<PAGE> 1
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 September 30, 1997
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
(619) 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 32,591,718 as of September 30, 1997. As of such date, 4,572,015
shares of common stock were held by subsidiaries of the registrant.
<PAGE> 2
PICO HOLDINGS, INC.
FORM 10-Q
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE NO.
--------
<S> <C> <C>
PART I: FINANCIAL INFORMATION
Item 1: Financial Statements
Consolidated Balance Sheets as of 3
September 30, 1997 and December 31, 1996
Consolidated Statements of Operations 4
for the Three and Nine Months Ended September 30, 1997 and 1996
Consolidated Statements of Cash Flows for 5
the Nine Months Ended September 30, 1997 and 1996
Notes to Consolidated Financial Statements 6
Item 2: Management's Discussion and Analysis of Financial 10
Condition and Results of Operations
PART II: OTHER INFORMATION
Item 4: Submission of Matters to a Vote of Security Holders 26
Item 6: Exhibits and Reports on Form 8-K 26
Signature 27
</TABLE>
2
<PAGE> 3
PART I: FINANCIAL INFORMATION
ITEM I: FINANCIAL STATEMENTS
PICO HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
------------- ------------
(unaudited)
ASSETS
<S> <C> <C>
Investments $221,547 $219,251
Cash and cash equivalents 109,498 54,917
Investment income receivable 1,644 2,993
Premiums receivable 10,884 14,406
Reinsurance receivables 77,549 94,447
Prepaid deposits and reinsurance premiums 2,372 5,225
Deferred policy acquisition costs 4,820 5,420
Property and equipment, net 8,786 4,717
Deferred income taxes 5,644
Other assets 5,647 7,588
Net assets of discontinued operations 20,139 15,767
Net assets of acquired business held for sale 7,089
------------ ------------
Total Assets $462,886 $437,464
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Loss and loss adjustment expense, net of discount $217,063 $252,024
Unearned premiums 22,774 34,808
Reinsurance balances 5,692 7,120
Deferred gain on retroactive reinsurance 3,247 3,355
Integration liability 725 1,368
Other liabilities 23,622 22,012
Deferred income taxes 115
Excess of fair value of net assets aquired over purchase price 5,781 6,293
------------ ------------
Total Liabilities 279,019 326,980
------------ ------------
MINORITY INTEREST 66,986 280
------------ ------------
SHAREHOLDERS' EQUITY
Preferred stock, $.01 par value, authorized 2,000,000 shares, none issued
Common stock, $.001 par value; authorized 100,000,000 shares, issued 32,591,718
and 32,486,718 in 1997 and 1996, respectively 32 32
Additional paid-in capital 43,076 42,965
Treasury stock, at cost (common shares 2,492,631 in 1997 and 1,940,315 in 1996) (9,924) (7,845)
Retained earnings 85,903 64,227
Cumulative foreign currency adjustments 172 (27)
Unrealized appreciation (depreciation) on investments (2,378) 11,838
Equity changes of investee company (986)
------------ ------------
Total Stockholders' Equity 116,881 110,204
------------ ------------
Total Liabilities and Stockholders' Equity $462,886 $437,464
============ ============
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
3
<PAGE> 4
PICO HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
(in thousands, except share data)
<TABLE>
<CAPTION>
Three Months Ended September 30, Nine Months Ended September 30,
-------------------------------- -------------------------------
1997 1996 1997 1996
----------- ----------- ------------ ------------
<S> <C> <C> <C> <C>
REVENUES: (unaudited) (unaudited)
Premium income $11,622 $7,710 $40,101 $21,450
Investment income 2,407 1,948 8,509 5,319
Realized gains on investments 27,054 2,202 29,999 2,798
Real estate sales 27 1,496
Commission and other income 2,725 323 3,403 1,110
------------ ------------ ------------ ------------
Total revenues 43,808 12,183 82,039 32,173
------------ ------------ ------------ ------------
EXPENSES:
Loss and loss adjustment expenses 9,956 6,446 31,494 15,542
Cost of real estate sales 1 21 1,407
Insurance underwriting and other expenses 9,092 4,493 20,293 13,057
------------ ------------ ------------ ------------
Total expenses 19,048 10,940 51,808 30,006
------------ ------------ ------------ ------------
Equity in earnings of investee 286 633
------------ ------------ ------------ ------------
Income from continuing operations
before income taxes and minority interest 24,760 1,529 30,231 2,800
Provision for federal, foreign and state
income taxes 8,181 353 9,840 739
------------ ------------ ------------ ------------
Net income from continuing
operations before minority interest 16,579 1,176 20,391 2,061
Minority interest in loss of subsidiary 537 20 447 290
------------ ------------ ------------ ------------
Net income from continuing
operations 17,116 1,196 20,838 2,351
Net income from discontinued
operations net of federal income tax
provision (benefit) of $622 and $(8) for the
three months and $642 and $47 for the
nine months ended 1997 and 1996, respectively 744 159 838 204
------------ ------------ ------------ ------------
Net income $17,860 $1,355 $21,676 $2,555
============ ============ ============ ============
Net income per common share
(primary and fully diluted):
Continuing operations $0.51 $0.04 $0.63 $0.09
Discontinued operations 0.02 0.01 0.02 0.01
------------ ------------ ------------ ------------
Net income per common share $0.53 $0.05 $0.65 $0.10
============ ============ ============ ============
Weighted average number of shares outstanding 33,869,718 25,421,970 33,601,850 26,377,184
============ ============ ============ ============
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
4
<PAGE> 5
PICO HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands, unaudited)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
-------------------------------
1997 1996
-------------- -------------
<S> <C> <C>
OPERATING ACTIVITIES
Net cash used in operating activities ($35,993) ($13,460)
-------------- -------------
INVESTING ACTIVITIES:
Investments purchased (337,187) (67,424)
Investments sold 168,422 45,611
Investments matured 281,303 9,345
Net sales of real estate 19 1,457
Proceeds from sale of property and equipment 8 43
Purchases of property and equipment (713) (223)
Sale of business (2,886)
Purchased cash from acquired subsidiary 18,108
-------------- -------------
Net cash (used in) provided by investing activities 127,074 (11,191)
-------------- -------------
FINANCING ACTIVITIES:
Issuance of common stock (36,403)
(Purchase) issuance of treasury stock (163) 94
-------------- -------------
Net cash provided by financing activities (36,566) 94
-------------- -------------
Effect of exchange rate changes on cash 66 51
-------------- -------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 54,581 (24,506)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 54,917 43,988
-------------- -------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $109,498 $ 19,482
============== =============
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for:
Income taxes $14,259 $200
============== =============
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
5
<PAGE> 6
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. 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 Securities and Exchange Commission
(?SEC?). Accordingly, they do not include all of the information and notes
required by generally accepted accounting principles 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 September 30, 1997 and December 31, 1996 and results of
operations and changes in financial position for the three and nine months
ended September 30, 1997 and 1996 have been included and are of a normal
recurring nature. Operating results for the three and nine months ended
September 30, 1997, are not necessarily indicative of the results that may
be expected for the year ending December 31, 1997.
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
Report on Form 10-K for the year ended December 31, 1996 and Quarterly
Reports on Form 10-Q as filed with the SEC.
2. ACQUISITIONS
On November 20, 1996, Physicians Insurance Company of Ohio ("Physicians")
consummated a transaction (the "Merger") pursuant to which Citation
Holdings, Inc. ("Holdings"), a wholly owned subsidiary of Citation
Insurance Group ("CIG"), merged with and into Physicians pursuant to an
Agreement and Plan of Reorganization dated as of May 1, 1996 with
Physicians being the accounting acquiror. Pursuant to the Merger, each
outstanding share of the common stock of Physicians was converted into the
right to receive 5.0099 shares of CIG's common stock. CIG's other
significant direct and indirect subsidiaries just prior to the merger were
Citation Insurance Company ("CIC") and Citation National Insurance Company
("CNIC"). Upon the consummation of the merger, CIG changed its name to
PICO Holdings, Inc. ("PICO"), which is the continuing registrant.
As a result of the Merger, the former shareholders of Physicians own
approximately 80% of the outstanding common stock of the Company and
control the Board of Directors of the Company. Accordingly, for accounting
purposes, the merger has been treated as a recapitalization of Physicians
with Physicians as the acquirer (i.e., a reverse acquisition). Therefore,
the statements of operations and cash flows for the three and nine month
periods ended September 30, 1996 represent the historical results of
Physicians and its subsidiaries, which is the predecessor entity.
The Merger was accounted for under the purchase method of accounting.
Financial results for the year ended December 31, 1996 include the
operations of CIG as if the Merger had occurred on November 1, 1996.
Financial activity for the period November 1, 1996 through November 20,
1996 was not significant.
The excess of the fair value of the net assets acquired over the purchase
price of such net assets (negative goodwill) is being amortized over a 10
year period using the straight-line method. The Company entered into a
Letter of Intent in January 1997 to sell the net assets related to CIC's
workers' compensation operations. The sale of the net assets related to
CIC's workers' compensation operations was completed on June 30, 1997.
The Company has accounted for the allocation of the purchase price and the
net assets of CIC's workers' compensation line of business in accordance
with the FASB's Emerging Issues Task Force Abstract 87-11 "Allocation of
Purchase Price to Assets to be Sold" ("EITF 87-11"). Accordingly, the net
assets related to CIC's workers' compensation line of business as of
December 31, 1996 had been reflected on a single line item in the
accompanying balance sheet as Net Assets of Acquired Business Held for
Sale. The fair value assigned to such net assets was based upon
management's estimate of the proceeds from the sale of CIC's workers'
compensation line of business of approximately $7.7 million less the
estimated loss from operations for such line of business during the
expected holding period of November 1996 through April 1997 of
approximately $0.5 million.
6
<PAGE> 7
In January 1997, the Company signed a Letter of Intent to sell the net
assets related to CIC?s workers? compensation business to Fremont
Compensation Insurance Group. Under the terms of the Letter of Intent, the
transaction was structured as a purchase of all the issued and outstanding
shares of stock of CNIC. CIC has reinsured all of its workers?
compensation business into CNIC and transferred all employees working on
the workers? compensation business to CNIC prior to the closing. This
transaction closed June 30, 1997. The adjusted purchase price for the sale
of CIC's and its subsidiary CNIC's workers' compensation line of business
was $7.9 million less $2.3 million in federal income taxes and $0.9
million in losses from operations of the workers' compensation line of
business from November 1996 through June 1997. The federal income taxes
were paid by CNIC to CIC. All amounts were paid in cash.
The pre-tax loss from operations related to CIC's workers' compensation
line of business excluded from the Company's statement of operations for
the three and six months ended June 30, 1997 was approximately $700,000
and $900,000, respectively. The difference between the carrying amount of
the net assets of CIC's workers' compensation line of business at the date
of sale and the actual proceeds from such sale resulted in a reallocation
of the purchase price of CIG. This reallocation will be calculated at
December 31, 1997, but is not expected to result in a material change.
The following unaudited pro forma information presents a summary of
consolidated results of operations of the Company and CIG and its
subsidiaries for the three and nine months ended September 30, 1996 as if
the acquisition of CIG and its subsidiaries occurred at the beginning of
1996, with proforma adjustments to give effect to the amortization of
goodwill and the accounting for CIC's workers' compensation line of
business held for sale in accordance with EITF 87-11, as discussed above
(in thousands, except per share data):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1996 1996
----------------------- ----------------------
<S> <C> <C>
Total revenues $26,785,083 $64,768,356
Income (loss) before taxes 1,313,903 (1,108,302)
Net loss (500,226) (6,731,911)
Net loss per share ($0.02) ($0.26)
</TABLE>
These unaudited pro forma results have been prepared for comparative
purposes and do not purport to be indicative of the results of operations
which actually would have resulted had the combinations been in effect on
January 1, 1996 or of future results of operations of the consolidated
entity.
On July 30, 1997, Physicians, The Professionals Insurance Company ("PRO"),
Sequoia Insurance Company ("Sequoia"), and CIC purchased from Mackenzie
Financial Corporation 6,616,218 additional shares of GEC at a total cost
of $11,406,435 increasing PICO's holdings in GEC to approximately 49.9%.
On August 18, 1997, PICO and Physicians acquired through a public offering
13,586,143 additional shares of GEC at a cost of $25,270,266, increasing
PICO's ownership in GEC to approximately 51.17%.
As a result of this majority ownership, GEC's financial results have been
consolidated with those of PICO in the accompanying financial statements
effective August 18, 1997.
On April 23, 1997, Global Equity Corporation ("GEC") and the Company
purchased Nevada Land and Resource Company, LLC ("NLRC"), owner of
approximately 1,365,000 acres of deeded land in northern Nevada. The total
purchase was approximately $53.7 million. GEC owns approximately 75
percent of NLRC. The Company paid approximately $12 million for the
remaining interest. GEC financed its portion of the acquisition in part by
issuing to the Company a 7% debenture in the principal amount of
approximately $25 million (U.S.). The debenture was subsequently repaid
along with accrued interest.
7
<PAGE> 8
The following unaudited pro forma information presents a summary of
consolidated results of operations of the Company and GEC and its
subsidiaries for the three and nine months ended September 30, 1997 as if
the acquisition of GEC and its subsidiaries occurred at the beginning of
1997, as discussed above:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1997 1997
-------------------- -------------------
<S> <C> <C>
Total revenues $43,221,403 $82,039,048
Income from continuing operations
before taxes and minority interest 25,610,631 30,230,826
Discontinued operations, net of taxes 312,675 838,357
Minority interest in loss of subsidiary 370,323 338,991
Net income 18,122,345 21,568,330
Net income per share $0.54 $0.64
</TABLE>
These unaudited pro forma results have been prepared for comparative
purposes and do not purport to be indicative of the results of operations
which actually would have resulted had the combinations been in effect on
January 1, 1997 or of future results of operations of the consolidated
entity.
On August 26, 1997 CIC purchased 113,743 newly issued shares of The
Physicians Investment Company ("PIC") and Sequoia purchased 40,162 newly
issued shares of PIC. The purchase price was $56.26 per share.
On July 1, 1997, Sequoia purchased all of the outstanding shares of
MacCready & Gutmann Insurance Services Nevada, Inc., a licensed Nevada
insurance agency, for $550,000 in cash and other considerations.
3. DISCONTINUED OPERATIONS
On June 16, 1997, Physicians announced the signing of a definitive
agreement to sell its indirectly wholly-owned life and health insurance
subsidiary, American Physicians Life Insurance Company ("APL") and its
wholly-owned subsidiary, Living Benefit Administrators Agency, Inc. to IFS
Insurance Holdings Corporation. The closing is subject to certain closing
conditions, including regulatory approval which is still pending. The
expected purchase price is approximately $17 million and is expected to be
paid in cash.
Because APL and its subsidiary represent a major segment of the Company's
business, in accordance with Accounting Principles Board Opinion No. 30
"Reporting the Results of Operations--Reporting the Effects of Disposal of
a Segment of a Business", APL's operations for the three and nine months
ended September 30, 1997 have been classified as discontinued operations.
Operating results for the three and nine months ended September 30, 1996
have also been reclassified for comparative purposes to reflect the
discontinued operations. Accordingly, the net assets of APL have been
shown as a single line item in the accompanying balance sheet as "Net
assets of discontinued operations."
The fair value assigned to such net assets at September 30, 1997 of
$16,542,186 was based upon the net book value of APL as of September 30,
1997 as determined on the basis of generally accepted accounting
principles. The primary remaining assets and liabilities of APL as of
September 30, 1997 were investments, cash and cash equivalents, and
accident and health insurance reserves. A small gain is expected to be
realized on the sale.
Following is an unaudited summary of APL's stand alone financial results
for the periods included as discontinued operations in the accompanying
financial statements:
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
------------------- -------------------
1997 1996 1997 1996
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Total revenues $1,261,778 $1,534,033 $4,040,806 $4,356,496
Income before taxes 8,668 150,812 122,944 251,124
Net income 15,056 158,840 108,969 203,922
Net income per share $0.00 $0.01 $0.00 $0.01
</TABLE>
8
<PAGE> 9
On August 21, 1997, GEC announced the signing of a definitive agreement to
sell its Sri Lankan subsidiaries. The closing is expected to occur in
1997. The expected purchase price is approximately $25 million ($US) and
will be paid in cash of $17.3 million and marketable securities of $7.7
million.
Because these subsidiaries represent a major segment of GEC's business, in
accordance with Accounting Principles Board Opinion No. 30 "Reporting the
Results of Operations--Reporting the Effects of Disposal of a Segment of a
Business", these companies' operations for the three and nine months ended
September 30, 1997 have been classified as discontinued operations.
Operating results for the three and nine months ended September 30, 1996
are not shown since there periods were prior to the effective date of
consolidation of GEC and PICO. Accordingly, the net assets of these
companies have been shown as a single line item in the accompanying
balance sheet as of September 30, 1997 along with those of APL as "Net
assets of discontinued operations."
The fair value assigned to such net assets at September 30, 1997 of
$3,596,890 was based upon the net book value of these Sri Lankan companies
as of September 30, 1997 as determined on the basis of generally accepted
accounting principles less cash advances received by GEC from the Sri
Lankan subsidiaries of $16,109,352. A gain of around $3 million is
expected to be realized on the sale. The primary remaining assets and
liabilities of these companies as of September 30, 1997 were cash and cash
equivalents, investments, inventories, capital assets, receivables and
trade payables.
Following is an unaudited summary of these Sri Lankan companies stand
alone financial results for the periods and amounts included as
discontinued operations in the accompanying financial statements:
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
------------------- -------------------
1997 1997
----------- -----------
<S> <C> <C>
Total Revenues $12,449,347 $12,449,347
Income before taxes
and minority interests 2,179,810 2,179,810
Minority interest in (income) of subsidiary (429,455) (429,455)
Net income 296,385 296,385
Net income per share $0.01 $0.01
</TABLE>
4. INVESTMENTS
On July 30, 1997, the Company acquired an additional 6,616,218 common
shares (or approximately 11.6% of the issued and outstanding shares) of
GEC from MacKenzie Financial Corporation at a price of $11.4 million
(U.S.) or $2.38 (CDN) per share. After giving effect to this transaction,
the Company owned 49.9% of GEC.
On August 6, 1997, GEC announced that it had filed its final short form
prospectus in all the provinces of Canada in relation to an offering of
24,160,054 common shares. GEC raised approximately $65.1 million (CDN)
through the offering. The net proceeds of the offering were used to repay
the indebtedness incurred by GEC in connection with its acquisition of an
approximate 75% interest in NLRC and will be used for GEC's ongoing
investment activities and general working capital purposes.
The Company subscribed for 13,586,143 common shares of GEC in connection
with the offering. After giving effect to this offering, beginning August
18, 1997, the Company owns approximately 51.17% of the outstanding shares
of GEC.
Equity securities include certain warrants to purchase the common stock of
a publicly traded company. The estimated fair value of such warrants is
their intrinsic value based on the quoted market price of the underlying
common stock of the investee company.
On July 24, 1997, Physicians exercised 983,150 warrants to purchase that
number of shares of common stock of Resource America, Inc. ("REXI").
Physicians immediately sold these shares upon exercise of the warrants for
a gain of $26,820,938. Physicians also received early payment in full from
REXI of a promissory note due May 25, 2004. REXI paid off the promissory
note in the principal amount of $8,000,000 plus accrued interest.
Physicians made the loan to REXI in May 1994.
9
<PAGE> 10
5. EARNINGS
Primary net income per share is computed by dividing net income by the
weighted average number of common stock and common stock equivalents
outstanding for the period with the average number of common stock
equivalents outstanding calculated using the treasury stock method based
on the average market price of the shares during the period. Fully diluted
net income per share is computed on the same basis, except that, if it
results in a more dilutive impact, the number of common stock equivalents
related to stock options is based on the period-end market value of the
shares instead of the average market value during the period. The weighted
average number of shares outstanding for the three and nine months ended
September 30, 1996 used in the calculation of earnings per share have been
recomputed to give effect to the stock exchange ratio utilized in
connection with the reverse acquisition of Citation Insurance Group
consummated on November 20, 1996 (Note 2).
6. COMMITMENTS AND CONTINGENCIES
The Company is subject to various litigation which 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 Company?s consolidated financial position or results
of operations.
7. RECENT ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board (?FASB?) issued
Statement of Financial Accounting Standards No. 128, Earnings per Share
("SFAS No. 128"). SFAS No. 128 requires dual presentation of newly defined
basic and diluted earnings per share on the face of the income statement
for all entities with complex capital structures. The accounting standard
is effective for fiscal years ending after December 15, 1997, including
interim periods. The Company does not believe that the adoption of SFAS
No. 128 will have a material impact on the computation of its earnings per
share in future periods.
In June 1997, the FASB issued SFAS No. 130, Reporting Comprehensive
Income, SFAS No. 130 establishes requirements for disclosure of
comprehensive income and becomes effective for the Company for the year
ending December 31, 1998. Comprehensive income includes such items as
foreign currency translation adjustments, unrealized holding gains and
losses on available for sale securities, and equity changes of investee
company that are currently being presented by the Company as a component
of stockholders' equity.
In June 1997, the FASB issued SFAS No. 131, Disclosures about Segments of
an Enterprise and Related Information. SFAS No. 131 establishes standards
for disclosure about operating segments in annual statements and selected
information in interim financial reports. It also establishes standards
for related disclosures about products and services, geographic areas and
major customers. This statement supersedes SFAS No. 14, Financial
Reporting for Segments of a Business Enterprise. The new standard becomes
effective for the Company for the year ending December 31, 1998, and
requires that comparative information from earlier years be restated to
conform to the requirements of this standard. The Company does not expect
this pronouncement to materially change the Company's current reporting
and disclosures.
8. SUBSEQUENT EVENTS
On October 7, 1997, the board of directors of PRO declared a dividend to
its sole shareholder, Physicians, payable in November 1997 in the amount
of $5.5 million.
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This section of the Report contains forward-looking statements within
the meaning of Section 21E of the Securities Exchange Act of 1934, as
amended. Discussion containing such forward-looking statements may be
found in Management's Discussion and Analysis of Financial Condition and
Results of Operations under the captions "Background," "Results of
Operations - three and nine months ended September 30, 1997 and 1996,"
"Liquidity and Capital Resources," and "Risk Factors and Uncertainties."
Actual results for future periods could differ materially from those
discussed in this section as a result of the various risks and
uncertainties discussed herein. A comprehensive summary of such risks
and uncertainties can be found in the Company's registration statement
on Form S-4 (File No. 333-06671), which was declared effective on
October 3, 1996.
10
<PAGE> 11
INTRODUCTION
------------
Readers of the Company?s prior financial statements will find that
these financial statements differ greatly from those presented for
periods prior to December 31, 1996. Whereas the Company was
previously engaged predominantly in property and casualty
operations, PICO Holdings, Inc. and subsidiaries ("PICO? or ?the
Company") currently operates primarily as an insurance and
investment company, specializing in portfolio investing, property
and casualty insurance, life and health insurance, and investment
management and other services.
These changes are a result of the November 20, 1996 merger of
Physicians Insurance Company of Ohio and a subsidiary of the
Company, in which Physicians Insurance Company of Ohio was the
surviving corporation (?the Merger?). Upon consummation of the
Merger, the Company which was previously known as Citation Insurance
Group changed its name to PICO Holdings, Inc. For accounting
purposes the Merger was treated as a reverse acquisition with
Physicians Insurance Company of Ohio (?Physicians?) being the
acquiror. As a result, these financial statements reflect prior
years data of Physicians and its subsidiaries and affiliates only.
Citation Insurance Group's prior years' operating results and
account balances prior to the Merger have not been included in these
financial statements. See PICO's Form 10-K as filed with the United
States Securities and Exchange Commission for the fiscal year ended
December 31, 1996, Note 3 to the Consolidated Financial Statements
entitled "Acquisitions" for further information on the accounting
treatment of the reverse acquisition.
BACKGROUND
----------
Prior to July 16, 1995, the effective date of Physicians' and The
Professionals Insurance Company's ("PRO") 100% quota share
reinsurance of their medical professional liability ("MPL")
businesses with Mutual Assurance, Inc. ("Mutual") and the subsequent
sale of the rights to these MPL books of business, effective January
1, 1996, the Physicians Insurance Company of Ohio group of
affiliated companies consisted primarily of two property and
casualty insurance companies writing MPL insurance (Physicians and
PRO) and one life and health insurance company -- American
Physicians Life Insurance Company ("APL"). For various reasons, in
November 1994, the respective boards of directors of Physicians and
PRO determined that it was in the best interests of Physicians and
PRO and their respective shareholders to sell their MPL insurance
businesses. This sale was part of an overall shift in the strategic
direction of Physicians and PRO.
On August 1, 1995, Physicians purchased Sequoia Insurance Company
("Sequoia"), a California property and casualty insurance company
writing light commercial and multiple peril insurance in northern
and central California.
Sequoia does not write MPL insurance.
On September 5, 1995, Physicians purchased 38.2% of the common stock
of Global Equity Corporation ("GEC"), a Canadian company operating
in portfolio investments, agricultural services, and other business
segments.
On November 20, 1996, Physicians and its subsidiaries merged with a
subsidiary of Citation Insurance Group (?CIG?) and CIG changed its
name to PICO Holdings, Inc. This reverse merger brought two more
California property and casualty insurance companies into the
affiliated group: Citation Insurance Company (?CIC?) and Citation
National Insurance Company (?CNIC?), collectively referred to as
?Citation?. This merger also provided a non-insurance holding
company able to engage in portfolio investing and other activities
with fewer restrictions than those imposed upon insurance companies.
On April 23, 1997, PICO and GEC announced the completion of the
purchase of Nevada Land and Resource Company, LLC ("NLRC"), owner of
approximately 1,365,000 acres of deeded land in northern Nevada. GEC
owns 75% of NLRC and PICO owns 25%.
On August 18, 1997, PICO increased its holdings in GEC to
approximately 51.17%. See Notes 2 and 4. As a result of this
majority ownership interest, beginning with August 19, 1997, the
financial statements of GEC and its subsidiaries have been
consolidated with those of PICO with appropriate provisions for
minority interests. The accompanying financial statements reflect
the consolidation of GEC with PICO during the third quarter of 1997.
Prior year amounts have not been shown for GEC because it was not
included in the consolidation prior to the third quarter of 1997.
See Note 8 to these Consolidated Financial Statements for additional
information regarding events affecting PICO subsequent to September
30, 1997.
11
<PAGE> 12
In addition to the operation of PICO's subsidiaries, PICO's
objective is to use its resources and those of its subsidiaries and
affiliates to increase shareholder value through investments in
businesses which PICO believes are undervalued. PICO's acquisition
philosophy is to make selective investments, predominantly in public
companies, for the purpose of enhancing and realizing additional
value by means of appropriate levels of shareholder influence and
control. This could involve the restructuring of the financing or
management of the companies in which PICO invests. It may also
encompass initiating and facilitating mergers and acquisitions
within the relevant industry to achieve constructive
rationalization. This business strategy was adopted in late 1994,
but was not fully implemented until 1996. Therefore, the results of
this business strategy are not fully reflected in the historical
financial statements prior to 1996. There can be no assurance that
sufficient opportunities will be found or that this business
strategy will be successful. Strategy may negatively impact the
business and financial condition and results of operating of the
Company.
RESULTS OF OPERATIONS - THREE AND NINE MONTHS ENDED SEPTEMBER 30,
1997 AND 1996
SUMMARY
-------
Including income from discontinued operations of $838,000, PICO
reported net income of approximately $21.7 million, or $0.65 per
share, for the nine months ended September 30, 1997. This compares
with net income of $2.6 million, or $0.10 per share, for the
comparable 1996 period, including $204,000 from discontinued
operations. For the third quarter of 1997, PICO posted net income of
$17.9 million, or $0.53 per share, including net income from
discontinued operations of $744,000. Net income for the same 1996
period was $1.4 million, or $0.05 per share, including $159,000 from
discontinued operations.
Income for nine months and third quarter of 1997 included a realized
investment gain of approximately $27 million before tax from the
exercise of warrants and subsequent sale of common stock of Resource
America Corporation ("Resource America" or "REXI") on July 25, 1997.
Resource America warrants were acquired in 1994, one of Physician's
earliest investments following its change in strategic direction.
Results for the nine months and third quarter of 1997 also include a
pre-tax $2 million strengthening of MPL loss and LAE reserves and an
approximate $750,000 pre-tax reduction in Physician's and PRO's
personal lines reserves based upon recent actuarial indications. A
$3.5 million before tax reduction in medical professional liability
reserves due to favorable claims experience helped to improve 1996
financial results.
Period-to-period comparisons are somewhat distorted due to the
addition of the Citation group effective November 20, 1996 ("the
Merger") and the consolidation of Global Equity Corporation
effective August 19, 1997, following PICO's increase in GEC common
stock holdings to approximately to 51.17%.
The former Citation Insurance Group of companies added approximately
$1.1 million and $368,000 to consolidated net income during the
first nine months and third quarter of 1997, respectively. Prior
year income per share figures have been adjusted to reflect the
Merger. Prior year amounts reflected in PICO's financial statements
exclude the operating results and financial condition of the former
Citation Insurance Group for periods prior to the Merger.
After elimination of minority interests and intercompany charges,
GEC's impact on overall net income was minimal for both the quarter
and nine months of 1997.
Revenues for the nine months of 1997 were $82 million, up nearly $50
million, or 155%, over the comparable 1996 period. CIC provided
$19.2 million and GEC added $2.6 million of this increase. Realized
investment gains accounting for $30 million of the total $82 million
revenues with premium income accounting for another $40.1 million.
Revenues for the 1997 third quarter were $43.8 million, up $31.6
million over the same 1996 quarter.
Adjusted book value increased to $3.88 per share as of September 30,
1997, up $0.27 per share from $3.61 at December 31, 1996. During the
first nine months of 1997, shareholders' equity increased $6.7
million over the December 31, 1996 level to $116.9 million,
principally as a result of $21.7 million in net income, partially
offset by a $14.2 million decline in unrealized appreciation of
securities, net of tax, and a $2.1 million increase in treasury
stock related to PICO's increased holdings in GEC. The 1997 decline
in unrealized appreciation of investments principally resulted from
the sale of the Resource America stock in the third quarter and
AmVestors stock during the first quarter. The total realized
investment gains on these two sales totaled approximately $19
million, after tax.
12
<PAGE> 13
The first three quarters of 1997 include $170,438 each, or a total
of $511,313 for the nine months, from the amortization of negative
goodwill related to the November 20, 1996 merger between Physicians
and the former Citation Insurance Group. Approximately $6.1 million
of negative goodwill will increase pre-tax revenues by approximately
$620,000 each year through the year 2006.
PICO's operations are organized into four segments: portfolio
investing, property and casualty, medical professional liability
insurance, and other operations. Global Equity's results have been
broken out separately for consistency of presentation and to aid in
analysis. Life and health insurance operations and certain of GEC's
operations are shown as discontinued operations pending satisfaction
of certain closing conditions. See Discontinued Operations.
Revenues and pre-tax income from CONTINUING OPERATIONS, by business
segment, are shown in the following schedules PRIOR TO minority
interests:
PICO HOLDINGS, INC.
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
------------------- -------------------
1997 1996 1997 1996
---- ---- ---- ----
(in millions)
Revenues by Business Segment-Continuing Operations:
---------------------------------------------------
<S> <C> <C> <C> <C>
Portfolio Investing $ 26.6 $ 2.3 $ 30.4 $ 2.6
Global Equity Corporation 2.6 - 2.6 -
Property and Casualty Insurance 13.4 8.2 45.1 19.2
Medical Professional Liability Insurance 1.1 1.5 3.5 8.3
Other 0.1 0.2 0.4 2.1
------ ------ ------ ------
Total Revenues $ 43.8 $ 12.2 $ 82.0 $ 32.2
====== ====== ====== ======
</TABLE>
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
------------------- -------------------
1997 1996 1997 1996
---- ---- ---- ----
(in millions)
Income (Loss) Before Taxes and Minority Interest-Continuing Operations:
-----------------------------------------------------------------------
<S> <C> <C> <C> <C>
Portfolio Investing $ 26.2 $ 2.1 $ 29.0 $ 2.0
Global Equity Corporation (0.9) - (0.9) -
Property and Casualty Insurance 1.2 0.3 4.1 0.2
Medical Professional Liability Insurance (1.6) (0.7) (1.5) 1.3
Other (0.1) (0.2) (0.5) (0.7)
------ ----- ------ -----
Income Before Tax and Minority Interest $ 24.8 $ 1.5 $ 30.2 $ 2.8
====== ===== ====== =====
</TABLE>
PORTFOLIO INVESTING
-------------------
Investment revenues and realized investment gains or losses
generated by Physicians and PRO are first allocated to MPL equal to
the amount of loss reserve discount accretion recorded during the
period. The remainder is shown as portfolio investing revenue. PICO
Holdings, Inc. also contributes to portfolio investing operations
through the investments in its own portfolio.
13
<PAGE> 14
For a number of reasons, including the existence of an experienced
claims department and Physicians' success in managing invested
assets, it was decided that it would be more advantageous for
Physicians to manage the assets remaining at the cessation of
writing MPL business than to sell off or fully reinsure the
reserves. As a result, assets are managed for maximum overall
return, within prudent safety guidelines. Assets are not designated
on an individual security basis as either MPL or portfolio
investing. As a result, Physicians' invested assets produce income
in both MPL and portfolio investing segments.
Portfolio investing revenues for the first nine months of 1997 were
approximately $30.4 million, compared to $2.6 million during the
same 1996 period. This increase was primarily attributable to an
approximate $27 million, pre-tax, realized investment gain from the
exercise of Physicians' warrants to purchase Resource America common
stock on July 25, 1997, and the immediate sale of those shares. A
1994 investment, Resource America was one of the first investments
made after the change in strategic direction of Physicians.
Portfolio investing revenues other than realized investment gains
increased approximately $500,000 over the first nine months of 1996,
principally as a result of reduced claims reserves and less loss
reserve discount accretion.
Portfolio investing revenues for the third quarter were $26.6
million, including the $27 million realized investment gain from the
sale of the Resource America common stock. This compares to $2.3
million in portfolio investing revenues during the third quarter of
1996. Excluding realized investment gains, portfolio investing
revenues were down approximately $500,000 as compared to the third
quarter of 1996.
Portfolio investing revenues are summarized below:
PORTFOLIO INVESTING
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
------------------- -------------------
1997 1996 1997 1996
---- ---- ---- ----
(in millions)
Portfolio Investing Revenues:
-----------------------------
<S> <C> <C> <C> <C>
Realized Investment Gains $ 27.0 $ 2.2 $ 29.8 $ 2.5
Investment Income (Expense) (0.4) 0.1 0.6 0.1
------ ----- ------ -----
Portfolio Investing Revenues $ 26.6 $ 2.3 $ 30.4 $ 2.6
====== ===== ====== =====
</TABLE>
Principally as a result of the sale of the Resource America common
stock, the consolidated investment portfolio at September 30, 1997
was in a net unrealized loss position of approximately $2.4 million,
net of taxes. This compares to net unrealized investment gains at
December 31, 1996 of approximately $11.8 million. Part of this
decline also resulted from the conversion of unrealized investment
gains to realized investment gains during the first quarter of 1997
when Physicians sold its holdings in its AmVestors Financial
Corporation ("AmVestors") common stock for a gain of $1.3 million,
net of tax. Unrealized investment gains, net of taxes, at December
31, 1996 attributable to Resource America and AmVestors were
approximately $9.4 million and $1.2 million, respectively.
Theoretically, the reported unrealized investment gains do not
include all of the appreciation of the consolidated group's
investment in GEC common stock, since GEC is part of the
consolidated group and its balance sheet is consolidated at GAAP
book value. GEC's common stock trades in excess of its book value
per share.
While past results are very encouraging, future results cannot and
should not be predicted based upon past performance alone.
Portfolio investing operations contributed $29.0 million to pre-tax
income during the first nine months of 1997, compared with $2.0
million during the comparable 1996 period. Increased realized
investment gains in the first and third quarters of 1997, as
discussed under the Portfolio Investing Revenues section above,
accounted for nearly all the fluctuation between years.
For the third quarter, pre-tax portfolio investing income amounted
to a $26.2 million, compared to $2.1 million during the 1996 third
quarter. Nearly all of this improvement relates to the sale of the
Resource America common stock, also.
14
<PAGE> 15
The breakdown of pre-tax income from portfolio investing operations
follows:
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
------------------- -------------------
1997 1996 1997 1996
---- ---- ---- ----
(in millions)
Portfolio Investing Pre-Tax Income:
-----------------------------------
<S> <C> <C> <C> <C>
PICO Holdings, Physicians and PRO $ 26.3 $ 1.9 $ 29.0 $ 1.4
Equity in Unconsolidated Subsidiaries (0.1) 0.2 - 0.6
------ ----- ------ -----
Portfolio Investing Pre-Tax Income $ 26.2 $ 2.1 $ 29.0 $ 2.0
====== ===== ====== =====
</TABLE>
GLOBAL EQUITY CORPORATION
-------------------------
Global Equity Corporation is an international investment company
with offices in Toronto, Ontario, Canada and in La Jolla,
California. GEC holds a portfolio of equity securities and
convertible instruments in North American, Asian and European
companies, as well as a number of interests in land holdings and
water rights in the western United States. Physicians initially
acquired approximately 38.2% of GEC on September 5, 1995. PICO
Holdings and its wholly-owned subsidiaries acquired additional
shares of GEC in July and August 1997, bringing the consolidated
group's holdings up to approximately 51.17% as of the end of the
third quarter.
As a result of the increased ownership of GEC, their results have
been consolidated with those of the other members of the PICO
Holdings, Inc. group beginning August 19, 1997. Appropriate
provisions have been made in these financial statements to reflect
the interests of other GEC shareholders, where applicable.
GEC revenues for the third quarter and nine months were as follows:
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
------------------- -------------------
1997 1997
---- ----
(in millions)
Revenues - Global Equity Corporation:
-------------------------------------
<S> <C> <C>
Realized Investment Gains $ - $ -
Investment Income 0.3 0.3
Other 2.3 2.3
----- -----
Global Equity Revenues $ 2.6 $ 2.6
===== =====
</TABLE>
Amounts for the quarter and the nine months are identical since the
1997 third quarter was the first quarter GEC was consolidated with
the PICO group. Most of GEC revenues resulted from operations other
than investment income, most notably operating and other revenues
from Vidler Water Company and Nevada Land and Resource Company, LLC,
two of GEC's subsidiaries having significant holdings in land, water
and mineral rights in the western United States.
15
<PAGE> 16
GEC pre-tax income before exclusion of minority interest is shown
below:
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
------------------- -------------------
1997 1997
---- ----
(in millions)
<S> <C> <C>
Global Equity Loss Before Tax and Minority Interest:
----------------------------------------------------
Global Equity Corporation $ (0.9) $ (0.9)
------- -------
Loss Before Tax & Minority Interest $ (0.9) $ (0.9)
======= =======
</TABLE>
GEC contributed to the consolidated group an approximate $900,000
loss from continuing operations before taxes and before elimination
of minority interests for the nine month period ended September 30,
1997. See Discontinued Operations below regarding GEC's contribution
to income from discontinued operations.
PROPERTY AND CASUALTY INSURANCE
-------------------------------
Sequoia and CIC account for all of the ongoing property and casualty
("P & C") insurance revenues. These companies predominately write
light commercial and multi peril insurance coverage in central and
northern California. CNIC is no longer a part of the group following
the sale of the company on June 30, 1997. Since CIC and CNIC became
part of the group in November 1996, their activities are not
included in PICO's 1996 results prior to that date. Sequoia,
however, has been part of the group since August 1995. Sequoia and
CIC are continually seeking ways to realize savings, synergies and
to combine operations, wherever possible. In evidence of this,
Sequoia and CIC consolidated their home office operations in
Monterey, California in July of 1997. Both companies are in the
process of leasing their former office spaces in Pleasanton and San
Jose, California.
Total P&C revenues for the first nine months of 1997 of $45.1
million surpassed those of the same 1996 period by $25.9 million. Of
this increase, CIC added $19.2 million, while Sequoia's revenues
increased $6.8 million, or 35%. Included in this increase,
investment income rose $3.6 million, nearly $2.9 million of which
was attributable to Citation.
Total P&C revenues for the third quarter of 1997 amounted to $13.4
million compared to $8.2 million a year ago, an increase of $5.2
million. Citation added $4.3 million to the third quarter 1997
revenues. Sequoia's earned premiums increased approximately $800,000
as compared to the prior year period.
PROPERTY AND CASUALTY INSURANCE
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
------------------- -------------------
1997 1996 1997 1996
---- ---- ---- ----
P&C Revenues: (in millions)
-------------
<S> <C> <C> <C> <C>
Earned Premiums-Sequoia $ 8.4 $ 7.6 $ 23.7 $ 17.5
Earned Premiums-Citation 3.2 - 16.1 -
Investment Income 1.5 0.4 4.4 0.8
Realized Investment Gains - - 0.2 0.3
Other 0.3 0.2 0.7 0.6
------ ----- ------ ------
Total P&C Revenues $ 13.4 $ 8.2 $ 45.1 $ 19.2
====== ===== ====== ======
Three Months Nine Months
Ended September 30, Ended September 30,
------------------- -------------------
1997 1996 1997 1996
---- ---- ---- ----
P&C Pre-tax Income: (in millions)
-------------------
<S> <C> <C> <C> <C>
Sequoia Insurance Company $ 1.0 $ 0.3 $ 3.0 $ 0.2
Citation Insurance Company 0.2 - 1.1 -
------ ----- ------ ------
Total P&C Pre-Tax Income $ 1.2 $ 0.3 $ 4.1 $ 0.2
====== ===== ====== ======
</TABLE>
16
<PAGE> 17
P&C pre-tax income for the nine months ended September 30, 1997 of
$4.1 million increased $3.9 million over the first nine months of
1996. Sequoia provided approximately $2.8 million of this growth.
Citation added $1.1 million to the 1997 total.
Third quarter 1997 P&C pre-tax income of $1.2 million represented an
approximate $900,000 increase over the third quarter of 1996.
Sequoia contributed nearly $750,000 to this improvement, principally
as a result of improved claims experience. CIC provided the
remainder.
Sequoia and CIC stress quality of business over quantity. As
policies come up for renewal, they are reviewed carefully by
underwriting management for excessive loss experience and unwanted
risks. New policy writings have been less than expected, largely due
to increased competition, and have not offset renewal policies
canceled or non-renewed. The loss of renewal policies with higher
loss ratios and greater exposures to risk may improve Sequoia's and
CIC's loss ratios in the future. Nevertheless, there can be no
assurance that Sequoia and Citation will be successful in reducing
their policies with higher loss ratios or that their loss ratios
will improve in the future.
Industry ratios as determined on the basis of generally accepted
accounting principles ("GAAP") for Sequoia and Citation are shown
below:
<TABLE>
<CAPTION>
First Nine Months of 1997
-------------------------
Sequoia Citation
---------- -----------
<S> <C> <C>
Loss and LAE Ratio 57.5% 86.0%
Underwriting Expense Ratio 38.7% 28.3%
---------- -----------
Combined Ratio 96.2% 114.3%
========== ===========
</TABLE>
A combined ratio of 100% indicates that insurance operations are
breaking even without the aid of investment income.
Despite Sequoia's increased incidence of reported claims during the
first quarter of 1997 resulting from the impact of heavy California
flooding, the nine months loss and Loss Adjustment Expense ("LAE")
ratio was much improved over the 1996 year end ratio of 62.9%.
Although reported claims were much greater than normal during the
first quarter of 1997, the severity of these claims was much less
than originally anticipated. Sequoia's year-end 1996 combined ratio
was 100.9%.
Citation's loss and LAE ratios are consistently higher than those of
Sequoia, reflective of tighter underwriting standards having been
employed by Sequoia for a longer period of time. Citation's new and
renewal books of business are being subjected to these much tighter
underwriting standards in an effort to improve Citation's loss and
LAE ratios over time. Citation's underwriting expense ratio appears
to be much lower than Sequoia's, but has been reduced by a GAAP
adjustment amortizing a prior deficiency reserve for deferred
acquisition costs from its property and casualty business.
MPL OPERATIONS
--------------
Physicians' and PRO's MPL insurance businesses were sold to Mutual
on August 28, 1995. Except for a few minor policy coverage
extensions and adjustments, for all intents and purposes, Physicians
ceased writing MPL policies effective January 1, 1996. Physicians
continues to administer and adjust the remaining claims and LAE
reserves. Based upon careful analysis of various alternative
scenarios for handling the runoff of the remaining claims reserves,
Physicians determined that the best option was to process the
existing claims internally with existing staff, rather than through
a third party administrator or through an outright sale of the
claims and LAE reserves. In addition, it is expected that
shareholders' equity may be better served by retaining the
investments necessary to fund the payment of these claims and LAE
reserves, managing them along with the rest of the Physicians'
investment holdings, as opposed to selling or fully reinsuring these
reserves and giving up the corresponding funds. However, there can
be no assurance that funds generated by such retained investments
will exceed claims. Accordingly, although Physicians ceased writing
MPL insurance, MPL is treated as a separate business segment of
continuing operations due to the continued management of claims and
associated investments.
17
<PAGE> 18
Revenues and pre-tax income or loss from MPL operations for the
three and nine month periods were as follows:
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
------------------- -------------------
1997 1996 1997 1996
---- ---- ---- ----
(in millions)
MPL Insurance Revenues:
- -----------------------
<S> <C> <C> <C> <C>
Earned Premiums $ - $ 0.1 $ 0.3 $ 4.0
Investment Income, Net of Expenses 1.1 1.4 3.2 4.3
----- ----- ----- -----
Total Mpl Insurance Revenues $ 1.1 $ 1.5 $ 3.5 $ 8.3
===== ===== ===== =====
Three Months Nine Months
Ended September 30, Ended September 30,
------------------- -------------------
1997 1996 1997 1996
---- ---- ---- ----
(in millions)
<S> <C> <C> <C> <C>
MPL Insurance Pre-Tax Income (Loss):
- ------------------------------------
Physicians and PRO $ (1.6) $ (0.7) $ (1.5) $ 1.3
====== ====== ====== =====
</TABLE>
Since the withdrawal of Physicians and PRO from personal automobile
and homeowners lines of business in the late 1980's, MPL has been
these two companies' only sources of significant insurance premiums.
The decline in earned premium from $4.0 million during the first
nine months of 1996 to $300,000 during the first nine months of 1997
resulted from the withdrawal of Physicians and PRO from the MPL line
of business beginning with the 100 percent quota share treaty with
Mutual effective July 16, 1995. MPL premium writings shown for 1997
principally represent adjustments to insurance policies in force
prior to the sale of the MPL insurance business.
The following table shows the decline in Physicians' and PRO's
direct written premiums over the prior five years:
<TABLE>
<CAPTION>
1996 1995 1994 1993 1992
-------------------------------------------------------
(in millions)
<S> <C> <C> <C> <C> <C>
$0.2 $22.6 $28.0 $37.6 $52.6
</TABLE>
The decline in direct written premiums shown above is reflective of
the increasing competitive pressures within Ohio which, among other
factors, led Physicians and PRO to increase premium rates, to be
more selective in underwriting and, ultimately, to withdraw from the
MPL line of business.
MPL premiums continued to be earned during 1996 based upon premiums
written prior to July 16, 1995, the effective date of the 100
percent quota share treaty with Mutual. Very few MPL premiums will
be earned in 1997. Investment income revenues will continue to
accrue to the MPL runoff.
MPL insurance revenues amounted to $3.5 million during the first
nine months of 1997 compared to $8.3 million during the comparable
1996 period. The $3.7 million decline in earned premiums between
years accounted for most of this $4.8 million decline in MPL
insurance revenues. Investment income declined approximately $1.1
million during the same periods principally as a result of the
reduced level of MPL claims and the associated loss reserve discount
accretion being allocated to MPL insurance. For the third quarter,
1997 MPL insurance revenues decreased $400,000 as compared to the
same period in 1996. As was true for the nine months, earned
premiums and investment income both declined compared to the same
quarter in the prior year for similar reasons.
MPL operations produced a pre-tax loss of approximately $1.5 million
for the first nine months of 1997 compared to $1.3 million in income
during the same 1996 period. Results for the 1997 third quarter and
nine months were impacted by a $2 million addition to loss and LAE
reserves. This addition to reserves was based upon an actuarial
analysis as of June 30, 1997 which indicated some unfavorable loss
experience had occurred during the first six months of 1997.
18
<PAGE> 19
Greatly reduced earned premiums, somewhat lower investment income,
and certain non-recurring expense accruals associated with the
runoff of the MPL business were responsible for the remainder of the
decline between years. The first nine months of 1996 also received
the benefit of a pre-tax $3.5 million MPL reserve reduction due to
favorable claim experience.
The third quarter of 1997 produced a pre-tax loss of $1.6 million
from MPL operations, including the addition to reserves of $2
million. This compares to a $700,000 loss reported in the third
quarter of 1996.
Physicians' claims department staff continues to process the runoff
of the remaining MPL loss and loss adjustment expense claims which
is progressing routinely. At September 30, 1997, MPL reserves
totaled $90.4 million, net of reinsurance and discount. This
compares to $112.9 million at December 31, 1996. MPL loss and LAE
reserves continue to decline as a result the disposition of claims.
MPL INSURANCE - LOSS AND LAE RESERVES
<TABLE>
<CAPTION>
As of September 30, As of December 31,
1997 1996
------------ -----------
(in millions)
<S> <C> <C>
Direct Reserves $133.5 $158.4
Ceded Reserves (33.6) (33.3)
Discount of Net Reserves (9.5) (12.2)
------------ -----------
Net MPL Reserves $90.4 $112.9
============ ===========
</TABLE>
OTHER OPERATIONS
----------------
Other operations consist principally of Summit Global Management's
("Summit") investment management operations, the wind down of Raven
Development Company's ("Raven") real estate development projects,
and various other activities as summarized below:
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
------------------- -------------------
1997 1996 1997 1996
---- ---- ---- ----
(in millions)
<S> <C> <C> <C> <C>
Revenues from Other Operations:
- -------------------------------
Investment Management Services $ 0.2 $ 0.2 $ 0.8 $ 0.6
Less: Intercompany Charges (0.1) (0.1) (0.4) (0.4)
Other - 0.1 - 1.9
----- ----- ----- -----
Total Other Operations Revenues $ 0.1 $ 0.2 $ 0.4 $ 2.1
===== ===== ===== =====
Three Months Nine Months
Ended September 30, Ended September 30,
------------------- -------------------
1997 1996 1997 1996
---- ---- ---- ----
(in millions)
<S> <C> <C> <C> <C>
Pre-tax Income (Loss) from Other Operations:
- --------------------------------------------
Investment Management Services $ - $ 0.1 $ 0.2 $ 0.2
Less: Intercompany Charges (0.1) (0.1) (0.4) (0.4)
Other - (0.2) (0.3) (0.5)
Other Operations Pre-tax Loss $ (0.1) $ (0.2) $ (0.5) $ (0.7)
======= ======= ======= =======
</TABLE>
19
<PAGE> 20
Revenues from other operations decreased from $2.1 million during
the first nine months of 1996 to $400,000 during the first nine
months of 1997. Nearly all this decline resulted from the wind down
of real estate operations of PICO's real estate subsidiary, Raven.
Very few lots remain in Raven's real estate inventory as a result of
its withdrawal from the real estate development business. Raven's
real estate activity is now minimal and will generally consist of
selling off the few remaining lots owned.
Investment management revenues and operating income from Summit,
before elimination of intercompany transactions, increased over the
comparable 1996 periods from approximately $600,000 to $800,000.
Summit revenues have increased due to the addition of new clients,
in addition to increased intercompany fees. Summit now has more than
$600 million in assets under management.
Other operations produced a $500,000 pre-tax loss for the nine
months ended September 30, 1997 compared to a pre-tax loss of
$700,000 during the comparable 1996 period. A pre-tax loss of
$100,000 was recognized during the third quarter of 1997 versus a
$200,000 loss during the third quarter of 1996.
Under the category of "Other," Stonebridge Partners AG
("Stonebridge"), a Swiss corporation owned by Physicians whose
business purpose was to broker annuities and other insurance
products within Europe, produced a pre-tax loss of approximately
$350,000 during the first nine months of 1997 compared to a $550,000
loss during the first nine months of 1996. Stonebridge began
operations in late 1995, resulting in significant start-up costs in
1995, which continued into 1996. For various reasons, Stonebridge
was unsuccessful in marketing their brokerage business, as well as
in collecting accounts which they believe are due them from clients.
Management took steps to limit additional downside exposure and to
close Stonebridge's operations. Additional operating losses will
most likely be incurred in 1997 as a result of Stonebridge. CLM
Insurance Agency, a small P&C insurance agency located in Monterey,
California, contributed $60,000 to pre-tax income during the first
nine months of 1996 and was virtually inactive in 1997.
DISCONTINUED OPERATIONS
-----------------------
APL, Physicians' wholly-owned life insurance subsidiary, produced
revenues of $4.0 million and pre-tax income of $123,000 during the
first nine months of 1997. This compares to $4.4 million in revenues
and $251,000 in pre-tax income for the first nine months in 1996.
Third quarter 1997 revenues were $1.3 million compared to third
quarter 1996 revenues of $1.5 million. The 1997 third quarter
resulted in pre-tax income of $9,000 compared to pre-tax income of
$151,000 during the same 1996 period
APL has been concentrating its efforts on its unique critical
illness product "Survivor Key" during the past several years. This
life insurance product combines the benefits of a lump sum cash
payout upon the diagnosis of certain critical illnesses with a death
benefit. Gross written premiums for Survivor Key have increased from
$96,000 in 1994 to $257,000 in 1995, and $547,000 in 1996.
PICO has entered into a binding agreement to sell APL subject to
certain closing conditions. Closing is pending regulatory approval.
See Note 3, "Discontinued Operations," of the accompanying financial
statements for additional information regarding the pending sale of
APL and its subsidiary.
GEC has elected to treat certain of its Sri Lankan operations as
discontinued in recognition of a binding agreement to sell those
operations. These operations produced approximately $739,000 in
income during the first nine months of 1997 on GEC's books, prior to
elimination of minority interests when consolidated with PICO. See
Note 3, "Discontinued Operations."
The net assets of both discontinued operations have been shown as
one line on the balance sheet as net assets of discontinued
operations totaling $20.1 million.
RISK FACTORS AND UNCERTAINTIES
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," the following risk
factors are also inherent in the Company's business operations:
20
<PAGE> 21
CHANGE IN STRATEGIC DIRECTION. In late 1994, Physicians began the
process of changing its strategic direction from the operation of an
MPL insurance business to investing in businesses which PICO
believes are undervalued or will benefit from additional capital,
restructuring of operations or management or improved
competitiveness through operational efficiencies with existing PICO
operations. Accordingly, in January 1995, Physicians reactivated its
investment advisory subsidiary, Summit; in August 1995 Physicians
acquired Sequoia and entered new lines of property and casualty
insurance; in August 1995 Physicians sold its MPL insurance
business; in September 1995 Physicians purchased 38.2% of GEC, a
Canadian corporation active in international investment banking,
agricultural services, water rights, and other businesses; in
November 1996 Physicians acquired control of Citation Insurance
Group (?CIG?) pursuant to the Merger; in April 1997 PICO acquired
25% ownership of Nevada Land and Resource Company which owns
approximately 1,365,000 acres of deeded land in northern Nevada; in
June 1997 PICO sold its workers' compensation business; and in July
and August 1997, PICO increased its ownership in GEC to 51.17%. Due
to the Company's limited experience in the operation of the
businesses of each of these subsidiaries, which currently constitute
a substantial portion of the Company's operations, there can be no
assurance as to the future operating results of the Company or the
recently acquired businesses of the Company.
The Company will continue to make selective investments for the
purpose of enhancing and realizing additional value by means of
appropriate levels of shareholder influence and control. This could
involve the restructuring of the financing or management of the
entities in which the Company invests and initiating and
facilitating mergers and acquisitions. This business strategy has
only recently been implemented, however, and it is not fully
reflected in prior years' financial statements, nor are the
financial statements indicative of possible results of this new
business strategy in the future. Shareholders are relying on the
experience and judgment of the Company's management to locate,
select and develop new acquisition and investment opportunities.
There can be no assurance that sufficient opportunities will be
found or that this business strategy will be successful. Failure to
successfully implement this strategy may negatively impact the
business and financial condition and results of operations of the
Company.
Application of Physicians' new strategy since 1995 has resulted in a
greater concentration of equity investments held by Physicians, and,
consequently, the Company. Market values of equity securities are
subject to changes in the stock market, which may cause the
Company's shareholders' equity to fluctuate from period to period.
At times, the Company may come to hold securities of companies for
which no market exists or which may be subject to restrictions on
resale. As a result, periodically, a portion of the Company's assets
may not be readily marketable.
INTEGRATION OF CERTAIN OPERATIONS. CIG and Physicians completed the
Merger with the expectation that the Merger would result in certain
benefits for the combined company. Achieving the anticipated
benefits of the Merger will depend in part upon whether certain of
the two companies' business operations can be integrated in an
efficient and effective manner. There can be no assurance that this
will occur or that cost savings in operations will be achieved. The
successful combination of the two companies will require, among
other things, integration of the companies' respective product
offerings, medical management of health care claims and management
information systems enhancements. The difficulties of such
integration may be increased by the necessity of coordinating
geographically separated organizations. The integration of certain
operations following the Merger will require the dedication of
management resources which may temporarily distract attention from
the day-to-day business of the combined companies. There can be no
assurance that integration will be accomplished smoothly or
successfully. Failure to effectively accomplish the integration of
the two companies' operations could have an adverse effect on the
Company's results of operations and financial condition following
the Merger.
DEPENDENCE ON KEY PERSONNEL. The Company has several key executive
officers, the loss of whom could have a significant adverse effect
on the Company. In particular, Ronald Langley, PICO's Chairman, and
John R. Hart, PICO's President and Chief Executive Officer, play key
roles in the Company's and GEC's investment decisions. Although
neither officer is party to an employment agreement, they have
entered into consulting agreements with PICO and various of its
subsidiaries. Messrs. Langley and Hart are key to the implementation
of the Company's new strategic focus, and the ability of the Company
to implement its current strategy is dependent on its ability to
retain the services of Messrs. Langley and Hart.
RISKS REGARDING PHYSICIANS; CONTINUING MPL LIABILITY. In August
1995, Physicians sold its and PRO's MPL insurance business and
related liability insurance business. Physicians and PRO retained
all assets and liabilities related to insurance policies written
prior to the sale of the recurring book of business. Physicians and
PRO will continue to administer claims and loss adjustment expenses
under MPL insurance policies issued or renewed prior to July 16,
1995.
21
<PAGE> 22
Cash flow needed to fund the day-to-day operations and the payment
of claims and claims expenses will be provided by investment income,
lease income, and proceeds from the sale or maturity of securities.
Physicians and PRO have established reserves to cover losses and
loss adjustment expense ("LAE") on claims incurred under the MPL
policies issued or renewed to date. The amounts established and to
be established by Physicians and PRO for loss and LAE reserves are
estimates of future costs based on various assumptions and, in
accordance with Ohio law, have been discounted (adjusted to reflect
the time value of money). 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 and PRO annually obtain a
certification that their respective reserves for losses and LAE are
adequate from an independent actuary. Physicians and PRO also obtain
a concurring actuarial opinion. Physicians' and PRO's reserves for
losses and LAE for prior years developed favorably in 1994, and
these reserves were decreased by $12.7 million in 1994. Reserves
also developed favorably in 1995; however, accretion of reserve
discount exceeded the amount of favorable development and
retroactive reinsurance, resulting in a $3.2 million increase in
liabilities for prior years' claims. As a result of continued
favorable claims experience, reserves for prior years' claims were
further reduced in the first and fourth quarters of 1996. However,
based upon actuarial indications from data through June 30, 1997,
Physicians' MPL claims reserves were increased by $2 million during
the third quarter of 1997 due to somewhat deteriorated claims
experience during the first six months of 1997. At the same time,
favorable development of Physicians' and PRO's discontinued personal
lines reserves (automobile, homeowner, etc.) allowed reserve
reductions of $750,000 during the third quarter of 1997. Management
believes that the reserving methods and assumptions are reasonable
and prudent and that Physicians' and PRO's reserves for losses and
LAE are adequate. Due to the inherent uncertainties in the reserving
process there is a risk, however, that Physicians' and PRO's
reserves for losses and LAE could prove to be inadequate which could
result in a decrease in earnings and shareholders' equity. Adverse
reserve development can reduce statutory surplus or otherwise limit
the growth of such surplus
Under Ohio law the statute of limitations is one year after the
cause of action accrues. Also under Ohio law there is a four-year
statutory time bar; however, this has been construed judicially to
be unconstitutional in situations where the plaintiff 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.
LOSS RESERVE EXPERIENCE. The inherent uncertainties in estimating
loss reserves are greater for some insurance products than for
others, and are dependent on the length of the reporting tail
associated with a given product, the diversity of historical
development patterns among various aggregations of claims, the
amount of historical information available during the estimation
process, the degree of impact that changing regulations and legal
precedents may have on open claims, and the consistency of
reinsurance programs over time, among other things. Because MPL and
commercial casualty claims may not be fully paid for several years
or more, estimating reserves for such claims can be more uncertain
than estimating reserves in other lines of insurance. As a result,
precise reserve estimates cannot be made for several years following
a current accident year for which reserves are initially
established.
There can be no assurance that the insurance subsidiaries in the
group have established reserves adequate to meet the ultimate cost
of losses arising from such claims. It has been necessary, and will
over time continue to be necessary, for the insurance companies to
review and make appropriate adjustment to reserves for estimated
ultimate losses, LAE, future policy benefits, claims payables, and
annuity and other policyholder funds. To the extent reserves prove
to be inadequate, the insurance companies would have to adjust their
reserves and incur a charge to earnings, which could have a material
adverse effect on the financial results of the Company.
REINSURANCE RISKS. Prior to the June 30, 1997 sale of CNIC, all of
CNIC's existing insurance risks and claims liabilities, except for
those insuring workers' compensation, were transferred to CIC
through reinsurance treaties in order to effect the sale of CNIC and
the Company's workers' compensation business. As with other P & C
insurers, CIC?s and Sequoia?s 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. CIC and Sequoia generally seek
to reduce their exposure to such events through individual risk
selection and the purchase of reinsurance. CIC?s and Sequoia?s
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 to the insurance companies should such an
event occur. While CIC and Sequoia attempt to limit their exposure
to acceptable levels, it is possible that an actual catastrophic
event or multiple catastrophic events could significantly exceed the
probable maximum loss previously assumed, resulting in a material
adverse effect on the financial condition and results of operations
of the Company.
22
<PAGE> 23
The future financial results of the insurance subsidiaries could be
adversely affected by disputes with their respective reinsurers with
respect to coverage and by the solvency of such reinsurers. None of
the Company?s insurance subsidiaries is aware of actual or potential
disputes with any of their respective reinsurers that could
materially and adversely impact the financial results of the
Company, or is aware of any insolvent reinsurer whose current
obligations to CIC, Physicians, PRO, APL, or Sequoia are material to
such companies.
RISKS REGARDING SUMMIT GLOBAL MANAGEMENT. Summit is registered as an
investment adviser in California, Florida, Kansas, Louisiana,
Oregon, Virginia and Wisconsin, as well as with the Securities and
Exchange Commission (the "SEC"). Summit must file periodic reports
with the SEC and must be available for periodic examination by the
SEC. Summit is subject to Section 206 of the Investment Advisers Act
of 1940, which prohibits material misrepresentations and fraudulent
practices in connection with the rendering of investment advice, and
to the general prohibitions of Section 208 of such Act. If Summit
were to violate the Investment Advisers Act prohibitions, it would
risk criminal prosecution, SEC injunctive actions and the imposition
of sanctions ranging from censure to revocation of registration in
an administrative hearing.
The investment adviser business is highly competitive. There are
several thousand investment advisers registered in the states in
which Summit does business, many of which are larger and have
greater financial resources than Summit. There can be no assurance
that Summit will be able to compete effectively in the markets that
it serves.
GLOBAL DIVERSIFICATION OF INVESTMENTS. As a result of global
diversification, investment decisions already made and which may be
made in the future, particularly with regard to GEC, the Company's
revenues may be adversely affected by economic, political and
governmental conditions in countries where it maintains investments
or operations, such as volatile interest rates or inflation, the
imposition of exchange controls which could restrict the Company's
ability to withdraw funds, political instability and fluctuations in
currency exchange rates.
FLUCTUATIONS IN HISTORICAL OPERATING RESULTS, P & C RESERVES.
Citation?s operating results over the past five years have been
volatile. During the past several years, the levels of the reserves
for CIG?s insurance subsidiaries have been very volatile. As a
result of its claims experience and the level of existing reserves
with respect to its P & C insurance business, Citation has had to
significantly increase these reserves in three of the past five
years.
There can be no assurance that significant increases with respect to
the reserves for the P & C business will not be necessary in the
future, that the level of reserves for CIG?s insurance subsidiaries
will not be volatile in the future, or that any such increases or
volatility will not have an adverse effect on Citation?s operating
results and financial condition.
COMPETITION. There are several hundred P & C insurers licensed in
California, many of which are larger and have greater financial
resources than CIC, and Sequoia; offer more diversified types of
insurance coverage; have greater financial resources and have
greater distribution capabilities than the insurance companies of
the group.
A.M. BEST RATINGS. A.M. Best (?Best?) has recently assigned Sequoia
a rating of B++ (Very Good) and APL has had a Best rating of B+
(Very Good) since 1983. CIC is currently rated B- (Adequate) by
Best. Physicians and PRO are currently rated, and have been for a
number of years, NR-3 (rating procedure inapplicable). Best?s
ratings reflect the assessment of A.M. Best and Company of the
insurer?s financial condition, as well as the expertise and
experience of management. Therefore, Best ratings are important to
policyholders. Best ratings are subject to review and change over
time. Failure to maintain or improve their Best ratings could have a
material adverse effect on the ability of the insurance companies to
write 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 a Best rating of less than B+, and that customers who do so
will demand lower rate structures. There can be no assurance that
any of the insurance companies? ratings will be maintained or
increased.
23
<PAGE> 24
CYCLICAL NATURE OF THE P&C INDUSTRY. The P & C insurance industry
has been highly cyclical, and the industry has been in a cyclical
downturn over the last several years due primarily to premium rate
competition, which has resulted in lower profitability. Premium rate
levels are related to the availability of insurance coverage, which
varies according to the level of surplus in the industry. 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 P & C insurers. The cyclical trends in the
industry and the industry?s profitability can also be affected
significantly by volatile and unpredictable developments, including
natural disasters, fluctuations in interest rates, and other changes
in the investment environment which affect market prices of
insurance companies? investments and the income from those
investments. Inflationary pressures affect the size of losses and
judicial decisions affect insurers? liabilities. The demand for P &
C insurance can also vary significantly, generally rising as the
overall level of economic activity increases and falling as such
activity decreases.
INSURANCE COMPANY CAPITAL AND SURPLUS TESTING. In the past few
years, the NAIC has developed risk-based capital ("RBC")
measurements for both property and casualty and life insurers. The
measures provide the various state regulators with varying levels of
authority based on the adequacy of an insurer's RBC. At December 31,
1996, the PICO, PRO, APL, CIC and Sequoia annual statements reported
more than adequate RBC levels.
LIQUIDITY AND CAPITAL RESOURCES
Cash, cash equivalents, and short-term investments increased by $
54.6 million to $109.5 million at September 30, 1997 from $54.9
million at December 31, 1996. This increase was due to the inclusion
of GEC in the consolidation (approximately $17.2 million) and the
liquidation of securities to provide funds for fourth quarter
investment purchases.
Much of the cash used by operating activities is consumed through
the normal payment of MPL claims. The only significant source of
operating cash inflow for MPL operations is investment income, which
is normally far less than the cash required in the payment of
claims. To fund these operating cash shortfalls, investments have
been liquidated as necessary.
The Company?s insurance subsidiaries attempt to structure the
duration of their invested assets to match the cash flows required
to settle the related unpaid claims liabilities. Their invested
assets should provide adequate liquidity to fund projected claims
and LAE payments for the foreseeable future, based upon current
projections.
To the extent that funds necessary for settling claims and paying
operating expenses are not provided by existing cash and cash
equivalents, investment income, reinsurance recoveries, and rental
and fee income, invested assets will be liquidated. Short term and
fixed maturity investments are managed to mature according to
projected cash flow needs. Equity securities will be converted to
cash as additional funds are required, with an anticipated maximum
liquidation lead time of approximately six months.
Nevertheless, timing and amounts of claims payments can only be
estimated until they actually occur. Actual payouts may differ
substantially from estimates. Although invested assets are managed
to mature or liquidate according to expected payout projections, at
times, in response to abnormal funding demands, some invested assets
may need to be sold at inopportune times during periods of decline
in the stock market or declines in the market values of the
individual securities. Such forced sales should occur infrequently
and only under extreme circumstances; however, this cannot be
guaranteed.
Additional funds of approximately $4.7 million were provided through
the sale of CNIC, including all of the workers' compensation
business of CNIC and CIC. This transaction closed on June 30, 1997.
Significant additional uses of funds during the first nine months of
1997 included:
- The purchase by PICO of a 25% ownership in Nevada Land and
Resource Company at an approximate cost of $12 million. The
transaction closed on April 23, 1997.
- The purchase of a debenture for approximately $25 million from
GEC on April 23, 1997 to help finance GEC's acquisition of a
75% interest in Nevada Land and Resource Company, which was
subsequently repaid.
24
<PAGE> 25
Management hopes to maximize the return of all assets, including
those needed to fund the eventual wrap-up of the MPL reserves
through, among other things, value investing and managing the
invested assets internally rather than liquidating assets to pay a
third party to oversee the runoff of the existing claims. Physicians
also elected to handle the runoff of the MPL claims internally to
continue to maintain a high standard of claims handling and to
maximize shareholder values. While management expects that
Physicians? current and future investments will increase in value,
offsetting some of the decline in assets during the period of runoff
and increasing shareholder value, no guarantees can be given.
As an additional source of funding, PICO's subsidiaries as they grow
and accumulate increasing amounts of retained earnings may be able
to return some of PICO's investment in the form of dividend
distributions; however, this cannot be assured. In December 1996,
Physicians paid a dividend of $13.2 million to PICO. In April 1997,
Physicians paid PICO an additional dividend of $8.6 million. On
October 7, 1997, the board of directors of PRO declared a $5.5
million dividend payable to Physicians in November.
Shareholder dividends payable by PICO or its insurance subsidiaries
are subject to certain limitations imposed by Ohio or California
law, according to the state of domicile. Generally, the limitations
are determined using the greater of the prior year's statutory net
income or 10% of statutory policyholder surplus. Physicians paid a
dividend to PICO in April 1997 of approximately $8.6 million, which
did not require regulatory approval.
In addition to the proceeding, the following events have occurred or
are expected to occur in the near future: o The sale of the
Company's life and health insurance subsidiary, APL, is pending
regulatory approval, which, if received, would provide $17 million
in additional cash inflow.
- On July 25, 1997, the Company announced the exercise of its
Resource America, Inc. warrants and the immediate sale of the
newly acquired Resource America, Inc. common stock for a gain
of approximately $27 million. Resource America also paid off a
promissory note held by PICO in the amount of $8 million plus
accrued interest.
- On July 30, 1997, PICO and its subsidiaries announced that
they had acquired an additional approximate 11.6% ownership in
GEC at a cost of approximately $11.4 million.
- On August 18, 1997, PICO and Physicians acquired through a
public offering 13,586,143 additional shares of GEC at a cost
of $25,270,266, increasing PICO's ownership in GEC to
approximately 51.2%.
Significant transaction affecting GEC's sources and uses of funds
during the first nine months of 1997 included:
- The purchase on April 23, 1997 of an approximate 75% ownership
in Nevada Land and Resource Company at an approximate cost of
$40 million.
- The successful completion of a secondary public offering
raising proceeds of approximately $46 million.
At September 30, 1997, the Company had no significant commitments
for future capital expenditures, other than in the ordinary course
of business. The Company has also committed to maintain Sequoia?s
capital and statutory policyholder surplus level at a minimum of
$7.5 million. The Company has also committed to make every attempt
to maintain Sequoia?s Best rating at or above B++ (Very Good), which
may at some time in the future require additional infusions into
Sequoia by the Company. GEC has a commitment to fund certain of its
subsidiaries amounting to $3.5 million.
25
<PAGE> 26
PART II: OTHER INFORMATION
Item 4: Submission of Matters to a Vote of Security Holders:
The Company held its Annual Meeting of Stockholders on June 5, 1997.
Out of 27,914,703 shares of Common Stock entitled to vote at such
meeting, there were present or by proxy 25,581,549 shares. At the
Annual Meeting, the stockholders of the Company approved the
following matter:
(a) The election of S. Walter Foulkrod, III, Esq., Richard D.
Ruppert, MD, and Dr. Gary H. Weiss as directors of the Company
to serve for three years until the annual meeting of
shareholders in the year 2000 and until their successors are
elected. The vote for the nominated directors was as follows:
S. Walter Foulkrod, III, Esq., 24,564,811 votes cast for and
1,016,738 votes withheld; Richard D. Ruppert, MD, 24,449,326
votes cast for and 1,132,223 votes withheld; Dr. Gary H.
Weiss, 24,454,811 votes cast for and 1,126,738 votes withheld.
The following five directors' terms continue after the meeting:
Robert R. Broadbent, Dr. Marshall J. Burak, John R. Hart, Ronald
Langley, and John D. Weil.
Item 6: Exhibits and Reports on Form 8-K:
(a) Exhibits:
See Exhibit Index.
(b) Reports on Form 8-K:
<TABLE>
<CAPTION>
Form Date Filed Description
--------- ------------------------- ---------------------------------------------------
<S> <C> <C> <C>
8-K June 12, 1997 Coopers & Lybrand, LLP, independent auditors of the
Company, was dismissed by the Company as its principal
accountant, effective June 5, 1997.
8-K/A June 26, 1997 Letter regarding change in Certifying Accountant from
Coopers & Lybrand, LLP, independent auditors.
8-K July 15, 1997 Engaged Deloitte & Touche LLP as the independent
accountant for the Registrant, effective July 8, 1997.
8-K/A September 24, 1997 Changes in Registrant's certifying accountants.
8-K/A2 September 26, 1997 Letters regarding change in Certifying Accountant from
Coopers & Lybrand, LLP, independent accountants and
Deloitte & Touche LLP, independent accountants.
</TABLE>
26
<PAGE> 27
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.
<TABLE>
<CAPTION>
<S> <C>
PICO HOLDINGS, INC.
Dated: November 14, 1997 By: /s/ Gary W. Burchfield
--------------------------------------------------
Gary W. Burchfield
Chief Financial Officer and Treasurer
(Principal Financial and Accounting Officer)
</TABLE>
27
<PAGE> 28
EXHIBITS INDEX
--------------
EXHIBIT NUMBER DESCRIPTION
- -------------- -----------
<TABLE>
<CAPTION>
<S> <C>
+ 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 PC Quote, Inc.
## 2.5 Purchase and Sale Agreement by, between and among Nevada Land and Resource
Company, LLC, GEC, 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 Bylaws of PICO.
++++ 4.2 First Amendment to Rights Agreement dated April 30, 1996.
+++++ 4.3 Second Amendment to Rights Agreement dated November 20, 1996.
-* 10.7 Key Officer Performance Recognition Plan.
* 10.8 Flexible Benefit Plan.
-* 10.9 Amended and Restated 1983 Employee Stock Option Plan.
- -**** 10.10 Salary Reduction Profit Sharing Plan as amended and restated effective January 1,
1994 and Amendments Nos. 1 and 2 thereto dated March 13, 1995 and March 15, 1995,
respectively.
-* 10.11 Employee Stock Ownership Plan and Trust Agreement.
- -*** 10.11.1 Amended Employee Stock Ownership Plan and Trust Agreement.
- -***** 10.11.2 Amendment to Employee Stock Ownership Plan dated October 1, 1992.
- -**** 10.11.3 Amendment to Employee Stock Ownership Plan dated March 15, 1995.
* 10.16 Office Lease between CIC and North Block Partnership dated July, 1990.
*** 10.16.1 Amendments Nos. 1 and 2 to Office Lease between CIC and North Block Partnership
dated January 6, 1992 and February 5, 1992, respectively.
**** 10.16.2 Amendments Nos. 3 and 4 to Office Lease between CIC and North Block Partnership
dated December 6, 1993 and October 4, 1994, respectively.
-* 10.22 1991 Employee Stock Option Plan.
- -***** 10.23 PICO Severance Plan for Certain Executive Officers,
Senior Management and Key Employees of the Company and its
Subsidiaries, including form of agreement.
-# 10.55 Consulting Agreements, effective January 1, 1997,
regarding retention of Ronald Langley and John R. Hart as
consultants by Physicians and GEC.
++ 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,
GPG and GEC.
++ 10.60 Agreement for Purchase and Sale of Certain Assets, dated July 14, 1995 between
Physicians, PRO and Mutual Assurance, Inc.
++ 10.61 Stock Purchase Agreement dated March 7, 1995 between Sydney Reinsurance
Corporation and Physicians.
++ 10.62 Letter Agreement, dated September 5, 1995 between Physicians, Christopher
Ondaatje and the South East Asia Plantation Corporation Limited.
++++ 10.63 Amendment No. 1 to Agreement for Purchase and Sale of Certain Assets, dated
July 30, 1996 between Physicians, PRO and Mutual Assurance, Inc.
+++++ 16.1 Letter regarding change in Certifying Accountant from Deloitte & Touche LLP,
independent auditors.
# 21 Subsidiaries of PICO.
27 Financial Data Schedule.
-------------
* Incorporated by reference to exhibit of same number filed with Registration Statement
on Form S-1 (File No. 33-36383).
*** Incorporated by reference to exhibit of same number filed with 1992 Form 10-K.
**** Incorporated by reference to exhibit of same number filed with 1994 Form 10-K.
***** Incorporated by reference to exhibit bearing the same number filed with
Registration Statement on Form S-4 (File No. 33-64328).
+ Filed as Appendix to the prospectus in Part I of Registration Statement on
Form S-4 (File No. 333-06671).
</TABLE>
28
<PAGE> 29
<TABLE>
<CAPTION>
<S> <C>
++ Incorporated by reference to exhibit filed with Physicians' Registration
Statement No. 33-99352 on Form S-1 filed with the SEC on November 4, 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.
# Incorporated by reference to exhibit of same number filed
with Form 10-K dated April 15, 1997.
## Incorporated by reference to exhibit of same number filed
with Form 10-K/A dated April 30, 1997.
- Executive Compensation Plans and Agreements.
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AND CONSOLIDATED STATEMENTS OF OPERATIONS OF PICO
HOLDINGS, INC. AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1
<CURRENCY> US DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> DEC-30-1997
<PERIOD-END> SEP-30-1997
<EXCHANGE-RATE> 1
<DEBT-HELD-FOR-SALE> 60,700
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 82,985
<MORTGAGE> 0
<REAL-ESTATE> 74,385
<TOTAL-INVEST> 221,547
<CASH> 109,498
<RECOVER-REINSURE> 7,508
<DEFERRED-ACQUISITION> 4,820
<TOTAL-ASSETS> 462,886
<POLICY-LOSSES> 217,063
<UNEARNED-PREMIUMS> 22,775
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 5,695
0
0
<COMMON> 33
<OTHER-SE> 116,881
<TOTAL-LIABILITY-AND-EQUITY> 462,886
40,101
<INVESTMENT-INCOME> 8,509
<INVESTMENT-GAINS> 29,999
<OTHER-INCOME> 3,403
<BENEFITS> 31,494
<UNDERWRITING-AMORTIZATION> 557
<UNDERWRITING-OTHER> 14,652
<INCOME-PRETAX> 30,678
<INCOME-TAX> 9,840
<INCOME-CONTINUING> 20,838
<DISCONTINUED> 838
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 21,676
<EPS-PRIMARY> 0.65
<EPS-DILUTED> 0.64
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
