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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_________
FORM 10-K
(MARK ONE)
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [FEE REQUIRED]
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
FOR THE TRANSITION PERIOD FROM __________ TO __________
COMMISSION FILE NUMBER 0-18786
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PICO HOLDINGS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
CALIFORNIA 94-2723335
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
875 PROSPECT STREET, SUITE 301
LA JOLLA, CALIFORNIA 92037
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (858) 456-6022
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, $.001 PAR VALUE
(TITLE OF CLASS)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III or this Form 10-K or any amendment to this
Form 10-K. [ X ]
Approximate aggregate market value of the registrant's common stock held by
non-affiliates of the registrant (based on the closing sales price of such stock
as reported in the NASDAQ National Market) on March 26, 2001 was $81,477,716.
This excludes shares of common stock held by directors, officers and each person
who holds 5% or more of the registrant's common stock.
On March 26, 2001, the Registrant had 12,390,096 shares of common stock, $.001
par value, outstanding, excluding 4,394,127 shares of common stock which are
held by the registrant and its subsidiaries.
DOCUMENTS INCORPORATED BY REFERENCE
(1) None.
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PICO HOLDINGS, INC.
ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
Page
No.
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PART I............................................................................................... 3
Item 1. BUSINESS.................................................................................. 3
Item 2. PROPERTIES................................................................................ 10
Item 3. LEGAL PROCEEDINGS......................................................................... 10
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS....................................... 11
PART II.............................................................................................. 12
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS..................... 12
Item 6. SELECTED FINANCIAL DATA................................................................... 13
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS..... 14
7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS............................... 45
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA............................................... 46
Item 9. CHANGE IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE....... 83
PART III............................................................................................. 83
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT........................................ 83
Item 11. EXECUTIVE COMPENSATION.................................................................... 85
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT............................ 91
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS............................................ 93
PART IV.............................................................................................. 94
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.......................... 94
SIGNATURES........................................................................................... 105
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PART I
THIS FORM 10-K CONTAINS FORWARD-LOOKING STATEMENTS. THESE INCLUDE, BUT ARE NOT
LIMITED TO, STATEMENTS ABOUT OUR INVESTMENT PHILOSOPHY, PLANS FOR EXPANSION,
BUSINESS EXPECTATIONS, AND REGULATORY FACTORS. THESE STATEMENTS REFLECT OUR
CURRENT VIEWS ABOUT FUTURE EVENTS WHICH COULD AFFECT OUR FINANCIAL PERFORMANCE.
ALTHOUGH WE AIM TO PROMPTLY DISCLOSE ANY NEW DEVELOPMENT WHICH WILL HAVE A
MATERIAL EFFECT ON PICO, WE DO NOT UNDERTAKE TO UPDATE ALL FORWARD-LOOKING
STATEMENTS UNTIL OUR NEXT SCHEDULED FORM 10-K OR FORM 10-Q FILING. YOU SHOULD
NOT PLACE UNDUE RELIANCE ON FORWARD-LOOKING STATEMENTS, BECAUSE THEY ARE SUBJECT
TO VARIOUS RISKS AND UNCERTAINTIES, INCLUDING THOSE LISTED UNDER "RISK FACTORS"
AND ELSEWHERE IN THIS FORM 10-K, WHICH COULD CAUSE ACTUAL RESULTS TO DIFFER
MATERIALLY FROM SUCH FORWARD-LOOKING STATEMENTS, OR FROM OUR PAST RESULTS.
ITEM 1. BUSINESS
INTRODUCTION
PICO Holdings, Inc. is a diversified holding company. We acquire interests
in companies which our management believes:
- are undervalued at the time we buy them; and
- have the potential to provide a superior rate of return over time, after
considering the risk involved.
Our over-riding objective is to generate superior long-term growth in
shareholders' equity, as measured by book value per share. To accomplish this,
we are seeking to build a profitable operating base and to realize gains from
our investment holdings. In the long term, we expect that most of the growth in
shareholders' equity will come from realized gains on the sale of assets, rather
than operating earnings. Accordingly, when analyzing PICO's performance, our
management places more weight on increased asset values than on reported
earnings.
Over time, the assets and operations owned by PICO will change. Currently
our major activities are:
- owning and developing land and the related mineral rights and water rights
through Nevada Land & Resource Company, LLC;
- owning and developing water rights and water storage operations through
Vidler Water Company, Inc.;
- property and casualty insurance;
- "running off" the loss reserves of our medical professional liability
insurance companies; and
- making long term value-based investments in other public companies.
The address of our main office is 875 Prospect Street, Suite 301, La Jolla,
California 92037, and our telephone number is (858) 456-6022.
Our web-site at www.picoholdings.com contains further material about PICO,
our Securities and Exchange Commission filings, and links to other sites,
including some of the companies with which we are associated. You should check
the site periodically during the year for current press releases and updated
information.
HISTORY
PICO was incorporated in 1981 and began operations in 1982. The company was
known as Citation Insurance Group until a reverse merger with Physicians
Insurance Company of Ohio on November 20, 1996. After the reverse merger, the
former shareholders of Physicians owned approximately 80% of Citation Insurance
Group, the Board of Directors and management of Physicians replaced their
Citation counterparts, and Citation Insurance Group changed its name to PICO
Holdings, Inc. You should be aware that information pre-dating the reverse
merger relates to the old Citation Insurance Group only, and does not reflect
the performance of Physicians prior to the merger.
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MAJOR OPERATING SEGMENTS & SUBSIDIARY COMPANIES
This section describes our operating segments and lists the important
subsidiaries in each segment. Unless otherwise indicated, we own 100% of each
subsidiary.
LAND, MINERALS AND RELATED WATER RIGHTS
In April 1997, PICO paid $48.6 million to acquire Nevada Land & Resource
Company, LLC, which at the time owned approximately 1,352,723 acres of deeded
land in northern Nevada, and the water, mineral, and geothermal rights related
to the property.
Nevada Land is the largest private landowner in Nevada. According to the
recent census, Nevada has been the fastest growing state in the United States
over the past 10 years, with population growth of 66%. Developable land is
relatively scarce in Nevada, as approximately 85% of the land in the state is
owned by governmental agencies. In fact, much of Nevada Land's property is
checker-boarded in square mile sections with publicly owned land.
Before we acquired Nevada Land, the property had been under the ownership
of a succession of railway companies, to whom it was not a core asset.
Accordingly, we believe that the potential of the property had never been fully
exploited.
After acquiring Nevada Land, we completed a "highest and best use study."
The study divided the land into 7 major categories and developed strategies to
maximize the value of each type of asset. These strategies include:
- land exchanges where Nevada Land transfers parcels of its land in return
for land owned by government agencies or private parties. The Bureau of
Land Management and other government agencies are motivated to conduct land
exchanges for many purposes, including obtaining environmentally sensitive
lands for conservation purposes or consolidating their land holdings;
- the sale of land and water assets. There is demand for land and water for a
variety of purposes including residential development, residential estate
living, farming, ranching, and from industrial users--in particular,
electricity-generating companies that wish to locate plants in Nevada to
generate electricity for Nevada, California, and other states where demand
is growing strongly;
- the development of land in and around fast-growing towns in northern
Nevada; and
- the development of water rights and management of mineral rights.
During the period from April 23, 1997 to December 31, 2000, Nevada Land
received consideration of $14.4 million from the sale and exchange of land and
the sale of water rights. This is comprised of $12.4 million in sales of land,
$1.3 million of cash and land received in a land exchange transaction, and
$624,000 from the sale of water rights.
A cost basis has been assigned to each category of land and other asset,
which, in aggregate, equals Nevada Land's original purchase price. We have sold
97,776 acres and divested a net 8,271 acres in land exchanges. The average price
received in land sales has been $126.96 per acre, compared to our average basis
of $69.23 per acre sold, and the average cost of $34.94 per acre for all of the
land acquired. Looked at another way, the proceeds from selling and exchanging
9.1% of the land acquired represent 29.1% of the cost basis of the land assets
at Nevada Land.
At December 31, 2000, less than 25% of the land in the three highest value
categories had been sold. The emphasis has been on selling agricultural land
(37.5% by acreage, 32.4% by proceeds) and land which could be used for
rural/suburban/urban living (17.2% by acreage, 22.2% by proceeds).
At December 31, 2000, Nevada Land owned 1,246,676 acres of land. We
anticipate continuing to sell parcels of land for residential, agricultural, and
industrial use, and that significantly larger parcels could be divested through
land exchanges.
WATER RIGHTS AND WATER STORAGE
This segment is comprised of two distinct but inter-related activities: the
ownership and development of water rights in Nevada, Arizona, and Colorado; and
our interests in water storage facilities in Arizona and California.
We first entered the water rights and water storage business in 1995,
through the acquisition of Vidler Water Company, Inc. Since then, we have
acquired, and continue to acquire, additional properties, water rights, and
water storage assets. PICO currently owns approximately 96.2% of Vidler.
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We believe that Vidler is one of the leading private companies in the water
rights and water storage business in the southwestern United States. The
escalating supply/demand imbalance for water in the Southwest is the primary
reason that our management identified water as an attractive industry to invest
in. There are already disparities between the time and place of highest demand
and the time and place where supplies of water are available. Meanwhile, demand
continues to rise rapidly, fueled by population growth, economic development,
environmental requirements, and the claims of native Americans.
While there is enough water in the region to meet foreseeable demand, the
allocation of this water is inefficient. Examples of inefficiencies which create
opportunity for private providers such as Vidler include:
- the majority of water rights are currently controlled by agricultural
users. In many locations, there are insufficient water rights controlled by
municipal users to meet present and future demand;
- currently there are not effective procedures in place for the transfer of
water from private parties with excess supply in one state to end-users in
other states; however, regulation and procedures are steadily being
developed to facilitate the interstate transfer of water; and
- infrastructure to store water will be required to facilitate interstate
transfer and transfers from wet years to dry years. Currently there is
limited storage capacity in place.
The water rights and water storage business is relatively new and complex.
For a glossary of terms and more information, please refer to Vidler's web-site
at www.vidlerwater.com .
A water right is the legal right to divert water and put it to beneficial
use. Water rights are tradable assets which can be bought and sold. In some
states, the use of the water can also be leased. Water law and terminology vary
from state to state. The value of a water right depends on a number of factors,
including location, the seniority of the right, and whether or not the water is
transferable.
Vidler is engaged in the following activities:
- acquiring water rights, redirecting the water to its highest and best use,
and then generating cash flow from either leasing the water or selling the
right;
- development of storage and distribution infrastructure, and then generating
cash flow from charging customers fees for "recharge" or placing water into
storage, and storing water;
- purchase and storage of water for resale in dry years; and
- working with municipalities and state legislators to facilitate the passing
of legislation which will result in the efficient allocation of water.
Vidler's business involves identifying end-users, namely municipalities,
developers or industrial users, in the Southwest who require water, and then
locating a source of water and supplying the demand, utilizing the Company's own
assets where possible. These assets comprise:
- water rights in the states of Nevada, Arizona, and Colorado. Typically,
Vidler acquires water rights in locations where there is current demand or
where near-term demand has been clearly identified. Vidler seeks to acquire
water rights at prices consistent with their current use, with the
expectation of an increase in value if the right can be converted to a
higher use. The majority of Vidler's water rights are in Nevada and
Arizona, the two states which experienced the most rapid population growth
in the past 10 years; and
- water storage facilities in Arizona and California.
After a significant acquisition and development period, Vidler's water
assets are now in the early stages of generating cash flow. Vidler's current
priority is to either monetize or develop recurring cash flow from these assets.
On March 19, 2001, Vidler announced its first major water transaction--the sale
of 2,165.5 acres of land, and the related 6,496.5 acre-feet of water rights, in
the Harquahala Valley ground water basin in Arizona to a unit of Allegheny
Energy, Inc. for approximately $9.1 million. This transaction resulted in a
pre-tax gain of approximately $2.4 million, which will be recognized in the
first quarter of 2001.
If Vidler is successful in commercially developing its water and water
storage assets, revenues could be significantly higher in future years if the
company:
- secures significant supply contracts utilizing its water rights in Arizona
and Nevada; and
- obtains contracts to store water at its water storage facilities in Arizona
and California.
Vidler has also entered into joint ventures with parties who lack the
capital or expertise to commercially develop water rights, and continues to
explore additional joint venture opportunities.
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This table details the water rights and water storage assets owned by
Vidler at December 31, 2000. Please note that this is intended as a summary, and
that all numbers are rounded to the nearest whole digit. Item 7 of this Form
10-K, beginning on page 14, contains more detail about these assets, recent
developments affecting them, and the current outlook.
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NAME OF ASSET & APPROXIMATE LOCATION BRIEF DESCRIPTION PRESENT COMMERCIAL USE
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WATER RIGHTS
ARIZONA:
HARQUAHALA VALLEY GROUND WATER BASIN 14,700 acres of irrigated fee title land, plus 320 leased to farmers
LA PAZ & MARICOPA COUNTIES acres under option, and 673 acres in escrow
75 miles northwest of metropolitan
Phoenix
3,617 acres of dry (not irrigated) fee title land
1,902 acres of leased state land
44,100 acre-feet (one acre of water one foot deep) In March 2001, sold 2,165.5 acres of
of transferable ground water, plus an option over land and the associated 6,496.5
9,786 acre-feet, and 2,019 acre-feet in escrow. acre-feet of water rights for $9.1
State legislation allows use of the Central Arizona million to an electricity-generating
Project Aqueduct to convey up to 20,000 acre-feet Company
from this area to cities and communities in the
Phoenix metropolitan area as an assured
municipal water supply
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NEVADA:
FISH SPRINGS RANCH, LLC (51% 8,628 acres of deeded ranchland the farmland is leased to a cattle
INTEREST) & V&B, LLC (50% rancher on a revenue-sharing basis
INTEREST)
Washoe County, 40 miles north of Reno 8,000 acre-feet of permitted water rights, which
are transferable to the Reno/Sparks area
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SPRING VALLEY RANCHES 9,985 acres of deeded land Vidler is growing alfalfa (lucerne)
(formerly "Robison Ranch") hay, and farming the property itself
White Pine County, 40 miles west of 500,000 acres of Forest Service and Bureau of
Ely Land Management allotment land
5,832 acre-feet of permitted agricultural water
rights
applications* for 14,500 acre-feet of water rights
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LINCOLN COUNTY JOINT VENTURE applications* for more than 100,000 acre-feet of
water rights through a joint venture with Lincoln
County, of which it is currently anticipated that up
to 40,000 acre-feet will be permitted.
agreement to supply a developer with up to
17,000 acre-feet
agreement to supply an electricity-generating
company with up to 9,000 acre-feet of water at
$3,300 per acre-foot
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SANDY application* for 2,000 acre-feet of water rights
agreement to supply water to support
additional growth at Primm, Nevada once the
water rights have been permitted
*The numbers indicated for water rights
applications are the maximum amount for which
we have filed. In some cases, we anticipate that
the actual permits received will be for smaller
quantities.
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BIG SPRINGS RANCH See Note 17, "Commitments and
Contingencies" on page 76
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NAME OF ASSET & APPROXIMATE LOCATION BRIEF DESCRIPTION PRESENT COMMERCIAL USE
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COLORADO:
CLINE RANCH 600 acre-feet of senior water rights agreement for sale in front of Denver \
Water Court
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VIDLER TUNNEL WATER RIGHTS agreement to sell 200 acre-feet of
(the Vidler Tunnel itself was senior water rights, 640 acre-feet of
divested in junior water rights, and related land
2000) and tunnel assets to the City of
Golden, Colorado
agreement to sell 86 acre-feet of water
rights to East Dillon Water District
163 acre-feet of senior water rights 65.73 acre-feet leased
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WET MOUNTAIN 600 acre-feet of priority water rights
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WATER STORAGE
Arizona:
Vidler Arizona Recharge Facility An underground water storage facility with
estimated capacity exceeding 1 million acre-feet
and permitted annual recharge capability of
100,000 acre-feet
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California:
Semitropic water storage facility The right to store 185,000 acre-feet of water
underground for 35 years. This includes the right
to recover up to 41,000 acre-feet in any one year
and minimum guaranteed recovery of 16,650
acre-feet every year
purchase and storage of water for resale in dry 8,846 acre-feet of water "banked" for
years resale sold 3,691 acre-feet of water to
a federal agency
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PROPERTY AND CASUALTY INSURANCE
PICO's Property and Casualty Insurance operations are conducted by our
California-based subsidiaries Sequoia Insurance Company and Citation Insurance
Company. Physicians Insurance Company of Ohio acquired Sequoia in 1995, and
merged with Citation in 1996.
Sequoia's core business is property and casualty insurance in
California and Nevada, focusing on the niche markets of farm insurance and small
to medium-sized commercial insurance. While Sequoia had written modest amounts
of personal insurance in California in previous years, the company's book of
business in personal lines of insurance increased significantly following the
acquisition of Personal Express Insurance Services, Inc. in May 2000. Personal
Express has a unique business model, writing insurance direct with the customer,
but with branches providing local service for underwriting and claims. At
present Personal Express operates in two central California cities--Bakersfield
and Fresno.
In the past, Citation wrote commercial property and casualty insurance,
primarily in California and Arizona. After the merger was completed, we
identified redundancy between Citation and Sequoia, and combined the operations
of the two companies. After we assumed management of Citation, we tightened
underwriting standards significantly and did not renew some business which
Citation had written previously. In recent years, all business in California and
Nevada was transitioned to Sequoia. Citation ceased writing business at the end
of 2000, and is now in "run off." This means that Citation is handling claims
arising from its historical business, but not writing new business. The level of
investment assets and loss reserve liabilities will decrease as claims are paid
with the funds from maturing fixed-income securities.
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Sequoia's management takes a very selective approach to underwriting and
aims to earn a profit from underwriting (that is, a profit before investment
income). During the period of our ownership of both companies, there have also
been a number of management initiatives to improve efficiency and reduce
expenses. These include the combination of the operations of Sequoia and
Citation, the introduction of an innovative information system, and the
re-underwriting of each company's book of business. Despite the disruption which
inevitably results from these changes, Sequoia has earned a profit from its
insurance activities, before investment income, in 3 of the past 4 years.
In 1998 and 1999, Citation incurred losses from its insurance business due
to a large number of claims in one line of business, artisans/contractors
construction defect insurance--which Citation stopped writing in 1995, the year
before the merger.
In this segment, revenues come from premiums earned on policies written and
investment income on the assets held by the insurance companies. Typically more
than 80% of the insurance company portfolios are invested in fixed-income
securities, and up to 20% in equities. The fixed-income portfolios focus on
high-quality corporate bonds, and the maturity of securities is laddered to
match the projected pattern of claims payouts. The equities portion of the
Sequoia and Citation portfolios contains some of PICO's long term investments,
as well as a number of small-capitalization value situations.
MEDICAL PROFESSIONAL LIABILITY INSURANCE
Until 1995, Physicians Insurance Company of Ohio and The Professionals
Insurance Company wrote medical professional liability insurance, mostly in the
state of Ohio. Physicians and Professionals have stopped writing new business
and are in "run off."
As expected during the run-off process, practically all of this segment's
revenues come from investment income. The Physicians and Professionals
portfolios contain some of our long-term investments. The desire to maximize the
return on these holdings was a factor in our decision that the most advantageous
alternative was to have Physicians' own claims personnel manage the run-off and
for us to retain management of the associated investment portfolios.
LONG TERM HOLDINGS
As well as investing assets held by the insurance subsidiaries as part of
their business, PICO sometimes makes investments with its general corporate
funds. Where we own less than 50% of the company or the company is too small to
constitute a segment of its own, the investment is included in the Long Term
Holdings segment.
PICO invests in companies which our management identifies as undervalued
based on fundamental analysis. Typically, the stocks will be selling for less
than tangible book value or appraised intrinsic value--that is, what we think
the company is worth. Often the stocks will also be trading for low ratios of
earnings and cash flow, or on high dividend yields. Additionally the company
must have special qualities, such as unique assets, a potential catalyst for
change, or it may be in an industry with attractive characteristics.
We invest for the long term, typically 5 years or more, and seek to develop
a constructive relationship with the company. This may include an appropriate
level of shareholder influence, such as encouraging companies to use proper
financial criteria when making capital expenditure decisions, or providing
financing or strategic input. In the case of large holdings, this will usually
include board representation.
Before a substantial sum is invested, after significant research and
analysis, we must be convinced that--for an acceptable level of risk--there is
sufficient value to provide the opportunity for superior returns. On rare
occasions, we will deviate slightly from our strict value criteria. In these
cases, given the higher level of risk, we invest smaller sums.
We sell investments if their price has significantly exceeded our
objective, or if there have been changes in the business or in the company which
we believe limit further appreciation potential, on a risk-adjusted basis.
Our largest long term investments are in HyperFeed Technologies, Inc.,
Jungfraubahn Holding AG, and Australian Oil & Gas Corporation Limited. After
allowing for related taxes, the carrying value of these three holdings on
December 31, 2000 was approximately $36.8 million, which represents 17.5% of
PICO's shareholders' equity.
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DECEMBER 31, 2000 CARRYING VALUE SHARES HELD CLOSING PRICE
Carrying value before taxes:
HyperFeed Technologies, Inc. Common & preferred $3,339,000 7,388,547 $1.5625
Warrants 2,854,000 4,055,195 unlisted
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Total 6,193,000 11,443,742
Jungfraubahn Holding AG 23,684,000 112,672 $167.54
Australian Oil & Gas Corporation Limited 8,152,000 8,426,044 $0.97
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Total carrying value before taxes $38,029,000
Deferred taxes (1,257,000)
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Carrying value, net of taxes $36,772,000
Notes: 1. Our Jungfraubahn common shares and HyperFeed common and preferred
shares are carried under the equity method. This is cost, adjusted for our
proportionate share of net income (or losses) and other events affecting equity.
This is explained in Item 7 on page 20, and in Note 5 of Notes to Consolidated
Financial Statements, "Investment in Unconsolidated Affiliates".
2. Our HyperFeed warrants are carried at estimated fair value, based on
the Black-Scholes model. Full detail is provided in Note 5 of Notes to
Consolidated Financial Statements, "Investment in Unconsolidated Affiliates";
however, the volatility of the common shares, and their price at December 31,
2000 are important inputs in the valuation. Since the HyperFeed price can be
volatile, the carrying value of the warrants can fluctuate considerably from
quarter to quarter. We are required to use this accounting treatment; however,
it introduces volatility to our reported shareholders' equity.
3. We would have to invest $6.6 million to exercise our HyperFeed
warrants.
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We also have a small portfolio of alternative investments, where we
deviated from our traditional value criteria in an attempt to capitalize on
areas of potentially greater growth without incurring undue risk. The total
after-tax carrying value of this portfolio at year-end was $4.3 million, which
represents approximately 2.0% of shareholders' equity. The most significant
investments in this group are Solpower Corporation and SISCOM, Inc.
FUTURE STRATEGY
Over the past 3 years, the majority of PICO's new investments have been in
private companies and foreign public companies. New investments were focused in
these areas because our management perceived that selected private companies and
foreign public companies carried less downside risk and offered greater upside
potential than investment in publicly-traded small-capitalization value equities
in North America.
Although we have yet to fully demonstrate the value of our private
companies, namely Nevada Land and Vidler, and foreign public company
investments, we are confident that the overall value of these holdings increased
in 2000.
At current price levels, we believe that selected small-capitalization
value stocks in North America are very attractive on a risk-adjusted basis.
Although the actual investments which PICO makes depend on many factors, in the
foreseeable future it is likely that new investments will be focused on domestic
and foreign small-capitalization value equities, rather than private companies.
EMPLOYEES
At December 31, 2000 PICO had 140 employees. A total of 7 employees were
engaged in land, minerals and related water rights operations; 2 in water rights
and storage; 109 in property and casualty insurance operations; 4 in medical
professional liability operations; and 18 in holding company activities.
EXECUTIVE OFFICERS
The executive officers of PICO are as follows:
Name Age Position
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Ronald Langley 56 Chairman of the Board, Director
John R. Hart 41 President, Chief Executive Officer and Director
Richard H. Sharpe 45 Chief Operating Officer
Gary W. Burchfield 54 Chief Financial Officer and Treasurer
James F. Mosier 53 General Counsel and Secretary
Sheila C. Ferguson 39 Vice President, Finance
Maxim C. W. Webb 39 Vice President, Investments
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Except for Sheila C. Ferguson and Maxim C. W. Webb, each executive officer
of PICO was an executive officer of Physicians prior to the 1996 merger between
Physicians Insurance Company of Ohio and Citation Insurance Group, the
predecessors to PICO Holdings, Inc. Each became an officer of PICO in November
1996 as a result of the merger. Sheila C. Ferguson and Maxim C. W. Webb were
officers of Global Equity Corporation and became officers of PICO upon the
effective date of the PICO/Global Equity Corporation Combination in December
1998.
Mr. Langley has been Chairman of the Board of PICO since November 1996 and
of Physicians since July 1995 and a Director and Chairman of the Board of Global
Equity Corporation since September 1995. Mr. Langley has been a Director of PICO
since November 1996 and a Director of Physicians since 1993. Mr. Langley has
been a Director of HyperFeed Technologies, Inc., formerly, PC Quote, Inc.
("HyperFeed") since 1995 and a director of Jungfraubauhn Holdings AG since 2000.
Mr. Langley has also served as a director of MC Shipping, Inc. since 1997.
Mr. Hart has been President and Chief Executive Officer of PICO since
November 1996 and of Physicians since July 1995 and President and Chief
Executive Officer and a Director of Global Equity Corporation since September
1995. Mr. Hart has been a Director of PICO since November 1996 and a Director of
Physicians since 1993. Mr. Hart has been a Director of HyperFeed since 1997, and
a director of SISCOM, Inc. since November 1996.
Mr. Sharpe has been Chief Operating Officer of PICO since November 1996 and
an officer of a former affiliate, American Physicians Life Insurance Company,
for more than 10 years.
Mr. Burchfield has been Chief Financial Officer and Treasurer of PICO since
November 1996 and an officer of Physicians since March 1990.
Mr. Mosier has served as General Counsel and Secretary of PICO since
November 1996 and of Physicians since October 1984 and in various other
executive capacities since joining Physicians in 1981.
Ms. Ferguson has served in various capacities with the Global Equity
Corporation group of companies since 1993, including Director, Treasurer and
Financial Controller of Forbes Ceylon Limited from 1993 through 1996. Ms.
Ferguson has also served as Financial Controller for Global Equity Corporation
since September 1995 and an officer of Global Equity Corporation since June
1997. Ms. Ferguson became Financial Controller of PICO November 20, 1998.
Mr. Webb has served in various capacities with the Global Equity
Corporation group of companies since 1993, including Vice President, Investments
of Forbes Ceylon Limited from 1994 through 1996. Mr. Webb became an officer of
Global Equity Corporation in November 1997 and Vice President, Investments of
PICO on November 20, 1998. Mr. Webb has been a director of SISCOM, Inc. since
November 1996.
ITEM 2. PROPERTIES
PICO leases approximately 6,354 square feet in La Jolla, California for its
principal executive offices.
Physicians leases approximately 1,892 square feet of office space in
Columbus, Ohio for its headquarters. Sequoia leases office space for its and
Citation's headquarters in Monterey, California and for regional claims and
underwriting offices in Modesto, Monterey, Ventura, Visalia, Orange, Pleasanton,
San Jose, Bakersfield, Clovis and Sacramento, California as well as Midvale,
Utah. Nevada Land leases office space in Carson City, Nevada. Vidler and Nevada
Land hold significant investments in land, water and mineral rights in the
western United States. See "ITEM 1-BUSINESS-INTRODUCTION."
ITEM 3. LEGAL PROCEEDINGS
The Company is subject to various litigation that arises in the ordinary
course of its business. Members of PICO's insurance group are frequently a party
in claims proceedings and actions regarding insurance coverage, all of which
PICO considers routine and incidental to its business. Based upon information
presently available, management is of the opinion that such litigation will not
have a material adverse effect on the consolidated financial position, the
results of operations or cash flows of the Company. Neither PICO nor its
subsidiaries are parties to any potential material pending legal proceedings
other than the following:
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On January 10, 1997, Global Equity Corporation commenced an action in
British Columbia against MKG Enterprises Corp., Vignoble Wines Agency Inc. to
enforce repayment of a loan made by Global Equity to MKG. On the same day, the
Supreme Court of British Columbia granted an order preventing MKG from disposing
of certain assets pending resolution of the action. Global Equity subsequently
brought a motion to have a receiver-manager appointed for MKG and Vignoble,
which motion has been adjourned. In addition, in March 1999 Global Equity filed
an action in the Supreme Court of British Columbia against a third party. This
action states the third party had fraudulently entered into loan agreements with
MKG. Accordingly, under this action Global Equity is claiming damages from the
third party and restraining the third party from further action. As of December
31, 200 , Global Equity is in the process of negotiating a final settlement. The
proposed settlement provides for the repayment of approximately $500,000.
Consequently, during the third quarter of 2000, the Company wrote the investment
down to $500,000, recording a loss before income tax of $2.5 million.
Under the terms of a joint venture agreement between Conex and a foreign
joint venture in The People's Republic of China, Conex had a commitment to fund
a third round of financing in the amount of $5 million. During the first quarter
of 2000, Conex funded $500,000 of this commitment. On September 8, 2000, PICO
sold its interest in Conex. Consequently, this liability as well as all other
assets and liabilities of Conex are no longer recorded in PICO's consolidated
financial statements.
BSND, Inc. ("BSND"), a wholly-owned subsidiary of Vidler Water Company, has
resolved a partnership dispute relating to Big Springs Associates, a partnership
which owns real property and water rights in Nevada (the "Partnership"). BSND
owns 50% of the Partnership. Under the terms of an agreement resolving the
dispute, BSND agreed to sell its interest in the Partnership to the other
partner for $12.65 million in cash, a gain to Vidler of approximately $2.0
million. If the transaction has not closed by August 1, 2001, BSND will own the
Partnership in its entirety.
SEE NOTE 17 OF NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, "COMMITMENTS AND
CONTINGENCIES."
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The Company held its Annual Meeting of Shareholders on October 19, 2000.
(b) At the October 19, 2000 Annual Meeting of Shareholders, S. Walter Foulkrod,
III, Esq. and Richard D. Ruppert, MD were elected to terms ending in 2003.
The other Directors whose terms continued after the meeting are Robert R.
Broadbent, Carlos C. Campbell, John R. Hart, Ronald Langley, John D. Weil
and David A. Williams.
(c) The following matters were voted upon and approved by the Company's
shareholders at the Company's October 19, 2000 Annual Meeting of
Shareholders:
1) To elect S. Walter Foulkrod, III, Esq. and Richard D. Ruppert, MD as
Directors. Both Mr. Foulkrod and Dr. Ruppert were elected as Directors
for terms ending in 2003. The vote for Mr. Foulkrod was 8,720,702
votes in favor, no votes against, no abstentions and no votes
withheld. The vote for Dr. Ruppert was 8,720,702 votes in favor, no
votes against, no abstentions and no votes withheld.
2) To ratify the Board's selection of Deloitte & Touche LLP to serve as
the Company's independent auditors for the fiscal years ended December
31, 1999 and ending December 31, 2000. There were 9,645,837 votes in
favor, 37,261 votes against, no abstentions and no votes withheld.
3) To amend Article III of the Company's Articles of Incorporation to
eliminate the authorization of Preferred stock. The vote was 8,353,250
in favor 57,115 votes against, no abstentions and no votes withheld.
4) To approve the Company's 2000 Nonstatutory Stock Option Plan. The vote
was 5,587,303 in favor 2,854,748 votes against, no abstentions and no
votes withheld.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The common stock of PICO is traded on the NASDAQ National Market under the
symbol PICO. The following table sets forth the high and low sale prices as
reported on the NASDAQ National Market. These reported prices reflect
inter-dealer prices without adjustments for retail markups, markdowns or
commissions.
1999 2000
------------------------- -------------------------
High Low High Low
---------- ----------- ---------- -----------
1st Quarter $ 20.50 $ 13.00 $ 14.13 $ 9.88
2nd Quarter $ 25.31 $ 16.19 $ 14.06 $ 10.00
3rd Quarter $ 24.88 $ 18.19 $ 14.06 $ 11.59
4th Quarter $ 20.25 $ 12.31 $ 13.38 $ 10.44
On December 29, 2000, the closing sale price of PICO's common stock was
$12.4375 and there were 1,427 holders of record.
PICO has not declared or paid any dividends in the last two years and does
not expect to pay any dividends in the foreseeable future.
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ITEM 6. SELECTED FINANCIAL DATA
The following table presents PICO's selected consolidated financial data.
The information set forth below is not necessarily indicative of the results of
future operations and should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" in
Item 7 of this Form 10-K and the consolidated financial statements and the
related notes thereto included elsewhere in this document.
Year Ended December 31,
-------------------------------------------------------------------------
2000 1999 1998 1997 1996
------------ ----------- ----------- ---------- ----------
OPERATING RESULTS (In thousands, except share data)
Revenues:
Premium income earned $ 34,436 $ 36,379 $ 36,131 $ 49,876 $ 38,761
Net investment income 8,238 6,387 9,261 13,416 8,086
Other income 2,679 11,722 1,845 26,623 29,889
------------ ----------- ----------- ---------- ----------
Total revenues $ 45,353 $ 54,488 $ 47,237 $ 89,915 $ 76,736
============ =========== =========== ========== ==========
Income (loss) from continuing operations before
extraordinary gain $ (4,562) $ (7,262) $ (8,951) $ 19,649 $ 20,485
Income from discontinued operations, net 1,075 456 3,301
Extraordinary gain, net of tax 442
Cumulative effect of change in accounting principle (4,964)
------------ ----------- ----------- ---------- ----------
Net income (loss) $ (9,526) $ (6,820) $ (7,876) $ 20,105 $ 23,786
============ =========== =========== ========== ==========
INCOME (LOSS) PER COMMON SHARE: BASIC
Income (loss) from continuing operations $ (0.39) $ (0.81) $ (1.50) $ 3.12 $ 3.70
Income from discontinued operations 0.18 0.07 0.59
Extraordinary gain, net of tax 0.05
Cumulative effect of change in accounting principle (0.43)
------------ ----------- ----------- ---------- ----------
Net income (loss) $ (.82) $ (0.76) $ (1.32) $ 3.19 $ 4.29
============ =========== =========== ========== ==========
Weighted Average Shares Outstanding 11,604,120 8,998,442 5,981,814 6,302,401 5,538,199
============ =========== =========== ========== ==========
INCOME (LOSS) PER COMMON SHARE: DILUTED
Income (loss) from continuing operations $ (0.39) $ (0.81) $ (1.50) $ 3.00 $ 3.56
Income from discontinued operations 0.18 0.07 0.57
Extraordinary gain, net of tax 0.05
Cumulative effect of change in accounting principle (0.43)
------------ ----------- ----------- ---------- ----------
Net income (loss) $ (.82) $ (0.76) $ (1.32) $ 3.07 $ 4.13
============ =========== =========== ========== ==========
Weighted Average Shares Outstanding 11,604,120 8,998,442 5,981,814 6,540,264 5,748,414
============ =========== =========== ========== ==========
Year Ended December 31
------------------------------------------------------------
2000 1999 1998 1997 1996
-------- -------- -------- -------- --------
(In thousands, except per share data)
FINANCIAL CONDITION
Assets $395,145 $380,049 $396,154 $430,877 $489,570
Unpaid losses and loss adjustment expenses,
net of discount $121,542 $139,133 $155,021 $196,096 $252,024
Total liabilities and minority interest $189,952 $206,657 $222,135 $318,142 $380,496
Shareholders' equity $205,193 $173,392 $174,018 $112,735 $109,074
Book value per share $ 16.56 $ 19.15 $ 19.45 $ 18.72 $ 17.86
Note: PICO consolidated Global Equity Corporation from August 19, 1997. Prior
to this treatment, Global Equity Corporation was accounted for using
the equity method.
Note: Prior year share values have been adjusted to reflect the 1-for-5
Reverse Stock Split effective December 16, 1998, the November 20, 1996
reverse merger of Physicians Insurance Company of Ohio and Citation
Insurance Group, the treatment of American Physicians Life Insurance
Company as discontinued operations and to reflect the investment
results of HyperFeed and Jungfraubauhn using the equity method of
accounting. Book value per share is computed by dividing shareholders'
equity by the net of total shares issued less shares held as treasury
shares.
SEE NOTE 2 OF NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, "SIGNIFICANT
ACQUISITIONS" FOR ADDITIONAL DISCUSSION.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
COMPANY SUMMARY, RECENT DEVELOPMENTS AND FUTURE OUTLOOK
LAND, MINERALS AND RELATED WATER RIGHTS
The $5.3 million gross value of land and water rights sold and exchanged in
2000 came close to our target of meeting or exceeding 1999's level of $5.8
million.
In 2000 Nevada Land & Resource Company, LLC generated $3.7 million in
revenue from selling 28,245 acres of land. The average sales price of $131.88
per acre compares to our average basis of $52.07 per acre in the parcels which
were sold, and our average cost of $34.94 per acre for all of Nevada Land's
property assets. Of 2000's land sales, 77.8% were settled for cash and Nevada
Land provided partial financing for the balance. The vendor finance is
collateralized by the land, carries a 10% interest rate, and is subject to a
minimum 20% down payment.
In addition, during 2000:
- we exchanged 25,828 acres of land for assets with an exchange value of
approximately $1.3 million, or $52 per acre. The consideration received
consisted of $430,000 in cash and 17,558 acres of land, which we believe
will be more readily marketable, with an exchange value of $913,000. Nevada
Land recorded a gain of $270,000 on the proportion of the total exchange
value for which cash was received (i.e., approximately 32%). No gain was
recognized on the portion of the exchange for which land was received
(i.e., approximately 68%). Any gain related to the land received will be
recorded when that land is sold; and
- we sold 61 acre-feet of certificated water rights for $244,000, or $4,000
per acre-foot.
Nevada Land recognizes revenue, and the resulting gross profit or loss,
from a land sale when the transaction closes. On closing, the sales price is
recorded as revenue, and a gross margin is recorded depending on the cost basis
attributed to the land which was sold. Since the date of closing determines the
accounting period in which the sales revenue and gain are recorded, Nevada
Land's reported revenues and income can fluctuate from period to period,
depending on the date when specific transactions close.
We expect that land sales and land exchange activity in 2001 will be at a
similar level to 2000. In particular, there is strong demand from
electricity-generating companies that are looking to acquire land to construct
power plants where water is available, and there is also the requisite proximity
to rail transport and the electricity transmission grid. We also expect
continued demand from ranchers who prefer to own land rather than lease it.
In March 2000, Nevada Land entered into a series of option agreements with a
unit of Duke Energy North America, spanning 3 years, for the sale of 480 acres
of land for $455,000 ($948 per acre) and 2,896 acre-feet of permitted water
rights for $347,000 ($120 per acre-foot). The value of water rights depends on
many factors, including location, seniority, and whether or not the water is
transferable. Permitted rights are less senior, and typically less valuable,
than certificated water rights. On February 15, 2001, it was announced that the
Washoe County Planning Commission had approved this site for a plant to generate
electric power for the Truckee Meadows and surrounding communities. A Regional
Planning Commission hearing is scheduled for March 2001.
During 2000 and the first quarter of 2001, Nevada Land filed applications
for additional water rights. Where these applications are successful, the value
and marketability of the associated land is expected to increase. The
applications consist of:
- 30,276 acre-feet of water rights for the beneficial use of irrigating the
related 7,569 acres of arable land. Nevada Land began to receive permits
for some of these applications in the first quarter of 2001; and
- 18,000 acre-feet of water rights in a northern valley for municipal and
industrial use.
Progress continues on a number of possible sale and exchange transactions
involving significantly larger parcels of land. It can take several years to
complete land exchange transactions.
WATER RIGHTS AND WATER STORAGE ASSETS
As well as developing its existing assets in 2000, Vidler Water Company,
Inc. acquired two properties with significant water rights in northern Nevada.
These investments were made as part of Vidler's strategy of increasing its
ownership of water rights in Nevada, the state which experienced the most rapid
population growth over the past decade. It has been publicly stated that, in the
long term, the northern counties are the only practical source of water to
support the continued growth of southern Nevada.
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The most important developments during the year were:
WATER RIGHTS
ARIZONA
At December 31, 2000, Vidler owned or had the right to acquire
approximately 55,905 acre-feet of transferable ground water in the HARQUAHALA
VALLEY, approximately 75 miles northwest of metropolitan Phoenix, Arizona.
Vidler owns 44,100 acre-feet, the purchase of 2,019 acre-feet is in escrow, and
we have the option to purchase 9,786 acre-feet.
The Arizona State Legislature has passed several pieces of legislation
which recognize the Harquahala Valley ground water as a special resource. In
1991, the expansion of irrigated farming in the Valley was prohibited, and the
transfer of the ground water to municipalities was authorized. In order to
protect the Harquahala Valley ground water from large commercial and industrial
users which are moving into the Basin, Vidler supported legislation enacted in
2000 which places restrictions on commercial and industrial users utilizing more
than 100 acre-feet of water annually. These users are required to purchase
irrigable land and to withdraw the water that they need from the land at no more
than 3 acre-feet per annum per acre of land.
One of the constraints on beginning to supply Harquahala Valley water to
municipalities is the need for the water to be conveyed through the Central
Arizona Project Aqueduct ("CAP"). The Arizona State Legislature has passed
legislation which commits the CAP to convey up to 20,000 acre-feet per annum of
Harquahala groundwater to cities and communities in Arizona as an assured
municipal water supply. Vidler is able to supply this water and is meeting with
communities and developers in the Phoenix metropolitan area, some of whom need
to secure further water supply to support expected growth. Vidler expects to
enter the first such agreement in 2001.
There is also demand for the water within the Harquahala Basin.
In the first quarter of 2000, we disclosed that Vidler had granted an
electricity-generating company an option to acquire land and the associated
water rights in the Harquahala Valley. The quantity of land and water under
option was later increased, and on March 19, 2001, we closed the sale of 2,165.5
acres of irrigable land and the associated 6,496.5 acre-feet of water rights to
a unit of Allegheny Energy, Inc. for approximately $9.1 million. The purchase
price equates to $4,200 per acre of land, or $1,400 per acre-foot of water. In
addition, Vidler received a non-refundable option premium of $300,000 late in
2000. As a result of this transaction, Vidler will record a pre-tax gain of
approximately $2.4 million in the first quarter of 2001.
Following the sale, Vidler still owns, or has the right to acquire,
approximately 49,426 acre-feet of transferable Harquahala Valley ground water.
Discussions are continuing to supply this water to both municipalities and
industrial users.
NEVADA
Vidler has been increasing its ownership of water rights in northern Nevada
through the purchase of ranch properties and entering into joint ventures with
parties owning water rights which they wish to commercialize.
1. THE LINCOLN COUNTY JOINT VENTURE
In October 1999, Vidler announced a public/private joint venture with
Lincoln County, Nevada. The joint venture has filed applications for more than
100,000 acre-feet of water rights, covering substantially all of the
unappropriated water in Lincoln County, with a view to supplying water to
rapidly growing communities in southern Nevada. Vidler anticipates that up to
40,000 acre-feet of water rights will be permitted from these applications.
The joint venture has announced an initial agreement to supply developers
near Mesquite with up to 17,000 acre-feet of water.
Tentative agreement has been reached to sell an electricity-generating
company a minimum of 6,700 acre-feet of water, and a maximum of 9,000 acre-feet
of water, at $3,300 per acre-foot. The sale of the water is subject to the
electricity-generating company obtaining permitting and financing for a new
power plant. The anticipated closing date is July 2003.
The Lincoln County joint venture is an example of a transaction where
Vidler can partner with an entity, in this case a public entity, to provide the
necessary capital and skills to commercially develop water assets.
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Vidler is contemplating similar joint ventures with other Nevada counties.
2. FISH SPRINGS RANCH
During 2000, Vidler purchased a 51% interest in Fish Springs, LLC and a 50%
interest in V&B, LLC. These companies own the 8,628-acre Fish Springs Ranch, and
the associated water rights. Fish Springs Ranch is located in Honey Lake Valley
in Washoe County, approximately 40 miles north of Reno, Nevada.
Currently, 8,000 acre-feet of permitted water rights associated with Fish
Springs Ranch are transferable to the Reno/Sparks area. Vidler is in discussions
with a number of potential users for the Fish Springs water rights. These
include an industrial user, developers in Washoe County, and customers in
Nevada's north valleys where there is strong demand for water and few
alternative sources of supply.
Vidler may also be able to commercially develop a limited quantity of the
additional permitted water rights associated with the property.
3. SPRING VALLEY RANCHES
Vidler purchased a property formerly known as Robison Ranch out of
bankruptcy proceedings during 2000. Now known as Spring Valley Ranches, the
property is located approximately 40 miles west of Ely in White Pine County,
Nevada. The real estate assets acquired consist of approximately 9,985 acres of
deeded land and 500,000 acres of Forest Service and Bureau of Land Management
allotment land. We believe that the land has significant environmental value to
federal agencies, making it suitable for a land exchange transaction.
There are 5,832 acre-feet of permitted agricultural water rights related to
the property. Vidler intends to commercially develop these water rights,
although this will be a long-term project. In addition, we have filed
applications for 14,500 acre-feet of additional water rights for the beneficial
use of irrigating more of the ranch property.
4. SANDY, NEVADA
Vidler has filed an application for approximately 2,000 acre-feet of water
rights near Sandy, Nevada. As soon as the water rights have been permitted, we
expect to close an agreement to supply water to support additional growth at
Primm, Nevada, a town in the fast-growing Interstate 15 corridor.
5. BIG SPRINGS RANCH
Please refer to Note 17, Commitments and Contingencies, on page 76 of this
Form 10-K report.
COLORADO
Vidler is progressing with the sale of all of its Colorado water assets, in
order to focus resources on states experiencing faster growth in demand for
water.
In December 2000, Vidler closed the sale of various water rights and
related assets to the City of Golden, Colorado for $1 million. We have granted
the City options to acquire other water rights. The aggregate purchase price is
approximately $1.6 million.
On December 15, 2000, Vidler entered into a definitive agreement to sell 86
acre-feet of water rights to the East Dillon Water District for $3.1 million.
The agreement must be approved by a referendum, so closing is not expected until
late 2002. In the meantime, part of the senior water rights are being leased out
for approximately $110,000 per annum.
Vidler has agreed to sell its interest in Cline Ranch to Centennial Water
and Sanitation District for approximately $2.1 million. This sale requires the
approval of the Denver Water Court, which is expected by the end of 2001.
Discussions are continuing to either lease or sell the remaining water
rights in Colorado, including the 97 acre-feet of senior water rights which are
currently unutilized.
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WATER STORAGE
1. VIDLER ARIZONA RECHARGE FACILITY
Vidler has completed the second stage of construction at its facility to
store water underground in the Harquahala Valley. The Vidler Arizona Recharge
Facility is the first privately owned water storage facility for the Colorado
River system, which is a primary source of water for the Lower Division States
of Arizona, California, and Nevada.
The water will be stored in a large aquifer underlying much of the valley
and recovered, when needed, by ground water wells. Vidler intends to charge
customers an annual fee based on the amount of water stored.
The water storage facility is strategically located adjacent to the Central
Arizona Project aqueduct, a conveyance canal running from Lake Havasu to Phoenix
and Tucson. We believe that proximity to the CAP is a competitive advantage,
because it minimizes the cost of water conveyance.
In October 1998, construction of a pilot-scale plant was completed and
recharging began on schedule. The pilot plant was constructed to determine the
most cost-effective method of recharging water, and to obtain the hydrogeologic
data required to submit an application for a permit for full-scale recharge.
During the third quarter of 2000, Vidler received the necessary permits to
operate a full-scale recharge facility.
During 1999, Federal interstate water "banking" regulations were adopted
which allow water from the Colorado River to be stored off-stream in Arizona's
Lower Basin for use in the Lower Division States. The Arizona Department of
Water Resources accepted these regulations in January 2000. Vidler is able to
provide storage to effect interstate transfers of water. Potential users include
developers and local governmental political subdivisions in Arizona, and
out-of-state users such as the Las Vegas metropolitan area and California.
We believe that a number of events during the past year have increased the
scarcity value of the project's storage capacity. At a public hearing on March
14, 2000, the Arizona Water Banking Authority disclosed that the Bureau of
Reclamation has indicated that, before permits are issued for new facilities to
store water for interstate users, extensive environmental impact studies will be
required. The Arizona Water Banking Authority also indicated that the first
priority for publicly owned storage capacity in Arizona is to store water for
Arizona users. At the same hearing, the states of California and Nevada again
confirmed that their demand for storage far exceeds the total amount of storage
available at existing facilities in Arizona. Consequently, interstate users will
need to rely, at least in part, on privately owned storage capacity.
The Arizona Water Banking Authority is negotiating with Vidler, on behalf
of the potential interstate end users, to "bank", or store, water in the Vidler
Arizona Recharge Facility. Vidler expects to enter into its first agreements to
lease storage capacity, and to begin recharging water and generating cash flow
from the facility, later in 2001.
Once Vidler has concluded agreements to store water, it will know the rate
at which customers will need to be able to recover water. At that time, Vidler
will be able to design, construct and finance the final stage of the project
which will allow full-scale recovery. It is anticipated that the users of the
facility will bear the capital cost of the improvements required to recover
water at commercial rates.
It is anticipated that Vidler's full-scale recharge facility will have the
capacity to recharge 100,000 acre-feet per year, and that Vidler will be able to
store in excess of 1 million acre-feet of water in the aquifer underlying
Harquahala Valley. Vidler's estimate of the aquifer's storage volume is
primarily based on a hydrological report prepared by an independent engineering
firm for the Central Arizona Water Conservation District in 1990. The report
concluded that there is storage capacity of 3.7 million acre-feet, which is in
excess of the 1 million acre-feet indicated by Vidler.
Recharge and recovery capacity is important because it indicates how
quickly water can be put into storage underground or recovered from storage. In
wet years, it is important to have a high recharge capacity, so that as much
available water as possible may be stored. In dry years, the critical factor is
the ability to recover water as quickly as possible. There is a long history of
farmers recovering significant quantities of water from the Harquahala Valley
aquifer.
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2. SEMITROPIC
Vidler has an 18.5% right to participate in a 1,000,000 acre-foot water
storage facility at Semitropic, near the California Aqueduct, northwest of
Bakersfield. Currently Vidler is not storing any water at Semitropic for third
parties; however, it is actively pursuing a number of potential customers. In
particular, we anticipate demand from developers in Kern County and Los Angeles
County, who must now--before they are permitted to begin development--be able to
demonstrate that they have sufficient back-up supplies of water in the case of a
drought year.
Over the first 10 years of the agreement with the Semitropic Water Storage
District, Vidler is required to make a minimum annual payment of $2.3 million.
Vidler began making the annual payments in November 1998. In return, Vidler has
the right to store up to 185,000 acre-feet of water underground over a 35-year
period. Vidler has the right to recover up to 42,000 acre-feet of water in any
one year, including the right to a guaranteed minimum recovery of 16,650
acre-feet every year. This guaranteed amount of annual minimum recovery is
important because it means that a customer who has stored water at Semitropic is
assured of being able to recover this quantity of water in a dry year. Vidler is
also required to make an annual payment for operating expenses.
During 1999 and 2000, Vidler purchased approximately 12,537 acre-feet of
water and "banked" it at Semitropic, with the intention of selling or leasing
the water in a dry year. Vidler purchased the water from the Interruptible State
Water Project, and was the first private entity to purchase water from the
Project for resale. During the third quarter of 2000, Vidler sold 3,691
acre-feet of this water to a federal agency for $509,000. The resulting gross
profit of $342,000 helped to offset fixed costs for depreciation and operations
and maintenance at Semitropic.
OTHER PROJECTS
Vidler continues to be approached by parties who are interested in
obtaining a water supply, or discussing joint ventures to commercially develop
water assets and/or develop water storage facilities.
Recent examples include:
- a Water Resource Planning Memorandum of Understanding which was signed on
November 1, 2000 with the MUDDY RIVER IRRIGATION DISTRICT in Nevada. Under
the agreement, Vidler will work with the Irrigation District to maximize
the efficiency of its irrigation system, and then evaluate opportunities to
commercially utilize water which is surplus to agricultural needs;
- a Memorandum of Understanding which was signed on December 18, 2000 with
the City of SURPRISE, ARIZONA, for Vidler to conduct a feasibility study of
a joint venture water recharge project; and
- approaches to develop water rights in two states where Vidler does not
currently own assets.
SUMMARY
In 2001, Vidler's focus will be on:
- generating cash flow from the water rights in Nevada and Arizona through
lease agreements or the sale of water rights;
- leasing storage capacity to customers at the Vidler Arizona Recharge
Facility; and
- pursuing present and additional water rights applications and partnerships
to commercially develop water rights.
PROPERTY AND CASUALTY INSURANCE
Following several successive years of declining premium volume, in 2000
Sequoia Insurance Company generated 33.5% growth in direct written premiums to
$47.1 million. The increase in written premiums resulted from both growth in the
existing book of business, which was principally in commercial lines of
insurance, and the acquisition of Personal Express, which greatly expanded
Sequoia's business in personal lines of insurance.
From 1997 until 1999, intense competition in the California market led many
insurance companies to lower premiums in an attempt to attract business. In this
environment, given that our strategy is to price policies with the objective of
earning an underwriting profit, Sequoia declined to write policies which its
management felt were inadequately priced, even if this resulted in lower volume
overall. Faced with inadequate underwriting returns, during 1999 the focus of
many companies in the California market returned to adequate pricing of
policies, and some of our competitors began to raise premium rates.
Consequently, the rate of decline in Sequoia's premium volume steadily slowed
throughout 1999, before turning around to year-over-year growth from January
2000.
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Commercial insurance premium volume also benefited when A.M. Best Company,
a leading insurance company rating service, favorably re-rated Sequoia from
"B++" (Very Good) to "A-" (Excellent) in the second quarter. This allowed
Sequoia to compete for business in an additional market segment -- customers
which can only purchase coverage from "A" rated insurance companies.
In May 2000, Sequoia acquired Personal Express Insurance Services, Inc. for
approximately $3 million. Personal Express had few tangible assets, so the bulk
of the purchase price was recorded as goodwill, an intangible asset which is
being charged off over 10 years. Personal Express markets personal insurance
products to customers in the central California cities of Bakersfield and
Fresno. The acquisition is expected to add approximately $7.5 million in
additional premiums for Sequoia annually. Historically this block of business
has generated an underwriting profit.
In 2000, direct written premiums in commercial lines increased 17.8% to
$39.7 million. This included 29.1% growth to $21.4 million in the second half,
following the change in Sequoia's A.M. Best rating.
Direct written premium in personal lines began to increase markedly in the
second quarter as new revenues from Personal Express began. In mid-May, Sequoia
began to write new policies which were generated by the Personal Express
Bakersfield office. From July 1, the amount of premium written for Personal
Express customers increased significantly as Sequoia had the opportunity to
renew existing policies for clients of the Bakersfield office as these expired
with the former carrier. Reflecting a full contribution from Personal Express,
written premium in personal lines reached $6.4 million in the second half of
2000.
Due to the fixed nature of some costs, Sequoia's management anticipates
that operating expenses will increase at a slower rate than premium volume,
which should have the effect of reducing Sequoia's average operating expense per
policy and underwriting expense ratio.
In 2001, Sequoia expects to generate upwards of $50 million in direct
written premiums, with approximately 82% coming from commercial lines and
approximately 18% from personal lines.
During 1998 and 1999, Sequoia and Citation "pooled," or shared, most of
their premiums and expenses. This pooling arrangement was terminated from
January 1, 2000, and all business is now written directly by Sequoia. In
December 2000, Citation ceased writing business and is now "running off" the
claims reserves from business written in previous years.
Citation did not need to increase claims reserves in the
artisans/contractors line of business in 2000. In each of the preceding three
years, Citation had taken charges to increase claims reserves in this line of
business, including a pre-tax charge of $10.1 million in 1999.
If current claims trends continue, we believe that our loss reserves in
this line of business are adequate; however, if the trend in claims worsens in
the future, then additional charges could be required to increase reserves.
The artisan/contractors business was written under the previous management
of Citation. In fact, Citation ceased writing this type of insurance coverage in
1995, the year before the reverse merger with Physicians Insurance Company of
Ohio, and no artisans/contractors business was renewed after the merger. The
decline in the California real estate market in the early 1990's encouraged
property owners to try and improve their position by filing claims against
contractors and related parties for alleged construction defects. Citation's
average loss ratio (i.e., the cost of making provision to pay claims as a
percentage of earned premium) for all years from 1989 to 1995 for this insurance
coverage is over 375%. This experience is not unique to Citation, but is shared
by all insurers who wrote this type of coverage in California in the 1980's and
1990's.
MEDICAL PROFESSIONAL LIABILITY INSURANCE
Physicians Insurance Company of Ohio and The Professionals Insurance
Company are in "run off." This means that they are handling claims arising from
policies written in previous years, but not writing new policies. The funds to
pay claims come from the maturity and sale of investments, and, in some cases,
collections from reinsurance companies, i.e., insurers to whom we pay
reinsurance premiums to share in our claims risk. This segment is diminishing as
the level of claims reserves liabilities and investment assets decrease as
claims are paid and investments mature or are sold to provide the funds to make
the payments. Accordingly, it is anticipated that investment income, and
therefore revenue, in this segment will decline over time. We are attempting to
minimize segment overhead expenses as much as possible, and reduced both head
count and office space in 2000.
During 2000, our medical professional liability insurance claims reserves,
net of reinsurance, but before discount, decreased from $61.2 million to $51.6
million. We anticipate a slightly smaller decrease in 2001.
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There were no unusual trends in claims in 2000. The net effect of prior
year reserve development was a $1.1 million expense, which represented a
significant improvement from the two preceding years.
LONG TERM HOLDINGS
1. HYPERFEED TECHNOLOGIES, INC.
HyperFeed provides financial market data and data-delivery solutions to the
financial services industry.
PICO first invested in HyperFeed in 1995 through the purchase of common
stock. We invested further capital in HyperFeed as debt, which was later
converted to equity, and received warrants for providing financing. We recently
increased our investment in HyperFeed through purchases of common stock on the
open market. During December 2000, we purchased 232,000 shares for $391,000. At
December 31, 2000, we owned 2,602,000 shares of HyperFeed common stock. During
January 2001, we purchased a further 13,000 shares for $22,000, increasing our
holding to the current level of 2,615,000 common shares and 4,786,547 share
equivalents from convertible preferred shares. Our current voting ownership in
HyperFeed is approximately 36%.
Shares of HyperFeed closed 2000 at $1.5625. If we were to exercise all of
the HyperFeed warrants which we own, the cash cost of our investment would be
approximately $15.1 million, or $1.32 per HyperFeed share.
Since our initial investment in HyperFeed, the Company's revenues have
grown from $13.4 million in 1995 to $46.4 million in 2000.
For full year 2000, HyperFeed's revenues increased 40.2% to $46.4 million,
gross margin more than doubled to $16.8 million, EBITDA (earnings before
interest, taxes, depreciation and amortization) was $7.7 million, and the
company earned net income of $1.7 million.
In the fourth quarter of 2000, HyperFeed generated revenues of $10.7
million, gross margin of $4.5 million, $2.4 million in EBITDA, and net income of
$998,000. Although revenues declined by $1.6 million, or 13.3%, from the
preceding third quarter, net income actually increased $231,000, or 30.2%,
sequentially. HyperFeed explained that this was due to "internal cost
efficiencies implemented in 1999 and increased sales focus on higher margin
datafeed products and services."
PICO uses the equity method to account for this investment. HyperFeed
contributed equity income of $175,000 to Long Term Holdings segment in 2000.
2. JUNGFRAUBAHN HOLDING AG
During 2000, PICO's shareholding in Jungfraubahn increased slightly to
112,672 shares, which represents approximately 19.3% of the company. Due to our
percentage ownership, and because our Chairman, Ronald Langley, joined the Board
of Jungfraubahn during the year, we now account for our shareholding in
Jungfraubahn under the equity method. Our results for all periods presented in
these financial statements have been restated as if our investment had always
been carried under the equity method of accounting, beginning with our original
purchase in 1996.
PICO's equity share of Jungfraubahn's 2000 undistributed net income is
included in our total equity income of $1.8 million. Jungfraubahn will announce
its full year 2000 results later this year.
At December 31, 2000, our investment in Jungfraubahn had a cost basis of
$17.4 million, a market value of $18.9 million, and a net carrying value of
$21.7 million, after allowing for taxes.
On January 29, 2001, Jungfraubahn issued a press release containing an
initial review of 2000 operations. The full text is available on Jungfraubahn's
web-site www.jungfraubahn.ch. Jungfraubahn described the year 2000 as
"exceptional" with successful marketing initiatives leading to an 18% increase
in revenue from transporting passengers to approximately 84 million Swiss francs
(the equivalent of $US 51.2 million).
3. ACCU HOLDING AG
During 2000, PICO's shareholding in Accu Holding increased to 2,086
registered shares and 6,039 bearer shares, which represents a voting ownership
interest of approximately 28.3% of the company. Since PICO was not able to
obtain the necessary financial
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information, and did not have significant influence over Accu Holding's
activities in 2000, this investment is not accounted for under the equity
method, but carried at market value, with the unrealized after-tax gain or loss
being included in shareholders' equity.
At December 31, 2000, our investment in Accu Holding had a cost basis of
$4.7 million, a market value of $4.9 million, and a net carrying value of $4.9
million, after allowing for taxes.
Accu Holding manufactures batteries at two plants in Switzerland.
4. AUSTRALIAN OIL AND GAS CORPORATION LIMITED
During the year we purchased 981,584 shares in AOG, lifting our
shareholding to 8,426,044 shares, representing approximately 18% of the company
at December 31, 2000. The investment is carried at market value, with the
unrealized after-tax gain or loss being included in shareholders' equity.
At December 31, 2000, our investment in AOG had a cost basis of $7.6
million, a market value of $8.2 million, and a net carrying value of $8 million
after allowing for taxes on the unrealized gain. This investment was funded in
US dollars. To this point, depreciation in the Australian dollar relative to the
US dollar has offset part of the unrealized gain in local Australian currency
terms.
On February 20, 2001, AOG reported its results for the six months to
December 31, 2000 ($A1.00 = $US0.5592). For the half-year, AOG's revenues
increased 93% to $A59.7 million, and the company earned net income of $A3
million, or $A0.064 per share. The accompanying letter to shareholders ended
with the statement that "The current contract book is satisfactory and barring
unforeseen events the likelihood of maintaining and improving upon the present
positive results is excellent."
Rig utilization averaged 54% for the half-year; however, late in the
period, on November 24, 2000, AOG indicated in an announcement to the Australian
Stock Exchange that "rig utilization has now reached 70%."
5. CONEX CONTINENTAL, INC.
On September 8, 2000, PICO sold its investment in Conex for a nominal sum,
realizing a pre-tax loss of $4.6 million, which is included in realized
investment losses in the third quarter and full year results. After allowing for
related taxes, the realized loss on sale was $1.8 million.
Conex's principal asset is a 60% interest in Guizhou Jonyang Machinery
Industry Limited, a joint venture which manufactures wheeled and tracked
hydraulic excavation equipment in the Guizhou province of the People's Republic
of China. Despite significant restructuring efforts, improved product quality,
and domestic market share of over 90% for wheeled excavators, the joint venture
was unable to achieve profitability. As a result of the sale of the investment
in Conex, PICO no longer records a $4.5 million liability which had previously
been included in our financial statements to reflect a commitment to fund a
third round of financing for the joint venture.
6. SISCOM, INC.
We have been building our investment in SISCOM since 1996, which culminated
in SISCOM becoming a consolidated subsidiary in 1999. We now own 4,431,000
common shares and 1,250,000 convertible preferred shares in SISCOM, which
represents 54.7% of SISCOM's voting stock.
SISCOM is in the process of a capital restructuring. Pending transactions
to convert debt to equity, which are expected to close in the first half of
2001, PICO will own more than 85% of SISCOM common stock, and more than 60% of
the Company on a fully-diluted basis.
SISCOM is a software developer and systems integrator for video-based
content management systems for the professional broadcast, sports, and
entertainment industries. SISCOM's proprietary technology includes integrated
tools for real-time logging, data management, archive management, browsing,
search and retrieval, and analytics/data mining tools.
SISCOM contributed a segment loss of $1.6 million to PICO in 2000, and a
net loss of approximately $1.1 million after taxes and minority interest.
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7. MENDELL TECHNOLOGIES, INC.
In the first quarter of 2000, Mendell Technologies, Inc., a private oil and
gas company, acquired our subsidiary Prospect Oil & Gas, Inc. for $1 million in
stock. Prospect Oil & Gas, Inc. was engaged in precision horizontal drilling in
proven oil and gas fields in North Dakota.
We currently own 49.5% of the voting stock in Mendell, and use the equity
method to account for the investment. In 2000, a pre-tax loss of $516,000 was
recorded in the Long Term Holdings segment, being our equity share of Mendell's
2000 net loss. At December 31, 2000, the investment in Mendell has a carrying
value of $657,000 after allowing for related taxes.
Mendell is currently attempting to raise additional capital from new
investors to develop several oil and gas interests.
8. OTHER
Other assets in the Long-Term Holdings segment include:
- 2,500,000 common shares and 1 million warrants in Solpower
Corporation, a publicly-traded Arizona-based distributor and
manufacturer of refrigerant gas and fuel additives, which had a
carrying value after taxes of $1.1 million at December 31, 2000;
- a 50% interest in Protocol Resource Management, Inc., the largest
refrigerant repackager in Canada, which is owned in conjunction with
Solpower. PICO paid approximately $338,000 for its shareholding, and
loaned $500,000 to Solpower to acquire the other 50% and for working
capital; and
- short term advances of $2.2 million to Dominion Capital Pty. Limited,
Solpower's major shareholder, which are due to be repaid in 2001.
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RESULTS OF OPERATIONS -- YEARS ENDED DECEMBER 31, 2000, 1999, AND 1998
SUMMARY
PICO reported a net loss of $9.5 million, or $0.82 per diluted share, in
2000, compared with a net loss of $6.8 million, or $0.76 per diluted share, in
1999, and a net loss of $7.9 million, or $1.32 per diluted share, in 1998. The
weighted average number of shares outstanding in 2000 includes new shares issued
in the rights offering at $15.00 per share in March 2000. The weighted average
number of shares outstanding in 1998 includes new shares issued to acquire the
minority shareholdings in Global Equity Corporation on December 16, 1998.
Per-share calculations for 1998 have also been adjusted to reflect the 1-for-5
reverse stock split which followed the PICO/Global Equity Corporation
combination.
At December 31, 2000, PICO had shareholders' equity of $205.2 million, or
$16.56 per share, compared to $173.4 million, or $19.15 per share, at the end of
1999. The principal factors leading to the $31.8 million increase in
shareholders' equity were:
- a $49.8 million increase from the new equity capital raised through the
rights offering;
- a $4.6 million decrease from the 2000 net loss from continuing operations;
- a $5 million decrease resulting from the elimination of accumulated
discount on medical professional liability claims reserves;
- a decrease of $7.6 million from net unrealized after-tax depreciation in
investments. This is primarily due to a decrease in the carrying value of
our HyperFeed warrants. As explained in Item 1, on page 9, we are required
to carry the HyperFeed, at estimated fair value, which introduces
volatility to our reported shareholders' equity; and
- a decrease of $963,000 from unrealized foreign currency translation loss.
Total assets at December 31, 2000 were $395.1 million, compared to $380
million at December 31, 1999. Total assets increased due to the $49.8 million in
new equity capital raised in the rights offering during the first quarter. As
the year progressed, Vidler utilized part of the money raised in the rights
offering to acquire water-righted properties and develop its existing water
rights and water storage assets. The increase in assets was partly offset by the
payment of claims by our insurance subsidiaries, which reduced both insurance
liabilities and the corresponding assets, and by the sale of land and water
rights at Nevada Land.
PICO reported a net loss of $9.5 million in 2000. The net loss from
operations of $4.6 million consisted of a $13.5 million pre-tax loss, which was
partially offset by $8.2 million in income tax benefits and the addition of
$717,000 to reflect the interest of minority shareholders in the losses of
subsidiaries which are less than 100%-owned by PICO. In addition, the cumulative
effect of a change in accounting principle reduced income by $5 million
after-tax. Until December 31, 1999, PICO had discounted the carrying value of
its medical professional liability claims reserves, to reflect the fact that
some claims will not be paid until many years in the future, but funds from the
corresponding premiums can be invested in the meantime. After December 31, 1999,
PICO's medical professional liability insurance subsidiaries were no longer
allowed to discount claims reserves in the statements they file with the Ohio
Department of Insurance, which are prepared on the statutory basis of
accounting. With this change in accounting principle, we have also eliminated
the discounting in our financial statements which are prepared on a GAAP basis
(i.e., generally accepted accounting principles).
In 1999, the $6.8 million net loss was comprised of a $20.5 million
before-tax loss, which was partially offset by the addition of $12.5 million in
income tax benefits, $706,000 in minority interest, and a $442,000 after-tax
extraordinary gain. This compares to a $12 million loss from continuing
operations in 1998, prior to the deduction of $1.5 million in income tax expense
and the addition of $4.5 million of minority interest and $1.1 million in income
from discontinued operations.
The $8.2 million in tax benefits recorded in 2000 is made up of several
items. These include a $4.4 million cash refund resulting from the successful
appeal of a prior year tax ruling in Canada, and a $3.3 million expense which
was recognized to increase federal income tax valuation allowances recorded
against tax assets in some of our subsidiaries. In 1999, $12.5 million of income
tax benefits were recognized, including an $8.4 million reduction in valuation
allowances that had previously been recorded to reduce income tax assets. Of
this amount, $6.5 million became available as a result of changes in federal
income tax legislation in 1999.
In June 1997, the Financial Accounting Standards Board established
standards for disclosure of comprehensive income, which PICO adopted in 1998.
Comprehensive income includes more than just the income reported in the
statement of operations. For PICO, it also includes foreign currency translation
and the change in unrealized investment gains and losses on securities which are
available for sale.
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PICO incurred an $18 million comprehensive loss in 2000. This was comprised
of the $9.5 million net loss, net unrealized depreciation in investments of $7.6
million after-tax, and negative foreign currency translation of $963,000. A $3.2
million comprehensive loss was recorded in 1999, consisting of a $6.8 million
net loss, a $28,000 decrease due to foreign currency translation, and a
partially offsetting $3.7 million net unrealized gain in investments. In 1998,
PICO incurred an $11 million comprehensive loss, consisting of a $7.9 million
net loss, $415,000 in net unrealized depreciation in investments, and negative
foreign currency translation of $2.7 million.
Detailed information on the performance of each segment is contained later
in this report; however, the principal items in the 2000 $13.5 million loss from
continuing operations before taxes and minority interest were:
Land, Minerals and Related Water Rights
- income of $1.9 million from Nevada Land on revenues of $5.3 million, which
included $3.7 million in land sales and a $270,000 gain from a land
exchange transaction;
Water Rights and Water Storage
- Vidler generated $3.1 million in revenues and incurred a pre-tax loss of
$4.9 million. The operating loss decreased by $296,000 as higher revenues
from leasing agricultural land and the sale of water at Semitropic exceeded
increases in depreciation, financing, and operating expenses; however, the
reduced operating loss was more than offset by a $1.2 million loss on the
sale of land and tunnel assets related to water rights sold during the
year;
Property and Casualty Insurance
- segment income of $2.5 million, consisting of a $1.3 million pre-tax profit
from Sequoia and $1.2 million from Citation;
Medical Professional Liability Insurance
- a pre-tax profit of $768,000;
Long Term Holdings
- equity income of $1.8 million, being PICO's share of the net income and
other events affecting shareholders' equity in Jungfraubahn, HyperFeed and
other companies which we account for under the equity method;
- realized losses of approximately $7.6 million, including a $4.6 million
pre-tax loss on the sale of PICO's investment in Conex and a $2.5 million
write-down of our investment in MKG Enterprises;
- an operating loss of $2.3 million from Conex prior to its sale and a $1.5
million operating loss from SISCOM; and
- other net costs of approximately $5.5 million.
Revenues and income before taxes and minority interests from continuing
operations, by business segment, were:
OPERATING REVENUES--CONTINUING OPERATIONS:
YEAR ENDED DECEMBER 31,
----------------------------------------------------------------
2000 1999 1998
------------- ------------- -------------
Land, Minerals and Related Water Rights $5,276,000 $7,147,000 $2,467,000
Water Rights and Water Storage 3,123,000 1,056,000 942,000
Property and Casualty Insurance 39,257,000 39,960,000 42,927,000
Medical Professional Liability Insurance 3,396,000 3,121,000 2,420,000
Long Term Holdings (5,699,000) 3,204,000 (1,519,000)
------------- ------------- -------------
Total Revenues - Continuing Operations $45,353,000 $54,488,000 $47,237,000
============= ============= =============
In 2000, total revenues were $45.4 million, compared to $54.5 million in
1999 and $47.2 million in 1998. The principal factors leading to the $7.3
million increase in revenues from 1998 to 1999 were higher land sales at Nevada
Land and the recognition of a net realized investment gain in the Long Term
Holdings segment in 1999, as opposed to a net realized loss in 1998. These
revenue increases were partly offset by lower earned premiums in the Property
and Casualty Insurance segment. From 1999 to 2000, revenues declined by $9.1
million, primarily due to the recognition of a $7.6 million net realized
investment loss in the Long Term Holdings segment in 2000, as opposed to a
$626,000 net realized gain in 1999.
Total expenses in 2000 were $60.6 million, compared to $73.9 million in
1999 and $58.4 million in 1998. The largest expense item in each of the past 3
years was loss and loss adjustment expense in our insurance businesses i.e., the
cost of making provision to
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pay claims. In 2000, loss and loss adjustment expense was $24 million, compared
to $35.2 million in 1999 and $30.5 million in 1998. In 1999 and 1998, loss and
loss adjustment expenses were inflated by the need to strengthen reserves in
both the medical professional liability segment and in Citation's
artisan/contractors liability book of business.
INCOME (LOSS) BEFORE TAXES AND MINORITY INTEREST--CONTINUING OPERATIONS:
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------
2000 1999 1998
-------------- -------------- -------------
Land, Minerals and Related Water Rights $ 1,918,000 $1,094,000 $ 204,000
Water Rights and Water Storage (4,854,000) (3,947,000) (2,050,000)
Property and Casualty Insurance 2,541,000 (3,679,000) 2,825,000
Medical Professional Liability Insurance 768,000 (4,805,000) (4,442,000)
Long Term Holdings (13,853,000) (9,151,000) (8,525,000)
-------------- -------------- -------------
Total Revenues - Continuing Operations $(13,480,000) $(20,488,000) $11,988,000
============== ============== =============
LAND, MINERALS AND RELATED WATER RIGHTS
NEVADA LAND & RESOURCE COMPANY, LLC
Year Ended December 31,
----------------------------------------------------------------
2000 1999 1998
------------- ------------- -------------
REVENUES:
Sale of Land $3,725,000 $5,432,000 $1,652,000
Sale of Water Rights 244,000 379,000 40,000
Gain on Land Exchange 270,000
Lease and Other Income 1,037,000 1,336,000 775,000
------------- ------------- -------------
Segment Total Revenues $5,276,000 $7,147,000 $2,467,000
============= ============= =============
EXPENSES:
Cost of Land and Water Rights Sold (1,751,000) (4,273,000) (727,000)
Operating Expenses (1,607,000) (1,780,000) (1,536,000)
------------- ------------- -------------
Segment Total Expenses $(3,358,000) $(6,053,000) $(2,263,000)
============= ============= =============
------------- ------------- -------------
INCOME BEFORE TAX $1,918,000 $1,094,000 $ 204,000
============= ============= =============
Nevada Land generated revenues of $5.3 million in 2000, compared to $7.1
million in 1999, and $2.5 million during 1998. Fluctuations in the level of land
sales caused most of the variation in revenue from year to year.
In 2000 we recorded $3.7 million in revenues from the sale of 28,245 acres
of land, compared to $5.4 million from the sale of 48,715 acres in 1999, and
$1.7 million from the sale of 5,866 acres in 1998.
In 2000, Nevada Land completed its first major land exchange transaction,
in which we exchanged 25,828 acres of land for assets with an exchange value of
approximately $1.3 million, or $52 per acre. The consideration received
consisted of $430,000 in cash and 17,558 acres of land, which we believe will be
more readily marketable, with an exchange value of $913,000. The revenue
recorded as a result of this transaction was the $270,000 net gain on the cash
portion of the total exchange value (i.e., approximately 32%). This gain
represents the difference between the cash received and our basis in
approximately 32% of the land given up in the exchange. No gain was recognized
on the portion of the exchange value for which land was received (i.e.,
approximately 68%). Any gain related to the land received will be recorded when
that land is sold.
Also during 2000 we sold 61 acre-feet of certificated water rights for
$244,000, compared to revenues of $379,000 from the sale of 125 acre-feet of
certificated water rights in 1999, and $40,000 from the sale of 8 acre-feet of
certificated water rights in 1998.
Lease and other income amounted to $1 million in 2000, $1.3 million in
1999, and $775,000 in 1998. Most of this revenue comes from land leases,
principally for grazing, agricultural, communications, and easements, which
totaled $608,000 in 2000, $737,000 in 1999, and $440,000 in 1998.
After deducting the cost of land sold, the gross margin on land sales
increased from $926,000 in 1998 to $1.5 million in 1999 and $2.2 million in
2000.
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Operating expenses were little changed over the three year period, at $1.5
million in 1998, $1.8 million in 1999, and $1.6 million in 2000.
Nevada Land recorded income of $1.9 million in 2000, compared to $1.1
million in 1999 and $204,000 in 1998. In 2000, segment income was $824,000
higher than 1999, principally due to a $685,000 higher gross profit from land
sales and the $270,000 net gain from the land exchange transaction. The $890,000
increase in segment income between 1998 and 1999 resulted from a $594,000
increase in gross profit from the sale of land, and lease and other revenues
growing at a faster pace than operating expenses.
WATER RIGHTS AND WATER STORAGE
VIDLER WATER COMPANY, INC.
Year Ended December 31,
-----------------------------------------------------------------
2000 1999 1998
------------ ------------ ------------
REVENUES:
Sale of Water Rights $1,000,000 $ 270,000 $ 550,000
Sale of Water 509,000
Water Service 188,000 185,000 245,000
Agricultural Leases 959,000 477,000 144,000
Other 467,000 124,000 4,000
------------ ------------ ------------
Segment Total Revenues $3,123,000 $1,056,000 $ 943,000
============ ============ ============
EXPENSES:
Cost of Sales 2,244,000 185,000 350,000
Operations & Maintenance 3,312,000 2,944,000 216,000
Depreciation & Amortization 988,000 810,000 160,000
Interest 821,000 678,000 131,000
Other 612,000 386,000 2,136,000
------------ ------------ ------------
Total Expenses 7,977,000 5,003,000 $2,993,000
============ ============ ============
------------ ------------ ------------
LOSS BEFORE TAX $(4,854,000) $(3,947,000) $(2,050,000)
============ ============ ============
We entered the water business with the understanding that most of the
assets we acquired were not ready for immediate commercial use. There has been a
considerable lead-time in developing and commercializing these assets. While we
believe that considerable value has been created from these efforts, this is not
reflected in our financial statements because the Company's most significant
assets did not begin to generate cash flow until the first quarter of 2001.
During the investment and building phase, the segment incurred costs associated
with the development and acquisition of assets which would not generate positive
cash flow and earnings until future years.
Vidler generated total revenues of $3.1 million in 2000, compared to $1.1
million in 1999, and $943,000 in 1998.
To this point, the bulk of recurring segment revenue has come from leasing
agricultural land in Arizona. Over the past three years, revenue from leasing
agricultural land has climbed each year as Vidler continued to purchase farm
properties and the related water rights in the Harquahala Valley, and lease the
land to farmers. Agricultural lease revenues rose from $144,000 in 1998 to
$477,000 in 1999 and $959,000 in 2000.
Over the past three years, Vidler has sold water rights and related assets
which were not essential to its strategy in Nevada and Arizona. In 1998, the
Company sold the Sylvan Reservoir in Colorado for $550,000. In 1999, Vidler sold
300 acre-feet of priority water rights at Wet Mountain, Colorado for $270,000.
In 2000, Vidler sold water rights and the related land and tunnel assets to the
City of Golden, Colorado for $1 million. Due to the potential for significant
capital outlays for repairs and maintenance, Vidler management decided to
dispose of the land and tunnel assets in conjunction with the water rights, even
though this resulted in a loss of $1.2 million being recognized on the sale of
the land and tunnel assets. It is anticipated that lease or sale of the
remaining Colorado water rights will result in a modest overall return.
Revenues for 2000 also included $509,000 from the sale of 3,691 acre-feet
of water which Vidler had banked at Semitropic. This sale resulted in a gross
profit of $342,000, which helped to offset fixed costs for depreciation and
operations and maintenance at Semitropic.
26
27
Vidler generated water service revenue of $245,000 in 1998, $185,000 in
1999, and $188,000 in 2000, from leasing some of the company's Colorado water
rights. These assets are leased in perpetuity. The lease payments are indexed
for inflation, with a minimum annual escalation of 3%. Once assets have been
leased in perpetuity, they cannot be leased again unless the lease is canceled,
where that is possible.
Segment expenses, including the cost of water rights and other assets sold,
increased from $3 million in 1998 to $5 million in 1999 and $8 million in 2000.
Excluding the cost of water rights and other assets sold, operating expenses
were $2.6 million in 1998, $4.8 million in 1999, and $5.7 million in 2000. The
increase in operating costs primarily resulted from the growth in Vidler's asset
base, including expenses related to individual projects (e.g., depreciation and
interest) which were recorded prior to the related revenues being earned.
The segment loss grew from $2.1 million in 1998, to $3.9 million in 1999,
and $4.9 million in 2000.
The $907,000 increase in segment loss from 1999 to 2000 was caused by the
$1.2 million realized loss on the sale of the land and tunnel assets described
above. Excluding this item, the segment loss declined by $296,000, primarily due
to the $342,000 gross profit on the sale of Semitropic water and $482,000 higher
agricultural lease revenues, which were partially offset by higher charges for
depreciation, interest, and other expenses.
The principal factors in the $1.9 million increase in segment loss from
1998 to 1999 were $1.5 million higher expenses related to Semitropic, $547,000
of additional interest expense on non-recourse financing to purchase land and
the associated water rights in the Harquahala Valley, and $645,000 higher
personnel and operating expenses.
PROPERTY AND CASUALTY INSURANCE
Year Ended December 31,
-----------------------------------------------------------------
2000 1999 1998
------------- ------------- -------------
P&C INSURANCE REVENUES:
Earned Premiums - Sequoia $32,741,000 $16,932,000 $18,145,000
Earned Premiums - Citation (158,000) 17,507,000 18,145,000
Net Investment Income 5,381,000 4,951,000 5,501,000
Realized Investment Gains 172,000 (186,000) 236,000
Other 1,121,000 756,000 900,000
------------- ------------- -------------
Segment Total Revenues $39,257,000 $39,960,000 $42,927,000
============= ============= =============
P&C INSURANCE INCOME (LOSS) BEFORE TAXES:
Sequoia Insurance Company $1,344,000 $2,207,000 $3,598,000
Citation Insurance Company 1,197,000 (5,886,000) (773,000)
------------- ------------- -------------
Total P&C Income (Loss) Before Taxes $2,541,000 $(3,679,000) $2,825,000
============= ============= =============
The Property & Casualty Insurance segment generated total revenues of $39.3
million in 2000, compared to $40 million in 1999, and $42.9 million in 1998.
Most revenues in this segment come from earned premiums. When an insurance
company writes a policy, the premium charged is referred to as "written"
premium; however, the premium is recognized as revenue, or "earned," evenly over
the term of the policy. Therefore, there is a lag between changes in written
premium and the resulting change in earned premium.
As explained on page 18, the amount of premium "written" by Sequoia and
Citation declined in 1997, 1998, and 1999, leading to a corresponding decrease
in segment "earned" premium from $36.3 million in 1998, to $34.4 million in
1999, and $32.6 million in 2000. During 1998 and 1999, Sequoia and Citation
"pooled," or shared, most of their premiums and expenses. This pooling
arrangement was terminated from January 1, 2000, and all business has been
transitioned to Sequoia, which accounts for the near doubling in Sequoia's
earned premiums in 2000. In December 2000, Citation ceased writing business and
is now "running off" the claims reserves from business written in previous
years.
Due to the lag between changes in written premium and earned premium, the
effect of the increased volume in Sequoia's commercial insurance business, the
increase in Sequoia's A.M. Best rating, and the acquisition of Personal Express,
will not be fully reflected in Sequoia's reported results until 2001.
27
28
Investment income represents interest earned from cash and cash equivalents
and fixed-maturity securities, and dividends received from stocks held in the
insurance company portfolios. During 2000, the average income yield on the bond
portfolio increased due to both the higher prevailing level of interest rates
and a refocusing onto high-grade corporate issues. This led to an 8.7% increase
in segment investment income to $5.4 million. The segment investment income had
declined from $5.6 million in 1998 to $5 million in 1999 because the decline in
written premium volume reduced the pool of assets available for investment.
The Property and Casualty Insurance segment produced $2.5 million of income
before taxes in 2000, compared to a $3.7 million loss before taxes in 1999, and
before-tax income of $2.8 million in 1998. Most of the variance between years is
due to the 1999 segment loss, which was caused by a $10.1 million pre-tax charge
to strengthen Citation's claims reserves, principally in the artisan/contractors
line of business. Citation ceased writing this type of coverage in 1995, the
year before the reverse merger with Physicians Insurance Company of Ohio.
The 2000 $2.5 million segment profit was comprised of a $1.3 million
pre-tax profit from Sequoia and a $1.2 million pre-tax profit from Citation. The
individual results of Sequoia and Citation cannot be directly compared to
previous years due to the termination of the pooling agreement, and the
acquisition of Personal Express.
The operating performance of insurance companies is frequently analyzed
using their "combined ratio." A combined ratio below 100% indicates that the
insurance company made a profit on its base insurance business, prior to
investment income, realized gains or losses, taxes, extraordinary items, and
other non-insurance items.
Sequoia manages its business so as to have a combined ratio of less than
100% each year; however, this is not always achieved. Sequoia's combined ratio,
determined on the basis of generally accepted accounting principles, for the
past 3 years have been:
SEQUOIA'S GAAP INDUSTRY RATIOS
--------------------------------------------------------------------
2000 1999 1998
-------- -------- --------
Loss and LAE Ratio 67.6% 53.5% 52.3%
Underwriting Expense Ratio 38.6% 46.3% 43.4%
-------- -------- --------
Combined Ratio 106.3% 99.8% 95.7%
--------------------------------------------------------------------
In 2000, Sequoia earned $32.7 million in premiums. This is primarily
composed of $29.8 million from commercial lines and $2.9 million from personal
lines, which includes some initial revenues from Personal Express. During 2000
Sequoia experienced higher claims costs than it has in recent years. Sequoia
management believes this is principally due to premium rates not keeping up with
the rate of increase in costs such as construction, medical care, and automobile
repair. This resulted in a loss and loss adjustment expense ratio (i.e., the
cost of making provision to pay claims as a percentage of earned premiums) of
67.6% in 2000, compared to 53.5% in 1999, and 52.3% in 1998. This included
additional expense in 2000 to recognize unfavorable development in prior year
loss reserves of $252,000, compared to favorable development of $401,000 in
1999, and favorable development of $2.1 million in 1998. The higher loss ratio
was partially offset by a lower underwriting expense ratio (i.e., operating
expenses as a percentage of earned premiums) of 38.6% in 2000, compared to 46.3%
in 1999, and 43.4% in 1998. The reduction in the underwriting expense ratio in
2000 was due to:
(1) economies of scale. Following the termination of the pooling agreement
with Citation, Sequoia's earned premiums increased 93.4% for the year. This
meant that fixed underwriting expense items were spread over a larger base of
revenue, therefore reducing them as a percentage of revenue; and
(2) Sequoia began to earn premiums from Personal Express. Sequoia does not
pay commission on Personal Express business, so commission expense fell as a
percentage of revenue.
For 2000, Sequoia's combined ratio was 106.3%, compared to 99.8% in 1999,
and 95.7% in 1998.
In 2000, Citation reported negative earned premiums of $158,000. Although
Citation earned $564,000 in property and casualty premiums, this was more than
offset by a $722,000 reduction in earned premium revenues related to
reinsurance. This represented additional reinsurance on contracts for 1998 and
prior years where the premium paid by Citation depends on loss experience in the
reinsured business. Under GAAP, reinsurance is recorded as a reduction in earned
premiums. Citation changed to fixed rate reinsurance contracts in 1999.
Favorable reserve development of $282,000 contributed to Citation earning a
$1.2 million pre-tax profit for the year. Since Citation reported negative
earned premiums in 2000, and is now in "run off," its Combined Ratio is no
longer meaningful.
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29
The 1999 $3.7 million segment loss consisted of $2.2 million in income from
Sequoia, which was more than offset by a $5.9 million loss from Citation.
In 1998, the segment income of $2.8 million consisted of $3.6 million in
income from Sequoia, which was partially offset by an $773,000 loss from
Citation. Sequoia's reported profit benefited from $2.1 million of favorable
claims experience, which was partially offset by an estimated $1 million in
additional claims due to the 1997-1998 "El Nino" weather pattern. Citation's
$773,000 loss was caused by $3.7 million of unfavorable claims experience in the
artisans/contractors line of business.
Segment policy acquisition costs were $11.7 million in 2000, compared to
$9.8 million in 1999, and $11.2 million in 1998. The largest component,
commissions to agents, was $7.2 million in 2000, $5.6 million in 1999, and $6.7
million in 1998. The level of agent commissions fluctuates depending on the
amount of direct written premium. Other acquisition expenses totaled $4.6
million in 2000, $4 million in 1999, and $4.5 million in 1998. These include
non-insurance expenses such as salaries and benefits, and sales and marketing.
MEDICAL PROFESSIONAL LIABILITY INSURANCE
Year Ended December 31,
---------------------------------------------------------------
2000 1999 1998
--------------- --------------- ----------------
MPL REVENUES:
Net Investment Income $1,543,000 $1,180,000 $2,579,000
Other 1,853,000 1,941,000 (159,000)
--------------- --------------- ----------------
Segment Total Revenues $3,396,000 $3,121,000 $2,420,000
=============== =============== ================
Loss and Loss Adjustment Expenses (1,064,000) (6,599,000) (5,628,000)
Other Expenses (1,565,000) (1,327,000) (1,234,000)
--------------- --------------- ----------------
SEGMENT TOTAL EXPENSES (2,628,000) (7,926,000) (6,862,000)
=============== =============== ================
INCOME (LOSS) BEFORE TAXES $ 768,000 $(4,805,000) $(4,442,000)
=============== =============== ================
Medical professional liability insurance segment revenues were $3.4 million
in 2000, compared to $3.1 million in 1999, and $2.4 million in 1998. Although
most of the revenues of an insurance company in "run off" come from investment
income, a minor amount of earned premium can arise, for example from the
recalculation of reinsurance premiums based upon loss experience.
Investment income has been declining--from $2.6 million in 1998, to $1.2
million in 1999, and $1.5 million in 2000--because the amount of
income-generating investments held by Physicians and Professionals has decreased
as claims are paid.
The largest component of other revenue is earned premiums, which were $1.9
million in 2000, $1.9 million in 1999, and negative $159,000 in 1998.
Loss and loss adjustment expenses were $1.1 million in 2000, $6.6 million
in 1999, and $5.6 million in 1998. Other operating expenses were $1.6 million in
2000, $1.3 million in 1999, and $1.2 million in 1998.
Medical professional liability operations produced $768,000 of income
before taxes in 2000, compared to losses in the two preceding years of $4.8
million in 1999 and $4.4 million in 1998, when results were adversely affected
by the need to increase loss and loss adjustment expense reserves. A $1.1
million net increase in reserves was required in 2000. As well, reserves
increased by $7.5 million due to the elimination of reserve discount included in
the cumulative effect of change in accounting principle. Positive income was
recorded following the return of approximately $1.9 million in premium for
reinsurance which actuarial analysis indicated was not required.
Until December 31, 1999, we discounted our medical professional liability
claims reserves to reflect the fact that some claims will not be paid until
future years, but funds from the corresponding premiums can be invested in the
meantime. In each quarter until December 31, 1999, a portion of this discount
was removed and recognized as an expense called "reserve discount accretion."
From January 1, 2000, we ceased discounting our reserves to be consistent with
the accounting treatment in our statutory financial statements, which no longer
permitted us to discount after December 31, 1999. The elimination of discounting
resulted in a $5 million after-tax charge to income, which is shown in the
"Cumulative Effect of Change in Accounting Principle" line in our Consolidated
Statement of Operations. See Notes 14 and 24 of Notes to Consolidated Financial
Statements.
29
30
The additions to reserves in 1999 and 1998 were based upon actuarial
analysis which indicated some deterioration of Physicians' loss experience
(i.e., a greater than expected number and/or amount of claims, resulting in a
greater than expected liability to pay claims) in most coverage years.
In 1999, we took a pre-tax charge to increase Physicians Insurance Company
of Ohio's loss reserves by $5 million, or $3.8 million after discounting to
reflect the time value of money. The addition to claims reserves was necessary
because of a higher than expected number of claims (increased "frequency"). This
was compounded by the fact that many of the claims were for smaller than
expected amounts (reduced "severity"), causing more of them to fall below our
reinsurance deductibles (i.e., the initial part of each claim which is not
covered by reinsurance). This meant that Physicians had to pay a greater
proportion of each claim, and that we could not recover as much as previously
anticipated from reinsurance.
The negative effect of the increased number of claims exceeded the positive
effect of the smaller average amount claimed. This resulted in a $2 million
increase in direct and assumed loss and loss adjustment expense reserves, a $3.6
million decrease in ceded (transferred) reinsurance reserves, and a $560,000
increase in general reserves for the future adjustment of claims (unallocated
loss adjustment expense). As well as these additions to reserves, claims
payments in excess of established reserves throughout 1999 and loss reserve
discount accretion added $3.3 million to 1999 incurred losses and loss
adjustment expenses. These increases were partially offset by the recovery of
$1.9 million in reinsurance premiums due to the reduction in ceded loss
reserves, and $1.2 million from the discounting of these reserve increases.
In 1998, approximately $5 million was added to loss and loss adjustment
expense reserves after actuarial analysis indicated deterioration in Physicians'
loss experience in most prior years. The principal factor causing the
deterioration was an increased number of a new type of claim, related to
patients who were allegedly injured as minors but who could not take action
until they reached the legal age of adulthood. No significant unusual activity
was noticed in this area in 1999 or 2000.
Physicians' own claims department staff continues to process the run off of
the remaining medical professional liability loss and loss adjustment expense
claims. As the "run off" continues, overhead costs are being minimized as much
as possible.
At December 31, 2000, medical professional liability reserves totaled $51.6
million net of reinsurance. This compares to $53.7 million at December 31, 1999,
and $61.5 million at December 31, 1998, net of reinsurance and discount.
MEDICAL PROFESSIONAL LIABILITY INSURANCE -- LOSS AND LOSS EXPENSE RESERVES
Year Ended December 31,
---------------------------------------------------------
2000 1999 1998
------------- ------------- -------------
Direct Reserves $58.6 million $81.6 million $97.1 million
Ceded Reserves (7.0) (20.4) (27.1)
Discount of Net Reserves (7.5) (8.5)
------------- ------------- -------------
Net Medical Professional Liability Insurance Reserves $51.6 million $53.7 million $61.5 million
============= ============= =============
Although, as required by Ohio insurance regulations, our medical
professional liability insurance reserves are certified annually by two
independent actuaries, significant fluctuations in reserve levels can occur
based upon a number of variables used in actuarial projections of ultimate
incurred losses and loss adjustment expenses.
LONG TERM HOLDINGS
Year Ended December 31,
---------------------------------------------------------
2000 1999 1998
-------------- ------------- -------------
LONG TERM HOLDINGS REVENUES (CHARGES):
Realized Investment Gains (Losses) $(7,623,000) $ 626,000 $(4,455,000)
Investment Income 988,000 505,000 1,924,000
Other 936,000 2,073,000 1,012,000
-------------- ------------- -------------
Segment Total Revenues $(5,699,000) $3,204,000 $(1,519,000)
============== ============= =============
SEGMENT TOTAL EXPENSES (9,948,000) (11,329,000) (6,226,000)
-------------- ------------- -------------
LOSS BEFORE INVESTEE INCOME $(15,647,000) $(8,125,000) $(7,745,000)
Equity Share of Investee's Net Income 1,794,000 (1,026,000) (780,000)
-------------- ------------- -------------
LOSS BEFORE TAXES $(13,853,000) $(9,151,000) $(8,525,000)
============== ============= =============
30
31
The Long Term Holdings segment recorded negative revenues of $5.7 million
in 2000, compared to revenues of $3.2 million in 1999, and negative revenues of
$1.5 million in 1998. Revenues in this segment vary considerably from year to
year, primarily because of fluctuations in net realized gains or losses on the
sale of investments. PICO does not sell investments on a regular basis, but when
the price of an individual security has significantly exceeded our target, or if
there have been changes which we believe limit further appreciation potential on
a risk-adjusted basis. Consequently, the amount of net realized gains or losses
recognized during any accounting period has no predictive value.
A net realized investment loss of $7.6 million was recorded in 2000. The
principal components were a $4.6 million loss on the sale of Conex, a $2.5
million write-down of the loan to MKG Enterprises to realizable value, and a
$562,000 loss when a former employee exercised an option which required PICO to
sell existing shares in Vidler for less than current book value. When PICO
acquired Vidler in the merger with Global Equity Corporation, call options had
already been granted to certain employees over existing shares in Vidler. All of
these call options have now been exercised.
Realized gains from the sale of securities from the Company's European
portfolio were recorded in both 1999 and 1998. In 1999, these gains were
partially offset by the $3.2 million write-down of an investment in an oil and
gas investment, resulting in net realized gains of $626,000. In 1998, realized
gains were more than offset by $8.2 million in write-downs. These consisted of a
$3 million reduction in the carrying value of our investment in MKG Enterprises,
$2.9 million related to Sri Lankan securities received by Global Equity when it
sold its Sri Lankan subsidiary, and $2.2 million on a portfolio investment in
North America.
In this segment, investment income includes interest on cash and cash
equivalents and dividends from long term holdings. Investment income totaled
$988,000 in 2000, compared to $505,000 in 1999, and $1.9 million in 1998. The
decrease in 1999 was due to lower levels of cash and cash equivalents and a
reduction in income earning investments in the medical professional liability
insurance company portfolios as the "run off" progressed. Investment income rose
in 2000, primarily due to interest income on funds raised in the rights
offering.
Other revenues include operating revenues from SISCOM and Conex.
The principal expenses recognized in this segment are PICO's corporate
overhead and operating expenses from SISCOM and Conex. In 2000, segment expenses
were $9.9 million, compared to $11.3 million in 1999 and $6.2 million in 1998.
Segment expenses decreased in 2000 due to overhead reductions.
PICO's equity share of investee's income represents our proportionate share
of the net income and other events affecting equity in the investments which we
carry under the equity method, less any dividends received from those
investments. For 2000, equity income was approximately $1.8 million, compared to
a $1 million loss in 1999, and a $780,000 loss in 1998. Here is a summary of the
material investments which we accounted for under the equity method in each of
the past three years:
--------------------------------------------------------------------------------------------------------
2000 1999 1998
--------------------------------------------------------------------------------------------------------
Jungfraubahn Jungfraubahn Jungfraubahn
HyperFeed HyperFeed HyperFeed
Conex - until August 1, 1999 Conex
Conex's sino-foreign joint venture- Conex's sino-foreign joint Conex's sino-foreign joint
until September 8, 2000 venture venture
Mendell
--------------------------------------------------------------------------------------------------------
The Long Term Holdings produced a loss before taxes of $13.9 million in
2000, compared to a loss of $9.2 million in 1999, and an $8.5 million loss in
1998. In 2000, the segment loss included a $4.6 million realized loss on the
sale of Conex, and a $2.3 million operating loss for the period prior to sale,
and a $1.6 million loss from SISCOM before tax and minority interest. In 1999,
Conex accounted for $1.8 million of the segment loss and SISCOM $672,000.
At December 31, 2000, the consolidated investment portfolio was showing a
net unrealized loss of approximately $7 million after tax, compared to a net
gain of $575,000 at December 31, 1999, and a $3.1 million net unrealized loss at
December 31, 1998.
31
32
DISCONTINUED OPERATIONS
Discontinued operations comprise PICO's former life and health insurance
subsidiary, American Physicians Life Insurance Company, which was sold on
December 4, 1998. In the 1998 income year, prior to its sale, American
Physicians Life produced revenues of $9.2 million and pre-tax income of
$300,000. PICO realized cash proceeds of $17 million from the disposal, and
recorded a gain of $1.1 million, which is included in the discontinued
operations segment result in the consolidated statements of operations.
LIQUIDITY AND CAPITAL RESOURCES--YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
PICO Holdings, Inc. is a diversified holding company. Our assets primarily
consist of investments in our operating subsidiaries, investments in other
public companies, and cash and cash equivalents. On a consolidated basis, the
Company had $13.6 million in cash and cash equivalents at December 31, 2000,
compared to $36.7 million at December 31, 1999, and $71.7 million at December
31, 1998.
Our cash flow position fluctuates depending on the requirements of our
operating subsidiaries for capital, and activity in our investment portfolios.
Our primary sources of funds include cash balances, cash flow from operations,
and--potentially--the sale of investments, and the proceeds of bank borrowings
or offerings of equity and debt. We endeavor to manage our cash flow to ensure
that funds are always available to take advantage of new investment
opportunities.
In broad terms, here is the cash flow profile of our principal operating
subsidiaries:
- Nevada Land & Resource Company, LLC is actively selling land which is not
part of PICO's long-term utilization plan for the property. Nevada Land's
principal sources of cash flow are the proceeds of cash sales, and
collections of principal and interest on sales contracts where Nevada Land
has provided vendor financing. Since these receipts and other revenues
exceed Nevada Land's operating costs, Nevada Land is generating strong
positive cash flow which provides a potential source of funds to finance
other group activities;
- Over the past 3 years, Vidler Water Company, Inc. has utilized cash to
purchase properties with significant water rights, to construct
improvements at the Vidler Arizona Recharge Facility, to maintain and
develop existing assets, to pursue applications for water rights, and to
cover financing and operating expenses. Other group companies have provided
financing to meet Vidler's on-going expenses and to fund capital
expenditure and the purchase of additional water-righted properties.
Vidler's most important water-related assets did not begin to generate
significant cash flow until the first quarter of 2001. As commercial use of
these assets increases, we expect that Vidler will start to generate free
cash flow as receipts from leasing water or storage and the proceeds from
selling water begin to overtake maintenance capital expenditure, financing
costs, and operating expenses. As water lease and storage contracts are
signed, we anticipate that Vidler may be able to monetize some of the
contractual revenue streams which could potentially provide another source
of funds;
- Over the next 12 months, we expect that Sequoia Insurance Company will
generate positive cash flow from increased written premium volume,
primarily as a result of growth in the existing commercial insurance
business and the Personal Express acquisition. Shortly after a policy is
written, the premium is collected and the funds can be invested for a
period of time before they are required to pay claims. Free cash flow
generated by Sequoia will likely be deployed in the company's investment
portfolio;
- Citation Insurance Company has ceased writing business and is "running off"
its existing claims reserves. Investment income more than covers Citation's
operating expenses. Most of the funds required to pay claims are coming
from the maturity of fixed-income securities in the company's investment
portfolio and recoveries from reinsurance companies; and
- As the "run off" progresses, Physicians Insurance Company of Ohio and The
Professionals Insurance Company are obtaining funds to pay operating
expenses and claims from the maturity of fixed-income securities, the
realization of investments, and recoveries from reinsurance companies.
The Departments of Insurance in Ohio and California prescribe minimum
levels of capital and surplus for insurance companies, and set guidelines for
insurance company investments. PICO's insurance subsidiaries structure the
maturity of fixed-income securities
32
33
to match the projected pattern of claims payments; however, it is possible that
fixed-income and equity securities may occasionally need to be sold at
unfavorable times when the bond market and/or the stock market are depressed.
As shown in the Consolidated Statements of Cash Flow, there was a $23.1
million net decrease in cash and cash equivalents in 2000, compared to a $34.9
million net decrease in 1999, and a $15.2 million net increase during 1998.
During 2000, $10.7 million of cash was used in Operating Activities.
Operating Activities used cash of $26.2 million in 1999, and $23.6 million in
1998. In all three years, the principal uses of cash were claims payments by our
insurance subsidiaries and operating expenses and lease payments by Vidler.
Investing Activities used $62 million of cash in 2000. This primarily
reflects:
(a) activity in the investment portfolios of our insurance companies, where
the proceeds of cash and cash equivalents and maturing fixed-income securities
were reinvested in high-grade corporate bonds and, to a lesser extent, in
small-capitalization value stocks;
(b) the investment of a total of $14.9 million in the purchase of two
water-righted ranch properties in Nevada and the construction of improvements
necessary to recharge water on a commercial scale at Vidler's Arizona water
storage facility; and
(c) the acquisition of Personal Express for approximately $3 million;
partly offset by
(d) cash receipts of $5.5 million from land, water, water rights, and
related assets sold by Nevada Land and Vidler.
In 1999, Investing Activities used $17.5 million of cash, as the purchase
of additional shares in Jungfraubahn and AOG exceeded the proceeds from the sale
and maturity of investments. During 1998, Investing Activities generated cash of
$40.8 million. This was primarily because the proceeds from the sale and
maturity of investments exceeded new purchases, and a total of $33.6 million was
received from the sale of American Physicians Life, residual international
investments of Global Equity, and the Physicians' former home office building in
Columbus, Ohio.
In 2000, there was a $49.5 million cash inflow from Financing Activities,
principally due to the rights offering which raised $49.8 million in new equity
capital during the first quarter. Financing Activities resulted in a $8.4
million net inflow in 1999, as Swiss franc borrowings to finance part of PICO's
portfolio of European value stocks raised $6.1 million, the exercise of PICO
warrants provided $2.9 million, and the purchase of treasury stock used
$292,000. In 1998, Financing Activities used $1.4 million in cash due to the net
purchase of treasury stock.
At December 31, 2000, PICO had no significant commitments for future
capital expenditures, other than in the ordinary course of business.
PICO is committed to maintaining Sequoia's capital and statutory surplus at
a minimum of $7.5 million. At December 31, 2000, Sequoia had approximately $23.4
million in capital and statutory surplus. PICO also aims to maintain Sequoia's
A.M. Best rating at or above its present "A-" (Excellent) level. At some time in
the future, this may require the injection of additional capital.
RISK FACTORS
In addition to the risks and uncertainties discussed in the preceding
sections of "Management's Discussion and Analysis of Financial Condition and
Results of Operations," and elsewhere in this document, the following risk
factors should be considered carefully in evaluating PICO and its business. The
statements contained in this Form 10-K that are not purely historical are
forward-looking statements within the meaning of Section 27A of the Exchange
Act, including statements regarding our expectations, beliefs, intentions, plans
or strategies regarding the future. All forward-looking statements included in
this document are based on information available to us on the date thereof, and
we assume no obligation to update any such forward-looking statements.
BECAUSE OUR OPERATIONS ARE SO DIVERSE, ANALYSTS AND INVESTORS MAY NOT BE ABLE TO
EVALUATE OUR COMPANY ADEQUATELY, WHICH MAY NEGATIVELY INFLUENCE OUR SHARE PRICE
PICO is a diversified holding company with operations in land, minerals and
related water rights; water rights and water storage; property and casualty
insurance; medical professional liability insurance; and other long-term
holdings. Each of these areas is unique, complex in nature, and difficult to
understand. In particular, water rights is a developing industry within the
western United States with very little historical data, very few experts and a
limited following of analysts. Because we are so complex, analysts and
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investors may not be able to adequately evaluate our operations, and PICO in
total. This could cause them to make inaccurate evaluations of our stock, or to
overlook PICO, in general. These factors could have a negative impact on the
trading volume and price of our stock.
IF WE DO NOT SUCCESSFULLY LOCATE, SELECT AND MANAGE INVESTMENTS AND ACQUISITIONS
OR IF OUR INVESTMENTS OR ACQUISITIONS OTHERWISE FAIL OR DECLINE IN VALUE, OUR
FINANCIAL CONDITION COULD SUFFER
We invest in businesses that we believe are undervalued or that will
benefit from additional capital, restructuring of operations or improved
competitiveness through operational efficiencies.
Failures and/or declines in the market values of businesses we invest in or
acquire, as well as our failure to successfully locate, select and manage
investment and acquisition opportunities, could have a material adverse effect
on our business, financial condition, the results of operations and cash flows.
Such business failures, declines in market values, and/or failure to
successfully locate, select and manage investments and acquisitions could result
in inferior investment returns compared to those which may have been attained
had we successfully located, selected and managed new investments and
acquisition opportunities, or had our investments or acquisitions not failed or
declined in value. We could also lose part or all of our investments in these
businesses and experience reductions in our net income, cash flows, assets and
shareholders' equity.
We will continue to make selective investments, and endeavor to enhance and
realize additional value to these acquired companies through our influence and
control. This could involve the restructuring of the financing or management of
the entities in which we invest and initiating and facilitating mergers and
acquisitions. Any acquisition could result in the use of a significant portion
of our available cash, significant dilution to you, and significant
acquisition-related charges. Acquisitions may also result in the assumption of
liabilities, including liabilities that are unknown or not fully known at the
time of the acquisition, which could have a material adverse effect on us.
We do not know of any reliable statistical data that would enable us to
predict the probability of success or failure of our investments, or to predict
the availability of suitable investments at the time we have available cash. You
will be relying on the experience and judgment of management to locate, select
and develop new acquisition and investment opportunities. Sufficient
opportunities may not be found and this business strategy may not be successful.
We have made a number of investments in the past that have been highly
successful, such as Fairfield Communities, Inc., which we sold in 1996, and
Resource America, Inc., which we sold in 1997. We have also made investments
that have lost money, such as our approximate $4 million loss from the Korean
investments in 1997, an approximate $5 million write-down of investments in
1998, a $3.2 million write-down of an oil and gas investment in 1999, and $7.1
million in investment losses in the third quarter of 2000. We reported net
realized investment gains of $441,000 of gains in 1999 and gains of $21.4
million in 1997; however, we reported net realized investment losses of $7.5
million in 2000 and $4.4 million for 1998. We reported a net unrealized
investment loss of $7 million at December 31, 2000, compared to a net unrealized
gain of $575,000 at December 31, 1999.
Our ability to achieve an acceptable rate of return on any particular
investment is subject to a number of factors which are beyond our control,
including increased competition and loss of market share, quality of management,
cyclical or uneven financial results, technological obsolescence, foreign
currency risks and regulatory delays.
Our investments may not achieve acceptable rates of return and we may not
realize the value of the funds invested; accordingly, these investments may have
to be written down or sold at their then-prevailing market values.
We may not be able to sell our investments in both private and public
companies when it appears to be advantageous to do so and we may have to sell
these investments at a discount. Investments in private companies are not as
marketable as investments in public companies. Investments in public companies
are subject to prices determined in the public markets and, therefore, values
can vary dramatically. In particular, the ability of the public markets to
absorb a large block of shares offered for sale can affect our ability to
dispose of an investment in a public company.
To successfully manage newly acquired companies, we must, among other
things, continue to attract and retain key management and other personnel. The
diversion of the attention of management from the day-to-day operations, or
difficulties encountered in the integration process, could have a material
adverse effect on our business, financial condition, and the results of
operations and cash flows.
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WE MAY MAKE INVESTMENTS AND ACQUISITIONS THAT MAY YIELD LOW OR NEGATIVE RETURNS
FOR AN EXTENDED PERIOD OF TIME, WHICH COULD TEMPORARILY OR PERMANENTLY DEPRESS
OUR RETURN ON INVESTMENTS
We generally make investments and acquisitions that tend to be long term in
nature. We invest in businesses that we believe to be undervalued or may benefit
from additional capital, restructuring of operations or management or improved
competitiveness through operational efficiencies with our existing operations.
We may not be able to develop acceptable revenue streams and investment returns.
We may lose part or all of our investment in these assets. The negative impacts
on cash flows, income, assets and shareholders' equity may be temporary or
permanent. We make investments for the purpose of enhancing and realizing
additional value by means of appropriate levels of shareholder influence and
control. This may involve restructuring of the financing or management of the
entities in which we invest and initiating or facilitating mergers and
acquisitions. These processes can consume considerable amounts of time and
resources. Consequently, costs incurred as a result of these investments and
acquisitions may exceed their revenues and/or increases in their values for an
extended period of time until we are able to develop the potential of these
investments and acquisitions and increase the revenues, profits and/or values of
these investments. Ultimately, however, we may not be able to develop the
potential of these assets that we anticipated.
IF MEDICAL MALPRACTICE INSURANCE CLAIMS TURN OUT TO BE GREATER THAN THE RESERVES
WE ESTABLISH TO PAY THEM, WE MAY NEED TO LIQUIDATE CERTAIN INVESTMENTS IN ORDER
TO SATISFY OUR RESERVE REQUIREMENTS
Under the terms of our medical malpractice liability policies, there is an
extended reporting period for claims. Under Ohio law, the statute of limitations
is one year after the cause of action accrues. Also, under Ohio law, a person
must make a claim within four years; however, the courts have determined that
the period may be longer in situations where the insured could not have
reasonably discovered the injury in that four-year period. Claims of minors must
be brought within one year of the date of majority. As a result, some claims may
be reported a number of years following the expiration of the medical
malpractice liability policy period.
Physicians Insurance Company of Ohio and The Professionals Insurance
Company have established reserves to cover losses on claims incurred under the
medical malpractice liability policies including not only those claims reported
to date, but also those that may have been incurred but not yet reported. The
reserves for losses are estimates based on various assumptions and, in
accordance with Ohio law, have been discounted to reflect the time value of
money for years prior to 2000. These estimates are based on actual and industry
experience and assumptions and projections as to claims frequency, severity and
inflationary trends and settlement payments. In accordance with Ohio law,
Physicians Insurance Company of Ohio and The Professionals Insurance Company
annually obtain a certification from an independent actuary that their
respective reserves for losses are adequate. They also obtain a concurring
actuarial opinion. Due to the inherent uncertainties in the reserving process,
there is a risk that Physicians Insurance Company of Ohio's and The
Professionals Insurance Company's reserves for losses could prove to be
inadequate. This could result in a decrease in income and shareholders' equity.
If we underestimate our reserves, they could reach levels which are lower than
required by law.
Reserves are money that we set aside to pay insurance claims. We strive to
establish a balance between maintaining adequate reserves to pay claims while at
the same time using our cash resources to invest in new companies.
IF WE UNDERESTIMATE THE AMOUNT OF INSURANCE CLAIMS, OUR FINANCIAL CONDITION
COULD BE MATERIALLY MISSTATED AND OUR FINANCIAL CONDITION COULD SUFFER
Our insurance subsidiaries may not have established reserves adequate to
meet the ultimate cost of losses arising from claims. It has been, and will
continue to be, necessary for our insurance subsidiaries to review and make
appropriate adjustments to reserves for claims and expenses for settling claims.
Inadequate reserves could have a material adverse effect on our business,
financial condition, and the results of operations and cash flows. Inadequate
reserves could cause our financial condition to fluctuate from period to period
and cause our financial condition to appear to be better than it actually is for
periods in which insurance claims reserves are understated. In subsequent
periods when we discover the underestimation and pay the additional claims, our
cash needs will be greater than expected and our financial the results of
operations for that period will be worse than they would have been had our
reserves been accurately estimated originally.
The inherent uncertainties in estimating loss reserves are greater for some
insurance products than for others, and are dependent on:
- the length of time in reporting claims;
- the diversity of historical losses among claims;
- the amount of historical information available during the estimation
process;
- the degree of impact that changing regulations and legal precedents may
have on open claims; and
- the consistency of reinsurance programs over time.
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Because medical malpractice liability and commercial casualty claims may
not be completely paid off for several years, estimating reserves for these
types of claims can be more uncertain than estimating reserves for other types
of insurance. As a result, precise reserve estimates cannot be made for several
years following the year for which reserves were initially established.
During the past several years, the levels of the reserves for our insurance
subsidiaries have been very volatile. As a result of our claims experience, we
have had to significantly increase these reserves in the past several years.
Significant increases in the reserves may be necessary in the future, and
the level of reserves for our insurance subsidiaries may be volatile in the
future. These increases or volatility may have an adverse effect on our
business, financial condition, and the results of operations and cash flows.
THERE HAS BEEN A DOWNTURN IN THE PROPERTY & CASUALTY INSURANCE BUSINESS WHICH,
IN THE SHORT TERM, HINDERS OUR ABILITY TO PROFIT FROM THIS INDUSTRY
The property and casualty insurance industry has been highly cyclical, and
the industry has been in a cyclical downturn over the last several years. This
is due primarily to competitive pressures on pricing, which has resulted in
lower profitability for us. Pricing is a function of many factors, including the
capacity of the property and casualty industry as a whole to underwrite
business, create policyholders' surplus and generate positive returns on their
investment portfolios. The level of surplus in the industry varies with returns
on invested capital and regulatory barriers to withdrawal of surplus. Increases
in surplus have generally been accompanied by increased price competition among
property and casualty insurers.
The cyclical trends in the industry and the industry's profitability can
also be affected by volatile and unpredictable developments, including natural
disasters, fluctuations in interest rates, and other changes in the investment
environment which affect market prices of investments and the income generated
from those investments. Inflationary pressures affect the size of losses and
court decisions affect insurers' liabilities. These trends may adversely affect
our business, financial condition, the results of operations and cash flows by
reducing revenues and profit margins, by increasing ratios of claims and
expenses to premiums, and by decreasing cash receipts. Capital invested in our
insurance companies may produce inferior investment returns during periods of
downturns in the insurance cycle due to reduced profitability.
STATE REGULATORS COULD REQUIRE CHANGES TO THE OPERATIONS OF OUR INSURANCE
SUBSIDIARIES AND/OR TAKE THEM OVER IF WE FAIL TO MAINTAIN ADEQUATE RESERVE
LEVELS
In the past few years, the National Association of Insurance Commissioners
has developed risk-based capital measurements for both property and casualty and
life and health insurers. These measurements prescribe the reserve levels that
insurance companies must maintain. The Commissioners have delegated to the state
regulators varying levels of authority based on the adequacy of an insurer's
reserves. The insurance companies' reserve levels are reported annually in their
statutory annual statements to the insurance departments.
Failure to meet one or more reserve levels may result in state regulators
requiring the insurance company to submit a business plan demonstrating
achievement of the required reserve levels. This may include the addition of
capital, a restructuring of assets and liabilities, or changes in operations. At
or below certain lower reserve levels, state regulators may supervise the
operation of the insurance company and/or require the liquidation of the
insurance company. Such insurance department actions could adversely affect our
business, financial condition, and the results of operations and cash flows and
decrease the value of our investments in our insurance subsidiaries. If the
insurance departments were to require changes in the operations of our insurance
subsidiaries, we may incur additional expenses and we may lose customers. If the
insurance departments were to require additional capital in our insurance
subsidiaries or a restructuring of our assets and liabilities, our investment
returns could suffer. If the insurance departments were to place our insurance
companies under their supervision, we would lose customers, our revenues may
decrease more rapidly than our expenses, and our investment returns would
suffer. We may even lose part or all of our investments in our insurance
subsidiaries if our insurance subsidiaries are liquidated by the insurance
departments.
WE MAY BE INADEQUATELY PROTECTED AGAINST MAN-MADE AND NATURAL CATASTROPHES,
WHICH COULD REDUCE THE AMOUNT OF CAPITAL SURPLUS AVAILABLE FOR INVESTMENT
OPPORTUNITIES
As with other property and casualty insurers, operating results and
financial condition can be adversely affected by volatile and unpredictable
natural and man-made disasters, such as hurricanes, windstorms, earthquakes,
fires, and explosions. Our insurance subsidiaries generally seek to reduce their
exposure to catastrophic events through individual risk selection and the
purchase of reinsurance. Our insurance subsidiaries' estimates of their
exposures depend on their views of the possibility of a catastrophic event in
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a given area and on the probable maximum loss created by that event. While our
insurance subsidiaries attempt to limit their exposure to acceptable levels, it
is possible that an actual catastrophic event or multiple catastrophic events
could significantly exceed the maximum loss anticipated, resulting in a material
adverse effect on our business, financial condition, and the results of
operations and cash flows. Such events could cause unexpected insurance claims
and expenses for settling claims well in excess of premiums, increasing cash
needs, reducing surplus and reducing assets available for investments. Capital
invested in our insurance companies may produce inferior investment returns as a
result of these additional funding requirements.
We insure ourselves against catastrophic losses by obtaining insurance
through other insurance companies known as reinsurers. The future financial
results of our insurance subsidiaries could be adversely affected by disputes
with their reinsurers with respect to coverage and by the solvency of the
reinsurers.
OUR INSURANCE SUBSIDIARIES COULD BE DOWNGRADED WHICH WOULD NEGATIVELY IMPACT OUR
BUSINESS
Our insurance subsidiaries' ratings may not be maintained or increased, and
a downgrade would likely adversely affect our business, financial condition, and
the results of operations and cash flows. A.M. Best Company's ("A.M. Best")
ratings reflect the assessment of A.M. Best of an insurer's financial condition,
as well as the expertise and experience of its management. Therefore, A.M. Best
ratings are important to policyholders. A.M. Best ratings are subject to review
and change over time. Failure to maintain or improve our A.M. Best ratings could
have a material adverse effect on the ability of our insurance subsidiaries to
underwrite new insurance policies, as well as potentially reduce their ability
to maintain or increase market share. Management believes that many potential
customers will not insure with an insurer that carries an A.M. Best rating of
less than B+, and that customers who do so will demand lower rates.
Our insurance subsidiaries are currently rated as follows:
- Sequoia Insurance Company A- (Excellent)
- Citation Insurance Company B+ (Very Good)
- Physicians Insurance Company of Ohio NR-3 (rating procedure inapplicable)
- The Professionals Insurance Company NR-3 (rating procedure inapplicable)
POLICY HOLDERS MAY NOT RENEW THEIR POLICIES, WHICH WOULD UNEXPECTEDLY REDUCE OUR
REVENUE STREAM
Insurance policy renewals have historically accounted for a significant
portion of our net revenue. We may not be able to sustain historic renewal rates
for our products in the future. A decrease in renewal rates would reduce our
revenues. It would also decrease our cash receipts and the amount of funds
available for investments and acquisitions. If we were not able to reduce
overhead expenses correspondingly, this would adversely affect our business,
financial condition, and the results of operations and cash flows.
IF WE ARE REQUIRED TO REGISTER AS AN INVESTMENT COMPANY, THEN WE WILL BE SUBJECT
TO A SIGNIFICANT REGULATORY BURDEN
At all times we intend to conduct our business so as to avoid being
regulated as an investment company under the Investment Company Act of 1940.
However, if we were required to register as an investment company, our ability
to use debt would be substantially reduced, and we would be subject to
significant additional disclosure obligations and restrictions on our
operational activities. Because of the additional requirements imposed on an
investment company with regard to the distribution of earnings, operational
activities and the use of debt, in addition to increased expenditures due to
additional reporting responsibilities, our cash available for investments would
be reduced. The additional expenses would reduce income. These factors would
adversely affect our business, financial condition, and the results of
operations and cash flows.
VARIANCES IN PHYSICAL AVAILABILITY OF WATER, ALONG WITH LEGAL RESTRICTIONS AND
LEGAL IMPEDIMENTS COULD IMPACT PROFITABILITY FROM OUR WATER RIGHTS
The water rights held by us and the transferability of these rights to
other uses and places of use are governed by the laws concerning water rights in
the states of Arizona, California, Colorado and Nevada. The volumes of water
actually derived from the water rights applications or permitted rights may vary
considerably based upon physical availability and may be further limited by
applicable legal restrictions. As a result, the amounts of acre-feet anticipated
from the water rights applications or permitted rights do not in every case
represent a reliable, firm annual yield of water, but in some cases describe the
face amount of the water right claims or management's best estimate of such
entitlement. Legal impediments exist to the sale or transfer of some of these
water rights, which in turn may affect their commercial value. If we were unable
to transfer or sell our water rights, we will not be able to make a profit, we
will not have enough cash receipts to cover cash needs, and we may lose some or
all of our value in our water rights investments.
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OUR FUTURE WATER REVENUES ARE UNCERTAIN AND DEPEND ON A NUMBER OF FACTORS, WHICH
MAY MAKE OUR REVENUE STREAMS AND PROFITABILITY VOLATILE
We engage in various water rights acquisition, management, development, and
sale and lease activities. Accordingly, our long-term future profitability will
be primarily dependent on our ability to develop and sell or lease water and
water rights, and will be affected by various factors, including timing of
acquisitions, transportation arrangements, and changing technology. To the
extent we possess junior or conditional water rights, such rights may be
subordinated to superior water right holders in periods of low flow or drought.
Our current water rights and the transferability of these rights to other
uses and places of use are governed by the laws concerning water rights in the
states of Arizona, California, Colorado and Nevada. The volumes of water
actually derived from these rights may vary considerably based upon physical
availability and may be further limited by applicable legal restrictions. Legal
impediments exist to sale or transfer of some of these water rights which may
affect their commercial value.
In addition to the risk of delays associated with receiving all necessary
regulatory approvals and permits, we may also encounter unforeseen technical
difficulties which could result in construction delays and cost increases with
respect to our water development projects.
OUR WATER ACTIVITIES MAY BECOME CONCENTRATED IN A LIMITED NUMBER OF ASSETS,
MAKING OUR GROWTH AND PROFITABILITY VULNERABLE TO FLUCTUATIONS IN LOCAL
ECONOMIES AND GOVERNMENTAL REGULATIONS
In the future, we anticipate that a significant amount of Vidler's revenues
and asset value will come from a limited number of assets, including our water
rights in the Harquahala Valley and the Vidler Arizona Recharge Facility.
Historically, a majority of Vidler's water service revenue has come from
our Colorado water assets. Although we continue to acquire and develop
additional water assets, in the foreseeable future we anticipate that our
revenues will still be derived from a limited number of assets.
THE PRICE OF WATER IS VOLATILE, WHICH CAN HAVE A SIGNIFICANT EFFECT ON OUR COSTS
OF ACQUIRING WATER AND THE PRICES AT WHICH WE ARE ABLE TO SELL WATER
Our profitability is significantly affected by changes in the market price
of water. Water prices may in the future fluctuate widely and are affected by
climatic, demographic and technologic factors affecting demand.
ENVIRONMENTAL REGULATIONS MAY DETRACT FROM OUR FUTURE REVENUE STREAMS AND
PROFITABILITY BY LIMITING OUR CUSTOMER BASE
Water we lease or sell may be subject to regulation as to quality by the
United States Environmental Protection Agency acting pursuant to the federal
Safe Drinking Water Act. While environmental regulations do not directly affect
us, the regulations regarding the quality of water distributed affects our
intended customers and may, therefore, depending on the quality of our water,
impact the price and terms upon which we may in the future sell our water or
water rights.
OUR WATER SALES MAY MEET WITH POLITICAL OPPOSITION IN CERTAIN LOCATIONS, THEREBY
LIMITING OUR GROWTH IN THESE AREAS
The transfer of water rights from one use to another may affect the
economic base of a community and will, in some instances, be met with local
opposition. Moreover, certain of the end users of our water rights, namely
municipalities, regulate the use of water in order to control or deter growth.
WE ARE DIRECTLY IMPACTED BY INTERNATIONAL AFFAIRS, WHICH DIRECTLY EXPOSES US TO
THE ADVERSE EFFECTS OF ANY FOREIGN ECONOMIC OR GOVERNMENTAL INSTABILITY
As a result of global investment diversification, our business, financial
condition, the results of operations and cash flows may be adversely affected
by:
- exposure to fluctuations in exchange rates;
- the imposition of governmental controls;
- the need to comply with a wide variety of foreign and U.S. export laws;
- political and economic instability;
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- trade restrictions;
- changes in tariffs and taxes;
- volatile interest rates;
- changes in certain commodity prices;
- exchange controls which may limit our ability to withdraw money;
- the greater difficulty of administering business overseas; and
- general economic conditions outside the United States.
Changes in any or all of these factors could result in reduced market
values of investments, loss of assets, additional expenses, reduced investment
income, reductions in shareholders' equity due to foreign currency fluctuations
and a reduction in our global diversification.
OUR COMMON STOCK PRICE MAY BE LOW WHEN YOU WANT TO SELL YOUR SHARES
The trading price of our common stock has historically been, and is
expected to be, subject to fluctuations. The market price of the common stock
may be significantly impacted by:
- quarterly variations in financial performance;
- shortfalls in revenue or earnings from levels forecast by securities
analysts;
- changes in estimates by such analysts;
- product introductions;
- our competitors' announcements of extraordinary events such as
acquisitions;
- litigation; and
- general economic conditions.
Our results of operations have been subject to significant fluctuations,
particularly on a quarterly basis, and our future results of operations could
fluctuate significantly from quarter to quarter and from year to year. Causes of
such fluctuations may include the inclusion or exclusion of operating earnings
from newly acquired or sold operations. At December 31, 1998, the closing price
of our common stock on the NASDAQ National Market was $13.25 per share, compared
to $12.4375 at December 31, 2000. On a quarterly basis between these two dates,
closing prices have ranged from a high of $25.3125 at June 30, 1999 to a low of
$11.125 at March 31, 2000. During 2000, closing prices have ranged from a low of
$9.875 per share on March 27 to a high of $14.125 on January 18.
Statements or changes in opinions, ratings, or earnings estimates made by
brokerage firms or industry analysts relating to the markets in which we do
business or relating to us specifically could result in an immediate and adverse
effect on the market price of our common stock.
WE MAY NOT BE ABLE TO RETAIN KEY MANAGEMENT PERSONNEL WE NEED TO SUCCEED, WHICH
COULD ADVERSELY AFFECT OUR ABILITY TO MAKE SOUND INVESTMENT DECISIONS
We have several key executive officers. If they depart, it could have a
significant adverse effect. In particular, Ronald Langley, our Chairman, and
John R. Hart, our President and Chief Executive Officer, play key roles in
investment decisions. Messrs. Langley and Hart have entered into employment
agreements with us dated as of December 31, 1997, for a period of four years.
Messrs. Langley and Hart are key to the implementation of our strategic focus,
and our ability to successfully develop our current strategy is dependent upon
our ability to retain the services of Messrs. Langley and Hart.
OUR CHARTER DOCUMENTS MAY INHIBIT A TAKEOVER, PREVENTING YOU FROM RECEIVING A
PREMIUM ON YOUR SHARES
The Board of Directors has authority to issue up to 2 million shares of
preferred stock and to fix the rights, preference, privileges and restrictions,
including voting rights, of those shares without any further vote or action by
the shareholders. Your rights as common stock holders will be subject to, and
may be adversely affected by, the rights of the holders of the preferred stock.
The issuance of preferred stock, while providing desirable flexibility in
connection with possible acquisitions and other corporate purposes, could have
the effect of making it more difficult for a third party to acquire a majority
of our outstanding voting stock, thereby delaying, deferring or preventing a
change in control of PICO. Furthermore, such preferred stock may have other
rights, including economic rights senior to the common stock, and, as a result,
the issuance thereof could have a material adverse effect on the market value of
the common stock.
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At the Annual Meeting of Shareholders on October 19, 2000, our shareholders
voted to amend the Articles of Incorporation to eliminate the preferred shares.
The change took effect during the first quarter of 2001.
THE FOREGOING FACTORS, INDIVIDUALLY OR IN THE AGGREGATE, COULD MATERIALLY
ADVERSELY AFFECT OUR OPERATING RESULTS AND COULD MAKE COMPARISON OF HISTORIC
OPERATING RESULTS AND BALANCES DIFFICULT OR NOT MEANINGFUL.
REGULATORY INSURANCE DISCLOSURES
Liabilities for Unpaid Loss and Loss Adjustment Expenses
Liabilities for unpaid loss and loss adjustment expenses are estimated
based upon actual and industry experience, and assumptions and projections as to
claims frequency, severity and inflationary trends and settlement payments. Such
estimates may vary from the eventual outcome. The inherent uncertainty in
estimating reserves is particularly acute for lines of business for which both
reported and paid losses develop over an extended period of time.
Several years or more may elapse between the occurrence of an insured
medical professional liability insurance or casualty loss, the reporting of the
loss and the final payment of the loss. Loss reserves are estimates of what an
insurer expects to pay claimants, legal and investigative costs and claims
administrative costs. PICO's subsidiaries are required to maintain reserves for
payment of estimated losses and loss adjustment expense for both reported claims
and claims which have occurred but have not yet been reported. Ultimate actual
liabilities may be materially more or less than current reserve estimates.
Reserves for reported claims are established on a case-by-case basis. Loss
and loss adjustment expense reserves for incurred but not reported claims are
estimated based on many variables including historical and statistical
information, inflation, legal developments, the regulatory environment, benefit
levels, economic conditions, judicial administration of claims, general trends
in claim severity and frequency, medical costs and other factors which could
affect the adequacy of loss reserves. Management reviews and adjusts incurred
but not reported claims reserves regularly.
The liabilities for unpaid losses and loss adjustment expenses of
Physicians, Professionals, Sequoia, and Citation were $121.5 million at December
31, 2000, $139.1million at December 31, 1999, and $155 million in 1998, net of
discount on medical professional liability insurance reserves in 1999 and 1998,
and before reinsurance reserves, which reduce net unpaid losses and loss
adjustment expenses. Of those amounts, the liabilities for unpaid loss and loss
adjustment expenses of prior years increased by $8.6 million in 2000, $16.3
million in 1999, and $7.3 million in 1998. The 2000 increase included $7.5
million of accumulated discount on reserves that was expensed as a result of our
decision to discontinue discounting reserves effective January 1, 2000. See Note
24 of Notes to Consolidated Financial Statements. These reserve changes for
prior years' reserves were due to the following:
CHANGE IN UNPAID LOSS AND LAE RESERVES
----------------------------------------------
2000 1999 1998
------------- -------------- -------------
Increase in provision for prior year claims $ 1,300,413 $ 15,878,697 $ 7,009,420
Retroactive reinsurance (267,653) (564,469) (367,399)
Accretion of reserve discount 994,545 643,474
Cumulative effect of change in accounting principle 7,520,744
------------- -------------- -------------
Net increase in liabilities for unpaid loss
and LAE of prior years $ 8,553,504 $ 16,308,773 $ 7,285,495
============= ============== =============
SEE SCHEDULE IN NOTE 14 OF NOTES TO PICO'S CONSOLIDATED FINANCIAL
STATEMENTS, "RESERVES FOR UNPAID LOSS AND LOSS ADJUSTMENT EXPENSES" for
additional information regarding reserve changes.
Although insurance reserves are certified annually by independent actuaries
for each insurance company as required by state law, significant fluctuations in
reserve levels can occur based upon a number of variables used in actuarial
projections of ultimate incurred losses and loss adjustment expenses.
Physicians' liability for unpaid medical professional liability insurance
losses and loss adjustment expenses was discounted through December 31, 1999, to
reflect investment income as permitted by the Ohio Department of Insurance. The
method of
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discounting was based upon historical payment patterns and assumed an interest
rate at or below Physicians' investment yield, and was the same rate used for
statutory reporting purposes. A discount rate of 4% was used for medical
professional liability insurance reserves. Discounting was discontinued
effective January 1, 2000. See Note 24 of Notes to Consolidated Financial
Statements.
All of PICO's insurance companies seek to reduce the loss that may arise
from individually significant claims or other events that cause unfavorable
underwriting results by reinsuring certain levels of risk with other insurance
carriers.
Various reinsurance treaties remain in place to limit PICO's exposure
levels. See "REINSURANCE" following this section and NOTE 13 OF NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS, "REINSURANCE."
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ANALYSIS OF LOSS AND LOSS ADJUSTMENT EXPENSE DEVELOPMENT
The following table presents the development of balance sheet liabilities
for 1990 through 2000 for all property and casualty lines of business including
medical professional liability insurance. The "Net liability as originally
estimated" line shows the estimated liability for unpaid losses and loss
adjustment expenses recorded at the balance sheet date on a discounted basis,
prior to 2000, for each of the indicated years. Reserves for other lines of
business that Physicians ceased writing in 1989, which are immaterial, are
excluded. The "Gross liability as originally estimated" represents the estimated
amounts of losses and loss adjustment expenses for claims arising in all prior
years that are unpaid at the balance sheet date on an undiscounted basis,
including losses that had been incurred but not reported.
1990 1991 1992 1993 1994 1995
---------- ---------- ---------- ---------- ---------- ----------
(In thousands)
Net liability as originally estimated: $128,104 $129,768 $159,804 $179,390 $153,212 $137,523
Discount 30,230 30,647 31,269 32,533 20,144 16,568
Gross liability as originally estimated: 158,334 160,415 191,073 211,923 173,356 154,091
Cumulative payments as of:
One year later 42,488 42,986 41,550 34,207 35,966 27,128
Two years later 81,536 81,489 73,012 69,037 61,263 65,062
Three years later 108,954 103,505 103,166 90,904 93,908 86,865
Four years later 120,063 120,073 116,278 118,331 110,272 100,967
Five Years later 126,100 127,725 139,028 128,773 119,879 111,553
Six years later 130,146 142,973 143,562 136,820 129,819
Seven years later 142,484 147,142 148,426 145,683
Eight years later 146,112 151,751 156,620
Nine years later 150,509 159,205
Ten years later 157,403
Liability re-estimated as of:
One year later 160,200 188,811 197,275 183,560 170,411 147,324
Two years later 179,915 184,113 179,763 184,138 163,472 146,653
Three years later 172,715 174,790 182,011 175,308 162,532 151,752
Four years later 170,847 177,811 176,304 178,544 165,696 156,482
Five Years later 171,968 172,431 181,721 178,584 167,145 159,266
Six years later 165,255 175,830 181,868 178,371 167,821
Seven years later 168,185 177,603 181,029 178,717
Eight years later 170,710 178,419 183,229
Nine years later 172,397 180,624
Ten years later 174,595
Cumulative Redundancy (Deficiency) ($16,261) ($20,209) $7,844 $33,206 $5,535 ($5,175)
RECONCILIATION TO FINANCIAL STATEMENTS
Gross liability - end of year
Reinsurance recoverable
Net liability before discount - end of year
Net discount
Net liability - end of year (discounted for 1998 and 1999)
Reinsurance recoverable (discounted for 1998 and 1999)
Discontinued personal lines insurance
Balance sheet liability (discounted for 1998 and 1999)
Gross re-estimated liability - latest
Re-estimated recoverable - latest
Net re-estimated liability before discount - latest
Net re-estimated discount - latest
Net re-estimated liability - latest
Net cumulative redundancy (deficiency) before discount
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YEAR ENDED DECEMBER 31,
------------------------------------------------------------------
1996 1997 1998 1999 2000
---------- ---------- ---------- ---------- ----------
(IN THOUSANDS)
Net liability as originally estimated: $164,817 $128,205 $102,877 $98,655 $93,997
Discount 12,216 9,159 8,515 7,521
Gross liability before discount as originally estimated: 177,033 137,364 111,392 106,176 93,997
Cumulative payments as of:
One year later 59,106 44,750 31,056 25,625
Two years later 95,574 69,571 51,184
Three years later 115,160 85,896
Four years later 129,907
Five Years later
Six years later
Seven years later
Eight years later
Nine years later
Ten years later
Liability re-estimated as of:
One year later 176,922 144,367 127,269 107,521
Two years later 192,203 160,325 127,898
Three years later 202,014 160,239
Four years later 202,767
Five Years later
Six years later
Seven years later
Eight years later
Nine years later
Ten years later
Cumulative Redundancy (Deficiency) ($25,734) ($22,875) ($16,506) ($1,345)
RECONCILIATION TO FINANCIAL STATEMENTS
Gross liability - end of year $166,131 $148,689 $121,442
Reinsurance recoverable (54,740) (42,514) (27,445)
---------- ---------- ----------
Net liability before discount - end of year 111,391 106,175 93,997
Net discount (8,515) (7,521)
---------- ---------- ----------
Net liability - end of year (discounted for 1998 and 1999) 102,876 98,654 93,997
Reinsurance recoverable (discounted for 1998 and 1999) 52,000 40,334 27,445
---------- ---------- ----------
154,876 138,988 121,442
Discontinued personal lines insurance 145 145 100
---------- ---------- ----------
Balance sheet liability (discounted for 1998 and 1999) $155,021 $139,133 $121,542
========== ========== ==========
Gross re-estimated liability - latest $184,426 $153,489
Re-estimated recoverable - latest (56,528) (45,968)
---------- ----------
Net re-estimated liability before discount - latest 127,898 107,521
Net re-estimated discount - latest
---------- ----------
Net re-estimated liability - latest $127,898 $107,521
========== ==========
Net cumulative redundancy (deficiency) before discount ($16,506) ($1,345)
========== ==========
Each decrease or increase amount includes the effects of all
changes in amounts during the current year for prior periods. For example, the
amount of the redundancy related to losses settled in 1993, but incurred in 1990
will be included in the decrease or increase amount for 1990, 1991 and 1992.
Conditions and trends that have affected development of the liability in the
past may not necessarily occur in the future. For example, Physicians commuted
reinsurance contracts in several different years that significantly increased
the estimate of net reserves for prior years by reducing the recoverable loss
and loss adjustment expense reserves for those years. Accordingly, it may not be
appropriate to extrapolate future increases or decreases based on this table.
43
44
The data in the above table is based on Schedule P from each of the
insurance companies' 1990 to 2000 Annual Statements, as filed with state
insurance departments; however, the development table above differs from the
development displayed in Schedule P, Part-2, of the insurance Annual Statements
as Schedule P, Part-2, excludes unallocated loss adjustment expenses.
LOSS RESERVE EXPERIENCE. The inherent uncertainties in estimating loss
reserves are greater for some insurance products than for others, and are
dependent on the length of the reporting lag or "tail" associated with a given
product (i.e, the lapse of time between the occurrence of a claim and the report
of the claim to the insurer) of the diversity of historical development patterns
among various aggregations of claims, the amount of historical information
available during the estimation process, the degree of impact that changing
regulations and legal precedents may have on open claims, and the consistency of
reinsurance programs over time, among other things. Because medical professional
liability insurance and commercial casualty claims may not be fully paid for
several years or more, estimating reserves for such claims can be more uncertain
than estimating reserves in other lines of insurance. As a result, precise
reserve estimates cannot be made for several years following a current accident
year for which reserves are initially established.
There can be no assurance that the insurance companies have established
reserves adequate to meet the ultimate cost of losses arising from such claims.
It has been necessary, and will over time continue to be necessary, for the
insurance companies to review and make appropriate adjustments to reserves for
estimated ultimate losses and loss adjustment expenses. To the extent reserves
prove to be inadequate, the insurance companies would have to adjust their
reserves and incur a charge to income, which could have a material adverse
effect on PICO's financial results.
Reconciliation of Unpaid Loss and Loss Adjustment Expenses
An analysis of changes in the liability for unpaid losses and loss
adjustment expenses for 2000, 1999 and 1998 is set forth in NOTE 14 OF NOTES TO
PICO'S CONSOLIDATED FINANCIAL STATEMENTS, "RESERVE FOR UNPAID LOSS AND LOSS
ADJUSTMENT EXPENSES."
REINSURANCE
Medical Professional Liability Insurance
On July 14, 1995, Physicians and Professionals entered into an Agreement
for the Purchase and Sale of Certain Assets with Mutual Assurance, Inc. This
transaction was approved by Physicians' shareholders on August 25, 1995 and
closed on August 28, 1995. Pursuant to the agreement, Physicians and
Professionals sold their professional liability insurance business and related
liability insurance business for physicians and other health care providers.
Physicians and Professionals were engaged in, among other things, the business
of offering medical professional liability insurance and related insurance to
physicians and other health care providers principally located in Ohio.
Simultaneously with execution of the agreement, Physicians and Mutual
entered into a reinsurance treaty pursuant to which Mutual agreed to assume all
risks attaching after July 15, 1995 under medical professional liability
insurance policies issued or renewed by Physicians on physicians, surgeons,
nurses, and other health care providers, dental practitioner professional
liability insurance policies including corporate and professional premises
liability coverage issued by Physicians, and related commercial general
liability insurance policies issued by Physicians, net of inuring reinsurance.
Prior to July 16, 1995, Physicians ceded a portion of the insurance it
wrote to unaffiliated reinsurers through reinsurance agreements. Physicians'
reinsurers for insurance policies with effective dates between July 1, 1993 and
July 15, 1995, were TIG Reinsurance Company (rated A [Excellent] by Best),
Transatlantic Reinsurance Company (rated A++ [Superior] by Best) and Cologne
Reinsurance Company of America (rated NR-3 [Rating Procedure Inapplicable] by
Best). Physicians ceded insurance to these carriers on an automatic basis when
retention limits were exceeded. Physicians retained all risks up to $200,000 per
occurrence. All risks above $200,000, up to policy limits of $5 million, were
transferred to reinsurers, subject to the specific terms and conditions of the
various reinsurance treaties. Physicians remains primarily liable to
policyholders for ceded insurance should any reinsurer be unable to meet its
contractual obligations. Physicians has not incurred any material loss resulting
from a reinsurer's breach or failure to comply with the terms of any reinsurance
agreement.
Property and Casualty Insurance
Effective January 1, 1998, Sequoia and Citation entered into an
inter-company reinsurance pooling agreement for business in force as of January
1, 1998 and business written thereafter. Per the agreement, Citation cedes 100%
of its net premium and losses to
44
45
Sequoia and Sequoia then cedes 50% of its net premiums and losses to Citation.
Sequoia and Citation share equally in the underwriting expenses. This
arrangement was terminated effective January 1, 2000.
Citation and Sequoia have the same reinsurance program which is outlined as
follows. For property business, reinsurance provides coverage of $10.4 million
excess of $150,000. For casualty business, excluding umbrella coverage,
reinsurance provides coverage of $4.9 million excess of $150,000. Umbrella
coverages are reinsured $9.9 million excess of $100,000. The catastrophe
treaties for 1998 and thereafter provide coverage of 95% of $19 million excess
of $1 million per occurrence for the combined losses of Citation and Sequoia.
The catastrophe treaties for 1998 and thereafter provide coverage of 95% of $14
million excess of $1 million per occurrence. Facultative reinsurance is placed
with various reinsurers.
Where the reinsurers are "not admitted" for regulatory purposes, Sequoia
and Citation presently maintain sufficient collateral with approved financial
institutions to secure cessions of paid losses and outstanding reserves.
With regard to Sequoia, all policy and claims liabilities prior to August
1, 1995 have been 100% reinsured with Sydney Reinsurance Corporation and
unconditionally guaranteed by QBE Insurance Group Limited. Sequoia, however,
retains primary responsibility to its policyholders and claimants should Sydney
and QBE fail.
See Note 13 of Notes to Consolidated Financial Statements, "Reinsurance"
with regard to reinsurance recoverable concentration for all property and
casualty lines of business, including medical professional liability, as of
December 31, 2000. PICO remains contingently liable with respect to reinsurance
contracts in the event that reinsurers are unable to meet their obligations
under the reinsurance agreements in force.
REGULATION
Beginning in 1994, Physicians, Professionals, Citation, and Sequoia became
subject to the provisions of the Risk-Based Capital for Insurers Model Act which
has been adopted by the National Association of Insurance Commissioners for the
purpose of helping regulators identify insurers that may be in financial
difficulty. The Model Act contains a formula which takes into account asset
risk, credit risk, underwriting risk and all other relevant risks. Under this
formula, each insurer is required to report to regulators using formulas which
measure the quality of its capital and the relationship of its modified capital
base to the level of risk assumed in specific aspects of its operations. The
formula does not address all of the risks associated with the operations of an
insurer. The formula is intended to provide a minimum threshold measure of
capital adequacy by individual insurance company and does not purport to compute
a target level of capital. Companies which fall below the threshold will be
placed into one of four categories: Company Action Level, where the insurer must
submit a plan of corrective action; Regulatory Action Level, where the insurer
must submit such a plan of corrective action, the regulator is required to
perform such examination or analysis the Superintendent of Insurance considers
necessary and the regulator must issue a corrective order; Authorized Control
Level, which includes the above actions and may include rehabilitation or
liquidation; and Mandatory Control Level, where the regulator must rehabilitate
or liquidate the insurer.
The Model Act is not expected to cause any material change in any of the
insurance companies' future operations. All companies' risk-based capital
results as of December 31, 2000 exceed the Company Action Level.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
PICO's balance sheets include a significant amount of assets and
liabilities whose fair value are subject to market risk. Market risk is the risk
of loss arising from adverse changes in market interest rates or prices. PICO
currently has interest rate risk as it relates to its fixed maturity securities
and mortgage loans, equity price risk as it relates to its marketable equity
securities, and foreign currency risk as it relates to investments denominated
in foreign currencies. PICO's bank debt is short-term in nature as PICO
generally secures rates for periods of approximately one to three years and
therefore approximates fair value. At December 31, 2000, PICO had $77.9 million
of fixed maturity securities and mortgage loans, $64 million of marketable
equity securities that were subject to market risk, and $41.2 million of
investments denominated in foreign currencies, primarily Swiss francs and
Australian dollars. PICO's investment strategy is to manage the duration of the
portfolio relative to the duration of the liabilities while managing interest
rate risk.
PICO uses two models to analyze the sensitivity of its assets and
liabilities subject to the above risks. For its fixed maturity securities, and
mortgage loans, PICO uses duration modeling to calculate changes in fair value.
For its marketable securities PICO uses a hypothetical 20% decrease in the fair
value to analyze the sensitivity of its market risk assets and liabilities. For
investments denominated in foreign currencies PICO uses a hypothetical 20%
decrease in the local currency of that investment. Actual results
45
46
may differ from the hypothetical results assumed in this disclosure due to
possible actions taken by management to mitigate adverse changes in fair value
and because the fair value of a securities may be affected by credit concerns of
the issuer, prepayment rates, liquidity, and other general market conditions.
The sensitivity analysis duration model produced a loss in fair value of $1.5
million for a 100 basis point decline in interest rates on its fixed securities
and mortgage loans. The hypothetical 20% decrease in fair value of PICO's
marketable equity securities produced a loss in fair value of $5.2 million that
would impact the unrealized appreciation in shareholders' equity. The
hypothetical 20% decrease in the local currency of PICO's foreign denominated
investments produced a loss of $7.1 million that would impact the unrealized
appreciation and foreign currency translation in shareholders' equity.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
PICO's financial statements as of December 31, 2000 and 1999 and for each
of the three years in the period ended December 31, 2000 and the independent
auditors' report is included in this report as listed in the index.
SELECTED QUARTERLY FINANCIAL DATA
Summarized unaudited quarterly financial data (in thousands, except share
and per share amounts) for 2000 and 1999 are shown below. In management's
opinion, the interim financial data contains all adjustments necessary for a
fair presentation of results for such interim periods. In the fourth quarter of
2000, the Company received notification from the Ohio Department of Insurance
that it would no longer permit the Company to discount its MPL reserves for
statutory accounting practices. Accordingly, the Company discontinued
discounting its MPL reserves in its statutory filing with the ODI and financial
statements prepared in accordance with US GAAP for the year ended December 31,
2000. The cumulative effect was recorded as of January 1, 2000 and the
previously filed quarterly data has been adjusted below to reflect this change.
In addition, a reconciliation of the previously reported net loss is also
included below. The effect for the year ended December 31, 2000 was to increase
the unpaid losses and loss adjustment expenses reserve by $7.5 million and an
cumulative effect of accounting principle of $5 million, or $0.43 per share, net
of an income tax benefit of approximately $2.5 million.
THREE MONTHS ENDED
----------------------------------------------------------------
March 31, June 30, September 30, December 31,
1999 1999 1999 1999
----------- ----------- ------------ -------------
Premium income $ 8,555 $ 8,527 $ 8,268 $ 11,029
Net investment income and
net realized gains (losses) 1,570 4,156 3,021 (1,920)
Total revenues 10,510 14,310 14,094 15,574
Net income (loss) (2,193) 7,833 (230) (12,230)
----------- ----------- ----------- -----------
Basic:
----------- ----------- ----------- -----------
Net income (loss) per share $ (0.25) $ 0.88 $ (0.03) $ (1.35)
----------- ----------- ----------- -----------
Weighted average common
and equivalent shares
outstanding 8,946,237 8,938,693 9,054,413 9,054,426
Diluted:
Net income (loss) per share $ (0.25) $ 0.83 $ (0.03) $ (1.35)
----------- ----------- ----------- -----------
Weighted average common
and equivalent shares
outstanding 8,946,237 9,458,320 9,054,413 9,054,426
----------- ----------- ----------- -----------
The following reconciles net
loss as previously reported:
Net loss as previously reported
Cumulative effect of change
in accounting principle
Net income (loss) as restated
Per share effect of cumulative
change in accounting principle
THREE MONTHS ENDED
----------------------------------------------------------------
March 31, June 30, September 30, December 31,
2000 2000 2000 2000
----------- ------------ ------------ -----------
Premium income $ 7,514 $ 7,678 $ 8,272 $ 10,972
Net investment income and
net realized gains (losses) 1,443 1,558 (4,589) 2,301
Total revenues 10,095 11,027 4,940 19,291
Net income (loss) (8,521) 121 (2,805) 1,679
----------- ------------ ------------ -----------
Basic:
----------- ------------ ------------ -----------
Net income (loss) per share $ (0.93) $ 0.01 $ (0.23) $ 0.14
----------- ------------ ------------ -----------
Weighted average common
and equivalent shares
outstanding 9,200,926 12,390,070 12,390,096 12,390,096
Diluted:
Net income (loss) per share $ (0.93) $ 0.01 $ (0.23) $ 0.14
----------- ------------ ------------ -----------
Weighted average common
and equivalent shares
outstanding 9,200,926 12,390,070 12,390,096 12,390,096
----------- ------------ ------------ -----------
The following reconciles net
loss as previously reported:
Net loss as previously reported $ (4,325) $ (49) $ (3,108)
Cumulative effect of change in
accounting principle (4,196) 170 303
------------ ------------ ------------
Net income (loss) as restated $ (8,521) $ 121 $ (2,805)
============ ============ ============
Per share effect of cumulative
change in accounting principle $ (0.46) $ 0.01 $ 0.02
============ ============ ============
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PICO HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2000 AND 1999
AND FOR EACH OF THE
THREE YEARS IN THE PERIOD
ENDED DECEMBER 31, 2000
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Independent Auditors' Report........................................ 48
Consolidated Balance Sheets as of December 31, 2000 and 1999........ 49-50
Consolidated Statements of Operations for the Years Ended
December 31, 2000, 1999 and 1998.................................. 51
Consolidated Statements of Shareholders' Equity for the
Years Ended December 31, 2000, 1999, and 1998..................... 52-54
Consolidated Statements of Cash Flows for the Years Ended
December 31, 2000, 1999 and 1998.................................. 55
Notes to Consolidated Financial Statements.......................... 56-83
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48
INDEPENDENT AUDITORS' REPORT
TO THE SHAREHOLDERS AND BOARD OF DIRECTORS OF PICO HOLDINGS, INC.
We have audited the accompanying consolidated balance sheets of PICO Holdings,
Inc. and its subsidiaries (collectively "the Company") as of December 31, 2000
and 1999, and the related consolidated statements of operations, shareholders'
equity, and cash flows for each of the three years in the period ended December
31, 2000. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. 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, such consolidated financial statements present fairly, in all
material respects, the financial position of PICO Holdings, Inc. and
subsidiaries as of December 31, 2000 and 1999, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2000, in conformity with accounting principles generally accepted
in the United States of America.
As discussed in Note 24 to the financial statements, in 2000 the Company changed
its method of accounting for medical professional liability claims reserves.
DELOITTE & TOUCHE LLP
San Diego, California
March 19, 2001
48
49
PICO HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2000 AND 1999
ASSETS
2000 1999
------------ ------------
Investments (Note 4):
Available for sale:
Fixed maturities $ 77,858,701 $ 47,324,414
Short-term investments 24,036,573 16,493,675
Equity securities 36,174,505 43,848,058
Investment in unconsolidated affiliates (Note 5) 27,824,291 32,066,252
------------ ------------
Total investments 165,894,070 139,732,399
Cash and cash equivalents 13,644,312 36,738,373
Premiums and other receivables, net (Note 8) 19,032,603 12,030,709
Reinsurance receivables (Note 13) 27,594,039 45,040,368
Prepaid deposits and reinsurance premiums 1,307,442
Accrued investment income 1,717,109 1,236,919
Land and related mineral and water rights (Note 6) 137,235,241 123,671,842
Property and equipment, net (Note 10) 2,944,513 1,752,820
Deferred policy acquisition costs (Note 11) 6,299,819 4,821,228
Income taxes receivable 3,648,577
Goodwill, net (Note 1) 4,000,508 3,456,750
Other assets 5,427,828 4,591,948
Net deferred income taxes (Note 9) 11,354,592 2,019,217
------------ ------------
Total assets $395,144,634 $380,048,592
============ ============
The accompanying notes are an integral part of the
consolidated financial statements.
49
50
PICO HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS, CONTINUED
DECEMBER 31, 2000 AND 1999
LIABILITIES AND SHAREHOLDERS' EQUITY
2000 1999
------------- -------------
Policy liabilities and accruals:
Unpaid losses and loss adjustment expenses, net of discount (Note 14) $ 121,541,722 $ 139,132,875
Unearned premiums 25,505,189 17,204,690
Reinsurance balance payable 5,631,603 7,712,602
Deferred gain on retroactive reinsurance 968,872 1,236,525
Other liabilities (Note 22) 13,148,093 15,953,623
Bank and other borrowings (Note 23) 15,550,387 15,704,507
Taxes payable 324,837 4,857,297
Excess of fair value of net assets acquired over purchase price (Note 1) 3,360,581 3,928,566
------------- -------------
Total liabilities 186,031,284 205,730,685
------------- -------------
Minority interest 3,920,739 926,371
------------- -------------
Commitments and Contingencies (Note 12, 13, 14, 15, 16, 17, 21, 22 and 23)
Preferred stock, $.01 par value, authorized 2,000,000; none issued (extinguished
in 2000)
Common stock, $.001 par value; authorized 100,000,000; issued 16,784,223
and 13,448,533 at December 31, 2000 and 1999, respectively 16,784 13,449
Additional paid-in capital 235,844,655 186,004,827
Accumulated other comprehensive loss (Note 1) (12,732,978) (4,216,827)
Retained earnings 59,893,785 69,419,722
------------- -------------
283,022,246 251,221,171
Less treasury stock, at cost (4,394,127 common shares in 2000 and 1999) (77,829,635) (77,829,635)
------------- -------------
Total shareholders' equity 205,192,611 173,391,536
------------- -------------
Total liabilities and shareholders' equity $ 395,144,634 $ 380,048,592
============= =============
The accompanying notes are an integral part of
the consolidated financial statements.
50
51
PICO HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
2000 1999 1998
------------ ------------ ------------
Revenues:
Premium income $ 34,435,754 $ 36,379,102 $ 36,131,415
Net investment income 8,238,296 6,386,887 9,260,720
Net realized gain (loss) on investments (7,525,762) 440,611 (4,411,805)
Sale of land and related mineral and water rights 5,478,263 6,081,764 2,242,200
Other income 4,726,419 5,199,173 4,014,692
------------ ------------ ------------
Total revenues 45,352,970 54,487,537 47,237,222
------------ ------------ ------------
Expenses:
Loss and loss adjustment expenses (Notes 13 and 14) 24,026,218 35,211,836 30,528,007
Amortization of policy acquisition costs (Note 11) 10,250,348 10,484,345 10,877,142
Cost of land and related mineral and water rights 3,995,508 4,458,694 1,067,503
Insurance underwriting and other expenses 22,355,463 23,794,385 15,972,882
------------ ------------ ------------
Total expenses 60,627,537 73,949,260 58,445,534
------------ ------------ ------------
Equity in income (loss) of unconsolidated affiliates 1,794,069 (1,026,245) (780,065)
------------ ------------ ------------
Loss from continuing operations before income taxes
and minority interest (13,480,498) (20,487,968) (11,988,377)
Provision (benefit) for federal, foreign and state income taxes (Note 9) (8,201,176) (12,519,374) 1,495,491
------------ ------------ ------------
Loss from continuing operations
before minority interest (5,279,322) (7,968,594) (13,483,868)
Minority interest in loss of subsidiaries 717,076 706,076 4,532,632
------------ ------------ ------------
Loss from continuing operations (4,562,246) (7,262,518) (8,951,236)
Income from discontinued operations, net (Note 7) 1,075,024
------------ ------------ ------------
Loss before extraordinary gain and accounting change (4,562,246) (7,262,518) (7,876,212)
Extraordinary gain, net of income tax expense of $227,821 442,240
Cumulative effect of change in accounting principle, net (Note 24) (4,963,691)
------------ ------------ ------------
Net loss $ (9,525,937) $ (6,820,278) $ (7,876,212)
============ ============ ============
Net loss per common share - basic and diluted:
Continuing operations $ (0.39) $ (0.81) $ (1.50)
Discontinued operations 0.18
Extraordinary gain 0.05
Cumulative effect of change in accounting principle (0.43)
------------ ------------ ------------
Net loss per common share $ (0.82) $ (0.76) $ (1.32)
============ ============ ============
Weighted average shares outstanding 11,604,120 8,998,442 5,981,814
============ ============ ============
The accompanying notes are an integral part of
the consolidated financial statements.
51
52
PICO HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
Accumulated Other
Comprehensive Loss
-----------------------------
Net Unrealized
Additional Appreciation Foreign
Common Paid-In Retained (Depreciation) Currency
Stock Capital Earnings on Investments Translation
-------- ------------ ------------ -------------- -------------
Balance, January 1, 1998 $ 6,518 $ 43,173,179 $84,116,212 $ (2,672,060) $ (2,060,358)
Comprehensive Loss for 1998
Net loss (7,876,212)
Net unrealized depreciation on investments
net of deferred tax of $21,000 and
reclassification adjustment of $2.4 million (415,505)
Foreign currency translation (2,703,514)
Total Comprehensive Loss
Issuance of common stock
upon acquisition of minority
interest of GEC, net of costs
of $1.7 million 6,811 131,381,409
Acquisition of 412,846 shares of
treasury stock 8,400,000
Exercise of 57,307 options on
treasury stock 200,000
-------- ------------ ----------- ------------ ------------
Balance, December 31, 1998 $ 13,329 $183,154,588 $76,240,000 $ (3,087,565) $ (4,763,872)
======== ============ =========== ============ ============
Treasury
Stock Total
------------ ------------
Balance, January 1, 1998 $ (9,828,953) $112,734,538
Comprehensive Loss for 1998
Net loss
Net unrealized depreciation on investments
net of deferred tax of $21,000 and
reclassification adjustment of $2.4 million
Foreign currency translation
Total Comprehensive Loss (10,995,231)
Issuance of common stock
upon acquisition of minority
interest of GEC, net of costs
of $1.7 million (57,709,089) 73,679,131
Acquisition of 412,846 shares of
treasury stock (10,000,000) (1,600,000)
Exercise of 57,307 options on
treasury stock 200,000
------------ ------------
Balance, December 31, 1998 $(77,538,042) $174,018,438
============ ============
The accompanying notes are an integral part of
the consolidated financial statements.
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53
PICO HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY, CONTINUED
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
Accumulated Other
Comprehensive Loss
----------------------------
Net Unrealized
Additional Appreciation Foreign
Common Paid-In Retained (Depreciation) Currency Treasury
Stock Capital Earnings on Investments Translation Stock
-------- ------------ ------------ -------------- ------------ -------------
Balance, December 31, 1998 $13,329 $183,154,588 $76,240,000 $ (3,087,565) $(4,763,872) $(77,538,042)
Comprehensive Loss for 1999
Net loss (6,820,278)
Net unrealized appreciation on investments
net of deferred tax of $2 million and
reclassification adjustment of $349,000 3,662,591
Foreign currency translation (27,981)
Total Comprehensive Loss
Exercise of 120,000 warrants
at $23.80 per share 120 2,850,239
Purchase of 13,000 PICO treasury shares (291,593)
-------- ------------ ----------- ------------- ----------- ------------
Balance, December 31, 1999 $13,449 $186,004,827 $69,419,722 $ 575,026 $(4,791,853) $(77,829,635)
======== ============ =========== ============= =========== ============
Total
-------------
Balance, December 31, 1998 $174,018,438
Comprehensive Loss for 1999
Net loss
Net unrealized appreciation on investments
net of deferred tax of $2 million and
reclassification adjustment of $349,000
Foreign currency translation
Total Comprehensive Loss (3,185,668)
Exercise of 120,000 warrants
at $23.80 per share 2,850,359
Purchase of 13,000 PICO treasury shares (291,593)
------------
Balance, December 31, 1999 $173,391,536
============
The accompanying notes are an integral part of the
consolidated financial statements
53
54
PICO HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY, CONTINUED
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
Accumulated Other
Comprehensive Loss
-----------------------------
Net Unrealized
Additional Appreciation Foreign
Common Paid-In Retained (Depreciation) Currency Treasury
Stock Capital Earnings on Investments Translation Stock
-------- ------------- ------------ -------------- ------------- --------------
Balance, December 31, 1999 $ 13,449 $ 186,004,827 $ 69,419,722 $ 575,026 $ (4,791,853) $ (77,829,635)
Comprehensive Loss for 2000
Net loss (9,525,937)
Net unrealized depreciation on investments
net of deferred tax of $3.7 million (7,552,774)
Foreign currency translation (963,377)
Total Comprehensive Loss
Rights offering, net of $193,000 of expenses 3,335 49,839,828
-------- ------------- ------------ ------------ ------------ -------------
Balance, December 31, 2000 $ 16,784 $ 235,844,655 $ 59,893,785 $ (6,977,748) $ (5,755,230) $ (77,829,635)
======== ============= ============ ============ ============ =============
Total
--------------
Balance, December 31, 1999 $ 173,391,536
Comprehensive Loss for 2000
Net loss
Net unrealized depreciation on investments
net of deferred tax of $3.7 million
Foreign currency translation
Total Comprehensive Loss (18,042,088)
Rights offering, net of $193,000 of expenses 49,843,163
-------------
Balance, December 31, 2000 $ 205,192,611
=============
The accompanying notes are an integral part of the
consolidated financial statements
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55
PICO HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999, AND 1998
2000 1999 1998
------------ ------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (9,525,937) $ (6,820,278) $ (7,876,212)
Adjustments to reconcile net loss to net cash used in
operating activities:
Provision for deferred taxes (3,084,491) (12,309,782) 6,552,162
Increase in deferred taxes related to cumulative effect (2,557,053)
Depreciation and amortization 2,678,267 3,076,471 1,492,097
(Gain) loss on sale of investments 7,525,762 (440,611) 4,411,805
Gain on land exchange (270,455)
Gain on disposal of discontinued operations (1,105,012)
Gain on sale of real estate (1,623,070) (1,174,697)
Extraordinary gain on early extinguishment of debt (442,240)
Equity in (income) loss of unconsolidated affiliates (1,794,069) 1,026,245 780,065
Semitropic lease payment (2,333,640) (2,333,333) (2,400,150)
Dividends received from unconsolidated affiliates 622,625 217,935 171,291
Minority interest (717,067) (706,076) (4,532,632)
Changes in assets and liabilities, net of effects of acquisitions:
Premiums and other receivables (7,001,894) 938,386 245,551
Income taxes (883,883) 8,049,785 (6,522,454)
Reinsurance receivable 17,446,329 10,584,462 19,400,746
Reinsurance payable (2,080,999) (4,356,288) 3,992,231
Deferred policy acquisition costs (1,478,591) 727,406 (227,918)
Unpaid losses and loss adjustment expenses (17,591,153) (15,887,821) (41,074,822)
Unearned premiums 8,300,499 (3,599,742) (830,465)
Other adjustments, net 2,044,885 (2,283,138) 5,085,280
------------ ------------ ------------
Net cash used in operating activities (10,700,865) (26,181,689) (23,613,134)
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from the sale of available for sale investments:
Fixed maturities 4,690,829 15,215,844
Equity securities 1,170,169 11,817,436 9,602,798
Proceeds from maturity of available for sale investments 13,900,000 3,815,669 2,925,000
Purchases of available for sale investments:
Fixed maturities (47,954,744) (19,047,153) (5,935,894)
Equity securities (14,335,900) (19,166,770) (9,685,616)
Net sales of short-term investments (7,542,898) 4,605,027 4,627,225
Proceeds from the sales of real estate 2,741,980 74,761
Purchases of land, water and mineral rights (14,400,964) (4,576,870) (4,143,988)
Proceeds from the sale of land, water and mineral rights 5,478,263 4,906,234 518,943
Proceeds from sale of property and equipment 6,510,166
Purchases of property and equipment (1,107,898) (739,748) (859,267)
Proceeds from sale of business 27,130,343
Acquisition costs for purchase of minority interest in GEC (1,665,613)
Investments in and advances to affiliates (1,390,851) (753,928) (1,886,714)
Other investing activities, net (537,258) (1,094,370) (1,635,197)
------------ ------------ ------------
Net cash provided by (used in) investing activities (62,031,252) (17,492,493) 40,792,791
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of bank and other borrowings (329,968) (191,787)
Cash raised in rights offering, net 49,843,163
Proceeds from debt 6,068,781
Proceeds from the sale of warrants 2,850,359
Proceeds from the sale of treasury stock 200,000
Repurchase of treasury stock (291,593) (1,600,000)
------------ ------------ ------------
Net cash provided by (used in) financing activities 49,513,195 8,435,760 (1,400,000)
------------ ------------ ------------
Effect of exchange rate changes on cash 124,861 322,599 (561,250)
------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents (23,094,061) (34,915,823) 15,218,407
Cash and cash equivalents, beginning of year 36,738,373 71,654,196 56,435,789
------------ ------------ ------------
Cash and cash equivalents, end of year $ 13,644,312 $ 36,738,373 $ 71,654,196
============ ============ ============
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest $ 847,000 $ 284,000 $ 380,000
============ ============ ============
Income taxes (recovered) paid $ (4,907,000) $ (4,627,000) $ 440,000
============ ============ ============
The accompanying notes are an integral part of the
consolidated financial statements.
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PICO HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES:
Organization and Operations:
PICO Holdings, Inc. and subsidiaries (collectively, "the Company") is a
diversified holding company.
Currently PICO's major activities are:
- owning and developing land and the related mineral rights and
water rights through Nevada Land & Resource Company, LLC;
- owning and developing water rights & water storage operations
through Vidler Water Company, Inc.;
- property and casualty insurance;
- "running off" the loss reserves of our medical professional
liability insurance companies; and
- making long term value-based investments in other public
companies.
PICO was incorporated in 1981 and began operations in 1982. The
company was known as Citation Insurance Group until a reverse merger with
Physicians Insurance Company of Ohio ("Physicians") on November 20, 1996.
Following the reverse merger, the Company changed its name to PICO
Holdings, Inc.
On December 16, 1998, PICO acquired the remaining 48.8% of the
outstanding stock of Global Equity Corporation ("Global Equity") through
a Plan of Arrangement (the "PICO/Global Equity Combination") whereby
Global Equity shareholders received .4628 of a newly issued PICO common
share for each Global Equity share surrendered. Immediately following the
close of the transaction, PICO effected a 1-for-5 reverse stock split
(the "Reverse Stock Split").
The Company's primary subsidiaries as of December 31, 2000 are as
follows:
Nevada Land & Resource Company, LLC ("Nevada Land"). In April
1997, PICO acquired Nevada Land, which then owned approximately 1.4
million acres of deeded land in northern Nevada, together with the
attaching water, mineral and geothermal rights.
Vidler Water Company, Inc. ("Vidler"). Vidler is a majority-owned
Delaware corporation that was originally formed under the laws of the
state of Colorado. Vidler's business involves identifying end users,
namely municipalities or developers, in the Southwest who require water,
and then locating a source and supplying the demand, utilizing the
company's own assets where possible. These assets comprise water rights
in the states of Colorado, Arizona, and Nevada, and water storage
facilities in Arizona and California.
Sequoia Insurance Company ("Sequoia"). Sequoia is a California
insurance company licensed to write insurance coverage for property and
casualty risks ("P&C") within the states of California and Nevada.
Sequoia writes business through independent agents and brokers. In recent
years, Sequoia has primarily written farm and small to medium-sized
commercial insurance in California and Nevada. During 2000, Sequoia
significantly expanded its personal insurance business with the
acquisition of Personal Express Insurance Services, Inc.
Citation Insurance Company ("Citation"). Citation is a
California-domiciled insurance company licensed to write commercial
property and casualty insurance in Arizona, California, Colorado, Nevada,
Hawaii, New Mexico and Utah. Citation ceased writing premiums in December
2000, and is now "running off" the loss reserves from its existing
business.
Physicians Insurance Company of Ohio ("Physicians"). Prior to selling
its book of medical professional liability ("MPL") insurance business in
1995, Physicians engaged in providing MPL insurance coverage to
physicians and surgeons, primarily in Ohio. On August 28, 1995,
Physicians entered into an agreement with Mutual Assurance, Inc.
("Mutual") pursuant to which Physicians sold its recurring MPL insurance
business to Mutual. Physicians is in "run off".
SISCOM, Inc. ("SISCOM"). SISCOM is a Colorado corporation that is
a software developer and systems integrator for video-based content
management systems for the professional broadcast, sports, and
entertainment industries.
56
57
Unconsolidated Affiliates:
Investments in which the Company owns between 20% to 50% of the voting
interest and/or has the ability to exercise significant influence are
accounted for under the equity method of accounting. Accordingly, the
Company's share of income or losses are included in consolidated results.
Currently, the most significant investments the Company classifies as
equity affiliates are:
Jungfraubahn Holding AG ("Jungfraubahn") is a Swiss corporation
engaged in the transportation, tourism and recreation sectors in
Switzerland. During 2000, PICO increased ownership to 19.3% and obtained
a board seat and adopted the equity method of accounting. Previously, the
investment was held at cost and marked to market under Statement of
Financial Accounting Standards No. 115, "Accounting for Certain
Investments in Debt and Equity Securities" ("SFAS 115"). All prior year
results have been adjusted to reflect the investment at equity.
HyperFeed Technologies, Inc. ("HyperFeed") provides financial
market data and data delivery solutions to the financial services
industry. PICO owns approximately 36% of the outstanding voting stock of
HyperFeed.
Principles of Consolidation:
The accompanying consolidated financial statements include the
accounts of the Company and its majority-owned subsidiaries, and have
been prepared in accordance with accounting principles generally accepted
in the United States of America. All significant intercompany balances
and transactions have been eliminated.
Use of Estimates in Preparation of Financial Statements:
The preparation of financial statements in accordance with US GAAP
requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent
liabilities at the date of the financial statements and the reported
amounts of revenues and expenses for each reporting period. The
significant estimates made in the preparation of the Company's
consolidated financial statements relate to the assessment of the
carrying value of unpaid losses and loss adjustment expenses, deferred
policy acquisition costs, land and water rights, deferred income taxes
and contingent liabilities. While management believes that the carrying
value of such assets and liabilities are appropriate as of December 31,
2000 and 1999, it is reasonably possible that actual results could differ
from the estimates upon which the carrying values were based.
Investments:
The Company's investment portfolio at December 31, 2000 and 1999 is
comprised of investments with fixed maturities, including U.S. government
bonds, agency securities, investment-grade corporate bonds and commercial
paper; equity securities, including investments in common and preferred
stocks, and warrants; debentures of public and private companies;
mortgage interests; and real estate.
The Company applies the provisions of SFAS No. 115, this statement,
among other things, requires investment securities to be divided into
three categories: held to maturity, available for sale, and trading. The
Company classifies all investments as available for sale. Unrealized
gains or losses on investments recorded at fair value are recorded net of
tax and included in accumulated other comprehensive income or loss.
The Company regularly reviews the carrying value of its investments
for impairment. A decline in the value of any investment below cost that
is deemed other than temporary is written down to net realizable value.
Adjustments for write-downs are reflected in net realized gain or loss on
investments in the consolidated statements of operations. During the year
ended December 31, 2000, the Company's investment in MKG was considered
permanently impaired, and a charge of $2.5 million was recorded to reduce
the investment to its net realizable value of $500,000 (See Note 17).
During 1999, the Company recorded impairment losses of $3.2 million
related to a portion of an oil and gas investment.
Net investment income includes amortization of premium and accretion
of discount on the level yield method relating to bonds acquired at other
than par value. Realized investment gains and losses are included in
income and are determined on the identified certificate basis and are
recorded on a trade date basis.
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58
The Company invests domestically and abroad. Approximately $41.2
million and $41.8 million of the Company's investments at December 31,
2000 and 1999, respectively, were invested internationally, including
equity values of affiliates. The Company's most significant foreign
currency exposure is in Swiss francs and Australian dollars.
Cash and Cash Equivalents:
Cash and cash equivalents include highly liquid debt instruments
purchased with original maturities of three months or less.
Land, Minerals, Water Rights and Water Storage:
Land, minerals, water rights, water storage, and land improvements are
carried at cost. Water rights consist of various water interests acquired
independently or in conjunction with the acquisition of real properties.
Water rights are stated at cost and, when applicable, consist of an
allocation of the original purchase price between water rights and other
assets acquired based on their relative fair values. In addition, costs
directly related to the acquisition and development of water rights are
capitalized. This cost includes, when applicable, the allocation of the
original purchase price, costs directly related to acquisition, and
interest and other costs directly related to developing land for its
intended use. Amortization of land improvements is computed on the
straight-line method over the estimated useful lives of the improvements
ranging from 5 to 15 years. Provision is made for any diminution in value
that is considered to be other than temporary.
Property and Equipment:
Property and equipment are carried at cost, net of accumulated
depreciation. Depreciation is computed on the straight-line method over
the estimated lives of the assets ranging from 3 to 15 years. Maintenance
and repairs are charged to expense as incurred, while significant
improvements are capitalized. Gains or losses on the sale of property and
equipment are included in other income.
Deferred Acquisition Costs:
Costs of the insurance companies that vary with and are primarily
related to the acquisition of new and renewal insurance contracts, net of
reinsurance ceding commissions, are deferred and amortized over the terms
of the policies for property and liability insurance. Future investment
income has been taken into consideration in determining the
recoverability of such costs.
Goodwill:
Goodwill represents the difference between the purchase price and the
fair value of the net assets (including tax attributes) of companies
acquired in purchase transactions. The Company recorded negative goodwill
(i.e., excess of fair value of assets acquired over purchase price) as a
result of the acquisition of Citation Insurance Group in November 1996.
Negative goodwill is amortized using the straight-line method over 10
years. At December 31, 2000 and 1999, the Company had accumulated
negative goodwill amortization of $2.3 million and $1.8 million,
respectively. The Company also recorded goodwill related to its
investment in Conex, SISCOM, Personal Express and Sequoia and amortizes
the balances over various lives not exceeding 10 years. At December 31,
2000 and 1999, the Company had $1.3 million and $1.1 million in
accumulated amortization, respectively.
Impairment of Long-Lived Assets:
The Company applies the provisions of SFAS No. 121 "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of" and periodically evaluates whether events or circumstances have
occurred that may affect the estimated useful life or the recoverability
of long-lived assets. Impairment of long-lived assets is triggered when
the estimated future undiscounted cash flows, excluding interest charges,
for the lowest level for which there are identifiable cash flows that are
independent of the cash flows of other groups of assets do not exceed the
carrying amount. The Company prepares and analyzes cash flows at various
levels of grouped assets. The Company reviews cash flows for significant
individual assets held within a subsidiary, and for a subsidiary taken as
a whole. If the events or circumstances indicate that the remaining
balance may be permanently impaired, such potential impairment will be
measured based upon the difference between the carrying amount and the
fair value of such assets determined using the estimated future
discounted cash flows, excluding interest charges, generated from the use
and ultimate disposition of the respective long-lived asset.
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59
Reinsurance:
The Company records all reinsurance assets and liabilities on the
gross basis, including amounts due from reinsurers and amounts paid to
reinsurers relating to the unexpired portion of reinsured contracts
(prepaid reinsurance premiums).
Unpaid Losses and Loss Adjustment Expenses:
Reserves for MPL and property and casualty insurance unpaid losses and
loss adjustment expenses include amounts determined on the basis of
actuarial estimates of ultimate claim settlements, which include
estimates of individual reported claims and estimates of incurred but not
reported claims. The methods of making such estimates and for
establishing the resulting liabilities are continually reviewed and
updated based on current circumstances, and any adjustments resulting
therefrom are reflected in current operations. Reserves for MPL unpaid
losses and loss adjustment expenses for MPL insurance claims have been
discounted, prior to 2000, to reflect the time value of money (See Note
24).
Recognition of Premium Revenue:
MPL and other property and casualty insurance premiums written are
earned principally on a monthly pro rata basis over the lives of the
policies. The premiums applicable to the unexpired terms of the policies
are included in unearned premiums.
Income Taxes:
The Company's provision for income tax expense includes federal,
state, local and foreign income taxes currently payable and those
deferred because of temporary differences between the income tax and
financial reporting bases of the assets and liabilities. The liability
method of accounting for income taxes also requires the Company to
reflect the effect of a tax rate change on accumulated deferred income
taxes in income in the period in which the change is enacted.
In assessing the realization of deferred income taxes, management
considers whether it is more likely than not that any deferred income tax
assets will be realized. The ultimate realization of deferred income tax
assets is dependent upon the generation of future taxable income during
the period in which temporary differences become deductible. If future
income does not occur as expected, a deferred income tax valuation
allowance may be established or modified.
Earnings per Share:
Basic earnings per share are computed by dividing net earnings by the
weighted average shares outstanding during the period. Diluted earnings
per share are computed similar to basic earnings per share except the
weighted average shares outstanding are increased to include additional
shares from the assumed exercise of stock options and warrants, if
dilutive. The number of additional shares is calculated by assuming that
the outstanding options and warrants were exercised, and that the
proceeds were used to acquire shares of common stock at the average
market price during the period.
The Company reported a loss from operations in each of the three years
ended December 31, 2000 and consequently the calculation of diluted
earnings per share in each year excludes the options and warrants
outstanding in those years because the impact would be anti-dilutive.
Stock options of 1.1 million in 2000, and 1 million in 1999 and 1998 and
223,187 warrants in 1998 were excluded from the calculation of the
diluted weighted average shares outstanding.
Comprehensive Loss
Comprehensive income or loss includes foreign currency
translation, and unrealized holding gains and losses on available for
sale securities. The components of accumulated other comprehensive loss
are as follows:
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60
December 31,
2000 1999
---------------- ----------------
Net unrealized income (loss) on securities $ (6,977,748) $ 575,026
Foreign currency translation (5,755,230) (4,791,853)
---------------- ----------------
Accumulated other comprehensive loss $ (12,732,978) $ (4,216,827)
================ ================
Accumulated other comprehensive loss is net of deferred income tax
asset of $3.2 million and a deferred tax liability of $523,000 at
December 31, 2000 and 1999, respectively.
Translation of Foreign Currency:
Financial statements of foreign operations are translated into U.S.
dollars using average rates of exchange in effect during the year for
revenues, expenses, gains and losses, and the exchange rate in effect at
the balance sheet date for assets and liabilities. Unrealized exchange
gains and losses arising on translation are reflected within accumulated
other comprehensive loss.
Reclassifications:
Certain amounts in the financial statements for prior periods have
been reclassified to conform to the current year presentation.
Recent Accounting Pronouncements:
Effective January 1, 2001, the Company adopted SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities," as
amended by SFAS 138, "Accounting for Certain Derivative Instruments and
Hedging Activities." As amended, SFAS 133 requires that an entity
recognize all derivatives as either assets or liabilities in the
statement of financial position, measure those instruments at fair value
and recognize changes in fair value in earnings for the period of change
unless the derivative qualifies as an effective hedge that offsets
certain exposure. As a result of this adoption, the Company recorded a
transition adjustment in the first quarter of 2001 that decreased net
income by approximately $1 million, net of a $500,000 tax benefit and
increased other comprehensive income by the same amount (no effect on
shareholders' equity). These adjustments will be reported as a
cumulative effect of change in accounting principle. Future effects on
net income will depend on market conditions.
In December 1999, the SEC issued Staff Accounting Bulletin (SAB) No.
101, "Revenue Recognition in Financial Statements," which summarizes the
SEC's interpretation of applying generally accepted accounting principles
to revenue recognition in the financial statements. SAB No. 101 was
subsequently amended in June 2000 and became effective for the fourth
fiscal quarter of 2000 for the Company. Based on the Company's current
revenue recognition policies, the adoption of SAB No. 101, as amended,
did not have a material impact on PICO's consolidated financial position
or the results of operations.
2. SIGNIFICANT ACQUISITIONS:
On December 16, 1998, PICO acquired the remaining 48.8% of Global
Equity, making it a wholly owned subsidiary. This was accomplished
through an exchange of PICO shares for Global Equity shares at the
exchange ratio of .4628 of a PICO share for each share of Global Equity.
PICO issued a total of 6,810,426 shares of PICO common stock to former
Global Equity shareholders. PICO subsidiaries hold 3,110,837 of these
newly issued shares which are recorded at cost, as treasury stock in the
consolidated balance sheets of the Company. Net of the shares issued to
affiliates, PICO issued 3,699,589 common shares valued at the average
market price per share 5 days before, and after the announcement of the
transaction. This average was approximately $22.10 per share (post
reverse split). In addition, PICO exchanged 223,187 PICO warrants with an
exercise price of $23.80 per share for all the outstanding Global Equity
warrants using the same exchange ratio. PICO also exchanged 484,967 stock
options with the Global Equity officers, two current Global Equity
directors and a former Global Equity director in exchange for
surrendering their Global Equity stock options. These grants placed the
participants in a substantially similar
60
61
position regarding shares and exercise price and vesting. The acquisition
was accounted for using the purchase method of accounting.
Accordingly, a portion of the purchase price was allocated to the
net assets acquired based on their estimated fair values as noted in the
following table:
Purchase Price:
Value of approximately 3.7 million PICO shares exchanged $ 81,760,917
Direct costs of acquisition 1,665,613
Value of GEC options assumed 2,731,975
------------------------
$ 86,158,505
========================
Allocation of Purchase Price:
Historic GEC shareholders' equity acquired $ 58,801,561
Adjustments to assets and liabilities acquired:
Increase in book value of surface, water and mineral rights 36,945,129
Increase in book value of PICO common stock owned by GEC 3,342,610
Deferred income tax liability (12,930,795)
------------------------
$ 86,158,505
========================
3. DISPOSITIONS:
On September 8, 2000, the Company sold its investment in Conex for
nominal consideration, and recorded a pretax loss on the sale of $4.6
million ($1.8 million after tax).
Prior to the sale, on November 3, 1999, the Company increased its
ownership of Conex from 66% to 83% through the redemption of its remaining
preferred shares and conversion of intercompany loans into common stock.
On August 2, 1999, the Company increased its ownership of Conex from 32%
to 66% through the redemption of preferred shares, the proceeds from which
were used to exercise warrants for common shares. The consolidated results
of operations for the year ended December 31, 1999 reflect the
consolidation of Conex for the period August 3 to December 31. Previous to
consolidation, the investment was accounted for using the equity method.
Consequently, the results of operations for the year ended December 31,
1999 include 32% of the losses in the unconsolidated affiliate for the
period January 1 to August 2, 1999. The reported results in 2000 include
Conex as a consolidated subsidiary until September 8, 2000. Conex's
primary asset is a 60% sino-foreign joint venture that manufactures
wheeled and tracked excavators in The People's Republic of China.
Conex accounts for its 60% interest in the sino-foreign joint venture
using the equity method of accounting due the fact that it does not have
majority financial control over the policies and procedures of the joint
venture. The functional currency for the joint venture is the Chinese
Renminbi.
Under the terms of the joint venture agreement between Conex and the
sino-foreign joint venture in The People's Republic of China, Conex had a
commitment to fund a third round of financing in the amount of $5 million.
This liability was included in the consolidated financial statements at
December 31, 1999, but following the sale of Conex, this liability, as
well as all the other assets and liabilities of Conex, are no longer
included in PICO's consolidated financial statements.
The following is the results of operations of Conex for the year
ended December 31, 1999 and for the period in 2000 prior to its
disposition:
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2000 1999
--------------- --------------
Expenses $1,393,721 $ 1,114,938
Equity in losses of
unconsolidated affiliates 889,627 1,873,874
--------------- --------------
Loss from operations 2,283,348 2,988,812
Minority interest (168,988) (1,491,417)
--------------- --------------
Net loss $2,114,360 $ 1,497,395
=============== ==============
On January 31, 2000, PICO sold its interest in Summit Global
Management for $100,000, and recorded a pretax loss on sale of $75,400.
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4. INVESTMENTS:
At December 31, the cost and carrying value of investments were as
follows:
Gross Gross
Unrealized Unrealized Carrying
2000: Cost Gains Losses Value
------------------ --------------- ---------------- ------------------
Fixed maturities:
U.S. Treasury securities
and obligations of U.S.
government corporations
and agencies $ 20,774,818 $ 186,444 $ (22,329) $ 20,938,933
Corporate securities 43,584,813 1,026,850 (41,895) 44,569,768
Mortgage-backed
securities 12,350,000 12,350,000
------------------ --------------- ---------------- ------------------
76,709,631 1,213,294 (64,224) 77,858,701
Short term investments 24,036,573 24,036,573
Equity securities 47,482,543 1,471,978 (12,780,016) 36,174,505
Investment in unconsolidated affiliates 27,824,291 27,824,291
------------------ --------------- ---------------- ------------------
Total $ 176,053,038 $2,685,272 $ (12,844,240) $ 165,894,070
================== =============== ================ ==================
Gross Gross
Unrealized Unrealized Carrying
1999: Cost Gains Losses Value
---------------- --------------- ---------------- -----------------
Fixed maturities:
U.S. Treasury securities
and obligations of U.S.
government corporations
and agencies $ 25,157,710 $ 8,461 $ (291,784) $ 24,874,387
Corporate securities 9,600,805 28,225 (29,003) 9,600,027
Mortgage-backed
securities 12,850,000 12,850,000
---------------- --------------- ---------------- -----------------
47,608,515 36,686 (320,787) 47,324,414
Equity securities 42,505,664 12,478,502 (11,136,108) 43,848,058
Short term investments 16,493,675 16,493,675
Investment in unconsolidated affiliates 32,066,252 32,066,252
---------------- --------------- ---------------- -----------------
Total $ 138,674,106 $ 12,515,188 $ (11,456,895) $ 139,732,399
================ =============== ================ =================
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The amortized cost and carrying value of investments in fixed
maturities at December 31, 2000, by contractual maturity, are shown
below. Expected maturity dates may differ from contractual maturity dates
because borrowers may have the right to call or prepay obligations with
or without call or prepayment penalties.
Amortized Carrying
Cost Value
------------------- ------------------
Due in one year or less $10,996,524 $11,005,461
Due after one year through five years 47,229,390 48,180,519
Due after five years 6,133,717 6,322,721
Mortgage-backed securities 12,350,000 12,350,000
------------------- ------------------
$76,709,631 $77,858,701
=================== ==================
Investment income is summarized as follows for each of the years
ended December 31:
2000 1999 1998
--------------- --------------- ---------------
Investment income from:
Available for sale:
Fixed maturities $ 5,196,831 $ 1,593,052 $ 1,694,345
Equity securities 343,211 252,693 414,038
Short-term investments
and other 2,884,099 4,809,821 7,540,967
--------------- --------------- ---------------
Total investment income 8,424,141 6,655,566 9,649,350
Investment expenses (185,845) (268,679) (388,630)
--------------- --------------- ---------------
Net investment income $ 8,238,296 $ 6,386,887 $ 9,260,720
=============== =============== ===============
Pre-tax net realized gain (loss) on investments is as follows for
each of the years ended December 31:
2000 1999 1998
-------------- --------------- ---------------
Gross realized gains:
Available for sale:
Fixed maturities $ 110,708 $ 201,665
Equity securities and other investments 15,127 $ 3,395,323 3,810,751
Real estate 670,451 806,574
-------------- --------------- ---------------
Total gain 125,835 4,065,774 4,818,990
-------------- --------------- ---------------
Gross realized losses:
Available for sale:
Fixed maturities (123) (178,770)
Equity securities and other investments (7,651,597) (3,625,040) (8,260,408)
Real estate (791,617)
-------------- --------------- ---------------
Total loss (7,651,597) (3,625,163) (9,230,795)
-------------- --------------- ---------------
Net realized gain (loss) $ (7,525,762) $ 440,611 $(4,411,805)
============== =============== ===============
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During 2000 and 1999, the Company recorded $2.5 million and $3.2
million, respectively, in permanent write downs of investments to
recognize what is expected to be other than temporary declines in the
value of those securities.
During 2000, the Company purchased 981,584 shares of Australian Oil
and Gas ("AOG") for $858,000. During 1999, the Company purchased
6,166,657 shares of Australian Oil and Gas for $6.6 million and received
420,494 shares as a dividend valued at $452,000. At December 31, 2000,
the Company owns a total of 8,426,044 shares, representing a 17.97%
interest in AOG.
During the fourth quarter of 2000, the Company increased its voting
ownership in Accu Holding AG, a Swiss corporation, to 28.3%. Generally,
with a voting ownership percentage of 20% or more, the investment should
be recorded under the equity method unless the investee lacks the ability
to exercise significant influence. PICO lacks the ability to exercise
significant influence based on the inability to obtain the financial
information necessary to apply equity accounting and is accounting for
this investment at cost and recording an unrealized gain under SFAS 115.
5. INVESTMENTS IN UNCONSOLIDATED AFFILIATES:
Jungfraubahn Holding AG:
Based on the Company's 19.3% voting ownership and a seat on the Board
of Directors of Jungfraubahn Holding AG, beginning in the third quarter
of 2000, the Company adopted the equity method of accounting for this
investment. Previously the Company recorded the investment at market
value under SFAS 115. The application of equity accounting requires the
investment account, results of operations, retained earnings, unrealized
gain/loss, and accumulated foreign currency to be adjusted retroactively
to report the investment on the equity method for the percentage owned,
for all periods presented. The difference between the cost of the
investment and underlying equity in the net assets of the company of
approximately $18 million was considered negative goodwill and was
allocated to the non-current assets of Jungfraubahn. Under the equity
method of accounting, the carrying value before tax of the Company's
investment in Jungfraubahn was $23.7 million and $20.8 at December 31,
2000 and 1999, respectively. The market value of the investment at
December 31, 2000 and 1999 was approximately $18.9 million and $15.3
million, respectively.
The earnings contribution recorded using equity accounting is included
in the statement of operations under Equity in income of unconsolidated
affiliates for the percentage owned in all periods presented. The results
of Jungfraubahn are adjusted to conform to US GAAP. Dividends received
from Jungfraubahn are recorded as a reduction in the cost basis of the
investment.
During 2000, the Company purchased 3,472 shares of Jungfraubahn for
$493,000. During 1999, the Company purchased 76,600 shares of
Jungfraubahn for $11.8 million. The acquisition was financed with $7
million in cash and the remaining balance in debt. At December 31, 2000
the Company owns 112,672 shares, or 19.3% of the Jungfraubahn.
HyperFeed Technologies, Inc.:
At December 31, 2000, the Company's investment in HyperFeed consisted
of 2,602,000 shares of common stock, representing 16.5% of the common
shares outstanding; 4,786,547 shares of preferred stock, representing a
23% diluted voting interest; and an additional 4,055,195 common stock
warrants which on a diluted basis would represent an additional 20.5%
voting interest. The common and preferred stock are presented using the
equity method of accounting for investments in common stock, and have a
combined carrying value of $3.3 million at December 31, 2000. The
difference between the carrying value of the investment and the
underlying equity in the net assets or liabilities of HyperFeed is
considered goodwill and is being amortized over 10 years on a
straight-line basis. At December 31, 2000, the common stock warrants are
carried in accordance with SFAS No. 115 at an estimated fair value of
$2.9 million, prior to a $435,000 deferred tax asset, using the Black
Scholes option-pricing model. The pre-tax unrealized loss on the warrants
is $1.3 million.
The Black Scholes pricing model incorporates assumptions in
calculating an estimated fair value. The following assumptions were used
in the computations: no dividend yield for all years; a risk-free
interest rate of 5.6%; a one year expected life; and a historical 5 year
cumulative volatility of 119%.
The following is the market value of the common shares and
preferred shares based on the December 31, 2000 and 1999 closing price of
HyperFeed common stock:
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2000 1999
------------------ -----------------
Common stock $ 4,065,625 10,961,250
Preferred stock 7,478,980 22,137,780
------------------ -----------------
$ 11,544,605 $ 33,099,030
================== =================
At December 31, 1999, the Company's investment in HyperFeed consisted
of 2,370,000 shares of common stock, representing 15% of the common
shares outstanding; 4,786,547 shares of preferred stock, representing a
23% diluted voting interest; and an additional 4,055,195 common stock
warrants which on a diluted basis would represent an additional 17%
voting interest. The common and preferred stock are presented using the
equity method of accounting for investments in common stock as prescribed
by APB No. 18, and have a combined carrying value of $2.8 million at
December 31, 1999. The difference between the carrying value of the
investment and the underlying equity in the net assets or liabilities of
HyperFeed is considered goodwill and is being amortized over 10 years on
a straight-line basis. At December 31, 1999, the common stock warrants
are carried in accordance with SFAS No. 115 at an estimated fair value of
$15.4 million, prior to $3.8 million in deferred tax, using the Black
Scholes option-pricing model. The pre-tax unrealized gain on the warrants
is $11.3 million.
During the three years ended December 31, 2000, HyperFeed recorded
various capital transactions that affected PICO's voting ownership
percentage. In 2000, HyperFeed issued 164,000 shares of common stock
related to conversion of stock options which resulted in a dilution gain
to PICO of approximately $208,000. Deferred taxes are provided on each
dilution transaction. In 1999, HyperFeed issued common stock related to
the conversion of options and warrants and stock in a private placement.
These transactions diluted PICO's ownership percentage approximately 3%
to 35% at the end of 1999 and the purchase of additional shares by PICO
increased our ownership to 36% by the end of December 31, 2000. During
1998, there were various capital transactions, other than the debt
conversion, that affected PICO's voting ownership percentage. In summary,
PICO's ownership percentage increased from 16.5% at the beginning of 1998
to 18% at June 30, 1998 then declined to 17.7% at September 30, 1998. The
debt conversion during the fourth quarter of 1998 increased PICO's voting
percentage to approximately 38% at the end of 1998.
In December 1998, the Company converted its $2.5 million HyperFeed
debenture, $3.3 million line of credit and $969,000 in accrued interest
into 1,907,463 shares of HyperFeed Series A voting convertible preferred
shares, 2,879,077 series B voting convertible preferred shares, and
3,106,163 million warrants to purchase HyperFeed common shares, expiring
in 2006. The value of the preferred shares and warrants was determined
using a relative fair value approach and consequently, no gain or loss
was recorded on the transaction.
6. LAND AND RELATED MINERAL AND WATER RIGHTS:
Through its subsidiary Nevada Land, the Company owns land and the
related mineral and water rights. Through its subsidiary Vidler, the
Company owns water rights and water storage assets consisting of various
real properties in California, Arizona, Colorado and Nevada. The costs
assigned to the various components at December 31, were as follows:
2000 1999
------------------ -----------------
NLRC:
Land and related mineral and water rights $ 42,799,043 $ 44,658,905
------------------ -----------------
Vidler:
Water and water rights 25,743,707 19,924,025
Land 55,960,544 52,320,131
California water storage 5,740,483 3,999,999
Land improvements, net 6,991,464 2,768,782
------------------ -----------------
94,436,198 79,012,937
------------------ -----------------
$ 137,235,241 $ 123,671,842
================== =================
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In July of 2000, Vidler purchased a 51% interest in Fish Springs
Ranch, LLC for $4.5 million and a commitment to invest an additional
$500,000 in July 2001 and a 50% interest in V&B, LLC for $1.2 million.
These companies own the 8,628-acre Fish Springs Ranch, and the
associated water rights. The purchase price was allocated based on
estimated fair values at the date of contribution. Vidler acts as
manager and effectively controls both companies. Consequently, the
companies are included in the accompanying consolidated financial
statements as of the date of the investment in the companies. As a
result of consolidation, water rights increased approximately $6.6
million, land increased approximately $306,000, various other assets
increased $2.1 million and liabilities increased $145,000. Also during
the year, Vidler purchased Spring Valley Ranches (formerly, Robison
Ranch), for approximately $4.5 million. Approximately $3.7 million of
the purchase price was recorded as land.
At December 31, 2000 and 1999, the book value of Vidler's interest
in the Semitropic Water Storage facility was $5.7 million and $4
million, respectively. During the first ten years of the agreement
through November 2008, Vidler is required to make a minimum annual
payment of $2.3 million. In return, Vidler is entitled to store up to
185,000 acre-feet of water underground at Semitropic for 35 years. The
cash payments made during the first ten years are being capitalized and
the asset is being amortized over its useful life of thirty-five years.
In 2000 and 1999, the $2.3 million payments each year were capitalized
to water storage, and $667,000 of expense was amortized against it each
year. In addition, Vidler is required to pay annual operating and
maintenance costs. In 2000 and 1999, operating costs of $889,000 and
$863,000, respectively, were expensed to the Water Rights and Water
Storage segment.
7. DISCONTINUED OPERATIONS:
On June 16, 1997, the Company announced a definitive agreement to sell
its life and health insurance subsidiary, American Physicians Life
("American Physicians"). The closing was completed on December 4, 1998.
Proceeds from the sale were $17 million in cash. Because American
Physicians represented a major segment of the Company's business, in
accordance with APB No. 30 "Reporting the Results of Operations --
Reporting the Effects of Disposal of a Segment of a Business," operations
have been classified as discontinued operations.
Following is an unaudited summary of American Physicians'
stand-alone financial results for the periods included in the statements
of operations as discontinued operations:
1998
-----------------
Total revenues $ 9,172,435
Income before taxes 431,650
Net income 345,716
Net income per share - basic $ 0.07
Net income per share - diluted $ 0.07
The following reconciles loss from continuing operations to net loss:
1998
-----------------
Loss from continuing operations
before income taxes and minority interest $ (11,988,378)
Provision for income taxes (1,495,490)
Minority interest 4,532,632
-----------------
Loss from continuing operations (8,951,236)
-----------------
Income from discontinued operations, net of
income taxes of $86,000 in 1998 345,716
Gain on disposal of discontinued operations, net of
income tax of $375,000 in 1998 729,308
-----------------
Income from discontinued operations 1,075,024
-----------------
Net loss $ (7,876,212)
=================
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8. PREMIUMS AND OTHER RECEIVABLES:
Premiums and other receivables consisted of the following at
December 31:
2000 1999
---------------- ----------------
Agents' balances and unbilled premiums $10,008,197 $ 6,680,895
Finance receivables 3,329,670 2,793,185
Trade receivables 263,400 651,400
Other accounts receivable 5,645,636 2,004,717
---------------- ----------------
19,246,903 12,130,197
Allowance for doubtful accounts (214,300) (99,488)
---------------- ----------------
$19,032,603 $12,030,709
================ ================
Other accounts receivable include $2.2 million due from Dominion
Capital Pty. Ltd which is affiliated with the Company through a mutual
ownership in Solpower Corporation. Also included in other accounts
receivable is a $100,000 note receivable from the President and CEO of
Summit Global Management for the purchase of Summit in January 2000.
9. FEDERAL INCOME TAX:
The Company and its U.S. subsidiaries, excluding U.S. subsidiaries
of Global Equity, file a consolidated federal income tax return. Non-U.S.
subsidiaries file tax returns in various foreign countries.
Deferred income taxes reflect the net tax effects 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 as follows at December 31:
2000 1999
---------------- ----------------
Deferred tax assets:
Net operating loss carryforwards $ 20,598,362 $ 13,512,799
Loss reserves 9,023,860 10,629,211
Unearned premium reserves 1,734,353 1,081,013
Unrealized depreciation on securities 3,648,678 3,451,782
Deferred gain on retroactive reinsurance 329,417 420,419
Write down of securities 3,457,381 1,634,616
Equity in unconsolidated affiliates 784,120
Other, net 550,044 861,923
---------------- ----------------
Total deferred tax assets 39,342,095 32,375,883
---------------- ----------------
Deferred tax liabilities:
Reinsurance receivables 2,823,237 6,189,121
Deferred policy acquisition costs 2,141,939 1,639,218
Unrealized appreciation on securities 435,151 3,935,046
Equity in unconsolidated affiliates 1,344,250 1,203,772
Revaluation of surface, water and mineral rights 14,880,795 14,880,795
NLRC land sales 1,065,315 1,065,315
Accretion of bond discount 61,795 60,465
Capitalized lease 1,133,434 566,771
---------------- ----------------
Total deferred tax liabilities 23,885,916 29,540,503
---------------- ----------------
Net deferred tax assets before
valuation allowance 15,456,179 2,835,380
Less valuation allowance (4,101,587) (816,163)
---------------- ----------------
Net deferred tax asset $ 11,354,592 $ 2,019,217
================ ================
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The deferred tax asset valuation allowance as of December 31, 2000 and
1999 relates primarily to the net operating loss carryforwards (NOL's) of
Global Equity and its Canadian subsidiaries. Global Equity and its
subsidiaries are subject to rules that limit the ability to utilize their
NOL's. Due to these limitations and the uncertainty of future taxable
income, a valuation allowance has been recorded for the deferred tax
asset that may not be realized. Prior to the enactment, in 1999, of U.S.
tax legislation that removed certain limitations on the Company's ability
to utilize its U.S. NOLs, the Company carried a valuation allowance on a
portion of its U.S. NOLs. As a result of this legislation, in 1999 most
of the valuation allowance for U.S. NOL's was removed. Deferred tax
assets and liabilities, the recorded valuation allowance, and federal
income tax expense in future years can be significantly affected by
changes in circumstances that would influence management's conclusions as
to the ultimate realization of deferred tax assets.
Pre-tax loss from continuing operations for the years ended
December 31 was under the following jurisdictions:
2000 1999 1998
----------------- ---------------- -----------------
Domestic $ (11,129,866) $ (14,593,039) $ (7,907,316)
Foreign (2,350,632) (5,894,929) (4,081,061)
----------------- ---------------- -----------------
Total $ (13,480,498) $ (20,487,968) $ (11,988,377)
================= ================ =================
Income tax expense (benefit) from continuing operations for each
of the years ended December 31 consists of the following:
2000 1999 1998
---------------- ---------------- -----------------
Current tax benefit:
U.S. federal $ (450,123) $ (729,136) $ (5,415,430)
Foreign (4,666,562) 519,544 358,759
---------------- ---------------- -----------------
Total current tax benefit (5,116,685) (209,592) (5,056,671)
---------------- ---------------- -----------------
Deferred tax expense (benefit):
U.S. federal $ (3,775,785) $ (9,351,935) $ 3,409,067
Foreign 691,294 (2,957,847) 3,143,095
---------------- ---------------- -----------------
Total deferred tax expense (benefit) (3,084,491) (12,309,782) 6,552,162
---------------- ---------------- -----------------
Total income tax expense (benefit) $ (8,201,176) $ (12,519,374) $ 1,495,491
================ ================ =================
The difference between income taxes provided at the Company's
federal statutory rate and effective tax rate is as follows:
2000 1999 1998
---------------- --------------- -----------------
Federal income tax benefit at statutory rate $ (4,583,369) $ (6,965,909) $ (4,076,048)
Book tax difference on sale of securities (1,247,596)
Settlement of tax appeal (4,398,731)
Change in valuation allowance 3,285,416 (8,448,347) 1,889,973
Amortization of goodwill 208,268 217,934
Non deductible capital loss (166,750) 294,188
Investment valuation (971,105) 171,115 3,434,307
Accrued liabilities 1,578,000
Extraordinary gain 227,821
Other (327,309) 405,824 247,259
---------------- --------------- -----------------
Federal income tax expense (benefit) $ (8,201,176) $ (12,519,374) $ 1,495,491
================ =============== =================
Provision has not been made for U.S. or additional foreign tax on the
undistributed earnings of foreign subsidiaries. It is not practical to
estimate the amount of additional tax that might be payable. At December
31, 2000 the Company had an income
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tax payable of $324,000 and at December 31, 1999 the Company had an
income tax receivable of $3.6 million. The aggregate NOL's of
approximately $59 million expire between 2001 and 2020. There is a $1.4
million annual limitation on the utilization of the NOL's of PICO,
Citation and Sequoia.
10. PROPERTY AND EQUIPMENT:
The major classifications of the Company's fixed assets are as
follows at December 31:
2000 1999
-------------- ---------------
Office furniture, fixtures and equipment $ 6,834,381 $ 6,838,170
Building and leasehold improvements 1,192,123 375,975
-------------- ---------------
8,026,504 7,214,145
Accumulated depreciation (5,081,991) (5,461,325)
-------------- ---------------
Property and equipment, net $ 2,944,513 $ 1,752,820
============== ===============
Depreciation expense was $1.1 million, $1 million and $1.3 million
in 2000, 1999, and 1998, respectively.
11. DEFERRED POLICY ACQUISITION COSTS:
Changes in deferred policy acquisition costs were as follows:
2000 1999 1998
---------------- ---------------- ----------------
Balance, January 1 $ 4,821,228 $ 5,548,634 $ 5,320,716
Additions:
Commissions 7,232,606 5,559,587 6,711,752
Other 4,613,034 3,966,560 4,540,307
Ceding commissions (116,701) 230,792 (43,819)
---------------- ---------------- ----------------
Deferral of expense 11,728,939 9,756,939 11,208,240
---------------- ---------------- ----------------
Adjustment for premium deficiency (103,180)
Amortization to expense (10,250,348) (10,484,345) (10,877,142)
---------------- ---------------- ----------------
Balance, December 31 $ 6,299,819 $ 4,821,228 $ 5,548,634
================ ================ ================
12. SHAREHOLDERS' EQUITY:
On February 9, 2000, PICO registered on Form S-3 with the U. S.
Securities and Exchange Commission to offer 6,546,497 shares of PICO
stock at a price of $15 per share through a rights offering. Shareholders
were offered 1 right to buy 1 new share at $15 for every 2 common shares
held at March 1, 2000.
An investment partnership registered as PICO Equity Investors, L.P.
agreed to acquire shares which were not subscribed for, up to a total of
3,333,333 shares with an aggregate subscription price of $50 million. In
the event that less than 3,333,333 shares of common stock remained
unpurchased by shareholders on March 27, 2000, PICO committed to sell and
PICO Equity Investors, L.P. committed to purchase the number of shares
necessary to increase the total number of shares purchased by PICO Equity
Investors, L.P. to 3,333,333. PICO Equity Investors, an entity managed by
PICO Equity Investors Management, LLC, which is owned by three of PICO's
current directors (including PICO's chairman of the board and PICO's
president and chief executive officer), will exercise all voting and
investment decisions with respect to these shares for up to 10 years.
The Company has used the $49.8 million net proceeds to develop
existing water and water storage assets, acquire additional water assets,
acquire investments, and for general working capital needs.
The rights offering closed on March 27, 2000 and the Company
issued 3,335,690 additional shares of common stock for proceeds of $50
million. The Company incurred approximately $192,500 of expenses directly
related to the transaction.
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On December 16, 1998, PICO acquired the remaining shares of Global
Equity. This was accomplished through an exchange of PICO shares for
Global Equity shares at the exchange ratio of .4628 of a PICO share for
each share of Global Equity. PICO issued a total of 6,810,426 shares of
PICO common stock to former Global Equity shareholders. PICO subsidiaries
hold 3,110,837 of these newly issued shares which are recorded as
treasury stock in the consolidated balance sheets of the Company.
Following the transaction, PICO had 13,328,778 shares of common stock
issued and outstanding of which 4,380,779 million are accounted for as
treasury stock, at cost in the consolidated balances sheets. In addition,
PICO exchanged 223,187 PICO warrants with an exercise price of $23.80 per
share for all the outstanding Global Equity warrants using the same
exchange ratio. The original October 23, 1998 expiration date of the
warrants was extended to June 30, 1999. During 1999, 120,000 of the
warrants were exercised for $2.9 million. The remaining warrants expired.
No other warrants exist. PICO also exchanged 484,967 stock options to
Global Equity officers, two current Global Equity directors and a former
Global Equity director in exchange for surrendering their Global Equity
stock options. These grants placed the participants in a substantially
similar position regarding shares and exercise price, vested according to
their original terms.
In August 1998, PICO acquired 412,846 shares of its own common stock
at a cost of $1.6 million, and assumed call option obligations for the
delivery of these shares when the options are exercised. These call
options expire on December 30, 2003 and are held by PICO's chairman of
the board and president and chief executive officer. On December 31,
1998, 57,307 of these options were exercised for a total of $200,000.
On November 30, 1998, the Company eliminated the 1991 Shareholder
Rights Plan, which had been adopted by Citation Insurance Group prior to
its acquisition by PICO. The action was taken by unanimous vote of PICO's
independent directors, as required by the terms of the Plan, and on the
recommendation of management.
Stock Option Plans
PICO Holdings 1995 Non-Qualified Stock Option Plan. PICO was
authorized to issue 521,030 shares of common stock pursuant to awards
granting non-qualified stock options to full-time employees (including
officers) and directors. The options granted to employees vest at a rate
of 33% upon grant and 33% per year on each of the first two anniversaries
of the date of grant. A total of 512,005 options have been issued from
this plan. No options were granted from the plan in 2000. The Company
granted stock options in 1996 and 1995 under this plan in the form of
incentive stock options and non-qualified stock options. All issued
options from this plan are fully vested.
PICO Holdings 1998 Stock Option Plan. PICO is authorized to issue
100,000 shares of common stock pursuant to awards granted in various
forms, including incentive stock options (intended to qualify under
Section 422 of the Internal Revenue Code of 1986, as amended),
non-qualified stock options, and other similar stock-based awards. On
October 22, 1998, PICO granted 100,000 non-qualified common stock options
to an officer of the Company at an exercise price of $15.625 per share.
The options granted vest monthly over three years, expiring October 22,
2008. During 1999, 61,111 of these options expired when the officer left
the Company.
PICO Holdings 1998 Global Equity/PICO Stock Option Plan. As discussed
above, PICO assumed 484,967 options to existing Global Equity option
holders pursuant to the acquisition of the remaining shares of Global
Equity by exchanging PICO options for Global Equity options. The options
granted from this plan placed the participants in an economically
equivalent position regarding the number of shares, exercise price, and
with vesting according to their original terms.
PICO Holdings 1999 Stock Option Plan. PICO is authorized to issue
10,665 shares of common stock pursuant to awards granted as non-qualified
stock options and other similar stock-based awards. On January 1, 1999,
PICO granted 10,665 non-qualified common stock options to an officer of
the Company at an exercise price of $13.25 per share. The options were
immediately vested and expire in 10 years.
PICO Holdings 2000 Non-Statutory Stock Option Plan. PICO is authorized
to issue 1,200,000 shares of common stock to employees and directors of
and consultants to the Company, pursuant to awards granted as
non-qualified stock options. On April 7, 2000, PICO granted, subject to
approval by the Company's shareholders obtained on October 19, 2000,
1,091,223 non-qualified common stock options to employees and directors
of the Company (1,082,223 to employees and 9,000 to directors) at an
exercise price of $15.00 per share. Of the options granted to employees,
one-third vested upon grant, one-third vest April 7, 2001 and one-third
vest April 7, 2002. The options granted to directors were fully vested on
the grant date.
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A summary of the status of the Company's stock options is
presented below for the years ended December 31:
2000 1999 1998
------------------------ ------------------------- --------------------------
Weighted Weighted Weighted
Shares Average Shares Average Shares Average
Underlying Exercise Underlying Exercise Underlying Exercise
Options Prices Options Prices Options Prices
------------ ---------- ------------ ---------- ------------- -----------
Outstanding at beginning of year 1,046,575 $ 15.83 1,097,021 $ 15.89 514,454 $13.55
Granted 1,091,223 15.00 10,665 13.25 100,000 15.63
Canceled (303,199) 18.31 (61,111) 15.63 (2,400) 30.00
Options assumed in merger 484,967 18.41
Outstanding at end of year 1,834,599 14.93 1,046,575 15.83 1,097,021 15.89
Exercisable at end of year 1,113,117 14.88 1,046,575 15.83 1,002,528 15.91
Weighted-average fair value
of options granted during
the year $ 7.15 $ 9.02 $10.23
========== ========== ===========
The following table summarizes information about stock options
outstanding at December 31, 2000:
Options Outstanding Options Exercisable
--------------------------------------------------------------------- -------------------------------
Weighted
Average Weighted
Number Remaining Average Number Weighted
Range of Outstanding Contractual Exercise Exercisable Average
Exercise Prices at 12/31/00 Life Price at 12/31/00 Exercise Price
-------------------- -------------- ---------- ----------- ------------- -------------
$13.25 to $14.40 522,672 4.71 $13.45 522,672 $13.45
$15.63 to $23.95 1,311,927 16.06 $15.51 590,445 $16.14
-------------- -------------
$13.25 to $23.95 1,834,599 12.83 $14.93 1,113,117 $14.88
============== =============
The fair value of each stock option granted is estimated on the date
of grant using the Black-Scholes option-pricing model with the following
weighted-average assumptions for grants in 2000, 1999 and 1998,
respectively: no dividend yield for all years; risk-free interest rates
are different for each grant ranging from 5% to 6.97%; the expected lives
of options are estimated at 10 years, 10 years and 7 years, respectively;
and a volatility of 51% for the 2000 grants, 54% for the 1999 grants, and
62% for the 1998 grants.
Had compensation cost for the Company's stock-based compensation plans
been determined consistent with SFAS No. 123, the Company's net loss and
net loss per share would approximate the following pro forma amounts for
the years ended December 31:
2000 1999 1998
---------------- ----------------- ----------------
Reported net loss $(9,525,937) $ (6,820,278) $ (7,876,212)
SFAS No. 123 charge (2,616,496) (96,249) (56,836)
---------------- ----------------- ----------------
Pro forma net loss $(12,142,433) $ (6,916,527) $ (7,933,048)
================ ================= ================
Pro forma net loss per share: basic and diluted $ (1.05) $ (0.77) $ (1.33)
================ ================= ================
The effects of applying SFAS No. 123 in this pro forma disclosure
are not indicative of future amounts.
13. REINSURANCE:
In the normal course of business, the Company's insurance subsidiaries
have entered into various reinsurance contracts with unrelated
reinsurers. The Company's insurance subsidiaries participate in such
agreements for the purpose of limiting their loss
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exposure and diversifying their business. Reinsurance contracts do not
relieve the Company's insurance subsidiaries from their obligations to
policyholders.
All reinsurance assets and liabilities are shown on a gross basis in
the accompanying consolidated financial statements. Amounts recoverable
from reinsurers are estimated in a manner consistent with the claim
liability associated with the reinsured policy. Such amounts are included
in "reinsurance receivables" in the consolidated balance sheets as
follows:
2000 1999
--------------- --------------
Estimated reinsurance recoverable on:
Unpaid losses and loss adjustment expense (net of
discount of $2,180,701 in 1999) $ 27,444,846 $ 40,333,000
Reinsurance recoverable on paid losses and loss expenses 149,193 2,209,867
--------------- --------------
27,594,039 42,542,867
Other balances receivable from reinsurers 2,497,501
--------------- --------------
Reinsurance receivables $ 27,594,039 $ 45,040,368
=============== ==============
Unsecured reinsurance risk is concentrated in the companies shown in
the table below. The Company remains contingently liable with respect to
reinsurance contracts in the event that reinsurers are unable to meet
their obligations under the reinsurance agreements in force.
CONCENTRATION OF REINSURANCE
Unearned Reported Unreported Reinsurer
Premiums Claims Claims Balances
-------------- --------------- --------------- ---------------
Sydney Reinsurance Corporation $ 5,384,733 $ 4,651,629 $10,036,362
Continental Casualty Company 2,127,778 1,625,000 3,752,778
American Reinsurance Corp. $ 92,727 42,424 135,151
Hartford Steam & Boiler 82,094 42,000 124,094
TIG Reinsurance Group 481,758 868,239 1,349,997
Transatlantic Reinsurance Company 1,256,150 1,256,150
Cologne Reinsurance Company of America 133,100 133,100
Gerling Global Reinsurance 112,354 255,000 367,354
Mutual Assurance, Inc. 3,913,397 195,603 4,109,000
GE Reinsurance Corp. 172,080 172,080
General Reinsurance 1,710 2,707,050 10,000 2,718,760
National Reinsurance Corporation 697,786 90,000 787,786
PXRE Reinsurance Company 555,083 690,000 1,245,083
Hartford Fire Insurance Company 509,923 240,000 749,923
-------------- --------------- --------------- ---------------
$ 176,531 $16,746,366 $10,014,721 $26,937,618
============== =============== =============== ===============
Immediately prior to the sale of Sequoia to Physicians by Sydney
Reinsurance Corporation ("SRC") in 1995, Sequoia and SRC entered into a
reinsurance treaty whereby all policy and claims liabilities of Sequoia
prior to the date of purchase by Physicians are the responsibility of
SRC. Payment of SRC's reinsurance obligations under this treaty has been
unconditionally and irrevocably guaranteed by QBE Insurance Group Limited
should SRC be unable to meet its obligations under the reinsurance
agreement.
The Company entered into a reinsurance treaty in 1995 with Mutual
Assurance Inc. ("Mutual") in connection with the sale of Physicians' MPL
business to Mutual. This treaty is a 100% quota share treaty covering all
claims arising from policies issued or renewed with an effective date
after July 15, 1995. At the same time, Physicians terminated two treaties
entered into in 1994 and renewed in 1995. The first of these was a
claims-made agreement under which Physicians' retention was $200,000, for
both occurrence and claims-made insurance policies. Claims are covered up
to $1 million. The second treaty reinsured claims above $1 million up to
policy limits of $5 million on a true occurrence and claims-made basis,
depending on the underlying insurance policy.
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In 1994, the Company entered into a retroactive reinsurance
arrangement with respect to its MPL business. As a result, Physicians
initially recorded a deferred gain on retroactive reinsurance of $3.4
million in 1994. Deferred gains are being amortized into income over the
expected payout of the underlying claims using the interest method. The
unamortized gain as of December 31, 2000 and 1999 was $969,000 and $1.2
million, respectively.
Effective October 1, 1997, PRO and Physicians entered into a 100%
quota share reinsurance treaty wherein PRO agreed to cede and Physicians
agreed to assume all of PRO's existing claims liabilities including
allocated loss adjustment expenses, but excluding unallocated loss
adjustment expenses. Physicians is to administer the settlement of all
claims under PRO's policies issued prior to the effective date of the
100% quota share treaty for which Physicians will be reimbursed for
direct expenses incurred in adjusting PRO's claims. This 100% quota share
reinsurance treaty is secondary to all of PRO's reinsurance treaties in
effect prior to its effective date.
The following is a summary of the net effect of reinsurance activity
on the consolidated financial statements for each of the years ended
December 31:
2000 1999 1998
----------------- ---------------- ----------------
Direct premiums written $ 47,620,431 $ 36,558,158 $ 41,792,175
Reinsurance premiums assumed (3,020) 120,185 93,277
Reinsurance premiums ceded (3,573,715) (3,019,059) (6,598,800)
----------------- ---------------- ----------------
Net premiums written $ 44,043,696 $ 33,659,284 $ 35,286,652
================= ================ ================
Direct premiums earned 39,987,563 39,162,077 42,760,312
Reinsurance premiums assumed 2,967 144,499 141,734
Reinsurance premiums ceded (5,554,776) (2,927,474) (6,770,631)
----------------- ---------------- ----------------
Net premiums earned $ 34,435,754 $ 36,379,102 $ 36,131,415
================= ================ ================
Losses and loss adjustment expenses incurred:
Direct 25,883,270 47,939,738 32,124,801
Assumed (681,716) (825,369) 261,504
Ceded (1,175,336) (12,897,078) (2,501,772)
----------------- ---------------- ----------------
24,026,218 34,217,291 29,884,533
Effect of discounting on losses and
loss adjustment expenses (Note 14) 994,545 643,474
----------------- ---------------- ----------------
Net losses and loss adjustment expenses $ 24,026,218 $ 35,211,836 $ 30,528,007
================= ================ ================
14. RESERVES FOR UNPAID LOSS AND LOSS ADJUSTMENT EXPENSES:
Reserves for unpaid losses and loss adjustment expenses on MPL and
property and casualty business represent management's estimate of
ultimate losses and loss adjustment expenses and fall within an
actuarially determined range of reasonably expected ultimate unpaid
losses and loss adjustment expenses.
Reserves for unpaid losses and loss adjustment expenses are estimated
based on both company-specific and industry experience, and assumptions
and projections as to claims frequency, severity, and inflationary trends
and settlement payments. Such estimates may vary significantly from the
eventual outcome. In management's judgment, information currently
available has been appropriately considered in estimating the loss
reserves and reinsurance recoverable of the insurance subsidiaries.
Physicians and PRO prepare their statutory financial statements in
accordance with accounting practices prescribed or permitted by the Ohio
Department of Insurance ("Ohio Department"). Citation and Sequoia prepare
their statutory financial statements in accordance with accounting
practices prescribed or permitted by the California Department of
Insurance. Prescribed statutory accounting practices include guidelines
contained in various publications of the National Association of
Insurance Commissioners ("NAIC"), as well as state laws, regulations, and
general administrative rules. Permitted statutory accounting practices
encompass all accounting practices not so prescribed. The Ohio
Department's prescribed accounting practices do not allow for discounting
of claim liabilities. However, for years prior to 2000, the Ohio
Department permitted Physicians to discount its losses and loss
adjustment expenses related to its MPL claims to reflect anticipated
investment income. Permission was granted due primarily to the longer
claims settlement period related to MPL business as compared to most
other types of property and casualty insurance lines of business. In 2000
the Ohio Department of Insurance withdrew
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permission to discount MPL claims reserves in Physicians' statutory
financial statements. In addition, Physicians no longer discounts MPL
reserves in its GAAP financials.
Prior to 2000, Physicians used a discount rate of 4% for financial
reporting purposes. The method of determining the discount was based on
historical payment patterns and assumed an interest rate at or below
Physicians' own investment yield. The carrying value of MPL reserves
gross as to reinsurance and undiscounted was approximately $58.6 million
at December 31, 2000, and $71.9 million, net of discounting of $9.7
million, at December 31 1999.
Activity in the reserve for unpaid claims and claim adjustment
expenses was as follows for each of the years ended December 31:
2000 1999 1998
----------------- ----------------- ------------------
Balance at January 1 $ 139,132,875 $ 155,020,696 $ 196,095,518
Less reinsurance recoverable (40,333,000) (52,000,444) (67,654,430)
----------------- ----------------- ------------------
Net balance at January 1 98,799,875 103,020,252 128,441,088
----------------- ----------------- ------------------
Incurred loss and loss adjustment expenses
for current accident year claims 22,993,457 18,903,062 23,242,512
Incurred loss and loss adjustment expenses
for prior accident year claims 1,300,414 15,878,697 7,009,420
Retroactive reinsurance (267,653) (564,469) (367,399)
Accretion of discount 994,545 643,474
----------------- ----------------- ------------------
Total incurred 24,026,218 35,211,835 30,528,007
----------------- ----------------- ------------------
Effect of retroactive reinsurance 267,653 564,469 367,399
----------------- ----------------- ------------------
Cumulative effect of accounting change 7,520,744
----------------- ----------------- ------------------
Payments for claims occurring during:
Current accident year (10,880,842) (8,940,341) (11,468,646)
Prior accident years (25,636,772) (31,056,340) (44,847,596)
----------------- ----------------- ------------------
Total paid (36,517,614) (39,996,681) (56,316,242)
----------------- ----------------- ------------------
Net balance at December 31 94,096,876 98,799,875 103,020,252
Plus reinsurance recoverable 27,444,846 40,333,000 52,000,444
----------------- ----------------- ------------------
Balance at December 31 $ 121,541,722 $ 139,132,875 $ 155,020,696
================= ================= ==================
15. EMPLOYEE BENEFIT PLAN:
PICO maintains a 401(k) Defined Contribution Plan covering
substantially all employees of the Company. Matching contributions are
based on a percentage of employee compensation. In addition, the Company
may make a discretionary contribution at the end of the Plan's fiscal
year within limits established by the Employee Retirement Income
Securities Act. Contribution expense incurred by the Company for the
three years ended December 31, 2000 was $578,000, $862,000 and $618,000,
respectively.
16. REGULATORY MATTERS:
The regulations of the Departments of Insurance in the states where
the Company's insurance subsidiaries are domiciled generally restrict the
ability of insurance companies to pay dividends or make other
distributions. Based upon statutory financial statements filed with the
insurance departments as of December 31, 2000, $10.2 million was
available for distribution by the Company's wholly-owned insurance
subsidiaries to the parent company without the prior approval of the
Department of Insurance in the states in which the Company's insurance
subsidiaries are domiciled.
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17. COMMITMENTS AND CONTINGENCIES:
The Company leases some of its offices under non-cancelable operating
leases that expire at various dates through October 2008. Total rent
expense was $1 million, $1.3 million, and $1.5 million for the years
ended December 31, 2000, 1999 and 1998, respectively.
In November 1998, Vidler entered into an operating lease to acquire
185,000 acre-feet of underground water storage privileges and associated
rights to recharge and recover water located near the California Aqueduct
northwest of Bakersfield. The agreement requires Vidler to pay for these
privileges and rights a minimum of $2.3 million per year for 10 years
beginning October 1998. The agreement calls for the lease payments to be
adjusted annually by the engineering price index. The $2.3 million
minimum annual lease payment is included in the summary of future minimum
rental payments. On October 7, 1998, PICO signed an agreement
guaranteeing payment of Vidler's obligations under the agreement. PICO's
maximum obligation under this guarantee is $3.2 million, adjusted
annually by the engineering price index. The guarantee expires October 7,
2008.
Future minimum rental payments required under the leases for the years
ending December 31, are as follows:
2001 3,317,540
2002 3,138,935
2003 2,566,494
2004 2,366,145
2005 2,363,915
Thereafter 6,417,510
-----------
Total $20,170,539
===========
On January 10, 1997, Global Equity commenced an action in British
Columbia against MKG Enterprises Corp. ("MKG") and Vignoble Wines Agency
Inc. ("Vignoble") to enforce repayment of a $5 million loan made by
Global Equity to MKG. On the same day, the Supreme Court of British
Columbia granted an order preventing MKG from disposing of certain assets
pending resolution of the action. Global Equity subsequently brought a
motion to have a receiver-manager appointed for MKG and Vignoble, which
motion has been adjourned. In addition, in March 1999 Global Equity filed
an action in the Supreme Court of British Columbia against a third party.
This action states the third party had fraudulently entered into loan
agreements with MKG. Accordingly, under this action Global Equity is
claiming damages from the third party and restraining the third party
from further action. During 2000, Global Equity entered into settlement
discussions with the third party to liquidate the underlying assets of
MKG. Although discussions still continue, Global Equity would receive
approximately $500,000 of the proceeds as full satisfaction of the loan.
In connection with the sale of their interests in Nevada Land by the
former members, a limited partnership agreed to act as consultant to
Nevada Land in connection with the maximization of the development,
sales, leasing, royalties or other disposition of land, water, mineral
and oil and gas rights with respect to the Nevada property. In exchange
for these services, the partnership was to receive from Nevada Land a
consulting fee calculated as 50% of any net proceeds that Nevada Land
actually receives from the sale, leasing or other disposition of all or
any portion of the Nevada property or refinancing of the Nevada property
provided that Nevada Land has received such net proceeds in a threshold
amount equal to the aggregate of: (i) the capital investment by Global
Equity and the Company in the Nevada property (ii) a 20% cumulative
return on such capital investment, and (iii) a sum sufficient to pay the
United States federal income tax liability, if any, of Nevada Land in
connection with such capital investment. Either party could terminate
this consulting agreement in April 2002 if the partnership had not
received or become entitled to receive by that time any amount of the
consulting fee. No payments have been made under this agreement through
December 31, 1998. By letter dated March 13, 1998, Nevada Land gave
notice of termination of the consulting agreement based on Nevada Land's
determination of default by the partnership under the terms of the
agreement. In November 1998, the partnership sued Nevada Land for
wrongful termination of the consulting contract. On March 12, 1999,
Nevada Land filed a cross-complaint against the partnership for breach of
written contract, breach of fiduciary duty and seeking declaratory
relief. Effective September 1, 1999, the parties entered into a
settlement agreement wherein they agreed that the lawsuit would be
dismissed without prejudice, and that Nevada Land would deliver a report
on or before June 30, 2002 to the limited partnership of the amount of
the consulting fee which would be owed by Nevada Land to the limited
partnership if the consulting agreement were in effect.
BSND, Inc. ("BSND"), a wholly-owned subsidiary of Vidler Water
Company, has resolved a partnership dispute relating to Big Springs
Associates, a partnership which owns real property and water rights in
Nevada (the "Partnership"). BSND owns 50% of the Partnership. Under the
terms of an agreement resolving the dispute, BSND agreed to sell its
interest in the
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Partnership to the other partner for $12.65 million in cash, a gain to
Vidler of approximately $2.0 million. If the transaction has not closed
by August 1, 2001, BSND will own the Partnership in its entirety.
The Company is subject to various other litigation that arises in the
ordinary course of its business. Based upon information presently
available, management is of the opinion that such litigation will not
have a material adverse effect on the consolidated financial position,
results of operations or cash flows of the Company.
18. RELATED-PARTY TRANSACTIONS:
The employment agreements entered into with Ronald Langley and John R.
Hart in 1997 for annual base salaries of $800,000 also entitles each to
an incentive award based on the growth of the Company's book value per
share in excess of a threshold that is calculated as 80% of the previous
five year average return for the S&P 500. No award was paid during 2000,
1999 or 1998 under this program.
Summit Global Management, Inc. is a Registered Investment Advisor
providing investment advisory services to managed accounts including the
Company's subsidiaries, until June 30, 2000. On January 1, 1995, Summit's
President and CEO was granted an option expiring December 31, 2004 to
purchase 49% of Summit's common shares for a nominal amount, which
represented the fair value on the grant date. In January 2000, PICO sold
its interest in Summit to its chief executive officer in exchange for a
note receivable of $100,000 bearing interest at 7% per annum, and due
2002. In addition, Summit owes PICO approximately $65,000 for operating
expenses. The agreement that two of the Company's directors, now officers
of the Company, were entitled to receive 50% of the first $1 million of
profits attributed to PICO's ownership of Summit's common stock
terminated on January 31, 2000. No compensation was ever earned under
this arrangement.
On March 6, 1996, Charles E. Bancroft, the President and Chief
Executive Officer of Sequoia entered into an incentive agreement with
Sequoia after its acquisition by Physicians. Under the terms of this
incentive agreement, Mr. Bancroft is to receive a payment equal to ten
percent of the increase in Sequoia's value upon his retirement, removal
from office for reasons other than cause, or the sale of Sequoia to a
third party. For purposes of the incentive agreement, the increase in
Sequoia's value is to be measured from August 1, 1995; the date
Physicians acquired Sequoia. Mr. Bancroft was not eligible to receive any
incentive payment, until he was continuously employed by Sequoia from
August 1, 1995 through August 1, 1998. On March 20, 1998 this incentive
agreement was clarified to include the combined increase in value of
Sequoia and Citation. The increase in value of Citation will be measured
from January 1, 1998. The Company recorded compensation expense related
to this arrangement of $160,000, $210,000 and $110,000 during the years
ended December 31, 2000, 1999 and 1998, respectively.
Certain of the Company's subsidiaries have stock option arrangements
with officers and other employees for stock of the respective subsidiary.
Options are granted under these arrangements at the estimated fair value
of the subsidiary's stock at the time of grant. Therefore, no
compensation has been recorded by the Company related to these
arrangements. During 1998, 18,950 options to acquire approximately 1.9%
of existing shares of Vidler were exercised for $108,000. During 2000,
19,037 options to acquire 1.9% of the existing shares of Vidler were
exercised for $109,000 and a loss, calculated in accordance with Staff
Accounting Bulletin No. 51, of $525,000 before tax was recorded on the
sale.
In 1998, the Company entered into an agreement with its president and
chief executive officer to defer a portion of his 1998 regular
compensation in a deferred compensation rabbi trust account held in the
name of the Company. The deferrals are included within the Company's
consolidated balance sheet. Salary deferrals to the trust amounted to
$316,000 for 1998. There were no deferrals into this trust in 1999 or
2000.
In August 1998, the Company acquired 412,846 shares of its common
stock at a cost of $1.6 million, and assumed call option obligations for
the delivery of these shares when the options are exercised. These call
options expire on December 30, 2003 and are held by the chairman of
PICO's board and its chief executive officer. On December 31, 1998,
57,307 of these options were exercised for a total of $200,000.
During 2000, the Company sold its interest in Conex Continental Inc.
to Dominion Capital Pty. Limited, an Australian corporation. PICO and
Dominion each have an ownership interest in the common stock of Solpower
Corporation. PICO accounts for Solpower at cost and records unrealized
gains or losses under SFAS 115. PICO loaned Solpower $500,000 to purchase
its 50% interest in Protocol Resource Management, Inc. and PICO acquired
the other 50% of Protocol. The loan bears interest at 10.8% and PICO
received a warrant to purchase 1 million shares of Solpower common stock.
PICO records its interest in Protocol using the equity method of
accounting. During 2000, PICO loaned approximately $2.2 million to
Dominion
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Capital Pty. Limited. The loans bear interest at a weighted rate of 10.2%
and are due in 2001. PICO carries the loans at cost plus accrued
interest.
19. STATUTORY INFORMATION:
The Company and its insurance subsidiaries are subject to regulation
by the insurance departments of the states of domicile and other states
in which the companies are licensed to operate and file financial
statements using statutory accounting practices prescribed or permitted
by the respective Departments of Insurance. Prescribed statutory
accounting practices include a variety of publications of the National
Association of Insurance Commissioners, as well as state laws,
regulations and general administrative rules. Permitted statutory
accounting practices encompass all accounting practices not so
prescribed. Physicians has received written approval from the Ohio
Department to discount its medical professional liability unpaid loss and
loss adjustment expense reserves, including related reinsurance
recoverable using a 4% discount rate through December 31, 1999. Effective
January 1, 2000, the Ohio Department of Insurance withdrew its permission
for Physicians to discount reserves. Statutory practices vary in certain
respects from generally accepted accounting principles. The principal
variances are as follows:
(1) Certain assets are designated as "non-admitted assets" and charged
to shareholders' equity for statutory accounting purposes
(principally certain agents' balances and office furniture and
equipment).
(2) Deferred policy acquisition costs are expensed for statutory
accounting purposes.
(3) Deferred federal income taxes are not recognized for statutory
accounting purposes.
(4) Equity in net income of subsidiaries and affiliates is credited
directly to shareholders' equity for statutory accounting
purposes.
(5) Fixed maturity securities classified as available for sale are
carried at amortized cost.
(6) Loss and loss adjustment expense reserves and unearned premiums
are reported net of the impact of reinsurance for statutory
accounting purposes.
The Company and its wholly-owned insurance subsidiaries'
policyholders' surplus and net income (loss) as of and for the years
ended December 31, 2000, 1999 and 1998 on the statutory accounting basis
are as follows:
2000 1999 1998
------------ ----------- -----------
Physicians Insurance Company of Ohio: (Unaudited)
Statutory net income (loss) $ 10,212,601 $ (6,578,611) $ 2,556,946
Policyholders' surplus 33,996,556 35,022,961 31,515,421
The Professionals Insurance Company:
Statutory net income $ 130,790 $ 158,012 $ 105,286
Policyholders' surplus 3,773,247 3,437,580 3,516,143
Sequoia Insurance Company:
Statutory net income (loss) $ (2,660,660) $ 497,523 $ 4,284,251
Policyholders' surplus 23,442,970 25,389,791 23,568,505
Citation Insurance Company:
Statutory net income (loss) $ 4,549,292 $ (5,519,801) $(4,395,534)
Policyholders' surplus 14,328,017 16,502,888 21,811,840
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Certain insurance subsidiaries are owned by other insurance
subsidiaries. In the table above, investments in such subsidiary-owned
insurance companies are reflected in statutory surplus of both the parent
and subsidiary-owned insurance company. As a result, at December 31,
2000, 1999, and 1998, statutory surplus of approximately $27.2 million,
$28.8 million and $27.1 million, respectively, is reflected in both the
parent and subsidiary-owned insurance companies.
20. SEGMENT REPORTING:
The Company is a diversified holding company engaged in five major
operating segments: Land, Minerals and Related Water Rights; Water Rights
and Water Storage; Property and Casualty Insurance; Medical Professional
Liability ("MPL") Insurance and Long Term Holdings.
Segment performance is measured by revenues and segment profit before
tax in addition to changes in shareholders' equity. This information
provides the basis for calculation of return on shareholders' equity,
which is the main performance measurement used in analyzing segment
performance. In addition, assets identifiable with segments are disclosed
as well as capital expenditures, and depreciation and amortization. The
Company has operations and investments both in the U.S. and abroad.
Information by geographic region is also similarly disclosed.
Land, Minerals and Related Water Rights
PICO is engaged in land, water and mineral rights operations through
its subsidiary Nevada Land. Nevada Land owns approximately 1.2 million
acres of land and related mineral and water rights in northern Nevada.
Revenue is generated by land sales, land exchanges and leasing for
grazing, agricultural and other uses. Revenue is also generated from the
development of water rights and mineral rights in the form of outright
sales and royalty agreements.
Water Rights and Water Storage
Vidler is engaged in the following water rights and water storage
activities:
- acquiring water rights, redirecting the water to its highest and best
use, and then generating cash flow from either leasing the water or
selling the right;
- development of storage and distribution infrastructure; and
- purchase and storage of water for resale in dry years.
Property and Casualty Insurance
PICO's Property and Casualty Insurance operations are conducted by our
California-based subsidiaries Sequoia and Citation.
Sequoia writes property and casualty insurance in California and
Nevada, focusing on the niche markets of farm insurance and small to
medium-sized commercial insurance. Sequoia also writes personal
insurance, and expanded this line of business through the acquisition of
Personal Express Insurance Services, Inc. during 2000.
In the past, Citation wrote commercial property and casualty insurance
in California and Arizona. Sequoia now directly writes all business in
California and Nevada. Citation ceased writing business in December 2000,
and is now "running-off" the loss reserves from its existing business.
In this segment, revenues come from premiums earned on policies
written and investment income on the assets held by the insurance
companies.
MPL Operations
Until 1995, Physicians and Professionals wrote medical professional
liability insurance, mostly in the state of Ohio. Physicians and
Professionals have stopped writing new business and are being "run off".
This means that they are handling claims arising from historical
business, and selling investments when funds are needed to pay claims.
As expected during the run-off process, the bulk of this segment's
revenues come from investment income. The Physicians' and Professionals'
portfolios contain some of the Company's long term holdings.
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Long Term Holdings
The Long Term Investments segment comprises investments where we own
less than 50% of the company, or the company is too small to constitute a
segment of its own.
PICO invests in companies, which our management identifies as
undervalued based on fundamental analysis. Typically, the stocks will be
selling for less than tangible book value or appraised intrinsic value
(i.e. what we think the company is worth). Often the stocks will also be
trading for low ratios of earnings and cash flow, or on high dividend
yields. Additionally, the company must have special qualities, such as
unique assets, potential catalysts for change, or attractive industry
characteristics.
We also have a small portfolio of alternative investments, where we
deviated from our traditional value criteria in an attempt to capitalize
on areas of potentially greater growth without incurring undue risk
Investments directly related to the insurance operations are included
within those segments
Segment information by major operating segment follows (in thousands):
Land, Mineral Water Rights Property Long-
and Related and Water and Term
Water Rights Storage Casualty MPL Investments Consolidated
2000:
Revenues $ 5,276 $ 3,123 $ 39,257 $ 3,396 $ (5,699) $ 45,353
Income (loss) before income taxes 1,918 (4,854) 2,541 768 (13,853) (13,480)
Identifiable assets 52,002 108,215 137,808 30,155 66,965 395,145
Depreciation and amortization 28 988 253 396 1,013 2,678
Capital expenditures 15,029 321 8 151 15,509
1999:
Revenues (charges) $ 7,147 $ 1,055 $ 39,960 $ 3,153 $ 3,173 $ 54,488
Income (loss) before income taxes 1,094 (4,551) (3,679) (4,805) (8,547) (20,488)
Identifiable assets 53,810 80,313 136,589 39,827 69,510 380,049
Depreciation and amortization 33 810 971 1,255 3,069
Capital expenditures 355 147 75 577
1998:
Revenues $ 2,820 $ 592 $ 42,927 $ 2,420 $ (1,522) $ 47,237
Income (loss) before income taxes 188 (2,006) 2,825 (4,442) (8,553) (11,988)
Identifiable assets 52,540 65,748 138,408 62,774 76,684 396,154
Depreciation and amortization 33 152 496 81 730 1,492
Capital expenditures 4,783 648 86 124 5,641
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Segment information by geographic region follows (in thousands):
United
States Canada Europe Australia Asia Consolidated
-------------------------------------------------------------------------------------
2000
----
Revenues $ 47,688 $(2,482) $ 147 $ 45,353
Loss before income taxes (12,815) (2,616) 1,951 (13,480)
Identifiable assets 354,609 2,115 30,269 $8,151 395,144
Depreciation and amortization 2,544 $ 134 2,678
Capital expenditures 15,509 15,509
1999
----
Revenues $ 51,148 $ 2,672 $ 668 $ 54,488
Income (loss) before income taxes (23,094) 4,383 (1,777) (20,488)
Identifiable assets 332,830 29,901 $8,280 9,038 380,049
Depreciation and amortization 2,770 299 3,069
Capital expenditures 577 577
1998
----
Revenues (charges) $ 48,308 $(2,233) $ 3,192 $(2,030) $ 47,237
Income (loss) before income taxes (13,666) 560 3,160 (2,042) (11,988)
Identifiable assets 361,458 7,811 22,631 4,254 396,154
Depreciation and amortization 1,233 259 1,492
Capital expenditures 5,641 5,641
21. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS:
The following methods and assumptions were used to estimate the fair
value of each class of financial instruments for which it is practicable
to estimate that fair value:
- CASH AND CASH EQUIVALENTS, SHORT-TERM INVESTMENTS, RECEIVABLES,
PAYABLES AND ACCRUED LIABILITIES: Carrying amounts for these items
approximate fair value because of the short maturity of these
instruments.
- INVESTMENTS: Fair values are estimated based on quoted market
prices, or dealer quotes for the actual or comparable securities.
Fair value of warrants to purchase common stock of publicly traded
companies is estimated based on values determined by the use of
accepted valuation models at the time of acquisition. Fair value
for equity securities that do not have a readily determinable fair
value is estimated based on the value of the underlying common
stock. The Company regularly evaluates the carrying value of
securities to determine whether there has been any diminution in
value that is other than temporary and adjusts the value
accordingly.
- DEPOSITS WITH REINSURERS AND REINSURANCE RECOVERABLES: The
carrying amounts of deposits with reinsurers and reinsurance
recoverable with fixed amounts due are reasonable estimates of
fair value.
- INVESTMENT IN AFFILIATE: Investments in which the Company owns
between 20% and 50%, and/or has the ability to significantly
influence the operations and policies of the investee, are carried
at equity. The balance of the investment is regularly evaluated
for impairment.
- BANK AND OTHER BORROWINGS: Carrying amounts for these items
approximate fair value because current interest rates and,
therefore, discounted future cash flows for the terms and amounts
of loans disclosed in Note 23, are not significantly different
from the original terms.
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December 31, 2000 December 31, 1999
------------------------------- --------------------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
---------- ---------- ---------- ----------
Financial assets:
Fixed maturities $77,858,701 $77,858,701 $47,324,414 $47,324,414
Short-term investments 24,036,573 24,036,573 16,493,675 16,493,675
Equity securities 36,174,505 36,174,505 43,848,058 43,848,058
Investment in unconsolidated affiliates 27,824,291 23,016,375 32,066,252 56,929,334
Cash and cash equivalents 13,644,312 13,644,312 36,738,373 36,738,373
Deposits with reinsurers and
reinsurance recoverables 7,604,288 7,604,288 4,707,367 4,707,367
Financial liabilities:
Bank and other borrowings 15,550,387 15,550,387 15,704,507 15,704,507
22. OTHER LIABILITIES:
2000 1999
----------- -----------
Accounts payable $ 1,295,218 $ 2,900,899
Accrued investment obligation 5,000,000
Unearned income 1,146,636 192,057
Accrued O&M - Semitropic 889,850 863,950
Accrued commissions 883,084 726,770
Option fees unearned 850,000
Accrued vacation 645,695 509,146
Accrued bonus 730,000 570,000
Accrued interest payable 404,045 451,157
Other liabilities 6,303,565 4,739,644
------------ ------------
$ 13,148,093 $ 15,953,623
============ ============
23. BANK AND OTHER BORROWINGS:
At December 31, 2000 and 1999, bank and other borrowings consisted of
loans and promissory notes incurred to finance the purchase of land and
investment securities. The weighted average interest rate on these
borrowings was approximately 7.4% and 6.9% at December 31, 2000 and 1999,
respectively.
At December 31, 2000, Global Equity SA has a loan facility with a
Swiss bank for a maximum of 15 million CHF based on a margin not higher
than 30% of the securities deposited with the bank. The actual amount
available is dependent on the value of the collateral held after a safety
margin established by the bank. It may be used as an overdraft or for
payment obligations arising from securities transactions. At December 31,
2000 $9.5 million CHF (approximately $5.9 million US dollars) is
outstanding bearing interest at approximately 5.6%.
At December 31, 2000, $9.7 million of the total outstanding debt is
within Vidler, incurred with the acquisition of land in the Harquahala
Valley. The weighted average rate of interest on these notes is 8.5%
which are collateralized by the purchased properties.
Nevada Land & Resource Company issued a $5 million promissory note,
maturing on October 1, 2000 in connection with the acquisition of lands.
The note was collateralized by 9.4 acres of land, which held geothermal
leases. The notes bore interest at 9% and were paid monthly to the extent
that payment was received on four geothermal leases associated with the
land. In April 1999, Nevada Land & Resource Company settled the note
payable by exchanging the particular land deed, which was collateral for
the note. As a result of this settlement the Company recognized a net
extraordinary gain of $442,000.
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At December 31, the Company's borrowings consisted of the following:
2000 1999
----------- -----------
5.58% (4% in 1999) Swiss loans $ 5,894,838 $ 5,718,911
8% Notes due:
2007 - 2008 455,957 489,366
2012 359,218 376,745
8.5% Notes due:
2004 1,540,354 1,560,000
2008 - 2009 3,772,131 3,909,648
2019 2,774,894 2,833,533
9% Notes due:
2003 188,356 204,025
2008 564,639 612,279
------------ ------------
$ 15,550,387 $ 15,704,507
============ ============
The Company's future minimum principal debt repayments for the years
ending December 31, are as follows:
2001 $ 6,240,379
2002 374,661
2003 538,541
2004 1,862,312
2005 415,314
Thereafter 6,119,180
-----------
Total $15,550,387
===========
24. CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE
In the fourth quarter of 2000, the Company received notification from
the Ohio Department of Insurance that it would no longer permit the
Company to discount its MPL reserves for statutory accounting practices.
Accordingly, the Company discontinued discounting its MPL reserves in its
statutory filing with the Ohio Department of Insurance and financial
statements prepared in accordance with US GAAP for the year ended
December 31, 2000. The effect of this change was to increase the unpaid
losses and loss adjustment expenses reserve by $7.5 million and an
cumulative effect of accounting principle of $5 million, or $0.43 per
share, net of an income tax benefit of approximately $2.5 million. Had
the change been made as of the first day of the earliest period
presented, the net loss and loss per share for 1999 and 1998 would have
been reduced by $995,000 and $0.11 per share and $643,000, and $0.11 per
share, respectively.
25. SUBSEQUENT EVENT
On March 19, 2001, Vidler sold 2,165.5 acres of land, and the related
6,496.5 acre-feet of water rights, in the Harquahala Valley to a unit of
Allegheny Energy, Inc. for approximately $9.1 million. The transaction
resulted in a pre-tax gain of approximately $2.4 million, which will be
recorded in the first quarter of 2001.
ITEM 9. CHANGE IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT
The Board of Directors is divided into three classes, with the terms of
office of each class ending in successive years.
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The following table sets forth information regarding the Company's
directors, including their ages, a brief description of their business
experience, certain directorships held by each of them and the year in which
each became a director of the Company.
Director Name Business Experience Age Since
------------- ------------------- --- -----
Directors with terms ending in 2001:
Robert R. Broadbent Retail consultant since 1989; Chairman of Higbee Company from 1984 to 79 1996
1989; President, CEO, Director and Vice Chairman of the Higbee Company
from 1979 to 1984; President and Chief Executive Officer of Liberty
House - Mainland from 1976 to 1978; Chairman and CEO of Gimbel's from
1973 to 1976; Director of Physicians from 1993 to 1995.
Carlos C. Campbell President of C.C. Campbell & Company, Reston, Virginia, since 1985; 63 1998
Director of Resource America, Inc., Fidelity Mortgage Funding, Inc., and
Passport Health.
David A. Williams CEO of Beutel Goodman & Co. Ltd. from 1991 to 1995; President, 58 1998
Roxborough Holdings Limited, Toronto, Ontario since 1995; Director of
Global Equity Corporation, Enhanced Marketing Services, Equisure
Financial Network, FRI Corporation, Krystal Bond Corporation, Octagon
Industries Ltd., Phoenix Duff and Phelps Corp., Pinetree Capital
Corporation, Micropulse Inc., Radiant Energy Corporation, and Signature
Brands Ltd.
Directors with terms ending in 2002:
John R. Hart President of Quaker Holdings Limited, an investment company, since 41 1996
1991; Principal with Detwiler, Ryan & Company, Inc., an investment
bank, from 1982 to 1991; Director of Physicians since 1993; President
and CEO of Physicians since 1995; President and CEO and Director of
Global Equity Corporation since 1995; Director of PC Quote, Inc;
President and CEO and Director of the Company since 1996.
Ronald Langley Director of Physicians since 1993; Chairman of Physicians since 1995: 56 1996
Chairman and Director of Global Equity Corporation since 1995;
Director of PC Quote, Inc; Chairman and Director of the Company since
1996. Director of MC Shipping, Inc. since 1997.
John D. Weil President, Clayton Management Company, a strategic investment company; 59 1996
Director of Todd Shipyards Corporation, Oglebay Norton Company,
Southern Investors Service Company, Inc., Allied Health Products,
Inc., and Baldwin & Lyons, Inc.
Nominees standing for election for terms ending in 2003:
S. Walter Foulkrod, III, Esq. Attorney; owner of S. Walter Foulkrod, III & Associates, Attorneys at 59 1996
Law, Harrisburg, PA, since 1994; President and Chairman of Foulkrod,
Reynolds & Havas, PC, from 1984 to 1994; Director of Physicians since
1988.
Richard D. Ruppert, MD Physician; President of Medical College of Ohio from 1978 to 1993; 70 1996
President of American Society of Internal Medicine from 1992 to 1993;
Director of Physicians since 1988.
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For information on the executive officers of Registrant, see Part I, Item
1., "Executive Officers."
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
executive officers, directors and persons who beneficially own more than 10% of
the Company's Common Stock to file initial reports of ownership and reports of
changes in ownership with the Securities and Exchange Commission ("SEC"). Such
persons are required by SEC regulations to furnish the Company with copies of
all Section 16(a) forms filed by such persons.
Based on a review of the copies of these reports received by the Company
and written representations from certain reporting persons that they have
complied with the relevant filing requirements, the Company believes that all
filing requirements have been complied with on a timely basis for the fiscal
year ended December 31, 2000.
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth information concerning the compensation for
fiscal year 2000 of the (i) Chief Executive Officer of the Company (ii) the four
most highly compensated executive officers of the Company as of December 31,
2000 (Messrs. Langley, Hart, Sharpe, Burchfield, and Mosier are sometimes
hereinafter referred to as "Named Officers"). Amounts under the caption "Bonus"
are amounts earned for performance during the year including amounts paid after
the end of the year.
SUMMARY COMPENSATION TABLE
-------------------------------------------------------------------------------------------------------------
Long-Term
Compensation
Annual Compensation Awards
Securities
Name and Principal Underlying
Position Options All Other
Chief Executive Officer: Year Salary Bonus (Shares) Compensation
------------------------ ---- ------ ----- -------- ------------
John R. Hart(1) 2000 $800,000 -0- 456,586(6) $20,093(7)
President and Chief 1999 $800,000 -0- -0- $21,839(7)
Executive Officer 1998 $800,000 -0- -0- $22,000(7)
Executive Officers:
Ronald Langley(2) 2000 $800,000 -0- 427,932(6) $20,093(7)
Chairman of the 1999 $800,000 -0- -0- $21,839(7)
Board of Directors 1998 $800,000 -0- -0- $22,000(7)
Richard H. Sharpe(3) 2000 $203,422 -0- 75,149(6) $21,814(7)
Chief Operating Officer 1999 $192,570 -0- -0- $21,839(7)
1998 $199,029 -0- -0- $22,000(7)
Gary W. Burchfield(4) 2000 $150,037 -0- 21,042(6) $18,553(7)
Chief Financial Officer 1999 $141,750 -0- -0- $19,202(7)
And Treasurer 1998 $164,640 -0- -0- $20,930(7)
James F. Mosier(5) 2000 $140,059 -0- 21,042(6) $17,269(7)
General Counsel 1999 $131,985 -0- -0- $17,879(7)
and Secretary 1998 $126,910 -0- -0- $18,512(7)
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(1) Mr. Hart became President and CEO of the Company on November 20, 1996.
Prior to that time he was President and CEO of Physicians since July 15,
1995.
(2) Mr. Langley became Chairman of the Board of Directors of Physicians on
July 15, 1995. He became Chairman of the Board of Directors of the
Company on November 20, 1996.
(3) Mr. Sharpe became Chief Operating Officer of Physicians on June 3, 1994.
He became Chief Operating Officer of the Company on November 20, 1996.
(4) Mr. Burchfield became Chief Financial Officer and Treasurer of Physicians
on November 3, 1995. He became Chief Financial Officer and Treasurer of
the Company on November 20, 1996.
(5) Mr. Mosier became General Counsel and Secretary of Physicians in 1984. He
became General Counsel and Secretary of the Company on November 20, 1996.
(6) This represents grants of non-statutory stock options in the year 2000
pursuant to the PICO Holdings, Inc. 2000 Nonstatutory Stock Option Plan.
(7) Represents amounts contributed by the Company to the PICO Holdings, Inc.
Employees 401(k) Retirement Plan and Trust. This retirement plan conforms
to the requirements of the Employee Retirement Income Security Act.
OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth certain information with respect to options
granted during 2000 to each of the Named Officers:
OPTION GRANTS IN 2000
----------------------------------------------------------------------------------------------------------------------------
Potential Realizable Value at
Percent of Assumed Annual Rates of Stock
Total Price Appreciation for Option
Number of Options Term (1)
Securities Granted to Exercise -----------------------------
Underlying Employees or Base
Options in Fiscal Price Expiration
Name Granted (2) Year ($/Share) Date 5% ($) 10% ($)
----------------------------------------------------------------------------------------------------------------------------
Ronald Langley 427,932 39.5% $15.00 4/7/20 6,283,654 25,788,854
John R. Hart 456,586 42.2% $15.00 4/7/20 6,704,403 27,515,656
Richard H. Sharpe 75,149 6.9% $15.00 4/7/20 1,103,470 4,528,772
Gary W. Burchfield 21,042 1.9% $15.00 4/7/20 308,976 1,268,073
James F. Mosier 21,042 1.9% $15.00 4/7/20 308,976 1,268,073
----------
(1) The amounts reflected in this table represent certain assumed rates of
appreciation only. Actual realized values, if any, on option exercises will
be dependent on the actual appreciation of the PICO stock over the term of
the options. There can be no assurances that the Potential Realizable
Values in this table will be achieved.
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(2) These options were granted on April 7, 2000, subject to approval by the
Company's shareholders obtained on October 19, 2000, under the PICO
Holdings 2000 Nonstatutory Option Plan at a fair market value in excess of
100% of the PICO common stock value on that date. PICO is authorized to
issue 1,200,000 shares of common stock to employees and directors of and
consultants to the Company, pursuant to awards granted as non-qualified
stock options. Of the options granted to employees, one-third vested upon
grant, one-third vest April 7, 2001 and one-third vest April 7, 2002. The
options granted to non-employee directors were fully vested on the grant
date.
OPTION EXERCISES AND FISCAL 2000 YEAR-END VALUE
The following table provides information concerning options held as of
December 31, 2000 by the persons named in the Summary Compensation Table. No
options were exercised by these individuals during 2000.
Aggregate Option Exercises in Last Fiscal Year And Fiscal Year-End Option Values
----------------------------------------------------------------------------------------------------------
Number of Securities Underlying Value of Unexercised
Unexercised In-the-Money-Options
Options at 12/31/00 At 12/31/00 (1)
---------------------------------------- ---------------------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
---- ----------- ------------- ----------- -------------
Ronald Langley(2) 405,938 285,288 -0- -0-
John R. Hart(2) 415,489 304,391 -0- -0-
Richard H. Sharpe 85,169 50,099 -0- -0-
Gary W. Burchfield 49,097 14,028 -0- -0-
James F. Mosier 49,097 14,028 -0- -0-
----------
(1) Based on the closing price of the Company's Common Stock on December 29,
2000 on the Nasdaq National Market of $12.4375 per share.
(2) In addition to these options shown above, Mr. Langley and Mr. Hart have a
right to purchase shares of the Company under Call Option Agreements
assumed by the Company in August 1998; see Item 12, footnote 4.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Messrs. Weil and Campbell, and Dr. Ruppert, serve as members of the
Compensation Committee. Mr. Langley and Mr. Hart have been directors and
executive officers of Global Equity since September 5, 1995.
REPORT OF THE COMPENSATION COMMITTEE
This report of the Compensation Committee, and the Stock Price Performance
Graph set forth below, shall not be deemed incorporated by reference by any
general statement incorporating by reference this Form 10-K into any filing
under the Securities Act of 1933, as amended (the "Securities Act") or under the
Securities Exchange Act of 1934, as amended (the "Exchange Act") except to the
extent that the Company specifically incorporates this information by reference,
and shall not otherwise be deemed filed under the Securities Act or the Exchange
Act.
COMMITTEE MEMBERS
The three-member Compensation Committee of the Board of Directors is a
standing committee composed entirely of outside Directors. Mr. Weil is the
chairman and Mr. Campbell and Dr. Ruppert are the other members.
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COMMITTEE FUNCTIONS
The Compensation Committee is responsible for assuring that all of the
executive compensation programs of the Company are developed, implemented, and
administered in a way that supports the Company's fundamental philosophy that a
significant proportion of executive compensation should be effectively linked to
Company performance.
The Compensation Committee meets on a regularly scheduled basis. It reviews
and approves the overall executive compensation program, which includes both
base pay and incentive compensation. It considers and approves individual
executive officer compensation packages based on recommendations of the
Company's Chief Executive Officer. It recommends, for the approval of the full
Board, any modification to the compensation package of the Company's Chief
Executive Officer.
EXECUTIVE COMPENSATION PHILOSOPHY
The Board of Directors of Physicians retained an independent compensation
expert, William M. Mercer, Incorporated ("Mercer"). In 1996, Mercer conducted an
analysis of marketplace executive compensation levels. The scope of Mercer's
study covered the Company's Chairman and President and Chief Executive Officer.
The objectives of Mercer's study were as follows:
- Analyze the scope, responsibilities and skill requirements of the jobs
performed by Messrs. Langley and Hart and compare and contrast to
comparable benchmark executive positions found in the marketplace.
- Develop an appropriate methodology for selecting comparable benchmark
jobs, industry categories and a peer group of companies comparable to the
Company in terms of business focus, industry classification and size; and
competing for senior executives with the skills, expertise and talent
demonstrated by the Company's top two executives.
- For the appropriate benchmark jobs, industry category and Peer Company
group, collect information on marketplace compensation levels and
practices from compensation surveys and peer company proxy statements.
The companies included in the peer company group are not necessarily
those included in the Nasdaq Insurance Stock Index. Determine the most
relevant marketplace compensation levels and to compare actual Company
compensation levels.
- Develop alternate approaches for structuring the total compensation
package for the Company's top two executives, in terms of compensation
elements to be used, the mix of total pay and how short and long term
incentive compensation might be structured to accurately reflect
performance.
Mercer's study recommended to the Compensation Committee a compensation
strategy with the following objectives:
- To provide a total compensation package that:
- is competitive with market rates for executives with similar
skill, talent and job requirements.
- is closely linked to the Company's strategy and the role of
covered executives in building shareholder value through growing
the book value and, ultimately, the market value of the Company.
- To retain critical executive talent by:
- providing a reasonable and competitive level of current income
(cash flow).
- providing for loss of future incentive opportunity if an executive
terminates employment before unrealized investment gains are
realized.
- To link executive rewards to shareholder interests by:
- tying incentive awards to growth in book value which ultimately
translates into increased market price per share (as investments
are liquidated for gains, and the Company grows earnings).
- granting additional stock options in the future once current
options are exercised or expire.
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The Compensation Committee believes that to accomplish these goals, the
executive compensation program should be based on three distinct components:
base pay, annual incentives, and long-term incentives. The Company obtains
industry and peer group surveys, and consults with independent experts, to
evaluate the Company's executive compensation programs in comparison with those
offered by its comparable competitors.
In March 2000, the Compensation Committee asked Mercer to examine the
present level of stock options granted to the Company's management, to recommend
an appropriate level of stock options to be granted in the future to the
Company's management, and to review the level of compensation paid to the
Company's nonemployee directors. The Compensation Committee believed such a
review by Mercer was necessary in order to assist the Company in retaining and
attracting qualified directors and executives, and to link executive and
director rewards to the long term interests of the Company's shareholders.
Mercer's study recommended that additional stock options be granted to
management to enhance the Company's ability to retain and attract key
executives. Mercer's study also recommended that, to enable the Company to
remain competitive and to continue to be able to retain and attract qualified
members of the Board of Directors and to align directors' long term interests
with those of shareholders, nonemployee directors compensation should be
increased and should contain an element of stock options granted annually. The
nonemployee directors options granted annually will vest immediately as a
further incentive to nonemployee directors and to further link nonemployee
directors compensation with the Company's performance. In line with the recent
study by Mercer, with respect to annual cash remuneration paid to nonemployee
directors, the board approved the Compensation Committee's recommendation that
the Company's annual retainer fee be increased to $20,000 per nonemployee
director.
The Compensation Committee has considered amendments to the Internal
Revenue Code denying deductions for annual compensation to certain executives in
excess of $1 million, subject to certain exceptions. The Company's compensation
structure has been such that it does not believe that it is likely that the $1
million cap will affect the Company in the near future. The Internal Revenue
Service has issued proposed regulations which, among other things, provide for a
transition period of three years for plans previously approved by shareholders.
The Company is studying the proposed regulations, but has not yet determined
what steps may be required or desirable with respect to its existing plans.
EXECUTIVE COMPENSATION PROGRAM
The features of the executive compensation program as recommended by Mercer
and approved by the Compensation Committee are:
BASE COMPENSATION. A fixed rate, to be reviewed annually. Future adjustments
will take into account movement in executive compensation levels, changes in job
responsibilities, and the size of the Company.
INCENTIVE AWARDS. Based on growth of book value per share in a fiscal year.
Awards are earned when a pre-determined threshold is surpassed. If book value
per share of the Company exceeds this threshold, the incentive award is equal to
5% of the increase in book value per share multiplied by the number of shares
outstanding at the beginning of the fiscal year.
In addition, the Board of Directors of Physicians granted options under the
Physicians Insurance Company of Ohio 1995 Non-Qualified Stock Option Plan. The
options granted under said option plan were designed to reinforce the
relationship between the Company's future performance and the executive's
potential future financial rewards. These options were assumed by PICO Holdings,
Inc. on November 20, 1996. In line with this philosophy of providing incentives
to executive officers, the Company agreed to convert the Global Equity options
of said officers on an economically equivalent basis, to options to purchase
shares of the Company effective with the close of the PICO/Global Equity
Combination. On April 7, 2000, PICO granted, subject to approval by the
Company's shareholders obtained on October 19, 2000, non-qualified common stock
options to employees and directors of the Company.
GOALS OF COMPENSATION COMMITTEE
The Compensation Committee attempts to align executive compensation with
the value achieved by the executives for the Company's shareholders. The
Company's compensation program for executives emphasizes a combination of base
salary, discretionary bonuses, and stock options designed to attract, retain,
and motivate executives who will maximize shareholder value. The Compensation
Committee considers individual and Company performance, as well as compensation
paid by comparable companies.
Executives also participate in other employee benefit programs, including
health insurance, group life insurance, and the Company's 401(k) Plan.
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DISCUSSION OF 1999 COMPENSATION FOR THE CHIEF EXECUTIVE OFFICER
No bonus was paid with respect to the Company's performance in 1999. In
1997, the Compensation Committee recommended to the Board of Directors, and the
Board of Directors accepted the recommendation, that it was appropriate for the
CEO and the Chairman to be compensated as employees, rather than as consultants.
Accordingly, effective December 31, 1997, the CEO and Chairman entered into
employment agreements with the Company. The terms of these employment agreements
are substantially similar to the terms of the consulting agreements.
June 28, 2000 Compensation Committee
John D. Weil, Chairman
S. Walter Foulkrod, III, Esq.
Richard D. Ruppert, MD
As stated above, the Compensation Committee believes the interest of the
Company shareholders is best served by aligning the CEO's short-term
compensation, over and above competitive fixed annual rate of pay, with an
increase in the Company's book value per share which will ultimately be
reflected in higher market values per share. Specifically, a threshold was set
at 80% of the S&P 500's annualized total return for the five previous calendar
years. For 2000, this threshold was approximately 17%. Since the Company's book
value per share decreased in 2000, no bonus, i.e. short-term incentive, was
payable for 2000.
The Compensation Committee awarded long term incentives in 1995 in the form
of 175,247 non-qualified stock options at the then current market value. In
addition, the Committee recommended that the CEO's options with Global Equity,
initially granted in 1995, be converted on an economically equivalent basis to
purchase shares of the Company upon consummation of the Global Equity/PICO
transaction, December 16, 1998. In August 1998, the Committee recommended and
the Board agreed that the Company assume the obligations of Guinness Peat Group
plc to the CEO and Chairman under November 1993 Call Option Agreements. In 2000,
the Compensation Committee awarded long-term incentives in the form of 456,586
non-qualified stock options with an exercise price of $15.00 per share, compared
to the then current market value of $11.1875 per share.
The Committee believes that the compensation provided by this combination
of fixed annual compensation, and short-term and long term incentives provides a
mechanism to fairly compensate the CEO while providing the CEO with a strong
incentive to maximize shareholder value.
The Committee believes that the compensation provided by this combination
of fixed annual compensation, and short-term and long term incentives provides a
mechanism to fairly compensate the CEO while providing the CEO with a strong
incentive to maximize shareholder value.
90
91
STOCK PRICE PERFORMANCE GRAPH
The graph below compares cumulative total return of the Company, the NASDAQ
Insurance Stocks Index, and the NASDAQ Stock Market (U.S. Companies) for the
period January 1, 1996 through December 31, 2000.
COMPARISON 5-YEAR CUMULATIVE TOTAL RETURN
AMONG PICO HOLDINGS, INC., NASDAQ INSURANCE STOCK INDEX, AND
RUSSELL 2000 INDEX
[CHART]
Dec-95 Dec-96 Dec-97 Dec-98 Dec-99 Dec-00
PICO Holdings 100.00 117.86 183.93 75.71 70.36 71.07
NASDAQ Insurance Stock Index 100.00 113.37 139.09 139.00 146.70 169.68
Russell 2000 Index 100.00 114.76 138.31 133.54 159.75 153.03
ASSUMES $100 INVESTED ON JAN. 1, 1996
FISCAL YEAR ENDING DEC. 31, 2000
The graph assumes $100 was invested on January 1, 1996 in the Company's
common stock, the NASDAQ Insurance Stocks Index, and the Russell 2000 Index, and
that all dividends were reinvested. The performance of PICO Holdings, Inc. stock
on this graph represents the historical performance of shares of Citation
Insurance Group, which was renamed PICO Holdings, Inc. on November 20, 1996. It
does not represent the historical stock performance of Physicians Insurance
Company of Ohio.
EMPLOYMENT AND CHANGE IN CONTROL ARRANGEMENTS
Mr. Langley and Mr. Hart each entered into employment agreements effective
December 31, 1997 with the Company. Total compensation to Mr. Langley and Mr.
Hart under these employment agreements is $800,000 each on an annual basis.
These employment agreements include a change in control clause providing that if
there was a change of control before December 31, 1999, the Company was required
to immediately pay each employee a total lump sum of $2.4 million and an amount
equal to three times the highest annual bonus paid to the employee in the last
three years.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information, as of March 1, 2001, with
respect to the beneficial ownership of the Company's common stock entitled to
vote by each person known by the Company to be the beneficial owner of more that
5% of common stock, and by each director, each executive officer and all
executive officers, former chief executive officers, and directors as a group.
Except as otherwise indicated, each person has sole investment and voting power,
subject to community property laws. As of March 1, 2001, there were 16,784,223
shares of the Company issued and outstanding. Of these shares, 4,394,127 are
held by the Company and its subsidiaries, and may therefore not be voted under
California law. The following table excludes shares of the Company held by the
Company and its subsidiaries since those shares are not entitled to vote.
91
92
NUMBER OF SHARES AND NATURE PERCENTAGE OWNERSHIP OF
NAME AND ADDRESS OF BENEFICIAL OWNER OF BENEFICIAL OWNERSHIP (1) VOTING SHARES
------------------------------------ --------------------------- -------------
Ronald Langley(2)(4)(5) 3,975,383 31.1%
John R. Hart(3)(4)(5) 3,966,217 31.0%
Robert R. Broadbent (6) 10,949 *
Carlos C. Campbell (7) 1,500 *
S. Walter Foulkrod, III, Esq. (6) 4,404 *
Richard D. Ruppert, MD (8) 8,798 *
John D. Weil (9)(5) 4,084,392 33.0%
David A. Williams (6) 155,000 1.3%
Richard H. Sharpe (10) 93,339 *
Gary W. Burchfield (11) 54,420 *
Maxim C. W. Webb (12) 40,759 *
Sheila C. Ferguson (13) 11,112 *
James F. Mosier (14) 54,316 *
PICO Equity Investors, L.P. (15) 3,333,333 26.9%
Dimensional Fund Advisors, Inc 687,805 5.6%
Artisan Partners L.P., Artisan Investment Corp.,
Andrew A. Zeigler, Carlene M. Zeigler 1,162,400 9.4%
Executive Officers and Directors as a Group (13 persons) 5,793,923 43.1%
* Less than one percent (1%)
----------
(1) Sole voting and investment power unless otherwise indicated.
(2) Of these shares, 405,938 represent beneficial ownership of options
granted or assumed under Company stock option plans exercisable as of
March 1, 2001. Included in these shares are 3,716 shares held in the
Company's 401(k) Plan.
(3) Of these shares, 415,489 represent beneficial ownership of options
granted or assumed under Company stock option plans exercisable as of
March 1, 2001. Included in these shares are 5,272 shares held in the
Company's 401(k) Plan. These shares do not include 19,940 shares of the
Company held in a deferred compensation plan Rabbi Trust for Mr. Hart.
(4) These shares also include call options owned by Mr. Langley and Mr. Hart.
Mr. Langley and Mr. Hart each had 1993 call option agreements with of
Guinness Peat Group plc. In August 1998, the Company assumed Guinness
Peat's obligations with respect to these 412,846 options. Mr. Langley
exercised 57,307 of his call options in December 1998 and has 149,116
call options remaining. Mr. Hart has not exercised any call options and
has 206,423 call options remaining.
(5) Mr. Langley, Mr. Hart and Mr. Weil each own equal membership interests in
PICO Equity Investors Management, LLC, which has voting control of
3,333,333 shares of the Company.
92
93
(6) Of these shares, 1,500 represent beneficial ownership of options
exercisable as of March 1, 2001.
(7) These shares represent beneficial ownership of options exercisable as of
March 1, 2001.
(8) Of these shares, 1,500 represent beneficial ownership of options
exercisable as of March 1, 2001. Dr. Ruppert shares voting and investment
power with his wife.
(9) Of these shares, 694,558 are owned by a partnership which Mr. Weil
controls, and 1,500 represent beneficial ownership of options exercisable
as of March 1, 2001.
(10) Of these shares, 85,169 represent beneficial ownership of options
exercisable as of March 1, 2001. Included in these shares are 3,661
shares held in the Company's 401(k) Plan.
(11) Of these shares, 49,097 represent beneficial ownership of options
exercisable as of March 1, 2001. Included in these shares are 1,128
shares held in the Company's 401(k) Plan.
(12) Of these shares, 38,966 represent beneficial ownership of options
exercisable as of March 1, 2001. Included in these shares are 1,412
shares held in the Company's 401(k) Plan.
(13) Of these shares, 5,000 represent beneficial ownership of options
exercisable as of March 1, 2001. Included in these shares are 1,583
shares held in the Company's 401(k) Plan.
(14) Of these shares, 49,097 represent beneficial ownership of options
exercisable as of March 1, 2001. Included in these shares are 2,370
shares held in the Company's 401(k) Plan.
(15) Pursuant to a rights offering conducted by the Company in March 2000, an
investment partnership named PICO Equity Investors, L.P. acquired on
March 28, 2000, 3,333,333 newly issued shares which were not subscribed
for in the rights offering. PICO Equity Investors, L.P. is managed by
PICO Equity Investors Management, LLC. PICO Equity Investors Management,
LLC is owned by Mr. Langley, Mr. Hart and Mr. Weil. PICO Equity Investors
Management, LLC will exercise all voting and investment decisions with
respect to these 3,333,333 shares for up to ten years. The interest of
PICO Investors Management, LLC in any profits and losses earned on this
investment will be proportional to the capital contributions made to PICO
Equity Investors, L.P. by the partners, i.e., 1,000/50,001,000. There are
no other fees or other management compensation of any kind payable to Mr.
Langley, Mr. Hart and Mr. Weil.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Mr. Langley and Mr. Hart entered into employment agreements with the
Company, effective December 31, 1997. See Part II, Item 8., NOTE 17,
"Related-Party Transactions."
93
94
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) FINANCIAL STATEMENTS, SCHEDULES AND EXHIBITS.
1. FINANCIAL STATEMENTS.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Independent Auditors' Report................................... 48
Consolidated Balance Sheets as of December 31, 2000 and 1999 49-50
Consolidated Statements of Operations for the Years
Ended December 31, 2000, 1999 and 1998 .................. 51
Consolidated Statements of Shareholders' Equity
for the Years Ended December 31, 2000, 1999, and 1998 ... 52-54
Consolidated Statements of Cash Flows for the Years
Ended December 31, 2000, 1999 and 1998................... 55
Notes to Consolidated Financial Statements..................... 56-83
2. FINANCIAL STATEMENT SCHEDULES.
Independent Auditors' Report.................................. 95
Schedule I - Condensed Financial Information of Registrant..... 96-97
Schedule II - Valuation and Qualifying Accounts................ 98
Schedule V - Supplementary Insurance Information............... 99-101
94
95
INDEPENDENT AUDITORS' REPORT ON FINANCIAL STATEMENT SCHEDULES
To the Shareholders and Board of Directors of
PICO Holdings, Inc.:
We have audited the consolidated financial statements of PICO Holdings, Inc. and
subsidiaries (the "Company") at December 31, 2000 and 1999, and for the three
years in the period ended December 31, 2000, and our report thereon (which
expresses an unqualified opinion, and includes an explanatory paragraph
concerning the change in accounting for medical professional liability claims
reserves). Our audits of the consolidated financial statements also included the
2000, 1999 and 1998 financial statement schedules of the Company, listed in Item
14. These financial statement schedules are the responsibility of the Company's
management. Our responsibility is to express an opinion based on our audits. In
our opinion, based on our audits, such 2000, 1999, and 1998 financial statement
schedules, when considered in relation to the basic consolidated financial
statements taken as a whole, present fairly in all material respects the
information set forth therein.
DELOITTE & TOUCHE LLP
San Diego, California
March 19, 2001
95
96
SCHEDULE I
CONDENSED FINANCIAL INFORMATION OF REGISTRANT (PARENT COMPANY ONLY)
CONDENSED BALANCE SHEETS
December 31, December 31,
2000 1999
------------- -------------
ASSETS
Cash and cash equivalents $ 4,331,102 $ 2,917,203
Investments in subsidiaries 126,892,188 169,966,593
Equity securities and other investments 31,464,151 11,694,590
Deferred income taxes 5,670,439 1,423,175
Other assets 38,546,947 4,867,756
------------- -------------
Total assets $ 206,904,827 $ 190,869,317
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Accrued expense and other liabilities $ 1,712,216 $ 17,477,781
------------- -------------
Preferred stock, $.01 par value, authorized 2,000,000 shares; none issued
(extinguished in 2000)
Common stock, $.001 par value, authorized 100,000,000 shares: issued 16,784,223
and 13,448,533 at December 31, 2000 and 1999, respectively 16,784 13,449
Additional paid-in capital 235,844,655 186,004,827
Accumulated other comprehensive loss (12,732,978) (4,216,827)
Retained earnings 59,893,785 69,419,722
------------- -------------
283,022,246 251,221,171
Less treasury stock, at cost (4,394,127 in 2000 and 1999) (77,829,635) (77,829,635)
------------- -------------
Total shareholders' equity 205,192,611 173,391,536
------------- -------------
Total liabilities and shareholders' equity $ 206,904,827 $ 190,869,317
============= =============
This statement should be read in conjunction with the notes to the consolidated
financial statements included in the Company's 2000 Form 10-K
96
97
SCHEDULE I
CONDENSED FINANCIAL INFORMATION OF REGISTRANT (PARENT COMPANY ONLY)
CONDENSED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31,
2000 1999 1998
------------ ------------ ------------
Investment (losses) income, net $ (4,067,068) $ 659,312 $ 544,424
Equity in income (loss) of subsidiaries 3,085,082 (3,939,199) (5,542,513)
------------ ------------ ------------
Total revenues (charges) (981,986) (3,279,887) (4,998,089)
Expenses 6,055,643 5,024,583 2,660,813
------------ ------------ ------------
Loss from continuing operations before income taxes (7,037,629) (8,304,470) (7,658,902)
Provision (benefit) for income taxes (2,475,383) (1,484,192) 1,292,334
------------ ------------ ------------
Loss from continuing operations (4,562,246) (6,820,278) (8,951,236)
Income from discontinued operations, net 1,075,024
Cumulative effect of accounting change, net (4,963,691)
------------ ------------ ------------
Net loss $ (9,525,937) $ (6,820,278) $ (7,876,212)
============ ============ ============
CONDENSED STATEMENTS OF CASH FLOWS
Cash flow from operating activities:
Net loss $ (9,525,937) $ (6,820,278) $ (7,876,212)
Adjustments to reconcile net income (loss) to net cash
used or provided in operating activities:
Equity in (income) loss of subsidiaries (3,085,082) 3,939,199 5,542,513
Income from discontinued operations, net (1,075,024)
Cumulative effect of accounting change, net 4,963,691
Changes in assets and liabilities:
Accrued expenses and other liabilities (15,765,565) 4,709,660 10,074,675
Other assets (37,926,455) 8,144,827 (11,559,294)
------------ ------------ ------------
Net cash provided by (used in) operating activities (61,339,348) 9,973,408 (4,893,342)
------------ ------------ ------------
Cash flow from investing activities:
Sale of investments 12,910,084 14,527,455
Purchase of investments (10,052,274) (9,278,630)
------------ ------------ ------------
Net cash provided by (used in) investing activities 12,910,084 (10,052,274) 5,248,825
Cash flow from financing activities:
Cash received from exercise of warrants 2,850,359
Cash received from rights offering, net 49,843,163
Purchase of treasury shares (291,593)
------------ ------------
Net cash provided by investing activities 49,843,163 2,558,766
------------ ------------
Increase in cash and cash equivalents 1,413,899 2,479,900 355,483
Cash and cash equivalents, beginning of year 2,917,203 437,303 81,820
------------ ------------ ------------
Cash and cash equivalents, end of year $ 4,331,102 $ 2,917,203 $ 437,303
============ ============ ============
This statement should be read in conjunction with the
notes to the consolidated financial statements
included in the Company's Form 10-K
97
98
SCHEDULE II
PICO HOLDINGS, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
Additions
----------------
(1)
Balance at Charged to Balance
Beginning Costs and End
Description of Period Expenses Deductions of Period
----------- ---------- ---------- ---------- ---------
Year-end December 31, 2000
Allowance for Doubtful Accounts, net $ 99,488 $ 114,812 $ 214,300
Valuation Allowance for
Deferred Federal Income Taxes $ 816,163 $ 3,285,424 $ 4,101,587
Year-end December 31, 1999
Allowance for Doubtful Accounts, net $ 94,525 $ 4,963 $ 99,488
Valuation Allowance for
Deferred Federal Income Taxes $ 12,184,499 $ (11,368,336) $ 816,163
Year-end December 31, 1998
Allowance for Doubtful Accounts, net $ 119,024 $ 61,204 $ (85,703) $ 94,525
Valuation Allowance for
Deferred Federal Income Taxes $ 6,800,000 $ 5,384,499 $12,184,499
(1) Increases and decreases in provisions for the allowance for doubtful
accounts are charged to expense accounts. Changes in the allowance for
deferred federal income taxes are charged to provision (benefit) for
federal, foreign and state income taxes except for amounts relating to
unrealized investment gains and losses.
(2) Changes in the valuation allowance relating to unrealized investment
gains and losses are netted against the net unrealized appreciation
(depreciation) on investments account.
98
99
SCHEDULE V
PICO HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED SUPPLEMENTARY INSURANCE INFORMATION
(In thousands)
December 31, 2000
Future
Policy
Benefits, Amortization
Deferred Losses, Losses of Deferred
Policy Claims Net and Policy
Acquisition and Loss Unearned Premium Investment Loss Acquisition
Costs Expenses Premiums Revenue Income Expenses Costs
------------ ------------- ----------- ---------- ------------ ----------- -------------
Medical
professional
liability $ 58,610 $ 1,853 $ 640 $ 1,063
Other property
and casualty $ 6,300 62,932 $25,505 32,583 5,622 22,963 $ 10,250
------- --------- ------- -------- ------- -------- --------
Total medical
professional
liability and
property and
casualty 6,300 121,542 25,505 34,436 6,262 24,026 10,250
Other operations 1,976
------- --------- ------- -------- ------- -------- --------
Total continuing $ 6,300 $ 121,542 $25,505 $ 34,436 $ 8,238 $ 24,026 $ 10,250
======= ========= ======= ======== ======= ======== ========
Other Net
Operating Premiums
Expenses Written
------------ ----------
Medical
professional
liability $ 1,580 $ 1,853
Other property
and casualty 3,514 42,191
-------- --------
Total medical
professional
liability and
property and
casualty 5,094 44,044
Other operations 21,257
-------- --------
Total continuing $ 26,351 $ 44,044
======== ========
99
100
SCHEDULE V
PICO HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED SUPPLEMENTARY INSURANCE INFORMATION
(In thousands)
December 31, 1999
Losses, Amortization
Deferred Claims Losses of Deferred
Policy and Loss Net and Policy
Acquisition Expense Unearned Premium Investment Loss Acquisition
Costs Reserves Premiums Revenue Income Expenses Costs
----------- ------------ ----------- ----------- ------------ ---------- -------------
Medical
professional
liability $ 71,859 $ 1,940 $ 1,188 $ 6,599
Other property
and casualty $ 4,821 67,274 $ 17,205 34,439 4,950 28,613 $ 10,484
------- --------- -------- -------- ------- ------- --------
Total medical
professional
liability and
property and
casualty 4,821 139,133 17,205 36,379 6,138 35,212 10,484
Other operations 249
------- --------- -------- -------- ------- ------- --------
Total continuing $ 4,821 $ 139,133 $ 17,205 $ 36,379 $ 6,387 $35,212 $ 10,484
======= ========= ======== ======== ======= ======= ========
Other Net
Operating Premiums
Expenses Written
------------- -----------
Medical
professional
liability $ 857 $ 1,934
Other property
and casualty 4,528 31,719
-------- --------
Total medical
professional
liability and
property and
casualty 5,385 33,653
Other operations 22,868
-------- --------
Total continuing $ 28,253 $ 33,653
======== ========
100
101
SCHEDULE V
PICO HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED SUPPLEMENTARY INSURANCE INFORMATION
(In thousands)
December 31, 1998
Losses, Amortization
Deferred Claims Losses of Deferred
Policy and Loss Net and Policy
Acquisition Expense Unearned Premium Investment Loss Acquisition
Costs Reserves Premiums Revenue Income Expenses Costs
------------ ------------ ---------- ---------- ------------ ---------- -------------
Medical
professional
liability $ 85,877 $ (159) $ 2,580 $ 5,628
Other property
and casualty $ 5,549 69,144 $20,804 36,290 5,500 24,900 $ 10,877
------- --------- ------- -------- ------- ------- --------
Total medical
professional
liability and
property and
casualty 5,549 155,021 20,804 36,131 8,080 30,528 10,877
Other operations 1,181
------- --------- ------- -------- ------- ------- --------
Total continuing $ 5,549 $ 155,021 $20,804 $ 36,131 $ 9,261 $30,528 $ 10,877
======= ========= ======= ======== ======= ======= ========
Other Net
Operating Premiums
Expenses Written
------------- -----------
Medical
professional
liability $ 1,156 $ (160)
Other property
and casualty 4,325 35,508
-------- -------
Total medical
professional
liability and
property and
casualty 5,481 35,348
Other operations 11,560
-------- -------
Total continuing $ 17,041 $35,348
======== =======
101
102
3. EXHIBITS
Exhibit
Number Description
------- -----------
+ 2.2 Agreement and Plan of Reorganization, dated as of May 1, 1996,
among PICO, Citation Holdings, Inc. and Physicians and amendment
thereto dated August 14, 1996 and related Merger Agreement.
+++++ 2.3 Second Amendment to Agreement and Plan of Reorganization dated
November 12, 1996.
# 2.4 Agreement and Debenture, dated November 14, 1996 and November 27,
1996, Respectively, by and between Physicians and HyperFeed.
# 2.5 Purchase and Sale Agreement by, between and among Nevada Land &
Resource Company, LLC, Global Equity, Western Water Company
and Western Land Joint Venture dated April 9, 1997.
+++++3.1 Amended and Restated Articles of Incorporation of PICO.
+ 3.2.2 Amended and Restated By-laws of PICO.
* 10.8 Flexible Benefit Plan
* 10.16 Office Lease between Citation and North Block Partnership dated
July, 1990.
*** 10.16.1 Amendments Nos. 1 and 2 to Office Lease between Citation and North
Block Partnership dated January 6, 1992 and February 5, 1992,
respectively.
**** 10.16.2 Amendments Nos. 3 and 4 to Office Lease between Citation and North
Block Partnership dated December 6, 1993 and October 4, 1994,
respectively.
-***** 10.23 PICO Severance Plan for Certain Executive Officers, Senior
Management and Key Employees of the Company and its Subsidiaries,
including form of agreement.
-10.55 Consulting Agreements, effective January 1, 1997, regarding
retention of Ronald Langley and John R. Hart as consultants by
Physicians and Global Equity.
++ 10.57 PICO 1995 Stock Option Plan
-+++ 10.58 Key Employee Severance Agreement and Amendment No. 1 thereto, each
made as of November 1, 1992, between PICO and Richard H. Sharpe
and Schedule A identifying other substantially identical Key
Employee Severance Agreements between PICO and certain of the
executive officers of PICO.
+++ 10.59 Agreement for Purchase and Sale of Shares, dated May 9, 1996,
among Physicians, Guinness Peat Group plc and Global Equity.
++ 10.60 Agreement for the Purchase and Sale of Certain Assets, dated July
14, 1995 between Physicians, PRO and Mutual Assurance, Inc.
++ 10.61 Stock Purchase Agreement dated March 7, 1995 between Sydney
Reinsurance Corporation and Physicians.
++ 10.62 Letter Agreement, dated September 5, 1995, between Physicians,
Christopher Ondaatje and the South East Asia Plantation
Corporation Limited.
++++ 10.63 Amendment No. 1 to Agreement for Purchase and Sale of Certain
Assets, dated July 30, 1996 between Physicians, PRO and Mutual
Assurance, Inc.
+++++ 16.1. Letter regarding change in Certifying Accountant from Deloitte &
Touche LLP, Independent auditors
18. Letter from Deloitte and Touche LLP regarding change in accounting
principle.
# 21. Subsidiaries of PICO.
23.1. Independent Auditors' Consent - Deloitte & Touche LLP.
102
103
### 28. Form S-8, Registration Statement under the Securities Act of 1933,
for the PICO Holdings, Inc. Employees 401(k) Retirement Plan and
Trust, Registration No. 333-36881.
### 29. Form S-8, Registration Statement under the Securities Act of 1933,
for the Physicians Insurance Company of Ohio 1995 Non-Qualified
Stock Option Plan and assumed by PICO Holdings, Inc., Registration
No. 333-32045.
----------
* Incorporated by reference to exhibit of same number filed with
Registration Statement on Form S-1 (File No. 33-36383).
*** Incorporated by reference to exhibit of same number filed With
1992 Form 10-K.
**** Incorporated by reference to exhibit of same number filed with
1994 Form 10-K.
***** Incorporated by reference to exhibit bearing the same number filed
with Registration Statement on Form S-4 (File No. 33-64328).
+ Filed as Appendix to the prospectus in Part I of Registration
Statement on Form S-4 (File No. 333-06671)
++ Incorporated by reference to exhibit filed with Physicians'
Registration Statement No. 33-99352 on Form S-1 filed with the SEC
on November 14, 1995.
+++ Incorporated by reference to exhibit filed with Registration
Statement on Form S-4 (File no. 333-06671).
++++ Incorporated by reference to exhibit filed with Amendment No. 1 to
Registration Statement No. 333-06671 on Form S-4.
+++++ Incorporated by reference to exhibit of same number filed with
Form 8-K dated December 4, 1996.
- Executive Compensation Plans and Agreements.
# Incorporated by reference to exhibit of same number filed with
Form 10-K dated April 15, 1997.
## Incorporated by reference to exhibit * of same number filed with
10-K/A dated April 30, 1997.
### Incorporated by reference to Form S-8 filed with the Securities
and Exchange Commission (File No. 333-36881).
#### Incorporated by reference to Form S-8 filed with the Securities
and Exchange Commission (File No. 333-32045).
(b) REPORTS ON FORM 8-K.
On March 19, 2001, PICO filed a Form 8-K announcing that it's
water rights and water storage subsidiary, Vidler Water Company, Inc.,
had sold a portion of its land and water rights in Arizona's Harquahala
Valley ground water basin to a unit of Allegheny Energy, Inc.
On December 22, 1998 and January 8, 1999, PICO filed Form 8-K and
Form 8-K/A, respectively, announcing jointly with Global Equity the
December 16, 1998 closing of the PICO/Global Equity Combination and the
1-for-5 Reverse Stock Split.
On October 9, 1998, PICO filed a Form 8-K announcing the
conversion of the Company's HyperFeed subordinated convertible debenture,
working capital loans and accrued interest into HyperFeed 5% Convertible
Preferred Stock and common stock warrants.
On October 9, 1998, PICO filed a Form 8-K announcing jointly with
Global Equity the September 18, 1998 filing with the SEC of their Joint
Proxy Statement in connection with the PICO/Global Equity Combination.
103
104
On July 21, 1998, PICO filed a Form 8-K announcing the favorable
response by Global Equity's independent committee of directors regarding
the PICO/Global Equity Combination including disclosure of the share
exchange ratio.
On May 20, 1998, PICO filed a Form 8-K announcing PICO's
consideration of the proposed PICO/Global Equity Combination through a
Plan of Arrangement.
See also Item 9 of Part II of this report for a listing of
additional 8-K documents filed.
104
105
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Date: March 29, 2001
PICO Holdings, Inc.
By: /s/ John R. Hart
----------------------------
John R. Hart
Chief Executive Officer
President and Director
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below on March 29, 2001 the following persons in the
capacities indicated.
/s/ Ronald Langley Chairman of the Board
---------------------------------------
Ronald Langley
/s/ John R. Hart Chief Executive Officer, President and
--------------------------------------- Director
John R. Hart
/s/ Gary W. Burchfield Chief Financial Officer and Treasurer
--------------------------------------- (Chief Accounting Officer)
Gary W. Burchfield
/s/ S. Walter Foulkrod, III, Esq. Director
---------------------------------------
S. Walter Foulkrod, III, Esq.
/s/ Richard D. Ruppert, MD Director
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Richard D. Ruppert, MD
/s/ David A. Williams Director
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David A. Williams
/s/ Carlos C. Campbell Director
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Carlos C. Campbell
/s/ Robert R. Broadbent
--------------------------------------- Director
Robert R. Broadbent
/s/ John D. Weil
--------------------------------------- Director
John D. Weil
105