Merger Approved, but Federal Investigation Looms for Doctors Co.

SACRAMENTO, Calif., Jun 27, 2008 (A. M. Best via COMTEX) — SKP | Quote | Chart | News | PowerRating — In a day of mixed blessings for the Doctors Co., California regulators approved the medical-malpractice insurer’s merger with SCPIE Holdings Inc., despite the announcement of a federal criminal investigation of the company.

The investigation is targeting the company and/or one or more current or future employees over possible unauthorized access to SCPIE’s computer system, according to a statement by Department of Insurance General Counsel Adam Cole.

“The U.S. Attorney’s office in Los Angeles declined to comment on the status of this matter. The department is unable to ascertain whether the criminal investigation is likely to lead to any action against Doctors,” Cole said.

Cole added that two of Doctors’ directors and an officer of the company “made statements to the department in connection with the application that later turned out to be false or misleading.” The individuals are “no longer with Doctors,” Cole said.

Doctors Co. officials did not immediately respond to questions about the federal criminal investigation.

In approving the merger, the insurance department cited an opinion from California Attorney General Jerry Brown’s office. That opinion concluded that Doctors’ acquisition of SCPIE (NYSE: SKP | Quote | Chart | News | PowerRating) “would not substantially lessen competition” in medical-malpractice insurance in the state. The Federal Trade Commission also took no action to prevent the privately held company’s acquisition of SCPIE.

As a condition of approval, however — and to address concerns about excessive rates — the insurance department required Doctors Co. to submit rate applications for itself and SCPIE by Sept. 1, 2008, and at least every three years thereafter. Doctors Co. agreed to the conditions, Cole said.

In a statement, Doctors Co. said the merger of SCPIE into a wholly owned subsidiary of the company will close on June 30. SCPIE Holdings will be de-listed from the New York Stock Exchange at that time.

SCPIE shareholders approved the merger with Doctors Co. by a nearly two-to-one majority on March 26 (BestWire, April 4, 2008). Under the agreement, Doctors is buying SCPIE for $28 per share in cash for a total of approximately $281 million.

Doctors Co. announced in March that the acquisition of SCPIE would expand its market share in California to nearly 19,000 physicians, making it the largest insurer of physician and surgeon professional liability insurance in the United States (BestWire, March 27, 2008).

Doctors Company Insurance Group currently has a Best?s Financial Strength Rating of A- (Excellent). SCPIE currently has a Best’s Financial Strength Rating of B+ (Good).

Neither the U.S. Attorney’s Office for California’s Central District, which covers SCPIE’s home base of Los Angeles, nor the Office for the Northern District of California, which covers Doctors’ headquarters in Napa, returned phone calls seeking comment.

The five largest providers of medical-malpractice coverage in California, according to 2007 A.M. Best Co. state/line data, were: Norcal Group, with a 19.6% market share; Doctors Company Insurance Group, 18.8%; SCPIE Cos., 14.2%; American International Group Inc., 6.7%; and MIEC Group, 4.4%.

(By Sean P. Carr, senior associate editor, BestWeek:

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