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 June 30, 2002
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from _________ to
Commission File Number: 0-18786
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
--- ---
The number of shares outstanding of the Registrant's Common Stock, $0.001 par
value, was 12,373,856 as of June 30, 2002, excluding 4,418,667 shares of common
stock held by the registrant and its subsidiaries.
1
PICO HOLDINGS, INC.
FORM 10-Q
TABLE OF CONTENTS
PAGE NO.
--------
PART I: FINANCIAL INFORMATION
Item 1: Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets as of 3
June 30, 2002 and December 31, 2001
Condensed Consolidated Statements of Operations for the 4
Three and Six Months Ended June 30, 2002 and 2001
Condensed Consolidated Statements of Cash Flows for the 5
Six Months Ended June 30, 2002 and 2001
Notes to Condensed Consolidated Financial Statements 6
Item 2: Management's Discussion and Analysis of Financial 9
Condition and the Results of Operations
Item 3: Quantitative and Qualitative Disclosure About Market Risk 22
PART II: OTHER INFORMATION
Item 4: Submission of Matters to a Vote of Security Holders 22
Item 6: Exhibits and Reports on Form 8-K 22
Signature 23
2
PART I: FINANCIAL INFORMATION
ITEM I: FINANCIAL STATEMENTS
PICO HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
June 30, December 31,
2002 2001
------------- -------------
ASSETS
Investments $ 176,544,488 $ 157,843,376
Cash and cash equivalents 14,340,914 17,361,624
Premiums and other receivables, net 14,951,584 18,076,561
Reinsurance receivables 26,924,771 23,783,106
Deferred policy acquisition costs 7,200,086 6,913,589
Land and related mineral rights and water rights, net 120,813,848 125,997,642
Property and equipment, net 2,875,479 2,727,931
Net deferred income taxes 4,480,723 7,299,015
Goodwill and intangibles, net 2,994,558 3,487,414
Other assets 9,783,667 9,644,256
------------- -------------
Total assets $ 380,910,118 $ 373,134,514
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Unpaid losses and loss adjustment expenses $ 98,945,366 $ 98,449,053
Unearned premiums 28,771,968 28,143,296
Reinsurance balance payable 2,937,471 5,458,720
Bank and other borrowings 14,893,097 14,596,302
Excess of fair value of net assets acquired over purchase price 2,792,597
Other liabilities 14,648,648 13,992,803
------------- -------------
Total liabilities 160,196,550 163,432,771
------------- -------------
Minority interest 3,325,863 3,062,190
------------- -------------
Commitments and Contingencies (Note 4)
Common stock, $.001 par value; authorized 100,000,000 shares,
16,792,523 issued in 2002 and 16,784,223 issued in 2001 16,792 16,784
Additional paid-in capital 235,956,282 235,844,655
Retained earnings 67,805,050 64,666,746
Accumulated other comprehensive loss (8,215,934) (15,759,997)
Treasury stock, at cost (common shares: 4,418,667 in 2002 and 4,415,607 in 2001) (78,174,485) (78,128,635)
------------- -------------
Total shareholders' equity 217,387,705 206,639,553
------------- -------------
Total liabilities and shareholders' equity $ 380,910,118 $ 373,134,514
============= =============
The accompanying notes are an integral part of the condensed consolidated
financial statements.
3
PICO HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
2002 2001 2002 2001
------------ ------------ ------------ ------------
Revenues:
Premium income $ 11,237,445 $ 10,535,503 $ 21,851,222 $ 20,574,613
Net investment income 2,640,226 3,113,084 5,019,398 5,282,128
Net realized gain (loss) on investments 695,672 704,757 976,783 (669,061)
Sale of land and water rights 1,459,490 372,918 8,916,437 9,534,618
Other 1,420,381 931,556 2,367,179 2,098,928
------------ ------------ ------------ ------------
Total revenues 17,453,214 15,657,818 39,131,019 36,821,226
------------ ------------ ------------ ------------
Costs and Expenses:
Loss and loss adjustment expenses 8,174,553 7,759,221 15,125,699 15,703,722
Insurance underwriting and other expenses 7,823,158 10,988,374 15,738,285 20,610,076
Cost of land and water rights sold 641,045 202,174 5,551,475 6,709,056
------------ ------------ ------------ ------------
Total costs and expenses 16,638,756 18,949,769 36,415,459 43,022,854
------------ ------------ ------------ ------------
Equity in income (loss) of unconsolidated affiliates (532,440) 11,612 (930,396) 156,055
------------ ------------ ------------ ------------
Income (loss) before income taxes, minority
interest and accounting change 282,018 (3,280,339) 1,785,164 (6,045,573)
Provision (benefit) for income taxes 44,981 (617,491) 668,827 (2,043,854)
------------ ------------ ------------ ------------
Income (loss) before minority interest
and accounting change 237,037 (2,662,848) 1,116,337 (4,001,719)
Minority interest in loss of subsidiaries 187,709 201,101 236,328 257,992
------------ ------------ ------------ ------------
Income (loss) before accounting change 424,746 (2,461,747) 1,352,665 (3,743,727)
Cumulative effect of change in accounting principle, net 1,785,639 (980,571)
------------ ------------ ------------ ------------
Net income (loss) $ 424,746 $ (2,461,747) $ 3,138,304 $ (4,724,298)
============ ============ ============ ============
Net income (loss) per common share - basic:
Income (loss) before accounting change $ 0.03 $ (0.20) $ 0.11 $ (0.30)
Cumulative effect of change in accounting principle 0.14 (0.08)
------------ ------------ ------------ ------------
Net income (loss) per common share $ 0.03 $ (0.20) $ 0.25 $ (0.38)
------------ ------------ ------------ ------------
Weighted average shares outstanding 12,373,856 12,390,096 12,371,236 12,390,096
============ ============ ============ ============
Net income (loss) per common share - diluted:
Income (loss) before accounting change $ 0.03 $ (0.20) $ 0.11 $ (0.30)
Cumulative effect of change in accounting principle 0.14 (0.08)
------------ ------------ ------------ ------------
Net income (loss) per common share $ 0.03 $ (0.20) $ 0.25 $ (0.38)
------------ ------------ ------------ ------------
Weighted average shares outstanding 12,498,923 12,390,096 12,408,401 12,390,096
============ ============ ============ ============
The accompanying notes are an integral part of the condensed consolidated
financial statements.
4
PICO HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
SIX MONTHS ENDED JUNE 30,
2002 2001
------------ ------------
OPERATING ACTIVITIES:
Net cash provided by operating activities $ 5,351,534 $ 3,904,163
------------ ------------
INVESTING ACTIVITIES:
Purchases of investments (53,103,583) (65,893,599)
Proceeds from sale of investments 24,743,571 49,240,890
Proceeds from maturity of investments 22,651,472 9,285,000
Purchases of property and equipment (385,182) (1,356,666)
Other investing activities, net (380,933)
------------ ------------
Net cash used in investing activities (6,474,655) (8,724,375)
------------ ------------
FINANCING ACTIVITIES:
Repayments of debt (636,974) (2,376,875)
Repurchase of treasury stock for deferred compensation plans (45,850)
Proceeds from exercise of stock options 111,635
Proceeds from borrowings 1,351,654
------------ ------------
Net cash used in financing activities (571,189) (1,025,221)
------------ ------------
Effect of exchange rate changes on cash (1,326,400) 1,740,656
------------ ------------
DECREASE IN CASH AND CASH EQUIVALENTS (3,020,710) (4,104,777)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 17,361,624 13,644,312
------------ ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 14,340,914 $ 9,539,535
============ ============
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for interest: $ 411,414 $ 402,000
============ ============
The accompanying notes are an integral part of the condensed consolidated
financial statements.
5
PICO HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements
of PICO Holdings, Inc. and Subsidiaries (the "Company"or "PICO") 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 ("US GAAP") 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 June 30, 2002 and December 31, 2001, the results of
operations for the three and six months ended June 30, 2002 and 2001, and
cash flows for the six months ended June 30, 2002 and 2001, have been
included and are only of a normal recurring nature. Operating results for
the three and six months ended June 30, 2002 are not necessarily indicative
of the results that may be expected for the year ending December 31, 2002.
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 the Results
of Operations and Risk Factors contained in the Company's Annual Reports on
Form 10-K for the year ended December 31, 2001 as filed with the SEC.
The preparation of financial statements in accordance with US GAAP
requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent
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, accounts and loans receivable,
and contingent liabilities. While management believes that the carrying
value of such assets and liabilities are appropriate as of June 30, 2002
and December 31, 2001, it is reasonably possible that actual results could
differ from the estimates upon which the carrying values were based.
2. EARNINGS (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. 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 antidilutive securities
(options) are ignored. The following reconciles basic and diluted shares
outstanding for the periods presented.
Three Months Ended June 30, Six Months Ended June 30,
2002 2001 2002 2001
------------ ------------ ------------ ------------
Net income (loss) $ 424,746 $ (2,461,747) $ 3,138,304 $ (4,724,298)
============ ============ ============ ============
Basic earnings (loss) per share $ 0.03 $ (0.20) $ 0.25 $ (0.38)
============ ============ ============ ============
Basic weighted average
common shares outstanding 12,373,856 12,390,096 12,371,236 12,390,096
Options 125,067 37,165
------------ ------------ ------------ ------------
Diluted weighted average
common shares outstanding 12,498,923 12,390,096 12,408,401 12,390,096
Diluted earnings (loss) per share $ 0.03 $ (0.20) $ 0.25 $ (0.38)
============ ============ ============ ============
Anti-Dilutive Options 11,825 1,628,656 1,258,048 1,628,656
============ ============ ============ ============
6
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.
The components of comprehensive income (loss) are as follows:
Three Months Ended June 30, Six Months Ended June 30,
2002 2001 2002 2001
----------- ----------- ----------- -----------
Net income (loss) $ 424,746 $(2,461,747) $ 3,138,304 $(4,724,298)
Net change in unrealized depreciation
on available for sale investments 5,381,606 (5,220,082) 5,302,259 (2,404,494)
Net change in foreign currency translation 1,496,449 571,581 2,241,804 63,122
----------- ----------- ----------- -----------
Total comprehensive income (loss) $ 7,302,801 $(7,110,248) $10,682,367 $(7,065,670)
=========== =========== =========== ===========
Total comprehensive income for the three and six months ended June 30,
2002 is net of deferred income tax expense of $3.3 million and $2.8
million, respectively. For the three and six months ended June 30, 2001,
total comprehensive loss is net of a deferred income tax benefit of $2.4
million and $4.2 million, respectively.
The components of accumulated comprehensive loss are as follows:
June 30, December 31,
2002 2001
------------ ------------
Unrealized depreciation
on available for sale investments $ (5,330,940) $(10,633,199)
Foreign currency translation (2,884,994) (5,126,798)
------------ ------------
Accumulated other comprehensive loss $ (8,215,934) $(15,759,997)
============ ============
Accumulated other comprehensive loss is net of deferred income tax
liability of $1.7 million at June 30, 2002, and a deferred income tax asset
of $1.5 million at December 31, 2001.
4. COMMITMENTS AND CONTINGENCIES
Vidler Water Company, Inc., a PICO subsidiary, is party to an operating
lease to acquire 30,000 acre-feet of underground water storage privileges
and associated rights to recharge and recover water located near the
California Aqueduct, northwest of Bakersfield. The agreement requires a
minimum payment of $378,000 per year adjusted annually by the engineering
price index until 2007. PICO signed a Limited Guarantee agreement with
Semitropic Water Storage District ("Semitropic") that requires PICO to
guarantee the annual obligation up to $519,000, adjusted annually by the
engineering price index.
In connection with the sale of their interests in Nevada Land &
Resource Company, LLC, a wholly owned PICO subsidiary, by the former
members, a limited partnership agreed to act as consultant to Nevada Land
in connection with the maximization of the development 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. Nevada Land delivered a report on or before June 30,
2002 to the limited partnership that demonstrated that Nevada Land had no
liability to the partnership, and accordingly the consulting agreement was
terminated.
7
In 2000, PICO Holdings loaned a total of $2.2 million to Dominion
Capital Pty. Ltd. ("Dominion Capital"), a private Australian company. In
2001, $1.2 million of the loans became overdue. Negotiations between PICO
and Dominion Capital to reach a settlement agreement on both the overdue
loan of $1.2 million and the other loan of $1 million proved unsuccessful.
Accordingly, PICO has commenced a legal action through the Australian
courts against Dominion Capital to recover the total amount due to PICO
Holdings. Due to the inherent uncertainty involved in pursuing legal
action, and our ability to realize the assets collateralizing the loans,
PICO has recorded an allowance for the total outstanding balance of $2.3
million for the loans and interest. PICO has been awarded summary judgment
in relation to the principle and interest on the $1.2 million loan and, as
a result, Dominion Capital has been placed in receivership. The court
appointed receiver is in the process of ascertaining Dominion Capital's
assets and liabilities. The court trial in connection with PICO's $1
million loan (with interest) has been adjourned pending the receiver's
investigations.
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 CHANGES IN ACCOUNTING PRINCIPLE
Effective January 1, 2002 the Company adopted SFAS No. 141, "Business
Combinations,"and SFAS No. 142, "Goodwill and Other Intangible Assets."
SFAS No. 141 prospectively prohibits the pooling of interest method of
accounting for business combinations initiated after June 30, 2001. SFAS
No. 142 also establishes a new method of testing goodwill for impairment on
an annual basis or on an interim basis if an event occurs or circumstances
change that would reduce the fair value of a reporting unit below its
carrying value. The adoption of SFAS 142 is reflected in Company's
consolidated financial statements as a cumulative effect of change in
accounting principle. The cumulative adjustment of $1.8 million is
comprised of negative goodwill of $2.8 million and positive goodwill of $1
million. The remaining balance of $2.4 million at January 1, 2002 was
classified as an intangible asset with a finite life. Accordingly, it will
be amortized over its remaining life of 8 years and tested for impairment
at least annually.
In August 2001, the FASB adopted SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." This statement supersedes
SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed of" and defines an impairment as "the
condition that exists when the carrying amount of a long-lived asset (asset
group) is not recoverable and exceeds its fair value." Based on the SFAS
No. 121 framework, this statement develops a single accounting model for
the disposal of long-lived assets, whether previously held or newly
acquired. The adoption of this statement did not have a material impact on
the consolidated financial statements.
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 No. 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 No. 133 are included in realized investment gains
and losses on the statement of operations and primarily include the
fluctuation in the value of the warrants and options to purchase shares of
HyperFeed Technologies, Inc. and Australian Oil & Gas Corporation Limited,
respectively. The value of the HyperFeed 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 various assumptions,
updated each reporting period, in calculating an estimated fair value: no
dividend yield; a risk-free interest rate of 4.2% to 1.5%; an expected life
of one year; and a historical 5 year cumulative volatility that typically
ranges from 121% to 104%. Future effects are dependent on market
conditions. The value of the publicly traded Australian Oil & Gas
Corporation Limited options are valued at market.
6. SUBSEQUENT EVENT
In July 2002, after the end of the second quarter, PICO accepted Ensign
(Australia) Holdings Pty. Ltd's cash offer of $A2.70 for the Australian Oil
& Gas Corporation Limited common shares and $A1.50 for the AOG options
owned by PICO. The sale proceeds were $21.1 million. The final gain on
sale, which is estimated at $8 million (before taxes), will be recorded in
PICO's fiscal third quarter ending September 30, 2002.
8
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
THIS FORM 10-Q CONTAINS "FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING OF
SECURITIES LAW. 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 IMPACT 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 OUR
PREVIOUS SEC FILINGS, WHICH COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM
SUCH "FORWARD-LOOKING STATEMENTS," OR FROM OUR PAST RESULTS.
RESULTS OF OPERATIONS -- THREE AND SIX MONTHS ENDED JUNE 30, 2002 AND 2001
INTRODUCTION
PICO Holdings, Inc. is a diversified holding company. We acquire interests
in assets and 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. 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, our management places more weight on increased asset values than on
reported earnings.
Currently our major assets and activities are:
- - owning and developing water rights and water storage operations through
Vidler Water Company, Inc.;
- - owning and developing land and the related water rights and mineral rights
through Nevada Land & Resource Company, LLC, which owns approximately 1.2
million acres of land in Nevada;
- - property and casualty insurance through Sequoia Insurance Company;
- - "running off" the property and casualty loss reserves of Citation Insurance
Company, and the medical professional liability insurance loss reserves of
Physicians Insurance Company of Ohio; and
- - making long term value-based investments in other public companies.
SUMMARY
SECOND QUARTER
PICO reported net income of $425,000, or $0.03 per basic and diluted share,
for the quarter ended June 30, 2002, compared to a net loss of $2.5 million, or
$0.20 per basic and diluted share, in the second quarter of 2001.
For the second quarter of 2002, income before taxes, minority interest and
accounting changes was $282,000. After a provision for income taxes of $45,000
and the addition of $188,000 in minority interest, net income was $425,000.
During the quarter, shareholders' equity increased by $7.4 million to $217.4
million at June 30, 2002, which represents book value per share of $17.57.
Comprehensive income for the second quarter of 2002 was $7.3 million,
principally consisting of the $425,000 net income, $5.4 million of unrealized
appreciation in investments, and a $1.5 million credit from appreciation in
foreign currencies where we hold investments, relative to the US dollar.
In the second quarter of 2001, PICO incurred a $3.3 million loss before
taxes, minority interest and accounting changes, which was partially offset by
an income tax benefit of $617,000 and the addition of $201,000 in minority
interest. The comprehensive loss for the second quarter of 2001 was $7.1
million, consisting of the $2.5 million net loss and $5.2 million in unrealized
depreciation in investments, partially offset by a $572,000 foreign currency
translation credit.
FIRST HALF
PICO reported net income of $3.1 million, or $0.25 per basic and diluted
share, for the six months ended June 30, 2002. This consisted of $1.3 million in
income before an accounting change, or $0.11 per share, and an accounting change
which increased income by $1.8 million, or $0.14 per share. From January 1,
2002, PICO adopted Statement of Financial Accounting Standards No. 142,
"Goodwill and Intangible Assets," which requires that goodwill and intangible
assets with indefinite lives be tested for impairment
9
annually rather than amortized over time. As a result of adopting this standard,
PICO recorded income of $1.8 million. This reflected the surplus of negative
goodwill arising from the 1996 reverse merger of Physicians Insurance Company of
Ohio and Citation Insurance Group (now known as PICO Holdings, Inc.) over the
write-off of positive goodwill items, which were determined to be impaired. See
Note 5 of Notes to Consolidated Financial Statements, "Cumulative Changes in
Accounting Principle" and the Property & Casualty Insurance segment.
Income before taxes, minority interest and accounting changes for the first
half of 2002 was $1.8 million. After a provision for income taxes of $669,000
and the addition of $236,000 in minority interest, income before the accounting
change was $1.3 million. During the first half, shareholders' equity increased
by $10.8 million. Comprehensive income was $10.7 million, consisting of the $3.1
million net income, $5.3 million in unrealized appreciation in investments, and
a $2.2 million credit from appreciation in foreign currencies.
PICO reported a net loss of $4.7 million, or $0.38 per basic and diluted
share, for the six months ended June 30, 2001. This consisted of a $3.7 million
loss before an accounting change, or $0.30 per share, and an accounting change
which reduced income by $980,000, or $0.08 per share. The accounting change
related to the adoption of Statement of Financial Accounting Standards No. 133,
"Accounting For Derivative Instruments and Hedging Activities" from January 1,
2001.
The $6 million loss before income taxes, minority interest and accounting
changes for the first half of 2001 was partially offset by $2 million in income
tax benefits, and the addition of $258,000 in minority interest. The
comprehensive loss for the first half of 2001 was $7.1 million, primarily
consisting of the $4.7 million net loss and $2.4 million in unrealized
diminution in the value of investments.
Segment revenues and income (loss) before taxes, minority interest and
accounting changes for the second quarter and the first half of 2002 and 2001
were:
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
------------------------------------------------------------------
2002 2001 2002 2001
------------------------------------------------------------------
REVENUES:
Water Rights & Water Storage Assets $ 1,278,000 $ 2,030,000 $ 9,139,000 $ 11,754,000
Land and Related Mineral Rights & Water Rights 797,000 616,000 1,194,000 974,000
Property & Casualty Insurance 12,952,000 12,573,000 25,184,000 24,845,000
Medical Professional Liability Insurance 147,000 (1,884,000) 398,000 (3,418,000)
Long Term Holdings 2,279,000 2,323,000 3,216,000 2,666,000
------------------------------------------------------------------
$ 17,453,000 $ 15,658,000 $ 39,131,000 $ 36,821,000
==================================================================
INCOME (LOSS) BEFORE TAXES, MINORITY INTEREST &
CUMULATIVE EFFECT OF CHANGES IN ACCOUNTING PRINCIPLES:
Water Rights & Water Storage Assets $ (1,094,000) $ 227,000 $ 736,000 $ 1,198,000
Land and Related Mineral Rights & Water Rights (617,000) 193,000 (778,000) 91,000
Property & Casualty Insurance 865,000 810,000 1,972,000 1,027,000
Medical Professional Liability Insurance 43,000 (2,121,000) 88,000 (3,769,000)
Long Term Holdings 1,085,000 (2,389,000) (233,000) (4,593,000)
------------------------------------------------------------------
$ 282,000 $ (3,280,000) $ 1,785,000 $ (6,046,000)
==================================================================
Detailed information on the performance and outlook for each segment is
contained later in this report; however, the major factors affecting PICO's
second quarter and first half results were:
WATER RIGHTS & WATER STORAGE ASSETS
In the second quarter of 2002, Vidler closed on its second sale of
transferable Harquahala Valley Irrigation District ground water for industrial
use. This transaction added $1 million to revenues and $556,000 to income, and
represented most of the segment's revenues and gross margin.
Vidler's results for the first half of 2002 also included $5.2 million in
revenues and income of $1.9 million from the company's first sale of
transferable HVID ground water for municipal use, and revenues of $2.1 million
and income of $120,000 from the sale of water rights in Colorado. Combined,
these three sales resulted in total revenues of $8.4 million and pre-tax income
of $2.6 million, and were primarily responsible for the segment's revenues of
$9.1 million and income of $736,000.
10
In the second quarter of 2001, a $1.6 million gain from the sale of part of
our interest in the Semitropic water storage facility comprised most of Vidler's
$2 million in revenues and resulted in segment income of $227,000.
During the first half of 2001, Vidler also completed its first major water
transaction, a sale of HVID ground water for industrial use, which added $9.4
million to revenues and $2.3 million to income. Combined, these two sales
resulted in revenues of $11 million and income of $3.9 million, and were the
principal component of segment revenues of $11.8 million and income of $1.2
million.
LAND AND RELATED WATER RIGHTS & MINERAL RIGHTS
Nevada Land reported a loss of $617,000 for the second quarter and a loss
of $778,000 for the first half of 2002. Segment expenses were unusually high in
the first six months of this year due to legal and related costs and a one-time
write-off of previously capitalized costs.
PROPERTY & CASUALTY INSURANCE
Sequoia reported year over year increases of $419,000 in second quarter
profit, and $1.5 million in first half profit, principally due to higher average
premium per commercial policy. This was partly offset by a year over year profit
decline at Citation of $364,000 in the second quarter, and $598,000 in the first
half.
MEDICAL PROFESSIONAL LIABILITY INSURANCE
In 2002, segment revenues were $147,000 in the second quarter and $398,000
for the first half, and segment income was $43,000 for the second quarter and
$88,000 for the first six months.
The segment's results for the first half of 2001 were dominated by realized
losses on the sale of a mutual fund investment. Due to the realized loss,
segment revenues were negative $1.9 million in the second quarter of 2001 and
negative $3.4 million for the first half, and the segment incurred losses of
$2.1 million for the quarter and $3.8 million for the half. Excluding the
realized loss, the segment would have generated a loss of $35,000 in the second
quarter and income of $309,000 for the first half of 2001.
LONG TERM HOLDINGS
In the second quarter of 2002, segment income was $1.1 million, compared to
a $2.4 million segment loss in the second quarter of 2001. The $3.5 million
improvement was primarily due to $4 million reduction in segment expenses year
over year. There was a $2 million favorable change in an expense related to
foreign currency, and segment expenses were unusually high in the second quarter
of 2001 due to a $2.3 million provision against two loans.
The segment generated a loss of $233,000 in the first half of 2002,
compared to a segment loss of $4.6 million in the first half of 2001. The $4.4
million improvement was principally due to a $4.9 million year over year
reduction in segment expenses, primarily resulting from a $2.6 million favorable
change in the foreign currency expense and the $2.3 million loan provision in
2001 which did not recur in 2002.
11
WATER RIGHTS AND WATER STORAGE ASSETS
VIDLER WATER COMPANY, INC.
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
------------------------------------------------------------------
2002 2001 2002 2001
------------------------------------------------------------------
REVENUES:
Sale of Land and Water Rights $ 1,008,000 $ 8,374,000 $ 9,095,000
Option Premiums Earned 300,000
Gain on sale of Semitropic Water Storage interest $ 1,615,000 1,615,000
Lease of Water 84,000 55,000 152,000 85,000
Agricultural Land Leases 164,000 203,000 353,000 405,000
Other 22,000 157,000 260,000 254,000
------------------------------------------------------------------
Segment Total Revenues $ 1,278,000 $ 2,030,000 $ 9,139,000 $ 11,754,000
==================================================================
EXPENSES:
Cost of Land and Water Rights Sold $ (452,000) $ (5,311,000) $ (6,524,000)
Commission and other cost of sales (392,000) (498,000) (546,000)
Depreciation and Amortization (240,000) $ (373,000) (477,000) (722,000)
Interest (123,000) (155,000) (257,000) (347,000)
Operations, Maintenance & Other (1,165,000) (1,275,000) (1,860,000) (2,417,000)
------------------------------------------------------------------
Segment Total Expenses $ (2,372,000) $ (1,803,000) $ (8,403,000) $(10,556,000)
------------------------------------------------------------------
INCOME (LOSS) BEFORE TAX $ (1,094,000) $ 227,000 $ 736,000 $ 1,198,000
==================================================================
Vidler's revenues and gross margin fluctuate from quarter to quarter
depending on the closing of specific transactions, so revenues and gross margin
for any individual quarter are not necessarily indicative of likely full-year
results.
On May 13, 2002, Vidler closed on the sale of 480 acre-feet of water rights
and the related 240 acres of land in the Harquahala Valley Irrigation District
to an industrial user within the Valley. The transaction added $1 million to
revenues and $556,000 to income in the second quarter of 2002. Other revenues
were $270,000 and other operating expenses were $1.5 million, resulting in a
pre-tax loss of $1.1 million for Vidler in the second quarter of 2002.
On March 1, 2002, Vidler closed on the sale of 3,645 acre-feet of water
rights and the related 1,215 acres of land in the HVID to golf course developers
near Scottsdale, Arizona. This is Vidler's first sale of transferable Harquahala
Valley ground water for municipal use. The transaction was recorded in the first
quarter of 2002, and added $5.2 million to revenues, and $1.9 million to income
in the first half of 2002. In March, Vidler also closed on the previously
announced sale of its interest in Cline Ranch to Centennial Water and Sanitation
District, which added $2.1 million to revenues and $120,000 to income in the
first half of 2002. Combined, these three transactions contributed $8.4 million
to first half revenues and $2.6 million to income. Other revenues were $765,000,
other operating expenses were $2.6 million, and Vidler generated $736,000 in
income before taxes for the first half of 2002.
In the second quarter of 2001, Vidler sold part of its interest in the
Semitropic water storage facility which added $1.6 million to segment revenues
and segment income. Other revenues were $415,000, other expenses were $1.8
million, and Vidler generated a pre-tax profit of $227,000 in the second quarter
of 2001.
Earlier in 2001, Vidler sold 6,496.5 acre-feet of water rights and 2,589
acres of land in the Harquahala Valley to a unit of Allegheny Energy, Inc. for
industrial use. The sale contributed total revenues of $9.4 million and income
of $2.3 million in the first half of 2001. For the first half of 2001, other
revenues, including the $1.6 million Semitropic gain discussed in the preceding
paragraph, were $2.4 million, other expenses were $3.5 million, and segment
income was $1.2 million.
Our 2001 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 half:
WATER RIGHTS
HARQUAHALA VALLEY WATER RIGHTS
The sales price for the water rights sold to the golf course developers
near Scottsdale, Arizona, represents $1,450 per acre-foot of transferable
Harquahala Valley ground water. After these transactions, Vidler still owns, or
has the right to acquire, approximately 49,550 acre-feet of transferable
Harquahala Valley ground water.
12
Vidler is working on further sales of transferable Harquahala Valley ground
water to both industrial users and to communities and developers.
SANDY VALLEY, NEVADA
Vidler has received a permit for 415 acre-feet of water out of the
approximately 2,000 acre-feet of water rights applied for near Sandy Valley,
Nevada. Vidler anticipates being able to put this water to beneficial use to
support additional growth at Primm, Nevada, a resort town on the border between
California and Nevada, in the Interstate 15 corridor. Vidler has filed an appeal
regarding the balance of the water applied for.
VIDLER ARIZONA RECHARGE FACILITY
Discussions are continuing with governmental and private entities to store
water at the facility. Although Vidler has not stored water for customers at the
facility yet, the company has been recharging water for its own account since
1998, when the pilot facility was constructed. Vidler purchased the water from
the Central Arizona Project, and intends to resell this water at an appropriate
time At June 30, 2002, Vidler had recharged more than 8,000 acre-feet of water
at the facility.
LAND AND RELATED MINERAL RIGHTS AND WATER RIGHTS
NEVADA LAND & RESOURCE COMPANY, LLC
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
--------------------------------------------------------------
2002 2001 2002 2001
--------------------------------------------------------------
REVENUES:
Sale of Land $ 451,000 $ 373,000 $ 543,000 $ 440,000
Lease and Royalty 182,000 209,000 368,000 291,000
Interest and Other 164,000 34,000 283,000 243,000
--------------------------------------------------------------
Segment Total Revenues $ 797,000 $ 616,000 $ 1,194,000 $ 974,000
==============================================================
EXPENSES:
Cost of Land Sales $ (189,000) $ (156,000) $ (241,000) $ (185,000)
Operating Expenses (1,225,000) (267,000) (1,731,000) (698,000)
--------------------------------------------------------------
Segment Total Expenses $(1,414,000) $ (423,000) $(1,972,000) $ (883,000)
--------------------------------------------------------------
--------------------------------------------------------------
INCOME (LOSS) BEFORE TAX $ (617,000) $ 193,000 $ (778,000) $ 91,000
==============================================================
Nevada Land does not recognize land sales contracts as revenues until the
sales transactions close. Consequently, revenues and the gross margin from land
sales fluctuate from quarter to quarter depending on the closing of specific
transactions, and land sales revenues and gross margin for any individual
quarter are not necessarily indicative of likely full-year results.
In the second quarter of 2002, Nevada Land sold approximately 4,560 acres
of land for $451,000. The average sales price was $99 per acre, and our average
basis in the land sold was $42 per acre. The gross margin on land sales was
$262,000, or $57 per acre, a gross margin percentage of 58.0%. Lease and royalty
revenues were $182,000, and interest and other revenues contributed $164,000
Following operating expenses of $1.2 million, the segment reported a loss of
$617,000.
In the second quarter of 2001, Nevada Land sold approximately 3,319 acres
of land for $373,000. The average sales price was $112 per acre, and our average
basis in the land sold was $47 per acre. The gross margin on land sales was
$217,000, or $65 per acre, a gross margin percentage of 58.2%. Lease and royalty
revenues were $209,000, and interest and other revenues were $34,000. Following
operating expenses of $267,000, segment income was $193,000.
The $810,000 year over year decrease in the second quarter segment result
is primarily attributable to an increase of almost $1 million in operating
expenses. Operating expenses in the second quarter of this year were unusually
high due to approximately $489,000 in legal and related expenses , and a
one-time write-off of $261,000 in previously capitalized costs.
During the first six months of 2002, Nevada Land sold approximately 6,201
acres of land for $543,000. The average sales price was $88 per acre, and our
average basis in the land sold was $39 per acre. The gross margin on land sales
was $302,000, or $49 per acre, a gross margin percentage of 55.6%. Lease and
royalty revenues were $368,000, and interest and other revenues contributed
$283,000. Following operating expenses of $1.7 million, the segment loss was
$778,000.
13
During the first half of 2001, Nevada Land sold approximately 4,443 acres
of land for $440,000. The average sales price was $99 per acre, and our average
basis in the land sold was $42 per acre. The gross margin on land sales was
$255,000, or $57 per acre, a gross margin percentage of 57.9%. Lease and royalty
revenues were $291,000, and interest and other revenues were $243,000. Following
operating expenses of $698,000, segment income was $91,000.
For the half-year, the segment result decreased by $869,000, primarily due
to the unusually high operating expenses For the six months, legal and related
costs were approximately $599,000 and $261,000 of previously capitalized costs
were expensed.
During 2000 and 2001, Nevada Land filed applications for an additional
105,516 acre-feet of water rights on the Company's lands. Where these
applications are successful, we anticipate that the value and marketability of
the associated land will increase. The applications consist of:
- - 39,076 acre-feet of water rights for the beneficial use of irrigating the
related 9,769 acres of arable land, and 40,240 acre-feet of water rights
for municipal and industrial use, on the former railroad lands; and
- - 26,200 acre-feet of water rights for the beneficial use of irrigating
another 6,550 acres of Spring Valley Ranches.
Progress continues on a number of potential land exchange transactions, in
which Nevada Land will give up land with environmental, cultural, or historical
value, in exchange for land which is either more marketable, or suitable for
future development. In some cases, we may form joint ventures with developers in
order to participate in the upside from developing the land acquired. Nevada
Land is currently working on the following land exchange opportunities, each of
which could take up to several years to complete:
- - the exchange of mountain lands in Washoe County for land suitable for
industrial use in Lincoln County;
- - the exchange of mountain lands in Washoe County for land suitable for
residential, commercial, and industrial use near Dayton, in Lyon County;
- - the exchange of working ranch land at Spring Valley Ranches and mountain
lands in Pershing County for developable land in southeastern Nevada; and
- - the exchange of mountain lands in Elko County for land which would be
suitable for agricultural use in Independence Valley, Elko County.
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 a fuel source (either natural gas transmission lines
for gas-fired stations or rail transport for coal-fired stations). The
difficulties which some energy and utility companies are experiencing in raising
capital could lead to the construction of new power plants being deferred until
capital markets and electricity demand and prices improve. We anticipate that
the sustained growth of Nevada, Arizona, California and other southwestern
states will lead to a permanent increase in the demand for electricity which, in
the long term, will require the construction of new power plants.
PROPERTY AND CASUALTY INSURANCE
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
------------------------------------------------------------------
2002 2001 2002 2001
------------------------------------------------------------------
REVENUES:
Sequoia - Earned Premiums $ 11,238,000 $ 10,459,000 $ 21,851,000 $ 20,396,000
Citation - Earned Premiums 76,000 178,000
Investment Income 1,347,000 1,553,000 2,704,000 3,024,000
Realized Investment Gains 297,000 130,000 479,000 658,000
Other 70,000 355,000 150,000 589,000
------------------------------------------------------------------
Segment Total Revenues $ 12,952,000 $ 12,573,000 $ 25,184,000 $ 24,845,000
==================================================================
EXPENSES:
Loss & Loss Adjustment Expense $ (8,175,000) $ (7,765,000) $(15,126,000) $(15,709,000)
Underwriting Expenses (3,912,000) (3,998,000) (8,086,000) (8,109,000)
------------------------------------------------------------------
Segment Total Expenses $(12,087,000) $(11,763,000) $(23,212,000) $(23,818,000)
INCOME BEFORE TAXES:
Sequoia Insurance Company $ 461,000 $ 42,000 $ 1,193,000 $ (350,000)
Citation Insurance Company 404,000 768,000 779,000 1,377,000
------------------------------------------------------------------
SEGMENT INCOME BEFORE TAXES $ 865,000 $ 810,000 $ 1,972,000 $ 1,027,000
==================================================================
14
The Property and Casualty segment is comprised of Sequoia Insurance Company
and Citation Insurance Company, which are headquartered in Monterey, California.
Sequoia is the only PICO insurance subsidiary which is writing new
business. 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 the Personal Express book of business.
In the past, Citation wrote commercial property and casualty insurance in
California, Nevada, and Arizona. The business previously written by Citation has
been transitioned to Sequoia, and Citation is now in "run off." This means that
Citation is handling claims arising from historical business, but not writing
any business. The last of Citation's policies expired in December 2001.
As a result of these factors, the individual results of Sequoia and
Citation cannot be directly compared to previous years.
SEQUOIA INSURANCE COMPANY
In the second quarter of 2002, Sequoia generated $15 million of direct
written premiums, comprised of $13.2 million in commercial lines of insurance
and $1.8 million in personal lines. Direct written premiums increased $3.1
million, or 25.7%, year over year. The increase was primarily due to growth of
$2.7 million in commercial lines, resulting from a 21.8% increase in the average
premium per commercial policy year over year.
For the second quarter of 2002, Sequoia generated total revenues of $12.5
million, including $11.2 million in earned insurance premiums, $952,000 in
investment income, and $247,000 in realized gains on the sale of investments.
Sequoia incurred an operating loss (i.e., loss before investment income,
realized gains, and taxes) of $738,000 for the quarter. The operating loss
included an expense of approximately $510,000 for adverse development in prior
year loss reserves, primarily in the commercial liability and commercial
automobile lines of business.
The investment gains were primarily realized on the sale of bonds. The
fixed-income portfolios of our insurance companies are focused on investment
grade bonds with less than 10 years to maturity, issued by high quality
companies which generate reliable free cash flow. In particular, the bond
portfolios of our insurance companies contain no exposure to the technology,
telecommunications, utilities, energy trading, and conglomerate sectors.
In the second quarter of 2001, Sequoia produced total revenues of $11.7
million, including $10.5 million in earned insurance premiums, $919,000 in
investment income, and $128,000 in realized gains. Sequoia incurred an operating
loss of $1 million for the quarter, including an expense of approximately
$232,000 for adverse development in prior year loss reserves.
The $267,000 year over year improvement in the second quarter underwriting
loss primarily resulted from the increase in average premium per commercial
insurance policy.
In the first half of 2002, Sequoia generated $28.7 million of direct
written premiums, comprised of $25.5 million in commercial lines of insurance
and $3.2 million in personal lines. Direct written premiums increased $5.2
million, or 22.1%, year over year, primarily due to growth of $4.4 million in
commercial lines resulting from higher average premiums per commercial policy.
For the first half of 2002, Sequoia generated total revenues of $24.3
million, including $21.9 million in earned insurance premiums, $1.9 million in
investment income, and $386,000 in realized gains. Sequoia incurred an operating
loss of $1 million for the half, including an expense of approximately $514,000
for adverse development in prior year loss reserves.
For the first half of 2001, Sequoia generated total revenues of $23.2
million, including $20.4 million in earned insurance premiums, $1.8 million in
investment income, and $644,000 in realized gains. Sequoia incurred an operating
loss of $2.8 million for the half, including an expense of approximately
$339,000 for adverse development in prior year loss reserves.
The $1.8 million year over year improvement in the first half operating
loss resulted from the increase in average premium per commercial policy and
more favorable claims experience.
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.
15
Sequoia's combined ratio, determined on the basis of generally accepted
accounting principles, for the second quarter and first half of 2002 and 2001
was:
SEQUOIA'S GAAP INDUSTRY RATIOS
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
2002 2001 2002 2001
-----------------------------------------------------------
Loss and Loss Adjustment Expense Ratio 72.9% 74.1% 69.2% 76.2%
Underwriting Expense Ratio 34.3% 37.5% 36.4% 39.0%
-----------------------------------------------------------
Combined Ratio 107.2% 111.6% 105.6% 115.2%
===========================================================
CITATION INSURANCE COMPANY
The "run off" of Citation's property and casualty insurance loss reserves
continues to be close to expectation. Practically no development in prior year
loss reserves was experienced in 2001 and in the first half of 2002. Since
Citation is in "run off," its combined ratio is not meaningful.
In the second quarter of 2002, Citation recorded $446,000 in revenues,
$42,000 in expenses, and income before taxes of $404,000. In the second quarter
of 2001, when the Company was still writing a minor amount of business, revenues
were $855,000, expenses were $87,000, and Citation earned a pre-tax profit of
$768,000.
For the first six months of 2002, Citation reported $918,000 in revenues,
$139,000 in expenses, and income before taxes of $779,000. In the first half of
2001, Citation's revenues were $1.7 million, expenses were $300,000, and
Citation earned a pre-tax profit of $1.4 million.
In 2001, Citation's revenues and income included a benefit from negative
goodwill amortization of $142,000 in the second quarter, and $283,000 in the
first half. When Citation Insurance Group (now known as PICO Holdings, Inc.)
acquired Physicians in the reverse merger in 1996, a $5.7 million negative
goodwill item arose. This was because the fair value of the assets acquired
(i.e., Physicians) exceeded the cost of the investment (i.e., the fair value of
the shares in Citation issued to the Physicians shareholders). The negative
goodwill was being recognized as income over a period of 10 years in this
segment. From January 1, 2002, PICO adopted Statement of Financial Accounting
Standards No. 142, "Goodwill and Intangible Assets," which requires that
goodwill and intangible assets with indefinite lives be tested for impairment
annually rather than amortized over time. As a result of adopting this standard,
the remaining negative goodwill in this segment of approximately $2.8 million
was recorded as income. The negative goodwill was included in the $1.8 million
cumulative effect of the change in accounting principle in the first half of
2002, and did not affect the segment result in 2002. See Note 5 of Notes to
Condensed Consolidated Financial Statements, "Cumulative Changes in Accounting
Principle."
RESERVES
At June 30, 2002, our property and casualty insurance loss reserves were
$39 million, net of reinsurance, compared to $39.2 million at March 31, 2002,
and $40.4 million at December 31, 2001.
PROPERTY AND CASUALTY INSURANCE - LOSS AND LOSS EXPENSE RESERVES
JUNE 30, 2002 MARCH 31, 2002 DECEMBER 31, 2001
------------------------------------------------------------------------------
SEQUOIA INSURANCE COMPANY:
Direct Reserves $41.0 million $ 40.0 million $ 36.9 million
Ceded Reserves (18.7) (18.9) (15.7)
------------------------------------------------------------------------------
Net Reserves $22.3 million $ 21.1 million $ 21.2 million
==============================================================================
CITATION INSURANCE COMPANY:
Direct Reserves $19.1 million $ 20.5 million $ 21.0 million
Ceded Reserves (2.4) (2.4) (1.8)
------------------------------------------------------------------------------
Net Reserves $16.7 million $ 18.1 million $ 19.2 million
==============================================================================
16
MEDICAL PROFESSIONAL LIABILITY INSURANCE
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
2002 2001 2002 2001
---------------------------------------------------------------------------------
REVENUES:
Net Investment Income $ 146,000 $ 202,000 $ 398,000 $ 660,000
Realized Investment Gain (Loss) 1,000 (2,086,000) (4,078,000)
=================================================================================
Segment Total Revenues $ 147,000 $(1,884,000) $ 398,000 $(3,418,000)
=================================================================================
EXPENSES:
Underwriting Expenses $ (104,000) $ (237,000) $ (310,000) $ (351,000)
---------------------------------------------------------------------------------
Segment Total Expenses $ (104,000) $ (237,000) $ (310,000) $ (351,000)
=================================================================================
=================================================================================
INCOME (LOSS) BEFORE TAXES $ 43,000 $(2,121,000) $ 88,000 $(3,769,000)
=================================================================================
Physicians Insurance Company of Ohio is now in "run off," which means the
Company is handling claims arising from historical business, but not writing new
business. The level of loss reserve liabilities, and corresponding investment
assets, in this segment are decreasing as claims are paid, and investments
mature, or are sold, to provide the funds required for the claims payments.
In the second quarter of 2002, segment revenues were $147,000, expenses
were $104,000, and segment income was $43,000. For the second quarter of 2001,
the segment generated revenues of negative $1.9 million, as net investment
income of $202,000 was more than offset by a realized investment loss of $2.1
million on the sale of Physicians' remaining investment in the Rydex URSA mutual
fund. Following expenses of $237,000, the segment incurred a pre-tax loss of
$2.1 million. Excluding the realized investment loss, the segment loss would
have been $35,000.
In the first half of 2002, segment revenues were $398,000, expenses were
$310,000, and segment income was $88,000. For the first half of 2001, segment
revenues were negative $3.4 million, comprised of $660,000 in net investment
income and a realized loss of $4.1 million on the sale of Physicians' investment
in the Rydex URSA mutual fund. Following operating expenses of $351,000, the
segment incurred a pre-tax loss of $3.8 million. Excluding the realized
investment loss, segment income would have been $309,000.
No unusual trends in claims emerged during the quarter.
MEDICAL PROFESSIONAL LIABILITY INSURANCE - LOSS AND LOSS EXPENSE RESERVES
JUNE 30, 2002 MARCH 31, 2002 DECEMBER 31, 2001
----------------------------------------------------
Direct Reserves $38.8 million $39.4 million $40.6 million
Ceded Reserves (5.4) (5.7) (5.7)
----------------------------------------------------
Net Medical Professional Liability Reserves $33.4 million $33.7 million $34.9 million
====================================================
LONG TERM HOLDINGS
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
---------------------------------------------------------------------
2002 2001 2002 2001
---------------------------------------------------------------------
REVENUES:
Investment Income $ 1,000,000 $ 951,000 $ 1,596,000 $ 1,239,000
SFAS No. 133 Change in Warrants 335,000 1,547,000 435,000 1,637,000
Realized Investment Gain (Loss) 62,000 (500,000) 62,000 (500,000)
Other 882,000 325,000 1,123,000 290,000
---------------------------------------------------------------------
Segment Total Revenues $ 2,279,000 $ 2,323,000 $ 3,216,000 $ 2,666,000
=====================================================================
SEGMENT TOTAL EXPENSES (662,000) (4,724,000) (2,518,000) (7,415,000)
---------------------------------------------------------------------
INCOME (LOSS) BEFORE INVESTEE INCOME (LOSS) $ 1,617,000 $(2,401,000) $ 698,000 $(4,749,000)
---------------------------------------------------------------------
EQUITY SHARE OF INVESTEES' NET INCOME (LOSS) (532,000) 12,000 (931,000) 156,000
---------------------------------------------------------------------
INCOME (LOSS) BEFORE TAXES $ 1,085,000 $(2,389,000) $ (233,000) $(4,593,000)
=====================================================================
17
In July, after the end of the second quarter, PICO accepted Ensign
(Australia) Holdings Pty. Ltd's cash offer of $A2.70 for the Australian Oil &
Gas Corporation Limited common shares and $A1.50 for the AOG options owned by
PICO. The sale proceeds were $21.1 million. Over the life of the investment,
PICO recorded a total of $10.1 million in income and realized gains from AOG,
and the annualized internal rate of return was approximately 24.3%. The final
gain on sale, which is estimated at $8 million (before taxes), will be recorded
in PICO's fiscal third quarter ended September 30, 2002.
This segment contains our long-term investments in public companies,
subsidiaries and other assets which individually are too small to constitute a
segment, and parent company assets. Revenues and results in this segment vary
considerably from quarter to quarter, primarily due to fluctuations in net
realized gains or losses on the sale of investments. Long term holdings are not
sold on a regular basis, but may be sold if the price of an individual security
has significantly exceeded our target, or if there have been changes which we
believe limit further appreciation potential on a risk-adjusted basis.
Consequently, the amount of net realized gains or losses recognized during any
accounting period has no predictive value.
At June 30, 2002, our largest long term holdings were HyperFeed
Technologies, Inc., Jungfraubahn Holding AG, and AOG, and these three long-term
holdings had a potential market value (before taxes) of approximately $43.7
million, and a carrying value (before taxes) of $41.2 million. The tax-effected
carrying value was $39.8 million.
The details of our investment in each company at the end of the quarter
were:
- -----------------------------------------------------------------------------------------------------------------------------------
JUNE 30, 2002 CARRYING VALUE ACCOUNTING METHOD SHARE EQUIVALENTS MARKET PRICE
($USD)
CARRYING VALUE BEFORE TAXES:
HyperFeed Technologies, Inc. Common $ 1,414,000 Equity method 10,077,856 $ 0.41
Warrants 243,000 Fair value 4,055,195
--------------- -------------------
Total $ 1,657,000 14,133,051
Jungfraubahn Holding AG $19,400,000 Market value 112,672 $172.18
Australian Oil & Gas Corporation Common $19,099,000 Market value 13,397,337 $ 1.43
Limited Options 1,073,000 Market value 1,431,640 $ 0.75
--------------- -------------------
Total $20,172,000 14,828,977
---------------
Total carrying value before taxes $41,229,000
Deferred taxes (1,423,000)
---------------
CARRYING VALUE, NET OF TAXES $39,806,000
- -----------------------------------------------------------------------------------------------------------------------------------
AUSTRALIAN OIL & GAS CORPORATION LIMITED
In January 2002, AOG announced that it was raising additional capital to
purchase a new deep capacity drill rig and to refit two existing rigs to perform
new long term drilling contracts. PICO provided AOG with a short term bridging
loan of $US4 million, and agreed to underwrite a rights offering by AOG. As a
result of this process, PICO acquired the following shares in AOG:
- - 666,666 common shares which were issued as fees for establishing the loan
facility and underwriting the rights offering, with no cash cost to PICO;
and
- - 2,863,280 common shares through the rights offering, at a cash cost of
$A1.20 per share. Through the rights offering, PICO also received, for no
cash cost, options to buy 1,431,640 new AOG shares at $A1.20 per share.
At June 30, 2002, the carrying value of our investment in AOG common stock
and options was $20.2 million (before taxes). As explained in the first
paragraph of this segment, PICO sold its AOG shares and options in July for
$21.1 million. Since we were carrying our AOG common shares and options at
market value, most of the unrealized appreciation in the investment was already
reflected in shareholders' equity at June 30, 2002. Therefore, although a
realized gain estimated at $8 million will be recognized in our statement of
operations in the third quarter of 2002, the sale will only result in an
additional increase in shareholders' equity of $599,000, or $0.05 per share
(after taxes).
HYPERFEED TECHNOLOGIES, INC.
On July 29, 2002, HyperFeed announced its results for the second quarter
and six months ended June 30, 2002. For the second quarter of 2002, HyperFeed
reported total revenues of $5 million, gross margin of $1.8 million, and a net
loss of $656,000. For 2002's first half, HyperFeed reported total revenues of
$10.6 million, gross margin of $4.1 million, and a net loss of $897,000.
18
At June 30, 2002, HyperFeed had $689,000 in cash and cash equivalents. Cash
flow before financing activities was $286,000 in the first half of 2002. In the
accompanying news release, HyperFeed's President and CEO Jim Porter commented
that "we are generating sufficient cash from operating activities to fund our
business" and that the company's efforts are "squarely focused on bringing new
products to market for financial institutions, which in turn should open new
revenue sources."
JUNGFRAUBAHN HOLDING AG
On May 23, 2002, Jungfraubahn announced its results for the year to
December 31, 2001, which was the second best year in the company's history. As
expected, revenues declined 10.5% year over year to CHF (Swiss Francs) 98.7
million. In 2000, a bank held a promotion which led to record high passenger
numbers, leading Jungfraubahn to describe 2000 as an exceptional year whose
results "will not easily be repeated." EBITDA (i.e., earnings before
depreciation, interest, and taxes, as calculated by Jungfraubahn) decreased
25.5% to CHF30.4 million, and net income fell 20.2% to CHF14.2 million, or
CHF24.4 per share. Jungfraubahn's operating activities generated net cash flow
of CHF26.7 million. At December 31, 2001, book value was approximately CHF505.9
per share. At June 30, 2002, Jungfraubahn's stock price was CHF255, and CHF1
equaled $US0.6752.
SEGMENT RESULTS
For the second quarter of 2002, Long Term Holdings segment revenues were
$2.3 million. Investment income of $1 million included $703,000 from
Jungfraubahn's annual dividend payment. SFAS No. 133 income from pre-tax
appreciation in warrants was $335,000. A $586,000 increase in the value of AOG
options was partially offset by a $251,000 decrease in the estimated fair value
of warrants held to buy shares in other companies, principally HyperFeed
Technologies, Inc. After segment expenses of $662,000, and our $532,000 equity
share of the net losses of companies accounted for under the equity method --
primarily HyperFeed -- the segment reported income before taxes of $1.1 million.
In the second quarter of 2001, Long Term Holdings segment revenues were
$2.3 million. Revenues principally consisted of SFAS No. 133 income of $1.5
million and investment income of $951,000, which were partially offset by a
$500,000 realized loss from the write-off of our remaining investment in MKG
Enterprises Corp. After segment expenses of $4.7 million and equity income of
$12,000, the segment incurred a loss of $2.4 million.
The $3.5 million year over year improvement in the second quarter segment
result primarily resulted from a $4.1 million reduction in segment expenses,
which was partially offset by a $544,000 decrease in our equity share of the
results of companies where we account for the investment under the equity
method.
Segment expenses in the second quarter of 2001 were unusually large due to
a $2.3 million provision against two loans. In addition, there was a $2 million
year over year change in a non-cash expense related to foreign currency, from a
$287,000 expense in 2001 to a $1.7 million benefit, which partially offset other
segment expenses in 2002.
Most of our investments in Swiss public companies are held by Global Equity
SA, a wholly owned subsidiary which is incorporated in Switzerland. Part of
Global Equity SA's funding comes from a loan from PICO, which is denominated in
Swiss Francs. During accounting periods when the Swiss Franc depreciates
relative to the US dollar, under GAAP we are required to record an expense
through the statement of operations to reflect the fact that Global Equity SA
owes PICO fewer US dollars. In Global Equity SA's financial statements, an
equivalent credit is included in the foreign currency translation component of
shareholders' equity (since it owes PICO fewer dollars), however this does not
go through the statement of operations. During accounting periods when the Swiss
Franc appreciates relative to the US dollar -- such as the second quarter of
2002 -- opposite entries are made and income is recorded in the statement of
operations. Accordingly, we are required to record a benefit of $1.7 million in
our statement of operations in the second quarter of 2002, and an expense of
$287,000 through the statement of operation in the second quarter of 2001, even
though there was no net impact on shareholders' equity.
For the first half of 2002, Long Term Holdings segment revenues were $3.2
million. Investment income of $1.6 million included the $703,000 Jungfraubahn
dividend and $589,000 in revenues related to the loan establishment fee and
underwriting fee from AOG. SFAS No. 133 income of $435,000 consisted of a
$787,000 increase in AOG options, which was partially offset by a $352,000
reduction in the estimated fair value of warrants we own to buy shares in other
companies. After segment expenses of $2.5 million, and our $931,000 equity share
of the net losses of companies accounted for under the equity method, the
segment reported a pre-tax loss of $233,000.
In the first half of 2001, Long Term Holdings segment revenues were $2.7
million, which included SFAS No. 133 income of $1.6 million, investment income
of $1.2 million, and the $500,000 MKG realized loss. After segment expenses of
$7.4 million and equity income of $156,000, the segment incurred a loss of $4.6
million.
19
The $4.4 million year over year reduction in the first half segment loss
primarily resulted from a $4.9 million reduction in segment expenses, which was
partially offset by a $1.1 million deterioration in our equity share of the
results of companies we account for under the equity method. The decrease in
equity income was primarily due to the decline in HyperFeed's financial results
year over year, and the inclusion of one quarter's equity income from
Jungfraubahn in the first half of 2001 which did not recur in 2002 after we
ceased equity accounting Jungfraubahn and reverted to market value accounting
from the second quarter of 2001.
Segment expenses in the first half of 2001 were unusually large due to the
$2.3 million provision against two loans. In addition, there was a $2.6 million
year over year change in the foreign currency related non-cash expense, from a
$1.1 million expense in 2001 to a $1.5 million benefit in 2002.
LIQUIDITY AND CAPITAL RESOURCES - THREE AND SIX MONTHS ENDED JUNE 30, 2002 AND
2001
PICO Holdings, Inc. is a diversified holding company. Our assets primarily
consist of investments in our operating subsidiaries, investments in other
public companies, marketable securities, and cash and cash equivalents. On a
consolidated basis, the Company had $14.3 million in cash and cash equivalents
at June 30, 2002, compared to $7.1 million at March 31, 2002, and $17.4 million
at December 31, 2001.
Our cash flow position fluctuates depending on the requirements of our
operating subsidiaries for capital, and activity in our investment portfolios.
Our primary sources of funds include cash balances, cash flow from operations,
the sale of investments, and -- potentially -- the proceeds of borrowings or
offerings of equity and debt. We endeavor to ensure that funds are always
available to take advantage of new investment opportunities.
In broad terms, the cash flow profile of our principal operating
subsidiaries is:
- - During the company's investment and development phase, Vidler Water
Company, Inc. utilized cash to purchase properties with significant water
rights, to construct improvements at the Vidler Arizona Recharge Facility,
to maintain and develop existing assets, to pursue applications for water
rights, and to meet financing and operating expenses. During this period,
other group companies provided financing to meet Vidler's on-going expenses
and to fund capital expenditure and the purchase of additional
water-righted properties.
Vidler's water-related assets began to generate significant cash flow in
the first quarter of 2001. As commercial use of these assets increases, we
expect that Vidler will start to generate free cash flow as income from
leasing water or storage, and the proceeds from selling land and water
rights, begin to overtake maintenance capital expenditure, financing costs,
and operating expenses As water lease and storage contracts are signed, we
anticipate that Vidler may be able to monetize some of the contractual
revenue streams, which could potentially provide another source of funds;
- - Nevada Land & Resource Company, LLC is actively selling land which has
reached its highest and best use, and is not part of PICO's long-term
utilization plan for the property. Nevada Land's principal sources of cash
flow are the proceeds of cash sales, and collections of principal and
interest on sales contracts where Nevada Land has provided vendor
financing. Since these receipts and other revenues exceed Nevada Land's
operating costs, Nevada Land is generating positive cash flow which
provides funds to finance other group activities;
- - During 2002, 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. Shortly after a policy is
written, the premium is collected and the funds can be invested for a
period of time before they are required to pay claims. Free cash flow
generated by Sequoia is being deployed in the company's investment
portfolio;
- - Citation Insurance Company has ceased writing business and is "running off"
its existing claims reserves. Investment income more than covers Citation's
operating expenses. Most of the funds required to pay claims are coming
from the maturity of fixed-income investments in the company's investment
portfolio and recoveries from reinsurance companies; and
- - As the "run off" progresses, Physicians Insurance Company of Ohio is
obtaining funds to pay operating expenses and claims from the maturity of
fixed-income securities, the realization of investments, and recoveries
from reinsurance companies.
20
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.
There was a $3 million net decrease in cash and cash equivalents in the
first half of 2002, compared to a $4.1 million net decrease in the first half of
2001.
During the first 6 months of 2002, Operating Activities generated cash of
$5.4 million. The principal sources of cash were the proceeds of water rights
and land sold by Vidler and Nevada Land. The principal uses of cash were
operating expenses at Vidler, the payment of claims by Citation and Physicians,
and group overhead. In the first half of 2001, Operating Activities generated
cash of $3.9 million.
Investing Activities used $6.5 million of cash in the first half of 2002,
primarily due to the net investment of $2.9 million in fixed-income securities
and the net investment of $2.8 million in stocks, principally AOG. In the first
half of 2001, Investing Activities used $8.7 million of cash. This principally
represented the investment of $2.1 million in our insurance company portfolios,
and the investment of $7.6 million in high quality corporate bonds with less
than 12 months to maturity by group operating companies.
Financing Activities used $571,000 of cash in the first half of 2002,
primarily due to the repayment of $637,000 in non-recourse borrowings
collateralized by the Harquahala Valley farm properties sold by Vidler. In the
first half of 2001, Financing Activities used $1 million of cash. Vidler paid
off approximately $2.4 million in non-recourse borrowings collateralized by farm
properties in the Harquahala Valley which were sold, and Global Equity SA took
on an additional $1.4 million of Swiss Franc bank borrowings to help finance the
acquisition of investments in Swiss public companies.
At June 30, 2002, PICO had no significant commitments for future capital
expenditures.
PICO is committed to maintaining Sequoia's capital and statutory surplus at
a minimum of $7.5 million. At June 30, 2002, Sequoia had approximately $30.7
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.
21
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 three
to five years and therefore approximates fair value. At June 30, 2002, the
Company had $105 million of fixed maturity securities and mortgage loans, $70
million of marketable equity securities that were subject to market risk,
including $51.7 million of investments denominated in foreign currencies,
primarily Swiss francs and Australian dollars. 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 by management to mitigate adverse
changes in fair value and because the fair value of securities may be affected
by credit concerns of the issuer, prepayment rates, liquidity, and other general
market conditions. The sensitivity analysis duration model produced a loss in
fair value of $3.5 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 $14 million that would impact the unrealized appreciation in
shareholders' equity. The hypothetical 20% decrease in the local currency of the
Company's net foreign denominated investments produced a loss of $8.6 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:
None
22
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: August 8, 2002 By: /s/ Maxim C. W. Webb
--------------------------------------
Maxim C. W. Webb
Chief Financial Officer and Treasurer
(Principal Financial and Accounting Officer)
23
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.
# 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.
++ 10.57 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.
99.1 Certification of Chief Executive Officer pursuant to the
Sarbanes-Oxley Act of 2002.
99.2 Certification of Chief Financial Officer pursuant to the
Sarbanes-Oxley Act of 2002.
----------
+ 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.
24
## Incorporated by reference to exhibit of same number
filed with 10-K/A dated April 30, 1997.
### Incorporated by reference to Form S-8 filed with the
Securities and Exchange Commission (File No.
333-36881).
#### Incorporated by reference to Form S-8 filed with the
Securities and Exchange Commission (File No.
333-32045).
25