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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------
FORM 10-K/A10-K
(MARK ONE)
[ X ][X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 20012003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
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]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes [X] No [ X ]
Approximate aggregate market value of the registrant's voting and non-voting
common stockequity 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 13, 2002 was $75,185,221.
This excludes shares of common stock held by directors, officers and each person
who holds 5% or morethe last
business day of the registrant's common stock.most recently completed second fiscal quarter,
was $71,641,232.
On March 13, 2002,5, 2004, the Registrantregistrant had 12,368,61612,373,534 shares of common stock, $.001
par value, outstanding, excluding 4,415,6074,428,389 shares of common stock which are
held by the registrant and its subsidiaries.
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DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's Definitive Proxy Statement to be filed with
the Commission pursuant to RegulationPORTIONS OF THE REGISTRANT'S DEFINITIVE PROXY STATEMENT TO BE FILED WITH THE
COMMISSION PURSUANT TO REGULATION 14A in connection with the registrant's
2002 Annual Meeting of Stockholders, to be filed subsequent to the date hereof,
are incorporated by reference into PartIN CONNECTION WITH THE REGISTRANT'S 2004
ANNUAL MEETING OF STOCKHOLDERS, TO BE FILED SUBSEQUENT TO THE DATE HEREOF, ARE
INCORPORATED BY REFERENCE INTO PART III of this Report. Such Definitive
Proxy Statement will be filed with the Securities and Exchange Commission not
later thanOF THIS REPORT. SUCH DEFINITIVE PROXY
STATEMENT WILL BE FILED WITH THE SECURITIES AND EXCHANGE COMMISSION NOT LATER
THAN 120 days after the conclusion of the registrant's fiscal year ended
DecemberDAYS AFTER THE CONCLUSION OF THE REGISTRANT'S FISCAL YEAR ENDED
DECEMBER 31, 2001.
================================================================================2003.
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PICO HOLDINGS, INC.
ANNUAL REPORT ON FORM 10-K/A10-K
TABLE OF CONTENTS
Page
No.
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PART I............................................................................................................ 3I.............................................................................................................. 4
Item 1. BUSINESS............................................................................................ 3BUSINESS.............................................................................................. 4
Item 2. PROPERTIES.......................................................................................... 11PROPERTIES............................................................................................ 19
Item 3. LEGAL PROCEEDINGS................................................................................... 11PROCEEDINGS..................................................................................... 19
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS................................................. 11HOLDERS................................................... 19
PART II........................................................................................................... 12II............................................................................................................. 20
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS............................... 12MATTERS................................. 20
Item 6. SELECTED FINANCIAL DATA............................................................................. 13DATA............................................................................... 21
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS........................................................................... 14OPERATIONS........................................................................ 22
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS......................................... 51RISKS........................................... 59
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA......................................................... 51DATA........................................................... 59
Item 9. CHANGE IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE............................................................................ 91DISCLOSURE......................................................................... 97
Item 9A. CONTROLS AND PROCEDURES............................................................................... 97
PART III.......................................................................................................... 92III............................................................................................................ 97
Item 10. DIRECTORS AND EXECUTIVE OFFICERS AND CODE OF ETHICS OF THE REGISTRANT.................................................. 92REGISTRANT................................. 97
Item 11. EXECUTIVE COMPENSATION.............................................................................. 92COMPENSATION................................................................................ 97
Item 1212. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.......................................................................................... 92MANAGEMENT...................................................................................... 97
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS...................................................... 92TRANSACTIONS........................................................ 97
Item 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES................................................................ 97
PART IV........................................................................................................... 93IV............................................................................................................. 98
Item 14.15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.................................... 102
SIGNATURES........................................................................................................ 1048-K...................................... 98
SIGNATURES.......................................................................................................... 107
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EXPLANATORY NOTE
This amended Annual Report on Form 10-K/A amends and restates in its
entirety PICO Holdings, Inc. ("PICO") Annual Report on Form 10-K for the fiscal
year ended December 31, 2001 as of the date of the filing of the original Form
10-K, March 18, 2002. PICO has filed this amended Annual Report on Form 10-K/A
as a result of the restatement of its consolidated financial statements for all
years from 1996 to 2001, inclusive. The effects of the restatement are
incorporated into our consolidated financial statements included herein as well
as in "Management's Discussion and Analysis of Financial Condition and Results
of Operations" and other portions of this Report. See Note 22 to the
Consolidated financial statements in Item 8 for the nature of the restatement.
This amended Annual Report on Form-K/A speaks as of the end of the fiscal year
2001 as required by Form 10-K or as of the date of filing the original Annual
Report on Form 10-K. It does not update any of the statements contained therein
except with respect to the effect of the restatement.
PART I
THIS ANNUAL REPORT ON FORM 10-K/A10-K (INCLUDING THE MANAGEMENT'S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS SECTION) CONTAINS
FORWARD-LOOKING STATEMENTS. THESE INCLUDE,STATEMENTS REGARDING OUR BUSINESS, FINANCIAL CONDITION, RESULTS
OF OPERATIONS AND PROSPECTS. WORDS SUCH AS "EXPECTS," "ANTICIPATES," "INTENDS,"
"PLANS," "BELIEVES," "SEEKS," "ESTIMATES" AND SIMILAR EXPRESSIONS OR VARIATIONS
OF SUCH WORDS ARE INTENDED TO IDENTIFY FORWARD-LOOKING STATEMENTS, BUT ARE NOT
LIMITED TO,THE EXCLUSIVE MEANS OF IDENTIFYING FORWARD-LOOKING STATEMENTS ABOUT OUR INVESTMENT PHILOSOPHY, PLANS FOR EXPANSION,
BUSINESS EXPECTATIONS, AND REGULATORY FACTORS. THESEIN THIS ANNUAL
REPORT ON FORM 10-K. ADDITIONALLY, STATEMENTS REFLECT OUR
CURRENT VIEWS ABOUTCONCERNING 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 ALLMATTERS ARE
FORWARD-LOOKING STATEMENTS.
YOU SHOULDALTHOUGH FORWARD-LOOKING STATEMENTS IN THIS ANNUAL REPORT ON FORM 10-K
REFLECT THE GOOD FAITH JUDGMENT OF OUR MANAGEMENT, SUCH STATEMENTS CAN ONLY BE
BASED ON FACTS AND FACTORS CURRENTLY KNOWN BY US. CONSEQUENTLY, FORWARD-LOOKING
STATEMENTS ARE INHERENTLY SUBJECT TO RISKS AND UNCERTAINTIES AND ACTUAL RESULTS
AND OUTCOMES DISCUSSED IN OR ANTICIPATED BY THE FORWARD-LOOKING STATEMENTS.
FACTORS THAT COULD CAUSE OR CONTRIBUTE TO SUCH DIFFERENCES IN RESULTS AND
OUTCOMES INCLUDE, WITHOUT LIMITATION, THOSE DISCUSSED UNDER THE HEADING "RISK
FACTORS" BELOW, AS WELL AS THOSE DISCUSSED ELSEWHERE IN THIS ANNUAL REPORT ON
FORM 10-K. READERS ARE URGED NOT TO PLACE UNDUE RELIANCE ON THESE
FORWARD-LOOKING STATEMENTS, BECAUSE THEYWHICH SPEAK ONLY AS OF THE DATE OF THIS ANNUAL
REPORT ON FORM 10-K. WE UNDERTAKE NO OBLIGATION TO REVISE OR UPDATE ANY
FORWARD-LOOKING STATEMENTS IN ORDER TO REFLECT ANY EVENT OR CIRCUMSTANCE THAT
MAY ARISE AFTER THE DATE OF THIS ANNUAL REPORT ON FORM 10-K. READERS ARE SUBJECTURGED
TO CAREFULLY REVIEW AND CONSIDER THE VARIOUS DISCLOSURES MADE IN THIS ANNUAL
REPORT, WHICH ATTEMPT TO ADVISE INTERESTED PARTIES OF THE RISKS AND UNCERTAINTIES, INCLUDING THOSE
LISTED UNDER "RISK FACTORS"FACTORS THAT
MAY AFFECT OUR BUSINESS, FINANCIAL CONDITION, RESULTS OF OPERATIONS AND
ELSEWHERE IN THIS FORM 10-K/A, WHICH COULD CAUSE
ACTUAL RESULTS TO DIFFER MATERIALLY FROM SUCH FORWARD-LOOKING STATEMENTS, OR
FROM OUR PAST RESULTS.PROSPECTS.
ITEM 1. BUSINESS
INTRODUCTION
PICO Holdings, Inc. ("PICO,(PICO and its subsidiaries are referred to as
"PICO," or "the Company"Company," "we," and "our") is a diversified holding company. WePICO
seeks to acquire businesses and interests in businesses which we identify as
undervalued based on fundamental analysis -- that is, our assessment of what the
business is worth, based on the private market value of its assets, earnings,
and cash flow. We prefer long-established businesses, with a history of
operating successfully through industry cycles, recessions and geo-political
disruptions, in basic, "old economy" industries. Typically, the business will be
generating free cash flow and have a low level of debt, or, alternatively,
strong interest coverage ratios or the ability to realize surplus assets. As
well as being undervalued, the business must have special qualities such as
unique assets, a potential catalyst for change, or be in an industry with
attractive economics. We are also interested in acquiring businesses and
interests in businesses where there is significant unrecognized value in land
and other tangible assets.
We have acquired businesses and interests in businesses by the
acquisition of private companies, which our management believes:
- - are undervalued atand the timepurchase of shares in public
companies, both directly through participation in financing transactions and
through open market purchases. When we buy them;a business or an interest in a
business, we have a long-term horizon, typically 5 years or more. Selected
acquisitions may become core operations; however, we are prepared to sell
businesses if the price received exceeds the return we expect to earn if we
retain ownership. We expect that most of our businesses and - - haveinterests in
businesses will eventually be sold to other companies in the potentialsame industry
seeking to provide a superior rateexpand or gain economies of return over time, after
considering the risk involved.scale.
Our over-riding objective is to generate superior long-term growth in shareholders'
equity, as measured by book value per share. To accomplish this,Over time, we are seeking to build a profitable operating base and to realize gains from
our investment holdings. In the long term, we expectanticipate that most
of theour net income and growth in shareholders' equity will come from realized
gains on the sale of assets, rather
thanbusinesses and interests in businesses, as opposed to
ongoing operating earnings. Accordingly, when analyzingConsequently, we anticipate that PICO's performance,earnings
will fluctuate from year to year, and that the results for any one year are not
necessarily indicative of our management places more weight on increased asset values than on reported
earnings.
Over time, the assets and operations owned by PICO will change.future performance.
Currently our major activitiesoperating businesses are:
- - owningVidler Water Company, Inc. ("Vidler"), which develops and developingowns water
rights and water storage operations through
Vidler Water Company, Inc.;in the southwestern United States,
primarily in Nevada and Arizona;
4
- - owningNevada Land & Resource Company, LLC ("Nevada Land"), which owns
approximately 1.1 million acres of land in Nevada, and developing land and the related mineral
rights and water rights through Nevada Land & Resourcerelated to the property;
- - Citation Insurance Company LLC;
- -("Citation"), which is "running off" its
historical property and casualty insurance in California and Nevada through Sequoiaworkers' compensation loss
reserves, and Physicians Insurance Company andof Ohio ("Physicians"),
which is "running off" the property and casualty loss
reserves of Citation Insurance Company;
- - "running off" theits medical professional liability loss
reserves of
Physicians Insurance Company of Ohio;reserves; and
- - making long term value-based investmentsHyperFeed Technologies, Inc. ("HyperFeed"), which became a 51%-owned
subsidiary in other public companies.2003. HyperFeed is a developer and provider of software,
ticker plant technologies, and managed services to the financial
markets industry.
On March 31, 2003, we closed on the sale of Sequoia Insurance Company
("Sequoia"), which is accounted for in our consolidated financial statements for
2003 and prior years as a discontinued operation. See "Discontinued Operations."
The address of our main office is 875 Prospect Street, Suite 301, La
Jolla, California 92037, and our telephone number is (858) 456-6022.
We maintain an Internet site (www.picoholdings.com) that makes
available, free of charge, our annual report on Form 10-K, quarterly reports on
Form 10-Q, current reports on Form 8-K, and amendments to those reports as soon
as reasonably practicable after such material is electronically filed with the
SEC. Our web-site at www.picoholdings.comwebsite also contains furtherother material about PICO,
our Securities and Exchange Commission filings, and links to other
sites, including some of the companies with which we are associated with. You should check
the site periodically during the year for press releases and updated
information.
3
associated.
HISTORY
PICO was incorporated in 1981 and began operations in 1982. The Companycompany
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 some data on information services
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.
SUBSIDIARY COMPANIES & MAJOR OPERATING SEGMENTS & SUBSIDIARY COMPANIES
This section describes our subsidiaries and operating segments and lists the important
subsidiaries in each segment.segments. Unless
otherwise indicated, we own 100% of each subsidiary.
VIDLER 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 entered the water rights and water storage business with the acquisition
of Vidler Water Company, Inc. ("Vidler") in 1995. At the time, Vidler owned a
limited quantity of water rights and related assets in Colorado. Since then,
Vidler has acquired:
- - additional water rights and related assets, predominantly in Arizona and
Nevada. Vidler seeks to acquire water rights at prices consistent with
their current use, with the expectation of an increase in value if the
water 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
- - interests in water storage facilities in Arizona and California.
PICO currently owns approximately 96.2% of Vidler.COMPANY, INC.
Vidler is the leading private company in the water rights and water storageresource development
business in the southwestern United States. PICO identified water rights and
water storageresource
development in the Southwest as an attractive niches to invest inbusiness opportunity due to the
escalating
supply/continued growth in demand imbalance for water in the Southwest. 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 byresulting from population growth, economic
development, environmental requirements, and the claims of Native Americans.
While, physically, thereVidler is enoughnot a water inutility, and does not intend to enter into regulated
utility activities. We develop new sources of water for municipal and industrial
use, and necessary storage infrastructure to facilitate the region to meet foreseeable
demand, someefficient allocation
of the water is in remote locations and available water is
allocated inefficiently, which creates opportunitysupplies.
The inefficient allocation of available water between agricultural
users and municipal or industrial users, or the lack of available known water
supply for private providers such as
Vidler. For example:a particular area, provide opportunities for Vidler:
- - the majority of water rights are currently owned or controlled by
agricultural users. Inusers, and in many locations there are insufficient water
rights owned or controlled by municipal and industrial users to meet
present and future demand;
- - certain areas of the Southwest experiencing rapid growth have
insufficient supplies of known water to support future growth. Vidler
identifies and develops new water supplies for communities with no
other known water to support future growth;
- - 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, althoughstates. However, regulation and procedures are
steadily being developed to facilitate the interstate transfer of
water; and
- - infrastructure to store water will be required to accommodate and allow
interstate transfer, and transfers from wet years to dry years.
Currently there is limited storage capacity in place.
TheWe entered the water resource development business with the acquisition
of Vidler in 1995. At the time, Vidler owned a limited quantity of water rights
and related assets in Colorado. Since then, Vidler has acquired:
- - additional water storage business is relatively newrights and complex,related assets, predominantly in Arizona
and Nevada. Vidler seeks to acquire water law and terminology vary from staterights at prices
5
consistent with their current use, with the expectation of an increase
in value if the water right can be converted to state.a higher use. 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. The value of a water right
depends on a number of factors, including location, the seniority of
the right, and whether or not the waterright is transferable. The majority
of Vidler's water rights are in Nevada and Arizona, the two states
which are leading the nation in population growth and new home
construction. Our objective is to monetize our water rights for
municipal and industrial use in Arizona and Nevada. Typically, our
water rights are the most competitive source of water to support new
growth in municipalities and new industry in Arizona and Nevada; and
- - a water storage facility in Arizona and an interest in Semitropic, a
water storage facility in California. Our water storage facility in
Arizona is fully permitted and ready for commercial use, and at
December 31, 2003, Vidler had "net recharge credits" representing
approximately 34,000 acre-feet of water in storage on its own account.
Water has been stored commercially at Semitropic since 1995.
At December 31, 2003, PICO owned approximately 96.2% of Vidler.
Vidler is engaged in the following activities:
- - identifyingsupplying water to end-users in the Southwest, who require water, namely water utilities,
municipalities, developers, or industrial users, and then
locating ausers. The source of water
could be from identifying and supplyingdeveloping a new water supply, or a
change in the demand, utilizing the
Company's own assets where possible;
4
- - acquiringuse of water rights, redirecting the water rightfrom agricultural to its highestmunicipal and
best
use, and then generating cash flow from either leasing the water or selling
the right;industrial use;
- - development of storage and distribution infrastructure, and then
generating cash flow from charging customers fees for "recharge," or
placing water into storage; and
- - purchase and storage of water for resale in dry years.
After an acquisition and development phase spanning several years,
Vidler completed its first significant sales of water rights for industrial use
in 2001 and municipal use in 2002. Vidler's priority is to monetize or develop
recurring cash flow from theseits most important assets and additional
water assets which we may acquire or develop in the future.
If Vidler is successful in commercially developing its water and water
storage assets, revenues could be significantly higher in future years if the
company:by:
- - securessecuring significant supply contracts utilizing its water rights in
Arizona and Nevada; and
- - obtains contracts to storestoring water at the Vidler Arizona Recharge Facility.
Vidler has also entered into joint venturespartnering arrangements with parties who
have water assets but lack the capital or expertise to commercially develop
water rights.these assets. Vidler continues to explore additional joint venturepartnering opportunities
throughout the Southwest.
This table details the water rights and water storage assets owned by
Vidler at December 31, 2001.2003. Please note that this is intended as a summary, and
that some numbers are rounded. Item 7 of this Form 10-K/A10-K contains more detail
about these assets, recent developments affecting them, and the current outlook.
During 2003, Vidler disposed of all of its land and water rights at Big
Springs Ranch, Nevada; West Wendover, Nevada; and Wet Mountain, Colorado. See
Item 7, "Management's Discussion and Analysis of Financial Condition and Results
of Operations."
An acre-foot is a unit commonly used to measure the volume of water. An
acre-foot is the volume of water required to cover one acre to a depth of one
foot. As a rule of thumb, one acre-foot of water would sustain two families of
four persons each for one year.
NAME OF ASSET & APPROXIMATE LOCATION BRIEF DESCRIPTION PRESENT COMMERCIAL USE
- ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
WATER RIGHTS
ARIZONA:
HARQUAHALA VALLEY GROUND WATER BASIN 16,52015,067 acres of land, plus 4,814 acres under Leased to farmers
LA PAZLa Paz & MARICOPA COUNTIESMaricopa Counties option
75 miles northwest of metropolitan Phoenix
39,91135,795 acre-feet of transferable ground
water, plus 13,764 acre-feet under option
State legislation allows use of the
Central Arizona Project Aqueduct to
convey up to 20,000 acre-feet ofHarquahala
Valley ground water from this areato be made available
as assured municipal water supply to
cities and communities in Arizona through
agreements with the Phoenix metropolitan
area as an assured municipal water supply
- -------------------------------------------------------------------------------------------------------------------------------Central Arizona Ground
Water Replenishment District
6
NEVADA:
FISH SPRINGS RANCH, LLC (51% INTEREST) & 8,600 acres of deeded ranchland Vidler is currently farming the
V&B, LLC (50% INTEREST) property. Cattle graze on part
of the property on a revenue-
Washoe County, 40 miles north of Reno property on a revenue-sharing basis
8,000 acre-feet of permitted water rights, sharing basis
which are transferable to the Reno/Sparks area
- -------------------------------------------------------------------------------------------------------------------------------
LINCOLN COUNTY JOINT VENTUREAGREEMENT Applications* for more than 100,000 acre-feet
Agreement to supply an
of water rights through a joint venturean agreement with electricity-generating company
Lincoln County, of which it is currently
with between 6,700 and 9,000 acre-
anticipated that up to 40,000 acre-feet feet of water at $3,300 per acre-foot will
be permitted and put to use in Lincoln County.
The purchase2,100 acre-feet of approximately 822permitted water rights in
the Tule Desert Groundwater Basin
570 acre-feet of permitted water rights at
Meadow Valley, islocated in escrow
5
- -------------------------------------------------------------------------------------------------------------------------------Lincoln and Clark
counties
CLARK COUNTY
SANDY VALLEY Application* for 2,000415 acre-feet of permitted water Agreement to supply water to supportrights
Near the Nevada / California state line
In the Interstate 15 corridor Application for 1,000 acre-feet of water rights
additional growth at Primm, NevadaMUDDY RIVER WATER RIGHTS 221 acre-feet of water rights, plus approximately
Approximately 35 miles east of Las Vegas, 46 acre-feet under option
in the Interstate 15 corridor once the water rights have been
permitted
*The numbers indicated for water rights
applications are the maximum amount which we have
filed for. In some cases, we anticipate that the
actual permits received will be for smaller
quantities.
- -------------------------------------------------------------------------------------------------------------------------------
WEST WENDOVER Approximately 6,300 acres of land near West Agreement to sell 7 acres of
Adjacent to the Nevada / Utah state line Wendover, Nevada industrial land
in the Interstate 80 corridor
- -------------------------------------------------------------------------------------------------------------------------------
BIG SPRINGS RANCH Approximately 37,500 acres of deeded ranch Leased to ranchers
65 miles from Elko in Elko County, Nevada land
6,000 acre-feet of certificated water rights
6,000 acre-feet of permitted water rights
- -----------------------------------------------------------------------------------------------------------------------------------
COLORADO:
CLINE RANCH Approximately 500COLORADO WATER RIGHTS 105 acre-feet of senior water Sale agreement in final stages of
rights regulatory approval
- -----------------------------------------------------------------------------------------------------------------------------------
VIDLER TUNNEL WATER RIGHTS Agreement to sell 200105 acre-feet
of (the Vidler Tunnel itself was divested in senior water rights 640
2000) acre-feet of junior water rights,
and related land and tunnel assets to the City
of Golden, Colorado Agreement to sell 86 acre-feetover a period
of water rights to East Dillon
Water District12 years
163 acre-feet of senior water rights 65.7365.5 acre-feet leased. Vidler has
applied for remaining water rights
to be upgraded, which will
increase their commercial value
- -----------------------------------------------------------------------------------------------------------------------------------
WET MOUNTAIN 600 acre-feet of priority water rights Vidler is in discussions with
potential users
- -----------------------------------------------------------------------------------------------------------------------------------
WATER STORAGE
ARIZONA:
VIDLER ARIZONA RECHARGE FACILITY An underground water storage facility with Vidler is currently buying water
Harquahala Valley, Arizona estimated capacity exceeding 1 million acre-feet and storing it on its own account.
and permitted annual recharge capability of up At December 31, 2003, Vidler had
to 100,000 acre-feet - -----------------------------------------------------------------------------------------------------------------------------------net recharge credits equivalent to
approximately 34,000 acre-feet of
water in storage at the Arizona
Recharge Facility, as well as more
than 7,000 acre-feet of water
purchased but not yet recharged. In
addition, Vidler has ordered
approximately 29,000 acre-feet of
water for purchase and recharge in
2004.
CALIFORNIA:
SEMITROPIC WATER STORAGE FACILITY The right to store 30,000 acre-feet of water
underground for 35 years.until 2035. This includes the
right to recover up to approximately 6,800
acre-feet in any one year and minimum guaranteed recovery of
approximately 2,700 acre-feet of water every
year, - -----------------------------------------------------------------------------------------------------------------------------------and the right to recovery up to
approximately 6,800 acre-feet in one year in
certain circumstances
7
NEVADA LAND AND RELATED MINERAL RIGHTS AND WATER RIGHTS& RESOURCE COMPANY, LLC
In April 1997, PICO paid $48.6 million to acquire Nevada Land, & Resource
Company, LLC ("Nevada Land"), 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. Much of
Nevada Land's property is checker-boarded in square mile sections with publicly
owned land. The lands generally parallel the Interstate-80 corridor and the
Humboldt River from West
Wendover,Fernley, in northeastwestern Nevada, to Fernley,Elko County, in westernnortheast
Nevada.
Nevada Land is the largest private landowner in the state of Nevada.
According to census data, the population of Nevada increased 66% in the 10 years
ended April 1, 2000, which was the most rapid population growth of any state in
the United States. In the fifteen months3.25 years from April 1, 2000 to July 1, 2001,
Nevada's2003, the
Nevada State Demographer estimates that the population of Nevada increased
another 5.4%14.9%, to approximately 2.12.3 million people. Most of
6
the growth is
centered in southern Nevada, which includes the city of Las Vegas and
surrounding municipalities. GovernmentalLand available for private development in Nevada is
relatively scarce, as governmental agencies own approximately 87% of the land in
Nevada, so developable land is relatively scarce.Nevada.
Before we acquired Nevada Land, the property had been under the
ownership of a succession of railway companies, to whom it was a non-core asset.
Accordingly, when we believeacquired the company, we believed that the potential of the
property had never been exploited.properly marketed.
After acquiring Nevada Land, we completed a "highest and best use
study."
The studystudy" which divided the land into 7 major categories andcategories. We developed strategies
to maximize the value of each type of asset.asset, with the objective of monetizing
assets once they had reached their highest and best use. These strategies
include:
- - the sale of land and water rights. There is demand for land and water
for a variety of purposes including residential development,
residential estate living, farming, ranching, and from industrial
users -- for example,
electricity-generating companies, which wish to locate new plants in
Nevada;users;
- - land exchangestransactions where Nevada Land transfersexchanges 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 into
more manageable contiguous parcels. Nevada Land completed its first land
exchange in 2000, and is working on other potential exchanges;parties;
- - the development of water rights. Nevada Land has applied for additional
water rights on land owned by the company.it owns. Where water rights are permitted, we
anticipate that the value and marketability of the related land will
increase;
- - the development of land in and around growing municipalities; and
- - the management of mineral 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.
During the period from April 23, 1997 to December 31, 2001,2003, Nevada Land
received consideration of approximately $15.5$23 million from the sale and exchange
of land and the sale of water rights. This is comprised of $13.6$21.1 million in
salesfrom
the sale of land, $1.3 million$752,000 of cash and land received in a landan exchange transaction,
and $624,000$1.1 million from the sale of water rights. Over this period, we sold 113,128have
divested approximately 242,510 acres and divested 25,828 acres in aof land exchange. Theat an average price received in land disposals has been $112of $90 per
acre, comparedwhich compares to our average basis of $57$46 in the acres disposed of. The
average gross margin percentage on the disposal of land and thewater rights over
this period is 51.7%. The average cost of $35 per acre for the total land, water, and mineral
assets acquired. Therefore, the proceeds from
selling and exchanging 10.3% of the land area acquired represent 31.5% of the
cost basis of the original land, water, and mineral assets.with Nevada Land was $35 per acre.
At December 31, 2001,2003, Nevada Land owned approximately 1,213,7671,110,000 acres
of former railroad 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. In addition to the former railroad property, Nevada
Land has acquired:
- - 17,558 acres of land in a land exchange with a private landowner. This
land is contiguous with Native American tribal lands and is culturally
sensitive. We have agreed to a second transaction, with the Bureau of Land
Management, where we will give up the 17,558 acres in exchange for lands in
the Highway 50 corridor, which runs from the state capital of Carson City,
Nevada to Fernley, Nevada. While agreement has been reached, it will likely
take several years to complete the exchange;sensitive; and
- - Spring Valley Ranches, which is located approximately 40 miles west of
Ely in White Pine County, Nevada. This property was purchased out of
bankruptcy proceedings in 2000. We believe that the land has
significant environmental value to federal agencies, making it suitable for a land exchange
transaction.value. The real estate assets consist of
approximately 9,500 acres of deeded land and 500,000 acres of Forest
Service and Bureau of Land Management allotment land. There are 5,582
acre-feet of permitted agricultural water rights related to the
property.
We anticipate continuing to sell smaller parcels of land for
residential, agricultural, and industrial use, and that significantly larger
parcels of land which has environmental, cultural, or historical value, will be
divested through exchange-type transactions. These transactions could be
structured as outright sales or as exchanges for land which is either more
marketable or suitable for future development.
8
In recent years, Nevada Land intends to
develop these water rights in conjunction with the property.
During 2000 and 2001, Nevada Landhas filed additional applications for
an additional
105,516approximately 96,000 acre-feet of water rights on properties owned by Nevada Land.the Company's lands. The
applications consist of:
- - 39,076on the former railroad lands, approximately 4,396 acre-feet of water
rights have been certificated and permitted, and applications are
pending for the beneficial use of irrigating the
related 9,769 acres of arable land, and 40,240approximately 65,520 acre-feet of water rightsuse for
agricultural, municipal, and industrial use, on the former railroad lands;use; and
- - 26,200 acre-feet of water rights for the beneficial use of irrigating
another 6,550 acres of Spring Valley Ranches.
Progress continuesBUSINESS ACQUISITIONS AND FINANCING
This segment contains businesses, interests in businesses, and other
parent company assets.
PICO seeks to acquire businesses which we identify as undervalued based
on fundamental analysis -- that is, our assessment of what the business is
worth, based on the private market value of its assets, earnings, and cash flow.
We prefer long-established businesses, with a history of operating successfully
through industry cycles, recessions and wars, in basic, "old economy"
industries. Typically, the business will be generating free cash flow and have a
low level of debt, or, alternatively, strong interest coverage ratios or the
ability to realize surplus assets. As well as being undervalued, the business
must have special qualities such as unique assets, a potential catalyst for
change, or be in an industry with attractive economics. We are also interested
in acquiring businesses and interests in businesses where there is significant
unrecognized value in land and other tangible assets.
We have acquired businesses and interests in businesses through the
acquisition of private companies, and the purchase of shares in public
companies, both directly through participation in financing transactions and
through open market purchases. When we buy a company, we have a long-term
horizon, typically 5 years or more; however, we are prepared to sell companies
if the price received exceeds the return we expect to earn if we retain
ownership. We expect that most of our interests in businesses will eventually be
sold to other companies in the same industry seeking to expand or gain economies
of scale. Consistent with our focus on increasing our shareholders' equity and
book value per share, we anticipate that most of the return from our interests
in businesses will come from realized gains on the ultimate sale of our holding,
rather than dividends, equity income, or operating earnings during our
ownership.
When we acquire an interest in a public company, we are prepared to
play an active role, for example encouraging companies to use proper financial
criteria when making capital expenditure decisions, or by providing financing or
strategic input.
At the time we acquire an interest in a public company, we believe that
the intrinsic value of the underlying business significantly exceeds the current
market capitalization. The gap between market price and intrinsic value may
persist for several years, and the stock price may decline while our estimate of
intrinsic value is stable or increasing. Sometimes, the gap is not eliminated
until another party attempts to acquire the company, as was the case with our
holding in Australian Oil & Gas Corporation Limited ("AOG").
Between 1998 and 2002, we became the largest shareholder in AOG, an
international provider of drilling services. We identified AOG as undervalued as
rig utilization, which is critical to earnings and cash flow for drilling
companies, had begun to recover in the U.S., but was still near cyclical lows in
the international markets where AOG operates. Historically, there has been a
time lag between recovery in rig utilization in the U.S. and in international
markets.
We acquired our interest, at an average cost of approximately A$1.35
per share, through open market purchases, the reinvestment of dividends, and
assisting AOG with a financing in early 2002. AOG had secured two major new
contracts with multinational oil companies, but needed to raise capital to
purchase equipment necessary to perform the contracts. We provided AOG with a
bridging loan facility, which was repaid with the proceeds of a rights offering
which we partly underwrote. After AOG's expanded activities and earnings base
became apparent, Ensign (Australia) Holdings Pty. Limited, a subsidiary of a
Canadian oil services company which was already a shareholder in AOG, made a
takeover offer for AOG at A$1.70 per share. Ensign was overbid by a number of
other companies, before lifting its bid several times and eventually acquiring
AOG in July 2002 for A$2.70 per share. Immediately prior to Ensign's first bid,
AOG shares had been trading at A$1.40.
PICO began to invest in European companies in 1996. We have been
accumulating shares in a number of undervalued asset-rich companies,
particularly in Switzerland, which we believe will benefit from pan-European
consolidation. At December 31, 2003, the market value (and carrying value) of
our European portfolio was $43.1 million. This includes our 22.4% interest in
Jungfraubahn Holding AG ("Jungfraubahn"), which had a market value (and carrying
value) of $26.7 million at the end of 2003.
Before a substantial acquisition is made, 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. We
also have a small portfolio of alternative investments where, in previous years,
we deviated from our traditional value criteria in an attempt to capitalize on
areas of potentially greater growth without incurring undue risk. Given the
higher level of risk, we committed smaller sums to the alternative investments.
9
At December 31, 2003, the total after-tax carrying value of this portfolio was
less than $100,000.
During the late 1990's, the businesses we acquired were primarily
private companies and foreign public companies. During this period, we perceived
that acquisitions in these areas carried less downside risk and offered greater
upside potential land exchange transactions,than the acquisition opportunities available among publicly
traded companies in which Nevada Land will give up landNorth America.
In the foreseeable future our acquisition efforts are likely to be
focused on domestic and foreign public companies, where we perceive greater
scope for value creation than with environmental, cultural, or historical
value, in exchange for land which is either more marketable, or suitable for
future development. In some cases, we may form joint ventures with developers in
order to participate in the upside from developing the land acquired.
7
Nevada Land is currently working on the following land exchange opportunities,
each of which could take up to several years to complete:
- - the exchange of mountain lands in Washoe County for land suitable for
industrial use in Lincoln County;
- - the exchange of mountain lands in Washoe County for land suitable for
residential, commercial, and industrial use near Dayton, in Lyon County;
- - the exchange of working ranch land at Spring Valley Ranches and mountain
lands in Pershing County for developable land in southeastern Nevada; and
- - the exchange of mountain lands in Elko County for land which would be
suitable for agricultural use in Independence Valley, Elko County.
PROPERTY AND CASUALTYprivate companies.
INSURANCE PICO's Property and Casualty InsuranceOPERATIONS IN RUN OFF
This segment is comprised of our
California-based subsidiaries Sequoia Insurance Company and Citation Insurance
Company. Physicians Insurance Company of Ohio acquired Sequoiaand
Citation Insurance Company.
PHYSICIANS INSURANCE COMPANY OF OHIO
Until 1995, Physicians and The Professionals Insurance Company
("Professionals") wrote medical professional liability insurance, mostly in the
state of Ohio.
Due to persistent uneconomic pricing by competitors, Physicians and
Professionals were unable to generate adequate premium volume in 1994 and the
early part of 1995. Faced with these market conditions, and the opportunity for
higher returns from activities other than medical professional liability
insurance, in 1995 and
merged with Citation's parentwe concluded that maximum value would be obtained by placing
Physicians in "run off." This means handling the claims arising from its
historical business, but not writing new business. In addition, the future book
of business -- essentially the opportunity to renew expiring policies -- was
sold for $6 million in cash.
After Physicians went into "run off", the company expanded its
insurance operations by acquisition:
- - in 1996.
Sequoia's core business is property and casualty1995, we purchased Sequoia Insurance Company, which primarily wrote
commercial lines of insurance in California and Nevada, focusing onNevada. After the
niche markets of commercial insurance for smallacquisition, we re-capitalized Sequoia, which provided the capital to
medium-sized businesses and farm insurance. While Sequoia had previously written
some personal insurancesupport growth in California, the company's book of businessbusiness; and
- - in personal lines of insurance increased significantly1996, Physicians completed a reverse merger with the acquisitionparent company
of the
Personal ExpressCitation Insurance Services, Inc. book of business 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.Company. In the past, Citation wrote various
lines of commercial property and casualty insurance and workers'
compensation insurance, primarily in California and Arizona.
Physicians and Citation obtain the funds to pay claims from the
maturity of fixed-income securities, the sale of investments, and collections
from reinsurance companies (that is, specialized insurance companies who share
in our claims risk).
Typically, most of the revenues of an insurance company in "run off"
come from investment income on funds held as part of the insurance business.
During the "run off" process, as claims are paid, both the loss reserve
liabilities and the corresponding investment portfolio assets decrease. Since
investment income in this segment will decline over time, we are attempting to
minimize segment overhead expenses as much as possible. For example, in recent
years we have reduced head count and office space. In 2001, Professionals merged
into Physicians, which simplified administration and reduced costs.
Although we regularly evaluate the strategic alternatives, we currently
believe that the most advantageous option is for Physicians' own claims
personnel to manage the "run off." We believe that this will ensure a high
standard of claims handling for our policyholders and, from the Company's
perspective, ensure the most careful examination of claims made to minimize loss
and loss adjustment expense payments. If we were to reinsure Physicians' entire
book of business and outsource claims handling, this would involve giving up
management of the corresponding investment assets.
Administering our own "run off" also provides us with the following
opportunities:
- - we retain management of the associated investment portfolios. After we
resumed direct management of our insurance company portfolios in 2000,
we believe that the return on our portfolio assets has been attractive
in absolute terms, and very competitive in relative terms. Since the
claims reserves of the "run off" insurance companies effectively
recognize the cost of paying and handling claims in future years, the
investment return on the corresponding investment assets, less
non-insurance expenses, will accrue to PICO. We aim to maximize this
source of income; and
- - to participate in favorable development in our claims reserves if there
is any, although this entails the corresponding risk that we could be
exposed to unfavorable development.
10
As the "run off" progresses, at an indeterminate time in the future Physicians'
claims reserves may diminish to the point where it is more cost-effective to
outsource claims handling to a third party administrator.
At December 31, 2003, Physicians had $19.6 million in medical
professional liability loss reserves, net of reinsurance.
CITATION INSURANCE COMPANY
In 1996, Physicians completed a reverse merger with Citation's parent
company. In the past, Citation wrote various lines of commercial property and
casualty insurance and workers' compensation insurance, primarily in California
and Arizona.
After the merger was completed, we identified redundancy between
CitationSequoia and Sequoia,Citation, and combined the operations of the two companies. After we
assumed management of Citation, we tightened underwriting standards
significantly and did not renew much of the business which Citation had written
previously. Eventually all business in California and Nevada was transitioned to
Sequoia. Citation ceased writing businessSequoia, and at the end of 2000 Citation ceased writing business and is now inwent into
"run off."
Prior to the reverse merger, Citation had been a direct writer of
workers' compensation insurance. Since PICO did not wish to be exposed to that
line of business, shortly after the merger was completed Citation reinsured 100%
of its workers compensation business with a subsidiary, Citation National
Insurance Company ("CNIC"), and sold CNIC to Fremont Indemnity Company
("Fremont") in 1997. As part of the sale of CNIC, all assets and liabilities,
including the assets which corresponded to the workers' compensation reserves
reinsured with CNIC, and all records, computer systems, policy files, and
reinsurance arrangements were transferred to Fremont. Fremont merged CNIC into
Fremont, and administered and paid all of the workers' compensation claims which
had been sold to it. Since 1997, Citation has booked the losses reported by
Fremont, and recorded an equal and offsetting reinsurance recoverable from
Fremont, as an admitted reinsurer, for all losses and loss adjustment expenses.
This means thatresulted in no net impact on Citation's reserves and financial statements,
and no net impact on PICO's consolidated financial statements.
On June 4, 2003, the California Department of Insurance obtained a
conservation order over Fremont, and applied for a court order to liquidate
Fremont. On July 2, 2003, the California Superior Court placed Fremont in
liquidation.
Since Fremont went into liquidation in July 2003, Fremont is no longer
an admitted reinsurance company under the statutory basis of insurance
accounting. Consequently, Citation reversed the $7.5 million reinsurance
recoverable from Fremont in both its statutory basis and GAAP basis financial
statements in the three months ended June 30, 2003, which is reflected in the
accompanying consolidated financial statements. Citation will make a claim to
recover deposits reported as held by Fremont for Citation's insureds; however,
the ultimate outcome cannot be accurately predicted. Citation is handlingpursuing its
rights to recover the reinsurance, and to have the deposit assets returned to
Citation to utilize against the workers' compensation claims arisingobligations.
At December 31, 2003, Citation had $23.8 million in loss reserves, net
of reinsurance. Citation's loss reserves consist of $13.3 million for property
and casualty insurance, principally in the artisans/contractors line of
business, and $10.5 million for workers' compensation insurance.
HYPERFEED TECHNOLOGIES, INC.
HyperFeed is a developer and provider of ticker plant technologies,
software, and managed services to the financial markets industry. HyperFeed is a
publicly traded company, based in Chicago, Illinois, and became a 51%-owned
subsidiary of PICO Holdings on May 15, 2003, when we acquired direct ownership
of a majority voting interest. HyperFeed became a separate reporting segment
from its historical business, but not writing new business. MostMay 15, 2003. In previous years and in 2003 until May 15, HyperFeed was
part of the revenuesBusiness Acquisitions & Financing segment.
PICO first invested in HyperFeed in 1995 through the purchase of common
stock. We invested further capital as debt, which was later converted to equity,
and received warrants for providing financing. In 2000, 2001, and 2002, we
further increased our holding through open market purchases, the conversion of
preferred stock, and the exercise of warrants. On May 15, 2003, PICO purchased
an additional 443,622.9 HyperFeed common shares in a private placement for $1.2
million, or approximately $2.705 per share (adjusted for the August 2003 1:10
reverse stock split). PICO now owns 1,546,311.7 HyperFeed common shares,
representing a voting ownership of approximately 51%.
During 2002 and 2003, HyperFeed restructured its operations,
culminating in the sale of its consolidated market data feed customers to
Interactive Data Corporation for $8.5 million on October 31, 2003. The sale has
strengthened HyperFeed's balance sheet -- at December 31, 2003, HyperFeed had
$4.7 million in cash -- and is expected to significantly reduce overhead and
operating expenses.
11
DISCONTINUED OPERATIONS
SEQUOIA INSURANCE COMPANY
On March 31, 2003, we closed on the sale of Sequoia. The gross sale
proceeds were approximately $43.1 million, consisting of $25.2 million in cash
and a dividend of $17.9 million. The dividend included the common stocks
previously held in Sequoia's investment portfolio with a value of $16.4 million.
The common stocks included in the dividend primarily consisted of a number of
holdings in small-capitalization value stocks, which we believed were still
undervalued based on the private market value of the underlying assets,
earnings, and cash flow. These common stocks were added to the investment
portfolio of Physicians, which was Sequoia's direct parent company.
Physicians acquired Sequoia in 1995. Sequoia's core business was
property and casualty insurance company in "run off" come from investment income.
Citation's loss reserve liabilitiesCalifornia and corresponding investment assets are
decreasing as claims are paid withNevada, focusing on the funds from maturing fixed-income
securities.niche
markets of commercial insurance for small to medium-sized businesses and farm
insurance. Sequoia also wrote selected lines of personal insurance in
California. During the period of our ownership, Sequoia's management takesapplied a
selective approach to underwriting, and aimsaiming 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, and implemented numerous
initiatives to improve efficiency and reduce expenses. These includeAs a result, Sequoia
consistently had loss ratios and combined ratios better than the combinationindustry
averages. During 2000, 2001, and 2002, Sequoia generated increased average
premiums per commercial policy, and significant growth in its book of business,
with combined ratios of 106.3%, 105.4%, and 101.6%, in those respective years.
From April 1, 2000, when we resumed direct management of Sequoia's
investment portfolio, the company's portfolio of unaffiliated stocks, bonds, and
cash equivalents earned returns (that is, interest and dividend income plus
realized and unrealized gains, before fees and taxes) of approximately 6.1% in
the last nine months of 2000, 10.4% in 2001, 12.6% in 2002, and 2.5% in the
first three months of 2003.
Despite these factors, Sequoia continued to generate a return on
capital lower than our expectation, and we concluded that value would be
maximized by sale of the operations of Sequoia and Citation,company, particularly given the introduction of an innovative information system,increasingly
restrictive regulatory & rating environment, and the re-underwritinghighly competitive
marketplace.
HYPERFEED TECHNOLOGIES, INC.
During 2003, HyperFeed completed the sale of each company's book of business. Sequoia has earned a profit fromtwo businesses, which are
now recorded as discontinued operations:
- its insurance
activities, before investment income,retail trading business, PCQuote.com, which was sold for
$370,000 in 3 of the past 5June 2003; and
- its consolidated market data feed customers, which were sold
to Interactive Data Corporation, for $8.5 million. HyperFeed
received $7 million in cash on closing, and can realize an
additional $1.5 million as milestones are met over two 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 companies' portfolios are invested in fixed-income
securities, and up to 20% in equities. The fixed-income portfolios focus on high
quality corporate bonds with 10 or less years to maturity. The equities portion
of the Sequoia and Citation portfolios contains some of PICO's long term
holdings, as well as a number of small-capitalization value investments.
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. In 1995, Physicians and Professionals stopped writing new
business and went into "run off." On December 21, 2001, Professionals merged
with, and into, Physicians.
8
Although we periodically evaluate the strategic alternatives, we currently
believe that the most advantageous option is for Physicians' own claims
personnel to manage the "run off" and for us to retain management of the
associated investment portfolios.
LONG TERM HOLDINGS
This segment contains our long-term investments in public companies,
subsidiaries, and other assets which individually are too small to constitute a
segment, and parent company assets.
PICO invests in companies which we identify as undervalued based on
fundamental analysis. Typically, the stocks will be selling for less than
tangible book value or appraised intrinsic value -- that is, our assessment of
what 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 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.
PICO began to invest in European companies in 1996. We have been
accumulating shares in a number of undervalued asset-rich companies,
particularly in Switzerland, which we believe will benefit from pan-European
consolidation.
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, 2001 was approximately $30.2 million, which represents 14.5% of
PICO's shareholders' equity.
----------------------------------------------------------------------------------------------------------------
DECEMBER 31, 2001 CARRYING VALUE UNITS HELD CLOSING PRICE
Carrying value before taxes:
HyperFeed Technologies, Inc. Common $2,128,000 10,077,856 $0.61
Warrants 527,000 4,055,195 unlisted
----------------
Total 2,655,000
Jungfraubahn Holding AG 17,676,000 112,672 $156.88
Australian Oil & Gas Corporation Limited 7,489,000 9,867,391 $0.76
----------------
Total carrying value before taxes $27,820,000
Deferred taxes $2,399,000
----------------
Carrying value $30,219,000
Notes: 1. Our HyperFeed common 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 the Long Term Holdings section of Item 7, and in Note 4
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 4 of
Notes to Consolidated Financial Statements, "Investment in
Unconsolidated Affiliates"; however, the volatility of the common
shares, and their price at December 31, 2001 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. At December 31, 2001, it would have cost $5.5 million to
exercise our HyperFeed warrants.
4. Our investments in Jungfraubahn and Australian Oil & Gas
Corporation are accounted for under Statement of Financial Accounting
Standards No. 115, "Accounting for Certain Investments in Debt and
Equity Securities."
---------------------------------------------------------------------
We also have a small portfolio of alternative investments where, in
previous years, 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 $3.2
million, which represents approximately 1.5% of shareholders' equity. The
largest investment in this group is SISCOM, Inc.
9
FUTURE STRATEGY
Over the past 4 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 we 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 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, 2001,2003, PICO had 139110 employees. A total of 811 employees
were engaged in land and related mineral rights and water rights operations; 45
in water rights and storage; 105storage operations; 1 in property and casualty insurance
operations; 42 in medical professional liability operations; and 1816 in holding
company activities. HyperFeed Technologies, Inc. has 64 employees, and SISCOM
Corporation has 11 employees.
EXECUTIVE OFFICERS
The executive officers of PICO are as follows:
Name Age Position
---- --- --------
Ronald Langley 5759 Chairman of the Board, Director
John R. Hart 4244 President, Chief Executive Officer and Director
Richard H. Sharpe 4648 Chief Operating Officer
James F. Mosier 5456 General Counsel and Secretary
Maxim C. W. Webb 4042 Chief Financial Officer and Treasurer
W. Raymond Webb 42 Vice President, Investments
John T. Perri 34 Vice President, Finance
Except for Maxim C. W. Webb, W. Raymond Webb and John T. Perri, 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
12
predecessors to PICO Holdings, Inc. Each became an officer of PICO in November
1996 as a result of the merger. Maxim C. W. Webb was an officer of Global Equity
Corporation and became an officer of PICO upon the effective date of the
PICO/Global Equity Corporation Combination in December 1998. W. Raymond Webb and
John T. Perri were elected as officers of PICO in April 2003.
Mr. Langley has been Chairman of the Board of PICO since November 1996
and of Physicians since July 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 Jungfraubahn Holding AG since 2000.
Mr. Langley
became a Director of Australian Oil & Gas Corporation Limited in September 2001.
Mr. Hart has been President and Chief Executive Officer of PICO since
November 1996 and of Physicians since July 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.Corporation
and its predecessor company since November 1996.
Mr. Sharpe has served as Chief Operating Officer of PICO since November
1996, and in various executive capacities since joining Physicians in 1977.
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.
Mr. Maxim Webb has been Chief Financial Officer and Treasurer of PICO
since May 14, 2001. Mr. Webb 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. Raymond Webb has been a Directorwith the Company since August 1999 as Chief
Investment Analyst and became Vice President, Investments in April 2003.
Mr. Perri has been Vice President, Finance of SISCOM, Inc.PICO since November 1996.
10
ITEM 2. PROPERTIES
PICO leases approximately 6,354 square feetAugust 2003
and served in La Jolla, California for its
principal executive offices.
Physicians leases approximately 1,892 square feet of office spacevarious capacities since joining the Company in Columbus, Ohio for its headquarters. Sequoia leases office space for its1998, including
Financial Reporting Manager 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 rights 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:
On January 10, 1997, Global Equity Corporation ("Global Equity"), a wholly
owned PICO subsidiary, commenced an action in British Columbia against MKG
Enterprises Corp. ("MKG") 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.Corporate Controller.
RISK FACTORS
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 and 2001, Global Equity entered into settlement negotiations
with a third party to dispose of the remaining assets of MKG. Dueaddition to the protracted naturerisks and uncertainties discussed in certain
sections of these discussions and the increasing uncertainty of whether
the remaining asset can be realized, Global Equity wrote off the remaining
balance of $500,000 of the investment in the quarter ended June 30, 2001. (See
Long Term Holdings in "Management's Discussion and Analysis of Financial
Condition and Results of Operations.") Global Equity is currently reviewing its
legal options before deciding if it will continue pursuing the outstanding legal
actions.
As disclosed in our 2000 Annual Report on Form 10-K and subsequent SEC
filings, in September and December 2000, PICO Holdings loaned a total of $2.2
million to Dominion Capital Pty. Ltd. ("Dominion Capital"), a private Australian
company. In May 2001, one of the loans for $1.2 million became overdue.
Negotiations between PICO and Dominion Capital to reach a settlement agreement
on both the overdue loans of $1.2 million and the other loan of $1 million
proved unsuccessful. Accordingly, PICO has commenced legal actions through the
Australian courts against Dominion Capital to recover the total amount due to
PICO Holdings. Due to the inherent uncertainty involved in pursuing a legal
action and our ability to realize the assets collateralizing the loans, PICO
fully provided for these loans and interest accrued in 2001.
PICO has been awarded summary judgment in relation to the principal and
interest on the $1.2 million loan and, as a result, Dominion Capital has been
placed in receivership. The court appointed receiver is in the process of
ascertaining Dominion Capital's assets and liabilities. The court trial in
connection with PICO's $1 million loan (with interest) has been adjourned
pending the receiver's investigations. In addition, PICO has commenced
proceedings in Australia to secure the proceeds from the sale of real estate in
Australia offered as collateral under the $1.2 million loan.
See Note 15 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 11,
2001.
(b) At the October 11, 2001 Annual Meeting of Shareholders, Robert R.
Broadbent and Carlos C. Campbell were elected to terms ending in 2004.
The other Directors whose terms continued after the meeting are John
R. Hart, Ronald Langley, John D. Weil, S. Walter Foulkrod, III, Esq.,
and Richard D. Ruppert, MD.
11
(c) The following matters were voted upon and approved by the Company's
shareholders at the Company's October 11, 2001 Annual Meeting of
Shareholders:
1) To elect Robert R. Broadbent and Carlos C. Campbell as Directors.
Both Mr. Broadbent and Mr. Campbell were elected as Directors for
terms ending in 2004. The vote for Mr. Broadbent was 9,287,300
votes in favor, no votes against, and 240,887 abstentions. The
vote for Mr. Campbell was 9,288,291 votes in favor, no votes
against, and 239,890 abstentions.
2) To ratify the Board's selection of Deloitte & Touche LLP to serve
as the Company's independent auditor for the fiscal year ended
December 31, 2001. There were 7,981,086 votes in favor, 1,541,702
votes against, 5,393 abstentions.
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.
2001 2000
-------------------------------- ---------------------------
High Low High Low
------------- ------------- ---------- ----------
1st Quarter $ 14.38 $ 11.88 $ 14.13 $ 9.88
2nd Quarter $ 14.62 $ 12.50 $ 14.06 $ 10.00
3rd Quarter $ 15.91 $ 10.80 $ 14.06 $ 11.59
4th Quarter $ 14.25 $ 10.70 $ 13.38 $ 10.44
On December 31, 2001, the closing sale price of PICO's common stock was
$12.50 and there were 1,179 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.
12
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/A and the consolidated financial statements and the
related notes thereto included elsewhere in this document.
Year Ended December 31,
-------------------------------------------------------------------------------
2001 (1) 2000 (1) 1999 (1) 1998 (1) 1997 (1)
--------------- ------------ ------------ ------------ ------------
OPERATING RESULTS (In thousands, except share data)
Revenues:
Premium income earned $ 43,290 $ 34,436 $ 36,379 $ 36,131 $ 49,876
Net investment income 9,767 8,861 6,605 9,432 13,521
Other income 18,215 2,517 10,670 (2,804) 26,623
------------ ------------ ------------ ------------ ------------
Total revenues $ 71,272 $ 45,814 $ 53,654 $ 42,759 $ 90,020
============ ============ ============ ============ ============
Income (loss) from continuing operations before
extraordinary gain and cumulative effect $ 6,095 $ (6,337) $ (10,183) $ (12,388) $ 19,360
Income from discontinued operations, net 1,075 456
Extraordinary gain, net of tax 442
Cumulative effect of change in accounting principle (981) (4,964)
------------ ------------ ------------ ------------ ------------
Net income (loss) $ 5,114 $ (11,301) $ (9,741) $ (11,313) $ 19,816
============ ============ ============ ============ ============
INCOME (LOSS) PER COMMON SHARE: BASIC
- -------------------------------------
Income (loss) from continuing operations $ 0.49 $ (0.55) $ (1.13) $ (2.07) $ 3.07
Income from discontinued operations 0.18 0.07
Extraordinary gain, net of tax 0.05
Cumulative effect of change in accounting principle (0.08) (0.43)
------------ ------------ ------------ ------------ ------------
Net income (loss) $ 0.41 $ (0.97) $ (1.08) $ (1.89) $ 3.14
============ ============ ============ ============ ============
Weighted Average Shares Outstanding 12,384,682 11,604,120 8,998,442 5,981,814 6,302,401
============ ============ ============ ============ ============
INCOME (LOSS) PER COMMON SHARE: DILUTED
- ---------------------------------------
Income (loss) from continuing operations $ 0.49 $ (0.55) $ (1.13) $ (2.07) $ 2.96
Income from discontinued operations 0.18 0.07
Extraordinary gain, net of tax 0.05
Cumulative effect of change in accounting principle (0.08) (0.43)
------------ ------------ ------------ ------------ ------------
Net income (loss) $ 0.41 $ (0.97) $ (1.08) $ (1.89) $ 3.03
============ ============ ============ ============ ============
Weighted Average Shares Outstanding 12,384,682 11,604,120 8,998,442 5,981,814 6,540,264
============ ============ ============ ============ ============
(1) Restated to reflect a change in the equity method of accounting for the
investment in Jungfraubahn and the recording of other-than-temporary
impairments on marketable securities. See Note 22, Restatement of Previously
Reported Financial Information, in the notes to consolidated financial
statements.
Year Ended December 31
------------------------------------------------------------------
2001 (1) 2000 (1) 1999 (1) 1998 (1) 1997 (1)
-------- -------- -------- -------- --------
(In thousands, except per share data)
FINANCIAL CONDITION
Assets $374,419 $392,082 $376,171 $395,465 $430,362
Unpaid losses and loss adjustment expenses,
net of discount (1999 and prior) $ 98,449 $121,542 $139,133 $155,021 $196,096
Total liabilities and minority interest $166,520 $189,977 $206,665 $221,709 $318,016
Shareholders' equity $207,899 $202,105 $169,506 $173,756 $112,346
Book value per share $ 16.81 $ 16.31 $ 18.72 $ 19.42 $ 18.66
(1) Restated to reflect a change in the equity method of accounting for the
investment in Jungfraubahn and the recording of other-than-temporary
impairments on marketable securities. See Note 22, Restatement of Previously
Reported Financial Information, in the notes to consolidated financial
statements.
Note: Prior year share values have been adjusted to reflect the 1-for-5
Reverse Stock Split effective December 16, 1998, the treatment of
American Physicians Life Insurance Company as discontinued operations
and to reflect the investment results of HyperFeed 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.
13
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
INTRODUCTION
As discussed in Note 22, "Restatement of Previously Reported Financial
Information" in the Notes to the Consolidated Financial Statements, the Company
has filed this amended Form 10-K. ("Form 10-K/A") to restate its previously
issued financial statements for the years ended December 31, 2001, 2000, and
1999. Item 7. "Management's Discussion and Analysis of Financial Condition and
Results of Operation," reflects this restatement.
COMPANY SUMMARY, RECENT DEVELOPMENTS AND FUTURE OUTLOOK
WATER RIGHTS AND WATER STORAGE ASSETS
WATER RIGHTS
ARIZONA
At December 31, 2001, Vidler owned or had the right to acquire
approximately 53,675 acre-feet of transferable ground water in the HARQUAHALA
VALLEY, approximately 75 miles northwest of metropolitan Phoenix, Arizona.
Vidler owns 39,911 acre-feet, and we have the option to purchase a further
13,764 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 were moving into the Basin, Vidler supported legislation, which was
enacted in 2000, placing 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. Any new residential development in Arizona must obtain a
permit from the Arizona Department of Water Resources certifying a "designated
assured water supply" sufficient to sustain the development for at least 100
years. The Harquahala Valley ground water meets the designation of assured water
supply, and Vidler is meeting with communities and developers in the Phoenix
metropolitan area, some of whom need to secure further water to support expected
growth.
On March 1, 2002, Vidler closed the sale, to developers near Scottsdale, of
3,645 acre-feet of water rights and 1,215 acres of land in the Harquahala Valley
ground water basin, for approximately $5.3 million, or $1,450 per acre-foot of
water. The sale was originally scheduled to close in 2001, but closing was
extended until 2002 and the price was increased. This transaction is expected to
add $5.3 million to revenues and approximately $2.3 million to segment income in
the first quarter of 2002.
There is also demand for the water within the Harquahala Basin. On March
19, 2001, Vidler closed the sale of 6,496.5 acre-feet of water rights and 2,589
acres of land in the Harquahala Valley to a unit of Allegheny Energy, Inc. for
approximately $9.1 million. The purchase price equated to $1,400 per acre-foot
of water. This transaction added $9.4 million to revenues and $2.3 million to
pre-tax income for Vidler in 2001; however, we paid $4.4 million in cash to
acquire the assets which were sold, resulting in a $5 million
14
cash surplus. Most of the difference between the $2.3 million pre-tax income on
an accounting basis and the $5 million cash surplus was recorded as an increase
in book value of the assets when PICO acquired Vidler's ultimate parent company,
Global Equity Corporation, in 1998.
Following these sales, Vidler owns or has the right to acquire
approximately 50,030 acre-feet of transferable Harquahala Valley ground water.
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 maximize the value of. Nevada is
the state experiencing the most rapid population growth in the United States.
THE LINCOLN COUNTY JOINT VENTURE
In October 1999, Vidler announced a public/private joint venture with
Lincoln County, Nevada for the location and development of water resources in
Lincoln County. The joint venture has filed applications for more than 100,000
acre-feet of water rights, covering substantially all of the unappropriated
water in the County, with the intention of supplying water to rapidly growing
communities and industrial users. Vidler anticipates that up to 40,000 acre-feet
of water rights will ultimately be permitted from these applications, and put to
use in Lincoln County.
Under the Lincoln County Land Act, more than 13,000 acres of publicly owned
land in southern Lincoln County will be offered for sale near the fast growing
City of Mesquite. Additional water supply will be required if this land is to be
developed.
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. Among other things, the agreement is subject to the
water rights being permitted, and the electricity-generating company obtaining
permitting and financing for a new power plant. The agreement specifies a
closing date of July 2003. Under the terms of the Lincoln County joint venture,
when a water sale occurs, Vidler will first recover its costs, and then the
remaining revenues will be split on a 50:50 basis.
Vidler has agreed to purchase 822.29 acre-feet of permitted water rights in
Meadow Valley, which is located in Lincoln County. The agreement went into
escrow in March 2001. Vidler is in discussions to commercially utilize these
water rights by supplying the water to an industrial user through the joint
venture with Lincoln County.
The Lincoln County joint venture is an example of a transaction where Vidler
can partner with an entity, in this case a governmental entity, to provide the
necessary capital and skills to commercially develop water assets.
2. SANDY VALLEY, NEVADA
Vidler has filed an application for approximately 2,000 acre-feet of water
rights near Sandy Valley, Nevada.
A hearing related to the application was held in December 2001. The Nevada
State Engineer is expected to announce a decision regarding the permitting of
the water rights in the second quarter of 2002. When, and if, the water rights
are permitted, we expect to close an agreement to supply water to support
additional growth at Primm, Nevada, a resort town on the border between
California and Nevada, in the Interstate 15 corridor.
3. FISH SPRINGS RANCH
During 2000, Vidler purchased a 51% interest in Fish Springs Ranch, LLC and
a 50% interest in V&B, LLC. These companies own the Fish Springs Ranch and other
properties totaling approximately 8,600 acres in Honey Lake Valley in Washoe
County, 45 miles north of Reno, Nevada. Approximately 8,000 acre-feet of
permitted water rights associated with Fish Springs Ranch are transferable to
the Reno/Sparks area.
Vidler is holding discussions with a number of potential users for the Fish
Springs water rights, including developers and industrial users. There is strong
demand for water in Nevada's north valleys, and few alternative sources of
supply. If water from Fish Springs could be supplied to the north valleys, this
would reduce their reliance on river water which comes through Reno, thereby
providing additional water to support growth in and around Reno, an area which
has been experiencing consistent growth. Alternatively, if the
15
capacity of nearby transmission lines can be expanded, we believe that Fish
Springs Ranch would be an attractive site for gas-fired electricity generation.
4. BIG SPRINGS RANCH
During 2001, a partnership dispute was resolved which resulted in Vidler
attaining full ownership and direct management of Big Springs Ranch and related
assets.
Big Springs Ranch consists of approximately 37,500 acres of deeded ranch
land, located approximately 65 miles east of Elko, Nevada, in the northeastern
part of the state. Currently the ranch land is leased to farmers, although parts
of the property have the potential for a higher and better use.
There are 6,000 acre-feet of certificated water rights at Big Springs Ranch,
which are the only known practical source of water to support new growth for
West Wendover, Nevada and Wendover, Utah.
In addition, there are 6,000 acre-feet of permitted water rights related to
the ranch, and Vidler has filed applications for an additional 5,950 acre-feet
of water rights.
5. WEST WENDOVER, NEVADA
In 1999, a land exchange was completed in which approximately 70,500 acres
of ranchland at Big Springs Ranch was exchanged with the Bureau of Land
Management for several parcels of developable land near West Wendover, Nevada,
totaling approximately 6,300 acres. West Wendover is adjacent to the Nevada/Utah
border in the Interstate 80 corridor. Governmental officials are considering a
proposal to move the state line and then merge the cities of West Wendover,
Nevada and Wendover, Utah. West Wendover is approximately 120 miles from Salt
Lake City, Utah, and attracts a significant number of drive-in visitors from
Utah, a state where gaming is prohibited. The land owned by Vidler will stay in
Nevada.
Following the resolution of the partnership dispute, Vidler attained direct
management of this land in 2001. The first parcel to be developed is
approximately 82 acres of industrial land. Vidler has agreed to sell
approximately 7 acres of unimproved land to a user who will then be responsible
for installing offsite utilities and access road improvements for an industrial
park. The transaction is expected to close later in 2002. We anticipate that
these improvements will allow Vidler to sell the remaining 75 acres as
higher-value industrial land.
Vidler is examining alternatives for the remaining parcels, including
industrial, commercial, hotel/casino, and residential development.
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, and granted the
City options to acquire other water rights. The City exercised an option to
acquire water assets for $390,000 in 2001. If the remaining options are
exercised, the aggregate purchase price is approximately $1.3 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 is 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 during 2002.
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. Vidler has applied to upgrade these water rights, which
would increase their commercial value.
16
WATER STORAGE
1. VIDLER ARIZONA RECHARGE FACILITY
During 2000, Vidler completed the second stage of construction at its
facility to "bank," or store, water underground in the Harquahala Valley, and
received the necessary permits to operate a full-scale water "recharge"
facility. "Recharge" is the process of placing water into storage underground.
Vidler has the permitted right to recharge 100,000 acre-feet of water per year
at the Vidler Arizona Recharge Facility, and anticipates being able to store in
excess of 1 million acre-feet of water in the aquifer underlying much of the
valley. When needed, the water will be "recovered," or removed from storage, by
ground water wells.
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 storage facility is strategically located adjacent to the Central Arizona
Project aqueduct, a conveyance canal running from Lake Havasu to Phoenix and
Tucson. The water to be recharged will come from surplus flows of CAP water. We
believe that proximity to the CAP is a competitive advantage, because it
minimizes the cost of water conveyance.
Vidler is able to provide storage for users located both within Arizona and
out-of-state. Potential users include industrial companies, developers, and
local governmental political subdivisions in Arizona, and out-of-state users
such as municipalities and water agencies in Nevada and California. The Arizona
Water Banking Authority ("AWBA") has the responsibility for intrastate and
interstate storage of water for governmental entities.
Vidler intends to charge customers a fee based on the amount of water
"recharged," and then an additional fee when the water is "recovered." The
revenues generated from this asset will depend on the quantity of water which
the AWBA, and private users, store at the facility. The quantity of water stored
will depend on a number of factors, including the availability of water and
available storage capacity at publicly owned facilities.
We believe that a number of events in recent years have increased the
scarcity value of the project's storage capacity. At a public hearing on March
14, 2000, the AWBA 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 AWBA 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 Southern Nevada Water Authority Water Resource Plan, which can be
viewed at www.snwa.com, calls for 1.2 million acre-feet of water to be stored in
Arizona in order to meet forecast demand after 2015. The AWBA is currently
finalizing agreements to store water on behalf of Nevada. Once these agreements
have been concluded, the AWBA can begin to negotiate storage for California. The
AWBA will be able to store water at existing publicly owned sites and at the
Vidler Arizona Recharge Facility, which is one of the largest water storage
facilities. In April 2001, Vidler reached agreement with the Arizona Water
Banking Authority concerning the terms under which water can be stored at the
facility for the users represented by the Authority -- $45.00 per acre-foot of
water recharged in 2001, rising to $46.50 in 2002, and $48.00 in 2003. The
agreement concludes on December 31, 2003.
In addition to the potential demand from the public users represented by the
AWBA, demand from private users could potentially utilize up to 100% of the
site's storage capacity.
Vidler has not stored water for customers at the facility yet, but Vidler
has been recharging water for its own account since 1998, when the pilot plant
was constructed. Vidler purchased the water from the CAP, and intends to resell
this water at an opportune time. At December 31, 2001, Vidler had recharged
approximately 4,800 acre-feet of water at the facility.
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 will be able to recharge 100,000 acre-feet of
water per year at the facility, and to store in excess of 1 million acre-feet of
water in the aquifer. 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.
17
Recharge and recovery capacity is critical, because it indicates how
quickly water can be put into storage 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 crucial 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.
2. SEMITROPIC
Vidler originally had an 18.5% right to participate in the Semitropic Water
Banking and Exchange Program, which operates a 1,000,000 acre-foot water storage
facility at Semitropic, near the California Aqueduct, northwest of Bakersfield,
California.
Over the first 10 years of the agreement with the Semitropic Water Storage
District, Vidler was required to make a minimum annual payment of $2.3 million.
Vidler began making the annual payments in November 1998. In return, Vidler had
the right to store up to 185,000 acre-feet of water underground over a 35-year
period. Vidler had 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. Vidler was also required to make an annual payment for
operating expenses.
The interest in Semitropic is Vidler's only asset in California, which has
proved a difficult state to operate in due to the large number of entities
involved in the water industry, each serving different, and sometimes
conflicting, constituencies. In the meantime, the strategic value of the
guaranteed right to recover an amount of water from Semitropic every year --
even in drought years -- became clear to water agencies, developers, and other
parties seeking a reliable water supply. For example, developers of large
residential projects in Kern County and Los Angeles County must now be able to
demonstrate that they have sufficient back-up supplies of water in the case of a
drought year before they are permitted to begin development. Accordingly, during
2001, Vidler took advantage of current demand for water storage capacity with
guaranteed recovery, and began to sell its interest in Semitropic.
On May 21, 2001, Vidler closed the sale of 29.7% of its original interest
(i.e., approximately 55,000 acre-feet of water storage capacity) to The Newhall
Land and Farming Company for $3.3 million, resulting in a pre-tax gain of $1.6
million. This transaction added $1.6 million to revenues and segment income in
2001.
On September 30, 2001, Vidler closed the sale of another 54.1% of its
original interest (i.e., approximately 100,000 acre-feet of water storage
capacity) to the Alameda County Water District for $6.9 million, resulting in a
pre-tax gain of $4.1 million. This transaction added $4.1 million to revenues
and segment income in 2001.
Vidler's remaining interest includes approximately 30,000 acre-feet of
storage capacity, and the right to recover up to approximately 6,800 acre-feet
in any one year and minimum guaranteed recovery of approximately 2,700 acre-feet
every year. We are considering various alternatives for the remaining interest,
including sale to developers or industrial users. Currently Vidler is not
storing any water at Semitropic for third parties.
OTHER PROJECTS
Vidler routinely evaluates the purchase of further water-righted properties
in Arizona and, potentially, Nevada. Vidler also 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.
SUMMARY
In 2002, 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.
18
LAND AND RELATED MINERAL RIGHTS AND WATER RIGHTS
The majority of Nevada Land's revenues come from the sale of land and water
rights. In addition, various types of recurring revenue are generated from use
of Nevada Land's properties, including leasing, easements, and mineral
royalties. Nevada Land also generates interest revenue from land sales contracts
where Nevada Land has provided partial financing, and from temporary investment
of the proceeds of land and water rights sales.
Nevada Land recognizes revenue from land sales, and the resulting gross
profit or loss, when transactions close. On closing, the entire sales price is
recorded as revenue, and a gross margin is recognized 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 fluctuate from period to
period, depending on the date when specific transactions close.
In 2001, Nevada Land generated $1.9 million in revenues from the sale of:
- - 15,352 acres of former railroad land for $1.7 million. The average sales
price of $113 per acre compares to our average basis of $43 per acre in the
parcels which were sold, and our average cost of $35 per acre for all of
Nevada Land's land, water, and mineral assets; and
- - 280 acres of land at Spring Valley Ranches for $178,000, resulting in a
gross profit of $70,000. This land was not contiguous with the main
property, and was not part of the land exchange transaction we are
proposing for the bulk of the land assets at Spring Valley Ranches.
In 2001, 86% of land sales were settled for cash, and Nevada Land provided
partial financing for the balance. Vendor financing has been collateralized by
the land conveyed, carries a 10% interest rate, and is subject to a minimum 20%
down payment.
PROPERTY AND CASUALTY 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 low-single-digit percentage growth
from January 2000. Growth in premium volume then accelerated significantly as a
result of two developments in the second quarter of 2000.
First, commercial insurance premium volume increased as a result of new
policies issued after A.M. Best Company, a leading insurance company rating
service, upgraded Sequoia's claims paying ability from "B++" (Very Good) to "A-"
(Excellent). This allowed Sequoia to compete for business in an additional
market segment -- customers who can only purchase coverage from "A"- rated
insurance companies.
Second, in May 2000, Sequoia acquired the Personal Express Insurance
Services, Inc. book of business for approximately $3 million. Personal Express
had few tangible assets, so the bulk of the purchase price was allocated to the
book of business and recorded as 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. Historically, this
book of business has generated an underwriting profit. The acquisition greatly
expanded Sequoia's business in personal lines of insurance, bringing
approximately $7.5 million in additional premiums in 2001.
As a result of these factors, Sequoia Insurance Company generated strong
growth in direct written premiums in 2000 and 2001.
In 2000, direct written premiums increased by 33.5% to $47.1 million, as a
result of both growth in the existing book of business, which was principally in
commercial lines of insurance, and new policies issued after the A.M. Best
upgrade and the acquisition of Personal Express.
Direct written premiums in commercial lines increased 17.8% to $39.7
million in 2000. This included 29.1% growth to $21.4 million in the second half
of 2000, following the change in Sequoia's A.M. Best rating.
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Direct written premiums in personal lines began to increase markedly in the
second quarter of 2000, as new revenues from the Personal Express book of
business 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.
In 2001, direct written premiums rose another 14.9%, to $54.1 million,
comprised of $45 million in commercial lines and $9.1 million in personal lines.
The growth in premium volume in 2001 was primarily due to growth in the
commercial insurance book of business.
In 2002, Sequoia is budgeting for approximately 10% growth in direct
written premiums, with approximately 84% of direct written premiums coming from
commercial lines and approximately 16% from personal lines.
During 2001 and 2000, Sequoia's loss ratio, and consequently underwriting
results, deteriorated because growth in claims costs (e.g., for construction,
medical care, and automobile repair) had outpaced growth in effective premiums
in recent years. In 2001, Sequoia introduced a number of initiatives to improve
its loss ratio. Sequoia further tightened underwriting standards, for example,
by ceasing to provide coverage for certain types of business. In addition,
Sequoia increased rates for commercial automobile coverage. Rate increases are
planned in most other commercial lines in 2002. While these initiatives have led
to an increase in average premiums per policy, the effect on total written
premiums was partially offset by a reduction in the number of policies issued.
Average direct premiums per policy in commercial lines increased approximately
15% in 2001, but the number of commercial policies written declined by
approximately 2.6%. The overall effect on profitability is expected to be
positive. Due to the lag between a policy being "written" and the premium being
"earned," the full effect of these initiatives will not be reflected in
Sequoia's reported results until 2002.
The growth in commercial premium volume and the acquisition of the Personal
Express book of business have helped to reduce Sequoia's underwriting expense
ratio (i.e., underwriting expenses as a percentage of earned premiums). Since
some costs are fixed (i.e., do not vary with changes in volume), Sequoia's
operating expenses have increased at a slower rate than premium volume, which
has reduced Sequoia's average operating expense per policy and underwriting
expense ratio.
In December 2000, Citation ceased writing business and is now in "run off"
(i.e., handling claims arising from policies written in previous years, but not
writing new policies). In 1997, 1998, and 1999, Citation took charges to
increase claims reserves in the artisans/contractors line of business, including
a pre-tax charge of $10.1 million in 1999. Citation did not need to increase
claims reserves in the artisans/contractors line of business in 2000 or 2001. 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 Citation's previous
management. 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.
Income from the investment of funds held as part of their insurance business
is an important component of the profitability of insurance companies.
Investment income consists of interest from fixed-income securities and
dividends from stocks held in the insurance company portfolios. In addition,
from time to time, gains or losses are realized from the sale of investments.
The duration of a bond portfolio measures the amount of time it would take
for the cash flows from scheduled interest payments and bond maturities to equal
the current value of the portfolio. Duration is important because it indicates
the sensitivity of the market value of a bond portfolio to changes in interest
rates. Typically, the longer the duration, the greater the sensitivity of the
value of the bond portfolio to changes in interest rates.
20
To minimize interest rate risk (i.e., the potential decrease in the market
value of the bond portfolio which would be brought on by higher interest rates),
Sequoia targets a duration of 5 years or less. At December 31, 2001, the
duration of Sequoia's bond portfolio was 4.4 years. The maturity of securities
in Citation's bond portfolio is structured to match the projected pattern of
claims payouts. At December 31, 2001, the duration of Citation's bond portfolio
was 3.1 years.
Apart from treasury bonds which are held as deposits and collateral with
regulators, and government-sponsored enterprise bonds (i.e., Freddie Mac and
FNMA) held for capital purposes, the bond portfolio consists of high quality
corporate issues. Our insurance companies do not own any bonds in the
telecommunications, technology, utilities, energy, or consumer finance sectors
which experienced difficulties in 2001 and the first two months of 2002.
MEDICAL PROFESSIONAL LIABILITY INSURANCE
Physicians Insurance Company of Ohio is in "run off." Physicians obtains the
funds to pay claims from the maturity of fixed-income securities, the sale of
investments, and collections from reinsurance companies (i.e., insurance
companies who share in our claims risk). During the "run off," this segment will
shrink as the level of claims reserve liabilities and investment assets
decrease, as claims are paid with the proceeds of investment maturities and
sales. 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. For example, in 2000 and 2001 we
reduced head count and office space. On December 21, 2001, Professionals
Insurance Company was merged into Physicians. This will simplify administration
and result in cost savings, for example, from the elimination of duplication.
During 2001, our medical professional liability insurance claims reserves,
net of reinsurance, decreased from $51.6 million to $34.9 million. Actuarial
analysis of Physicians' loss reserves as of September 30, 2001 concluded that
Physicians' reserves against claims were significantly greater than the
actuary's projections of future claims payments. Accordingly, Physicians reduced
its claims reserves by approximately $11.2 million in the fourth quarter, which
accounts for 67% of the net decrease in reserves during 2001. It should be noted
that such actuarial analyses involve estimation of future trends in many
factors which may vary significantly from expectation, which could lead to
further reserve adjustments -- either increases or decreases -- in future years.
We manage the Physicians investment portfolio with the objective of having
sufficient cash and maturing fixed-income securities to meet the claims payments
projected for at least the following twelve months. At December 31, 2001, the
duration of the Physicians bond portfolio was 1.6 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. During
December 2000 and January 2001, we purchased 245,000 shares of common stock on
the open market. In September 2001, the principal and accrued dividends on the
HyperFeed Series A and Series B preferred stock held by PICO and its
subsidiaries were converted into HyperFeed common shares at a conversion price
of $1.03 per share. PICO received 7,462,856 shares on conversion, increasing our
voting ownership of HyperFeed from approximately 35% to approximately 42.4%.
At December 31, 2001, PICO and its subsidiaries held the following
securities in HyperFeed:
- - 10,077,856 common shares, which had a carrying value of $2.1 million
(before taxes), compared to a potential market value of $6.1 million
(before taxes) based on the last sale price of $0.61 on December 31, 2001;
and
- - warrants to buy 4,055,195 shares. The exercise price for the warrants to
buy 3,106,163 shares is fixed at $1.575 per share. However, the warrants to
buy 949,032 shares are exercisable at the lesser of the stated exercise
price, which averages approximately $1.844, or the then market price of the
common stock. At December 31, 2001, the warrants were carried at estimated
fair value of $527,000 (before taxes).
Since our initial investment in HyperFeed, the Company's revenues have
grown from $13.4 million in 1995 to $33.3 million in 2001.
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For full year 2001, HyperFeed generated revenues of $33.3 million, gross
margin of $12.9 million, EBITDA (i.e., earnings before depreciation,
amortization, interest and tax, a non-GAAP measure which investors frequently
use as a proxy for gross cash flow) of $4 million, and a net loss from
operations of $1.5 million, excluding non-cash preferred dividends of $927,000.
Net cash flow from operating activities was $2.8 million.
In the fourth quarter of 2001, HyperFeed generated revenues of $6.2
million, gross margin of $3.8 million, EBITDA of $1.2 million, and a net loss of
$303,000. Net cash flow from operating activities was $522,000.
We use the equity method to account for the common shares. HyperFeed
contributed an equity loss of $1.2 million to the Long Term Holdings segment in
2001.
The HyperFeed warrants are carried in our financial statements at estimated
fair value. Following the adoption of Statement of Financial Accounting
Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities," the change in estimated fair value of warrants during an accounting
period is recorded in the Consolidated Statement of Operations for that period.
See Note 4 of Notes to Consolidated Financial Statements, "Investments."
2. JUNGFRAUBAHN HOLDING AG
PICO owns 112,672 shares of Jungfraubahn, which represents approximately
19.3% of the company.
Our holding in Jungfraubahn is accounted for under Statement of Financial
Accounting Standards No. 115, "Accounting for Certain Investments in Debt and
Equity Securities." Under this method, the investment is carried at market value
in our balance sheet, and the only income recorded is from dividends. At
December 31, 2001, our investment in Jungfraubahn had a cost basis of $14.9
million and a carrying (market) value of $17.7 million.
Jungfraubahn announced its result for the 2000 financial year on May 21,
2001, so the 2001 result will probably not be released until after this 10-K has
been filed. Jungfraubahn described 2000 as an exceptional year, whose results
"will not easily be repeated." Passenger numbers and revenues in 2000 were
unusually high due to a 100-year anniversary promotion by Raiffeisen, a Swiss
bank, which is estimated to have generated more than 50% of the increase in
passenger visits to Jungfraujoch, and due to 22.4% growth in group travel.
Revenues increased 19.7% to CHF (Swiss Francs) 110.3 million ($US65.5 million).
EBITDA (i.e., earnings before depreciation, amortization, interest and tax, a
non-GAAP measure which investors frequently use as a proxy for gross cash flow)
increased 30.4% to CHF40.8 million ($US24.2 million). Net income increased
19.5% to CHF17.9 million ($US10.6 million), or CHF30.6 ($US18.20) per share.
Jungfraubahn's operating activities generated net cash flow of CHF35.2 million
($US20.9 million).
On August 31, 2001, Jungfraubahn announced its results for the first six
months of 2001. Revenues declined by CHF5.4 million ($US3.2 million), or 10.6%,
year over year to CHF45.7 million ($US27.1 million), principally due to the
absence of revenues from the Raiffeisen promotion. Due to the CHF5.4 million
($US3.2 million) reduction in revenue and a CHF2.1 million ($US1.3 million)
increase in operating expenses, EBITDA declined CHF7.6 million ($US4.5 million)
to CHF10.3 million ($US6.1 million). Net income dropped CHF7.6 million
($US4.5 million) to CHF3.3 million ($US2 million), or CHF5.6 ($US3.33)
per share. In addition, the sale of art contributed an extraordinary profit of
CHF1.4 million ($US830,000).
On January 23, 2002, Jungfraubahn issued a press release containing an
initial review of 2001 operations. The full text is available on Jungfraubahn's
web-site www.jungfraubahn.ch (in the "Shareholders" tab of the "Inside"
section).
In the press release, Jungfraubahn indicated that it expected transport
revenues of approximately CHF74.5 million ($US44.2 million) for 2001, an 11.6%
reduction from the record CHF84.3 million ($US50 million) of 2000, but the
second highest in the company's history. Jungfraubahn signaled that "a
satisfactory result" was anticipated, "despite the reduction in numbers of
guests from Asia and the USA in the fourth quarter," although the result will
likely be below the previous year.
Jungfraubahn indicated that it expects that the September 11 terrorist
attacks in the U.S. will lead to a redistribution in passenger numbers in 2002.
Visitors from Japan, the most important inbound market, are expected to be down
due to a fear of flying, compounded by the weak Japanese economy, although
Jungfraubahn noted "positive signs" suggesting that "a recovery in the travel
market may be expected as early as May 2002." Jungfraubahn expects this to be
offset, to some extent, by increased visitation from the domestic Swiss market
and nearby countries. Jungfraubahn noted that the U.S. is a "relatively small"
inbound market.
Jungfraubahn's most recent published balance sheet is as of December 31,
2000, when book value per share was CHF485 ($US292.64). On December 31, 2001,
Jungfraubahn's stock price was CHF270 ($US162.92), and CHF1 equaled $US0.6034.
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3. AUSTRALIAN OIL & GAS CORPORATION LIMITED
During 2001, we acquired another 1,441,347 shares in AOG, lifting our
shareholding to 9,867,391 shares, representing approximately 20.7% of the
company at December 31, 2001.
At December 31, 2001, our investment in AOG had a cost basis of $8.2
million, a market value of $7.5 million, and a net carrying value of $7.7
million after allowing for taxes. We reviewed the unrealized loss at December
31, 2001, and determined that an other-than-temporary impairment did not exist.
This investment was funded in US dollars.
On September 5, 2001, AOG announced that it had returned to profit in the
financial year ended June 30, 2001. AOG's revenues increased 86.1% to $A130.1
million ($US66.3 million), and the company reported net income of $A8 million
($US4.1 million), or $A0.17 ($US0.09) per share. Rig utilization improved during
the financial year, from 54% in the first half, to 65% in the second half. The
increase in utilization during the year appears to have translated into profit
growth, with net income for the second half estimated at $A5 million ($US2.6
million), compared to $A3 million ($US1.5 million) in the first half. In the
letter accompanying the results, AOG indicated that rig utilization was "running
at over 75%."
On January 17, 2002, AOG announced that it was raising additional capital
to purchase a new deep capacity drilling rig and to refit two existing rigs to
perform new long term drilling contracts with ExxonMobil Indonesia and Petroleum
Development - Oman. In January 2002, PICO provided AOG with a short term $US4
million bridging facility, and was issued 333,333 shares in AOG as a loan
establishment fee. AOG is to repay the advance with the proceeds of a rights
offering which closes on March 18, 2002. PICO is underwriting part of the
offering, and has been issued with another 333,333 shares in AOG as an
underwriting fee.
On February 27, 2002, AOG announced its results for the six months ended
December 31, 2001. Revenues increased 26.6% to $A76.1 million ($US38.8 million),
and net income increased 21% to $A3.7 million ($US1.9 million), or $A0.077
($US0.04) per share. Net cash flow from operating activities was $A10.2 million
($US5.2 million), shareholders' equity was $A100.7 million ($US51.3 million),
and tangible book value per share was $A2.10 ($US1.07). In the letter to
shareholders accompanying the results, AOG indicated that "the contract book is
satisfactory and the Company can look forward to continuing and increasing
profitability for the rest of this calendar year."
AOG provides its shareholders with half-yearly financial information in
accordance with the requirements of the Australian Stock Exchange and Australian
securities laws. Given our 20.7% voting ownership at December 31, 2001, and that
our Chairman joined AOG's Board of Directors in September 2001, we asked AOG for
an on-going commitment to provide timely quarterly financial statements, so that
the equity method could potentially be applied to this investment. AOG has
declined to provide us with quarterly financial statements and other financial
information which is not publicly available to other AOG shareholders. Based on
this and other factors, we concluded that PICO does not have the ability to
exercise significant influence over AOG which is required to apply the equity
method of accounting. Instead, the investment is carried at market value, with
the unrealized after-tax gain or loss being included in shareholders' equity.
See the next section in Item 7, "Significant Accounting Policies."
4. OTHER DISCLOSED EUROPEAN INVESTMENTS
SIHL
During 2000 and 2001, we acquired approximately 10.6% of SIHL, a Swiss
public company, through participation in a restructuring/capital raising and
on-market purchases. SIHL's core business is digital imaging, but the company
has surplus property assets in and around Zurich, including a major development
project known as Sihlcity. Our investment in SIHL is accounted for under SFAS
No. 115, "Accounting for Certain Investments in Debt and Equity Securities."
SIHL's operations were adversely affected by the economic downturn in 2001,
and the company was unable to improve profitability and reduce debt as
previously expected. Based on these developments and the extent and duration of
the decline in the market value of SIHL's common stock, we concluded that the
decline in SIHL's market value was other-than-temporary, and we recorded a $2.1
million pre-tax charge for impairment in the investment in 2001. This charge
reduced our basis in the investment to its total market (carrying) value of $2.1
million at December 31, 2001.
A charge for other-than-temporary impairment is a non-cash charge recorded
as a realized loss. The basis of the investment is written down from its
original cost to current carrying value, which typically is the market price at
the balance sheet date when the charge is recorded.
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It should be noted that:
- - the charges for other-than-temporary impairment relating to SIHL do not
affect book value per share, as the after-tax decline in the market value
of investments carried under SFAS No. 115 is already reflected in
shareholders' equity in our balance sheet; and
- - the carrying value of the holding does not change. The impairment simply
reclassifies the decline from an unrealized decrease in shareholders'
equity to a realized loss in the statement of operations.
The written-down value becomes our new basis in the investment. In future
accounting periods, unrealized gains or losses from that level will be recorded
in shareholders' equity, and when the investment is sold, a realized gain or
loss from that level will be recorded in the statement of operations. See
"Results of Operations -- Years Ended December 31, 2001, 2000, and 1999."
ACCU HOLDING AG
PICO owns 8,125 shares in Accu Holding, which represents a voting ownership
interest of approximately 28.3% of the company. Due to a number of factors, we
have concluded that we do not have the ability to exercise significant influence
over Accu Holding's activities in 2001, so this investment is not accounted for
under the equity method. Instead, the investment is accounted for under SFAS No.
115 and carried at market value, with the unrealized after-tax gain or loss
being included in shareholders' equity.
At December 31, 2001, our investment in Accu Holding had a cost basis of
$4.6 million, and a carrying (market) value of $4.5 million.
Accu Holding manufactures batteries at two plants in Switzerland.
5. ALTERNATIVE INVESTMENTS
At December 31, 2001, PICO's remaining alternative investments had an
aggregate carrying value of $3.2 million after taxes, or 1.5% of Shareholders'
Equity.
The principal alternative investment is SISCOM, Inc., which is a
consolidated subsidiary. SISCOM is a software developer and systems integrator
for video-based content management systems for the professional broadcast,
sports, and entertainment industries. We are pursuing a number of alternatives
to realize the value of this investment, including assisting SISCOM to enter
into strategic licensing agreements with companies which have multi-national
marketing and distribution channels.
SIGNIFICANT ACCOUNTING POLICIES
PICO's principal assets and activities comprise:
- - land, water rights, and water storage assets;
- - property and casualty insurance, and the "run off" of property and casualty
insurance and medical professional liability insurance loss reserves; and
- - long term investment in other companies.
Following is a description of what we believe to be the critical accounting
policies affecting our company, and how we apply these policies.
1. ESTIMATION OF RESERVES IN INSURANCE COMPANIES
We must estimate future claims and ensure that our loss reserves are
adequate to pay those claims. This process requires us to make estimates about
future events. The accuracy of these estimates will not be known for many years.
For example, part of our claims reserves cover "IBNR" claims (i.e., the event
giving rise to the claim has occurred, but the claim has not been reported to
us). In other words, in the case of IBNR claims, we must provide for claims
which we do not know about yet.
At December 31, 2001, the loss reserves, net of reinsurance, of our three
insurance subsidiaries were:
- - Sequoia Insurance Company, $21.2 million;
- - Citation Insurance Company, $19.2 million; and
- - Physicians Insurance Company of Ohio, $34.9 million. Physicians wrote its
last policy in 1995. However, under current law, claims can be made until
2017 for events which allegedly occurred during the periods when we
provided insurance coverage to medical professionals.
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Our medical professional liability insurance reserves are certified
annually by an independent actuary, as required by Ohio insurance law. Actuarial
estimates of our future claims obligations have been volatile. In 2001, we
reduced claims reserves by $11.2 million after actuarial studies by two
independent firms concluded that Physicians' claims reserves were significantly
greater than projected claims payments. However, based on actuarial analysis, we
increased reserves by $2 million in 2000 and by $5 million in 1999. Accordingly,
there can be no assurance that our claims reserves are adequate and there will
not be reserve increases or decreases in the future.
As required by California insurance law, the loss reserves of Sequoia
Insurance Company and Citation Insurance Company are reviewed quarterly, and
certified annually, by an independent actuarial firm.
2. CARRYING VALUE OF LONG-LIVED ASSETS
Our principal long-lived assets are land, water rights, and interests in
water storage assets owned by Vidler, and land at Nevada Land. At December 31,
2001, the total carrying value of land, water rights, and interests in water
storage assets was $126 million, or 33.7% of PICO's total assets.
As required by GAAP (i.e., accounting principles generally accepted in the
United States of America), our long-lived assets are rigorously reviewed at
least quarterly to ensure that the estimated future undiscounted cash flows from
these assets will at least recover their carrying value. Our management conducts
these reviews utilizing the most recent information available. The review
process inevitably involves the significant use of estimates and assumptions.
In our water rights and water storage business, we develop some projects
and assets from scratch. This can require cash outflows (e.g., to drill wells to
prove that water is available) in situations where there is no guarantee that
the project will ultimately be commercially viable. If we determine that it is
probable that the project will be commercially viable, the costs of developing
the asset are capitalized (i.e., recorded as an asset in our balance sheet,
rather than being charged as an expense). If the project ends up being viable,
in the case of a sale, the capitalized costs are included in the cost of land
and water rights sold and applied against the purchase price. In the case of a
lease transaction or when the asset is fully developed and ready for use, the
capitalized costs are amortized (i.e., charged as an expense in our income
statement) and match any related revenues.
If we determine that the carrying value of an asset cannot be justified by
the forecast future cash flows of that asset, the carrying value of the asset is
written down to fair value.
At December 31, 2001, our balance sheet contained capitalized costs of $3
million for two projects at Vidler, which require regulatory approval to
proceed.
3. ACCOUNTING FOR INVESTMENTS AND INVESTMENTS IN UNCONSOLIDATED AFFILIATES
At December 31, 2001, PICO and its subsidiaries held equities with a
carrying value of approximately $56.4 million. These holdings are primarily
small-capitalization value stocks in the US, Switzerland, and Australia.
Depending on the circumstances, and our judgment about the level of our
involvement with the investee company, we apply one of two accounting policies.
In the case of most holdings, we apply Statement of Financial Accounting
Standards ("SFAS") No. 115, "Accounting for Certain Investments in Debt and
Equity Securities." Under this method, the investment is carried at market value
in our balance sheet, with unrealized gains or losses being included in
shareholders' equity, and the only income recorded is from dividends.
In the case of investments where we have the ability to exercise
significant influence over the company we have invested in, we apply the equity
method under Accounting Principles Board Opinion No. 18 ("APB No. 18"), "The
Equity Method of Accounting for Investments in Common Stock."
The application of the equity method (APB No. 18) to an investment may
result in a different outcome in our financial statements than market value
accounting (SFAS No. 115). The most significant difference between the two
policies is that, under the equity method, we include our proportionate share of
the investee's earnings or losses in our statement of operations, and dividends
received are used to reduce the carrying value of the investment in our balance
sheet. Under market value accounting, the only income recorded is dividends.
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The assessment of what constitutes the ability to exercise "significant
influence" requires our management to make significant judgments. We look at
various factors in making this determination. These include our percentage
ownership of voting stock, whether or not we have representation on the investee
company's Board of Directors, transactions between us and the investee, the
ability to obtain timely quarterly financial information, and whether PICO
management can affect the operating and financial policies of the investee
company. When we conclude that we have this kind of influence, we adopt the
equity method and change all of our previously reported results of the investee
to show the investment as if we had applied equity accounting from the date of
our first purchase. This adds volatility to our reported results.
While the method of accounting we use clearly has no impact on the
underlying performance of the investee, the use of market value accounting or
the equity method can result in significantly different carrying values at
discrete balance sheet dates and contributions to our statement of operations
over the course of the investment. It should be noted that the total impact of
the investment on PICO's shareholders' equity over the entire life of the
investment will be the same whichever method is adopted.
For example, our investment in HyperFeed is carried under the equity method
of accounting as we have determined that we have the ability to exercise
significant influence over HyperFeed. As a result, at December 31, 2001, the
carrying value of HyperFeed in our balance sheet is significantly below what it
would be if we recorded this investment at market.
For equity and debt securities accounted for under SFAS No. 115 which are
in an unrealized loss position, we are required to regularly review whether the
decline in market value is other-than-temporary. In general, this review
requires management to consider several factors, including specific adverse
conditions affecting the issuer's business and industry, the financial condition
of the issuer, and the long-term prospects for the issuer. Accordingly,
management has to make important assumptions regarding our intent and ability to
hold the security, and our assessment of the overall worth of the security.
Risks and uncertainties in our methodology for reviewing unrealized losses for
other-than-temporary declines include our judgments regarding the overall worth
of the issuer and its long-term prospects, our ability to realize on our
assessment of the overall worth of the business.
In a subsequent quarterly review, if we conclude that an unrealized loss
previously determined to be temporary is other-than-temporary, an impairment
loss will be recorded. There will be no impact on our financial condition or
book value per share, as the decline in market value has already been recorded
through shareholders' equity. However, there will be an impact on our net income
before and after tax and on our reported earnings per share, due to recognition
of the unrealized loss and related tax effects. When a charge for
other-than-temporary impairment is recorded, our basis in the security is
decreased. Consequently, if the market value of the security later recovers and
we sell the security, a correspondingly greater gain will be recorded in the
statement of operations. However, there will be no impact on book value as the
gain, after related taxes, will already have been recorded in the unrealized
appreciation component of shareholders' equity.
RESULTS OF OPERATIONS -- YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
SUMMARY
PICO reported net income of $5.1 million, or $0.41 per diluted share in
2001, compared with a net loss of $11.3 million, or $0.97 per diluted share, in
2000, and a net loss of $9.7 million, or $1.08. per diluted share, in 1999. The
weighted average number of shares outstanding in 2001 and 2000 increased as a
result of the rights offering in March 2000.
At December 31, 2001, PICO had shareholders' equity of $207.9 million,
or $16.81 per share, compared to $202.1 million, or $16.31 per share, at the
end of 2000. The principal factors leading to the $5.8 million increase in
shareholders' equity were:
- - net income of $5.1 million for the year;
- - net unrealized appreciation in investments of $1.9 million; which were
partially offset by
- - a foreign currency translation debit of $955,000; and
- - a $299,000 increase in treasury stock due to the purchase of PICO shares in
deferred compensations plans.
Total assets at December 31, 2001 were $374.4 million, compared to $392.1
million at December 31, 2000. Most of the $17.7 million decrease in total assets
is attributable to the "run off" of Physicians and Citation, which reduced both
insurance liabilities and the corresponding assets. Total liabilities decreased
by $22.6 million, primarily due to a $16.7 million reduction in medical
professional liability insurance loss reserves during the year.
The $5.1 million in net income reported in 2001 consisted of $6.1 million in
net income before a change in accounting principle, or $0.49 per share, and a
change in accounting principle which had the cumulative effect of reducing
income by $981,000 after taxes, or $0.08 per share. The $6.1 million in net
income before a change in accounting principle was comprised of $9.1 million
in income before taxes and minority interest, a $3.4 million provision for
income tax expense, and the addition of $359,000 in minority interest. This
reflects the interest of minority shareholders in the losses of subsidiaries
which are less than 100%-owned by PICO. The accounting change was due to the
adoption of the Statement of Financial Accounting Standards No. 133, "Accounting
for Derivative Instruments and Hedging
26
Activities." This non-cash charge recognized the accumulated after-tax decline
in the estimated fair value of warrants we own to buy shares in other companies
(principally HyperFeed Technologies, Inc.) from the date we acquired the
warrants through to January 1, 2001. The decline in the estimated fair value of
warrants during 2001 is recorded in the Long Term Holdings segment.
The $3.4 million net provision for income tax expense for 2001 consists of
several items, which are detailed in Note 7 of Notes to Consolidated Financial
Statements, "Federal Income Tax." A gross provision for tax of approximately $4
million was partially offset by $630,000 in tax benefits, primarily represented
by a cash refund following a successful appeal of a prior year tax ruling in
Canada. We do not need to pay any taxes in cash for 2001 because prior year net
operating loss carry-forwards offset our tax provision for the year.
PICO incurred a net loss of $11.3 million in 2000. The $6.3 million net
loss before an accounting change consisted of a $16.1 million pre-tax loss,
which was partially offset by $9 million in income tax benefits and the addition
of $717,000 in minority interest. In addition, the cumulative effect of the
accounting change 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 U.S. GAAP basis.
The $9 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, the $9.7 million net loss was comprised of a $24.3 million loss
before taxes and minority interest, which was partially offset by the addition
of $13.4 million in income tax benefits, $706,000 in minority interest, and a
$442,000 after-tax extraordinary gain from the early settlement of debt. The
income tax benefits recognized include 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.
From 1998, PICO began to report comprehensive income (loss) in addition to
the income (loss) reported in the Consolidated Statement of Operations.
Comprehensive income includes items resulting in unrealized changes in
shareholders' equity. For PICO, comprehensive income (loss) includes foreign
currency translation and change in unrealized investment gains and losses on
securities which are available for sale.
PICO reported comprehensive income of $6.1 million in 2001, consisting of
net income of $5.1 million and a $1.9 million after-tax increase in net
unrealized change in investments, which were partially offset by a foreign
currency translation debit of $955,000. In 2000, PICO incurred a $17.2 million
comprehensive loss. This was comprised of the $11.3 million net loss, a decrease
in net unrealized change in investments of $4.3 million after-tax, and a foreign
currency translation debit of $1.6 million. A $6.8 million comprehensive loss
was recorded in 1999, consisting of a $9.7 million net loss, a $1.5 million
decrease due to foreign currency translation, and a $4.4 million increase in net
unrealized change in investments.
Detailed information on the performance of each segment is contained later
in this report; however, the principal items in the 2001 $9.1 million income
before taxes and minority interest were:
Water Rights and Water Storage
- - Vidler generated $17.8 million in revenues and a $5 million pre-tax profit.
The principal contributors to segment income were $2.3 million from the
sale of land and related water rights in the Harquahala Valley Irrigation
District, and $5.7 million in pre-tax gains from the sale of part of
Vidler's interest in the Semitropic water storage facility;
Land and Related Mineral Rights & Water Rights
- - income of $131,000 from Nevada Land on revenues of $3.2 million, which
included $1.9 million in land sales;
Property and Casualty Insurance
- - segment income of $6.2 million, consisting of a $3.3 million pre-tax profit
from Sequoia and $2.9 million from Citation;
27
Medical Professional Liability Insurance
- - a pre-tax profit of $13.1 million, principally due to an $11.2 million
reduction in claims reserves;
Long Term Holdings
- - a $15.3 million loss before taxes, primarily due to parent company overhead
of $4.8 million, a $3 million provision for other-than-temporary impairment
in two unrelated equity securities, a $2.5 million SFAS No. 133 decrease in
the value of warrants during the year, a $2.3 million provision against
loans to Dominion Capital Pty. Ltd., and our $1.5 million share of the net
losses of investments accounted for under the equity method.
Revenues and income before taxes and minority interests by business segment
were:
OPERATING REVENUES:
YEAR ENDED DECEMBER 31,
--------------------------------------------
2001 2000 1999
------------ ------------ ------------
Water Rights and Water Storage $ 17,763,000 $ 3,123,000 $ 1,056,000
Land and Related Mineral Rights & Water Rights 3,221,000 5,276,000 7,147,000
Property and Casualty Insurance 51,349,000 39,257,000 39,836,000
Medical Professional Liability Insurance 2,601,000 3,396,000 3,121,000
Long Term Holdings (3,662,000) (5,238,000) 2,494,000
------------ ------------ ------------
Total Revenues $ 71,272,000 $ 45,814,000 $ 53,654,000
============ ============ ============
In 2001, total revenues were $71.3 million, compared to $45.8 million in
2000, and $53.7 million in 1999. Revenues in 2001 were $25.5 million higher than
2000, primarily due to $14.6 million higher revenues from Vidler and $12.1
million higher revenues in the Property and Casualty Insurance segment. The most
significant items in the revenue growth at Vidler were revenues of $9.4 million
from the sale of water rights and land in the Harquahala Valley, and $5.7
million from pre-tax gains on the sale of interests in Semitropic. The principal
sources of the $12.1 million revenue growth in the Property and Casualty
Insurance segment were $10 million higher earned premiums, and a $1.6 million
increase in realized investment gains. From 1999 to 2000, total revenues
declined by $7.9 million, primarily due to the recognition of a $7.8 million net
realized investment loss which reduced revenues in the Long Term Holdings
segment in 2000.
Total expenses in 2001 were $60.6 million, unchanged from $60.6 million in
2000, and compared to $73.9 million in 1999. 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 pay claims). In 2001, loss and
loss adjustment expense was $18.3 million, compared to $24 million in 2000, and
$35.2 million in 1999. Loss and loss adjustment expense for 2001 was reduced by
favorable reserve development of $11.2 million in the Medical Professional
Liability segment. Due to the greater amount of land and water rights sold in
2001, the cost of land, water rights and water sold was higher than previous
years at $7.6 million, compared to $4 million in 2000, and $4.5 million in 1999.
INCOME (LOSS) BEFORE TAXES AND MINORITY INTEREST:
YEAR ENDED DECEMBER 31,
--------------------------------------------
2001 2000 1999
------------ ------------ ------------
Water Rights and Water Storage $ 4,989,000 $ (4,854,000) $ (3,947,000)
Land and Related Mineral Rights & Water Rights 131,000 1,918,000
1,094,000
Property and Casualty Insurance 6,178,000 2,541,000
(3,803,000)
Medical Professional Liability Insurance 13,132,000 768,000
(4,805,000)
Long Term Holdings (15,288,000) (16,438,000) (12,850,000)
------------ ------------ ------------
Income (Loss) Before Taxes and Minority
Interest $ 9,142,000 $(16,065,000) $(24,311,000)
============ ============ ============
28
WATER RIGHTS AND WATER STORAGE
VIDLER WATER COMPANY, INC.
Year Ended December 31,
--------------------------------------------
2001 2000 1999
------------ ------------ ------------
REVENUES:
Sale of Land, Water Rights, & Water $ 9,487,000 $ 1,509,000 $ 270,000
Gain on sale of Semitropic Water Storage interests 5,701,000
Lease of Water 235,000 188,000 185,000
Lease of Agricultural Land 795,000 959,000 477,000
Other 1,545,000 467,000 124,000
------------ ------------ ------------
Segment Total Revenues $ 17,763,000 $ 3,123,000 $ 1,056,000
============ ============ ============
EXPENSES:
Cost of Land, Water Rights, & Water Sold (6,796,000) (2,244,000) (185,000)
Commission and Other Cost of Sales (553,000)
Depreciation & Amortization (1,285,000) (988,000) (810,000)
Interest (646,000) (821,000) (678,000)
Operations & Maintenance (311,000) (612,000) (214,000)
Other (3,183,000) (3,312,000) (3,116,000)
------------ ------------ ------------
Segment Total Expenses (12,774,000) (7,977,000) (5,003,000)
============ ============ ============
INCOME (LOSS) BEFORE TAX $ 4,989,000 $ (4,854,000) $ (3,947,000)
============ ============ ============
We entered the water business with the realization that most of the assets
which Vidler acquired were not ready for immediate commercial use, and that
there would be a lead-time in developing and commercializing these assets.
Vidler's water assets did not begin to generate significant revenues until the
first quarter of 2001. In 2000 and prior years, Vidler was generating modest
revenues from the lease and sale of water assets in Colorado and from leasing
agricultural land, and incurring significant costs associated with the
development of assets and expansion of the water rights portfolio. Consequently,
Vidler reported operating losses until 2001.
Vidler generated total revenues of $17.8 million in 2001, compared to $3.1
million in 2000, and $1.1 million in 1999.
In 2001, Vidler's results were dominated by three transactions, which
generated $15.1 million in revenues:
- - the sale of 6,496.5 acre-feet of transferable ground water and 2,589 acres
of land in Arizona's Harquahala Valley Irrigation District to a unit of
Allegheny Energy, Inc. This transaction added $9.4 million to revenues,
comprised of the $9.1 million sales price and a $300,000 option fee earned
which is included in Other Revenues, and contributed $2.3 million to
segment income;
- - the sale of 29.7% of Vidler's original interest in the Semitropic Water
Banking and Exchange Program (i.e., approximately 55,000 acre-feet of
storage capacity, out of the original 185,000 acre-feet) for $3.3 million.
This transaction added $1.6 million to revenues and to segment income; and
- - the further sale of 54.1% of Vidler's original interest in the Semitropic
Water Banking and Exchange Program (i.e., approximately 100,000 acre-feet
of storage capacity) for $6.9 million. This transaction added $4.1 million
to revenues and to segment income.
Over the past three years, Vidler has sold water rights, water, and related
assets which were not essential to its strategy in Nevada and Arizona. In
addition to the Allegheny transaction described in the preceding paragraph, in
2001 Vidler recognized revenues of $390,000 from the sale of water rights to the
City of Golden, Colorado. In 2000, Vidler sold 3,691 acre-feet of water which
had been "banked" at the Semitropic water storage facility for $509,000, and
water rights and the related land and tunnel assets to the City of Golden for $1
million. Due to the potential for significant capital outlays for repairs and
maintenance, Vidler disposed of the land and tunnel assets in conjunction with
the water rights in 2000, even though this resulted in a loss of $1.2 million
being recognized on the sale of the land and tunnel assets. In 1999, Vidler sold
300 acre-feet of priority water rights at Wet Mountain, Colorado for $270,000.
The leasing of agricultural land generated revenues of $795,000 in 2001,
$959,000 in 2000, and $477,000 in 1999. Agricultural land lease revenues
decreased in 2001 as a result of the sale of farm properties in the Harquahala
Valley to Allegheny, as described above. The increase from 1999 to 2000
primarily reflects the purchase of additional Harquahala Valley farm properties
during 1999.
Vidler generated revenue of $235,000 in 2001, $188,000 in 2000, and $185,000
in 1999, 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%.
29
Other Revenues were $1.5 million in 2001, $467,000 in 2000, and $124,000 in
1999. The most significant items in Other Revenues in 2001 were a $600,000 gain
from granting an easement to El Paso Natural Gas Company in the Harquahala
Valley, interest revenue of $357,000, and various revenues from properties
farmed by Vidler (e.g., sales of hay and cattle). In 2001, Other Revenues were
reduced by a $202,000 loss on the condemnation (i.e., compulsory acquisition) of
a commercially zoned property in Mesa, Arizona due to freeway construction. This
property, which was located in greater metropolitan Phoenix, was not part of
Vidler's water business. It was acquired in conjunction with MTB Ranch in 1996,
and was being held for sale. Originally, a $442,000 provision for loss on
condemnation was recorded in the first quarter of 2001; however, this was
partially offset by an additional $240,000 payment to be received from a
negotiated settlement after Vidler challenged the value at which the property
was condemned.
Total segment expenses, including the cost of water rights and other assets
sold, increased from $5 million in 1999, to $8 million in 2000, and $12.8
million in 2001.
Segment operating expenses (i.e., excluding the cost of water rights and
other assets sold and related selling costs, and the $40,000 Silver State
write-down described in the "Land and Related Mineral Rights & Water Rights"
section) were $4.8 million in 1999, $5.7 million in 2000, and $5.4 million in
2001. Segment operating expenses in 2000 and 2001 were higher than in 1999 due
to growth in Vidler's asset base (e.g., the acquisition of Fish Springs Ranch),
including expenses related to individual projects (e.g., depreciation and
interest) which were recognized prior to the related revenues being earned.
The $348,000 net reduction in segment operating expenses in 2001 from 2000
was primarily attributable to decreases of $301,000 in operations and
maintenance expense, $175,000 in interest expense, and $129,000 in other
expenses. The decrease in operations and maintenance expense was primarily due
to a lower obligation to contribute to operations and maintenance expense at the
Semitropic water storage facility, as our interest in the asset reduced.
Interest expense declined due to the repayment of the non-recourse debt on the
Harquahala Valley farm properties which were sold to Allegheny. These expense
reductions were partially offset by a $297,000 increase in depreciation and
amortization expense, primarily due to the start of amortization of improvements
at the Vidler Arizona Recharge Facility. Since construction of the improvements
required to recharge water is complete and the facility is ready for use, on
March 1, 2001, Vidler began to amortize the improvements at the facility over 15
years. The annual amortization charge will be approximately $518,000. The
amortization charge for 2001 was $421,000.
Segment operating expenses increased $915,000 from 1999 to 2000, due to
increases of $398,000 in operations and maintenance, $178,000 in depreciation
and amortization, $143,000 in interest, and $196,000 in other expenses. The
increase in segment expenses reflected the growth in Vidler's asset base,
including the purchase of farm properties and the related water rights in the
Harquahala Valley.
Vidler recorded segment income of $5 million in 2001, compared to segment
losses of $4.9 million in 2000, and $3.9 million in 1999.
The principal causes of the $9.9 million improvement in the segment result
from 2000 to 2001 were the contributions to income of $5.7 million from the sale
of interests in Semitropic, $2.3 million from the Allegheny transaction, and
$600,000 from the easement granted in 2001.
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 a $342,000 gross profit on the sale of the water "banked" at Semitropic and
$482,000 higher agricultural lease revenues, which were partially offset by
higher charges for depreciation, interest, and other expenses.
30
LAND AND RELATED MINERAL RIGHTS & WATER RIGHTS
NEVADA LAND & RESOURCE COMPANY, LLC
Year Ended December 31,
-----------------------------------------
2001 2000 1999
----------- ----------- -----------
REVENUES:
Sale of Land $ 1,918,000 $ 3,725,000 $ 5,432,000
Sale of Water Rights 244,000 379,000
Gain on Land Exchange 270,000
Lease and Royalty 734,000 716,000 980,000
Interest and Other 569,000 321,000 356,000
----------- ----------- -----------
Segment Total Revenues $ 3,221,000 $ 5,276,000 $ 7,147,000
=========== =========== ===========
EXPENSES:
Cost of Land and Water Rights Sold (772,000) (1,751,000) (4,273,000)
Operating Expenses (1,777,000) (1,607,000) (1,780,000)
Write-down of Silver State Resources, LLC (541,000)
----------- ----------- -----------
Segment Total Expenses $(3,090,000) $(3,358,000) $(6,053,000)
=========== =========== ===========
INCOME BEFORE TAX $ 131,000 $ 1,918,000 $ 1,094,000
=========== =========== ===========
Nevada Land generated revenues of $3.2 million in 2001, compared to $5.3
million in 2000, and $7.1 million in 1999.
Most of the variation in revenue from year to year is caused by fluctuations
in the level of land sales. In 2001, Nevada Land recorded revenues of $1.9
million from the sale of 15,632 acres of land. In 2000, we generated $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.
Lease and royalty income amounted to $734,000 in 2001, compared to $716,000
in 2000, and $980,000 in 1999. Most of this revenue comes from land leases,
principally for grazing, agricultural, communications, and easements.
Interest and other revenues contributed $569,000 in 2001, compared to
$321,000 in 2000, and $356,000 in 1999.
Nevada Land also generated revenues from a gain on a land exchange
transaction in 2000, and the sale of water rights in 2000 and 1999.
In the 2000 land exchange, 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, or $52 per acre. 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.
In 2000, Nevada Land sold 61 acre-feet of certificated water rights for
$244,000. In 1999, we sold 125 acre-feet of certificated water rights for
$379,000.
After deducting the cost of land sold, the gross margin on land sales was
$1.1 million in 2001, $2.2 million in 2000, and $1.5 million in 1999. This
represented a gross margin percentage of 59.8% in 2001, 59.2% in 2000, and 28%
in 1999.
Operating expenses were little changed over the three-year period, at $1.8
million in 2001, $1.6 million in 2000, and $1.8 million in 1999.
As part of our strategy of increasing our ownership of water rights in
northern Nevada, in 1998 Nevada Land and Vidler jointly acquired a controlling
interest in Silver State Land, LLC, which had filed applications for
approximately 51,000 acre-feet of water rights in various locations that were
geographically unrelated to Nevada Land's properties. In 1999, 2000, and 2001,
our priority has been to pursue the water rights applications filed by the
Vidler/Lincoln County joint venture, and by Nevada Land on its own properties.
Accordingly, due to the uncertainty of realizing the value of these
applications, in 2001 we reduced the carrying value of Silver State to zero,
which resulted in expenses of $541,000 in this segment and $40,000 in the "Water
Rights and Water Storage" segment. The Silver State water rights applications
were the only water rights applications with a carrying value in our financial
statements.
31
Nevada Land recorded income of $131,000 in 2001, compared to $1.9 million in
2000, and $1.1 million in 1999. Segment income decreased $1.8 million from 2000
to 2001, principally due to a $1.1 million reduction in the gross margin on land
sales, the $541,000 write down of Silver State, and the $270,000 land exchange
gain included in 2000. 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 gain from the land exchange transaction.
PROPERTY AND CASUALTY INSURANCE
Year Ended December 31,
--------------------------------------------
2001 2000 1999
------------ ------------ ------------
P&C INSURANCE REVENUES:
Earned Premiums $ 42,535,000 $ 32,583,000 $ 34,439,000
Net Investment Income 5,997,000 5,381,000 4,951,000
Realized Investment Gains 1,818,000 172,000 (310,000)
Negative Goodwill 568,000 568,000 568,000
Other 431,000 553,000 188,000
------------ ------------ ------------
Segment Total Revenues $ 51,349,000 $ 39,257,000 $ 39,836,000
============ ============ ============
P&C INSURANCE EXPENSES:
Loss and Loss Adjustment Expense $(29,460,000) $(22,963,000) $(28,613,000)
Underwriting Expenses (15,711,000) (13,753,000) (15,026,000)
------------ ------------ ------------
Segment Total Expenses $(45,171,000) $(36,716,000) $(43,639,000)
============ ============ ============
P&C INSURANCE INCOME (LOSS) BEFORE TAXES:
Sequoia Insurance Company $ 3,314,000 $ 1,344,000 $ 2,083,000
Citation Insurance Company 2,864,000 1,197,000 (5,886,000)
------------ ------------ ------------
Total P&C Income (Loss) Before Taxes $ 6,178,000 $ 2,541,000 $ (3,803,000)
============ ============ ============
The Property & Casualty Insurance segment generated total revenues of $51.3
million in 2001, compared to $39.3 million in 2000, and $39.8 million in 1999.
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. The "written" premium is recognized as revenue, or "earned," evenly
over the term of the policy. Therefore, there is a time lag between changes in
written premium and the resulting change in earned premium.
As described in the Property and Casualty Insurance section of "Company
Summary, Recent Developments and Future Outlook" in Item 7, the amount of
premium "written" by Sequoia and Citation declined in 1998 and 1999. This led to
a corresponding decrease in segment "earned" premium from $34.4 million in 1999
to $32.6 million in 2000.
In 2000, Citation wrote only a minor amount of premium in one state, and
Sequoia was responsible for practically all written premiums in the segment.
During 2000, Sequoia experienced 33.5% growth in written premiums to $47.1
million, due to an improved pricing environment, the increase in the company's
A.M. Best rating to "A-" (Excellent), and the acquisition of Personal Express.
Due to the lag between changes in written premium and earned premium, the
increase in premium written in 2000 led to the $9.9 million increase in earned
premium, from $32.6 million to $42.5 million, in 2001.
Segment investment income increased 8.7% to $5.4 million during 2000. The
average income yield on the bond portfolio increased throughout 2000 due to the
higher prevailing level of interest rates and the purchase of high quality
corporate bonds with 5 years or less to maturity with the proceeds of
lower-yielding treasury bills and money market funds. The increase in the income
yield was partially offset by the purchase of several small-capitalization value
stocks with lower income (i.e., dividend) yields but greater appreciation
potential than bonds.
Segment Investment income increased another 11.4% to $6 million in 2001.
This reflected a higher average yield to maturity in the bond portfolio,
resulting from the purchase of high quality corporate bonds with 5 to 10 years
to maturity and the sale of some shorter term securities whose yields had fallen
to low levels.
Investment gains of $1.8 million were realized in 2001, primarily due to the
sale of bonds with 5 years or less to maturity, compared to realized gains of
$172,000 in 2000. Given the historic drop in interest rates during 2001,
particularly in shorter-term (5 years or less) interest rates, realized gains of
this magnitude from bonds are unlikely to be repeated. The $310,000 net realized
32
investment loss in 1999 represented a $186,000 realized loss on the sale of a
portfolio investment and a $124,000 provision for other-than-temporary
impairment in the value of an unrelated portfolio investment.
The Property and Casualty Insurance segment produced $6.2 million of
pre-tax income in 2001, consisting of a $3.3 million pre-tax profit from Sequoia
and $2.9 million from Citation. This compares to segment income of $2.5 million
in 2000, and a segment pre-tax loss of $3.8 million in 1999.
During 1998 and 1999, Sequoia and Citation "pooled," or shared, most of
their premiums and expenses, and all business in California and Nevada was
transitioned to Sequoia. From January 1, 2000, the pooling arrangement was
terminated, and Citation only wrote a minor amount of premium in Arizona.
Citation ceased writing business in December 2000, and went into "run off" in
2001. Citation's last policy expired in December 2001. Due to these factors, as
well as the acquisition of the Personal Express book of business, the individual
results of Sequoia and Citation for 2001 cannot be directly compared to previous
years.
In 2000, the $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
$3.6 million increase in segment income in 2001 over 2000 is primarily due to
$1.6 million higher realized investment gains and a $616,000 increase in
investment income for the segment, and a $1.4 million decrease in expenses at
Citation after the company went into "run off."
The 1999 $3.8 million segment loss consisted of $2.1 million in income from
Sequoia, which was more than offset by a $5.9 million loss from Citation. From
1999 to 2000, the segment result improved by $6.3 million, from a $3.8 million
loss in 1999 to a $2.5 million profit in 2000. The 1999 segment loss was caused
by a $10.1 million pre-tax charge to strengthen Citation's claims reserves,
principally in the artisan/contractors line of business.
SEQUOIA INSURANCE COMPANY
In 2001, Sequoia's revenues included earned premiums of $42.3 million,
investment income of $3.7 million, and realized gains of $1.5 million. Earned
premiums increased 29.2% from the previous year, and consisted of $34.1 million
from commercial lines and $8.2 million from personal lines. Earned premiums for
2001 reflected most, but not a full 12 months, of the annualized increase in
premium resulting from the acquisition of the Personal Express book of business.
For 2001, Sequoia reported a loss from operations (i.e., income before
investment income, realized gains, and taxes) of $1.9 million, and income before
taxes of $3.3 million. This included an additional expense of $738,000 to
recognize adverse development in prior year loss reserves.
In 2000, Sequoia's revenues included $32.7 million in earned premiums, $2.8
million in investment income, and realized gains of $99,000. The earned premiums
were composed of $29.6 million from commercial lines and $3.1 million from
personal lines, which included some initial revenues from the Personal Express
book of business. For 2000, Sequoia reported a loss from operations of $1.5
million, which included an additional expense of $252,000 to recognize adverse
development in prior year loss reserves, and income before taxes of $1.3
million.
In 1999, when the pooling agreement with Citation was still in force,
Sequoia's revenues included $16.9 million in earned premium and $2.1 million in
investment income. The company earned a profit from operations of $114,000 and
income before taxes of $2.1 million, including the benefit of a $401,000 credit
from favorable development in prior year loss reserves.
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
---------------------------------------------------------------------------------------------------
2001 2000 1999
------------ ----------- ------------
Loss and LAE Ratio 69.1% 67.6% 53.5%
Underwriting Expense Ratio 36.3% 38.6% 46.3%
----- ---- ----
Combined Ratio 105.4% 106.3% 99.8%
---------------------------------------------------------------------------------------------------
For 2001, Sequoia's combined ratio was 105.4%, compared to 106.3% in 2000,
and 99.8% in 1999.
33
Sequoia's loss and loss adjustment expense ratio (i.e., the cost of making
provision to pay claims as a percentage of earned premiums) was 69.1% in 2001
and 67.6% in 2000, compared to 53.5% in 1999. In 2001, this included an
additional expense of $738,000 to recognize adverse development in prior year
loss reserves, compared to an additional $252,000 expense in 2000, and a
$401,000 credit from favorable development in 1999.
The higher loss ratio was partially offset by a lower underwriting expense
ratio (i.e., operating expenses as a percentage of earned premiums) of 36.3% in
2001, compared to 38.6% in 2000, and 46.3% in 1999. The reduction in the
underwriting expense ratio was due to:
- - economies of scale. Sequoia's earned premiums grew by 29.2% in 2001,
following a 93.4% increase in 2000 after the pooling agreement with
Citation was terminated. In 2001 and 2000, fixed underwriting expense items
(i.e., expenses which do not change with volume) were spread over a larger
base of revenue, and therefore reduced as a percentage of revenue; and
- - earned premiums from the Personal Express book of business. Sequoia does
not pay commission on Personal Express business, so commission expense fell
as a percentage of revenue in 2001 and 2000.
CITATION INSURANCE COMPANY
Citation went into "run off" from January 1, 2001. In future years, this
will significantly affect the company's level of revenues and expenses. It is
anticipated that the majority of Citation's future revenues will come from
investment income, which is expected to decline over time as fixed-income
investments mature or are sold to provide the funds to pay down the company's
claims reserves. Unless there is adverse development in prior year loss
reserves, typically the expenses of an insurance company in "run off" will be
lower than the expenses of an insurance company which is actively writing
business.
In 2001, Citation's revenues included investment income of $2.3 million,
earned premiums of $225,000, and negative goodwill amortization of $568,000
(explained in the following paragraph). The $225,000 in earned premiums
represents the final premiums earned from the policies on Citation's books when
the company went into "run off." After expenses of $571,000, Citation earned
income of $2.9 million before taxes for 2001. The "run off" of Citation's loss
reserves appears to be proceeding in line with expectation. In 2001, an expense
of just $56,000 was recorded for development in prior year loss reserves.
When Citation Insurance Group acquired Physicians in the reverse merger in
1996, a $5.7 million negative goodwill asset arose because the fair value of the
assets acquired (i.e., Physicians) exceeded the cost of the investment (i.e.,
the fair value of the shares in Citation issued to Physicians shareholders). The
negative goodwill was being recognized as income over a period of 10 years in
this segment. From January 1, 2002, PICO is adopting Statement of Financial
Accounting Standards No. 142, "Goodwill and Intangible Assets," which requires
that goodwill and intangible assets with indefinite lives be tested for
impairment annually rather than amortized over time. As a result of adopting
this standard, the remaining negative goodwill of approximately $2.8 million
will be recognized as an extraordinary gain in 2002. See Note 1 of Notes to
Consolidated Financial Statements, "Nature of Operations and Significant
Accounting Policies."
In 2000, Citation's revenues included investment income of $2.7 million,
earned premiums of negative $158,000, and negative goodwill amortization of
$568,000. Although Citation earned $564,000 in property and casualty premiums in
2000, this was more than offset by a $722,000 reduction in earned premium
revenues related to reinsurance. After expenses of $1.9 million, including a
partially offsetting $282,000 benefit from favorable development in prior year
loss reserves, Citation earned a $1.2 million pre-tax profit for 2000.
From 2000 to 2001, Citation's pre-tax profit increased $1.7 million. While
revenues increased $309,000 year over year, underwriting and other expenses
declined by $1.4 million after the company went into "run off."
During 1999, Citation was "pooling" most of its revenues and expenses with
Sequoia so revenues and expenses were significantly greater than in 2000 and
2001. In 1999, Citation's revenues included earned premiums of $17.5 million,
investment income of $2.9 million, and negative goodwill amortization of
$568,000. Following expenses of $26.7 million, which included a $10.1 million
charge to strengthen loss reserves, Citation reported a pre-tax loss of $5.9
million.
Since Citation is in "run off," its Combined Ratio is no longer meaningful.
34
PROPERTY AND CASUALTY INSURANCE - LOSS AND LOSS EXPENSE RESERVES
December 31, 2001 December 31, 2000 December 31, 1999
-----------------------------------------------------------------------------
SEQUOIA INSURANCE COMPANY:
Direct Reserves $ 36.9 million $ 37.2 million $ 39.4 million
Ceded Reserves (15.7) (18.1) (28.9)
-----------------------------------------------------------------------------
Net Reserves $ 21.2 million $ 19.1 million $ 10.5 million
=============================================================================
CITATION INSURANCE COMPANY:
Direct Reserves $ 21.0 million $ 25.8 million $ 36.6 million
Ceded Reserves (1.8) (2.4) (2.0)
-----------------------------------------------------------------------------
Net Reserves $ 19.2 million $ 23.4 million $ 34.6 million
=============================================================================
MEDICAL PROFESSIONAL LIABILITY INSURANCE
Year Ended December 31,
----------------------------------------
2001 2000 1999
----------- ----------- -----------
MPL REVENUES:
Net Investment Income $ 1,096,000 $ 1,543,000 $ 1,180,000
Net Realized Investment Gain 750,000
Earned Premiums 755,000 1,853,000 1,941,000
----------- ----------- -----------
Segment Total Revenues $ 2,601,000 $ 3,396,000 $ 3,121,000
=========== =========== ===========
Underwriting Recoveries (Expenses) 10,531,000 (2,628,000) (7,926,000)
----------- ----------- -----------
SEGMENT TOTAL RECOVERIES (EXPENSES) 10,531,000 (2,628,000) (7,926,000)
=========== =========== ===========
Income (Loss) Before Taxes $13,132,000 $ 768,000 $(4,805,000)
=========== =========== ===========
Actuarial analysis of Physicians' loss reserves as of September 30, 2001
concluded that Physicians' reserves against future claims were significantly
greater than the actuary's projections of future claims payments. This was due
to favorable trends in both the "frequency" (number) and "severity" (size) of
claims. Accordingly, Physicians took down $11.2 million of excess reserves in
the fourth quarter of 2001.
Medical professional liability insurance segment revenues were $2.6 million
in 2001, compared to $3.4 million in 2000, and $3.1 million in 1999.
Investment income was $1.1 million in 2001, $1.5 million in 2000, and $1.2
million in 1999. The principal reason for the variation in investment income
from year to year is fluctuation in the amount of fixed-income securities held
in the portfolio and the prevailing level of interest rates.
The $750,000 net realized investment gain in 2001 principally represented a
$731,000 realized gain on the redemption of all units held in the Rydex URSA
mutual fund. The Rydex URSA Fund is designed to deliver a return which is the
inverse of the return on the S&P 500 Index. The investment was originally
acquired in 1995 when Physicians had greater exposure to listed stocks, and was
accounted for under SFAS No. 115. In 1996, we recorded a pre-tax provision of
$4.7 million for other-than-temporary impairment of this investment as the rise
in the S&P 500 Index had caused a corresponding decline in the value of the
Rydex URSA Fund. In 2000 and the first four months of 2001, the S&P 500 Index
declined sharply, which led to a corresponding increase in the price of the
Rydex URSA Fund. When we redeemed the investment in 2001, this resulted in a
gain because the sales proceeds exceeded the basis of the investment, which had
been written down in 1996.
Although Physicians is in "run off" and no longer writing premiums, earned
premium does arise, for example, from "swing rated" reinsurance, where the
reinsurance premiums we pay are recalculated based on loss experience (i.e.,
number and size of claims). Under GAAP, reinsurance is recorded in the earned
premium line. Earned premiums of $755,000 were recorded in 2001, which primarily
reflects a reduction in the amount of reinsurance we need to pay in line with
the reduction in our claims reserves during 2001. Similarly, earned premiums of
$1.9 million were recorded in both 2000 and 1999.
Underwriting expenses consist of loss and loss adjustment expense and other
operating expenses.
35
In 2001, the segment reported a $10.5 million underwriting recovery, as an
$11.2 million reduction in reserves more than offset regular loss and loss
adjustment expense and operating expenses for the year. Combined with $2.6
million in segment revenues, this resulted in segment income of $13.1 million.
In 2000, after underwriting expenses of $2.6 million, which included a $1.1
million net increase in reserves, segment income of $768,000 was recorded. In
addition, reserves increased by $7.5 million due to the elimination of reserve
discount included in the cumulative effect of change in accounting principle.
The elimination of discounting did not affect the segment in 2000, but 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 Note 21 of Notes to Consolidated Financial Statements,
"Cumulative Effect of Change in Accounting Principle." 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, where discounting was not permitted after
December 31, 1999.
In 1999, underwriting expenses were $7.9 million. This included a pre-tax
charge to increase Physicians' loss reserves by $5 million, or $3.8 million
after discounting to reflect the time value of money. The addition to claims
reserves was based upon actuarial analysis which indicated some deterioration of
Physicians' loss experience in most coverage years, resulting in a greater than
expected liability to pay claims. At that time, Physicians was receiving a
higher than expected number of claims, which was compounded by the fact that
many of the claims were for smaller than expected amounts. This meant that a
greater proportion of each claim fell below our reinsurance deductible (i.e.,
the initial part of each claim which is not covered by reinsurance), so
Physicians had to pay a greater proportion of each claim, and 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. Medical professional liability operations reported a $4.8
million loss in 1999.
At December 31, 2001, medical professional liability reserves totaled $34.9
million, net of reinsurance, compared to $51.6 million net of reinsurance at
December 31, 2000. At December 31, 1999, medical professional liability reserves
were $53.7 million, net of reinsurance and discount.
MEDICAL PROFESSIONAL LIABILITY INSURANCE--LOSS AND LOSS EXPENSE RESERVES
Year Ended December 31,
------------------------------------------------------------
2001 2000 1999
------------- ------------- -------------
Direct Reserves $40.6 million $58.6 million $81.6 million
Ceded Reserves (5.7) (7.0) (20.4)
Discount of Net Reserves (7.5)
------------- ------------- -------------
Net Medical Professional Liability Insurance Reserves $34.9 million $51.6 million $53.7 million
============= ============= =============
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. See "Risk Factors."
LONG TERM HOLDINGS
Year Ended December 31,
--------------------------------------------
2001 2000 1999
------------ ------------ ------------
LONG TERM HOLDINGS REVENUES (CHARGES):
Realized Investment Gains (Losses):
On Sale or Impairment of Investments $ (3,531,000) $ (7,784,000) $ (302,000)
SFAS No. 133 Change In Warrants (2,453,000)
Investment Income 1,856,000 1,610,000 723,000
Other 466,000 936,000 2,073,000
------------ ------------ ------------
Segment Total Revenues (Charges) $ (3,662,000) $ (5,238,000) $ 2,494,000
SEGMENT TOTAL EXPENSES (10,097,000) (9,949,000) (11,329,000)
------------ ------------ ------------
LOSS BEFORE INVESTEE INCOME (LOSS) $(13,759,000) $(15,187,000) $ (8,835,000)
Equity Share of Investees' Net Income (Loss) (1,529,000) (1,251,000) (4,015,000)
------------ ------------ ------------
LOSS BEFORE TAXES $(15,288,000) $(16,438,000) $(12,850,000)
============ ============ ============
36
The Long Term Holdings segment recorded negative revenues $3.7 million in
2001, negative revenues of $5.2 million in 2000, and positive revenues of $2.5
million in 1999. Revenues in this segment vary considerably from year to year,
primarily due to fluctuations in net realized gains or losses on the sale of
investments. Investments are not sold 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 $6 million net realized investment loss was recorded in 2001. This
included a $2.5 million loss to reflect a decrease in the value of warrants we
own in other companies, principally HyperFeed Technologies, Inc., during 2001.
Following the introduction of Statement of Financial Accounting Standards No.
133, "Accounting For Derivative Instruments and Hedging Activities," we are now
required to recognize changes in the estimated fair value of warrants (before
taxes) during an accounting period through the Consolidated Statement of
Operations for that period. In addition, although this did not affect the
segment, a change in accounting principle had the cumulative effect of reducing
income by $981,000 to reflect the after-tax decline in the estimated fair value
of warrants during the period from the acquisition of the various warrants
through to December 31, 2000. See Note 4 of Notes to Consolidated Financial
Statements, "Investments." In addition, we recorded a $500,000 write-off of the
remaining carrying value of the loan to MKG Enterprises, and charges for
other-than-temporary impairment of $2.1 million in SIHL (see the SIHL section of
the "Company Summary, Recent Developments and Future Outlook" portion of Item
7), and $888,000 in Solpower. Solpower Corporation is a development stage
company, which was one of the final Alternative Investments discussed in Item 1.
Given the duration of the decline in value in this stock, in the absence of
factors indicating otherwise, led us to determine that the decline is
other-than-temporary. Accordingly, we reduced the basis of the investment to its
market value at December 31, 2001. Charges other-than-temporary impairment do
not affect shareholders' equity, or book value per share.
In 2000, a net realized loss of $7.8 million was incurred. This primarily
represented a $4.6 million loss on the sale of Conex, a $2.5 million write-down
of the loan to MKG Enterprises, and $161,000 in provisions for
other-than-temporary impairment in the value of an international equity
security. In addition, we recognized a $526,000 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.
On September 8, 2000, PICO sold its investment in Conex, representing
approximately 83% of Conex's issued common stock, for a nominal sum. Conex's
principal asset was 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.
In 1999, net realized losses of $302,000 were recorded. This primarily
represented net realized gains of approximately $3.2 million from the sale of
securities, primarily from the Company's European portfolio, and $670,000 from
the sale of property, which were partially offset by the $3.2 million write-down
of an oil and gas investment. In addition, we recorded charges for
other-than-temporary impairment of $609,000 in Raetia Energy and $319,000 in an
unrelated international equity security, primarily due to the extent and
duration of the decline in market price. Raetia Energy is a Swiss public
company, which is a producer of hydro-electricity. The 1999 charge reduced
our basis in Raetia Equity to approximately $2.1 million, being its market value
at December 31, 1999. Charges for other-than-temporary impairment do not affect
shareholders' equity, or book value per share.
In this segment, investment income includes interest on cash and short term
fixed-income investments, and dividends from long term holdings. Investment
income totaled $1.9 million in 2001, compared to $1.6 million in 2000, and
$723,000 in 1999. In 2001, investment income was $246,000 higher than in 2000,
principally due to the receipt of $391,000 in dividends from AOG in 2001 after
AOG had not paid a dividend in 2000. The $887,000 increase in investment income
from 1999 to 2000 was primarily due to interest revenue earned on the proceeds
from the rights offering in the first quarter of 2000, and a $405,000 increase
in the dividend from Jungfraubahn year over year.
Other revenues were $466,000 in 2001, $936,000 in 2000, and $2.1 million in
1999.
The principal expenses recognized in this segment are PICO's corporate
overhead and operating expenses from SISCOM and, in 2000 and 1999, Conex. In
2001, segment expenses were $10.1 million, compared to $9.9 million in 2000, and
$11.3 million in 1999.
37
In 2001, segment expenses included a $2.3 million provision against the
principal and accrued interest on two loans receivable from Dominion Capital
Pty. Limited. As disclosed in the Long Term Holdings section of Item 7 in our
2000 Form 10-K, PICO made short term advances to Dominion Capital Pty. Limited,
a private Australian company. The advances consisted of two loans, which were
due to be repaid in 2001. The assets collateralizing the loans include real
estate in Australia. We have instituted legal proceedings in Australia to
realize on the collateral and to obtain additional legal remedies, if required.
Given the delays and uncertainties inherent in the legal process and in
realizing on the collateral, we have fully provided against the principal and
accrued interest on both loans. The other principal components of segment
expenses were parent company overhead of $4.8 million, and SISCOM expenses of
$1.7 million.
In 2000, segment expenses include a $2.3 million operating loss from Conex
for the period prior to its sale, and a $1.6 million operating loss from SISCOM.
For 1999, segment expenses include a $1.8 million operating loss from Conex, and
a $672,000 operating loss from SISCOM.
PICO's equity share of investees' income (loss) represents our proportionate
share of the net income (loss) and other events affecting equity in the
investments which we carry under the equity method, less any dividends received
from those investments. In 2001, an equity share of investees' loss of $1.5
million was recorded, compared to equity shares of investees' losses of $1.3
million in 2000, and $4 million in 1999. Here is a summary of the principal
investments which we accounted for under the equity method in each of the past
three years:
------------------------------------------------------------------------------------------------------------
2001 2000 1999
------------------------------------------------------------------------------------------------------------
HyperFeed HyperFeed HyperFeed
Conex - until August 1, 1999
Conex's sino-foreign joint Conex's sino-foreign joint venture
venture -
until September 8, 2000
------------------------------------------------------------------------------------------------------------
The Long Term Holdings segment produced a loss before taxes of $15.3 million
in 2001, compared to a $16.4 million loss in 2000 and a $12.9 million loss in
1999.
The 2001 segment loss includes investment income and other revenues of $2.3
million, which were more than offset by the $2.5 million SFAS No. 133 loss, the
$3.5 million realized investment loss, the $1.5 million equity share of
investees' losses, and segment expenses of $10.1 million.
In 2000, the segment loss included equity income of $1.3 million and
investment income and other revenues of $2.5 million. These were more than
offset by segment expenses of $9.9 million, the $7.8 million in realized losses
described above, and the equity share of investees' losses of $13 million.
In 1999, the segment loss included $302,000 in net realized losses and $2.8
million in investment income and other revenues, which were more than offset by
segment expenses of $11.3 million and a $4 million equity share of investees'
loss.
LIQUIDITY AND CAPITAL RESOURCES -- YEARS ENDED DECEMBER 31, 2001, 2000, AND 1999
PICO Holdings, Inc. is a diversified holding company. Our assets primarily
consist of investments in our operating subsidiaries, investments in other
public companies, marketable securities, and cash and cash equivalents. On a
consolidated basis, the Company had $17.4 million in cash and cash equivalents
at December 31, 2001, compared to $13.6 million at December 31, 2000.
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,
the sale of investments, and -- potentially -- the proceeds of borrowings or
offerings of equity and debt. We endeavor to ensure that funds are always
available to take advantage of new investment opportunities.
38
In broad terms, the cash flow profile of our principal operating
subsidiaries is:
- - During the company's investment and development phase, Vidler Water
Company, Inc. 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 meet financing and operating expenses. During this period,
other group companies provided financing to meet Vidler's on-going expenses
and to fund capital expenditure and the purchase of additional
water-righted properties.
Vidler's water-related assets began to generate significant cash flow in
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 land and water
rights 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;
- - Nevada Land & Resource Company, LLC is actively selling land which has
reached its highest and best use, and 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 funds to finance other group activities;
- - Sequoia Insurance Company is currently generating positive cash flow from
increased written premium volume. 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
is being 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 investments in the company's investment
portfolio and recoveries from reinsurance companies; and
- - As the "run off" progresses, Physicians Insurance Company of Ohio is
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 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 $3.7
million net increase in cash and cash equivalents in 2001, compared to a $23.1
million net decrease in 2000.
During 2001, Operating Activities used cash of $3.9 million. Operating
Activities used cash of $17.3 million in 2000, and $23.5 million in 1999. The
most significant cash inflow in 2001 was $9.4 million in total receipts from the
sale of water rights and land in the Harquahala Valley. The principal uses of
cash were claims payments by our insurance subsidiaries and operating expenses
in all three years.
In 2001, Investing Activities generated cash of $9 million. The most
significant cash inflow was $10.2 million from the sale of part of our interest
in Semitropic. Significant cash outflows included the investment of $3.5 million
in Sihl, a Swiss public company, and $941,000 in AOG. Most of the remaining
Investing Activities cash flow represents activity in the investment portfolios
of our insurance companies:
- - Sequoia Insurance Company, which is the only insurance company writing new
business, has been realigning its bond portfolio through the purchase of
high quality corporate bonds with 5 to 10 years to maturity, utilizing the
proceeds from the sale of bonds with lower yields to maturity; and
- - the "run off" insurance companies, Physicians and Citation, structuring
their fixed-income portfolios to match the projected pattern of claims
payouts, utilizing the proceeds of maturing fixed-income securities, the
sale of investments, and investment income.
In addition, Vidler and Nevada Land invested $7.5 million in high quality
corporate bonds with less than 1 year to maturity to maximize the return on the
proceeds of land and water rights sales.
39
Investing Activities used $55.4 million of cash in 2000. Most of the
Investing Activities cash flow represents 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 longer-dated corporate bonds
and, to a lesser extent, in small-capitalization value stocks. In addition,
Vidler made a $2.3 million payment related to the Semitropic Water Banking and
Exchange Program.
In 1999, Investing Activities used $20.2 million of cash. This primarily
represented the purchase of additional shares in Jungfraubahn and AOG, and the
$2.3 million Semitropic payment.
Financing Activities used $1.8 million of cash in 2001. Vidler paid off
approximately $2.9 million in non-recourse borrowings collateralized by the farm
properties in the Harquahala Valley Irrigation District which it sold to
Allegheny. Global Equity SA took on an additional $1.9 million of Swiss
Franc-denominated borrowings to help finance the acquisition of investments in
Swiss public companies, principally Sihl.
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.
At December 31, 2001, 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, 2001, Sequoia had approximately $29.3
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.
SUPPLEMENTARY DISCLOSURES
At December 31, 2001:
- - PICO had no "off balance sheet" financing arrangements;
- - PICO has not provided any debt guarantees; and
- - PICO has no commitments to provide additional collateral for financing
arrangements. PICO's Swiss subsidiary, Global Equity SA, has Swiss Franc
borrowings which partially finance the Company's European stock holdings.
If the market value of those stocks declines below certain levels, we could
be required to provide additional collateral or to repay a portion of the
Swiss Franc borrowings.
See Note 15 of Notes To Consolidated Financial Statements, "Commitments and
Contingencies."
40
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/A10-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 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 and
related water rights and mineral rights; water rights and water storage;
propertyinsurance operations in run-off; and casualty insurance; medical professional liability insurance;business acquisitions and other
long-term holdings.financing. Each
of these areas is unique, complex in nature, and difficult to understand. In
particular, the water rightsresource business 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 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.
13
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 incapital these
businesses and experience reductions in our net income, cash flows, assets and
shareholders' equity.
We will continue to make selective investments,acquisitions, 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 acquisitions and
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 investmentsacquisitions in the
past that have been highly successful and we have also made investmentsacquisitions that
have lost money. Further details of the realized and unrealized gains and losses can
be found in the Notes 1, 2, 3 and 4 to the accompanying consolidated financial
statements (see notes 1, 3 and 4) andin Item 77A in this 10-K/A.Form 10-K.
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 investmentsacquisitions 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.
41
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.
We may acquire shares of stock in U.S. public companies that are not
registered with the SEC, and we may not be able to register the stock during our
period of ownership. Accordingly, this may affect our ability to dispose of an
investment in a public company or achieve the full market price quoted by the
stock exchange that the particular stock is listed on.
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.
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 inacquire 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
14
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 originally 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 has 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, were 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 annually obtains
a certification from an independent actuary that its reserves for losses are
adequate. Physicians Insurance Company of Ohio also obtains a concurring
actuarial opinion. Due to the inherent uncertainties in the reserving process,
there is a risk that Physicians Insurance Company of Ohio'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 provisions that we make 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.
42
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 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.
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. We have had to significantly
increase and decrease these reserves in the past several years.
Furthermore, we have reinsurance agreements on all of our insurance
books of business with reinsurance companies. We base the level of reinsurance
purchased on our direct reserves on our assessment of the overall direct
underwriting risk.
We attempt to ensure that we have acceptable net risk, but it is
possible that we may underestimate the amount of reinsurance required to achieve
the desired level of net claims risk.
In addition, while we carefully review the creditworthiness of the
companies we have reinsured part, or all, of our initial direct underwriting
risk with, our reinsurers could default on amounts owed to us for their portion
of the direct insurance claim. Our insurance subsidiaries, as direct writers of
lines of insurance, have ultimate responsibility for the payment of claims, and
any defaults by reinsurers may result in our established reserves not being
adequate to meet the ultimate cost of losses arising from claims.
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.
THE PROPERTY & CASUALTY INSURANCE BUSINESS IS CYCLICAL, WHICH COULD HINDER OUR
ABILITY TO PROFIT FROM THIS INDUSTRY IN THE FUTURE
The property and casualty insurance industry has been highly cyclical.
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. During the late 1990's, the industry was in a cyclical
downturn, due primarily to competitive pressures on pricing, which resulted in
lower profitability for our property and casualty insurance operations. In 2000
and 2001, competitive pressures began to ease and pricing began to improve,
which is referred to as a hardening market.
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 OUR CAPITALIZATION AND/OR TO THE
OPERATIONS OF OUR INSURANCE SUBSIDIARIES, AND/OR PLACE THEM INTO REHABILITATION
OR LIQUIDATION
Beginning in 1994, Physicians Professionals,and 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 43
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
15
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. All companies'
risk-based capital results as of December 31, 20012002 exceed the Company Action
Level.
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 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)
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
44
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 ENVIRONMENTAL AND 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, 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 may 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.acquisitions.
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 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.
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 and water storage development projects.
Our profitability is significantly affected by changes in the market
price of water. In the future, water prices may fluctuate widely as demand is
affected by climatic, demographic and technological factors.
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. 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.
16
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.
45
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;
- - 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;performance and condition;
- - 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, 2001,2003,
the closing price of our common stock on the NASDAQ National Market was $12.50$15.67
per share, compared to $12.3125$12.50 at December 31, 1999.2001. On a quarterly basis between
these two dates, closing prices have ranged from a high of $14.62 at June 30, 2001$16.17 to a low of
$11.00 at September 30, 2001. During 2001, closing prices have ranged from a low
of $10.70 per share on October 9 to a high of $15.91 on July 20.$8.33.
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. Messrs. Langley and Hart, have entered into
employment agreements with us dated as of December 31, 1997, for a period of
four years. Messrs. Langleyour Chairman and HartCEO,
respectively, 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.
17
New employment agreements were entered into with Mr. Langley and Mr.
Hart on January 1, 2002 for a further four years. (See Part II, Item 8, Note 16,15,
"Related-Party Transactions."Transactions")
46.
MANAGEMENT'S USE OF JUDGMENT IN PREPARING FINANCIAL STATEMENTS IN ACCORDANCE
WITH ACCOUNTING PRINCIPLES GENERALLY ACCEPTED IN THE UNITED STATES OF AMERICA.
The preparation our financial statements in conformity with U.S GAAP
requires management to make estimates, judgments and assumptions that affect the
reported amounts of assets and liabilities, disclosure of contingent liabilities
at the date of financial statements and the reported amount of revenues and
expenses during the reporting period. We regularly evaluate our estimates, which
are based on historical experience and on various other assumptions that are
believed to be reasonable under the circumstances. The result of these
evaluations forms the basis for making judgments about the carrying values of
assets and liabilities and the reported amount of revenues and expenses that are
not readily apparent from other sources. The carrying values of assets and
liabilities and the reported amount of revenues and expenses may differ by using
different assumptions. In addition, in future periods, in order to incorporate
all known experience at that time, we may have to revise assumptions previously
made which may change the value of previously reported assets and liabilities.
This potential subsequent change in value may have a material adverse effect on
our business, financial condition, and the results of operations and cash flows.
See "Critical Accounting Policies" in Item 7.
COMMON STOCK TRANSACTIONS
Our Board of Directors has authorized the repurchase of up to $10
million of our common stock. The stock purchases may be made from time to time
at prevailing prices though open market, or negotiated transactions, depending
on market conditions, and will be funded from available cash resources of the
company. Such a repurchase program may have an impact on our cash flows. (Refer
to our Liquidity and Capital Resources in Item 7).
FUTURE CHANGES IN FINANCIAL ACCOUNTING STANDARDS MAY CAUSE ADVERSE UNEXPECTED
REVENUE FLUCTUATIONS AND AFFECT OUR REPORTED RESULTS OF OPERATIONS.
A change in accounting standards could have a significant effect on our
reported results and may even affect our reporting transactions completed before
the change is effective. New accounting pronouncements and varying
interpretations of pronouncements have occurred and may occur in the future.
Changes to existing rules or the questioning of current practices may adversely
affect our reported financial results of the way we conduct our business.
COMPLIANCE WITH CHANGING REGULATION OF CORPORATE GOVERNANCE AND PUBLIC
DISCLOSURE MAY RESULT IN ADDITIONAL EXPENSES.
Changing laws, regulations and standards relating to corporate
governance and public disclosure, including the Sarbanes-Oxley Act of 2002, new
SEC regulations and NASDAQ Stock Market rules, are creating uncertainty for
companies such as ours. We are committed to maintaining high standards of
corporate governance and public disclosure. As a result, we intend to invest all
reasonably necessary resources to comply with evolving standards, and this
investment may result in increased general and administrative expenses and a
diversion of management time and attention from revenue-generating activities to
compliance activities.
ABSENCE OF DIVIDENDS COULD REDUCE OUR ATTRACTIVENESS TO INVESTORS.
Some investors favor companies that pay dividends, particularly in
market downturns. We have never declared or paid any cash dividends on our
common stock. We currently intend to retain any future earnings for funding
growth and, therefore, we do not currently anticipate paying cash dividends on
our common stock.
WE MAY NEED ADDITIONAL CAPITAL IN THE FUTURE TO FUND THE GROWTH OF OUR BUSINESS,
AND FINANCING MAY NOT BE AVAILABLE.
We currently anticipate that our available capital resources and
operating income will be sufficient to meet our expected working capital and
capital expenditure requirements for at least the next 12 months. However, we
cannot assure you that such resources will be sufficient to fund the long-term
growth of our business. We may raise additional funds through public or private
debt or equity financings if such financings become available on favorable
terms, but such financing may dilute our stockholders. We cannot assure you that
you that any additional financing we need will be available on terms favorable
to us, or at all. If adequate funds are not available or are not available on
acceptable terms, we may not be able to take advantage of unanticipated
opportunities or otherwise respond to competitive pressures. In any such case,
our business, operating results or financial condition could be materially
adversely affected.
18
LITIGATION MAY HARM OUR BUSINESS OR OTHERWISE DISTRACT OUR MANAGEMENT.
Substantial, complex or extended litigation could cause us to incur
large expenditures and distract our management. For example, lawsuits by
employees, stockholders or customers could be very costly and substantially
disrupt our business. Disputes from time to time with such companies or
individuals are not uncommon, and we cannot assure that that we will always be
able to resolve such disputes out of court or on terms favorable to us.
THE FOREGOING FACTORS, INDIVIDUALLY OR IN AGGREGATE, COULD MATERIALLY ADVERSELY
AFFECT OUR OPERATING RESULTS AND CASH FLOWS AND FINANCIAL CONDITION AND COULD
MAKE COMPARISON OF HISTORIC OPERATING RESULTS AND CASH FLOWS AND BALANCES
DIFFICULT OR NOT MEANINGFUL.
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. Citation leases office space for a claims
office in Orange County, California. Vidler and Nevada Land lease office space
in Carson City, Nevada. Vidler and Nevada Land hold significant investments in
land, water rights and mineral rights in the southwestern United States. We
continually evaluate our current and future space capacity in relation to our
business needs. We believe that our existing facilities are suitable and
adequate to meet our current business requirements. 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:
In 2000, PICO Holdings loaned a total of $2.2 million to Dominion
Capital Pty. Ltd. ("Dominion Capital"), a private Australian company. In 2001,
$1.2 million of the loans became past due. Negotiations between PICO and
Dominion Capital to reach a settlement agreement on both the overdue loan of
$1.2 million and the other loan of $1 million proved unsuccessful. Accordingly,
PICO commenced legal actions through the Australian courts against Dominion
Capital to recover the total amount due to PICO Holdings. Due to the inherent
uncertainty involved in pursuing a legal action and our ability to realize the
assets collateralizing the loans, PICO recorded an allowance for the total
outstanding balance of $2.3 million for the loans and interest. PICO has been
awarded summary judgment in relation to the principal and interest on the $1.2
million loan and, as a result, Dominion Capital has been placed in receivership.
A trial was held in July 2003 concerning both loans, and the Company is awaiting
judgment from the Australian courts.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Company's shareholders
during the fourth quarter of 2003.
19
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 out the high and low daily closing
sale prices as reported on the NASDAQ National Market. These reported prices
reflect inter-dealer prices without adjustments for retail markups, markdowns or
commissions.
2003 2002
-------------------------- ------------------------
High Low High Low
------- ------- ------- -------
1st Quarter $ 14.39 $ 12.01 $ 15.69 $ 12.57
2nd Quarter $ 14.37 $ 12.78 $ 17.42 $ 13.41
3rd Quarter $ 14.04 $ 12.83 $ 16.42 $ 11.00
4th Quarter $ 16.17 $ 13.10 $ 13.80 $ 8.33
On March 5, 2004, the closing sale price of PICO's common stock was
$16.57 and there were 770 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.
EQUITY COMPENSATION PLAN INFORMATION
On July 17, 2003, the Company's shareholders approved the PICO
Holdings, Inc. 2003 Stock Appreciation Rights ("SAR") program, which replaced
the stock option and call option programs previously in place. The stock options
and call options held by directors, employees, and consultants were surrendered
and, after shareholders' approval, replaced with SAR with the same exercise
price. There are now no stock options or call options outstanding.
All SAR are fully vested; however, a holder may only exercise a maximum
of 20% of the SAR initially received in any twelve month period, except with the
permission of the Company's Compensation Committee. When a SAR is exercised, the
holder will receive a cash payment equal to the difference between the market
value of the underlying stock and the exercise price of the SAR. No shares of
stock are issued.
We believe that the accounting treatment for SAR is more transparent
than for stock options. The change in the "in the money" amount (i.e., the
difference between the market value of PICO stock and the exercise price of the
SAR) of SAR outstanding during each accounting period is recorded through the
consolidated statements of operations. An increase in the "in the money" amount
of SAR is recorded as an expense, and a decrease in the "in the money" amount of
SAR will be recorded as a reduction in expenses. Previously, we disclosed the
fair value of outstanding stock options but, in accordance with GAAP, we did not
expense this value in our statement of operations.
For 2003, a total expense of $6 million before taxes for SAR was
recorded, based on the last sale price of $15.67 for PICO stock on December 31,
2003. This consists of a $3.5 million charge on the initial adoption of the SAR
program on July 17, 2003, and a $2.5 million expense to record the increase in
the "in the money" amount of SAR during the period from the adoption of the SAR
Program through the end of 2003. The $3.5 million pre-tax charge was one-time in
nature, as it expensed the "in the money" amount of SAR outstanding from the
date that the call options and stock options converted to SAR were originally
issued, through to July 17, 2003. After the related tax effect, the 2003 SAR
expense reduced book value per share by approximately 1.7% as of December 31,
2003.
The Company has a total of 1,962,781 SAR outstanding, with a weighted
average exercise price of $12.63. Of this total, 1,927,781 SAR, with a weighted
average exercise price of $12.59, were granted to the Company's officers. A
total of 80,000 SAR remain available for issuance.
20
(a) (b) (c)
- ------------------------------------------------------------------------------------------------------------------------------
NUMBER OF SECURITIES
NUMBER OF SECURITIES TO REMAINING AVAILABLE FOR
BE ISSUED UPON WEIGHTED-AVERAGE EXERCISE FUTURE ISSUANCE UNDER
EXERCISE OF OUTSTANDING PRICE OF OUTSTANDING EQUITY COMPENSATION PLANS
OPTIONS, WARRANTS AND OPTIONS, WARRANTS AND (EXCLUDING SECURITIES
PLAN CATEGORY RIGHTS BY OFFICERS RIGHTS GRANTED TO OFFICERS REFLECTED IN COLUMN (a)
- ------------------------------------------------------------------------------------------------------------------------------
Equity compensation plans approved
by security holders.(1) - - -
Equity compensation plans not
approved by security holders.(2) - - 34,262
- ------------------------------------------------------------------------------------------------------------------
Total - - 34,262
- ------------------------------------------------------------------------------------------------------------------
(1) On July 17, 2003 the Company's shareholders voted to adopt the PICO
Holdings, Inc. 2003 Stock Appreciation Rights Program (the "SAR
Program") to replace the Company's stock option plans and call option
agreements. The maximum number of SARs issuable under the SAR program
may not exceed 2,042,781. 1,962,781 SARs were issued to the prior
option holders upon adoption of the SAR program at an exercise price
equal to that of the surrendered options (weighted average exercise
price is $12.63). Upon exercise of the SAR, the holder is entitled to a
cash benefit equal to the difference between the exercise price and the
then current market price of PICO stock. Accordingly, no securities,
options or warrants will be issued by the Company on any exercise of
the SAR. (See Stock-Based Compensation section in Note 1 to the
Company's consolidated financial statements "Nature of Operations and
Significant Accounting Policies")
(2) The Directors' and Officers Deferred Compensation Arrangements are
described in Note 15 to the Company's notes to the consolidated
financial statements. ("Related-Party Transactions")
ITEM 6. SELECTED FINANCIAL DATA
The following table presents the Company'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,
--------------------------------------------------------------
2003 2002 2001 2000 1999
----------- ----------- ----------- ----------- ----------
(In thousands, except share data)
OPERATING RESULTS
Revenues:
Premium income earned (charged) $ (42) $ 980 $ 1,695 $ 19,447
Net investment income (loss) $ 8,116 9,595 1,161 (1,694) 4,024
Sale of land, water and minerals 19,751 15,232 17,106 5,478 6,082
Other income 5,011 4,489 4,313 4,200 5,119
----------- ----------- ----------- ----------- ----------
Total revenues $ 32,878 $ 29,274 $ 23,560 $ 9,679 $ 34,672
=========== =========== =========== =========== ==========
Income (loss) before discontinued
operations, extraordinary gain and
cumulative effect of change in accounting principle $ (13,736) $ 1,110 $ 3,778 $ (7,290) $ (11,559)
Income from discontinued operations, net 10,498 2,834 2,317 953 1,377
Extraordinary gain, net 442
Cumulative effect of change in accounting principles, net 1,985 (981) (4,964)
----------- ----------- ----------- ----------- ----------
Net income (loss) $ (3,238) $ 5,929 $ 5,114 $ (11,301) $ (9,740)
=========== =========== =========== =========== ==========
PER COMMON SHARE BASIC AND DILUTED:
Income (loss) from continuing operations $ (1.11) $ 0.09 $ 0.30 $ (0.63) $ (1.28)
Income from discontinued operations 0.85 0.23 0.19 0.08 0.15
Extraordinary gain, net of tax 0.05
Cumulative effect of change in accounting principle 0.16 (0.08) (0.43)
----------- ----------- ----------- ----------- ----------
Net income (loss) $ (0.26) $ 0.48 $ 0.41 $ (0.97) $ (1.08)
=========== =========== =========== =========== ==========
Weighted Average Shares Outstanding 12,375,933 12,375,466 12,384,682 11,604,120 8,998,442
=========== =========== =========== =========== ==========
21
Year Ended December 31
----------------------------------------------------------
2003 2002 2001 2000 1999
--------- --------- --------- --------- ---------
(In thousands, except per share data)
FINANCIAL CONDITION
Assets (1) $ 330,078 $ 265,587 $ 270,742 $ 295,682 $ 289,004
Unpaid losses and loss adjustment expenses,
net of discount, 1999 and prior (1) $ 60,864 $ 52,703 $ 61,538 $ 84,384 $ 99,719
Bank and other borrowings (1) $ 15,377 $ 14,636 $ 14,596 $ 15,550 $ 15,705
Discontinued operations, net $ (1,351) $ 37,332 $ 33,266 $ 29,255 $ 27,149
Total liabilities and minority interest (1) $ 99,566 $ 81,888 $ 96,110 $ 122,802 $ 146,648
Shareholders' equity $ 229,160 $ 221,032 $ 207,899 $ 202,105 $ 169,506
Book value per share $ 18.52 $ 17.86 $ 16.81 $ 16.31 $ 18.72
Note: Book value per share is computed by dividing shareholders' equity by
the net of total shares issued less shares held as treasury shares.
(1) Excludes balances classified as discontinued operations.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
INTRODUCTION
The consolidated financial statements and other portions of this Annual Report
on Form 10-K for the fiscal year ended December 31, 2003, including Item 7,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," reflect the effects of:
(1) presenting Sequoia Insurance Company and two businesses sold by
HyperFeed Technologies, Inc. as discontinued operations. See Note 2 of
Notes to Consolidated Financial Statements, "Discontinued Operations";
and
(2) presenting HyperFeed Technologies, Inc. as a separate segment beginning
May 15, 2003. See Note 4 of Notes To Consolidated Financial Statements,
"Consolidation of HyperFeed Technologies, Inc."
COMPANY SUMMARY, RECENT DEVELOPMENTS, AND FUTURE OUTLOOK
VIDLER WATER COMPANY, INC.
BACKGROUND
We believe that continuing trends in Nevada and Arizona indicate strong
future demand for Vidler's water rights and water storage assets.
Based on figures prepared by the Nevada State Demographer, in the year
ended July 2003, the population of Clark County, Nevada, which includes
metropolitan Las Vegas, increased 4.6% to more than 1.6 million residents.
Around 70,000 people are moving to the area annually. Currently Las Vegas takes
most of its water supply from Lake Mead. Due to the continued growth in demand
for water and 5 years of drought, the level of Lake Mead has reached 50 year
lows. Accordingly, Las Vegas is aggressively seeking to conserve water (e.g.,
rules have been introduced restricting water use in new homes) and to diversify
its sources of water supply. At the same time, the increasing cost of housing in
Las Vegas is leading to more rapid growth in outlying areas within commuting
distance.
Over time, we believe that these factors will lead to demand for water
in parts of southern Nevada where Vidler owns or has an interest in water
rights, including Sandy Valley and Muddy River in Clark County, and southern
Lincoln County. If growth management initiatives are introduced in Las Vegas,
these will lead to even more rapid growth in the areas surrounding metropolitan
Las Vegas.
22
In Arizona, the continued growth of the municipalities surrounding
Phoenix in Maricopa County is likely to lead to strong demand for Vidler's water
rights in the Harquahala Valley. The Arizona State Demographer estimates that
the population of Maricopa County increased 10.6% in the 3.25 years from April
1, 2000 until July 1, 2003, to almost 3.4 million residents. Many municipalities
surrounding Phoenix/Scottsdale do not receive allotments of water from the
Colorado River, and are therefore forced to find alternative supplies of water.
Due to the low level of Lake Mead, the states of Arizona, California,
and Nevada may be required to take no more than their current allotments of
water from the Colorado River. This is likely to increase demand for the net
recharge credits owned by Vidler, representing water which Vidler has in storage
in its Arizona Recharge Facility. We also anticipate demand from developers and
other entities to store water for various purposes, including back-up water
supply for dry years by developers, and assured water supply for new development
projects.
The Central Arizona Water Conservation District ("CAWCD") is a
three-county water district servicing the most populous parts of the state,
including Maricopa County. A recent CAWCD study predicted that CAWCD will be
able to use 9 million acre-feet of water from Arizona's Colorado River supplies
in the years from 2004 through 2050, assuming average annual precipitation. The
CAWCD also estimated that 8.6 million acre-feet will be required over the same
period by the Central Arizona Groundwater Replenishment District, the authority
responsible for protecting groundwater supplies in the CAWCD three-county
service area. The CAWCD also estimated demand of 3.5 million acre-feet from the
Arizona Water Bank for various purposes (e.g., use in Nevada), and a further 4.3
million acre-feet to replenish groundwater reserves. Based on these forecasts,
Arizona appears to be faced with a shortfall of 7.4 million acre-feet of water
in the period through 2050, which will require CAWCD to purchase additional
supplies.
The Southern Nevada Water Authority has released a master water plan
(which can be viewed at www.snwa.com) to develop and deliver water supplies to
meet regional growth demands. This plan consists of (1) the storage of water,
including up to 1.25 million acre-feet in Arizona' combined with (2) the
development of further water resources in Nevada. We believe that Vidler's
assets are favorably positioned to contribute to the water resource solutions
required in the Southwest.
WATER RIGHTS
ARIZONA
At December 31, 2003, Vidler owned or had the right to acquire
approximately 49,559 acre-feet of transferable ground water in the HARQUAHALA
VALLEY, approximately 75 miles northwest of metropolitan Phoenix, Arizona.
Vidler owns 35,795 acre-feet, and we have the option to purchase a further
13,764 acre-feet. We believe that Vidler's water rights in the Harquahala Valley
represent the most practical and competitive source of water to support the
growth of greater metropolitan Phoenix, which is one of the fastest growing
areas in the nation.
Vidler's water rights in the Harquahala Valley are primarily located in
Maricopa County. According to census data, Maricopa County was the fastest
growing county in the U.S. between April 1, 2000 and July 1, 2001, with 53,367
new homes added, an increase of 4.3% in 15 months. Vidler anticipates that there
will be municipal demand for water from the Harquahala Valley to support the
growth of the west side cities in Maricopa County, which are part of greater
metropolitan Phoenix.
Any new residential development in Arizona must obtain a permit from
the Arizona Department of Water Resources certifying a "designated assured water
supply" sufficient to sustain the development for at least 100 years. The
Harquahala Valley ground water meets the designation of assured water supply. In
order for the ground water to be used by municipalities in the heavily populated
parts of Arizona, the water must be "wheeled," or transported, from the
Harquahala Valley to the end users. The Arizona State Legislature has passed
legislation which allows Harquahala Valley ground water to be made available as
assured water supply to cities and communities in Arizona through agreements
with the Central Arizona Groundwater Replenishment District.
The Arizona State Legislature has passed several pieces of legislation
which recognize the Harquahala Valley ground water as a future municipal supply
for the greater Phoenix metropolitan area. 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 were moving into the
Basin, legislation was enacted in 2000 placing 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.
23
In 2001 and 2002, Vidler completed its first sales of Harquahala Valley
ground water for industrial use and municipal use:
- - in March 2001, Vidler sold 6,496.5 acre-feet of water rights and 2,589
acres of land to an industrial user, for $9.4 million;
- - in March 2002, Vidler sold 3,645 acre-feet of water rights and 1,215
acres of land to golf course developers near Scottsdale, for $5.2
million; and
- - in May 2002, Vidler sold 480 acre-feet of water rights and 240 acres of
land to an industrial user, for $1 million.
Vidler is working on further sales of Harquahala Valley ground water to
both industrial users and communities and developers in the greater Phoenix
metropolitan area who need to secure further water to support expected growth.
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 maximize the value of.
Nevada is the state experiencing the most rapid population growth and
new home construction in the United States. The population is concentrated in
southern Nevada, which includes the Las Vegas metropolitan area.
1. LINCOLN COUNTY
Vidler is working jointly with Lincoln County to locate and develop
water resources in Lincoln County, Nevada. Lincoln County and Vidler have filed
applications for more than 100,000 acre-feet of water rights with the intention
of supplying water to communities and industrial users. We believe that this is
the only known new source of water for Lincoln County. Vidler anticipates that
up to 40,000 acre-feet of water rights will ultimately be permitted from these
applications, and put to use in Lincoln County.
Under the Lincoln County Land Act, more than 13,000 acres of publicly
owned land in southern Lincoln County is to be offered for sale near the fast
growing City of Mesquite. The first release of land under the Lincoln County
Land Act is expected to occur later in 2004. Additional water will be required
if this land is to be developed.
In 1998, Lincoln/Vidler filed for 14,000 acre-feet of water rights for
industrial use from the Tule Desert Groundwater Basin. In November 2002, the
Nevada State Engineer granted an application for 2,100 acre-feet of water
rights, and ruled that another 7,244 acre-feet could be granted, but would be
held in abeyance while Lincoln/Vidler pursues additional studies.
In 2001, Lincoln/Vidler reached conditional agreement to sell an
electricity-generating company between 6,700 and 9,000 acre-feet of water, at
$3,300 per acre-foot, for a new power plant to be located in southern Lincoln
County on a site which was to be acquired from Nevada Land. Due to the
unprecedented instability in the energy market and capital market conditions
affecting the electricity sector, the electricity-generating company decided not
to move forward with the project. Recognizing that a permitted site with
permitted water rights will have value once the energy market stabilizes, Vidler
purchased the project for $50,000 in February 2003. Energy companies and
utilities are currently reviewing the project.
The Lincoln County undertaking is an example of a transaction where
Vidler can partner with an entity, in this case a government entity, to provide
the necessary capital and skills to commercially develop water assets.
2. SANDY VALLEY, NEVADA
In June 2002, the Nevada State Engineer awarded Vidler 415 acre-feet of
water rights near Sandy Valley, Nevada. Vidler has filed another application for
1,000 acre-feet.
The water rights awarded to Vidler are the only known water to support
future growth in Sandy Valley and surrounding areas in southwestern Nevada near
the California state line, including Primm, Nevada. Primm is a resort town on
the border between California and Nevada, in the Interstate 15 corridor. Primm
requires additional water to support future growth, which could result from
expansion of the existing hotel/casino and retail/commercial operations.
3. MUDDY RIVER WATER RIGHTS
The Muddy River is a perennial river fed by the Muddy Springs in
Southern Nevada, originating in Nevada and flowing into Lake Mead. Currently,
Muddy River water rights are utilized for agriculture and electricity
generation; however, in the future, we
24
anticipate that Muddy River water rights may be utilized to support development
in southern Nevada. The Southern Nevada Water Authority has been acquiring Muddy
River water rights as a water resource to support future growth in Clark County,
Nevada.
At December 31, 2003, Vidler owned approximately 221 acre-feet of Muddy
River water rights, and had the right to acquire an additional 45.6 acre-feet.
4. FISH SPRINGS RANCH
In 2000, Vidler purchased a 51% interest in Fish Springs Ranch, LLC
("Fish Springs") and a 50% interest in V&B, LLC. These companies own the Fish
Springs Ranch and other properties totaling approximately 8,600 acres in Honey
Lake Valley in Washoe County, 45 miles north of Reno, Nevada. Approximately
8,000 acre-feet of permitted water rights associated with Fish Springs Ranch are
transferable to the Reno/Sparks area. The water rights at Fish Springs have been
identified as the most economical and proven new source of supply to support new
growth in the North Valley communities of Washoe County. This county was in the
top 2% of all counties in the U.S. for new home construction between April 1,
2000 and July 1, 2001. According to census data, almost 5,500 new homes were
constructed over that 15 month period, a 3.8% increase.
Vidler is holding discussions with a number of potential users for the
Fish Springs water rights, including developers and industrial users. There is
strong demand for water in the North Valleys, and few alternative sources of
supply. The future demand of the North Valleys area is estimated to exceed
12,000 acre-feet annually. If water from Fish Springs could be supplied to the
North Valleys, this would reduce their reliance on Truckee River water which
comes through Reno, thereby providing environmental benefits and additional
water to support growth in and around Reno, an area which has been experiencing
consistent growth.
In October 2002, the Regional Water Planning Committee accepted the
North Valley Water Supply Comparison report. This study re-evaluated the
feasibility and potential cost of supplying future North Valley's water demands
with continued exportation of water from the Truckee River Basin, or,
alternatively, meeting the demands from Fish Springs and two other basins. The
study indicated that ground water from Fish Springs would be the most economical
source of supply. Alternatively, if the capacity of nearby transmission lines
can be expanded, we believe that Fish Springs Ranch would be an attractive site
for gas-fired electricity generation.
5. BIG SPRINGS RANCH AND WEST WENDOVER, NEVADA
In December 2003, Vidler closed on the sale of approximately 37,500
acres of deeded ranch land and the related water rights at Big Springs Ranch for
$2.8 million. The ranch land was located approximately 65 miles east of Elko, in
northeastern Nevada.
In December 2003, in a separate but related transaction, Vidler closed
on the sale of approximately 6,500 acres of developable land near West Wendover,
Nevada for $12 million. West Wendover is adjacent to the Nevada/Utah border in
the Interstate 80 corridor. The land at West Wendover was acquired in 1999
through a land exchange with the Bureau of Land Management, under which Vidler
gave up approximately 70,500 acres of ranch land at Big Springs Ranch in return
for the parcels of developable land.
The assets at Big Springs Ranch and West Wendover were different in
nature from Vidler's remaining assets in Arizona and Nevada, in that the land
comprised the bulk of the value of Big Springs Ranch and West Wendover, with the
water rights being a lesser component.
COLORADO
Vidler is completing the process of monetizing its water rights in
Colorado, through sale or lease:
- - in 2000, Vidler closed on the sale of various water rights and related
assets to the City of Golden, Colorado for $1 million, and granted the
City options to acquire other water rights over the next 15 years. The
City exercised options to acquire water assets for $390,000 in 2001,
$145,000 in 2002, and $146,000 in 2003. If the remaining options are
exercised, the present value of the aggregate purchase price is
approximately $1 million;
- - during 2002, Vidler closed on the sale of its interest in Cline Ranch
for $2.1 million and the sale of 86 acre-feet of water rights for $3.1
million; and
- - in 2003, Vidler closed on the sale of the Wet Mountain water rights for
$414,000.
Discussions are continuing to either lease or sell the remaining water rights in
Colorado.
25
WATER STORAGE
1. VIDLER ARIZONA RECHARGE FACILITY
During 2000, Vidler completed the second stage of construction at its
facility to "bank," or store, water underground in the Harquahala Valley, and
received the necessary permits to operate a full-scale water "recharge"
facility. "Recharge" is the process of placing water into storage underground.
Vidler has the permitted right to recharge 100,000 acre-feet of water per year
at the Vidler Arizona Recharge Facility, and anticipates being able to store in
excess of 1 million acre-feet of water in the aquifer underlying much of the
valley. When needed, the water will be "recovered," or removed from storage, by
ground water wells.
Vidler has the only permitted, complete private water storage facility
in Arizona. Given that Arizona is the only southwestern state with surplus flows
of water available for storage, we believe that Vidler's is the only private
water storage facility where it is practical to "bank," or store, water for
users in other states, which is known as "interstate banking." Having a
permitted water storage facility also allows Vidler to acquire, and store,
surplus water for re-sale in future years.
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 storage facility is strategically located adjacent to the Central Arizona
Project ("CAP") aqueduct, a conveyance canal running from Lake Havasu to Phoenix
and Tucson. The water to be recharged will come from surplus flows of CAP water.
We believe that proximity to the CAP is a competitive advantage, because it
minimizes the cost of water conveyance.
Vidler is able to provide storage for users located both within Arizona
and out-of-state. Potential users include industrial companies, developers, and
local governmental political subdivisions in Arizona, and out-of-state users
such as municipalities and water agencies in Nevada and California. The Arizona
Water Banking Authority ("AWBA") has the responsibility for intrastate and
interstate storage of water for governmental entities.
Vidler intends to charge customers a fee based on the amount of water
"recharged," and then an additional fee when the water is "recovered." The
revenues generated from this asset will depend on the quantity of water which
the AWBA, and private users, store at the facility. The quantity of water stored
will depend on a number of factors, including the availability of water and
available storage capacity at publicly owned facilities.
We believe that a number of events in recent years have increased the
scarcity value of the project's storage capacity. At a public hearing in March
2000, the AWBA 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 AWBA 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 Southern Nevada Water Authority Water Resource Plan, which can be
viewed at www.snwa.com, calls for 1.25 million acre-feet of water to be stored
in Arizona in order to meet forecast demand. The AWBA is currently finalizing
agreements to store water on behalf of Nevada. Once these agreements have been
concluded, the AWBA can begin to negotiate storage for California. The AWBA will
be able to store water at existing publicly owned sites and at the Vidler
Arizona Recharge Facility, which is one of the largest water storage facilities.
Under the current agreement, which expires in 2004, Vidler has agreed on a price
of $48.00 per acre-foot of water recharged for users represented by the AWBA.
In addition to the potential demand from the public users represented
by the AWBA, demand from private users could potentially utilize up to 100% of
the site's storage capacity.
Vidler has not yet stored water for customers at the facility, but the
company has been recharging water for its own account since 1998, when the pilot
plant was constructed. In 2003, Vidler had "net recharge credits" representing
approximately 34,000 acre-feet of water in storage at the facility, and had
purchased a further 7,000 acre-feet which was recharged in 2004 as well as
ordering an additional 29,000 acre-feet for purchase and recharge in 2004.
Vidler purchased the water from the CAP, and intends to resell this water at an
appropriate time. Vidler is in discussions with a number of developers and other
entities, which could lead to the sale of the water that we have stored on our
own account, and to storing additional water.
26
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. The users of the facility will
bear the capital cost of the improvements required to recover water at
commercial rates.
Vidler anticipates being able to recharge 100,000 acre-feet of water
per year at the facility, and to store in excess of 1 million acre-feet of water
in the aquifer. 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, which concluded that
there is storage capacity of 3.7 million acre-feet.
Recharge and recovery capacity is critical, because it indicates how
quickly water can be put into storage 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 crucial 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 ground
water aquifer for irrigation purposes.
2. SEMITROPIC
Vidler originally had an 18.5% right to participate in the Semitropic
Water Banking and Exchange Program, which operates a 1,000,000 acre-foot water
storage facility at Semitropic, near the California Aqueduct, northwest of
Bakersfield, California.
The strategic value of the guaranteed right to recover an amount of
water from Semitropic every year -- even in drought years -- became clear to
water agencies, developers, and other parties seeking a reliable water supply.
For example, developers of large residential projects in Kern County and Los
Angeles County must now be able to demonstrate that they have sufficient back-up
supplies of water in the case of a drought year before they are permitted to
begin development. Accordingly, during 2001, Vidler took advantage of current
demand for water storage capacity with guaranteed recovery, and began to sell
its interest in Semitropic. The strategic value of the guaranteed right to
recover water was again highlighted by two court decisions in February 2003
which held that developers could not rely on water from state water projects.
In May 2001, Vidler closed the sale of 29.7% of its original interest
(i.e., approximately 55,000 acre-feet of water storage capacity) to The Newhall
Land and Farming Company for $3.3 million, resulting in a pre-tax gain of $1.6
million. This transaction added $1.6 million to revenues and segment income in
2001.
In September 2001, Vidler closed the sale of another 54.1% of its
original interest (i.e., approximately 100,000 acre-feet of water storage
capacity) to the Alameda County Water District for $6.9 million, resulting in a
pre-tax gain of $4.1 million. This transaction added $4.1 million to revenues
and segment income in 2001.
Vidler's remaining interest includes approximately 30,000 acre-feet of
storage capacity. We have the guaranteed right to recover a minimum of
approximately 2,700 acre-feet every year. In some circumstances, we have the
right to recover up to approximately 6,800 acre-feet in any one year. We are
considering various alternatives for the remaining interest, including sale to
developers or industrial users. Currently Vidler is not storing any water at
Semitropic for third parties. Vidler is required to make annual payments of
$519,000 under its agreement with Semitropic Water Storage District.
OTHER PROJECTS
Vidler routinely evaluates the purchase of further water-righted
properties in Arizona and Nevada. Vidler also 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 in Arizona, Nevada, and other southwestern states. We have the
resources and relationships to respond to business opportunities which are
consistent with our strategic objectives.
NEVADA LAND & RESOURCE COMPANY, LLC
The majority of Nevada Land's revenues come from the sale of land and
the related water rights. In addition, various types of recurring revenue are
generated from use of the Nevada Land's properties, including leasing,
easements, and mineral royalties. Nevada Land also generates interest revenue
from land sales contracts where Nevada Land has provided partial financing, and
from temporary investment of the proceeds of land sales.
27
Nevada Land recognizes revenue from land sales, and the resulting gross
profit or loss, when transactions close. On closing, the entire sales price is
recorded as revenue, and a gross margin is recognized 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 fluctuate from period to
period, depending on the dates when specific transactions close.
In 2003, Nevada Land generated $4.1 million in revenues from the sale
of 75,131 acres of former railroad land, indicating on-going demand. The average
sales price of $55 per acre compares to our average basis of $25 per acre in the
parcels which were sold. Included in 2003 land sales were approximately 50,000
acres of desert and mountainous land which biased the average sales price and
average basis downwards, but resulted in a gross margin in the typical 50% - 60%
range.
In 2003, 89.8% of land sales were settled for cash, and Nevada Land
provided partial financing for the remainder. Vendor financing is collateralized
by the land conveyed, typically carries a 10% interest rate, and is subject to a
minimum 20% down payment.
BUSINESS ACQUISITIONS AND FINANCING
This section describes the most significant interests in public
companies included in this segment during 2003.
Excluding HyperFeed, which became a consolidated subsidiary during the
year, we estimate that the common stock interests in public companies reported
in this segment generated a total return (i.e., realized and unrealized gains,
plus dividends received, in U.S. dollars) of approximately 29% in 2003.
1. HYPERFEED TECHNOLOGIES, INC.
In 2001, 2002, and 2003 until May 15, PICO's investment in HyperFeed
common shares was recorded in this segment using the equity method under
Accounting Principles Board ("APB") Opinion No. 18, "The Equity Method of
Accounting for Investments in Common Stock." Since May 15, 2003, when HyperFeed
became a consolidated subsidiary, its results have been recorded in a separate
segment, "HyperFeed Technologies;"; however, PICO's investment in HyperFeed
warrants is still recorded in the Business Acquisitions and Financing segment.
After adjusting for HyperFeed's 1:10 reverse stock split in August
2003, PICO holds warrants to buy approximately 310,616 shares of HyperFeed
common stock at an average price of $15.75 per share, exercisable by April 2005.
At December 31, 2003, the price of HyperFeed's common stock was $6.14, and the
warrants were carried at estimated fair value of $556,000.
2. JUNGFRAUBAHN HOLDING AG
PICO owns 130,577 shares of Jungfraubahn, which represents
approximately 22.4% of that company. At December 31, 2003, the market (carrying)
value of our holding was $26.7 million.
In September 2002, we increased our holding to 22.3% of Jungfraubahn,
and became the largest shareholder in that company. Despite the increase in our
shareholding to more than 20%, we continue to account for this investment under
SFAS No. 115, "Accounting for Certain Investments in Debt and Equity
Securities." At this time, we do not believe that we have the requisite ability
to exercise "significant influence" over the financial and operating policies of
Jungfraubahn, and therefore do not apply the equity method of accounting.
In February 2004, Jungfraubahn issued a press release containing an
initial review of 2003 operations, using Swiss accounting principles. The full
text is available on Jungfraubahn's website www.jungfraubahn.com. The contents
of Jungfraubahn's website are not incorporated in this 10-K.
In the press release, Jungfraubahn indicated that it expected transport
revenues of approximately CHF (Swiss Francs) 86.2 million (US$64.9 million) for
2003, a 2.5% increase year over year. In the first six months of 2003,
Jungfraubahn's results were affected by a decrease in group travel, particularly
from Japan and the U.S., resulting from a reluctance to travel due to the Iraq
war and the respiratory disease SARS. During the summer, the shortfall was
partly made up by increased numbers of passengers from Switzerland and other
European countries. In the first half of 2003, the number of visitors to
Jungfraujoch-Top of Europe declined 16.6% year over year; however, for the full
year, passenger numbers were only down 3.4%, illustrating a recovery in the
second half of 2003.
28
In September 2003, Jungfraubahn announced its results for the six
months to June 30, 2003. Reported revenues were CHF 54.3 million (US$39.9
million). Net income was CHF 4.4 million (US$3.2 million), or approximately CHF
7.5 per share (US$5.54), a 14.3% increase year over year.
Jungfraubahn announced its results for the 2002 financial year in May
2003, so the 2003 results will not be released until after this 10-K has been
filed. Revenues were CHF 110 million (US$71.6 million), and net income was CHF
12.4 million (US$8.1 million), or CHF 21.3 per share (US$13.87). Jungfraubahn's
operating activities generated net cash flow of CHF 26.7 million (US$17.4
million).
In the most recent published balance sheet -- December 31, 2002 --
Jungfraubahn had shareholders' equity of CHF 302 million, or approximately CHF
517.5 (US$374.70) book value per share. At December 31, 2003, Jungfraubahn's
stock price was CHF 254 (US$ 204.80). At December 31, 2002, Jungfraubahn's stock
price was CHF 255 (US$ 184.64).
3. OTHER EUROPEAN INVESTMENTS
RAETIE ENERGIE AG
PICO owns 80,755 shares in Raetie Energie, which is a producer of hydro
electricity. At December 31, 2003, our investment in Raetia Energie had a basis
of $3.4 million, and a market value of $11.3 million.
During 2003, the market price of Raetia stock increased by 83.8% in
Swiss francs, and the carrying value of our holding appreciated by $5.8 million,
or almost 105%, in U.S. dollars. We first purchased this stock in 1997, and
increased our holding in 1998, 2002, and 2003. Over the life of the investment
so far, we have generated a total return (i.e., realized and unrealized gains,
plus dividends received in U.S. dollars) upwards of 225%.
ACCU HOLDING AG
PICO has acquired 8,125 shares in Accu Holding for $5 million, which
represents a voting ownership interest of approximately 28.3%. Due to a number
of factors, we do not have the ability to exercise significant influence over
Accu Holding's activities, so the investment is carried at market value under
SFAS No. 115.
Accu Holding manufactures batteries at two plants in Switzerland. Accu
is adjusting its production and cost structure following a decline in demand for
batteries during the economic slowdown. Accu is also preparing to redevelop the
site of a former factory near Zurich, which could have significant value.
We have agreed to support a capital-raising by Accu, which we expect to
occur in 2004. Swiss franc funds equivalent to our maximum commitment of US$1.9
million (CHF 2.3 million) are held in a separate bank account.
SIHL
In 2000 and 2001, we acquired approximately 10.6% of SIHL for $4
million, through participation in a restructuring/capital raising and open
market purchases. Our investment in SIHL is accounted for under SFAS No. 115.
At the time, SIHL's core business was digital imaging, but the company
had surplus property assets in and around Zurich, including a major development
project known as Sihlcity. SIHL's operations were adversely affected by the
economic downturn in late 2001 and 2002, and SIHL was unable to improve
profitability and reduce debt as previously expected. In 2003, SIHL sold its
core business, and announced a debt restructuring with its banks which assures
the shareholders of a return in certain circumstances.
As more fully explained in the Business Financing and Acquisitions
portion of "Results of Operations -- Years Ended December 31, 2003, 2002 and
2001," we regularly review stocks which have declined in price from our cost. If
we determine that the decline in market value is other-than-temporary, we record
a charge which writes our basis in the investment down from its original cost to
current carrying value, which typically is the market price at the balance sheet
date when the provision is recorded. It should be noted that charges for
other-than-temporary impairments do not affect shareholders' equity or book
value per share, since the after-tax decline in the market value of investments
carried under SFAS No. 115 is already reflected in shareholders equity in our
balance sheet. Also, the carrying (book) value of the holding does not change.
If the stock price subsequently recovers, the basis does not change.
Due to the extent and duration of the decline in the market value of
SIHL stock, we recorded pre-tax charges for other-than-temporary impairment of
our holding in SIHL of $2.1 million in 2001, $1.6 million in 2002, and $293,000
in 2003. At December 31, 2003, the charges for other-than-temporary impairment
had reduced our basis in SIHL to $542,000, compared to the carrying (market)
value of the holding of $433,000.
29
Given the extent and duration of the decline in the market price of
Accu stock, we determined that the decline in Accu's market value is also
other-than-temporary. Accordingly, we recorded pre-tax charges for
other-than-temporary impairment of our holding in Accu of $2.2 million in 2002,
and $823,000 in the first nine months of 2003. These charges were recorded as
realized losses and reduced the basis of the investment. At December 31, 2003,
the holding had a market (carrying) value of $ 3.1 million (CHF 3.9 million).
INSURANCE OPERATIONS IN RUN OFF
Typically, most of the revenues of an insurance company in "run off"
come from investment income (i.e., interest from fixed-income securities and
dividends from stocks) earned on funds held as part of their insurance business.
In addition, from time to time, gains or losses are realized from the sale of
investments.
In broad terms, Physicians and Citation hold cash and fixed-income
securities corresponding to their loss reserves, and the excess is invested in
value stocks in the U.S. and selected foreign markets.
Given the very low level of interest rates, we expect to generate
limited income and no capital gains from our bond holdings. To maintain
liquidity and to guard against capital losses which would be brought on by
higher interest rates, we have increased our holdings of bonds maturing in 2
years or less. At December 31, 2003, the duration of Citation's bond portfolio
was 1.8 years, and the duration of the Physicians bond portfolio was 2.9 years.
The duration of a bond portfolio measures the amount of time it will take for
the cash flows from scheduled interest payments and the maturity of bonds to
equal the current value of the portfolio. Duration indicates the sensitivity of
the market value of a bond portfolio to changes in interest rates. If interest
rates increase, the market value of existing bonds will decline. During periods
when market interest rates decline, such as 2001, 2002, and 2003, the market
value of existing bonds increases. Typically, the longer the duration, the
greater the sensitivity of the value of the bond portfolio to changes in
interest rates. Duration of less than 3 years is generally regarded as short
term.
We hold bonds issued by the U.S. Treasury and government-sponsored
enterprises (e.g., Freddie Mac and FNMA) only to the extent required for capital
under state insurance codes, or as required for deposits or collateral with
state regulators. Otherwise, the bond portfolios consist almost entirely of
investment-grade corporate issues with 10 or less years to maturity. As of
December 31, 2003, none of our bond holdings had declined significantly from
cost. We do not own any municipal bonds, and did not own any corporate bonds in
the telecommunications, technology, utilities, energy trading, automotive, and
consumer finance sectors, or conglomerates which experienced difficulties in
recent years.
The equities component of the insurance company portfolios is
concentrated on a limited number of asset-rich small-capitalization value stocks
in the U.S. These positions have been accumulated at a significant discount to
our estimate of the private market value of each company's underlying "hard"
assets (i.e., land and other tangible assets). The insurance company portfolios
also have a degree of international diversification through holdings of
small-capitalization value stocks in New Zealand and Australia, and selected
large-capitalization resource stocks with world class mining operations in
foreign countries. Dividends and realized gains or losses from stocks held in
the insurance company portfolios are reported in the Insurance Operations in Run
Off segment.
In 2003, we estimate that the total return on the fixed-income
securities and unaffiliated common stocks in Citation's portfolio was
approximately 19.6%, including better than 40% for the stocks component (40.7%
of the portfolio at December 31, 2003.) We estimate that the total return on the
fixed-income securities and unaffiliated common stocks in Physicians' portfolio
was approximately 21.5% in 2003, including better than 39% for the stocks
component (53.7% of the portfolio at December 31, 2003.)
The investment income, and therefore revenue, of a "run off" insurance
company is expected to decline over time as fixed-income investments mature or
are sold to provide the funds to pay down the company's claims reserves. Unless
there is adverse development in prior year loss reserves, typically the expenses
of an insurance company in "run off" will be lower than the expenses of an
insurance company which is actively writing business.
The financial results of insurance companies in "run off" can be
volatile if there is favorable or unfavorable development in the loss reserves.
Physicians recorded significant income from favorable reserve development in
2001 and 2003; however, Citation recorded a significant loss in 2003, partly due
to increases in the workers' compensation and property and casualty insurance
loss reserves.
30
PHYSICIANS INSURANCE COMPANY OF OHIO
Physicians wrote its last policy in 1995; however, claims can be filed
until 2017 resulting from events allegedly occurring during the period when
Physicians provided coverage.
By its nature, medical professional liability insurance involves a
relatively small number (frequency) of relatively large (severity) claims. We
have purchased excess of loss reinsurance to limit our potential losses. The
amount of risk we have retained on each claim varies depending on the accident
year but, in general, we are liable for the first $1 million to $2 million per
claim.
Due to the long "tail" (i.e., period of time between the occurrence of
the alleged event giving rise to the claim, and the claim being reported to us)
in the medical professional liability insurance business, it is difficult to
accurately quantify future claims liabilities and establish appropriate loss
reserves. Our loss reserves, which are reviewed by management every quarter and
are assessed in the fourth quarter of each year, based on independent actuarial
analysis of past, current, and projected claims trends in the 12 months ended
September 30 of each year.
At December 31, 2003, medical professional liability reserves totaled
$19.6 million, net of reinsurance, compared to $30.3 million net of reinsurance
at December 31, 2002, and $34.9 million net of reinsurance at December 31, 2001.
PHYSICIANS INSURANCE COMPANY OF OHIO -- LOSS AND LOSS ADJUSTMENT
EXPENSE RESERVES
Year Ended December 31,
---------------------------------------------------
2003 2002 2001
-------------- -------------- --------------
Direct Reserves $ 23.6 million $ 36.4 million $ 40.6 million
Ceded Reserves (4.0) (6.1) (5.7)
-------------- -------------- --------------
Net Medical Professional Liability Insurance Reserves $ 19.6 million $ 30.3 million $ 34.9 million
============== ============== ==============
At December 31, 2003, our direct reserves, or reserves before
reinsurance, essentially equaled the independent actuary's best estimate. The
independent actuary is continually reviewing our claims experience and projected
claims trends in order to arrive at the most accurate estimate possible. The
independent actuary did not explicitly forecast a range of reserves, but arrived
at a best estimate through weighting the results of five different projection
methods for each accident year, and in total. Under the different projection
methods, the lowest direct reserve calculation was approximately $15.3 million,
and the highest direct reserve calculation was $23.1 million. Consequently, our
loss reserves could be materially different depending on the particular method
of calculation chosen.
Changes in assumptions about future claim trends, and the cost of
handling claims, could lead to significant increases and decreases in our loss
reserves. When loss reserves are reduced, this is referred to as favorable
development. If loss reserves are increased, the development is referred to as
adverse or unfavorable.
At December 31, 2003, approximately $7.8 million, or 33% of our direct
reserves were case reserves, which are the loss reserves established when a
claim is reported to us. Our provision for incurred but not reported claims
("IBNR" i.e., the event giving rise to the claim has allegedly occurred, but the
claim has not been reported to us) were $9.9 million, or 42% of our direct
reserves. The loss adjustment expense reserves, totaling $5.9 million, or 25% of
direct reserves, recognize the cost of handling claims over the next 13 years
while the Physicians loss reserves run off.
31
Over the past 3 years, the trends in open claims and claims paid have
been:
Year Ended December 31,
------------------------------------
2003 2002 2001
---------- ---------- ----------
Open claims at the start of the year 144 179 252
New claims reported during the year 22 24 37
Claims closed during the year -98 -59 -110
---------- ---------- ----------
Open claims at the end of the year 68 144 179
========== ========== ==========
Total claims closed during the year 98 59 110
Claims closed with no indemnity payment -91 -36 -87
---------- ---------- ----------
Claims closed with an indemnity payment 7 23 23
Net indemnity payments $3,048,000 $2,473,000 $4,142,000
Net loss adjustment expense payments 912,000 1,072,000 1,947,000
---------- ---------- ----------
Total claims payments during the year $3,960,000 $3,545,000 $6,089,000
========== ========== ==========
Average indemnity payment $ 435,000 $ 108,000 $ 180,000
PHYSICIANS INSURANCE COMPANY OF OHIO - CHANGE IN LOSS AND LOSS ADJUSTMENT
EXPENSE RESERVES
Year Ended December 31,
-----------------------------------------------
2003 2002 2001
-------------- -------------- --------------
Beginning Reserves $ 30.3 million $ 34.9 million $ 51.6 million
Loss & Loss Adjustment Expense Payments (4.0) (3.6) (6.1)
Re-estimation of Prior Year Loss Reserves (6.7) (1.0) (10.6)
-------------- -------------- --------------
Net Medical Professional Liability Insurance Reserves $ 19.6 million $ 30.3 million $ 34.9 million
============== ============== ==============
-------------- -------------- --------------
Re-estimation as a percentage of undiscounted beginning reserves -22.1 -2.9 -20.6
============== ============== ==============
During 2003, our medical professional liability insurance claims
reserves, net of reinsurance, decreased by $10.7 million, from $30.3 million to
$19.6 million. Claims and loss adjustment expense payments for the year were
approximately $4 million, accounting for 37% of the net decrease in reserves.
During 2003, Physicians continued to experience favorable trends in the
"severity" (size) of claims, and, to a lesser extent, the "frequency" (number)
of claims. Consequently, independent actuarial analysis of Physicians' loss
reserves concluded that Physicians' reserves against claims were significantly
greater than the actuary's projections of future claims payments. Reserves were
reduced in all of Physicians' 20 accident years from 1976 until 1996, resulting
in a net reduction of approximately $6.7 million, or 22.1% of reserves at the
start of the year.
The net reduction in reserves of approximately $6.7 million was
primarily due to a decrease in claims severity; Physicians reduced its reserve
for IBNR claims by approximately $6.9 million, which was partially offset by a
$218,000 increase in the provision for unallocated loss adjustment expense which
effectively recognizes the cost of handling Physicians' claims over the
remaining run off.
As shown in the table above, in 2003 Physicians made $3 million in net
indemnity payments to close 7 cases, an average indemnity payment of $435,000
per case. Although total claims payments in 2003 were less than anticipated, the
average indemnity payment is higher than in recent years due to the mix of cases
closed in 2003. We are projecting a decrease in severity in future years -- at
December 31, 2003, the average case reserve per open claim was approximately
$115,000.
There were no changes in key actuarial assumption in 2003. It should be
noted that such actuarial analyses involves estimation of future trends in many
factors which may vary significantly from expectation, which could lead to
further reserve adjustments -- either increases or decreases -- in future years.
See "Critical Accounting Policies" and "Risk Factors."
During 2002, our medical professional liability insurance claims
reserves, net of reinsurance, decreased $3.6 million, from $34.9 million to
$30.3 million. Loss and loss adjustment expense payments for the year were
approximately $3.6 million, accounting for 78% of the net decrease in reserves
during 2002. Due to continued favorable trends in the "severity" (size) of
claims, and, to a lesser extent, the "frequency" (number) of claims, independent
actuarial analysis of Physicians' loss reserves concluded that Physicians'
reserves against claims were greater than the actuary's projections of future
claims payments. Reserves were increased in 10 of Physicians' 20 accident years
from 1976 until 1996 (by $3.4 million), and reduced in the other 10 accident
years (by $4.4 million),
32
resulting in a net reduction of approximately $1 million, or 2.9% of reserves at
the start of the year. There were no changes in key actuarial assumption in
2002.
During 2001, our medical professional liability insurance claims
reserves, net of reinsurance, decreased $16.7 million, from $51.6 million to
$34.9 million. Loss and loss adjustment expense payments for the year were $6.1
million, accounting for 36% of the net decrease in reserves during 2001.
Actuarial analysis of Physicians' loss reserves concluded that Physicians'
reserves against claims were significantly greater than the actuary's
projections of future claims payments in 18 of 20 accident years, due to
favorable trends in both the "frequency" and "severity" of claims. Consequently,
Physicians reduced its reserve for IBNR claims by approximately $10.6 million,
which accounted for the remaining 64% of the net decrease in reserves for the
year.
There was a change in a key actuarial assumption in 2001: when
estimating the reserves required for losses greater than $200,000 per claim, the
independent actuary began to use Physicians' own claims experience, rather than
industry averages. Since Physicians' own experience had been less severe than
the industry averages, the actuary reduced the reserves required for losses in
excess of $200,000 per claim, which contributed to the reduction in reserves. In
reaching the best estimate, the appointed actuary also took note of both a
decrease in the number of open claims, and favorable development in known claims
during 2001.
Since it is almost eight years since Physicians wrote its last policy,
and the direct IBNR claims reserve at December 31, 2003 is $15.2 million ($9.9
million net of reinsurance), it is conceivable that further favorable
development could be recorded in future years if claims trends remain favorable,
particularly claims severity. However, given that favorable development of $6.7
million was recognized in 2003, there is less potential for favorable
development in future years than there has been in the past. In addition, we
caution (1) that claims can be reported until 2017, and (2) against
over-emphasizing claims count statistics -- for example, the last claims to be
resolved by a "run off" insurance company could be the most complex and the most
severe.
CITATION INSURANCE COMPANY
PROPERTY AND CASUALTY INSURANCE LOSS RESERVES
Citation went into "run off" from January 1, 2001. At December 31,
2003, after three years of "run off," Citation had $13.3 million in property and
casualty insurance loss and loss adjustment expense reserves, after reinsurance.
Approximately 97% of Citation's net property and casualty insurance
reserves are related to one line of business, artisans/contractors liability
insurance. The remaining 3% is comprised of commercial property and casualty
insurance policies all of which expired in 2001. As a general rule, based on
state statutes of limitations, we believe that no new commercial property and
casualty insurance claims can be filed in California and Arizona. However, in
certain limited circumstances, claims filing periods may be extended.
We have purchased excess of loss reinsurance to limit our potential
losses. The amount of risk we have retained on each claim varies depending on
the accident year, but we can be liable for the first $50,000 to $250,000 per
claim.
Citation wrote artisans/contractors insurance until 1995, the year
before Physicians merged with Citation's parent company. No artisans/contractors
business was renewed after the merger. Artisans/contractors liability insurance
has been a problematic line of business for all insurers who offered this type
of coverage in California during the 1980's and 1990's. California experienced a
severe recession in the early 1990's, which caused a steep downturn in real
estate values. In an attempt to improve their position, many homeowners filed
claims against developers of new home communities and condominiums, and related
parties such as general contractors, 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%. The nature of this line of business is that we
receive a large number (high frequency) of small (low severity) claims.
Citation primarily insured subcontractors, and only rarely insured
general contractors. A large percentage of the claims received in 2002 and 2003
related to Additional Insured Endorsements ("AIE"). In general, these represent
claims from general contractors who were not direct policyholders of Citation's,
but were named as insureds on policies issued to Citation's subcontractor
policyholders. Most of Citation's subcontractor insureds are not initially named
as defendants in construction defect law suits, but are drawn into litigation
against general contractors, typically when the general contractor's legal
expenses reach the limit of their own insurance policy. The courts have held
that subcontractors who performed only a minor role in the construction can be
held in on complicated litigation against general contractors. Accordingly, the
cost of legal defenses can be as significant as claims payments. Typically, AEI
claims are shared among more than one subcontractor and more than one insurance
carrier. This reduces the expense to any one carrier, so AEI claims typically
involve smaller claims payments than claims from actual policyholders.
33
Although Citation wrote its last artisans/contractors policy in 1995
and the statute of limitations in California is 10 years, this can be extended
in some situations.
Over the past 3 years, the trends in open claims and claims paid in the
artisans/contractors line of business has been:
Year Ended December 31,
-----------------------
2003 2002 2001
---- ---- ----
Open claims at the start of the year 290 303 341
New claims reported during the year 290 227 197
Claims closed during the year -263 -240 -235
---- ---- ----
Open claims at the end of the year 317 290 303
==== ==== ====
Total claims closed during the year 263 240 235
Claims closed with no payment -106 -90 -71
Claims closed with LAE payment only (no indemnity payment) -40 -40 -49
---- ---- ----
Claims closed with an indemnity payment 117 110 115
==== ==== ====
Due to the long "tail" (i.e., period between the occurrence of the
alleged event giving rise to the claim and the claim being reported to us) in
the artisans/contractors line of business, it is difficult to accurately
quantify future claims liabilities and establish appropriate loss reserves. Our
loss reserves are reviewed at September 30 and December 31 of each year by an
independent actuary who issues an opinion annually, as required by California
state law. The independent actuary analyzes past, current, and projected claims
trends for all active accident years, using several forecasting methods. The
appointed actuary believes this will result in more accurate reserve estimates
than using a single method. We typically book our reserves to the actuary's best
estimate, or above the actuary's best estimate.
Changes in assumptions about future claim trends and the cost of
handling claims can lead to significant increases and decreases in our loss
property and casualty reserves. Due to the large number of claims received in
the artisans/contractors line of business in 1997, 1998, and 1999, Citation was
forced to increase its reserves in each of those years. Citation reduced claims
reserves (net of reinsurance) by $282,000 in 2000, but increased reserves by
$56,000 in 2001. In both cases, the reserve changes were less than 1% of
beginning reserves. In 2002, primarily due to reduced severity of claims as
described in preceding paragraphs, Citation reduced reserves by $889,000,
representing a 4.6% change in beginning reserves. However, in 2003 Citation
increased reserves by $847,000, or 5.8% of beginning reserves, primarily due to
the increased number of new claims received (higher frequency).
There were no changes in key actuarial assumptions during 2001, 2002,
and 2003. See "Critical Accounting Policies" and "Risk Factors."
At December 31, 2003, Citation's net property and casualty reserves
were carried at $13.3 million, approximately $295,000 more than the actuary's
best estimate. Given the uncertainties inherent in projecting trends in loss
development, we elected to set higher reserves than the actuary's best estimate,
to partially guard against unexpected reserve increases in future years if
claims experience deteriorates.
CITATION INSURANCE COMPANY - PROPERTY & CASUALTY INSURANCE LOSS AND LOSS
ADJUSTMENT EXPENSE RESERVES
December 31, 2003 December 31, 2002 December 31, 2001
----------------- ----------------- -----------------
Direct Reserves $14.8 million $16.3 million $21.0 million
Ceded Reserves (1.5) (1.7) (1.8)
------------- ------------- -------------
Net Reserves $13.3 million $14.6 million $19.2 million
============= ============= =============
At December 31, 2003, $2.8 million of Citation's net property and
casualty reserves (approximately 21%) were case reserves, $3.8 million
represented provision for IBNR claims (29%), and the unallocated loss adjustment
expense reserve was $6.7 million (50%).
34
The change in Citation's reserves over the past 3 years has resulted
from:
CITATION INSURANCE COMPANY - CHANGE IN PROPERTY & CASUALTY INSURANCE LOSS
AND LOSS ADJUSTMENT EXPENSE RESERVES
Year Ended December 31,
----------------------------------------------------
2003 2002 2001
------------- ------------- -------------
Beginning Reserves $14.6 million $19.2 million $23.4 million
Loss & Loss Adjustment Expense Payments (2.2) (3.7) (4.5)
Incurred Loss & Loss Adjustment Expense Payments For Current Year 0.2
Re-estimation of Prior Year Loss Reserves 0.9 (0.9) 0.1
------------- ------------- -------------
Net Property & Casualty Insurance Reserves $13.3 million $14.6 million $19.2 million
============= ============= =============
------------- ------------- -------------
Re-estimation as a percentage of beginning reserves +5.8% -4.6% +0.2%
============= ============= =============
During 2003, Citation's property and casualty insurance claims
reserves, net of reinsurance, decreased from $14.6 million to $13.3 million.
Claims payments for the year were $2.2 million. Following actuarial analysis
during 2003, Citation increased loss reserves by $847,000 due to adverse
development in the artisans/contractors book of business resulting from an
increased frequency of new claims.
During 2002, Citation's property and casualty insurance claims
reserves, net of reinsurance, decreased from $19.2 million to $14.6 million.
Claims payments for the year were $3.7 million, accounting for approximately 80%
of the net decrease in reserves during 2002. Actuarial analysis of Citations'
loss reserves as of December 31, 2002 showed a redundancy in the carried
reserves of Citation, which we reduced during 2002 by $889,000. The reserve
redundancy reflected a reduction in the "severity" (size) of claims.
During 2001, Citation's property and casualty insurance claims
reserves, net of reinsurance, decreased from $23.4 million to $19.2 million.
Claims payments for prior years reduced reserves by $4.5 million, and
essentially accounted for the net reduction in reserves for the year. This was
partially offset by $172,000 in incurred loss and loss adjustment expenses for
the 2001 accident year. A $56,000 increase in prior year loss reserves was
recorded.
It should be noted that such actuarial analyses involves estimation of
future trends in many factors which may vary significantly from expectation,
which could lead to further reserve adjustments -- either increases or decreases
- -- in future years.
WORKERS' COMPENSATION LOSS RESERVES
Until 1997, Citation was a direct writer of workers' compensation
insurance in California, Arizona, and Nevada. In 1997, Citation reinsured 100%
of its workers' compensation business with a subsidiary, Citation National
Insurance Company ("CNIC"), and sold CNIC to Fremont Indemnity Company
("Fremont"). As part of the sale of CNIC, all assets and liabilities, including
the assets which corresponded to the workers' compensation reserves reinsured
with CNIC, and all records, computer systems, policy files, and reinsurance
arrangements were transferred to Fremont. Fremont merged CNIC into Fremont, and
administered and paid all of the workers' compensation claims which it had been
sold to it. Since 1997, Citation has booked the losses reported by Fremont but
recorded an equal and offsetting reinsurance recoverable from Fremont (as an
admitted reinsurer) for all losses and loss adjustment expenses. This resulted
in no net impact on Citation's reserves and financial statements.
On July 2, 2003, the California Superior Court placed Fremont in
liquidation. Since Fremont is in liquidation, it is no longer an admitted
reinsurance company under the statutory basis of insurance accounting.
Consequently, Citation reversed the reinsurance recoverable from Fremont of
approximately $7.5 million in its financial statements prepared on both the
statutory basis and GAAP basis in the three months ended June 30, 2003. Citation
is pursuing its rights to recover the reinsurance, and to recover deposits
reported as held by Fremont for Citation's insureds to utilize against the
workers' compensation claims obligations; however, the ultimate outcome cannot
be accurately predicted.
Workers' compensation has been a problematic line of business for all
insurers who offered this type of coverage in California during the 1990's. We
believe that this is primarily due to claims costs escalating at a greater than
anticipated rate, in particular for medical care.
The nature of this line of business is that we receive a relatively
small number (low frequency) of relatively large (high severity) claims.
Although the last of Citation's workers' compensation policies expired in 1998,
new workers' compensation claims can still be filed for events which allegedly
occurred during the term of the policy. The state statute of limitations is 10
years, but claims filing periods may be extended in some circumstances. At
December 31, 2003, Citation had 227 open workers' compensation claims. Few
35
new claims have been filed in the past 3 years. Since Citation ceased writing
workers' compensation coverage 6 years ago, most of the claims which are still
open tend to be severe, and likely to lead to claims payments for a prolonged
period of time.
At December 31, 2003, Citation had workers' compensation reserves of
$22.4 million before reinsurance, and $10.5 million after reinsurance. Citation
purchased excess reinsurance to limit its potential losses in this line of
business. In general, we have retained the risk on the first $150,000 to
$250,000 per claim. The workers' compensation reserves are reinsured with
General Reinsurance, a subsidiary of Berkshire Hathaway, Inc.
CITATION INSURANCE COMPANY - WORKERS' COMPENSATION LOSS AND LOSS ADJUSTMENT
EXPENSE RESERVES
December 31, 2003
Direct Reserves $ 22.4 million
Ceded Reserves (11.9)
--------------
Net Reserves $ 10.5 million
==============
It is difficult to accurately quantify future claims liabilities and
establish appropriate loss reserves in the workers' compensation line of
business due to:
- - the long "tail" (i.e., period between the occurrence of the alleged
event giving rise to the claim and the claim being reported to us); and
- - the extended period over which policy benefits are paid.
Our workers' compensation loss reserves were reviewed at September 30, 2003 and
December 31, 2003 by an independent actuary who issues an opinion annually, as
required by California state law. The independent actuary analyzes past,
current, and projected claims trends for all active accident years, using
several forecasting methods. The appointed actuary believes this will result in
more accurate reserve estimates than using a single method. Our reserves are
typically booked at close to the actuary's best estimate. In previous years, we
booked the direct reserves and an equal offsetting reinsurance recoverable based
on reports provided by Fremont.
Changes in assumptions about future trends in claims and the cost of
handling claims can lead to significant increases and decreases in our loss
reserves. When the Fremont reinsurance recoverable was reversed after Fremont
went into liquidation, our workers' compensation reserves were approximately
$7.5 million. Following independent actuarial analysis at September 30, 2003 and
December 31, 2003, Citation increased its workers' compensation loss reserves by
$3 million, or approximately 39.9% of the initial $7.5 million in reserves. This
adverse development was primarily as a result of setting reserves at a more
realistic level than Fremont had previously carried them based on management and
actuarial review and assessment of claims files after Fremont had been placed in
liquidation. There can be no assurance that our workers' compensation reserves
will not develop adversely in the future, particularly if medical care costs
continue to inflate.
The change in Citation's reserves during 2003 resulted from:
CITATION INSURANCE COMPANY - CHANGE IN WORKERS' COMPENSATION LOSS AND LOSS
ADJUSTMENT EXPENSE RESERVES
YEAR ENDED DECEMBER 31,
2003
Beginning Net Reserves $ 0.0 million
Reversal of reinsurance recoverable from Fremont 7.5
-------------
Adjusted Beginning Net Reserves $ 7.5 million
=============
Re-estimation of Prior Year Loss Reserves 3.0
--------------
Net Workers' Compensation Insurance Reserves $ 10.5 million
==============
--------------
Re-estimation as a percentage of adjusted beginning reserves +39.9%
==============
There were no changes in key actuarial assumptions during 2003. It
should be noted that such actuarial analyses involves estimation of future
trends in many factors which may vary significantly from expectation, which
could lead to further reserve adjustments -- either increases or decreases -- in
future years. See "Critical Accounting Policies" and "Risk Factors."
36
At December 31, 2003, Citation's net workers' compensation reserves
were carried at $10.5 million, approximately $254,000 below the actuary's best
estimate. Approximately $3.8 million of Citation's net workers' compensation
reserves (36%) were case reserves, $3.2 million represented provision for IBNR
claims (30%), and the unallocated loss adjustment expense reserve was $3.5
million (34%).
Currently, the workers' compensation claims are being handled by a
third-party administrator.
HYPERFEED TECHNOLOGIES
During 2003, HyperFeed continued to restructure operations, which
culminated in the sale of two business units:
- - in June 2003, HyperFeed sold its retail trading business, PCQuote.com,
for approximately $370,000; and
- - in November 2003, HyperFeed sold its consolidated market data feed
service contracts for $8.5 million. HyperFeed recorded a gain on the
sale of $6.6 million in 2003.
Through these disposals, HyperFeed exited two low margin businesses,
and replaced the business with revenues from providing products and services to
the purchasers. In addition, the sale of the businesses will reduce HyperFeed's
operating expenses, and receipt of the sale proceeds has strengthened the
balance sheet.
Now, HyperFeed is purely a developer and provider of software, ticker
plant technologies, and managed services to the financial markets industry. In a
November 13, 2003 press release, HyperFeed indicated that it expects to generate
long-term revenues from providing products and services to customers such as the
Chicago Board Options Exchange, Moneyline Telerate, and Interactive Data
Corporation. The release also indicated that, following the disposals HyperFeed
"expects to realize an $8.0 million annual reduction in overhead." At December
31, 2003, HyperFeed had $4.7 million in cash and cash equivalents.
For more detail on HyperFeed's operations, financial condition, and
prospects, please refer to HyperFeed's Annual Report on Form 10-K, which will be
filed with the SEC on or before March 15, 2004. The contents of HyperFeed's 10-K
are not incorporated into this 10-K.
CRITICAL ACCOUNTING POLICIES
PICO's principal assets and activities comprise:
- - Vidler and Nevada Land's land, water rights, and water storage
operations;
- - the "run off" of property and casualty insurance, workers'
compensation, and medical professional liability insurance loss
reserves; and
- - business acquisitions and financing.
Following is a description of what we believe to be the critical
accounting policies affecting PICO, and how we apply these policies.
1. ESTIMATION OF RESERVES IN INSURANCE COMPANIES
We must estimate future claims and ensure that our loss reserves are
adequate to pay those claims. This process requires us to make estimates about
future events. The accuracy of these estimates will not be known for many years.
For example, part of our claims reserves cover "IBNR" claims (i.e., the event
giving rise to the claim has occurred, but the claim has not been reported to
us). In other words, in the case of IBNR claims, we must provide for claims
which we do not know about yet.
At December 31, 2003, the loss reserves, net of reinsurance, of our two
insurance subsidiaries were:
- - Citation, $23.8 million; and
- - Physicians, $19.6 million. Physicians wrote its last policy in 1995.
However, under current law, claims can be made until 2017 for events
which allegedly occurred during the periods when we provided insurance
coverage to medical professionals.
Our medical professional liability insurance reserves are certified
annually by an independent actuary, as required by Ohio insurance law. Actuarial
estimates of our future claims obligations have been volatile. In 2003, there
was a $6.7 million reduction after independent actuarial studies concluded that
Physicians' claims reserves were greater than projected claims payments. In
2002,
37
there was a $1 million net reduction in claims reserves, and in 2001 we reduced
claims reserves by $10.6 million. There can be no assurance that our claims
reserves are adequate and that there will not be reserve increases or decreases
in the future.
As required by California insurance law, Citation's loss reserves are
reviewed quarterly, and certified annually, by an independent actuarial firm.
In addition, we have to make judgments about the recoverability of
reinsurance owed to us on direct claims reserves. In making this assessment, we
carefully review the creditworthiness of reinsurers, as well as relying on
schedules in statutory filings with state Departments of Insurance which show
separate deposits held as assets for the benefit of reinsureds.
As discussed on preceding pages in the "Insurance Operations in Run
Off" section of Item 7, during 2003 we booked a reversal of reinsurance
recoverable of approximately $7.5 million from Fremont Indemnity Company, as it
is uncertain whether we can recover the corresponding deposit assets in the
Fremont liquidation. If we cannot reach a satisfactory resolution, we plan to
take legal action against the California Department of Insurance, as we believe
that we have very strong arguments which could enable us to recover the deposit
assets. However, for accounting purposes, due to the inherent uncertainties in
attempting to recover the deposit assets in this situation, we have adopted a
prudent policy, consistent with the principles of our accounting policies, and
fully reserved against the reinsurance recoverable from Fremont related to the
workers' compensation claims reserves.
See "Insurance Operations In Run Off" and "Regulatory Insurance
Disclosure" in Item 7.
2. CARRYING VALUE OF LONG-LIVED ASSETS
Our principal long-lived assets are land, water rights, and interests
in water storage operations owned by Vidler, and land at Nevada Land. At
December 31, 2003, the total carrying value of land, water rights, and interests
in water storage assets was $112.3 million, or 33.9% of PICO's total assets.
As required by GAAP, our long-lived assets are reviewed regularly to
ensure that the estimated future undiscounted cash flows from these assets will
at least recover their carrying value. Our management conducts these reviews
utilizing the most recent information available; however, the review process
inevitably involves the significant use of estimates and assumptions, especially
the estimated market values of our real estate and water assets.
In our water rights and water storage business, we develop some
projects and assets from scratch. This can require cash outflows (e.g., to drill
wells to prove that water is available) in situations where there is no
guarantee that the project will ultimately be commercially viable. If we
determine that it is probable that the project will be commercially viable, the
costs of developing the asset are capitalized (i.e., recorded as an asset in our
balance sheet, rather than being charged as an expense). If the project ends up
being viable, in the case of a sale, the capitalized costs are included in the
cost of land and water rights sold and applied against the purchase price. In
the case of a lease transaction or when the asset is fully developed and ready
for use, the capitalized costs are amortized (i.e., charged as an expense in our
income statement) and match any related revenues.
If we determine that the carrying value of an asset cannot be justified
by the forecast future cash flows of that asset, the carrying value of the asset
is written down to fair value immediately,in accordance with Statement of
Financial Accounting Standards No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets."
3. ACCOUNTING FOR INVESTMENTS AND INVESTMENTS IN UNCONSOLIDATED
AFFILIATES
At December 31, 2003, PICO and its subsidiaries held equities with a
carrying value of approximately $96.3 million. These holdings are primarily
small-capitalization value stocks listed in the U.S., Switzerland, Australia,
and New Zealand. Depending on the circumstances, and our judgment about the
level of our involvement with the investee company, we apply one of two
accounting policies.
In the case of most holdings, we apply Statement of Financial
Accounting Standards ("SFAS") No. 115, "Accounting for Certain Investments in
Debt and Equity Securities." Under this method, the investment is carried at
market value in our balance sheet, with unrealized gains or losses being
included in shareholders' equity, and the only income recorded being from
dividends.
In the case of investments where we have the ability to exercise
significant influence over the company we have invested in, we apply the equity
method under Accounting Principles Board ("APB") Opinion No. 18, "The Equity
Method of Accounting for Investments in Common Stock."
38
The application of the equity method (APB No. 18) to an investment may
result in a different outcome in our financial statements than market value
accounting (SFAS No. 115). The most significant difference between the two
policies is that, under the equity method, we include our proportionate share of
the investee's earnings or losses in our statement of operations, and dividends
received are used to reduce the carrying value of the investment in our balance
sheet. Under market value accounting, the only income recorded is from
dividends.
The assessment of what constitutes the ability to exercise "significant
influence" requires our management to make significant judgments. We look at
various factors in making this determination. These include our percentage
ownership of voting stock, whether or not we have representation on the investee
company's Board of Directors, transactions between us and the investee, the
ability to obtain timely quarterly financial information, and whether PICO
management can affect the operating and financial policies of the investee
company. When we conclude that we have this kind of influence, we adopt the
equity method and change all of our previously reported results from the
investee to show the investment as if we had applied equity accounting from the
date of our first purchase. This adds volatility to our reported results.
The use of market value accounting or the equity method can result in
significantly different carrying values at specific balance sheet dates, and
contributions to our statement of operations in any individual year during the
course of the investment. The total impact of the investment on PICO's
shareholders' equity over the entire life of the investment will be the same
whichever method is adopted.
For equity and debt securities accounted for under SFAS No. 115 which
are in an unrealized loss position in local currency terms, we regularly review
whether the decline in market value is other-than-temporary. In general, this
review requires management to consider several factors, including specific
adverse conditions affecting the investee's business and industry, the financial
condition of the investee, the long-term prospects of the investee, and the
extent and duration of the decline in market value of the investee. Accordingly,
management has to make important assumptions regarding our intent and ability to
hold the security, and our assessment of the overall worth of the security.
Risks and uncertainties in our methodology for reviewing unrealized losses for
other-than-temporary declines include our judgments regarding the overall worth
of the issuer and its long-term prospects, and our ability to realize on our
assessment of the overall worth of the business.
In a subsequent quarterly review, if we conclude that an unrealized
loss previously determined to be temporary is other-than-temporary, an
impairment loss will be recorded. The other-than-temporary impairment charge
will have no impact on shareholders' equity or book value per share, as the
decline in market value will already have been recorded through shareholders'
equity. However, there will be an impact on income before and after tax and on
our reported earnings per share, due to recognition of the unrealized loss and
related tax effects. When a charge for other-than-temporary impairment is
recorded, our basis in the security is decreased. Consequently, if the market
value of the security later recovers and we sell the security, a correspondingly
greater gain will be recorded in the statement of operations.
These accounting treatments add volatility to our statements of
operations.
4. REVENUE RECOGNITION
We recognize revenue on the sale of land, water, and water rights based
on the guidance of FASB 66. Specifically we recognize revenue when:
(a) there is a legally binding sale contract;
(b) the profit is determinable (i.e., the collectability of the sales price
is reasonably assured, or any amount that will not be collectable can
be estimated);
(c) the earnings process is virtually complete (i.e., we are not obliged to
perform significant activities after the sale to earn the profit,
meaning we have transferred all risks and rewards to the buyer); and
(d) the buyer's initial and continuing investment are sufficient to
demonstrate a commitment to pay for the property.
If any of these conditions are not met, we use the deposit method of
accounting. Under the deposit method of accounting, until the conditions to
fully recognize a sale are met, payments received from the buyer are recorded as
liabilities and no gain is recognized.
39
RESULTS OF OPERATIONS -- YEARS ENDED DECEMBER 31, 2003, 2002, AND 2001
SHAREHOLDERS' EQUITY
At December 31, 2003, PICO had shareholders' equity of $229.2 million
($18.52 per share), compared to $221 million ($17.86 per share) at the end of
2002, and $207.9 million ($16.81 per share) at the end of 2001. Book value per
share increased 3.7% in 2003, and 6.2% in 2002.
The principal factors leading to the $8.2 million increase in
shareholders' equity during 2003 were the net increases of $10.9 million in
unrealized appreciation in investments and $570,000 in foreign currency
translation. These factors were partially offset by the $3.2 million net loss
and a $83,000 increase in treasury stock due to the purchase of PICO shares in
deferred compensation plans for directors.
BALANCE SHEET
Total assets at December 31, 2003 were $330.9 million, compared to
$396.2 million at December 31, 2002. During 2003, total assets decreased by
$65.3 million and total liabilities decreased by $76.2 million, primarily due to
the sale of Sequoia during 2003. At December 31, 2002, our balance sheet
included $130.6 million in assets and $93.2 million of liabilities related to
Sequoia.
The most notable change on the asset side of the balance sheet is an
increase in equity securities from $47.4 million at December 31, 2002, to $96.3
million at December 31, 2003. If the equity securities held by Sequoia (which
were transferred to Physicians as part of the sale of Sequoia) are included in
the 2002 total, equity securities increased from $60.8 million to $96.3 million
during 2003. Approximately 65% of the $35.5 million adjusted year over year
increase is attributable to an increase in the market value of equity securities
during 2003, and the balance is due to net additions to the stock portfolios
(i.e., new purchases less sales.)
As discussed in the preceding Insurance Operations In Run Off section
of Item 7, "Management's Discussion and Analysis of Financial Condition and
Results of Operations," the unpaid losses and loss adjustment expenses of
continuing operations increased by $8.2 million year over year. The net increase
was primarily due to the reversal of the Fremont reinsurance recoverable and
adverse development in Citation's property and casualty insurance claims
reserves and workers' compensation reserves, which more than offset reductions
in reserves due to favorable development at Physicians and claims payments
during 2003.
At December 31, 2003, on a consolidated basis, available for sale
equity securities showed a net unrealized gain of $20.1 million after tax. This
total consists of approximately $20.3 million in gains, partially offset by
$192,000 in losses. No individual equity security had an unrealized loss, net of
tax, of more than $95,000.
NET INCOME
PICO reported a net loss of $3.2 million, or $0.26 per diluted share in
2003, compared with net income of $5.9 million, or $0.48 per diluted share in
2002, and net income of $5.1 million, or $0.41 per diluted share, in 2001.
2003
The net loss of $3.2 million, or $0.26 per share, consisted of:
- - a $13.9 million loss before taxes and minority interest from continuing
operations; and
- - the deduction of $1 million in minority interest, which reflects the
interest of outside shareholders in the net income of subsidiaries
which are less than 100%-owned by PICO; partially offset by
- - a $1.2 million income tax benefit; and
- - income from discontinued operations of $10.5 million after tax.
The $1.2 million tax benefit for 2003 consists of several items, which
are detailed in Note 7 of Notes to the Consolidated Financial Statements,
"Federal, Foreign and State Income Tax."
2002
The $5.9 million net income reported in 2002 consisted of $3.9 million
net income before a change in accounting principle, or $0.32 per share, and a
change in accounting principle which increased income by $2 million after-tax,
or $0.16 per share. From January 1, 2002, PICO adopted Statement of Financial
Accounting Standards No. 142, "Goodwill and Intangible Assets," which requires
that goodwill and intangible assets with indefinite lives be tested for
impairment annually rather than amortized over time. The $2 million in net
income recognized reflected the surplus of negative goodwill arising from the
1996 reverse merger of Physicians
40
and Citation Insurance Group (now known as PICO Holdings, Inc.) over the
write-off of goodwill items which were determined to be impaired. See Note 20 of
Notes to Consolidated Financial Statements, "Cumulative Effect of Changes in
Accounting Principle."
The $3.9 million in net income before a change in accounting principle
was comprised of:
- - income of $2.7 million before taxes and minority interest from
continuing operations;
- - a $2 million income tax expense;
- - the addition of $454,000 in minority interest; and
- - income from discontinued operations of $2.8 million after tax and a
change in accounting principle.
2001
In 2001, PICO generated $5.1 million in net income, consisting of $6.1
million in net income before a change in accounting principle, or $0.49 per
share, and a change in accounting principle which reduced income by $981,000
after-tax, or $0.08 per share. The change in accounting principle resulted from
the adoption of the Statement of Financial Accounting Standards No. 133,
"Accounting for Derivative Instruments and Hedging Activities." This non-cash
charge recognized the accumulated after-tax decline in the estimated fair value
of warrants we own to buy shares in other companies (principally HyperFeed) from
the date we acquired the warrants through to January 1, 2001.
The $6.1 million in net income before a change in accounting principle was
comprised of:
- - $5.8 million in income before taxes and minority interest;
- - a $2.4 million provision for income tax expense;
- - the addition of $358,000 in minority interest; and
- - income from discontinued operations of $2.3 million after-tax.
COMPREHENSIVE INCOME
In accordance with Statement of Financial Accounting Standards No. 130,
"Reporting Comprehensive Income," PICO reports comprehensive income as well as
net income from the Consolidated Statement of Operations. Comprehensive income
measures changes in shareholders' equity, and includes unrealized items which
are not recorded in the Consolidated Statement of Operations, for example,
foreign currency translation and the change in investment gains and losses on
available-for-sale securities.
Over the past three years, PICO has recorded:
- - comprehensive income of $8.2 million in 2003, primarily consisting of
net increases of $10.9 million in net unrealized appreciation in
investments and $570,000 in foreign currency translation, which were
partially offset by the $3.2 million net loss;
- - comprehensive income of $13 million in 2002, primarily consisting of
the $5.9 million net income and movements of $4.5 million in net
unrealized appreciation in investments and $2.6 million in foreign
currency translation; and
- - comprehensive income of $6.1 million in 2001, consisting of net income
of $5.1 million and a movement of $1.9 million in net unrealized
appreciation in investments, which were partially offset by a $955,000
reduction in foreign currency translation.
OPERATING REVENUES
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------
2003 2002 2001
----------- ----------- -----------
Vidler Water Company $16,816,000 $13,777,000 $17,964,000
Nevada Land & Resource Company 5,889,000 4,414,000 3,221,000
Business Acquisitions and Financing 5,549,000 8,458,000 (3,662,000)
Insurance Operations in Run Off 3,245,000 2,625,000 6,037,000
HyperFeed Technologies 1,379,000
----------- ----------- -----------
Total Revenues $32,878,000 $29,274,000 $23,560,000
=========== =========== ===========
In 2003, total revenues were $32.9 million, compared to $29.3 million
in 2002, and $23.6 million in 2001. Revenues increased by $3.6 million year over
year in 2003, and by $5.7 million year over year in 2002.
Total expenses in 2003 were $46.2 million, compared to $24.4 million in
2002, and $16.2 million in 2001. The largest expense item in each of the past
three years was the cost of land and water rights sold -- $12.6 million in 2003,
compared to $9.7 million in 2002, and $7.6 million in 2001. As detailed in the
following individual segment analyses, the increase in expenses in 2003 from
2002 is primarily attributable to the reserve increases at Citation, the
adoption of the PICO Holdings, Inc. 2003 SAR Program, and the consolidation of
HyperFeed.
41
INCOME (LOSS) BEFORE TAXES AND MINORITY INTEREST
YEAR ENDED DECEMBER 31,
--------------------------------------------
2003 2002 2001
------------ ------------ ------------
Vidler Water Company $ (543,000) $ (897,000) $ 4,989,000
Nevada Land & Resource Company 2,004,000 484,000 131,000
Business Acquisitions and Financing (8,112,000) (1,181,000) (15,288,000)
Insurance Operations in Run Off (2,902,000) 4,300,000 15,996,000
HyperFeed Technologies (4,340,000)
------------ ------------ ------------
Income (Loss) Before Taxes and Minority Interest $(13,893,000) $ 2,706,000 $ 5,828,000
============ ============ ============
The principal items in the $13.9 million loss before taxes and minority
interest in 2003 were:
- - Vidler incurred a $543,000 loss on $16.8 million in revenues. Vidler
closed on two significant sales of land and related assets in Nevada,
which generated $14.8 million in revenues and $4.6 million in gross
margin. The gross margin on these land sales was more than offset by
Vidler's on-going operating expenses and the costs of developing water
assets which will not be monetized until future years;
- - income of $2 million from Nevada Land on revenues of $5.9 million,
which included $4.4 million from the sale of land and water rights;
- - an $8.1 million loss from Business Acquisitions and Financing. This
primarily represented $1.7 million in gains on the sale of two stocks,
which was more than offset by segment expenses, including a $6 million
charge from the PICO Holdings, Inc. SAR Program, which replaced the
previous option programs;
- - a $2.9 million loss from Insurance Operations in Run Off, consisting of
an $7.3 million profit from Physicians and a $10.2 million loss from
Citation; and
- - a $4.3 million loss from the continuing operations of HyperFeed.
VIDLER WATER COMPANY, INC.
YEAR ENDED DECEMBER 31,
--------------------------------------------
2003 2002 2001
------------ ------------ ------------
REVENUES:
Sale of Land, Water Rights, & Water $ 15,360,000 $ 12,118,000 $ 9,487,000
Gain on Sale of Semitropic Water Storage interests 5,701,000
Lease of Agricultural Land 703,000 690,000 795,000
Other 753,000 969,000 1,981,000
------------ ------------ ------------
Segment Total Revenues $ 16,816,000 $ 13,777,000 $ 17,964,000
============ ============ ============
EXPENSES:
Cost of Land, Water Rights, & Water Sold (10,681,000) (8,465,000) (6,796,000)
Commission and Other Cost of Sales (601,000) (515,000) (553,000)
Depreciation & Amortization (1,020,000) (953,000) (1,285,000)
Interest (431,000) (496,000) (646,000)
Operations, Maintenance & Other (4,626,000) (4,245,000) (3,695,000)
------------ ------------ ------------
Segment Total Expenses $(17,359,000) $(14,674,000) $(12,975,000)
============ ============ ============
------------ ------------ ------------
INCOME (LOSS) BEFORE TAX $ (543,000) $ (897,000) $ 4,989,000
============ ============ ============
Since we entered the water resource business, the water rights and
water storage operations acquired by Vidler have been development-stage assets,
which were not ready for immediate commercial use. Although Vidler began to
generate significant revenues from the sale of water rights in 2001, the segment
is still incurring costs related to long-lived assets which will not generate
revenues until future years, e.g., operating, maintenance, and amortization
expenses at storage facilities which are not yet storing water for customers.
Vidler generated total revenues of $16.8 million in 2003, compared to
$13.8 million in 2002, and $18 million in 2001.
In 2003, Vidler generated $15.4 million in revenues from the sale of
water rights and land. This primarily represented two transactions, which
generated $14.8 million in revenues:
- - the sale of approximately 6,500 acres of land and the related water
rights near West Wendover, Nevada. This transaction added $12 million
to revenues and $4.1 million to gross margin; and
- - the sale of approximately 37,500 acres of land and the related water
rights at Big Springs Ranch in Elko County, Nevada. This transaction
added $2.8 million to revenues and $505,000 to gross margin.
42
In 2002, Vidler generated $12.1 million in revenues from the sale of
water rights and land. This primarily represented four transactions, which
generated $11.4 million in revenues:
- - the sale of 3,645 acre-feet of transferable ground water and 1,215
acres of land in the Harquahala Valley Irrigation District to golf
course developers near Scottsdale, Arizona. This transaction added $5.2
million to revenues and $1.9 million to gross margin;
- - the sale of 480 acre-feet of water rights and 240 acres of land in the
HVID to a unit of Allegheny Energy, Inc., which added $1 million to
revenues and $556,000 to gross margin; and
- - two sales of water rights in Colorado -- Cline Ranch to Centennial
Water and Sanitation District, which added $2.1 million to revenues and
$119,000 in gross margin, and 85 acre-feet of water rights to the City
of East Dillon, which added $3.1 million to revenues and $401,000 to
gross margin.
In 2001, Vidler's results were dominated by three transactions, which
generated $15.1 million in revenues:
- - the sale of 6,496.5 acre-feet of transferable ground water and 2,589
acres of land in Arizona's Harquahala Valley Irrigation District to a
unit of Allegheny Energy, Inc. This transaction added $9.4 million to
revenues and $2.3 million to gross margin;
- - the sale of 29.7% of Vidler's original interest in the Semitropic Water
Banking and Exchange Program (i.e., approximately 55,000 acre-feet of
storage capacity, out of the original 185,000 acre-feet) for $3.3
million. This transaction added $1.6 million to revenues and to gross
margin; and
- - another sale of 54.1% of Vidler's original interest in the Semitropic
Water Banking and Exchange Program (i.e., approximately 100,000
acre-feet of storage capacity) for $6.9 million. This transaction added
$4.1 million to revenues and to gross margin.
Other Revenues include lease income from water rights in Colorado,
interest, and various revenues from properties farmed by Vidler (e.g., sales of
hay and cattle). In 2001, Other Revenues included a $600,000 gain from granting
an easement to El Paso Natural Gas Company in the Harquahala Valley.
Total segment expenses, including the cost of water rights and other
assets sold, increased from $13 million in 2001, to $14.7 million in 2002, and
$17.4 million in 2003. However, excluding the cost of water rights and other
assets sold and related selling costs, segment operating expenses were $5.6
million in 2001, $5.7 million in 2002, and $6.1 million in 2003.
In 2003, segment operating expenses were $383,000 higher than in 2002,
principally due to a $381,000 increase in operations, maintenance, and other
expenses.
In 2002, segment operating expenses were $68,000 higher than in 2001.
Decreases of $150,000 in interest expense and $332,000 in depreciation and
amortization charges were offset by a $550,000 increase in operations,
maintenance, and other expenses.
Vidler recorded a segment loss of $543,000 in 2003, compared to a
segment loss of $897,000 in 2002, and segment income of $5 million in 2001.
The 2003 segment loss was $354,000 less than in 2002. The narrower loss
resulted from a $940,000 increase in the gross margin from the sale of land and
water rights, which was partially offset by a $203,000 decrease in other
revenues and a $383,000 increase in all other expenses.
The segment result decreased $5.9 million from 2001 to 2002, primarily
due to the $5.7 million in gains from the sale of interests in Semitropic
recorded in 2001, which did not recur in 2002.
NEVADA LAND & RESOURCE COMPANY, LLC
YEAR ENDED DECEMBER 31,
-----------------------------------------
2003 2002 2001
----------- ----------- -----------
REVENUES:
Sale of Land $ 4,141,000 $ 2,843,000 $ 1,918,000
Sale of Water Rights 250,000 270,000
Lease and Royalty 695,000 721,000 707,000
Interest and Other 803,000 580,000 596,000
----------- ----------- -----------
Segment Total Revenues $ 5,889,000 $ 4,414,000 $ 3,221,000
=========== =========== ===========
EXPENSES:
Cost of Land and Water Rights Sold (1,968,000) (1,275,000) (772,000)
Operating Expenses (1,917,000) (2,655,000) (2,318,000)
----------- ----------- -----------
Segment Total Expenses $(3,885,000) $(3,930,000) $(3,090,000)
=========== =========== ===========
----------- ----------- -----------
INCOME BEFORE TAX $ 2,004,000 $ 484,000 $ 131,000
=========== =========== ===========
43
Nevada Land generated revenues of $5.9 million in 2003, compared to
$4.4 million in 2002, and $3.2 million in 2001.
In each of the past 3 years, land sales have been the largest
contributor to revenues in this segment. The timing of land sales is
unpredictable, and historically the level of land sales has fluctuated from year
to year. In 2003, Nevada Land recorded revenues of $4.1 million from the sale of
75,131 acres of land. In 2002, Nevada Land generated revenues of $2.8 million
from the sale of 28,451 acres of land, compared to $1.9 million in revenues from
the sale of 15,632 acres of land in 2001. In some years, including 2002 and
2003, Nevada Land also generates revenues from the sale of water rights.
Lease and royalty income amounted to $695,000 in 2003, compared to
$721,000 in 2002, and $707,000 in 2001. Most of this revenue comes from land
leases, principally for grazing, agricultural, communications, and easements.
Interest and other revenues contributed $803,000 in 2003, compared to
$580,000 in 2002, and $596,000 in 2001.
After deducting the cost of land sold, the gross margin on land sales
was $2.2 million in 2003, $1.7 million in 2002, and $1.1 million in 2001. This
represented a gross margin percentage of 54.3% in 2003, 59.6% in 2002, and 59.8%
in 2001.
Segment operating expenses were $1.9 million in 2003, $2.7 million in
2002, and $2.3 million in 2001. Segment operating expenses returned to more
typical levels in 2003, after being unusually high in 2002 due to approximately
$900,000 in legal and related expenses related to land development issues.
Nevada Land recorded income of $2 million in 2003, compared to $484,000
in 2002 and $131,000 in 2001.
The $1.5 million increase in segment income from 2002 to 2003 is
principally attributable to a $553,000 increase in gross margin on land sales
year over year, and the unusually high expenses of approximately $900,000 in
2002, which did not recur in 2003. Segment income increased $353,000 from 2001
to 2002, primarily due to a $548,000 increase in gross margin on land sales year
over year.
BUSINESS ACQUISITIONS AND FINANCING
YEAR ENDED DECEMBER 31,
--------------------------------------------
2003 2002 2001
------------ ------------ ------------
BUSINESS ACQUISITIONS & FINANCING REVENUES (CHARGES):
Realized Gains (Losses):
On Sale or Impairment of Holdings $ 1,707,000 $ 3,419,000 $ (3,531,000)
SFAS No. 133 Change In Warrants 461,000 402,000 (2,453,000)
Investment Income 2,092,000 2,512,000 1,856,000
Other 1,289,000 2,125,000 466,000
------------ ------------ ------------
Segment Total Revenues (Charges) $ 5,549,000 $ 8,458,000 $ (3,662,000)
============ ============ ============
SEGMENT TOTAL EXPENSES (13,096,000) (7,431,000) (10,097,000)
------------ ------------ ------------
INCOME (LOSS) BEFORE INVESTEES' INCOME ( LOSS) $ (7,547,000) $ 1,027,000 $(13,759,000)
Equity Share of Investees' Net (Loss) (565,000) (2,208,000) (1,529,000)
------------ ------------ ------------
(LOSS) BEFORE TAXES $ (8,112,000) $ (1,181,000) $(15,288,000)
============ ============ ============
The Business Acquisitions and Financing segment recorded revenues of
$5.5 million in 2003, compared to $8.5 million in 2002, and negative $3.7
million in 2001. Revenues in this segment vary considerably from year to year,
primarily due to fluctuations in net realized gains or losses on the sale or
impairment of holdings. We do not sell holdings on a regular basis. A holding
may be sold if the price of a 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. In
addition, in this segment various income items relate to investments held during
that period, and since investments change over time, comparability from year to
year is limited.
In 2003, a net realized gain of $2.2 million was recorded. This
primarily represented $1.7 million in realized gains on the sale of two
unrelated foreign stocks. In addition, as explained in the following paragraphs,
a $1.1 million realized gain on the sale of most of our holding in MC Shipping,
Inc. was offset by $1.1 million in charges for other-than-temporary impairment
of our holdings in Accu Holding AG and SIHL during 2003. Finally, Statement of
Financial Accounting Standards No. 133, "Accounting For Derivative Instruments
and Hedging Activities" income was $461,000, primarily representing an increase
in the estimated fair value of HyperFeed warrants.
44
We regularly review any securities in which we have an unrealized loss.
If we determine that the decline in market value is other-than-temporary, under
GAAP we record a charge to reduce the basis of the security from its original
cost to current carrying value, which is usually the market price at the balance
sheet date when the provision is recorded. The determination is based on various
factors, including the extent and the duration of the unrealized loss. A charge
for other-than-temporary impairment is a non-cash charge, which is recorded as a
realized loss.
It should be noted that:
- - charges for other-than-temporary impairments do not affect book value
per share, as the after-tax decline in the market value of investments
carried under SFAS No. 115, "Accounting for Certain Investments in Debt
and Equity Securities," is already reflected in shareholders equity in
our balance sheet; and
- - the carrying (book) value of the holding does not change. The
impairment simply reclassifies the decline from an unrealized decrease
in shareholders' equity to a realized loss in the Statement of
Operations.
The written-down value becomes our new basis in the investment. In future
accounting periods, unrealized gains or losses from that level will be recorded
in shareholders' equity, and when the investment is sold a realized gain or loss
from that level will be recorded in the statement of operations.
During 2003, we sold the majority of our holding in MC Shipping, Inc.
Although this resulted in a $1.1 million realized gain under GAAP, the gain only
recovered part of a charge for other-than-temporary impairment of this holding
recorded in 1998. The gain on MC Shipping was offset by charges of $1.1 million
for other-than-temporary impairment of our holdings in Accu Holding and SIHL,
which reflected a decline in the market value of those securities during 2003.
In 2002, a net realized gain of $3.4 million was recognized. This
principally consisted of:
- - a $7.8 million gain on the sale of our common shares in AOG; which was
partially offset by
- - a $1.6 million charge for other-than-temporary impairment of our
investment in SIHL;
- - a $2.2 million charge for other-than-temporary impairment of our
investment in Accu Holding;
- - a $312,000 charge for other-than-temporary impairment of our investment
in Solpower Corporation.
In addition, income of $402,000 was recorded under SFAS No. 133, primarily
consisting of income of $900,000 from AOG options, which was partially offset by
a $410,000 reduction in the estimated fair value of HyperFeed warrants.
In 2001, a $6 million net realized investment loss was recorded. This
consisted of charges of $3 million for other-than-temporary impairment of our
holdings in SIHL and Solpower, a $2.5 million loss under SFAS No. 133 reflecting
a decrease in the value of warrants during 2001, and a $500,000 write-off of the
remaining carrying value of the loan to MKG Enterprises. In addition, although
this did not affect the segment, a cumulative effect of a change in accounting
principle reduced income by $981,000 to reflect the after-tax decline in the
estimated fair value of warrants during the period from the acquisition of the
various warrants through to December 31, 2000.
In this segment, investment income includes interest on cash and
short-term fixed-income securities, and dividends from partially owned
businesses. Investment income totaled $2.1 million in 2003, $2.5 million in
2002, and $1.9 million in 2001. Investment income fluctuates depending on the
level of cash and temporary investments, the level of interest rates, and the
dividends paid by partially owned businesses.
PICO's equity share of investees' income (loss) represents our
proportionate share of the net income (loss) and other events affecting equity
in the investments which we carry under the equity method, less any dividends
received from those investments. Our equity share of investees' losses,
principally HyperFeed, was $565,000 in 2003, $2.2 million in 2002, and $1.5
million in 2001.
Segment expenses were $13.1 million in 2003, $7.4 million in 2002, and
$10.1 million in 2001. The principal expenses recognized in this segment are
PICO's corporate overhead, the U.S. dollar change in value of a Swiss franc
inter-company loan, and operating expenses from SISCOM.
The Business Acquisitions And Financing segment produced pre-tax losses
of $8.1 million in 2003, $1.2 million in 2002, and $15.3 million in 2001.
In 2003, the segment loss consists of the $2.2 million net realized
investment gains, investment income of $2.1 million, and other revenues of $1.3
million, which were more than offset by the $565,000 equity share of investees'
losses and segment expenses of $13.1 million. Segment expenses include $6
million related to the PICO Holdings, Inc. 2003 Stock Appreciation Rights
("SAR") Program, the accrual of $1.3 million in incentive compensation, other
parent company overhead of $6.6 million, and $1.5 million in
45
SISCOM expenses. Segment expenses were reduced by a $2.3 million resulting from
the effect of appreciation in the Swiss Franc on an inter-company loan during
2003.
During 2003, the Company's shareholders approved the PICO Holdings,
Inc. 2003 SAR program, which replaced the stock option and call option programs
previously in place. The change in the "in the money" amount (i.e., the
difference between the market value of PICO stock and the exercise price of the
SAR) of SAR outstanding during each accounting period is recorded through the
consolidated statements of operations. An increase in the "in the money" amount
of SAR (i.e., if the price of PICO stock rises during the accounting period) is
recorded as an expense, and a decrease in the "in the money" amount of SAR (if
the price of PICO stock declines) will be recorded as a reduction in expenses.
See "Equity Compensation Plan Information" in Item 5, "Market for Registrant's
Common Equity and Related Stockholder Matters."
For 2003, a total expense of $6 million before taxes for SAR was
recorded. This consists of a $3.5 million charge on the initial adoption of the
SAR program on July 17, 2003, and a $2.5 million expense to record the increase
in the "in the money" amount of SAR during the period from July 17, 2003 through
the end of 2003.
Our interests in Swiss public companies are held by Global Equity SA, a
wholly owned subsidiary which is incorporated in Switzerland. Part of Global
Equity SA's funding comes from a loan from PICO, which is denominated in Swiss
Francs. During accounting periods when the Swiss Franc appreciates relative to
the US dollar -- such as 2002 and 2003 -- under GAAP we are required to record a
benefit through the statement of operations to reflect the fact that Global
Equity SA owes PICO more US dollars. In Global Equity SA's financial statements,
an equivalent debit is included in the foreign currency translation component of
shareholders' equity (since it owes PICO more dollars); however, this does not
go through the statement of operations. During accounting periods when the Swiss
Franc depreciates relative to the US dollar, opposite entries are made and an
expense is recorded in the statement of operations. Accordingly, we were
required to record a benefit of $2.3 million in our statement of operations in
2003, even though there was no net impact on shareholders' equity.
In 2002, the segment loss consists of the $3.8 million in net realized
investment gains, investment income of $2.5 million and other revenues of $2.1
million, which were more than offset by the $2.2 million equity share of
investees' losses and segment expenses of $7.4 million. Segment expenses include
the accrual of $2 million in incentive compensation, other parent company
overhead of $4.6 million, and SISCOM expenses of $1.4 million. Segment expenses
were reduced by a $2.7 million benefit resulting from the effect of appreciation
in the Swiss Franc on an inter-company loan during 2002.
The 2001 segment loss includes investment income and other revenues
totaling $2.3 million, which were more than offset by the $3 million in
provisions for other-than-temporary impairment in investments, the $2.5 million
SFAS No. 133 loss, the $500,000 MKG realized loss, the $1.5 million equity share
of investees' losses, and segment expenses of $10.1 million. Segment expenses
include parent company overhead of $4.8 million, SISCOM expenses of $1.7
million, and a $270,000 expense related to the Swiss Franc loan to Global Equity
SA discussed in a previous paragraph. In 2001, segment expenses also included a
$2.3 million provision against loans to Dominion Capital Pty. Ltd. See Item 3,
"Legal Proceedings."
INSURANCE OPERATIONS IN RUN OFF
YEAR ENDED DECEMBER 31,
--------------------------------------------
2003 2002 2001
------------ ------------ ------------
REVENUES (CHARGES):
Net Investment Income $ 2,680,000 $ 2,269,000 $ 3,363,000
Realized Gains On Sale or Impairment of Investments 562,000 387,000 1,112,000
Earned Premiums (42,000) 980,000
Other 3,000 11,000 582,000
------------ ------------ ------------
Segment Total Revenues $ 3,245,000 $ 2,625,000 $ 6,037,000
============ ============ ============
EXPENSES:
Underwriting (Expenses) / Recoveries (6,147,000) 1,675,000 9,959,000
------------ ------------ ------------
Segment Total Expenses $ (6,147,000) $ 1,675,000 $ 9,959,000
============ ============ ============
INCOME (LOSS) BEFORE TAXES:
Physicians Insurance Company of Ohio $ 7,314,000 $ 2,120,000 $ 13,133,000
Citation Insurance Company (10,216,000) 2,180,000 2,863,000
------------ ------------ ------------
Income (Loss) Before Taxes $ (2,902,000) $ 4,300,000 $ 15,996,000
============ ============ ============
46
Once an insurance company has gone into run off and the last of its
policies has expired, typically most revenues will come from investment income.
However, even when an insurance company is in "run off," earned premium can
arise. For example, with "swing rated" reinsurance, the reinsurance premiums we
pay are recalculated based on actual loss experience (i.e., the number and size
of claims). Under GAAP, if we are required to pay for additional reinsurance
this is recorded as a reduction in the earned premium line, while a reduction in
the amount of reinsurance we need to pay is recorded as an increase in earned
premiums.
Although "run off" insurance companies no longer write policies, earned
premiums can still arise, for example from policies which were still in force
when the company went into "run off,", or related to reinsurance. Our insurance
companies have purchased reinsurance from specialized insurance companies to
limit our potential losses on the insurance coverage we have provided to our
policyholders. There are various types of reinsurance contracts, including
"swing rated" contracts, where the premium we pay is adjusted retroactively
based on the actual loss experience on the block of business which was
reinsured. Under GAAP, if we need to pay for additional reinsurance this is
recorded as a reduction in earned premiums, and if reinsurance premiums are
returned to us, this is recorded as an increase in earned premiums.
The financial results of insurance companies in run off can be volatile
if there is favorable or unfavorable development in the loss reserves.
Physicians recorded significant income from favorable reserve development in
2001 and 2003; however, Citation recorded a significant loss in 2003,
principally due to the reversal of the $7.5 million Fremont reinsurance
recoverable and $3.9 million in reserve increases in the property and casualty
insurance and workers' compensation loss reserves. See the Citation section of
the "Company Summary, Recent Developments, and Future Outlook" portion of Item
7.
The Insurance Operations in Run Off segment incurred a $2.9 million
loss in 2003, consisting of a $7.3 million profit from Physicians, which was
more than offset by a $10.2 million loss from Citation. In 2002, the segment
generated income of $4.3 million, consisting of $2.1 million from Physicians and
$2.2 million from Citation. In 2001, segment income was $16 million, consisting
of income of $13.1 million from Physicians, and $2.9 million from Citation.
PHYSICIANS INSURANCE COMPANY OF OHIO
YEAR ENDED DECEMBER 31,
--------------------------------------------
2003 2002 2001
------------ ------------ ------------
MPL REVENUES:
Net Investment Income $ 1,353,000 $ 679,000 $ 1,097,000
Net Realized Investment Gain (Loss) 84,000 (4,000) 750,000
Earned Premium 382,000 755,000
------------ ------------ ------------
Segment Total Revenues $ 1,437,000 $ 1,057,000 $ 2,602,000
============ ============ ============
------------ ------------ ------------
MPL UNDERWRITING RECOVERIES (EXPENSES) $ 5,877,000 $ 1,063,000 10,531,000
============ ============ ============
------------ ------------ ------------
INCOME BEFORE TAXES $ 7,314,000 $ 2,120,000 $ 13,133,000
============ ============ ============
Physicians' total revenues were $1.4 million in 2003, compared to $1.1
million in 2002 and $2.6 million in 2001.
Investment income was $1.4 million in 2003, compared to $679,000 in
2002 and $1.1 million in 2001. Investment income varies from year to year,
depending on the amount of fixed-income securities held in the portfolio and the
prevailing level of interest rates. Investment income was higher in 2003 than in
the two previous years due to the expansion of Physicians' investment portfolio
following the receipt of the proceeds from selling Sequoia.
The $750,000 net realized investment gain recorded in 2001 was
primarily due to a $731,000 gain on the redemption of all units held in the
Rydex URSA mutual fund.
Physicians recorded earned premiums of $382,000 in 2002 and $755,000 in
2001, representing a reduction in the amount of reinsurance that we need to pay
on "swing rated" contracts. The reduced reinsurance requirement resulted from
the reduction in IBNR reserves.
In 2003, Physicians recorded a $5.9 million underwriting recovery. The
$6.7 million net reduction in reserves more than offset regular loss and loss
adjustment expense and operating expenses of $876,000 for the year. The changes
in reserves are more fully explained in the Physicians section of the "Company
Summary, Recent Developments, and Future Outlook" portion of Item 7.
47
In 2002, Physicians recorded a $1.1 million underwriting recovery. The
$1 million net reduction in reserves and a $439,000 benefit related to
reinsurance more than offset regular loss and loss adjustment expense and
operating expenses of $395,000 for the year.
In 2001, the segment reported a $10.5 million underwriting recovery,
primarily due to a $10.6 million reduction in reserves which was partially
offset by on-going operating expenses.
CITATION INSURANCE COMPANY
YEAR ENDED DECEMBER 31,
--------------------------------------------
2003 2002 2001
------------ ------------ ------------
REVENUES:
Net Investment Income $ 1,327,000 $ 1,590,000 $ 2,266,000
Realized Investment Gains 478,000 391,000 362,000
Earned Premiums (424,000) 225,000
Negative Goodwill 568,000
Other 3,000 11,000 14,000
------------ ------------ ------------
Segment Total Revenues $ 1,808,000 $ 1,568,000 $ 3,435,000
============ ============ ============
EXPENSES:
------------ ------------ ------------
Underwriting (Expenses) / Recoveries $(12,024,000) $ 612,000 $ (572,000)
============ ============ ============
------------ ------------ ------------
INCOME (LOSS) BEFORE TAXES $(10,216,000) $ 2,179,000 $ 2,863,000
============ ============ ============
In 2003, Citation generated total revenues of $1.8 million, primarily
consisting of $1.3 million in investment income and net realized investment
gains of $478,000. Underwriting expenses totaled $12 million, including the $7.5
million reversal of the reinsurance recoverable from Fremont related to the
workers' compensation book of business. Underwriting expenses also included
increases in reserves of $3 million in workers' compensation, and $847,000 in
property and casualty insurance, due to unfavorable development. As a result of
these factors, Citation incurred a loss of $10.2 million before taxes for 2003.
In 2002, Citation generated total revenues of $1.6 million. Revenues
primarily consisted of $1.6 million in investment income and realized gains of
$391,000, which were partially offset by a reduction in earned premiums of
$424,000 related to reinsurance. Citation recorded approximately $889,000 of
favorable development in prior year loss reserves, which more than offset
operating expenses of approximately $277,000, resulting in a net underwriting
recovery of $612,000. As a result of these factors, Citation generated income of
$2.2 million before taxes for 2002.
In 2001, Citation's revenues included investment income of $2.3
million, earned premiums of $225,000, and negative goodwill amortization of
$568,000 (explained in the following paragraph). The $225,000 in earned premiums
represents the final premiums earned from the policies on Citation's books when
the company went into "run off." After expenses of $570,000, Citation earned
income of $2.9 million before taxes for 2001. In 2001, an expense of $56,000 was
recorded for development in prior year loss reserves.
When Citation Insurance Group acquired Physicians in the reverse merger
in 1996, a $5.7 million negative goodwill item arose because the fair value of
the assets acquired (i.e., Physicians) exceeded the cost of the investment
(i.e., the fair value of the shares in Citation issued to Physicians
shareholders). The negative goodwill was being recognized as income over a
period of 10 years in this segment. On January 1, 2002, PICO adopted Statement
of Financial Accounting Standards No. 142, "Goodwill and Intangible Assets,"
which requires that goodwill and intangible assets with indefinite lives be
tested for impairment annually rather than amortized over time. As a result of
adopting this standard, the remaining negative goodwill of approximately $2.8
million was recognized as an extraordinary gain in 2002. See Note 1 of Notes to
Consolidated Financial Statements, "Nature of Operations and Significant
Accounting Policies."
The $12.4 million year over year deterioration in Citation's pre-tax
result was primarily due to the reinsurance reversal and reserve increases
recorded in 2003.
From 2001 to 2002, Citation's pre-tax profit declined by $683,000. A
$1.2 million year over year improvement in underwriting performance was more
than offset by a $676,000 decrease in investment income, a $649,000 decrease in
earned premium, and the absence in 2002 of negative goodwill which added
$568,000 to income in 2001.
Since Citation is in "run off," its Combined Ratio is no longer
meaningful.
48
HYPERFEED TECHNOLOGIES
YEAR ENDED DECEMBER 31,
--------------------------------------------
2003 2002 2001
------------ ------------ ------------
REVENUES:
Service $ 1,363,000
Investment Income 16,000
------------ ------------ ------------
Segment Total Revenues $ 1,379,000
============ ============ ============
EXPENSES:
Cost of Service (1,031,000)
Depreciation and Amortization (592,000)
Other (4,096,000)
------------ ------------ ------------
Segment Total Expenses $ (5,719,000)
============ ============ ============
------------ ------------ ------------
SEGMENT LOSS BEFORE TAXES $ (4,340,000)
============ ============ ============
During the period from May 15, 2003 (commencement of consolidation) to
December 31, 2003 , HyperFeed generated $1.4 million in revenues. Service
revenues were $1.4 million and the costs of service were $1 million, resulting
in gross margin of $332,000. After the deduction of $4.6 million in other
operating expenses, HyperFeed generated a loss before taxes of $4.3 million.
For more detail, please refer to HyperFeed's Annual Report on Form
10-K, which will be filed with the SEC on or before March 15, 2004. The contents
of HyperFeed's 10-K are not incorporated into this 10-K.
DISCONTINUED OPERATIONS
SEQUOIA INSURANCE COMPANY
YEAR ENDED DECEMBER 31,
--------------------------------------------
2003 2002 2001
------------ ------------ ------------
Revenues $ 16,433,000 $ 52,439,000 $ 47,913,000
Expenses (12,759,000) (47,861,000) (44,599,000)
------------ ------------ ------------
Income Before Taxes $ 3,674,000 $ 4,578,000 $ 3,314,000
Income Taxes (1,285,000) (1,545,000) (997,000)
Cumulative Effect of Change in Accounting Principle, net (199,000)
------------ ------------ ------------
NET INCOME $ 2,389,000 $ 2,834,000 $ 2,317,000
============ ============ ============
In the first three months of 2003 prior to its sale, Sequoia Insurance
Company generated income of $2.4 million after-tax, which is included in the
"Income from discontinued operations, net of tax" line in the Consolidated
Statement of Operations for 2003.
In 2002, Sequoia generated income of $2.8 million after-tax, compared
to income of $2.3 million after-tax in 2001.
PICO also recorded a $443,000 after-tax gain from the sale of Sequoia
in 2003, which forms part of the "Gain on disposal of discontinued operations,
net" line in the Consolidated Statement of Operations for 2003.
DISCONTINUED OPERATIONS OF HYPERFEED
YEAR ENDED DECEMBER 31,
--------------------------------------------
2003 2002 2001
------------ ------------ ------------
Income Before Taxes $ 659,000
Gain on Sale of Discontinued Operations Before Taxes 7,008,000
------------ ------------ ------------
Income & Gain Before Taxes $ 7,667,000
Income Taxes
------------ ------------ ------------
NET INCOME $ 7,667,000
============ ============ ============
During the period from May 15, 2003 until their sale, the discontinued
operations of HyperFeed generated income of $659,000 after-tax, which is
included in the "Income from discontinued operations, net of tax" line in the
Consolidated Statement of Operations for 2003.
HyperFeed also recorded a $7 million after-tax gain from the sale of
the discontinued operations in 2003, which forms part of the "Gain on disposal
of discontinued operations, net" line in the Consolidated Statement of
Operations for 2003.
49
LIQUIDITY AND CAPITAL RESOURCES -- YEARS ENDED DECEMBER 31, 2003, 2002, AND 2001
CASH FLOW
PICO's assets primarily consist of our operating subsidiaries, holdings
in other public companies, marketable securities, and cash and cash equivalents.
On a consolidated basis, the Company had $24.3 million in cash and cash
equivalents at December 31, 2003, compared to $22.1 million at December 31,
2002.
In addition to the $24.3 million in consolidated cash and cash
equivalents as defined by GAAP, at December 31, 2003, the parent company held
fixed-income securities, mostly investment-grade corporate bonds maturing in
2004, with a market value of $8.8 million.
Our cash flow position fluctuates depending on the requirements of our
operating subsidiaries for capital, and activity in our insurance company
investment portfolios. Our primary sources of funds include cash balances, cash
flow from operations, the sale of holdings, and -- potentially -- the proceeds
of borrowings or offerings of equity and debt. We endeavor to ensure that funds
are always available to take advantage of new acquisition opportunities.
In broad terms, the cash flow profile of our principal operating
subsidiaries is:
- - As commercial use of Vidler's water assets increases, we expect that
Vidler will generate free cash flow as receipts from leasing water or
storage capacity, and the proceeds from selling land and water rights,
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;
- - Nevada Land is actively selling land which has reached its highest and
best use, and 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. These
receipts and other revenues exceed Nevada Land's operating costs, so
Nevada Land is generating strong positive cash flow;
- - At this stage of its "run off", investment income more than covers
Citation's operating expenses. The funds required to pay claims are
coming from the sale or maturity of fixed-income investments in the
Citation's investment portfolio, and recoveries from reinsurance
companies;
- - As its "run off" progresses, Physicians is obtaining funds to pay
operating expenses and claims from the maturity of fixed-income
securities, the realization of investments, and recoveries from
reinsurance companies; and
- - HyperFeed finances its operations from its own cash and cash equivalent
balances on a stand-alone basis. At December 31, 2003, HyperFeed held
approximately $4.7 million in cash and cash equivalents.
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. Typically, PICO's insurance subsidiaries
structure the maturity of fixed-income securities to match the projected pattern
of claims payments. When interest rates are at very low levels, to insulate the
capital value of the bond portfolios against a decline in value which could be
brought on by a future increase in interest rates, the bond portfolios may have
a shorter duration than the projected pattern of claims payments. It is possible
that fixed-income and equity securities may occasionally need to be sold at
unfavorable times when the bond market, the stock market, or prices of
individual securities are depressed.
As shown in the Consolidated Statements of Cash Flow, there was a $2.2
million net increase in cash and cash equivalents in 2003, compared to a $5.7
million net increase in 2002, and a $1.8 million net increase in 2001.
During 2003, Operating Activities used cash of $426,000, compared to
$10.8 million generated in 2002, and $4.1 million used in 2001.
The most significant cash inflows from operating activities were:
- - in 2003, approximately $4 million in proceeds of land and related
assets sold by Nevada Land, and $5.5 million from two significant sales
of land and related assets by Vidler. In addition, part of the price of
land sold by Vidler was satisfied by a $9.3 million collateralized
note, which Vidler expects to receive in cash in 2004;
50
- - in 2002, approximately $12.1 million in proceeds from water rights and
land sold by Vidler and $8.5 million in cash generated by discontinued
operations (Sequoia); and
- - in 2001, $9.4 million in total receipts from Vidler's sale of water
rights and land in the Harquahala Valley Irrigation District.
In all three years, the principal uses of cash were operating expenses at Vidler
and Nevada Land, claims payments by Physicians and Citation, and overhead
expenses in the Business and Acquisitions and Financing segment.
Investing Activities generated cash of $5.0 million in 2003. The cash
inflow in 2003 primarily resulted from cash received of $25.1 million from the
sale of Sequoia (gross proceeds of approximately $43 million, less the $17.9
million dividend of common stocks and debt securities received). The remaining
2003 cash flow items principally reflect the net investment of $6.3 million in
fixed-income securities and $10.9 million in marketable equity securities, and
the payment of $1.2 million in cash to acquire additional shares of HyperFeed.
The net investment in fixed-income securities represents routine activity in the
investment portfolios of our insurance companies, and the temporary investment
of surplus funds in fixed-income securities. The investment in marketable equity
securities principally represents the net investment of $6.9 million of common
stocks by the insurance companies, and the net investment of $2.6 million in
common stocks by the parent company and Global Equity SA.
In 2002, Investing Activities used cash of $1.1 million. This primarily
represented the sale of our holding in AOG for $21.1 million and the subsequent
reinvestment of the proceeds in marketable fixed-income and equity securities,
and regular activity in the investment portfolios of our insurance companies.
In 2001, Investing Activities generated cash of $7.2 million. The most
significant cash inflow was $10.2 million from the sale of part of our interest
in Semitropic. Significant cash outflows included the investment of
approximately $4 million in SIHL and AOG common stock. Most of the remaining
Investing Activities cash flow represents activity in the investment portfolios
of our insurance companies, and the temporary investment of surplus funds in
fixed-income securities.
Financing Activities used $617,000 of cash in 2003, primarily due to
the repayment of $534,000 in non-recourse borrowings collateralized by farm
properties owned by Vidler. In addition, during 2003 Global Equity S.A. repaid
borrowings to a Swiss bank of $9.1 million (CHF 12.1 million) and took out new
borrowings of an equivalent amount with another Swiss bank.
In 2002, Financing Activities used $1.4 million of cash, primarily due
to the repayment of $1.1 million in non-recourse borrowings collateralized by
the farm properties in the Harquahala Valley Irrigation District by Vidler, and
a net reduction of $586,000 in Swiss Franc borrowings.
Financing Activities used $1.8 million of cash in 2001. Vidler paid off
approximately $2.9 million in non-recourse borrowings collateralized by the farm
properties in the Harquahala Valley Irrigation District which it sold during the
year. Global Equity S.A. took on an additional $1.9 million of Swiss
Franc-denominated borrowings to help finance the acquisition of investments in
Swiss public companies.
We believe that our cash and cash equivalent balances and short-term
investments will be sufficient to satisfy cash requirements for at least the
next twelve months. Although we cannot accurately predict the effect of
inflation on our operations, we do not believe that inflation has had, or is
likely in the foreseeable future to have, a material impact on our net revenues
or results of operations.
At December 31, 2003, PICO had no significant commitments for future
capital expenditures.
SHARE REPURCHASE PROGRAM
In October 2002, PICO's Board of Directors authorized the repurchase of
up to $10 million of PICO common stock. The stock purchases may be made from
time to time at prevailing prices through open market or negotiated
transactions, depending on market conditions, and will be funded from available
cash.
As of December 31, 2003, no stock had been repurchased under this
authorization.
COMMITMENTS AND SUPPLEMENTARY DISCLOSURES
1. AT DECEMBER 31, 2003:
- - PICO had no "off balance sheet" financing arrangements;
51
- - PICO has not provided any debt guarantees; and
- - PICO has no commitments to provide additional collateral for financing
arrangements. PICO's Swiss subsidiary, Global Equity SA, has Swiss
Franc borrowings which partially finance the Company's European stock
holdings. If the market value of those stocks declines below certain
levels, we could be required to provide additional collateral or to
repay a portion of the Swiss Franc borrowings.
Global Equity S.A. has agreed to support a capital raising by Accu
Holding AG, which we expect to occur in 2004 (see the Business Acquisitions and
Financing segment in Item 7, "Management's Discussion and Analysis of Financial
Condition and Results of Operations"). Swiss franc funds of CHF 2.3 million (US$
1.9 million), equivalent to our maximum commitment, are held in a separate bank
account.
Vidler, a PICO subsidiary, is party to a lease to acquire 30,000
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 a minimum payment of $378,000 per year
adjusted annually by the engineering price index until 2007. PICO signed a
Limited Guarantee agreement with Semitropic Water Storage District
("Semitropic") that requires PICO to guarantee Vidler's annual obligation up to
$519,000, adjusted annually by the engineering price index.
AGGREGATE CONTRACTUAL OBLIGATIONS:
The following table provides a summary of our contractual cash obligations and
other commitments and contingencies as of December 31, 2003.
PAYMENTS DUE BY PERIOD
-------------------------------------------------------------------------------
Contractual Obligations Less than 1 year 1 -3 years 3 -5 years More than 5 years Total
- -------------------------------------------------------------------------------------------------------------------
Bank borrowings $ 10,079,021 $10,079,021
Other borrowings $ 1,353,442 1,085,853 $ 802,731 $ 1,923,368 5,165,394
Other obligations 1,854,540 1,854,540
Capital leases 58,932 73,293 132,225
Operating leases 919,823 1,427,332 727,744 3,111,000 6,185,899
---------------- -------------- ------------ ----------------- -----------
Total $ 4,186,737 $ 12,665,499 $ 1,530,475 $ 5,034,368 $23,417,079
================ ============== ============ ================= ===========
2. RECENT ACCOUNTING PRONOUNCEMENTS
In November 2002, the FASB issued FASB Interpretation No. 45 ("FIN
45"), Guarantor's Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others. FIN 45 requires that a
liability be recorded in the guarantor's balance sheet upon issuance of a
guarantee at its fair value. In addition, FIN 45 requires certain disclosures
about each of the entity's guarantees. The Company will apply the recognition
provisions of FIN 45 prospectively to guarantees issued after December 31, 2002.
The disclosure provisions of FIN 45 are included herein.
In December 2002, the FASB issued SFAS No. 148, Accounting for
Stock-Based Compensation, Transition and Disclosure. SFAS No. 148 provides
alternative methods of transaction for those entities that elect to voluntarily
adopt the fair value accounting provisions of SFAS No. 123, Accounting for
Stock-Based Compensation. SFAS No. 148 also requires more prominent disclosures
of the pro forma effect of using the fair value method of accounting for
stock-based employee compensation as well as pro forma disclosure of the effect
in interim financial statements. The transition and annual disclosure provisions
of SFAS No. 148 included herein. The interim disclosure requirements are
effective for the first interim period ending December 15, 2002. The Company has
not elected to adopt the fair value accounting provisions of SFAS No. 123.
In January 2003, the FASB issued FASB Interpretation No. 46 ("FIN 46"),
Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51.
FIN 46 requires the consolidation of certain variable interest entities by the
primary beneficiary of the entity if the equity investment at risk is not
sufficient to permit the entity to finance its activities without additional
subordinated financial support from other parties or if the equity investors
lack the characteristics of a controlling financial interest. FIN 46 is
effective for variable interest entities created or acquired after January 31,
2003. For variable interest entities created or acquired prior to February 1,
2003, the provisions of FIN 46 must be applied in the first interim or annual
period beginning after December 15, 2003. The Company believes the effect of the
adoption of FIN 46 will not have any effect on its results of operations and
financial position.
52
In April 2003, the FASB approved Statement of Financial Accounting
Standards No. 149, "Amendment of Statement 133 on Derivative Instruments and
Hedging Activities." This Statement is effective for contracts entered into or
modified after June 30, 2003, except as stated, and for hedging relationships
designated after June 30, 2003. In addition, except as stated, all provisions of
this Statement should be applied prospectively. SFAS 149 amends Statement 133
for certain decisions made as part of the Derivatives Implementation Group (DIG)
process. For those amendments that relate to Statement 133 implementation
guidance, the specific Statement 133 Implementation Issue necessitating the
amendment is identified. If the amendment relates to a cleared issue, the
clearance date also is noted. This Statement also amends Statement 133 to
incorporate clarifications of the definition of a derivative. This Statement
contains amendments relating to FASB Concepts Statement No. 7, "Using Cash Flow
Information and Present Value in Accounting Measurements," and FASB Statements
No. 65, "Accounting for Certain Mortgage Banking Activities," No. 91,
"Accounting for Nonrefundable Fees and Costs Associated with Originating or
Acquiring Loans and Initial Direct Costs of Leases," No. 95, "Statement of Cash
Flows," and No. 126, "Exemption from Certain Required Disclosures about
Financial Instruments for Certain Nonpublic Entities." The Company adoption of
this statement did not have a material effect on the Company's results of
operations and financial position.
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 or workers'
compensation claim, 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 insurance
subsidiaries are required to maintain reserves for payment of estimated losses
and loss adjustment expenses 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 Sequoia, and Citation were $98.4$60.9 million at December 31, 2001,
$121.52003, $52.7 million
at December 31, 2000,2002, and $139.1$61.5 million at December 31, 1999,
net of discount on medical professional liability insurance reserves in 1999,
and2001 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 $4.7 million in 2003, and decreased by $10.4$2.3 million in 2001,2002,
and increased by $8.6$11.1 million in 2000, and $16.3 million in 1999. 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 21 of Notes to Consolidated Financial Statements, "Cumulative
Effect of Change in Accounting Principle."2001. These changes to prior years' reserves were due to
the following:
CHANGE IN UNPAID LOSS AND LAE RESERVES FOR PRIOR YEARS
2003 2002 2001
2000 1999
----------------- ------------------- -------------------------- ---------- -----------
Increase (decrease) in provision forfrom prior year claims $ (9,833,352) $ 1,300,413 $ 15,878,6974,667,024 (1,907,552) (10,571,292)
Retroactive reinsuranceinsurance (438,879) (529,993)
(267,653) (564,469)
Accretion of reserve discount 994,545
Cumulative effect of change in accounting principle 7,520,744
---------------- ------------------ ------------------------- ---------- -----------
Net increase (decrease) in liabilities for unpaid loss
and LAE of prior years $ (10,363,345) $ 8,553,504 $ 16,308,773
================ ================== ================4,667,024 (2,346,431) (11,101,285)
========= ========== ===========
See schedule in Note 1211 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 discounting was based upon historical payment patterns and assumed an
interest rate at or below Physicians' investment yield, and
4753
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 Notes 12 and 21 of Notes to
Consolidated Financial Statements, "Reserves for Unpaid Loss and Loss Adjustment
Expenses" and "Cumulative Effect of Change in Accounting Principle."
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.
ANALYSIS OF LOSS AND LOSS ADJUSTMENT EXPENSE DEVELOPMENT
The following table presents the development of balance sheet
liabilities for 19911993 through 20012003 for all continuing operations property and
casualty and workers' compensation lines of business includingand 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.
Year Ended DecemberYEAR ENDED DECEMBER 31,
------------------------------------------------------------------------------------------
1991 1992-------------------------------------------------------------
1993 1994 1995 1996 -------------- ------------- ------------- ------------- -------------1997
---------- (In thousands)--------- ---------- ---------- ---------
(IN THOUSANDS)
Net liability as originally estimated: $ 179,390 $ 153,212 $ 135,825 $ 153,891 $ 110,931
Discount 32,533 20,144 16,568 12,217 9,159
Gross liability as originally
estimated: 211,923 173,356 152,393 166,108 120,090
Cumulative payments as of:
One year later 34,207 35,966 26,331 54,500 37,043
Two years later 69,037 61,263 63,993 88,298 57,622
Three years later 90,904 93,906 85,649 107,094 73,096
Four years later 118,331 110,272 99,730 121,698 82,249
Five Years later 128,773 119,879 110,299 130,247 89,398
Six years later 136,820 129,819 115,312 137,462 95,454
Seven years later 145,683 132,394 118,396 143,532
Eight years later 147,386 134,811 121,837
Nine years later 149,443 137,602
Ten years later 151,579
Liability re-estimated as of:
One year later 183,560 170,411 145,824 166,870 129,225
Two years later 184,138 163,472 145,031 182,963 145,543
Three years later 176,308 162,532 150,439 193,498 146,618
Four years later 178,544 165,696 155,183 194,423 135,930
Five Years later 178,584 167,145 157,973 183,333 133,958
Six years later 178,371 167,821 149,074 181,705 138,520
Seven years later 178,717 160,233 147,525 185,201
Eight years later 171,926 160,188 141,028
Nine years later 170,935 153,869
Ten years later 165,469
Cumulative Redundancy (Deficiency) $ 46,454 $ 19,487 $ 11,365 ($ 19,093) ($ 18,430)
54
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------
1998 1999 2000 2001 2002 2003
-------- --------- -------- -------- --------- --------
(IN THOUSANDS)
Net liability as originally estimated: $129,768 $159,804 $179,390 $153,212 $137,523 $164,817$ 89,554 $ 88,112 $ 74,896 $ 54,022 $ 44,906 $ 43,357
Discount 30,647 31,269 32,533 20,144 16,568 12,216
Gross liability as originally estimated: 160,415 191,073 211,923 173,356 154,091 177,033
Cumulative payments as of:
One year later 42,986 41,550 34,207 35,966 27,128 59,106
Two years later 81,489 73,012 69,037 61,263 65,062 95,574
Three years later 103,505 103,166 90,904 93,908 86,865 115,160
Four years later 120,073 116,278 118,331 110,272 100,967 129,907
Five Years later 127,725 139,028 128,773 119,879 111,553 138,505
Six years later 142,973 143,562 136,820 129,819 116,575
Seven years later 147,142 148,426 145,683 132,394
Eight years later 151,751 156,620 147,386
Nine years later 159,205 157,975
Ten years later 160,426
Liability re-estimated as of:
One year later 188,811 197,275 183,560 170,411 147,324 176,922
Two years later 184,113 179,763 184,138 163,472 146,653 192,203
Three years later 174,790 182,011 175,308 162,532 151,752 202,014
Four years later 177,811 176,304 178,544 165,696 156,482 202,767
Five Years later 172,431 181,721 178,584 167,145 159,266 191,728
Six years later 175,830 181,868 178,371 167,821 150,375
Seven years later 177,603 181,029 178,717 160,233
Eight years later 178,419 183,229 171,926
Nine years later 180,624 179,052
Ten years later 177,577
Cumulative Redundancy (Deficiency) ($17,162) $12,021 $39,997 $13,123 $3,716 ($14,695)
48
Year Ended December 31,
---------------------------------------------------------------------
1997 1998 1999 2000 2001
------------- ------------- ----------- ------------ ---------
(In thousands)
Net liability as originally estimated: $128,205 $102,877 $98,655 $93,997 $75,259
Discount 9,159 8,515 7,521
Gross liability before discount as originally estimated: 137,364 111,392 106,176 93,997 75,25998,069 95,633 74,896 54,022 44,906 43,357
Cumulative payments as of:
One year later 44,750 31,056 25,625 21,68823,696 22,636 9,767 7,210 6,216
Two years later 69,571 51,184 41,02941,789 31,987 16,946 13,426
Three years later 85,896 62,49450,968 39,150 23,162
Four years later 95,59158,129 45,140
Five Years later 64,119
Six years later
Seven years later
Eight years later
Nine years later
Ten years later
Liability re-estimated as of:
One year later 144,367 127,269 107,521 83,511114,347 96,727 63,672 52,115 49,574
Two years later 160,325 127,898 97,614115,539 85,786 61,832 56,782
Three years later 160,239 117,246104,689 83,763 66,494
Four years later 149,723102,704 88,460
Five Years later 107,409
Six years later
Seven years later
Eight years later
Nine years later
Ten years later
Cumulative Redundancy (Deficiency) ($12,359) ($5,854) $8,562 $10,486$ (9,340) $ 7,173 $ 8,402 $ (2,760) $ (4,668)
RECONCILIATION TO FINANCIAL STATEMENTS
Gross liability - end of year $148,689 $121,442 $98,409$ 61,497 $ 52,686 $ 60,847
Reinsurance recoverable (42,514) (27,445) (23,190)
----------- ------------(7,475) (7,780) (17,490)
--------- Net liability before discount - end of year 106,175 93,997 75,219
Net discount (7,521)
----------- ------------ --------- --------
Net liability - end of year (discounted for 1998 and 1999) 98,654 93,997 75,21954,022 44,906 43,357
Reinsurance recoverable (discounted for 1998 and 1999) 40,334 27,445 23,190
----------- ------------7,475 7,780 17,490
--------- 138,988 121,442 98,409--------- --------
61,497 52,686 60,847
Discontinued personal lines insurance 145 100 40
----------- ------------41 17 17
--------- --------- --------
Balance sheet liability (discounted for 1998 and 1999) $139,133 $121,542 $98,449
=========== ============$ 61,538 $ 52,703 $ 60,864
========= ========= ========
Gross re-estimated liability - latest $146,131 $114,299$ 78,397 $ 69,489
Re-estimated recoverable - latest (48,518) (30,788)
----------- ------------
Net re-estimated liability before discount - latest 97,613 83,511
Net re-estimated discount - latest
----------- ------------(21,615) (19,915)
--------- ---------
Net re-estimated liability - latest $97,613 $83,511
=========== ============56,782 49,574
--------- ---------
Net re-estimated liability - latest $ 56,782 $ 49,574
========= =========
Net cumulative redundancy before discount $8,562 $10,486
=========== ============($ 2,760) ($ 4,668)
========= =========
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 1994, but incurred in 1991, will be
included in the decrease or increase amount for 1991, 1992 and 1993. 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.
49
The data in the above table is based on Schedule P from each of
the
insurance companies' 1991Physician's and Citation's 1993 to 20012003 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.
55
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),
on 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 and workers' compensation 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 statement of operations and financial results.condition.
Reconciliation of Unpaid Loss and Loss Adjustment Expenses
An analysis of changes in the liability for unpaid losses and loss
adjustment expenses for 2001, 2000,2003, 2002, and 19992001 is set forth in Note 1211 of Notes to
PICO's Consolidated Financial Statements, "Reserves for Unpaid Loss and Loss
Adjustment Expenses."
REINSURANCE
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 Note 10 of Notes to PICO's Consolidated Financial
Statements, "Reinsurance." PICO's insurance subsidiaries are contingently liable
with respect to reinsurance contracts in the event that reinsurers are unable to
meet their obligations under the reinsurance agreements in force.
Medical Professional Liability Insurance through Physicians Insurance
Company of Ohio
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 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.
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 applicable
reinsurance.
Prior to July 1, 1993, Physicians ceded a portion of the risk it wrote
under numerous reinsurance treaties at various retentions and risk limits.
However, during the last two accident years that Physicians wrote premium (July
1, 1993 to July 15, 1995), Physicians ceded reinsurance contracts through TIG
Reinsurance Group (rated B+ by A. M. Best Company) and Medical Assurance
Company, a wholly owned subsidiary of Pro Assurance Group (rated A [Strong]A- by Standard
& Poors), Transatlantic
Reinsurance Company (rated AA [Very Strong] by S&P) and Cologne Reinsurance
Company of America (rated BBBpi [Good] by S&P). 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.
Property and Casualty Insurance through Citation Insurance Company
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 ceded 100%
of its net premium and losses to Sequoia and Sequoia then ceded 50% of its net
premiums and losses to Citation. Sequoia and Citation shared equally in the
underwriting expenses. This arrangement was terminated effective January 1,
2000.
5056
During this period, Citation and Sequoia had the same reinsurance
program. For property business, reinsurance provided coverage of $10.4 million
excess of $150,000 per occurrence. For casualty business, excluding umbrella
coverage, reinsurance provided coverage of $4.9 million excess of $150,000 per
occurrence. Umbrella coveragescoverage's were reinsured $9.9 million excess of $100,000
per occurrence. The catastrophe treaties for 1998 and thereafter provided
coverage of 95% of $14 million excess of $1 million per occurrence. Facultative
reinsurance was placed with various reinsurers.
Effective January 1, 2002, Sequoia increased its retention for property and
casualty losses from $150,000 to $200,000 per occurrence. Therefore, reinsurance
provides property coverage of $10.3 million excess of $200,000 per occurrence,
and casualty coverage of $4.8 million excess of $200,000 per occurrence. In
addition, Sequoia changed the umbrella reinsurance from $9.9 million excess of
$100,000 per occurrence to 98% quota share reinsurance for the first $5 million.
Therefore, Sequoia will retain 2% of each umbrella loss while the reinsurance
provides for 98% of each umbrella loss. The reinsurance for umbrella business $5
million excess of $5 million per occurrence remains at 100%. The catastrophe
treaties for 2002 provide coverage of 70% for $1.5 million excess of $1 million
per occurrence, and 95% for $12.5 million per occurrence excess of $2.5 million.
Citation does not require reinsurance from 2002 onwards, as its last
policy expired in December 2001.
WhereIf the reinsurers are "not admitted" for regulatory purposes, Sequoia and
Citation
presentlyhas to maintain sufficient collateral with approved financial institutions to
secure cessions of paid losses and outstanding reserves.
All policy and claims liabilities of Sequoia prior to August 1, 1995 have
been 100% reinsured with Sydney Reinsurance Corporation and unconditionally
guaranteed by QBE Insurance Group Limited.
See Note 1110 of Notes to Consolidated Financial Statements,
"Reinsurance," with regard to reinsurance recoverable concentration for all
property and casualty lines of business as of December 31, 2001. PICO2003. Citation
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.
Workers' Compensation Insurance through Citation Insurance
Company
Claims and Liabilities Related to the Insolvency of Fremont
Indemnity Company
In 1997, pursuant to a Quota Share Reinsurance Agreement (the
"Reinsurance Agreement"), Citation ceded its California workers' compensation
insurance liabilities to Citation National Insurance Company ("CNIC") and
transferred all administrative services relating to these liabilities to
Fremont. The Reinsurance Agreement became effective upon Fremont's acquisition,
with approval from the California Department of Insurance (the "Department"), of
CNIC on or about June 30, 1997. Thereafter, on or about December 31, 1997, CNIC
merged, with Department approval, with and into Fremont. Accordingly, since
January 1, 1998, Fremont has been both the reinsurer and the administrator of
the California workers' compensation business ceded by Citation.
During the period from June 30, 1997 (the date on which Citation ceded
its workers' compensation insurance liabilities) through July 2, 2003 (the date
on which Fremont was placed in liquidation), Fremont maintained a workers'
compensation insurance securities deposit in California for the benefit of
claimants under workers' compensation insurance policies issued, or assumed, by
Fremont (hereafter, the "Deposit"). As set forth in Part III of the Special
California Schedule P's filed by Fremont during such time period, a portion of
the Deposit was specifically allocated by Fremont for the benefit of Citation
and claimants under workers' compensation insurance policies issued by Citation
and thereafter assumed and administered by Fremont (hereafter, the "Citation
Allocated Deposit"). Fremont's 2001 Special Schedule P reflects that it had
posted a deposit for the benefit of Citation of approximately $12.1 million
(subject to a "reserve discount adjustment" discussed below). Fremont's 2002
Special Schedule P reflects that it had posted a deposit for the benefit of
Citation of approximately $7.1 million (subject to a "reserve discount
adjustment" discussed below). The portion of the Deposit other than the Citation
Allocated Deposit is hereafter referred to as the "Unallocated Deposit."
Concurrent with Fremont's posting of the Citation Allocated Deposit,
Citation reduced its own workers' compensation insurance reserves by the amount
of the Citation Allocated Deposit. Prior to the commencement of Fremont's
liquidation case, the Department had never questioned, let alone disputed,
Citation's right to reduce its workers' compensation insurance reserves by the
amount of the Citation Allocated Deposit posted by Fremont for Citation's
benefit.
According to an A.M. Best Company report dated June 6, 2003, Fremont
executed a letter of oversight with the Department on November 27, 2000, which
provided the Department with certain oversight privileges in return for allowing
Fremont to discount its workers' compensation loss and allocated loss adjustment
expense reserves related to 1999 and prior accident years. Under a permitted
accounting practice, a discount rate of 4.25% was applied to the loss and
allocated loss adjustment expense reserves as of June 30, 2000. On December 31,
2001, the Department revised the permitted accounting practice to allow Fremont
to discount its workers' compensation loss and loss adjustment expense reserves
for accidents occurring in 2001 and earlier using a 5.5% discount rate.
In accordance with the aforementioned permitted accounting practice(s),
Fremont appears to have reduced its loss and loss adjustment expense reserves
for accidents occurring in 2001 and earlier. In addition, and without
explanation or justification, Fremont appears to have reduced its Special
Schedule P Deposits. A review of Part III of Fremont's 2002 Special Schedule P
reveals that Fremont had posted total deposits on account of assumed reinsurance
of $7,165,921, of which $7,138,757 was for the benefit of Citation, and that
Fremont made a "reserve discount adjustment" of $3,109,557 and thereby reduced
its total Part III Special Schedule P deposits to $4,056,364. Neither Fremont
nor the Department informed Citation of Fremont's request to reduce the Citation
Allocated Deposit, the Department's approval of the same (if any) or Fremont's
subsequent reduction of the Citation Allocated Deposit. As a result, Citation
only recently became aware of the reduction of the Citation Allocated Deposit.
Given its prior lack of knowledge, Citation did not previously challenge the
57
reduction of the Citation Allocated Deposit or otherwise increase its own
deposit. Although the exact impact of the reserve discount adjustment upon
Citation is unclear, the Department of Insurance allowed a full reinsurance
offset to Citation in the amount of the Citation Allocation Deposit for 2001 and
2002.
On June 4, 2003, the Superior Court of the State of California for the
County of Los Angeles (the "Liquidation Court") entered an Order of Conservation
over Fremont and appointed the California Department of Insurance Commissioner
(the "Commissioner") as the conservator. Pursuant to such order, the
Commissioner was granted authority to take possession of all of Fremont's
assets, including its rights in the Citation Allocated Deposit. Shortly
thereafter, on July 2, 2003, the Liquidation Court entered an Order appointing
the Commissioner as the liquidator of Fremont's Estate (hereafter, the
"Liquidator"). The July 2, 2003 Order further provides, in relevant part, that
(i) "the rights and liabilities of claimants, creditors, shareholders,
policyholders, escrow holders and all other persons interested in the assets of
[Fremont], including the State of California, are fixed as of the date of the
entry of this order;" and (ii) "any and all claims against [Fremont] . . . ,
including those which in any way affect or seek to affect any of the assets of
[Fremont], wherever and however such assets may be owned or held, must be filed
by no later than June 30, 2004 (the `Claims Bar Date') . . . and any claim not
filed by the Claims Bar Date is conclusively deemed forever waived."
Under Citation's interpretation of the applicable law, the Citation
Allocated Deposit assets are required to be (i) held by the Commissioner in
trust, "separate and apart" from Fremont's general account and other assets of
its Estate, and (ii) applied solely towards the payment of the assumed claims
and allocated claims expenses arising from the workers' compensation insurance
policies that Citation ceded/transferred to Fremont and its
predecessor-in-interest. Accordingly, in the wake of the aforementioned events,
in the Fourth Quarter of 2003, Citation requested that the Commissioner, in his
capacity as the Liquidator, (i) maintain the Citation Allocated Deposit assets
separate and apart from other assets of the Estate and (ii) apply the same
solely to the payment of the direct and assumed claims and allocated claims
expenses arising from the workers' compensation insurance liabilities that
Citation ceded/transferred to CNIC and Fremont. Alternatively, Citation
requested that the Commissioner pay Citation's ceded liabilities from the
totality of Fremont's Special Schedule P Deposit on a pari passu basis with
Fremont's direct and assumed workers' compensation claims and allocated claims
expenses.
As of the date hereof, the Commissioner has refused to comply with
Citation's request; instead, the Commissioner indicated that he intended to
transfer the Citation Allocated Deposit to the California Insurance Guarantee
Association ("CIGA"). At present, it is unknown whether the Commissioner is
still in possession of the Citation Allocated Deposit. Thus, the Department
appears to have (i) refused to acknowledge that the Citation Allocated Deposit
assets are required to have been held in trust for Citation and its
policyholders, and (ii) maintained its belief that Citation holds nothing more
than a general unsecured claim that falls near the bottom of the statutory
distribution scheme.
Shortly thereafter, Citation concluded that, because Fremont had been
placed in liquidation, Citation was no longer entitled to take a reinsurance
credit for the Citation Allocated Deposit under the statutory basis of
accounting. Consequently, Citation reversed the $7.5 million reinsurance
recoverable from Fremont in its June 30, 2003 financial statements prepared on
the statutory basis of accounting. In addition, Citation made a corresponding
provision for the reinsurance recoverable from Fremont at June 30, 2003 for GAAP
purposes, as disclosed in PICO's Form 10-Q dated June 30, 2003. Accordingly,
Citation has, for both its statutory and GAAP financial statements, provided for
the reinsurance recoverable from Fremont on its Workers' Compensation policy
liabilities.
In light of the foregoing, it appears that Citation must litigate its
claim to the Citation Allocated Deposit assets. As of the date hereof, Citation
has not filed a claim seeking the benefit of the Citation Allocated Deposit.
However, unless the situation is amicably resolved, Citation intends to bring
legal action to enforce its rights prior to the June 30, 2004 Claims Bar Date.
In the event that Citation asserts, but fails to prevail on such a claim, it is
unlikely to receive any distribution from the Fremont Estate or any credit for
the Citation Allocated Deposit. If, however, Citation prevails on such a claim,
it may obtain the benefit, directly or indirectly, of the Citation Allocated
Deposit, as well as other relief.
Citation feels very strongly in the validity of its claim. However, the
results of litigation are difficult to predict. Moreover, this dispute,
involving the interpretation of workers' compensation laws enacted in 2002,
appears to present an issue of first impression. Accordingly, Citation is
presently unable to predict the outcome of this dispute with a reasonable degree
of certainty
Reinsurance Agreements on Workers' Compensation Insurance Liabilities
In addition to the reinsurance agreements with Fremont noted above,
Citation's workers' compensation insurance liabilities from policy years 1986 to
1997 retain additional reinsurance coverage with General Reinsurance, a wholly
owned subsidiary of Berkshire Hathaway, Inc. (Standard & Poors rating of AAA.)
Policy years 1986 and 1987 have a Company retention of $150,000; policy years
1988 and 1989 have a Company retention of $200,000 and policy years 1990 through
to 1997 have a Company retention of $250,000.
Citation remains contingently liable with respect to reinsurance
contracts in the event that reinsurers do not meet their obligations under the
reinsurance agreements in force.
58
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKSRISK
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 participation interests, equity price risk as it relates to its
marketable equity securities, and foreign currency risk as it relates to
investments denominated in foreign currencies. Generally, PICO's bank debt is short-termborrowings are
short to medium term in nature as PICO generally secures rates for periods of approximately one to three
years and therefore approximatesapproximate fair value. At December
31, 2001,2003, PICO had $100.9$52.6 million of fixed maturity securities and mortgage
participation interests, $57$96.3 million of marketable equity securities that were
subject to market risk, of which $36.8$51.4 million were denominated in foreign
currencies, primarily Swiss francs and Australian dollars.francs. 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 analyzereport the sensitivity of its assets and
liabilities subject to the above risks. For its fixed maturity securities, and
mortgage participation interests, 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 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 $3.5$1.1 million for a 100 basis point decline in interest rates on
its fixed securities and mortgage participation interests. The hypothetical 20%
decrease in fair value of PICO's marketable equity securities produced a loss in
fair value of $10.9$19.3 million that would impact the unrealized appreciation in
shareholders' equity.equity, net of the related tax effect. The hypothetical 20%
decrease in the local currency of PICO's foreign denominated investments
produced a loss of $5.8$8.3 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, 20012003 and 20002002 and for
each of the three years in the period ended December 31, 20012003 and the
independent auditors' report is included in this report as listed in the index.
5159
SELECTED QUARTERLY FINANCIAL DATA
Summarized unaudited quarterly financial data (in thousands, except
share and per share amounts) for 20012003 and 20002002 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 and are of a normal
recurring nature. 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 GAAPThe following total revenue figures for the yearthree months ended
December 31, 2000. The effect for the
year ended December 31, 2000 wasJune 30, 2003 differ from previously reported quarterly results due to increase the unpaid losses and loss
adjustment expenses reserve by $7.5 million and an cumulative effectreporting
certain operations of accounting principle of $5 million, or $0.43 per share, net of an income tax
benefit of approximately $2.5 million.
AS PREVIOUSLY REPORTEDHyperFeed as discontinued operations.
THREE MONTHS ENDED
----------------------------------------------------------------
March 31, June 30, September 30, December 31,
2001 2001 2001 20012003 2003 2003 2003
----------- ------------ ------------- ----------- -------------- ---------------------------
Premium income $10,039 $10,536 $10,665 $12,051
Net investment income and
net realized gain (loss) 795 2,203 (473) 2,131328 3,624 1,445 2,720
Sale of land and water rights 20 2,196 2,002 15,533
Total revenues 20,721 15,658 15,749 17,4521,483 6,411 4,571 20,413
Net income (loss) (2,263) (2,462) 1,364 8,134
-------------856 (2,001) (3,190) 1,098
----------- -------------- ---------------
Basic:
------------------------- ----------- -------------- --------------------------
Basic and Diluted:
Net income (loss) per share $ (0.18)0.07 $ (0.20)(0.16) $ 0.11(0.26) $ 0.66
------------- ----------- -------------- ---------------0.09
=========== ============ =========== ===========
Weighted average common
and equivalent shares
outstanding 12,390,096 12,390,096 12,390,096 12,368,616
Diluted:
Net income (loss) per share $ (0.18) $ (0.20) $ 0.11 $ 0.66
------------- ----------- -------------- ---------------
Weighted average common
and equivalent shares
outstanding 12,390,096 12,390,096 12,408,408 12,368,616
------------- ----------- -------------- ---------------12,379,042 12,375,610 12,375,610 12,373,534
AS RESTATED, SEE NOTE 22
THREE MONTHS ENDED
-------------------------------------------------------------
March 31, June 30, September 30, December 31,
2001 2001 2001 20012002 2002 2002 2002
----------- ----------- ----------- - ----------------------- ------------- ------------
Premium income (charge) $ 10,039(425) $ 10,536 $ 10,665 $ 12,051383
Net investment income and
net realized gain (loss) 2,370 3,877 (1,014) 1,115644 1,513 7,173 265
Sale of land and water rights 7,365 1,552 872 5,443
Total revenues 22,296 17,332 15,208 16,4368,971 4,324 9,105 6,874
Net income (loss) (1,439) (1,534) 866 7,2211,864 (149) 3,248 966
----------- ------------ ----------- -----------
-------------- ---------------
Basic:
----------- ----------- -------------- ---------------Basic and Diluted:
Net income (loss) per share $ (0.12)0.15 $ (0.12)(0.01) $ 0.070.26 $ 0.58
----------- ----------- -------------- ---------------0.08
=========== ============ =========== ===========
Weighted average common
and equivalent shares
outstanding 12,390,096 12,390,096 12,390,096 12,368,616
Diluted:
Net income (loss) per share $ (0.12) $ (0.12) $ 0.07 $ 0.58
----------- ----------- -------------- ---------------
Weighted average common
and equivalent shares
outstanding 12,390,096 12,390,096 12,408,408 12,368,616
----------- ----------- -------------- ---------------12,367,021 12,373,856 12,381,878 12,379,242
52
AS PREVIOUSLY REPORTED
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 gain (loss) 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
------------ ------------ ------------- -------------
AS RESTATED, SEE NOTE 22
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 gain (loss) 1,999 1,510 (4,589) 2,255
Total revenues 10,651 10,979 4,940 19,245
Net income (loss) (8,444) (401) (3,823) 1,368
------------ ----------- ------------- -----------
Basic:
------------ ----------- ------------- -----------
Net income (loss) per share $ (0.92) $ (0.03) $ (0.31) $ 0.11
------------ ----------- ------------- -----------
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 $ (0.92) $ (0.03) $ (0.31) $ 0.11
------------ ----------- ------------- -----------
Weighted average common
and equivalent shares
outstanding 9,200,926 12,390,070 12,390,096 12,390,096
------------ ----------- ------------- -----------
5360
PICO HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 20012003 AND 20002002
AND FOR EACH OF THE
THREE YEARS IN THE PERIOD
ENDED DECEMBER 31, 2001, 2000 and 19992003
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Independent Auditors' Report................................................................................. 55Reports........................................... 62-63
Consolidated Balance Sheets as of December 31, 20012003 and 2000................................................. 56-572002............ 64-65
Consolidated Statements of Operations for the Years Ended
December 31, 2001, 20002003, 2002 and 1999........................................................................... 582001.................................. 66
Consolidated Statements of Shareholders' Equity for the
Years Ended December 31, 2001, 20002003, 2002, and 1999............................................................... 59-612001...................... 67-69
Consolidated Statements of Cash Flows for the Years Ended
December 31, 2001, 20002003, 2002 and 1999........................................................................... 622001................................... 70
Notes to Consolidated Financial Statements................................................................... 63-91Statements.............................. 71-96
5461
INDEPENDENT AUDITORS' REPORT
TO THE SHAREHOLDERS AND BOARD OF DIRECTORS OFTo the Shareholders and Board of Directors of PICO HOLDINGS, INC.Holdings, Inc.
We have audited the accompanying consolidated balance sheets of PICO Holdings,
Inc. and its subsidiaries (collectively "the Company"(the "Company") as of December 31, 20012003 and 2000,2002, and the
related consolidated statements of operations, shareholders' equity, and cash
flows for each of the three years in the period ended December 31, 2001.2003. 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 did not audit the financial statements of Hyperfeed Technologies,
Inc. (a 51% owned consolidated subsidiary), which statements reflect total
assets of $9,714,258 as of December 31, 2003, and net income of $1,600,818 for
the year then ended. Those statements were audited by other auditors whose
report has been furnished to us, and our opinion, insofar as it relates to the
amounts included for Hyperfeed Technologies, Inc., is based solely on the report
of the other auditors.
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 and the report of
other auditors provide a reasonable basis for our opinion.
In our opinion, based on our audits and the report of other auditors, such
consolidated financial statements present fairly, in all material respects, the
financial position of the Company as of December 31, 2003 and 2002, and the
results of their operations and their cash flows for the years then ended in
conformity with accounting principles generally accepted in the United States of
America.
As discussed in Note 20 to the financial statements, in 2002 the Company changed
its accounting for goodwill as a result of the adoption of Statement of
Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets.
DELOITTE & TOUCHE LLP
San Diego, California
March 9, 2004
62
REPORT OF INDEPENDENT AUDITORS'
To the Board of Directors and Stockholders of
HyperFeed Technologies, Inc.:
We have audited the accompanying consolidated balance sheets of HyperFeed
Technologies, Inc. and subsidiary as of December 31, 2003 and 2002, and the
related consolidated statements of operations, stockholders' equity, and cash
flows for each of the years in the three-year period ended December 31, 2003.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
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, suchthe consolidated financial statements referred to above present
fairly, in all material respects, the financial position of PICO Holdings,HyperFeed
Technologies, Inc. and subsidiariessubsidiary as of December 31, 20012003 and 2000,2002, and the
results of their operations and their cash flows for each of the three years in the
three-year period ended December 31, 2001,2003, in conformity with accounting
principles generally accepted in the United States of America.
As discussed in Note 211 to the financial statements, in 2000Consolidated Financial Statements, the Company
changed
its methodadopted the provisions of accounting for medical professional liability claims reserves.
As discussed in Note 22, the accompanying consolidated financial statements have
been restated.
DELOITTE & TOUCHEStatement of Financial Accounting Standards No. 142,
"Goodwill and Other Intangible Assets", on January 1, 2002.
/s/ KPMG LLP
San Diego, CaliforniaChicago, Illinois
March 8, 2002 (March 27, 2003 as to Note 22)
554, 2004
63
PICO HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 20012003 AND 20002002
ASSETS
2001 2000
------------------ ------------------
(AS RESTATED, (AS RESTATED,
SEE NOTE 22) SEE NOTE 22)2003 2002
--------------- --------------
Investments (Note 3):
Available for sale:
Fixed maturities $ 100,895,24452,615,376 $ 101,895,27447,566,764
Equity securities 54,364,542 55,051,04996,306,035 47,430,192
Investment in unconsolidated affiliates (Note 4) 2,583,590 4,139,830
------------------ ------------------498,214
--------------- --------------
Total investments- continuing operations 148,921,411 95,495,170
Investments held by discontinued operations (Note 2) 78,442,627
--------------- --------------
Total investments 157,843,376 161,086,153148,921,411 173,937,797
Cash and cash equivalents 17,361,624 13,644,312
Premiums24,348,693 22,079,082
Notes and other receivables, net (Note 6) 18,076,561 19,032,60316,430,541 5,897,934
Reinsurance receivables (Note 11) 23,783,106 27,594,039
Accrued investment income 1,595,400 1,717,109
Land and related mineral rights10) 17,714,012 7,832,708
Real estate and water rightsassets (Note 5) 125,997,642 137,235,241112,270,280 116,790,891
Property and equipment, net (Note 8) 2,727,931 2,944,513
Deferred policy acquisition costs (Note 9) 6,913,589 6,299,819
Goodwill and intangibles, net (Note 1) 3,487,414 4,000,5083,117,521 2,143,746
Net deferred income taxes (Note 7) 8,583,265 13,100,32829,577 6,079,810
Other assets 8,048,856 5,427,828
------------------ ------------------7,246,695 9,267,845
Other assets of discontinued operations (Note 2) 818,537 52,138,398
--------------- --------------
Total assets $ 374,418,764330,897,267 $ 392,082,453
================== ==================396,168,211
=============== ==============
The accompanying notes are an integral part of the consolidated financial
statements.
5664
PICO HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS, CONTINUED
DECEMBER 31, 20012003 AND 20002002
LIABILITIES AND SHAREHOLDERS' EQUITY
2001 2000
----------------- ------------------2003 2002
------------- -------------
Policy liabilities and accruals: (AS RESTATED, (AS RESTATED,
SEE NOTE 22) SEE NOTE 22)
Unpaid losses and loss adjustment expenses (Note 12)11) $ 98,449,05360,863,884 $ 121,541,722
Unearned premiums 28,143,296 25,505,18952,703,113
Unpaid losses and loss adjustment expenses of discontinued operations (Note 2 ) 49,162,995
Reinsurance balance payable 5,458,720 5,631,603
Deferred gain on retroactive reinsurance 438,879 968,872671,031 538,000
Other liabilities 13,579,220 13,148,09316,841,050 10,902,399
Bank and other borrowings (Note 20) 14,596,302 15,550,387
Taxes payable 350,133
Excess19) 15,376,640 14,636,017
Other liabilities of fair value of net assets acquired over purchase pricediscontinued operations (Note 1) 2,792,597 3,360,581
----------------- ------------------2 ) 2,169,879 44,085,976
------------- -------------
Total liabilities 163,458,067 186,056,580
----------------- ------------------95,922,484 172,028,500
------------- -------------
Minority interest 3,062,190 3,920,739
----------------- ------------------5,814,381 3,108,007
------------- -------------
Commitments and Contingencies (Notes 10, 11, 12, 13, 14, 15 and 19)
Common stock, $.001 par value; authorized 100,000,000; 16,784,22316,801,923 issued and outstanding
at December 31, 20012003 and 2000 16,784 16,7842002 16,802 16,802
Additional paid-in capital 235,844,655 235,844,655236,082,703 236,082,703
Accumulated other comprehensive lossincome (Note 1) (3,225,867) (4,204,335)15,283,404 3,833,676
Retained earnings 53,391,570 48,277,665
----------------- ------------------
286,027,142 279,934,76956,082,903 59,320,715
------------- -------------
307,465,812 299,253,896
Less treasury stock, at cost (common shares: 4,415,6074,428,389 in 20012003 and 4,394,1274,422,681 in 2000) (78,128,635) (77,829,635)
----------------- ------------------2002) (78,305,410) (78,222,192)
------------- -------------
Total shareholders' equity 207,898,507 202,105,134
----------------- ------------------229,160,402 221,031,704
------------- -------------
Total liabilities and shareholders' equity $ 374,418,764330,897,267 $ 392,082,453
================= ==================396,168,211
============= =============
The accompanying notes are an integral part of the consolidated financial
statements.
5765
PICO HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2001, 20002003, 2002 AND 19992001
2003 2002 2001
2000 1999
------------------- ------------------ -------------------
Revenues: (AS RESTATED, (AS RESTATED, (AS RESTATED,
SEE NOTE 22) SEE NOTE 22) SEE NOTE 22)------------ ------------ -------------
Premium incomeRevenues:
Sale of real estate and water assets $ 43,289,67619,751,160 $ 34,435,75415,231,769 $ 36,379,10217,106,174
Net investment income (Note 3) 9,766,893 8,860,921 6,604,8225,370,588 5,385,209 6,035,825
Net realized lossgain (loss) on investments (Note 3) (3,418,496) (7,686,963) (611,373)
Sale2,745,657 4,209,632 (4,874,594)
Service revenue 1,363,188
Premium income (charge) (41,796) 979,952
Other 3,647,748 4,489,425 4,313,071
------------ ------------ -------------
Total revenues 32,878,341 29,274,239 23,560,428
------------ ------------ -------------
Costs and expenses:
Operating and other costs 25,359,114 15,055,461 17,445,665
Cost of landreal estate and water rights 17,106,174 5,478,263 6,081,764
Other income 4,528,090 4,726,419 5,199,172
------------------- ------------------ -------------------
Total revenues 71,272,337 45,814,394 53,653,487
------------------- ------------------ -------------------
Expenses:assets sold 12,648,864 9,740,137 7,568,229
Cost of service revenue 1,031,161
Loss and loss adjustment (recoveries) expenses (Note 12) 18,302,320 24,026,218 35,211,836
Amortization of policy acquisition11) 4,667,024 (2,346,314) (10,929,282)
Interest expense 719,902 795,193 1,031,994
Depreciation and amortization 1,780,519 1,115,716 1,086,729
------------ ------------ -------------
Total costs (Note 9) 13,044,382 10,250,348 10,484,345
Cost of land and water rights 7,568,229 3,995,508 4,458,694
Insurance underwriting and other expenses 21,685,855 22,355,463 23,794,385
------------------- ------------------ -------------------
Total expenses 60,600,786 60,627,537 73,949,260
------------------- ------------------ -------------------46,206,584 24,360,193 16,203,335
------------ ------------ -------------
Equity in loss of unconsolidated affiliates (564,785) (2,208,070) (1,529,060)
(1,252,020) (4,014,892)
------------------- ------------------ ------------------------------- ------------ -------------
Income (loss) before income taxes and minority interest 9,142,491 (16,065,163) (24,310,665)(13,893,028) 2,705,976 5,828,033
Provision (benefit) for federal, foreign and state income taxes (Note 7) 3,406,464 (9,011,222) (13,422,069)
------------------- ------------------ -------------------(1,202,407) 2,049,565 2,409,501
------------ ------------ -------------
Income (loss) before minority interest 5,736,027 (7,053,941) (10,888,596)(12,690,621) 656,411 3,418,532
Minority interest in (income) loss of subsidiaries (1,045,605) 454,184 358,449
717,076 706,076
------------------- ------------------ ------------------------------- ------------ -------------
Income (loss) from continuing operations (13,736,226) 1,110,595 3,776,981
Income from discontinued operations, net (Note 2) 3,047,928 2,833,806 2,317,495
Gain on sale of discontinued operations, net 7,450,486
------------ ------------ -------------
Income (loss) before extraordinary gain andcumulative changes in accounting changeprinciples (3,237,812) 3,944,401 6,094,476 (6,336,865) (10,182,520)
Extraordinary gain, net of income tax expense of $227,821 442,240
Cumulative effect of changechanges in accounting principle,principles, net (Note 21)20) 1,984,744 (980,571)
(4,963,691)
------------------- ------------------ ------------------------------- ------------ -------------
Net income (loss) $ (3,237,812) $ 5,929,145 $ 5,113,905
$ (11,300,556) $ (9,740,280)
=================== ================== =============================== ============ =============
Net income (loss) per common share - basic and diluted:
Income (loss) per share before extraordinary gain and
cumulative effectfrom continuing operations $ 0.49(1.11) $ (0.55)0.09 $ (1.13)
Extraordinary gain 0.050.30
Discontinued operations 0.85 0.23 0.19
Cumulative effect of changechanges in accounting principleprinciples 0.16 (0.08)
(0.43)
------------------- ------------------ ------------------------------- ------------ -------------
Net income (loss) per common share $ (0.26) $ 0.48 $ 0.41
$ (0.97) $ (1.08)
=================== ================== =============================== ============ =============
Weighted average shares outstanding 12,375,933 12,375,466 12,384,682
11,604,120 8,998,442
=================== ================== =============================== ============ =============
The accompanying notes are an integral part of the consolidated financial
statements.
5866
PICO HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2001, 20002003, 2002 AND 19992001
Accumulated Other
Comprehensive Loss
---------------------------------
Additional Net Unrealized Foreign
Common Paid-In Retained Appreciation Currency
Stock Capital Earnings ---------- ----------------- -----------------on Investments Translation
-------- -------------- ------------- ---------------- --------------
Balance, January 1, 1999, as previously reported $13,3292001 $ 183,154,58816,784 $ 76,240,000
Prior period adjustments (See Note 22) (6,921,499)
---------- ----------------- -----------------
Balance, January 1, 1999 (*) 13,329 183,154,588 69,318,501235,844,655 $ 48,277,665 $ 3,611,475 $ (7,815,810)
Comprehensive Loss for 19992001
Net loss (*) (9,740,280)income 5,113,905
Net unrealized appreciation on investments
net of deferred tax of $2.3 million$996,000 and
reclassification adjustment of $1.3 million (*)$556,000 1,933,582
Foreign currency translation (*)(955,114)
Total Comprehensive Loss
ExerciseIncome
Acquisition of 120,000 warrants
at $23.80 per share 120 2,850,239
Purchaseshares of
13,000 PICO treasury shares
---------- ----------------- -----------------stock for deferred compensation plans
-------- -------------- ------------- ------------ -------------
Balance, December 31, 1999 (*) $13,4492001 $ 186,004,82716,784 $ 59,578,221
========== ================= =================
(*) As Restated, See Note 22
235,844,655 $ 53,391,570 $ 5,545,057 $ (8,770,924)
======== ============== ============= ============ =============
Accumulated Other
Comprehensive Income
--------------------------------------
Net Unrealized Foreign
Appreciation Currency Treasury
on Investments Translation
Stock Total
----------------- ----------------- --------------------------------- ----------------
Balance, January 1, 1999, as previously reported2001 $ (3,087,565)(77,829,635) $ (4,763,872) $ (77,538,042) $ 174,018,438
Prior period adjustments (See Note 22) 6,640,753 17,968 (262,778)
----------------- ----------------- ----------------- ----------------
Balance, January 1, 1999 (*) (3,553,188) (4,745,904) (77,538,042) 173,755,660202,105,134
Comprehensive Loss for 19992001
Net loss (*)income
Net unrealized appreciation on investments
net of deferred tax of $2.3$996,000 and
reclassification adjustment of $556,000
Foreign currency translation
Total Comprehensive Income 6,092,373
Acquisition of shares of
treasury stock for deferred compensation plans (299,000) (299,000)
---------------- ----------------
Balance, December 31, 2001 $ (78,128,635) $ 207,898,507
================ ================
The accompanying notes are an integral part of the consolidated financial
statements
67
PICO HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY, CONTINUED
FOR THE YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
Accumulated Other
Comprehensive Income
---------------------------------
Additional Net Unrealized Foreign
Common Paid-In Retained Appreciation Currency
Stock Capital Earnings on Investments Translation
-------- -------------- ------------- ---------------- --------------
Balance, December 31, 2001 $ 16,784 $ 235,844,655 $ 53,391,570 $ 5,545,057 $ (8,770,924)
Comprehensive Income for 2002
Net income 5,929,145
Net unrealized appreciation on investments
net of deferred tax of $2 million and
reclassification adjustment of $1.3 million (*) 4,413,947$588,000 4,454,385
Foreign currency translation (*) (1,481,998)2,605,158
Total Comprehensive Loss (6,808,331)income
Acquisition of shares of treasury stock for
deferred compensation plans
Exercise of 120,000 warrants
at $23.80 per share 2,850,359
Purchasestock options 18 238,048
-------- -------------- ------------- ------------ -------------
Balance, December 31, 2002 $ 16,802 $ 236,082,703 $ 59,320,715 $ 9,999,442 $ (6,165,766)
======== ============== ============= ============ =============
Treasury
Stock Total
---------------- ----------------
Balance, December 31, 2001 $ (78,128,635) $ 207,898,507
Comprehensive Income for 2002
Net income
Net unrealized appreciation on investments
net of 13,000 PICOdeferred tax of $2 million and
reclassification adjustment of $588,000
Foreign currency translation
Total Comprehensive income 12,988,688
Acquisition of shares of treasury shares (291,593) (291,593)
----------------- ----------------- -----------------stock for
deferred compensation plans (93,557) (93,557)
Exercise of stock options 238,066
---------------- ----------------
Balance, December 31, 1999 (*)2002 $ 7,967,135(78,222,192) $ (6,227,902)221,031,704
================ ================
The accompanying notes are an integral part of the consolidated financial
statements
68
PICO HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY, CONTINUED
FOR THE YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
Accumulated Other
Comprehensive Income
---------------------------------
Additional Net Unrealized Foreign
Common Paid-In Retained Appreciation Currency
Stock Capital Earnings on Investments Translation
-------- -------------- ------------- ---------------- --------------
Balance, December 31, 2002 $ (77,829,635)16,802 $ 169,506,095
================= ================= =================236,082,703 $ 59,320,715 $ 9,999,442 $ (6,165,766)
Comprehensive Income for 2003
Net loss (3,237,812)
Net unrealized appreciation on investments
net of deferred tax of $3.7 million and
reclassification adjustment of $1.5 million 10,879,588
Foreign currency translation 570,140
Total Comprehensive Income
Acquisition of shares of treasury stock for
deferred compensation plans
-------- -------------- ------------- ----------- -------------
Balance, December 31, 2003 $ 16,802 $ 236,082,703 $ 56,082,903 $20,879,030 $ (5,595,626)
======== ============== ============= =========== =============
Treasury
Stock Total
---------------- ----------------
Balance, December 31, 2002 $ (78,222,192) $ 221,031,704
Comprehensive Income for 2003
Net loss
Net unrealized appreciation on investments
net of deferred tax of $3.7 million and
reclassification adjustment of $1.5 million
Foreign currency translation
Total Comprehensive Income 8,211,916
Acquisition of shares of treasury stock for (83,218) (83,218)
deferred compensation plans
---------------- ----------------
Balance, December 31, 2003 $ (78,305,410) $ 229,160,402
================ (*) As Restated, See Note 22================
The accompanying notes are an integral part of the consolidated financial
statements.
59
PICO HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
Additional
Common Paid-In Retained
Stock Capital Earnings
----------- ------------------ ------------------
Balance, December 31, 1999 (*) $13,449 $ 186,004,827 $ 59,578,221
Comprehensive Loss for 2000
Net loss (*) (11,300,556)
Net unrealized depreciation on investments
net of deferred tax of $2.2 million (*)
Foreign currency translation (*)
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 $ 48,277,665
========== ================= =================
(*) As Restated, See Note 22
Accumulated Other
Comprehensive Loss
--------------------------------------
Net Unrealized
Appreciation Foreign
(Depreciation) Currency Treasury
on Investments Translation Stock Total
------------------ ------------------ ------------------ ------------------
Balance, December 31, 1999 (*) $ 7,967,135 $ (6,227,902) $ (77,829,635) $ 169,506,095
Comprehensive Loss for 2000
Net loss (*)
Net unrealized depreciation on investments
net of deferred tax of $2.2 million (*) (4,355,660)
Foreign currency translation (*) (1,587,908)
Total Comprehensive Loss (17,244,124)
Rights offering, net of $193,000 of expenses 49,843,163
----------------- ----------------- ----------------- -----------------
Balance, December 31, 2000 (*) $ 3,611,475 $ (7,815,810) $ (77,829,635) $ 202,105,134
================= ================= ================= =================
(*) As Restated, See Note 22
The accompanying notes are an integral part of the consolidated financial
statements
60
PICO HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
Additional
Common Paid-In Retained
Stock Capital Earnings
------------ ------------------ ---------------
Balance, December 31, 2000 (*) $ 16,784 $ 235,844,655 $ 48,277,665
Comprehensive Loss for 2001
Net income (*) 5,113,905
Net appreciation on investments net of
deferred tax of $996,000 and
reclassification adjustment of $2.6 million (*)
Foreign currency translation (*)
Total Comprehensive Loss
Acquisition of 21,846 shares of
treasury stock for deferred compensation plans
----------- ----------------- --------------
Balance, December 31, 2001 (*) $ 16,784 $ 235,844,655 $ 53,391,570
=========== ================= ==============
(*) As Restated, See Note 22
Accumulated Other
Comprehensive Loss
----------------------------------
Net Unrealized Foreign
Appreciation Currency Treasury
on Investments Translation Stock Total
---------------- --------------- ---------------- ----------------
Balance, December 31, 2000 (*) $ 3,611,475 $ (7,815,810) $ (77,829,635) $ 202,105,134
Comprehensive Loss for 2001
Net income (*)
Net appreciation on investments net of
deferred tax of $996,000 and
reclassification adjustment of $2.6 million (*) 1,933,582
Foreign currency translation (*) (955,114)
Total Comprehensive Loss 6,092,373
Acquisition of 21,846 shares of
treasury stock for deferred compensation plans (299,000) (299,000)
--------------- -------------- --------------- ---------------
Balance, December 31, 2001 (*) $ 5,545,057 $ (8,770,924) $ (78,128,635) $ 207,898,507
=============== ============== =============== ===============
(*) As Restated, See Note 22
The accompanying notes are an integral part of the consolidated financial
statements
6169
PICO HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2001, 2000,2003, 2002 AND 19992001
2003 2002 2001 2000 1999
-----------
------------- ------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
(AS RESTATED, (AS RESTATED, (AS RESTATED,
SEE NOTE 22) SEE NOTE 22) SEE NOTE 22)
Net income (loss) $ 5,113,905(3,237,812) $ (11,300,556)5,929,145 $ (9,740,280)5,113,905
Adjustments to reconcile net income (loss) to net cash used inprovided by
(used in) operating activities:activities, net of acquisitions:
Provision for deferred taxes 4,036,227 (3,910,103) (13,217,925)(876,207) 1,990,042 3,850,740
Cumulative effect of accounting change (1,984,744) 980,571 (2,557,053)
Depreciation and amortization 2,034,657 2,678,267 3,076,471
Loss2,757,493 1,420,806 1,197,073
(Gain) loss on sale of investments 3,418,468 7,686,963 611,373(2,745,657) (4,209,632) 4,874,594
Gain on sale of Sequoia (1,568,278)
Gain on sale of interest in Semitropic (5,700,720)
Loss on condemnation of property 201,822
Allowance for uncollectible accounts 270,000 2,633,204 114,812 4,963
Extraordinary gain on early extinguishment of debt (442,240)
Equity in loss of unconsolidated affiliates 564,785 2,208,070 1,529,060 1,252,020 4,014,892
Minority interest 1,045,605 (454,184) (358,449) (717,076) (706,076)
Changes in assets and liabilities, net of effects of acquisitions:
PremiumsNotes and other receivables (1,677,162) (7,001,894) 938,386
Land,(9,467,051) 1,572,574 (282,066)
Other liabilities 5,884,656 540,055 405,831
Real estate and water and mineral rights 4,922,434 (8,922,701) 329,364assets 9,914,760 9,425,589 6,724,258
Income taxes 71,846 (324,837) (883,883) 8,049,785
Reinsurance receivable 3,810,933 17,446,329 10,584,462(9,881,304) (323,870) 2,205,782
Reinsurance payable (172,883) (2,080,999) (4,356,288)
Deferred policy acquisition costs (613,770) (1,478,591) 727,406133,031 (2,781,333) (928,187)
Deferred gain on retroactive insurance (438,879) (529,993) (267,653) (564,469)
Unpaid losses and loss adjustment expenses (23,092,669) (17,591,153) (15,887,821)
Unearned premiums 2,638,107 8,300,499 (3,599,742)8,160,771 (8,834,797) (22,845,944)
Net operating cash provided by (used in) discontinued operations (1,558,754) 8,499,963 1,077,534
Other adjustments, net (2,784,077) 1,927,280 (3,346,702)105,965 (1,711,060) (3,721,524)
------------- -------------------- --------------------------- ------------
Net cash used inprovided by (used in) operating activities (3,935,172) (17,305,492) (23,524,441)(426,151) 10,847,745 (4,099,168)
------------- -------------------- --------------------------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from the sale of available for sale investments:
Fixed maturities 68,452,287 4,690,82912,637,514 21,566,412 15,010,568
Equity securities 7,818,540 1,170,169 11,817,43614,735,268 23,168,694 6,071,383
Proceeds from maturity of investments 20,470,000 13,900,000 3,815,66927,537,091 48,646,426 16,970,000
Purchases of available for sale investments:
Fixed maturities (83,598,484) (55,497,642) (14,442,126)(46,476,107) (68,074,673) (28,912,393)
Equity securities (14,562,923) (14,335,900) (19,166,770)
Semitropic lease payment(25,667,968) (15,106,827) (6,768,109)
Proceeds from the sale of Sequoia 25,144,350
Real estate and water asset capital expenditure (2,315,322) (378,429) (2,333,640) (2,333,333)(2,180,253)
Proceeds from the sale of interest in Semitropic 10,202,733
Proceeds from the condemnation of property 1,098,178
Proceeds from the sales of real estate 2,741,980
Purchases of property and equipment (760,095) (1,107,898) (739,748)
Investments in and advances to affiliates (1,390,851) (753,928)(490,078) (457,109) (395,667)
Net investing cash used by discontinued operations (10,622,501) (4,156,457)
Other investing activities, net (98,429) 116,803 273,000
(537,258) (1,094,370)
------------- -------------------- --------------------------- ------------
Net cash provided by (used in) investing activities 9,014,807 (55,442,191) (20,155,190)5,006,319 (1,141,204) 7,212,983
------------- -------------------- --------------------------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of bank and other borrowings (9,645,053) (4,177,517) (2,903,407) (329,968) (191,787)
Proceeds from borrowings 9,111,446 2,670,348 1,949,321
6,068,781Cash received on exercise of stock options 238,066
Cash paid to minority shareholders of partnership (500,000)
Proceeds from rights offering, net 49,843,163
Proceeds from the saleCash paid for purchase of warrants 2,850,359
Repurchase of treasuryPICO stock (for deferred compensation in 2001)plans) (83,218) (93,557) (299,000)
(291,593)
------------- -------------------- --------------------------- ------------
Net cash provided by (used in)used in financing activities (616,825) (1,362,660) (1,753,086)
49,513,195 8,435,760
------------- -------------------- --------------------------- ------------
Effect of exchange rate changes on cash (1,693,730) (2,607,173) 390,763
140,427 328,048
------------- -------------------- --------------------------- ------------
Net increase (decrease) in cash and cash equivalents 3,717,312 (23,094,061) (34,915,823)2,269,613 5,736,708 1,751,492
Cash and cash equivalents, beginning of year 13,644,312 36,738,373 71,654,19622,079,082 16,342,374 14,590,882
------------- -------------------- --------------------------- ------------
Cash and cash equivalents, end of year $ 17,361,62424,348,695 $ 13,644,31222,079,082 $ 36,738,37316,342,374
============= ==================== =========================== ============
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest $ 327,608 $ 856,983 $ 880,000
$ 847,000 $ 284,000
============= ==================== =========================== ============
Income taxes recoveredpaid (recovered) $ 555,600 $ (1,190,000)
$ (4,907,000) $ (4,627,000)
============= ==================== ===========================
The accompanying notes are an integral part of the consolidated financial
statements.
6270
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, "PICO" or
"the Company") is a diversified holding company.
Currently PICO's major activities are:
- owning and developing water rights &and water storage
operations in the southwestern United States
through Vidler Water Company, Inc.;
- owning and developing land and the related mineral
rights and water rights in Nevada through Nevada
Land & Resource Company, LLC;
- propertythe acquisition and casualty insurance;financing of businesses;
- "running off" the insurance loss reserves of Citation
Insurance Company and Physicians Insurance Company
of Ohio; and
- making long term value-based investments in other public
companies.Ohio.
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 operating subsidiaries as of December
31, 20012003 are as follows:
Vidler Water Company, Inc. ("Vidler"). Vidler is a 96.2% owned
Delaware corporation. Vidler's business involves identifying end users,
namely water utilities, municipalities or developers, in the Southwest
who require water, and then locating a source and supplying the demand,
either by utilizing Vidler'sthe company's own assets or securing other sources
of supply. These assets comprise water rights in the states of
Colorado, Arizona, and Nevada, and water storage facilities in Arizona
and California.
Nevada Land & Resource Company, LLC ("Nevada Land"). In April 1997,
PICO acquired Nevada
Land is a Delaware Limited Liability Company, which then ownedowns approximately
1.41.1 million acres of deeded land in northern Nevada. Nevada together with the relatedLand's business
includes selling land and water mineralrights, and geothermal rights.
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 the book
of business of Personal Express Insurance Services, Inc.leasing property.
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. This means that it is handling claims arising from
historical business, and selling investments when funds are needed to
pay claims.
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." This means
that it is handling claims arising from historical business, and
selling investments when funds are needed to pay claims.
63
HyperFeed Technologies, Inc. ("HyperFeed"). HyperFeed is a
developer and provider of software, ticker plant technologies and
managed services to the financial markets industry. PICO owns
approximately 51% of the outstanding voting stock of HyperFeed.
SISCOM Inc.Corporation ("SISCOM"). SISCOM is a ColoradoDelaware
corporation that is a software developer and systems integrator for video-based contentdigital asset
management systems for the professional broadcast, sports, and
entertainment industries.
71
Unconsolidated Affiliates:
Investments in which the Company owns betweenat least 20% tobut not
more than 50% of the voting interest and/and, or has the ability to
exercise significant influence are generally accounted for under the
equity method of accounting. Accordingly, the Company's share of the
income or losses areloss of the affiliate is included in PICO's consolidated
results. Currently, the onlythere is no significant investment the Company
classifies as an equity affiliate is HyperFeed Technologies, Inc. ("HyperFeed"). Hyperfeed
provides financial market data and data delivery solutions to the
financial services industry. PICO owns approximately 42% of the
outstanding voting stock of HyperFeed.affiliate.
Principles of Consolidation:
The accompanying consolidated financial statements include the
accounts of the Company and its majority-owned and controlled
subsidiaries, and have been prepared in accordance with accounting
principles generally accepted in the United States of America ("US
GAAP"). 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 investments, unpaid losses and loss adjustment
expenses, deferred policy acquisition costs, landreal estate and water rights,assets, deferred income taxes and
contingent liabilities. While management believes that the carrying
value of such assets and liabilities are appropriate as of December 31,
20012003 and 2000,2002, it is reasonably possible that actual results could
differ from the estimates upon which the carrying values were based.
Revenue Recognition:
Sale of Land, Water and Water Rights
Revenue on the sale of land, water, and water rights is
recognized in full when (a) there is a legally binding sale contract;
(b) the profit is determinable (i.e., the collectibility of the sales
price is reasonably assured, or any amount that will not be collectible
can be estimated); (c) the earnings process is virtually complete
(i.e., the Company is not obligated to perform significant activities
after the sale to earn the profit, meaning the Company has transferred
all risks and rewards to the buyer); and (d) the buyer's initial and
continuing investment are adequate to demonstrate a commitment to pay
for the property. If these conditions are not met, the Company records
the cash received as a deposit until the conditions to recognize full
profit are met.
Investments:
The Company's investment portfolio at December 31, 20012003 and
20002002 is comprised of investments with fixed maturities, including U.S.
government bonds, government -- sponsored enterprise bonds, and
investment-grade corporate bonds; equity securities, including investments in common
stock, and preferred stocks, andcommon stock purchase warrants; convertible debt instruments and mortgage participation
interests.
The Company applies the provisions of Statement of Financial
Accounting Standards ("SFAS") No. 115, "Accounting for Certain
Investments in Debt and Equity Securities." 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 investment gains or
losses on investments recorded at fair valuesecurities available for sale are recorded net of
tax and included indirectly to
shareholders' equity as accumulated other comprehensive income, or
loss.loss, net of applicable tax effects. The Company also applies the
provisions of Accounting Principles Board ("APB") Opinion No. 18, "The
Equity Method of Accounting for Investments in Common Stock," is used to account for
investments where management determines the Company has the ability to
exercise significant influence over the operating and financial
policies of the investee. The Company's share of the income or loss of
the investee is included in the consolidated statement of operations
and any dividends are recorded as a reduction in the carrying value of
the investment.
The Company regularly and methodically reviews the carrying
value of its investments for impairment. AWhen there is a decline in
the value of anyan investment to below cost, that is deemed
other than temporaryother-than-temporary, a loss is recorded within net realized gains or
losses in the consolidated statement of operations and the security is
written down to net realizableits fair value. AdjustmentsImpairment charges of $1.1 million,
$4.1 million, and $3 million are included in realized losses for write-downs are reflected in net realized gain or loss on
investments in the consolidated statements of operations. During the
three
years ended December 31, 2003, 2002 and 2001, the Company recorded impairment
losses on equity securities of $3 million, $161,000 and $1.1 million,
respectively. In addition, the Company wrote off its investment in a loan
by expensing $500,000 in 2001, and $2.5 million in 2000 (See Note 15).
During 1999, the Company recorded an impairment loss of $3.2 millionrespectively, related to
various securities where the unrealized losses had been deemed
other-than-temporary. If a portionsecurity is impaired and continues to
decline in value, additional impairment charges are recorded in the
period of the decline if
72
deemed other-than-temporary. Subsequent recoveries of such securities
are reported as an oilunrealized gain and gas investment.part of other comprehensive
results in future periods. Realized gains on impaired securities are
recorded only when sold.
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 andrevenues, are determined on the identified certificatean average basis and
are
recorded on athe trade date basis.
64
date.
The Company invests domesticallyhas subsidiaries and makes acquisitions in the
U.S. and abroad. Approximately $36.8$51.5 million and $41.2$41.1 million of the
Company's investments at December 31, 20012003 and 2000,2002, respectively, were
invested internationally, including equity values of affiliates. The
Company's most significant foreign currency exposure at December 31,
2003 is in Swiss francs and Australian dollars.francs.
Cash and Cash Equivalents:
Cash and cash equivalents include highly liquid debt instruments
purchased with original maturities of three months or less.
Land,Real Estate and Water Rights, Water Storage and Land Improvements:Assets:
Land, 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 and water rights 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. Buildings and leasehold improvements
are depreciated over 15-20 years;years, office furniture and fixtures are
generally depreciated over 7seven years, and computer equipment is
depreciated over 3 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.revenues.
Goodwill and Intangibles:
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. Intangibles are generally
assets arising out of a contractual or legal right. The Company recorded negativeapplies
the provisions of SFAS No. 141, "Business Combinations," and SFAS No.
142, "Goodwill and Other Intangible Assets." Consequently, goodwill (i.e., excess ofand
intangible assets that have indefinite useful lives are not amortized
but rather are tested at least annually, or on an interim basis if an
event occurs or circumstances change that would reduce the fair value
of assets acquired over purchase price)a reporting unit below its carrying value for impairment. The
adoption of SFAS No. 142 is reflected in the Company's consolidated
financial statements for the year ended December 31, 2002 as a
resultcumulative effect of change in accounting principle. The cumulative
adjustment of $2 million is comprised of a gain from recognizing
negative goodwill of $2.8 million offset by the write-off of goodwill
of $800,000. The positive goodwill of $800,000 was deemed impaired
based on the present value of the reverse merger between Citation and Physicians in November
1996. Negative goodwillunderlying cash flows. Included
within the 2002 balance sheet caption "Other assets of discontinued
operations" is $2.2 million of intangible assets that were being
amortized using the straight-line method over 10seven years. At December 31, 2001 and 2000, the Company had accumulated
negative goodwill amortization of $2.9 million and $2.3 million,
respectively. The Company also recorded goodwill and intangibles related
to its acquisitions of SISCOM, Personal Express and Sequoia and amortizes
the balances over various lives not exceeding 10 years. At December 31,
2001 and 2000, the Company had $1.5 million and $1.3 million in
accumulated amortization, respectively.
Impairment of Long-Lived Assets:
The Company applies the provisions of SFAS No. 121144,
"Accounting for the Impairment or Disposal of Long-Lived AssetsAssets." As
such, the Company records an impairment charge when the condition
exists where the carrying amount of a long-lived asset (asset group) is
not recoverable 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.exceeds its fair value. Impairment of long-lived
assets is triggered when the estimated future undiscounted cash flows,
excluding interest charges, for the lowest level for which there areis
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 variousappropriate 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.under SFAS No. 144. If the events or circumstances indicate that
the remaining balance may be permanently impaired, such potential
impairment will be measured based upon the
73
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.
65
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 are
reflected in current operations. (See Note 21).
Recognition of Premium Revenue:
MPL and other property and casualty insurance premiums written are
earned principally on a monthly pro rata basis over the terms 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,using the
treasury method, 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.
In July 2003, the Company adopted a Stock Appreciation Rights
Plan whereby all stock options outstanding were exchanged for stock
appreciation rights. These rights are not considered common stock
equivalents for purposes of earnings per share because no common shares
of the Company are issued when a SAR is exercised (the benefit is paid
in cash). Consequently, there are no longer any common stock
equivalents to consider for purposes of the weighted average shares
outstanding for diluted earnings per share and therefore, basic and
diluted shares outstanding will now be identical.
For the yearyears ended December 31, 2002 and 2001, there was no
difference between basic and diluted earnings per share because the
average stock price of PICO stock during the year was less than the
strike prices of the options outstanding and to include those options
would be anti-dilutive to the calculation. Similarly, in 2000 and 1999, the calculation of diluted
earnings per share excludes the options and warrants outstanding in those
years because the Company reported a loss from operations and
consequently the impact of those options and warrants would be
anti-dilutive. Stock options of 1.7 million
in 2002, and 1.8 million in 2001 1.1 million in 2000,
and 1 million in 1999 were excluded from the calculation of
the diluted weighted average shares outstanding.
Stock-Based Compensation:
On July 2, 2003, all 1,687,242 outstanding stock options were
voluntarily surrendered by employees and directors. On July 17, 2003,
the Company's shareholders voted to adopt the PICO Holdings, Inc. 2003
Stock BasedAppreciation Rights Program (the "SAR program") to replace the
Company's stock option plans and call option agreements. Upon adoption
of the SAR program, all 355,539 outstanding options under call option
agreements were also surrendered by the holders. The maximum number of
SARs issuable under the SAR program may not exceed 2,042,781. 1,962,781
SAR's were issued to the prior option holders upon adoption of the SAR
program at an exercise price equal to that of the surrendered options.
All SARs are fully vested, never expire, and only 20% of the initial
number can be exercised by an individual in any 12 month period unless
74
permission is given by the Compensation Committee. Upon exercise, the
holder is entitled to a cash benefit equal to the difference between
the exercise price and the then current market price of PICO stock.
Compensation cost is measured at the end of each period as the
amount by which the quoted market price of PICO stock exceeds the
exercise price. Changes in the quoted market price are reflected as an
adjustment to the accrued compensation obligation and compensation
expense in the Company's consolidated financial statements. The Company
accountsrecorded compensation expense and accrued compensation of $6 million
for the year ended December 31, 2003, representing the difference
between the exercise price of the vested SARs and the market value of
PICO stock at December 31, 2003. This amount is included in operating
and other costs on the consolidated statement of operations for the
year ended December 31, 2003 and the corresponding obligation resides
within other liabilities in the consolidated balance sheet at December
31, 2003.
The following table summarizes the SARs outstanding at
December 31, 2003:
SARs Outstanding
Weighted
Range of Exercise Number Average
Price Outstand Exercise Price
- ---------------------------------------------------------
$3.49 - $4.74 355,539 $ 3.93
$13.25 - $13.45 463,561 13.45
$15.00 1,143,681 15.00
--------------------------
1,962,781 $ 12.63
==========================
In December 2002, the Financial Accounting Standards Board
("FASB") issued SFAS No. 148, "Accounting for Stock-Based Compensation,
Transition and Disclosure." SFAS No. 148 provides alternative methods
of transition for those entities that elect to voluntarily adopt the
fair value accounting provision of SFAS No. 123, "Accounting for
Stock-Based Compensation." SFAS No. 148 also requires more prominent
disclosures of the pro forma effect of using the fair value method of
accounting for stock based employee compensation as well as pro forma
disclosure of the effect in interim financial statements. The
transition and annual disclosure provision of SFAS No. 148 are
effective for fiscal years ending after December 15, 2002. The interim
disclosure requirements are effective for the first interim period
ending after December 15, 2002. PICO has not elected to adopt the fair
value accounting provisions of SFAS No. 123, but rather has elected to
continue accounting for stock-based compensation under the intrinsic
value method of APB No. 25, "Accounting Forfor Stock Issued to Employees."
NoHad compensation expense was recorded duringcost for the Company's stock-based
compensation plans been determined consistent with SFAS No. 148, the
Company's net loss and net loss per share would approximate the
following pro forma amounts for the years ended December 31,31:
2003 2002 2001
------------ ----------- -----------
Reported net income (loss) $ (3,237,812) $ 5,929,145 $ 5,113,905
Add: Stock-based compensation recorded, net of tax 3,940,043
Deduct: Total stock-based employee compensation expense
determined under fair value based method for all awards,
net of tax (8,844,608) (445,555) (711,521)
------------ ----------- -----------
Pro forma net income (loss) $ (8,142,377) $ 5,483,590 $ 4,402,384
============ ========== ===========
Reported net income (loss) per share: basic and diluted $ (0.26) $ 0.48 $ 0.41
============ =========== ===========
Pro forma net income (loss) per share: basic and diluted $ (0.61) $ 0.44 $ 0.36
============ =========== ===========
The effects of applying SFAS No. 148 in this pro forma
disclosure are not indicative of future amounts.
The fair value of each SAR granted in 2003 and stock option
granted in previous years is estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted-average
assumptions: no dividend yield; risk-free interest rate of 1% for
grants in 2003 and 6.97% for grants in 2001; expected life of a SAR is
estimated at 5 years, expected life of a stock option is generally
estimated at 10 years; and volatility of 36% for the 2003 grants and
42% for the 2001 2000grants. No stock options were granted in 2002.
75
The Black-Scholes valuation model was used in estimating the
fair value of the Company's SARs that are fully vested and 1999.
66
are
non-transferable. This model requires the input of highly subjective
assumptions including the expected stock price volatility and estimated
life of the SAR. Because the Company SARs have characteristics
significantly different from those of any like instrument that is
publicly traded, and because changes in the subjective input
assumptions can materially change the fair value estimate, management
believes the existing model does not necessarily provide a reliable
single measure of the fair value of its SARs.
Comprehensive Loss:Income:
Comprehensive income or loss includes foreign currency
translation, and unrealized holding gains and losses, net of taxes on
available for sale securities. The components of accumulated other comprehensive loss are as follows:
December 31,
2001 2000
---------------- ----------------2003 2002
------------ -----------
Net unrealized gain on securities $ 5,545,05720,879,030 $ 3,611,4759,999,442
Foreign currency translation (8,770,924) (7,815,810)
---------------- ----------------(5,595,626) (6,165,766)
------------ -----------
Accumulated other comprehensive lossincome $ (3,225,867)15,283,404 $ (4,204,335)
================ ================3,833,676
============ ===========
Accumulated other comprehensive lossThe accumulated balance is net of deferred income tax
assetliabilities of $1.4$7.2 million and $3.2$3.5 million at December 31, 20012003 and
2000,2002, 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 income or loss.
Reclassifications:
Certain amounts in the financial statements for prior periods
have been reclassified to conform to the current year presentation.
Recent Accounting Pronouncements:
In June 2001,November 2002, the FASB issued FASB Interpretation No. 45
("FIN 45"), "Guarantor's Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of Others."
FIN 45 requires that a liability be recorded in the guarantor's balance
sheet upon issuance of a guarantee at its fair value. In addition, FIN
45 requires certain disclosures about each of the entity's guarantees.
At December 31, 2003, the Company has no guarantees that require the
application of FIN 45.
In January 2003, the FASB issued Interpretation No. 46 ("FIN
46"), "Consolidation of Variable Interest Entities, an Interpretation
of ARB No. 51." FIN 46 requires the consolidation of certain variable
interest entities by the primary beneficiary of the entity if the
equity investment at risk is not sufficient to permit the entity to
finance its activities without additional subordinated financial
support from other parties, or if the equity investors lack the
characteristics of a controlling financial interest. FIN 46 is
effective for variable interest entities created or acquired after
January 31, 2003. For variable interest entities created or acquired
prior to February 1, 2003, the provisions of FIN 46 must be applied in
the first interim or annual period beginning after December 15, 2003.
Management does not expect the adoption of FIN 46 will have a material
effect on the Company's results of operations and financial position.
In April 2003, the FASB approved Statement of Financial
Accounting Standards Board ("FASB")
approved SFAS No. 141, "Business Combinations,149, "Amendment of Statement 133 on Derivative
Instruments and Hedging Activities." and SFAS No. 142,
"Goodwill and Other Intangible Assets." SFAS No. 141 prospectively
prohibits the pooling of interest method of accountingThis Statement is effective for
business
combinations initiatedcontracts entered into or modified after June 30, 2001. The2003, except as
stated, and for hedging relationships designated after June 30, 2003.
In addition, except as stated, all provisions of this Statement are required toshould
be applied startingprospectively. SFAS 149 amends Statement 133 for certain
decisions made as
76
part of the Derivatives Implementation Group (DIG) process. The
adoption of this statement did not have a material effect on the
Company's results of operations and financial position.
2. DISCONTINUED OPERATIONS:
On March 31, 2003, the sale of Sequoia Insurance Company
("Sequoia") closed for gross proceeds of $43.1 million, which consisted
of $25.2 million in cash and a dividend of equity and debt securities
previously held by Sequoia with fiscal years beginning
after December 15, 2001. However, as an exception, any goodwill resulting
from acquisitions completed after June 30, 2001 will not be amortized.
SFAS No. 142 also establishes a new method of testing goodwill for
impairment on an annual basis or on an interim basis if an event occurs
or circumstances change that would reduce the fairmarket value of a reporting
unit below its carrying value. At December 31, 2001, PICO's balance sheet
included goodwill and intangible assets of $5.8 million, $2.3 million of
which is included within the investment balances of the unconsolidated
affiliates, and negative goodwill ("excess of fair value of net assets
acquired over purchase price") of $2.8 million.
Management has estimated that the adoption of SFAS No. 142 will have
the following effects. The initial consequence will be reflected in the
Company's consolidated financial statements for the quarter ending March
31, 2002:
1) The write-off of negative goodwill of $2.8 million;
2) The write-off of goodwill of $1$17.9 million. The
net effect of the above of $1.8 million addition to net income or
reductionfrom Sequoia included in net loss will be reported as a cumulative effect of a change
in accounting principle. The remaining balance of $2.5 million will be
classified as an intangible asset with a finite life. Accordingly, it will
be amortized over its remaining life of 8 years and tested for impairment
at least annually.
In August 2001, the FASB adopted SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." This statement supersedes
SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed of" and defines an impairment as "the
condition that exists when the carrying amount of a long-lived asset (asset
group)
67
is not recoverable and exceeds its fair value." Based on the SFAS No. 121
framework, this statement develops a single accounting model for the
disposal of long-lived assets, whether previously held or newly acquired.
The statement will be effective for financial statements issued for fiscal
years beginning after December 15, 2001, and interim periods within those
fiscal years, with initial application as of the beginning of the fiscal
year. Management does not believe this statement will have a material
impact on the consolidated financial statements.
2. 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. ThePICO's condensed consolidated
results
of operations for the year ended December 31, 1999 reflect the
consolidation2003 was $2.4 million, which is
reported as "Income from discontinued operations, net." The Company
also recorded a $443,000 gain on sale, net of Conex for the period August 3 to December 31. Prior to
consolidation, the investment was accounted for using the equity method.
Consequently, the resultsestimated income taxes of
$281,000 and selling costs of $845,000, which is reported as "Gain on
disposal of discontinued operations, net" for the year ended December
31, 1999 include 32%2003.
HyperFeed, a 51% owned subsidiary of the lossesCompany, sold its
consolidated market data feed service contracts to Interactive Data
Corporation for $8.5 million in the unconsolidated affiliate for the
period January 1 to August 2, 1999.fourth quarter of 2003. The reported results in 2000 include
Conex as a consolidated subsidiary until September 8, 2000. Conex's
primary asset was a 60% joint venture that manufactures wheeled and
tracked excavators in The People's Republic of China.
Conex accounted for its 60% interest in the joint venture using the
equity method of accounting due the fact that it did not have majority
financial control over the policies and procedures of the joint venture.
The functional currency for the joint venturegain
recorded within discontinued operations is the Chinese Renminbi.
Under the terms of the joint venture agreement between Conex and the
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$7 million. This liability wasgain is
included in the accompanying condensed 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
includedoperations in the Company's consolidated financial statements.
The following is the resultsline item titled "Gain on disposal of discontinued
operations, of Conexnet" for the year ended December 31, 19992003. In addition,
HyperFeed generated income of $659,000 from discontinued operations
during the 2003 period HyperFeed was a consolidated subsidiary of the
Company. Such amount is included in "Income from discontinued
operations, net". The assets and liabilities of this HyperFeed
subsidiary are reported as discontinued operations in the December 31,
2003 balance sheet.
In accordance with SFAS No. 144, Sequoia's results of
operations for all periods presented have been reclassified as
discontinued operations in the accompanying consolidated financial
statements. Certain major assets and liabilities of Sequoia are grouped
and presented on the face of the accompanying 2002 consolidated balance
sheet as assets and liabilities of discontinued operations, and results
of operations from discontinued operations are shown on the face of the
statement of operations as a single line. The following is a detail of
Sequoia's results for the period included in 2000 prior to its disposition:
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 Januarythe accompanying
consolidated financial statements:
BALANCE SHEET AT DECEMBER 31, 2000, the Company sold its interest in Summit Global
Management for $100,000, and recorded a pretax loss on sale of $75,400.
682002:
2002
-------------
Cash $ 838,851
Investments 78,442,627
Premium receivables 13,973,024
Reinsurance receivables 26,485,523
Deferred policy acquisition costs 8,615,621
Intangible assets 2,182,777
Other assets 42,602
-------------
Total assets 130,581,025
Unpaid loss and loss adjustment expense 49,162,995
Unearned Premiums revenues 35,687,057
Accrued Expenses and other liabilities 8,398,919
-------------
Total liabilities 93,248,971
-------------
Carrying value $ 37,332,054
=============
77
STATEMENTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31 (THREE MONTHS ENDED
MARCH 31 FOR 2003):
2003 2002 2001
------------ ------------ ------------
Revenues:
Premium income $ 13,478,457 $ 47,102,301 $ 42,309,724
Net investment income and realized gains/losses 2,863,487 5,096,002 5,187,166
Other income 91,303 241,195 416,841
------------ ------------ ------------
Total revenues 16,433,247 52,439,498 47,913,731
Expenses:
Loss and loss adjustment expenses 7,657,813 31,175,373 29,231,602
Policy acquisition costs 4,163,270 15,048,726 13,047,108
Insurance underwriting and other expenses 938,341 1,636,727 2,320,563
------------ ------------ ------------
Total expenses 12,759,424 47,860,826 44,599,273
------------ ------------ ------------
Income before income taxes and cumulative effect 3,673,823 4,578,672 3,314,458
Provision for income taxes 1,284,974 1,545,761 996,963
Cumulative effect of change in
accounting principle, net (199,105)
------------ ------------ ------------
Net income $ 2,388,849 $ 2,833,806 $ 2,317,495
============ ============ ============
Income per common share - basic and diluted $ 0.19 $ 0.23 $ 0.19
============ ============ ============
3. INVESTMENTS:
At December 31, the cost and carrying value of investments
held by continuing operations were as follows:
Gross Gross
Unrealized Unrealized Carrying
2001:2003: Cost Gains Losses Value
----------------- --------------- ----------------- ------------------------------ ------------ ---------- ------------
Fixed maturities:
U.S. Treasury securities
and obligations of U.S.
government - sponsored enterprises $ 12,179,6707,082,293 $ 326,884329,102 $ (90,457) $ 12,416,0977,411,395
Corporate securities 83,172,507 1,247,644 (614,004) 83,806,14739,610,609 968,512 (48,140) 40,530,981
Mortgage participation interests 4,673,000 4,673,000
----------------- --------------- ----------------- -----------------
100,025,177 1,574,528 (704,461) 100,895,244------------- ------------ --------- ------------
51,365,902 1,297,614 (48,140) 52,615,376
Equity securities 48,183,148 7,178,436 (997,042) 54,364,542
Investment in unconsolidated affiliates 2,583,590 2,583,590
----------------- --------------- ----------------- -----------------69,745,247 26,811,054 (250,266) 96,306,035
------------- ------------ --------- ------------
Total $150,791,915 $ 8,752,964121,111,149 $ (1,701,503) $ 157,843,376
================= =============== ================= =================28,108,668 $(298,406) $148,921,411
============= ============ ========= ============
Gross Gross
Unrealized Unrealized Carrying
2000:2002: Cost Gains Losses Value
----------------- --------------- ----------------- ------------------------------ ------------ ---------- ------------
Fixed maturities:
U.S. Treasury securities
and obligations of U.S.
government - sponsored enterprises $ 20,774,8187,157,734 $ 186,444486,594 $ (22,329) $ 20,938,9337,644,328
Corporate securities 67,621,386 1,026,850 (41,895) 68,606,34134,427,283 822,153 35,249,436
Mortgage participation interests 12,350,000 12,350,000
----------------- --------------- ----------------- -----------------
100,746,204 1,213,294 (64,224) 101,895,2744,673,000 4,673,000
------------- ------------ --------- ------------
46,258,017 1,308,747 47,566,764
Equity securities 52,201,758 5,043,089 (2,193,798) 55,051,04940,782,699 6,813,729 (166,236) 47,430,192
Investment in unconsolidated affiliates 4,139,830 4,139,830
----------------- --------------- ----------------- -----------------498,214 498,214
------------- ------------ --------- ------------
Total $ 157,087,79287,538,930 $ 6,256,3838,122,476 $(166,236) $ (2,258,022) $ 161,086,153
================= =============== ================= =================95,495,170
============= ============ ========= ============
78
The amortized cost and carrying value of investments in fixed
maturities at December 31, 2001,2003, 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 $19,272,532 $19,308,867$ 9,630,934 $ 9,654,002
Due after one year through five years 41,193,744 41,903,36222,157,496 23,186,806
Due after five years 34,885,901 35,010,01514,904,472 15,101,568
Mortgage participation interests 4,673,000 4,673,000
------------------- ------------------
$100,025,177 $100,895,244
=================== ==================------------ ------------
$ 51,365,902 $ 52,615,376
============ ============
69
InvestmentNet investment income is summarized as follows for each of the years ended
December 31:
2003 2002 2001
2000 1999
--------------- --------------- -------------------------- ----------- -----------
Investment income from:
Available for sale:income:
Fixed maturities $ 6,171,0142,465,683 $ 5,196,8313,060,988 $ 1,593,0522,877,173
Equity securities 1,795,248 965,836 470,6281,951,462 1,143,870 1,461,990
Other 1,871,738 2,884,099 4,809,821
--------------- --------------- ---------------999,871 1,201,470 1,728,894
----------- ----------- -----------
Total investment income 9,838,000 9,046,766 6,873,5015,417,016 5,406,328 6,068,057
Investment expenses (71,107) (185,845) (268,679)
--------------- --------------- ---------------expenses: (46,428) (21,119) (32,232)
----------- ----------- -----------
Net investment income $ 9,766,8935,370,588 $ 8,860,9215,385,209 $ 6,604,822
=============== =============== ===============6,035,825
=========== =========== ===========
Pre-tax net realized gain (loss)or loss on investments is as follows for each
of the years ended December 31:
2003 2002 2001
2000 1999
------------------ --------------- -------------------------- ----------- ------------
Gross realized gains:
Fixed maturities $ 1,788,474142,509 $ 110,708383,576 $ 406,554
Equity securities and other investments 803,760 15,127 $ 3,395,323
Real estate 670,451
------------------ --------------- ---------------3,797,245 8,842,416 729,084
----------- ----------- ------------
Total gains 2,592,234 125,835 4,065,774
------------------ --------------- ---------------gain 3,939,754 9,225,992 1,135,638
----------- ----------- ------------
Gross realized losses:
Fixed maturities (84,446) (123)(33,960) (320,949) (83,949)
Equity securities and other investments (5,926,284) (7,812,798) (4,677,024)
------------------ --------------- ---------------(1,160,137) (4,695,411) (5,926,283)
----------- ----------- ------------
Total losses (6,010,730) (7,812,798) (4,677,147)
------------------ --------------- ---------------loss (1,194,097) (5,016,360) (6,010,232)
----------- ----------- ------------
Net realized lossgain (loss) $ (3,418,496) $(7,686,963)2,745,657 $ (611,373)
================== =============== ===============4,209,632 $ (4,874,594)
----------- ----------- ------------
During 2001, 20002003, 2002 and 1999,2001, the Company recorded
$3 million, $161,000
and $1.1 million, respectively, in other-than-temporary impairments of $1.1 million, $4.1 million and $3
million, respectively, on equity securities to recognize what are
expected to be other-than-temporary declines in value primarily due to
the extent and duration of the decline in market valuevalues of the equity
securities.
Also, during 2001During 2002, the Company sold an investment that had previously been impaired. The total pre-tax
loss was $4.7 million and the accounting effect in 2001 was a pre-tax
gain of $731,000.
During 2001, 2000 and 1999, the Company recorded $500,000, $2.5
million and $3.2 million, respectively, in permanent write downs of
non-equity security investments to recognize what is expected to be other
than temporary declines in the value of securities.
At December 31, 2001, the Company owned 9,867,391 shares, representing
a 20.7%its interest in Australian Oil
and Gas ("AOG"). During 2001, for a realized gain of $8.8 million in response to a
take over bid. The sale proceeds of $21.1 million were received in
cash.
Accu Holding:
At December 31, 2003, the Company purchased 1,026,732 sharesowns 28.3% of AOG for $941,000 and received
414,615 shares asAccu Holding
AG, a dividend valued at $333,000. During 2000, the Company
purchased 981,584 shares of 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. Generally, with
a voting ownership percentage of 20% or more, the investment may be
recorded under the equity method unless the investor lacks the ability to
exercise significant influence.Swiss corporation. PICO lacks the ability to exercise significant
influence based on a numberconsideration of factors.
During the fourth quarter of 2000, the Company increased its voting
ownership in Accu Holding AG, a Swiss corporation, to 28.3%. As is the
case with AOG, PICO lacks the ability to exercise significant influence
based on a number of factors and therefore
accounts for the holding using SFAS No. 115. In 2003 and 2002, the
Company recorded other-than-temporary impairments of $823,000 and $2.2
million, respectively, due to the extent and duration of the decline of
Accu's stock price. At December 31, 2003, Accu's market value is $3.1
million.
79
SIHL:
In 2001, the Company recorded a pre-tax provision of $2.1
million for an other-than-temporary decline in the market value of this
security. During 2002, the stock continued to decline which, combined
with an announcement from SIHL that a total sale of the company for
more than the current market value of the stock was unlikely, caused
the Company to record an additional other-than-temporary impairment of
$1.6 million. The charge reduced our basis in SIHL to $768,000, which
was equivalent to market value at December 31, 2002. In 2003, the
Company recorded an additional other-than-temporary impairment of
$293,000. At December 31, 2003 the market value of SIHL is $433,000.
Jungfraubahn:
At December 31, 2003, the Company owns 130,577 shares of
Jungfraubahn, which represents approximately 22.4% of the outstanding
shares of Jungfraubahn. At December 31, 2003, the market value of the
investment was $26.7 million and had an unrealized gain of $3 million,
net of tax. During 2002, the Company acquired 17,505 shares for
approximately $2.8 million, and became the largest shareholder in
Jungfraubahn. Despite the increase in our shareholding to more than
20%, the Company continues to account for this investment under SFAS
No. 115, "Accounting for Certain Investments in Debt and Equity
Securities." At this time, the Company does not believe that it has the
requisite ability to exercise "significant influence" over the
financial and operating policies of Jungfraubahn, and therefore does
not apply the equity method of accounting and is accounting for this investment at cost and
has recorded an unrealized loss under SFAS 115.
70
During 2000,accounting.
4. CONSOLIDATION OF HYPERFEED TECHNOLOGIES, INC:
On May 15, 2003 the Company purchased 3,472increased its ownership of HyperFeed from
44% to 51% by purchasing 443,623 shares for $1.2 million and
accordingly, now has a controlling financial interest through a direct
ownership of Jungfraubahn
Holding AG ("Jungfraubahn") for $493,000. During 1999,a majority voting interest. Consequently, PICO
consolidated HyperFeed's results from the Company
purchased 76,600 sharesdate of Jungfraubahn for $11.8 million.acquisition forward.
The acquisition was financed withaccounted for using the purchase method of
accounting and accordingly, the accompanying condensed consolidated
financial statements include the revenues and expenses and costs of
HyperFeed beginning May 15. Prior to May 15, the Company accounted for
its investment in HyperFeed using the equity method of accounting. The
following is an allocation of the purchase price to the assets acquired
and liabilities assumed at the date of acquisition:
Purchase price $ 1,200,000
===============
Allocation of Purchase Price:
Cash 1,221,866
Receivables 761,459
Property and equipment, net 1,551,182
Other assets 2,564,765
Accounts payable and accrued liabilities (3,493,802)
Other liabilities (69,032)
Minority interest (1,336,438)
--------------
$ 1,200,000
==============
The following are the unaudited pro forma results of PICO for
the years ended December 31, 2003, 2002 and 2001 assuming the
acquisition had taken effect at the beginning of the period:
2003 2002 2001
-------------- ------------ ------------
Total revenues $ 33,098,458 $ 49,070,635 $ 56,906,145
Income (loss) before taxes and minority interest (15,449,874) 337,367 5,643,294
Net income (loss) (3,514,185) 5,019,980 4,717,665
Net income (loss) per share: basic and diluted $ (0.28) $ 0.41 $ 0.38
80
On October 31, 2003, HyperFeed sold its consolidated market
data feed service contracts to Interactive Data Corporation for $8.5
million. The gain recorded within discontinued operations is $7
million in cash andmillion. Based on PICO's 51% ownership, net of minority interest, the
remaining
balance in debt.gain to PICO is approximately $3.6 million.
In the third quarter of 2003, HyperFeed completed a 1 for 10
reverse split of its common stock. Consequently, the following share
amounts have been adjusted from amounts previously reported.
At December 31, 2001 and 2000, the Company owns 112,672
shares, or 19.3% of the Jungfraubahn. The Company accounts for the
investment under SFAS 115 and reported a net unrealized gain of $2.6
million at December 31, 2001.
4. INVESTMENTS IN UNCONSOLIDATED AFFILIATES:
HyperFeed Technologies, Inc.:
At December 31, 2001,2003, the Company's investment in HyperFeed
consisted of 10,077,8561.5 million shares of common stock, representing 42.4%51% of
the common shares outstanding; and 4,055,195310,616 common stock warrants which
on a diluted basis would represent an additional 14.5%5% voting interest if
exercised. The common stock is recorded using the equity method of
accounting and has a carrying value of $2.1 million atAt December 31, 2001.
The difference between2003, the carrying value of the investment
and the
underlying equity in the net assets or liabilities of HyperFeed of $2.2
million considered goodwill and is being amortized over 10 years on a
straight-line basis. At December 31, 2001, the common stock warrants are
valued atis an estimated fair value of $527,000, prior to a $1.2 million
deferred tax asset,$556,000, using
the Black-Scholes option-pricing model. The warrants are reported as a
derivative instrument under the provisions of SFAS No. 133 and
consequently the lossgains and losses for the 2001 year iseach period are reflected in the
caption "Realized"Net Realized Loss on Investments" in the Statement of Operations.
The cumulative change in fair value from the date of acquisition to
January 1, 2001 was a decline of $1.3 million and is recorded net of a
deferred tax benefit on the Statement of
Operations.
The Black-Scholes pricing model incorporates assumptions in
calculating an estimated fair value. The following assumptions were
used in the computations:computations in each of the three years ended December 31,
2003: no dividend yield for all years; a risk-free interest rate
ofranging from 1% - 2% - 5.6%; a one year expected life; and a historical
5
year cumulative volatility ofranging from 109% to 119%139%.
At December 31, 2000,2002, the Company's investment in HyperFeed
consisted of 2,602,0001.1 million shares of common stock, representing 16.5%44% of
the common shares outstanding; 4,786,547 shares of preferred stock, representing a
23% diluted voting interest; and an additional 4,055,195310,616 common stock warrants which
on a diluted basis would represent an additional 20.5%6% voting interest.interest if
exercised. During 2002, PICO exercised 94,903 common stock warrants in
HyperFeed for $305,000. The common and preferred stock arewas recorded using the equity
method of accounting for investmentsaccounting. At December 31, 2002, the carrying value of the
investment in common stock was $498,000 after recording losses of $2
million before tax and have a
combined carryingthe common stock warrants are valued at an
estimated fair value of $3.3 million at December 31, 2000.$65,000, using the Black-Scholes option-pricing
model. The warrants are reported as a derivative instrument under the
provisions of SFAS No. 133 and consequently gains and losses for each
period are reflected in the caption "Net Realized Loss on Investments"
in the Statement of Operations. The difference between the carrying
value of the investment and the underlying equity in the net assets or
liabilities of HyperFeed is considered goodwill, andwhich is no longer
being amortized over 10 years on a
straight-line basis. Atbeginning January 1, 2002. For the year ended December
31, 2000,2002, no goodwill was amortized given the common stock warrants are
carried in accordance withprovisions of 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.142.
During the three years ended December 31, 2001,2003, HyperFeed
recorded various capital transactions that affected PICO's voting
ownership percentage. During 2002, our voting percentage declined
slightly due to the issue of new shares for option exercises, and
increased by approximately 2% upon PICO's exercise of 94,903 common
stock purchase warrants. In 2001, HyperFeed issued 491,00049,100 shares of
common stock related to an acquisition which resulted in a dilution
gain of $352,000 to PICO. 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 providedwere recorded 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 1% to 35% at June of 2001 and through the conversion of
preferred shares and exercise of warrants, PICO increased its voting
ownership to 42.4% by the end of December 31, 2001.2001, and to 44% by December 31,
2002. In September 2001, the Company converted2003, PICO increased its HyperFeed Series A voting
convertible preferred shares, and its Series B voting convertible
preferred shares into 7,462,856 newly issued common shares. After the
conversion, PICO owned 42.4% of the outstanding voting interest.ownership to 51%.
The following is the market value of the common shares at December 31, 2003 and
preferred
shares (preferred shares existed in 2000 only)2002 based on the December 31,
2001 and 2000 closing price of HyperFeed common stock:
2001 2000
------------------ -----------------
Common stock $ 6,147,492 $ 4,065,625
Preferred stock 7,478,980
------------------ -----------------
$ 6,147,492 $ 11,544,605
================== =================
71is $9.5
million and $3.3 million, respectively.
81
5. LAND AND RELATED MINERAL RIGHTSREAL ESTATE AND WATER RIGHTS:ASSETS:
Through its subsidiary Nevada Land, the Company owns land and
the related mineral rights and water rights. Through its subsidiary
Vidler, the Company owns land and 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:
2001 2000
------------------ ------------------2003 2002
------------ -------------
NLRC:Nevada Land:
Land and related mineral rights and water rights $ 45,249,03942,193,587 $ 42,799,043
------------------ ------------------43,973,852
------------ -------------
Vidler:
Water and water rights 24,530,412 25,743,70724,214,843 20,339,440
Land 46,803,276 55,960,54435,457,247 43,685,803
California water storage 1,206,737 5,740,483(Semitropic) 1,759,739 1,483,238
Land improvements, net 8,208,178 6,991,464
------------------ ------------------
80,748,603 94,436,198
------------------ ------------------8,644,864 7,308,558
------------ -------------
70,076,693 72,817,039
------------ -------------
$112,270,280 $ 125,997,642 $ 137,235,241
================== ==================116,790,891
============ =============
At December 31, 2001 and 2000, the book value of Vidler's interest in
the Semitropic Water Storage facility was $1.2 million and $5.7 million,
respectively. During the first ten years of the agreement throughThrough November 2008, Vidler is required to make a minimum
annual payment.payment for the Semitropic water storage facility of $378,000.
These payments are being capitalized and the asset is being amortized
over its useful life of thirty-five years. Amortization expense was
$102,000 in 2003 and 2002 and $438,000 in 2001. In May 2001, Vidler sold
29.73% of its
right, title and interest under the lease to Newhall Land and Farming
Company. In 2001 Vidler soldapproximately 84% of its right, title and interest under the lease for
a gain of $5.7 million. As a result, at December 31, 2001,2003 and 2002,
Vidler owns the right to store 30,000 acre-feet of water andwater. Vidler is
required
to make a minimum annual payment of $519,000. At December 31, 2000,
Vidler owned the right to store 185,000 acre-feet and was required to
make a minimum annual payment of $2.3 million. The amortization expense
in 2001 and 2000 was $438,000 and $667,000, respectively. In addition,
Vidler isalso required to pay annual operating and maintenance costs. Incharges and for
the years ended December 31, 2003, 2002 and 2001, 2000the Company expensed
a total of $155,000, $152,000 and 1999, operating costs of $146,000, $889,000 and $863,000,
respectively, were expensed.
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 also purchased 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 acquisition. 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 $184,000 and minority interest of $3.8 million.
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.respectively.
6. PREMIUMSNOTES AND OTHER RECEIVABLES:
PremiumsNotes and other receivables consisted of the following at
December 31:
2001 2000
---------------- ----------------2003 2002
------------ -----------
Agents' balances and unbilled premiums $ 11,081,153 $ 10,008,197
FinanceNotes receivable 13,118,122 4,480,001
Trade receivable 510,490 51,835
Interest receivable 589,322 425,100
Other receivables 5,961,567 3,329,670
Trade receivables 49,288 263,400
Other accounts receivable 3,535,157 5,645,636
---------------- ----------------
20,627,165 19,246,9034,663,211 3,441,602
------------ -----------
18,881,145 8,398,538
Allowance for doubtful accounts (2,550,604) (214,300)
---------------- ----------------(2,450,604) (2,500,604)
------------ -----------
$ 18,076,56116,430,541 $ 19,032,603
================ ================5,897,934
============ ===========
72
Notes receivable, primarily from the sale of real estate and
water assets ($9.3 million of which are due by December 31, 2004), have
a weighed average interest rate of 7.4% and a weighted average life to
maturity of approximately 3 years at December 31, 2003.
Other accounts receivable includeincludes $2.3 million due from
Dominion Capital Pty. Ltd ("Dominion"), which is affiliated with the Company
through a mutual ownership in Solpower Corporation. During 2001,completely offset by
an allowance for the total outstanding balance owed by Dominion of $2.3
million was recordeddoubtful accounts due to the uncertainty surrounding
the recovery of the balance.
Also included in other accounts receivable is a $187,000
note receivable from the President and CEO of Summit Global Management
for the purchase of Summit in January 2000.
7. FEDERAL, FOREIGN AND STATE INCOME TAX:
The Company and its U.S. subsidiaries (excluding HyperFeed)
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.
82
Significant components of the Company's deferred tax assets
and liabilities are as follows at December 31:
2001 2000
---------------- ----------------2003 2002
------------ ------------
Deferred tax assets:
Net operating loss carryforwardscarry forwards $ 12,155,88310,077,295 $ 20,598,36210,042,312
Capital loss carryforwards 2,947,945carry forwards 1,304,859
Loss reserves 7,100,265 9,023,860
Unearned premium reserves 1,913,744 1,734,3535,613,628 5,707,325
Unrealized depreciation on securities 292,122 364,041
Deferred gain on retroactive reinsurance 149,219 329,417148,345
Equity in unconsolidated affiliates 2,201,760
Write down of securities 5,961,979 6,742,018
Equity in unconsolidated affiliates 1,392,552 681,104
Deferred3,095,168 3,919,177
Cumulative loss on SFAS No. 133 505,1441,346,962 939,807
Other, net 1,187,741 550,044
---------------- ----------------2,183,563 1,734,785
------------ ------------
Total deferred tax assets 33,606,594 40,023,199
---------------- ----------------23,769,820 24,545,166
------------ ------------
Deferred tax liabilities:
Discounting of reserves 2,823,237 2,823,237
Deferred policy acquisition costs 2,350,620 2,141,939
Unrealized appreciation on securities 1,669,697 714,7696,995,708 2,068,933
Revaluation of surface,real estate and water and mineral rights 12,991,330 14,880,795
NLRC landassets 10,383,777 11,737,924
Land sales 1,065,3151,931,688 1,065,315
Accretion of bond discount 109,664 61,79581,855 81,886
Capitalized lease 279,313 1,133,434
---------------- ----------------279,313
------------ ------------
Total deferred tax liabilities 21,289,176 22,821,284
---------------- ----------------22,495,578 18,056,608
------------ ------------
Net deferred tax assets before
valuation allowance 12,317,418 17,201,9151,274,242 6,488,558
Less valuation allowance (3,734,153) (4,101,587)
---------------- ----------------(1,244,665) (408,748)
------------ ------------
Net deferred tax asset $ 8,583,26529,577 $ 13,100,328
================ ================6,079,810
============ ============
The deferred tax asset valuation allowance as of December 31, 2001 and
2000 relates primarily to the net operating loss carryforwards (NOL's) of
Global Equity, a Canadian company. Global Equity is 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. NOL's, the
Company carried a valuation allowance on a portion of its U.S. NOL's. 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.
73
The State of California has completed income tax audits on the
Company's consolidated tax returns for tax years ended December 31,
1997 and 1998. As part of these audits the California Franchise Tax
Board ("FTB") is challenging, among other things, the Company's ability
to deduct dividends received from PICO's non-California insurance
company. Based partly on the recent California Court of Appeal decision
in Ceridian vs. Franchise Tax Board, the FTB is challenging the
Company's ability to exclude intercompany dividends from income tax.
The Company has formally appealed the proposed assessments and is
currently awaiting a hearing before the California State Board of
Equalization ("SBE").
Although the ultimate outcome of these audits is uncertain,
management believes the Company is adequately reserved in the event the
additional state income taxes assessments are upheld.
Pre-tax income (loss) from continuing operations for the years
ended December 31 was under the following jurisdictions:
2003 2002 2001
2000 1999
----------------- ---------------- ------------------------------ ----------- -----------
Domestic $ 12,508,221(12,662,646) $ (11,129,866)6,639,696 $ (14,716,953)9,193,763
Foreign (1,230,382) (3,933,720) (3,365,730)
(4,935,297) (9,593,712)
----------------- ---------------- ------------------------------ ----------- -----------
Total $ 9,142,491(13,893,028) $ (16,065,163)2,705,976 $ (24,310,665)
================= ================ =================5,828,033
============= =========== ===========
83
Income tax expense (benefit) from continuing operations for
each of the years ended December 31 consists of the following:
2003 2002 2001
2000 1999
---------------- ---------------- ----------------------------- ----------- -----------
Current tax benefit:expense (benefit):
U.S. federal $ (15,373)(326,200) $ (450,125)2,471,607 $ (718,240)(826,850)
Foreign (2,412,084) (614,389)
(4,650,993) 514,096
---------------- ---------------- ----------------------------- ----------- -----------
Total current tax benefit (629,762) (5,101,118) (204,144)
---------------- ---------------- -----------------expense (benefit) (326,200) 59,523 (1,441,239)
------------ ----------- -----------
Deferred tax expense (benefit):
U.S. federal $ 4,365,247(177,746) $ (3,775,786)5,334,617 $ (9,394,066)4,179,761
Foreign (698,461) (3,344,575) (329,021)
(134,318) (3,823,859)
---------------- ---------------- ----------------------------- ----------- -----------
Total deferred tax expense (benefit) 4,036,226 (3,910,104) (13,217,925)
---------------- ---------------- -----------------(876,207) 1,990,042 3,850,740
------------ ----------- -----------
Total income tax expense (benefit) $ 3,406,464(1,202,407) $ (9,011,222)2,049,565 $ (13,422,069)
================ ================ =================2,409,501
============ =========== ===========
The difference between income taxes provided at the Company's
federal statutory rate and effective tax rate is as follows:
2003 2002 2001
2000 1999
---------------- ---------------- ----------------------------- ----------- -----------
Federal income tax provision (benefit) at statutory rate $ 3,108,447 $(5,462,155)(4,723,807) $ (8,265,626)
Book tax difference on sale920,032 $ 1,981,531
Change in valuation allowance 835,917 (2,980,872) (367,434)
Write off of securities (1,247,596)NOL's previously valued and other items 493,420 2,264,119
Foreign rate differences 243,870 854,064
Permanent differences 1,948,193 992,222 1,354,545
Settlement of tax appeal (495,976)
(4,398,731)
Change in valuation allowance (367,434) 3,285,416 (8,448,347)
Amortization of goodwill (63,165)
208,268 217,934
Non-deductible capital loss (166,750) 294,188
Investment valuation (971,105) 171,115
Accrued liabilities 1,578,000
Extraordinary gain 227,821
Permanent differences 1,224,592 (258,569) 802,846
---------------- ---------------- -----------------
Federal income tax provision (benefit)------------ ----------- -----------
Total $ 3,406,464 $(9,011,222) $(13,422,069)
================ ================ =================(1,202,407) $ 2,049,565 $ 2,409,501
============ =========== ===========
84
Provision has not been made for U.S. or additional foreign tax
on the $5.9$2.5 million of undistributed earnings of foreign subsidiaries.
It is not practical to estimate the amount of additional tax that might
be payable. Rate differences within the difference between statutory
and effective tax rates reflect foreign results taxed at the local
statutory rate, which can be as much as 20% lower than the US statutory
rate of 34%. At December 31, 2001,2003 and 2002, the Company had no material
federal income tax payable or receivable, and at December 31, 2000, the Company had an income tax
payable of $324,000.receivable. As of December 31, 2001,2003, the
Company has net operating loss carryforwards of $35 million.$30.8 million, which
includes $3.7 million of which that may not be utilized due to certain
limitation imposed by current tax law .
The Company has $2.2
million, $620,000, and $6.7 million of consolidated NOL's that expire in
2014, 2016, and 2020, respectively. In addition certain subsidiaries have
$25.5 million of NOL's subject to certain limitations that restrict their
use and have valuation allowances established.
74
as follows:
EXP DATE NOL
-------- ---
12/31/2009 6,695,792
12/20/2011 619,708
12/31/2017 4,881,041
12/31/2018 2,441
3/30/2019 292,896
12/31/2019 1,592,516
6/17/2020 3,633,691
6/30/2020 445,444
12/31/2020 6,644,738
6/30/2021 1,013,710
12/31/2023 4,974,173
----------
30,796,150
Valuation allowance (3,660,779)
----------
TOTAL 27,135,371
==========
8. PROPERTY AND EQUIPMENT:
The major classifications of the Company's fixed assets are as
follows at December 31:
2001 2000
-------------- ---------------2003 2002
----------- -----------
Office furniture, fixtures and equipment $ 6,833,9726,760,616 $ 6,834,3813,555,103
Building and leasehold improvements 1,135,071 1,192,123
-------------- ---------------
7,969,043 8,026,5041,870,473 1,333,025
----------- -----------
8,631,089 4,888,128
Accumulated depreciation (5,241,112) (5,081,991)
-------------- ---------------(5,513,568) (2,744,382)
----------- -----------
Property and equipment, net $ 2,727,9313,117,521 $ 2,944,513
============== ===============2,143,746
=========== ===========
Depreciation expense was $969,000, $1.1 million, $456,000, and $1 million$598,000
in 2001, 2000,2003, 2002, and 1999,2001, respectively.
9. DEFERRED POLICY ACQUISITION COSTS:
Changes in deferred policy acquisition costs were as follows:
2001 2000 1999
---------------- ---------------- ----------------
Balance, January 1 $ 6,299,819 $ 4,821,228 $ 5,548,634
Additions:
Commissions 7,884,474 7,232,606 5,559,587
Other 5,903,573 4,613,034 3,966,560
Ceding commissions (129,895) (116,701) 230,792
---------------- ---------------- ----------------
Deferral of expense 13,658,152 11,728,939 9,756,939
---------------- ---------------- ----------------
Amortization to expense (13,044,382) (10,250,348) (10,484,345)
---------------- ---------------- ----------------
Balance, December 31 $ 6,913,589 $ 6,299,819 $ 4,821,228
================ ================ ================
10. SHAREHOLDERS' EQUITY:
At the Annual Meeting of Shareholders on October 19, 2000,
shareholders voted to amend the Articles of Incorporation to eliminate
the Company's preferred shares. This amendment became effective January
16, 2001.
On February 9, 2000, the CompanyPICO 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.
In March 2000, an investment partnership registered as PICO
Equity Investors, L.P. acquired 3,333,333 shares of PICO stock for
approximately $50 million. 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
85
executive officer), will exercise all voting and investment decisions
with respect to these shares for up to 10 years. There is no monetary
compensation for the management of either partnership. PICO 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.
Stock Option PlansAppreciation Rights Plan
PICO Holdings 1995 Non-Qualified2003 Stock OptionAppreciation Rights Plan. PICO was
authorized to issue 521,030 shares of common stock pursuant to awards
granting non-qualifiedOn July 2,
2003, all 1,687,242 outstanding stock options to full-timewere voluntarily
surrendered by employees (including
officers) and directors. The options grantedOn July 17, 2003, the Company's
shareholders voted to employees vest at a rate
of 33% upon grantadopt the PICO Holdings, Inc. 2003 Stock
Appreciation Rights Program (the "SAR program") to replace the
Company's stock option plans and 33% per year on eachcall option agreements. Upon adoption
of the first two anniversariesSAR program, all 355,539 outstanding options under call option
agreements were also surrendered by the holders. The maximum number of
SARs issuable under the SAR program may not exceed 2,042,781. 1,962,781
were issued to the prior option holders upon adoption of the date of grant. A total of 512,005 options have been issued from
this plan. 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.
75
PICO Holdings 1998 Stock Option Agreement. PICO was 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 CompanySAR
program 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. The remaining options expired during 2001. None of these
stock options were exercised.
PICO Holdings 1998 Global Equity/PICO Stock Option Plan. As discussed
above, PICO assumed 484,967 optionsequal to existing Global Equity option
holders pursuant to the acquisitionthat of the remaining sharessurrendered options.
In future periods, in the case of Global
Equity by exchanging"in the money" SARs (i.e., the market
price of PICO options for Global Equity options. The options
granted from this plan placedstock is higher than 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 Agreement. 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 expirethe SAR), a
charge or benefit is recorded 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 non-employee
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
non-employee directors ofconsolidated financial
statements. The charge or benefit will recognize the Company (1,082,223 to employees and 9,000
to directors) at anchange during the
period in the difference between the exercise price of $15.00 per share. Of"in 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.
On July 9, 2001, PICO granted 100,000 non-statutory stock options to
an employee at an exercise price of $15.00 per share. 66,000 of these
stock options vested on July 9, 2001money"
SARs and the remaining 34,000market value of PICO stock options will vest on July 9, 2002. These stock options expire on July 9,
2021.
On August 2, 2001, PICO granted 8,777 non-statutory stock options to
an employee at an exercise price of $15.00 per share. 2,925 of those
stock options vested on August 2, 2001, 2,926 stock options will vest on
August 2, 2002, and 2,926 stock options will vest on August 2, 2003. They
expire on August 2, 2021.
PICO Holdings 2001 Stock Option Agreements. PICO is authorized to
issue 46,223 shares of common stock pursuant to awards granted in
individual non-qualified stock option agreements. In August 2001, PICO
granted a total of 46,223 non-qualified stock options to three employeesthe end of the Company. The exercise price for all these non-statutory stock
options is $15.00 per share. One-third of these stock options vested in
August 2001, one-third will vest in August 2002, and the remaining
one-third will vest in August 2003. All of these non-statutory stock
options expire in August 2021.
76
period.
A summary of the status of the Company's stock options is
presented below for the years ended December 31:
2003 2002 2001
2000 1999
------------------------ ------------------------- -------------------------- ---------------------------- ------------------------------
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 1,687,242 $14.57 1,780,720 $ 14.60 1,834,599 $14.93 1,046,575 $ 15.83 1,097,021 $ 15.8914.93
Granted 155,000 15.00
1,091,223 15.00 10,665 13.25Exercised (17,700) 13.45
Canceled -/ expired / exchanged (1,687,242) 14.57 (75,778) 15.62 (208,879) 17.72
(303,199) 18.31 (61,111) 15.63------------- --------------- ---------------
Outstanding at end of year 1,687,242 14.57 1,780,720 14.60 1,834,599 14.93 1,046,575 15.83
Exercisable at end of year 1,668,909 14.57 1,349,312 14.48 1,113,117 14.88 1,046,575 15.83
Weighted-average fair value
of options granted during
the year $ 8.52
$ 7.15 $ 9.02
========== ========== ===========
The following table summarizes information about stock options outstanding
at December 31, 2001:
Options Outstanding Options Exercisable
- -------------------------------------------------------------- ---------------------------
Weighted
Average Weighted
Number Remaining Average Number Weighted
Range of Outstanding Contractual Exercise Exercisable Average
Exercise Prices at 12/31/01 Life Price at 12/31/01 Exercise Price
- -------------------- ------------- ----------- ----------- ------------- ------------
$13.45 to $23.80 522,672 3.71 $13.45 522,672 $13.45
$15.63 to $23.95 1,258,048 18.19 $15.08 826,640 $15.13
------------- -------------
$13.25 to $23.95 1,780,720 13.94 $14.60 1,349,312 $14.48
============= =============
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 each year: no dividend yield;
risk-free interest rates are different for each grant and range from 4.9% to
6.97%; expected lives of options are estimated at 10 years for 2001, 10 years
for 2000 and 7 years for 1999; and volatility of 42% for the 2001 grants, 51%
for the 2000 grants, and 54% for the 1999 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:
2001 2000 1999
--------------- ----------------- ----------------
Reported net income (loss) $ 5,113,905 $ (11,300,556) $ (9,740,280)
SFAS No. 123 charge (711,521) (2,616,496) (96,249)
--------------- ----------------- ----------------
Pro forma net income (loss) $ 4,402,384 $ (13,917,052) $ (9,836,529)
=============== ================= ================
Pro forma net income (loss) per share: basic and diluted $ 0.36 $ (1.20) $ (1.09)
=============== ================= ================
The effects of applying SFAS No. 123 in this pro forma disclosure are not
indicative of future amounts.
77
11.10. 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 exposure and
diversifying their risk. 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 at December 31 are as follows:
2001 2000
--------------- ----------------2003 2002
----------- -----------
Estimated reinsurance recoverable on:
Unpaid losses and loss adjustment expense $23,190,015 $27,444,846$17,490,157 $ 7,780,432
Reinsurance recoverable on paid losses and loss expenses 593,091 149,193
--------------- ----------------223,855 52,276
----------- -----------
Reinsurance receivables $23,783,106 $27,594,039
=============== ================$17,714,012 $ 7,832,708
=========== ===========
Unsecured reinsurance risk is concentrated in the companies
shown in the table below. The Company remains continentlycontingently liable with
respect to reinsurance contracts in the event that reinsurers are
unable to meet their obligations under the reinsurance agreements in
force.
86
CONCENTRATION OF REINSURANCE AS OFAT DECEMBER 31, 20012003
Unearned
Reported Unreported Reinsurer
Premiums Claims Claims Balances
-------------- --------------- --------------- -------------------------- ----------- ------------
Sydney Reinsurance Corporation $ 4,662,052 $ 2,390,600 $ 7,052,652
Continental Casualty Company 1,647,722 2,165,000 3,812,722
American Reinsurance Corp. $ 170,308 37,400 207,708
Hartford Steam & Boiler 100,105 34,000 134,105
TIG Reinsurance Group $ 312,612 (10,612) 302,000
Transatlantic Reinsurance$ 396,370 $ 708,982
Medical Assurance Company 958,151 958,151
Cologne Reinsurance Company of America 103,601 103,601
Gerling Global Reinsurance 53,574 195,000 248,574
Mutual Assurance, Inc. 3,236,656 218,446 3,455,102
GE Reinsurance Corp. 203,928 1,500,000 1,703,9282,328,221 1,005,718 3,333,939
General Reinsurance 38,291 1,209,135 10,000 1,257,4264,272,706 8,151,692 12,424,398
National Reinsurance Corporation 299,877 299,877
PXRE Reinsurance Company 749,474 1,130,000 1,879,474
Hartford Fire Insurance Company 117,746 80,000 197,746
Partner Reinsurance 302,775 330,000 632,775
Lumberman's Mutual Casualty Company 219,553 219,553226,909 226,909
North Star Reinsurance Corp. 137,818 137,818356,753 39,700 396,453
Swiss American Reinsurance Corporation 137,818 137,818
-------------- --------------- --------------- ---------------356,753 39,700 396,453
----------- ----------- ------------
$ 308,704 $13,362,1407,853,954 $ 9,070,186 $22,741,030
============== =============== =============== ===============9,633,180 $ 17,487,134
=========== =========== ============
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.
78
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.
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 beingwere amortized into income over the
expected payout of the underlying claims using the interest method.
The
unamortized gain atDeferred gains of $439,000, and $530,000 in 2002 and 2001,
respectively, were recorded in income. At December 31, 2001 and 20002002 the
deferred gain was $439,000 and $969,000,
respectively.fully amortized.
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:
2003 2002 2001
2000 1999
----------------- ---------------- ------------------------- ----------- ------------
Direct premiums written $ 54,110,16021 $ 47,620,431 $ 36,558,158(18,918)
Reinsurance premiums assumed 282,541 (3,020) 120,185427 804
Reinsurance premiums ceded (8,464,918) (3,573,715) (3,019,059)
----------------- ---------------- ----------------(42,217) 704,158
----------- ------------
Net premiums written $ 45,927,783(41,769) $ 44,043,696 $ 33,659,284
================= ================ ================686,044
=========== ============
Direct premiums earned 51,355,206 39,987,563 39,162,07727 274,978
Reinsurance premiums assumed 267,215 2,967 144,499394 816
Reinsurance premiums ceded (8,332,745) (5,554,776) (2,927,474)
----------------- ---------------- ----------------(42,217) 704,158
----------- ------------
Net premiums earned $ 43,289,676(41,796) $ 34,435,754 $ 36,379,102
================= ================ ================979,952
=========== ============
Losses and loss adjustment expenses incurred:incurred (recovered):
Direct 29,442,055 25,883,270 47,939,7384,941,702 859,948 (9,190,670)
Assumed 164,500 (681,716) (825,369)137,376 (49,314) (63,091)
Ceded (11,304,235) (1,175,336) (12,897,078)
----------------- ---------------- ----------------
18,302,320 24,026,218 34,217,291
Effect of discounting on losses and
loss adjustment expenses (Note 12) 994,545
----------------- ---------------- ----------------(412,054) (3,156,948) (1,675,521)
--------- ----------- ------------
Net losses and loss adjustment expenses $ 18,302,320 $ 24,026,218 $ 35,211,836
================= ================ ================expense (recovery) 4,667,024 (2,346,314) (10,929,282)
========= =========== ============
12.11. 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.
87
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 prepares its statutory financial statements in
accordance with accounting practices prescribed or permitted by the
Ohio Department of Insurance ("Ohio Department"). Citation and Sequoia prepare theirprepares its
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
79
property and casualty insurance lines of business. In 2000 the Ohio
Department of Insurance withdrew 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 $40.6 million
at December 31, 2001 and $58.6 million at December 31, 2000.
Activity in the reserve for unpaid
claims and claim adjustment expenses was as follows for each of the
years ended December 31:
2003 2002 2001
2000 1999
----------------- ----------------- ------------------------------ ------------ ------------
Balance at January 1 $ 121,541,72252,703,113 $ 139,132,87561,537,910 $ 155,020,69684,383,854
Less reinsurance recoverable (27,444,846) (40,333,000) (52,000,444)
----------------- ----------------- ------------------(7,780,432) (7,474,854) (9,387,965)
------------ ------------ ------------
Net balance at January 1 94,096,876 98,799,875 103,020,252
----------------- ----------------- ------------------44,922,681 54,063,056 74,995,889
------------ ------------ ------------
Incurred loss and loss adjustment expenses
for current accident year claims 28,665,664 22,993,457 18,903,062117 172,003
Incurred loss and loss adjustment expenses
(recoveries) for prior accident year claims (9,833,352) 1,300,414 15,878,6974,667,024 (1,907,552) (10,571,292)
Retroactive reinsurance (438,879) (529,993)
(267,653) (564,469)
Accretion of discount 994,545
----------------- ----------------- ------------------------------ ------------ ------------
Total incurred 18,302,319 24,026,218 35,211,835
----------------- ----------------- ------------------(recovered) 4,667,024 (2,346,314) (10,929,282)
------------ ------------ ------------
Effect of retroactive reinsurance 438,879 529,993
267,653 564,469
----------------- ----------------- ------------------
Cumulative effect of accounting change 7,520,744
----------------- ----------------- ------------------------------ ------------ ------------
Payments for claims occurring during:
Current accident year (15,269,960) (10,880,842) (8,940,341)(50) (54,591)
Prior accident years (22,400,190) (25,636,772) (31,056,340)
----------------- ----------------- ------------------(6,215,978) (7,232,890) (10,478,953)
------------ ------------ ------------
Total paid (37,670,150) (36,517,614) (39,996,681)
----------------- ----------------- ------------------(6,215,978) (7,232,940) (10,533,544)
------------ ------------ ------------
Net balance at December 31 75,259,038 94,096,876 98,799,87543,373,727 44,922,681 54,063,056
Plus reinsurance recoverable 23,190,015 27,444,846 40,333,000
----------------- ----------------- ------------------17,490,157 7,780,432 7,474,854
------------ ------------ ------------
Balance at December 31 $ 98,449,05360,863,884 $ 121,541,72252,703,113 $ 139,132,875
================= ================= ==================61,537,910
============ ============ ============
In 1997, Citation ceded its workers' compensation business to
Fremont Indemnity Company ("Fremont"). On July 2, 2003 Fremont was
placed in liquidation and as a result Citation recorded a provision of
$7.5 million of reinsurance recoverable from Fremont, which is included
in incurred loss and loss adjustment expenses for the year ended
December 31, 2003. In addition, during the year, Citation also recorded
adverse development in its property and casualty business of $3.9
million. The $11.4 million in negative development in Citation is
offset by $6.7 million of positive development within Physicians'
medical professional liability loss reserves, reduced after actuarial
analysis concluded that Physicians' reserves against claims were
significantly greater than the actuary's projections of future claims
payments. During 2001, our medical professional liability insurance claims
reserves, net of reinsurance, decreased from $51.6 million to $34.9
million and during 2002 decreased from $34.9 million to $30.3 million.
Actuarial analysis of Physicians' loss reserves as of September
30, 2001 concluded that
Physicians' reserves against claims were significantly greater than the
actuary's projections of future claims payments. Accordingly,
Physicians reduced its claims reserves by approximately $11.2 million
in the fourth quarter of 2001.
13.12. EMPLOYEE BENEFIT PLAN:
PICO maintains a 401(k) Defined Contribution Plandefined 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. Total contribution expense incurred byfor the Companyyear ended December
31, 2003, 2002 and 2001 was $427,000, $837,000, and $855,000,
in 2001, $864,000 in 2000, and $862,000 in 1999.
14.respectively.
88
13. 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, 2001, $5.42003, $7.7 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.
80
15.14. COMMITMENTS AND CONTINGENCIES:
The Company leases some of its offices under non-cancelable
operating leases that expire at various dates through October 2008.
Total rentRent expense for office space was $323,000 in 2003 and $1 million $1 million,in
2002 and $1.3 million for the years ended
December 31, 2001, 2000 and 1999, respectively.
Future minimum rental payments required under the leases for the
years ending December 31, are as follows:
2002 1,450,605
2003 815,851
2004 639,928
2005 586,942
2006 544,928
Thereafter 3,837,728
----------------
Total $7,875,982
================
In November 1998,2001.
Vidler Water Company, Inc.,is party to a PICO subsidiary,
entered into an operating lease to acquire 185,00030,000 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 required Vidler to payrequires a minimum payment of $2.3
million$378,000 per
year for 10 years beginning October 1998. On October 7, 1998,adjusted annually by the engineering price index until 2007. PICO
signed a Limited Guarantee agreement with Semitropic Water Storage
District ("Semitropic") that requiredrequires PICO to guarantee a maximumVidler's annual
obligation of $3.2 million, adjusted annually by the engineering price
index. In May 2001, Vidler permanently assigned 29.73% of its right,
title and interest under the operating lease to Newhall Land and Farming
Company. As a result of the permanent assignment by Vidler, PICO entered
into an amended Limited Guarantee agreement effective May 21, 2001. Under
the amended Limited Guarantee, the maximum obligation of PICO was revised
to $2.2 million adjusted annually by the engineering price index. In
September 2001, Vidler permanently assigned a further 54.05% of its
right, title and interest under the operating lease to Alameda County
Water District. Accordingly, PICO entered into a second amendment to the
Limited Guarantee effective September 28, 2001. Under the second
amendment to the Limited Guarantee, the maximum obligation of PICO was
revisedup to $519,000, adjusted annually by the engineering price
index.
The
guarantee expires October 7, 2008.
On January 10, 1997, Global Equity Corporation ("Global Equity"), a
wholly owned PICO subsidiary atFuture minimum payments under all leases for the years ending
December 31, 2001, commenced an action in
British Columbia against MKG Enterprises Corp. ("MKG") 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 to the action.are as follows:
2004 $ 919,823
2005 833,039
2006 594,293
2007 551,044
2008 176,700
Thereafter 3,111,000
-----------
Total 6,185,899
===========
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 and 2001, Global Equity entered into settlement
negotiations with a third party to dispose of the remaining assets of
MKG. Due to the protracted nature of these discussions and the increasing
uncertainty of whether the remaining asset can be realized, Global Equity
wrote off the remaining balance of $500,000 of the investment during
2001. (See Long Term Holdings in "Management's Discussion and Analysis of
Financial Condition" and "Results of Operations.") Global Equity is
currently reviewing its legal options before deciding if it will continue
pursuing the outstanding legal actions.
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, 2001. 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
81
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. At December 31, 2001, Nevada Land
has no liability to the partnership.
BSND, Inc. ("BSND"), a wholly-owned subsidiary of Vidler has resolved
a partnership dispute relating to Big Springs Associates, a partnership
which owned real property and water rights in Nevada (the "Partnership").
Under the terms of an agreement resolving the dispute, BSND, Inc. is now
the sole owner and manager of all the Partnership's assets.
In September and December 2000, PICO Holdings loaned a total of $2.2 million to
Dominion Capital Pty. Ltd. ("Dominion Capital"), a private Australian
Company.company. In May 2001, one$1.2 million of the loans for $1.2 million became overdue.
Negotiations between PICO and Dominion Capital to reach a settlement
agreement on both the overdue loan of $1.2 million and the other loan
of $1 million proved unsuccessful. Accordingly, PICO has commenced a
legal action through the Australian courts against Dominion Capital to
recover the total amount due to PICO Holdings. Due to the inherent
uncertainty involved in pursuing a legal action, and our ability to
realize the assets collateralizing the loans, PICO has recorded an
allowance for the total outstanding balance of $2.3 million for the
loans and interest. The court appointed receiver is in the process of
ascertaining Dominion Capital's assets and liabilities. PICO has been
awarded summary judgment in relation to the principal and interest on
the loan for $1.2 million loan and as a result, Dominion Capital has been
placed in receivership. The court appointed
receiverA trial was held in July 2003 concerning both
loans, and the Company is in the process of ascertaining Dominion Capital's assets and
liabilities. The court trial in connection with PICO's $1 million loan
(with interest) has been adjourned pending the receiver's investigations.
In addition, PICO has commenced proceedings in Australia to secure the
proceedsawaiting judgment from the sale of real estate in Australia offered as collateral
underAustralian court.
Global Equity S.A, the $1.2 million loan.
In January 2002, AOG announced that it was raising additional capital
to purchase a drilling rig and to refit two existing rigs. PICO
subsequently provided AOG with a short term bridge loan of $4 million,
and was issued 333,333 shares in AOG as a loan establishment fee. AOG is
to repay the loan with the proceeds of a rights offering which is
expected to close in March of 2002. PICOCompany's wholly owned Swiss domiciled
subsidiary has made a commitment to underwrite partAccu Holding AG to participate with
other shareholders of the offering, and was issued another 333,333 shares of
AOGAccu in March 2002, as an underwriting fee.raising capital which is expected to
occur in 2004. The maximum commitment for Global Equity is $1.9 million
(2.3 million CHF).
In 1997, pursuant to PICOa Quota Share Reinsurance Agreement,
Citation ceded its workers' compensation insurance business to Fremont
Indemnity Company ("Fremont"). Fremont maintained a security deposit
for the benefit of claimants under workers' compensation insurance
policies issued, or assumed, by Fremont. A portion of that deposit was
specifically allocated for the benefit of Citation. Consequently,
Citation reduced its own workers' compensation insurance reserves by
the amount of the deposit. On June 4, 2003, the Superior Court of the
State of California for the County of Los Angeles entered an Order of
Conservation over Fremont and appointed the California Department of
Insurance Commissioner as the conservator. Pursuant to such order, the
Commissioner was granted authority to take possession of all of
Fremont's assets, including the Citation deposit. On July 2, 2003, the
Liquidation Court entered an Order appointing the Commissioner as
liquidator of Fremont.
89
Under Citation's interpretation of the applicable law, the
Citation Allocated Deposit assets are required to be (i) held by the
Commissioner in trust, "separate and apart" from Fremont's general
account and other assets of its Estate, and (ii) applied solely towards
the payment of the assumed claims and allocated claims expenses arising
from the workers' compensation insurance policies that Citation
ceded/transferred to Fremont and its predecessor-in-interest. Citation
requested that the Commissioner, in his capacity as the Liquidator, (i)
maintain the Citation Allocated Deposit assets separate and apart from
other assets of the Estate and (ii) apply the same solely to the
payment of the direct and assumed claims and allocated claims expenses
arising from the workers' compensation insurance liabilities that
Citation ceded/transferred to CNIC and Fremont. Alternatively, Citation
requested that the Commissioner pay Citation's ceded liabilities from
the totality of Fremont's Special Schedule P Deposit on a pari passu
basis with Fremont's direct and assume workers' compensation claims and
allocated claims expenses.
The Commissioner has refused to comply with Citation's
request; instead, the Commissioner indicated that he intended to
transfer the Citation deposit to the California Insurance Guarantee
Association ("CIGA").
Citation concluded that, because Fremont had been placed in
liquidation, Citation was no longer entitled to take a reinsurance
credit for the Citation deposit under the statutory basis of
accounting. Consequently, during 2003 Citation reversed $7.5 million
reinsurance recoverable from Fremont in its financial statements
prepared on the statutory basis of accounting. In addition, Citation
made a corresponding provision for the reinsurance recoverable from
Fremont for GAAP purposes. Accordingly, Citation has, for both its
statutory and GAAP financial statements, provided for the reinsurance
recoverable from Fremont on its workers' compensation policy
liabilities.
Under the circumstances, it appears that Citation must
litigate its claim to the Citation deposit. To date, Citation has not
filed a claim seeking the benefit. In the event that Citation asserts,
but fails to prevail on such a claim, it is just over $4 million.unlikely to receive any
distribution from Fremont or any credit for the Citation deposit. If,
however, Citation prevails on such a claim, it may obtain the benefit,
directly or indirectly, of the Citation deposit, as well as other
relief.
The Company is presently unable to predict the outcome of this
dispute with a reasonable degree of certainty.
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.
16.15. RELATED-PARTY TRANSACTIONS:
The employment agreements entered into with Ronald Langley and
John R. Hart in 1997 and renewed for 4 years on January 1, 2002 provide
for annual base salaries of $800,000 also entitled 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 2001,
2000 or 1999 under this program. New employment agreements were entered
into with Mr. Langley and Mr. Hart on January 1, 2002 for a further four
years. The terms of these new employment agreements are substantially
similar to the agreements entered into in 1997. The base salary in each
agreement is $800,000 subject to annual adjustment in
January of each year in the same percentage applicable to PICO's other
staff members in an amount deemed adequate to provide for inflation,
cost of living, and merit increases based on the CPI and major
compensation studies. Each is also entitled 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
total return for the S&P 500. The growth in book value per share
exceeded the threshold in 2003 and 2002 and an award was accrued in the
accompanying consolidated financial statements of $935,000 and $1.5
million, respectively. No award was accrued during 2001 under this
program.
On March 27, 2000, the CompanyPICO sold 3,333,333 shares of common stock
to PICO Equity Investors, LP ("PEI") in a rights offering. PEI is
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). PICO Equity
Investors will exercise all voting and investment decisions with
respect to these shares for up to 10 years. There is no monetary
compensation for management of either partnership.
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. In January 2000, the Company
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 owed the Company approximately $65,000 for
operating expenses.
82
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 iswas 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 $250,000, $160,000,$105,000, $283,000, and $210,000$250,000 during the years ended
December 31, 2003, 2002 and 2001, 2000 and 1999, respectively. CertainThe total accrued
balance of $1.3 million was paid upon completion of the Company's subsidiaries have stock option arrangements
with officers and other employees for stocksale 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 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 $526,000 before tax
was recordedSequoia, which closed on the sale.
In 1998, theMarch 31, 2003.
The Company entered into an agreement with its president and
chief executive officer, and certain other officers and Directors to
defer a portion of his 1998 regular
compensation in a deferred compensationinto Rabbi Trust accountaccounts held in the name of the
Company. The deferrals aretotal value of the Rabbi
90
Trusts of $1.5 million, of which $537,000 represents PICO stock, is
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, 2000
or 2001. During 2001, two other Directors elected to defer their fees
into a Rabbi Trust account. Combined deferrals to these two accounts were
$17,000sheets (John Hart
19,940 PICO shares, Dr. Richard Ruppert 2,272 PICO shares, John Weil
5,227 PICO shares, Robert Broadbent 5,266 PICO shares, and Carlos
Campbell 1,557 PICO shares). The trustee for the year. Allaccounts is Huntington
National Bank. Each account contains various assets, including PICO
stock purchased in the Rabbi Truststock. The accounts isare subject to the claims of outside creditors, and
any PICO stock held in the accounts is reported as treasury stock in
the consolidated financial statements.
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 Japan, a Japanese corporation. PICO and Dominion, through its
parent, Dominion Capital Pty. Ltd., 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 Capital Pty. Limited. The loans
bear interest at a weighted rate of 10.2% and were due in 2001. In May
2001, one of the loans for $1.2 million became overdue. Negotiations
between PICO and Dominion Capital to reach a settlement agreement on both
the overdue loan of $1.2 million and the other loan of $1 million proved
unsuccessful. Accordingly, PICO has commenced legal actions through the
Australian courts against Dominion Capital to recover the total amount
due to PICO Holdings. Due to the inherent uncertainty involved in
pursuing a legal action and our ability to realize the assets
collateralizing the loans, PICO recorded an allowance for the total
outstanding balance of $2.3 million for the loans and interest during
2001.
17.16. 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 had received written approval from the Ohio
Department of Insurance 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 US GAAP.generally
accepted accounting principles. The principal variances are as follows:
83
(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) Equity in net income of subsidiaries and affiliates is
credited directly to shareholders' equity for statutory
accounting purposes.
(4) Fixed maturity securities are carried at amortized cost.
(5) 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, 2001,
20002003, 2002 and 19992001 on the statutory accounting
basis are as follows:
2003 2002 2001
2000 1999
---------------- -------------- -------------------------- ------------ -----------
(Unaudited)
Physicians Insurance Company of Ohio:
(Unaudited)
Statutory net income (loss) $ 5,412,6267,659,200 $ 10,212,601(4,856,572) $ (6,578,611)5,412,626
Policyholders' surplus 45,778,599 42,266,183 42,859,837
33,996,556 35,022,961
The ProfessionalsSequoia Insurance Company: (1)
Statutory net incomeloss $ 130,790(1,499,260) $ 158,012(50,861)
Policyholders' surplus 3,773,247 3,437,580
Sequoia Insurance Company:
Statutory net income (loss) $ (50,861) $ (2,660,660) $ 497,523
Policyholders' surplus32,301,520 29,271,877 23,442,970 25,389,791
Citation Insurance Company:
Statutory net income (loss) $ 2,317,209(7,589,951) $ 4,549,2921,641,070 $ (5,519,801)2,317,209
Policyholders' surplus 14,303,039 17,665,606 16,629,106 14,328,017 16,502,888
(1) The Professionals Insurance Company was merged with Physicians
Insurance Company of Ohio on December 21, 2001. Sequoia Insurance Company is classified as discontinued
operations.
17. SEGMENT REPORTING:
PICO Holdings, Inc. is a wholly owned subsidiarydiversified holding company. The
Company acquire businesses which management believes are undervalued at
the time, and have the potential to provide a superior rate of return
over time, after considering the risk involved. The Company's
over-riding objective is to generate superior long-term growth in
shareholders' equity, as measured by book value per share. The Company
accounts for segments as described in the significant accounting
policies in Note 1.
91
Currently the major businesses are owning and developing water
rights and water storage operations through Vidler Water Company, Inc.;
owning and developing land and the related mineral rights and water
rights through Nevada Land & Resource Company, LLC; "running off" the
property and casualty and workers' compensation loss reserves of
Citation Insurance Company and the medical professional liability loss
reserves of Physicians Insurance Company of Ohio. InOhio; and the table above, the statutory surplusacquisition
and financing of Sequoia ($29.3 million in 2001, $23.4 million in 2000, and $25.4 million
in 1999) is also reflected in statutory surplus of Physicians.
18. SEGMENT REPORTING:
The Company is a diversified holding company engaged in five major
operating segments: Water Rights and Water Storage; Land and Related
Mineral Rights and Water Rights; Property and Casualty Insurance; Medical
Professional Liability ("MPL") Insurance; and Long Term Holdings.businesses.
Segment performance is measured by revenues and segment profit
before tax. 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.
We account for segments
as described in the significant accounting policies contained in Note 1.
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.
84
Land and Related Mineral Rights and Water Rights
PICO is engaged in land and related mineral rights and water
rights operations through its subsidiary Nevada Land. Nevada Land owns
approximately 1.21.1 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.
PropertyInsurance Operations in Run Off
This segment is comprised of Physicians Insurance Company of
Ohio and CasualtyCitation 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 OperationsCompany.
Until 1995, Physicians and Professionalsits subsidiaries wrote medical
professional liability insurance, mostly in the state of Ohio.
Professionals merged
with and into Physicians on December 21, 2001. Physicians has stopped writing new business and is beingin "run off." This
means that it is handling claims arising from historical business, and
selling investments when funds are needed to pay claims.
In the past, Citation wrote commercial property and casualty
insurance in California and Arizona and workers' compensation insurance
in California. Citation ceded all its workers' compensation business in
1997, and ceased writing property and casualty business in December
2000 and is run off.
In this segment, revenues come from premiums earned on
policies written and investment income on the assets held by the
insurance companies. As expected during the run-off process, the bulk
of this segment's revenues come from investment income. The Physicians' portfolio contains
some of the Company's long term holdings.
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 assess the company to be 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
have deviated from our traditional value criteria in an attempt to
capitalize on areas of potentially greater growth without incurring undue
risk.
85
Investments
directly related to the insurance operations are included within those
segments. The assets of Sequoia, reported as discontinued operations
for all periods presented, are included within the Insurance Run Off
segment in those years as the equity of the discontinued operations was
owned by Physicians. Sequoia was sold on March 31, 2003.
HyperFeed Technologies, Inc.
HyperFeed is a developer and provider of software, ticker
plant technologies and managed services to the financial markets
industry. PICO owns approximately 51% of the outstanding voting stock
of HyperFeed.
Business Acquisitions and Financing
This segment contains businesses, interests in businesses, and
other parent company assets.
PICO seeks to acquire businesses which are undervalued based
on fundamental analysis -- that is, the assessment of what the company
is worth, based on the private market value of its assets, and/or
earnings and cash flow. The Company has acquired businesses and
interests in businesses through the purchase of private companies and
shares in public companies, both directly through participation in
financings and from open market purchases. The business must have
special qualities, such as unique assets, a potential catalyst for
change, or it is in an industry with attractive characteristics. When
buying a company, the
92
Company has a long term horizon, typically 5 years or more; however, the Company
is prepared to sell if the price received exceeds the return; the Company
expects to earn if held.
Segment information by major operating segment follows (in thousands):follows:
Land and Related Water Rights Property Long-Insurance Business
Mineral Rights and Water and TermOperations in Acquisitions &
and Water Rights Storage Casualty MPL InvestmentsRun Off Finance HyperFeed Consolidated
------------------------------------------------------------------------------ ---------------------------------------------------------------------------------------------- -------------
2001:
- -----2003:
Revenues (charges) $ 3,2215,889,560 $ 17,76316,815,624 $ 51,3493,244,748 $ 2,6025,548,563 $ (3,663)1,379,846 $ 71,27332,878,341
Income (loss) before income taxes 131 4,989 6,178 13,132 (15,288) 9,1422,004,626 (543,146) (2,902,354) (8,111,741) (4,340,413) (13,893,028)
Identifiable assets 59,682 97,216 152,751 28,782 35,988 374,41946,267,828 88,134,979 118,351,511 68,278,691 9,864,258 330,897,267
Depreciation and amortization 58 1,285 346 99 247 2,03582,344 1,020,341 22,551 63,511 591,772 1,780,519
Capital expenditures 43 277 364 76 760
2000:
- -----44,496 2,447,180 3,577 77,186 232,961 2,805,400
2002:
Revenues (charges) $ 5,2764,414,084 $ 3,12313,777,016 $ 39,2572,625,420 $ 3,396 $ (5,238) $ 45,8148,457,719 $29,274,239
Income (loss) before income taxes 1,918 (4,854) 2,541 768 (16,438) (16,065)483,513 (897,344) 4,299,987 (1,180,180) 2,705,976
Identifiable assets 52,002 108,215 137,808 30,155 63,902 392,08260,406,824 82,428,762 219,325,970 34,006,655 396,168,211
Depreciation and amortization 28 988 253 396 1,013 2,67883,605 953,186 27,267 51,658 1,115,716
Capital expenditures 628 321 8 151 1,108
1999:
- -----188,197 593,863 11,040 42,438 835,538
2001:
Revenues (charges) $ 7,1473,221,433 $ 1,05617,964,295 $ 39,8366,036,784 $ 3,121 $ 2,493 $ 53,653(3,662,084) $23,560,428
Income (loss) before income taxes 1,094 (3,947) (3,803) (4,805) (12,850) (24,311)131,385 4,988,994 15,996,147 (15,288,493) 5,828,033
Identifiable assets 53,810 80,313 136,589 39,827 65,632 376,17159,682,078 97,215,882 181,532,258 35,988,546 374,418,764
Depreciation and amortization 33 810 971 1,255 3,06957,901 1,284,611 (502,330) 246,547 1,086,729
Capital expenditures 385 147 208 74042,556 2,457,267 76,097 2,575,920
8693
Segment information by geographic region follows (in thousands):follows:
United
States Canada Europe Australia Asia Consolidated
--------------------------------------------------------------------- -------------------------------------------------------------------- -------------
2001
- ----2003
Revenues (charges) $ 71,80932,722,143 $ (928)156,198 $ 391 $ 71,272
Income before income taxes 9,194 (52) 9,142
Identifiable assets 341,372 25,558 $ 7,489 374,419
Depreciation and amortization 2,035 2,035
Capital expenditures 760 760
2000
- ----
Revenues (charges) $ 48,149 $ (2,482) $ 147 $ 45,81432,878,341
Income (loss) before income taxes (12,977) $ (2,616) (472) (16,065)(12,662,646) (1,230,382) (13,893,028)
Identifiable assets 354,609 2,115 27,207 $ 8,151 392,082285,378,620 45,518,647 330,897,267
Depreciation and amortization 2,544 $ 134 2,6781,780,519 1,780,519
Capital expenditures 1,108 1,108
1999:
- -----2,805,400 2,805,400
2002
Revenues (charges) $ 53,08431,943,501 $ (99)(2,669,262) $ 668 $ 53,65329,274,239
Income (loss) before income taxes (24,146) 1,612 (1,777) (24,311)6,611,242 (3,905,266) 2,705,976
Identifiable assets 333,894 24,959 $ 8,280 9,038 376,171360,469,577 35,698,634 396,168,211
Depreciation and amortization 2,770 299 3,0691,115,716 1,115,716
Capital expenditures 740 740835,538 835,538
2001
Revenues (charges) $ 24,099,049 $ (928,422) $ 389,801 $ 23,560,428
Income before income taxes 5,880,863 (52,830) 5,828,033
Identifiable assets 341,371,349 25,558,071 7,489,344 374,418,764
Depreciation and amortization 1,086,729 1,086,729
Capital expenditures 2,575,920 2,575,920
19.18. 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 LIABILITES: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.models. 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 temporaryother-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.on the equity
method. The balance of the investment is regularly evaluated for
impairment.impairment by comparing the carrying value to quoted market prices.
- 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 20,19, are not significantly different from the
original terms.
8794
December 31, 20012003 December 31, 2000
--------------------------------------- ---------------------------------------2002
---------------------------------- ---------------------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
----------------- ----------------- ------------------ ------------------------------- -------------- --------------- ---------------
Financial assets:
Fixed maturities $ 100,895,24452,615,376 $ 100,895,24452,615,376 $ 101,895,27447,566,764 $ 101,895,27447,566,764
Equity securities 54,364,542 54,364,542 55,051,049 55,051,04996,306,035 96,306,035 47,430,192 47,430,192
Investment in unconsolidated affiliates 2,583,590 6,602,760 4,139,830 7,181,670498,214 3,308,066
Cash and cash equivalents 17,361,624 17,361,624 13,644,312 13,644,312
Deposits with reinsurers and
reinsurance recoverables 6,745,010 6,745,010 7,604,288 7,604,28824,348,693 24,348,693 22,079,082 22,079,082
Financial liabilities:
Bank and other borrowings 14,596,302 14,596,302 15,550,387 15,550,38715,376,640 15,376,640 14,636,017 14,636,017
20.19. BANK AND OTHER BORROWINGS:
At December 31, 20012003 and 2000,2002, bank and other borrowings consisted of
loans and promissory notes incurred to finance the purchase of land and
investmentequity securities. The weighted average interest rate on these borrowings
was approximately 7.2%5.1% and 7.4%5.4% at December 31, 2001,2003, and 2000,2002,
respectively, with principal and interest due throughout the term.
2001 2000
------------------ -----------------
5.58% (5.58% in 2000) Swiss loans $ 7,844,084 $ 5,894,838
8% Notes due:
2007 - 2008 208,280 455,957
2012 359,218
8.5% Notes due:
2004 1,155,120 1,540,354
2008 - 2009 3,141,837 3,772,131
2019 1,563,063 2,774,894
9% Notes due:
2003 171,277 188,356
2008 512,641 564,639
------------------ -----------------
$ 14,596,302 $ 15,550,387
================== =================
At December 31, 2001,
2003 2002
------------- ------------
3.27% (3.33% in 2002) Swiss loans $ 10,079,021 $ 8,804,790
7% - 8% Notes due:
2003 137,011
2007 - 2008 263,664 179,947
8.5% Notes due:
2004 1,042,571 1,114,848
2005 - 2009 2,821,265 2,988,091
2019 750,217 772,076
9% - 10% Notes due:
2003 183,366
2008 419,902 455,888
------------- -------------
$ 15,376,640 $ 14,636,017
============= =============
Global Equity SA has a loan facility with a Swiss bank which matures
by May 2006, for a maximum of U.S. $9.1$10.1 million (CHF 15 million)(12.5 million CHF) based on a
margin not higher than 30% of the securities deposited with the bank. It
is anticipated the Company will refinance the loan facility when it
becomes due. 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, 2001 approximately U.S. $7.82003 and 2002, $10.1 million
(13 million CHF) is outstanding bearing
interest at approximately 6%3.27% and $8.8 million bearing interest at 3.33% is
outstanding. Subsequent to year end, the Company established an
additional line of credit to borrow a further $2.4 million bearing
interest at 3.32% (3 million CHF).
At December 31, 2001, $6.82003 and 2002, $5.2 million and $5.8 million,
respectively, of the total outstanding debt isborrowings was reported within
Vidler, primarily incurred withto finance the acquisition of landlands in the
Harquahala Valley.Valley in Arizona. The weighted average interest rate of interest on these
notes is 8.5% and is collateralized by the purchased properties.
Nevada Land 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 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.
8895
The Company's future minimum principal debt repayments for the years
ending December 31 are as follows:
2002 $ 8,199,865
2003 518,749
2004 1,376,519
2005 362,652
2006 393,826
Thereafter 3,744,691
-------------------------------
Total $14,596,302
================
21.
2004 $ 1,412,374
2005 372,978
2006 10,483,609
2007 381,580
2008 802,731
Thereafter 1,923,368
- -------------------------------------
Total $15,376,640
===========
20. CUMULATIVE EFFECT OF CHANGECHANGES IN ACCOUNTING PRINCIPLE:
In the fourth quarter of 2000,Effective July 1, 2001 the Company received notification fromadopted SFAS No. 141, "Business
Combinations," and effective January 1, 2002, SFAS No. 142, "Goodwill and
Other Intangible Assets." SFAS No. 141 prospectively prohibits the
Ohio Departmentpooling of Insuranceinterests method of accounting for business combinations
initiated after June 30, 2001. SFAS No. 142 establishes a new method of
testing goodwill for impairment on an annual basis or on an interim basis
if an event occurs or circumstances change that it would no longer permitreduce the Company to discountfair
value of a reporting unit below its MPL reserves for statutory accounting practices.
Accordingly, the Company discontinued discounting its MPL reservescarrying value. The adoption of SFAS
No. 142 is reflected in its
statutory filing with the Ohio Department of Insurance andCompany's consolidated 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 anas a
cumulative effect of change in accounting principleprinciple. The cumulative
adjustment of $5$2 million or $0.43 per
share, netis comprised of an income tax benefita gain from recognizing negative
goodwill of approximately $2.5 million.$2.8 million offset by write-offs of goodwill of $800,000.
Had the change been madeCompany ceased amortizing goodwill as of the first day of the
earliest period presented, net income or loss for each of the net loss and loss per share for 1999 and 1998years ended
December 31, would have
been reduced by $995,000 and $0.11 per share and $643,000, and $0.11 per
share, respectively.be as follows:
2002 2001
----------- -----------
Net income as reported 5,929,145 5,113,905
Amortization of goodwill, net 321,152
Cumulative effect of change in accounting principle (1,984,744)
----------- -----------
Pro forma net income 3,944,401 5,435,057
=========== ===========
Net income per share
basic and diluted as reported $ 0.48 $ 0.41
Amortization of goodwill, net 0.03
Cumulative effect of change in accounting principle (0.16)
----------- -----------
Adjusted net income per share $ 0.32 $ 0.44
=========== ===========
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 are reported as a cumulative
effect of change in accounting principle in the accompanying consolidated
financial statements.
The current impacts of SFAS 133, are included in realized investment
gains and losses on the statement of operations and primarily includes
the fluctuation in the value of the warrants to purchase shares of
HyperFeed Technologies, Inc. The value of the warrants is determined each
period using the Black-Scholes option pricing model. The model uses the
current market price of the common stock of HyperFeed, and the following
assumptions in calculating an estimated fair value: no dividend yield; a
risk-free interest rate of 2% - 5.6%; a one year expected life; and a
historical 5 year cumulative volatility of 109% to 119%. The value of the
4.1 million warrants derived from the model was $527,000 and $2.9 million
at December 31, 2001 and 2000, respectively. The change in value is
reported within the realized investment gain/loss in the consolidated
statement of operations. Future effects on net income will depend on
market conditions.
22. RESTATEMENT OF PREVIOUSLY REPORTED FINANCIAL INFORMATION:
Subsequent to the issuance of the Company's consolidated financial
statements for the year ended December 31, 2001 the company determined
that it needed to record other-than-temporary impairments on marketable
securities and reverse the equity method of accounting for the
investment in Jungfraubahn.
Other-Than-Temporary Impairments:
The Company has previously recorded realized gains or losses from
other-than-temporary impairment on certain marketable securities.
However, the Company determined that it should have recorded additional
other-than-temporary impairment charges on other marketable securities.
For the year ended December 31, 2001, 2000 and 1999, additional
impairment charges of $3 million, $161,000 and $1.1 million, respectively
were recorded. The Company reversed $4.7 million in losses originally
reported in the year ended December 31, 2001 since it was determined that
an other-than-temporary impairment had occurred in an earlier period. The
total net effect in 2001 was a decrease in realized losses of $1.7
million. The $4.7 million in losses were
8996
subsequently recorded in the year ended December 31, 1996. In addition, the
Company recorded impairment charges of $4.6 million for the year ended December
31, 1998.
Accounting for Jungfraubahn:
In September 2000, the Company adopted the equity method of accounting
related to its investment in Jungfraubahn. It was subsequently determined that
the Company should account for Jungfraubahn in accordance with SFAS No. 115. The
Company has reversed its accounting which reduced earnings in unconsolidated
affiliates by $241,000, $3 million and $3 million in 2001, 2000 and 1999,
respectively. Net investment income increased by dividends received from
Jungfraubahn of $622,000 and $217,000 in 2000 and 1999, respectively. Under the
equity method of accounting, dividends had been recorded as a reduction in the
equity basis.
The after tax effect of the other-than-temporary impairments and the
adjustments related to the equity method of accounting increased net income by
$340,000 in 2001, and increased net loss by $1.8 million in 2000 and $2.9
million in 1999, respectively. Beginning retained earnings at January 1, 1999
decreased $6.9 million to $69.3 million due primarily to reversing an
accumulated $737,000 in net earnings of affiliate recorded on Jungfraubahn and
$6.2 million in net realized losses recorded for other-than-temporary
impairments recorded in 1996 and 1998.
At December 31, 2001, the net deferred income tax asset increased from
the removal of deferred income tax liabilities related to a timing difference
for the equity in income from Jungfraubahn. Previously reported net unrealized
losses at December 31, 2001 went from a loss of $10.6 million to a net
unrealized gain of $5.5 million primarily due to 1) reversing the equity basis
of our investment in Jungfraubahn and reporting the investment at fair value
under the accounting provisions of SFAS No. 115 and 2) recording impairment
charges for other-than-temporary impairment losses. Accumulated foreign currency
losses also increased by $3.6 million due to the change from equity method to
fair value.
At December 31, 2000, equity securities increased $18.9 million for the
market value of the investment in Jungfraubahn and investment in unconsolidated
affiliate decreased $23.7 million related to reversing the equity method
accounting for Jungfraubahn. The net deferred income tax asset increased from
the relief of deferred income tax liabilities that represented a timing
difference due to recording the equity in income on the investment in
Jungfraubahn offset by an increase in deferred tax liabilities related to the
unrealized gain on the investment in Jungfraubahn using the accounting
provisions of SFAS No. 115. Reported net unrealized losses at December 31, 2000
went from a loss of $7 million to a net unrealized gain of $3.6 million
primarily due to 1) reporting the investment at fair value under the accounting
provisions of SFAS No. 115, and 2) recording charges for the
other-than-temporary impairment losses described above. Accumulated foreign
currency losses increased by $2.1 million due to the change from equity method
to fair value for the investment in Jungfraubahn.
As a result, the Company has restated its consolidated financial
statements for the years ended December 31, 2001, 2000 and 1999 from amounts
previously reported to record other-than-temporary impairments on marketable
securities and to reverse the equity method of accounting for its investment in
Jungfraubahn.
90
A summary of the significant effects on the consolidated financial statements is
as follows:
Year Ended Year Ended
December 31, 2001 December 31, 2000
As Previously Reported As Restated As Previously Reported As Restated
-------------------------------------------- ----------------------------------------------
Realized gain (loss) $ (5,110,963) $ (3,418,496) $ (7,525,762) $ (7,686,963)
Net investment income $ 8,238,296 $ 8,860,921
Total revenues $ 69,579,870 $ 71,272,337 $ 45,352,970 $ 45,814,394
Equity in income (loss) of
unconsolidated affiliates $ (1,288,460) $ (1,529,060) $ 1,794,069 $ (1,252,020)
Income (loss) before minority
interest $ 7,690,623 $ 9,142,491 $(13,480,498) $(16,065,163)
Income tax expense (benefit) $ 2,295,540 $ 3,406,464 $ (8,201,176) $ (9,011,222)
Income (loss) from continuing
operations $ 5,753,532 $ 6,094,476 $ (4,562,246) $ (6,336,865)
Net income (loss) $ 4,772,961 $ 5,113,905 $ (9,525,937) $(11,300,556)
Basic and Diluted
income (loss) per share $ (0.39) $ 0.41 $ (0.82) $ (0.97)
Year Ended
December 31, 1999
As Previously Reported As Restated
-----------------------------------------
Realized gain (loss) $ 440,611 $ (611,373)
Net investment income $ 6,386,887 $ 6,604,822
Total revenues $ 54,487,537 $ 53,653,488
Equity in income (loss) of
unconsolidated affiliates $ (1,026,245) $ (4,014,892)
Income (loss) before minority
interest $(20,487,968) $(24,310,665)
Income tax expense (benefit) $(12,519,374) $(13,422,069)
Income (loss) from continuing
operations $ (7,262,518) $(10,182,520)
Net income (loss) $ (6,820,278) $ (9,740,280)
Basic and Diluted
income (loss) per share $ (0.76) $ (1.08)
December 31, 2001 December 31, 2000
As Previously Reported As Restated As Previously Reported As Restated
--------------------------------------------- -------------------------------------------
Equity securities $ 36,174,505 $ 55,051,049
Investment in unconsolidated affiliate $ 27,824,291 $ 4,139,830
Net deferred income tax asset $ 7,299,015 $ 8,583,265 $ 11,354,592 $ 13,100,328
Total assets $ 373,134,514 $ 374,418,764 $ 395,144,634 $ 392,082,453
Total liabilities $ 163,432,771 $ 163,458,067 $ 186,031,284 $ 186,056,580
Unrealized loss, net of tax $ (10,633,199) $ 5,545,057 $ (6,977,748) $ 3,611,475
Accumulated foreign currency (5,126,798) (8,770,924) (5,755,230) (7,815,810)
------------- ------------- ------------- -------------
Accumulated other comprehensive loss $ (15,759,997) $ (3,225,867) $ (12,732,978) $ (4,204,335)
Retained earnings $ 64,666,746 $ 53,391,570 $ 59,893,785 $ 48,277,665
Total shareholders' equity $ 206,639,553 $ 207,898,507 $ 205,192,611 $ 202,105,134
23. SUBSEQUENT EVENT:
On March 1, 2002, Vidler closed a sale for 1,215 acres of land, and
the related 3,645 acre-feet of water rights, to developers near the city
of Scottsdale for approximately $5.3 million. The transaction resulted in
a gross profit of approximately $2.3 million, which will be recorded in
the first quarter of 2002.
ITEM 9. CHANGE IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
91
ITEM 9A. CONTROLS AND PROCEDURES
Under the supervision and with the participation of our management,
including our principal executive officer and principal financial officer, we
evaluated the effectiveness of our disclosure controls and procedures, as such
term is defined under Rule 13a-15(e) promulgated under the Securities Exchange
Act of 1934, as amended. Based on this evaluation, our principal executive
officer and principal financial officer concluded that our disclosure controls
and procedures were effective as of the end of the period covered by this annual
report.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS AND CODE OF ETHICS OF REGISTRANT
The information required by this item regarding directors will be set forth
in the section headed "Election of Directors" in our definitive proxy statement
with respect to our 20022004 annual meeting of shareholders, to be filed on or
before April 10, 200230, 2004 and is incorporated herein by reference. The information
required by this item regarding the Company's code of ethics will be set forth
in the section headed "Code Of Ethics" in our definitive 2004 proxy statement
and is incorporated herein by reference. Information regarding executive
officers is set forth in Item 1 of Part 1 of this Report under the caption
"Executive Officers."
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item will be set forth in the section
headed "Executive Compensation" in our 20022004 definitive proxy statement and is
incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item will be set forth in the section
headed "Security Ownership of Certain Beneficial Owners and Management" in our
20022004 definitive proxy statement and is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item will be set forth in the section
headed "Certain Relationships and Related Transactions" and "Compensation
Committee, Interlocks and Insider Participation" in our 2002definitive 2004 proxy
statement and is incorporated herein by reference.
92ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required by this item will be set forth in the section
headed "Fees Paid to Deloitte & Touche, LLP" in our definitive 2004 proxy
statement and is incorporated herein by reference.
97
PART IV
ITEM 14.15. 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......................................... 55Reports ................................................ 62-63
Consolidated Balance Sheets as of December 31, 20012003 and 2000......... 56-572002 ................. 64-65
Consolidated Statements of Operations for the Years
Ended December 31, 2003, 2002 and 2001 2000 and 1999......................... 58................................. 66
Consolidated Statements of Shareholders' Equity
for the Years Ended December 31, 2003, 2002 and 2001 2000, and 1999.................. 59-61................... 67-69
Consolidated Statements of Cash Flows for the Years
Ended December 31, 2003, 2002 and 2001 2000 and 1999.......................... 62................................. 70
Notes to Consolidated Financial Statements........................... 63-91Statements ................................... 71-96
2. FINANCIAL STATEMENT SCHEDULES.
Independent Auditors' Report......................................... 94Report ................................................ 99
Schedule I - Condensed Financial Information of Registrant........... 95-96Registrant ................... 100-101
Schedule II - Valuation and Qualifying Accounts...................... 98Accounts .............................. 102
Schedule V - Supplementary Insurance Information..................... 99-101Information ............................. 103-105
9398
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") as of December 31, 20012003 and 2000,2002, and for each of
the three years in the period ended December 31, 2001,2003, and have issued our
report thereon dated March 8, 2002 (March 27, 2003 as to Note 22)9, 2004, which report includes an explanatory
paragraphsparagraph relating to the changeadoption of Statement of Financial Accounting
Standards No. 142 Goodwill and Other Intangible Assets in accounting for medical
professional liability claims reserves2002; such financial
statements and report are included elsewhere in 2000 as discussed in Note 21 and the
restatement discussed in Note 22.this Form 10-K. Our audits of the consolidated financial
statements also
included the consolidated financial statement schedules of the Company, listed
in Item 14.15(a)2. 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, such 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 8, 2002 (March 27, 2003 as to Note 22)
949, 2004
99
SCHEDULE I
CONDENSED FINANCIAL INFORMATION OF REGISTRANT (PARENT COMPANY ONLY)
CONDENSED BALANCE SHEETS
December 31, December 31,
2001 2000
---------------- ----------------
ASSETS (AS RESTATED, (AS RESTATED,
SEE NOTE 1) SEE NOTE 1)2003 2002
------------- -------------
ASSETS
Cash and cash equivalents $ 1,559,5846,646,086 $ 4,331,10213,430,400
Investments in subsidiaries 134,957,362 123,804,711159,428,214 144,352,868
Equity securities and other investments 29,279,888 31,464,15133,111,733 27,682,994
Deferred income taxes 10,486,309 5,670,4397,852,006 5,483,344
Other assets 32,690,726 38,546,947
---------------- ----------------39,409,614 38,683,506
------------- -------------
Total assets $208,973,869 $203,817,350
================ ================$ 246,447,653 $ 229,633,112
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Accrued expense and other liabilities $ 1,075,36217,287,251 $ 1,712,216
---------------- ----------------8,601,408
------------- -------------
Common stock, $.001 par value, authorized 100,000,000 shares: issued and
outstanding 16,784,22316,801,923
at December 31, 20012003 and 2000, respectively 16,784 16,784at December 31, 2002 16,802 16,802
Additional paid-in capital 235,844,655 235,844,655236,082,703 236,082,703
Accumulated other comprehensive loss (3,225,867) (4,204,335)income 15,283,404 3,833,676
Retained earnings 53,391,570 48,277,665
---------------- ----------------
286,027,142 279,934,76956,082,903 59,320,715
------------- -------------
307,465,812 299,253,896
Less treasury stock, at cost (2001: 4,415,607(2003: 4,428,389 shares and 2000:
4,394,1272002: 4,422,681 shares) (78,128,635) (77,829,635)
---------------- ----------------(78,305,410) (78,222,192)
------------- -------------
Total shareholders' equity 207,898,507 202,105,134
---------------- ----------------229,160,402 221,031,704
------------- -------------
Total liabilities and shareholders' equity $208,973,869 $203,817,350
================ ================$ 246,447,653 $ 229,633,112
============= =============
This statement should be read in conjunction with the notes to the consolidated
financial statements included in the Company's 20012003 Form 10-K/A
9510-K
100
SCHEDULE I
CONDENSED FINANCIAL INFORMATION OF REGISTRANT (PARENT COMPANY ONLY)
CONDENSED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31,
2003 2002 2001
2000 1999
--------------- ---------------- ---------------
(AS RESTATED, (AS RESTATED, (AS RESTATED,
SEE NOTE 1) SEE NOTE 1) SEE NOTE 1)------------ ------------ ------------
Investment income (loss), net $ 3,058,5336,417,240 $ (4,067,068)13,913,246 $ 659,3123,058,533
Equity in income (loss) of subsidiaries 10,741,775 1,310,463 (6,859,201)
--------------- ---------------- ---------------(8,528,754) (1,422,091) 8,424,280
------------ ------------ ------------
Total revenues (charges) 13,800,308 (2,756,605) (6,199,889)(2,111,514) 12,491,155 11,482,813
Expenses 15,017,239 9,862,307 8,587,153
6,055,643 5,024,583
--------------- ---------------- --------------------------- ------------ ------------
Income (loss) from continuing operations before income taxes 5,213,155 (8,812,248) (11,224,472)
Benefit(17,128,753) 2,628,848 2,895,660
Provision (benefit) for income taxes (3,392,527) 1,518,253 (881,321)
(2,475,383) (1,484,192)
--------------- ---------------- --------------------------- ------------ ------------
Income (loss) before cumulative effect 6,094,476 (6,336,865) (9,740,280)(13,736,226) 1,110,595 3,776,981
Income from discontinued operations, net 10,498,414 2,833,806 2,317,495
Cumulative effect of accounting change, net 1,984,744 (980,571)
(4,963,691)
--------------- ---------------- --------------------------- ------------ ------------
Net income (loss) $ (3,237,812) $ 5,929,145 $ 5,113,905
$ (11,300,556) $ (9,740,280)
=============== ================ =========================== ============ ============
CONDENSED STATEMENTS OF CASH FLOWS
2003 2002 2001
2000 1999
--------------- ---------------- --------------------------- ------------ ------------
Cash flow from operating activities:
(AS RESTATED, (AS RESTATED, (AS RESTATED,
SEE NOTE 1) SEE NOTE 1) SEE NOTE 1)
Net income (loss) $ 5,113,905(3,237,812) $ (11,300,556)5,929,145 $ (9,740,280)5,113,905
Adjustments to reconcile net income (loss) to net cash used or provided
by operating activities:
Equity in (income) loss of subsidiaries (10,741,775) (1,310,463) 6,859,2018,528,754 1,422,091 (8,424,280)
Income from discontinued operations, net (10,498,414) (2,833,806) (2,317,495)
Cumulative effect of accounting change, net (1,984,744) 980,571 4,963,691
Changes in assets and liabilities:
Accrued expenses and other liabilities (636,854) (15,765,565) 4,709,6608,685,843 8,367,856 (1,478,664)
Other assets 1,040,351 (37,926,455) 8,144,827
--------------- ---------------- ---------------(3,094,770) (1,831,625) 1,882,161
------------ ------------ ------------
Net cash provided by (used in) operating activities 383,601 9,068,917 (4,243,802)
(61,339,348) 9,973,408
--------------- ---------------- --------------------------- ------------ ------------
Cash flow from investing activities:
SaleProceeds from sale of investments 8,539,180 21,100,950 1,771,284
12,910,084Proceeds from maturities of investments 18,673,000
Purchase of investments (10,052,274)
--------------- ---------------- ---------------(34,296,877) (18,443,560)
------------ ------------ ------------
Net cash provided by (used in) investing activities (7,084,697) 2,657,390 1,771,284 12,910,084 (10,052,274)
Cash flow from financing activities:
Cash received from exercise of warrants 2,850,359
Cash received from rights offering, net 49,843,163stock options 238,066
Purchase of treasury shares for deferred compensation plans (83,218) (93,557) (299,000)
(291,593)
--------------- ---------------- --------------------------- ------------ ------------
Net cash provided by (used in) financing activities (83,218) 144,509 (299,000)
49,843,163 2,558,766
--------------- ---------------- --------------------------- ------------ ------------
Increase (decrease) in cash and cash equivalents (6,784,314) 11,870,816 (2,771,518) 1,413,899 2,479,900
Cash and cash equivalents, beginning of year 13,430,400 1,559,584 4,331,102
2,917,203 437,303
--------------- ---------------- --------------------------- ------------ ------------
Cash and cash equivalents, end of year $ 6,646,086 $ 13,430,400 $ 1,559,584
$ 4,331,102 $ 2,917,203
=============== ================ =========================== ============ ============
This statement should be read in conjunction with the notes to the consolidated
financial statements included in the Company's Form 10-K/A
96
NOTE TO CONDENSED FINANCIAL INFORMATION OF REGISTRANT (PARENT COMPANY ONLY)
NOTE 1. RESTATEMENT OF PREVIOUSLY REPORTED FINANCIAL INFORMATION:
Subsequent to the issuance of the Company's stand alone financial
statements for the year ended December 31, 2001, the Company determined that it
needed to record other-than-temporary impairments on marketable securities and
reverse equity method of accounting for the investment in Jungfraubahn.
Other-Than-Temporary Impairments:
The Company had previously recorded realized gains or losses from
other-than-temporary impairments on certain marketable securities. The Company
determined that it should have recorded other-than-temporary impairment charges
on other marketable securities. During the year ended December 31, 2001, there
was an additional impairment charge of $888,000 related to securities held
directly by the parent.
Other-Than-Temporary Impairments Recorded by Subsidiaries:
For the years presented within the condensed statement of operations,
Equity in income (loss) of subsidiaries increased by $927,000 in 2001, decreased
by $1.8 million in 2000 and increased the loss by $2.9 million in 1999 due to
the net of tax impact of its subsidiaries recording additional impairment
charges of $2.1 million, $161,000 and $1.1 million, in 2001, 2000 and 1999,
respectively. The subsidiaries reversed $4.7 million in losses originally
reported in the year ended December 31, 2001 since it was determined that an
other-than-temporary impairment had occurred in an earlier period. The effect of
the adjustments related to other-than-temporary impairments in 2001 was an
increase in gross realized gains of $2.5 million, a $1.1 million increase after
tax. The $4.7 million in losses were subsequently recorded in the year ended
December 31, 1996. In addition, the subsidiaries recorded impairment charges of
$4.6 million for the year ended December 31, 1998.
Accounting for Jungfraubahn:
In September 2000, the Company adopted the equity method of accounting
related to its investment in Jungfraubahn. It was subsequently determined that
the Company should account for Jungfraubahn in accordance with SFAS No. 115. The
Company has reversed its accounting which reduced equity in income (loss) of
subsidiaries by $241,000, $3 million and $3 million in 2001, 2000 and 1999,
respectively. In addition, equity in income (loss) of subsidiaries increased by
dividends received from Jungfraubahn of $622,000 and $217,000 in 2000 and 1999,
respectively. Under the equity method of accounting, dividends had been recorded
as a reduction in the equity basis.
The after tax effect of the other-than-temporary impairments and the
adjustments related to the equity method of accounting increased net income by
$340,000 in 2001, and increased net loss by $1.8 million in 2000 and $2.9
million in 1999, respectively. Beginning retained earnings at January 1, 1999
decreased $6.9 million to $69.3 million due primarily to reversing an
accumulated $737,000 in net earnings of affiliate recorded on Jungfraubahn and
$6.2 million in net realized losses recorded for other than temporary
impairments recorded in 1996 and 1998.
At December 31, 2001, investment in subsidiaries increased from the
removal of deferred income tax liabilities related to a timing difference for
the equity in income from Jungfraubahn. Previously reported net unrealized
losses at December 31, 2001 went from a loss of $10.6 million to a net
unrealized gain of $5.5 million primarily due to 1) reversing the equity basis
of our investment in Jungfraubahn and reporting the investment at fair value
under the accounting provisions of SFAS No. 115, and 2) recording impairment
charges for other-than-temporary impairment losses. Accumulated foreign currency
losses also increased by $3.6 million due to the change from equity method to
fair value.
At December 31, 2000, investment in subsidiaries decreased by $3.1
million primarily due to an increase of $18.9 million for the market value of
the investment in Jungfraubahn, and a decrease to the of $23.7 million related
to reversing the equity method accounting for Jungfraubahn. Reported net
unrealized losses at December 31, 2000 went from a loss of $7 million to a net
unrealized gain of $3.6 million primarily due to 1) reporting the investment at
fair value under the accounting provisions of SFAS No. 115, and 2) recording
charges for the other-than-temporary impairment losses described above.
Accumulated foreign currency losses increased by $2.1 million due to the change
from equity method to fair value for the investment in Jungfraubahn.
As a result, the Condensed Financial Statements (Parent Only) have been
restated for the years ended December 31, 2001, 2000 and 1999 from amounts
previously reported to record other than temporary impairments on marketable
securities and to reverse the equity method of accounting for its investment in
Jungfraubahn.
A summary of the significant effects on the parent company financial
statements is as follows:
Year Ended Year Ended
December 31, 2001 December 31, 2000
As Previously Reported As Restated As Previously Reported As Restated
------------------------------------------ ----------------------------------------------
Investment income, net $ 3,946,033 $ 3,058,533
Equity in income (loss) of subs $ 9,815,081 $ 10,741,775 $ 3,085,082 $ 1,310,463
Total revenues $ 13,761,114 $ 13,800,308 $ (981,986) $ (2,756,605)
Income tax expense (benefit) $ (579,571) $ (881,321)
Income (loss) from continuing
operations before cumulative effect $ 5,753,532 $ 6,094,476 $ (4,562,246) $ (6,336,865)
Net income (loss) $ 4,772,961 $ 5,113,905 $ (9,525,937) $(11,300,556)
Basic and Diluted
income (loss) per share $ 0.39 $ 0.41 $ (0.82) $ (0.97)
Year Ended
December 31, 1999
As Previously Reported As Restated
-----------------------------------------
Investment income, net
Equity in income (loss) of subs $ (3,939,199) $ (6,859,201)
Total revenues $ (3,279,887) $ (6,199,889)
Income tax expense (benefit)
Income (loss) from continuing
operations before cumulative effect $ (6,820,278) $ (9,740,280)
Net income (loss) $ (6,820,278) $ (9,740,280)
Basic and Diluted
income (loss) per share $ (0.76) $ (1.08)
December 31, 2001 December 31, 2000
As Previously Reported As Restated As Previously Reported As Restated
------------------------------------------ ----------------------------------------------
Investment in subsidiaries $133,698,408 $134,957,362 $ 126,892,188 $ 123,804,711
Unrealized loss, net of tax $(10,633,199) $ 5,545,057 $ (6,977,748) $ 3,611,475
Accumulated foreign currency (5,126,798) (8,770,924) (5,755,230) (7,815,810)
------------------- -------------------- ---------------------- ----------------------
Accumulated other comprehensive loss $(15,759,997) $ (3,225,867) $ (12,732,978) $ (4,204,335)
Retained earnings $ 64,666,746 $ 53,391,570 $ 59,893,785 $ 48,277,665
Total shareholders' equity $206,639,553 $207,898,507 $ 205,192,611 $ 202,105,134
9710-K
101
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, 20012003:
Allowance for Doubtful Accounts, netdoubtful accounts $ 214,3002,500,604 420,000 $ (470,000) $ 2,450,604
Deferred tax valuation allowance $ 408,748 835,917 1,244,665
Year-end December 31, 2002:
Allowance for doubtful accounts $ 2,500,604 $ 2,500,604
Deferred tax valuation allowance $ 3,389,620 $(2,980,872) 408,748
Year-end December 31, 2001:
Allowance for doubtful accounts $ 164,300 $ 2,633,204 $ (296,900) $ 42,550,604
Valuation Allowance for2,500,604
Deferred Federal Income Taxestax valuation allowance $ 4,101,5873,757,054 $ (367,434) $ 43,734,153
Year-end December 31, 2000
Allowance for Doubtful Accounts, net $ 99,488 $ 114,812 $ 214,300
Valuation Allowance for
Deferred Federal Income Taxes $ 816,171 $ 3,285,416 $ 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 $ 12,184,507 $(11,368,336) $ 816,1713,389,620
98(1) Includes $150,000 in 2003 from the consolidation of HyperFeed.
102
SCHEDULE V
PICO HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED SUPPLEMENTARY INSURANCE INFORMATION
(In thousands)
December 31, 2003
Losses, Losses
Claims Net and Other
and Loss Investment Loss Operating
Expenses Income Expenses Expenses
-------- ---------- -------- --------
Medical professional
liability $ 23,626 $ 1,353 $ (6,753) $ 876
Property and casualty and
workers' compensation 37,238 1,327 11,420 604
-------- ---------- -------- --------
Total medical professional
liability and property
and casualty and workers'
compensation 60,864 2,680 4,667 1,480
Other operations 2,691 40,060
-------- ---------- -------- --------
Total continuing $ 60,864 $ 5,371 $ 4,667 $ 41,540
======== ========== ======== ========
103
SCHEDULE V
PICO HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED SUPPLEMENTARY INSURANCE INFORMATION
(In thousands)
December 31, 2002
Losses,
Claims Losses
and Loss Net and Other Net
Expense Premium Investment Loss Operating Premiums
Reserves Revenue Income Recoveries Expenses Written
-------- ---------- ------------ ---------- -------- ----------
Medical professional
liability $ 36,398 $ 382 $ 679 $ (1,458) $ 395 $ 382
Property and casualty
and workers' compensation 16,305 (424) 1,589 (889) 276 (424)
-------- ---------- ------------ ---------- -------- ----------
Total medical professional
liability and property
and casualty workers'
compensation 52,703 (42) 2,268 (2,347) 671 (42)
Other operations 3,117 26,035
-------- ---------- ------------ ---------- -------- ----------
Total continuing $ 52,703 $ (42) $ 5,385 $ (2,347) $ 26,706 $ (42)
======== ========== ============ ========== ======== ==========
104
SCHEDULE V
PICO HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED SUPPLEMENTARY INSURANCE INFORMATION
(IN THOUSANDS)
DECEMBER 31, 2001
Losses,
Amortization
Deferred Claims Losses of Deferred
Policy
and Loss Net and Policy
AcquisitionOther Net
Expense Unearned Premium Investment Loss Acquisition
CostsOperating Premiums
Reserves Premiums Revenue Income Expenses Costs
------------ -------------Expenses Written
----------- ---------- ------------ ------------ ------------------------ ----------- ----------- ----------- -----------
Medical professional
liability $ 40,543 $ 755 $ 1,097 $ (11,158) Other property$ 626 $ 755
Property and casualty
$ 6,914 57,906 $ 28,143 42,535 5,997 29,460 $ 13,044
------------ ------------- ----------- ---------- ------------ ------------ -------------
Total medical
professional
liability and property
and casualty 6,914 98,449 28,143 43,290 7,094 18,302 13,044
Other operations 2,673
------------ ------------- ----------- ---------- ------------ ------------ -------------
Total continuing $ 6,914 $ 98,449 $ 28,143 $43,290 $ 9,767 $ 18,302 $ 13,044
============ ============= =========== ========== ============ ============ =============
Other Net
Operating Premiums
Expenses Written
------------ ----------
Medical
professional
liability $ 524 $ 755
Other property
and casualty 2,667 45,173
------------ ----------
Total medical
professional
liability and property
and casualty 3,191 45,928
Other operations 26,063
------------ ----------
Total continuing $ 29,254 $ 45,928
============ ==========
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 $ 1,543 $ 1,063
Other property
and casualty $ 6,300 62,932 $ 25,505 32,583 5,381 22,963 $ 10,250
------------ ------------- ----------- ---------- ------------ ----------- -------------
Total medical
professional
liability and property
and casualty 6,300 121,542 25,505 34,436 6,924 24,026 10,250
Other operations 1,937
------------ ------------- ----------- ---------- ------------ ----------- -------------
Total continuing $ 6,300 $ 121,542 $ 25,505 $34,436 $ 8,861 $ 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
============ ==========
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
----------- ------------workers' compensation 20,995 225 2,266 228 343 225
----------- ----------- ------------ ---------- -------------
Medical
professional
liability $ 71,859 $ 1,941 $ 1,180 $ 6,599
Other property
and casualty $ 4,821 67,274 $ 17,205 34,439 4,951 28,613 $ 10,484
----------- ------------ ----------- ----------- ------------ ---------- -------------
Total medical
professional
liability and property
and casualty 4,821 139,133 17,205 36,380 6,131 35,212 10,484
Other operations 474
----------- ------------ ----------- ----------- ------------ ---------- -------------
Total continuing $ 4,821 $ 139,133 $ 17,205 $ 36,380 $ 6,605 $ 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 33,653and workers'
compensation 61,538 980 3,363 (10,930) 969 980
Other operations 22,868
-------------2,673 26,164
----------- ----------- ----------- ----------- ----------- -----------
Total continuing $ 28,25361,538 $ 33,653
=============980 $ 6,036 $ (10,930) $ 27,133 $ 980
=========== =========== =========== =========== =========== ===========
101105
3. ExhibitsEXHIBITS
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++ 3.2 Amended and Restated By-laws of PICO.
* 10.8 Flexible Benefit Plan.
++ 10.57+ 10.1 PICO 1995Holdings, Inc. 2003 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.
#Appreciation Rights Program.
21. Subsidiaries of PICO. 23.1.See "Notes To Consolidated Financial
Statements, 1. Nature of Operations and Significant
Accounting Policies."
23.1 Independent Auditors' Consent - Deloitte & Touche LLP.
99.123.2 Independent Auditors' Consent - KPMG LLP.
31.1 Certification of Chief Executive Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification of Chief Financial Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 Certification of Chief Executive Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
99.232.2 Certification of Chief ExecutiveFinancial Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
- ------------------------
*----------
+ 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).
+8-K
dated December 4, 1996.
++ 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'
RegistrationProxy Statement No. 33-99352for Annual Meeting of
Shareholders to be Held on Form S-1July 17, 2003, dated May 27, 2003, and 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).
102
++++ 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).
##### Incorporated by reference to Form S-8 filed with the Securities and
Exchange Commission (File No. 333-51688).
###### Incorporated by reference to Form S-8 filed with the Securities and
Exchange Commission (File No. 333-74072).
(b)2003.
(B) REPORTS ON FORM 8-K.
On March 19, 2001, PICO filed a form 8-K announcing that its 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.
103None
106
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 31, 200310, 2004
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 18, 200210, 2004 by the following persons in the
capacities indicated.
/s/ Ronald Langley Chairman of the Board
- ------------------------------------------------------------------------
Ronald Langley
/s/ John R. Hart Chief Executive Officer,
President
- ------------------------------------------------------------------------ President and Director
John R. Hart (Principal Executive Officer)
/s/ Maxim C. W. Webb Chief Financial Officer and Treasurer
- ------------------------------------------------------------------------ (Chief Accounting Officer)
Maxim C. W. Webb
/s/ S. Walter Foulkrod, III, Esq. Director
- ------------------------------------------------------------------------
S. Walter Foulkrod, III, Esq.
/s/ Richard D. Ruppert, MD Director
- ------------------------------------------------------------------------
Richard D. Ruppert, MD
/s/ Carlos C. Campbell Director
- ------------------------------------------------------------------------
Carlos C. Campbell
/s/ Robert R. Broadbent Director
- ------------------------------------------------------------------------
Robert R. Broadbent
/s/ John D. Weil Director
- ------------------------------------------------------------------------
John D. Weil
104
CERTIFICATIONS
I, John R. Hart, Chief Executive Officer of PICO Holdings, Inc.
(the "Registrant") certify that:
1. I have reviewed this annual report on Form 10-K/A of the
Registrant;
2. Based on my knowledge, this annual report does not contain
any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light
of the circumstances under which such statements were made,
not misleading with respect to the period covered by this
annual report;
3. Based on my knowledge, the financial statements, and other
financial information included in this annual report, fairly
present in all material respects the financial condition,
results of operations and cash flows of the Registrant as of,
and for, the periods presented in this annual report;
Date: March 31, 2003 /s/ John R. Hart
--------------------------
John R. Hart
Chief Executive Officer
105
CERTIFICATIONS
I, Maxim C. W. Webb, Chief Financial Officer and Treasurer of
PICO Holdings, Inc. (the "Registrant") certify that:
1. I have reviewed this annual report on Form 10-K/A of the
Registrant;
2. Based on my knowledge, this annual report does not contain
any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light
of the circumstances under which such statements were made,
not misleading with respect to the period covered by this
annual report;
3. Based on my knowledge, the financial statements, and other
financial information included in this annual report, fairly
present in all material respects the financial condition,
results of operations and cash flows of the Registrant as of,
and for, the periods presented in this annual report;
Date: March 31, 2003 /s/ Maxim C. W. Webb
--------------------------
Maxim C. W. Webb
Chief Financial Officer and Treasurer
106107