<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, 2000
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from __________ to _________
Commission File Number: 0-18786
PICO HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
CALIFORNIA 94-2723335
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
875 PROSPECT STREET, SUITE 301
LA JOLLA, CALIFORNIA 92037
(858) 456-6022
(Address and telephone number of principal executive offices)
Indicate by check mark whether registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
--- ---
The number of shares outstanding of the Registrant's Common Stock, $0.001 par
value, was 12,390,096 as of June 30, 2000, excluding 4,394,127 shares of common
stock were held by the registrant and subsidiaries of the registrant.
1
<PAGE> 2
PICO HOLDINGS, INC.
FORM 10-Q
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE NO.
--------
<S> <C> <C> <C>
PART I: FINANCIAL INFORMATION
Item 1: Financial Statements
Consolidated Balance Sheets as of 3
June 30, 2000 and December 31, 1999
Consolidated Statements of Operations for the Three 4
and Six Months Ended June 30, 2000 and 1999
Consolidated Statements of Cash Flows for 5
the Six Months Ended June 30, 2000 and 1999
Notes to Consolidated Financial Statements 6
Item 2: Management's Discussion and Analysis of Financial 9
Condition and the Results of Operations
Item 3: Quantitative and Qualitative Disclosure About Market Risk 28
PART II: OTHER INFORMATION
Item 4: Submission of Matters to a Vote of Security Holders 29
Item 6: Exhibits and Reports on Form 8-K 29
Signature 30
</TABLE>
2
<PAGE> 3
PART I: FINANCIAL INFORMATION
ITEM I: FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PICO HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
June 30, December 31,
2000 1999
-------------- -------------
<S> <C> <C>
ASSETS
Investments $ 141,651,277 $ 134,269,177
Cash and cash equivalents 62,083,422 36,738,373
Accrued investment income 1,562,334 1,236,919
Premiums and other receivables, net 11,480,713 12,030,709
Reinsurance receivables 39,017,496 45,040,368
Prepaid deposits and reinsurance premiums 1,307,442
Deferred policy acquisition costs 5,071,258 4,821,228
Land, mineral and water rights and water storage 125,223,672 123,671,842
Property and equipment, net 1,594,018 1,752,820
Income taxes receivable 4,615,491 3,648,577
Net deferred income taxes 5,413,736 3,087,859
Other assets 10,679,538 8,048,698
------------- -------------
Total assets $ 408,392,955 $ 375,654,012
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Unpaid losses and loss adjustment expenses, net of discount $ 131,655,953 $ 139,132,875
Unearned premiums 19,218,485 17,204,690
Reinsurance balance payable 8,115,758 7,712,602
Deferred gain on retroactive reinsurance 1,236,525 1,236,525
Other liabilities 16,936,658 16,879,994
Bank and other borrowings 15,698,733 15,704,507
Taxes Payable 2,009,723 4,867,028
Excess of fair value of net assets acquired over purchase price 3,644,573 3,928,566
------------- -------------
Total liabilities 198,516,408 206,666,787
------------- -------------
Commitments and Contingencies (Note 4)
Preferred stock, $.01 par value, authorized 2,000,000 shares, none issued
Common stock, $.001 par value; authorized 100,000,000 shares,
issued 16,784,223 in 2000 and 13,448,533 in 1999 16,784 13,449
Additional paid-in capital 235,839,422 186,004,827
Retained earnings 62,345,327 66,718,780
Accumulated other comprehensive loss (10,495,351) (5,920,196)
Treasury stock, at cost (4,394,127 common shares in 2000 and 1999) (77,829,635) (77,829,635)
------------- -------------
Total shareholders' equity 209,876,547 168,987,225
------------- -------------
Total liabilities and shareholders' equity $ 408,392,955 $ 375,654,012
============= =============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
3
<PAGE> 4
<TABLE>
<CAPTION>
PICO HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended June 30, Six Months Ended June 30,
2000 1999 2000 1999
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Revenues:
Premium income $ 7,677,533 $ 8,526,934 $ 15,191,689 $ 17,081,908
Net investment income 2,621,498 1,258,276 4,123,780 3,172,630
Net realized gain (loss) on investments (441,221) 3,115,975 (500,350) 2,771,580
Other income 1,792,526 1,626,887 2,930,700 2,011,890
-------------- -------------- -------------- --------------
Total revenues 11,650,336 14,528,072 21,745,819 25,038,008
-------------- -------------- -------------- --------------
Expenses:
Loss and loss adjustment expenses 5,408,515 5,575,576 11,890,700 12,091,602
Insurance underwriting and other expenses 8,175,397 6,966,283 16,679,405 13,464,747
-------------- -------------- -------------- --------------
Total expenses 13,583,912 12,541,859 28,570,105 25,556,349
-------------- -------------- -------------- --------------
Equity in losses of unconsolidated affiliates (349,728) (444,285) (878,232) (805,577)
-------------- -------------- -------------- --------------
Income (loss) from continuing operations before
income taxes and minority interest (2,283,304) 1,541,928 (7,702,518) (1,323,918)
Benefit for federal, foreign and state
income taxes (2,021,449) (5,863,807) (2,814,140) (6,340,929)
-------------- -------------- -------------- --------------
Income (loss) from continuing operations before
minority interest (261,855) 7,405,735 (4,888,378) 5,017,011
Minority interest in loss of subsidiaries 212,912 514,925
-------------- -------------- -------------- --------------
Income (loss) before extraordinary gain (48,943) 7,405,735 (4,373,453) 5,017,011
Extraordinary gain, net of income tax expense
of $227,821 442,240 442,240
-------------- -------------- -------------- --------------
Net income (loss) $ (48,943) $ 7,847,975 $ (4,373,453) $ 5,459,251
============== ============== ============== ==============
Net income (loss) per common share - basic:
Continuing operations $ 0.00 $ 0.83 $ (0.41) $ 0.56
Extraordinary gain 0.05 0.05
-------------- -------------- -------------- --------------
Net income (loss) per common share $ 0.00 $ 0.88 $ (0.41) $ 0.61
-------------- -------------- -------------- --------------
Weighted average shares outstanding 12,390,070 8,938,693 10,795,498 8,942,550
============== ============== ============== ==============
Net income (loss) per common share - basic:
Continuing operations $ 0.00 $ 0.78 $ (0.41) $ 0.52
Extraordinary gain 0.05 0.05
-------------- -------------- -------------- --------------
Net income (loss) per common share $ 0.00 $ 0.83 $ (0.41) $ 0.57
-------------- -------------- -------------- --------------
Weighted average shares outstanding 12,390,070 9,458,320 10,795,498 9,564,012
============== ============== ============== ==============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
4
<PAGE> 5
<TABLE>
<CAPTION>
PICO HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Six Months Ended June 30,
2000 1999
-------------- --------------
<S> <C> <C>
OPERATING ACTIVITIES
Net cash used in operating activities $ (4,896,390) $(16,776,599)
------------- -------------
INVESTING ACTIVITIES:
Purchases of investments (28,030,639) (22,159,500)
Proceeds from sale of investments 7,476,923 10,317,103
Proceeds from maturity of investments 3,500,000 2,065,669
Other investing activities, net (2,224,544) 1,200,977
------------- -------------
Net cash used in investing activities (19,278,260) (8,575,751)
------------- -------------
FINANCING ACTIVITIES:
Proceeds from rights offering, net of costs of
$197,000 $ 49,842,072
Proceeds from borrowings 85,097 6,704,451
Repayments of debt (90,871)
Proceeds from the exercise of warrants 2,850,359
Purchase of treasury stock (291,593)
------------- -------------
Net cash provided by financing activities 49,836,298 9,263,217
------------- -------------
Effect of exchange rate changes on cash (316,599) 72,557
------------- -------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 25,345,049 (16,016,576)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 36,738,373 71,654,196
------------- -------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 62,083,422 $ 55,637,620
============= =============
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for interest: $ 302,000 $ 241,000
============= =============
Non-Cash Investing and Financing Activities:
Borrowings settled in exchage for land deed $ 5,000,000
=============
</TABLE>
The accompanying notes are an integral part of the 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. ("PICO") and Subsidiaries (the "Company") have been
prepared in accordance with the interim reporting requirements of Form
10-Q, pursuant to the rules and regulations of the United States Securities
and Exchange Commission (the "SEC"). Accordingly, they do not include all
of the information and notes required by accounting principles generally
accepted in the United States of America for complete financial statements.
In the opinion of management, all adjustments and reclassifications
considered necessary for a fair and comparable presentation of financial
position as of June 30, 2000 and December 31, 1999 and the results of
operations for the three and six months ended June 30, 2000 and 1999, and
cash flows for the six months ended June 30, 2000 and 1999 have been
included and are only of a normal recurring nature. Operating results for
the three and six months ended June 30, 2000 are not necessarily indicative
of the results that may be expected for the year ending December 31, 2000.
These financial statements should be read in conjunction with the
Company's audited financial statements and notes thereto, together with
Management's Discussion and Analysis of Financial Condition and the Results
of Operations and Risks and Uncertainties contained in the Company's Annual
Reports on Form 10-K for the year ended December 31, 1999 as filed with the
SEC.
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported
amounts of revenues and expenses for each reporting period. The significant
estimates made in the preparation of the Company's consolidated financial
statements relate to the assessment of the carrying value of investments,
unpaid losses and loss adjustment expenses, deferred policy acquisition
costs, deferred income taxes and contingent liabilities. While management
believes that the carrying value of such assets and liabilities are
appropriate as of June 30, 2000 and December 31, 1999, it is reasonably
possible that actual results could differ from the estimates upon which the
carrying values were based.
2. EARNINGS (LOSS) PER SHARE
The Company applies the provisions of Statement of Financial
Accounting Standards ("SFAS") No. 128, "Earnings Per Share." Basic earnings
or loss per share is based on the actual weighted average common shares
outstanding during the period. Diluted earnings or loss per share is
similar to basic earnings per share, except the weighted shares outstanding
includes the dilutive effect of the Company's stock options and warrants.
Such securities are dilutive if the strike price is less than the average
market price of the Company's stock during the period or if the Company is
in a loss position. For the three and six months ended June 30, 2000 and
June 30, 1999, approximately 1 million options were excluded from the
computation. The following is a reconciliation of basic and diluted
earnings per share:
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
2000 1999 2000 1999
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Net income (loss) $ (48,943) $ 7,847,975 $ (4,373,453) $ 5,459,251
============== ============== ============== ==============
Basic earnings (loss) per share $ (0.00) $ 0.88 $ (0.41) $ 0.61
============== ============== ============== ==============
Basic weighted average common shares outstanding 12,390,070 8,938,693 10,795,498 8,942,550
Options 519,627 621,462
-------------- -------------- -------------- --------------
Diluted weighted average common and
common equivalent shares outstanding 12,390,070 9,458,320 10,795,498 9,564,012
============== ============== ============== ==============
Diluted earnings (loss) per share $ (0.00) $ 0.83 $ (0.41) $ 0.57
============== ============== ============== ==============
</TABLE>
6
<PAGE> 7
On June 30, 1999, 119,763 common stock warrants were exercised at
$23.80 per share for a total of $2.9 million. The remaining warrants
expired on June 30, 1999.
3. COMPREHENSIVE INCOME (LOSS)
The Company applies the provisions of SFAS No. 130, "Reporting
Comprehensive Income." Comprehensive income for the Company includes
foreign currency translation and unrealized holding gains and losses on
available for sale securities.
The components of comprehensive income (loss) are as follows:
<TABLE>
<CAPTION>
Three months ended June 30, Six months ended June 30,
2000 1999 2000 1999
------------- -------------- ------------- ------------
<S> <C> <C> <C> <C>
Comprehensive income (loss):
Net income (loss) $ (48,943) $ 7,847,975 $ (4,373,453) $ 5,459,251
Net change in unrealized appreciation
on av(depreciation) on available
for sale investment (5,864,565) (10,657,503) (3,279,637) 9,718,599
Net change in foreign currency translation (615,967) (442,243) (1,295,518) 1,550,089
------------- -------------- ------------- ------------
Total comprehensive income (loss) $ (6,529,475) $ (3,251,771) $ (8,948,608) $ 16,727,939
============= ============== ============= ============
</TABLE>
Total comprehensive income (loss) is net of deferred income tax
liability of $3 million and $1.7 million for the three and six months ended
June 30, 2000, respectively. For the three and six months ended June 30,
1999, total comprehensive income (loss) is net of a deferred income tax
asset of $5.5 million and a $5 million deferred income tax liability,
respectively.
The components of accumulated comprehensive loss are as follows:
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
----------------- -----------------
<S> <C> <C>
Unrealized appreciation on
on available for sale investments $ (2,452,881) $ 826,756
Foreign currency translation (8,042,470) (6,746,952)
----------------- -----------------
Accumulated other comprehensive loss $ (10,495,351) $ (5,920,196)
================= =================
</TABLE>
Accumulated other comprehensive loss is net of deferred income tax
liability of $998,000 at June 30, 2000 and $658,000 at December 31, 1999.
4. COMMITMENTS AND CONTINGENCIES
In November 1998, Vidler entered into an operating lease to acquire
185,000 acre-feet of underground water storage privileges and associated
rights to recharge and recover water located near the California Aqueduct
northwest of Bakersfield. The agreement requires Vidler to pay for these
privileges and rights a minimum of $2.3 million per year for 10 years
beginning October 1998. The agreement calls for the lease payments to be
adjusted annually by the engineering price index. On October 7, 1998, PICO
signed an agreement guaranteeing payment of Vidler's obligations under the
agreement. The maximum obligation under this guarantee is $3.2 million,
adjusted annually by the engineering price index. The guarantee expires
October 7, 2008.
On January 10, 1997, Global Equity commenced an action in British
Columbia against MKG Enterprises Corp. ("MKG"), Vignoble Wines Agency Inc.
("Vignoble") to enforce repayment of a $5 million loan made by Global
Equity to MKG. On the same day, the Supreme Court of British Columbia
granted an order preventing MKG from disposing of certain assets pending
resolution of the action. Global Equity subsequently brought a motion to
have a receiver-manager appointed for MKG and Vignoble, which motion has
been adjourned. In addition, in March 1999 Global Equity filed an action in
the Supreme Court of
7
<PAGE> 8
British Columbia against a third party. This action states the third party
had fraudulently entered into loan agreements with MKG. Accordingly, under
this action Global Equity is claiming damages from the third party and
restraining the third party from further action.
Under the terms of the joint venture agreement between Conex and the
sino-foreign joint venture in The People's Republic of China, Conex has a
commitment to fund a third tranche of financing in the amount of $5
million. This liability has been recorded in the financial statements.
During the first quarter of 2000, Conex funded $500,000 of this commitment
bringing the balance outstanding to $4.5 million.
The Company is subject to various other litigation that arises in the
ordinary course of its business. Based upon information presently
available, management is of the opinion that such litigation will not have
a material adverse effect on the consolidated financial position, the
results of operations or cash flows of the Company.
6. RECENT ACCOUNTING PRONOUNCEMENT
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 establishes accounting
and reporting standards for derivative instruments, including instruments
embedded in other contracts and for hedging activities. It requires
recognition of all derivatives as either assets or liabilities in the
consolidated balance sheet, and to measure those instruments at fair value.
The new standard, as amended by SFAS No. 137, becomes effective for fiscal
years beginning after June 15, 2000. Management has not assessed the
impacts this statement may have on the Company's consolidated financial
statements.
In December 1999, the SEC issued Staff Accounting Bulletin (SAB) No.
101, "Revenue Recognition in Financial Statements," which summarizes the
SEC's interpretation of applying generally accepted accounting principals
to revenue recognition in the financial statements. SAB No. 101 was
subsequently amended in June 2000 and becomes effective for the fourth
fiscal quarter of fiscal years beginning after December 15, 1999. Based on
the Company's current revenue recognition policies, PICO does not expect
the adoption of SAB No. 101, as amended, to have a material impact on
PICO's consolidated financial position or the results of operations.
7. SEGMENT REPORTING
The Company is a diversified holding company engaged in five major
operating segments: Land, Mineral and Related Rights; Water Rights and
Water Storage; Property and Casualty Insurance Operations; Medical
Professional Liability ("MPL") Insurance Operations and Long-Term Holdings.
The accounting policies of the reportable segments are the same as
those described in the Company's 1999 annual report on Form 10-K. Segment
performance is measured by revenues and segment profit before tax in
addition to changes in shareholders' equity. This information provides the
basis for calculation of return on shareholders' equity, which is the main
performance measurement used in analyzing segment performance. In addition,
assets identifiable with segments are disclosed as well as capital
expenditures, and depreciation and amortization. The Company has operations
and investments both in the U.S. and abroad.
The following is a detail of revenues by segment:
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
2000 1999 2000 1999
------------ ------------ ------------- ------------
<S> <C> <C> <C> <C>
Land, Mineral and Related Water Rights $ 573,503 $ 708,620 $ 1,243,405 $ 902,284
Water Rights and Water Storage 372,029 167,321 617,444 339,500
Property and Casualty Insurance 9,384,467 9,917,556 18,449,422 19,665,479
Medical Professional Liability Insurance 498,327 634,485 1,011,348 1,182,565
Long-Term Holdings 822,010 3,100,090 424,200 2,948,180
------------ ------------ ------------- ------------
Total Revenues-Continuing Operations $ 11,650,336 $ 14,528,072 $ 21,745,819 $ 25,038,008
============ ============ ============ ============
</TABLE>
8
<PAGE> 9
The following is a detail of segment profit or loss before income
taxes and minority interest:
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
2000 1999 2000 1999
----------------- --------------- --------------- ----------------
<S> <C> <C> <C> <C>
Land, Mineral and Related Water Rights $ (123,881) $ 220,236 $ 44,001 $ 151,366
Water Rights and Water Storage (976,733) (830,428) (1,788,785) (1,315,590)
Property and Casualty Insurance 843,427 1,111,293 534,619 1,346,001
Medical Professional Liability Insurance (258,743) (208,350) (539,881) (693,986)
Long-Term Holdings (1,767,374) 1,249,177 (5,952,472) (811,709)
------------ ----------- ------------ -------------
Income (Loss) Before Taxes and Minority
Interest $ (2,283,304) $1,541,928 $ (7,702,518) $ (1,323,918)
================= ========= ============= =============
</TABLE>
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
THIS FORM 10-Q CONTAINS FORWARD-LOOKING STATEMENTS. THESE INCLUDE, BUT ARE
NOT LIMITED TO, STATEMENTS ABOUT THE COMPANY'S INVESTMENT PHILOSOPHY, PLANS FOR
EXPANSION, BUSINESS EXPECTATIONS, AND REGULATORY FACTORS. THESE STATEMENTS
REFLECT OUR CURRENT VIEWS ABOUT FUTURE EVENTS THAT COULD AFFECT OUR FINANCIAL
PERFORMANCE. YOU SHOULD NOT PLACE UNDUE RELIANCE ON FORWARD-LOOKING STATEMENTS
BECAUSE THEY ARE SUBJECT TO VARIOUS RISKS AND UNCERTAINTIES (INCLUDING THOSE
LISTED UNDER "RISK FACTORS" AND ELSEWHERE IN THIS FORM 10-Q) THAT COULD CAUSE
ACTUAL RESULTS TO DIFFER MATERIALLY FROM SUCH FORWARD-LOOKING STATEMENTS OR FROM
OUR PAST RESULTS.
RESULTS OF OPERATIONS -- THREE AND SIX MONTHS ENDED JUNE 30, 2000 AND 1999
INTRODUCTION
PICO Holdings, Inc. is a diversified holding company. We acquire interests
in companies which our management believes:
- are undervalued at the time we buy them; and
- have the potential to provide a superior rate of return over time, after
considering the risk involved.
Our over-riding objective is to generate superior long-term growth in
shareholders' equity, as measured by book value per share. To accomplish this,
we are seeking to build a profitable operating base with our land, water, and
insurance subsidiaries, and over time to realize gains from our portfolio of
long-term investment holdings. In the long run, we expect that most of the
growth in shareholders' equity will come from realized gains on the sale of
assets, rather than operating earnings. Accordingly, when analyzing our
performance, PICO's management places more weight on increased asset values than
on reported earnings.
Currently our major assets and activities are:
- owning and developing land, mineral rights, and water rights through Nevada
Land & Resource Company, LLC, which owns approximately 1,284,709 acres of
land in northern Nevada;
- owning and developing water rights and water storage operations through
Vidler Water Company, Inc.;
- property and casualty insurance through our California-based subsidiaries
Sequoia Insurance Company and Citation Insurance Company;
- "running off" the loss reserves of our Ohio-based medical professional
liability insurance companies, Physicians Insurance Company of Ohio and The
Professionals Insurance Company; and
- making long-term value-based investments in other public companies.
SUMMARY
PICO reported a net loss of $49,000, or $0.00 per basic and diluted share,
for the second quarter ended June 30, 2000. In the second quarter of 1999, PICO
earned net income of $7.4 million, or $0.83 per basic and $0.78 per diluted
share, before an extraordinary gain of $442,000 after tax, or $0.05 per basic
and diluted share.
9
<PAGE> 10
For the six month period ended June 30, 2000, PICO reported a net loss of
$4.4 million, or $0.41 per basic and diluted share. In the first half of 1999,
PICO earned net income of $5.5 million, or $0.56 per basic and $0.52 per diluted
share, before an extraordinary gain of $442,000 after tax, or $0.05 per basic
and diluted share.
At June 30, 2000, PICO had shareholders' equity of $209.9 million ($16.94
per share), compared to $216.4 million ($17.47 per share) at March 31, 2000, and
$169 million ($18.66 per share) at December 31, 1999.
The second quarter's $6.5 million comprehensive loss (see Note 3,
"Comprehensive Income (Loss)") reduced shareholders' equity by the same amount.
This was comprised of a $5.9 million reduction in unrealized appreciation in
investments, the $49,000 quarterly net loss, and negative currency translation
of $616,000 as the currencies of foreign countries where we have investments
declined relative to the US dollar. In the second quarter of 1999, PICO recorded
a comprehensive loss of $3.3 million, consisting of $7.8 million in net income,
which was more than offset by $10.7 million of net unrealized depreciation in
securities, and negative foreign currency translation of $442,000.
During the first half, shareholders' equity increased by $40.9 million. The
rights offering, which raised $49.8 million in new capital after expenses and
led to the increase in equity, was partly offset by a comprehensive loss of $8.9
million. This was comprised of the $4.4 million first half net loss, a $3.3
million reduction in unrealized appreciation in investments, and $1.3 million in
negative currency translation.
Second quarter 2000 revenues were $11.7 million, compared to $14.5 million
during the second quarter of 1999. The decrease primarily resulted from an
$849,000 decline in earned property and casualty insurance premiums, and
realized losses of $441,000 in 2000, compared to realized gains of $3.1 million
in 1999.
First half 2000 revenues were $21.7 million, compared to $25 million during
the first half of 1999. The decrease primarily resulted from a $1.9 million
decline in earned property and casualty insurance premiums, and realized losses
of $500,000 in 2000, compared to realized gains of $2.8 million in 1999.
The net loss for the second quarter of 2000 consisted of a $2.3 million
loss before income taxes and minority interest, which was partially offset by $2
million in income tax benefits, and adding back $213,000 to reflect the interest
of the minority shareholders in SISCOM and Conex in the losses of these
companies. In the second quarter of 1999, PICO earned $1.5 million income before
taxes and minority interest, and recognized $5.9 million in income tax benefits
related to a change in tax law regarding the net operating loss carry-forwards
of acquired companies.
The net loss for the first half of 2000 was comprised of a $7.7 million
loss before income taxes and minority interest, partially offset by income tax
benefits of $2.8 million and the add-back of $515,000 of minority interest in
the losses of SISCOM and Conex. In the first half of 1999, a $1.3 million loss
before income taxes and minority interest was more than offset by $6.3 million
of income tax benefits and a $442,000 after-tax extraordinary gain.
Segment revenues and income (loss) before taxes and minority interest for
the second quarter and the first half of 2000 and 1999 were:
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
-------------------------------------- --------------------------------------
2000 1999 2000 1999
------------------ ------------------- ----------------------- --------------
<S> <C> <C> <C> <C>
REVENUES:
Land, Minerals & Related Water Rights $ 574,000 $ 709,000 $1,243,000 $ 902,000
Water Rights & Water Storage Assets 372,000 167,000 617,000 340,000
Property & Casualty Insurance 9,384,000 9,918,000 18,449,000 19,665,000
Medical Professional Liability Insurance 498,000 634,000 1,011,000 1,183,000
Long-Term Holdings 822,000 3,100,000 424,000 2,948,000
------------------ ------------------- ----------------------- --------------
Total Revenues $11,650,000 $14,528,000 $21,746,000 $25,038,000
================== =================== ======================= ==============
INCOME (LOSS) BEFORE TAXES & MINORITY INTERESTS:
Land, Minerals & Related Water Rights $ (124,000) $ 220,000 $ 44,000 $ 151,000
Water Rights & Water Storage Assets (977,000) (830,000) (1,789,000) (1,316,000)
Property & Casualty Insurance 843,000 1,111,000 535,000 1,346,000
Medical Professional Liability Insurance (259,000) (208,000) (540,000) (694,000)
Long-Term Holdings (1,767,000) 1,249,000 (5,953,000) (812,000)
------------------ ------------------- ----------------------- --------------
INCOME (LOSS) BEFORE TAXES & MINORITY INTERESTS $(2,283,000) $ 1,542,000 $(7,703,000) $(1,324,000)
================== =================== ======================= ==============
</TABLE>
10
<PAGE> 11
Detailed information on the performance and outlook for each segment is
contained later in this report; however, the major factors affecting PICO's
second quarter and first half results were:
LAND, MINERALS & RELATED WATER RIGHTS
Second quarter revenues were $135,000 lower than the previous year at
Nevada Land, because revenues in the 1999 quarter included a $181,000 item
related to geothermal assets which Nevada Land exchanged in 1999. Other revenues
were little changed.
Due to the absence of the gain related to the geothermal item, and to
higher legal and professional fees resulting from initiatives to increase
utilization of our land assets, Nevada Land incurred a loss of $124,000 for the
second quarter of 2000, compared to income of $220,000 in the 1999 quarter.
First half revenues were $341,000 higher than in the previous year. The
effect of $414,000 higher land sales was partly offset by the inclusion in 1999
revenues of the $192,000 item related to the geothermal assets which were
exchanged last year. First half income declined from $151,000 in 1999 to $44,000
this year due to the absence of the geothermal item and higher legal and
professional fees in 2000.
WATER RIGHTS & WATER STORAGE ASSETS
In the second quarter of 2000, Vidler reported $205,000 higher revenues
than in the previous year. At this stage, income from leasing agricultural land
provides most of Vidler's revenues. The level of agricultural lease revenue is
higher in 2000 due to the increase in Vidler's land holdings resulting from the
program of purchasing farms in Arizona's Harquahala Valley during 1999.
The second quarter pre-tax loss increased by $147,000 to $977,000 due to
higher operations and maintenance expenses resulting from the expansion of
Vidler's asset base during 1999.
During the first half of 2000, an increase in agricultural lease income
resulted $277,000 higher revenues, and higher operations and maintenance expense
led to a $473,000 greater pre-tax loss of $1.8 million.
PROPERTY & CASUALTY INSURANCE
Second quarter segment revenues were $534,000 lower than in 1999, due to a
$849,000 decline in earned premiums. The segment profit of $843,000 represented
a $268,000 decline from last year due to higher loss and underwriting expense
ratios.
For the first half, property & casualty insurance revenues declined by $1.2
million due to $1.9 million lower earned premiums. The segment profit fell
$811,000 to $535,000 due to higher loss and underwriting expense ratios. The
second quarter earnings of both Sequoia and Citation declined slightly from last
year, and Sequoia incurred a loss in the first quarter of 2000, as opposed to a
profit the year before. Sequoia's first quarter loss was principally due to a
large number of weather-related property damage claims during the peak claims
winter months. Sequoia's first quarter loss was more than recouped in the second
quarter.
MEDICAL PROFESSIONAL LIABILITY INSURANCE
As expected during the "run off" of loss reserves in this segment, lower
investment balances led to a 21.5% decline in investment income and total
revenues to $498,000 in the second quarter, and a 14.5% decline to $1 million in
the first half. The pre-tax loss increased by $51,000 to $259,000 in the
quarter, and narrowed by $154,000 to $540,000 in the half.
LONG-TERM HOLDINGS
This segment is comprised of investments where we own less than 50% of the
company, and our smaller subsidiaries. Our largest long-term holdings are
HyperFeed Technologies, Inc., Jungfraubahn Holding A.G., and Australian Oil &
Gas Corporation Limited.
The segment reported revenues of $822,000 and $3.1 million in the second
quarter of 2000 and 1999, and revenues of $424,000 and $2.9 million in the first
half of 2000 and 1999, respectively. The principal reason for the revenue
decline is that the 1999 periods included realized gains of $3.1 million for the
quarter and $3 million for the half, compared to realized losses of $562,000 and
$573,000 in the quarter and the half this year.
The second quarter segment result moved from a $1.2 million profit in 1999
to a $1.8 million loss in 2000. A realized loss of $562,000 was recorded in the
first half of 2000, compared to realized gains of $3.1 million in 1999. Segment
results in 2000 were also impacted by higher operating losses and goodwill
amortization related to PICO's investments in Conex Continental, Inc. and
SISCOM, Inc. totaling $369,000 during the second quarter, and $1.3 million in
the first half.
11
<PAGE> 12
The segment result does not reflect the difference between the carrying
value and the potential market value of our largest long-term investments. This
is detailed later in this report.
<TABLE>
<CAPTION>
LAND, MINERALS AND RELATED WATER RIGHTS
---------------------------------------
NEVADA LAND & RESOURCE COMPANY, LLC
-----------------------------------
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
----------------------------------- ---------------------------------
2000 1999 2000 1999
------------------ ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
REVENUES:
--------
Sale of Land $ 402,000 $ 412,000 $ 825,000 $ 411,000
Lease and Other Income 172,000 297,000 418,000 491,000
------------------ ---------------- ---------------- ----------------
Segment Total Revenues $ 574,000 $ 709,000 $1,243,000 $ 902,000
================== ================ ================ ================
------------------ ---------------- ---------------- ----------------
INCOME (LOSS) BEFORE TAX $ (124,000) $ 220,000 $ 44,000 $ 151,000
------------------------ ================== ================ ================ ================
</TABLE>
Nevada Land & Resource Company, LLC owns approximately 1,284,709 acres of
deeded land in northern Nevada, and the mineral rights and water rights
specifically related to that property.
Nevada Land recognizes revenue and the resulting gain or loss from land
sales when the transactions close. On closing, the sale proceeds are recorded as
revenue and a gain or loss is recognized depending on the cost basis of the land
which was sold. Therefore, because the date of closing determines the accounting
period in which the sales revenue and gain are recorded, Nevada Land's reported
revenues and income can fluctuate from quarter to quarter depending on the
closing of specific transactions.
In the second quarter of 2000, Nevada Land closed the sale of 4,340 acres
of land at an average price of $92.69 per acre. During the first half, the sale
of 7,824 acres of land closed at an average price of $105.51 per acre. These
sales prices compare to the average cost of $34.92 per acre for the land
component when PICO acquired Nevada Land.
Nevada Land generated total revenues of $574,000 in the second quarter of
2000, made up of $402,000 in proceeds from the sale of land and $172,000 of
recurring operating revenues. Due to higher legal fees and other professional
fees related to initiatives to increase utilization of our lands, Nevada Land
incurred a second quarter loss of $124,000 this year.
In the second quarter of 1999, revenues were $709,000, comprised of
$412,000 of land sales proceeds and $297,000 of other income, which included a
$181,000 item related to the geothermal assets which Nevada Land exchanged in
1999. Segment income for the quarter was $220,000. The primary causes of the
year over year decline in segment income were the benefit to 1999 income from
the item related to our former geothermal assets, and the higher legal and
professional fees in 2000.
For the first half of 2000, Nevada Land reported total revenues of $1.2
million, comprised of $825,000 in land sales proceeds and $418,000 in recurring
operating revenues. Segment income was $44,000. In the first half of 1999,
Nevada Land generated revenues of $902,000, comprised of $411,000 in land sales
proceeds and other income of $491,000, including a $192,000 item related to the
former geothermal assets. Segment income for the first half of 1999 was
$151,000.
Nevada Land is hopeful of achieving its goal of exceeding 1999's $5.8
million in land sales this year. A transaction to sell 5,000 acres for $1.5
million, an average price of $300 per acre, entered escrow during the second
quarter, and is expected to close before the end of the year. A number of
smaller land sales also went into escrow during the quarter.
Progress is continuing on a number of possible sale and exchange
transactions involving significantly larger parcels of land.
Nevada Land has applied for additional water rights for the beneficial use
of irrigating arable land. Where applications are successful, the value and
marketability of the associated land will increase. During the first quarter of
2000, Nevada Land submitted applications for 20,480 acre-feet of water to
irrigate 5,120 acres of land. No applications were filed in the second quarter;
however, we expect to file applications for a further 30,720 acre-feet of water
rights to irrigate 7,680 acres of land before the end of 2000.
12
<PAGE> 13
WATER RIGHTS AND WATER STORAGE ASSETS
-------------------------------------
<TABLE>
<CAPTION>
VIDLER WATER COMPANY, INC.
--------------------------
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
---------------------------------- ----------------------------------
2000 1999 2000 1999
--------------- ------------------ ----------------- ----------------
<S> <C> <C> <C> <C>
REVENUES:
--------
Agricultural lease revenues $ 293,000 $ 99,000 $ 512,000 $ 212,000
Water service revenues 61,000 67,000 87,000 125,000
Other 18,000 1,000 18,000 3,000
--------------- ------------------ ----------------- ----------------
Segment Total Revenues $ 372,000 $ 167,000 $ 617,000 $ 340,000
=============== ================== ================= ================
EXPENSES:
--------
Depreciation and amortization (208,000) (210,000) (416,000) (409,000)
Interest (203,000) (373,000) (404,000) (385,000)
Operations and maintenance (869,000) (414,000) (1,482,000) (862,000)
Other ( 69,000) (104,000)
--------------- ------------------ ----------------- ----------------
$ (1,349,000) $ (997,000) $ (2,406,000) $ (1,656,000)
--------------- ------------------ ----------------- ----------------
LOSS BEFORE TAX $ (977,000) $ (830,000) $ (1,789,000) $ (1,316,000)
--------------- =============== ================== ================= ================
</TABLE>
This segment is comprised of two distinct but inter-related activities: the
ownership and development of water rights in Nevada, Arizona, and Colorado; and
our interests in water storage facilities in Arizona and California.
When we entered the water business, most of the assets which we acquired
were not ready for immediate commercial use. There has been a considerable
lead-time in developing and commercializing these assets to the point of cash
flow generation. While we believe that significant value has been created from
these efforts, this is not reflected in our financial statements because most of
the Company's significant assets are not yet generating cash flow. Our current
priority is to develop that cash flow. In the meantime, the segment is incurring
costs associated with the development of assets and expansion of the water
rights portfolio, which will not result in cash flow and earnings until future
years.
In the second quarter of 2000, Vidler generated total revenues of $372,000,
which include $293,000 from leasing agricultural land and $61,000 from leasing
some of the Company's Colorado water assets. In the second quarter of 1999,
total revenues of $167,000 included $99,000 of agricultural lease income and
$67,000 of income from water assets. The growth in income from leasing
agricultural land reflected larger land holdings as a result of Vidler's
purchase of farms in the Harquahala Valley during 1999.
Compared to the second quarter of 1999, revenues rose by $205,000, but
expenses increased by $352,000, resulting in a segment pre-tax loss of $977,000.
The pre-tax loss for the second quarter of 1999 was $830,000. The main factor in
the increased segment loss was $455,000 higher operations and maintenance
expense resulting from the expansion of Vidler's asset base during 1999.
For the first half, Vidler generated segment revenues of $617,000,
including $512,000 from leasing agricultural land and $87,000 from leasing some
of the Company's Colorado water assets. The pre-tax loss for the first half of
2000 was $1.8 million. In the first half of 1999, Vidler generated total
revenues of $340,000, including $212,000 from leasing agricultural land and
$125,000 from leasing water assets in Colorado, and the pre-tax loss was $1.3
million. Although revenues increased $278,000 year over year, expenses rose
$751,000, resulting in a $473,000 larger segment loss. The principal factor
leading to the increased segment loss was $621,000 higher operations and
maintenance expenses.
The Colorado water assets which generated the $61,000 of income for the
quarter are leased in perpetuity. The lease payments are indexed for inflation,
subject to a 3% minimum annual increase. Once a water right has been leased in
perpetuity, it cannot be leased again unless the lease is canceled (if, in fact,
the contract allows for cancellation). Consequently, revenue growth beyond the
limits of the CPI escalators on the Colorado leases will have to come from
income from other leases, the commercial development of other existing assets,
and the acquisition of additional water rights and water-related assets for
subsequent lease or sale. If water rights are sold, that reduces the future
revenue stream until the asset can be replaced.
Our 1999 Form 10-K contains a detailed description of our water rights and
water storage assets, and our first quarter 2000 Form 10-Q describes any
significant developments affecting these assets which occurred during the first
quarter. The following section updates this information where necessary, and
outlines new developments during the second quarter and the month of July:
13
<PAGE> 14
WATER RIGHTS
------------
SANDY, NEVADA
Vidler has commenced a drilling program to support its application for
approximately 2,000 acre-feet of water rights near Sandy, Nevada. Subject to the
water rights being permitted, which could happen before the end of 2000,
preliminary agreement has been reached to supply the underlying water to support
additional growth at Primm, Nevada, a town in the fast-growing Interstate 15
corridor.
HARQUAHALA VALLEY WATER RIGHTS
Vidler controls approximately 55,913 acre-feet of transferable ground water
in the Harquahala Valley, which is located approximately 75 miles northwest of
metropolitan Phoenix, Arizona.
Under state legislation, the Central Arizona Canal Project is committed to
convey up to 20,000 acre-feet of Harquahala ground water to cities and
communities in Arizona as an assured municipal water supply. Vidler is able to
supply this water and is meeting with communities and developers in the Phoenix
metropolitan area, some of whom need to secure further water supply to support
expected growth. Vidler expects to enter the first such agreement within the
next 12 months.
There are also potential sources of demand for water within the Harquahala
Valley itself. Vidler has granted an electricity-generating company a 24-month
option to purchase 1,700 acres of land and the associated 5,100 acre-feet of
water rights for $7.1 million. There will be a lengthy permitting and approval
process before the electricity-generating company decides whether to proceed
with the project and exercise its option. The purchase price represents $4,200
per acre of land, or $1,400 per acre-foot of water.
LINCOLN COUNTY PUBLIC/PRIVATE JOINT VENTURE ("THE MESQUITE PROJECT")
The joint venture has begun a drilling program to support its applications
for more than 100,000 acre-feet of water rights in Lincoln County, Nevada. The
joint venture intends to supply water to rapidly growing communities in southern
Nevada. In addition to the previously announced agreement to supply developers
near Mesquite with 17,000 acre-feet of water, tentative agreement has been
reached to supply an electricity-generating company with a minimum of 6,700
acre-feet of water, and a maximum of 9,000 acre-feet of water, at $3,300 per
acre-foot. The sale of the water is subject to the electricity-generating
company obtaining permitting for a new power plant, and then financing, which
could take 2 to 3 years.
We are pursuing similar joint ventures with other Nevada counties.
ADDITIONAL RANCH PROPERTIES IN NEVADA
In July, after the end of the second quarter, Vidler invested more than $10
million in two water-righted ranch properties in northern Nevada:
- we purchased a 51% interest in Fish Springs Ranch, LLC and a 50% interest
in Vidler Brown, LLC. These partnerships own the 8,600 acre Fish Springs
Ranch and more than 8,000 acre-feet of permitted, transferable water
rights. Fish Springs Ranch is located in Honey Lake Valley in Washoe
County, 40 miles north of Reno, Nevada.
Fish Springs can supply 8,000 acre-feet of water to customers in Nevada's
north valleys where water is in strong demand and there are few alternative
sources of supply. Vidler is already negotiating with potential customers,
including an industrial user and developers in Washoe County. An additional
source of demand could come from Lemmon Valley, a north valley which is
over-pumping its aquifer by around 3,865 acre-feet per year; and
- we purchased Robison Ranch, which is located in White Pine County,
approximately 40 miles west of Ely, Nevada. The property is now known as
Spring Valley Ranches. The assets acquired consist of approximately 9,800
acres of deeded land, 500,000 acres of Forest Service and BLM allotment
land, and more than 20,000 acre-feet of certificated and permitted water
rights.
We believe that the land has significant environmental value to federal
agencies, making it potentially suitable for a land exchange transaction.
14
<PAGE> 15
It is anticipated that the long-term end-users of water from White Pine
County, and the other northern counties of Nevada, will be located in Southern
Nevada, particularly in Clark County, which includes the City of Las Vegas and
surrounding municipalities.
These investments were made as part of Vidler's strategy of increasing its
ownership of water rights in Nevada, which has been the fastest-growing state in
the nation for more than 5 years. It has been publicly-stated that the northern
counties are the only practical source of water to support the continued growth
of Southern Nevada. We are considering further property purchases and joint
venture opportunities to increase the quantity of water which we control in
northern Nevada.
WATER STORAGE OPERATIONS
------------------------
VIDLER ARIZONA RECHARGE FACILITY
Vidler expects to receive the necessary permits to operate a full-scale
recharge facility at its water storage site in the Harquahala Valley before the
end of the third quarter. Vidler estimates that the full-scale facility will
have more than 1 million acre-feet of storage capacity. When complete, Vidler
will be able to provide storage to effect both intrastate and interstate
transfers of water at this facility.
Construction has started on some of the improvements required to recharge
and store water on a commercial scale in anticipation of the permits being
issued. Construction is currently 80% complete. Vidler expects construction to
be completed by the end of September, at a cost of less than $9 million.
The Arizona Water Banking Authority has directed its staff to begin
negotiations to utilize the Vidler Arizona Recharge Facility to "bank," or
store, Arizona water supplies. We expect to enter agreements to store water
later in 2000 or in 2001, and to begin recharging water and generating cash flow
from the facility in 2001.
Once Vidler has concluded agreements to store water, we will know the rate
at which customers need to be able to recover water, so that we can design,
finance and construct the final stage of the project, which will allow water to
be recovered at commercial rates. The cost of the final stage cannot be
accurately predicted until the requirements of the users are determined,
although this could equal or exceed the $9 million required for the second
stage. Vidler will not be constructing the improvements for full-scale recovery
until binding storage contracts are in place.
OTHER PROJECTS
--------------
- Vidler is evaluating the purchase of further water-righted properties in
Arizona and Nevada;
- Vidler is continuing to file applications for additional water rights; and
- Vidler continues to be approached by parties who are interested in
obtaining a water supply, or discussing joint ventures to commercially
develop water assets and/or develop water storage facilities. We believe
that Vidler has become the leading private water rights aggregator in
Arizona and Nevada, and the leading private owner-operator of water storage
in Arizona and California. Our presence in these markets has consolidated
our expertise and reputation for providing solutions to both end-users who
require water and to parties who are otherwise unable to commercialize
water assets.
15
<PAGE> 16
PROPERTY AND CASUALTY INSURANCE
-------------------------------
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
------------------------------ ----------------------------------
2000 1999 2000 1999
------------- ------------- ------------- -----------------
<S> <C> <C> <C> <C>
REVENUES:
--------
Sequoia - Earned Premiums $ 7,504,000 $ 4,263,000 $ 14,834,000 $ 8,541,000
Citation - Earned Premiums 173,000 4,263,000 358,000 8,541,000
Investment Income 1,248,000 1,206,000 2,476,000 2,424,000
Realized Investment Gain (Loss) 73,000 73,000 (185,000)
Other 385,000 186,000 708,000 344,000
------------ ------------ ------------ -------------
Segment Total Revenues $ 9,384,000 $ 9,918,000 $ 18,449,000 $ 19,665,000
============ ============ ============ =============
EXPENSES:
--------
Loss & Loss Adjustment Expense (4,950,000) (5,576,000) (10,974,000) (12,092,000)
Underwriting Expenses (3,591,000) (3,231,000) (6,940,000) (6,227,000)
------------- ------------- ------------- -------------
$ (8,541,000) $ (8,807,000) $(17,914,000) $(18,319,000)
INCOME BEFORE TAXES:
-------------------
Sequoia Insurance Company $ 418,000 $ 625,000 $ 69,000 $ 728,000
Citation Insurance Company 425,000 486,000 466,000 618,000
------------- ------------- ------------- -------------
SEGMENT INCOME BEFORE TAXES $ 843,000 $ 1,111,000 $ 535,000 $ 1,346,000
--------------------------- ============= ============= ============= =============
</TABLE>
The Property & Casualty segment is comprised of our California-based
subsidiaries Sequoia Insurance Company and Citation Insurance Company. In the
second quarter of 2000, total revenues of $9.4 million included earned premiums
of $7.7 million, $1.2 million in investment income, and $73,000 in realized
gains from the sale of portfolio investments. In the second quarter of 1999,
segment total revenues were $9.9 million, including earned premiums of $8.5
million, and investment income of $1.2 million. Both companies were profitable
in the second quarter of each year, generating segment income before taxes of
$843,000 in 2000 and $1.1 million in 1999.
In the first half of 2000, segment revenues of $18.4 million included $15.2
million in earned premiums, $2.5 million in investment income, and realized
gains of $73,000, compared to segment revenues of $19.7 million, earned premiums
of $17.1 million, investment income of $2.4 million, and a realized loss of
$185,000 in the first half of 1999. First-half segment income before taxes was
$535,000 in 2000, versus $1.3 million in 1999.
In May 2000, Sequoia acquired Personal Express Insurance Services, Inc. for
approximately $3 million. Personal Express had few tangible assets, so most of
the purchase price has been recorded as goodwill, an intangible asset which is
being charged off on a straight-line basis over 10 years. Other than in the
first year and the final year (when the amount is pro rated), a constant amount
of approximately $298,000 will be charged off as goodwill amortization expense
each year. This quarter $50,000 of Personal Express goodwill was amortized.
Personal Express markets personal insurance products to customers in
Bakersfield and Fresno, California. This acquisition is expected to generate
approximately $7.5 million of additional annual premiums for Sequoia.
Historically this block of business has produced an underwriting profit (i.e., a
combined ratio below 100%). Sequoia is considering opening additional offices in
central and northern California to test the expansion potential of the Personal
Express business model, which is to write insurance direct with the customer
while providing local service for underwriting and claims.
In 1998 and 1999 Sequoia and Citation "pooled", or shared, most premiums
and expenses. From January 1, 2000, the pooling arrangement was terminated.
Sequoia now writes all business in the states of California and Nevada, and
Citation only writes renewal business in Arizona. Due to the termination of the
pooling arrangement, and the fact that all business in California and Nevada had
been transitioned to Sequoia in recent years, in the second quarter of 2000
Sequoia earned $7.5 million in premiums, compared to just $173,000 for Citation.
The individual results of Sequoia and Citation are not directly comparable
to prior years due to the cancellation of the pooling agreement. Although the
effect will be more pronounced in future periods, Sequoia's second quarter
results are not directly comparable to prior years due to the Personal Express
acquisition.
16
<PAGE> 17
When an insurance company writes a policy, the amount of the premium is
referred to as "written" premium; however the premium is recognized as revenue,
or "earned," over the term of the policy. Therefore, there is a time lag before
a change in the volume of "written" premium is reflected in the amount of
"earned" premium that an insurance company reports as revenue.
In the second quarter of 2000, the segment's earned premiums were
approximately 10.0% below the second quarter of 1999. In the first half, earned
premiums were 11.1% below 1999 levels. Due to the time lag between a policy
being written and the premium being earned, the drop in earned premiums reflects
the declining volume of business which Sequoia and Citation were writing in
1999. This was due to intense competition, and our strategy of seeking to earn
an underwriting profit, rather than accepting marginal business for the sake of
additional volume.
Written premiums began to grow from January 2000. The growth in written
premium should lead to growth in earned premium--which is the figure that
Sequoia reports as revenue--from the second half of 2000.
In the first half of 2000, Sequoia wrote a 7.3% higher volume of premium
than in the first half of 1999. Written premium grew 2.6% in the first quarter.
In the second quarter, written premium increased 11.8%. This included some
additional revenues from Personal Express--in mid-May, Sequoia began to write
new policies which were generated by the Personal Express Bakersfield office.
From July, the amount of written premium being written for Personal Express
customers will increase significantly because Sequoia will have the opportunity
to renew existing policies for clients of the Bakersfield office as these expire
with the former carrier. Due to the fixed nature of some costs, Sequoia's
management anticipates that operating expenses will increase at a slower rate
than premium volume. This should have the effect of reducing Sequoia's average
operating expense per policy, which would reduce the underwriting expense ratio.
In the second quarter of 2000, Sequoia produced total revenues of $8.3
million, including $7.5 million in earned insurance premiums and $629,000 in
investment income. Pre-tax income for the second quarter was $418,000, compared
to $625,000 in the second quarter of 1999. For the first half of 2000, Sequoia
generated total revenues of $16.4 million, including $14.8 million in earned
insurance premiums and $1.1 million in investment income. Sequoia earned $69,000
in the first half, compared to $728,000 in the first half of 1999.
The principal cause of the $659,000 decrease in first half income was that
Sequoia incurred a loss of $349,000 in the first quarter of 2000, as opposed to
a profit of $103,000 the year before. Sequoia's first quarter loss was primarily
due to the cyclical nature of claims, including the influence of weather. In the
second quarter, the loss ratio improved significantly from the first half but
remained slightly above Sequoia's long-term average.
Sequoia's "combined ratio"--a ratio which is commonly used to analyze the
performance of insurance companies--calculated on the basis of generally
accepted accounting principles was:
SEQUOIA'S GAAP INDUSTRY RATIOS
------------------------------
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
2000 1999 2000 1999
<S> <C> <C> <C> <C>
Loss and Loss Adjustment Expense Ratio 58.8% 52.3% 67.9% 59.6%
Underwriting Expense Ratio 47.2% 45.6% 42.1% 44.2%
----- ----- ------ ------
Combined Ratio 106.0% 97.9% 109.9% 103.8%
====== ===== ====== ======
</TABLE>
A combined ratio of less than 100% indicates that the insurance company is
making a profit on its base insurance business, prior to investment income,
realized investment gains or losses, extraordinary items, taxes, and other
non-insurance items. Sequoia manages its business so as to have a combined ratio
of less than 100% each year; however, this is not always achieved in every
quarter or year.
During the second quarter, A.M. Best and Company, a leading insurance
company rating service, increased its rating for Sequoia from B++ (Very Good) to
A- (Excellent). This will allow Sequoia to compete for business in a new market
segment - customers who can only purchase insurance from companies with an "A"
rating.
Citation's second-quarter revenues of $1 million include $173,000 of earned
premium and $619,000 of investment income. Citation generated a pre-tax profit
of $425,000 for the quarter, compared to a pre-tax profit of $487,000 last year.
For the half, Citation generated $2.1 million in revenues and a $465,000 pre-tax
profit, compared to $618,000 in the first half of 1999.
17
<PAGE> 18
Citation's combined ratio (340.1% in the second quarter of 2000, versus
109.5% in 1999) is not meaningful due to the termination of the pooling
arrangement which had a number of unusual effects. For example, Citation now has
a small amount of earned premium income relative to its underwriting and other
expenses, which distorts the combined ratio.
MEDICAL PROFESSIONAL LIABILITY INSURANCE
----------------------------------------
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
2000 1999 2000 1999
-------------------------- -------------------------
<S> <C> <C> <C> <C>
REVENUES:
--------
Investment Income, Net of Expenses $ 498,000 $ 634,000 $ 1,011,000 $ 1,183,000
----------- ----------- ----------- -----------
Segment Total Revenues $ 498,000 $ 634,000 $ 1,011,000 $ 1,183,000
=========== =========== =========== ===========
----------- ----------- ----------- -----------
LOSS BEFORE TAX $ (259,000) $ (208,000) $ (540,000) $ (694,000)
--------------- =========== =========== =========== ===========
</TABLE>
Physicians Insurance Company of Ohio and The Professionals Insurance
Company are in "run off." This means that they are handling claims arising from
historical business, but not writing new business. All of the segment's revenues
come from investment income. The level of investment assets and loss reserve
liabilities in this segment are decreasing as claims are paid and investments
are sold when funds are needed to make the payments. Accordingly, it is
anticipated that investment income in this segment will decline over time.
The investment income recorded in this segment is largely offset by an
expense called reserve discount accretion. Our medical professional liability
claims reserves are discounted to reflect the fact that some claims will not be
paid until future years, but funds from the corresponding premiums can be
invested in the meantime. Each quarter, a portion of this discount is removed
and recognized as an expense.
In the second quarter of 2000, the segment generated investment income and
total revenues of $498,000. After $459,000 of reserve discount accretion and
operating expenses of $298,000, the segment produced a pre-tax loss of $259,000.
In the second quarter of 1999, investment income and segment revenues were
$634,000, and the pre-tax loss was $208,000 after reserve discount accretion
expense of $589,000, and other expenses of $255,000.
For the first half of 2000, investment income and total revenues were $1
million and the pre-tax loss was $540,000 following $917,000 in reserve discount
expense and $634,000 in other expenses. The comparable figures for the first
half of 1999 were revenues of $1.2 million, a pre-tax loss of $694,000, reserve
discount expense of $1.1 million, and other expenses of $794,000.
No unusual trends in claims emerged during the first half of 2000.
At June 30, 2000, our medical professional liability loss reserves stood at
$49 million, net of reinsurance and reserve discount, compared to $52 million at
March 31, 2000, and $59.2 million at December 31, 1999.
MEDICAL PROFESSIONAL LIABILITY INSURANCE - LOSS AND LOSS EXPENSE RESERVES
-------------------------------------------------------------------------
<TABLE>
<CAPTION>
JUNE 30, 2000 MARCH 31, 2000 DECEMBER 31, 1999
------------- -------------- -----------------
(in millions) (in millions) (in millions)
<S> <C> <C> <C>
Direct Reserves $ 74.4 $ 78.0 $ 94.9
Ceded Reserves (18.8) (18.9) (27.7)
Discount Of Net Reserves (6.6) (7.1) (8.0)
------ ------ ------
Net Medical Professional Liability Reserves $ 49.0 $ 52.0 $ 59.2
====== ====== ======
</TABLE>
18
<PAGE> 19
LONG-TERM HOLDINGS
------------------
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
----------------------------------- --------------------------------------
2000 1999 2000 1999
------------ ----------- ------------ ----------
<S> <C> <C> <C> <C>
REVENUES (CHARGES):
------------------
Realized Investment Losses $ (562,000) $ 3,125,000 $ (573,000) $2,966,000
Investment Income 871,000 (851,000) 622,000 (443,000)
Other Income 513,000 826,000 375,000 425,000
------------ ----------- ------------ ----------
Segment Total Revenues $ 822,000 $ 3,100,000 $ 424,000 $2,948,000
------------ ----------- ------------ ----------
INCOME (LOSS) BEFORE TAXES $ (1,767,000) $ 1,249,000 $ (5,953,000) $ (812,000)
--------------------------
============ =========== ============ ==========
</TABLE>
Our largest long-term holdings are HyperFeed Technologies, Inc.,
Jungfraubahn Holding A.G., and Australian Oil & Gas Corporation Limited. The
details of our investment in each company at the end of the quarter were:
<TABLE>
<CAPTION>
JUNE 30, 2000 CARRYING VALUE SHARE EQUIVALENTS CLOSING PRICE (USD)
-------------------------------- -------------- ----------------- -------------------
<S> <C> <C> <C> <C>
CARRYING VALUE BEFORE TAXES:
Hyperfeed Common & preferred $ 2,507,000 7,156,538 $ 3.625
Warrants 11,220,000 4,055,195 Unlisted
------------- ----------
Total $13,727,000 11,211,733
Jungfraubahn Common 17,278,000 112,672 $153.35
Australian Oil and Gas Common 6,388,000 8,226,044 $0.78
-------------
Total carrying value before $ 37,393,000
taxes
Deferred taxes (1,768,000)
-------------
CARRYING VALUE, NET OF TAXES $ 35,625,000
=============
</TABLE>
At June 30, 2000, these three long-term holdings had a potential market
value (before taxes) of approximately $64.3 million, and a carrying value
(before taxes) of $37.4 million. After allowing for taxes on the net unrealized
gains, the tax-effected carrying value of the holdings was $35.6 million, or
17.0% of PICO's shareholders' equity.
Currently, the principal subsidiary companies in this segment are Conex
Continental, Inc. and SISCOM, Inc. At June 30, 2000, the carrying value of our
investment in Conex and SISCOM, after deducting the interests of their outside
shareholders, was approximately $7.1 million, or 3.4% of PICO's shareholders'
equity.
On January 31, 2000, we sold our interest in Summit Global Management,
Inc., and its wholly-owned subsidiary Monitor Capital, Inc., for $100,000.
Summit Global Management, Inc. had been a subsidiary in this segment until its
sale. Summit contributed a pre-tax profit of $57,000 in January, 2000. A $75,000
loss was realized on the sale, which was recognized in the calculation of
realized investment losses for the first half.
Conex and SISCOM both became subsidiaries during 1999; however, neither was
consolidated in the first half of 1999. In the first half of 1999 Conex was
accounted for under the equity method, so PICO was recording its equity share of
Conex's results. SISCOM was carried as an investment, so its results had no
effect on PICO's income statement. Now that Conex and SISCOM are consolidated,
we are now including all of Conex's and SISCOM's operating results in segment
income, and then making adjustments for tax and the interest of the minority
shareholders in Conex and SISCOM in the net income or losses of those companies.
Compared to last year, our income statement now includes a higher proportion of
Conex's operating results, and incorporates operating results from SISCOM which
were not included in 1999.
For the second quarter of 2000, the segment reported revenues of $822,000
and a loss of $1.8 million. The principal factors contributing to the segment
loss were $867,000 in operating losses and goodwill amortization related to our
investments in HyperFeed, Conex and SISCOM; unallocated overhead of $2 million;
and realized losses on the sale of investments of $562,000. When PICO acquired
Vidler as part of the merger with Global Equity Corporation, call options had
already been granted to certain employees over existing shares in Vidler. The
last of these call options were exercised in the second quarter. PICO realized a
loss of $526,000 on the sale of the underlying shares in Vidler, which is
recognized in this segment. PICO now owns 96.2% of Vidler.
19
<PAGE> 20
In the second quarter of 1999, PICO realized $3.1 million in gains from the
sale of part of its portfolio of European value stocks. The gain contributed to
segment revenues of $3.1 million, and profits of $1.2 million in second quarter
1999.
For the first half of 2000, the segment generated revenues of $424,000 and
a loss of $6 million. The segment loss includes $573,000 in realized investment
losses; a total of $2.2 million in operating losses and goodwill amortization
related to our investments in HyperFeed, Conex and SISCOM; and unallocated
overhead of $4.6 million. Revenues for the first half of 2000 were less than for
the second quarter. This was because the segment reported net charges in excess
of revenues in the first quarter, when investment income was insufficient to
cover the allocation of revenue to the medical professional liability insurance
segment to offset reserve discount accretion expense (this is explained in the
first quarter Form 10-Q).
In the first half of 1999, PICO recorded realized gains of $3 million.
Segment revenues were $2.9 million, and a pre-tax loss of $812,000 was incurred.
In aggregate, HyperFeed, Conex and SISCOM contributed a net loss of $1.5
million to PICO in the second quarter, and $2.2 million in the first half. These
figures include goodwill amortization related to our investments in these three
companies.
Other highlights for the Long-Term Holdings segment included:
- during the quarter, PICO invested a total of $598,000 to increase its
holding in Jungfraubahn to 19.2%, and its investment in AOG to 17.6%
(shareholding percentages as of June 30, 2000); and
- on August 1, 2000, HyperFeed reported a return to profit in the June
quarter. HyperFeed reported second quarter revenue of $12.5 million, EBITDA
(earnings before interest, tax, depreciation and amortization) of $1.7
million, cash flow of $800,000, and net income of $108,000. Revenues rose
15.2% sequentially from the preceding March quarter, and 55.2% from the
second quarter of 1999. Gross margin rose 19.3% sequentially to $4.0
million, which was almost 4 times higher than the second quarter of 1999.
HyperFeed attributes the improvement in revenue and gross margin to growth
in its higher-margin business-to-business unit which sells data feed and
application services to business customers, such as discount brokerage firms who
offer these services directly to their customers for no charge.
LIQUIDITY AND CAPITAL RESOURCES--THREE AND SIX MONTHS ENDED JUNE 30, 2000 AND
1999
PICO Holdings, Inc. is a diversified holding company. Our assets primarily
consist of investments in our operating subsidiaries, investments in other
public companies, and cash and cash equivalents.
Our cash flow position fluctuates depending on the requirements of our
operating subsidiaries for capital, and activity in our investment portfolio.
Our primary sources of funds include cash balances, cash flow from operations,
and--potentially--the sale of investments and the proceeds of bank borrowings or
offerings of equity and debt. We endeavor to manage our balance sheet to ensure
that cash is always available to take advantage of new investment opportunities.
In broad terms, here is the cash flow profile of our principal operating
subsidiaries:
- Nevada Land & Resource Company, LLC is currently focused on selling lands
which do not have strategic value. Nevada Land's principal sources of cash
flow are the proceeds of cash sales, and collections of principal and
interest on sales contracts where Nevada Land has provided vendor
financing. Since these receipts and other income exceed Nevada Land's
operating costs, Nevada Land is generating strong positive cash flow which
provides a potential source of funds to finance other group activities;
- Vidler Water Company, Inc. is currently utilizing cash to purchase
water-righted properties, to complete the construction of the Vidler
Arizona Recharge Facility, to maintain and develop existing assets, to
pursue applications for water rights, and to cover financing and operating
expenses. Other group companies are currently providing finance to meet
Vidler's on-going expenses and to fund capital expenditure and the purchase
of additional water-righted properties.
20
<PAGE> 21
None of Vidler's significant water-related assets are generating cash flow
yet. As commercial use of these assets begins--which will likely be in
2001--we expect that Vidler will start to generate free cash flow as income
from leasing water or storage and the proceeds from selling water begins to
overtake maintenance capital expenditure, financing costs and operating
expenses. As water lease and storage contracts are signed, we anticipate
that Vidler may be able to monetize some of the contractual revenue streams
which could provide another potential source of funds;
- over the next 12 to 24 months, we expect that Sequoia Insurance Company
will generate positive cash flow from increased written premium volume,
resulting from growth in the existing book of business and the Personal
Express acquisition. Shortly after a policy is written, the premium is
collected and the funds can be invested for a period of time before they
are required to pay claims. Any free cash flow generated by Sequoia will
likely be deployed in the company's investment portfolio;
- Citation Insurance Company is generating only a minor amount of premium
income from renewal business in one state. Most of the funds required to
pay claims are coming from the maturity of fixed income investments in
Citation's portfolio; and
- during the "run off" process, Physicians Insurance Company of Ohio and The
Professionals Insurance Company are obtaining funds to pay claims from the
maturity of fixed income securities, the realization of investments, and
recoveries from reinsurers. At June 30, 2000, the investment portfolios of
Physicians and Professionals contained cash and investments with a market
value of $84.9 million, compared to loss reserves of approximately $49
million, which represents the present value of expected claims payments.
The Ohio and California Departments of Insurance prescribe minimum levels
of capital and surplus for insurance companies, and set guidelines for insurance
company investments. PICO's insurance subsidiaries aim to structure the maturity
of fixed income securities to match the projected pattern of claims payments;
however, it is possible that fixed income and equity securities may occasionally
need to be sold at unfavorable times when the bond market and/or the stock
market are depressed.
As shown in the Consolidated Statements of Cash Flow, there was a $25.3
million net increase in cash and cash equivalents in the first half of 2000,
compared to a $16 million net decrease in the first half of 1999.
During the first 6 months of 2000, $4.9 million of cash was used in
Operating Activities. The principal uses of cash were claims payments by our
insurance subsidiaries and operating costs at Vidler. In the first half of 1999,
Operating Activities used cash of $16.8 million, primarily due to the payment of
insurance claims.
In the first half of 2000, $19 million of cash was used in Investing
Activities. The majority of the cash outflow reflects activity in our insurance
portfolios where the proceeds of cash and cash equivalents and maturing fixed
income securities were reinvested in longer-dated corporate bonds and equities.
The other significant items were the acquisition of Personal Express for
approximately $3 million and $2 million in capitalized costs at Vidler. In the
first half of 1999, Investing Activities used $9.3 million in cash as the
purchase of additional shares in Jungfraubahn and AOG exceeded the proceeds from
the sale and maturity of investments.
The rights offering, which raised $49.8 million in new equity capital in
March, resulted in the $49.8 million cash inflow from Financing Activities in
the first half of 2000. In the first half of 1999, there was a $9.3 million net
inflow from Financing Activities as swiss franc borrowings to finance part of
PICO's portfolio of European value stocks raised $6.7 million, the exercise of
PICO warrants provided $2.9 million, and the purchase of treasury stock used
$292,000.
At June 30, 2000, PICO had no other significant commitments for future
capital expenditures, other than in the ordinary course of business. During
July, Vidler invested more than $10 million in two additional water-righted
ranch properties in Nevada.
PICO is committed to maintaining Sequoia's capital and statutory surplus at
a minimum of $7.5 million. At June 30, 2000, Sequoia had approximately $22.1
million in capital and statutory surplus. PICO also aims to maintain Sequoia's
A.M. Best rating at or above its present "A-" (Excellent) level. At some time in
the future, this may require the injection of additional capital.
CAPITAL RESOURCES
Our primary sources of funds include cash balances, cash flow from
operations, and--potentially--the sale of investments and the proceeds of bank
borrowings or offerings of equity and debt. At June 30, 2000, on a consolidated
basis the Company had $62.1 million in cash and cash equivalents, compared to
$36.7 million at December 31, 1999.
21
<PAGE> 22
RISK FACTORS
In addition to the risks and uncertainties discussed in the preceding
sections of "Management's Discussion and Analysis of Financial Condition and the
Results of Operations," and elsewhere in this document, the following risk
factors should be considered carefully in evaluating PICO and its business. The
statements contained in this Form 10-Q that are not purely historical are
forward-looking statements within the meaning of Section 27A of the Exchange
Act, including statements regarding our expectations, beliefs, intentions, plans
or strategies regarding the future. All forward-looking statements included in
this document are based on information available to us on the date thereof, and
we assume no obligation to update any such forward-looking statements.
BECAUSE OUR OPERATIONS ARE SO DIVERSE, ANALYSTS AND INVESTORS MAY NOT BE ABLE TO
EVALUATE OUR COMPANY ADEQUATELY, WHICH MAY NEGATIVELY INFLUENCE OUR SHARE PRICE
PICO is a diversified holding company with operations in land, minerals and
related water rights; water rights and water storage; property and casualty
insurance; medical professional liability insurance; and other long-term
holdings. Each of these areas is unique, complex in nature, and difficult to
understand. In particular, water rights is a developing industry within the
western United States with very little historical data, very few experts and a
limited following of analysts. Because we are so complex, analysts and investors
may not be able to adequately evaluate our operations, and PICO in total. This
could cause them to make inaccurate evaluations of our stock, or to overlook
PICO, in general. These factors could have a negative impact on the volume and
price of our stock.
IF WE DO NOT SUCCESSFULLY LOCATE, SELECT AND MANAGE INVESTMENTS AND ACQUISITIONS
OR IF OUR INVESTMENTS OR ACQUISITIONS OTHERWISE FAIL OR DECLINE IN VALUE, OUR
FINANCIAL CONDITION COULD SUFFER
We invest in businesses that we believe are undervalued or that will
benefit from additional capital, restructuring of operations or improved
competitiveness through operational efficiencies.
Failures and/or declines in the market values of businesses we invest in or
acquire, as well as our failure to successfully locate, select and manage
investment and acquisition opportunities, could have a material adverse effect
on our business, financial condition, the results of operations and cash flows.
Such business failures, declines in market values, and/or failure to
successfully locate, select and manage investments and acquisitions could result
in inferior investment returns compared to those which may have been attained
had we successfully located, selected and managed new investments and
acquisition opportunities, or had our investments or acquisitions not failed or
declined in value. We could also lose part or all of our investments in these
businesses and experience reductions in our net income, cash flows, assets and
shareholders' equity.
We will continue to make selective investments, and endeavor to enhance and
realize additional value to these acquired companies through our influence and
control. This could involve the restructuring of the financing or management of
the entities in which we invest and initiating and facilitating mergers and
acquisitions. Any acquisition could result in the use of a significant portion
of our available cash, significant dilution to you, and significant
acquisition-related charges. Acquisitions may also result in the assumption of
liabilities, including liabilities that are unknown or not fully known at the
time of the acquisition, which could have a material adverse effect on us.
We do not know of any reliable statistical data that would enable us to
predict the probability of success or failure of our investments, or to predict
the availability of suitable investments at the time we have available cash. You
will be relying on the experience and judgment of management to locate, select
and develop new acquisition and investment opportunities. Sufficient
opportunities may not be found and this business strategy may not be successful.
We have made a number of investments in the past that have been highly
successful, such as Fairfield Communities, Inc., which we sold in 1996, and
Resource America, Inc., which we sold in 1997. We have also made investments
that have lost money, such as our approximate $4 million loss from the Korean
investments in 1997, an approximate $5 million write-down of investments in 1998
and a $3.2 million write-down of an oil and gas investment in 1999. We reported
net realized investment gains in 1999 of $441,000 and gains of $21.4 million in
1997; however, we reported a net realized investment loss of $4.4 million for
1998. We reported a net unrealized investment gain of $827,000 at December 31,
1999, and a net unrealized loss of $2.5 million at June 30, 2000.
Our ability to achieve an acceptable rate of return on any particular
investment is subject to a number of factors which are beyond our control,
including increased competition and loss of market share, quality of management,
cyclical or uneven financial results, technological obsolescence, foreign
currency risks and regulatory delays.
22
<PAGE> 23
Our investments may not achieve acceptable rates of return and we may not
realize the value of the funds invested; accordingly, these investments may have
to be written down or sold at their then-prevailing market values.
We may not be able to sell our investments in both private and public
companies when it appears to be advantageous to do so and we may have to sell
these investments at a discount. Investments in private companies are not as
marketable as investments in public companies. Investments in public companies
are subject to prices determined in the public markets and, therefore, values
can vary dramatically. In particular, the ability of the public markets to
absorb a large block of shares offered for sale can affect our ability to
dispose of an investment in a public company.
To successfully manage newly acquired companies, we must, among other
things, continue to attract and retain key management and other personnel. The
diversion of the attention of management from the day-to-day operations, or
difficulties encountered in the integration process, could have a material
adverse effect on our business, financial condition, the results of operations
and cash flows.
WE MAY MAKE INVESTMENTS AND ACQUISITIONS THAT MAY YIELD LOW OR NEGATIVE RETURNS
FOR AN EXTENDED PERIOD OF TIME, WHICH COULD TEMPORARILY OR PERMANENTLY DEPRESS
OUR RETURN ON INVESTMENTS
We generally make investments and acquisitions that tend to be long term in
nature. We invest in businesses that we believe to be undervalued or may benefit
from additional capital, restructuring of operations or management or improved
competitiveness through operational efficiencies with our existing operations.
We may not be able to develop acceptable revenue streams and investment returns.
We may lose part or all of our investment in these assets. The negative impacts
on cash flows, income, assets and shareholders' equity may be temporary or
permanent. We make investments for the purpose of enhancing and realizing
additional value by means of appropriate levels of shareholder influence and
control. This may involve restructuring of the financing or management of the
entities in which we invest and initiating or facilitating mergers and
acquisitions. These processes can consume considerable amounts of time and
resources. Consequently, costs incurred as a result of these investments and
acquisitions may exceed their revenues and/or increases in their values for an
extended period of time until we are able to develop the potential of these
investments and acquisitions and increase the revenues, profits and/or values of
these investments. Ultimately, however, we may not be able to develop the
potential of these assets that we anticipated.
IF MEDICAL MALPRACTICE INSURANCE CLAIMS TURN OUT TO BE GREATER THAN THE RESERVES
WE ESTABLISH TO PAY THEM, WE MAY NEED TO LIQUIDATE CERTAIN INVESTMENTS IN ORDER
TO SATISFY OUR RESERVE REQUIREMENTS
Under the terms of our medical malpractice liability policies, there is an
extended reporting period for claims. Under Ohio law, the statute of limitations
is one year after the cause of action accrues. Also, under Ohio law, a person
must make a claim within four years; however, the courts have determined that
the period may be longer in situations where the insured could not have
reasonably discovered the injury in that four-year period. Claims of minors must
be brought within one year of the date of majority. As a result, some claims may
be reported a number of years following the expiration of the medical
malpractice liability policy period.
Physicians Insurance Company of Ohio and The Professionals Insurance
Company have established reserves to cover losses on claims incurred under the
medical malpractice liability policies including not only those claims reported
to date, but also those that may have been incurred but not yet reported. The
reserves for losses are estimates based on various assumptions and, in
accordance with Ohio law, have been discounted to reflect the time value of
money. These estimates are based on actual and industry experience and
assumptions and projections as to claims frequency, severity and inflationary
trends and settlement payments. In accordance with Ohio law, Physicians
Insurance Company of Ohio and The Professionals Insurance Company annually
obtain a certification from an independent actuary that their respective
reserves for losses are adequate. They also obtain a concurring actuarial
opinion. Due to the inherent uncertainties in the reserving process, there is a
risk that Physicians Insurance Company of Ohio's and The Professionals Insurance
Company's reserves for losses could prove to be inadequate. This could result in
a decrease in income and shareholders' equity. If we underestimate our reserves,
they could reach levels which are lower than required by law.
Reserves are money that we set aside to pay insurance claims. We strive to
establish a balance between maintaining adequate reserves to pay claims while at
the same time using our cash resources to invest in new companies.
23
<PAGE> 24
IF WE UNDERESTIMATE THE AMOUNT OF INSURANCE CLAIMS, OUR FINANCIAL CONDITION
COULD BE MATERIALLY MISSTATED AND OUR FINANCIAL CONDITION COULD SUFFER
Our insurance subsidiaries may not have established reserves adequate to
meet the ultimate cost of losses arising from claims. It has been, and will
continue to be, necessary for our insurance subsidiaries to review and make
appropriate adjustments to reserves for claims and expenses for settling claims.
Inadequate reserves could have a material adverse effect on our business,
financial condition, the results of operations and cash flows. Inadequate
reserves could cause our financial condition to fluctuate from period to period
and cause our financial condition to appear to be better than it actually is for
periods in which insurance claims reserves are understated. In subsequent
periods when we discover the underestimation and pay the additional claims, our
cash needs will be greater than expected and our financial the results of
operations for that period will be worse than they would have been had our
reserves been accurately estimated originally.
The inherent uncertainties in estimating loss reserves are greater for some
insurance products than for others, and are dependent on:
- the length of time in reporting claims;
- the diversity of historical losses among claims;
- the amount of historical information available during the estimation
process;
- the degree of impact that changing regulations and legal precedents may
have on open claims; and
- the consistency of reinsurance programs over time.
Because medical malpractice liability and commercial casualty claims may
not be completely paid off for several years, estimating reserves for these
types of claims can be more uncertain than estimating reserves for other types
of insurance. As a result, precise reserve estimates cannot be made for several
years following the year for which reserves were initially established.
During the past several years, the levels of the reserves for our insurance
subsidiaries have been very volatile. As a result of our claims experience, we
have had to significantly increase these reserves in the past several years.
Significant increases in the reserves may be necessary in the future, and
the level of reserves for our insurance subsidiaries may be volatile in the
future. These increases or volatility may have an adverse effect on our
business, financial condition, the results of operations and cash flows.
THERE HAS BEEN A DOWNTURN IN THE PROPERTY & CASUALTY INSURANCE BUSINESS WHICH,
IN THE SHORT TERM, HINDERS OUR ABILITY TO PROFIT FROM THIS INDUSTRY
The property and casualty insurance industry has been highly cyclical, and
the industry has been in a cyclical downturn over the last several years. This
is due primarily to competitive pressures on pricing, which has resulted in
lower profitability for us. Pricing is a function of many factors, including the
capacity of the property and casualty industry as a whole to underwrite
business, create policyholders' surplus and generate positive returns on their
investment portfolios. The level of surplus in the industry varies with returns
on invested capital and regulatory barriers to withdrawal of surplus. Increases
in surplus have generally been accompanied by increased price competition among
property and casualty insurers.
The cyclical trends in the industry and the industry's profitability can
also be affected by volatile and unpredictable developments, including natural
disasters, fluctuations in interest rates, and other changes in the investment
environment which affect market prices of investments and the income generated
from those investments. Inflationary pressures affect the size of losses and
court decisions affect insurers' liabilities. These trends may adversely affect
our business, financial condition, the results of operations and cash flows by
reducing revenues and profit margins, by increasing ratios of claims and
expenses to premiums, and by decreasing cash receipts. Capital invested in our
insurance companies may produce inferior investment returns during periods of
downturns in the insurance cycle due to reduced profitability.
STATE REGULATORS COULD REQUIRE CHANGES TO THE OPERATIONS OF OUR INSURANCE
SUBSIDIARIES AND/OR TAKE THEM OVER IF WE FAIL TO MAINTAIN ADEQUATE RESERVE
LEVELS
In the past few years, the National Association of Insurance Commissioners
has developed risk-based capital measurements for both property and casualty and
life and health insurers. These measurements prescribe the reserve levels that
insurance companies must maintain. The Commissioners have delegated to the state
regulators varying levels of authority based on the adequacy of an
24
<PAGE> 25
insurer's reserves. The insurance companies' reserve levels are reported
annually in their statutory annual statements to the insurance departments.
Failure to meet one or more reserve levels may result in state regulators
requiring the insurance company to submit a business plan demonstrating
achievement of the required reserve levels. This may include the addition of
capital, a restructuring of assets and liabilities, or changes in operations. At
or below certain lower reserve levels, state regulators may supervise the
operation of the insurance company and/or require the liquidation of the
insurance company. Such insurance department actions could adversely affect our
business, financial condition, the results of operations and cash flows and
decrease the value of our investments in our insurance subsidiaries. If the
insurance departments were to require changes in the operations of our insurance
subsidiaries, we may incur additional expenses and we may lose customers. If the
insurance departments were to require additional capital in our insurance
subsidiaries or a restructuring of our assets and liabilities, our investment
returns could suffer. If the insurance departments were to place our insurance
companies under their supervision, we would lose customers, our revenues may
decrease more rapidly than our expenses, and our investment returns would
suffer. We may even lose part or all of our investments in our insurance
subsidiaries if our insurance subsidiaries are liquidated by the insurance
departments.
WE MAY BE INADEQUATELY PROTECTED AGAINST MAN MADE AND NATURAL CATASTROPHES,
WHICH COULD REDUCE THE AMOUNT OF CAPITAL SURPLUS AVAILABLE FOR INVESTMENT
OPPORTUNITIES
As with other property and casualty insurers, operating results and
financial condition can be adversely affected by volatile and unpredictable
natural and man-made disasters, such as hurricanes, windstorms, earthquakes,
fires, and explosions. Our insurance subsidiaries generally seek to reduce their
exposure to catastrophic events through individual risk selection and the
purchase of reinsurance. Our insurance subsidiaries' estimates of their
exposures depend on their views of the possibility of a catastrophic event in a
given area and on the probable maximum loss created by that event. While our
insurance subsidiaries attempt to limit their exposure to acceptable levels, it
is possible that an actual catastrophic event or multiple catastrophic events
could significantly exceed the maximum loss anticipated, resulting in a material
adverse effect on our business, financial condition, the results of operations
and cash flows. Such events could cause unexpected insurance claims and expenses
for settling claims well in excess of premiums, increasing cash needs, reducing
surplus and reducing assets available for investments. Capital invested in our
insurance companies may produce inferior investment returns as a result of these
additional funding requirements.
We insure ourselves against catastrophic losses by obtaining insurance
through other insurance companies known as reinsurers. The future financial
results of our insurance subsidiaries could be adversely affected by disputes
with their reinsurers with respect to coverage and by the solvency of the
reinsurers.
OUR INSURANCE SUBSIDIARIES COULD BE DOWNGRADED WHICH WOULD NEGATIVELY IMPACT OUR
BUSINESS
Our insurance subsidiaries' ratings may not be maintained or increased, and
a downgrade would likely adversely affect our business, financial condition, the
results of operations and cash flows. A.M. Best and Company's ("A.M. Best")
ratings reflect the assessment of A.M. Best of an insurer's financial condition,
as well as the expertise and experience of its management. Therefore, A.M. Best
ratings are important to policyholders. A.M. Best ratings are subject to review
and change over time. Failure to maintain or improve our A.M. Best ratings could
have a material adverse effect on the ability of our insurance subsidiaries to
underwrite new insurance policies, as well as potentially reduce their ability
to maintain or increase market share. Management believes that many potential
customers will not insure with an insurer that carries an A.M. Best rating of
less than B+, and that customers who do so will demand lower rates.
Our insurance subsidiaries are currently rated as follows:
- Sequoia Insurance Company A- (Excellent)
- Citation Insurance Company B+ (Very Good)
- Physicians Insurance Company of Ohio NR-3 (rating procedure inapplicable)
- The Professionals Insurance Company NR-3 (rating procedure inapplicable)
POLICY HOLDERS MAY NOT RENEW THEIR POLICIES, WHICH WOULD UNEXPECTEDLY REDUCE OUR
REVENUE STREAM
Insurance policy renewals have historically accounted for a significant
portion of our net revenue. We may not be able to sustain historic renewal rates
for our products in the future. A decrease in renewal rates would reduce our
revenues. It would also decrease our cash receipts and the amount of funds
available for investments and acquisitions. If we were not able to reduce
overhead expenses correspondingly, this would adversely affect our business,
financial condition, the results of operations and cash flows.
25
<PAGE> 26
IF WE ARE REQUIRED TO REGISTER AS AN INVESTMENT COMPANY, THEN WE WILL BE SUBJECT
TO A SIGNIFICANT REGULATORY BURDEN
At all times we intend to conduct our business so as to avoid being
regulated as an investment company under the Investment Company Act of 1940.
However, if we were required to register as an investment company, our ability
to use debt would be substantially reduced, and we would be subject to
significant additional disclosure obligations and restrictions on our
operational activities. Because of the additional requirements imposed on an
investment company with regard to the distribution of earnings, operational
activities and the use of debt, in addition to increased expenditures due to
additional reporting responsibilities, our cash available for investments would
be reduced. The additional expenses would reduce income. These factors would
adversely affect our business, financial condition, the results of operations
and cash flows.
VARIANCES IN PHYSICAL AVAILABILITY OF WATER, ALONG WITH LEGAL RESTRICTIONS AND
LEGAL IMPEDIMENTS COULD IMPACT PROFITABILITY FROM OUR WATER RIGHTS
The water rights held by us and the transferability of these rights to
other uses and places of use are governed by the laws concerning water rights in
the states of Arizona, California, Colorado and Nevada. The volumes of water
actually derived from the water rights applications or permitted rights may vary
considerably based upon physical availability and may be further limited by
applicable legal restrictions. As a result, the amounts of acre-feet anticipated
from the water rights applications or permitted rights do not in every case
represent a reliable, firm annual yield of water, but in some cases describe the
face amount of the water right claims or management's best estimate of such
entitlement. Legal impediments exist to the sale or transfer of some of these
water rights, which in turn may affect their commercial value. If we were unable
to transfer or sell our water rights, we will not be able to make a profit, we
will not have enough cash receipts to cover cash needs, and we may lose some or
all of our value in our water rights investments.
OUR FUTURE WATER REVENUES ARE UNCERTAIN AND DEPEND ON A NUMBER OF FACTORS, WHICH
MAY MAKE OUR REVENUE STREAMS AND PROFITABILITY VOLATILE
We engage in various water rights acquisition, management, development,
sale and lease activities. Accordingly, our long-term future profitability will
be primarily dependent on our ability to develop and sell or lease water and
water rights, and will be affected by various factors, including timing of
acquisitions, transportation arrangements, and changing technology. To the
extent we possess junior or conditional water rights, such rights may be
subordinated to superior water right holders in periods of low flow or drought.
Our current water rights and the transferability of these rights to other
uses and places of use are governed by the laws concerning water rights in the
states of Arizona, California, Colorado and Nevada. The volumes of water
actually derived from these rights may vary considerably based upon physical
availability and may be further limited by applicable legal restrictions. Legal
impediments exist to sale or transfer of some of these water rights which may
affect their commercial value.
In addition to the risk of delays associated with receiving all necessary
regulatory approvals and permits, we may also encounter unforeseen technical
difficulties which could result in construction delays and cost increases with
respect to our water development projects.
OUR WATER ASSETS MAY BECOME CONCENTRATED IN A LIMITED NUMBER OF FACILITIES,
MAKING OUR GROWTH AND PROFITABILITY VULNERABLE TO FLUCTUATIONS IN LOCAL
ECONOMIES AND GOVERNMENTAL REGULATIONS.
We anticipate that in the future, a significant amount of Vidler's revenues
and asset value may be derived from a single asset, the Vidler Arizona recharge
water storage facility. Currently, we have obtained only a pilot permit for the
recharge and storage of a limited amount of water at that facility. We have not
yet applied for a recovery permit and have applied for, but not yet received, a
full-scale permit for that facility. There can be no assurance:
- that we will be able to obtain permits for the facility at the recharge,
storage or recovery levels anticipated, or at all;
- that the full-scale storage facility will have the capacity currently
anticipated; or
- that we will be able to contract with third parties for storage of water on
commercially reasonable terms, or at all.
A majority of our water revenue historically has been derived from the
Vidler Tunnel. Although we have recently begun to acquire additional water
assets, we anticipate that our revenues will be derived from a limited number of
water assets for the foreseeable future.
26
<PAGE> 27
THE PRICE OF WATER IS VOLATILE, WHICH CAN HAVE A SIGNIFICANT EFFECT ON OUR COSTS
OF ACQUIRING WATER AND THE PRICES AT WHICH WE ARE ABLE TO SELL WATER.
Our profitability is significantly affected by changes in the market price
of water. Water prices may in the future fluctuate widely and are affected by
climatic, demographic and technologic factors affecting demand.
ENVIRONMENTAL REGULATIONS MAY DETRACT FROM OUR FUTURE REVENUE STREAMS AND
PROFITABILITY BY LIMITING OUR CUSTOMER BASE.
Water we lease or sell may be subject to regulation as to quality by the
United States Environmental Protection Agency acting pursuant to the federal
Safe Drinking Water Act. While environmental regulations do not directly affect
us, the regulations regarding the quality of water distributed affects our
intended customers and may, therefore, depending on the quality of our water,
impact the price and terms upon which we may in the future sell our water or
water rights.
OUR WATER SALES MAY MEET WITH POLITICAL OPPOSITION IN CERTAIN LOCATIONS, THEREBY
LIMITING OUR GROWTH IN THESE AREAS
The transfer of water rights from one use to another may affect the
economic base of a community and will, in some instances, be met with local
opposition. Moreover, certain of the end users of our water rights, namely
municipalities, regulate the use of water in order to control or deter growth.
WE ARE DIRECTLY IMPACTED BY INTERNATIONAL AFFAIRS, WHICH DIRECTLY EXPOSES US TO
THE ADVERSE EFFECTS OF ANY FOREIGN ECONOMIC OR GOVERNMENTAL INSTABILITY
As a result of global investment diversification, our business, financial
condition, the results of operations and cash flows may be adversely affected
by:
- exposure to fluctuations in exchange rates;
- the imposition of governmental controls;
- the need to comply with a wide variety of foreign and U.S. export laws;
- political and economic instability; o trade restrictions; o changes in
tariffs and taxes;
- volatile interest rates;
- changes in certain commodity prices;
- exchange controls which may limit our ability to withdraw money;
- the greater difficulty of administering business overseas; and o general
economic conditions outside the United States.
Changes in any or all of these factors could result in reduced market
values of investments, loss of assets, additional expenses, reduced investment
income, reductions in shareholders' equity due to foreign currency fluctuations
and a reduction in our global diversification.
OUR COMMON STOCK PRICE MAY BE LOW WHEN YOU WANT TO SELL YOUR SHARES
The trading price of our common stock has historically been, and is
expected to be, subject to fluctuations. The market price of the common stock
may be significantly impacted by:
- quarterly variations in financial performance;
- shortfalls in revenue or earnings from levels forecast by securities
analysts;
- changes in estimates by such analysts;
- product introductions;
- our competitors' announcements of extraordinary events such as
acquisitions;
- litigation; and
- general economic conditions.
27
<PAGE> 28
Our results of operations have been subject to significant fluctuations,
particularly on a quarterly basis, and our future results of operations could
fluctuate significantly from quarter to quarter and from year to year. Causes of
such fluctuations may include the inclusion or exclusion of operating earnings
from newly acquired or sold operations. At December 31, 1997, the closing price
of our common stock on the Nasdaq National Market was $32.19 per share, compared
to $12.31 at December 31, 1999. On a quarterly basis between these two dates,
closing prices have ranged from a high of $32.19 at December 31, 1997 to a low
of $12.31 at December 31, 1999. During 2000, closing prices have ranged from a
low of $9.875 per share on March 27 to a high of $14.125 on January 18.
Statements or changes in opinions, ratings, or earnings estimates made by
brokerage firms or industry analysts relating to the markets in which we do
business or relating to us specifically could result in an immediate and adverse
effect on the market price of our common stock.
WE MAY NOT BE ABLE TO RETAIN KEY MANAGEMENT PERSONNEL WE NEED TO SUCCEED, WHICH
COULD ADVERSELY AFFECT OUR ABILITY TO MAKE SOUND INVESTMENT DECISIONS
We have several key executive officers. If they depart, it could have a
significant adverse effect. In particular, Ronald Langley, our Chairman, and
John R. Hart, our President and Chief Executive Officer, play key roles in
investment decisions. Messrs. Langley and Hart have entered into employment
agreements with us dated as of December 31, 1997, for a period of four years.
Messrs. Langley and Hart are key to the implementation of our strategic focus,
and our ability to successfully develop our current strategy is dependent upon
our ability to retain the services of Messrs. Langley and Hart.
OUR CHARTER DOCUMENTS MAY INHIBIT A TAKEOVER, PREVENTING YOU FROM RECEIVING A
PREMIUM ON YOUR SHARES
The Board of Directors has authority to issue up to 2 million shares of
preferred stock and to fix the rights, preference, privileges and restrictions,
including voting rights, of those shares without any further vote or action by
the shareholders. Your rights as common stock holders will be subject to, and
may be adversely affected by, the rights of the holders of the preferred stock.
The issuance of preferred stock, while providing desirable flexibility in
connection with possible acquisitions and other corporate purposes, could have
the effect of making it more difficult for a third party to acquire a majority
of our outstanding voting stock, thereby delaying, deferring or preventing a
change in control of PICO. Furthermore, such preferred stock may have other
rights, including economic rights senior to the common stock, and, as a result,
the issuance thereof could have a material adverse effect on the market value of
the common stock.
THE FOREGOING FACTORS, INDIVIDUALLY OR IN THE AGGREGATE, COULD MATERIALLY
ADVERSELY AFFECT OUR OPERATING RESULTS AND COULD MAKE COMPARISON OF HISTORIC
OPERATING RESULTS AND BALANCES DIFFICULT OR NOT MEANINGFUL.
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The Company's balance sheets include a significant amount of assets and
liabilities whose fair value are subject to market risk. Market risk is the risk
of loss arising from adverse changes in market interest rates or prices. The
Company currently has interest rate risk as it relates to its fixed maturity
securities and mortgage loans, equity price risk as it relates to its marketable
equity securities, and foreign currency risk as it relates to investments
denominated in foreign currencies. The Company's bank debt is short-term in
nature as the Company generally secures rates for periods of approximately one
to three years and therefore approximates fair value. At June 30, 2000, the
Company had $65.9 million of fixed maturity securities and mortgage loans, $69.8
million of marketable equity securities that were subject to market risk, and
$32.3 million of investments denominated in foreign currencies, primarily Swiss
francs. The Company's investment strategy is to manage the duration of the
portfolio relative to the duration of the liabilities while managing interest
rate risk.
The Company uses two models to analyze the sensitivity of its assets and
liabilities subject to the above risks. For its fixed maturity securities, and
mortgage loans, the Company uses duration modeling to calculate changes in fair
value. For its marketable securities, the Company uses a hypothetical 20%
decrease in the fair value to analyze the sensitivity of its market risk assets
and liabilities. For investments denominated in foreign currencies, the Company
uses a hypothetical 20% decrease in the local currency of that investment.
Actual results may differ from the hypothetical results assumed in this
disclosure due to possible actions taken by management to mitigate adverse
changes in fair value and because the fair value of a securities may be affected
by credit concerns of the issuer, prepayment rates, liquidity, and other general
market conditions. The sensitivity analysis duration model produced a loss in
fair value of $935,000 for a 100 basis point increase in interest rates on its
fixed securities and mortgage loans. The
28
<PAGE> 29
hypothetical 20% decrease in fair value of the Company's marketable equity
securities produced a loss in fair value of $9.3 million that would impact the
unrealized appreciation in shareholders' equity. The hypothetical 20% decrease
in the local currency of the Company's foreign denominated investments produced
a loss of $5.3 million that would impact the unrealized appreciation and foreign
currency translation in shareholders' equity.
PART II: OTHER INFORMATION
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS:
None.
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K:
(a) Exhibits:
See Exhibit Index.
(b) Reports on Form 8-K:
None.
29
<PAGE> 30
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 11, 2000 By: /s/ Gary W. Burchfield
------------------------------------
Gary W. Burchfield
Chief Financial Officer and Treasurer
(Principal Financial and Accounting
Officer)
30
<PAGE> 31
EXHIBITS INDEX
--------------
EXHIBIT
NUMBER DESCRIPTION
------- -----------
+ 2.2 Agreement and Plan of Reorganization, dated as of
May 1, 1996, among PICO, Citation Holdings, Inc. and
Physicians and amendment thereto dated August 14,
1996 and related Merger Agreement.
+++++ 2.3 Second Amendment to Agreement and Plan of
Reorganization dated November 12, 1996.
# 2.4 Agreement and Debenture, dated November 14, 1996 and
November 27, 1996, Respectively, by and between
Physicians and Hyperfeed.
# 2.5 Purchase and Sale Agreement by, between and among
Nevada Land 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 By-laws of PICO.
-10.55 Consulting Agreements, effective January 1, 1997,
regarding retention of Ronald Langley and John R.
Hart as consultants by Physicians and 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.
GPG and GEC.
++ 10.60 Agreement for the Purchase and Sale of Certain
Assets, dated July 14, 1995 between Physicians, PRO
and Mutual Assurance, Inc.
++ 10.61 Stock Purchase Agreement dated March 7, 1995 between
Sydney Reinsurance Corporation and Physicians.
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.
# 21. Subsidiaries of PICO.
27. Financial Data Schedule.
### 28. Form S-8, Registration Statement under the
Securities Act of 1933, for the PICO Holdings, Inc.
Employees 401(k) Retirement Plan and Trust,
Registration No. 333-36881.
#### 29. Form S-8, Registration Statement under the
Securities Act of 1933, for the Physicians Insurance
Company of Ohio 1995 Non-Qualified Stock Option Plan
and assumed by PICO Holdings, Inc., Registration No.
333-32045.
------------------------
* Incorporated by reference to exhibit of same number
filed with Registration Statement on Form S-1 (File No.
33-36383).
+ Filed as Appendix to the prospectus in Part I of
Registration Statement on Form S-4 (File No. 333-06671)
++ Incorporated by reference to exhibit filed with
Physicians' Registration Statement No. 33-99352 on Form
S-1 filed with the SEC on November 14, 1995.
+++ Incorporated by reference to exhibit filed with
Registration Statement on Form S-4 (File no. 333-06671).
++++ Incorporated by reference to exhibit filed with
Amendment No. 1 to Registration Statement No. 333-06671
on Form S-4.
+++++ Incorporated by reference to exhibit of same number
filed with Form 8-K dated December 4, 1996.
- Executive Compensation Plans and Agreements.
# Incorporated by reference to exhibit of same number
filed with Form 10-K dated April 15, 1997.
## Incorporated by reference to exhibit * of same number
filed with 10-K/A dated April 30, 1997.
### Incorporated by reference to Form S-8 filed with the
Securities and Exchange Commission (File No. 333-36881).
#### Incorporated by reference to Form S-8 filed with the
Securities and Exchange Commission (File No. 333-32045).
31
