<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 June 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 32,576,718 as of June 30, 1997. As of such date, 4,572,015 shares of
common stock were held by a subsidiary and an affiliate of the registrant.
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PICO HOLDINGS, INC.
FORM 10-Q
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE NO.
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<S> <C>
PART I: FINANCIAL INFORMATION
Item 1: Financial Statements
Consolidated Balance Sheets as of 3
June 30, 1997 and December 31, 1996
Consolidated Statements of Operations 4
for the Three and Six Months Ended June 30, 1997 and 1996
Consolidated Statements of Cash Flows for 5
the Six Months Ended June 30, 1997 and 1996
Notes to Consolidated Financial Statements 6
Item 2: Management's Discussion and Analysis of Financial 9
Condition and Results of Operations
PART II: OTHER INFORMATION
Item 4: Submission of Matters to a Vote of Security Holders 24
Item 6: Exhibits and Reports on Form 8-K 24
Signature 25
</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>
June 30, December 31,
1997 1996
--------- ------------
(unaudited)
<S> <C> <C>
ASSETS
Investments $ 205,222 $ 219,251
Cash and cash equivalents 49,280 54,917
Investment income receivable 2,392 2,993
Premiums receivable 12,584 14,406
Reinsurance receivables 77,874 94,447
Prepaid deposits and reinsurance premiums 2,271 5,225
Deferred policy acquisition costs 5,001 5,420
Property and equipment, net 5,401 4,717
Deferred income taxes 4,339 5,644
Other assets 7,933 7,588
Net assets of discontinued operations 15,805 15,767
Net assets of acquired business held for sale 7,089
--------- ---------
Total Assets $ 388,102 $ 437,464
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Loss and loss adjustment expense, net of discount $ 228,945 $ 252,024
Unearned premiums 25,961 34,808
Reinsurance balances 5,274 7,120
Deferred gain on retroactive reinsurance 3,283 3,355
Integration liability 884 1,368
Other liabilities 6,589 22,012
Excess of fair value of net assets acquired over purchase price 5,952 6,293
--------- ---------
Total Liabilities 276,888 326,980
--------- ---------
MINORITY INTEREST 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 32,576,718 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 1,940,315) (7,845) (7,845)
Retained earnings 68,042 64,227
Cumulative foreign currency adjustments (357) (27)
Unrealized appreciation on investments 10,892 11,838
Equity changes of investee company (2,626) (986)
--------- ---------
Total Stockholders' Equity 111,214 110,204
--------- ---------
Total Liabilities and Stockholders' Equity $ 388,102 $ 437,464
========= =========
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
3
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PICO HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 1997 AND 1996
(in thousands, except share data)
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
------------------------------ -----------------------------
1997 1996 1997 1996
----------- ----------- ----------- -----------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
REVENUES:
Premium income $ 13,976 $ 7,112 $ 28,478 $ 13,740
Investment income 2,728 1,606 6,102 3,371
Realized gains on investments 111 150 2,945 596
Real Estate sales 27 27 1,496
Commission and other income 339 631 679 860
----------- ----------- ----------- -----------
Total revenues 17,181 9,499 38,231 20,063
----------- ----------- ----------- -----------
EXPENSES:
Loss and loss adjustment expenses 10,019 6,325 21,538 9,097
Policy acquisition costs (141) (516) 377 (1,993)
Cost of real estate sales 21 2 21 1,405
Insurance underwriting and other expenses 4,839 4,866 11,086 10,286
----------- ----------- ----------- -----------
Total expenses 14,738 10,677 33,022 18,795
----------- ----------- ----------- -----------
Equity in earnings of investee 164 140 172 346
----------- ----------- ----------- -----------
Income (loss) from continuing operations
before income taxes 2,607 (1,038) 5,381 1,614
Provision (benefit) for federal and state
income taxes 725 (502) 1,659 387
----------- ----------- ----------- -----------
Net income (loss) from continuing
operations 1,882 (536) 3,722 1,227
Net income (loss) from discontinued
operations net of federal income tax
provision (benefit) of $(24) and $4
for the three months and $20 and
$55 for the six months in 1997 and
1996, respectively (58) (236) 94 (27)
----------- ----------- ----------- -----------
Net income (loss) $ 1,824 $ (772) $ 3,816 $ 1,200
=========== =========== =========== ===========
Net income (loss) per common share
(primary and fully diluted):
Continuing operations $ 0.05 $ (0.02) $ 0.11 $ 0.04
----------- ----------- ----------- -----------
Discontinued operations 0.00 (0.01) 0.00 0.00
----------- ----------- ----------- -----------
Net income (loss) per common share $ 0.05 $ (0.03) $ 0.11 $ 0.04
=========== =========== =========== ===========
Weighted average number of shares outstanding 33,508,820 26,880,052 33,409,655 27,330,054
=========== =========== =========== ===========
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
4
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PICO HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands, unaudited)
<TABLE>
<CAPTION>
Six Months Ended
----------------
June 30, June 30,
1997 1996
--------- ---------
<S> <C> <C>
OPERATING ACTIVITIES
Net cash (used in) operating activities $ (23,757) $ (4,076)
--------- --------
INVESTING ACTIVITIES:
Investments purchased (285,395) (31,387)
Investments sold 118,373 20,098
Investments matured 188,506 5,412
Net sales of real estate 19 1,480
Proceeds from sale of property and equipment 43
Purchases of property and equipment (528) (141)
--------- --------
Net cash (used in) provided by investing activities 20,975 (4,495)
--------- --------
FINANCING ACTIVITIES:
Issuance of common stock 274
Proceeds from sale of business (2,964)
(Purchase) issuance of treasury stock (163) 94
--------- --------
Net cash (used in) provided by financing activities (2,853) 94
--------- --------
Effect of exchange rate changes on cash (1) (2)
--------- --------
NET (DECREASE) IN CASH (5,636) (8,479)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 54,916 27,208
--------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 49,280 $ 18,729
========= ========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for:
Income taxes $ 12,650
=========
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
5
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PICO HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements of
PICO Holdings, Inc. 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 June 30, 1997 and December 31, 1996 and results of
operations and changes in financial position for the three and six months
ended June 30, 1997 and 1996 have been included and are of a normal
recurring nature. Operating results for the three and six months ended
June 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
Report on Form 10-Q for the quarter ended March 31, 1997 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
CIC and CNIC. Upon the consummation of the merger, CIG changed its name to
PICO Holdings, Inc., 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 acquiror (i.e., a reverse acquisition). Therefore,
the statements of operations and cash flows for the three and six month
periods ended June 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 will result in a
reallocation of the purchase price of CIG. Such reallocation is expected
to be immaterial.
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 six months ended June 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 Six Months Ended
June 30, June 30,
1996 1997
------- --------
<S> <C> <C>
Total Revenues $18,379 $37,983
Income before income taxes 4,931 2,422
Net income 8,120 6,232
Net income per share $0.30 $0.23
</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 April 23, 1997, Global Equity Corporation ("GEC") and PICO
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. PICO Holdings, Inc. paid approximately $12 million for
the remaining interest. GEC financed its portion of the acquisition in
part by issuing to PICO a 7% debenture in the principal amount of
approximately $25 million (U.S.). The debenture matures on the earlier of
180 days after the closing of the land acquisition or the closing of any
public offering of common shares of GEC within 180 days. If a public
offering of shares is not completed, the debenture will be convertible
upon maturity into nearly 9.4 million common shares of GEC. If a public
offering of shares is completed, the debenture will be convertible into
the number of shares that will enable PICO to maintain its approximate
38.2% ownership interest in GEC. This offering would carry an exercise
price of $2.59 (CDN) per share. See Note 8.
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 and is expected to occur during
the third quarter of 1997. The expected purchase price is approximately
$17 million and is expected to be paid in cash.
7
<PAGE> 8
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 six months
ended June 30, 1997 have been classified as discontinued operations.
Operating results for the three and six months ended June 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 June 30, 1997 of $15,804,818
was based upon the net book value of APL as of June 30, 1997 as determined
on the basis of generally accepted accounting principles. The primary
remaining assets and liabilities of APL as of June 30, 1997 were
investments, cash and cash equivalents, and accident and health insurance
reserves.
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 Six Months
Ended June 30, Ended June 30,
-------------- --------------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Total revenues $1,204,071 $1,130,938 $2,779,028 $2,822,463
Income (loss) before taxes (122,056) (231,955) 41,713 27,987
Net income (loss) (98,000) (236,507) 21,350 (27,243)
Net income (loss) per share $ 0.00 $ (0.01) $ 0.00 $ 0.00
</TABLE>
4. INVESTMENTS
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. The estimated fair value and cost of
such warrants were $20,916,235 and $240,000, respectively, as of June 30,
1997, and $14,530,957 and $240,000, respectively, as of December 31, 1996.
On July 24, 1997, Physicians executed the warrants to purchase common
stock and immediately sold those shares and recognized a gain of
$26,820,938. (See Note 8)
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 six months ended
June 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.
8
<PAGE> 9
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 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,
PICO owns 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 anticipates raising approximately $62.6
million (CDN) through the offering. The net proceeds of the offering will
be used to repay indebtedness incurred by GEC in connection with its
acquisition of an approximate 75% interest in NLRC and for GEC's ongoing
investment activities and general working capital purposes. The Company
has agreed to subscribe for 13,586,143 common shares of GEC in connection
with the offering. After giving effect to this offering, the Company will
own approximately 51.79% of the outstanding shares of GEC. The acquisition
of these additional shares by the Company is expected to take place in
mid- to late August this year.
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 approximately $27,000,000 (Note 4). Physicians has 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.
On August 11, 1997, the Internal Revenue Service concluded its examination
of the Company's 1993 through 1995 federal income tax returns. Adjustments
to the Company's tax returns for prior periods principally represent
timing differences and as such did not have a material impact on current
year financial statements.
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 Six months ended
June 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.
9
<PAGE> 10
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")'s 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 land in northern Nevada. GEC owns
75% of NLRC and PICO owns 25%.
See Note 8 to these Consolidated Financial Statements for additional
information regarding events affecting PICO subsequent to June 30,
1997.
10
<PAGE> 11
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. Failure to successfully implement this
strategy may negatively impact the business and financial condition
and results of operations of the Company.
RESULTS OF OPERATIONS - THREE AND SIX MONTHS ENDED JUNE 30, 1997 AND
1996
SUMMARY
PICO reported net income of approximately $1.8 million or $0.05 per
share for the three months ended June 30, 1997, compared with a net
loss of approximately $772,000, or a loss of $0.03 per share during
the second quarter of 1996. For the first six months of 1997, net
income was $3.8 million, or $0.11 per share, versus net income of
approximately $1.2 million, or $0.04 per share, during the first six
months of 1996. Period-to-period comparisons are somewhat distorted
due to the additions of the Citation group effective November 20,
1996 ("the Merger"). The former Citation Insurance Group of
companies added approximately $0.4 million and $0.7 million to
consolidated net income during the second quarter and first six
months of 1997, respectively. Prior year 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.
Adjusted book value per share increased to $3.63 as of June 30,
1997, up $0.02 from $3.61 at December 31, 1996. During the first six
months of 1997, shareholders' equity increased $1.0 million over the
December 31, 1996 level to $111.2 million, principally as a result
of $3.8 million in net income, partially offset by a $900,000
decline in unrealized appreciation of securities, net of tax, mostly
due to the realization of investment gains during the first quarter
of 1997. Shareholders' equity was further reduced by approximately
$1.6 million due to a reduction in PICO's equity in GEC, much of
which arose from a non-recurring adjustment to the method used by
PICO to calculate its equity in GEC. This adjustment was recorded
during the second quarter. Shareholders' equity declined less than
$600,000 during the second quarter of 1997, having been negatively
impacted by these same factors.
Net realized investment gains accounted for more than $2.9 million
of pre-tax income during the first six months of 1997, $111,000 of
which was incurred during the second calendar quarter. In
comparison, $596,000 and $150,000 of investment gains were realized
during the first six months and second quarter of 1996,
respectively.
A pre-tax $3.5 million reduction in medical professional liability
reserves due to favorable claims experience helped to improve 1996
financial results. Routine actuarial claims reserve studies are
currently underway to provide a preliminary indication of the
adequacy of current reserve levels.
Second quarter 1997 results include $155,000 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. Life and health insurance
operations are shown as discontinued operations pending closing of
the sale of the Company's wholly-owned subsidiary, American
Physicians Life Insurance Company.
11
<PAGE> 12
Revenues and pre-tax income by segment are shown in the following
schedules:
<TABLE>
<CAPTION>
Three Months Six Months
Ended March 31, Ended June 30,
--------------- --------------
1997 1996 1997 1996
---- ---- ---- ----
(in millions)
<S> <C> <C> <C> <C>
Revenues by Business Segment:
Portfolio Investing $ 0.6 $ 0.2 $ 3.8 $ 0.7
Property and Casualty Insurance 15.1 6.4 31.7 11.0
Medical Professional Liability Insurance 1.4 2.6 2.4 6.4
Other 0.1 0.3 0.3 1.9
----- ----- ----- -----
Total Revenues $17.2 $ 9.5 $38.2 $20.0
===== ===== ===== =====
</TABLE>
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30, Ended June 30,
-------------- --------------
1997 1996 1997 1996
---- ---- ---- ----
(in millions)
<S> <C> <C> <C> <C>
Pre-Tax Income (Loss) by Business Segment:
Portfolio Investing $ -- $(0.4) $ 2.8 $(0.4)
Property and Casualty Insurance 2.0 0.1 2.9 (0.1)
Medical Professional Liability Insurance 0.9 (0.7) 0.2 2.3
Other (0.3) (0.1) (0.5) (0.2)
----- ----- ----- -----
Total Pre-Tax Income (Loss) $ 2.6 $(1.1) $ 5.4 $ 1.6
===== ===== ===== =====
</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.
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.
Second quarter portfolio investing revenues were approximately
$600,000, an increase of nearly $400,000 over the second quarter of
1996. This increase was primarily attributable to a $384,000
decrease in loss reserve discount accretion from the higher second
quarter 1996 amount. For the first six months of 1997, portfolio
investing revenues were $3.8 million, up $3.1 million over the same
1996 period. A $2.4 million increase in realized investment gains in
1997 accounted for most of the increase in revenues for the first
six months, accompanied by $700,000 increase in investment income
principally resulting from a $767,000 decrease in loss reserve
discount accretion. Loss reserve discount accretion will continue to
decline as the level of MPL claims diminishes.
12
<PAGE> 13
Portfolio investing revenues are summarized below:
PORTFOLIO INVESTING
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30, Ended June 30,
-------------- --------------
1997 1996 1997 1996
---- ---- ---- ----
(in millions)
<S> <C> <C> <C> <C>
Portfolio Investing Revenues:
Realized Investment Gains $0.1 $0.1 $2.7 $0.3
Investment Income 0.5 0.1 1.1 0.4
---- ---- ---- ----
Portfolio Investing Revenues $0.6 $0.2 $3.8 $0.7
==== ==== ==== ====
</TABLE>
Net unrealized investment gains at June 30, 1997 amounted to $10.9
million, net of taxes, down $946,000 from the December 31, 1996
level. Part of this decline resulted from the conversion of
unrealized investment gains to realized investment gains during the
first quarter as a result of the sale of Physicians' holdings in its
AmVestors Financial Corporation ("AmVestors") common stock at a gain
of $1.3 million, net of tax. Unrealized investment gains, net of
taxes, attributable to AmVestors at December 31, 1996 were $1.2
million. Unrealized investment gains decreased approximately
$600,000 during the second quarter of 1997, net of taxes.
The reported unrealized investment gains do not include all of the
appreciation of Physicians' investment in GEC common stock, since
GEC is recorded on Physicians' books at GEC's equity value which,
per share, is less than the fair market value of the GEC stock.
Management believes its new strategic focus is succeeding as well as
or better than expected. Nevertheless, while past results are very
encouraging, future results cannot and should not be predicted based
upon past performance alone.
Portfolio investing operations contributed $2.8 million to pre-tax
income during the first six months of 1997, compared to a $400,000
loss during the comparable 1996 period. Increased realized
investment gains in the first quarter of 1997 accounted for nearly
all the fluctuation between years. For the second quarter, pre-tax
portfolio investing income amounted to a break-even, compared to a
$400,000 loss during the 1996 second quarter. Nearly all of this
improvement was due to the reduced level of loss reserve discount
accretion discussed above.
The breakdown of pre-tax income from portfolio investing operations
follows:
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30, Ended June 30,
-------------- --------------
1997 1996 1997 1996
---- ---- ---- ----
(in millions
<S> <C> <C> <C> <C>
Portfolio Investing Pre-Tax Income:
PICO Holdings, Physicians and PRO $(0.2) $(0.7) $2.6 $(1.0)
Equity in Unconsolidated Subsidiaries 0.2 0.1 0.2 0.3
Other -- 0.2 -- 0.3
----- ----- ---- -----
Portfolio Investing Pre-Tax
Income (Loss) $ -- $(0.4) $2.8 $(0.4)
===== ===== ==== =====
</TABLE>
Equity in unconsolidated subsidiaries represents Physicians' share
of GEC's operating income, in addition to that of the recently
acquired 25 percent interest in Nevada Land and Resource Company.
13
<PAGE> 14
PROPERTY AND CASUALTY INSURANCE
Sequoia, CIC and CNIC currently 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 will no longer be
a part of the group after June 30, 1997 following the sale of the
company. Since CIC and CNIC became part of the group in November
1996, their activities are not included in PICO's 1996 results.
Sequoia, however, has been part of the group since August 1995.
Total P&C revenues for the first half of 1997 of $31.7 million
surpasses those of the same 1996 period by $20.7 million. Of this
$20.7 million increase, CIC and CNIC added $12.9 million,
accompanied by a $5.4 million increase in Sequoia's earned premiums.
Investment income rose $2.5 million during the same period, nearly
$2.0 million of which was attributable to Citation.
PROPERTY AND CASUALTY INSURANCE
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30, Ended June 30,
-------------- --------------
1997 1996 1997 1996
---- ---- ---- ----
(in millions)
<S> <C> <C> <C> <C>
P&C Revenues:
Earned Premiums-Sequoia $ 8.0 $ 5.8 $15.3 $ 9.9
Earned Premiums-Citation 5.7 -- 12.9 --
Investment Income 1.2 0.2 2.9 0.4
Realized Investment Gains -- 0.1 0.2 0.3
Other 0.2 0.3 0.4 0.4
----- ----- ----- -----
Total P&C Revenues $15.1 $ 6.4 $31.7 $11.0
===== ===== ===== =====
</TABLE>
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30, Ended June 30,
-------------- --------------
1997 1996 1997 1996
---- ---- ---- ----
(in millions)
<S> <C> <C> <C> <C>
P&C Pre-tax Income (Loss):
Sequoia Insurance Company $1.5 $0.1 $2.0 $(0.1)
Citation Insurance Company 0.5 -- 0.9 --
---- ---- ---- -----
Total P&C Pre-Tax Income (Loss) $2.0 $0.1 $2.9 $(0.1)
==== ==== ==== =====
</TABLE>
P&C pre-tax income expanded by $3.0 million during the first six
months of 1997 as compared to the first six months of 1996. Sequoia
provided approximately $2.1 million of this growth over the previous
period, while Citation added $900,000 to the 1997 total. During the
second quarter of 1997, P&C revenues of $15.1 million represented an
$8.7 million increase over the same 1996 quarter. CIC and CNIC
provided $5.7 million of this increase, with Sequoia adding an
additional improvement of $2.2 million. Investment income increased
nearly $1.0 million as compared to the second quarter of 1996,
principally as a result of the addition of CIC and CNIC.
Although Sequoia's earned premiums increased $5.4 million during the
first half of 1997, direct written premiums actually declined. The
reduction in direct premium writings reflect the increased
underwriting selectivity of Sequoia's new management team. Sequoia
stresses 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 loss ratios in the future.
Nevertheless, there can be no assurance that Sequoia will be
successful in reducing its policies with higher loss ratios or that
its loss ratios will improve in the future.
14
<PAGE> 15
Property and casualty insurance operations produced pre-tax income
of $2.9 million during the first six months of 1997 as compared to a
loss of $100,000 during the first half of 1996. Of this $3.0 million
increase, $2.1 million was attributable to Sequoia and $900,000 to
Citation.
Industry ratios as determined on the basis of generally accepted
accounting principles ("GAAP") for Sequoia and Citation are shown
below:
<TABLE>
<CAPTION>
First Half of 1997
------------------
Sequoia Citation
------- --------
<S> <C> <C>
Loss and LAE Ratio 58.9% 83.8%
Underwriting Expense Ratio 37.9% 26.0%
---- -----
Combined Ratio 96.8% 109.8%
==== =====
</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 six 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 the tighter underwriting standards employed
by Sequoia. 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.
15
<PAGE> 16
Revenues from MPL operations included the following:
MEDICAL PROFESSIONAL LIABILITY INSURANCE
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30, Ended June 30,
-------------- --------------
1997 1996 1997 1996
---- ---- ---- ----
(in millions)
<S> <C> <C> <C> <C>
MPL Insurance Revenues:
Earned Premiums $0.3 $1.3 $0.3 $3.9
Investment Income, Net of Expenses 1.1 1.3 2.1 2.5
---- ---- ---- ----
Total MPL Insurance Revenues $1.4 $2.6 $2.4 $6.4
==== ==== ==== ====
</TABLE>
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30, Ended June 30,
-------------- --------------
1997 1996 1997 1996
---- ---- ---- ----
(in millions)
<S> <C> <C> <C> <C>
MPL Insurance Pre-Tax Income (Loss):
Physicians and PRO $0.9 $(0.7) $0.2 $2.3
==== ===== ==== ====
</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 $3.9 million during the first
half of 1996 to $300,000 during the first half of 1997 is a result
of the withdrawal from the MPL line of business beginning with the
100 percent quota share treaty with Mutual effective July 16, 1995.
The following table shows the decline in Physicians' and PRO's
direct written premiums over the past five years:
<TABLE>
<CAPTION>
1996 1995 1994 1993 1992
========================================================
(in millions)
<S> <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 $2.4 million during the first
half of 1997 compared to $6.4 million during the comparable 1996
period. A decline in earned premiums between the two periods of $3.6
million accounted for most of this $4.0 million decline in MPL
insurance revenues. Investment income declined approximately
$400,000 during the same periods as a result of the reduced level of
MPL claims and the associated loss reserve discount accretion being
allocated to MPL insurance. For the second quarter, 1997 MPL
insurance revenues decreased $1.2 million as compared to the same
period in 1996. As was true for the six months, earned premiums and
investment income both declined compared to the same quarter in the
prior year for the same reasons.
16
<PAGE> 17
MPL operations produced pre-tax income of approximately $200,000
during the first half of 1997 compared to $2.3 million during the
same 1996 period. 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
this decline between years. The first half of 1996 also received the
benefit of a pre-tax $3.5 million MPL reserve reduction due to
favorable claim experience. No reserve adjustments have thus far
been made for 1997, although routine actuarial reserve reviews are
underway.
For the second quarter, 1997 results improved $1.6 million over
those of the second quarter of 1996 producing pre-tax income of
approximately $900,000 in the 1997 second quarter. Second quarter
1996 results were depressed by some unusual adjustment to claims
and premiums, accompanied by a number of non-recurring expenses.
Physicians' claims department staff continues to process the runoff
of the remaining MPL loss and loss adjustment expense claims which
is progressing routinely. At June 30, 1997, MPL reserves totaled
$100.8 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 June 30, As of December 31,
1997 1996
-------------- ------------------
(in millions)
<S> <C> <C>
Direct Reserves $144.8 $151.2
Ceded Reserves (33.6) (33.3)
Discount of Net Reserves (10.4) (12.2)
------ ------
Net MPL Reserves $100.8 $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:
OTHER OPERATIONS
<TABLE>
Three Months Six Months
Ended June 30, Ended June 30,
-------------- --------------
1997 1996 1997 1996
---- ---- ---- ----
(in millions)
<S> <C> <C> <C> <C>
Revenues from Other Operations:
Real Estate Development 0.1 -- 0.1 1.5
Investment Management Services 0.3 0.2 0.6 0.4
Less: Intercompany Charges (0.3) (0.1) (0.4) (0.2)
Other -- 0.2 -- 0.2
---- ---- ---- ----
Total Other Operations Revenues $0.1 $0.3 $0.3 $1.9
==== ==== ==== ====
</TABLE>
17
<PAGE> 18
<TABLE>
<CAPTION>
Three Months Six Months
------------ ----------
Ended June 30, Ended June 30,
1997 1996 1997 1996
---- ---- ---- ----
(in millions)
<S> <C> <C> <C> <C>
Pre-Tax Income from Other Operations:
Real Estate Development -- -- -- --
Investment Management Services $ 0.1 $ -- $ 0.2 $ 0.1
Less: Intercompany Charges (0.3) (0.1) (0.3) (0.2)
Other (0.1) -- (0.4) (0.1)
----- ----- ----- -----
Other Operations Pre-Tax (Loss) $(0.3) $(0.1) $(0.5) $(0.2)
===== ===== ===== =====
</TABLE>
Revenues from other operations decreased from $1.9 million during
the first half of 1996 to $300,000 during the first six months of
1997. Nearly all of this decline resulted from a sharp downturn in
real estate sales 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. Summit revenues have increased due to
additional clients and competitive portfolio management fees
charged to the insurance companies.
Other operations produced a $500,000 pre-tax loss for the six months
ended June 30, 1997 compared to a pre-tax loss of $200,000 during
the comparable 1996 period. A pre-tax loss of $300,000 was
recognized during the second quarter of 1997 versus a $100,000 loss
during the second quarter of 1996.
Under the category of "Other," Stonebridge Partners AG
("Stonebridge"), a Swiss corporation owned by Physicians which
brokered annuities and other insurance products within Europe,
produced a pre-tax loss of approximately $371,000 during the first
six months of 1997 compared to a $204,000 loss during the first half
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 contributed $89,000 to
pre-tax income during the second quarter and first half of 1996 and
was relatively inactive in 1997.
DISCONTINUED OPERATIONS--LIFE AND HEALTH INSURANCE
APL, Physicians' wholly-owned life insurance subsidiary, produced
revenues of $2.8 million and pre-tax income of $114,000 during the
first six months of 1997. This compares to $2.8 million in revenues
and $28,000 in income for the first six months in 1996. Pre-tax
income excludes charges for investment management services provided
by Summit which have been eliminated on a consolidated basis. These
charges amounted to approximately $73,000 for the first six months
of both 1997 and 1996.
Second quarter 1997 revenues were $1.2 million compared to second
quarter 1996 revenues of $1.1 million. The 1997 second quarter
resulted in a pre-tax loss of $82,000 compared to a pre-tax loss of
$232,000 during the same 1996 period, after eliminating intercompany
charges for investment management services provided by Summit. These
charges were approximately $20,000 and $33,000 for the second
quarters of 1997 and 1996, respectively. 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 expected to take place during
the third quarter of this year. See note 3, "Discontinued
Operations," of the accompanying financial statements for additional
information regarding the pending sale of APL and its subsidiary.
18
<PAGE> 19
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:
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 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; and in June 1997 PICO sold
its workers' compensation business. 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.
19
<PAGE> 20
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.
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. 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.
20
<PAGE> 21
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.
21
<PAGE> 22
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. The State of
Ohio enacted the NAIC's RBC rules effective March 3, 1996. However,
disclosure of each company's RBC adequacy was required to be
reported in their statutory annual statements filed with the various
departments of insurance for 1994 and 1995. At December 31, 1996,
the PICO, PRO, APL, and Sequoia annual statements reported more than
adequate RBC levels.
LIQUIDITY AND CAPITAL RESOURCES
Cash, cash equivalents, and short-term investments decreased by $5.6
million to $49.3 million at June 30, 1997 from $54.9 million at
December 31, 1996. This decrease was not due to any one identifiable
event, but rather to a number of events, including the normal
operating activities of the companies. Net cash used in operating
activities and financing activities exceeded funds provided by
investing activities.
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 half 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.
22
<PAGE> 23
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.
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:
- The sale of the Company's life and health insurance
subsidiary, APL, is expected to close in the third quarter,
providing $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.
- Only 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
At June 30, 1997, the Company had no significant commitments for
future capital expenditures, other than in the ordinary course of
business and to provide certain funding for Stonebridge, which has
subsequently been limited. 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.
23
<PAGE> 24
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>
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.
</TABLE>
24
<PAGE> 25
PICO HOLDINGS, INC. AND SUBSIDIARIES
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PICO HOLDINGS, INC.
Dated: August 14, 1997 By: /s/ Gary W. Burchfield
-------------------------
Gary W. Burchfield
Chief Financial Officer and Treasurer
(Principal Financial and Accounting
Officer)
25
<PAGE> 26
EXHIBITS INDEX
EXHIBIT NUMBER DESCRIPTION
+ 2.2 Agreement and Plan of Reorganization, dated as of May 1,
1996 among PICO, Citation Holdings, Inc., and Physicians
and amendment thereto dated August 14, 1996 and related
Merger Agreement.
+++++ 2.3 Second Amendment to Agreement and Plan of Reorganization
dated November 12, 1996.
# 2.4 Agreement and Debenture, dated November 14, 1996 and
November 27, 1996, respectively, by and between Physicians
and 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).
26
<PAGE> 27
++ 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.
27
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
THIS 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>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> JUN-30-1997
<DEBT-HELD-FOR-SALE> 92,098
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 85,665
<MORTGAGE> 0
<REAL-ESTATE> 1,480
<TOTAL-INVEST> 205,222
<CASH> 49,280
<RECOVER-REINSURE> 7,207
<DEFERRED-ACQUISITION> 5,001
<TOTAL-ASSETS> 388,102
<POLICY-LOSSES> 228,945
<UNEARNED-PREMIUMS> 25,961
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 0
0
0
<COMMON> 32
<OTHER-SE> 111,214
<TOTAL-LIABILITY-AND-EQUITY> 388,102
28,478
<INVESTMENT-INCOME> 6,102
<INVESTMENT-GAINS> 2,945
<OTHER-INCOME> 705
<BENEFITS> 21,538
<UNDERWRITING-AMORTIZATION> 377
<UNDERWRITING-OTHER> 9,222
<INCOME-PRETAX> 5,380
<INCOME-TAX> 1,659
<INCOME-CONTINUING> 3,722
<DISCONTINUED> 94
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,816
<EPS-PRIMARY> 0.11
<EPS-DILUTED> 0.11
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
