non-employee Director will receive an annual retainer of $25,000. The
Chairman of the Board of Directors of SCPIE Holdings will be paid $1,500 per
Board meeting and other non-employee Directors will be paid $1,000 per Board
meeting. Fees to non-employee Directors for participation on committees of the
Board of Directors will be $1,000 per meeting. The Chairman of the Executive
Committee will receive an additional annual retainer of $24,000. All
non-employee Directors will be reimbursed for reasonable travel and other
expenses incurred to attend meetings of the SCPIE Holdings Board and committees
thereof.
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<PAGE> 86
EXECUTIVE COMPENSATION
SCPIE Holdings was organized as a Delaware corporation in February 1996,
and consequently did not pay any cash compensation to its executive officers for
the year ended December 31, 1995. The following Summary Compensation Table sets
forth information concerning the compensation of (i) the Company's President and
Chief Executive Officer and (ii) the three other most highly compensated
executive officers of the Company (collectively, the "Named Executive Officers")
for the year ended December 31, 1995. During such time period, the Named
Executive Officers were compensated by SCPIE Management Company.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
--------------------------------------
OTHER ANNUAL ALL OTHER
NAME AND PRINCIPAL POSITION(S) YEAR(1) SALARY BONUS COMPENSATION(2) COMPENSATION(3)
- - ------------------------------- ------- -------- ------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
Donald J. Zuk 1995 $391,378 $52,085 $ 1,581 $28,970
President and Chief Executive
Officer
Joseph P. Henkes 1995 $190,000 $ 5,000 -- $11,400
Senior Vice President,
Operations and Actuarial
Services
Patrick S. Grant 1995 $165,000 $15,000 -- $ 9,990
Senior Vice President,
Marketing
Patrick T. Lo 1995 $131,000 $10,000 -- $ 7,860
Vice President and Chief
Financial Officer
</TABLE>
- - ---------------
(1) Under the rules promulgated by the Commission, since the Company was not a
reporting company during the three immediately preceding fiscal years, only
the information with respect to the most recent completed fiscal year is
reported in the Summary Compensation Table.
(2) Other Annual Compensation for Mr. Zuk consists of payments for medical
expenses that are in addition to those covered by the Company's medical
benefit plans.
(3) All Other compensation consists of contributions to the SMC Cash
Accumulation Plan of SCPIE (the "401(k) Plan") for each Named Executive
Officer and expenses related to a company vehicle provided to Mr. Zuk by the
Company.
EMPLOYMENT AGREEMENT
SCPIE Management Company has in effect an employment agreement (the
"Employment Agreement") with Mr. Zuk, which is guaranteed by SCPIE. The
Employment Agreement will be assumed by the Company. The Employment Agreement
provides for a term expiring on December 31, 2000, at a current salary of
$413,409 per annum, with annual increases indexed to increases in the Consumer
Price Index for the preceding calendar year. The Employment Agreement also
provides for payment of bonuses at the discretion of the Board of Directors of
SCPIE Management Company, subject to the approval of the Exchange. In the event
of termination of the Employment Agreement by SCPIE Management Company,
severance pay of up to two years' salary is due under certain circumstances. Mr.
Zuk may also terminate the Employment Agreement at any time, with or without
cause, upon 90 days' written notice to SCPIE Management Company. No other
employment agreements currently exist.
COMPENSATION PLANS
401(k) Plan. Following the Merger, the Company will assume the 401(k) Plan
of the Exchange. The 401(k) Plan offers eligible employees of SCPIE Management
Company an opportunity to contribute to the 401(k) Plan on a regular basis
through payroll deductions. The 401(k) Plan's benefits are based on amounts
contributed and individual account investment performance. All full-time
employees of SCPIE
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<PAGE> 87
Management Company (defined as employees whose work week constitutes at least
38 3/4 hours) who are over age 21 years are eligible to participate in the
401(k) Plan.
The Company matches 100% of an employee's contribution to the 401(k) Plan
up to 6% of such employee's compensation. The amount of matching contributions
made by the Company for the fiscal years ended December 31, 1995, 1994 and 1993
were $436,000, $350,000 and $304,000, respectively. In addition, the Company may
make discretionary contributions to the 401(k) Plan to be allocated among the
employees' accounts on the basis of their relative levels of compensation.
Pension Benefits. Following the Merger, the Company will assume two
retirement plans that provide pensions for employees of SCPIE. The SCPIE
Management Company Retirement Income Plan (the "Retirement Plan") is an employee
non-contributory tax qualified defined benefit plan that provides each employee
with a basic annual benefit at normal retirement (age 65) equal to 1.15% of the
employee's earnings for each year of service after 1989 (subject to applicable
law limitations on the amount of earnings which may be considered for benefit
accrual purposes under tax qualified plans) while with the Company and the
employee's benefit accrued under a prior plan of SCPIE Management Company.
Employees attaining age 35 or attaining age 21 and having completed one year of
service are eligible to participate in the Retirement Plan. Benefits vest after
five years of service. The Supplemental Retirement Plan for Selected Employees
of SCPIE Management Company (the "Supplemental Plan") enhances the benefits
under the Retirement Plan for selected employees of the Company (currently all
15 Vice Presidents and the President of SCPIE Management Company). The enhanced
benefit under the Supplemental Plan provides an annual benefit at normal
retirement age (age 65) equal to 1.5% of the average annual rate of earnings
during the employee's 36 highest consecutive months in his or her last ten years
of service immediately prior to retirement, multiplied by the employee's years
of service with the Company or SCPIE Management Company, less the employee's
benefits under the Retirement Plan and under the Johnson & Higgins Retirement
Income Plan. In addition, the Supplemental Plan provides for a lump sum payment
equal to the difference between (i) the amount of the benefits that the employee
would have accrued under the 401(k) Plan if the Company's contribution allocated
to the employee's account had not been limited by certain provisions of the Code
that limit the amount which can be allocated to the employee's account under the
401(k) Plan and the amount of each employee's annual compensation which can be
taken into account under the 401(k) Plan and (ii) the amount of the benefits
actually accrued by the employee under the 401(k) Plan. The period of service
under both the Retirement Plan and the Supplemental Plan includes any period of
service with Johnson & Higgins, which formerly managed the business of SCPIE.
The following table shows the estimated annual benefits payable under the
Supplemental Plan and the Retirement Plan to Company employees in the higher
salary classifications upon retirement :
<TABLE>
<CAPTION>
SUPPLEMENTAL
PLAN
REMUNERATION
(AVERAGE OF 36 ESTIMATED ANNUAL BENEFIT($)
HIGHEST ------------------------------------------------------------------------
CONSECUTIVE
MONTHS IN FINAL YEARS OF CREDITED SERVICE AT AGE 65
TEN YEARS OF ------------------------------------------------------------------------
SERVICE) 10 15 20 25 30 35
- - ---------------- ------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
$100,000 $15,000 $ 22,500 $ 30,000 $ 37,500 $ 45,000 $ 52,500
$150,000 22,500 33,750 45,000 56,250 67,500 78,750
$200,000 30,000 45,000 60,000 75,000 90,000 105,000
$250,000 37,500 56,250 75,000 93,750 112,500 131,250
$300,000 45,000 67,500 90,000 112,500 135,000 157,500
$350,000 52,500 78,750 105,000 131,250 157,500 183,750
$400,000 60,000 90,000 120,000 150,000 180,000 210,000
$450,000 67,500 101,250 135,000 168,750 202,500 236,250
$500,000 75,000 112,500 150,000 187,500 225,000 262,500
</TABLE>
The amounts shown in the table are straight life annuities payable under
the plans without reduction for the joint and survivor annuity. Retirement
benefits listed in the table are not subject to any deduction
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<PAGE> 88
for Social Security benefits, but are reduced by any pension amounts payable to
the employee under a Johnson & Higgins retirement plan.
The earnings subject to the retirement plans for each of the executive
officers in the Summary Compensation Table is determined from the compensation
amounts shown under "Salary," but not the amounts shown under "Bonus." As of
December 31, 1995, the years of service of Messrs. Zuk, Henkes, Grant and Lo are
29 years, 9 years, 24 years and 5 years, respectively.
Frozen Retirement Plan for Members of the SCPIE Board of Governors. The
Exchange has maintained the SCPIE Retirement Plan for Outside Governors and
Affiliated Directors (the "Board of Governors' Retirement Plan"), a nonqualified
supplemental retirement plan that provides a $12,000 annual retirement benefit
for members of the Board of Governors and directors of affiliated entities who
have at least five years of service as defined in the Board of Governors'
Retirement Plan. After the Merger, the Exchange's obligations under the Board of
Governors' Retirement Plan will become the obligations of SCPIE Indemnity.
Participation in the Board of Governors' Retirement Plan will be frozen on
December 31, 1996. Any persons receiving benefits on that date will continue to
receive them. All other eligible persons under the Board of Governors'
Retirement Plan will, on that date, become 100% vested in the benefits accrued
prior to that date and no additional benefits will accrue in the future. No
additional individuals, including directors of SCPIE Indemnity or directors of
SCPIE Holdings, will be eligible to participate in the Board of Governors'
Retirement Plan.
LIMITATION OF LIABILITY AND INDEMNIFICATION
The DGCL permits a Delaware corporation to include in its charter and
bylaws certain provisions to eliminate the personal liability of directors for
monetary damages and to indemnify its directors and officers. In addition,
effective upon consummation of the Merger, SCPIE Holdings will enter into
indemnification agreements with each of its directors and certain of its
executive officers. See "Comparison of Certain Rights of Members Before and
After the Merger -- Indemnification" and "Description of Capital
Stock -- Delaware Law and Certain Charter and Bylaw
Provisions -- Indemnification."
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company has employed in the past, and intends to employ in the future,
the law firm of Latham & Watkins, to perform legal services. Donald P. Newell, a
director of the Company, is a partner of Latham & Watkins.
The Company has entered into in the past, and intends to enter into in the
future, certain contracts with the firms of Willcox Incorporated Reinsurance
Intermediaries and Johnson & Higgins, for whom Willis T. King, Jr., a director
of the Company, serves as a director and officer. Johnson & Higgins serves as an
insurance broker for the Company and received commissions for these services of
$46,142, $81,658, and $114,559 in 1995, 1994 and 1993, respectively. The Company
has six reinsurance contracts that are placed by Willcox Incorporated
Reinsurance Intermediaries, which is the reinsurance division of Johnson &
Higgins. Willcox Incorporated Reinsurance Intermediaries received commissions on
the placement of these policies of $679,825, $571,615 and $717,807 in 1995, 1994
and 1993, respectively.
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<PAGE> 89
OWNERSHIP OF COMMON STOCK
The following table sets forth certain information regarding beneficial
ownership of Common Stock as of the Effective Date by (i) each person who will
own beneficially more than 5% of the outstanding shares of Common Stock, (ii)
each director and executive officer named in the Summary Compensation Table and
(iii) all directors and executive officers of SCPIE Holdings as a group. The
number of shares of Common Stock beneficially owned by each director represents
the number of shares each director and certain persons and entities affiliated
with each director will receive as Eligible Members under the Merger Agreement.
This estimate does not include any shares which any director or executive
officer may purchase in the Initial Public Offering. Except as noted below, each
holder listed below will have sole investment and voting power with respect to
the shares beneficially owned by the holder. The address for all stockholders
listed in the table is c/o SCPIE Holdings Inc., 9441 West Olympic Boulevard,
Beverly Hills, California 90213-4015.
<TABLE>
<CAPTION>
NUMBER OF SHARES
TO BE PERCENT
NAME BENEFICIALLY OWNED OF TOTAL
------------------------------------------------- ------------------ --------
<S> <C> <C>
Mitchell S. Karlan, M.D.......................... 2,610 *
Donald J. Zuk.................................... -- --
Patrick S. Grant................................. -- --
Joseph P. Henkes................................. -- --
Patrick T. Lo.................................... -- --
Jack E. McCleary, M.D............................ 786 *
Wendell L. Moseley, M.D.......................... 470 *
Allan K. Briney, M.D............................. 571 *
Willis T. King, Jr............................... -- --
Charles B. McElwee, M.D.......................... 3,040 *
Donald P. Newell................................. -- --
Harriet M. Opfell, M.D........................... 445 *
William A. Renert, M.D........................... 895 *
Henry L. Stoutz, M.D............................. 1,202 *
Reinhold A. Ullrich, M.D......................... 4,201 *
-------- --------
All directors and executive officers as a group
(15 persons)................................... 14,220 *
</TABLE>
- - ---------------
* Less than 1%.
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DESCRIPTION OF CAPITAL STOCK
GENERAL
The authorized capital stock of the Company as of the completion of the
Merger will consist of 30,000,000 shares of Common Stock, $.0001 par value per
share, and 5,000,000 shares of Preferred Stock, the rights, preferences and
powers of which may be designated by the SCPIE Holdings Board. At present, there
are no shares of Preferred Stock issued or outstanding. Assuming that the
Initial Public Offering is held, SCPIE Holdings anticipates that, upon the
completion of the Merger and the Initial Public Offering, there will be
approximately 12,500,000 shares (12,800,000 shares if the underwriters' over-
allotment option is exercised in full) of Common Stock issued and outstanding
(less fractional shares, which, pursuant to the Merger Agreement, will be paid
in cash).
The following description of the capital stock of SCPIE Holdings does not
purport to be complete or to give full effect to Delaware statutory or common
law and is, in all respects, qualified by reference to the applicable provisions
of the DGCL, and the Restated Certificate and the Bylaws.
COMMON STOCK
Holders of shares of Common Stock are entitled to one vote per share on
matters to be voted upon by the stockholders and, subject to the prior rights of
the holders of Preferred Stock, to receive dividends ratably when and as
declared by the SCPIE Holdings Board with funds legally available therefor and
to share ratably in the assets of the Company legally available for distribution
to the stockholders in the event of liquidation or dissolution, after payment of
all debts and other liabilities. Holders of the Common Stock are not entitled to
preemptive rights and will have no subscription, redemption or conversion
privileges. The Common Stock does not have cumulative voting rights, which means
the holder or holders of more than one-half of the shares of Common Stock voting
for the election of directors can elect all of the directors then being elected.
All of the outstanding shares of Common Stock are, and the shares to be issued
in the Merger when issued and paid for will be, fully paid and nonassessable.
The rights, preferences and powers of holders of Common Stock are subject to the
rights of the holders of shares of any series of Preferred Stock which the
Company may issue in the future. Pursuant to Section 160 of the DGCL, SCPIE
Indemnity will not be entitled to vote the shares of Common Stock issued to it
in the Merger. See "The Merger -- Additional Aspects of the Merger and the
Plan -- Issuance of Shares to SCPIE Indemnity."
PREFERRED STOCK
The SCPIE Holdings Board will have the authority, without further
stockholder approval, to issue up to 5,000,000 shares of Preferred Stock in one
or more series and to determine the dividend rights, any conversion rights or
rights of exchange, voting powers, rights and terms of redemption (including
sinking fund provisions), liquidation preferences and any other rights,
preferences, powers and restrictions. The number of shares constituting a series
of Preferred Stock and the designation thereof shall be stated in a resolution
or resolutions providing for the issuance of such series of Preferred Stock all
in accordance with the laws of the State of Delaware.
The issuance of Preferred Stock may have the effect of delaying, deferring
or preventing a change in control of the Company, making removal of the present
management of the Company more difficult, restricting the payment of dividends
and other distributions to the holders of Common Stock, diluting the voting
power of the Common Stock to the extent that the Preferred Stock has voting
rights or diluting the equity interests of the Common Stock to the extent that
the Preferred Stock is convertible into Common Stock. In addition, issuance of
Preferred Stock, while providing desirable flexibility in connection with
possible acquisitions and other corporate purposes, could make it more difficult
for a third party to acquire a majority of the outstanding shares of voting
stock. Accordingly, the issuance of Preferred Stock may be used as an
"anti-takeover" device without further action on the part of the stockholders of
SCPIE Holdings.
83
<PAGE> 91
DELAWARE LAW AND CERTAIN CHARTER AND BYLAW PROVISIONS
The following is a description of certain provisions of the DGCL and the
Restated Certificate and the Bylaws. This summary does not purport to be
complete and is qualified in its entirety by reference to the DGCL, the Restated
Certificate and the Bylaws.
SCPIE Holdings is subject to the provisions of Section 203 of the DGCL.
Section 203 of the DGCL prohibits a publicly held Delaware corporation from
engaging in a "business combination" with an "interested stockholder" for a
period of three years after the date of the transaction in which the person
became an "interested stockholder," unless the business combination is approved
in a prescribed manner. A "business combination" includes certain mergers, asset
sales and other transactions resulting in a financial benefit to the "interested
stockholder." Subject to certain exceptions, an "interested stockholder" is a
person who, together with affiliates and associates, owns, or within the past
three years did own, 15% of the corporation's voting stock.
Certain provisions of the Restated Certificate and the Bylaws could have
anti-takeover effects. These provisions are intended to enhance the likelihood
of continuity and stability in the composition of the policies formulated by the
SCPIE Holdings Board. In addition, these provisions also are intended to ensure
that the SCPIE Holdings Board will have sufficient time to act in what the Board
of Directors believes to be in the best interests of the Company and its
stockholders. These provisions also are designed to reduce the vulnerability of
SCPIE Holdings to an unsolicited proposal for a takeover of SCPIE Holdings that
does not contemplate the acquisition of all of its outstanding shares or an
unsolicited proposal for the restructuring or sale of all or part of SCPIE
Holdings. The provisions are also intended to discourage certain tactics that
may be used in proxy fights. However, these provisions could delay or frustrate
the removal of incumbent directors or the assumption of control of SCPIE
Holdings by the holder of a large block of Common Stock, and could also
discourage or make more difficult a merger, tender offer or proxy contest, even
if such event would be favorable to the interest of stockholders.
Classified Board of Directors. The Restated Certificate provides for the
SCPIE Holdings Board to be divided into three classes of directors, with each
class as nearly equal in number as possible, serving staggered three-year terms
(other than directors which may be elected by holders of Preferred Stock). As a
result, approximately one-third of the SCPIE Holdings Board will be elected each
year. The classified board provision will help to assure the continuity and
stability of the SCPIE Holdings Board and the business strategies and policies
of SCPIE Holdings as determined by the SCPIE Holdings Board. The classified
board provision could have the effect of discouraging a third party from making
an unsolicited tender offer or otherwise attempting to obtain control of SCPIE
Holdings without the approval of the Board. In addition, the classified board
provision could delay stockholders who do not like the policies of the SCPIE
Holdings Board from electing a majority of the SCPIE Holdings Board for two
years.
No Stockholder Action by Written Consent; Special Meetings. The Restated
Certificate provides that stockholder action can only be taken at an annual or
special meeting of stockholders and prohibits stockholder action by written
consent in lieu of a meeting. The Bylaws provide that special meetings of
stockholders may be called only by the SCPIE Holdings Board, its Chairman or the
President of SCPIE Holdings. Stockholders are not permitted to call a special
meeting of stockholders or to require that the SCPIE Holdings Board call a
special meeting.
Advance Notice Requirements for Stockholder Proposals and Director
Nominees. The Bylaws establish an advance notice procedure for stockholders to
make nominations of candidates for election as directors or to bring other
business before an annual meeting of stockholders of SCPIE Holdings (the
"Stockholder Notice Procedure"). The Stockholder Notice Procedure provides that
only persons who are nominated by, or at the direction of, the SCPIE Holdings
Board or its Chairman, or by a stockholder who has given timely written notice
to the Secretary of SCPIE Holdings prior to the meeting at which directors are
to be elected, will be eligible for election as directors of SCPIE Holdings. The
Stockholder Notice Procedure also provides that at an annual meeting only such
business may be conducted as has been brought before the meeting by, or at the
direction of, the SCPIE Holdings Board or its Chairman or by a stockholder who
has given timely written notice to the Secretary of SCPIE Holdings of such
stockholder's
84
<PAGE> 92
intention to bring such business before such meeting. Under the Stockholder
Notice Procedure, if a stockholder desires to submit a proposal or nominate
persons for election as directors at an annual meeting, the stockholder must
submit written notice to SCPIE Holdings not less than 60 days nor more than 90
days prior to the first anniversary of the previous year's annual meeting. In
addition, under the Stockholder Notice Procedure, a stockholder's notice to
SCPIE Holdings proposing to nominate a person for election as a director or
relating to the conduct of business other than the nomination of directors must
contain certain specified information. If the chairman of a meeting determines
that business was not properly brought before the meeting, in accordance with
the Stockholder Notice Procedure, such business shall not be discussed or
transacted.
Number of Directors; Removal; Filling Vacancies. The Restated Certificate
and the Bylaws provide that the SCPIE Holdings Board will consist of between
seven and thirteen members (other than directors elected by holders of Preferred
Stock), the exact number to be fixed from time to time by resolution adopted by
the directors of SCPIE Holdings. The SCPIE Holdings Board currently consists of
twelve directors. Further, subject to the rights of the holders of any series of
Preferred Stock then outstanding, the Restated Certificate authorizes the SCPIE
Holdings Board to fill newly created directorships. If a number of vacancies
existed in the SCPIE Holdings Board, this provision could delay the ability of a
stockholder from obtaining majority representation on the SCPIE Holdings Board
by permitting the SCPIE Holdings Board to enlarge the SCPIE Holdings Board in
certain circumstances and fill the new directorships with its own nominees. A
director so elected by the SCPIE Holdings Board holds office until the next
election of the class for which such director has been chosen and until his
successor is elected and qualified. Subject to the rights of the holders of any
series of Preferred Stock then outstanding, the Restated Certificate and the
Bylaws also provide that directors may be removed only for cause and only by the
affirmative vote of holders of two-thirds (66 2/3%) of the outstanding shares of
voting securities. The effect of these provisions is to preclude a stockholder
from removing incumbent directors without cause and simultaneously gaining
control of the SCPIE Holdings Board by filling the vacancies created by such
removal with its own nominees.
Indemnification. The Company has included in its Restated Certificate and
Bylaws provisions to (i) eliminate the personal liability of its directors for
monetary damages resulting from breaches of their fiduciary duty to the extent
permitted by the DGCL and (ii) indemnify its directors and officers to the
fullest extent permitted by Section 145 of the DGCL, including circumstances in
which indemnification is otherwise discretionary. The Company believes that
these provisions are necessary to attract and retain qualified persons as
directors and officers.
Bylaws. The Restated Certificate provides that the Bylaws are subject to
adoption, amendment, alteration, repeal or rescission either by (i) a majority
of the authorized number of directors or (ii) the affirmative vote of the
holders of not less than two-thirds (66 2/3%) of the outstanding shares of
voting securities. This provision makes it more difficult for stockholders to
make changes in the Bylaws by allowing the holders of a minority of the voting
securities to prevent the holders of a majority of voting securities from
amending the Bylaws.
TRANSFER AGENT AND REGISTRAR
ChaseMellon Shareholder Services L.L.C. has been appointed as the transfer
agent and registrar for the Company's Common Stock.
LEGAL MATTERS
The validity of the Common Stock to be issued pursuant to the Merger will
be passed upon for the Company by Latham & Watkins, San Diego, California,
counsel for the Company.
85
<PAGE> 93
EXPERTS
The combined financial statements of Southern California Physicians
Insurance Exchange and Subsidiaries and Organization of Southern California
Physicians, Inc. and Subsidiary at December 31, 1995 and 1994, and for each of
the three years in the period ended December 31, 1995, and the balance sheet of
SCPIE Holdings Inc. at February 29, 1996 included in the Proxy
Statement/Prospectus of Southern California Physicians Insurance Exchange, which
is referred to and made a part of this Proxy Statement/Prospectus and
Registration Statement, have been audited by Ernst & Young LLP, independent
auditors, as set forth in their reports thereon, appearing elsewhere herein, and
are included in reliance upon such reports given the authority of such firm as
experts in accounting and auditing.
86
<PAGE> 94
GLOSSARY OF SELECTED INSURANCE TERMS
Accident year basis........... The annual accounting period in which loss
events occurred, regardless of when the losses
are actually reported, booked or paid.
Calendar year basis........... The matching of all losses incurred within a
given period of time as reported in an income
statement including estimated losses and LAE,
IBNR and changes in estimates of losses and LAE
incurred in prior periods, with premiums earned
during that same period of time. Once
calculated for a given time period, calendar
year experience never changes.
Cede.......................... To transfer risk and related premium in
connection with a reinsurance transaction.
Claims made and reported
basis......................... A liability insurance policy written on a basis
that generally insures only claims that are
reported to the insurer during the policy
period, or reported during any extended
reporting period provided in the policy or any
endorsement thereto, but only if the claims
arise from incidents that occurred after a
retroactive date stated in the policy. A claims
made and reported policy is to be distinguished
from an "occurrence policy."
Combined ratio................ The sum of the loss ratio and the expense ratio
expressed as a percentage. Generally, a
combined ratio below 100% indicates an
underwriting profit and a combined ratio above
100% indicates an underwriting loss.
Direct premiums written....... Total premiums written by an insurer other than
premiums for reinsurance assumed by an insurer.
Excess insurance.............. Insurance which covers the insured only for
losses in excess of a stated amount or a
specific primary policy.
Excess of loss reinsurance.... A generic term describing reinsurance that
indemnifies the reinsured against all or a
specified portion of losses on underlying
insurance policies in excess of a specified
dollar amount, called a "layer" or "retention."
Expense ratio................. Policy acquisition costs and other underwriting
expenses, divided by net premiums earned under
GAAP accounting or by net premiums written
under statutory accounting, expressed as a
percentage.
Frequency..................... Refers to the rate of occurrence. The number of
times a claim or a loss by a specific peril
occurs to a given body of exposures or insureds
during a particular time period.
GAAP.......................... Generally accepted accounting principles in use
throughout the United States in the
preparation of financial statements, including
the financial statements presented in this
Proxy Statement/Prospectus.
Gross premiums written........ Total of (i) direct premiums written, plus (ii)
reinsurance assumed premiums.
87
<PAGE> 95
Incurred but not reported
("IBNR") reserves........... The estimated liabilities for future payments
of losses and LAE that have occurred, but have
not yet been reported to the insurer.
Loss Adjustment Expenses
("LAE")..................... Expenses incurred in the settlement of claims,
including outside adjustment expenses, legal
fees and internal administration costs
associated with the claims adjustment process,
but not including general overhead expenses.
Loss Adjustment Expense
("LAE")
reserves.................... Liabilities established for LAE. LAE includes
an estimated provision for IBNR.
Loss ratio.................... The ratio of net incurred losses and LAE to net
premiums earned. Net incurred losses include an
estimated provision for IBNR.
Net premiums written.......... Gross premiums written less premiums ceded.
Occurrence basis.............. A liability insurance policy written on a basis
that generally insures claims that arise from
incidents that occurred during the policy
period irrespective of when the claims are
reported.
Premiums ceded................ The consideration paid to reinsurers in
connection with reinsurance transactions.
Premiums earned............... The portion of premiums written applicable to
the expired period of policies and,
accordingly, recognized as revenue during a
given period.
Primary insurance............. Insurance which covers an insured from the
first dollar of loss, after any deductible or
self-insured retention, as distinguished from
umbrella or excess insurance.
Quota share basis............. Reinsurance wherein the insurer cedes an agreed
fixed percentage of liabilities, premiums and
losses for each policy covered on a pro rata
basis.
Redundancy (deficiency)....... Estimates in reserves change as more
information becomes known about the frequency
and severity of claims for each year. A
redundancy (deficiency) exists when the
original liability estimate is greater (less)
than the reestimated liability. The cumulative
redundancy (deficiency) is the aggregate net
change in estimates over time subsequent to
establishing the original liability estimate.
Reinsurance................... A procedure whereby an original insurer cedes a
portion of the premium to a reinsurer as
payment for the reinsurer's assumption of a
portion of the risk; referred to as reinsurance
ceded by the original insurer and as
reinsurance assumed by the reinsurer.
Reserves...................... Liabilities established by insurers to reflect
the estimated cost of claims and the related
LAE expenses that the insurer will ultimately
be required to pay in respect of insurance it
has written.
88
<PAGE> 96
Retention..................... The amount or portion of risk that an insurer
retains for its own account. Losses in excess
of the retention level are paid by the
reinsurer. In quota share treaties, the
retention may be a percentage of the original
policy's limit. In excess of loss reinsurance,
the retention is a dollar amount of loss, a
loss ratio or a percentage of loss.
Risk-Based Capital
Requirements
("RBC")..................... Regulatory and rating agency targeted surplus
based on the relationship of statutory surplus,
with certain adjustments, to the sum of slated
percentages of each element of a specified list
of company risk exposures.
Severity...................... The average claim cost, statistically
determined by dividing dollars of losses by the
number of claims.
Statutory Accounting Practices
("SAP")..................... The accounting rules and procedures promulgated
or permitted by the National Association of
Insurance Commissioners ("NAIC") for financial
reporting by insurers licensed in one or more
states of the United States.
Statutory surplus............. Total assets less total liabilities as
determined in accordance with SAP.
Underwriting.................. The process whereby an insurer, directly or
through its agent, reviews applications
submitted for insurance coverage and determines
whether it will accept all or part of the
coverage being requested, and the applicable
premium.
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<PAGE> 97
GLOSSARY OF MERGER RELATED TERMS
Approval Date................. September 16, 1996, the date that the
Commissioner, pursuant to Section 1552 of the
California Insurance Law, approved the Merger
Agreement for submission to the Eligible
Members for approval.
Board of Governors............ The Board of Governors of the Exchange.
California Department......... The Department of Insurance of the State of
California.
Commissioner.................. The Commissioner of Insurance of the California
Department, or such governmental officer, body
or authority as may succeed such Commissioner
as the primary regulator of the Company's
insurance business under applicable law.
Earned Premiums............... For the applicable period, earned premiums in
respect of a Policy.
Effective Date................ The date on which the Effective Time occurs.
Effective Time................ The time that the Merger Agreement is duly
executed and delivered and filed with the
California Secretary of State, or such other
time as specified in the Merger Agreement.
Eligible Member............... A Person who is a Member of the Company on the
Approval Date.
Eligible Policy............... A Policy issued to an Eligible Member on which
premiums were earned at any time, provided,
however, that with respect to a Policy issued
to an Eligible Member who was not a Member on
March 21, 1996, Earned Premiums for such a
Policy shall consist only of earned premiums
following March 21, 1996, and not earned
premiums at any point prior to such date.
Fair Market Value............. (i) the average closing price of a share of the
Common Stock on the principal exchange on which
the Common Stock is then trading, if any, on
the first five trading days following the
Effective Date; or (ii) if the Common Stock is
not traded on an exchange but is quoted on
Nasdaq or a successor quotation system, (1) the
average last sales price (if the Common Stock
is then listed as a National Market Issue under
the NASD National Market System) or (2) the
average of the mean between the closing
representative bid and asked prices (in all
other cases) for the Common Stock on the first
five trading days following the Effective Date
as reported by Nasdaq or such successor
quotation system.
Initial Stock Price........... The price per share at which the Common Stock
is sold to the public in the Initial Public
Offering.
Manager....................... SCPIE Management Company, a California
corporation that is the Exchange's
attorney-in-fact.
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<PAGE> 98
Member, subscriber and
insured person.............. A Person is a Member of the Exchange if such
Person is a subscriber who is an "insured
person" under the name of the Exchange through
the facilities of the attorney-in-fact acting
on behalf of the several subscribers. The term
"subscriber" shall include those Persons who
have executed a Subscription Agreement and
Power of Attorney or any like agreement of the
Exchange. The term "insured person" shall
include (a) each individual physician, surgeon,
nurse anesthetist, professional medical
partnership, professional medical corporation
or other healthcare provider to whom or which a
policy of insurance has been issued by the
Exchange as "named insured," and (b) each
physician, surgeon, nurse anesthetist or other
healthcare provider to whom a certificate
insert (naming such person as a "physician
member" or "certificate holder") has been
issued as part of a policy of insurance issued
by the Exchange to a professional medical
partnership, professional medical corporation
or other healthcare provider. A "named insured"
under a policy of insurance ceases to be an
insured person, subscriber and Member when the
"policy period" of such policy terminates by
expiration of time, cancellation or any other
reason and a "physician member" or "certificate
holder" ceases to be an insured person,
subscriber and Member when the "coverage
period" or "certificate period" under the
applicable policy terminates by expiration of
time cancellation, or any other reason.
Membership Interests.......... Rights of members under the subscription
agreements, Company Bylaws, and California
Insurance law (but not including contractual
rights under policies).
Merger Shares................. Shares of Common Stock to be delivered (i) to
Members for their Membership Interests by
virtue of the Merger and (ii) to SCPIE
Indemnity as consideration for the cancellation
of the shares of Common Stock currently held by
the Exchange, which cancellation shall occur as
part of the Merger.
Person........................ An individual, corporation, joint venture,
limited liability company, partnership,
association, trust, trustee, unincorporated
entity, organization or government or any
department or agency thereof.
Policy........................ An insurance policy issued by the Company, but
not including (i) any agreement pursuant to
which the Company has ceded or assumed
insurance or (ii) a reporting endorsement.
Record Date................... September 16, 1996.
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<PAGE> 99
INDEX TO FINANCIAL STATEMENTS
SOUTHERN CALIFORNIA PHYSICIANS INSURANCE EXCHANGE
AND
ORGANIZATION OF SOUTHERN CALIFORNIA PHYSICIANS, INC.
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Auditors........................................................ F-2
Combined Balance Sheets as of December 31, 1995 and 1994 and as of June 30, 1996 and
1995................................................................................ F-3
Combined Statements of Income for the years ended December 31, 1995, 1994 and 1993 and
for the six months ended June 30, 1996 and 1995..................................... F-4
Combined Statements of Policyholders' Equity for the years ended December 31, 1995,
1994, and 1993 and for the six months ended June 30, 1996 and 1995.................. F-5
Combined Statements of Cash Flows for the years ended December 31, 1995, 1994 and 1993
and for the six months ended June 30, 1996 and 1995................................. F-6
Notes to Combined Financial Statements................................................ F-7
</TABLE>
SCPIE HOLDINGS INC.
<TABLE>
<S> <C>
Report of Independent Auditors........................................................ F-21
Balance Sheets as of February 29, 1996 and June 30, 1996.............................. F-22
Statement of Income for the four months ended June 30, 1996........................... F-22
Note to Balance Sheets................................................................ F-23
</TABLE>
F-1
<PAGE> 100
REPORT OF INDEPENDENT AUDITORS
Board of Governors
Southern California Physicians Insurance Exchange
Board of Trustees
Organization of Southern California Physicians, Inc.
We have audited the accompanying combined balance sheets as of December 31,
1995 and 1994, of Southern California Physicians Insurance Exchange and
Organization of Southern California Physicians, Inc. and the related combined
statements of income, policyholders' equity and cash flows for each of the three
years in the period ended December 31, 1995. These financial statements are the
responsibility of the Companies' management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the combined financial position at December 31, 1995
and 1994, of Southern California Physicians Insurance Exchange and Organization
of Southern California Physicians, Inc. and the combined results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1995, in conformity with generally accepted accounting principles.
At December 31, 1993, Southern California Physicians Insurance Exchange and
Organization of Southern California Physicians, Inc. adopted Statement of
Financial Accounting Standards No. 115, Accounting for Certain Investments in
Debt and Equity Securities, as described in Note 1.
ERNST & YOUNG LLP
Los Angeles, California
March 5, 1996, except
for Note 9, as to which
the date is July 12, 1996
F-2
<PAGE> 101
SOUTHERN CALIFORNIA PHYSICIANS INSURANCE EXCHANGE
ORGANIZATION OF SOUTHERN CALIFORNIA PHYSICIANS, INC.
COMBINED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
JUNE 30, ---------------------
1996 1995 1994
-------- -------- --------
(UNAUDITED)
<S> <C> <C> <C>
Securities available-for-sale (Note 2):
Fixed maturity investments, at fair value (amortized
cost: 1996 -- $656,499, 1995 -- $582,115,
1994 -- $587,744).................................. $651,336 $606,155 $558,914
Equity investments, at fair value (cost:
1996 -- $15,099, 1995 -- $49,396,
1994 -- $43,289)................................... 20,491 61,083 46,440
-------- -------- --------
Total securities available-for-sale........... 671,827 667,238 605,354
Short-term investments.................................. 13,735 27,783 31,555
-------- -------- --------
Total investments............................. 685,562 695,021 636,909
Cash.................................................... 6,548 3,053 5,180
Accrued investment income............................... 10,970 9,835 11,136
Reinsurance recoverable on paid losses (Note 4)......... 23 27 170
Reinsurance recoverable on unpaid losses (Note 4)....... 22,086 19,560 19,177
Federal income taxes recoverable (Note 5)............... -- 20,363 23,941
Deferred Federal income taxes (Note 5).................. 25,349 11,992 33,635
Deferred policy acquisition costs....................... 531 468 515
Property and equipment, net............................. 19,161 19,145 19,648
Other assets............................................ 16,390 1,894 1,294
-------- -------- --------
Total assets.................................. $786,620 $781,358 $751,605
======== ======== ========
LIABILITIES
Reserves:
Losses and loss adjustment expenses (Note 3).......... $474,398 $466,187 $468,743
Unearned premiums..................................... 22,629 19,916 21,928
-------- -------- --------
Total reserves................................ 497,027 486,103 490,671
Policyholders' dividends payable........................ 12,951 8,646 18,147
Other liabilities....................................... 11,820 12,790 33,251
-------- -------- --------
Total liabilities............................. 521,798 507,539 542,069
Commitments and contingencies (Note 8)
POLICYHOLDERS' EQUITY
Surplus................................................. 264,673 250,596 226,227
Unrealized appreciation (depreciation) on
available-for-sale securities, net of deferred
taxes................................................. 149 23,223 (16,691)
-------- -------- --------
Total policyholders' equity................... 264,822 273,819 209,536
-------- -------- --------
Total liabilities and policyholders' equity... $786,620 $781,358 $751,605
======== ======== ========
</TABLE>
See accompanying notes.
F-3
<PAGE> 102
SOUTHERN CALIFORNIA PHYSICIANS INSURANCE EXCHANGE
ORGANIZATION OF SOUTHERN CALIFORNIA PHYSICIANS, INC.
COMBINED STATEMENTS OF INCOME
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, YEAR ENDED DECEMBER 31,
------------------- ----------------------------------
1996 1995 1995 1994 1993
------- ------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues:
Premiums earned (Note 4)........ $61,128 $59,453 $116,354 $111,659 $113,194
Net investment income (Note
2)........................... 20,939 20,032 40,424 39,663 39,738
Realized investment gains (Note
2)........................... 11,496 4,684 7,950 548 15,987
Other revenue................... 124 117 281 207 267
-------- -------- -------- -------- --------
Total revenues.......... 93,687 84,286 165,009 152,077 169,186
Expenses:
Losses and loss adjustment
expenses (Note 3)............ 58,247 57,533 118,023 108,720 125,354
Other operating expenses........ 6,764 6,270 12,561 11,844 9,734
-------- -------- -------- -------- --------
Total expenses.......... 65,011 63,803 130,584 120,564 135,088
-------- -------- -------- -------- --------
Income before policyholder
dividends and Federal income
taxes........................... 28,676 20,483 34,425 31,513 34,098
Policyholder dividends............ 9,000 0 0 0 0
Federal income taxes (Note 5)..... 5,599 6,167 10,056 9,212 8,618
-------- -------- -------- -------- --------
Net income.............. $14,077 $14,316 $ 24,369 $ 22,301 $ 25,480
======== ======== ======== ======== ========
Pro forma net income per share of
common stock (Note 9)........... $ 1.41 $ 1.43 $ 2.44 $ 2.23 $ 2.55
======== ======== ======== ======== ========
</TABLE>
See accompanying notes.
F-4
<PAGE> 103
SOUTHERN CALIFORNIA PHYSICIANS INSURANCE EXCHANGE
ORGANIZATION OF SOUTHERN CALIFORNIA PHYSICIANS, INC.
COMBINED STATEMENTS OF POLICYHOLDERS' EQUITY
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
UNREALIZED
APPRECIATION TOTAL
(DEPRECIATION) OF POLICYHOLDERS'
INVESTMENTS SURPLUS EQUITY
----------------- -------- --------------
<S> <C> <C> <C>
Balance at January 1, 1993....................... $ 3,197 $178,446 $181,643
Cumulative effect of change in accounting for
investments at December 31.................. 19,555 -- 19,555
Net income..................................... -- 25,480 25,480
Net unrealized appreciation.................... 721 -- 721
-------- -------- --------
Balance at December 31, 1993..................... 23,473 203,926 227,399
Net income..................................... -- 22,301 22,301
Net unrealized depreciation.................... (40,164) -- (40,164)
-------- -------- --------
Balance at December 31, 1994..................... (16,691) 226,227 209,536
Net income..................................... -- 24,369 24,369
Net unrealized appreciation.................... 39,914 -- 39,914
-------- -------- --------
Balance at December 31, 1995..................... $ 23,223 $250,596 $273,819
-------- -------- --------
Net income (unaudited)......................... -- 14,077 14,077
Net unrealized depreciation (unaudited)........ (23,074) -- (23,074)
-------- -------- --------
Balance at June 30, 1996 (unaudited)............. $ 149 $264,673 $264,822
======== ======== ========
</TABLE>
See accompanying notes.
F-5
<PAGE> 104
SOUTHERN CALIFORNIA PHYSICIANS INSURANCE EXCHANGE
ORGANIZATION OF SOUTHERN CALIFORNIA PHYSICIANS, INC.
COMBINED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE
30 YEAR ENDED DECEMBER 31,
----------------------- ------------------------------------
1996 1995 1995 1994 1993
--------- --------- --------- --------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net income................. $ 14,077 $ 14,316 $ 24,369 $ 22,301 $ 25,480
Adjustments to reconcile
net income to net cash
provided by operating
activities:
Unpaid losses and loss
adjustment expenses,
and reinsurance
recoverables.......... 5,689 (3,498) (2,796) (21,402) 5,609
Accrued investment
income................ (1,135) 699 1,301 (98) 645
Provision for deferred
Federal income
taxes................. (446) 1,686 158 6,050 4,777
Unearned premiums........ 2,713 (1,426) (2,012) 1,398 614
Policyholders' dividends
payable............... 4,305 (4,770) (9,501) (11,179) (18,588)
Realized investments
gains................. (11,496) (4,684) (7,950) (548) (15,987)
Provisions for
amortization and
depreciation.......... 933 4,305 4,504 4,940 4,542
Accrued expenses and
other liabilities..... (970) 621 430 4,717 (23)
Changes in other
assets................ 5,780 898 3,029 (2,496) (1,278)
-------- -------- -------- -------- -------
Net cash provided
by operating
activities..... 19,450 6,527 11,532 3,683 5,791
INVESTING ACTIVITIES
Purchases -- fixed
maturities............... (298,305) (91,711) (269,149) (193,618) (353,972)
Sales -- fixed
maturities............... 211,974 85,555 235,332 174,705 321,699
Maturities -- fixed
maturities............... 9,476 8,554 15,909 15,211 30,200
Purchases -- equities...... (569) (8,824) (37,033) (42,581) (38,812)
Sales -- equities.......... 47,421 14,108 37,510 35,901 49,993
Change in short-term
investments, net......... 14,048 (15,240) 3,772 8,230 (15,940)
-------- -------- -------- -------- -------
Net cash used in
investing
activities..... (15,955) (7,558) (13,659) (2,152) (6,832)
-------- -------- -------- -------- -------
Increase (decrease) in
cash..................... 3,495 (1,031) (2,127) 1,531 (1,041)
Cash at beginning of
period................... 3,053 5,180 5,180 3,649 4,690
-------- -------- -------- -------- -------
Cash at end of
period......... $ 6,548 $ 4,149 $ 3,053 $ 5,180 $ 3,649
======== ======== ======== ======== =======
</TABLE>
See accompanying notes.
F-6
<PAGE> 105
SOUTHERN CALIFORNIA PHYSICIANS INSURANCE EXCHANGE
ORGANIZATION OF SOUTHERN CALIFORNIA PHYSICIANS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
1. NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The financial statements have been combined using the consolidated balance
sheets and results of operations of the Southern California Physicians Insurance
Exchange (the Exchange) and the Organization of Southern California Physicians,
Inc. (OSCAP), collectively the "Company." The Exchange formed two wholly owned
subsidiaries in 1995, SCPIE Indemnity Company (SCPIE Indemnity) and SCPIE
Holdings Inc. (SCPIE Holdings). Neither subsidiary had any operations since its
formation. OSCAP is the holding company of SCPIE Management Company (SMC), the
Exchange's attorney-in-fact, and is indirectly controlled by the Exchange. SMC
has two wholly owned subsidiaries, SCPIE Insurance Services, Inc. (SIS) and
SCPIE Management Services, Inc. (SMS). All transactions between the Exchange and
OSCAP have been eliminated in the preparation of the combined financial
statements.
The Company writes professional liability insurance for physicians, oral
and maxillofacial surgeons, hospitals and other healthcare providers.
Substantially all of the Company's coverage is written on a "claims made and
reported" basis. Generally, coverage is provided only for claims which are first
reported to the Company during the insured's coverage period and which arise
from occurrences during the insured's coverage period. The Company also makes
"tail" coverage available for purchase by members in order to cover claims which
arise from occurrences during the insured's coverage period, but which are first
reported to the Company after the insured's coverage period and during the term
of the applicable tail coverage.
The preparation of financial statements of insurance companies requires
management to make estimates and assumptions that affect amounts reported in the
financial statements and accompanying notes. Such estimates and assumptions
could change in the future as more information becomes known which could impact
the amounts reported and disclosed herein.
The accompanying combined financial statements have been prepared in
conformity with generally accepted accounting principles which differ from
statutory accounting practices prescribed or permitted by regulatory
authorities. The significant accounting policies followed by the Company that
materially affect financial reporting are summarized below:
Investments
In 1993, the Financial Accounting Standards Board (FASB) issued Statement
115 (Statement 115), Accounting for Certain Investments in Debt and Equity
Securities. Statement 115 requires that fixed maturity securities are to be
classified as either held-to-maturity, available-for-sale, or trading. The
Company adopted Statement 115 as of December 31, 1993, which had no effect on
net income and increased policyholders' surplus by $19,555,000 (net of deferred
income taxes of $10,500,000) to reflect the net unrealized holding gains on
securities previously carried at amortized cost; there was no effect on net
income.
Recognizing the need for the ability to respond to changes in market
conditions and in tax positions, the Company has designated its entire
investment portfolio as available-for-sale. As required by Statement 115, the
Company adjusted the carrying value of its fixed maturity investments that are
classified as investments available-for-sale to fair value at December 31, 1993.
The Company has no securities classified as "trading" or "held-to-maturity."
Transfers between categories are severely restricted.
F-7
<PAGE> 106
SOUTHERN CALIFORNIA PHYSICIANS INSURANCE EXCHANGE
ORGANIZATION OF SOUTHERN CALIFORNIA PHYSICIANS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
Changes in fair values of available-for-sale securities, after adjustment
of deferred income taxes, are reported as unrealized appreciation or
depreciation directly in policyholders' equity and, accordingly, have no effect
on net income.
Prior to the adoption of Statement 115, the Company carried all of its
equity securities, including non-redeemable preferred stock, at fair value with
the unrealized gains and losses reported as a separate component of
policyholders' equity. Fixed maturity securities, including redeemable preferred
stock, were previously carried at amortized cost.
For the mortgage-back bond portion of the fixed maturity securities
portfolio, the Company recognizes income using a constant effective yield based
on anticipated prepayments and the estimated economic life of securities.
Prepayment assumptions are obtained from dealer surveys or internal estimates
and are based on the current interest rate and economic environment. When actual
prepayments differ significantly from anticipated prepayments, the effective
yield is recalculated to reflect actual payments to date and anticipated future
payments. The net investment in the security is adjusted to the amount that
would have existed had the new effective yield been applied since the
acquisition of the security. That adjustment is included in net investment
income.
In October 1994, the FASB issued Statement 119 (Statement 119), Derivative
Financial Instruments and Fair Value of Financial Instruments. The Company
currently holds no derivative financial instruments subject to Statement 119
disclosure requirements.
Premiums and discounts on investments are amortized to investment income
using the interest method over the contractual lives of the investments.
Short-term investments are carried at cost, which approximates market value.
Realized investment gains and losses are included as a component of revenues
based on specific identification of the investment sold.
Premiums
Premiums are earned on a pro rata basis over the terms of the respective
policies. The reserve for unearned premiums is determined on a monthly pro rata
basis.
Deferred Policy Acquisition Costs
Premium taxes are capitalized and amortized as premiums are earned over the
terms of the related policies. The deferred policy acquisition costs are
amortized over the effective period of the related policies. Anticipated
investment income is considered in determining if premium deficiencies exist.
Reserves for Losses and Loss Adjustment Expenses
Reserves for losses and loss adjustment expenses represent the estimated
liability for reported claims plus those incurred but not yet reported and the
related estimated adjustment expenses. The reserve for unpaid claims and related
adjustment expenses is determined using case-basis evaluations and statistical
analyses and represents estimates of the ultimate cost of all unpaid losses
incurred through December 31 of each year. Although considerable variability is
inherent in such estimates, management believes that the reserve for unpaid
losses and related loss adjustment expenses (LAE) is adequate. The estimates are
continually reviewed and adjusted as necessary; such adjustments are included in
current operations and are accounted for as changes in estimates.
F-8
<PAGE> 107
SOUTHERN CALIFORNIA PHYSICIANS INSURANCE EXCHANGE
ORGANIZATION OF SOUTHERN CALIFORNIA PHYSICIANS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
Reinsurance
Reinsurance premiums, losses and loss adjustment expenses are accounted for
on bases consistent with those used in accounting for the original policies
issued and the terms of the reinsurance contracts.
On January 1, 1993, the Company adopted the provisions of FASB Statement
113 (Statement 113), Accounting and Reporting for Reinsurance of Short-Duration
and Long-Duration Contracts. At that date, the only effect of adopting Statement
113 was to reclassify as assets those reinsurance ceded amounts that previously
had been reported as reductions of loss and LAE reserves.
Dividends to Policyholders
Dividends to policyholders are accrued during the period in which the
related premiums are earned. Estimates of policyholder dividends are reviewed
and adjusted as necessary; such adjustments are included in current operations
and accounted for as changes in estimates. In the second quarter of 1996, the
Company estimated an additional $9,000,000 of policyholder dividends would be
paid due to favorable loss experience related to policy years 1987 through 1992.
Except for this final dividend, after the merger, the Company will cease paying
such dividends to its policyholders.
Property and Equipment
Property and equipment, principally the Company's home office building and
land, are recorded at cost and depreciated principally under the straight-line
method over the useful life of the assets.
Income Taxes
Effective January 1, 1993, the Company changed its method of accounting for
income taxes to the liability method prescribed in FASB Statement 109 (Statement
109), Accounting for Income Taxes. Under that method, deferred tax assets and
liabilities are determined based on differences among financial reporting and
tax basis of assets and liabilities and are measured using the enacted tax rates
and laws. The provisions of Statement 109 have been retroactively applied to the
financial statements of the Company for all years beginning in 1990.
Credit Risk
Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of temporary cash investments
and fixed maturities and reinsurance recoverables. The Company places its
temporary cash investments with high credit quality financial institutions and
limits the amounts of credit exposure to any one financial institution.
Concentrations of credit risk with respect to fixed maturities are limited due
to the large number of such investments and their distributions across many
different industries and geographics.
Reinsurance is placed with a number of individual companies and syndicates
at Lloyd's of London to avoid concentration of credit risk. For the year ended
December 31, 1995, approximately 54.9% of total reinsurance premiums ceded were
placed with reinsurance companies with an A.M. Best rating of A or better and
26.5% of total reinsurance premiums ceded were ceded to Lloyd's of London
syndicates. No other single reinsurer's percentage participation in 1995
exceeded 5.3%.
Segment Information
The Company operates in the United States of America and in only one
reportable industry segment which provides professional liability insurance for
physicians, oral and maxillofacial surgeons, hospitals and other health care
providers principally in California.
F-9
<PAGE> 108
SOUTHERN CALIFORNIA PHYSICIANS INSURANCE EXCHANGE
ORGANIZATION OF SOUTHERN CALIFORNIA PHYSICIANS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
2. INVESTMENTS
The Company's investments in available-for-sale securities are summarized
as follows:
<TABLE>
<CAPTION>
COST OR GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------- ---------- ---------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
JUNE 30, 1996 (UNAUDITED)
Fixed maturity securities:
Bonds:
U.S. Government and Agencies............ $ 334,341 $ 3,789 $ 7,096 $331,034
State, municipalities and political
subdivisions.......................... 220,771 1,724 3,173 219,322
Mortgage-backed securities, U.S.
Government............................ 88,586 713 1,059 88,240
Corporate............................... 12,696 3 64 12,635
Other................................... 105 -- -- 105
Redeemable preferred stock................. -- -- -- --
-------- ------- ------- --------
Total fixed maturity securities.............. 656,499 6,229 11,392 651,336
Common stock................................. 15,099 5,838 446 20,491
-------- ------- ------- --------
Total.............................. $ 671,598 $ 12,067 $ 11,838 $671,827
======== ======= ======= ========
DECEMBER 31, 1995
Fixed maturity securities:
Bonds:
U.S. Government and Agencies............ $ 304,091 $ 15,458 $ 430 $319,119
State, municipalities and political
subdivisions.......................... 149,693 5,569 144 155,118
Mortgage-backed securities, U.S.
Government............................ 80,279 1,896 277 81,898
Corporate............................... 46,951 2,035 97 48,889
Other................................... 105 -- -- 105
Redeemable preferred stocks................ 996 30 -- 1,026
-------- ------- ------- --------
Total fixed maturity securities.............. 582,115 24,988 948 606,155
Common stocks................................ 49,396 13,530 1,843 61,083
-------- ------- ------- --------
Total.............................. $ 631,511 $ 38,518 $ 2,791 $667,238
======== ======= ======= ========
</TABLE>
F-10
<PAGE> 109
SOUTHERN CALIFORNIA PHYSICIANS INSURANCE EXCHANGE
ORGANIZATION OF SOUTHERN CALIFORNIA PHYSICIANS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
COST OR GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
-------- ------- ------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
DECEMBER 31, 1994
Fixed maturity securities:
Bonds:
U.S. Government and Agencies............ $ 300,131 $ 512 $ 18,712 $281,931
State, municipalities and political
subdivisions.......................... 110,423 767 1,798 109,392
Mortgage-backed securities, U.S.
Government............................ 51,175 153 4,295 47,033
Corporate............................... 120,353 358 5,455 115,256
Other................................... 2,644 109 469 2,284
Redeemable preferred stocks................ 3,018 -- -- 3,018
-------- ------- ------- --------
Total fixed maturity securities.............. 587,744 1,899 30,729 558,914
Non-redeemable preferred stocks.............. 1,061 17 42 1,036
Common stocks................................ 42,228 5,563 2,387 45,404
-------- ------- ------- --------
Total.............................. $ 631,033 $ 7,479 $ 33,158 $605,354
======== ======= ======= ========
</TABLE>
The fair values for fixed maturity securities are based on quoted market
prices, where available. For fixed maturity securities not actively traded, fair
values are estimated using values obtained from independent pricing services.
The fair values for equity securities are based on quoted market prices.
The amortized cost and estimated fair value of the Company's investments in
fixed maturity securities are summarized by stated maturities as follows:
<TABLE>
<CAPTION>
JUNE 30, 1996 DECEMBER 31, 1995
--------------------- ---------------------
AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE
-------- -------- -------- --------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Years to maturity:
One or less....................... $ 13,637 $ 13,504 $ 168 $ 172
After one through five............ 118,488 118,530 111,332 114,096
After five through ten............ 194,668 194,434 167,105 177,626
After ten......................... 241,120 236,628 223,231 232,363
Mortgage-backed securities.......... 88,586 88,240 80,279 81,898
-------- -------- -------- --------
Totals.............................. $656,499 $651,336 $582,115 $606,155
======== ======== ======== ========
</TABLE>
The foregoing data is based on the stated maturities of the securities.
Actual maturities will differ for some securities because borrowers may have the
right to call or prepay obligations.
F-11
<PAGE> 110
SOUTHERN CALIFORNIA PHYSICIANS INSURANCE EXCHANGE
ORGANIZATION OF SOUTHERN CALIFORNIA PHYSICIANS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
The ratings of the Company's fixed maturity securities, using Moody's
Investors Services, Inc. or Standard & Poor's Corporation rating service, are
summarized as follows:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1996 1995
----------- ------------
(UNAUDITED)
<S> <C> <C>
AAA............................................... 81% 79%
AA................................................ 12 12
A................................................. 6 8
Not rated......................................... 1 1
--- ---
100% 100%
=== ===
</TABLE>
Major categories of the Company's investment income are summarized as
follows:
<TABLE>
<CAPTION>
SIX MONTHS YEAR ENDED DECEMBER 31,
ENDED JUNE 30, -------------------------------
1996 1995 1994 1993
-------------- ------- ------- -------
(UNAUDITED) (IN THOUSANDS)
<S> <C> <C> <C> <C>
Fixed maturities................... $ 20,415 $36,987 $37,968 $38,620
Equities........................... 552 1,627 1,148 1,126
Other.............................. 899 4,250 2,862 2,178
------- ------- ------- -------
Total investment income............ 21,866 42,864 41,978 41,924
Investment expenses................ 927 2,440 2,315 2,186
------- ------- ------- -------
Net investment income.............. $ 20,939 $40,424 $39,663 $39,738
======= ======= ======= =======
</TABLE>
Realized gains and losses from sales of investments are summarized as
follows:
<TABLE>
<CAPTION>
SIX MONTHS
ENDED JUNE 30,
1996 1995 1994 1993
-------------- -------- -------- --------
(UNAUDITED) (IN THOUSANDS)
<S> <C> <C> <C> <C>
Fixed maturities:
Gross realized gains............ $ 5,337 $ 4,946 $ 3,440 $ 13,520
Gross realized losses........... 3,799 1,558 3,186 321
-------- -------- -------- --------
Net realized gains.............. $ 1,538 $ 3,388 $ 254 $ 13,199
======== ======== ======== ========
Equities:
Gross realized gains............ $ 11,674 $ 6,649 $ 2,430 $ 5,337
Gross realized losses........... 1,716 2,087 2,136 2,549
-------- -------- -------- --------
Net realized gains.............. $ 9,958 $ 4,562 $ 294 $ 2,788
======== ======== ======== ========
</TABLE>
The change in the Company's unrealized appreciation (depreciation) on fixed
maturity securities was $52,870,000, ($58,915,000) and $12,615,000 for the years
ended December 31, 1995, 1994 and 1993, respectively and the corresponding
amounts for equity securities were $8,536,000, ($2,877,000) and $984,000.
At December 31, 1995, the Company's investments in fixed maturity
securities with a carrying amount of $533,000 were on deposit with state
insurance departments to satisfy regulatory requirements.
No investment in any person or its affiliates exceeded 10% of the Company's
policyholders' equity at December 31, 1995.
F-12
<PAGE> 111
SOUTHERN CALIFORNIA PHYSICIANS INSURANCE EXCHANGE
ORGANIZATION OF SOUTHERN CALIFORNIA PHYSICIANS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
3. LOSSES AND LOSS ADJUSTMENT EXPENSES
The following table provides a reconciliation of the beginning and ending
reserve balances, net of reinsurance recoverable.
<TABLE>
<CAPTION>
SIX MONTHS
ENDED JUNE 30, YEAR ENDED DECEMBER 31,
--------------------- ----------------------------------
1996 1995 1995 1994 1993
-------- -------- -------- -------- --------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Reserve for losses and
LAE, net of related
reinsurance
recoverable, at
beginning of period... $446,627 $449,566 $449,566 $472,129 $465,424
Provision for losses and
LAE for claims
occurring in the
current period, net of
reinsurance........... 86,160 89,203 175,856 169,143 168,784
Decrease in estimated
losses and LAE for
claims occurring in
prior periods, net of
reinsurance........... (27,913) (31,670) (57,833) (60,423) (43,430)
-------- -------- -------- -------- --------
Incurred losses during
the period, net of
reinsurance........... 58,247 57,533 118,023 108,720 125,354
-------- -------- -------- -------- --------
Deduct losses and LAE
payments for claims,
net of reinsurance,
occurring during:
Current period........ 1,257 988 11,481 10,178 12,971
Prior periods......... 51,305 59,538 109,481 121,105 105,678
-------- -------- -------- -------- --------
52,562 60,526 120,962 131,283 118,649
-------- -------- -------- -------- --------
Reserve for losses and
LAE, net of related
reinsurance
recoverable, at end of
period................ 452,312 446,573 446,627 449,566 472,129
Reinsurance recoverable
for losses and LAE, at
end of period......... 22,086 17,112 19,560 19,177 18,644
-------- -------- -------- -------- --------
Reserves for losses and
LAE, gross of
reinsurance
recoverable, at end of
period................ $474,398 $463,685 $466,187 $468,743 $490,773
======== ======== ======== ======== ========
</TABLE>
The Company's reserves for unpaid losses and LAE, net of related
reinsurance recoverable, at December 31, 1994, 1993 and 1992 were decreased in
the following year by $57,833,000, $60,423,000, and $43,430,000, respectively,
for claims that had occurred on or prior to those balance sheet dates. Those
redundancies resulted primarily from settling case basis reserves established in
prior years for amounts that were less than expected. The 1995 redundancies were
offset, in part, by a $23,900,000 increase in the loss reserves carried for
physicians who receive free tail coverage in the event of death,
F-13
<PAGE> 112
SOUTHERN CALIFORNIA PHYSICIANS INSURANCE EXCHANGE
ORGANIZATION OF SOUTHERN CALIFORNIA PHYSICIANS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
disability or retirement from the medical profession. The increase was the
result of a refinement in the actuarial methodology used to calculate the
reserve for this tail coverage.
The anticipated effect of inflation is implicitly considered when
estimating liabilities for losses and LAE. While anticipated price increases due
to inflation are considered in estimating the ultimate claim costs, the increase
in average severities of claims is caused by a number of factors that vary with
the individual type of insurance written. Future average severities are
projected based on historical trends adjusted for implemented changes in
underwriting standards, policy provisions and general economic trends. Those
anticipated trends are monitored based on actual development and are modified if
necessary.
4. REINSURANCE
Certain premiums and benefits are ceded to other insurance companies under
various reinsurance agreements. These reinsurance agreements provide the Company
with increased capacity to write additional risks and maintain its exposure to
loss within its capital resources. Amounts recoverable from reinsurers are
estimated in a manner consistent with the claim liability associated with the
reinsured policy.
Reinsurance contracts do not relieve the Company from its obligations to
policyholders. The failure of reinsurers to honor their obligations could result
in losses to the Company; consequently, allowances are established for amounts
deemed uncollectible. The Company evaluates the financial condition and economic
characteristics of its reinsurers to minimize its exposure to significant losses
from reinsurer insolvencies.
The effect of assumed and ceded reinsurance on premiums is summarized in
the following tables.
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
----------------------------------------
1996 1995
------------------ ------------------
WRITTEN EARNED WRITTEN EARNED
------- ------- ------- -------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Direct........................................ $62,659 $63,979 $62,216 $63,294
Assumed....................................... 6,008 1,559 397 397
Ceded......................................... 4,372 4,410 3,961 4,238
------- ------- -------- -------
Net premiums.................................. $64,295 $61,128 $58,652 $59,453
======= ======= ======== =======
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------
1995 1994 1993
-------------------- -------------------- --------------------
WRITTEN EARNED WRITTEN EARNED WRITTEN EARNED
-------- -------- -------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Direct...................... $122,277 $124,118 $120,024 $118,449 $112,459 $112,428
Assumed..................... 780 780 736 736 782 782
Ceded....................... 8,544 8,544 7,526 7,526 16 16
-------- -------- -------- -------- -------- --------
Net premiums................ $114,513 $116,354 $113,234 $111,659 $113,225 $113,194
======== ======== ======== ======== ======== ========
</TABLE>
Reinsurance premiums ceded reduced loss and loss adjustment expenses by
$1,019,000 in 1995, $2,685,000 in 1994 and $2,501,000 in 1993.
F-14
<PAGE> 113
SOUTHERN CALIFORNIA PHYSICIANS INSURANCE EXCHANGE
ORGANIZATION OF SOUTHERN CALIFORNIA PHYSICIANS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
5. FEDERAL INCOME TAXES
The components of the Federal income tax provision in the accompanying
statements of income are summarized as follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, YEAR ENDED DECEMBER 31,
---------------- -----------------------------
1996 1995 1995 1994 1993
------ ------ ------- ------ ------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Current...................................... $6,045 $4,481 $ 9,898 $3,162 $3,841
Deferred..................................... (446) 1,686 158 6,050 4,777
------ ------ ------- ------ ------
Total.............................. $5,599 $6,167 $10,056 $9,212 $8,618
====== ====== ======= ====== ======
</TABLE>
A reconciliation of income tax computed at the U.S. Federal statutory tax
rates to total income tax expense is as follows:
<TABLE>
<CAPTION>
SIX MONTHS
ENDED JUNE 30, YEAR ENDED DECEMBER 31,
--------------- ---------------------------
1996 1995 1995 1994 1993
------ ------ ------- ------- -------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Federal income tax at 35%....................... $6,887 $7,169 $12,049 $11,029 $11,934
Increase (decrease) in taxes resulting from:
Tax-exempt interest............................. (1,276) (1,029) (2,125) (1,825) (1,986)
Dividends received deduction.................... (96) (116) (216) (290) (323)
Tax rate change................................. -- -- -- -- (1,021)
Other........................................... 84 143 348 298 14
------- ------ ------- ------- -------
Total Federal income tax expense...... $5,599 $6,167 $10,056 $ 9,212 $ 8,618
======= ====== ======= ======= =======
</TABLE>
F-15
<PAGE> 114
SOUTHERN CALIFORNIA PHYSICIANS INSURANCE EXCHANGE
ORGANIZATION OF SOUTHERN CALIFORNIA PHYSICIANS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
Deferred income taxes reflect the net tax effect of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax assets and liabilities are summarized as follows:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
-------- -------------------
1996 1995 1994
-------- ------- -------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C>
Deferred tax assets:
Discounting of loss reserves............................ $ 25,477 $24,771 $25,557
Policyholder dividends.................................. 138 138 3,500
Unrealized investment losses............................ -- -- 8,987
------- ------- -------
Total deferred tax assets....................... 25,615 24,909 38,044
Deferred tax liabilities:
Deferred policy acquisition costs....................... 186 164 180
Unrealized investment gains............................. 80 12,498 --
Interest receivable -- IRS audit........................ -- -- 3,953
Other................................................... -- 255 276
------- ------- -------
Total deferred tax liabilities.................. 266 12,917 4,409
======= ======= =======
Net deferred tax assets......................... $ 25,349 $11,992 $33,635
======= ======= =======
</TABLE>
Federal income taxes paid during 1995, 1994 and 1993 were $9,900,000,
$3,250,000 and $3,816,000, respectively.
The Internal Revenue Service (IRS) had proposed adjustments to increase the
Company's tax liability for 1986 and 1987 by $60,815,000 as a result of its
examinations. The Company's management disagreed with the deficiencies proposed
by the IRS and worked with the IRS Appeals Office. The Appeals Office reversed
the $60,815,000 proposed adjustment and concluded that there would be no change
in the 1986 or 1987 tax amounts. The Appeals Office has allowed the Company's
refund claim for $9,120,000 in tax which arose from issues in the 1985 IRS
examination which the IRS previously disallowed. The Appeals Office has also
approved an outstanding claim for refund of $3,563,000 in tax resulting from an
amended filing of the 1988 return. Both the 1985 and 1988 refunds were paid by
the IRS with interest of $13,220,000 in January 1996. At December 31, 1995 the
Company has recorded these refunds totaling $25,903,000 in Federal income taxes
recoverable.
In November 1995, the IRS proposed a $13,023,000 adjustment to increase the
Company's 1991 tax liability and in June 1996, proposed a $3,673,000 adjustment
to increase the Company's 1992 tax liability for the issue asserted in the 1986
and 1987 examinations. The Company's management disagrees with the proposed
adjustment and intends to pursue all administrative and judicial remedies
available to satisfactorily settle this dispute. The Company filed a petition in
Tax Court to contest the 1991 tax deficiency in February 1996, and will file a
similar petition related to the 1992 deficiency. Based on the results of the
1986 and 1987 IRS examinations, the Company's management believes that the
resolution of these matters will not have a material adverse effect on the
Company's financial position or results of operations and no accrual has been
recorded in the accompanying financial statements. Because this matter may have
to be appealed or litigated, the Company's management believes that it is
unlikely that this issue will be resolved in the foreseeable future.
F-16
<PAGE> 115
SOUTHERN CALIFORNIA PHYSICIANS INSURANCE EXCHANGE
ORGANIZATION OF SOUTHERN CALIFORNIA PHYSICIANS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
6. STATUTORY ACCOUNTING PRACTICES
The Company is domiciled in California and prepares its statutory-basis
financial statements in accordance with accounting practices prescribed or
permitted by the California Department of Insurance. "Prescribed" statutory
accounting practices include state laws, regulations and general administrative
rules, as well as a variety of publications of the National Association of
Insurance Commissioners (NAIC). "Permitted" statutory accounting practices
encompass all accounting practices that are not prescribed; such practices may
differ from state to state, may differ from company to company within a state,
and may change in the future. The NAIC currently is in the process of codifying
statutory accounting practices, the result of which is expected to constitute
the only source of "prescribed" statutory accounting practices. Policyholders'
surplus and net income, as reported to the domiciliary state insurance
department in accordance with its prescribed or permitted statutory accounting
practices, for the Company are summarized as follows:
<TABLE>
<CAPTION>
1995 1994 1993
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Statutory net income for the year............... $ 24,393 $ 17,730 $ 16,886
Statutory surplus at year end................... 235,352 187,299 171,589
</TABLE>
The Company offers its insureds free tail coverage in the event of death,
total and permanent disability and complete and permanent retirement. In 1993,
the NAIC published guidelines for establishing a reserve for future free tail
policies when the claims-made policy includes a provision for waiving a premium
charge in the event of death, disability or retirement of the insured. Based on
the NAIC guidelines, this reserve should be recorded as an unearned premium
reserve. Alternatively, it can be considered an unpaid loss with the permission
of the insurance entity's state insurance department. In 1995, the Company
received written approval from the California Department of Insurance to record
this reserve as an unpaid loss. The Company's statutory surplus would be
unaffected if the California Department of Insurance were to rescind its
permission for this treatment.
7. BENEFIT PLANS
The Company has a 401(k) defined contribution plan and a non-contributory
defined benefit plan which provide retirement benefits to all its employees.
Under the 401(k) plan, the Company presently matches the employees'
contribution. The contribution expense for the 401(k) plan was $436,000,
$350,000 and $304,000 for the years ended December 31, 1995, 1994 and 1993,
respectively. An additional defined contribution plan that no longer accepts
contributions will remain with the trustee as funded at December 31, 1989 until
retirement or termination of all employees vested in the plan.
SMC also maintains a defined benefit pension plan whose benefits are based
on years of service and salary levels. The Company's policy is to fund the
pension plan up to the maximum deductible contributions the Federal laws and
regulations permit. Plan assets consist of investment funds and cash held in a
bank money market account.
F-17
<PAGE> 116
SOUTHERN CALIFORNIA PHYSICIANS INSURANCE EXCHANGE
ORGANIZATION OF SOUTHERN CALIFORNIA PHYSICIANS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
Net pension expense consists of the following components:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1995 1994 1993
----- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
Service cost-benefits earned during the year............... $ 223 $252 $191
Interest on projected benefit obligation................... 73 55 44
Actual return on plan assets............................... (282) (60) (51)
Net amortization and deferral.............................. 201 1 25
----- ---- ----
Net pension expense........................................ $ 215 $248 $209
===== ==== ====
</TABLE>
The following table sets forth the funding status of the plan:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1995 1994
------- -------
(IN THOUSANDS)
<S> <C> <C>
Actuarial present value of benefit obligations:
Accumulated benefit obligations, including vested benefits of
$759,000 in 1995 and $489,000 in 1994........................ $(1,078) $ (694)
======= =======
Projected benefit obligation................................... $(1,370) $ (910)
Plan assets.................................................... 1,423 863
------- -------
Plan assets in excess of (less than) projected benefit
obligations.................................................. 53 (47)
Unrecognized net loss from past experience different from that
assumed...................................................... 31 48
Unrecognized past service cost................................. (15) (16)
Unrecognized net asset at January 1............................ (35) (39)
------- -------
Prepaid (accrued) pension expense.............................. $ 34 $ (54)
======= =======
</TABLE>
The projected benefit obligation for 1995, 1994 and 1993 was determined
using an assumed discount rate of 7%, 8% and 7%, respectively, and an assumed
rate of compensation increase of 5% for 1995, 1994 and 1993. The expected
long-term rate of return on plan assets was 8% in 1995, 1994 and 1993.
The Company also has enacted a non-qualified supplemental employee
retirement agreement for selected employees which provides benefits
retroactively from January 1, 1990. At December 31, 1995, the projected benefit
obligation for this plan was $1,891,000 of which the accumulated benefit
obligation of $1,101,000 is accrued as a liability in the combined balance
sheet. Pension expense for this plan was approximately $258,000 in 1995,
$291,000 in 1994 and $19,000 in 1993.
F-18
<PAGE> 117
SOUTHERN CALIFORNIA PHYSICIANS INSURANCE EXCHANGE
ORGANIZATION OF SOUTHERN CALIFORNIA PHYSICIANS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
8. COMMITMENTS AND CONTINGENCIES
The Company leases certain facilities under lease agreements expiring from
1996 to 2001. Future minimum payments under noncancellable operating leases at
December 31, 1995 consisted of the following (in thousands):
<TABLE>
<S> <C>
1996................................. $195
1997................................. 195
1998................................. 185
1999................................. 175
2000................................. 175
Thereafter........................... 9
----
Total minimum payments
due...................... $934
====
</TABLE>
Rent expense for the years ended December 31, 1995, 1994 and 1993 was
$46,000, $42,000 and $39,000, respectively.
The Company is a defendant in an action brought by the bankruptcy estate of
an uninsured physician. The bankruptcy estate alleged that the Company had an
undisclosed conflict of interest when it provided the physician with a free
courtesy defense by an attorney who had represented the interests of the
Company's insureds in other cases. The punitive damages rendered by the jury
were reduced to $14,000,000 by the trial judge. The Company believes that the
action is entirely without merit and plans to aggressively pursue its rights on
appeal. However, the ultimate resolution of this matter cannot be determined at
this time and could result in a loss to the Company.
The Company is named as defendant in various legal actions primarily
arising from claims made under insurance policies and contracts. These actions
are considered by the Company in estimating the loss and loss adjustment expense
reserves. The Company's management believes that the resolution of these actions
will not have a material adverse effect on the Company's financial position or
results of operations.
Since 1981, the Company has purchased annuities from life insurance
companies to fund obligations under structured settlement agreements with
certain medical malpractice claimants. Annuities having an aggregate purchase
price of $12,294,000 were purchased from Executive Life Insurance Company (ELIC)
which was placed in conservatorship during 1991 by the California Insurance
Commissioner. On August 13, 1993, the California Superior Court for Los Angeles
County approved a Rehabilitation Plan (the Plan) under which the annuities were
restructured to reduce their account values and amounts payable to
beneficiaries. Under the Plan, substantially all of the assets of ELIC have been
transferred to another insurer, which has assumed the restructured annuities and
is obligated to pay varying percentages of the original annuity benefits as they
become due. Certain state insurance guaranty associations have agreed to enhance
the annuity benefits up to the monetary limits permitted by applicable state
laws. Under many of the annuities purchased by the Company, there remains a
significant shortfall from the benefits provided in the original contracts.
Certain creditors of ELIC have appealed the court's decision approving the Plan
and the Plan was upheld in all material respects by the Court of Appeals. The
Company has determined that it is contractually obligated for the shortfall
amounts under certain of these annuities and at December 31, 1995, included in
losses incurred a reserve in the amount of $7,036,000 and included in
reinsurance recoverables expected recoverables of $3,036,000 related to these
expected shortfall payments. During 1995, the Company made shortfall payments
totaling $93,000 ($260,000 in 1994). The shortfall amounts paid by the Company
in 1995 were reduced by a distribution to all annuitants of certain ELIC assets
held in trust, pending the completion of various
F-19
<PAGE> 118
SOUTHERN CALIFORNIA PHYSICIANS INSURANCE EXCHANGE
ORGANIZATION OF SOUTHERN CALIFORNIA PHYSICIANS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
transactions and claims. The Company has been advised that there will be at
least two additional distributions of assets from the ELIC Trusts, which will
further reduce the shortfall under the ELIC annuities. The extent of the
Company's obligations with respect to these and other ELIC annuities purchased
by the Company cannot be determined until various transactions under the Plan
are completed and claims with respect to the annuities and the pending appeal
are resolved including claims on the remaining assets held in the ELIC Trusts.
The Company believes that the amount of its obligations in excess of the
existing reserves, if any, is not material to its financial position or results
of operations.
9. REORGANIZATION
On March 21, 1996, the Board of Governors of the Exchange adopted a Plan
and Agreement of Merger (the Merger Agreement) whereby the Exchange will
reorganize from a reciprocal insurer to a stock insurance company and become a
wholly owned subsidiary of SCPIE Holdings (the Reorganization). Pursuant to the
Reorganization, the Exchange will merge with and into SCPIE Indemnity, a newly
organized California stock insurer and a wholly owned subsidiary of SCPIE
Holdings that will be the surviving corporation of the Reorganization. The
assets and liabilities of the Exchange that will be merged into SCPIE Indemnity
will be accounted for at a historical cost in a manner similar to that in a
pooling of interests. SCPIE Indemnity is licensed to write property and casualty
insurance lines in the state of California, but has not conducted business prior
to the Reorganization. Prior to the Reorganization, OSCAP will be liquidated
into the Exchange, so that SCPIE Management Company will become a subsidiary of
SCPIE Indemnity after the Reorganization. The Reorganization also involves the
consolidation of certain other affiliated entities and SCPIE Holdings.
The principal purpose of the Reorganization is to improve SCPIE's access to
the capital markets and to raise capital to permit the growth of existing
business and develop new business opportunities in the professional liability
insurance industry. The Reorganization will also provide Members of the Exchange
with shares of Common Stock in exchange for their membership interests in the
Exchange.
A special meeting of SCPIE Members will be held to approve the Merger
Agreement.
Unaudited pro forma net income per share generated in the Combined
Statements of Income gives effect in all periods to the Reorganization and the
issuance of 10,000,000 shares of Common Stock (less fractional shares, which
will be paid in cash) to Eligible Members of the Exchange.
On July 12, 1996, OSCAP was liquidated into the Exchange and SMC and its
subsidiaries became subsidiaries of the Exchange.
F-20
<PAGE> 119
REPORT OF INDEPENDENT AUDITORS
Board of Directors
SCPIE Holdings Inc.
We have audited the accompanying balance sheet of SCPIE Holdings Inc. as of
February 29, 1996. This balance sheet is the responsibility of the Company's
management. Our responsibility is to express an opinion on this balance sheet
based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the balance sheet is free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the balance sheet. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall balance sheet presentation. We
believe that our audit provides a reasonable basis for our opinion.
In our opinion, the balance sheet referred to above presents fairly, in all
material respects, the financial position of SCPIE Holdings Inc. as of February
29, 1996, in conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
Los Angeles, California
May 1, 1996
F-21
<PAGE> 120
SCPIE HOLDINGS INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
FEBRUARY
JUNE 30, 29,
1996 1996
----------- ----------
(UNAUDITED)
<S> <C> <C>
Assets
Cash.......................................................... $ 415,331 $ 600,010
Deposit....................................................... -- 400,000
Investment in subsidiaries.................................... 13,569,300 --
Other......................................................... 418,472 --
----------- ----------
Total assets............................................... $14,403,103 $1,000,010
============ ==========
Liabilities
Due to affiliates............................................. $ 392,843 --
Other......................................................... 3,591 --
----------- ----------
Total liabilities.......................................... $ 396,434 --
============ ==========
Stockholder's Equity
Common stock -- $.01 par value, 1,000 shares authorized, 500
shares issued and outstanding.............................. $ 5 $ 5
Additional paid-in capital...................................... 13,999,995 999,995
Retained earnings............................................... 6,669 10
----------- ----------
Total stockholder's equity................................. $14,006,669 $1,000,010
============ ==========
Total liabilities and stockholder's equity................. $14,403,103
============
</TABLE>
STATEMENT OF INCOME
<TABLE>
<CAPTION>
FOUR MONTHS ENDED
JUNE 30, 1996
-----------------
(UNAUDITED)
<S> <C>
Net investment income...................................................... $10,361
Federal income taxes....................................................... 3,692
-----------------
Net income............................................................ $ 6,669
===============
</TABLE>
See accompanying note.
F-22
<PAGE> 121
SCPIE HOLDINGS INC.
NOTE TO BALANCE SHEETS
1. ORGANIZATION
SCPIE Holdings Inc. (SCPIE Holdings) is a Delaware corporation which is a
wholly owned subsidiary of Southern California Physicians Insurance Exchange
(the Exchange). SCPIE Holdings has no historic operations and was organized in
February 1996, as part of the Exchange's plan to reorganize its corporate
structure.
In March 1996 SCPIE Holdings acquired the outstanding stock of two inactive
property and casualty insurance companies, FG Insurance Corporation and FG
Casualty Company, for $12.5 million, and an additional contribution of $1.05
million was made during the second quarter of 1996. The transaction will be
accounted for as a purchase and the excess of the purchase price over the net
book value of the underlying assets will be recorded as goodwill and amortized
over a period of 10 years. SCPIE Holdings plans to utilize these companies to
enter geographic markets outside California.
F-23
<PAGE> 122
ANNEX I
AMENDED AND RESTATED
PLAN AND AGREEMENT OF MERGER
ANNEX I-i
<PAGE> 123
AMENDED AND RESTATED
PLAN AND AGREEMENT OF MERGER
BY AND AMONG
SCPIE HOLDINGS INC.
A DELAWARE CORPORATION,
AND
SCPIE INDEMNITY COMPANY
A CALIFORNIA CORPORATION,
AND
SOUTHERN CALIFORNIA PHYSICIANS
INSURANCE EXCHANGE
A CALIFORNIA INTER-INSURANCE EXCHANGE
ANNEX I-ii
<PAGE> 124
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<C> <S> <C>
I THE MERGER...................................................................... 1
1.1 The Merger................................................................. 1
1.2 Effective Time of the Merger............................................... 2
1.3 Effect of the Merger....................................................... 2
1.4 Subsequent Actions......................................................... 2
1.5 Governing Documents........................................................ 2
1.6 Directors and Officers..................................................... 2
II CONVERSION OF MEMBERSHIP INTERESTS, ALLOCATION AND PAYMENT OF MERGER
CONSIDERATION................................................................... 3
2.1 Certain Definitions........................................................ 3
2.2 Conversion of Membership Interests......................................... 4
2.3 Allocation of Merger Shares................................................ 4
2.4 Adjustment of Share Numbers................................................ 5
2.5 Fractional Shares.......................................................... 5
2.6 Cancellation and Issuance of Holdings Stock................................ 5
2.7 Issuance of Consideration.................................................. 5
2.8 No Further Interest in the Company......................................... 5
III APPROVAL BY THE COMMISSIONER.................................................... 5
3.1 Commissioner's Approval.................................................... 5
IV REPRESENTATIONS AND WARRANTIES BY THE COMPANY................................... 5
4.1 Organization and Qualification............................................. 5
4.2 Authority Relative to this Plan; Recommendation to Eligible Members........ 5
4.3 Compliance................................................................. 5
V REPRESENTATIONS AND WARRANTIES OF HOLDINGS AND NEW INSURER...................... 6
5.1 Organization and Qualification............................................. 6
5.2 Capitalization............................................................. 6
5.3 Authority Relative to this Plan............................................ 6
5.4 Compliance................................................................. 7
VI ADDITIONAL AGREEMENTS........................................................... 7
6.1 Cooperation................................................................ 7
6.2 Special Meeting of Eligible Members of the Company......................... 8
6.3 Officers' and Directors' Insurance; Indemnification........................ 9
6.4 Continuity of Obligations Regarding Policyholders.......................... 9
VII CONDITIONS PRECEDENT............................................................ 10
7.1 Conditions to Obligations of Each Party to Effect the Merger............... 10
VIII TERMINATION..................................................................... 10
8.1 Termination................................................................ 10
8.2 Effect of Termination...................................................... 11
</TABLE>
ANNEX I-iii
<PAGE> 125
<TABLE>
<CAPTION>
PAGE
----
<C> <S> <C>
IX GENERAL PROVISIONS.............................................................. 11
9.1 Amendment.................................................................. 11
9.2 Extension; Waiver.......................................................... 11
9.3 Nonsurvival of Representations and Warranties.............................. 11
9.4 Entire Plan................................................................ 11
9.5 Counterparts............................................................... 11
9.6 Severability............................................................... 11
9.7 Notices.................................................................... 12
9.8 Public Announcements....................................................... 12
9.9 Section Headings........................................................... 12
9.10 Benefits and Assignment.................................................... 12
9.11 Applicable Law............................................................. 12
</TABLE>
ANNEX I-iv
<PAGE> 126
THIS AMENDED AND RESTATED PLAN AND AGREEMENT OF MERGER (the "Plan"), dated
as of August 8, 1996, is among SCPIE HOLDINGS INC., a Delaware corporation
("Holdings"), SCPIE INDEMNITY COMPANY, a California corporation and a wholly
owned subsidiary of Holdings ("New Insurer"), and SOUTHERN CALIFORNIA PHYSICIANS
INSURANCE EXCHANGE, a California inter-insurance exchange (the "Company").
RECITALS
WHEREAS, the Company is a California reciprocal or inter-insurance exchange
organized pursuant to the provisions of Division I, Part 2, Chapter 3
(commencing with Section 1280) of the Insurance Code of the State of California
(the "California Insurance Law").
WHEREAS, New Insurer is a corporation of the State of California authorized
to transact insurance under the California Insurance Law.
WHEREAS, Holdings is a corporation of the State of Delaware and a wholly
owned subsidiary of the Company.
WHEREAS, the General Corporations Law of the State of California (the
"California Corporations Law") and the California Insurance Law permit a merger
of a California reciprocal or inter-insurance exchange with and into a
corporation authorized to transact insurance in California.
WHEREAS, in furtherance of such merger, it is contemplated that the
Membership Interests (as hereinafter defined) of Eligible Members (as
hereinafter defined) of the Company will be exchanged for the consideration
described herein.
WHEREAS, the Board of Governors of the Company (the "Board of Governors")
and the respective Boards of Directors of New Insurer and Holdings have each
duly approved the merger contemplated by this Plan (the "Merger") upon the terms
and subject to the conditions set forth in this Plan and in accordance with
California Corporations Law and the California Insurance Law, with the result
that the Company shall be merged with and into New Insurer and the Eligible
Members of the Company shall receive, pursuant to the Merger, shares of the
Common Stock, par value $.0001 per share, of Holdings (the "Common Stock").
WHEREAS, the Company intends to prepare and mail to all Eligible Members of
the Company a proxy statement with respect to a special meeting (the "Special
Meeting") of Members of the Company at which Eligible Members will be asked to
approve this Plan.
WHEREAS, the parties entered into a plan and agreement of merger, dated
March 21, 1996, relating to the Merger (the "Original Plan"); and
WHEREAS, the parties desire to amend and restate the Original Plan by
entering into this Plan, and the parties intend for the terms and conditions of
this Plan to supersede all terms and conditions of the Original Plan.
AGREEMENT
NOW, THEREFORE, in consideration of the premises and the mutual covenants
herein contained and for other good and valuable consideration the receipt and
adequacy of which are hereby acknowledged, Holdings, New Insurer and the Company
hereby agree as follows:
ARTICLE I
THE MERGER
1.1 The Merger. Subject to the conditions of Article VII being satisfied
or duly waived, and in accordance with and subject to (i) the provisions of this
Plan, (ii) the California Corporations Law and
ANNEX I-1
<PAGE> 127
(iii) the California Insurance Law, the Company shall be merged with and into
New Insurer in the Merger. At and after the Effective Time, the separate
existence of the Company (except as may be continued by operation of law) shall
cease, and the New Insurer shall continue as the surviving corporation under the
corporate name it possesses immediately prior to the Effective Time. The Company
and the New Insurer are sometimes hereinafter referred to as the "Constituent
Entities" and New Insurer is sometimes hereinafter referred to as the "Surviving
Corporation."
1.2 Effective Time of the Merger. The Merger shall become effective at the
time (herein called the "Effective Time") this Plan is filed with the Secretary
of State of the State of California in the manner provided under Section 1113(g)
of the California Corporations Law and Section 1556(a) of the California
Insurance Law. The day on which the Effective Time occurs is hereinafter called
the "Effective Date." The Effective Date shall be such date as the Board of
Governors and the Boards of Directors of Holdings and New Insurer determine is
appropriate after the conditions set forth herein have been satisfied or waived.
1.3 Effect of the Merger. At the Effective Time, the effect of the Merger
shall be as provided in the applicable provisions of the California Corporations
Law and the California Insurance Law, including, without limitation, Section
1107 of California Corporations Law and Section 1557 of the California Insurance
Law. Without limiting the generality of the foregoing, and subject thereto, at
the Effective Time all the rights and property of the Company shall accrue to,
and become the rights and properties of, the Surviving Corporation, which shall
succeed to and assume all the obligations and liabilities (including
policyholder obligations and liabilities) of the Company; and all rights of
creditors (including policyholders) and liens of the Company shall become the
rights of creditors (including policyholders) and liens of the Surviving
Corporation. After the Effective Time, any reference to the Company in any
writing, including but not limited to any power or powers of attorney or agency
agreement or agreements authorizing the execution of any surety bonds or
contracts or policies of insurance, or authorizing the acceptance of service of
process or any other act on behalf of the Constituent Entities and any and all
other contracts, policies, agreements, instruments and documents to which either
Constituent Entity is a party, whether executed or taking effect before or after
the Merger, shall be deemed a reference to the Surviving Corporation if not
inconsistent with the other provisions of such writing, and all such writings
are hereby ratified, confirmed and approved by the Surviving Corporation, and
the Surviving Corporation shall be deemed to be substituted in the place and
stead of either Constituent Entity as a party thereto.
1.4 Subsequent Actions. If, at any time after the Effective Time, the
Surviving Corporation shall consider or be advised that any deeds, bills of
sale, assignments, assurances or any other actions or things are necessary or
desirable to vest, perfect or confirm of record or otherwise in the Surviving
Corporation its right, title or interest in, to or under any of the rights,
properties or assets of the Company acquired or to be acquired by the Surviving
Corporation as a result of, or in connection with, the Merger or otherwise to
carry out this Plan, the officers and directors of the Surviving Corporation
shall be authorized to execute and deliver, in the name and on behalf of the
Company, all such deeds, bill of sale, assignments and assurances and to take
and do, in the name and on behalf of such corporation or otherwise, all such
other actions and things as may be necessary or desirable to vest, perfect or
confirm any and all right, title and interest in, to and under such rights,
properties or assets in the Surviving Corporation or otherwise to carry out this
Plan.
1.5 Governing Documents. The Articles of Incorporation and Bylaws of New
Insurer shall be the Articles of Incorporation and Bylaws of the Surviving
Corporation, as in effect immediately prior to the Effective Time, until
thereafter amended as provided therein and under California Corporations Law.
1.6 Directors and Officers. The members of the Board of Directors of the
New Insurer immediately prior to the Effective Time will be the initial
directors of the Surviving Corporation, and the officers of the New Insurer
immediately prior to the Effective Time will be the initial officers of the
Surviving Corporation, in each case until their successors are duly elected and
qualified.
ANNEX I-2
<PAGE> 128
ARTICLE II
CONVERSION OF MEMBERSHIP INTERESTS,
ALLOCATION AND PAYMENT OF MERGER CONSIDERATION
2.1 Certain Definitions. As used in this Article II and elsewhere in this
Plan, the terms listed below shall have the following meanings:
"Approval Date" means the date that the Commissioner, pursuant to Section
1552 of the California Insurance Law, approves this Plan for submission to the
Eligible Members for approval.
"Attorney-in-Fact" means SCPIE Management Company, a California corporation
that is the Company's attorney-in-fact.
"California Department" means the Department of Insurance of the State of
California.
"Commissioner" means the Commissioner of Insurance of the California
Department, or such governmental officer, body or authority as may succeed such
Commissioner as the primary regulator of the Company's insurance business under
applicable law.
"Earned Premiums" means, for the applicable period, earned premiums in
respect of a Policy.
"Eligible Member" means a Person who is a Member of the Company on the
Approval Date.
"Eligible Policy" means a Policy issued to an Eligible Member on which
premiums were earned at any time, provided, however, that with respect to a
Policy issued to an Eligible Member who was not a Member on March 21, 1996,
Earned Premiums for such a Policy shall consist only of earned premiums
following March 21, 1996, and not earned premiums at any point prior to such
date.
"Fair Market Value" means (i) the average closing price of a share of the
Common Stock on the principal exchange on which the Common Stock is then
trading, if any, on the first five trading days following the Effective Date; or
(ii) if the Common Stock is not traded on an exchange but is quoted on Nasdaq or
a successor quotation system, (1) the average last sales price (if the Common
Stock is then listed as a National Market Issue under the NASD National Market
System) or (2) the average of the mean between the closing representative bid
and asked prices (in all other cases) for the Common Stock on the first five
trading days following the Effective Date as reported by Nasdaq or such
successor quotation system.
"Initial Public Offering" means the initial public offering by Holdings of
shares of Common Stock pursuant to an effective registration statement on Form
S-1.
"Initial Stock Price" means the price per share to the public at which the
Common Stock is sold in the Initial Public Offering.
"Member," "subscriber" and "insured person." A Person is a Member of the
Company if such Person is a subscriber who is an "insured person" under the name
of the Company through the facilities of the Attorney-in-Fact acting on behalf
of the several subscribers. The term "subscriber" shall include those Persons
who have executed a Subscription Agreement and Power of Attorney or any like
agreement of the Company. The term "insured person" shall include (a) each
individual physician, surgeon, nurse anesthetist, professional medical
partnership, professional medical corporation or other health care provider to
whom or which a policy of insurance has been issued by the Company as "named
insured," and (b) each physician, surgeon, nurse anesthetist or other health
care provider to whom a certificate insert (naming such person as a "physician
member" or "certificate holder") has been issued as part of a policy of
insurance issued by the Company to a professional medical partnership,
professional medical corporation or other health care provider. A "named
insured" under a policy of insurance ceases to be an insured person, subscriber
and Member when the "policy period" of such policy terminates by expiration of
time, cancellation or any other reason and a "physician member" or "certificate
holder" ceases to be an insured person, subscriber and Member when the "coverage
period" or "certificate period" under the applicable policy terminates by
expiration of time cancellation, or any other reason.
ANNEX I-3
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"Merger Shares" means the shares of Common Stock to be delivered (i) to
Members upon conversion of their Membership Interests by virtue of the Merger
and (ii) to New Insurer as consideration for the cancellation of the shares of
Common Stock held by the Company, which cancellation shall occur immediately
prior to the Merger as set forth in Section 2.5.
"Person" means an individual, corporation, joint venture, limited liability
company, partnership, association, trust, trustee, unincorporated entity,
organization or government or any department or agency thereof.
"Policy" means an insurance policy issued by the Company but does not
include (i) any agreement pursuant to which the Company has ceded or assumed
insurance or (ii) a reporting endorsement.
2.2 Conversion of Membership Interests. At the Effective Time, by virtue
of the Merger and without any action on the part of the Company, New Insurer,
Holdings, the Surviving Corporation or the holder of any of the following
securities:
(a) The rights of Members of the Company arising under the
subscription agreements between Members and the Company (the "Subscription
Agreements"), the Company's Bylaws, the California Insurance Law and
otherwise, including, without limitation, the right to vote for members of
the Board of Governors and on other matters and to participate in any
distribution of surplus on liquidation of the Company (but not including
contractual rights arising under Policies (the "Membership Interests"), in
existence immediately prior to the Effective Time shall be cancelled and
extinguished and be converted into the right to receive shares of Common
Stock as set forth in this Agreement.
(b) The Members entitled to receive Merger Shares shall be the
Eligible Members. The Merger Shares shall be allocated among the Eligible
Members as described in this Article II.
(c) Each share of common stock of New Insurer issued and outstanding
immediately prior to the Effective Time shall be converted into and become
one validly issued, fully paid and nonassessable share of common stock of
the Surviving Corporation.
2.3 Allocation of Merger Shares.
(a) The number of Merger Shares allocable to each Eligible Member
shall be determined as follows:
(i) Each Eligible Member shall be allocated a number of shares of
Common Stock equal to the product of x and y, where
"x" equals 9,000,000 shares of Common Stock and
"y" equals the ratio of the Earned Premiums of such Eligible Member
on Eligible Policies to the total Earned Premiums of all Eligible
Members on Eligible Policies during the period beginning on January 1,
1993 and ending on but including the Approval Date,
plus
(ii) Each Eligible Member who was also a Member on March 21, 1996
shall be allocated a number of shares of Common Stock equal to 1,000,000
shares of Common Stock divided by the total number of Eligible Members who
were also Members on March 21, 1996.
(b) The number of Merger Shares allocable to New Insurer shall be (i)
500,000 or (ii) such other number as the Board of Directors of Holdings and
the Board of Governors of the Company determine is appropriate in order to
insure that the Merger Shares issued to New Insurer pursuant to the Merger
have a fair market value equivalent to the fair market value of the shares
of Common Stock held by the Company which are to be cancelled in the Merger
pursuant to Section 2.5 hereof.
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2.4 Fractional Shares. No fractional shares of Common Stock shall be
issued to any Eligible Member upon surrender of Membership Interests. In lieu of
any fractional shares, each Eligible Member shall be paid an amount in cash
(without interest) rounded to the nearest cent, determined (i) by multiplying
(a) the Initial Stock Price by (b) the fractional interest to which such
Eligible Member would otherwise be entitled or (ii) in the event that the
Initial Public Offering does not occur on the Effective Date, by multiplying (a)
the Fair Market Value by (b) the fractional interest to which such Eligible
Member would otherwise be entitled.
2.5 Cancellation and Issuance of Holdings Stock. At the Effective Time, by
virtue of the Merger and without any action on the part of the Company, New
Insurer, Holdings or the Surviving Corporation:
(a) the Common Stock of Holdings held by the Company shall be
cancelled; and
(b) the Merger Shares allocable to New Insurer pursuant to Section
2.3(b) shall be issued.
2.6 Issuance of Consideration. As soon as reasonably practicable after the
Effective Date, Holdings shall prepare and issue (i) stock certificates
representing the Merger Shares allocated to each Eligible Member and to New
Insurer, and (ii) checks representing the cash paid in lieu of fractional
shares, as calculated pursuant to Section 2.4 hereof.
2.7 No Further Interest in the Company. As of the Effective Time, each
Member of the Company shall cease to be a Member, and shall have no further
interest in the Company or the Surviving Corporation, except for such interest
that each such Member may have as a holder of Common Stock.
ARTICLE III
APPROVAL BY THE COMMISSIONER
3.1 Commissioner's Approval. This Plan is subject to the approval of the
Commissioner pursuant to Sections 1552 et. seq. of the California Insurance Law.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES BY THE COMPANY
The Company represents and warrants to Holdings that, as of the date of
this Plan and as of the Effective Time:
4.1 Organization and Qualification. The Company is a reciprocal or
inter-insurance exchange duly organized, validly existing and in good standing
under the laws of the State of California. The Company has all requisite power
and authority required for it to own (or lease) and use its properties and carry
on its business as presently conducted. The Company is duly qualified or
licensed to do business, and is in good standing, in each jurisdiction where the
nature of business or the character of its properties makes necessary such
qualifications or licensing, except where the failure to so qualify would not
materially adversely affect the condition (financial or otherwise), results of
operations, business, properties or prospects of the Company taken as a whole.
4.2 Authority Relative to this Plan; Recommendation to Eligible
Members. The Company has full right, power, and authority to execute, deliver
and perform the terms of this Plan. Subject only to favorable action by the
Company's Eligible Members at the Special Meeting referred to in Section 6.2,
the execution, delivery and performance of this Plan by the Company have been
duly and validly authorized and approved by all required action on the part of
the Company. The Company's Board of Governors has unanimously approved the
execution, delivery and performance of this Plan. Subject only to approval of
the Company's Eligible Members as described above, this Plan constitutes the
valid and binding agreement of the Company and is enforceable in accordance with
its terms.
4.3 Compliance. Neither the execution and delivery of this Plan by the
Company nor the consummation of the transactions contemplated hereby nor
compliance by the Company with any of the
ANNEX I-5
<PAGE> 131
provisions hereof will (i) violate, conflict with, or result in a breach of any
provision of, or constitute a default (or an event which, with notice or lapse
of time or both, would constitute a default) under, or result in the termination
of, or accelerate the performance required by, or result in a right of
termination or acceleration under, or result in the creation of any lien,
security interest, charge or encumbrance upon any of the properties or assets of
the Company under any of the terms, conditions or provisions of (a) the
management agreement between the Company and the Attorney-in-Fact, or the
Company's Bylaws or (b) any material note, bond, mortgage, indenture, deed of
trust, license, lease, agreement or other instrument or obligation to which the
Company or any direct or indirect subsidiary of the Company is a party, or to
which any of them, or any of their respective properties or assets, may be
subject, or (ii) subject to compliance with the statutes and regulations
referred to in the next paragraph, violate any judgment, ruling, order, writ,
injunction, decree, statute, rule or regulation applicable to the Company or any
direct or indirect subsidiary of the Company or any of their respective
properties or assets, except, in the case of each of clauses (i) and (ii) above,
for such violations, conflicts, breaches, defaults, terminations, accelerations
or creations of liens, security interests, charges or encumbrances, which, in
the aggregate, would not have a material adverse effect on the transactions
contemplated hereby or on the condition (financial or other), business or
operations of the Company and its subsidiaries taken as a whole.
Other than in connection with or in compliance with the provisions of the
California Corporations Law, the California Insurance Law, the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), the Securities Act of
1933, as amended (the "Securities Act"), and the "takeover" or "blue sky" laws
of various states, no notice to, filing with, or authorization, consent or
approval of, any domestic or foreign public body or authority is necessary for
the consummation the Company of the transactions contemplated by this Plan,
except where failure to give such notice, make such filings, or obtain
authorizations, consents or approvals would, in the aggregate, not have a
material adverse effect on the transactions contemplated hereby or on the
condition (financial or other), business or operations of the Company taken as a
whole.
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF HOLDINGS AND NEW INSURER
Each of Holdings and New Insurer each, jointly and severally, represents
and warrants to the Company as follows:
5.1 Organization and Qualification. Holdings is a corporation duly
organized, validly existing and in good standing under the laws of the State of
Delaware. New Insurer is a corporation duly organized, validly existing and in
good standing under the laws of the State of California. Each of Holdings and
New Insurer is duly qualified or licensed to do business, and is in good
standing, in each jurisdiction where the nature of their respective businesses
or the character of their respective properties makes necessary such
qualifications or licensing, except where the failure to so qualify would not
materially adversely affect the condition (financial or otherwise), results of
operations, business, properties or prospects of Holdings and New Insurer, taken
as a whole. New Insurer holds a certificate of authority from the Commissioner
to transact specified classes of insurance in the State of California, and such
certificate of authority is in full force and effect.
5.2 Capitalization. As of the date of this Plan, Holdings has an
authorized capital stock of 1,000 shares of Common Stock, par value $.0001 per
share, of which 500 shares are duly and validly issued and outstanding, fully
paid and nonassessable, all of which are held by the Company. As of the date of
this Plan, New Insurer has an authorized capital stock of 100,000 shares of
common stock, par value $260.00 per share, of which 10,000 shares are duly and
validly issued and outstanding, fully paid, nonassessable, all of which are held
by the Company.
5.3 Authority Relative to this Plan. Each of Holdings and New Insurer has
full corporate power and authority to execute and deliver this Plan and to
perform its respective obligations hereunder. All
ANNEX I-6
<PAGE> 132
corporate action required on the part of Holdings and New Insurer in order to
authorize such execution, delivery and performance has been taken. This Plan
constitutes the valid and binding obligation of each of Holdings and New
Insurer, enforceable against each in accordance with its terms.
5.4 Compliance. Neither the execution and delivery of this Plan by
Holdings and New Insurer nor the consummation of the transactions contemplated
hereby nor compliance by Holdings and New Insurer with any of the provisions
hereof will (i) violate, conflict with, or result in a breach of any provision
of, or constitute a default (or an event which, with notice or lapse of time or
both, would constitute a default) under, or result in the termination of, or
accelerate the performance required by, or result in a right of termination or
acceleration under, or result in the creation of any lien, security interest,
charge or encumbrance upon any of the properties or assets of Holdings or New
Insurer or any other direct or indirect subsidiary under any of the terms,
conditions or provisions of (a) the respective charters or bylaws of Holdings or
New Insurer or (b) any material note, bond, mortgage, indenture, deed of trust,
license, lease, agreement or other instrument or obligation to which Holdings or
New Insurer is a party, or to which either of them, or any of their respective
properties or assets, may be subject, or (ii) subject to compliance with the
statutes and regulations referred to in the next paragraph, violate any
judgment, ruling, order, writ, injunction, decree, statute, rule or regulation
applicable to Holdings or New Insurer or any of their respective properties or
assets, except, in the case of each of clauses (i) and (ii) above, for such
violations, conflicts, breaches, defaults, terminations, accelerations or
creations of liens, security interests, charges or encumbrances, which, in the
aggregate, would not have a material adverse effect on the transactions
contemplated hereby or on the condition (financial or other), business or
operations of Holdings and its subsidiaries taken as a whole.
Other than in connection with or in compliance with the provisions of the
California Corporations Law, the California Insurance Law, the Exchange Act, the
Securities Act, and the "takeover" or "blue sky" laws of various states, no
notice to, filing with, or authorization, consent or approval of, any domestic
or foreign public body or authority is necessary for the consummation by
Holdings or New Insurer of the transactions contemplated by this Plan, except
where failure to give such notice, make such filings, or obtain authorizations,
consents or approvals would, in the aggregate, not have a material adverse
effect on the transactions contemplated hereby or on the condition (financial or
other), business or operations of Holdings and New Insurer taken as a whole.
ARTICLE VI
ADDITIONAL AGREEMENTS
6.1 Cooperation. Subject to the terms and conditions herein provided, each
of the parties hereto agrees to use all reasonable efforts to take, or cause to
be taken, all actions and to do, or cause to be done, all things necessary,
proper or advisable to consummate and make effective as promptly as practicable
the transactions contemplated by this Plan and to cooperate with each other in
connection with the foregoing, including using its best efforts to:
(a) prepare and file with the California Department as soon as is
reasonably practicable all necessary permit applications and other
necessary registrations and filings, including, but not limited to, all
filings and other submissions of information to governmental authorities
with respect to the transactions contemplated by this Plan, and use its
best efforts to obtain such permits and approvals as promptly as possible;
(b) prepare and file with the SEC as soon as is reasonably practicable
a Registration Statement, including a proxy statement/prospectus (the
"Registration Statement") with respect to the transactions contemplated by
this Plan, and use its best efforts to have such Registration Statement
declared effective by the SEC under the Securities Act as promptly as
possible;
(c) mail, as soon as is reasonably practicable after receiving any
required regulatory approvals, a proxy statement, together with a form of
proxy, with respect to the meeting of the Company's Eligible Members at
which the Eligible Members of the Company will vote upon this Plan and the
ANNEX I-7
<PAGE> 133
Merger (the "Proxy Statement"). The term "Proxy Statement" shall mean such
proxy or information statement at the time it initially is mailed to the
Company's Eligible Members and all amendments or supplements thereto, if
any, similarly filed and mailed. The information provided and to be
provided by the Company, Holdings and New Insurer, respectively, for use in
the Proxy Statement shall, on the date the Proxy Statement is first mailed
to the Company's Eligible Members and on the date of the meeting of the
Company's Eligible Members referred to in Section 6.2, be true and correct
in all material respects and shall not omit to state any material fact
necessary in order to make such information not misleading, and each of the
Company, Holdings and New Insurer agrees to correct any information
provided by it for use in the Proxy Statement that shall have become false
or misleading;
(d) take all such actions as may be required under state blue sky or
securities laws in connection with the transactions contemplated by this
Plan;
(e) arrange for the listing of the Common Stock on a national
securities exchange;
(f) obtain all necessary waivers, consents and approvals from other
parties to material loan agreements, leases and other contracts;
(g) obtain all necessary consents, approvals and authorizations as are
required to be obtained under any Federal, state or foreign law or
regulations;
(h) defend all lawsuits or other legal proceedings, formal or
informal, challenging this Plan or the consummation of the transactions
contemplated hereby; and
(i) lift, rescind or mitigate the effect of any injunction or
restraining order or other order adversely affecting the ability of the
parties to consummate the transactions contemplated hereby.
6.2 Special Meeting of Eligible Members of the Company. (a) After approval
by the Commissioner of this Plan pursuant to Section 1552 of the California
Insurance Law, the Company shall take all action necessary, in accordance with
California Corporations Law, the California Insurance Law, the Subscription
Agreements and the Company's Bylaws, to convene the Special Meeting of the
Eligible Members as promptly as practicable to consider and vote upon this Plan
and the Merger.
(b) The record date for the Special Meeting shall be the Approval Date.
(c) Each Eligible Member shall be entitled to vote in person or by proxy in
a manner to be prescribed by the Commissioner and the Company's Bylaws;
provided, however, that any vote cast shall be by ballot and not viva voce.
(d) The Proxy Statement shall contain the recommendation of the Board of
Governors that the Eligible Members of the Company vote to adopt and approve the
Merger and this Plan.
(e) The Company shall use its best efforts to solicit from Eligible Members
proxies in favor of such adoption and approval and to take all other action
necessary or, in the reasonable judgment of the Company, helpful to secure the
vote or consent of the Eligible Members.
(f) The Company shall mail notice of the Special Meeting to all Eligible
Members. Such notice shall set forth the reasons for the Special Meeting and the
time and place of the Special Meeting, and shall enclose a proxy for each
Eligible Member. Such notice and proxy shall be mailed by first class mail to
the address of each Eligible Member, as such address appears on the records of
the Company, at least 35 days prior to the Special Meeting, and such notice and
proxy shall be in a form satisfactory to the Commissioner. Notice of the Special
Meeting shall be accompanied by information relevant to the Special Meeting.
(g) Notice of the Special Meeting also shall be given by the Company
through publication in a newspaper of general circulation in Los Angeles County,
State of California, the county of the Company's principal place of business.
Such publication shall be made at least twice and shall be published in a
ANNEX I-8
<PAGE> 134
business day edition of the newspaper. Such publication shall be made at least
30 days prior to the Special Meeting.
(h) The affirmative vote of the Eligible Members required for adoption and
approval of this Plan and the Merger shall be 66-2/3% of the Eligible Members.
6.3 Officers' and Directors' Insurance; Indemnification. It is understood
and agreed that the Company shall indemnify and hold harmless and, after the
Effective Time, the Surviving Corporation will indemnify and hold harmless, each
present and former member of the Board of Governors and officer of the Company,
and each director and officer of the Attorney-in-Fact (the "Indemnified
Parties") to the full extent permitted by applicable law against any losses,
claims, damages, liabilities, costs, expenses, judgments and amounts paid in
settlement in connection with any claim, action, suit, proceeding or
investigation arising out of or pertaining to any action or omission which
arises out of or relates to the transactions contemplated by this Plan, and the
Company and the Surviving Corporation, as the case may be, will advance expenses
to each such person upon receipt of an undertaking to: (i) repay such amount if
it shall be determined ultimately that such person is not entitled to
indemnification under the applicable law; and (ii) reasonably cooperate with the
Company (of, after the Effective Time, the Surviving Corporation) concerning the
action, suit, proceeding or investigation. In the event any such claim, action,
suit, proceeding or investigation is brought against any Indemnified Party
(whether arising before or after the Effective Time), (a) the Indemnified
Parties may retain counsel satisfactory to them and the Company (or them and the
Surviving Corporation after the Effective Time), (b) the Company (or after the
Effective Time, the Surviving Corporation) shall pay all reasonable fees and
expenses of such counsel for the Indemnified Parties promptly as statements
therefor are received, and (c) the Company (or after the Effective Time, the
Surviving Corporation) will use its best efforts to assist in the vigorous
defense of any such matter, provided, that neither the Company nor the Surviving
Corporation shall be liable for any such settlement effected without their
written consent, which consent, however, shall not be unreasonably withheld. Any
Indemnified Party wishing to claim indemnification under this Section 6.3, upon
learning of any such claim, action, suit, proceeding or investigation, shall
notify the Company or the Surviving Corporation thereof and shall deliver to the
Company or the Surviving Corporation an undertaking to repay any amounts
advanced pursuant hereto when and if a court of competent jurisdiction shall
ultimately determine, after exhaustion of all avenues of appeal, that such
Indemnified Party was not entitled to indemnification under this Section. In
addition, upon the occurrence of the Effective Time, New Insurer shall be deemed
expressly to have assumed any obligations of the Company to its directors and
officers for indemnification, whether under the Company's Bylaws or the
Subscription Agreements, or otherwise, for acts or occurrences prior to the
Effective Time. This Section 6.3 shall survive the consummation of the Merger.
6.4 Continuity of Obligations Regarding Policyholders. It is understood
and agreed that after the Effective Time: (i) the Surviving Corporation shall be
a corporation of the State of California authorized to transact insurance under
the California Insurance Law, (ii) the policyholders of the Company prior to the
Effective Time shall become policyholders of the Surviving Corporation; (iii)
the Surviving Corporation shall, as required by Section 1070.6(b) of the
California Insurance Law, be available to such policyholders to obtain policy
changes and endorsements, to receive payment of premiums and refund unearned
premiums, to serve notice of claim, proof of loss, summons, process and other
papers, and for purposes of suit; and (iv) the Surviving Corporation shall
timely file with the Commissioner the financial statements and tax returns
required by Section 1070.6(c) of the California Insurance Law, and shall timely
pay all taxes found to be due relating to the business of the Company in the
State of California during the calendar year of the Merger, in accordance with
said Section 1070.6(c).
ANNEX I-9
<PAGE> 135
ARTICLE VII
CONDITIONS PRECEDENT
7.1 Conditions to Obligations of Each Party to Effect the Merger. The
respective obligations of each party to effect the Merger shall be subject to
the fulfillment at or prior to the Effective Time of the following conditions:
(a) the Registration Statement shall have become effective under the
Securities Act and no stop order with respect to the Registration Statement
shall have been issued;
(b) all consents, authorizations, orders or approvals of the
California Department and any other governmental commission, board or other
regulatory body that the parties mutually agree are essential to effect the
Merger and for New Insurer to conduct the business of New Insurer and the
Company in substantially the same matter as now conducted shall have been
received;
(c) this Plan and the Merger shall have been approved and adopted by
the requisite vote or consent of the Eligible Members of the Company
required by California Corporations Law and California Insurance Law, by
the requisite vote or consent of the shareholders of New Insurer required
by California Corporations Law; and by the requisite vote or consent of the
stockholder of Holdings;
(d) the Company shall have received either a private letter ruling
from the Internal Revenue Service, or an opinion from a law firm of
recognized standing, to the effect that for Federal income tax purposes,
the Eligible Members generally will recognize no gain or loss on the
exchange of their Membership Interests for shares of Common Stock pursuant
to the Merger;
(e) the Company shall have contributed, for no consideration, all of
the outstanding shares of Common Stock of New Insurer to Holdings;
(f) no preliminary or permanent injunction or other order, decree or
ruling issued by a court of competent jurisdiction or by a governmental,
regulatory or administrative agency or commission nor any statute, rule,
regulation or executive order promulgated or enacted by any governmental
authority shall be in effect, which would prevent the consummation of the
Merger or make the consummation of the Merger illegal; and
(g) prior to the Effective Time, the Company and Holdings shall have
received from an investment banking firm of recognized standing an opinion
that the exchange of the aggregate Membership Interests for the Merger
Shares and the cash in lieu of fractional shares to be paid to the Eligible
Members in the Merger in the aggregate is fair, from a financial point of
view, to the Eligible Members as a group.
ARTICLE VIII
TERMINATION
8.1 Termination. This Plan may be terminated, and the Merger contemplated
herein may be abandoned, at any time prior to the Effective Time, whether prior
to or after approval of the Merger by the Eligible Members:
(a) by mutual written consent of the Board of Directors of Holdings,
the Board of Directors of New Insurer and the Board of Governors of the
Company; or
(b) by the Company, if New Insurer or Holdings breaches in any
material respect any of its covenants or agreements contained in this Plan;
or
(c) by Holdings, if the Company breaches in any material respect any
of its covenants or agreements contained in this Plan; or
ANNEX I-10
<PAGE> 136
(d) by either Holdings or the Company:
(i) if the Merger has not been consummated prior to December 31,
1996; or
(ii) if any court of competent jurisdiction or other governmental
body shall have issued an order, decree or ruling, or taken any other
action restraining, enjoining or otherwise prohibiting the Merger and
such order, decree, ruling or other action shall have become final and
non-appealable.
8.2 Effect of Termination. In the event of the termination of this Plan as
provided in Section 7.1, this Plan shall forthwith become void, and there shall
be no liability on the part of the Company, Holdings or New Insurer, except as
described in Section 6.3 and as set forth in the last sentence of this Section
8.2. Nothing contained in this Section 8.2 shall relieve the Company, Holdings
or New Insurer from liability for any breach of this Plan.
ARTICLE IX
GENERAL PROVISIONS
9.1 Amendment. This Plan may be amended by an instrument in writing signed
on behalf of each of the parties hereto; provided, however, that after approval
of the Merger by the Eligible Members, no amendment may be made which under
applicable law requires further approval of Eligible Members without such
further approval of Eligible Members.
9.2 Extension; Waiver. At any time prior to the Effective Time any party
hereto may (i) extend the time for the performance of any of the obligations or
other acts of any other party hereto; (ii) waive any inaccuracies in the
representations and warranties contained in this Plan and (iii) waive compliance
with any of the agreements of the other parties or conditions to its own
obligations contained in this Plan. Any agreement on the part of a party hereto
to any such extension or waiver shall be valid only if set forth in an
instrument in writing signed on behalf of such party by a duly authorized
officer.
9.3 Nonsurvival of Representations and Warranties. The respective
representations and warranties of the Company, New Insurer and Holdings
contained herein shall expire with, and be terminated and extinguished upon,
consummation of the Merger, and thereafter none of the Company, New Insurer and
Holdings or any officer, director or principal thereof shall be under any
liability whatsoever with respect to any such representation or warranty. This
Section 9.3 shall have no effect upon any other obligation of the parties
hereto, whether to be performed before or after the consummation of the Merger.
9.4 Entire Plan. This Plan contains the entire agreement among the
Company, New Insurer and Holdings with respect to the subject matter hereof and
supersedes all prior arrangements and understandings, both written and oral,
among such parties with respect thereto.
9.5 Counterparts. This Plan may be executed in one or more counterparts,
all of which shall be considered one and same agreement and shall become binding
when one or more counterparts have been signed by each of the parties and
delivered to the other parties, it being understood that all parties need not
sign the same counterpart.
9.6 Severability. It is the desire and intent of the parties that the
provisions of this Plan be enforced to the fullest extent permissible under the
law and public policies applied in each jurisdiction in which enforcement is
sought. Accordingly, in the event that any provision of this Plan would be held
in any jurisdiction to be invalid, prohibited or unenforceable for any reason,
such provision, as to such jurisdiction, shall be ineffective, without
invalidating the remaining provisions of this Plan or affecting the validity or
enforceability of such provision in any other jurisdiction. Notwithstanding the
foregoing, if such provision could be more narrowly drawn so as not to be
invalid, prohibited or unenforceable in such jurisdiction, it shall, as to such
jurisdiction, be so narrowly drawn, without invalidating the remaining
provisions of this Plan or affecting the validity or enforceability of such
provision in any other jurisdiction.
ANNEX I-11
<PAGE> 137
9.7 Notices. Any notice given by any party under this Plan (each, a
"notice") shall be in writing and shall be deemed duly given (i) when personally
delivered, or (ii) when five days have elapsed after its transmittal by
registered or certified mail, postage prepaid, return receipt requested,
addressed to the party to whom directed at that party's address as it appears
below or another address of which that party has given notice as provided
herein, or (iii) when transmitted by telex or telecopy (or equivalent service),
the sender's receiving apparatus having printed the answerback (if any) of the
addressee on a copy of the telex or telecopy message. Notices of address change
shall be effective only upon receipt notwithstanding the previous sentence.
If to the Company, to:
Southern California Physicians Insurance Exchange
9441 W. Olympic Boulevard
P.O. Box 4015
Beverly Hills, California 90213-4015
Telecopy No.: (310) 551-5924
If to Holdings to:
SCPIE Holdings Inc.
9441 W. Olympic Boulevard
P.O. Box 4015
Beverly Hills, California 90213-4015
Telecopy No.: (310) 551-5924
If to New Insurer, to:
SCPIE Indemnity Company
9441 W. Olympic Boulevard
P.O. Box 4015
Beverly Hills, California 90213-4015
Telecopy No.: (310) 551-5924
In each case, with copy to:
Latham & Watkins
701 "B" Street, Suite 2100
San Diego, California 92101
Attention: Donald P. Newell, Esq.
Telecopy No.: (619) 696-7419
9.8 Public Announcements. Unless otherwise required by law, prior to the
Effective Time, no news release or other public announcement pertaining to the
transactions contemplated by this Plan will be made by any party without the
prior written consent of the other party hereto.
9.9 Section Headings. The section headings contained in this Plan are
inserted for reference purposes only and shall not affect the meaning or
interpretation of this Plan.
9.10 Benefits and Assignment. This Plan is not intended to convey upon any
person other than the parties any rights or remedies hereunder. This Plan shall
not be assigned by operation of law or otherwise.
9.11 Applicable Law. This Plan and the legal relations between the parties
hereto shall be governed by and construed in accordance with the laws of the
State of California applicable to contracts made and to be performed therein.
ANNEX I-12
<PAGE> 138
IN WITNESS WHEREOF, each of the parties has caused this Plan to be executed
as of the date first above written, which is sometimes referred to herein as
"the date of this Plan."
SOUTHERN CALIFORNIA PHYSICIANS
INSURANCE EXCHANGE, by SCPIE
Management Company, its
Attorney-in-Fact
By /s/ DONALD J. ZUK
------------------------------------
Donald J. Zuk
President and Chief Executive
Officer
By /s/ WENDELL L. MOSELEY, M.D.
------------------------------------
Wendell L. Moseley, M.D.
Secretary
SCPIE INDEMNITY COMPANY
By /s/ DONALD J. ZUK
------------------------------------
Donald J. Zuk
President and Chief Executive
Officer
By /s/ WENDELL L. MOSELEY, M.D.
------------------------------------
Wendell L. Moseley, M.D.
Secretary
SCPIE HOLDINGS INC.
By /s/ DONALD J. ZUK
------------------------------------
Donald J. Zuk
President and Chief Executive
Officer
By /s/ WENDELL L. MOSELEY, M.D.
------------------------------------
Wendell L. Moseley, M.D.
Secretary
ANNEX I-13
<PAGE> 139
ANNEX II
OPINION OF THE FINANCIAL ADVISOR
ANNEX II-1
<PAGE> 140
[SALOMON BROTHERS INC LETTERHEAD]
September 17, 1996
The Board of Governors
Southern California Physicians Insurance Exchange
9441 West Olympic Boulevard
Beverly Hills, CA 90213-4015
Members of the Board:
You have requested our opinion as investment bankers as to the fairness,
from a financial point of view, to the Eligible Members of Southern California
Physicians Insurance Exchange ("SCPIE" or the "Company"), as a group, of the
exchange of the aggregate Membership Interests for shares of Common Stock of
SCPIE Holdings Inc. (the "Holding Company"), and cash in lieu of fractional
shares, pursuant to the Plan and Agreement of Merger among the Company, the
Holding Company and SCPIE Indemnity Company, a California stock insurance
company, dated March 21, 1996 and amended August 8, 1996 (as so amended, the
"Plan"). Capitalized terms not otherwise defined herein are used as defined in
the Plan.
The Plan provides for a merger and related transactions pursuant to Section
1550 et seq. of the California Insurance Law (the "Reorganization") and further
provides, among other things, that: (1) the Company will merge with and into
SCPIE Indemnity Company, the surviving corporation of the Merger; (2) following
the Reorganization, SCPIE Indemnity Company will be a wholly owned subsidiary of
the Holding Company; (3) the Membership Interests in SCPIE will be extinguished;
(4) Eligible Members will receive shares of Common Stock of the Holding Company
and cash in lieu of fractional shares as compensation for the extinguishment of
their Membership Interests in SCPIE; and (5) at the discretion of the board of
directors of the Holding Company, shares of Common Stock of the Holding Company
may be offered to the public in the Initial Public Offering.
As you are aware, Salomon Brothers Inc has been retained by SCPIE to
provide investment banking advice and SCPIE has agreed to retain Salomon
Brothers Inc as lead manager in connection with the proposed Initial Public
Offering. The Company has agreed to indemnify us for certain liabilities arising
out of the rendering of this opinion.
[SALOMON BROTHERS INC LETTERHEAD]
ANNEX II-2
<PAGE> 141
SALOMON BROTHERS INC
THE BOARD OF DIRECTORS
SOUTHERN CALIFORNIA PHYSICIANS INSURANCE EXCHANGE
SEPTEMBER 17, 1996
PAGE 2 (LOGO)
Pursuant to California Insurance Law, the Plan must be approved by (a) the
Commissioner of Insurance of the California Insurance Department (the
"Commissioner") and (b) not less than two-thirds of the Eligible Members at a
special meeting of the policyholders. If approved by Eligible Members and the
Commissioner, and if the other conditions set forth in the Plan or required by
law are satisfied, the Merger contemplated by the Plan will become effective on
the Effective Date.
You have not asked for our opinion and we do not express any opinion as to:
(1) which of the Company's policyholders are to be included among the Eligible
Members; (2) the fairness of the proposed consideration to be paid to any
Eligible Member or to any class of Eligible Members in connection with the
Reorganization, including any provisions of the Plan relating to which Eligible
Members receive Common Stock of the Holding Company, the allocation of such
Common Stock among Eligible Members and other provisions of the Plan which
distinguish among Eligible Members; and (3) the price at which the common stock
is sold in the Initial Public Offering (the "IPO Price"), the fair market value
of any shares of Common Stock of the Holding Company to be issued pursuant to
the Plan or the price at which the Common Stock of the Holding Company issued in
connection with the Plan or pursuant to the Initial Public Offering will trade.
We note that the IPO Price will be a function of market conditions and the
recent performance of and outlook for the Company at that time. We believe that
trading in the Common Stock of the Holding Company for a period following the
completion of a distribution of the Common Stock of the Holding Company,
including the Initial Public Offering, would be characterized by a
redistribution of the Common Stock of the Holding Company among Eligible Members
that were issued shares of Common Stock and other investors. It is possible that
during these periods of redistribution the Common Stock of the Holding Company
may trade at prices below the prices at which it would trade on a fully
distributed basis.
In arriving at our opinion, we have reviewed, analyzed and relied upon
material bearing upon the financial and operating condition and prospects of the
Company and material prepared in connection with the Plan and the
Reorganization, and we have considered such financial and other factors as we
have deemed appropriate under the circumstances, including, among other things,
the following: (1) the statutory annual statements provided by the Company for
the years 1991 through 1995; (2) certain GAAP financial data provided by the
Company, including the unaudited income statement and
ANNEX II-3
<PAGE> 142
SALOMON BROTHERS INC
THE BOARD OF DIRECTORS
SOUTHERN CALIFORNIA PHYSICIANS INSURANCE EXCHANGE
SEPTEMBER 17, 1996
PAGE 3 (LOGO)
balance sheet for the six-month period ending June 30, 1996, the audited income
statements for each year of the three-year period ending December 31, 1995, the
audited balance sheets for each year of the two-year period ending December 31,
1995, the unaudited income statements for each year of the two-year period
ending December 31, 1992, and the unaudited balance sheets for each year of the
three-year period ending December 31, 1993; (3) certain consolidated financial
projections for the Holding Company and its subsidiaries after the
Reorganization provided to us by the Company; (4) the Registration Statement on
Form S-1 of the Company dated May 3, 1996 as amended by Amendment No. 1 dated
August 8, 1996 and Amendment No. 2 dated August 28, 1996; (5) the Registration
Statement on Form S-4 of the Company dated May 3, 1996 as amended by Amendment
No. 1 dated August 8, 1996, Amendment No. 2 dated August 28, 1996, Amendment No.
3 dated September 12, 1996, and Amendment No. 4 dated September 16, 1996; (6) a
copy of the Plan dated March 21, 1996 as amended August 8, 1996; (7) certain
financial data of the Company which we compared with publicly available
financial information and market data of other companies which we believed to be
comparable; and (8) the aggregate ownership interests of the Company represented
by the Common Stock to be distributed to Eligible Members in exchange for their
Membership Interests, which we compared with the exchange of ownership interests
in other transactions we deemed to be relevant. We have also conducted
discussions with management and advisors of the Company relating to the business
of the Company and certain financial and other aspects of the Plan and the
Reorganization and such other matters we believe relevant to our inquiry. We
have also taken into account our assessment of general economic, market and
financial conditions, our experience in securities valuation and our knowledge
of the insurance industry generally.
Furthermore, you have directed us to assume and we have assumed that: (1)
the Reorganization will meet all applicable legal and regulatory requirements
and that all necessary action will have been taken to comply with all applicable
laws and requirements, including the receipt of all required approvals by
policyholders, regulators and otherwise; and (2) the terms of the Initial Public
Offering (which have not yet been determined) will not affect the legal or tax
treatment of the Plan or the Reorganization. We have also assumed that, as of
the date hereof, the Reorganization will be completed on the basis described in
the Plan. We have been advised as to certain legal and tax matters by counsel to
the Company and, with respect to such matters, we have relied upon such counsel.
We have assumed that the Company will receive, prior to the Effective Date,
a private letter ruling from the Internal Revenue Service or an opinion from its
tax counsel as to certain tax matters as described in Section 7.1(d) of
ANNEX II-4
<PAGE> 143
SALOMON BROTHERS INC
THE BOARD OF DIRECTORS
SOUTHERN CALIFORNIA PHYSICIANS INSURANCE EXCHANGE
SEPTEMBER 17, 1996
PAGE 4 (LOGO)
the Plan. For purposes of our opinion, we have assumed that, if an opinion from
tax counsel is delivered, then such opinion of tax counsel is correct and will
be confirmed as of the Effective Date with no changes or exceptions whatsoever.
In preparing our opinion we have taken into account a number of factors
including, but not limited, to the following (in no particular order): (1) the
fact that the Company has advised us that growth is extremely important to
remain an effective and competitive insurer in the future; (2) the fact that the
Company has advised us that it is of significant strategic importance that it
have broader access to external capital to finance this growth; (3) the
Company's A (Excellent) rating by A.M. Best and the considerations on which such
rating is based; (4) in its present form as a reciprocal insurer, the Company
has limited access to the capital markets for new capital; (5) following the
Reorganization the Company will have a capital structure potentially enabling it
to access the capital markets for new capital; and (6) the illiquidity of
Membership Interests.
In conducting our review and arriving at our opinion, we have relied upon
and assumed the accuracy and completeness of the financial and other information
provided to us or publicly available and have not attempted to independently
verify the same. With respect to the financial forecasts, we have assumed that
such forecasts have been reasonably prepared on a basis reflecting the best
currently available estimates and judgments of the Company, and we express no
opinion with respect to such forecasts or the assumptions on which they are
based. We have not made or obtained any evaluations or appraisals of the
properties, assets, liabilities, reserves or surplus of the Company. Our opinion
as expressed herein is limited to the fairness, from a financial point of view,
to the Eligible Members of the exchange of the aggregate membership interests
for shares of Common Stock of the Holding Company, and cash in lieu of
fractional shares, pursuant to the Plan, and does not address the Company's
underlying business decision to participate in the Plan and Reorganization, and
does not constitute a recommendation to any Eligible Member as to how such
Eligible Member should vote with respect to the Plan. Our opinion is necessarily
based upon conditions as they exist and can be evaluated on the date hereof and
the information made available to us through the date hereof.
It is understood that this letter is for the information of the Board of
Governors of the Company and is not to be quoted or referred to, in whole or in
part, in any document or used for any other purpose without the prior written
consent of Salomon Brothers Inc, except that it may be referred to in, and
attached as an exhibit to, the Proxy Statement/Prospectus to be sent to Eligible
Members, and copies of it may be provided to the Commissioner.
ANNEX II-5
<PAGE> 144
SALOMON BROTHERS INC
THE BOARD OF DIRECTORS
SOUTHERN CALIFORNIA PHYSICIANS INSURANCE EXCHANGE
SEPTEMBER 17, 1996
PAGE 5 (LOGO)
Based upon and subject to the foregoing, it is our opinion as investment
bankers that, as of the date hereof, the exchange of the aggregate Membership
Interests for shares of Common Stock of the Holding Company, and for cash in
lieu of fractional shares pursuant to the Plan is fair, from a financial point
of view, to the Eligible Members of the Company, as a group.
Very truly yours,
(SIG)
ANNEX II-6
<PAGE> 145
ANNEX III
RESTATED CERTIFICATE OF INCORPORATION OF SCPIE HOLDINGS
ANNEX III-1
<PAGE> 146
AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
SCPIE HOLDINGS INC.
SCPIE HOLDINGS INC., a corporation organized and existing under and by
virtue of the General Corporation Law of the State of Delaware (the
"Corporation"), DOES HEREBY CERTIFY:
1. The Corporation's original Certificate of Incorporation was filed
with the Secretary of State of the State of Delaware on September 18, 1995
under the name SCPIE HOLDINGS INC.
2. That by action taken at a special meeting of the Board of Directors
on May 9, 1996, resolutions were duly adopted setting forth a proposed
amendment and restatement of the Certificate of Incorporation of the
Corporation, declaring said amendment and restatement to be advisable and
directing its officers to submit said amendment and restatement to the
stockholder of the Corporation for consideration thereof. The resolution
setting forth the proposed amendment and restatement is as follows:
"THEREFORE, BE IT RESOLVED, that the Certificate of Incorporation
of the Corporation is hereby amended and restated to read in its
entirety as follows, subject to the required consent of the stockholder
of the corporation:
FIRST: The name of the Corporation (hereinafter the "Corporation") is
SCPIE HOLDINGS INC.
SECOND: The address, including street, number, city and county, of
the registered office of the Corporation in the State of Delaware is
1013 Centre Road, City of Wilmington, County of New Castle, and the
name of the registered agent of the Corporation in the State of
Delaware is The Prentice-Hall Corporation System, Inc.
THIRD: The nature of the business or purposes to be conducted or
promoted is to engage in any lawful act or activity for which
corporations may be organized under the General Corporation Law of
the State of Delaware.
FOURTH: The total number of shares of stock which the Corporation
shall have authority to issue shall be thirty five million
(35,000,000), divided as follows: (i) thirty million (30,000,000)
shares of Common Stock with a par value of $.0001 per share, and (ii)
five million (5,000,000) shares of Preferred Stock with a par value
of $1.00 per share.
Shares of Preferred Stock may be issued from time to time in one
or more series, each of such series to have such terms as stated in
the resolution or resolutions providing for the establishment of such
series adopted by the Board of Directors of the Corporation as
hereinafter provided. Except as otherwise expressly stated in the
resolution or resolutions providing for the establishment of a series
of Preferred Stock, any shares of Preferred Stock which may be
redeemed, purchased or acquired by the Corporation may be reissued
except as otherwise expressly provided by law.
Authority is hereby expressly granted to the Board of Directors
of the Corporation to issue, from time to time, shares of Preferred
Stock in one or more series, and, in connection with the
establishment of any such series by resolution or resolutions, to
determine and fix such voting powers, full or limited, or no voting
powers, and such other powers, designations, preferences and
relative, participating, optional and other special rights, and the
qualifications, limitations and restrictions thereof, if any
including, without limitation, dividend rights, conversion rights,
redemption privileges and liquidation preferences, as shall be stated
in such resolution or resolutions, all to the fullest extent
permitted by the General Corporation Law of the State of Delaware.
Without limiting the generality of the foregoing, the resolution or
resolutions providing for the establishment of any series of
Preferred Stock
Annex III-2
<PAGE> 147
may, to the extent permitted by law, provide that such series shall
be superior to, rank equally with or be junior to the Preferred Stock
of any other series. Except as otherwise expressly provided in the
resolution or resolutions providing for the establishment of any
series of Preferred Stock, no vote of the holders of shares of
Preferred Stock or Common Stock shall be a prerequisite to the
issuance of any shares of any series of the Preferred Stock
authorized by and complying with the conditions of this Amended and
Restated Certificate of Incorporation.
FIFTH: 1. The business and affairs of the Corporation shall be
managed by or under the direction of a Board of Directors consisting
of (not including directors elected by one or more series of
Preferred Stock) not less than 7 nor more than 13 directors, the
exact number of directors to be determined from time to time solely
by resolution adopted by the affirmative vote of a majority of the
directors.
2. The directors of the Corporation, other than directors elected by
one or more series of Preferred Stock, shall be divided into three
classes, designated Class I, Class II and Class III. Each class shall
consist, as nearly as may be possible, of one-third of the total
number of directors (other than directors elected by one or more
series of Preferred Stock) constituting the entire Board of
Directors. Each director (other than directors elected by one or more
series of Preferred Stock) shall serve for a term ending on the date
of the third annual meeting of stockholders next following the annual
meeting at which such director was elected, provided that directors
initially designated as Class I directors shall serve for a term
ending on the date of the 1997 annual meeting, directors initially
designated as Class II directors shall serve for a term ending on the
date of the 1998 annual meeting, and directors initially designated
as Class III directors shall serve for a term ending on the date of
the 1999 annual meeting. Notwithstanding the foregoing, each director
shall hold office until such director's successor shall have been
duly elected and qualified or until such director's earlier death,
resignation, disqualification or removal. If the authorized number of
directors (other than directors elected by one or more series of
Preferred Stock and other than directors to be elected at an annual
meeting of stockholders) is changed, any increase or decrease shall
be apportioned among the classes so as to maintain the number of
directors in each class as nearly equal as possible, but in no event
will a decrease in the number of directors shorten the term of any
incumbent director. Vacancies on the Board of Directors resulting
from death, resignation, removal or otherwise and newly created
directorships resulting from any increase in the number of directors
may be filled (other than directors elected by one or more series of
Preferred Stock) solely by a majority of the directors then in office
(although less than a quorum) or by a sole remaining director, and
each director so elected shall hold office for a term that shall
coincide with the remaining term of the class to which such director
shall have been elected. Whenever the holders of one or more series
of Preferred Stock shall have the right, voting separately as a
series, to elect directors, the nomination, election, term of office,
filling of vacancies, removal and other features of such
directorships shall not be governed by this ARTICLE SIXTH unless
otherwise provided for in the certificate of designation for such
series.
3. No director (other than directors elected by one or more series of
Preferred Stock) may be removed from office by the stockholders
except for cause and, in addition to any other vote required by law,
upon the affirmative vote of the holders of not less than 66 2/3% of
the total voting power of all outstanding securities of the
Corporation then entitled to vote generally in the election of
directors, voting together as a single class.
SIXTH: The following provisions are inserted for the management of
the business and the conduct of the affairs of the Corporation and
for the further definition of the powers of the Corporation and its
directors and stockholders:
Annex III-3
<PAGE> 148
1. The Board of Directors shall have the power to adopt, amend or
repeal the by-laws of the Corporation.
The stockholders may adopt, amend, alter, repeal or rescind the
by-laws of the Corporation only with, in addition to any other vote
required by law, the affirmative vote of the holders of not less than
66 2/3% of the total voting power of all outstanding securities of
the Corporation then entitled to vote generally in the election of
directors, voting together as a single class.
2. Elections of directors need not be by written ballot unless the
by-laws of the Corporation so provide.
3. Any action required or permitted to be taken at any annual or
special meeting of stockholders may be taken only upon the vote of
stockholders at an annual or special meeting duly noticed and called
in accordance with the General Corporation Law of the State of
Delaware, and may not be taken by written consent of stockholders
without a meeting.
4. Special meetings of stockholders may be called by the Board of
Directors, the Chairman of the Board of Directors or the President of
the Corporation and may not be called by any other person.
Notwithstanding the foregoing, whenever holders of one or more series
of Preferred Stock shall have the right, voting separately as a
series, to elect directors, such holders may call special meetings of
such holders pursuant to the certificate of designation for such
series.
SEVENTH: A director of this Corporation shall not be liable to the
Corporation or its stockholders for monetary damages for breach of
fiduciary duty as a director, except to the extent such exemption
from liability or limitation thereof is not permitted under the
General Corporation Law of the State of Delaware as the same exists
or may hereafter be amended.
Any repeal or modification of the foregoing paragraph shall not
adversely affect any right or protection of a director of the
Corporation existing hereunder with respect to any act or omission
occurring prior to such repeal or modification.
EIGHTH: The Corporation reserves the right at any time, and from time
to time, to amend, alter, change or repeal any provision contained in
this Certificate of Incorporation, and other provisions authorized by
the laws of the State of Delaware at the time in force may be added
or inserted, in the manner now or hereafter prescribed by law; and
all rights, preferences and privileges of whatsoever nature conferred
upon stockholders, directors or any other persons whomsoever by and
pursuant to this Certificate of Incorporation in its present form or
as hereafter amended are granted subject to the rights reserved in
this article.
3. That thereafter, at a meeting of the sole stockholder of the
Corporation in accordance with Section 228 of the General Corporation Law
of the State of Delaware, all of the shares of Common Stock of the
Corporation were voted in favor of the amendment.
4. That said Amended and Restated Certificate of Incorporation was
duly adopted in accordance with the provisions of Sections 242 and 245 of
the General Corporation Law of the State of Delaware.
Annex III-4
<PAGE> 149
IN WITNESS WHEREOF, SCPIE HOLDINGS INC. has caused this Certificate to be
signed by Donald J. Zuk, its President, this 10th day of September, 1996.
SCPIE HOLDINGS INC.
a Delaware corporation
By: /s/ DONALD J. ZUK
Name: Donald J. Zuk
Title: President
Annex III-5
<PAGE> 150
ANNEX IV
BYLAWS OF SCPIE HOLDINGS
ANNEX IV-i
<PAGE> 151
AMENDED AND RESTATED
BY-LAWS
OF
SCPIE HOLDINGS INC.
ANNEX IV-ii
<PAGE> 152
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
ARTICLE I -- OFFICES................................................................... 1
Section 1. REGISTERED OFFICES.................................................... 1
Section 2. OTHER OFFICES......................................................... 1
ARTICLE II -- MEETINGS OF STOCKHOLDERS................................................. 1
Section 1. PLACE OF MEETINGS..................................................... 1
Section 2. ANNUAL MEETING OF STOCKHOLDERS........................................ 1
Section 3. QUORUM; ADJOURNED MEETINGS AND NOTICE THEREOF......................... 1
Section 4. VOTING................................................................ 1
Section 5. PROXIES............................................................... 1
Section 6. SPECIAL MEETINGS...................................................... 2
Section 7. NOTICE OF STOCKHOLDER BUSINESS AND NOMINATIONS........................ 2
Section 8. MAINTENANCE AND INSPECTION OF STOCKHOLDER LIST........................ 2
ARTICLE III -- DIRECTORS............................................................... 3
Section 1. THE NUMBER OF DIRECTORS............................................... 3
Section 2. VACANCIES............................................................. 3
Section 3. POWERS................................................................ 3
Section 4. PLACE OF DIRECTORS' MEETINGS.......................................... 3
Section 5. REGULAR MEETINGS...................................................... 3
Section 6. SPECIAL MEETINGS...................................................... 3
Section 7. QUORUM................................................................ 3
Section 8. ACTION WITHOUT MEETING................................................ 3
Section 9. TELEPHONIC MEETINGS................................................... 4
Section10. COMMITTEES OF DIRECTORS............................................... 4
Section11. MINUTES OF COMMITTEE MEETINGS......................................... 4
Section12. COMPENSATION OF DIRECTORS............................................. 4
ARTICLE IV -- OFFICERS................................................................. 4
Section 1. OFFICERS.............................................................. 4
Section 2. ELECTION OF OFFICERS.................................................. 4
Section 3. SUBORDINATE OFFICERS.................................................. 5
Section 4. COMPENSATION OF OFFICERS.............................................. 5
Section 5. TERM OF OFFICE; REMOVAL AND VACANCIES................................. 5
Section 6. CHAIRMAN OF THE BOARD................................................. 5
Section 7. PRESIDENT............................................................. 5
Section 8. VICE PRESIDENTS....................................................... 5
Section 9. SECRETARY............................................................. 5
Section10. ASSISTANT SECRETARY................................................... 5
Section11. TREASURER............................................................. 5
Section12. ASSISTANT TREASURER................................................... 6
ARTICLE V -- INDEMNIFICATION OF DIRECTORS AND OFFICERS................................. 6
ARTICLE VI -- INDEMNIFICATION OF EMPLOYEES AND AGENTS.................................. 6
ARTICLE VII -- CERTIFICATES OF STOCK................................................... 6
Section 1. CERTIFICATES.......................................................... 6
Section 2. SIGNATURES ON CERTIFICATES............................................ 6
Section 3. STATEMENT OF STOCK RIGHTS, PREFERENCES, PRIVILEGES.................... 7
</TABLE>
ANNEX IV-iii
<PAGE> 153
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
Section 4. LOST CERTIFICATES..................................................... 7
Section 5. TRANSFERS OF STOCK.................................................... 7
Section 6. FIXED RECORD DATE..................................................... 7
Section 7. REGISTERED STOCKHOLDERS............................................... 7
ARTICLE VIII -- GENERAL PROVISIONS..................................................... 7
Section 1. DIVIDENDS............................................................. 7
Section 2. PAYMENT OF DIVIDENDS; DIRECTORS' DUTIES............................... 8
Section 3. CHECKS................................................................ 8
Section 4. FISCAL YEAR........................................................... 8
Section 5. CORPORATE SEAL........................................................ 8
Section 6. MANNER OF GIVING NOTICE............................................... 8
Section 7. WAIVER OF NOTICE...................................................... 8
ARTICLE IX -- AMENDMENTS............................................................... 8
Section 1. AMENDMENT BY DIRECTORS OR STOCKHOLDERS................................ 8
</TABLE>
ANNEX IV-iv
<PAGE> 154
AMENDED AND RESTATED
BY-LAWS
OF
SCPIE HOLDINGS INC.
ARTICLE I
OFFICES
SECTION 1. Registered Offices. The registered office of the corporation
shall be in the City of Wilmington, County of New Castle, State of Delaware.
SECTION 2. Other Offices. The corporation may also have offices at such
other places both within and without the State of Delaware as the Board of
Directors may from time to time determine or the business of the corporation may
require.
ARTICLE II
MEETINGS OF STOCKHOLDERS
SECTION 1. Place of Meetings. Meetings of stockholders shall be held at any
place within or outside the State of Delaware designated by the Board of
Directors. In the absence of any such designation, stockholders' meetings shall
be held at the principal executive office of the corporation.
SECTION 2. Annual Meeting of Stockholders. The annual meeting of
stockholders shall be held each year on a date and a time designated by the
Board of Directors.
SECTION 3. Quorum; Adjourned Meetings and Notice Thereof. A majority of the
voting power of the shares of capital stock of the corporation issued and
outstanding and entitled to vote at any meeting of stockholders, the holders of
which are present in person or represented by proxy, shall constitute a quorum
for the transaction of business except as otherwise provided by law, by the
Certificate of Incorporation, or by these By-Laws. A quorum, once established,
shall not be broken by the withdrawal of enough votes to leave less than a
quorum and the votes present may continue to transact business until
adjournment. If, however, such quorum shall not be present or represented at any
meeting of the stockholders, a majority of the voting power of the shares of
capital stock represented in person or by proxy may adjourn the meeting from
time to time, without notice other than announcement at the meeting of the time
and place of the adjourned meeting, until a quorum shall be present or
represented. At such adjourned meeting at which a quorum shall be present or
represented, any business may be transacted which might have been transacted at
the meeting as originally noticed. If the adjournment is for more than thirty
days, or if after the adjournment a new record date is fixed for the adjourned
meeting, a notice of the adjourned meeting shall be given to each stockholder of
record entitled to vote thereat.
SECTION 4. Voting. When a quorum is present at any meeting, in all matters
other than the election of directors, the vote of the holders of stock
representing a majority of the voting power present in person or represented by
proxy shall decide any question brought before such meeting, unless the question
is one upon which by express provision of the Certificate of Incorporation, or
these By-Laws, or any rule, regulation or statutory provision applicable to the
corporation, a different vote is required in which case such express provision
shall govern and control the decision of such question. Directors shall be
elected by a plurality of the votes of the shares present in person or
represented by proxy at the meeting and entitled to vote on the election of
directors.
SECTION 5. Proxies. At each meeting of the stockholders, each stockholder
having the right to vote may vote in person or may authorize another person or
persons to act for him by proxy appointed by an instrument in writing subscribed
by such stockholder and bearing a date not more than three years prior to said
meeting, unless said instrument provides for a longer period. All proxies must
be filed with the Secretary of the corporation at the beginning of each meeting
in order to be counted in any vote at the meeting. Each stockholder shall have
one vote for each share of common stock having voting power,
ANNEX IV-1
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registered in his name on the books of the corporation on the record date set by
the Board of Directors as provided in Article VI, Section 6 hereof.
SECTION 6. Special Meetings. Special meetings of the stockholders, for any
purpose, or purposes, unless otherwise prescribed by statute or by the
Certificate of Incorporation, may be called by the Board of Directors, the
Chairman of the Board or the President. Such request shall state the purpose or
purposes of the proposed meeting. Business transacted at any special meeting of
stockholders shall be limited to the purposes stated in the notice.
SECTION 7. Notice of Stockholder Business and Nominations. (1) Nominations
of persons for election to the Board of Directors of the corporation and the
proposal of business to be considered by the stockholders may be made at an
annual meeting of stockholders (a) pursuant to the corporation's notice of
meeting, (b) by or at the direction of the Board of Directors or (c) by any
stockholder of the corporation who was a stockholder of record at the time of
giving of notice provided for in this By-Law, who is entitled to vote at the
meeting and who complies with the notice procedures set forth in this By-Law.
(2) For nominations or other business to be properly brought before an
annual meeting by a stockholder pursuant to clause (c) of paragraph (1) of this
By-Law, the stockholder must have given timely notice thereof in writing to the
Secretary of the corporation and such other business must otherwise be a proper
matter for stockholder action. To be timely, a stockholder's notice shall be
delivered to the Secretary at the principal executive offices of the corporation
not later than the close of business on the 60th day nor earlier than the close
of business on the 90th day prior to the first anniversary of the preceding
year's annual meeting; provided, however, that in the event that the date of the
annual meeting is more than 30 days before or more than 60 days after such
anniversary date, notice by the stockholder to be timely must be so delivered
not earlier than the close of business on the 90th day prior to such annual
meeting and not later than the close of business on the later of the 60th day
prior to such annual meeting and not later than the close of business on the
later of the 60th day prior to such annual meeting or the 10th day following the
day on which public announcement of the date of such meeting is first made by
the corporation. In no event shall the public announcement of an adjournment of
an annual meeting commence a new time period for the giving of a stockholder's
notice as described above. Such stockholder's notice shall set forth (a) as to
each person whom the stockholder proposes to nominate for election or
re-election as a director all information relating to such person that is
required to be disclosed in solicitations of proxies for election of directors
in an election contest, or is otherwise required, in each case pursuant to
Regulation 14A under the Securities Exchange Act of 1934, as amended (the
"Exchange Act") and Rule 14A-11 thereunder (including such person's written
consent to being named in the proxy statement as a nominee and to serving as a
director if elected); (b) as to any other business that the stockholder proposes
to bring before the meeting, a brief description of the business desired to be
brought before the meeting, the reasons for conducting such business at the
meeting and any material interest in such business of such stockholder and the
beneficial owner, if any, on whose behalf the nomination or proposal is made and
(c) as to the stockholder giving the notice and the beneficial owner, if any, on
whose behalf the nomination or proposal is made (i) the name and address of such
stockholder, as they appear on the Corporation's books, and of such beneficial
owner and (ii) the class and number of shares of the Corporation which are owned
beneficially and of record by such stockholder and such beneficial owner.
SECTION 8. Maintenance and Inspection of Stockholder List. The officer who
has charge of the stock ledger of the corporation shall prepare and make, at
least ten days before every meeting of stockholders, a complete list of the
stockholders entitled to vote at the meeting, arranged in alphabetical order,
and showing the address of each stockholder and the number of shares registered
in the name of each stockholder. Such list shall be open to the examination of
any stockholder, for any purpose germane to the meeting, during ordinary
business hours, for a period of at least ten days prior to the meeting, either
at a place within the city where the meeting is to be held, which place shall be
specified in the notice of the meeting, or, if not so specified, at the place
where the meeting is to be held. The list shall
ANNEX IV-2
<PAGE> 156
also be produced and kept at the time and place of the meeting during the whole
time thereof, and may be inspected by any stockholder who is present.
ARTICLE III
DIRECTORS
SECTION 1. The Number of Directors. The number of directors (other than
directors elected by one or more series of Preferred Stock) which shall
constitute the whole Board shall be not less than seven (7) nor more than
thirteen (13), the exact number of directors to be determined from time to time
solely by resolution adopted by the affirmative vote of a majority of the
directors. The directors need not be stockholders. The directors shall be
elected at the annual meeting of the stockholders, except as provided in Section
2 of this Article, and each director elected shall hold office until his
successor is duly elected and qualified.
SECTION 2. Vacancies. Vacancies on the Board of Directors by reason of
death, resignation, removal, or otherwise, and newly created directorships
resulting from any increase in the number of directors may be filled (other than
directors elected by one or more series of Preferred Stock) solely by a majority
of the directors then in office (although less than a quorum) or by a sole
remaining director. Each director so chosen shall hold office until such
director's successor shall have been duly elected and qualified or until such
director's earlier death, resignation, disqualification or removal. If, at the
time of filling any vacancy or any newly created directorship, the directors
then in office shall constitute less than a majority of the whole Board (as
constituted immediately prior to any such increase), the Court of Chancery may,
upon application of any stockholder or stockholders having the right to vote for
such directors, summarily order an election to be held to fill any such
vacancies or newly created directorships, or to replace the directors chosen by
the directors then in office.
SECTION 3. Powers. The property and business of the corporation shall be
managed by or under the direction of its Board of Directors. In addition to the
powers and authorities by these By-Laws expressly conferred upon them, the Board
may exercise all such powers of the corporation and do all such lawful acts and
things as are not by statute or by the Certificate of Incorporation or by these
By-Laws directed or required to be exercised or done by the stockholders.
SECTION 4. Place of Directors' Meetings. The directors may hold their
meetings and have one or more offices, and keep the books of the corporation
outside of the State of Delaware.
SECTION 5. Regular Meetings. Regular meetings of the Board of Directors may
be held without notice at such time and place as shall from time to time be
determined by the Board.
SECTION 6. Special Meetings. Special meetings of the Board of Directors may
be called by the President on forty-eight hours' notice to each director, either
personally or by mail, telecopier, or other means of electronic transmission at
the address of such director on the books and records of the corporation;
special meetings shall be called by the President or the Secretary in like
manner and on like notice on the written request of two directors.
SECTION 7. Quorum. At all meetings of the Board of Directors a majority of
the then authorized number of directors shall be necessary and sufficient to
constitute a quorum for the transaction of business, and the vote of a majority
of the directors present at any meeting at which there is a quorum shall be the
act of the Board of Directors, except as may be otherwise specifically provided
by statute, by the Certificate of Incorporation or by these By-Laws. If a quorum
shall not be present at any meeting of the Board of Directors, the directors
present thereat may adjourn the meeting from time to time, without notice other
than announcement at the meeting, until a quorum shall be present.
SECTION 8. Action Without Meeting. Unless otherwise restricted by the
Certificate of Incorporation or these By-Laws, any action required or permitted
to be taken at any meeting of the Board of Directors or of any committee thereof
may be taken without a meeting, if all members of the Board or committee, as
ANNEX IV-3
<PAGE> 157
the case may be, consent thereto in writing, and the writing or writings are
filed with the minutes of proceedings of the Board or committee.
SECTION 9. Telephonic Meetings. Unless otherwise restricted by the
Certificate of Incorporation or these By-Laws, members of the Board of
Directors, or any committee designated by the Board of Directors, may
participate in a meeting of the Board of Directors, or any committee, by means
of conference telephone or similar communications equipment by means of which
all persons participating in the meeting can hear each other, and such
participation in a meeting shall constitute presence in person at such meeting.
SECTION 10. Committees of Directors. The Board of Directors may, by
resolution passed by a majority of the whole Board, designate one or more
committees, each such committee to consist of one or more of the directors of
the corporation. The Board may designate one or more directors as alternate
members of any committee, who may replace any absent or disqualified member at
any meeting of the committee. In the absence or disqualification of a member of
a committee, the member or members thereof present at any meeting and not
disqualified from voting, whether or not he or they constitute a quorum, may
unanimously appoint another member of the Board of Directors to act at the
meeting in the place of any such absent or disqualified member. Any such
committee, to the extent provided in the resolution of the Board of Directors,
shall have and may exercise all the powers and authority of the Board of
Directors in the management of the business and affairs of the corporation, and
may authorize the seal of the corporation to be affixed to all papers which may
require it; but no such committee shall have the power or authority in reference
to amending the Certificate of Incorporation, adopting an agreement of merger or
consolidation, recommending to the stockholders the sale, lease or exchange of
all or substantially all of the corporation's property and assets, recommending
to the stockholders a dissolution of the corporation or a revocation of a
dissolution, or amending the By-Laws of the corporation; and, unless the
resolution or the Certificate of Incorporation expressly so provide, no such
committee shall have the power or authority to declare a dividend or to
authorize the issuance of stock.
SECTION 11. Minutes of Committee Meetings. Each committee shall keep
regular minutes of its meetings and report the same to the Board of Directors
when required.
SECTION 12. Compensation of Directors. Unless otherwise restricted by the
Certificate of Incorporation or these By-Laws, the Board of Directors shall have
the authority to fix the compensation of directors. The directors may be paid
their expenses, if any, of attendance at each meeting of the Board of Directors
and may be paid a fixed sum for attendance at each meeting of the Board of
Directors or a stated salary as director. No such payment shall preclude any
director from serving the corporation in any other capacity and receiving
compensation therefor. Members of special or standing committees may be allowed
like compensation for attending committee meetings.
ARTICLE IV
OFFICERS
SECTION 1. Officers. The officers of this corporation shall be chosen by
the Board of Directors and shall include a Chairman of the Board of Directors or
a President, or both, and a Secretary. The corporation may also have at the
discretion of the Board of Directors such other officers as are desired,
including a Vice-Chairman of the Board of Directors, a Chief Executive Officer,
a Treasurer, one or more Vice Presidents, one or more Assistant Secretaries and
Assistant Treasurers, and such other officers as may be appointed in accordance
with the provisions of Section 3 hereof. In the event there are two or more Vice
Presidents, then one or more may be designated as Executive Vice President,
Senior Vice President, or other similar or dissimilar title. At the time of the
election of officers, the directors may by resolution determine the order of
their rank. Any number of offices may be held by the same person, unless the
Certificate of Incorporation or these By-Laws otherwise provide.
SECTION 2. Election of Officers. The Board of Directors, at its first
meeting after each annual meeting of stockholders, shall choose the officers of
the corporation.
ANNEX IV-4
<PAGE> 158
SECTION 3. Subordinate Officers. The Board of Directors may appoint such
other officers and agents as it shall deem necessary who shall hold their
offices for such terms and shall exercise such powers and perform such duties as
shall be determined from time to time by the Board.
SECTION 4. Compensation of Officers. The salaries of all officers and
agents of the corporation shall be fixed by the Board of Directors.
SECTION 5. Term of Office; Removal and Vacancies. The officers of the
corporation shall hold office until their successors are chosen and qualify in
their stead. Any officer elected or appointed by the Board of Directors may be
removed at any time by the affirmative vote of a majority of the members of the
Board of Directors. If the office of any officer or officers becomes vacant for
any reason, the vacancy shall be filled by the Board of Directors.
SECTION 6. Chairman of the Board. The Chairman of the Board, if such an
officer be elected, shall, if present, preside at all meetings of the Board of
Directors and exercise and perform such other powers and duties as may be from
time to time assigned to him by the Board of Directors or prescribed by these
By-Laws. If there is no President, the Chairman of the Board shall in addition
be the Chief Executive Officer of the corporation and shall have the powers and
duties prescribed in Section 7 of this Article IV.
SECTION 7. President. Subject to such supervisory powers, if any, as may be
given by the Board of Directors to the Chairman of the Board, if there be such
an officer, the President shall be the Chief Executive Officer of the
corporation and shall, subject to the control of the Board of Directors, have
general supervision, direction and control of the business and officers of the
corporation. He shall preside at all meetings of the stockholders and, in the
absence of the Chairman of the Board, or if there be none, at all meetings of
the Board of Directors. He shall be an ex-officio member of all committees and
shall have the general powers and duties of management usually vested in the
office of President and Chief Executive Officer of corporations, and shall have
such other powers and duties as may be prescribed by the Board of Directors or
these By-Laws.
SECTION 8. Vice Presidents. In the absence or disability of the President,
the Vice Presidents in order of their rank as fixed by the Board of Directors,
or if not ranked, the Vice President designated by the Board of Directors, shall
perform all the duties of the President, and when so acting shall have all the
powers of and be subject to all the restrictions upon the President. The Vice
Presidents shall have such other duties as from time to time may be prescribed
for them, respectively, by the Board of Directors.
SECTION 9. Secretary. The Secretary shall attend all sessions of the Board
of Directors and all meetings of the stockholders and record all votes and the
minutes of all proceedings in a book to be kept for that purpose; and shall
perform like duties for the standing committees when required by the Board of
Directors. He shall give, or cause to be given, notice of all meetings of the
stockholders and of the Board of Directors, and shall perform such other duties
as may be prescribed by the Board of Directors or these By-Laws. He shall keep
in safe custody the seal of the corporation, and when authorized by the Board,
affix the same to any instrument requiring it, and when so affixed it shall be
attested by his signature or by the signature of an Assistant Secretary. The
Board of Directors may give general authority to any other officer to affix the
seal of the corporation and to attest the affixing by his signature.
SECTION 10. Assistant Secretary. The Assistant Secretary, or if there be
more than one, the Assistant Secretaries in the order determined by the Board of
Directors, or if there be no such determination, the Assistant Secretary
designated by the Board of Directors, shall, in the absence or disability of the
Secretary, perform the duties and exercise the powers of the Secretary and shall
perform such other duties and have such other powers as the Board of Directors
may from time to time prescribe.
SECTION 11. Treasurer. The Treasurer shall have the custody of the
corporate funds and securities and shall keep full and accurate accounts of
receipts and disbursements in books belonging to the corporation and shall
deposit all moneys, and other valuable effects in the name and to the credit of
the corporation, in such depositories as may be designated by the Board of
Directors. He shall disburse the funds of the corporation as may be ordered by
the Board of Directors, taking proper vouchers for such disbursements, and shall
render to the Board of Directors, at its regular meetings, or when the Board of
ANNEX IV-5
<PAGE> 159
Directors so requires, an account of all his transactions as Treasurer and of
the financial condition of the corporation. If required by the Board of
Directors, he shall give the corporation a bond, in such sum and with such
surety or sureties as shall be satisfactory to the Board of Directors, for the
faithful performance of the duties of his office and for the restoration to the
corporation, in case of his death, resignation, retirement or removal from
office, of all books, papers, vouchers, money and other property of whatever
kind in his possession or under his control belonging to the corporation.
SECTION 12. Assistant Treasurer. The Assistant Treasurer, or if there shall
be more than one, the Assistant Treasurers in the order determined by the Board
of Directors, or if there be no such determination, the Assistant Treasurer
designated by the Board of Directors, shall, in the absence or disability of the
Treasurer, perform the duties and exercise the powers of the Treasurer and shall
perform such other duties and have such other powers as the Board of Directors
may from time to time prescribe.
ARTICLE V
INDEMNIFICATION OF DIRECTORS AND OFFICERS
The corporation shall indemnify every person who was or is a party or is or
was threatened to be made a party to any action, suit, or proceeding, whether
civil, criminal, administrative or investigative, by reason of the fact that he
is or was a director or officer of the corporation or, while a director or
officer of the corporation, is or was serving at the request of the corporation
as a director or officer of another corporation, partnership, joint venture,
trust, employee benefit plan or other enterprise, against expenses (including
counsel fees), judgments, fines and amounts paid in settlement actually and
reasonably incurred by him in connection with such action, suit or proceeding,
to the full extent permitted by applicable law. The corporation shall be
required to indemnify a person in connection with a proceeding (or part thereof)
initiated by such person only if the proceeding (or part thereof) was authorized
by the Board of Directors of the corporation. The indemnification provided for
in these Bylaws shall not be deemed exclusive of any other rights to which those
seeking indemnification may be entitled under these Bylaws, or any agreement,
vote of stockholders or otherwise.
ARTICLE VI
INDEMNIFICATION OF EMPLOYEES AND AGENTS
The corporation may, at its option, indemnify every person who was or is a
party or is or was threatened to be made a party to any action, suit, or
proceeding, whether civil, criminal, administrative or investigative, by reason
of the fact that he is or was an employee or agent of the corporation or, while
an employee or agent of the corporation, is or was serving at the request of the
corporation as an employee or agent or trustee of another corporation,
partnership, joint venture, trust, employee benefit plan or other enterprise,
against expenses (including counsel fees), judgments, fines and amounts paid in
settlement actually and reasonably incurred by him in connection with such
action, suit or proceeding, to the extent permitted by applicable law.
ARTICLE VII
CERTIFICATES OF STOCK
SECTION 1. Certificates. Every holder of stock of the corporation shall be
entitled to have a certificate signed by, or in the name of the corporation by,
the Chairman or Vice Chairman of the Board of Directors, or the President or a
Vice President, and by the Secretary or an Assistant Secretary, or the Treasurer
or an Assistant Treasurer of the corporation, certifying the number of shares
represented by the certificate owned by such stockholder in the corporation.
SECTION 2. Signatures on Certificates. Any or all of the signatures on the
certificate may be a facsimile. In case any officer, transfer agent, or
registrar who has signed or whose facsimile signature has
ANNEX IV-6
<PAGE> 160
been placed upon a certificate shall have ceased to be such officer, transfer
agent, or registrar before such certificate is issued, it may be issued by the
corporation with the same effect as if he were such officer, transfer agent, or
registrar at the date of issue.
SECTION 3. Statement of Stock Rights, Preferences, Privileges. If the
corporation shall be authorized to issue more than one class of stock or more
than one series of any class, the powers, designations, preferences and
relative, participating, optional or other special rights of each class of stock
or series thereof and the qualifications, limitations or restrictions of such
preferences and/or rights shall be set forth in full or summarized on the face
or back of the certificate which the corporation shall issue to represent such
class or series of stock, provided that, except as otherwise provided in section
202 of the General Corporation Law of the State of Delaware, in lieu of the
foregoing requirements, there may be set forth on the face or back of the
certificate which the corporation shall issue to represent such class or series
of stock, a statement that the corporation will furnish without charge to each
stockholder who so requests the powers, designations, preferences and relative,
participating, optional or other special rights of each class of stock or series
thereof and the qualifications, limitations or restrictions of such preferences
and/or rights.
SECTION 4. Lost Certificates. The Board of Directors may direct a new
certificate or certificates to be issued in place of any certificate or
certificates theretofore issued by the corporation alleged to have been lost,
stolen or destroyed, upon the making of an affidavit of that fact by the person
claiming the certificate of stock to be lost, stolen or destroyed. When
authorizing such issue of a new certificate or certificates, the Board of
Directors may, in its discretion and as a condition precedent to the issuance
thereof, require the owner of such lost, stolen or destroyed certificate or
certificates, or his legal representative, to advertise the same in such manner
as it shall require and/or to give the corporation a bond in such sum as it may
direct as indemnity against any claim that may be made against the corporation
with respect to the certificate alleged to have been lost, stolen or destroyed.
SECTION 5. Transfers of Stock. Upon surrender to the corporation, or the
transfer agent of the corporation, of a certificate for shares duly endorsed or
accompanied by proper evidence of succession, assignation or authority to
transfer, it shall be the duty of the corporation to issue a new certificate to
the person entitled thereto, cancel the old certificate and record the
transaction upon its books.
SECTION 6. Fixed Record Date. In order that the corporation may determine
the stockholders entitled to notice of or to vote at any meeting of the
stockholders, or any adjournment thereof, or entitled to receive payment of any
dividend or other distribution or allotment of any rights, or entitled to
exercise any rights in respect of any change, conversion or exchange of stock or
for the purpose of any other lawful action, the Board of Directors may fix a
record date which shall not be more than sixty nor less than ten days before the
date of such meeting, nor more than sixty days prior to any other action. A
determination of stockholders of record entitled to notice of or to vote at a
meeting of stockholders shall apply to any adjournment of the meeting; provided,
however, that the Board of Directors may fix a new record date for the adjourned
meeting.
SECTION 7. Registered Stockholders. The corporation shall be entitled to
treat the holder of record of any share or shares of stock as the holder in fact
thereof and accordingly shall not be bound to recognize any equitable or other
claim or interest in such share on the part of any other person, whether or not
it shall have express or other notice thereof, save as expressly provided by the
laws of the State of Delaware.
ARTICLE VIII
GENERAL PROVISIONS
SECTION 1. Dividends. Dividends upon the capital stock of the corporation,
subject to the provisions of the Certificate of Incorporation, if any, may be
declared by the Board of Directors at any regular or special meeting, pursuant
to law. Dividends may be paid in cash, in property, or in shares of the capital
stock, subject to the provisions of the Certificate of Incorporation.
ANNEX IV-7
<PAGE> 161
SECTION 2. Payment of Dividends; Directors' Duties. Before payment of any
dividend there may be set aside out of any funds of the corporation available
for dividends such sum or sums as the directors from time to time, in their
absolute discretion, think proper as a reserve fund to meet contingencies, or
for equalizing dividends, or for repairing or maintaining any property of the
corporation, or for such other purpose as the directors shall think conducive to
the interests of the corporation, and the directors may abolish any such
reserve.
SECTION 3. Checks. All checks or demands for money and notes of the
corporation shall be signed by such officer or officers as the Board of
Directors may from time to time designate.
SECTION 4. Fiscal Year. The fiscal year of the corporation shall be fixed
by resolution of the Board of Directors.
SECTION 5. Corporate Seal. The corporate seal shall have inscribed thereon
the name of the corporation, the year of its organization and the words
"Corporate Seal, Delaware." Said seal may be used by causing it or a facsimile
thereof to be impressed or affixed or reproduced or otherwise.
SECTION 6. Manner of Giving Notice. Whenever, under the provisions of the
Certificate of Incorporation, or of these By-Laws, or any rule, regulation or
statutory provision applicable to the corporation, notice is required to be
given to any director or stockholder, it shall not be construed to mean personal
notice, but such notice may be given (unless otherwise provided) in writing, by
mail, addressed to such director or stockholder, at his address as it appears on
the records of the corporation, with postage thereon prepaid, and such notice
shall be deemed to be given at the time when the same shall be deposited in the
United States mail. Notice to directors may also be given by mail, telecopier,
or other means of electronic transmission at the address of such director on the
books and records of the corporation.
SECTION 7. Waiver of Notice. Whenever any notice is required to be given
under the provisions of the Certificate of Incorporation or of these By-Laws, or
any rule, regulation or statutory provision applicable to the corporation, a
waiver thereof in writing, signed by the person or persons entitled to said
notice, whether before or after the time stated therein, shall be deemed
equivalent thereto.
ARTICLE IX
AMENDMENTS
SECTION 1. Amendment by Directors or Stockholders. These By-Laws may be
altered, amended or repealed or new By-Laws may be adopted by the affirmative
vote of the holders of not less than two-thirds of the total voting power of all
outstanding shares of securities of the corporation then entitled to vote
generally in the election of directors or by the Board of Directors, at any
regular meeting of the stockholders or of the Board of Directors or at any
special meeting of the stockholders or of the Board of Directors if notice of
such alteration, amendment, repeal or adoption of new By-Laws be contained in
the notice of such special meeting.
ANNEX IV-8
<PAGE> 162
CERTIFICATE OF SECRETARY
I, the undersigned, do hereby certify:
(1) That I am the duly elected and acting Secretary of SCPIE HOLDINGS
INC., a Delaware corporation; and
(2) That the foregoing amended and restated by-laws constitute the
bylaws of said corporation as duly adopted by the written consent of the
stockholder of said corporation as of May 9, 1996.
IN WITNESS WHEREOF, I have hereunto subscribed my name this 9th day of May,
1996.
/s/ WENDELL L. MOSELEY, M.D.
----------------------------
Wendell L. Moseley, M.D.
Secretary
ANNEX IV-9
<PAGE> 163
ANNEX V
INSTRUCTIONS FOR COMPLETING
THE TAXPAYER IDENTIFICATION NUMBER ("TIN")
CERTIFICATION CARD
INSTRUCTIONS TO TAXPAYER
(Section References are to the Internal Revenue Code).
PURPOSE OF FORM. -- A person who is required to file an information return with
the Internal Revenue Service (IRS) must obtain your correct taxpayer
identification number (TIN) to report income paid to you, real estate
transactions, mortgage interest you paid, the acquisition or abandonment of
secured property, or contributions you made to an individual retirement
arrangement (IRA). Use Form W-9 to furnish your correct TIN to the requester
(the person asking you to furnish your TIN), and, when applicable, (1) to
certify that the TIN you are furnishing is correct (or that you are waiting for
a number to be issued), (2) to certify that you are not subject to backup
withholding if you are an exempt payee. Furnishing your correct TIN and making
the appropriate certifications will prevent certain payments from being subject
to backup withholding.
Note: If a requester gives you a form other than a W-9 to request your TIN, you
must use the requester's form. The TIN Certification Card is a "Substitute" Form
W-9.
HOW TO OBTAIN A TIN. -- If you do not have a TIN, apply for one immediately. To
apply, get Form SS-5, Application for a Social Security Card (for individuals)
from your local office of the Social Security Administration, or Form SS-4,
Application for Employer Identification Number (for businesses and all other
entities), from your local IRS office.
To complete Form W-9 if you do not have a TIN, write "Applied For" in the
space for the TIN on the form, sign and date the form, and give it to the
requester. Generally, you will then have 60 days to obtain a TIN and furnish it
to the requester. If the requester does not receive your TIN within 60 days,
backup withholding, if applicable, will begin and continue until you furnish
your TIN to the requester. For reportable interest or dividend payments, the
payer must exercise one of the following options concerning backup withholding
during this 60-day period. Under option (1), a payer must backup withhold on any
withdrawals you make from your account after 7 business days after the requester
receives this form back from you. Under option (2), the payer must backup
withhold on any reportable interest or dividend payments made to your account,
regardless of whether you make any withdrawals. The backup withholding under
option (2) must begin no later than 7 business days after the requester receives
this form back. Under option (2) the payer is required to refund the amounts
withheld if your certified TIN is received within the 60-day period and you were
not subject to backup withholding during that period.
Note: Writing "Applied For" on the form means that you have already applied for
a TIN OR that you intend to apply for one in the near future.
As soon as you receive your TIN, complete another Form W-9, include your TIN,
sign and date the form, and give it to the requester.
WHAT IS BACKUP WITHHOLDING? -- Persons making certain payments to you are
required to withhold and pay to the IRS 31% of such payments under certain
conditions. This is called "backup withholding." Payments that could be subject
to backup withholding include interest, dividends, broker and barter exchange
transactions, rents, royalties, nonemployee compensation, and certain payments
from fishing boat operators, but do not include real estate transactions.
If you give the requester your correct TIN, make the appropriate
Certification, and report all your taxable interest and dividends on your tax
return, your payments will not be subject to backup withholding. Payments you
receive will be subject to backup withholding if:
(1) You do not furnish your TIN to the requester, or
(2) The IRS notifies the requester that you furnished an incorrect TIN, or
(3) You are notified by the IRS that you are subject to backup withholding
because you failed to report all your interest and dividends on your tax return
(for reportable interest and dividends only), or
(4) You fail to certify to the requester that you are not subject to backup
withholding under (3) above (for reportable interest and dividend accounts
opened after 1983 only), or
(5) You fail to certify your TIN. This applies only to reportable interest,
dividend, broker, or barter exchange accounts opened after 1983, or broker
accounts considered inactive in 1983.
Except as explained in (5) above, other reportable payments are subject to
backup withholding only if (1) or (2) above applies.
Certain payees and payments are exempt from backup withholding and
information reporting. See Payees and Payments Exempt From Backup Withholding,
below, and Exempt Payees and Payments under Specific Instructions, on page 94 if
you are an exempt payee.
PAYEES AND PAYMENTS EXEMPT FROM BACKUP WITHHOLDING. -- The following is a list
of payees exempt from backup withholding and for which no information reporting
is required. For interest and dividends, all listed payees are exempt except
item (9). For broker transactions, payees listed in (1) through (13), and a
person registered under the Investment Advisers Act of 1940 who regularly acts
as broker are exempt. Payments subject to reporting under sections 6041 and
6041A are generally exempt from backup withholding only if made to payees
described in items (1) through (7), except that a corporation that provides
medical and health care services or bills and collects payments for such
services is not exempt from backup withholding or information reporting. Only
payees described in items (2) through (6) are exempt from backup withholding for
barter exchange transactions, patronage dividends, and payments by certain
fishing boat operators.
(1) A corporation.
(2) An organization exempt from tax under section 501(a), or an IRA, or a
custodial account under section 403(b)(7).
(3) The United States or any of its agencies or instrumentalities.
(4) A state, the District of Columbia, a possession of the United States, or any
of their political subdivisions, agencies or instrumentalities.
(5) A foreign government or any of its political subdivisions, agencies or
instrumentalities.
(6) An international organization or any of its agencies or instrumentalities.
(7) A foreign central bank of issue.
(8) A dealer in securities or commodities required to register in the U.S. or
possession of the U.S.
(9) A futures commission merchant registered with the Commodity Futures Trading
Commission.
(10) A real estate investment trust.
(11) An entity registered at all times during the tax year under the Investment
Company Act of 1940.
(12) A common trust fund operated by a bank under section 584(a).
(13) A financial institution.
(14) A middleman known in the investment community as a nominee or listed in the
most recent publication of the American Society of Corporate Secretaries, Inc.,
Nominee List.
(15) A trust exempt from tax under section 664 or described in section 4947.
Payments of dividends and patronage dividends generally not subject to
backup withholding also include the following:
- - -- Payments to nonresident aliens subject to withholding under section 1441.
- - -- Payments to partnerships not engaged in a trade or business in the U.S. and
that have at least one nonresident partner.
- - -- Payments of patronage dividends not paid in money.
- - -- Payments made by certain foreign organizations.
Payments of interest generally not subject to backup withholding include the
following:
- - -- Payments of interest on obligations issued by individuals. Note: You may be
subject to backup withholding if this interest is $600 or more and is paid in
the course of the payer's trade or business and you have not provided your
correct TIN to the payer.
- - -- Payments of tax-exempt interest (including exempt-interest dividends under
section 852).
- - -- Payments described in section 6049(b)(5) to nonresident aliens.
- - -- Payments on tax-free covenant bonds under section 1451.
- - -- Payments made by certain foreign organizations.
- - -- Mortgage interest paid by you.
ANNEX V-1
<PAGE> 164
Payments that are not subject to information reporting are also not subject
to backup withholding. For details, see sections 6041, 60.41A(a), 6042, 6044,
6045, 6049, 6050A, and 6050N, and the regulations under those sections.
PENALTIES
FAILURE TO FURNISH TIN. -- If you fail to furnish your correct TIN to the
requester, you are subject to a penalty of $50 for each such failure unless your
failure is due to reasonable cause and not to willful neglect.
CIVIL PENALTY FOR FALSE INFORMATION WITH RESPECT TO WITHHOLDING. If you make
a false statement with no reasonable basis that results in no imposition of
backup withholding, you are subject to a penalty of $500.
CRIMINAL PENALTY FOR FALSIFYING INFORMATION. -- Willfully falsifying
certifications or affirmations may subject you to criminal penalties including
fines and/or imprisonment.
SPECIFIC INSTRUCTIONS
NAME. -- If you are an individual, you must generally provide the name shown
on your social security card. However, if you have changed your last name, for
instance, due to marriage, without informing the Social Security Administration
of the name change, please enter your first name and both the last name shown on
your social security card and your new last name.
If you are a sole proprietor, you must furnish your individual name and
either your SSN or EIN. You may also enter your business name below your
individual name. Enter your name(s) as shown on your social security card and/or
as it was used to apply for your EIN on Form SS-4.
SIGNING THE CERTIFICATION. --
(1) INTEREST, DIVIDEND AND BARTER EXCHANGE ACCOUNTS OPENED BEFORE 1984 AND
BROKER ACCOUNTS CONSIDERED ACTIVE DURING 1983. -- You are required to furnish
your correct TIN, but you are not required to sign the certification.
(2) INTEREST, DIVIDEND, BROKER AND BARTER EXCHANGE ACCOUNTS OPENED AFTER
1983 AND BROKER ACCOUNTS CONSIDERED INACTIVE DURING 1983. -- You must sign the
certification or backup withholding will apply. If you are subject to backup
withholding and you are merely providing your correct TIN to the requester, you
must cross out item (2) in the certification before signing the form.
(3) REAL ESTATE TRANSACTIONS. -- You must sign the certification. You may
cross out item (2) of the certification if you wish.
(4) OTHER PAYMENTS. -- You are required to furnish your correct TIN, but you
are not required to sign the certification unless you have been notified of an
incorrect TIN. Other payments include payments made in the course of the
requester's trade or business for rents, royalties, goods (other than bills for
merchandise), medical and health care services, payments to a nonemployee for
services (including attorney and accounting fees), and payments to certain
fishing boat crew members.
(5) MORTGAGE INTEREST PAID BY YOU, ACQUISITION OR ABANDONMENT OF SECURED
PROPERTY, OR IRA CONTRIBUTIONS. -- You are required to furnish your correct TIN,
but you are not required to sign the certification.
(6) EXEMPT PAYEES AND PAYMENTS. -- If you are exempt from backup
withholding, you should complete this form to avoid possible erroneous backup
withholding. Enter your correct TIN on the form, circle "EXEMPT" in 2(i) of the
certification, sign and date the form. If you are a nonresident alien or foreign
entity not subject to backup withholding, give the requester a completed Form
W-8, Certification of Foreign Status.
(7) TIN "APPLIED FOR." -- Follow the instructions under How To Obtain a TIN,
on page 93, sign and date this form.
SIGNATURE. -- For a joint account, only the person whose TIN is shown on the
form should sign the form.
PRIVACY ACT NOTICE. -- Section 6109 requires you to furnish your correct TIN
to persons who must file information returns with the IRS to report interest
dividends, and certain other income paid to you, mortgage interest you paid, the
acquisition or abandonment of secured property, or contributions you made to an
IRA. The IRS uses the numbers for identification purposes and to help verify the
accuracy of your tax return. You must provide your TIN whether or not you are
required to file a tax return. Payers must generally withhold 31% of taxable
interest, dividend, and certain other payments to a payee who does not furnish a
TIN to a payer. Certain penalties may also apply.
ANNEX V-2
<PAGE> 165
WHAT NAME AND NUMBER TO GIVE THE REQUESTER
<TABLE>
<CAPTION>
- - ------------------------------------------------------------- -------------------------------------------------------------
GIVE THE NAME AND GIVE THE NAME AND
FOR THIS TYPE OF ACCOUNT: SOCIAL SECURITY FOR THIS TYPE OF ACCOUNT: EMPLOYER
NUMBER OF: IDENTIFICATION
NUMBER OF:
- - ------------------------------------------------------------- -------------------------------------------------------------
<S> <C> <C> <C>
1. Individual The individual 6. Sole proprietorship The owner(3)
2. Two or more individuals The actual owner of 7. A valid trust, estate, Legal entity(4)
joint (account) the account or, if or pension trust
combined funds, the
first individual on 8. Corporate The corporation
the account(1)
9. Association, club, The organization
3. Custodian account of a minor The minor(2) religious, charitable,
(Uniform Gift to Minors Act) educational or other
tax-exempt organization
4. a. The usual revocable savings The grantor-trustee(1)
trust (grantor is 10. Partnership The partnership
also trustee)
11. A broker or registered The broker or nominee
b. So-called trust account that The actual owner(1) nominee
is not a legal or valid
trust under State law 12. Account with the The public entity
Department of Agriculture
5. Sole proprietorship The owner(3) in the name of a public
entity (such as a state or
local government, school
district or prison) that
receives agricultural
program payments.
- - ------------------------------------------------------------- -------------------------------------------------------------
</TABLE>
(1) List first and circle the name of the person whose number you furnish.
(2) Circle the minor's name and furnish the minor's social security number.
(3) Show the individual's name. See item 5 or 6. You may also enter business
name.
(4) List first and circle the name of the legal trust, estate, or pension trust.
(Do not furnish the identification number of the personal representative or
trustee unless the legal entity itself is not designated in the account
title.)
Note: If no name is circled when there is more than one name, the number will
considered to be that of the first name listed.
ANNEX V-3
<PAGE> 166
ANNEX VI
STATE OF CALIFORNIA CHUCK QUACKENBUSH, Insurance Commissioner
================================================================================
DEPARTMENT OF INSURANCE
45 FREMONT STREET, 24TH FLOOR
SAN FRANCISCO, CA 94105
[LOGO]
September 16, 1996
Southern California Physicians Insurance Exchange
9441 West Olympic Blvd.
Beverly Hills, CA 90213-4015
SUBJECT: Southern California Physicians Insurance Exchange --
Application for Approval of Conversion Merger with and into
SCPIE Indemnity Co.
Dear Applicant:
By this letter, the California Department of Insurance (CDI) herewith approves
for submission to a vote of the members, the proposed merger of Southern
California Physicians Insurance Exchange (SCPIE) with and into SCPIE Indemnity
Company (Indemnity), a California-domiciled stock insurer, whereby SCPIE will in
effect be converted from a reciprocal exchange into a stock insurer owned by
SCPIE Holdings, Inc., a Delaware-domiciled business corporation, the shares of
which will be issued to SCPIE members, all as more fully set forth in the
documents duly filed with CDI in support of the captioned application.
Please note that this approval is issued under California Insurance Code (CIC)
sec. 1552 for purposes of authorizing submission of the transaction to SCPIE's
members for approval per CIC sec. 1553, and does not constitute a final
certificate of approval under CIC sec. 1555 which would enable complete
consummation of the transaction by means of filing the merger agreement with
California Secretary of State.
Please further note that with respect to the required member vote, the issuance
of this approval should be considered as being permissive only, and not as
constituting an official recommendation or endorsement of the proposed
transaction. SCPIE members should exercise their own sound independent judgement
in deciding how they will vote.
Additionally, this approval cannot constitute assurance that a final certificate
of approval will be issued, inasmuch as fairness and equity require due
consideration by CDI of any pertinent comments or concerns brought to CDI's
attention by members or other interested parties as part of the approval
process. Accordingly, notwithstanding approval at the point, any such
information shall be considered with respect to whether a final certificate of
approval should be issued following the membership vote, pursuant to CIC
sec. 1555.
This approval is issued pursuant to CIC sec. 1552 only and, except as indicated
hereinbelow, does not constitute, signify or imply review under any other CIC
Section or other California statutes.
By reason of this review and approval, no additional consent per CIC
sec. 1011(c) shall be needed or required. Additionally, insofar as the
transaction would result in a change of control within the purview of the
California Insurance Holding Company System Regulatory Act, CIC sec. 1215.2,
then by reason of the review and approval required by CIC sec. 1552 and
sec. 1555, CDI herein and hereby issues its order pursuant to CIC sec. 1215.2(f)
exempting the transaction from the review and approval requirements of
sec. 1215.2, inasmuch as transactions subject to comprehensive review and
approval requirements under other CIC provisions are not among those believed to
be comprehended within the purpose of sec. 1215.2.
ANNEX VI-1
<PAGE> 167
Appropriate amendment to the survivor's Form B registration statement under CIC
sec. 1215.4(d) should be timely filed to reflect the result of the merger and
repositioning of Indemnity.
Acknowledged as presently pending with CDI, concurrently with the captioned
application, are three additional related applications; specifically,
applications for (1) technical withdrawal per CIC sec. 1070 et seq. of SCPIE as
an insurer following its merger with Indemnity; (2) prior CDI consent to
transfer of all 10,000 issued and outstanding shares of Indemnity to SCPIE
Holdings, Inc., a Delaware stock corporation; and (3) security permit for
initial public issuance of additional shares by SCPIE Holdings, Inc. Appropriate
administrative action upon all such applications shall be taken concurrently
with CDI's action upon any filing for final definitive certificate of approval
per CIC sec. 1555(a); should no such filing be made, all related applications
will be deemed to have been abandoned without prejudice as moot.
This administrative authorization is based on the specific information and
documentation previously filed in or with the captioned application, together
with all assurances, representations, confirmations, certifications,
undertakings, opinions and commitments submitted in support of it. Consequently,
it is conditioned on the continuing full accuracy and validity of them all, and
on the continuous conduct of Applicant and all other pertinent parties in
complete compliance therewith.
This authorization applies only to the transaction between the present
parties thereto, in the form as presently proposed or described in the materials
filed in or with the captioned application, and cannot be assumed to apply to
any amendment, revision, substitution, modification or other alteration thereto.
Consequently, any contemplated alteration must be brought promptly to the
attention of CDI before consummation, for determination as to whether it falls
with the scope of this authorization, or requires additional regulatory action
or review.
This approval addresses those issues within the California Insurance
Commissioner's statutory jurisdiction, and shall not be construed to determine
or resolve any issues or matters lawfully committed to the jurisdiction of any
other administrative agency or judicial tribunal.
CDI suggests that this letter or a true copy thereof be retained among the
parties' permanent corporate records, inasmuch as it constitutes the sole
evidence of approval of the transaction for submission to vote of the membership
intended to be issued by CDI.
This communication is believed and intended to be a complete response to
the captioned Applicant's request for approval to submit the transaction to a
vote of Applicant's members, and accordingly, should suffice to conclude this
stage of the administrative approval process.
Very truly yours,
CHUCK QUACKENBUSH
Insurance Commissioner
By /s/ JAMES HOLMES
--------------------
JAMES W. HOLMES
Senior Staff Counsel
(415) 904-5679
JWH:pd
cc: Donald P. Newell
Diana L. Day
Latham & Watkins
Patrick Abandy
CDI Financial Analysis Div.
ANNEX VI-2
<PAGE> 168
PROXY CARD
SOUTHERN CALIFORNIA PHYSICIANS INSURANCE EXCHANGE
SPECIAL MEETING OF MEMBERS NOVEMBER 5, 1996
PROXY SOLICITED ON BEHALF OF THE BOARD OF GOVERNORS
The undersigned hereby revokes all proxies heretofore given and hereby appoints
Mitchell S. Karlan, M.D., Allan K. Briney, M.D., and Wendell L. Moseley, M.D.,
or any one or more of them in the absence of the others, with full power of
substitution, as the true and lawful attorneys, proxies and agents of the
undersigned, to attend, represent and vote on behalf of the undersigned at the
Special Meeting of Members of the Southern California Physicians Insurance
Exchange ("SCPIE") to be held at The Sheraton Grande Hotel, 333 S. Figueroa
Street, Los Angeles, California 90071 on November 5, 1996, at 3:00 p.m.,
Pacific time, and any postponements or adjournments thereof, with all the powers
the undersigned would have if personally present at such meeting, upon the
following proposal described in the accompanying Proxy Statement/Prospectus
dated September 17, 1996.
(Continued and to be signed on other side)
PROXY CARD
CONTROL NUMBER
THE BOARD OF GOVERNORS OF SCPIE RECOMMENDS THAT YOU
VOTE YES (FOR THE MERGER AGREEMENT).
FOR AGAINST ABSTAIN
[ ] [ ] [ ] Proposal: To approve and adopt the Amended and Restated
Plan and Agreement of Merger (the "Merger Agreement"),
dated as of August 8, 1996, among Southern California
Physicians Insurance Exchange ("SCPIE"), SCPIE
Indemnity Company ("SCPIE Indemnity") and SCPIE Holdings
Inc., and the transactions contemplated thereby,
including the merger of SCPIE into SCPIE Indemnity.
[LOGO] The Board of Governors of SCPIE has approved the Merger
Agreement.
SOUTHERN
CALIFORNIA Please vote by placing an X in one of the boxes above,
PHYSICIANS and sign your name at the bottom of the card. You
INSURANCE must place an X in one, and only one, of the boxes in
EXCHANGE order for your vote to be counted.
THIS PROXY WILL BE VOTED IN ACCORDANCE WITH THE
SPECIFICATION MADE. IF NO SPECIFICATION IS MADE, THIS
PROXY WILL BE VOTED FOR THE APPROVAL AND ADOPTION OF
THE MERGER AGREEMENT AND THE TRANSACTIONS CONTEMPLATED
THEREBY.
----------------------------------------
SIGNATURE
Dated ___________________________, 1996
Please sign exactly as your name appears
to the left. If a corporation, please
sign in full corporate name by the
president or other authorized officer.
If a partnership, please sign in
partnership name, by an authorized
person.
PLEASE MARK, SIGN, DATE AND MAIL THIS
PROXY CARD PROMPTLY, USING THE ENCLOSED
ENVELOPE.
<PAGE> 169
TAXPAYER IDENTIFICATION CARD
CONTROL NUMBER
<TABLE>
<S> <C>
PLEASE FOLLOW DIRECTIONS CAREFULLY:
FAILURE TO COMPLETE THIS FORM
CORRECTLY MAY RESULT IN A BACKUP
PLEASE SIGN AND RETURN THIS CARD EVEN IF THE TAXPAYER IDENTIFICATION NUMBER* WITHHOLDING TAX OF 31%.
SHOWN BELOW IS CORRECT. If you do not return the card, you may be subject PLEASE SIGN AND DATE TO INSURE IMMEDIATE
to a $50 Internal Revenue Service penalty and we may be required to withhold PROCESSING. PRINT CLEARLY THE NUMERALS
and pay to the IRS 31% of any cash payment to which you may be entitled. OF YOUR TAXPAYER I.D. NUMBER IN THE
EMPTY BOXES PROVIDED IN THE RED AREA
*For individuals, your taxpayer identification number is your social security BELOW, THEN FILL IN COMPLETELY THE
number. For other entities, it is your employer identification number. CORRESPONDING BOXES IN INK AS SHOWN [ ].
-------------------------------------
ALL PERSONS ARE REQUIRED TO SIGN AND RETURN THIS CERTIFICATION | | | | | | | | | |
| | | | | | | | | |
--------------------- -------------------------------------
IS THIS YOUR CORRECT TAXPAYER | | IF NOT PLEASE CORRECT IN |[0] [0] [0] [0] [0] [0] [0] [0] [0]|
IDENTIFICATION NUMBER | | THE SPACE PROVIDED | |
--------------------- |[1] [1] [1] [1] [1] [1] [1] [1] [1]|
| |
Certification - Under penalties of perjury, I certify that 1) The number shown |[2] [2] [2] [2] [2] [2] [2] [2] [2]|
on this form is my correct taxpayer identification number (or I am waiting for | |
a number to be issued to me) and 2) I am not subject to backup withholding |[3] [3] [3] [3] [3] [3] [3] [3] [3]|
because (i) I am exempt from backup withholding, or (ii) I have not been | |
notified by the IRS that I am subject to backup withholding as a result of a |[4] [4] [4] [4] [4] [4] [4] [4] [4]|
failure to report all interest or dividends, or (iii) the IRS has notified | |
me that I am no longer subject to backup withholding. [Cross out item 2 if |[5] [5] [5] [5] [5] [5] [5] [5] [5]|
you are subject to backup withholding.] | |
|[6] [6] [6] [6] [6] [6] [6] [6] [6]|
| |
|[7] [7] [7] [7] [7] [7] [7] [7] [7]|
- - ---------------------------------------------------------------------------- | |
SIGNATURE OF TAXPAYER DATE |[8] [8] [8] [8] [8] [8] [8] [8] [8]|
| |
Please refer to the instructions in Annex V to the Proxy Statement/Prospectus. |[9] [9] [9] [9] [9] [9] [9] [9] [9]|
| |
-------------------------------------
|
|
|
- - -------
PLEASE MARK, SIGN, DATE AND MAIL THIS TAXPAYER IDENTIFICATION CARD PROMPTLY,
USING THE ENCLOSED ENVELOPE.
</TABLE>
<PAGE> 170
MEMBER RECORD CARD
CONTROL NUMBER
If the Amended and Restated Plan and Agreement of Merger goes into effect, it
is estimated that you will receive the number of shares of SCPIE Holdings Inc.
as indicated above.
PLEASE READ THE IMPORTANT INFORMATION ON THE BACK OF THIS CARD
Please retain for your records
CHANGE OF ADDRESS
CONTROL NUMBER
NAME AND ADDRESS OF RECORD NEW ADDRESS/CORRECTIONS
-------------------------------------
-------------------------------------
-------------------------------------
-------------------------------------
-------------------------------------
-------------------------------------
SIGNATURE DATE
MEMBER RECORD CARD
SOUTHERN CALIFORNIA PHYSICIANS INSURANCE EXCHANGE
- - ------------------------------------------------------------------------------
IMPORTANT INFORMATION ABOUT YOUR CONSIDERATION
Our records show that you were a member of SCPIE on September 16, 1996. Based
on such membership, and provided the Amended and Restated Plan and Agreement of
Merger is approved and adopted at the Special Meeting and the conditions set
forth therein are satisfied or waived, you will be eligible to receive
consideration in the form of (i) a number of shares of SCPIE Holdings Inc.
Common Stock and (ii) cash in lieu of fractional shares.
Details of the Amended and Restated Plan and Agreement of Merger's provisions
for the amount and form of consideration are in the section on "The
Merger--Consideration" in the Proxy Statement/Prospectus.
<PAGE> 171
SOUTHERN CALIFORNIA PHYSICIANS INSURANCE EXCHANGE
MERGER INFORMATION CENTER Q&AS
SECTION I: GENERAL INFORMATION ABOUT THE MERGER
<TABLE>
<CAPTION>
S-4 Page Reference
- - ------------------
<S> <C> <C>
Notice, Cover Page, 1. WHO IS THE COMPANY THAT SCPIE IS MERGING WITH?
1, 4, 16, 18, 27
Response: SCPIE would merge with an affiliated insurance company named SCPIE
Indemnity Company. SCPIE Indemnity Company is a California stock insurance
company that has conducted no business prior to the merger.
Notice, Cover Page, 2. IS SCPIE MERGING WITH THE SAME COMPANY THAT WILL BE ISSUING STOCK IN THE
1, 4, 16, 17, 18, 27 MERGER?
Response: SCPIE is merging into an insurance company named SCPIE Indemnity
Company. The stock issued in the merger will be stock of SCPIE Holdings Inc., a
holding company that is the parent company of SCPIE Indemnity Company.
SCPIE Indemnity Company is a wholly owned subsidiary of SCPIE Holdings Inc.
2, 5, 6, 16, 23 3. WHY IS SCPIE DOING THE MERGER?
Response: the principal purpose of the merger is to improve the company's
access to the capital markets and to raise capital to permit the growth of
existing business and develop new business opportunities.
2, 16 4. WHEN DID SCPIE DECIDE TO DO THE MERGER?
Response: SCPIE first announced the merger on March 22, 1996, the day after
the SCPIE Board of Governors adopted a Plan and Agreement of Merger.
6, 17 5. WHEN WILL THE MERGER BE COMPLETE?
*Response: We currently anticipate that the merger will occur during 1996.
However, the effective date of the merger may be delayed, with the approval
of the California Department of Insurance, to a later date.
</TABLE>
1
<PAGE> 172
<TABLE>
<CAPTION>
S-4 Page Reference
- - ------------------
<S> <C> <C>
6, 16, 17, 24 **Response: This is a complex process. The Plan of Merger details how the
company will merge into a stock insurance company. The Plan has been
unanimously approved by SCPIE's Board of Governors and the California
Commissioner of Insurance has approved the Plan for submission to SCPIE's
members for approval. The Plan must now be approved by a vote of SCPIE's
members. The Plan is also subject to final approval by the Department of
Insurance. The merger cannot be effective until these steps are completed
and certain other conditions have been satisfied. In addition, SCPIE
Holdings is planning to complete an initial public offering of stock at the
same time as the merger. So once the required approvals are obtained we
will probably be in the fourth quarter of 1996 before the company would be
able to implement the merger. Even then, the effective date may be delayed
if the initial public offering is delayed or if other factors outside
SCPIE's control cause the delay.
1, 5, 16, 17, 22 6. IS THIS A GOOD TIME FOR SCPIE, OR ANY COMPANY, TO GO PUBLIC?
Response: The decision to reorganize, including the public offering, is not
based solely on market conditions. The Company believes that being a stock
company and implementing a holding company structure will have long-term
advantages for SCPIE and its policyholders.
Notice, Cover Page, 7. WHAT HAPPENS IN THE MERGER?
1, 3, 4, 13, 14,
16, 17, 18, 24, Response: SCPIE, a reciprocal insurer, will merge into SCPIE Indemnity
26, 27, 31, 43 Company, a stock insurer. SCPIE Indemnity will continue to conduct SCPIE's
insurance business, without interruption. Eligible Members of SCPIE will
receive stock in SCPIE Holdings Inc., the parent company of SCPIE Indemnity
Company. The stock of SCPIE Holdings Inc. will be publicly traded and
listed on the New York Stock Exchange.
Front Page, Notice, 8. HOW WILL THE MERGER/REORGANIZATION BENEFIT ME, THE POLICYHOLDER?
Cover Page, 1, 5, 20
*Response: As a member of SCPIE, you may be eligible to receive shares of
SCPIE Holdings stock, which will be distributed to eligible members of SCPIE
in the merger. The estimated numbers of shares you will be allocated is
shown on the green record card which was included in the reorganization
package.
**Response: Each eligible member will receive shares of common stock of
SCPIE Holdings Inc. in the merger. The allocation of shares is based on a
formula which takes into account earned premiums and whether a policyholder
was a member of SCPIE on March 21, 1996.
</TABLE>
2
<PAGE> 173
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2, 16, 17, 29 9. WILL THE MERGER AFFECT SCPIE'S POLICIES?
*Response: The merger will not affect the benefits, values or premiums of
SCPIE policies.
**Response: After the Merger, all policies will remain in force, according
to their terms, with SCPIE Indemnity Company. However, all membership
rights in SCPIE, including the right to vote for the Board of Governors that
is contained in a policy, will be extinguished. If you receive stock and you
remain a shareholder of the new holding company, you will be entitled to
vote for the directors of the holding company and to all other shareholder
rights.
10, 29, 43, 49, 10. WILL THE MERGER HAVE ANY EFFECT ON MY PREMIUM?
50, 52, 53
Response: Management of SCPIE does not believe that the merger will have
any effect on premium rates. Premium rates will continue to be established
as they have in the past, based on actuarial factors in existence at the
time rate changes are under consideration. The Company will not continue to
pay premium credit dividends on outstanding policies after the merger.
Thus, if you have been receiving premium credits on your premium invoice,
the net amount you pay to SCPIE will increase (assuming no decrease in
premium rates). These dividends have been declared by the SCPIE Board based
upon profitable experience. There is no assurance that such premium credits
will continue, or that the amount of such credits will not decrease, if the
merger is not completed. If the merger is completed, the SCPIE Holdings
Board does intend to pay dividends on its Common Stock. The amount of such
dividends, in the aggregate, will at least initially be less than the amount
that SCPIE has paid in premium credits during the past few years.
4, 5, 6, 15, 16, 17, 11. WHAT MUST HAPPEN FOR THE MERGER TO "GO THROUGH" (BE COMPLETED)?
24, 28
Response: Even though the Board of Governors has unanimously approved the
Plan of Merger, several steps must still be taken. The Plan must be
approved by two-thirds of the eligible members of SCPIE at a special meeting
of members. The California Commissioner of Insurance must issue a final
approval of the Plan of Merger. The merger cannot be effective until these
steps are completed and certain other conditions have been satisfied. In
addition, SCPIE Holdings is planning to complete an initial public offering
of stock at the same time as the merger.
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4, 5, 15, 16, 28 12. CAN THE MERGER OCCUR WITHOUT POLICYHOLDER APPROVAL?
*Response: No. The approval by SCPIE members and by the California
Commissioner of Insurance is required by the California insurance law.
Enclosed in the mailing package you received is a proxy you should use to
vote on the proposed merger.
**Response: The reorganization process began with the development of the
Plan of Merger and its adoption on March 21, 1996 by SCPIE's Board of
Governors. The entire merger process, including the vote of members and the
California Commissioner of Insurance, is regulated under California
insurance law.
2, 6, 15, 18, 24, 26 13. HAS THE BOARD OF GOVERNORS APPROVED THE MERGER?
Response: Yes. They have done so unanimously.
6, 25, 26, 27 14. HOW DOES SCPIE HAVE THE RIGHT TO MERGE?
Response: California law permits the merger of reciprocal insurance
companies into stock insurance companies. The merger is taking place under
California law.
6, 25, 26, 27 15. WHAT IS THE LAW THAT GOVERNS THE MERGER/REORGANIZATION?
Response: SCPIE is organized in California and is, therefore, governed by
the insurance law of the State of California.
N/A 16. WHO IS THE COMMISSIONER OF INSURANCE IN CALIFORNIA?
Response: The Commissioner of Insurance is Mr. Charles Quackenbush.
16 17. HOW CAN I CONTACT THE CALIFORNIA INSURANCE COMMISSIONER?
Response: Instruct the Member to write to:
Department of Insurance
45 Fremont Street, 24th Floor
San Francisco, CA 94105
Attn: James Holmes, Esq.
Clients may also fax Mr. Holmes at (415) 904-5729
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13, 14, 71-72 18. AFTER THE MERGER, WILL THE DEPARTMENT OF INSURANCE HAVE JURISDICTION OVER
THE COMPANY?
Response: The Department of Insurance will continue to have jurisdiction
over SCPIE Indemnity Company, the insurance company that SCPIE is merging
with. The Department of Insurance will not have jurisdiction over SCPIE
Holdings Inc., the holding company, because it is not an insurance company.
13, 14, 71, 72 19. DOES THE FEDERAL GOVERNMENT HAVE A ROLE IN THIS?
Response: The insurance industry throughout the country is primarily
regulated at the state level, therefore, the California Insurance Department
regulates the merger process. The Securities and Exchange Commission, a
federal agency, is involved in regulating the issuance of stock by the
holding company.
14, 34, 43, 83 20. WHAT IS HAPPENING TO THE PREFERRED STOCK THAT SCPIE HOLDINGS INC. IS
AUTHORIZED TO ISSUE?
Response: SCPIE Holdings Inc. will only be issuing Common Stock at the time
of the merger. Any future issuances of Preferred Stock or additional Common
Stock will require authorization of the SCPIE Holdings Board of Directors.
N/A 21. WHAT INFORMATION WILL BE SENT TO THE POLICYHOLDERS AFTER THE MERGER?
Response: A certificate notifying you that SCPIE Indemnity Company has
assumed the assets and liabilities of SCPIE will be sent for inclusion with
your policy. SCPIE Indemnity Company is the affiliated insurance company
that SCPIE is merging with as part of the reorganization.
N/A 22. WHY IS SCPIE HOLDINGS INC. A DELAWARE HOLDING COMPANY?
Response: Management has decided to incorporate the holding company in
Delaware based on legal and financial considerations.
1, 16, 17, 27 23. WHAT HAPPENS AFTER THE MERGER?
Response: SCPIE Indemnity Company, through its new holding company, will
then be a publicly owned company. Your insurance will remain in effect
according to its terms. The merger will not affect your policy's benefits
or premiums.
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5 24. WHAT HAPPENS IF THE MERGER DOESN'T GO THROUGH?
Response: If the merger does not become effective for any reason (including
non-approval by the members or the California Commissioner of Insurance),
SCPIE will remain a reciprocal insurance company, the interests of members
will remain unchanged, no stock will be issued to members, and the initial
public offering will not occur.
26 25. WHY OR WHEN WOULD SCPIE AMEND OR WITHDRAW THE PLAN?
Response: SCPIE has no plans to materially amend or withdraw the Plan. We
are unable to speculate on possible future events.
[If caller persists beyond this, inquiry should be referred to supervisor]
6, 21, 81, 85, 86 26. WHO IS ADVISING SCPIE IN THE REORGANIZATION PROCESS?
*Response: SCPIE is being advised by investment advisors, legal counsel and
accountants.
**Response: These firms include the investment bank, Salomon Brothers Inc,
the law firm of Latham & Watkins, and Ernst & Young, independent
accountants.
6, 24, 28 27. WHO IS REPRESENTING POLICYHOLDERS IN THE REORGANIZATION?
Response: The interests of members are being overseen by the California
Commissioner of Insurance and by SCPIE's Board of Governors. SCPIE's Board
of Governors has had, and continues to have, the interest of members
uppermost in mind in the development, adoption and implementation of the
Plan of Merger. In addition, the California Commissioner of Insurance has
had the responsibility for determining that the merger complies with the
California insurance law and is fair, just and equitable to members.
20, 30 28. DO I HAVE TO GIVE ANYTHING UP IN ORDER TO RECEIVE STOCK IN THE MERGER?
Response: As part of the merger, eligible members will receive stock in
exchange for their membership interests in SCPIE, which includes the right
to vote for the Board of Governors. Your policy will otherwise remain in
force in accordance with its terms.
20, 30 29. WHAT DOES THE TERM "MEMBERSHIP INTEREST" MEAN?
Response: The term "membership interest" includes the right that SCPIE
members have to elect the Board of Governors and to participate in the
distribution of surplus in liquidation.
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20, 30 30. IF SCPIE DOESN'T DO THE MERGER, WILL I STILL RECEIVE MY SHARE OF THE
SURPLUS?
Response: As long as SCPIE remains a reciprocal insurance company,
policyholders would continue to retain their current membership interests.
76-78 31. WILL THERE BE CHANGES IN THE MANAGEMENT OF THE COMPANY IF THE MERGER GOES
THROUGH?
Response: No. Each of members of the Board of Governors and officers of
the company will have a similar position after the merger.
20, 30 32. WHY AM I GETTING SHARES FOR "NOTHING"?
Response: As an insured of SCPIE, which is a reciprocal insurer, each
policyholder has "membership interests." Upon the consummation of the
merger, these interests are cancelled and extinguished. In exchange,
eligible members will be entitled to receive SCPIE Holdings stock and cash
for fractional shares. In effect, you would not be getting "something for
nothing." Your membership interest in SCPIE has value, which is being
passed along to you under the terms of the merger.
N/A 33. WHY DID I RECEIVE MORE THAN ONE PROXY?
Response: Either
a. You have more than one membership interest based upon the title of
the ownership, or
b. You may have had a duplicate proxy sent to you as a reminder to make
certain that your interests are represented at the Special Meeting.
In either case, management urges you to complete, sign and return all
proxies received. In the event that more than one proxy is received, only
the most recent proxy will be counted.
2, 55 34. WHAT EFFECT MAY THE SALE OF SHARES TO THE PUBLIC HAVE ON SCPIE'S "PHYSICIAN-
FRIENDLY" POLICIES?
Response: The Company is committed, as part of its ongoing strategy, to
maintain SCPIE's relationship with its primary policyholder base of
California physician and medical group insureds. SCPIE foresees no
diminution whatsoever in the level of service to its California physician
and medical group policyholders. SCPIE understands the importance of paying
attention to the individual needs of its policyholders. Management is
committed to a continuation of this high level of service.
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15 35. ARE THE DIRECTORS AND OFFICERS OF SCPIE GETTING ANY SPECIAL COMPENSATION OUT
OF THIS MERGER?
Response: No.
5, 14, 19, 26, 27 36. WHAT IS THE EFFECT OF THE PROPOSED PUBLIC OFFERING OF SCPIE SHARES AFTER THE
MERGER?
Response: The consummation of the merger is not dependent upon the public
offering, although SCPIE expects that both transactions will be consummated
at the same time. The purpose of the public offering is to raise some
additional capital for expansion and to create a stable trading market in
the Company's Common Stock. The current SCPIE members will hold
approximately 80% of the outstanding capital stock after the merger, and
those persons purchasing shares in the public offering will hold
approximately 20% of the outstanding shares.
33, 83 37. WILL I VOTE ON ELECTING SCPIE DIRECTORS AFTER THE MERGER?
SCPIE will disappear as a result of the merger and you will become a
stockholder of SCPIE Holdings Inc., the holding company. As long as you
remain a shareholder in SCPIE Holdings, you will continue to vote in the
election of its directors. You will have one vote for each share you hold.
You will not be entitled to vote for directors of SCPIE Indemnity, the
surviving insurance company in the merger.
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SECTION II: GENERAL INFORMATION ABOUT THE MERGER AGREEMENT
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1, Annex I 1. WHAT IS THE MERGER AGREEMENT?
Response: The Merger Agreement refers to SCPIE's Plan and Agreement of
Merger. It is a lengthy document specifying how the merger will take place.
It includes information about:
- your eligibility to vote on the merger; and
- the consideration you may receive.
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N/A 2. HOW CAN I OBTAIN A COPY OF THE MERGER AGREEMENT?
Response: Callers asking this question need to be further identified and be
asked the following:
- Are you a SCPIE member?
- Did you receive the package of information about the merger
that we recently sent you?
If caller is an Eligible Member and has received the package, direct him/her
to Annex I of the proxy statement. If they are an Eligible Member of SCPIE
and are confirmed as such in the member file, but haven't received the
package, forward request to Patrick Lo.
If they are not an Eligible Member ask the caller to send a written request
---
to:
Southern California Physicians Insurance Exchange
P.O. Box 4015
Beverly Hills, CA 90213-4015
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SECTION III: GENERAL INFORMATION ABOUT CONSIDERATION
NOTE: Caller may be referred to the section of the proxy statement entitled
"The Merger - Consideration" for additional information.
NOTE: The policyholder (PH) screen will show a code indicating the
personalized information sent to the eligible member on the green record card
(card 3) regarding the estimated whole number of shares that the eligible
member could expect to receive in the merger.
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4, 5, 19-20 1. WHAT ARE THE ELIGIBILITY REQUIREMENTS FOR RECEIVING STOCK?
Response: You are eligible to receive stock if your green record card (card
3) indicates that you have been allocated shares of common stock.
Essentially, the Plan of Merger provides that you are eligible to receive
stock if you were the owner of an eligible policy on September 16, 1996 (the
"approval date").
Notice, Cover Page, 2. WHAT FORM WILL CONSIDERATION TAKE?
1, 17, 20-21
Response: consideration will take the form of:
- shares of common stock in the new holding company, SCPIE Holdings Inc.;
and
- cash in lieu of fractional shares.
Notice, Cover Page, 3. WILL I HAVE A CHOICE IN THE FORM OF MY CONSIDERATION?
1, 17, 20-21
Response: No. All consideration will be paid in the form of shares of
common stock in the new holding company, SCPIE Holdings Inc., and cash in
lieu of fractional shares.
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21 4. WHEN WILL I GET MY CONSIDERATION?
*Response: Eligible members will receive their consideration after the
merger is completed.
**Response: The consideration will be distributed as soon as practicable
after the merger becomes effective. The Company expects that issuance of
stock will be approximately one month to six weeks after the effective date.
Cover Page, 5, 21 5. HOW MUCH CONSIDERATION AM I ENTITLED TO?
Response: Information about the estimated amount of consideration to which
you are entitled, if you are the owner of an eligible policy on the approval
date, is shown on card No. 3, the green record card enclosed with the
mailing package you received.
14, 26 6. HOW WILL THE PRICE OF THE STOCK AT THE INITIAL PUBLIC OFFERING AFFECT WHAT I
GET?
Response: Your consideration will equal the number of shares allocated to
you multiplied by the price per share at which the stock trades on the New
York Stock Exchange. The price of the stock in the initial public offering
will be price initially set for each share of stock, but the Company expects
that there will be market fluctuations in the stock price once trading
begins.
14, 26 7. WHAT DETERMINES THE STOCK PRICE AT THE INITIAL PUBLIC OFFERING?
Response: The price of a share sold in the initial public offering is
determined in consultation with representatives of the underwriters, who
will take into account the number of shares offered and the value placed on
the shares by the market.
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Notice, Cover Page, 8. HOW DID YOU ARRIVE AT THE NUMBER OF SHARES INDICATED ON THE CARD?
1, 20-21
*Response: The estimated number of shares is based on a formula which takes
into account earned premiums and whether you were an eligible member of the
company on March 21, 1996. This formula is explained in the proxy statement
in the section "The Merger - Consideration - Allocation of Shares."
**[If member is still not satisfied, make this a referral.] I'm sorry, we
don't have that detailed information here in the Merger Information Center.
I will have to refer your question to my supervisor. May I have (or verify)
your name, address and telephone number? Someone will be in touch with you
shortly. [Verify Member's name and address; advise him/her that the
appropriate representative from SCPIE will be calling them shortly. There
should be no implied commitment that SCPIE will provide any more detail than
is in the proxy statement]
Notice, Cover Page, 9. I DON'T WANT STOCK; I WANT CASH. WHAT DO I DO?
1, 14, 16, 17, 20-21, 43 Response: The consideration being distributed in the merger is stock of the
holding company; SCPIE Holdings, Inc. The stock will be listed on the New
York Stock Exchange and is freely tradeable. Once you receive your stock
certificates, you may sell your stock in the open market.
N/A 10. CAN I SELL MY STOCK?
Response: Once the merger has become effective and eligible members have
actually been issued their shares, you will be able to sell or buy SCPIE
Holdings Inc. stock. At present, there is no market for SCPIE Holdings Inc.
stock since none has been issued.
N/A 11. HOW DO I SELL MY STOCK?
Response: After eligible members have been issued their shares, you will be
able to sell your stock of SCPIE Holdings Inc. like any other common stock,
through any stock brokerage firm.
N/A 12. HOW SOON CAN I SELL MY STOCK?
Response: You may sell your stock as soon as you receive the actual stock
certificates.
N/A 13. HOW CAN I BUY MORE STOCK?
Response: Beginning with the effective date of the merger, stock of SCPIE
Holdings Inc. can be bought through any stock brokerage firm.
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14, 21 14. HOW WILL FRACTIONAL SHARES BE HANDLED?
Response: Once the merger is completed, any fractional shares will be
cashed out and a check representing the interest along with Form 1099-B will
be mailed.
N/A 15. HOW DO I CHANGE THE OWNERSHIP ON THE STOCK CERTIFICATE BUT NOT THE OWNERSHIP
OF MY INSURANCE POLICY?
Response: As required by the Plan of Merger, SCPIE Holdings will issue the
stock certificate in the name of the person who appears on SCPIE's records
as the owner of the eligible policy. However, once the certificate has been
issued, you will be able to request that SCPIE's transfer agent, ChaseMellon
Shareholder Services, L.L.C., transfer the shares to another person. When
you receive your stock certificate you will also receive information from
ChaseMellon on how to contact the transfer agent.
N/A 16. I WANT TO HAVE THE STOCK SPLIT AND ISSUED TO SEVERAL PEOPLE.
Response: You may do this once you have received the actual stock
certificates. As required by the Plan of Merger, SCPIE Holdings must issue
the stock certificate in the name of the person who appears on SCPIE's
records as the owner of the policy. However, once the certificate has been
issued, you will be able to request that SCPIE Holdings' transfer agent,
ChaseMellon Shareholder Services, transfer partial ownership of these shares
to another person. When you receive your stock certificates you will also
receive information from ChaseMellon on how to contact the transfer agent.
N/A 17. MY POLICY IS CO-OWNED BY MY MEDICAL GROUP - WE'RE ALL INSUREDS. WHO WILL
GET THE STOCK?
Response: As required by the Plan of Merger, SCPIE Holdings will issue the
stock certificate in the name of the person who appears on SCPIE's records
as the owner of the eligible policy. After the Merger, the transfer agent
will reissue separate individual stock certificates upon the written
instructions of the record owner.
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Notice, Cover Page, 18. WHAT IS THE FORMULA USED TO CALCULATE THE NUMBER OF SHARES I WILL RECEIVE?
1, 20-21
*Response: Pages 20 and 21 of the proxy statement summarize the formula
used to calculate the estimated number of shares allocable to each eligible
member.
**Response: [if Member asks specific questions about the amount of earned
premiums used to calculate his/her number of shares, or if Member asks
whether he/she was an eligible member on March 21 and is therefore entitled
to participate in the distribution of the 1,000,000 shares]: take Members's
name and have someone from the Company notify him/her with specifics.
N/A 19. SINCE YOU'VE INDICATED THE NUMBER OF SHARES I MAY RECEIVE, HOW MUCH MONEY AM
I GOING TO GET FOR THESE SHARES?
*Response: The market value of your consideration cannot be determined
until the merger takes place and the stock begins trading on the New York
Stock Exchange. There can be no assurance as to the value of the shares you
may receive. In the "Capitalization" section of the Proxy Statement, there
is as assumed price of $20.00 per share. But there is no assurance that the
actual market price will not be lower or higher; the market value will
fluctuate from time to time, as with any stock.
N/A 20. I READ IN ________________ THAT THE PRICE PER SHARE WILL BE $___. IS THAT
CORRECT?
Response: The company can make no comment on any outside communications or
publications which may make reference to the merger or the initial public
offering.
N/A 21. WILL THE EQUITY IN THE NEW COMPANY GROW?
Response: No one can predict for certain what will happen. The proxy
statement which you received in the mailing package contains information
about SCPIE and its business, including financial statements and certain
considerations relevant to the ownership of SCPIE Holdings Inc. Common
Stock. We urge you to read all of the material in your mailing package
before voting.
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SEC. IV. INFORMATION ABOUT THE INITIAL PUBLIC OFFERING:
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21 1. WHO ARE THE UNDERWRITERS BRINGING THE COMPANY PUBLIC?
Response: The underwriters are expected to be Salomon Brothers Inc and a
group of other underwriters it represents as managing underwriters.
26 2. WILL I BE SENT A "RED HERRING"?
Response: The shares that policyholders will receive as consideration for
the merger are not part of the initial public offering and therefore
policyholders will not be receiving a "red herring." However, the proxy
statement which you received in the policyholder mailing package contains
information about SCPIE and its business, including financial statements,
certain considerations relevant to the ownership of SCPIE Holdings Inc.
common stock and additional information about SCPIE's plans to reorganize
into a stock company.
N/A 3. WILL THERE BE A DIVIDEND REINVESTMENT PLAN (DRIP), IN WHICH SHAREHOLDERS CAN
MAKE SHARE PURCHASES WITHOUT COMMISSION?
Response: At the closing of the merger and the initial public offering
SCPIE Holdings will not have a DRIP. Company management is looking at this
issue and will notify shareholders (once they exist) if the Company decides
to implement a Dividend Reinvestment Plan. [A Dividend Reinvestment Plan is
a program under which a person's shares are held in electronic form, and all
paid dividends are automatically reinvested in new shares (or parts of
shares) by the Company on a regular basis.]
N/A 4. WILL POLICYHOLDERS GET PREFERENTIAL TREATMENT IN "SUBSCRIBING" TO THE
INITIAL PUBLIC OFFERING? (IN OTHER WORDS, CAN POLICYHOLDERS BE GUARANTEED
TO BE ABLE TO PURCHASE NEW SHARES IN THE OFFERING, OR WITHOUT COMMISSIONS,
ETC.?)
Response: There will be no preferential treatment given to policyholders
for the shares to be offered in the initial public offering. However, any
individual may contact a stockbroker to inquire about buying shares in the
initial public offering, when it occurs.
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SEC. V. INFORMATION ABOUT THE TAXATION OF THE CONSIDERATION:
IMPORTANT: THE FOLLOWING PHRASES SHOULD PRECEDE ANY RESPONSE TO A QUESTION
ABOUT TAXATION ISSUES: "WE (SCPIE) ARE NOT IN A POSITION TO GIVE INDIVIDUAL
LEGAL OR TAX ADVICE. WE STRONGLY RECOMMEND THAT YOU CONTACT YOUR OWN TAX
ADVISOR OR ATTORNEY WITH ANY SPECIFIC QUESTIONS. HOWEVER, FOR ADDITIONAL
INFORMATION, YOU MAY WANT TO REFER TO THE PROXY STATEMENT, IN PARTICULAR THE
SECTION TITLED `CERTAIN FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER.'"
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7, 45-47 1. WHAT ARE THE TAX CONSEQUENCES OF RECEIVING STOCK?
*Response: In general, if you receive stock in the merger, you will not be
subject to Federal income tax on its receipt. If you later sell or
otherwise dispose of the stock, you will be subject to Federal income tax on
the full amount of the proceeds of that sale.
45-47 2. CLIENT ASKS: WHAT ARE THE TAX CONSEQUENCES OF RECEIVING CASH IN LIEU OF
FRACTIONAL SHARES?
*Response: The cash in lieu of fractional shares that you receive as
consideration in the merger generally will be taxable in full in the year in
which you receive it. (Remind the policyholder that SCPIE will report the
cash payment to the IRS on an information return as required by law, sending
a copy of the information return to the policyholder. SCPIE may be required
to withhold for Federal income taxes from any cash payment to policyholders
who do not complete and return the TIN certification card included in the
merger policyholder mailing package).
**Response: for individual owned policies, the TIN is the policyholder's
social security number. For policies owned by corporations or partnerships,
estates, and trustees, the TIN is the employer identification number.
46 3. HOW IS THE HOLDING PERIOD DETERMINED?
*Response: Capital gain income resulting from the receipt of cash as
consideration from the merger or of the proceeds from the sale or other
disposition of stock received as consideration as long or short-term depends
on when you obtained your policy. The one-year long-term period starts with
the date you became a SCPIE member.
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SEC. VI. IF POLICYHOLDER/CLIENT WANTS INFORMATION ABOUT VOTING:
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Notice, Cover Page, 1. WHO IS ELIGIBLE TO VOTE?
1, 5, 19
*Response: Essentially, any SCPIE member who received a proxy is eligible
to vote on the Merger. You are eligible to vote on the Plan if:
You were the named insured on September 16, 1996 under an eligible policy
issued by SCPIE. This is the date that the California Commissioner of
Insurance approved the Plan for submission to be members of SCPIE for
approval.
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Cover Page, 5, 15, 2. HOW DO I VOTE?
28
*Response: All votes must be cast through the mail or in person. A proxy
and postage-paid return envelope are enclosed in your mailing package for
your convenience. Please mark your preference on your proxy and return it
along with your "Taxpayer Identification" card in the envelope provided.
**Response: Only valid proxies which are duly executed will be counted. If
the proxy is signed but not marked FOR or AGAINST, it will be voted FOR the
Plan.
***Response: You may attend the special meeting of members in person, which
will be held at The Sheraton Grande Hotel, 333 South Figueroa Street, Los
Angeles, California, at 3:00 p.m., Pacific time, on November 5, 1996.
5, Proxy Card 3. WHEN IS THE DEADLINE FOR VOTING?
*Response: In order to be counted, proxies must be received before 3:00
p.m., Pacific time, on November 5, 1996 (the time of the Special Meeting).
You may also attend the Special Meeting and vote in person.
Front Page, 1, 6, 15 4. HOW DOES THE COMPANY RECOMMEND ITS MEMBERS TO VOTE?
*Response: Scpie's Board of Governors has unanimously approved the plan.
The Board of Governors recommends that you vote "FOR" the Plan.
**Be prepared to recite for the eligible member the benefits of the merger
for SCPIE and its eligible members. (See Sec. I, Ques. 3 & 8.)
Notice, Cover Page, 5. HOW MANY PEOPLE HAVE TO VOTE FOR THE MERGER TO BE APPROVED?
4, 15
*Response: Approval of the merger requires the affirmative vote of two-
thirds of all eligible members.
**Response: The SCPIE Board of Governors has unanimously approved the Plan.
The Board of Governors recommends that you vote "FOR" the Plan.
16 6. CAN I CHANGE MY VOTE?
Response: Yes. We will be happy to send you a new package. The most
recent proxy cast is the proxy that will be considered valid.
Alternatively, you could attend the Special Meeting and cast your vote in
person.
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Notice, Cover Page, 7. WHAT HAPPENS IF I DON'T VOTE?
5, 16
Response: Not voting is tantamount to voting against the Plan. If the
proposal to approve the Plan is not passed, the merger will not take place,
no members of SCPIE will receive shares of Common Stock and no initial
public offering will occur.
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SEC. VII. IF POLICYHOLDER/CLIENT HAS QUESTIONS ABOUT THE ITEMS IN THE PACKAGE:
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<S> <C> <C>
Notice, Cover Page, 1. WHY SHOULD I RESPOND TO THE PACKAGE?
1, 4-5, 15, 16
*Response: Your vote is important and you should return your proxy
promptly. SCPIE can complete the merger and the initial public offering
only if two-thirds of the eligible members vote in favor of the Plan. The
SCPIE Board of Governors has unanimously approved the Plan. The Board of
Governors recommends that you vote "FOR" the Plan.
**Response: Please return your completed proxy, along with your "Taxpayer
Identification" card in the postage-paid envelope provided. Failure to
complete and return the "Taxpayer Identification" card contained in the
package could subject you to withholding for Federal income tax purposes of
31 percent of any cash you receive as consideration if the merger is
approved and you may be subject to a $50 penalty by the IRS.
5, 47, Annex V 2. WHAT IS A TIN/ TAXPAYER IDENTIFICATION NUMBER?
*Response: For individually owned policies or contracts, a Taxpayer
Identification Number, or TIN, is your Social Security Number. (For policies
owned by corporations or partnerships, this number would be your Employer
Identification Number.)
We need this for tax reporting purposes. If you do not return this card, we
may have to withhold 31 percent from any cash you receive in the merger as
backup withholding for Federal income taxes and you may be subject to a $50
penalty by the IRS. Also, if you subsequently become entitled to a cash
dividend on the stock you receive in the merger, the same withholding may
apply unless we have received a certified taxpayer identification number
card.
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SEC. VIII. IF MEMBER HAS QUESTIONS NOT PERTAINING TO THE REORGANIZATION:
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<S> <C> <C>
N/A 1. IF MEMBER ASKS FOR SPECIFIC INFORMATION ABOUT THE STATUS OF POLICIES WITH
SCPIE.
*Response: Refer the policyholder to the appropriate contact in the
particular line of business.
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<CAPTION>
S-4 Page Reference
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<S> <C> <C>
N/A 2. IF MEMBER ASKS FOR CLARIFICATION ABOUT SCPIE'S FINANCIAL STRENGTH, ABOUT
SPECIFIC INVESTMENTS OF THE COMPANY, RATINGS, ETC.
*Response: Refer the member to the proxy statement. If the member wants
more information, use the established procedure and enter the member's name,
address and telephone number. Record the question with as much detail as
possible. Advise the member that we will forward the requested information.
N/A 3. IF MEMBER ASKS FOR GENERAL INFORMATION ABOUT SCPIE'S PRODUCTS.
*Response: Use the fulfillment item list and check "Product Information
Request." Inform the member that a representative of SCPIE will contact the
policyholder shortly and enter the member's name, address and telephone
number.
N/A 4. IF MEMBER ASKS TO SPEAK WITH A SCPIE AGENT.
*Response: Follow the procedure described in Question 3.
N/A 5. IF MEMBER ASKS FOR SOMEONE OTHER THAN THE CUSTOMER SERVICE REPRESENTATIVE
ANSWERING THE CALL TO WHOM TO EXPRESS CONCERNS.
*Response: Try to probe further. Explain to the member that you are not
really sure what the question is. Or try to get the member to be more
specific about the area or topic on which more information is needed. If
the member becomes upset, offer to have him/her speak with the CSR's
supervisor.
N/A 6. IF MEMBER ASKS FOR THE NAMES OF SCPIE'S SENIOR OFFICERS AND/OR THE COMPANY'S
DIRECTORS.
*Response: Refer the member to the "Management" section of the proxy
statement.
N/A 7. IF MEMBER IS ABRASIVE OR THREATENING:
*Response: To the greatest extent possible, adopt and maintain a tone that
is open and neutral in providing information.
**Other options include referring the call to a supervisor or taking down
the member's name and telephone number and having someone else return the
call.
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CLOSING FORMAT
May I help you with any other questions about SCPIE's reorganization?
Would you like to have a SCPIE representative contact you to discuss SCPIE's
products and services?
If you have any more questions about our reorganization, please call again.
Thank you for calling SCPIE's Merger Information Center.
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