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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington DC 20549
FORM 10-Q
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2001
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from to
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Commission File Number: 0-18786
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
(858) 456-6022
(Address and telephone number of principal executive offices)
Indicate by check mark whether 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
--- ---
On May 10, 2001, the Registrant had 12,390,096 shares of common stock, $.001 par
value, outstanding, excluding 4,394,127 shares of common stock which are held by
the registrant and its subsidiaries.
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PICO HOLDINGS, INC.
FORM 10-Q
TABLE OF CONTENTS
PAGE NO.
PART I: FINANCIAL INFORMATION
Item 1: Financial Statements
Consolidated Balance Sheets as of 3
March 31, 2001 and December 31, 2000
Consolidated Statements of Operations 4
for the Three Months Ended March 31, 2001 and 2000
Consolidated Statements of Cash Flows for 5
the Three Months Ended March 31, 2001 and 2000
Notes to Consolidated Financial Statements 6
Item 2: Management's Discussion and Analysis of Financial 10
Condition and Results of Operations
Item 3: Quantitative and Qualitative Disclosure About Market Risk 28
PART II: OTHER INFORMATION
Item 4: Submission of Matters to a Vote of Security Holders 29
Item 6: Exhibits and Reports on Form 8-K 29
Signature 30
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PART I: FINANCIAL INFORMATION
ITEM I: FINANCIAL STATEMENTS
PICO HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
March 31, December 31,
2001 2000
------------- ----------------
ASSETS
Investments $ 164,843,393 $ 165,894,070
Cash and cash equivalents 16,889,795 13,644,312
Accrued investment income 1,486,675 1,717,109
Premiums and other receivables, net 15,568,391 19,032,603
Reinsurance receivables 27,360,572 27,594,039
Deferred policy acquisition costs 6,179,853 6,299,819
Land and related mineral and water rights 129,978,985 137,235,241
Property and equipment, net 2,722,208 2,944,513
Income taxes receivable 933,639
Net deferred income taxes 9,995,300 11,354,592
Goodwill 3,872,234 4,000,508
Other assets 5,392,985 5,427,828
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Total assets $ 385,224,030 $ 395,144,634
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Unpaid losses and loss adjustment expenses $ 117,431,886 $ 121,541,722
Unearned premiums 25,034,711 25,505,189
Reinsurance balance payable 5,956,514 5,631,603
Deferred gain on retroactive reinsurance 968,872 968,872
Other liabilities 10,476,711 13,148,093
Bank and other borrowings 13,035,714 15,550,387
Taxes payable 324,837
Excess of fair value of net assets acquired over purchase price 3,218,585 3,360,581
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Total liabilities 176,122,993 186,031,284
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Minority interest 3,863,848 3,920,739
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Commitments and Contingencies (Note 4)
Common stock, $.001 par value; authorized 100,000,000 shares,
issued 16,784,223 in 2001 and 2000 16,784 16,784
Additional paid-in capital 235,844,655 235,844,655
Retained earnings 57,631,234 59,893,785
Accumulated other comprehensive loss (10,425,849) (12,732,978)
Treasury stock, at cost (4,394,127 common shares in 2001 and 2000) (77,829,635) (77,829,635)
------------- -------------
Total shareholders' equity 205,237,189 205,192,611
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Total liabilities and shareholders' equity $ 385,224,030 $ 395,144,634
============= =============
The accompanying notes are an integral part of the consolidated
financial statements.
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PICO HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended March 31,
2001 2000
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Revenues:
Premium income $ 10,039,110 $ 7,514,156
Net investment income 2,169,044 1,502,282
Net realized loss on investments (1,373,818) (59,129)
Other income 9,886,950 1,138,174
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Total revenues 20,721,286 10,095,483
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Expenses:
Loss and loss adjustment expenses 7,944,501 6,023,608
Insurance underwriting and other expenses 15,686,462 8,504,008
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Total expenses 23,630,963 14,527,616
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Equity in income of unconsolidated affiliates 144,443 95,493
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Loss before income taxes, minority interest
and accounting change (2,765,234) (4,336,640)
Benefit for federal, foreign and state income taxes (1,426,363) (477,595)
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Loss before minority interest and accounting change (1,338,871) (3,859,045)
Minority interest in loss of subsidiaries 56,891 302,013
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(1,281,980) (3,557,032)
Cumulative effect of change in accounting principle, net (980,571) (4,963,691)
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Net loss $ (2,262,551) $ (8,520,723)
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Net loss per common share - basic and diluted:
Continuing operations $ (0.10) $ (0.39)
Cumulative effect of change in accounting principle (0.08) (0.54)
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Net loss per common share $ (0.18) $ (0.93)
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Weighted average shares outstanding 12,390,096 9,200,926
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The accompanying notes are an integral part of the consolidated
financial statements.
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PICO HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Three Months Ended March 31,
2001 2000
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OPERATING ACTIVITIES
Net cash used in operating activities $ (5,530,318) $ (1,031,461)
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INVESTING ACTIVITIES:
Purchases of investments (41,047,461) (3,058,595)
Proceeds from sale of investments 36,091,855 74,127
Proceeds from maturity of investments 6,000,000 2,000,000
Proceeds from the sale of land, water and mineral rights 9,161,710
Other investing activities, net (118,189) (153,108)
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Net cash provided by (used in) investing activities 10,087,915 (1,137,576)
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FINANCING ACTIVITIES:
Repayments of debt (2,514,673) (64,017)
Proceeds from rights offering, net of costs of $168,989 49,831,011
Proceeds from borrowings 10,884
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Net cash provided by (used in) financing activities (2,514,673) 49,777,878
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Effect of exchange rate changes on cash 1,202,559 490,789
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NET INCREASE IN CASH AND CASH EQUIVALENTS 3,245,483 48,099,630
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 13,644,312 36,738,373
------------ ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 16,889,795 $ 84,838,003
============ ============
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for interest: $ 320,063 $ 247,264
============ ============
The accompanying notes are an integral part of the consolidated
financial statements.
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PICO HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements
of PICO Holdings, Inc. ("PICO") and Subsidiaries (the "Company") have been
prepared in accordance with the interim reporting requirements of Form
10-Q, pursuant to the rules and regulations of the United States Securities
and Exchange Commission (the "SEC"). Accordingly, they do not include all
of the information and notes required by accounting principles generally
accepted in the United States of America for complete financial statements.
In the opinion of management, all adjustments and reclassifications
considered necessary for a fair and comparable presentation of financial
position as of March 31, 2001 and December 31, 2000 and results of
operations and cash flows for the three months ended March 31, 2001 and
2000 have been included and are only of a normal recurring nature. Certain
reclassifications have been made to conform the 2000 presentation to the
2001 presentation. Operating results for the three months ended March 31,
2001 are not necessarily indicative of the results that may be expected for
the year ending December 31, 2001.
These financial statements should be read in conjunction with the
Company's audited financial statements and notes thereto, together with
Management's Discussion and Analysis of Financial Condition and Results of
Operations and Risks and Uncertainties contained in the Company's Annual
Reports on Form 10-K for the year ended December 31, 2000 as filed with the
SEC.
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
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, deferred income taxes and contingent liabilities. While management
believes that the carrying value of such assets and liabilities are
appropriate as of March 31, 2001 and December 31, 2000, it is reasonably
possible that actual results could differ from the estimates upon which the
carrying values were based.
2. LOSS PER SHARE
The Company applies the provisions of Statement of Financial
Accounting Standards ("SFAS") No. 128, "Earnings Per Share." Basic earnings
or loss per share is based on the actual weighted average common shares
outstanding during the period. Diluted earnings or loss per share is
similar to basic earnings per share, except the weighted shares outstanding
includes the dilutive effect of the Company's stock options and warrants.
Such securities are dilutive if the strike price is less than the average
market price of the Company's stock during the period and the Company has
earnings for the period. In computing earnings per share, all anti-dilutive
securities are ignored. For the three months ended March 31, 2001 and 2000,
there was no difference between basic and diluted weighted shares
outstanding. For the three months ended March 31, 2001, approximately 1.8
million options were excluded. For the three months ended March 31, 2000,
approximately 1 million options were excluded from the computation.
3. COMPREHENSIVE INCOME (LOSS)
The Company applies the provisions of SFAS No. 130, "Reporting
Comprehensive Income." Comprehensive income for the Company includes
foreign currency translation and unrealized holding gains and losses on
available for sale securities.
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The components of comprehensive income (loss) are as follows:
Three months ended March 31,
2001 2000
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Comprehensive income (loss):
Net loss $(2,262,551) $(8,520,723)
Net change in unrealized appreciation
on available for sale investments $ 2,815,588 $ 2,080,492
Net change in foreign currency translation (508,459) (1,522,472)
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Total comprehensive income ( loss) $ 44,578 $(7,962,703)
=========== ===========
Total comprehensive income (loss) is net of deferred income tax
liability of $1.0 million and $2.1 million for the three months ended March
31, 2001 and March 31, 2000, respectively.
The components of accumulated comprehensive loss are as follows:
March 31, December 31,
2001 2000
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Unrealized depreciation on
on available for sale investments $ (4,162,160) $ (6,977,748)
Foreign currency translation (6,263,689) (5,755,230)
------------ ------------
Accumulated other comprehensive loss $(10,425,849) $(12,732,978)
============ ============
Accumulated comprehensive loss is net of deferred income tax assets of
$2 million at March 31, 2001 and $3.2 million at December 31, 2000.
4. COMMITMENTS AND CONTINGENCIES
In November 1998, Vidler entered into an operating lease to acquire
185,000 acre-feet of underground water storage privileges and associated
rights to recharge and recover water located near the California Aqueduct
northwest of Bakersfield. The agreement requires Vidler to pay for these
privileges and rights a minimum of $2.3 million per year for 10 years
beginning October 1998. The agreement calls for the lease payments to be
adjusted annually by the engineering price index. On October 7, 1998, PICO
signed an agreement guaranteeing payment of Vidler's obligations under the
agreement. PICO's maximum obligation under this guarantee is $3.2 million,
adjusted annually by the engineering price index. The guarantee expires
October 7, 2008.
On January 10, 1997, Global Equity commenced an action in British
Columbia against MKG Enterprises Corp. ("MKG") and Vignoble Wines Agency
Inc. ("Vignoble") to enforce repayment of a $5 million loan made by Global
Equity to MKG. On the same day, the Supreme Court of British Columbia
granted an order preventing MKG from disposing of certain assets pending
resolution of the action. Global Equity subsequently brought a motion to
have a receiver-manager appointed for MKG and Vignoble, which motion has
been adjourned. In addition, in March 1999 Global Equity filed an action in
the Supreme Court of British Columbia against a third party. This action
states the third party had fraudulently entered into loan agreements with
MKG. Accordingly, under this action Global Equity is claiming damages from
the third party and restraining the third party from further action. During
2000, Global Equity entered into settlement discussions with the third
party to liquidate the underlying assets of MKG. Although discussions still
continue, Global Equity would receive approximately $500,000 of the
proceeds as full satisfaction of the loan, which is the carrying value of
the investment.
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In connection with the sale of their interests in Nevada Land by the
former members, a limited partnership agreed to act as consultant to Nevada
Land in connection with the maximization of the development, sales,
leasing, royalties or other disposition of land, water, mineral and oil and
gas rights with respect to the Nevada property. In exchange for these
services, the partnership was to receive from Nevada Land a consulting fee
calculated as 50% of any net proceeds that Nevada Land actually receives
from the sale, leasing or other disposition of all or any portion of the
Nevada property or refinancing of the Nevada property provided that Nevada
Land has received such net proceeds in a threshold amount equal to the
aggregate of: (i) the capital investment by Global Equity and the Company
in the Nevada property (ii) a 20% cumulative return on such capital
investment, and (iii) a sum sufficient to pay the United States federal
income tax liability, if any, of Nevada Land in connection with such
capital investment. Either party could terminate this consulting agreement
in April 2002 if the partnership had not received or become entitled to
receive by that time any amount of the consulting fee. No payments have
been made under this agreement through December 31, 1998. By letter dated
March 13, 1998, Nevada Land gave notice of termination of the consulting
agreement based on Nevada Land's determination of default by the
partnership under the terms of the agreement. In November 1998, the
partnership sued Nevada Land for wrongful termination of the consulting
contract. On March 12, 1999, Nevada Land filed a cross-complaint against
the partnership for breach of written contract, breach of fiduciary duty
and seeking declaratory relief. Effective September 1, 1999, the parties
entered into a settlement agreement wherein they agreed that the lawsuit
would be dismissed without prejudice, and that Nevada Land would deliver a
report on or before June 30, 2002 to the limited partnership of the amount
of the consulting fee which would be owed by Nevada Land to the limited
partnership if the consulting agreement were in effect.
BSND, Inc. ("BSND"), a wholly-owned subsidiary of Vidler Water
Company, has resolved a partnership dispute relating to Big Springs
Associates, a partnership which owns real property and water rights in
Nevada (the "Partnership"). BSND owns 50% of the Partnership. Under the
terms of an agreement resolving the dispute, BSND agreed to sell its
interest in the Partnership to the other partner for $12.65 million in
cash, a gain to Vidler of approximately $2.0 million. If the transaction
has not closed by August 1, 2001, BSND will own the Partnership in its
entirety.
The Company is subject to various other litigation that arises in the
ordinary course of its business. Based upon information presently
available, management is of the opinion that such litigation will not have
a material adverse effect on the consolidated financial position, results
of operations or cash flows of the Company.
5. CUMULATIVE CHANGE IN ACCOUNTING PRINCIPLE
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 have
been reported as a cumulative effect of change in accounting principle. 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 4.2%; an expected life of one year; and a
historical 5 year cumulative volatility of 121%. The value of our 4.1
million warrants derived from the model was $2.9 million at December 31,
2000 and $3.1 million at March 31, 2001. The change in value is reported as
a realized investment gain. Future effects on net income will depend on
market conditions.
In the fourth quarter of 2000, the Company received notification from
the Ohio Department of Insurance ("ODI") that it would no longer permit the
Company to discount its Medical Professional Liability Insurance ("MPL")
reserves for statutory accounting practices. Accordingly, the Company
discontinued discounting its MPL reserves in its statutory filing with the
ODI and financial statements prepared in accordance with US GAAP for the
year ended December 31, 2000. The effect of this change was an increase in
unpaid loss and loss adjustment expense reserves of $7.5 million and an
income tax benefit of approximately $2.5 million, resulting in a cumulative
effect of change in accounting principle of $5 million, or $0.43 per share.
The adjustment has been reported as a cumulative effect of change in
accounting principle as of January 1, 2000.
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6. SEGMENT REPORTING
The Company is a diversified holding company engaged in five major
operating segments: Land, Minerals and Related Water Rights; Water Rights
and Water Storage; Property and Casualty Insurance Operations; Medical
Professional Liability Insurance Operations and Long Term Holdings.
The accounting policies of the reportable segments are the same as
those described in the Company's 2000 annual report on Form 10-K. Segment
performance is measured by revenues and segment profit before tax in
addition to changes in shareholders' equity. This information provides the
basis for calculation of return on shareholders' equity, which is the main
performance measurement used in analyzing segment performance. The Company
has operations and investments both in the U.S. and abroad.
The following is a detail of revenues (charges) by segment:
Three Months Ended March 31,
2001 2000
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Land, Minerals and Related Water Rights $ 358,391 $ 669,902
Water Rights and Water Storage 9,282,207 245,425
Property and Casualty Insurance 12,272,319 9,064,955
Medical Professional Liability Insurance 458,200 513,021
Long Term Holdings (1,649,831) (397,820)
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Total Revenues-Continuing Operations $ 20,721,286 $ 10,095,483
============ ============
The following is a detail of segment profit or loss before income
taxes and minority interest:
Three Months Ended March 31,
2001 2000
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Land, Minerals and Related Water Rights $ (101,799) $ 167,881
Water Rights and Water Storage 971,268 (812,052)
Property and Casualty Insurance 217,013 (308,808)
Medical Professional Liability Insurance 344,698 352,466
Long Term Holdings (4,196,414) (3,736,127)
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Loss Before Taxes and Minority Interest $(2,765,234) $(4,336,640)
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ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
THIS FORM 10-Q CONTAINS FORWARD-LOOKING STATEMENTS. THESE INCLUDE, BUT ARE
NOT LIMITED TO, STATEMENTS ABOUT THE COMPANY'S INVESTMENT PHILOSOPHY, PLANS FOR
EXPANSION, BUSINESS EXPECTATIONS AND REGULATORY FACTORS. THESE STATEMENTS
REFLECT OUR CURRENT VIEWS ABOUT FUTURE EVENTS WHICH COULD AFFECT OUR FINANCIAL
PERFORMANCE. ALTHOUGH WE AIM TO PROMPTLY DISCLOSE ANY NEW DEVELOPMENT WHICH WILL
HAVE A MATERIAL EFFECT ON PICO, WE DO NOT UNDERTAKE TO UPDATE ALL
FORWARD-LOOKING STATEMENTS UNTIL OUR NEXT SCHEDULED FORM 10-K OR FORM 10-Q
FILING. YOU SHOULD NOT PLACE UNDUE RELIANCE ON FORWARD-LOOKING STATEMENTS
BECAUSE THEY ARE SUBJECT TO VARIOUS RISKS AND UNCERTAINTIES, INCLUDING THOSE
LISTED UNDER "RISK FACTORS" AND ELSEWHERE IN THIS FORM 10-Q, WHICH COULD CAUSE
ACTUAL RESULTS TO DIFFER MATERIALLY FROM SUCH FORWARD-LOOKING STATEMENTS, OR
FROM OUR PAST RESULTS.
RESULTS OF OPERATIONS -- THREE MONTHS ENDED MARCH 31, 2001 AND 2000
INTRODUCTION
PICO Holdings, Inc. is a diversified holding company. We acquire interests
in companies which our management believes:
- - are undervalued at the time we buy them; and
- - have the potential to provide a superior rate of return over time, after
considering the risk involved.
Our over-riding objective is to generate superior long-term growth in
shareholders' equity, as measured by book value per share. To accomplish this,
we are seeking to build a profitable operating base and to realize gains from
our investment holdings. In the long term, we expect that most of the growth in
shareholders' equity will come from realized gains on the sale of assets, rather
than operating earnings. Accordingly, when analyzing our performance, PICO's
management places more weight on increased asset values than on reported
earnings.
Currently our major assets and activities are:
- - owning and developing land and the related water rights and mineral rights
through Nevada Land & Resource Company, LLC, which owns approximately
1,245,551 acres of land in northern Nevada;
- - owning and developing water rights and water storage operations through
Vidler Water Company, Inc.;
- - property and casualty insurance;
- - "running off" the loss reserves of our medical professional liability
insurance companies; and
- - making long term value-based investments in other public companies.
SUMMARY
PICO reported a net loss of $2.3 million, or $0.18 per basic and diluted
share, for the quarter ended March 31, 2001, which includes the cumulative
effect of a change in accounting principle which reduced income by $981,000
after taxes, or $0.08 per share. Despite the net loss, shareholders' equity
increased slightly during the quarter to $205.2 million, or $16.56 per share, at
March 31, 2001, due to unrealized appreciation in the value of several of PICO's
investments. In the first quarter of 2000, PICO reported a net loss of $8.5
million, or $0.93 per basic and diluted share, which included a separate change
in accounting principle that reduced income by $5 million after taxes, or $.54
per share.
PICO recorded comprehensive income of $45,000 for the first quarter of
2001. This was comprised of $2.8 million of unrealized appreciation in the value
of investments, which was partially offset by the $2.3 million net loss and
negative foreign currency translation of $508,000, caused by a decline in the
value of foreign currencies where we hold investments relative to the US dollar.
In the first quarter of 2000, PICO experienced an $8 million comprehensive loss,
consisting of an $8.5 million net loss and negative currency translation of $1.5
million, which were partially offset by a $2.1 million increase in unrealized
appreciation in investments.
In the first quarter of 2001, PICO reported a $2.8 million loss before
income taxes, minority interest, and the cumulative effect of a change in
accounting principle. This was partially offset by income tax benefits of $1.4
million and the addition of $57,000 to reflect the interest of minority
shareholders in the net losses of subsidiaries which are less than 100% owned by
PICO. In addition, a change in accounting principle due to the adoption of the
Statement of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities," had the cumulative effect of reducing
income by $981,000 after taxes.
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The practical effect of the new accounting principle on PICO is that
fluctuations, after applicable taxes, in the carrying value of warrants which we
own to acquire new shares in other companies -- primarily HyperFeed
Technologies, Inc. -- will now be recognized in the statement of operations each
quarter. Previously, the unrealized fluctuations in value had been recorded
directly in shareholders' equity. Adoption of this principle on January 1, 2001
resulted in a catch-up charge against income to record the cumulative unrealized
loss in value of $981,000 after-tax; however, there was no effect on book value
because the fluctuation was already fully reflected in shareholders' equity.
During the first quarter of 2001, the application of FAS No. 133 resulted in the
recognition of $90,000 of income in the Long Term Holdings segment, primarily
due to an increase in the estimated fair value of warrants in HyperFeed. This
treatment will apply to any additional warrants, or other derivative instruments
covered by the principle, which PICO acquires in the future.
In the first quarter of 2000, a $4.3 million loss before income taxes and
minority interest was partially offset by income tax benefits of $478,000 and
the addition of $302,000 to reflect the interest of minority shareholders in the
net loss of PICO subsidiaries. In addition, the cumulative effect of a change in
accounting principle reduced income by $5 million after-tax. Until December 31,
1999, PICO had discounted the carrying value of its medical professional
liability claims reserves, to reflect the fact that some claims will not be paid
until many years in the future, but funds from the corresponding premiums can be
invested in the meantime. After December 31, 1999, PICO's medical professional
liability insurance subsidiaries were no longer allowed to discount claims
reserves in the statements they file with the Ohio Department of Insurance,
which are prepared on the statutory basis of accounting. With this change in
accounting principle, we also eliminated the discounting in our financial
statements which are prepared on a GAAP basis (i.e., generally accepted
accounting principles) from the start of 2000.
First quarter 2001 revenues were $20.7 million, compared to $10.1 million
during the first quarter of 2000. This increase primarily resulted from Vidler's
sale of water rights and land in the Harquahala Valley which generated revenues
of $9.4 million, and a $2.6 million increase in earned premiums at Sequoia
Insurance Company.
Segment revenues and income (loss) before taxes, minority interest, and the
cumulative effect of changes in accounting principles, for the first quarter of
2001 and 2000 were:
THREE MONTHS ENDED MARCH 31,
--------------------------------
2001 2000
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REVENUES:
Land, Minerals & Related Water Rights $ 358,000 $ 670,000
Water Rights & Water Storage Assets 9,282,000 245,000
Property & Casualty Insurance 12,272,000 9,065,000
Medical Professional Liability Insurance 458,000 513,000
Long Term Holdings (1,649,000) (398,000)
------------ ------------
Total Revenues $ 20,721,000 $ 10,095,000
============ ============
INCOME (LOSS) BEFORE TAXES, MINORITY INTEREST
& CUMULATIVE EFFECT OF CHANGES IN ACCOUNTING
PRINCIPLES:
Land, Minerals & Related Water Rights $ (102,000) $ 168,000
Water Rights & Water Storage Assets 971,000 (812,000)
Property & Casualty Insurance 217,000 (309,000)
Medical Professional Liability Insurance 345,000 352,000
Long Term Holdings (4,196,000) (3,736,000)
------------ ------------
Loss Before Taxes, Minority Interest & Cumulative
Effect of Changes in Accounting Principles $ (2,765,000) $ (4,337,000)
============ ============
Detailed information on the performance and outlook for each segment is
contained later in this report; however, the major factors affecting PICO's
first quarter results were:
LAND, MINERALS AND RELATED WATER RIGHTS
First quarter revenues were $312,000 below the previous year at Nevada
Land, due to lower land sales. Segment income declined by $270,000, primarily
due to a $227,000 lower gross margin on land sales and a $111,000 increase in
professional fees resulting from various initiatives to enhance the value of
Nevada Land's assets.
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WATER RIGHTS AND WATER STORAGE ASSETS
During the first quarter of 2001, Vidler completed its first major water
transaction, which resulted in total revenues of $9.4 million and pre-tax income
of $2.4 million. This was partly offset by the recording of a $442,000 loss on
the condemnation (i.e., compulsory acquisition) of commercially zoned land in
Mesa, Arizona, which is part of the greater Phoenix metropolitan area, resulting
in segment revenues of $9.3 million and segment income of $971,000.
In the first quarter of 2000, Vidler was concentrating on the development
and commercialization of its assets and was not generating significant cash flow
from its water rights and water storage assets. This resulted in revenues of
just $245,000, and a segment loss of $812,000, in the 2000 quarter.
PROPERTY AND CASUALTY INSURANCE
Segment revenues rose by $3.2 million, or 35.4%, due to growth in earned
premiums of $2.5 million, and a $713,000 increase in investment income and
realized gains. Sequoia incurred a $392,000 pre-tax loss for the quarter,
principally due to a large number of weather-related property damage claims.
This was more than offset by $609,000 of income before taxes from Citation
Insurance Company, resulting in segment income of $217,000, versus a $309,000
loss in the previous year.
MEDICAL PROFESSIONAL LIABILITY INSURANCE
As the "run off" of loss reserves in this segment continues, investment
income dropped by $55,000 from the first quarter of 2000, and segment pre-tax
income declined by $7,000, or 2.0%.
LONG TERM HOLDINGS
This segment is comprised of investments which are too small to constitute
a segment, or where we own less than 50% of the company. Our largest long term
holdings are in HyperFeed Technologies, Inc., Jungfraubahn Holding AG, and
Australian Oil & Gas Corporation Limited, all of which are publicly traded
companies. The segment result does not reflect the difference between the
carrying value and the potential market value of these long term investments.
This is detailed later in this report.
Segment revenues were negative $1.7 million for the first quarter of 2001,
due to a $2 million realized loss on the sale of a portfolio investment,
compared to negative $398,000 in the first quarter of 2000.
The $2 million realized loss more than offset the positive effect of the
elimination of losses from Conex Continental, Inc. following its sale in the
third quarter of 2000, resulting in a $460,000 higher segment loss of $4.2
million.
LAND, MINERALS AND RELATED WATER RIGHTS
NEVADA LAND & RESOURCE COMPANY, LLC
Three Months Ended March 31,
----------------------------
2001 2000
--------- ---------
REVENUES:
Sale of Land $ 67,000 $ 423,000
Lease and Other 291,000 247,000
--------- ---------
Segment Total Revenues $ 358,000 $ 670,000
========= =========
EXPENSES:
Cost of Land Sales (29,000) (158,000)
Operating Expenses (431,000) (344,000)
--------- ---------
Segment Total Expenses $(460,000) $(502,000)
========= =========
========= =========
INCOME (LOSS) BEFORE TAX $(102,000) $ 168,000
========= =========
In the first quarter of 2001, Nevada Land & Resource Company, LLC sold
approximately 1,125 acres of land for $67,000. The parcels of land sold were
from lower value categories, which is reflected in the average sales price of
$59.20 per acre and our average basis of $26.56 per acre in the land sold. Lease
and other revenue totaled $291,000, resulting in segment total revenues of
$358,000.
Nevada Land does not recognize land sales contracts as revenue until the
sales transactions close. Consequently, revenues fluctuate from quarter to
quarter depending on the closing of specific transactions, and land sales
revenues for any individual quarter are not indicative of likely full-year
revenues.
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In the first quarter of 2000, Nevada Land & Resource Company, LLC sold
3,484 acres of land for $423,000. The average sales price of $121.50 per acre
compares to our basis in the land sold of $45.32. Lease and other revenues of
$247,000 resulted in segment total revenues for the quarter of $670,000.
The gross margin on land sales in the first quarter of 2001 was $38,000,
compared to $265,000 the year before. The $227,000 lower gross margin from land
sales and a $111,000 increase in professional fees were the principal causes of
the $270,000 drop in segment income from a $168,000 profit in 2000 to a segment
loss of $102,000 this year. The additional professional fees were related to
various initiatives to increase the value of Nevada's land assets, including
water rights applications and preparation for potential land exchanges. Other
operating expenses were little changed.
During 2000 and the first quarter of 2001, Nevada Land filed applications
for additional water rights related to its lands. Where these applications are
successful, we anticipate that the value and marketability of the associated
land will increase. The applications consist of:
- - 30,276 acre-feet of agricultural water rights for the beneficial use of
irrigating the related 7,569 acres of land; and
- - 18,000 acre-feet of water rights in a northern valley for municipal and
industrial use.
Later in the year, Nevada Land intends to file applications for a further 20,480
acre-feet of water rights to irrigate 7,680 acres of land.
Discussions are continuing with several electricity-generating companies
that are looking for sites to construct new power plants in northern Nevada.
Nevada Land has a supply of suitable land in various locations which also offer
the other essential requirements of water for cooling, access to the electricity
grid, and availability of feedstock (i.e., a fuel source) through either natural
gas transmission lines for gas-fired stations or rail transport for coal-fired
stations.
Progress is also continuing on a number of possible sale and exchange
transactions involving significantly larger parcels of land.
WATER RIGHTS AND WATER STORAGE ASSETS
VIDLER WATER COMPANY, INC.
Three Months Ended March 31,
------------------------------
2001 2000
------------- -----------
REVENUES:
Sale of Land and Water Rights $ 9,095,000
Option Premiums Earned 300,000
Lease of Water 30,000 $ 26,000
Agricultural Land Leases 202,000 219,000
Loss on Condemnation (442,000)
Other 97,000
----------- -----------
Segment Total Revenues $ 9,282,000 $ 245,000
=========== ===========
EXPENSES:
Cost of Land and Water Rights Sold (6,478,000)
Commission and other costs of sales (546,000)
Depreciation and amortization (349,000) (208,000)
Interest (192,000) (202,000)
Operations and maintenance (78,000) (108,000)
Other (668,000) (539,000)
----------- -----------
$(8,311,000) $(1,057,000)
----------- -----------
INCOME (LOSS) BEFORE TAX $ 971,000 $ (812,000)
=========== ===========
Vidler closed its first major water transaction in the first quarter of
2001, with the sale of 6,496.5 acre-feet of transferable ground water and the
related 2,165.5 acres of land in Arizona's Harquahala Valley to a unit of
Allegheny Energy, Inc. The transaction generated total revenues of approximately
$9.4 million, comprised of a sales price of $9.1 million and a $300,000 option
premium earned. After deducting the cost of the water rights sold and selling
costs, the transaction resulted in pre-tax income of $2.4 million. We earned an
accounting pre-tax rate of return of approximately 76% on the equity invested in
the Allegheny transaction.
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We paid $4.4 million in cash to acquire the assets which we sold to
Allegheny for $9.4 million. Therefore, the sale resulted in a $5 million cash
surplus. The cash-on-cash pre-tax internal rate of return (i.e., annualized
compound rate of return) on the investment was almost 140%. This is not an
accounting measure, but a supplemental disclosure of the actual rate of return
on the cash invested in these assets. Most of the difference between the $2.4
million pre-tax income on a GAAP basis and the $5 million cash surplus was
recorded as an increase in book value at the time of the PICO/Global Equity
combination in 1998.
The sales price represents $1,400 per acre-foot of transferable Harquahala
Valley ground water. Following the Allegheny transaction, Vidler owns, or has
the right to acquire, approximately 49,426 acre-feet of transferable Harquahala
Valley ground water.
The Arizona Department of Transportation has condemned (i.e., compulsorily
acquired) a parcel of commercially zoned land owned by Vidler in Mesa, Arizona,
which is part of greater metropolitan Phoenix. The Department condemned the
property due to freeway construction. The property was acquired in association
with MBT Ranch in 1996 and was not part of Vidler's water rights and water
storage business, and was being held for resale. The Department has condemned
the property for approximately $858,000, which is less than the value that
Vidler was carrying the property at, and less than a recent appraisal obtained
by Vidler which estimated its value at more than $1.5 million. Vidler disputes
the value at which the Department condemned the land, and the case is expected
to go to court in the second half of 2001. In the first quarter of 2001, Vidler
recorded a loss of $442,000, being the difference between the value at which the
property had been carried and the cash proceeds of the condemnation. If Vidler
is ultimately able to obtain a higher price, the difference will be recorded as
income when the litigation is resolved.
The other significant components of Vidler's $9.3 million total segment
revenues were $202,000 from leasing agricultural land to farmers and $30,000
from leasing certain water assets in Colorado until their sale closes. After
deducting the cost of the water rights sold and related selling costs, and
operating expenses of $1.3 million, Vidler generated segment income before taxes
of $971,000.
Throughout 2000, Vidler was concentrating on the development and
commercialization of its assets and the company's water rights and water storage
operations were not generating significant cash flow. This is reflected in the
segment results for the first quarter of 2000, when segment total revenues were
$245,000, operating expenses were $1.1 million, and the segment pre-tax loss was
$812,000.
Our 2000 Form 10-K report contains a detailed description of Vidler's water
rights and water storage operations. The following section updates this
information for significant developments during the first quarter:
WATER RIGHTS
HARQUAHALA VALLEY WATER RIGHTS
Following the Allegheny transaction, Vidler owns, or has the right to
acquire, approximately 49,426 acre-feet of transferable ground water in the
Harquahala Valley, approximately 75 miles northwest of metropolitan Phoenix,
Arizona. Under state legislation, the Central Arizona Project Aqueduct is
committed to convey up to 20,000 acre-feet of Harquahala ground water to cities
and communities in Arizona as an assured municipal water supply. Vidler is able
to supply this water and is meeting with communities and developers in the
Phoenix metropolitan area, some of whom need to secure further water supply to
support expected growth. It is currently anticipated that the first such
agreement will close in the second half of 2001.
Discussions are also continuing with potential users within the Harquahala
Valley.
LINCOLN COUNTY PUBLIC/PRIVATE JOINT VENTURE
In October 1999, Vidler announced a public/private joint venture with
Lincoln County, Nevada. The joint venture has filed applications for more than
100,000 acre-feet of water rights, covering substantially all of the
unappropriated water in Lincoln County, with a view to supplying water to
rapidly growing communities in southern Nevada.
During the first quarter, Vidler agreed to purchase 822.29 acre-feet of
vested water rights in Meadow Valley, which is located in Lincoln County,
Nevada. Vested water rights are similar to certificated water rights. The
agreement entered escrow in March 2001. Vidler is in discussions to commercially
utilize these water rights by supplying the water to an end user through the
joint venture with Lincoln County.
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WATER STORAGE OPERATIONS
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" refers to the process of placing water into storage
underground. Vidler has the permitted right to recharge 100,000 acre-feet 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 the
Harquahala Valley.
Vidler is able to provide storage for both intrastate users and interstate
users at the facility. Potential users include local governmental political
subdivisions and developers within Arizona and out-of-state users such as the
Las Vegas metropolitan area and California. The Arizona Water Banking Authority
has the responsibility for intrastate and interstate storage of water for public
entities. The Authority has indicated that the first priority for publicly owned
storage capacity in Arizona is to store water for Arizona users. Therefore,
interstate users will need to rely, at least in part, on privately owned storage
capacity.
The Arizona Water Banking Authority is negotiating with Vidler, on behalf
of potential interstate public users, to store water in the Vidler Arizona
Recharge Facility. In April 2001, Vidler reached agreement with the Authority
concerning the terms under which water can be stored at the facility. Vidler is
charging a water storage fee of $45.00 per acre-foot of water recharged during
2001. The fee will be $46.50 per acre-foot for water recharged in 2002, and
$48.00 per acre-foot for water recharged in 2003. The agreement concludes on
December 31, 2003.
The ultimate revenues generated will depend on the quantity of water which
the Arizona Water Banking Authority, and other users, store at the facility. The
Authority has not yet indicated the quantity of water which it will store this
year. This will depend on a number of factors, including the availability of
water and available storage capacity at other facilities. Vidler is also in
discussions with private entities to store water at the facility. At present,
there is a limited volume of water available for storage due to below average
winter precipitation, and the spring run-off period, which generates surplus
flows of water, has passed. Despite this, Vidler expects to store up to 20,000
acre-feet of water this year for users within Arizona.
Vidler anticipates higher usage next year, once potential interstate users
have concluded their agreements with the State of Arizona and federal agencies.
Ultimately, Vidler expects to fully utilize the facility as recently projected
storage requirements for Nevada and California alone exceed the total amount of
storage available at existing facilities in Arizona.
On March 1, 2001, Vidler began to amortize the improvements at the Facility
over a period of 15 years. The annual amortization charge will be approximately
$467,000. The charge for the quarter was approximately $39,000, which represents
amortization for the month of March.
SEMITROPIC WATER STORAGE FACILITY
Vidler has a 18.5% interest in a water storage facility at Semitropic, near
the California Aqueduct, northwest of Bakersfield. Vidler has the right to store
up to 185,000 acre-feet of water underground over a 35-year period, and 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. Recent
events have highlighted the strategic value of the guaranteed right to recover
water every year. In particular, the plans of some developers which intend to
obtain water from the State Water Project to support additional development have
been challenged, because, in some circumstances, the right to take water from
the State Water Project can be scaled back in drought years. Accordingly, to
secure guaranteed water supply during dry years, a number of developers are
joining water banking programs.
OTHER PROJECTS
Vidler continues to be approached by parties who are interested in
obtaining a water supply, or discussing joint ventures to commercially develop
water assets and/or develop water storage facilities.
Recent examples include:
- - a Water Resource Planning Memorandum of Understanding which was signed on
November 1, 2000 with the MUDDY RIVER IRRIGATION DISTRICT in Nevada. Under
the agreement, Vidler will work with the Irrigation District to maximize
the efficiency of its irrigation system, and then evaluate opportunities to
commercially utilize water which is surplus to agricultural needs;
15
16
- - a Memorandum of Understanding which was signed on December 18, 2000 with
the city of SURPRISE, ARIZONA, for Vidler to conduct a feasibility study of
a joint venture water recharge project; and
- - approaches to develop water rights in two states where Vidler does not
currently own assets.
PROPERTY AND CASUALTY INSURANCE
Three Months Ended March 31,
-----------------------------
2001 2000
------------- ------------
P&C INSURANCE REVENUES:
Sequoia - Earned Premiums $ 9,937,000 $ 7,329,000
Citation - Earned Premiums 102,000 185,000
Investment Income 1,471,000 1,287,000
Realized Investment Gains 528,000
Other 234,000 264,000
------------ ------------
Segment Total Revenues $ 12,272,000 $ 9,065,000
============ ============
P&C INSURANCE EXPENSES:
Loss & Loss Adjustment Expense (7,944,000) (6,024,000)
Underwriting Expenses (4,111,000) (3,350,000)
------------ ------------
Segment Total Expenses $(12,055,000) $ (9,374,000)
P&C INSURANCE INCOME (LOSS) BEFORE TAXES:
Sequoia Insurance Company $ (392,000) $ (349,000)
Citation Insurance Company 609,000 40,000
------------ ------------
Total P&C Segment Income (Loss) Before Taxes $ 217,000 $ (309,000)
============ ============
The Property and Casualty segment is comprised of Sequoia Insurance Company
and Citation Insurance Company, both of which are based in Monterey, California.
Traditionally Sequoia's core business has been commercial property and
casualty insurance in California and Nevada, focusing on the niche markets of
small to medium-sized businesses and farms. In May 2000, Sequoia's book of
business in personal lines of insurance increased significantly with the
acquisition of Personal Express Insurance Services, Inc. Personal Express, which
operates in the central California cities of Bakersfield and Fresno, has a
unique business model -- writing insurance direct with the customer, but with
branches providing local service for underwriting and claims. In recent years,
the business written by Citation in California and Nevada has been transitioned
to Sequoia. Citation ceased writing business at the end of 2000, and is now
"running off" its historical business. As a result of these factors, the
individual results of Sequoia and Citation cannot be directly compared to
previous years.
In the first quarter of 2001, Sequoia generated $11.6 million of direct
written premiums, comprised of $10.6 million in commercial lines of insurance
and $974,000 in personal lines. In the first quarter of 2000, Sequoia's total
direct written premiums of $9 million consisted of $8.8 million in commercial
lines and just $223,000 in personal lines. Most of the 28.5% overall growth in
direct written premiums resulted from two important developments which occurred
in the second quarter of 2000:
- - the $1.8 million, or 20.7%, increase in direct written premium volume in
commercial lines principally resulted from new policies issued following
the increase in Sequoia's A.M. Best rating to "A-" (Excellent). This
enabled Sequoia to compete for business in a new segment -- customers which
only purchase coverage from insurance companies with an "A" rating; and
- - the acquisition of Personal Express, which led to a more than fourfold, or
$751,000, increase in direct written premiums in personal lines. Personal
Express writes the majority of its premium volume in the third and fourth
quarters, so first quarter written premiums are not indicative of likely
full-year volume.
For the first quarter of 2001, segment total revenues of $12.3 million
included $10 million in earned premiums, $1.5 million of investment income
(i.e., interest and dividend income), and realized investment gains of $528,000.
In the first quarter of 2000, segment total revenues were $9.1 million,
including earned premiums of $7.5 million and investment income of $1.3 million.
In the first quarter of 2001, Sequoia produced total revenues of $11.4
million, including $9.9 million in earned insurance premiums, $897,000 in
investment income, and $516,000 in realized gains on the sale of investments.
The earned premiums were comprised of $8.2 million in commercial lines and $1.8
million in personal lines. Due to the growth in the commercial insurance book of
business and the Personal Express acquisition described in preceding paragraphs,
total earned premiums increased by $2.6 million, or 35.6%, year on year -- $1.2
million of the growth was in commercial lines of insurance, and $1.4 million was
in personal lines.
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Due to the cyclical nature of claims, including the influence of weather,
Sequoia usually receives the highest number of claims in the first quarter of
the year, which includes the winter months of January, February and March when
California experiences the bulk of its annual rainfall and storm activity.
Typically, Sequoia's loss ratio peaks during the first quarter, and a small
underwriting loss is not unusual.
In the first quarter of 2001, Sequoia incurred a loss before investment
income, realized gains, and taxes of $1.8 million. The underwriting loss is
primarily attributable to higher than expected payments for current year claims
due to:
- - the large number of claims received, including numerous claims from
homeowners who suffered property damage during windstorms which swept
through Bakersfield in March; and
- - higher average claims costs. In recent years, premium rates have not kept
up with the rate of increase in costs such as construction, medical care,
and automobile repair.
In addition, Sequoia recorded approximately $107,000 of adverse development in
prior year loss reserves.
In the first quarter of 2000, Sequoia reported a pre-tax loss of $349,000
due to the seasonal peak in claims and approximately $125,000 of adverse
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 investment gains or losses, extraordinary items,
taxes, and other non-insurance items. Sequoia aims to have a combined ratio of
less than 100% each year; however, this is not achieved in every quarter or
year.
Sequoia's combined ratio, determined on the basis of generally accepted
accounting principles, for the first quarter of 2001 and 2000 was:
SEQUOIA'S GAAP INDUSTRY RATIOS
THREE MONTHS ENDED MARCH 31,
------------------------------------------
2001 2000
----------- -----------
Loss and Loss Adjustment Expense Ratio 78.4% 77.2%
Underwriting Expense Ratio 40.6% 36.9%
----------- -----------
Combined Ratio 119.0% 114.1%
=========== ===========
Sequoia's management expects improvement in the combined ratio in the
remainder of 2001. It is currently anticipated that the loss and loss adjustment
expense ratio will improve due to the seasonal factors discussed in preceding
paragraphs, a further tightening in underwriting standards (e.g., we have
stopped writing coverage for certain categories of business), and, potentially,
rate increases in some lines of business. The underwriting expense ratio is
expected to decline due to:
(1) economies of scale. As fixed expense items are spread over a larger
revenue base, these reduce as a percentage of revenue; and
(2) as the proportion of Personal Express premiums in the business mix
increases, commission expense should decline as a percentage of revenue
because no commission is payable on the policies generated by Personal
Express.
Segment investment income increased by $184,000, or 14.3%, year over year.
This primarily reflected a higher average income yield on the portfolio due to a
refocusing of the fixed-income component on to high-grade corporate bonds and,
to a lesser extent, an increase in invested assets resulting from the growth in
written premium. In addition, gains of $528,000 were realized from the sale of
bonds and stocks held in the insurance company investment portfolios. Most of
the gains resulted from the sale of bonds with less than 3 years to maturity,
which released funds for reinvestment in longer term bonds at higher yields to
maturity. The amount of realized gains varies from quarter to quarter and has no
predictive value. Given the extraordinary decline in market interest rates
during the first quarter, gains of this size from bonds are unlikely to be
repeated in the near term.
Citation's first-quarter revenues of $832,000 include $102,000 of earned
premium and $574,000 of investment income. Although Citation ceased writing new
business in December 2000, the company will earn premiums each quarter this year
until the final in-force policy expires in December 2001. Citation generated
income of $23,000 before investment income, realized gains, and taxes for the
quarter, after recording $60,000 in adverse development in prior year loss
reserves. Citation's pre-tax profit for the first quarter of 2001 was $609,000,
compared to $40,000 a year earlier. Since Citation is in run off, its combined
ratio is not meaningful.
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MEDICAL PROFESSIONAL LIABILITY INSURANCE
Three Months Ended March 31,
----------------------------
2001 2000
---------- ---------
MPL REVENUES:
Net Investment Income $ 458,000 $ 513,000
--------- ---------
Segment Total Revenues $ 458,000 $ 513,000
========= =========
EXPENSES:
Underwriting Expenses (113,000) (161,000)
--------- ---------
Segment Total Expenses $(113,000) $(161,000)
========= =========
========= =========
INCOME BEFORE TAXES $ 345,000 $ 352,000
========= =========
Physicians Insurance Company of Ohio and The Professionals Insurance
Company are in "run off." This means that they are handling claims arising from
historical business, but not writing new business. The level of investment
assets and loss reserve liabilities in this segment are decreasing as claims are
paid and investments mature, or are sold, to provide the funds required to make
the claims payments.
In the first quarter of 2001, the segment generated net investment income
of $458,000. Following operating expenses of $113,000, the segment earned income
of $345,000 before taxes.
In the first quarter of 2000, net investment income was $513,000, and the
segment earned a pre-tax profit of $352,000, after operating expenses of
$161,000. The segment result for the first quarter of 2000 has been restated to
reflect a change in accounting principle, which eliminated the discounting of
loss reserves and the related reserve discount accretion expense from January 1,
2000. The change in accounting principle is explained on page 11 of this
Form 10-Q report.
No unusual trends in claims emerged during the quarter.
At March 31, 2001, our medical professional liability loss reserves stood
at $48.9 million, net of reinsurance, compared to $51.6 million at December 31,
2000.
MEDICAL PROFESSIONAL LIABILITY INSURANCE - LOSS AND LOSS EXPENSE RESERVES
MARCH 31, 2001 DECEMBER 31, 2000
-------------- -----------------
Direct Reserves $55.9 million $58.6 million
Ceded Reserves (7.0) (7.0)
------------- -------------
Net Medical Professional Liability Reserves $48.9 million $51.6 million
============= =============
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LONG TERM HOLDINGS
Three Months Ended March 31,
------------------------------
2001 2000
------------- ------------
LONG TERM HOLDINGS REVENUES (CHARGES):
Realized Investment Losses $(1,992,000) $ (12,000)
Investment Income 288,000 (266,000)
FAS 133 Change in Warrants 90,000
Other (35,000) (120,000)
----------- -----------
Segment Total Revenues (Charges) $(1,649,000) $ (398,000)
=========== ===========
SEGMENT TOTAL EXPENSES (2,691,000) (3,433,000)
----------- -----------
LOSS BEFORE INVESTEE INCOME $(4,340,000) $(3,831,000)
Equity Share of Investee's Net Income 144,000 95,000
----------- -----------
LOSS BEFORE TAXES $(4,196,000) $(3,736,000)
=========== ===========
This segment is comprised of investments which are too small to constitute
an individual segment, or where we own less than 50% of the company.
Our largest long term holdings are in HyperFeed Technologies, Inc.,
Jungfraubahn Holding AG, and Australian Oil & Gas Corporation Limited. At March
31, 2001, these three long term holdings had a potential market value (before
taxes) of approximately $44.5 million, and a carrying value (before taxes) of
$38.5 million. After allowing for taxes on the net unrealized gains, the
tax-effected carrying value of the holdings was $37.1 million, or 18.1% of
PICO's shareholders' equity.
At March 31, 2001, PICO owned 7,401,547 common and preferred shares in
HyperFeed, and held warrants to buy an additional 4,055,195 shares. The common
and preferred shares had a carrying value of $3.4 million (before taxes),
compared to a potential market value of $12 million (before taxes). The warrants
were carried at estimated fair value of $3.1 million (before taxes). Based on
the HyperFeed stock price of $1.625 at March 31, 2001, if we were to exercise
our warrants, the potential market value of the shares received would
approximate the cost of exercise.
Long Term Holdings segment revenues were negative $1.6 million for the
first quarter of 2001, due to a net realized loss of $2 million from the sale of
investments which exceeded positive revenue items. Other revenues include
investment income of $288,000 and income of $90,000 from unrealized appreciation
(before taxes) in warrants which is now recognized in the income statement under
FAS 133 (i.e., Statement of Financial Accounting Standards No. 133, "Accounting
for Derivative Instruments and Hedging Activities"). This is explained on page
11 of this Form 10-Q report.
The investment loss was realized on the redemption of 300,000 units of the
Rydex URSA Fund, a mutual fund which was held in the investment portfolio of
Physicians Insurance Company of Ohio. This mutual fund is designed to deliver a
return which is the inverse of the return on the S&P 500 Index, and was acquired
in 1995 when Physicians had greater exposure to listed stocks. The realized loss
had no effect on book value because the unrealized depreciation, after the
applicable tax benefit, was already reflected in shareholders' equity.
Our original investment strategy had called for this investment to be
liquidated progressively throughout 2001; however, redemptions were accelerated
during February and March when weakness in the S&P 500 Index led to a sharp
increase in the price of Rydex URSA units.
The market weakness persisted into April and early May, and the remainder
of the investment was redeemed for a realized loss of approximately $2 million
before taxes, which will be recorded in the second quarter of 2001. PICO has no
other investments in mutual funds, and has no investments in derivative
instruments, apart from the warrants to purchase new shares in HyperFeed and
other companies which are accounted for under FAS 133.
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The principal components in the Long Term Holdings segment pre-tax loss of
$4.2 million were the $2 million realized loss, unallocated expenses of $2.2
million, and a loss of $406,000 before taxes and minority interest from SISCOM.
These items were partially offset by $144,000 of income from investments which
we account for under the equity method.
In the first quarter of 2000, segment total revenues were negative $398,000
and the segment generated a pre-tax loss of $3.7 million. The main components in
the 2000 segment loss were unallocated expenses of $2.8 million, $1.2 million in
losses from Conex and its Chinese joint venture (prior to their sale in the
third quarter of 2000), and a $268,000 loss before taxes and minority interest
from SISCOM. Excluding Conex's Chinese joint venture, income from investments
accounted for under the equity method was $452,000.
Highlights in the Long Term Holdings segment included:
AUSTRALIAN OIL & GAS
During the quarter, PICO invested a total of $785,000 to increase its
holding in AOG to 9,261,135 shares, or 19.76% of the company, at March 31, 2001.
HYPERFEED
On April 30, 2001, HyperFeed announced its fourth consecutive profitable
quarter.
For the quarter ended March 31, 2001, HyperFeed reported net income of
$646,000, compared to net income of $995,000 in the preceding December quarter,
and a net loss of $149,000 in the March quarter of 2000. As expected, total
revenues declined sequentially, but higher-margin institutional datafeed service
sales increased as a percentage of revenues. Compared to the preceding December
quarter, datafeed service sales increased 6.3% and reached 70.4% of total
revenues. Also compared to the preceding December quarter, total revenues
declined by 9.1% to $9.8 million, gross margin declined by 6.1% to $4.2 million,
and EBITDA (i.e., earnings before interest, taxes, depreciation and
amortization) declined by approximately 20.8% to $1.9 million. Cash and cash
equivalents increased by $750,000 to $3.3 million during the quarter.
During the first quarter, HyperFeed announced a new retail strategy, which
is designed to increase market share among individual investors and build a more
profitable consumer business to complement the institutional datafeed business.
As part of this strategy, HyperFeed has already launched two new products --
Mercenary and Orbit 3.0.
HyperFeed also announced:
- - that, during the second quarter, the company expects to begin adding data
from international markets and ECNs (i.e., electronic communications
networks, which are computerized stock trading systems that compete with
stock exchanges) to its datafeed;
- - the acquisition of substantially all of the assets of Marketscreen.com,
Inc., a provider of computerized stock screens (i.e., computer programs
which screen, or search, for stocks based on set criteria) for an
undisclosed amount. This acquisition will enable HyperFeed to offer a wider
variety of services to both institutional and individual investors; and
- - SmarTicker, a new offering targeted at large institutions.
LIQUIDITY AND CAPITAL RESOURCES -- THREE MONTHS ENDED MARCH 31, 2001 AND 2000
PICO Holdings, Inc. is a diversified holding company. Our assets primarily
consist of investments in our operating subsidiaries, investments in other
public companies, and cash and cash equivalents. On a consolidated basis, the
Company had $16.9 million in cash and cash equivalents at March 31, 2001,
compared to $13.6 million at December 31, 2000, and $84.8 million at March 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,
and -- potentially -- the sale of investments, and the proceeds of bank
borrowings or offerings of equity and debt. We endeavor to manage our cash flow
to ensure that funds are always available to take advantage of new investment
opportunities.
In broad terms, here is the cash flow profile of our principal operating
subsidiaries:
- - Nevada Land & Resource Company, LLC is actively selling land which is not
part of PICO's long-term utilization plan for the property. Nevada Land's
principal sources of cash flow are the proceeds of cash sales, and
collections of principal and interest on sales contracts where Nevada Land
has provided vendor financing. Since these receipts and other revenues
exceed Nevada Land's operating costs, Nevada Land is generating strong
positive cash flow which provides a potential source of funds to finance
other group activities;
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- - 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 cover financing and operating expenses. Other group
companies have provided financing to meet Vidler's on-going expenses and to
fund capital expenditure and the purchase of additional water-righted
properties.
Vidler's most important water-related assets did not begin to generate
significant cash flow until the first quarter of 2001. As commercial use of
these assets increases, we expect that Vidler will start to generate free
cash flow as receipts from leasing water or storage and the proceeds from
selling 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;
- - Over the next 12 months, we expect that Sequoia Insurance Company will
generate positive cash flow from increased written premium volume, due to
growth in the commercial insurance book of business and the Personal
Express acquisition. Shortly after a policy is written, the premium is
collected and the funds can be invested for a period of time before they
are required to pay claims. Free cash flow generated by Sequoia will likely
be deployed in the company's investment portfolio;
- - Citation Insurance Company has ceased writing business and is "running off"
its existing claims reserves. Investment income more than covers Citation's
operating expenses. Most of the funds required to pay claims are coming
from the maturity of fixed-income securities in the company's investment
portfolio and recoveries from reinsurance companies; and
- - As the "run off" progresses, Physicians Insurance Company of Ohio and The
Professionals Insurance Company are obtaining funds to pay operating
expenses and claims from the maturity of fixed-income securities, the
realization of investments, and recoveries from reinsurance companies.
The Departments of Insurance in Ohio and California prescribe minimum
levels of capital and surplus for insurance companies, and set guidelines for
insurance company investments. PICO's insurance subsidiaries structure the
maturity of fixed-income securities 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 $3.2
million net increase in cash and cash equivalents in the first quarter of 2001,
compared to a $48.1 million net increase in 2000, when $49.8 million of new
equity capital was raised in a rights offering.
During the first quarter of 2001, $5.5 million of cash was used in
Operating Activities. Operating Activities used cash of $1 million in the 2000
quarter. In both years, the principal uses of cash were claims payments by our
insurance subsidiaries and operating expenses at Vidler.
Investing Activities generated $10.1 million of cash in the first quarter
of 2001, principally due to net cash receipts of $9.1 million from land and
water rights sold by Nevada Land and Vidler. There was also a net increase in
cash of $1 million resulting from activity in the investment portfolios of our
insurance companies during the quarter. This primarily reflected:
- the purchase of high-grade corporate bonds with 4 to 10 years to maturity
by Sequoia, which is the only insurance company writing new business,
utilizing the proceeds from the sale of bonds with less than 3 years to
maturity and maturing fixed-income securities; and
- the purchase of short-term bonds to match projected claims payments by
our "run off" insurance companies, utilizing cash and the proceeds of
maturing fixed-income securities and mutual fund redemptions.
In 2000, Investing Activities used $1.1 million of cash as the purchase of
new investments exceeded the proceeds from maturing fixed-income securities.
Financing Activities used $2.5 million of cash in the first quarter of
2001, as Vidler paid off non-recourse borrowings collateralized by the
Harquahala Valley farm properties which it sold to Allegheny. In the first
quarter of 2000, there was a $49.8 million cash inflow from Financing
Activities, principally due to the rights offering which raised $49.8 million in
new equity capital.
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At March 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 March 31, 2001, Sequoia had approximately $26.5
million in capital and statutory surplus. PICO also aims to maintain Sequoia's
A.M. Best rating at or above its present "A-" (Excellent) level. At some time in
the future, this may require the injection of additional capital.
RISK FACTORS
In addition to the risks and uncertainties discussed in the preceding
sections of "Management's Discussion and Analysis of Financial Condition and
Results of Operations," and elsewhere in this document, the following risk
factors should be considered carefully in evaluating PICO and its business. The
statements contained in this Form 10-Q that are not purely historical are
forward-looking statements within the meaning of Section 27A of the Exchange
Act, including statements regarding our expectations, beliefs, intentions, plans
or strategies regarding the future. All forward-looking statements included in
this document are based on information available to us on the date thereof, and
we assume no obligation to update any such forward-looking statements.
BECAUSE OUR OPERATIONS ARE SO DIVERSE, ANALYSTS AND INVESTORS MAY NOT BE ABLE TO
EVALUATE OUR COMPANY ADEQUATELY, WHICH MAY NEGATIVELY INFLUENCE OUR SHARE PRICE
PICO is a diversified holding company with operations in land, minerals and
related water rights; water rights and water storage; property and casualty
insurance; medical professional liability insurance; and other long-term
holdings. Each of these areas is unique, complex in nature, and difficult to
understand. In particular, water rights is a developing industry within the
western United States with very little historical data, very few experts and a
limited following of analysts. Because we are so complex, analysts and investors
may not be able to adequately evaluate our operations, and PICO in total. This
could cause them to make inaccurate evaluations of our stock, or to overlook
PICO, in general. These factors could have a negative impact on the trading
volume and price of our stock.
IF WE DO NOT SUCCESSFULLY LOCATE, SELECT AND MANAGE INVESTMENTS AND ACQUISITIONS
OR IF OUR INVESTMENTS OR ACQUISITIONS OTHERWISE FAIL OR DECLINE IN VALUE, OUR
FINANCIAL CONDITION COULD SUFFER
We invest in businesses that we believe are undervalued or that will
benefit from additional capital, restructuring of operations or improved
competitiveness through operational efficiencies.
Failures and/or declines in the market values of businesses we invest in or
acquire, as well as our failure to successfully locate, select and manage
investment and acquisition opportunities, could have a material adverse effect
on our business, financial condition, the results of operations and cash flows.
Such business failures, declines in market values, and/or failure to
successfully locate, select and manage investments and acquisitions could result
in inferior investment returns compared to those which may have been attained
had we successfully located, selected and managed new investments and
acquisition opportunities, or had our investments or acquisitions not failed or
declined in value. We could also lose part or all of our investments in these
businesses and experience reductions in our net income, cash flows, assets and
shareholders' equity.
We will continue to make selective investments, and endeavor to enhance and
realize additional value to these acquired companies through our influence and
control. This could involve the restructuring of the financing or management of
the entities in which we invest and initiating and facilitating mergers and
acquisitions. Any acquisition could result in the use of a significant portion
of our available cash, significant dilution to you, and significant
acquisition-related charges. Acquisitions may also result in the assumption of
liabilities, including liabilities that are unknown or not fully known at the
time of the acquisition, which could have a material adverse effect on us.
We do not know of any reliable statistical data that would enable us to
predict the probability of success or failure of our investments, or to predict
the availability of suitable investments at the time we have available cash. You
will be relying on the experience and judgment of management to locate, select
and develop new acquisition and investment opportunities. Sufficient
opportunities may not be found and this business strategy may not be successful.
We have made a number of investments in the past that have been highly
successful, such as Fairfield Communities, Inc., which we sold in 1996, and
Resource America, Inc., which we sold in 1997. We have also made investments
that have lost money, such as our approximate $4 million loss from the Korean
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investments in 1997, an approximate $5 million write-down of investments in
1998, a $3.2 million write-down of an oil and gas investment in 1999, $7.1
million in investment losses in the third quarter of 2000 and $1.4 million in
investment losses in the first quarter of 2001. We reported net realized
investment gains of $441,000 of gains in 1999 and gains of $21.4 million in
1997; however, we reported net realized investment losses of $7.5 million in
2000 and $4.4 million for 1998. We reported a net unrealized investment loss of
$4.2 million at March 31, 2001, compared to a net unrealized loss of $7 million
at December 31, 2000.
Our ability to achieve an acceptable rate of return on any particular
investment is subject to a number of factors which are beyond our control,
including increased competition and loss of market share, quality of management,
cyclical or uneven financial results, technological obsolescence, foreign
currency risks and regulatory delays.
Our investments may not achieve acceptable rates of return and we may not
realize the value of the funds invested; accordingly, these investments may have
to be written down or sold at their then-prevailing market values.
We may not be able to sell our investments in both private and public
companies when it appears to be advantageous to do so and we may have to sell
these investments at a discount. Investments in private companies are not as
marketable as investments in public companies. Investments in public companies
are subject to prices determined in the public markets and, therefore, values
can vary dramatically. In particular, the ability of the public markets to
absorb a large block of shares offered for sale can affect our ability to
dispose of an investment in a public company.
To successfully manage newly acquired companies, we must, among other
things, continue to attract and retain key management and other personnel. The
diversion of the attention of management from the day-to-day operations, or
difficulties encountered in the integration process, could have a material
adverse effect on our business, financial condition, and the results of
operations and cash flows.
WE MAY MAKE INVESTMENTS AND ACQUISITIONS THAT MAY YIELD LOW OR NEGATIVE RETURNS
FOR AN EXTENDED PERIOD OF TIME, WHICH COULD TEMPORARILY OR PERMANENTLY DEPRESS
OUR RETURN ON INVESTMENTS
We generally make investments and acquisitions that tend to be long term in
nature. We invest in businesses that we believe to be undervalued or may benefit
from additional capital, restructuring of operations or management or improved
competitiveness through operational efficiencies with our existing operations.
We may not be able to develop acceptable revenue streams and investment returns.
We may lose part or all of our investment in these assets. The negative impacts
on cash flows, income, assets and shareholders' equity may be temporary or
permanent. We make investments for the purpose of enhancing and realizing
additional value by means of appropriate levels of shareholder influence and
control. This may involve restructuring of the financing or management of the
entities in which we invest and initiating or facilitating mergers and
acquisitions. These processes can consume considerable amounts of time and
resources. Consequently, costs incurred as a result of these investments and
acquisitions may exceed their revenues and/or increases in their values for an
extended period of time until we are able to develop the potential of these
investments and acquisitions and increase the revenues, profits and/or values of
these investments. Ultimately, however, we may not be able to develop the
potential of these assets that we anticipated.
IF MEDICAL MALPRACTICE INSURANCE CLAIMS TURN OUT TO BE GREATER THAN THE RESERVES
WE ESTABLISH TO PAY THEM, WE MAY NEED TO LIQUIDATE CERTAIN INVESTMENTS IN ORDER
TO SATISFY OUR RESERVE REQUIREMENTS
Under the terms of our medical malpractice liability policies, there is an
extended reporting period for claims. Under Ohio law, the statute of limitations
is one year after the cause of action accrues. Also, under Ohio law, a person
must make a claim within four years; however, the courts have determined that
the period may be longer in situations where the insured could not have
reasonably discovered the injury in that four-year period. Claims of minors must
be brought within one year of the date of majority. As a result, some claims may
be reported a number of years following the expiration of the medical
malpractice liability policy period.
Physicians Insurance Company of Ohio and The Professionals Insurance
Company have established reserves to cover losses on claims incurred under the
medical malpractice liability policies including not only those claims reported
to date, but also those that may have been incurred but not yet reported. The
reserves for losses are estimates based on various assumptions and, in
accordance with Ohio law, have been discounted to reflect the time value of
money for years prior to 2000. These estimates are based on actual and industry
experience and assumptions and projections as to claims frequency, severity and
inflationary trends and settlement payments. In accordance with Ohio law,
Physicians Insurance Company of Ohio and The Professionals Insurance Company
annually obtain a certification from an independent actuary that their
respective reserves for losses are adequate. They also obtain a concurring
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actuarial opinion. Due to the inherent uncertainties in the reserving process,
there is a risk that Physicians Insurance Company of Ohio's and The
Professionals Insurance Company's reserves for losses could prove to be
inadequate. This could result in a decrease in income and shareholders' equity.
If we underestimate our reserves, they could reach levels which are lower than
required by law.
Reserves are money that we set aside to pay insurance claims. We strive to
establish a balance between maintaining adequate reserves to pay claims while at
the same time using our cash resources to invest in new companies.
IF WE UNDERESTIMATE THE AMOUNT OF INSURANCE CLAIMS, OUR FINANCIAL CONDITION
COULD BE MATERIALLY MISSTATED AND OUR FINANCIAL CONDITION COULD SUFFER
Our insurance subsidiaries may not have established reserves adequate to
meet the ultimate cost of losses arising from claims. It has been, and will
continue to be, necessary for our insurance subsidiaries to review and make
appropriate adjustments to reserves for claims and expenses for settling claims.
Inadequate reserves could have a material adverse effect on our business,
financial condition, and the results of operations and cash flows. Inadequate
reserves could cause our financial condition to fluctuate from period to period
and cause our financial condition to appear to be better than it actually is for
periods in which insurance claims reserves are understated. In subsequent
periods when we discover the underestimation and pay the additional claims, our
cash needs will be greater than expected and our financial the results of
operations for that period will be worse than they would have been had our
reserves been accurately estimated originally.
The inherent uncertainties in estimating loss reserves are greater for some
insurance products than for others, and are dependent on:
- - the length of time in reporting claims;
- - the diversity of historical losses among claims;
- - the amount of historical information available during the estimation
process;
- - the degree of impact that changing regulations and legal precedents may
have on open claims; and
- - the consistency of reinsurance programs over time.
Because medical malpractice liability and commercial casualty claims may
not be completely paid off for several years, estimating reserves for these
types of claims can be more uncertain than estimating reserves for other types
of insurance. As a result, precise reserve estimates cannot be made for several
years following the year for which reserves were initially established.
During the past several years, the levels of the reserves for our insurance
subsidiaries have been very volatile. As a result of our claims experience, we
have had to significantly increase these reserves in the past several years.
Significant increases in the reserves may be necessary in the future, and
the level of reserves for our insurance subsidiaries may be volatile in the
future. These increases or volatility may have an adverse effect on our
business, financial condition, and the results of operations and cash flows.
THERE HAS BEEN A DOWNTURN IN THE PROPERTY & CASUALTY INSURANCE BUSINESS WHICH,
IN THE SHORT TERM, HINDERS OUR ABILITY TO PROFIT FROM THIS INDUSTRY
The property and casualty insurance industry has been highly cyclical, and
the industry has been in a cyclical downturn over the last several years. This
is due primarily to competitive pressures on pricing, which has resulted in
lower profitability for us. Pricing is a function of many factors, including the
capacity of the property and casualty industry as a whole to underwrite
business, create policyholders' surplus and generate positive returns on their
investment portfolios. The level of surplus in the industry varies with returns
on invested capital and regulatory barriers to withdrawal of surplus. Increases
in surplus have generally been accompanied by increased price competition among
property and casualty insurers.
The cyclical trends in the industry and the industry's profitability can
also be affected by volatile and unpredictable developments, including natural
disasters, fluctuations in interest rates, and other changes in the investment
environment which affect market prices of investments and the income generated
from those investments. Inflationary pressures affect the size of losses and
court decisions affect insurers' liabilities. These trends may adversely affect
our business, financial condition, the results of operations and cash flows by
reducing revenues and profit margins, by increasing ratios of claims and
expenses to premiums, and by decreasing cash receipts. Capital invested in our
insurance companies may produce inferior investment returns during periods of
downturns in the insurance cycle due to reduced profitability.
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STATE REGULATORS COULD REQUIRE CHANGES TO THE OPERATIONS OF OUR INSURANCE
SUBSIDIARIES AND/OR TAKE THEM OVER IF WE FAIL TO MAINTAIN ADEQUATE RESERVE
LEVELS
In the past few years, the National Association of Insurance Commissioners
has developed risk-based capital measurements for both property and casualty and
life and health insurers. These measurements prescribe the reserve levels that
insurance companies must maintain. The Commissioners have delegated to the state
regulators varying levels of authority based on the adequacy of an insurer's
reserves. The insurance companies' reserve levels are reported annually in their
statutory annual statements to the insurance departments.
Failure to meet one or more reserve levels may result in state regulators
requiring the insurance company to submit a business plan demonstrating
achievement of the required reserve levels. This may include the addition of
capital, a restructuring of assets and liabilities, or changes in operations. At
or below certain lower reserve levels, state regulators may supervise the
operation of the insurance company and/or require the liquidation of the
insurance company. Such insurance department actions could adversely affect our
business, financial condition, and the results of operations and cash flows and
decrease the value of our investments in our insurance subsidiaries. If the
insurance departments were to require changes in the operations of our insurance
subsidiaries, we may incur additional expenses and we may lose customers. If the
insurance departments were to require additional capital in our insurance
subsidiaries or a restructuring of our assets and liabilities, our investment
returns could suffer. If the insurance departments were to place our insurance
companies under their supervision, we would lose customers, our revenues may
decrease more rapidly than our expenses, and our investment returns would
suffer. We may even lose part or all of our investments in our insurance
subsidiaries if our insurance subsidiaries are liquidated by the insurance
departments.
WE MAY BE INADEQUATELY PROTECTED AGAINST MAN-MADE AND NATURAL CATASTROPHES,
WHICH COULD REDUCE THE AMOUNT OF CAPITAL SURPLUS AVAILABLE FOR INVESTMENT
OPPORTUNITIES
As with other property and casualty insurers, operating results and
financial condition can be adversely affected by volatile and unpredictable
natural and man-made disasters, such as hurricanes, windstorms, earthquakes,
fires, and explosions. Our insurance subsidiaries generally seek to reduce their
exposure to catastrophic events through individual risk selection and the
purchase of reinsurance. Our insurance subsidiaries' estimates of their
exposures depend on their views of the possibility of a catastrophic event in a
given area and on the probable maximum loss created by that event. While our
insurance subsidiaries attempt to limit their exposure to acceptable levels, it
is possible that an actual catastrophic event or multiple catastrophic events
could significantly exceed the maximum loss anticipated, resulting in a material
adverse effect on our business, financial condition, and the results of
operations and cash flows. Such events could cause unexpected insurance claims
and expenses for settling claims well in excess of premiums, increasing cash
needs, reducing surplus and reducing assets available for investments. Capital
invested in our insurance companies may produce inferior investment returns as a
result of these additional funding requirements.
We insure ourselves against catastrophic losses by obtaining insurance
through other insurance companies known as reinsurers. The future financial
results of our insurance subsidiaries could be adversely affected by disputes
with their reinsurers with respect to coverage and by the solvency of the
reinsurers.
OUR INSURANCE SUBSIDIARIES COULD BE DOWNGRADED WHICH WOULD NEGATIVELY IMPACT OUR
BUSINESS
Our insurance subsidiaries' ratings may not be maintained or increased, and
a downgrade would likely adversely affect our business, financial condition, and
the results of operations and cash flows. A.M. Best Company's ("A.M. Best")
ratings reflect the assessment of A.M. Best of an insurer's financial condition,
as well as the expertise and experience of its management. Therefore, A.M. Best
ratings are important to policyholders. A.M. Best ratings are subject to review
and change over time. Failure to maintain or improve our A.M. Best ratings could
have a material adverse effect on the ability of our insurance subsidiaries to
underwrite new insurance policies, as well as potentially reduce their ability
to maintain or increase market share. Management believes that many potential
customers will not insure with an insurer that carries an A.M. Best rating of
less than B+, and that customers who do so will demand lower rates.
Our insurance subsidiaries are currently rated as follows:
- - Sequoia Insurance Company A- (Excellent)
- - Citation Insurance Company B+ (Very Good)
- - Physicians Insurance Company of Ohio NR-3 (rating procedure inapplicable)
- - The Professionals Insurance Company NR-3 (rating procedure inapplicable)
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POLICY HOLDERS MAY NOT RENEW THEIR POLICIES, WHICH WOULD UNEXPECTEDLY REDUCE OUR
REVENUE STREAM
Insurance policy renewals have historically accounted for a significant
portion of our net revenue. We may not be able to sustain historic renewal rates
for our products in the future. A decrease in renewal rates would reduce our
revenues. It would also decrease our cash receipts and the amount of funds
available for investments and acquisitions. If we were not able to reduce
overhead expenses correspondingly, this would adversely affect our business,
financial condition, and the results of operations and cash flows.
IF WE ARE REQUIRED TO REGISTER AS AN INVESTMENT COMPANY, THEN WE WILL BE SUBJECT
TO A SIGNIFICANT REGULATORY BURDEN
At all times we intend to conduct our business so as to avoid being
regulated as an investment company under the Investment Company Act of 1940.
However, if we were required to register as an investment company, our ability
to use debt would be substantially reduced, and we would be subject to
significant additional disclosure obligations and restrictions on our
operational activities. Because of the additional requirements imposed on an
investment company with regard to the distribution of earnings, operational
activities and the use of debt, in addition to increased expenditures due to
additional reporting responsibilities, our cash available for investments would
be reduced. The additional expenses would reduce income. These factors would
adversely affect our business, financial condition, and the results of
operations and cash flows.
VARIANCES IN PHYSICAL AVAILABILITY OF WATER, ALONG WITH LEGAL RESTRICTIONS AND
LEGAL IMPEDIMENTS COULD IMPACT PROFITABILITY FROM OUR WATER RIGHTS
The water rights held by us and the transferability of these rights to
other uses and places of use are governed by the laws concerning water rights in
the states of Arizona, California, Colorado and Nevada. The volumes of water
actually derived from the water rights applications or permitted rights may vary
considerably based upon physical availability and may be further limited by
applicable legal restrictions. As a result, the amounts of acre-feet anticipated
from the water rights applications or permitted rights do not in every case
represent a reliable, firm annual yield of water, but in some cases describe the
face amount of the water right claims or management's best estimate of such
entitlement. Legal impediments exist to the sale or transfer of some of these
water rights, which in turn may affect their commercial value. If we were unable
to transfer or sell our water rights, we will not be able to make a profit, we
will not have enough cash receipts to cover cash needs, and we may lose some or
all of our value in our water rights investments.
OUR FUTURE WATER REVENUES ARE UNCERTAIN AND DEPEND ON A NUMBER OF FACTORS, WHICH
MAY MAKE OUR REVENUE STREAMS AND PROFITABILITY VOLATILE
We engage in various water rights acquisition, management, development, and
sale and lease activities. Accordingly, our long-term future profitability will
be primarily dependent on our ability to develop and sell or lease water and
water rights, and will be affected by various factors, including timing of
acquisitions, transportation arrangements, and changing technology. To the
extent we possess junior or conditional water rights, such rights may be
subordinated to superior water right holders in periods of low flow or drought.
Our current water rights and the transferability of these rights to other
uses and places of use are governed by the laws concerning water rights in the
states of Arizona, California, Colorado and Nevada. The volumes of water
actually derived from these rights may vary considerably based upon physical
availability and may be further limited by applicable legal restrictions. Legal
impediments exist to sale or transfer of some of these water rights which may
affect their commercial value.
In addition to the risk of delays associated with receiving all necessary
regulatory approvals and permits, we may also encounter unforeseen technical
difficulties which could result in construction delays and cost increases with
respect to our water development projects.
OUR WATER ACTIVITIES MAY BECOME CONCENTRATED IN A LIMITED NUMBER OF ASSETS,
MAKING OUR GROWTH AND PROFITABILITY VULNERABLE TO FLUCTUATIONS IN LOCAL
ECONOMIES AND GOVERNMENTAL REGULATIONS
In the future, we anticipate that a significant amount of Vidler's revenues
and asset value will come from a limited number of assets, including our water
rights in the Harquahala Valley and the Vidler Arizona Recharge Facility.
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Historically, a majority of Vidler's water service revenue has come from
our Colorado water assets. Although we continue to acquire and develop
additional water assets, in the foreseeable future we anticipate that our
revenues will still be derived from a limited number of assets.
THE PRICE OF WATER IS VOLATILE, WHICH CAN HAVE A SIGNIFICANT EFFECT ON OUR COSTS
OF ACQUIRING WATER AND THE PRICES AT WHICH WE ARE ABLE TO SELL WATER
Our profitability is significantly affected by changes in the market price
of water. Water prices may in the future fluctuate widely and are affected by
climatic, demographic and technologic factors affecting demand.
ENVIRONMENTAL REGULATIONS MAY DETRACT FROM OUR FUTURE REVENUE STREAMS AND
PROFITABILITY BY LIMITING OUR CUSTOMER BASE
Water we lease or sell may be subject to regulation as to quality by the
United States Environmental Protection Agency acting pursuant to the federal
Safe Drinking Water Act. While environmental regulations do not directly affect
us, the regulations regarding the quality of water distributed affects our
intended customers and may, therefore, depending on the quality of our water,
impact the price and terms upon which we may in the future sell our water or
water rights.
OUR WATER SALES MAY MEET WITH POLITICAL OPPOSITION IN CERTAIN LOCATIONS, THEREBY
LIMITING OUR GROWTH IN THESE AREAS
The transfer of water rights from one use to another may affect the
economic base of a community and will, in some instances, be met with local
opposition. Moreover, certain of the end users of our water rights, namely
municipalities, regulate the use of water in order to control or deter growth.
WE ARE DIRECTLY IMPACTED BY INTERNATIONAL AFFAIRS, WHICH DIRECTLY EXPOSES US TO
THE ADVERSE EFFECTS OF ANY FOREIGN ECONOMIC OR GOVERNMENTAL INSTABILITY
As a result of global investment diversification, our business, financial
condition, the results of operations and cash flows may be adversely affected
by:
- - exposure to fluctuations in exchange rates;
- - the imposition of governmental controls;
- - the need to comply with a wide variety of foreign and U.S. export laws;
- - political and economic instability;
- - trade restrictions;
- - changes in tariffs and taxes;
- - volatile interest rates;
- - changes in certain commodity prices;
- - exchange controls which may limit our ability to withdraw money;
- - the greater difficulty of administering business overseas; and
- - general economic conditions outside the United States.
Changes in any or all of these factors could result in reduced market
values of investments, loss of assets, additional expenses, reduced investment
income, reductions in shareholders' equity due to foreign currency fluctuations
and a reduction in our global diversification.
OUR COMMON STOCK PRICE MAY BE LOW WHEN YOU WANT TO SELL YOUR SHARES
The trading price of our common stock has historically been, and is
expected to be, subject to fluctuations. The market price of the common stock
may be significantly impacted by:
- - quarterly variations in financial performance;
- - shortfalls in revenue or earnings from levels forecast by securities
analysts;
- - changes in estimates by such analysts;
- - product introductions;
- - our competitors' announcements of extraordinary events such as
acquisitions;
- - litigation; and
- - general economic conditions.
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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, 1999, the closing price
of our common stock on the NASDAQ National Market was $12.3125 per share,
compared to $14 at March 31, 2001. On a quarterly basis between these two dates,
closing prices have ranged from a high of $14.063 at June 30, 2000 to a low of
$9.875 at March 27, 2000. During 2001, closing prices have ranged from a low of
$11.875 per share on January 22 to a high of $14.375 on March 13.
Statements or changes in opinions, ratings, or earnings estimates made by
brokerage firms or industry analysts relating to the markets in which we do
business or relating to us specifically could result in an immediate and adverse
effect on the market price of our common stock.
WE MAY NOT BE ABLE TO RETAIN KEY MANAGEMENT PERSONNEL WE NEED TO SUCCEED, WHICH
COULD ADVERSELY AFFECT OUR ABILITY TO MAKE SOUND INVESTMENT DECISIONS
We have several key executive officers. If they depart, it could have a
significant adverse effect. In particular, Ronald Langley, our Chairman, and
John R. Hart, our President and Chief Executive Officer, play key roles in
investment decisions. Messrs. Langley and Hart have entered into employment
agreements with us dated as of December 31, 1997, for a period of four years.
Messrs. Langley and Hart are key to the implementation of our strategic focus,
and our ability to successfully develop our current strategy is dependent upon
our ability to retain the services of Messrs. Langley and Hart.
OUR CHARTER DOCUMENTS MAY INHIBIT A TAKEOVER, PREVENTING YOU FROM RECEIVING A
PREMIUM ON YOUR SHARES
The Board of Directors has authority to issue up to 2 million shares of
preferred stock and to fix the rights, preference, privileges and restrictions,
including voting rights, of those shares without any further vote or action by
the shareholders. Your rights as common stock holders will be subject to, and
may be adversely affected by, the rights of the holders of the preferred stock.
The issuance of preferred stock, while providing desirable flexibility in
connection with possible acquisitions and other corporate purposes, could have
the effect of making it more difficult for a third party to acquire a majority
of our outstanding voting stock, thereby delaying, deferring or preventing a
change in control of PICO. Furthermore, such preferred stock may have other
rights, including economic rights senior to the common stock, and, as a result,
the issuance thereof could have a material adverse effect on the market value of
the common stock.
At the Annual Meeting of Shareholders on October 19, 2000, our shareholders
voted to amend the Articles of Incorporation to eliminate the preferred shares.
The change took effect during the first quarter of 2001.
THE FOREGOING FACTORS, INDIVIDUALLY OR IN THE AGGREGATE, COULD MATERIALLY
ADVERSELY AFFECT OUR OPERATING RESULTS AND COULD MAKE COMPARISON OF HISTORIC
OPERATING RESULTS AND BALANCES DIFFICULT OR NOT MEANINGFUL.
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The Company'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. The
Company currently has interest rate risk as it relates to its fixed maturity
securities and mortgage loans, equity price risk as it relates to its marketable
equity securities, and foreign currency risk as it relates to investments
denominated in foreign currencies. The Company's bank debt is short-term in
nature as the Company generally secures rates for periods of approximately one
to three years and therefore approximates fair value. At March 31, 2001, the
Company had $91.8 million of fixed maturity securities and mortgage loans,
$62.1million of marketable equity securities that were subject to market risk,
and $40.1 million of investments denominated in foreign currencies, primarily
Swiss francs. The Company's investment strategy is to manage the duration of the
portfolio relative to the duration of the liabilities while managing interest
rate risk.
The Company uses two models to analyze the sensitivity of its assets and
liabilities subject to the above risks. For its fixed maturity securities, and
mortgage loans, the Company uses duration modeling to calculate changes in fair
value. For its marketable securities, the Company 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, the Company
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
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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 $2.4
million for a 100 basis point increase in interest rates on its fixed securities
and mortgage loans. The hypothetical 20% decrease in fair value of the Company's
marketable equity securities produced a loss in fair value of $10.1 million that
would impact the unrealized appreciation in shareholders' equity. The
hypothetical 20% decrease in the local currency of the Company's foreign
denominated investments produced a loss of $5.2 million that would impact the
unrealized appreciation and foreign currency translation in shareholders'
equity.
PART II: OTHER INFORMATION
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS:
None.
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K:
(a) Exhibits:
See Exhibit Index.
(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.
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PICO HOLDINGS, INC. AND SUBSIDIARIES
SIGNATURE
Pursuant to the requirements 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.
PICO HOLDINGS, INC.
Dated: May 10, 2001 By: /s/ Gary W. Burchfield
-----------------------------
Gary W. Burchfield
Chief Financial Officer and Treasurer
(Principal Financial and Accounting
Officer)
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EXHIBITS INDEX
--------------
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 Technologies, Inc.
# 2.5 Purchase and Sale Agreement by, between and among Nevada Land &
Resource Company, LLC, Global Equity, Western Water Company and
Western Land Joint Venture dated April 9, 1997.
+++++3.1 Amended and Restated Articles of Incorporation of PICO.
+ 3.2.2 Amended and Restated By-laws of PICO.
-10.55 Consulting Agreements, effective January 1, 1997, regarding
retention of Ronald Langley and John R. Hart as consultants
by Physicians and Global Equity.
++ 10.57 PICO 1995 Stock Option Plan
- -+++ 10.58 Key Employee Severance Agreement and Amendment No. 1
thereto, each made as of November 1, 1992, between PICO and
Richard H. Sharpe and Schedule A identifying Other
substantially identical Key Employee Severance Agreements
between PICO and Certain of the executive officers of PICO.
+++ 10.59 Agreement for Purchase and Sale of Shares, dated May 9,
1996, among Physicians, Guinness Peat Group plc and Global
Equity.
++ 10.60 Agreement for the Purchase and Sale of Certain Assets, dated
July 14, 1995 between Physicians, PRO and Mutual Assurance,
Inc.
++ 10.61 Stock Purchase Agreement dated March 7, 1995 between Sydney
Reinsurance Corporation and Physicians.
++++ 10.63 Amendment No. 1 to Agreement for Purchase and Sale of
Certain Assets, dated July 30, 1996 between Physicians, PRO
and Mutual Assurance, Inc.
## 18. Letter from Deloitte and Touche LLP regarding change in
accounting principle.
# 21. Subsidiaries of PICO.
### 28. Form S-8, Registration Statement under the Securities Act of
1933, for the PICO Holdings, Inc. Employees 401(k)
Retirement Plan and Trust, Registration No. 333-36881.
#### 29. Form S-8, Registration Statement under the Securities Act of
1933, for the Physicians Insurance Company of Ohio 1995
Non-Qualified Stock Option Plan and assumed by PICO
Holdings, Inc., Registration No. 333-32045.
------------------------------------------------------------
+ Filed as Appendix to the prospectus in Part I of Registration
Statement on Form S-4 (File No. 333-06671)
++ Incorporated by reference to exhibit filed with Physicians'
Registration Statement No. 33-99352 on Form S-1 filed with the
SEC on November 14, 1995.
+++ Incorporated by reference to exhibit filed with Registration
Statement on Form S-4 (File no. 333-06671).
++++ Incorporated by reference to exhibit filed with Amendment No. 1
to Registration Statement No. 333-06671 on Form S-4.
+++++ Incorporated by reference to exhibit of same number filed with
Form 8-K dated December 4, 1996.
- Executive Compensation Plans and Agreements.
# Incorporated by reference to exhibit of same number filed with
Form 10-K dated April 15, 1997.
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## Incorporated by reference to exhibit of same number filed with
Form10-K dated March 29, 2001.
### 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).
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