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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [FEE REQUIRED]
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
FOR THE TRANSITION PERIOD FROM __________ TO __________
COMMISSION FILE NUMBER 0-18786
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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
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (858) 456-6022
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, $.001 PAR VALUE
(TITLE OF CLASS)
Indicate by check mark whether the 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 [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III or this Form 10-K or any amendment to this
Form 10-K. [ X ]
Approximate aggregate market value of the registrant's common stock held by
non-affiliates of the registrant (based on the closing sales price of such stock
as reported in the Nasdaq National Market) on March 28, 2000 was $90,198,194.
Excludes shares of common stock held by directors, officers and each person who
holds 5% or more of the registrant's common stock.
Number of shares of common stock, $.001 par value, outstanding as of March 28,
2000 was 16,785,281. As of such date, 4,394,127 shares of common stock were held
by the registrant and subsidiaries of the registrant.
DOCUMENTS INCORPORATED BY REFERENCE
(1) None.
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PICO HOLDINGS, INC.
ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
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Page
No.
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PART I.............................................................................................................. 3
Item 1. BUSINESS............................................................................................... 3
Item 2. PROPERTIES............................................................................................. 10
Item 3. LEGAL PROCEEDINGS...................................................................................... 10
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.................................................... 10
PART II............................................................................................................. 11
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.................................. 11
Item 6. SELECTED FINANCIAL DATA................................................................................ 12
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.......................................................................... 13
7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS........................................... 42
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA............................................................ 43
Item 9. CHANGE IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE........................................................................... 82
PART III............................................................................................................ 82
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.................................................... 82
Item 11. EXECUTIVE COMPENSATION................................................................................ 83
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT....................................................................................... 89
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS........................................................ 90
PART IV............................................................................................................. 91
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE, AND REPORTS ON FORM 8-K....................................... 91
SIGNATURES.......................................................................................................... 101
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PART I
THIS FORM 10-K CONTAINS FORWARD-LOOKING STATEMENTS. THESE INCLUDE, BUT ARE NOT
LIMITED TO, STATEMENTS ABOUT OUR 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 UNCERTAINITIES, INCLUDING THOSE LISTED UNDER
"RISK FACTORS" AND ELSEWHERE IN THIS FORM 10-K, THAT COULD CAUSE ACTUAL RESULTS
TO DIFFER MATERIALLY FROM SUCH FORWARD-LOOKING STATEMENTS OR FROM OUR PAST
RESULTS.
ITEM 1. BUSINESS
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
strategic investment holdings. In the long term, we expect that most of the
growth in shareholders' equity will come from realized gains on the sale of
assets, rather than operating earnings. Accordingly, when analyzing our
performance, PICO's management places more weight on increased asset values than
on reported earnings.
The assets which PICO owns may change over time. Currently our major
activities are:
- owning and developing land, mineral rights, and related water rights
through Nevada Land & Resource Company, LLC;
- owning and developing water rights & water storage operations through
Vidler Water Company, Inc.;
- property and casualty insurance;
- "running off" the loss reserves of our medical professional liability
insurance companies; and
- making strategic investments in other public companies.
PICO was incorporated in 1981 and began operations in 1982. The company was
known as Citation Insurance Group until a reverse merger with Physicians
Insurance Company of Ohio on November 20, 1996. After the reverse merger, the
former shareholders of Physicians owned approximately 80% of Citation Insurance
Group, the Board of Directors and management of Physicians replaced their
Citation Insurance Group counterparts, and Citation Insurance Group changed its
name to PICO Holdings, Inc. You should be aware that information pre-dating the
reverse merger relates to the old Citation Insurance Group only, and does not
reflect the performance of Physicians prior to the merger.
The address of our main office is 875 Prospect Street, Suite 301, La Jolla,
California 92037, and our telephone number is (858) 456-6022.
Our website at www.picoholdings.com contains further material about PICO,
our U. S. Securities and Exchange Commission filings, and links to other sites,
including some of the companies that we are associated with. You should check
the site periodically during the year for current press releases and updated
information.
MAJOR OPERATING SEGMENTS & SUBSIDIARY COMPANIES
This section describes our operating segments and lists the important
subsidiaries in each segment. Unless otherwise indicated, we own 100% of each
subsidiary.
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LAND, MINERALS AND RELATED WATER RIGHTS
In April 1997, PICO paid $48.6 million to acquire Nevada Land & Resource
Company, LLC which then owned approximately 1,362,753 acres of deeded land in
northern Nevada, together with the attaching water, mineral and geothermal
rights.
Nevada Land is the largest private landowner in Nevada, which is one of the
fastest developing states in the union. Developable land is scarce in Nevada, as
approximately 85% of the state is owned by various governmental agencies. In
fact, much of Nevada Land's land is checker-boarded by publicly-owned land.
Before we bought Nevada Land, the property had been under the ownership of
a succession of railway companies, to whom it was not a core asset. Accordingly,
we believe that the potential of the property had never been fully exploited.
After acquiring Nevada Land, we completed a "highest and best use study".
This divided the land into 7 categories and developed strategies to maximize the
value of each type of asset. These strategies include:
- land exchanges where Nevada Land transfers parcels of its land for
land owned by various government agencies. The Bureau of Land
Management and other government agencies are motivated to conduct land
exchanges for a variety of purposes, including obtaining
environmentally sensitive lands for conservation purposes or
consolidating their land holdings;
- the development of land in and around fast-growing towns in northern
Nevada;
- the development of water rights and management of mineral rights; and
- the outright sale of land and water assets.
During the period from April 23, 1997 until December 31, 1999, Nevada Land
sold approximately 69,531 acres of land for $8.7 million and non-essential water
assets for $379,000. The average price received has been $124.95 per acre,
compared to our average acquisition cost of $34.92 per acre. Therefore, the
proceeds from selling 5.1% of the land area equal 18.4% of the land's initial
cost. This has been accomplished with less than 10% of the land in the 3 highest
value categories having been sold.
The emphasis has been on selling agricultural land (48.0% by acreage, 44.1%
by proceeds) and land which could be used for rural/suburban/urban living (23.5%
by acreage, 30.9% by proceeds). The lowest average sales price in any category
in any year so far was $54.48 per acre.
In most cases when land is sold, Nevada Land retains the mineral rights.
WATER RIGHTS AND WATER STORAGE
We first entered the water rights and water storage business through our
acquisition of Vidler Water Company, Inc. in 1995. Since then, we have acquired,
and continue to acquire, additional properties, water rights, and water storage
assets.
The water rights and water storage business is relatively new and complex.
For a glossary of terms and more information, please refer to Vidler's web-site
at www.vidlerwater.com .
A water right is the legal right to divert water and put it to beneficial
use. Water rights are tradable assets which can be bought and sold, or the use
of the water can be leased. Water law and terminology vary from state to state.
The value of a water right depends on a number of factors, including location,
the seniority of the right, and whether or not the right is transferable.
We believe that Vidler is one of the leading private companies in the water
rights and water storage business in the southwestern United States. Our
management identified water as an attractive industry to invest in for the
following reasons:
- there is an escalating supply/demand imbalance for water in the
southwest. There are already disparities in both timing and location
between available supplies and the areas of highest demand. Meanwhile,
demand continues to rise rapidly, fuelled by population growth,
economic development, environmental mandates, and the claims of Native
Americans;
- the market is highly inefficient; and
- the end product - water - is a low-cost item which is essential to
consumers.
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While there is enough water in the region to meet foreseeable demand, the
allocation of this water is inefficient. Examples of Inefficiencies which create
opportunity for private providers such as Vidler include:
- the majority of water rights are currently controlled by agricultural
users. In many locations, there are insufficient water rights
controlled by municipal users to meet present and future demand;
- the procedures for interstate transfer of water from parties with
excess supply in one state to end-users in other states are
ineffective. For example, the state of California is currently taking
more water from the Colorado River than it is entitled to. However,
regulation and procedures are steadily being developed to facilitate
the interstate transfer of water; and
- infrastructure to store water will be required to facilitate
interstate transfer and transfers from wet years to dry years.
Currently there is only very limited storage capacity in place.
Vidler is engaged in the following activities:
- acquiring water rights, redirecting the water to its highest and best
use, and then generating cash flow from either leasing the water or
selling the right;
- development of storage and distribution infrastructure;
- purchase and storage of water for resale in dry years; and
- working with municipalities and state legislators to facilitate the
passing of legislation which will result in the efficient allocation
of water.
Vidler's business involves identifying end users, namely municipalities or
developers, in the southwest who require water, and then locating a source and
supplying the demand, utilizing the company's own assets where possible. These
assets comprise:
- water rights in the states of Colorado, Arizona, Nevada and
California. Vidler only acquires water rights in locations where there
is current demand or where near-term demand has been clearly
identified. Vidler seeks to acquire water rights at prices consistent
with their current use, with the expectation of an increase in value
if the right can be converted to a higher use; and
- water storage facilities in Arizona and California. A storage facility
earns revenue from charging customers fees for:
- "recharge," or inflow;
- storage; and
- "recovery," or outflow.
Vidler currently earns revenue from leasing land and water to other
parties, and from selling water assets. Vidler owns a number of significant
assets which are not yet generating cash flow. If Vidler is successful in
commercially developing its water and water storage assets, revenues could be
significantly higher in future years if Vidler:
- secures significant supply contracts utilizing its water rights in
Arizona and Nevada; and
- obtains contracts to store water at its water storage facilities in
Arizona and California.
Vidler's initial objective was to assemble a portfolio of water and water
storage assets that would form a viable base for further expansion. The current
priority is to develop recurring cash flow from the existing assets. In
addition, Vidler has entered into joint ventures with parties who lack the
capital or expertise to commercially develop water rights, and continues to
explore additional joint venture opportunities.
This table details Vidler's assets. Please note that this is intended as a
summary. All numbers are rounded to the nearest whole number. Item 7 of this
Form 10-K contains more detail about these assets, recent developments affecting
them, and the current outlook.
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NAME OF ASSET & BRIEF DESCRIPTION PRESENT COMMERCIAL USE
APPROXIMATE LOCATION
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ARIZONA:
HARQUAHALA VALLEY 18,637 acres of irrigated fee title land and 1,902 Leased to farmers.
70 miles northwest acres of leased state land
of metropolitan Phoenix
Approximately 55,913 acre-feet (one acre of
water one foot deep) of transferable
groundwater. Recent state legislation allows
use of the Central Arizona Project Aqueduct
to convey up to 20,000 acre-feet from this
area to cities and communities in the Phoenix
metropolitan area as an assured municipal
water supply.
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VIDLER RECHARGE An underground water storage facility with estimated
FACILITY capacity exceeding 1 million acre-feet and annual
inflow and outflow capability of more than
100,000 acre-feet. The pilot program was
completed and recharging began on schedule in
1998. Permits are now being obtained for the
full-scale project.
NEVADA:
BIG SPRINGS RANCH 39,000 acres of deeded ranchland Leased to ranchers.
120 miles west of Salt Lake 6,398 acres of developable land in and around
City West Wendover, Nevada, which were recently acquired in a
land exchange with the Bureau of Land Management
6,000 acre-feet of certificated water rights,
which are the only known practical source of
water to support new growth at Wendover and
West Wendover
6,000 acre-feet of permitted water rights (these are
less senior than certificated water rights)
5,950 acre-feet of water rights applications*
MESQUITE PROJECT water right applications* for more
than 100,000 acre-feet through a joint
venture with Lincoln County
agreement to supply a developer with up to 17,000
acre-feet and to construct the infrastructure
required to deliver the water
SILVER STATE LLC water right applications* for 51,000 acre-feet
SANDY water right applications* for 2,000 acre-feet
* The numbers provided for water rights
applications indicate the maximum amount
which we have filed for. The actual permits
we ultimately receive are anticipated to be
for smaller quantities.
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COLORADO:
VIDLER WATER TUNNEL a 7,500 foot collection and delivery system which Under lease.
transports water between the east and west slope of
the Continental Divide.
476 acre-feet of senior water rights 61 acre-feet leased.
630 acre-feet of junior water rights
1,000 acre-feet of conditional water rights
CLINE RANCH 600 acre-feet of senior water rights
WET MOUNTAIN 1,000 acre-feet of priority water rights
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CALIFORNIA:
SEMITROPIC WATER STORAGE The right to store 185,000 acre-feet of water
FACILITY underground for 35 years
purchase and storage of water for resale in dry years
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PROPERTY & CASUALTY INSURANCE
PICO's Property and Casualty Insurance operations are conducted by our
California-based subsidiaries Sequoia Insurance Company and Citation Insurance
Company.
Sequoia writes property and casualty insurance in California and Nevada,
focusing on the niche markets of farm insurance and small to medium-sized
commercial insurance. Sequoia writes a small amount of personal insurance, and
is pursuing two opportunities to increase this business.
In the past, Citation wrote commercial property and casualty insurance in
California and Arizona. After the reverse merger was completed, we identified
redundancy between Citation and Sequoia, and combined the operations of the two
companies. Sequoia now directly writes all business in California and Nevada.
Citation is licensed in 7 states, but Arizona is the only state where it is
directly writing and the level of premium generated is minor.
In this segment, revenues come from premiums earned on policies written and
investment income on the assets held by the insurance companies.
The management of Sequoia and Citation take a very selective approach to
underwriting and aim to earn an underwriting profit. During the period of our
ownership, there have also been a number of management initiatives to improve
efficiency and reduce expenses. These include the combination of the operations
of Sequoia and Citation, the introduction of an innovative information system,
and the re-underwriting of each company's book of business.
Despite the disruption which inevitably results from these changes, Sequoia
has outperformed industry averages by earning a profit from its insurance
activities, before investment income, in each of the past 3 years.
Citation has incurred losses from its insurance business due to a large
number of claims in one line of business--artisans/contractors construction
defect insurance - which Citation stopped writing in 1995, the year before the
reverse merger.
MEDICAL PROFESSIONAL LIABILITY INSURANCE
Until 1995, Physicians Insurance Company of Ohio and The Professionals
Insurance Company wrote medical professional liability insurance, mostly in the
state of Ohio. Physicians and Professionals have stopped writing new business
and are being "run off". This means that they are handling claims arising from
historical business, and selling investments when funds are needed to pay
claims.
As expected during the run-off process, the bulk of this segment's revenues
come from investment income. The Physicians and Professionals portfolios contain
some of our strategic investments. This was a factor in our management's
decision that the most advantageous alternative was to have Physicians' own
claims staff manage the run-off and for us to retain management of the
associated investment portfolios.
OTHER STRATEGIC HOLDINGS
As well as investing assets held by the insurance subsidiaries as part of
their business, PICO sometimes makes strategic investments with its general
corporate funds. The Other Strategic Holdings segment comprises investments
where we own less than 50% of the company, and our smaller subsidiaries.
PICO invests in companies which our management identifies as undervalued
based on fundamental analysis. Typically the stocks will be selling for less
than tangible book value or appraised intrinsic value -- what we think the
company is worth. Often the stocks will also be trading for low ratios of
earnings and cash flow, or on high dividend yields. Additionally the company
must have special qualities, such as unique assets, potential catalysts for
change, or attractive industry characteristics.
We invest for the long-term, typically 3 to 7 years, and seek to develop a
constructive relationship with the company. This may include an appropriate
level of shareholder influence, such as encouraging companies to use proper
financial criteria when making capital expenditure decisions, or providing
financing or strategic input. In the case of large holdings, this will usually
include board representation.
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Before a substantial sum is invested, after significant research and
analysis, we must be convinced that - for an acceptable level of risk - there is
sufficient value to provide the opportunity for superior returns. On rare
occasions, we will deviate slightly from our strict value criteria. In these
cases, higher risks dictate smaller financial commitments.
Investments are sold if their price has significantly exceeded our
objective, or there have been changes in the business or company which we
believe limit further appreciation potential.
Realized gains from the sale of strategic holdings have been an important
contributor to growth in shareholders' equity. The sale of strategic investments
contributed an aggregate of $55.1 million in pre-tax gains in the 1996, 1997,
1998 and 1999 income years.
Our largest strategic investments are in HyperFeed Technologies, Inc.,
Jungfraubahn Holding A.G., and Australian Oil & Gas Corporation Limited. At
year-end, the carrying value of these three strategic holdings was $41.7
million. After allowing for related taxes, these three strategic holdings
represented 22.7% of shareholders' equity on December 31, 1999.
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December 31, 1999 Carrying value Shares held Closing price
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Carrying value before taxes:
HyperFeed Technologies, Inc. Common & preferred $ 2,773,000 7,156,538 $4.625
Warrants 15,391,000 4,055,195 unlisted
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Total $18,164,000 11,211,733
Jungfraubahn Holding A.G. 15,305,000 109,200 $140.16
Australian Oil & Gas Corporation Limited 8,280,000 7,444,460 $1.11
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Total carrying value before taxes $41,749,000
Deferred taxes (3,340,000)
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Carrying value, net of taxes $38,409,000
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Notes: 1. Our HyperFeed common and preferred shares are carried
under the equity method. This is cost, adjusted for our
proportionate share of net losses and other events affecting
HyperFeed's equity.
2. Our HyperFeed warrants are carried at estimated fair
value, based on the Black-Scholes model. Full detail is provided in
Note 4 of Notes to Consolidated Financial Statements, "Investment in
Unconsolidated Affiliates"; however, the volatility of the common
shares, and their price at December 31, 1999 are important inputs in
the valuation. Since the HyperFeed price can be volatile, the carrying
value of the warrants can fluctuate considerably from quarter to
quarter. We are required to use this accounting treatment; however, it
introduces volatility to our reported shareholders' equity.
3. We would have to invest $6.6 million to exercise our
HyperFeed warrants.
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We also have a small portfolio of alternative investments, where we have
deviated from our strict value criteria in an attempt to capitalize on areas of
potentially greater growth without incurring undue risk. The total carrying
value of this portfolio at year-end was $11.5 million, which represents less
than 7% of shareholders' equity. The most significant investments in this group
are Conex Continental, Inc. and SISCOM, Inc.
FUTURE STRATEGY
Over the past 3 years, the majority of PICO's new investments have been in
private companies and foreign public companies. New investments were focused in
these areas because our management perceived that selected private companies and
foreign public companies carried less downside risk and offered greater upside
potential than investment in publicly-traded small-capitalization value equities
in North America. Despite the fact that many of the popular market indicators
are close to record highs, it is well-documented that the majority of stocks in
North America actually declined in price during 1999--particularly
small-capitalization value stocks.
Although we have yet to crystallize the value of our private companies,
namely Nevada Land and Vidler, and foreign public company investments, we are
confident that the overall value of these holdings increased in 1999.
At current price levels, our management believes that selected
small-capitalization value stocks in North America are very attractive on a
risk-adjusted basis. Although the actual investments which PICO makes depend on
many factors, in the foreseeable future it is likely that new investments will
be focused on domestic and foreign small-capitalization value equities, rather
than private companies.
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EMPLOYEES
At December 31, 1999 PICO had 145 employees. A total of 6 employees were
engaged in land, minerals and related water rights operations; 6 in water rights
and storage; 104 in property and casualty insurance operations; 6 in medical
professional liability operations; 7 in investment management operations and 16
in holding company activities.
EXECUTIVE OFFICERS
The executive officers of PICO are as follows:
Name Age Position
---- --- --------
Ronald Langley 55 Chairman of the Board, Director
John R. Hart 40 President, Chief Executive Officer and
Director
Richard H. Sharpe 44 Chief Operating Officer
Gary W. Burchfield 53 Chief Financial Officer and Treasurer
James F. Mosier 52 General Counsel and Secretary
Sheila C. Ferguson 38 Financial Controller
Maxim C. W. Webb 38 Vice President, Investments
Except for Sheila C. Ferguson and Maxim C. W. Webb, each executive officer
of PICO was an executive officer of Physicians prior to the Merger and became an
officer of PICO in November 1996 as a result of the Merger. Sheila C. Ferguson
and Maxim C. W. Webb were officers of Global Equity Corporation and became
officers of PICO upon the effective date of the PICO/Global Equity Corporation
Combination.
Mr. Langley has been Chairman of the Board of PICO since November 1996 and
of Physicians since July 1995 and a Director and Chairman of the Board of Global
Equity Corporation since September 1995. Mr. Langley has been a Director of PICO
since November 1996 and a Director of Physicians since 1993. Mr. Langley has
been a Director of HyperFeed Technologies, Inc., formerly, PC Quote, Inc.
("HyperFeed") since 1995. Mr. Langley has also served as a director of MC
Shipping, Inc. since 1997.
Mr. Hart has been President and Chief Executive Officer of PICO since
November 1996 and of Physicians since July 1995 and President and Chief
Executive Officer and a Director of Global Equity Corporation since September
1995. Mr. Hart has been a Director of PICO since November 1996 and a Director of
Physicians since 1993. Mr. Hart has been a Director of HyperFeed since 1997, a
director of Conex Continental, Inc. since August 1997 and a director of SISCOM,
Inc. since November 1996.
Mr. Sharpe has been Chief Operating Officer of PICO since November 1996 and
an officer of a former affiliate, American Physicians Life Insurance Company for
more than 10 years.
Mr. Burchfield has been Chief Financial Officer and Treasurer of PICO since
November 1996 and an officer of Physicians since March 1990.
Mr. Mosier has served as General Counsel and Secretary of PICO since
November 1996 and of Physicians since October 1984 and in various other
executive capacities since joining Physicians in 1981.
Ms. Ferguson has served in various capacities with the Global Equity
Corporation group of companies since 1993, including Director, Treasurer and
Financial Controller of Forbes Ceylon Limited from 1993 through 1996. Ms.
Ferguson has also served as Financial Controller for Global Equity Corporation
since September 1995 and an officer of Global Equity Corporation since June
1997. Ms. Ferguson became Financial Controller of PICO November 20, 1998.
Mr. Webb has served in various capacities with the Global Equity
Corporation group of companies since 1993, including Vice President, Investments
of Forbes Ceylon Limited from 1994 through 1996. Mr. Webb became an officer of
Global Equity Corporation in November 1997 and Vice President, Investments of
PICO on November 20, 1998. Mr. Webb has been a director of Conex Continental,
Inc. since August 1997 and a director of SISCOM, Inc. since November 1996.
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ITEM 2. PROPERTIES
PICO leases approximately 6,354 square feet in La Jolla, California for its
principal executive offices.
Physicians leases approximately 7,900 square feet of office space in
Reynoldsburg, Ohio for its headquarters. Sequoia leases office space for its and
Citation's headquarters in Monterey, California and for regional claims and
underwriting offices in Modesto, Monterey, Ventura, Visalia, Oceanside, Orange,
Pleasanton, San Jose and Tarzana, California as well as Midvale, Utah. Nevada
Land leases office space in Carson City, Nevada. Vidler and Nevada Land hold
significant investments in land, water and mineral rights in the western United
States. Forbes & Walker (USA), Inc., a wholly-owned subsidiary, leases office
space in New York City, New York which is sub-leased. This lease expires April
2000. See "ITEM 1-BUSINESS-INTRODUCTION."
ITEM 3. LEGAL PROCEEDINGS
Members of PICO's insurance group are frequently a party in claims
proceedings and actions regarding insurance coverage, all of which PICO
considers routine and incidental to its business. Neither PICO nor its
subsidiaries are parties to any potential material pending legal proceedings
other than the following:
On January 10, 1997, Global Equity Corporation commenced an action in
British Columbia against MKG Enterprises Corp., Vignoble Wines Agency Inc. to
enforce repayment of a loan made by Global Equity to MKG. On the same day, the
Supreme Court of British Columbia granted an order preventing MKG from disposing
of certain assets pending resolution of the action. Global Equity subsequently
brought a motion to have a receiver-manager appointed for MKG and Vignoble,
which motion has been adjourned. In addition, in March 1999 Global Equity filed
an action in the Supreme Court of British Columbia against a third party. This
action states the third party had fraudulently entered into loan agreements with
MKG. Accordingly, under this action Global Equity is claiming damages from the
third party and seeking an order restraining the third party from taking any
further action in connection with MKG's assets.
In connection with the sale of their interests in Nevada Land & Resource
Company, LLC by the former members, a limited partnership agreed to act as
consultant to Nevada Land in connection with the maximization of the
development, sales, leasing, royalties or other disposition of land, water,
mineral and oil and gas rights with respect to certain property owned in Nevada.
In exchange for these services, the partnership was to receive from Nevada Land
a consulting fee calculated as 50% of any net proceeds that Nevada Land actually
receives from the sale, leasing or other disposition of all or any portion of
the Nevada property or refinancing of the Nevada property provided that Nevada
Land has received such net proceeds in a threshold amount equal to the aggregate
of: (i) the capital investment by Global Equity and PICO in the Nevada property,
(ii) a 20% cumulative return on such capital investment, and (iii) a sum
sufficient to pay the United States federal income tax liability, if any, of
Nevada Land in connection with such capital investment. Either party could
terminate this consulting agreement in April 2002 if the partnership had not
received or become entitled to receive by that time any amount of the consulting
fee. No payments have been made under this agreement through December 31, 1999.
By letter dated March 13, 1998, Nevada Land gave notice of termination of the
consulting agreement based on Nevada Land's determination of default by the
partnership under the terms of the agreement. In November 1998, the partnership
sued Nevada Land for wrongful termination of the consulting contract. On March
12, 1999, Nevada Land filed a cross-complaint against the partnership for breach
of written contract, breach of fiduciary duty and seeking declaratory relief.
Effective September 1, 1999, the parties entered into a settlement
agreement wherein they agreed that the lawsuit would be dismissed without
prejudice, and that Nevada Land would deliver a report on or before June 30,
2002 to the limited partnership of the amount of the consulting fee which would
be owed by Nevada Land to the limited partnership if the consulting agreement
were in effect.
SEE NOTE 16 OF NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, "COMMITMENTS AND
CONTINGENCIES."
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The common stock of PICO is traded on the Nasdaq National Market under the
symbol PICO. The following table sets forth the high and low sale prices as
reported on the Nasdaq National Market. These reported prices reflect
inter-dealer prices without adjustments for retail markups, markdowns or
commissions.
1998 1999
-------------------------------- ---------------------------
High Low High Low
------------- ------------- ---------- ----------
1ST QUARTER $ 35.31 $ 28.44 $ 20.50 $ 13.00
2ND QUARTER $ 30.00 $ 20.00 $ 25.31 $ 16.19
3RD QUARTER $ 21.88 $ 11.56 $ 24.88 $ 18.19
4TH QUARTER $ 18.75 $ 12.75 $ 20.25 $ 12.31
NOTE: AMOUNTS HAVE BEEN ADJUSTED TO REFLECT THE 1-FOR-5 REVERSE STOCK SPLIT
EFFECTIVE DECEMBER 16, 1998.
As of December 31, 1999, the closing sale price of PICO's common stock was
$12.3125 and there were 1,423 holders of record.
PICO has not declared or paid any dividends in the last two years and does
not expect to pay any dividends in the foreseeable future.
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<PAGE> 12
ITEM 6. SELECTED FINANCIAL DATA
The following table presents PICO's selected consolidated financial data.
The information set forth below is not necessarily indicative of the results of
future operations and should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" in
Item 7 of this Form 10-K and the consolidated financial statements and the
related notes thereto included elsewhere in this document.
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
------------- ------------- -------------- ------------- -------------
OPERATING RESULTS (In thousands, except share data)
<S> <C> <C> <C> <C> <C>
Revenues
Premium income earned $ 36,379 $ 36,131 $ 49,876 $ 38,761 $ 19,542
Net investment income 6,605 9,432 13,520 8,086 9,165
Other income 11,721 1,845 26,623 29,889 12,482
------------- ------------- -------------- ------------- -------------
Total revenues $ 54,705 $ 47,408 $ 90,019 $ 76,736 $ 41,189
============= ============= ============== ============= =============
Income (loss) from continuing operations before
extraordinary gain $ (9,228) $ (9,319) $ 19,156 $ 20,404 $ 15,063
Income from discontinued operations, net 1,075 456 3,301 778
Extraordinary gain, net of tax 442
------------- ------------- -------------- ------------- -------------
Net income (loss) $ (8,786) $ (8,244) $ 19,612 $ 23,705 $ 15,841
============= ============= ============== ============= =============
PER COMMON SHARE RESULTS--BASIC:
Income (loss) from continuing operations $ (1.03) $ (1.56) $ 3.04 $ 3.69 $ 2.75
Income from discontinued operations 0.18 0.07 0.59 0.14
Extraordinary gain, net of tax 0.05
------------- ------------- -------------- ------------- -------------
Net income (loss) $ (0.98) $ (1.38) $ 3.11 $ 4.28 $ 2.89
============= ============= ============== ============= =============
WEIGHTED AVERAGE SHARES OUTSTANDING 8,998,442 5,981,814 6,302,401 5,538,199 5,487,238
============= ============= ============== ============= =============
PER COMMON SHARE RESULTS--DILUTED:
Income (loss) from continuing operations $ (1.03) $ (1.56) $ 2.93 $ 3.55 $ 2.75
Income from discontinued operations 0.18 0.07 0.57 0.14
Extraordinary gain, net of tax 0.05
------------- ------------- -------------- ------------- -------------
Net income (loss) $ (0.98) $ (1.38) $ 3.00 $ 4.12 $ 2.89
============= ============= ============== ============= =============
WEIGHTED AVERAGE SHARES OUTSTANDING 8,998,442 5,981,814 6,540,264 5,748,414 5,487,238
============= ============= ============== ============= =============
</TABLE>
Note: Prior year share values have been adjusted to reflect the 1-for-5
Reverse Stock Split effective December 16, 1998 and the November 20,
1996 reverse merger of Physicians Insurance Company of Ohio and
Citation Insurance Group. Additionally, prior year operating results
have also been adjusted to reflect the treatment of American Physicians
Life Insurance Company as a discontinued operation.
PICO consolidated Global Equity Corporation from August 19, 1997. Prior
to this treatment, Global Equity Corporation was accounted for using
the equity method. SEE NOTE 2 OF NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS, "SIGNIFICANT ACQUISITIONS."
<TABLE>
<CAPTION>
Year Ended December 31
--------------------------------------------------------------------------------
1999 1998 1997 1996 1995
------------- ------------ ------------ ------------- -------------
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C>
FINANCIAL CONDITION
Assets $375,654 $395,176 $430,491 $489,392 $399,292
Unpaid losses and loss adjustment expenses,
net of discount $139,133 $155,021 $196,096 $252,024 $229,797
Total liabilities and minority interest $206,667 $221,746 $318,142 $380,496 $338,517
Shareholders' equity $168,987 $173,430 $112,348 $108,896 $ 60,775
Book value per share $ 18.66 $ 19.38 $ 18.66 $ 17.83 $ 11.65
</TABLE>
Note: Prior year book value per share values have been adjusted to reflect
the 1-for-5 Reverse Stock Split effective December 16, 1998 and the
November 20, 1996 reverse merger of Physicians Insurance Company of
Ohio and Citation Insurance Group. Book value per share is computed by
dividing shareholders' equity by the net of total shares issued less
shares held as treasury shares.
SEE NOTE 2 OF NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, "SIGNIFICANT
ACQUISITIONS" FOR ADDITIONAL DISCUSSION.
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<PAGE> 13
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
COMPANY SUMMARY AND RECENT DEVELOPMENTS
INTRODUCTION
The activities and assets of PICO Holdings, Inc. today are quite different
to those of Citation Insurance Group prior to its reverse merger with Physicians
Insurance of Ohio, Inc. on November 20, 1996.
RECENT DEVELOPMENTS AND FUTURE OUTLOOK
Land, Minerals & Related Water Rights
In 1999 Nevada Land & Resource Company, LLC recorded $5.4 million of
revenue from selling approximately 48,715 acres of land. This represents an
average price of $111.51 per acre, and compares to our average acquisition cost
of $34.92 per acre for the land component of Nevada Land. Also during 1999, we
sold non-strategic water rights for approximately $379,000.
This is the highest level of annual land sales since we acquired Nevada
Land in 1997. In previous years, we did not aggressively pursue land sales until
we had a complete understanding of potential land values from the study of
"highest and best use".
Approximately 80% of the sales (by value) were settled for cash, and Nevada
Land provided partial financing for the balance. Vendor finance is
collateralized by the land, carries a 10% interest rate, and is subject to a
minimum 20% down-payment.
We expect increased land sales and land exchange activity in 2000 and 2001.
Factors contributing to this include:
1. increased demand for private land by mining companies due to more
restrictive use of government land;
2. increased demand from parties seeking to buy land from us to use as
currency to conduct land exchanges of their own; and
3. in an effort to accelerate land exchanges, Nevada Land has recently
employed 2 specialist staff who will be physically located in the Bureau of
Land Management offices.
In 1999, Nevada Land increased its efforts to encourage exploration for
minerals on the property. During 1999, mining leases were granted over 24,015
acres, compared to 8,176 acres in 1998. Should mining commence, the leases
typically entitle Nevada Land to receive a 3.5% net smelter royalty on the gross
production of precious metals and 0.75% on base metals. Although there is no
guarantee that any mines will be developed, potentially Nevada Land could earn
significant royalty income in future years.
In the first quarter of 2000, Nevada Land applied for an additional 30,720
acre-feet of water rights for the beneficial use of irrigating arable land. If
this application is successful, the value and marketability of the associated
7,680 acres of land will increase. In addition, we currently own 4,603 acre-feet
of certificated water rights and 2,896 acre-feet of permitted water rights
related to Nevada Land.
Water Rights and Water Storage Assets
In contrast to previous years when Vidler Water Company concentrated on
acquiring water rights and water storage assets to build a viable platform in
the water industry, in 1999 Vidler's focus shifted to development of the
existing assets.
The most important developments were:
1. MBT RANCH STORAGE
We believe that MBT Ranch Storage is currently Vidler's most significant
individual asset.
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<PAGE> 14
Vidler is in the process of constructing a facility to store water
underground at MBT Ranch, in the Harquahala Valley, approximately 75 miles west
of the Phoenix metropolitan area. The facility will be capable of storing
surplus water in a large aquifer underlying much of the valley. When needed,
water will be recovered from the aquifer by groundwater wells.
The MBT Ranch water storage facility is strategically located adjacent to
the Central Arizona Project Canal, a conveyance canal running from Lake Havasu
to Phoenix and Tucson. We believe that proximity to the CAP is a competitive
advantage, because it minimizes the cost of water conveyance facilities.
On November 1, 1999, Federal interstate water banking regulations were
published which will allow water from the Colorado River to be stored offstream
in Arizona's Lower Basin for use in the Lower Division States, Arizona,
California and Nevada. Since year-end, these regulations have also been approved
by the State of Arizona.
When complete, MBT Ranch Storage will be able to provide storage to effect
interstate transfers of water. MBT Ranch Storage is likely to be the first
privately-owned water storage facility for the Colorado River system, which is a
primary source of water for the Lower Division States. Potential users include
local governments in Arizona, the Las Vegas metropolitan area, California, and
the Bureau of Reclamation.
Vidler intends to charge an annual fee based on the amount of water stored,
plus separate fees for the recharge, or inflow, and recovery, or outflow, of
water.
In October, 1998, construction of the pilot program was completed and
recharging began on schedule. The pilot plant was constructed to determine the
most cost-effective method of recharging water, and to obtain hydrogeologic data
required to submit the permit for the full-scale project. To this point, only
the pilot facility has been permitted and constructed, and Vidler has not
attempted to store water at commercial levels.
During the second quarter of 2000, Vidler expects to receive the necessary
permits to operate a full-scale recharge facility. Within 12 months of the
necessary permits being issued, Vidler expects to enter into agreements to lease
storage capacity. Construction of the recharge and storage facility is expected
to take 6 months at a cost not exceeding $10 million.
Once Vidler has concluded agreements to store water, it will know the rate
at which customers need to be able to recover water. At that time, Vidler will
be able to design, construct and finance the final stage of the project which
will allow full-scale recovery. The cost of constructing the improvements
required to recover water at commercial rates cannot be accurately predicted
until the needs of Vidler's customers are determined, although this could equal
or exceed the $10 million required for the storage facility. Vidler will not be
constructing the improvements for full-scale recovery until binding storage
contracts are in place.
Vidler's full-scale recharge facility is anticipated to have the capacity
to recharge 100,000 acre-feet per year and to store in excess of 1 million
acre-feet in the aquifer underlying Harquahala Valley. Vidler's estimate of the
aquifer's storage volume was primarily based on a hydrological report prepared
by an independent engineering firm for the Central Arizona Water Conservation
District in 1990. The report concluded that there is storage capacity of 3.7
million acre-feet, which is in excess of the 1 million acre-feet indicated by
Vidler.
Vidler will have the right to recover the water it recharged to the
subsurface under both the pilot permit and the submitted full-scale permit.
Vidler is not required to recover the same molecules of water that it stores,
only the same quantity of water.
Recharge/recovery capacity is significant because it indicates how fast
water can be stored underground or pumped from the underground. In wet years, it
is important to have a high recharge capacity so that as much available water as
possible may be stored. In dry years, the critical factor is the ability to
recover water as quickly as possible. There is a long history of recovering
water from the aquifer for agricultural users.
2. HARQUAHALA VALLEY
During 1999, Vidler acquired approximately 26,926 acre-feet of water rights
in the Harquahala Valley, which is located approximately 70 miles northwest of
metropolitan Phoenix. Including approximately 1,140 acre-feet of water rights at
MBT Ranch, at December 31, 1999, Vidler controlled approximately 55,913
acre-feet of transferable groundwater in the Harquahala Valley area.
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<PAGE> 15
One of the constraints on actually beginning to lease water to customers is
the requirement for the water to be conveyed ("wheeled") through the Central
Arizona Project Aqueduct ("CAP"). Vidler anticipates negotiating a "wheeling
contract" which would allow it to transport water to end-users within Arizona
through the Central Arizona Project.
In the meantime, the Arizona State Legislature recently passed legislation
which commits the CAP to convey up to 20,000 acre-feet per annum of Harquahala
groundwater to cities and communities in Arizona as an assured municipal water
supply. Vidler is in a position 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.
There are also potential uses for the water within the Harquahala Basin. To
illustrate this point, in the first quarter of 2000, Vidler granted a 24-month
option to an electricity generation company to acquire 1,700 acres of land and
the associated 5,100 acre-feet of water rights. There will be a lengthy
permitting and approval process. Should the option be exercised, the purchase
price will be $4,200 per acre of land (or the equivalent of $1,400 per acre-foot
of water).
3. BIG SPRINGS RANCH
In 1999, Big Springs Ranch completed a land exchange with the Bureau of
Land Management which exchanged approximately 70,499 acres of ranch land for
approximately 6,398 acres of developable land in and around West Wendover,
Nevada.
West Wendover is a rapidly-growing city adjacent to the Nevada/Utah border
in the Interstate 80 corridor. Vidler is exploring its options for the land.
These may include sales or joint ventures with developers.
4. THE MESQUITE PROJECT
In October, 1999, Vidler announced a public/private joint venture with
Lincoln County which had filed more than 100,000 acre-feet of water rights
applications, covering substantially all of the unappropriated water in the
county. The joint venture intends to supply water to rapidly-growing communities
in southern Nevada. The joint venture has announced an initial agreement to
supply developers in Mesquite with up to 17,000 acre-feet of water and to
construct the necessary infrastructure. The developers have a minimum
take-or-pay obligation for 2,000 acre-feet in 2003, rising in annual increments
of 2,000 acre-feet to 10,000 acre-feet in 2007. The take-or-pay obligation is
comprised of a one-time reservation fee of $1,500 per acre-foot and an ongoing
annual user fee, starting at $415 per acre-foot and escalating at 5%. A
take-or-pay obligation means that the developers are required to pay Vidler for
the agreed amount of water each year, whether they take it or not. Nothing has
been received under this agreement to date.
This joint venture is an example of a transaction where Vidler can partner
with an entity (in this case a public entity) to provide them with the necessary
capital and skills to commercially develop water assets.
5. THE COLORADO ASSETS
Vidler is progressing with the sale of all of the water rights which are
currently unutilized, namely approximately 415 acre-feet of absolute senior
water rights associated with Vidler Tunnel, approximately 600 acre-feet of
senior rights at Cline Ranch, and approximately 700 acre-feet of priority water
rights at Wet Mountain.
In particular, subject to approval by the Denver Water Court, Vidler has
agreed to sell its interest in Cline Ranch to Centennial Water and Sanitation
District for approximately $2.1 million.
6. NEW APPLICATIONS FOR WATER RIGHTS
Vidler has filed approximately 2,000 acre-feet of water rights applications
at Sandy, Nevada.
7. SEMITROPIC
Vidler has an 18.5% interest (i.e. right to participate) in a water storage
facility at Semitropic, near the California Aqueduct, northwest of Bakersfield.
Currently Vidler is not storing any water at Semitropic for third parties,
however it is actively pursuing a number of
15
<PAGE> 16
potential customers. In the future, Vidler will be able to provide storage to
facilitate exchanges and water transfers within California, such as the transfer
of water from northern California to southern California.
Over the first 10 years of the agreement with the Semitropic Water Storage
District, Vidler is required to make a minimum annual payment of $2.3 million.
Vidler began making the annual payments in November, 1998. In return, Vidler has
the right to store up to 185,000 acre-feet of water underground over a 35-year
period. Vidler is also required to make an annual payment for operating expenses
which amounted to $863,000 in 1999.
In 1999, Vidler "banked", or stored, approximately 6,300 acre-feet of water
at Semitropic with the intention of selling or leasing the water in a dry year.
Vidler purchased the water from the Interruptible State Water Project, and was
the first private entity to purchase water from the Interruptible State Water
Project for resale.
8. SUMMARY
In the coming year, Vidler's focus will be on:
- generating cash flow from the water rights in Arizona, Nevada and
Colorado through pursuing lease agreements or the sale of
non-strategic assets;
- completing permitting and construction of the MBT Ranch Storage
facility and entering into agreements to lease storage capacity to
customers;
- leasing storage capacity to customers at Semitropic; and
- pursuing present and additional water rights applications and
partnerships to commercially develop water rights.
Property & Casualty Insurance
As a result of intense competition in the California marketplace and the
company's strategy of carefully selecting the business which it is prepared to
underwrite, Sequoia Insurance Company has experienced declines in net written
premiums in each of the past 3 years. The rate of decline began to slow in the
latter part of 1999, and written premiums are up slightly in both January and
February, 2000, compared to the same months in 1999. Sequoia's management
believes that premium volume will stabilize at around current levels, if not
increase.
Sequoia may be able to earn a higher return on capital if it were able to
use its current level of surplus to write more premium volume. To achieve this,
Sequoia is examining two separate opportunities to offer selected lines of
personal insurance through direct channels.
In 1999, Citation Insurance Company incurred an underwriting loss
principally due to a large number of claims in artisans/contractors insurance.
This business was written under Citation's previous management. Citation ceased
writing this insurance coverage in 1994, two years before the reverse merger,
and none was renewed after the merger. Citation has taken charges in each of the
past 3 years to increase claims reserves in this line of business, including a
pre-tax charge of $10.1 million in 1999. This charge was calculated on the basis
of current claims trends. If current claims trends continue, we believe that our
loss reserves in this line of business are adequate. However, if the trend in
claims worsens in the future, then additional charges could be required to
increase reserves.
In 1998 and 1999, Sequoia and Citation "pooled," or shared, most of their
premiums and expenses. Subject to regulatory approval, this pooling arrangement
will be terminated from January 1, 2000. Citation has ceased to write new
business, apart from a minor level in the State of Arizona.
Medical Professional Liability Insurance
Due to unfavorable claims trends, in 1999 we took a pre-tax charge to
increase Physicians Insurance Company of Ohio's loss reserves by $5 million, or
$3.8 million after the related reserves were discounted to reflect the time
value of money. This addition to claims reserves was due to a higher than
expected number of insurance claims in 1999 for prior years' accidents,
compounded by the fact that many of the claims were for smaller than expected
amounts, causing more of them to fall below our reinsurance deductibles. This
means that we need to pay valid claims ourselves, and that we cannot recover as
much as we previously anticipated fom our reinsurers.
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<PAGE> 17
Other Strategic Holdings
1. HYPERFEED TECHNOLOGIES, INC.
HyperFeed is a premier Internet content and solutions provider to the
financial services industry. HyperFeed has a number of business-to-business
solutions, and its business-to-consumer subsidiary PCQuote.com is an
Internet-based provider of high performance, real-time financial data.
PICO first invested in HyperFeed in 1995 through the purchase of common
stock. We invested further capital in HyperFeed as debt which was later
converted to equity, and received warrants for providing financing. Shares of
HyperFeed closed 1999 at $4 5/8. If we were to exercise all of the HyperFeed
warrants which we own, the cash cost of our investment would be approximately
$17 million, or $1.518 per HyperFeed share.
Since our initial investment in HyperFeed, the company's revenues have
grown from $13.4 million in 1995 to $33.1 million in 1999. Revenues were up 44%
in the 1999 year, and climbed 50% to $9.1 million in the fourth quarter. When
announcing the 1999 results on March 7, 2000, HyperFeed's Chief Financial
Officer, John Juska, indicated that HyperFeed expected to be "profitable in the
second half" of 2000 at the net income level.
HyperFeed contributed an equity loss of $1.6 million to PICO's 1999 net
loss. This is a non-cash item to PICO.
2. JUNGFRAUBAHN HOLDING A.G.
During 1999, PICO increased its shareholding in Jungfraubahn to 109,200
shares, which equates to a shareholding of approximately 18.7%. At year-end, our
investment in Jungfraubahn had a cost basis of $14.9 million, a market value of
$15.3 million, and a net book value of $15.2 million, after allowing for taxes
on the unrealized gain.
3. AUSTRALIAN OIL AND GAS CORPORATION LIMITED
During the year we increased our shareholding to 7,444,460 shares,
representing approximately 15.9% of Australian Oil and Gas. At December 31,
1999, the investment had a cost basis of $7.8 million, a market value of $8.3
million, and a net book value of $8.1 million, after allowing for taxes on the
unrealized gain.
4. CONSOLIDATION OF CONEX CONTINENTAL, INC.
In the fourth quarter of 1999, PICO converted all of the securities which
it held in Conex to common shares. At December 31, 1999, PICO owned 228,148,343
common shares in Conex, equivalent to 83.4% of the company. Conex was an
equity-accounted affiliate until it became a consolidated subsidiary on August
3, 1999.
Conex's principal asset is a 60% interest in Guizhou Jonyang Machinery
Industry Limited, a joint venture which manufactures wheeled and tracked
hydraulic excavation equipment in the Guizhou province of the People's Republic
of China. Conex accounts for this stake by the equity method so the interest in
the joint venture is not consolidated into the financial statements of either
Conex or PICO.
At year-end, the carrying value of PICO's stake in Conex was $5.8 million,
after deducting the interest of the outside shareholders in Conex. In 1999,
Conex contributed a net loss of $2.1 million to PICO, after outside equity
interests.
5. CONSOLIDATION OF SISCOM, INC.
We have been building our investment in SISCOM since 1996, which culminated
in SISCOM becoming a consolidated subsidiary in 1999. We now own 4,431,000
common shares and 1,250,000 convertible preferred shares in SISCOM, which
represents 54.6% of SISCOM's voting stock. Assuming conversion of our preferred
stock and the exercise of all options and warrants which SISCOM has outstanding,
we own approximately 45.4% of SISCOM.
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<PAGE> 18
SISCOM markets its own proprietary technology to the sports and broadcast
industries. HyperVideo, SISCOM's flagship product, is emerging as a critical
component for content companies and organizations seeking to manage and improve
the value of their digital video assets. HyperVideo captures, annotates, stores,
retrieves, edits, and outputs digital video. SISCOM is actively exploring ways
to leverage this technology in the broadband delivery of combined video and
related information associated with the digital assets, either through the
internet or set-top boxes.
After deducting the interest of the outside shareholders in SISCOM, at
December 31, 1999, the carrying value of our investment in SISCOM was
approximately $1.7 million, and SISCOM contributed a 1999 net loss of
approximately $413,000.
6. PROSPECT OIL & GAS, INC.
Prospect Oil & Gas is engaged in precision horizontal drilling in proven
oil and gas fields in North Dakota. The rate of decline on pilot program wells
was greater than anticipated and did not justify further drilling. In the fourth
quarter of 1999, we took a pre-tax charge of $3.2 million to write down the
carrying value of our investment in the oil and gas venture to $1 million.
In the first quarter of 2000, a private oil and gas company acquired our
interest in Prospect Oil & Gas for $1 million in stock.
Rights Offering
On February 9, 2000, we registered on Form S-3 with the U. S. Securities
and Exchange Commission to offer 6,546,497 shares of PICO stock at a price of
$15 per share in a rights offering. You should refer to the Form S-3 dated
February 9, 2000 for full information.
Shareholders were offered 1 right to buy 1 new share at $15 for every 2
common shares held at March 1, 2000.
An investment partnership called PICO Equity Investors, L.P. has agreed to
acquire shares that are not subscribed for, up to a total of 3,333,333 shares
with an aggregate subscription price of $50 million. In the event that less than
3,333,333 shares of common stock remain unpurchased by our shareholders on March
27, 2000, PICO Holdings, Inc. has committed to sell, and PICO Equity Investors,
L.P. has committed to purchase, the number of shares necessary to increase the
total number of shares purchased by PICO Equity Investors, L.P. to 3,333,333.
We intend to use the net proceeds of the offering for developing existing
water and water storage assets, acquiring additional water assets, strategic
investments, and general working capital needs. Also, see Note 23 of Notes to
Consolidated Financial Statements, "Subsequent Events."
RESULTS OF OPERATIONS -- YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
SUMMARY
PICO reported a net loss of $8.8 million, or $0.98 per diluted share, for
1999 compared with a net loss of $8.2 million, or $1.38 per diluted share, in
1998 and net income of $19.6 million, or $3.00 per diluted share, during 1997.
Although the net loss is 6.6% higher in 1999, the loss per share is 29% lower
than in 1998 because the weighted average number of shares in 1999 was higher
than in 1998. This resulted from the shares issued to acquire the outstanding
minority shareholdings in Global Equity Corporation at December 16, 1998, which
were only outstanding for a short period in 1998, but for the full year of 1999.
Shareholders' equity at December 31, 1999 was $169 million, compared to
$173.4 million at the previous year-end. Book value per share at December 31,
1999, calculated on an undiluted basis net of treasury shares, was $18.66
compared to $19.38 at year-end 1998. The 1999 change in shareholders' equity
resulted primarily from the following:
- an increase of $2.9 million in additional paid-in capital from the
exercise of 120,000 warrants;
- an increase of $3.3 million from improvement in net unrealized
investment gains, net of tax;
- an $8.8 million decrease from the 1999 net loss; and
- a reduction of $1.6 million from unrealized foreign currency
translation loss.
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The 1999 $8.8 million net loss consisted of a $23.3 pre-tax million loss
from continuing operations, partially offset by a $13.3 million income tax
benefit, $706,000 in minority interest and a $442,000 extraordinary gain, net of
tax. This compares to a $12.6 million loss from continuing operations in 1998
($23.8 million in income in 1997), $1.3 million in income tax expense in 1998
($7.8 million of expense in 1997) and income from discontinued operations in
1998 of $1.1 million ($456,000 in 1997).
Income tax benefits recorded in 1999 of $13.3 million included reductions
in income tax valuation allowances of $8.4 million. Of this amount, $6.5 million
became available as a result of recent changes in federal income tax
legislation.
Included in PICO's $23.3 million loss from continuing operations before
taxes and minority interest were the following:
LAND, MINERALS AND RELATED WATER RIGHTS
- - $1.1 million in income from Nevada Land & Resource Company, on revenues of
$7.1 million, excluding an extraordinary gain of $670,000, before taxes;
WATER RIGHTS AND WATER STORAGE
- - A $4.6 million loss from Vidler Water Company, on revenues of $1.1 million;
PROPERTY AND CASUALTY INSURANCE
- - $2.2 million in income from Sequoia Insurance Company, including $401,000
of favorable loss development;
- - A $5.9 million loss from Citation, including $10.1 million in unfavorable
claims experience from artisan/contractors insurance coverage;
Citation discontinued writing artisan/contractors insurance in 1994, prior
to our merger. See "Property and Casualty Insurance" for a more detailed
discussion.
MEDICAL PROFESSIONAL LIABILITY INSURANCE
- - A $4.8 million loss from Physicians Insurance Company of Ohio;
Physicians added $2.6 million to gross insurance loss and loss adjustment
expense reserves principally due to unfavorable claims frequency. Although
claims frequency was higher than expected, claims severity was less than
expected, which resulted in fewer than expected claims exceeding reinsurance
retention levels and a resultant $3.6 million decrease in expected reinsurance
recoveries. This was partially offset by claims reserve discounting of $1.2
million and a reduction in prior reinsurance premiums of $1.9 million.
OTHER STRATEGIC HOLDINGS
- - $2.6 million in realized investment gains from the sale of European
securities;
- - $3.2 million permanent write-down of a portion of an oil and gas
investment;
- - $2.5 million loss from Conex Continental Inc. and its sino-foreign joint
venture (before minority interest of $447,000);
- - $2.1 million loss from HyperFeed Technologies, Inc.;
- - $672,000 loss from SISCOM, Inc. (before minority interest of $259,000);
- - $4.1 million in overhead expenses; and
- - $1.4 million in various other expenses, net of other income.
PICO's ongoing operations are organized into five segments: Land, Minerals
and Related Water Rights; Water Rights and Water Storage; Property and Casualty
Insurance; Medical Professional Liability Insurance; and Other Strategic
Holdings.
Revenues and income before taxes and minority interests from continuing
operations, by business segment, are shown in the following schedules:
19
<PAGE> 20
OPERATING REVENUES--CONTINUING OPERATIONS:
Year Ended December 31,
-------------------------------------
1999 1998 1997
---------- ---------- ---------
(in millions)
Land, Minerals and Related Water Rights $ 7.1 $ 2.8 $ 2.8
Water Rights and Water Storage 1.1 0.6 0.3
Property and Casualty Insurance 40.0 42.9 57.0
Medical Professional Liability Insurance 3.1 2.4 3.9
Other Strategic Holdings 3.4 (1.3) 26.0
---------- ---------- ---------
Total Revenues-Continuing Operations $ 54.7 $ 47.4 $ 90.0
========== ========== =========
Revenues for 1999 were $54.7 million, compared to $47.4 million in 1998 and
$90 million in 1997. Excluding realized investment gains and losses, revenues
increased $2.4 million over 1998, primarily due to increased land sales in our
land, minerals and related water rights operations, but were $14.4 million less
than in 1997. Lower property and casualty insurance earned premiums accounted
for most of the decline since 1997. Property and casualty insurance premiums and
a reinsurance premium reduction from medical professional liability insurance
resulted in premium income for 1999 that was slightly higher than in 1998.
Property and casualty insurance premium writings declined in 1998, primarily due
to more stringent underwriting standards applied to Citation's property and
casualty insurance business, as well as continued aggressive competition for
commercial multiple peril insurance business within California.
INCOME (LOSS) BEFORE TAXES AND MINORITY INTEREST--CONTINUING OPERATIONS:
-----------------------------------------------------------------------
Year Ended December 31,
-------------------------------------
1999 1998 1997
---------- ----------- ----------
(in millions)
Land, Minerals and Related Water Rights $ 1.1 $ 0.2 $ 0.6
Water Rights and Water Storage (4.6) (2.0) (0.6)
Property and Casualty Insurance (3.7) 2.8 5.6
Medical Professional Liability Insurance (4.8) (4.4) 0.8
Other Strategic Holdings (11.3) (9.2) 17.4
---------- ----------- ----------
Income (Loss) Before Tax and Minority
Interest $ (23.3) $ (12.6) $23.8
========== =========== ==========
Total expenses for 1999 were $73.9 million, compared to $58.4 million in
1998 and $64.7 million in 1997. Included in the 1999 total were loss and loss
adjustment expenses of $35.2 million, compared to $30.5 million during the same
1998 period, and $34.3 million during 1997. Loss and loss adjustment expenses
would have been considerably lower had it not been for the significant reserve
strengthening taken in 1999 by our insurance operations, as discussed above.
Total assets at December 31, 1999 were $375.7 million, compared to $395.2
million at December 31, 1998. Most of this decline resulted from the payment of
insurance claims by Physicians, which reduced insurance liabilities and
corresponding cash and cash equivalent balances, investments and reinsurance
receivables.
20
<PAGE> 21
Shares outstanding and per share calculations for prior years have been
adjusted to reflect the December 16, 1998 1-for-5 Reverse Stock Split following
the PICO/Global Equity Corporation Combination.
In June 1997, the Financial Accounting Standards Board established standards
for disclosure of comprehensive income, which PICO adopted in 1998. As the name
suggests, comprehensive income includes more than just the income reported in
the statement of operations. For PICO, it also includes foreign currency
translation and the change in unrealized investment gains and losses on
available for sale securities. In 1999, PICO recorded a comprehensive loss of $7
million. The 1999 comprehensive loss included the $8.8 million net loss, as
discussed above, and a $1.6 million decrease due to foreign currency
translation. Included in 1999 comprehensive loss was an offsetting unrealized
gain of $3.3 million from the increase in value of investments, principally
HyperFeed warrants. The 1999 comprehensive loss of $7 million compares to a
$11.2 million loss in 1998, which included an $8.2 million net loss, $39,000 in
net unrealized investment gains and a loss in accumulated foreign currency
translation of $3 million. Comprehensive income for 1997 was $4.3 million, which
included $19.6 million in net income (principally due $21.4 million in realized
gains from the sale of PICO's investment in Resource America, Inc., before tax),
a $13.2 million unrealized depreciation of investments , and a loss in
accumulated foreign currency reserve of $2.2 million.
LAND, MINERALS AND RELATED WATER RIGHTS
LAND, MINERALS AND RELATED WATER RIGHTS
NEVADA LAND & RESOURCE COMPANY, LLC
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
1999 1998 1997
---- ---- ----
(in millions)
<S> <C> <C> <C>
REVENUES - LAND, MINERALS AND RELATED WATER RIGHTS:
Sale of Land, Minerals and Related Water Rights $ 5.8 $ 2.0 $ 1.5
Lease and Other Income 1.3 0.8 1.3
--------- --------- ---------
Segment Total Revenues $ 7.1 $ 2.8 $ 2.8
========= ========= =========
INCOME BEFORE TAX
Nevada Land and Resource Company LLC 1.1 0.2 0.6
--------- --------- ---------
Income Before Tax $ 1.1 $ 0.2 $ 0.6
========= ========= =========
</TABLE>
Revenues generated from Nevada Land were approximately $7.1 million during
1999, compared to $2.8 million in 1998 and $2.8 million for the period April 23,
1997 to December 31, 1997. Most of this significant growth in 1999 resulted from
the sale of 48,715 acres of land for proceeds of $5.4 million compared to 5,866
acres in 1998 for proceeds of $1.7 million and 14,949 acres in 1997 for proceeds
of $1.5 million. This increase in land sales is primarily attributable to
increased sales efforts based upon the recently completed "highest and best use"
land use study. In addition 125 acre-feet of water rights were sold for proceeds
of $379,000 in 1999 representing a sale of Nevada Land's non-strategic water
rights.
Lease and other revenues include land leases, principally for grazing,
agricultural, communications and easement purposes. In 1999, revenues from land
leases increased by $500,000 to $1.3 million, compared to $800,000 in 1998. This
increase was due to the inception of new leases and increased royalties. The
$500,000 decrease from 1997 to 1998 resulted largely from a reduction in
geothermal royalties.
During 1999, Nevada Land earned $25,000 from mining leases based on 24,015
acres of land, compared to $9,000 for 1998 on 8,176 acres and $4,000 for 1997 on
3,218 acres. The mining leases are with Newmont Gold Corporation and give
Newmont the right to mine the land. Nevada Land will earn a net smelter royalty
based on 3.5% of gross production if commercial mining is undertaken.
21
<PAGE> 22
Nevada Land recorded $1.1 million in income before taxes in 1999 compared to
$200,000 in 1998 and $600,000 in 1997. Increases in land sales and lease income
were the primary factors behind this growth.
WATER RIGHTS AND WATER STORAGE
WATER RIGHTS AND WATER STORAGE
VIDLER WATER COMPANY, INC.
Year Ended December 31,
-----------------------
1999 1998 1997
---- ---- ----
(in millions)
REVENUES - WATER RIGHTS AND WATER STORAGE:
Sale of water rights $ 0.3 $ 0.2
Water service revenue 0.2 0.2 $ 0.2
Agricultural leases 0.5 0.2 0.1
Other income 0.1
--------- --------- ---------
Segment Total Revenues $ 1.1 $ 0.6 $ 0.3
========= ========= =========
Expenses:
Consulting and engineering 0.3 0.1
Interest 0.7 0.2
Operations and maintenance 0.9 0.2
Salaries and benefits 1.1 0.6 0.4
Professional fees 0.6 0.7
Depreciation and amortization 0.8 0.2 0.2
Taxes, licences and fees 0.2 0.1
General, administration and other 1.1 0.5 0.3
--------- --------- ---------
5.7 2.6 0.9
LOSS BEFORE TAX:
Vidler Water Company, Inc. $ (4.6) $ (2.0) $ (0.6)
========= ========= =========
Revenues generated by Vidler were approximately $1.1 million for 1999,
compared to $600,000 in 1998 and $300,000 in 1997. Vidler sold 300 acre-feet of
water rights during 1999 for $300,000 compared to 600 acre-feet in 1998 for
$200,000.
Water service revenue has remained constant at $200,000 during the three
year period. This revenue is generated from leases under a perpetual agreement.
Payments for these leases are indexed to the consumer price index ("CPI"), with
a 3% minimum increase per year. Once water rights or assets are leased in
perpetuity, they cannot be leased again unless the lease is canceled, if
cancelable. Consequently, future revenue growth beyond the limits of these CPI
escalators is dependent upon growth in leases not subject to perpetual
agreements, development of existing assets, and acquisition of additional water
rights and water related assets for subsequent lease or sale. The sale of water
rights or assets reduces future revenue streams from water rights and assets
until those assets can be replaced.
Agricultural lease income increased to $500,000 during 1999 compared to
$200,000 in 1998 and $100,000 in 1997. The increase in agricultural lease income
resulted from the additional lands purchased in the Harquahala Valley in
Arizona. During 1999, Vidler acquired 26,926 acre-feet of water rights with the
acquired lands. Including the 1,140 acre-feet of water rights at MBT Ranch, at
December 31, 1999, Vidler controlled approximately 55,913 acre-feet of
transferable groundwater in the Harquahala Valley area.
Vidler is in the process of constructing a facility to store water
underground at MBT Ranch, in the Harquahala Valley. The facility will be capable
of storing surplus water in a large aquifer underlying much of the valley. When
needed, water can be recovered from the aquifer by groundwater wells.
22
<PAGE> 23
The MBT Ranch Water Storage facility is strategically located adjacent to
the Central Arizona Project Canal, a conveyance canal running from Lake Havasu
to Phoenix and Tucson. We believe that proximity to the Central Arizona Project
Canal is a competitive advantage, because it minimizes the cost of water
conveyance facilities. Vidler intends to charge fees for both the recharge, or
inflow, and recovery, or outflow, of water. Vidler also intends to charge an
annual fee based on the amount of water stored.
The increase in expenses of $3.1 million from 1998 to $5.7 million and the
increase to $2.6 million from 1997 from $900,000 relates to the overall increase
in activity at Vidler including acquisitions of water rights and lands as well
as further development in Vidler's other projects. Individual expense categories
are detailed in the above table. Costs were incurred to develop and preserve
existing assets and for the acquisition of additional assets, to complete
engineering and geological studies, lobbying and the identification and
development of target assets for future growth. The expenses relate to the
acquisition of lands as well as to the overall increase in business activity
revolving around the commencement of active recharge/storage/recovery
operations. Construction of the recharge and storage facility is expected to
take 6 months at a cost not exceeding $10 million.
Included in amortization expense is the annual amortization expense of
$700,000 of the operating lease at the Semitropic Water Storage facility. The
lease is payable over 10 years and allows Vidler to operate the asset for 35
years. Revenue will be generated from the asset through the recharge, storage
and recovery of water. Annual operating and maintenance fees of $900,000 related
to Semitropic are included in maintenance expense.
Interest expense in 1999 of $700,000 relates to interest owing on notes
assumed to acquire lands. The 1999 amount increased $500,000 from 1998 due to
the additional land acquired.
Vidler controls water rights in Nevada, Arizona and Colorado. In Nevada and
Arizona, Vidler controls approximately 12,000 acre-feet and 56,000 acre-feet,
respectively. There are no known legal impediments for the sale of these water
rights. In addition, there are no known legal impediments pertaining to the
conveyance of the Nevada water. Conveyance of the Arizona water underlying
Vidler's Arizona water rights is subject to additional regulatory approval.
Vidler's Colorado water rights amount to approximately 3,000 acre-feet. Sale or
transfer of certain of these rights may require approval by the state water
courts.
PROPERTY AND CASUALTY INSURANCE
PROPERTY AND CASUALTY INSURANCE
Year Ended December 31,
-----------------------
1999 1998 1997
---- ---- ----
P & C INSURANCE REVENUES: (in millions)
Earned Premiums - Sequoia $ 16.9 $ 18.1 $ 32.8
Earned Premiums - Citation 17.5 18.1 17.4
Investment Income 5.0 5.5 5.6
Realized Investment Gains (0.2) 0.2 0.2
Other 0.8 1.0 1.0
------ ------ ------
Total P&C Revenues $ 40.0 $ 42.9 $ 57.0
====== ====== ======
P & C INSURANCE INCOME (LOSS) BEFORE TAXES:
Sequoia Insurance Company $ 2.2 $ 3.6 $ 4.3
Citation Insurance Company (5.9) (0.8) 1.3
------ ------ ------
Total P&C Income Before Taxes $(3.7) $ 2.8 $ 5.6
====== ====== ======
Earned premiums comprise the majority of the Property and Casualty Insurance
segment revenues. Premiums are earned pro-rata throughout the year according to
the coverage dates of the underlying policies. Total Property and Casualty
Insurance revenues for 1999 were $40 million compared to $42.9 million in 1998
and $57.0 in 1997. Declining earned premiums accounted for most of this decrease
23
<PAGE> 24
between years. Total Property and Casualty Insurance earned premiums for 1999
were $34.4 million, compared to $36.2 million in 1998 and $50.2 million in 1997.
Earned premiums declined 28% from 1997 to 1998, principally as a result of
increased underwriting selectivity applied to Citation's business and aggressive
competition for commercial multiple peril business within the state of
California. All new property and casualty insurance applications and policies
scheduled to renew are processed through Sequoia and subjected to Sequoia's
underwriting standards which are much tighter than those previously employed by
Citation. As a result, a significant portion of Citation's prior book of
business was not renewed in 1998. The 5% decline in earned premiums from 1998 to
1999 principally reflects the continued aggressive competition.
The primary reason for the decline in Sequoia's earned premiums from $32.8
million in1997 to $17.4 million in 1998 (see above table) was the reinsurance
pooling agreement, which resulted in the equal splitting of earned premiums,
prospective losses and loss adjustment expenses and operating expenses between
Sequoia and Citation from January 1, 1998 forward. Effective January 1, 1998,
Sequoia and Citation entered into a reinsurance pooling agreement which provides
for pooling of all insurance premiums, losses, loss adjustment expenses and
administrative and other insurance operating expenses between Sequoia and
Citation. The reinsurance agreement calls for these items to be split equally
between the two companies.
Direct premium writings in 1999 for Sequoia were $35.6 million, down 12.5%
from the $40.7 million of 1998 and down 13.2% from the $41.0 million of 1997.
Citation wrote $883,000 in direct premiums in 1999, compared to $1.9 million in
1998 and $14.9 million in 1997.
Investment revenues from Property and Casualty Insurance operations in 1999
were $5 million, down 9% from 1998's $5.5 million and 10.7% from 1997's $5.6
million. These decreases principally resulted from changes in the mix of fixed
income or short-term securities versus equity securities. As shown in the table
above, realized investment gains were minimal in each of the periods.
Property and Casualty Insurance operations produced a $3.7 million loss
before federal income taxes in 1999, compared to $2.8 million in income during
1998 and $5.6 million of income in 1997. Most of these variances between years
was because the 1999 loss included $10.1 million in unfavorable prior years'
claims experience, primarily from Citation's prior artisan/contractor line of
insurance, which was no longer offered after 1995. This was partially offset by
approximately $401,000 of favorable claims experience for prior years from
Sequoia. In 1999, artisan/contractors or construction defects claims continued
to be reported at a higher than expected rate, resulting in the need to once
again increase loss reserves. Citation's average loss ratio, or the ratio of
losses and loss adjustment expenses incurred to earned premiums, for all years
from 1989 to 1995 for this insurance coverage is over 375%. This experience is
not unique to Citation, but appears to be problematic for all insurers who have
written this type of coverage in California in the 1980's and 1990's due to a
number of factors, including:
- the general decline of the California real estate market in the early
1990's which tended to encourage property owners to seek a measure of
relief through the filing of claims against contractors and related
parties for construction defects; and
- in recent years, three California judicial decisions have added great
uncertainty to the statute of limitations for construction property
damage claims and the duty of an insurer to defend the policyholder
against such claims.
However, on January 1, 1996, the Calderon bill took effect in California,
which makes construction defect lawsuits more difficult to file. With these
additions to Citation's reserves, we are assuming that the reporting of new
artisans/contractors claims has peaked and that future calendar years will see
decreases in the numbers of new claims. Nevertheless, insurance reserves,
particularly for Citation's artisan/contractors coverage, can be, and have been,
highly volatile and unpredictable and may go up or down significantly in the
future.
The 1998 $2.8 million income included approximately $3.7 million in
unfavorable claims experience from Citation's artisan/contractors business,
partially offset by $2.1 million of Sequoia's favorable claims experience. The
1997-98 "El Nino" phenomenon is estimated to have cost an additional $1 million
in the first half of 1998.
As a result of these additions to claims reserves, Citation 's combined
loss, loss adjustment expense and expense ratio increased to 152.6% in 1999
compared to 126.4% in 1998 and 117.7% in 1997.
24
<PAGE> 25
Industry ratios as determined on the basis of generally accepted accounting
principles for Citation are shown in the following chart:
CITATION'S GAAP INDUSTRY RATIOS
1999 1998 1997
Loss and LAE Ratio 111.7% 84.9% 84.8%
Underwriting Expense Ratio 40.9% 41.5% 32.9%
------ ------ ------
Combined Ratio 152.6% 126.4% 117.7%
====== ====== ======
Industry ratios as determined on the basis of generally accepted accounting
principles for Sequoia are:
SEQUOIA'S GAAP INDUSTRY RATIOS
1999 1998 1997
------ ------ ------
Loss and LAE Ratio 53.5% 52.3% 57.3%
Underwriting Expense Ratio 46.3% 43.4% 38.1%
------ ------ ------
Combined Ratio 99.8% 95.7% 95.4%
====== ====== ======
Loss and loss adjustment expense ratios, underwriting expense ratios and
combined ratios are calculated using net earned premiums as a denominator.
Theoretically, a combined ratio of less than 100% indicates that the insurance
company is making a profit on its base insurance business before consideration
of investment income, realized investment gains or losses, extraordinary items,
taxes and other non-insurance items.
Although slightly less favorable than in 1998, Sequoia's loss experience
continued to be favorable in 1999 producing a loss and loss adjustment expense
ratio of 53.5% compared to 52.3% in 1998 and 57.3% in 1997. Sequoia's loss ratio
has improved over 1997, despite the negative pressures of the 1997-98 El Nino
effect and the reinsurance pooling agreement between Sequoia and Citation, which
went into effect on January 1, 1998. Management's efforts to reduce exposure to
risk through re-underwriting risks in prior years and tighter underwriting and
careful selection of risks are chiefly responsible for these improvements.
Sequoia's 1999 underwriting expense ratio was 46.3%, up 2.9 percentage points
from 1998 and 8.2 from 1997. Expense ratios have tended to escalate as a result
of the decreasing level of earned premiums. In addition, in 1999 Sequoia's
pension costs were abnormally inflated by the addition of $381,000 to fund its
prior defined benefit pension plan, which was frozen as of December 31, 1991.
Plan funds had declined as a result of fluctuations in the market value of its
underlying securities.
Property and casualty insurance acquisition expenses were $9.8 million for
1999 compared to $11.2 million in 1998 and $12.1 million in 1997. Commissions to
agents were $5.6 million in 1999, $6.7 million in 1998 and $7.7 million in 1997,
reflecting the declining level of direct written premiums. Other acquisition
expenses were $4 million in 1999, compared to $4.5 million in 1998 and $4.4
million in 1997. Although direct written premiums written decreased by 8.7% from
1997 to 1998, other acquisition expenses increased by 2.4%, or $109,000. This
increase in other acquisition expenses resulted from a 1.5% increase in other
expenses of PICO's commercial property and casualty insurance companies, Sequoia
and Citation. Other expenses are those expenses of the insurance companies other
than premium taxes, commissions, loss adjustment expenses and non-insurance
expenses. These expenses include salaries, benefits and other expenses of sales
and marketing staff. Although the levels of direct written premiums and
insurance underwriting expenses has decreased (principally due to realizations
of synergies and reductions of overhead expenses), the level of sales and
marketing expenses has not decreased correspondingly. As a result, the
percentage of other expenses (principally sales and marketing) has actually
increased, resulting in a greater deferral of acquisition expenses as a
percentage of unearned premiums. The impact of this 1.5% increase in the other
expense acquisition percentage was to increase deferred acquisition costs at
December 31, 1998 by approximately $279,000. As premiums increase or sales,
marketing and other acquisition expenses decrease, this percentage should
decrease to or below the 1997 level.
25
<PAGE> 26
MEDICAL PROFESSIONAL LIABILITY INSURANCE
MEDICAL PROFESSIONAL LIABILITY INSURANCE
Year Ended December 31,
--------------------------------
1999 1998 1997
---- ---- ----
(in millions)
MED PROFESSIONAL LIABILITY REVENUES (CHARGES):
Earned Premiums $ 1.9 $ (0.2) $ 0.2
Investment Income, Net of Expenses 1.2 2.6 3.7
--------- --------- ---------
MPL Revenues $ 3.1 $ 2.4 $ 3.9
========= ========= =========
INCOME (LOSS) BEFORE TAXES $ (4.8) $ (4.4) $ 0.8
========= ========= =========
Physicians Insurance Company of Ohio's and The Professionals Insurance
Company's assets are not designated on an individual security basis as belonging
either to the Medical Professional Liability Insurance or the Other Strategic
Holdings business segment. Consequently, Physicians' invested assets produce
income in both the Medical Professional Liability Insurance and Other Strategic
Holdings segments. All of Professionals' revenues and pre-tax income are
assigned to the Medical Professional Liability Insurance segment. However, all
investment income and realized investment gains generated by Physicians from
assets in excess of those needed to support the medical professional liability
claims are allocated to the Other Strategic Holdings segment. See Note 19 of
Notes to the Consolidated Financial Statements, "Segment Reporting."
Since the withdrawal of Physicians and Professionals from their personal
automobile and homeowners lines of business in the late 1980's, medical
professional liability has been these two companies' only sources of insurance
premiums.
Medical professional liability insurance revenues were $3.1 million in 1999
compared to $2.4 million during 1998 and $3.9 million during 1997. As shown
above earned medical professional liability premiums increased $2.1 million over
1998 and $1.7 million over 1997 due to recalculation of reinsurance premiums
based upon loss experience (see below). Investment income continues to decline
(from $3.7 million in 1997 to $2.6 million to $1.2 million in 1999) as a result
of the payment of claims and the liquidation of interest-bearing investments.
Medical professional liability operations produced a 1999 pre-tax loss of
approximately $4.8 million compared to a $4.4 million loss in 1998 and $800,000
of income in 1997. Results for all three years were negatively impacted by
additions to loss and loss adjustment expense reserves of approximately $ 5
million in 1999, $5 million in 1998 and $2.2 million in 1997. These additions to
reserves during the third quarter of 1997 and the fourth quarters of 1998 and
1999 were based upon actuarial analyses indicating some deterioration of
Physicians' loss experience. The addition to 1999 loss and loss adjustment
expense reserves included unfavorable development in most coverage years
resulting in:
- an increase in direct and assumed loss and loss adjustment expense
reserves of $2 million;
- a decrease in ceded reinsurance reserves of $3.6 million; and
- a $560,000 increase in general reserves for the future adjustment of
claims (unallocated loss adjustment expense).
These increases were partially offset by $1.2 million from the discounting
of these reserve increases.
The largest of these adjustments, the $3.6 million decrease in ceded
(recoverable) reinsurance reserves, primarily resulted from prior years claims
which were less severe (i.e. the average claim cost), but more frequent than
originally expected. The effects of the increased frequency of claims were
greater than the reduction in incurred losses due to the reduction in claims
severity. As a result, direct incurred losses and loss adjustment expense
increased by approximately $2 million. Since claims were less severe than
expected, fewer met the reinsurance retention thresholds (i.e. the deductibles)
and Physicians expects to recover $3.6 million less in reinsurance than it did
previously. Partially offsetting these losses, Physicians was able to recover
$1.9 million in reinsurance premiums from its reinsurers due
26
<PAGE> 27
to the reduction in ceded loss reserves. In addition to these additions to
reserves, claims payments in excess of established reserves throughout 1999 and
loss reserve discount accretion added $3.3 million to 1999 incurred losses and
loss adjustment expenses.
The addition to 1998 reserves included additions to loss and loss adjustment
expense reserves for virtually all loss years (years in which losses were
incurred). These additions primarily were necessitated by an increased incidence
of claims reported on behalf of claimants that allegedly were injured as minors
and had attained the age of majority. No significant unusual activity was
noticed in this area in 1999.
As discussed above, medical professional liability investment income and
earned premiums continually declined from 1997 through 1999 due to the runoff of
the medical professional liability business and the decreasing level of loss and
loss adjustment expense reserves.
Physicians' claims department staff continues to process the runoff of the
remaining medical professional liability loss and loss adjustment expense claims
which is progressing routinely. At December 31, 1999, medical professional
liability reserves totaled $53.7 million, net of reinsurance and discount. This
compares to $60.9 million at December 31, 1998 and $77.5 million at December 31,
1997. Medical professional liability loss and loss adjustment expense reserves
continue to decline as a result of the disposition of claims.
MEDICAL PROFESSIONAL LIABILITY INSURANCE -- LOSS AND LOSS EXPENSE RESERVES
Year Ended December 31,
----------------------------------------
1999 1998 1997
--------- --------- ----------
(in millions)
Direct Reserves $81.6 $ 97.1 $121.4
Ceded Reserves (20.4) (27.7) (34.8)
Discount of Net Reserves (7.5) (8.5) (9.1)
--------- --------- ----------
Net Medical Professional
Liability Insurance Reserves $53.7 $ 60.9 $ 77.5
========= ========= ==========
Although Medical professional liability insurance reserves are certified
annually by two independent actuaries, as required by Ohio insurance
regulations, significant fluctuations in reserve levels can occur based upon a
number of variables used in actuarial projections of ultimate incurred losses
and loss adjustment expenses.
OTHER STRATEGIC HOLDINGS
OTHER STRATEGIC HOLDINGS REVENUES
Year Ended December 31,
--------------------------------
1999 1998 1997
(in millions)
OTHER STRATEGIC HOLDINGS REVENUES (CHARGES):
Realized Investment Gain (Loss) $ 0.6 $ (4.4) $ 21.3
Investment Income 0.7 2.1 2.3
Other Income 2.1 1.0 2.4
----- ------ ------
Other Stragetic Holdings Revenues (Charges) $ 3.4 $ (1.3) $ 26.0
===== ====== ======
Other Strategic Holdings revenues for 1999 were $3.4 million, compared to a
charge of $1.3 million in 1998 and $26 million in income in 1997. Realized
investment gains were $600,000 for 1999 compared to a $4.4 million loss in 1998
and $21.3 million in gains in 1997. The 1999 realized investment gains were net
of an approximate $3.2 million write-down of an oil and gas equity investment.
Revenues for 1998 included approximately $8.2 million in write-downs of
equity investments, partially offset by realized investment gains from the sale
of equity securities. Included in the $21.3 million of 1997 realized investment
gains was approximately $27 million, before taxes, resulting from the exercise
of PICO's warrants to buy common stock of Resource America Inc. and the
subsequent sale of that stock.
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Investment income from the Other Strategic Holdings segment in 1999 was
approximately $700,000, compared to $2.1 million in 1998 and $2.3 million in
1997. The changes in investment income are due to reduced levels of interest and
dividend paying securities and the reduction in the size of Physicians'
portfolio due to the payment of medical professional liability insurance claims
(See the Medical Professional Liability Insurance segment).
Other income in 1997 included $1.8 million in interest income based upon the
value of common stock warrants granted to PICO in 1997 by HyperFeed
Technologies, Inc. as consideration for extension of loan due dates.
At December 31, 1999, the consolidated investment portfolio was in a net
unrealized gain position of approximately $827,000, net of taxes, compared to
$2.5 million in unrealized losses at December 31, 1998.
OTHER STRATEGIC HOLDINGS INCOME BEFORE TAX
Year Ended December 31,
-----------------------------------------
1999 1998 1996
---------- ----------- ----------
(in millions)
OTHER STRATEGIC HOLDINGS
INCOME (LOSS) BEFORE TAX:
Income (Loss) Before Investee Loss $ (8.5) $ (7.7) $ 19.0
Loss in Investee (2.8) (1.5) (1.6)
---------- ----------- ----------
Income (Loss) Before Tax $ (11.3) $ (9.2) $ 17.4
========== =========== ==========
Other Strategic Holdings produced a 1999 loss before taxes of $11.3 million,
compared to an $9.2 million loss in 1998 and income of $17.4 million in 1997.
Included in the 1999 loss was a $3.2 million permanent write-down of an oil and
gas investment due to lower than anticipated recoverable reserves. SISCOM
contributed a $700,000 loss to 1999. Conex, excluding the equity in the loss of
its sino-foreign joint venture, added a loss of $600,000. Realized investment
losses, as shown in the previous table, accounted for nearly $4.4 million of the
1998 amount and realized investment gains of $21.3 million were included in
1997. As shown in the table below, PICO's Other Strategic Holdings income can
fluctuate greatly from year to year. A number of factors contribute to these
fluctuations, including, among other things, the mix of PICO's portfolio, timing
of the realization of capital gains, the volume of trading and demand for
individual securities PICO owns and fluctuations in the U.S. and world stock and
bond markets in general. Therefore, future results cannot and should not be
predicted based upon past performance alone. See "RISK FACTORS."
Loss in investee includes PICO's share of HyperFeed Technologies, Inc.
losses for all years presented, plus Conex's losses in 1998 and in 1999 prior to
its consolidation on August 1, plus the equity in the loss of Conex's
sino-foreign joint venture for all of 1998 and 1999. The HyperFeed loss for 1999
was $2.1 million, compared to a $751,000 loss in 1998 and income of $256,000 in
1997.
DISCONTINUED OPERATIONS
Discontinued operations consists of the operations of PICO's former life and
health insurance subsidiary, American Physicians Life Insurance Company, sold in
1998, and Global Equity Corporation's former Sri Lankan subsidiaries sold in
1997, which engaged in various activities including stock and commodity
brokerage and agricultural services.
American Physicians Life Insurance Company produced revenues of $9.2 million
and pre-tax income of $300,000 in 1998 prior to its sale. This compares to $5.3
million in revenues and a pre-tax loss of $112,000 in 1997.
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On June 16, 1997, Physicians announced the signing of a binding agreement to
sell American Physicians subject to certain closing conditions. The sale closed
on December 4, 1998. PICO received $9 million in cash from the sale in addition
to an $8 million dividend prior to the sale, and recorded a gain of $1.1
million, included in discontinued operations on the consolidated statements of
operations.
Sri Lankan operations are classified as discontinued in recognition of their
sale in November and December 1997. These operations produced approximately $3.3
million in pre-tax income during 1997 as recorded in Global Equity Corporation's
financial results, prior to the elimination of minority interests when
consolidated with PICO. This included approximately $3.5 million of realized
pre-tax gain in 1997 on the sale and reversal of a foreign currency translation
adjustment relating to those operations of approximately $2.3 million, prior to
recognition of minority interest. See Note 6 of Notes to the Consolidated
Financial Statements, "Discontinued Operations."
LIQUIDITY AND CAPITAL RESOURCES -- YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
PICO continually evaluates its existing operations and searches for new
opportunities to maximize shareholder value. This strategy causes significant
fluctuations in the cash needs of PICO. PICO may need to sell investments, or
borrow funds to meet operating cash requirements. In addition, it may become
necessary or advantageous for PICO to offer stock or debt through a public or
private offering. At times PICO may have excess cash. PICO attempts to invest
such cash to provide maximum returns within the constraint of remaining liquid
enough to meet expected cash requirements and to take advantage of investment
opportunities. PICO's primary sources of funds are its available cash, cash from
operations, the sale of invested assets, bank borrowings, public and private
debt and equity offerings, and management and other fees.
On February 9, 2000, PICO registered on Form S-3 with the Securities and
Exchange Commission to offer 6,546,497 shares of PICO stock at a price of $15
per share in a rights offering. Shareholders were offered one right to buy one
new share at $15 for every two common shares held at March 1, 2000.
An investment partnership called PICO Equity Investors, L.P. has agreed to
acquire shares which are not subscribed for, up to a total of 3,333,333 shares
with an aggregate subscription price of $50 million. In the event that less than
3,333,333 shares of common stock remain unpurchased by our shareholders on March
27, 2000, PICO Holdings, Inc. has committed to sell and PICO Equity Investors,
L.P. has committed to purchase the number of shares necessary to increase the
total number of shares purchased by PICO Equity Investors, L.P. to 3,333,333.
Net proceeds of the offering will be used for developing existing water and
water storage assets, acquiring additional water assets, strategic investments,
and general working capital needs. Also, see Note 23 of Notes to Consolidated
Financial Statements, "Subsequent Events."
During the period from April 23, 1997 until December 31, 1999, Nevada Land
sold approximately 69,531 acres of land for $8.7 million and non-essential water
assets for $379,000. NRLC provides a source of cash flow to finance the other
operations in the group.
Vidler's initial objective was to assemble a portfolio of water and water
storage assets that would form a viable base for further expansion. The current
priority is to develop recurring cash flow from the existing assets. In
addition, Vidler has entered into joint ventures with parties who lack the
capital or expertise to commercially develop water rights, and continues to
explore additional joint venture opportunities.
As a result of ceasing to write medical professional liability insurance,
Physicians' operating cash flows are negative and should continue to be negative
for the foreseeable future. Positive cash flows from other sources within
Physicians, primarily reinsurance recoveries and the sale of invested assets,
may partially or fully offset uses of cash. Major cash outflows will likely
include the funding of claims and loss adjustment expenses, investment
purchases, and operating costs.
Medical professional liability insurance reserves declined $7.2 million in
1999 to $53.7 million, including a reduction of $14.4 million from payment of
insurance claims, partially offset by increases in reserves due to $6.2 million
in unfavorable claims experience and $995,000 in accretion of claims reserve
discount. Reserves decreased $16.6 million during 1998 compared to year-end
1997. Medical professional liability insurance reserves have declined 60.6%
since December 31, 1995, when Physicians and Professionals ceased writing
insurance.
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PICO's insurance subsidiaries attempt to structure the duration of invested
assets to match the cash flows required to settle the related unpaid claims
liabilities. Invested assets provide adequate liquidity to fund projected claims
and loss adjustment expense payments for the coming years. The Ohio and
California Insurance Departments monitor and set guidelines for the insurance
companies' investments. The Ohio and California Insurance Departments also set
minimum levels of policyholder capital and surplus and monitor these levels
through various means.
To the extent that funds necessary for settling claims and paying operating
expenses are not provided by existing cash and cash equivalents, investment
income, reinsurance recoveries, and rental and other income, then invested
assets will be liquidated. Short term and fixed maturity investments are managed
to mature according to projected cash flow needs. Equity securities will be
converted to cash, as additional funds are required, with an anticipated maximum
liquidation lead-time of approximately six months.
At December 31, 1999, the investment portfolios of Physicians and
Professionals contained invested assets of approximately $125.5 million, plus
cash and cash equivalents of $2.4 million. These invested assets are in excess
of the present value of expected future payouts of losses and loss adjustment
expenses of approximately $53.7 million.
Management attempts to maximize the return on all assets, including those
needed to fund the eventual wrap-up of the medical professional liability
insurance reserves through, among other things, value investing and managing the
invested assets internally rather than liquidating assets to pay a third party
to oversee the runoff of the existing claims. Management also elected to handle
the runoff of the medical professional liability insurance claims internally to
continue to maintain a high standard of claims handling and to maximize
shareholder value. While management expects that certain of PICO's current and
future investments may increase in value, offsetting some of the decline in
assets during the period of runoff, the impact of future market fluctuations on
the value of PICO's invested assets cannot be accurately predicted. Although
assets will be managed to mature or liquidate according to expected payout
projections, at times some invested assets may need to be sold when the stock
market is depressed. Such forced sales are expected to occur infrequently and
only under extreme circumstances; however, this cannot be guaranteed.
PICO's active property and casualty insurance subsidiaries, Sequoia and
Citation, should provide cash flows from operations once industry combined
ratios (See "Property and Casualty Insurance.") stabilize below 100%,
artisan/contractor claims stabilize and premiums remain at a constant or
increasing levels. At times, it may be necessary to liquidate invested assets to
provide the additional funds necessary to cover operating expenses.
As shown in the accompanying consolidated statements of cash flows,
operating activities used $26.2 million of cash during 1999 compared to cash
used of $23.6 million during 1998 and $62.1 million in 1997. The decline in cash
used by operations between 1997 and 1998 of $38.5 million principally consisted
of reductions in claims and loss adjustment expense payments (both property and
casualty and medical professional liability insurance) and insurance operating
expenses, partially offset by a decreased level of premiums received. PICO
received $4.6 million in federal income tax recoveries in 1999 from the 1997 and
1998 tax years. Federal income taxes paid in 1998 were $10.5 million less than
in 1997, primarily due to the differences in pre-tax income between years. The
$62.1 million in cash used by operations in 1997 also included a $9.7 million
use of funds from reclassification of APL's year-end 1996 cash balances to
discontinued operations in 1997.
The primary use of operating cash flow during 1999 was $40 million in
insurance claims and loss adjustment expenses, net of reinsurance recoveries.
This compares to $56.3 million in 1998 and $69.6 million in 1997. Other expenses
for 1999, including insurance and other operating costs, accounted for $34.3 in
additional cash outflows compared to $26.9 million in 1998 and $29.1 million in
1997. Premiums received amounted to $30.5 million in 1999, $40.9 million in 1998
and $41.6 million in 1997, net of ceded reinsurance payments. The decrease in
premiums from 1998 to 1999 was primarily due to increased competition for
property and casualty insurance in California, while the decline from 1997 to
1998 was mainly due to increased selectivity of Citation's insurance risks
following its change in control, as well as increased competition for commercial
property and casualty insurance in California. Investment income, other than
realized investment gains and losses, amounted to $6.7 million in 1999 compared
to $10.7 million in 1998, and $13.1 million in 1997.
Cash used in investing activities for 1999 was $17.5 million compared to
cash flow provided by investing activities for 1998 of $40.8 million and $68.1
million in 1997. For 1999, purchases of available for sale investments for cash
totaled $38.2 million and proceeds on sale amounted to $15.6 million. In 1998
purchases amounted to $15.6 million and proceeds on sale amounted to $24.8
million. 1998 cash investing activities included $17 million of cash received
from the sale of APL, and $10.1 million receipt from the disposition of the Sri
Lankan investments. In addition, in 1998 PICO sold property, generating
approximately $6.5 million. In 1998 PICO used cash to pay
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$1.7 million in direct costs associated with the acquisition of the remaining
shares of Global Equity Corporation. In 1999 purchases of $4.6 million were made
for additional land, water and mineral rights, compared to $4.1 million in 1998
and $2.3 million in 1997. The purchases were offset by sales of $4.9 million in
net proceeds, of which $4.6 were from Nevada Land land and water rights sales
and $300,000 from the sale of Vidler water rights. Total sales of $6.5 million
included carryback financing at Nevada Land of $1.2 million. Net sales proceeds
in 1998 were $518,000. The cash provided by investing activities in 1997
resulted primarily from $52 million of cash provided by net investment
transactions, and $18.1 million of cash provided by consolidation of Global
Equity Corporation. Specifically, significant uses of investment cash in 1997
include the purchase of Nevada Land for $48.6 million, and $36.7 million used to
acquire shares of Global Equity Corporation common stock.
Of the $8.4 million net cash provided by financing activities during 1999,
$5.7 million represents proceeds from bank financing for the purchase of
additional Jungfraubahn shares and vendor financing amounting to $1.2 million
for purchases of land in the Harquahala Valley of Arizona. Total financing to
date on land purchases is $10 million. Financing activities during 1998 used
cash of $1.4 million, primarily due to the purchase of PICO's own stock for $1.6
million, offset by $200,000 in proceeds received from the exercise of options on
treasury shares, as discussed in Note 17 of Notes to Consolidated Financial
Statements, "Related Party Transactions." During 1997, financing activities used
$14.3 million primarily to repay borrowings, offset by proceeds of $2 million
from the sale of Global Equity Corporation warrants.
At December 31, 1999, PICO has no significant commitment for future capital
expenditures, other than in the ordinary course of business and as discussed
herein. PICO is committed to maintaining Sequoia's capital and statutory
policyholder surplus at a minimum of $7.5 million. At December 31, 1999, Sequoia
was well above this level. PICO is also committed to maintain Sequoia's Best
Rating at or above the "B++" (Very Good) level, which may at some time in the
future require additional capital infusions into Sequoia. See Note 16 of Notes
to Consolidated Financial Statements, "Commitments and Contingencies."
CAPITAL RESOURCES
PICO's principal sources of funds are its available cash resources,
operating cash flow, liquidation of non-essential investment holdings,
borrowings, public and private debt and equity offerings, funds from
consolidated tax savings, and investment management and other fees. At December
31, 1999, PICO had $36.7 million in cash and cash equivalents compared to $71.7
million and $56.4 million at December 31, 1998 and 1997, respectively.
RISK FACTORS
In addition to the risks and uncertainties discussed in the preceding
sections of "Management's Discussion and Analysis of Financial Condition and
Results of Operations," and elsewhere in this document, the following risk
factors should be considered carefully in evaluating PICO and its business. The
statements contained in this Form 10-K 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 strategic
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.
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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, 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 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. Our financial statements indicate net unrealized investment gains, before
taxes, of $1.4 million at December 31, 1999 and net unrealized investment losses
of $4.9 million at December 31, 1998.
Our ability to achieve an acceptable rate of return on any particular
investment is subject to a number of factors which are beyond our control,
including increased competition and loss of market share, quality of management,
cyclical or uneven financial results, technological obsolescence, foreign
currency risks and regulatory delays.
Our investments may not achieve acceptable rates of return and we may not
realize the value of the funds invested; accordingly, these investments may have
to be written down or sold at their then-prevailing market values.
We may not be able to sell our investments in both private and public
companies when it appears to be advantageous to do so and we may have to sell
these investments at a discount. Investments in private companies are not as
marketable as investments in public companies. Investments in public companies
are subject to prices determined in the public markets and, therefore, values
can vary dramatically. In particular, the ability of the public markets to
absorb a large block of shares offered for sale can affect our ability to
dispose of an investment in a public company.
To successfully manage newly acquired companies, we must, among other
things, continue to attract and retain key management and other personnel. The
diversion of the attention of management from the day-to-day operations, or
difficulties encountered in the integration process, could have a material
adverse effect on our business, financial condition, 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 strategic 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
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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.
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, 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 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, results of operations and cash flows.
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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, 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 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, 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, 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.
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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,
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 B++ (Very Good)
- 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, results of operations and cash flows.
IF WE ARE REQUIRED TO REGISTER AS AN INVESTMENT COMPANY, THEN WE WILL BE SUBJECT
TO A SIGNIFICANT REGULATORY BURDEN
At all times we intend to conduct our business so as to avoid being
regulated as an investment company under the Investment Company Act of 1940.
However, if we were required to register as an investment company, our ability
to use debt would be substantially reduced, and we would be subject to
significant additional disclosure obligations and restrictions on our
operational activities. Because of the additional requirements imposed on an
investment company with regard to the distribution of earnings, operational
activities and the use of debt, in addition to increased expenditures due to
additional reporting responsibilities, our cash available for investments would
be reduced. The additional expenses would reduce income. These factors would
adversely affect our business, financial condition, 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.
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<PAGE> 36
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 MBT Ranch 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.
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, results of operations and cash flows may be adversely affected by:
- exposure to fluctuations in exchange rates;
- the imposition of governmental controls;
- the need to comply with a wide variety of foreign and U.S. export
laws;
- political and economic instability;
- trade restrictions;
- changes in tariffs and taxes;
- volatile interest rates;
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- changes in certain commodity prices;
- exchange controls which may limit our ability to withdraw money;
- the greater difficulty of administering business overseas; and
- general economic conditions outside the United States.
Changes in any or all of these factors could result in reduced market values
of investments, loss of assets, additional expenses, reduced investment income,
reductions in shareholders' equity due to foreign currency fluctuations and a
reduction in our global diversification.
OUR COMMON STOCK PRICE MAY BE LOW WHEN YOU WANT TO SELL YOUR SHARES
The trading price of our common stock has historically been, and is expected
to be, subject to fluctuations. The market price of the common stock may be
significantly impacted by:
- quarterly variations in financial performance;
- shortfalls in revenue or earnings from levels forecast by securities
analysts;
- changes in estimates by such analysts;
- product introductions;
- our competitors' announcements of extraordinary events such as
acquisitions;
- litigation; and
- general economic conditions.
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 1999, closing prices have ranged from a
low of $12.31 per share on December 31 to a high of $25.31 on June 30.
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.
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REGULATORY INSURANCE DISCLOSURES
Liabilities for Unpaid Loss and Loss Adjustment Expenses
Liabilities for unpaid loss and loss adjustment expenses are estimated based
upon actual and industry experience, and assumptions and projections as to
claims frequency, severity and inflationary trends and settlement payments. Such
estimates may vary from the eventual outcome. The inherent uncertainty in
estimating reserves is particularly acute for lines of business for which both
reported and paid losses develop over an extended period of time.
Several years or more may elapse between the occurrence of an insured
medical professional liability insurance or casualty loss, the reporting of the
loss and the final payment of the loss. Loss reserves are estimates of what an
insurer expects to pay claimants, legal and investigative costs and claims
administrative costs. PICO's subsidiaries are required to maintain reserves for
payment of estimated losses and loss adjustment expense for both reported claims
and claims which have occurred but have not yet been reported. Ultimate actual
liabilities may be materially more or less than current reserve estimates.
Reserves for reported claims are established on a case-by-case basis. Loss
and loss adjustment expense reserves for incurred but not reported claims are
estimated based on many variables including historical and statistical
information, inflation, legal developments, the regulatory environment, benefit
levels, economic conditions, judicial administration of claims, general trends
in claim severity and frequency, medical costs and other factors which could
affect the adequacy of loss reserves. Management reviews and adjusts incurred
but not reported claims reserves regularly.
The liabilities for unpaid losses and loss adjustment expenses of
Physicians, Professionals, Sequoia, and Citation were $139.1 million at December
31, 1999, $155 million at December 31, 1998, and $196.1 million in 1997, net of
discount on medical professional liability insurance reserves and before
reinsurance reserves, which reduce net unpaid losses and loss adjustment
expenses. Of those amounts, the liabilities for unpaid loss and loss adjustment
expenses of prior years increased by $16.3 million in 1999, $7.3 million in
1998, and $900,000 in 1997. These reserve changes for prior years' reserves were
due to the following:
CHANGE IN UNPAID LOSS AND LAE RESERVES
<TABLE>
<CAPTION>
1999 1998 1997
------------ ------------- -------------
<S> <C> <C> <C>
Increase (decrease) in provision for prior year claims $ 15.9 $ 7.0 $ (1.0)
Retroactive reinsurance (0.6) (0.4) (1.2)
Accretion of reserve discount 1.0 0.7 3.1
------------ ------------- -------------
Net increase in liabilities for unpaid loss
and LAE of prior years $ 16.3 $ 7.3 $ 0.9
============ ============= =============
</TABLE>
SEE SCHEDULE IN NOTE 13 OF NOTES TO PICO'S CONSOLIDATED FINANCIAL
STATEMENTS, "RESERVES FOR UNPAID LOSS AND LOSS ADJUSTMENT EXPENSES" for
additional information regarding reserve changes.
Although insurance reserves are certified annually by independent actuaries
for each insurance company as required by state law, significant fluctuations in
reserve levels can occur based upon a number of variables used in actuarial
projections of ultimate incurred losses and loss adjustment expenses.
Physicians' liability for unpaid medical professional liability insurance
losses and loss adjustment expenses is discounted to reflect investment income
as permitted by the Ohio Department of Insurance. The method of discounting is
based upon historical payment patterns and assumes an interest rate at or below
Physicians' investment yield, and is the same rate used for statutory reporting
purposes. A discount rate of 4% is used for medical professional liability
insurance reserves.
All of PICO's insurance companies seek to reduce the loss that may arise
from individually significant claims or other events that cause unfavorable
underwriting results by reinsuring certain levels of risk with other insurance
carriers.
Various reinsurance treaties remain in place to limit PICO's exposure
levels. See "REINSURANCE" following this section and NOTE 12 OF NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS, "REINSURANCE."
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ANALYSIS OF LOSS AND LOSS ADJUSTMENT EXPENSE DEVELOPMENT
The following table presents the development of balance sheet liabilities
for 1989 through 1999 for all property and casualty lines of business including
medical professional liability insurance. The "Net liability as originally
estimated" line shows the estimated liability for unpaid losses and loss
adjustment expenses recorded at the balance sheet date on a discounted basis for
each of the indicated years. Reserves for other lines of business that
Physicians ceased writing in 1989, which are immaterial, are excluded. The
"Gross liability as originally estimated" represents the estimated amounts of
losses and loss adjustment expenses for claims arising in all prior years that
are unpaid at the balance sheet date on an undiscounted basis, including losses
that had been incurred but not reported.
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------------------------------------------------------
1989 1990 1991 1992 1993 1994
----------- ------------ ------------- ------------- ------------ ------------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Net Liability as originally estimated: $126,603 $128,104 $129,768 $159,804 $179,390 $153,212
Discount 36,806 30,230 30,647 31,269 32,533 20,144
Gross liability as originally estimated: 163,409 158,334 160,415 191,073 211,923 173,356
Cumulative payments as of:
One year later 43,725 42,488 42,986 41,550 34,207 35,966
Two years later 84,463 81,536 81,489 73,012 69,037 61,263
Three years later 110,291 108,954 103,505 103,166 90,904 93,908
Four years later 128,737 120,063 120,073 116,278 118,331 110,272
Five Years later 135,170 126,100 127,725 139,028 128,773 119,879
Six years later 138,912 130,146 142,973 143,562 136,820
Seven years later 141,854 142,484 147,142 148,426
Eight years later 152,706 146,112 151,751
Nine years later 154,659 150,509
Ten years later 158,140
Liability re-estimated as of:
One year later 162,653 160,200 188,811 197,275 183,560 170,411
Two years later 162,371 179,915 184,113 179,763 184,138 163,472
Three years later 176,123 172,715 174,790 182,011 175,308 162,532
Four years later 169,488 170,847 177,811 176,304 178,544 165,696
Five Years later 171,532 171,968 172,431 181,721 178,584 167,145
Six years later 170,873 165,255 175,830 181,868 178,371
Seven years later 167,341 168,185 177,603 181,029
Eight years later 170,941 170,710 178,419
Nine years later 173,630 172,397
Ten years later 175,281
Cumulative Redundancy (Deficiency) ($11,872) ($14,063) ($18,004) $10,044 $33,552 $6,211
</TABLE>
RECONCILIATION TO FINANCIAL STATEMENTS
Gross Liability - end of year
Reinsurance recoverable
Net liability before discount - end of year
Net discount
Discounted net liability - end of year
Discounted reinsurance recoverable
Discontinued personal lines insurance
Balance sheet liability (discounted)
Gross re-estimated liability - latest
Re-estimated recoverable - latest
Net re-estimated liability before discount - latest
Net re-estimated discount - latest
Discounted net re-estimated liability - latest
Net cumulative redundancy (deficiency) before discount
39
<PAGE> 40
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------------------------------------
1995 1996 1997 1998 1999
------------ ------------ ------------- ------------ ------------
(In thousands)
<S> <C> <C> <C> <C> <C>
Net Liability as originally estimated: $137,523 $165,629 $128,205 $102,877 $98,655
Discount 16,568 12,216 9,159 8,515 7,521
Gross liability before discount as originally estimated: 154,091 177,845 137,364 111,392 106,176
Cumulative payments as of:
One year later 27,128 59,918 44,750 31,056
Two years later 65,062 95,574 69,571
Three years later 86,865 115,160
Four years later 100,967
Five Years later
Six years later
Seven years later
Eight years later
Nine years later
Ten years later
Liability re-estimated as of:
One year later 147,324 177,734 144,367 127,269
Two years later 146,653 185,366 160,325
Three years later 151,752 202,014
Four years later 156,482
Five Years later
Six years later
Seven years later
Eight years later
Nine years later
Ten years later
Cumulative Redundancy (Deficiency) ($2,391) ($24,169) ($22,961) ($15,877)
RECONCILIATION TO FINANCIAL STATEMENTS
Gross Liability - end of year $208,351 $166,131 $148,689
Reinsurance recoverable (70,987) (54,740) (42,514)
------------- ------------ ------------
Net liability before discount - end of year 137,364 111,391 106,175
Net discount (9,159) (8,515) (7,521)
------------- ------------ ------------
Discounted net liability - end of year 128,205 102,876 98,654
Discounted reinsurance recoverable 67,654 52,000 40,334
------------- ------------ ------------
195,859 154,876 138,988
Discontinued personal lines insurance 237 145 145
------------- ------------ ------------
Balance sheet liability (discounted) $196,096 $155,021 $139,133
============= ============ ============
Gross re-estimated liability - latest $229,795 $190,187
Re-estimated recoverable - latest (69,470) (62,918)
------------- ------------
Net re-estimated liability before discount - latest 160,325 127,269
Net re-estimated discount - latest (7,521) (7,521)
------------- ------------
Discounted net re-estimated liability - latest $152,804 $119,748
============= ============
Net cumulative redundancy (deficiency) before discount ($22,961) ($15,877)
============= ============
</TABLE>
Each decrease or increase amount includes the effects of all changes in
amounts during the current year for prior periods. For example, the amount of
the redundancy related to losses settled in 1992, but incurred in 1989 will be
included in the decrease or increase amount for 1989, 1990 and 1991. Conditions
and trends that have affected development of the liability in the past may not
necessarily occur in the future. For example, Physicians commuted reinsurance
contracts in several different years that significantly increased the estimate
of net reserves for prior years by reducing the recoverable loss and loss
adjustment expense reserves for those years. Accordingly, it may not be
appropriate to extrapolate future increases or decreases based on this table.
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The data in the above table is based on Schedule P from each of the
insurance companies' 1989 to 1999 Annual Statements, as filed with state
insurance departments; however, the development table above differs from the
development displayed in Schedule P, Part-2, of the insurance Annual Statements
as Schedule P, Part-2, excludes unallocated loss adjustment expenses.
LOSS RESERVE EXPERIENCE. The inherent uncertainties in estimating loss
reserves are greater for some insurance products than for others, and are
dependent on the length of the reporting lag or "tail" associated with a given
product (i.e. the lapse of time between the occurrence of a claim and the report
of the claim to the insurer) of the diversity of historical development patterns
among various aggregations of claims, the amount of historical information
available during the estimation process, the degree of impact that changing
regulations and legal precedents may have on open claims, and the consistency of
reinsurance programs over time, among other things. Because medical professional
liability insurance and commercial casualty claims may not be fully paid for
several years or more, estimating reserves for such claims can be more uncertain
than estimating reserves in other lines of insurance. As a result, precise
reserve estimates cannot be made for several years following a current accident
year for which reserves are initially established.
There can be no assurance that the insurance companies have established
reserves adequate to meet the ultimate cost of losses arising from such claims.
It has been necessary, and will over time continue to be necessary, for the
insurance companies to review and make appropriate adjustments to reserves for
estimated ultimate losses and loss adjustment expenses. To the extent reserves
prove to be inadequate, the insurance companies would have to adjust their
reserves and incur a charge to income, which could have a material adverse
effect on PICO's financial results.
Reconciliation of Unpaid Loss and Loss Adjustment Expenses
An analysis of changes in the liability for unpaid losses and loss
adjustment expenses for 1999, 1998 and 1997 is set forth in NOTE 13 OF NOTES TO
PICO'S CONSOLIDATED FINANCIAL STATEMENTS, "RESERVE FOR UNPAID LOSS AND LOSS
ADJUSTMENT EXPENSES."
REINSURANCE
Medical Professional Liability Insurance
On July 14, 1995, Physicians and Professionals entered into an Agreement for
the Purchase and Sale of Certain Assets with Mutual Assurance Inc. This
transaction was approved by Physicians' shareholders on August 25, 1995 and
closed on August 28, 1995. Pursuant to the agreement, Physicians and
Professionals sold their professional liability insurance business and related
liability insurance business for physicians and other health care providers.
Physicians and Professionals were engaged in, among other things, the business
of offering medical professional liability insurance and related insurance to
physicians and other health care providers principally located in Ohio.
Simultaneously with execution of the agreement, Physicians and Mutual
entered into a reinsurance treaty pursuant to which Mutual agreed to assume all
risks attaching after July 15, 1995 under medical professional liability
insurance policies issued or renewed by Physicians on physicians, surgeons,
nurses, and other health care providers, dental practitioner professional
liability insurance policies including corporate and professional premises
liability coverage issued by Physicians, and related commercial general
liability insurance policies issued by Physicians, net of inuring reinsurance.
Prior to July 16, 1995, Physicians ceded a portion of the insurance it wrote
to unaffiliated reinsurers through reinsurance agreements. Physicians'
reinsurers for insurance policies with effective dates between July 1, 1993 and
July 15, 1995, were TIG Reinsurance Company (rated A [Excellent] by Best),
Transatlantic Reinsurance Company (rated A++ [Superior] by Best) and Cologne
Reinsurance Company of America (rated NR-3 [Rating Procedure Inapplicable] by
Best). Physicians ceded insurance to these carriers on an automatic basis when
retention limits were exceeded. Physicians retained all risks up to $200,000 per
occurrence. All risks above $200,000, up to policy limits of $5 million, were
transferred to reinsurers, subject to the specific terms and conditions of the
various reinsurance treaties. Physicians remains primarily liable to
policyholders for ceded insurance should any reinsurer be unable to meet its
contractual obligations. Physicians has not incurred any material loss resulting
from a reinsurer's breach or failure to comply with the terms of any reinsurance
agreement.
Property and Casualty Insurance
Effective January 1, 1998, Sequoia and Citation entered into an
inter-company reinsurance pooling agreement for business in force as of January
1, 1998 and business written thereafter. Per the agreement, Citation cedes 100%
of its net premium and losses to Sequoia and Sequoia then cedes 50% of its net
premiums and losses to Citation. Sequoia and Citation share equally in the
underwriting expenses.
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<PAGE> 42
Effective January 1, 1997, Citation cancelled its reinsurance contracts and
replaced them with the following coverages. For policies in force at December
31, 1996 and for policies written with effective dates from January 1, 1997
through February 28, 1997, Citation has reinsurance providing coverage for both
property and casualty business, excluding umbrella coverage, of $4.8 million
excess of $250,000.
For policies written with effective dates March 1, 1997 and after, Citation has
the same reinsurance as Sequoia's 1997 and 1998 reinsurance program which is
outlined as follows. For property business, reinsurance provides coverage of
$10.4 million excess of $150,000. For casualty business, excluding umbrella
coverage, reinsurance provides coverage of $4.9 million excess of $150,000.
Umbrella coverages are reinsured $9.9 million excess of $100,000. The
catastrophe treaties for 1997 provide coverage of 95% of $19 million excess of
$1million per occurrence for the combined losses of Citation and Sequoia. The
catastrophe treaties for 1998 provide coverage of 95% of $14 million excess of
$1 million per occurrence. Facultative reinsurance is placed with various
reinsurers.
Where the reinsurers are "not admitted" for regulatory purposes, Sequoia and
Citation presently maintain sufficient collateral with approved financial
institutions to secure cessions of paid losses and outstanding reserves.
With regard to Sequoia, all policy and claims liabilities prior to August 1,
1995 have been 100% reinsured with Sydney Reinsurance Corporation and
unconditionally guaranteed by QBE Insurance Group Limited. Sequoia, however,
retains primary responsibility to its policyholders and claimants should Sydney
and QBE fail. Sequoia's net retention for both property and casualty business,
excluding umbrella coverage, is $150,000 per risk or occurrence. The working
layers provide coverage up to $5.5 million excess of $150,000 per risk on
property losses subject to occurrence limits and unlimited reinstatements.
General liability coverage, excluding umbrella coverage, is provided up to $3
million excess of $150,000 per occurrence. Two excess catastrophe treaties
provide additional property reinsurance up to $10 million each occurrence,
excess of $500,000 each occurrence, with allowances for one full reinstatement
each at pro rata pricing. Sequoia retains the first $100,000 of each umbrella
loss up to $5 million. Facultative reinsurance is placed with various
reinsurers.
See Note 12 of Notes to Consolidated Financial Statements, "Reinsurance"
with regard to reinsurance recoverable concentration for all property and
casualty lines of business, including medical professional liability, as of
December 31, 1999. PICO remains contingently liable with respect to reinsurance
contracts in the event that reinsurers are unable to meet their obligations
under the reinsurance agreements in force.
REGULATION
Beginning in 1994, Physicians, Professionals, Citation, and Sequoia became
subject to the provisions of the Risk-Based Capital for Insurers Model Act which
has been adopted by the National Association of Insurance Commissioners for the
purpose of helping regulators identify insurers that may be in financial
difficulty. The Model Act contains a formula which takes into account asset
risk, credit risk, underwriting risk and all other relevant risks. Under this
formula, each insurer is required to report to regulators using formulas which
measure the quality of its capital and the relationship of its modified capital
base to the level of risk assumed in specific aspects of its operations. The
formula does not address all of the risks associated with the operations of an
insurer. The formula is intended to provide a minimum threshold measure of
capital adequacy by individual insurance company and does not purport to compute
a target level of capital. Companies which fall below the threshold will be
placed into one of four categories: Company Action Level, where the insurer must
submit a plan of corrective action; Regulatory Action Level, where the insurer
must submit such a plan of corrective action, the regulator is required to
perform such examination or analysis the Superintendent of Insurance considers
necessary and the regulator must issue a corrective order; Authorized Control
Level, which includes the above actions and may include rehabilitation or
liquidation; and Mandatory Control Level, where the regulator must rehabilitate
or liquidate the insurer.
The Model Act is not expected to cause any material change in any of the
insurance companies' future operations. All companies' risk-based capital
results as of December 31, 1999 exceed the requirements of PICO Action Level
except for Physicians which was at the Company Action Level. Physicians has been
in communication with the Ohio Department of Insurance and will submit a plan of
corrective action within the prescribed period. The Ohio Department may require
additional action to be taken based upon its ongoing regular triennial
examination of Physicians that began March 15, 1999. While up from the December
31, 1998 level, Physicians' Risk-Based Capital level fell below the target level
primarily due to the decline in the market value of PICO common stock.
ITEM 7. A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
PICO'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. PICO 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
42
<PAGE> 43
as it relates to investments denominated in foreign currencies. PICO's bank debt
is short-term in nature as PICO generally secures rates for periods of
approximately one to three years and therefore approximates fair value. At
December 31, 1999, PICO had $47.3 million of fixed maturity securities and
mortgage loans, $40.9 million of marketable equity securities that were subject
to market risk, and $33.3 million of investments denominated in foreign
currencies, primarily Swiss francs. PICO's investment strategy is to manage the
duration of the portfolio relative to the duration of the liabilities while
managing interest rate risk.
PICO 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, PICO uses duration modeling to calculate changes in fair value.
For its marketable securities PICO 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 PICO 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 $502,000
for a 100 basis point decline in interest rates on its fixed securities and
mortgage loans. The hypothetical 20% decrease in fair value of PICO's marketable
equity securities produced a loss in fair value of $6.3 million that would
impact the unrealized appreciation in shareholders' equity. The hypothetical 20%
decrease in the local currency of PICO's foreign denominated investments
produced a loss of $5.4 million that would impact the unrealized appreciation
and foreign currency translation in shareholders' equity.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
PICO's financial statements as of December 31, 1999 and 1998 and for each of
the three years in the period ended December 31, 1999 and the independent
auditors' reports are included in this report as listed in the index of this
report.
SELECTED QUARTERLY FINANCIAL DATA
Summarized unaudited quarterly financial data (in thousands, except share
and per share amounts) for 1999 and 1998 are shown below. In management's
opinion, the interim financial data contains all adjustments necessary for a
fair presentation of results for such interim periods. Prior period share and
per share amounts have been adjusted to conform to the current period
presentation reflecting the December 16, 1998 1-for-5 Reverse Stock Split.
<TABLE>
<CAPTION>
March 31, June 30, September 30, December 31, March 31, June 30, September 30, December 31,
1998 1998 1998 1998 1999 1999 1999 1999
---------- ----------- ------------ ----------- ------------ ------------ ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Premium income $9,138 $8,455 $8,805 $9,733 $8,555 $8,527 $8,268 $11,029
Net investment income and
net realized gains (losses) 3,068 3,775 2,236 (4,059) 1,570 4,374 3,021 (1,920)
Total revenues 12,922 13,654 12,180 8,653 10,510 14,528 14,094 15,574
Net income (loss) (1,678) 934 600 (8,100) (2,389) 7,848 (1,478) (12,767)
---------- ----------- ------------ ----------- ------------ ------------ ------------- -------------
Basic:
---------- ----------- ------------ ----------- ------------ ------------ ------------- -------------
Net income (loss) per
share $ (0.28) $0.16 $0.11 $ (1.31) $ (0.27) $ 0.88 $ (0.16) $ (1.41)
---------- ----------- ------------ ----------- ------------ ------------ ------------- -------------
Weighted average common
and equivalent shares
outstanding 6,019,817 6,019,817 5,711,304 6,178,675 8,946,237 8,938,693 9,054,413 9,054,426
Diluted:
Net income (loss) per
share $ (0.28) $0.15 $0.10 $ (1.31) $ (0.27) $ 0.83 $ (0.16) $ (1.41)
---------- ----------- ------------ ----------- ------------ ------------ ------------- -------------
Weighted average common
and equivalent shares
outstanding 6,019,817 6,254,573 6,158,606 6,178,675 8,946,237 9,458,320 9,054,413 9,054,426
---------- ----------- ------------ ----------- ------------ ------------ ------------- -------------
</TABLE>
43
<PAGE> 44
PICO HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1999 AND 1998
AND FOR EACH OF THE
THREE YEARS IN THE PERIOD
ENDED DECEMBER 31, 1999
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Independent Auditors' Reports..................................... 45-46
Consolidated Balance Sheets as of December 31, 1999 and 1998...... 47-48
Consolidated Statements of Operations for the Years Ended
December 31, 1999, 1998 and 1997............................ 49
Consolidated Statements of Shareholders' Equity for the
Years Ended December 31, 1999, 1998, and 1997................ 50-52
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1999, 1998 and 1997............................. 53
Notes to Consolidated Financial Statements........................ 54-82
44
<PAGE> 45
INDEPENDENT AUDITORS' REPORT
TO THE SHAREHOLDERS AND BOARD OF DIRECTORS OF PICO HOLDINGS, INC.
We have audited the accompanying consolidated balance sheets of PICO Holdings,
Inc. and its subsidiaries (collectively "the Company") as of December 31, 1999
and 1998, and the related consolidated statements of operations, shareholders'
equity, and cash flows for each of the three years in the period ended December
31, 1999. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits. We did not audit the 1997 consolidated financial
statements of Global Equity Corporation (all expressed in Canadian dollars), a
51.2% owned consolidated subsidiary as of December 31, 1997, which constituted
42% of consolidated total assets as of December 31, 1997. Those statements were
audited by other auditors whose report has been furnished to us, and our
opinion, insofar as it relates to the amounts included for Global Equity
Corporation (all expressed in Canadian dollars), is based solely on the report
of such other auditors.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, based on our audits and the report of the other auditors, such
consolidated financial statements present fairly, in all material respects, the
financial position of PICO Holdings, Inc. and subsidiaries as of December 31,
1999 and 1998, and the results of their operations and their cash flows for each
of the three years in the period ended December 31, 1999, in conformity with
accounting principles generally accepted in the United States of America.
DELOITTE & TOUCHE LLP
San Diego, California
March 10, 2000
45
<PAGE> 46
AUDITORS' REPORT TO THE SHAREHOLDERS
We have audited the consolidated statement of financial position of Global
Equity Corporation ("GEC") as at December 31, 1997 and the consolidated
statements of operations, deficit and changes in financial position for the year
then ended. These financial statements are the responsibility of GEC's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards
in Canada. Those standards require that we plan and perform an audit to obtain
reasonable assurance whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
In our opinion, these consolidated financial statements present fairly, in all
material respects, the financial position of GEC as at December 31, 1997 and the
results of its operations and the changes in its financial position for the year
then ended in accordance with generally accepted accounting principles in
Canada.
Accounting principles generally accepted in Canada vary in certain significant
respects from accounting principles generally accepted in the United States in
GEC's circumstances, as described in note 14 to GEC's consolidated financial
statements.
KPMG LLP
Chartered Accountants
Toronto, Canada
March 17, 1998
46
<PAGE> 47
PICO HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1999 AND 1998
ASSETS
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
Investments:
Available for sale:
Fixed maturities $ 47,324,414 $ 32,642,140
Equity securities and other investments 70,451,088 60,624,253
Short-term investments 16,493,675 21,098,702
Real estate 2,046,685
------------ ------------
Total investments 134,269,177 116,411,780
Cash and cash equivalents 36,738,373 71,654,196
Premiums and other receivables, net 12,030,709 10,414,017
Reinsurance receivables 45,040,368 55,624,830
Prepaid deposits and reinsurance premiums 1,307,442 2,187,387
Accrued investment income 1,236,919 1,295,550
Land, Mineral, and Water Rights and Water Storage 123,671,842 118,986,851
Property and equipment, net 1,752,820 1,851,502
Deferred policy acquisition costs 4,821,228 5,548,634
Income taxes receivable 3,648,577 6,522,454
Other assets 8,048,698 4,678,317
Net deferred income taxes 3,087,859
------------ ------------
Total assets $375,654,012 $395,175,518
============ ============
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
47
<PAGE> 48
PICO HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS, CONTINUED
DECEMBER 31, 1999 AND 1998
LIABILITIES AND SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
1999 1998
------------- -------------
<S> <C> <C>
Policy liabilities and accruals:
Unpaid losses and loss adjustment expenses, net of discount $ 139,132,875 $ 155,020,696
Unearned premiums 17,204,690 20,804,432
Reinsurance balance payable 7,712,602 12,068,890
Deferred gain on retroactive reinsurance 1,236,525 1,800,994
Other liabilities 16,879,994 11,402,000
Bank and other borrowings 15,704,507 8,966,707
Taxes payable 4,867,028
Net deferred income taxes 7,185,656
Excess of fair value of net assets acquired over purchase price 3,928,566 4,496,551
------------- -------------
Total liabilities 206,666,787 221,745,926
------------- -------------
Commitments and Contingencies (Note 11,12,13,14,15,16,17,20, and 21)
Preferred stock, $.01 par value, authorized 2,000,000; none issued
Common stock, $.001 par value; authorized 100,000,000; issued 13,448,533
and 13,328,770 at December 31, 1999 and 1998, respectively 13,449 13,329
Additional paid-in capital 186,004,827 183,154,588
Accumulated other comprehensive loss (5,920,196) (7,705,165)
Retained earnings 66,718,780 75,504,882
------------- -------------
246,816,860 250,967,634
Less treasury stock, at cost (4,394,127 common shares in 1999 and 4,380,780 in 1998) (77,829,635) (77,538,042)
------------- -------------
Total shareholders' equity 168,987,225 173,429,592
------------- -------------
Total liabilities and shareholders' equity $ 375,654,012 $ 395,175,518
============= =============
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
48
<PAGE> 49
PICO HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Revenues:
Premium income $ 36,379,102 $ 36,131,415 $ 49,876,404
Net investment income 6,604,822 9,432,012 13,520,107
Net realized gain (loss) on investments 440,611 (4,411,805) 21,393,331
Sale of surface, water, and mineral rights 6,081,764 2,242,200 1,494,088
Other income 5,199,173 4,014,692 3,735,447
------------ ------------ ------------
Total revenues 54,705,472 47,408,514 90,019,377
------------ ------------ ------------
Expenses:
Loss and loss adjustment expenses 35,211,836 30,528,007 34,330,327
Amortization of policy acquisition costs 10,484,345 10,877,142 11,567,460
Cost of surface, water, and mineral rights sold 4,458,694 1,067,503 605,578
Insurance underwriting and other expenses 23,794,385 15,972,883 18,176,891
------------ ------------ ------------
Total expenses 73,949,260 58,445,535 64,680,256
------------ ------------ ------------
Equity in loss of unconsolidated affiliates (4,014,892) (1,522,480) (1,577,876)
------------ ------------ ------------
Income (loss) from continuing operations before income taxes
and minority interest (23,258,680) (12,559,501) 23,761,245
Provision (benefit) for federal, foreign and state income taxes (13,324,262) 1,292,334 7,807,971
------------ ------------ ------------
Income (loss) from continuing operations
before minority interest (9,934,418) (13,851,835) 15,953,274
Minority interest in loss of subsidiary 706,076 4,532,632 3,202,461
------------ ------------ ------------
Income (loss) from continuing operations (9,228,342) (9,319,203) 19,155,735
Income from discontinued operations, net (Note 6) 1,075,024 456,283
------------ ------------ ------------
Net income (loss) before extraordinary gain (9,228,342) (8,244,179) 19,612,018
Extraordinary gain, net of income tax expense of $227,821 442,240
------------ ------------ ------------
Net income (loss) $ (8,786,102) $ (8,244,179) $ 19,612,018
============ ============ ============
Net income (loss) per common share - basic:
Continuing operations $ (1.03) $ (1.56) $ 3.04
Discontinued operations 0.18 0.07
Extraordinary gain 0.05
------------ ------------ ------------
Net income (loss) per common share $ (0.98) $ (1.38) $ 3.11
============ ============ ============
Weighted average shares outstanding 8,998,442 5,981,814 6,302,401
============ ============ ============
Net income (loss) per common share - diluted:
Continuing operations $ (1.03) $ (1.56) $ 2.93
Discontinued operations 0.18 0.07
Extraordinary gain 0.05
------------ ------------ ------------
Net income (loss) per common share $ (0.98) $ (1.38) $ 3.00
============ ============ ============
Weighted average shares outstanding 8,998,442 5,981,814 6,540,264
============ ============ ============
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
49
<PAGE> 50
PICO HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
Accumulated Other
Comprehensive Loss
---------------------------
Net Unrealized Equity
Additional Appreciation Foreign Changes
Common Paid-In Retained (Depreciation) Currency of Investee Treasury
Stock Capital Earnings on Investments Translation Company Stock Total
------- ----------- ---------- -------------- ----------- ----------- ---------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1997 $6,497 $42,991,053 $64,137,043 $ 10,619,063 $ (27,159) $(986,361) $(7,844,675) $108,895,461
Comprehensive Income for 1997
Net income 19,612,018
Net unrealized depreciation on
investments net of deferred
taxes of $7.1 million and
reclassification
adjustment of $9.3 million (13,169,501)
Foreign currency translation (2,173,934)
Total Comprehensive Income 4,268,583
Equity changes of investee
company 986,361 986,361
Issuance of common stock
upon exercise of options 21 344,979 345,000
Increase in ownership of
subsidiary holding common
stock of the Company (1,984,278) (1,984,278)
Purchase of common stock
in connection with CIG
merger (162,853) (162,853)
------- ----------- ----------- ------------- ------------- ---------- ------------ -------------
Balance, December 31, 1997 $6,518 $43,173,179 $83,749,061 $ (2,550,438) $ (2,201,093) $ - $(9,828,953) $112,348,274
======= =========== =========== ============= ============= ========== ============ =============
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
50
<PAGE> 51
PICO HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
Accumulated Other
Comprehensive Loss
-------------------------
Net Unrealized
Additional Appreciation Foreign
Common Paid-In Retained (Depreciation) Currency Treasury
Stock Capital Earnings on Investments Translation Stock Total
--------- ------------ ----------- -------------- ------------ ------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1997 $ 6,518 $ 43,173,179 $83,749,061 $(2,550,438) $(2,201,093) $ (9,828,953) $112,348,274
Comprehensive Loss for 1998
Net loss (8,244,179)
Net unrealized appreciation
on investments net of
deferred tax of $21,000
and reclassification
adjustment of $2.4 million 38,651
Foreign currency translation (2,992,285)
Total Comprehensive Loss (11,197,813)
Issuance of common stock
upon acquisition of minority
interest of GEC, net of costs
of $1.7 million 6,811 131,381,409 (57,709,089) 73,679,131
Acquisition of 412,846 shares of
treasury stock 8,400,000 (10,000,000) (1,600,000)
Exercise of 57,307 options on
treasury stock 200,000 200,000
--------- ------------ ------------ ------------ ------------ ------------- -------------
Balance, December 31, 1998 $ 13,329 $183,154,588 $75,504,882 $(2,511,787) $(5,193,378) $(77,538,042) $173,429,592
========= ============ ============ ============ ============ ============= =============
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
51
<PAGE> 52
PICO HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
Accumulated Other
Comprehensive Loss
---------------------------
Net Unrealized
Additional Appreciation Foreign
Common Paid-In Retained (Depreciation) Currency Treasury
Stock Capital Earnings on Investments Translation Stock Total
-------- ------------- ------------ -------------- ------------ ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1998 $ 13,329 $ 183,154,588 $ 75,504,882 $(2,511,787) $(5,193,378) $(77,538,042) $173,429,592
Comprehensive Loss for 1999
Net loss (8,786,102)
Net unrealized appreciation
on investments net of
deferred tax of $2 million
and reclassification
adjustment of $349,000 3,338,543
Foreign currency translation (1,553,574)
Total Comprehensive Loss (7,001,133)
Exercise of 120,000 warrants
at $23.80 per share 120 2,850,239 2,850,359
Purchase of 13,000 PICO treasury shares (291,593) (291,593)
-------- ------------- ------------- ------------ ------------ ------------- -------------
Balance, December 31, 1999 $ 13,449 $ 186,004,827 $ 66,718,780 $ 826,756 $(6,746,952) $(77,829,635) $168,987,225
======== ============= ============= ============ ============ ============= =============
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements
52
<PAGE> 53
PICO HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997
<TABLE>
<CAPTION>
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (8,786,102) $ (8,244,179) $ 19,612,018
Adjustments to reconcile net income (loss) to net cash used in
operating activities:
Deferred taxes (13,114,670) 7,156,521 576,418
Depreciation and amortization 3,076,471 1,492,097 1,181,495
(Gain) loss on sale of investments (440,611) 4,411,805 (21,393,331)
Gain on disposal of discontinued operations (1,105,012) (1,413,012)
Gain on sale of real estate (1,623,070) (1,174,697)
Extraordinary gain on early extinguishment of debt (442,240)
Equity in (earnings) losses of investee 4,014,892 1,522,480 1,577,876
Interest income recorded for value of HyperFeed warrants (1,834,035)
Semitropic lease payment (2,333,333) (2,400,150)
Minority interest (706,076) (4,532,632) (3,202,461)
Changes in assets and liabilities, net of effects of acquisitions:
Premiums and other receivables 938,386 245,551 4,878,240
Income taxes 8,049,785 (6,522,454) (191,275)
Reinsurance receivable 10,584,462 19,400,746 20,528,708
Reinsurance payable (4,356,288) 3,992,231
Accrued investment income 58,631 426,732 1,370,499
Deferred policy acquisition costs 727,406 (227,918) 56,623
Unpaid losses and loss adjustment expenses (15,887,821) (41,074,822) (57,033,716)
Discontinued operations (2,186,355)
Unearned premiums (3,599,742) (830,465) (13,173,128)
Other adjustments, net (2,341,769) 3,851,032 (11,410,837)
------------ ------------ ------------
Net cash used in operating activities (26,181,689) (23,613,134) (62,056,273)
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from the sale of available for sale investments:
Fixed maturities 15,215,844 53,988,484
Equity securities 11,817,436 9,602,798 94,473,149
Proceeds from maturity of available for sale investments 3,815,669 2,925,000 9,250,000
Purchases of available for sale investments:
Fixed maturities (19,047,153) (5,935,894) (23,082,301)
Equity securities (19,166,770) (9,685,616) (95,175,078)
Net sales of short-term investments 4,605,027 4,627,225 13,388,506
Proceeds from the sales of real estate 2,741,980 74,761 270,978
Purchases of land, water and mineral rights (4,576,870) (4,143,988) (2,336,851)
Proceeds from the sale of land, water and mineral rights 4,906,234 518,943
Proceeds from sale of property and equipment 6,510,166 215,882
Purchases of property and equipment (739,748) (859,267) (984,623)
Purchased cash from consolidated subsidiary 18,108,171
Proceeds from sale of business 27,130,343
Acquisition costs for purchase of minority interest in GEC (1,665,613)
Investments in and advances to affiliates (753,928) (1,886,714)
Other investing activities, net (1,094,370) (1,635,197)
------------ ------------ ------------
Net cash provided by (used in) investing activities (17,492,493) 40,792,791 68,116,317
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of bank and other borrowings (191,787) (16,489,329)
Proceeds from debt 6,068,781
Proceeds from the sale of warrants 2,850,359 2,006,567
Proceeds from the sale of treasury stock 200,000
Repurchase of treasury stock (291,593) (1,600,000)
Proceed from exercise of stock options 182,147
------------ ------------ ------------
Net cash provided by (used in) financing activities 8,435,760 (1,400,000) (14,300,615)
------------ ------------ ------------
Effect of exchange rate changes on cash 322,599 (561,250) 95,304
------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents (34,915,823) 15,218,407 (8,145,267)
Cash and cash equivalents, beginning of year 71,654,196 56,435,789 64,581,056
------------ ------------ ------------
Cash and cash equivalents, end of year $ 36,738,373 $ 71,654,196 $ 56,435,789
============ ============ ============
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest, net of amounts capitalized $ 284,000 $ 380,000 $ 201,000
============ ============ ============
Income taxes (recovered) paid $ (4,627,000) $ 440,000 $ 10,895,000
============ ============ ============
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
53
<PAGE> 54
PICO HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES:
Organization and Operations:
PICO Holdings, Inc. and subsidiaries (collectively, "the Company") is
a diversified holding company.
Currently PICO's major activities are:
- owning and developing land, mineral rights, and related water
rights through Nevada Land & Resource Company, LLC;
- owning and developing water rights & water storage operations
through Vidler Water Company, Inc.;
- property and casualty insurance;
- "running off" the loss reserves of our medical professional
liability insurance companies; and
- making strategic investments in other public companies.
PICO was incorporated in 1981 and began operations in 1982. The
company was known as Citation Insurance Group until a reverse merger with
Physicians Insurance Company of Ohio, Inc. ("Physicians") on November 20,
1996. After the reverse merger, the former shareholders of Physicians
owned approximately 80% of Citation Insurance Group, the Board of
Directors and management of Physicians replaced their Citation Insurance
Group counterparts, and Citation Insurance Group changed its name to PICO
Holdings, Inc. You should be aware that information pre-dating the
reverse merger relates to the old Citation Insurance Group only, and does
not reflect the performance of Physicians prior to the merger.
Effective December 16, 1998, PICO acquired the remaining 48.8% of the
outstanding stock of Global Equity Corporation ("Global Equity") through
a Plan of Arrangement (the "PICO/Global Equity Combination") whereby
Global Equity shareholders received .4628 of a newly issued PICO common
share for each Global Equity share surrendered. Immediately following the
close of the transaction, PICO consummated a 1-for-5 reverse stock split
(the "Reverse Stock Split"). Accordingly, all share amounts included
herein are restated to reflect the Reverse Stock Split.
The Company's primary subsidiaries as of December 31, 1999 are as
follows:
Nevada Land & Resource Company, LLC ("Nevada Land"). In April 1997,
PICO acquired Nevada Land, which then owned approximately 1.4 million
acres of deeded land in northern Nevada, together with the attaching
water, mineral and geothermal rights.
Vidler Water Company, Inc. ("Vidler"). Vidler is a majority-owned
Delaware corporation that was originally formed under the laws of the
state of Colorado. Vidler's business involves identifying end users,
namely municipalities or developers, in the Southwest who require water,
and then locating a source and supplying the demand, utilizing the
company's own assets where possible. These assets comprise water rights
in the states of Colorado, Arizona, Nevada and California, and water
storage facilities in Arizona and California.
Sequoia Insurance Company ("Sequoia"). Sequoia is a California
insurance company licensed to write insurance coverage for property and
casualty risks ("P&C") within the states of California and Nevada.
Sequoia writes business through independent agents and brokers covering
risks located primarily within northern and central California and
Nevada. Although multiple line underwriting is conducted, and at one time
or another all major lines of property and casualty insurance except
workers' compensation and ocean marine have been written, over the past
few years Sequoia transitioned from writing primarily personal lines of
business (automobile, homeowners, etc.) to commercial lines.
Citation Insurance Company ("Citation"). Citation is a
California-domiciled insurance company licensed to write commercial
property and casualty insurance in Arizona, California, Colorado, Nevada,
Hawaii, New Mexico and Utah.
54
<PAGE> 55
Physicians Insurance Company of Ohio ("Physicians"). Prior to selling
its book of medical professional liability ("MPL") insurance business in
1995, Physicians engaged in providing MPL insurance coverage to
physicians and surgeons, primarily in Ohio. On August 28, 1995,
Physicians entered into an agreement with Mutual Assurance, Inc.
("Mutual") pursuant to which Physicians sold its recurring MPL insurance
business to Mutual. Physicians still holds MPL unpaid losses and loss
adjustment expense liabilities that are being settled.
Conex Continental, Inc. ("Conex"). Conex is a Delaware corporation
that trades on the Canadian Dealer Network. Conex's principal asset is a
60% interest in a sino-foreign joint venture that manufactures wheeled
and tracked excavators.
SISCOM, Inc. ("SISCOM"). SISCOM is a Colorado corporation that markets
proprietary technology to the sports and broadcast industries.
Unconsolidated Affiliate:
HyperFeed Technologies, Inc. ("HyperFeed") is an Internet content and
solutions provider to the financial services industry. HyperFeed has a
number of business-to-business solutions, and its business-to-consumer
subsidiary PCQuote.com, is an Internet-based provider of high
performance, real-time financial data.
Principles of Consolidation:
The accompanying consolidated financial statements include the
accounts of the Company and its majority owned subsidiaries, and have
been prepared in conformity with accounting principles generally accepted
in the United States of America. All significant intercompany balances
and transactions have been eliminated. Investments in which the Company
owns between 20% to 50% of the voting interest and has the ability to
exercise significant influence are accounted for under the equity method
of accounting. Accordingly, the Company's share of income or losses are
included in consolidated results. Currently, the Company classifies its
35% voting ownership in HyperFeed as an equity investment.
Use of Estimates in Preparation of Financial Statements:
The preparation of financial statements in conformity with generally
accepted accounting principles 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 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 December 31, 1999
and 1998, it is reasonably possible that actual results could differ from
the estimates upon which the carrying values were based.
Investments:
The Company's investment portfolio at December 31, 1999 and 1998 is
comprised of investments with fixed maturities, including U.S. government
instruments, certificates of deposit, and corporate bonds; equity
securities, including investments in common and preferred stocks, and
warrants; debentures of public and private companies; oil and gas leases;
short term investments, including certificates of deposit, U.S. treasury
bills and mortgage interests; and real estate.
The Company applies the provisions of Statement of Financial
Accounting Standards ("SFAS") No. 115, "Accounting for Certain
Investments in Debt and Equity Securities." This statement, among other
things, requires investment securities to be divided into three
categories: held to maturity, available for sale, and trading. The
Company classifies all investments as available for sale. Investments
with a readily determinable fair value are carried at fair value.
Unrealized gains or losses on investments recorded at fair value are
recorded net of tax and included in accumulated other comprehensive
income or loss.
The Company regularly reviews the carrying value of its investments
for impairment. A decline in the market value of any investment below
cost that is deemed other than temporary is written down to net
realizable value. Adjustments for write-downs are reflected in net
realized gains or losses on investments in the consolidated statements of
operations.
55
<PAGE> 56
Net investment income includes amortization of premium and accretion
of discount on the level yield method relating to bonds acquired at other
than par value. Realized investment gains and losses are included in
income and are determined on the identified certificate basis and are
recorded on a trade date basis.
The Company invests domestically and abroad. Approximately $41.8
million and $32.7 million of the Company's investments at December 31,
1999 and 1998, respectively, were invested internationally. The Company's
most significant foreign currency exposure is in Swiss francs and
Australian dollars.
Real estate represents the carrying value of real property held for
investment.
Cash and Cash Equivalents:
Cash and cash equivalents include highly liquid debt instruments
purchased with original maturities of three months or less.
Land, Minerals and Related Water Rights; Water Rights and Water Storage:
Land, Minerals and Related Water Rights and Water Rights and Water
Storage, and land improvements are carried at cost. Water rights consist
of various water interests acquired independently or in conjunction with
the acquisition of real properties. Water rights are stated at cost and,
when applicable, consist of an allocation of the original purchase price
between water rights and other assets acquired based on their relative
fair values. In addition, costs directly related to the acquisition and
development of water rights are capitalized. This cost includes, when
applicable, the allocation of the original purchase price, costs directly
related to acquisition, and interest and other costs directly related to
developing land for its intended use. Amortization of land improvements
is computed on the straight-line method over the estimated useful lives
of the improvements ranging from 5 to 15 years. Provision is made for any
diminution in value that is considered to be other than temporary.
Property and Equipment:
Property and equipment are carried at cost, net of accumulated
depreciation. Depreciation is computed on the straight-line method over
the estimated lives of the assets ranging from 3 to 15 years. Maintenance
and repairs are charged to expense as incurred, while significant
improvements are capitalized. Gains or losses on the sale of property and
equipment are included in other income.
Deferred Acquisition Costs:
Costs of the insurance companies that vary with and are primarily
related to the acquisition of new and renewal insurance contracts, net of
reinsurance ceding commissions, are deferred and amortized over the terms
of the policies for property and liability insurance. Future investment
income has been taken into consideration in determining the
recoverability of such costs.
Goodwill:
Goodwill represents the difference between the purchase price and the
fair value of the net assets (including tax attributes) of companies
acquired in purchase transactions. The Company recorded negative goodwill
(i.e., excess of fair value of assets acquired over purchase price) as a
result of the acquisition of Citation Insurance Group in November 1996.
Negative goodwill is amortized using the straight-line method over 10
years. The Company recorded goodwill related to other purchase
transactions, primarily its investment in HyperFeed and Conex and
amortizes the balance over various lives not exceeding 10 years.
Impairment of Long-Lived Assets:
The Company applies the provisions of SFAS No. 121 "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of" and periodically evaluates whether events or circumstances have
occurred that may affect the estimated useful life or the recoverability
of long-lived assets. Impairment of long-lived assets is triggered when
the estimated future undiscounted cash flows (excluding interest charges)
for the lowest level for which there are identifiable cash flows that are
independent of the cash flows of other groups of assets do not exceed the
carrying amount. The Company prepares and analyzes
56
<PAGE> 57
cash flows at various levels of grouped assets. The Company reviews cash
flows for significant individual assets held within a subsidiary, and for
a subsidiary taken as a whole. If the events or circumstances indicate
that the remaining balance may be permanently impaired, such potential
impairment will be measured based upon the difference between the
carrying amount and the fair value of such assets determined using the
estimated future discounted cash flows (excluding interest charges)
generated from the use and ultimate disposition of the respective
long-lived asset.
Reinsurance:
The Company records all reinsurance assets and liabilities on the
gross basis, including amounts due from reinsurers and amounts paid to
reinsurers relating to the unexpired portion of reinsured contracts
(prepaid reinsurance premiums).
Unpaid Losses and Loss Adjustment Expenses:
Reserves for MPL and property and casualty insurance unpaid losses and
loss adjustment expenses include amounts determined on the basis of
actuarial estimates of ultimate claim settlements, which include
estimates of individual reported claims and estimates of incurred but not
reported claims. The methods of making such estimates and for
establishing the resulting liabilities are continually reviewed and
updated based on current circumstances, and any adjustments resulting
therefrom are reflected in current operations. Reserves for MPL unpaid
losses and loss adjustment expenses for MPL insurance claims have been
adjusted to reflect the time value of money (discounting).
Recognition of Premium Revenue:
MPL and other property and casualty insurance premiums written are
earned principally on a monthly pro rata basis over the lives of the
policies. The premiums applicable to the unexpired terms of the policies
are included in unearned premiums.
Income Taxes:
The Company's provision for income tax expense includes federal,
state, local and foreign income taxes currently payable and those
deferred because of temporary differences between the income tax and
financial reporting bases of the assets and liabilities. The liability
method of accounting for income taxes also requires the Company to
reflect the effect of a tax rate change on accumulated deferred income
taxes in income in the period in which the change is enacted.
In assessing the realization of deferred income taxes, management
considers whether it is more likely than not that any deferred income tax
assets will be realized. The ultimate realization of deferred income tax
assets is dependent upon the generation of future taxable income during
the period in which temporary differences become deductible. If future
income does not occur as expected, a deferred income tax valuation
allowance may be established or modified.
Earnings per Share:
In February 1997, the Financial Accounting Standards Board ("FASB")
issued SFAS No. 128, "Earnings Per Share," effective for financial
statements issued after December 15, 1997. SFAS No. 128 requires dual
presentation of "Basic" and "Diluted" earnings per share ("EPS") by
entities with complex capital structures, replacing "Primary" and "Fully
Diluted" EPS under Accounting Principles Board ("APB") Opinion No. 15.
Basic EPS excludes dilution and is computed by dividing income available
to common stockholders by the weighted-average number of common shares
outstanding for the period. Diluted EPS reflects the potential dilution
that could occur if securities or other contracts to issue common stock
were exercised or converted into common stock or resulted in the issuance
of common stock that then shared in earnings. The Company adopted the new
method of reporting EPS for the year ended December 31, 1997.
57
<PAGE> 58
Reconciliation of the Basic and Diluted EPS is as follows:
<TABLE>
<CAPTION>
Year ended December 31,
----------------------------------------------------
1999 1998 1997
---------------- --------------- --------------
<S> <C> <C> <C>
Net income (loss) $(8,786,102) $ (8,244,179) $ 19,612,018
=========== ============ ============
Basic income (loss) per share $ (0.98) $ (1.38) $ 3.11
=========== ============ ============
Basic weighted average common shares outstanding 8,998,442 5,981,814 6,302,401
Effect of options 237,863
----------- ------------ ------------
Diluted weighted average common and
common equivalent shares outstanding 8,998,442 5,981,814 6,540,264
=========== ============ ============
Diluted income (loss) per share $ (0.98) $ (1.38) $ 3.00
=========== ============ ============
</TABLE>
Stock options of 1 million, 1.1 million and 276,543 for 1999, 1998 and
1997, respectively and 223,187 warrants in 1998 were not included in the
calculation of weighted average shares because the impacts of such
instruments were anti-dilutive.
Comprehensive Loss
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income." SFAS No. 130 established requirements for disclosure of
comprehensive income and is effective for the Company for the year ended
December 31, 1998. The Company adopted the new standard for the year ended
1998, and has reclassified previous financial statements to conform to the
new presentation. Comprehensive income or loss includes foreign currency
translation, and unrealized holding gains and losses on available for sale
securities, which prior to adoption were reported separately in
stockholders' equity. The components of accumulated other comprehensive
loss are as follows:
<TABLE>
<CAPTION>
December 31,
1999 1998
----------- -----------
<S> <C> <C>
Net unrealized income (loss) on securities $ 826,756 $(2,511,787)
Foreign currency translation (6,746,952) (5,193,378)
----------- -----------
Accumulated other comprehensive loss $(5,920,196) $(7,705,165)
=========== ===========
</TABLE>
Accumulated other comprehensive loss is net of deferred income tax
liability of $658,000 and deferred income tax benefit of $1.3 million at
December 31, 1999 and 1998, respectively.
Translation of Foreign Currency:
Financial statements of foreign operations are translated into U.S.
dollars using average rates of exchange in effect during the year for
revenues, expenses, gains and losses, and the exchange rate in effect at
the balance sheet date for assets and liabilities. Unrealized exchange
gains and losses arising on translation are reflected within accumulated
other comprehensive loss.
Reclassifications:
Certain amounts in the financial statements for prior periods have
been reclassified to conform to the current year presentation.
Recent Accounting Pronouncements:
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
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<PAGE> 59
and for hedging activities. It requires recognition of all derivatives as
either assets or liabilities in the consolidated balance sheet, and
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.
2. SIGNIFICANT ACQUISITIONS:
On December 16, 1998, PICO acquired the remaining 48.8% of Global
Equity, making it a wholly owned subsidiary. This was accomplished
through an exchange of PICO shares for Global Equity shares at the
exchange ratio of .4628 of a PICO share for each share of Global Equity.
PICO issued a total of 6,810,426 shares of PICO common stock to former
Global Equity shareholders. PICO subsidiaries hold 3,110,837 of these
newly issued shares which are recorded at cost, as treasury stock in the
consolidated balance sheets of the Company. Net of the shares issued to
affiliates, PICO issued 3,699,589 common shares valued at the average
market price per share 5 days before, and after the announcement of the
transaction. This average was approximately $22.10 per share (post
reverse split). In addition, PICO exchanged 223,187 PICO warrants with an
exercise price of $23.80 per share for all the outstanding Global Equity
warrants using the same exchange ratio. PICO also exchanged 484,967 stock
options with the Global Equity officers, two current Global Equity
directors and a former Global Equity director in exchange for
surrendering their Global Equity stock options. These grants placed the
participants in a substantially similar position regarding shares and
exercise price and vesting. The acquisition was accounted for using the
purchase method of accounting.
Accordingly, a portion of the purchase price was allocated to the net
assets acquired based on their estimated fair values as noted in the
following table:
<TABLE>
<S> <C>
Purchase Price:
Value of approximately 3.7 million PICO shares exchanged $ 81,760,917
Direct costs of acquisition 1,665,613
Value of GEC options assumed 2,731,975
-----------------
$ 86,158,505
=================
Allocation of Purchase Price:
Historic GEC shareholders' equity acquired $ 58,801,561
Adjustments to assets and liabilities acquired:
Increase in book value of surface, water and mineral rights 36,945,129
Increase in book value of PICO common stock owned by GEC 3,342,610
Deferred income tax liability (12,930,795)
-----------------
$ 86,158,505
=================
</TABLE>
The following table reflects unaudited pro forma combined results of
operations of the Company and Global Equity on the basis that the
acquisition had taken place at the beginning of the fiscal year for the
period presented:
<TABLE>
<CAPTION>
(Unaudited)
1998 1997
--------------- ----------------
<S> <C> <C>
Total revenues $ 47,408,514 $90,019,377
Income (loss) before income taxes (17,100,625) 20,558,784
Net income (loss) (17,300,443) 13,207,096
Net income (loss) per share - basic $ (1.93) $ 1.38
Net income (loss) per share - diluted $ (1.93) $ 1.34
</TABLE>
These unaudited pro forma results have been prepared for comparative
purposes and do not purport to be indicative of the results of operations
which actually would have resulted had the combinations been in effect at
the beginning of the period or of future results of operations of the
consolidated entities.
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<PAGE> 60
On April 23, 1997, Global Equity and PICO acquired 100% of the
membership interest of Nevada Land, a Delaware limited liability company.
The total purchase price was approximately $48.6 million.
At November 3, 1999 the Company increased its ownership of Conex from
66% to 83% through the redemption of its remaining preferred shares and
conversion of intercompany loans into common stock. At August 2, 1999 the
Company increased its ownership of Conex from 32% to 66% through the
redemption of preferred shares, the proceeds from which were used to
exercise warrants for common shares. The consolidated results of
operations for the year ended December 31, 1999 reflect the consolidation
of Conex for the period August 3 to December 31. Previous to
consolidation, the investment was accounted for using the equity method.
Consequently, the results of operations for the year ended December 31,
1999 include 32% of the losses in the unconsolidated affiliate for the
period January 1 to August 2, 1999. Conex's primary asset is a 60%
sino-foreign joint venture that manufactures wheeled and tracked
excavators in The People's Republic of China.
Conex accounts for its 60% interest in the sino-foreign joint venture
using the equity method of accounting due the fact that it does not have
majority financial control over the policies and procedures of the joint
venture. The functional currency for the joint venture is the Chinese
Renminbi.
The following is the results of operations of Conex for the year ended
December 31, 1999:
<TABLE>
<S> <C>
Expenses $ 1,114,938
Equity in losses of
unconsolidated affiliates 1,873,874
---------------
Loss from operations 2,988,812
Minority interest (1,491,417)
---------------
Net loss $ 1,497,395
===============
</TABLE>
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<PAGE> 61
3. INVESTMENTS:
At December 31, the cost and carrying value of investments were as
follows:
<TABLE>
<CAPTION>
Gross Gross
Unrealized Unrealized Carrying
1999: Cost Gains Losses Value
----------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Fixed maturities:
U.S. Treasury securities
and obligations of U.S.
government corporations
and agencies $ 25,157,710 $ 8,461 $ (291,784) $24,874,387
Corporate securities 9,600,805 28,225 (29,003) 9,600,027
Mortgage-backed
securities 12,850,000 12,850,000
----------------- --------------- --------------- ---------------
47,608,515 36,686 (320,787) 47,324,414
Equity securities 57,424,022 12,865,362 (11,136,108) 59,153,276
Short term investments 16,493,675 16,493,675
Investment in unconsolidated affiliates 11,297,812 11,297,812
----------------- --------------- --------------- ---------------
Total $ 132,824,024 $12,902,048 $(11,456,895) $134,269,177
================= =============== =============== ===============
</TABLE>
<TABLE>
<CAPTION>
Gross Gross
Unrealized Unrealized Carrying
1998: Cost Gains Losses Value
---------------- -------------- --------------- ---------------
<S> <C> <C> <C> <C>
Fixed maturities:
U.S. Treasury securities
and obligations of U.S.
government corporations
and agencies $ 6,991,162 $ 63,105 $ (43,919) $ 7,010,348
Corporate securities 12,943,949 184,032 13,127,981
Mortgage-backed
securities 12,503,811 12,503,811
---------------- -------------- --------------- ---------------
32,438,922 247,137 (43,919) 32,642,140
Equity securities 60,606,395 5,017,651 (9,915,154) 55,708,892
Short term investments 21,098,702 21,098,702
Investment in unconsolidated affiliates 4,915,361 4,915,361
Real estate 2,046,685 2,046,685
---------------- -------------- --------------- ---------------
Total $ 121,106,065 $5,264,788 $(9,959,073) $116,411,780
================ ============== =============== ===============
</TABLE>
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<PAGE> 62
The amortized cost and carrying value of investments in fixed
maturities at December 31, 1999, by contractual maturity, are shown
below. Expected maturity dates may differ from contractual maturity dates
because borrowers may have the right to call or prepay obligations with
or without call or prepayment penalties.
<TABLE>
<CAPTION>
Amortized Carrying
Cost Value
------------------- ------------------
<S> <C> <C>
Due in one year or less $14,933,795 $14,846,286
Due after one year through five years 19,824,720 19,628,128
Mortgage-backed securities 12,850,000 12,850,000
------------------- ------------------
$47,608,515 $47,324,414
=================== ==================
</TABLE>
Investment income is summarized as follows for each of the years ended
December 31:
<TABLE>
<CAPTION>
1999 1998 1997
--------------- --------------- ---------------
<S> <C> <C> <C>
Investment income from:
Available for sale:
Fixed maturities $ 1,593,052 $ 1,694,345 $3,665,643
Equity securities 470,628 585,330 2,956,309
Short-term investments
and other 4,809,821 7,540,967 7,412,342
--------------- --------------- ---------------
Total investment income 6,873,501 9,820,642 14,034,294
Investment expenses (268,679) (388,630) (514,187)
--------------- --------------- ---------------
Net investment income $ 6,604,822 $ 9,432,012 $13,520,107
=============== =============== ===============
</TABLE>
Pre-tax net realized gains (losses) on investments were as follows for
each of the years ended December 31:
<TABLE>
<CAPTION>
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Gross realized gains:
Available for sale:
Fixed maturities $ 201,665 $ 300,167
Equity securities and other investments $ 3,395,323 3,810,751 31,083,312
Real estate 670,451 806,574
------------ ------------ ------------
Total gain 4,065,774 4,818,990 31,383,479
------------ ------------ ------------
Gross realized losses:
Available for sale:
Fixed maturities (123) (178,770) (1,253,139)
Equity securities and other investments (3,625,040) (8,260,408) (8,737,009)
Real estate (791,617)
------------ ------------ ------------
Total losses (3,625,163) (9,230,795) (9,990,148)
------------ ------------ ------------
Net realized gain (loss) $ 440,611 $ (4,411,805) $ 21,393,331
============ ============ ============
</TABLE>
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<PAGE> 63
During 1999 and 1998, the Company recorded $3.2 million and $8.2
million, respectively, in permanent write downs of investments to
recognize what is expected to be other than temporary declines in the
market values of those securities.
During 1999, the Company purchased 6,166,657 shares of Australian Oil
and Gas ("AOG") for $6.6 million and received 420,494 shares as a
dividend valued at $452,000. During 1998, the Company purchased 857,309
shares of Australian Oil and Gas ("AOG") for $803,000. At December 31,
1999 the Company owns a total of 7,444,460 shares, representing a 15.9%
interest in AOG.
During 1999, the Company purchased 76,600 shares of Jungfraubahn
Holding AG ("Jungfraubahn") based in Interlaken, Switzerland for $11.8
million, bringing the total holding to 109,200 shares, or 18.7% of the
company. The acquisition was financed with $7 million in cash and the
remaining balance in debt.
Approximately $26.8 million of the total gross realized gains for the
year ended December 31, 1997 were generated from the conversion of
Resource America, Inc. warrants and the immediate sale of the converted
common stock. For the year ended December 31, 1997, Global Equity
recorded a permanent write down of $8 million (of which approximately
$3.8 million represented the realization of accumulated foreign currency
translation adjustments recorded by Global Equity) in the value of its
investment in Korean securities in recognition of what is expected to be
an other than temporary decline in the market value of those securities.
These write-downs have been recorded as a realized loss.
4. INVESTMENT IN UNCONSOLIDATED AFFILIATES:
At December 31, 1999, the Company's investment in HyperFeed consisted
of 2,370,000 shares of common stock, representing 15% of the common
shares outstanding; 4,786,538 shares of preferred stock, representing a
23% diluted voting interest; and an additional 4,055,195 common stock
warrants which on a diluted basis would represent an additional 17%
voting interest. The common and preferred stock are presented using the
equity method of accounting for investments in common stock as prescribed
by APB No. 18, and have a combined carrying value of $2.8 million at
December 31, 1999. The difference between the carrying value of the
investment and the underlying equity in the net assets or liabilities of
HyperFeed is considered goodwill and is being amortized over 10 years on
a straight-line basis. At December 31, 1999, the common stock warrants
are carried in accordance with SFAS No. 115 at an estimated fair value of
$15.4 million, prior to $3.8 million in deferred tax, using the Black
Scholes option-pricing model. The pre-tax unrealized gain on the warrants
is $11.3 million.
The Black Scholes pricing model incorporates assumptions in
calculating an estimated fair value. The following assumptions were used
in the computations: no dividend yield for all years; a risk-free
interest rate of 5%; a two year expected life; and a historical 4 year
cumulative volatility of 133%.
The market value of the common shares and preferred shares based on
the December 31, 1999 closing price of HyperFeed common stock was
approximately $11 million and $22.1 million, respectively.
At December 31, 1998, the investment in HyperFeed consisted of
2,370,000 shares of common stock (representing 16.7% of the common shares
outstanding) and 4,786,538 shares of preferred stock, representing a 24%
diluted voting interest and an additional 4,055,195 common stock
warrants, which on a diluted basis would represent an additional 17%
voting interest. The investment in common stock and preferred stock have
a combined carrying value of $5 million, net of deferred tax at December
31, 1998. At December 31, 1998, the common stock warrants are carried in
accordance with SFAS No. 115 at an estimated fair value of $6.1 million,
prior to $683,000 in deferred tax, using the Black Scholes pricing model.
The pre-tax unrealized gain on the warrants was $2 million. The market
value of the common shares and preferred shares based on the December 31,
1998 closing price of HyperFeed common stock was approximately $5 million
and $10.2 million, respectively.
During the three years ended December 31, 1999, HyperFeed recorded
various capital transactions that affected PICO's voting ownership
percentage. In 1999, HyperFeed issued common stock related to the
conversion of options and warrants and stock in a private placement.
These transactions diluted PICO's ownership percentage approximately 3%
to 35% at the end of 1999. During 1998, there were various capital
transactions, other than the debt conversion, that affected PICO's voting
ownership percentage. In summary, PICO's ownership percentage increased
from 16.5% at the beginning of 1998 to 18% at June 30, 1998 then declined
to 17.7% at September 30, 1998. The debt conversion during the fourth
quarter of 1998 increased PICO's voting percentage to approximately 38%
at the end of 1998. In 1997, HyperFeed sold 5 million shares common stock
and warrants to purchase 500,000
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<PAGE> 64
shares of common stock at $1 per share, for net proceeds of $4.7 million.
As a result, PICO's voting ownership declined from 27.8% prior to the
transaction to 16.6%. This gave rise to a dilution gain of $997,000.
Deferred taxes are provided on each dilution transaction.
In December 1998, the Company converted its $2.5 million HyperFeed
debenture, $3.3 million line of credit and $969,000 in accrued interest
into 1,907,463 shares of HyperFeed Series A voting convertible preferred
shares, 2,879,077 series B voting convertible preferred shares, and
3,106,163 million warrants to purchase HyperFeed common shares, expiring
in 2006. The value of the preferred shares and warrants was determined
using a relative fair value approach and consequently, no gain or loss
was recorded on the transaction.
5. LAND, MINERALS AND RELATED WATER RIGHTS; WATER RIGHTS AND WATER
STORAGE:
Through its subsidiary Nevada Land, the Company owns land, mineral and
related water rights. Through its subsidiary Vidler, the Company owns
water rights and water storage consisting of various real properties in
California, Arizona, Colorado and Nevada. The costs assigned to the
various components at December 31, were as follows:
<TABLE>
<CAPTION>
1999 1998
------------------ -----------------
<S> <C> <C>
NLRC:
Land, Mineral and Related Water Rights $ 44,658,905 $ 53,905,167
------------------ -----------------
Vidler:
Water rights 19,924,025 20,012,797
Land 52,320,131 40,236,058
Water Storage 3,999,999 2,333,640
Land improvements, net 2,768,782 2,499,189
------------------ -----------------
Water Rights and Water Storage 79,012,937 65,081,684
------------------ -----------------
$123,671,842 $ 118,986,851
================== =================
</TABLE>
At December 31, 1999, the book value of Vidler's interest in the
Semitropic Water Storage facility was $4.0 million. During the first ten
years of the agreement through November, 2008, Vidler is required to make
a minimum annual payment of $2.3 million. In return, Vidler is entitled
to store up to 185,000 acre-feet of water underground at Semitropic for
35 years. The cash payments made during the first ten years are being
capitalized and the asset is being amortized over its useful life of
thirty-five years. In 1999, the $2.3 million payment was capitalized to
water storage, and $667,000 of expense was amortized against it. In
addition, Vidler is required to pay annual operating and maintenance
costs. In 1999, operating costs of $863,000 were charged to the water
rights and water storage segment.
6. DISCONTINUED OPERATIONS:
On June 16, 1997, the Company announced a definitive agreement to sell
its life and health insurance subsidiary, American Physicians Life
("American Physicians"). The closing was completed on December 4, 1998.
Proceeds from the sale were $17 million in cash. On August 21, 1997,
Global Equity announced an agreement to sell its Sri Lankan subsidiaries.
The closings occurred during 1997 for consideration of $17.3 million in
cash and $7.7 million in marketable securities. Approximately $15 million
of the $25 million purchase price was received in 1997, and the remaining
balance was received in 1998.
Because these subsidiaries represented major segments of the Company's
business, in accordance with APB No. 30 "Reporting the Results of
Operations--Reporting the Effects of Disposal of a Segment of a
Business," operations for all of 1999, 1998 and 1997 have been classified
as discontinued operations.
64
<PAGE> 65
The following reconciles income (loss) from continuing operations to
net income (loss):
<TABLE>
<CAPTION>
1998 1997
--------------- ---------------
Income (loss) from continuing operations
<S> <C> <C>
before income taxes and minority interest $ (12,559,501) $ 23,761,245
Provision for income taxes 1,292,334 7,807,971
Minority interest 4,532,632 3,202,461
--------------- ---------------
Income (loss) from continuing operations (9,319,203) 19,155,735
--------------- ---------------
Income from discontinued operations, net of
income taxes of $86,000 in 1998
and $965,000 in 1997 and minority interest of $489,000 in 1997 345,716 892,275
Gain (loss) on disposal of discontinued operations, net of
income tax of $375,000 in 1998 and
$1.3 million in 1997 and foreign currency of $1.2 million in 1997 729,308 (160,250)
Minority interest (275,742)
--------------- ---------------
Income from discontinued operations 1,075,024 456,283
--------------- ---------------
Net income (loss) $ (8,244,179) $ 19,612,018
=============== ===============
</TABLE>
Following is an unaudited summary of American Physicians' stand-alone
financial results for the periods included in the statements of operations as
discontinued operations:
<TABLE>
<CAPTION>
1998 1997
------------------ ------------------
<S> <C> <C>
Total revenues $ 9,172,435 $ 5,310,330
Income (loss) before taxes 431,650 (112,012)
Net income (loss) 345,716 (167,327)
Net income (loss) per share - basic $ 0.07 $ (0.03)
Net income (loss) per share - diluted $ 0.07 $ (0.03)
</TABLE>
Following is an unaudited summary of these Sri Lankan companies stand
alone financial results for the period included as discontinued operations in
the accompanying financial statements.
<TABLE>
<CAPTION>
1997
--------------
<S> <C>
Total revenues $ 12,449,347
Income before taxes
and minority interests 3,309,699
Minority interest in income of subsidiary 764,418
Net income 288,956
Net income per share - basic $ 0.05
Net income per share - diluted $ 0.04
</TABLE>
7. PREMIUMS AND OTHER RECEIVABLES:
Premiums and other receivables consisted of the following at December
31:
<TABLE>
<CAPTION>
1999 1998
---------------- ----------------
<S> <C> <C>
Agents' balances and unbilled premiums $ 6,680,895 $ 7,513,754
Finance receivables 2,793,185
Trade receivables 651,400
Other accounts receivable 2,004,717 2,994,788
---------------- ----------------
12,130,197 10,508,542
Allowance for doubtful accounts (99,488) (94,525)
---------------- ----------------
$ 12,030,709 $ 10,414,017
================ ================
</TABLE>
65
<PAGE> 66
8. FEDERAL INCOME TAX:
The Company and its U.S. subsidiaries, excluding U.S. subsidiaries of
Global Equity, file a consolidated federal income tax return. Non-U.S.
subsidiaries file tax returns in various foreign countries.
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes.
Significant components of the Company's deferred tax assets and
liabilities are as follows at December 31:
<TABLE>
<CAPTION>
1999 1998
---------------- ----------------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards $ 16,432,788 $ 13,852,749
Loss reserves 10,629,211 11,142,641
Unearned premium reserves 1,081,013 1,265,960
Unrealized depreciation on securities 3,451,782 2,683,119
Deferred gain on retroactive reinsurance 420,419 612,338
Integration liability 51,680
Write down of securities 1,634,616
Equity in unconsolidated affiliates 784,120 275,642
Other, net 861,923 1,128,294
---------------- ----------------
Total deferred tax assets 35,295,872 31,012,423
---------------- ----------------
Deferred tax liabilities:
Reinsurance receivables 6,189,121 8,484,586
Deferred policy acquisition costs 1,639,218 1,886,536
Unrealized appreciation on securities 4,070,176 243,775
Revaluation of surface, water and mineral rights 14,880,795 14,880,795
NLRC land sales 1,065,315 455,000
Accretion of bond discount 60,465 62,888
Capitalized lease 566,771
---------------- ----------------
Total deferred tax liabilities 28,471,861 26,013,580
---------------- ----------------
Net deferred tax assets before
valuation allowance 6,824,011 4,998,843
Less valuation allowance (3,736,152) (12,184,499)
---------------- ----------------
Net deferred tax asset (liability) $ 3,087,859 $ (7,185,656)
================ ================
</TABLE>
The deferred tax asset valuation allowance as of December 31, 1999
relates to the net operating loss carryforwards (NOL's) of Global Equity and its
subsidiaries. Global Equity and its subsidiaries are subject to rules that limit
the ability to utilize their NOL's. Due to these limitations and the uncertainty
of future taxable income, a valuation allowance has been recorded for the
deferred tax asset that may not be realized. The deferred tax asset valuation
allowance as of December 31, 1998 also include amounts related to NOL's of PICO
and its U. S. consolidated subsidiaries. During 1999, U.S. tax legislation was
enacted that removed certain limitations on the Company's ability to utilize its
U.S. NOL's. As a result of this legislation, the valuation allowance for these
losses was removed. Deferred tax assets and liabilities, the recorded valuation
allowance, and federal income tax expense in future years can be significantly
affected by changes in circumstances that would influence management's
conclusions as to the ultimate realization of deferred tax assets.
66
<PAGE> 67
Pre-tax income (loss) from continuing operations for the years ended
December 31 was under the following jurisdictions:
<TABLE>
<CAPTION>
1999 1998 1997
----------------- ---------------- -----------------
<S> <C> <C> <C>
Domestic $ (17,363,751) $ (8,478,440) $ 36,248,709
Foreign (5,894,929) (4,081,061) (12,487,464)
----------------- ---------------- -----------------
Total $ (23,258,680) $ (12,559,501) $ 23,761,245
================= ================ =================
</TABLE>
Income tax expense (benefit) from continuing operations for each of
the years ended December 31 consists of the following:
<TABLE>
<CAPTION>
1999 1998 1997
---------------- ---------------- -----------------
<S> <C> <C> <C>
Current tax expense (benefit):
U.S. federal $ (729,136) $ (5,415,430) $ 9,292,120
Foreign 519,544 358,759
---------------- ---------------- -----------------
Total tax expense (benefit) (209,592) (5,056,671) 9,292,120
---------------- ---------------- -----------------
Deferred tax expense (benefit):
U.S. federal $(10,156,823) $3,205,910 $ 2,068,300
Foreign (2,957,847) 3,143,095 (3,552,449)
---------------- ---------------- -----------------
Total tax expense (benefit) (13,114,670) 6,349,005 (1,484,149)
---------------- ---------------- -----------------
Total income tax expense (benefit) $(13,324,262) $1,292,334 $ 7,807,971
================ ================ =================
</TABLE>
The difference between income taxes provided at the Company's
effective tax rate and federal statutory rate is as follows:
<TABLE>
1999 1998 1997
---------------- -------------- ----------------
<S> <C> <C> <C>
Federal income tax expense (benefit) at statutory rate $ (7,907,951) $ (4,270,230) $ 8,316,436
Change in valuation allowance (8,448,347) 1,889,973 (136,000)
Accrued liabilites 1,578,000
Equity in losses of unconsolidated affiliates 217,934
Extraordinary gain 227,821
Non deductible capital loss 294,188
Investment valuation 171,115 3,434,307
Other 542,978 238,284 (372,465)
---------------- -------------- ----------------
Federal income tax expense (benefit) $ (13,324,262) $ 1,292,334 $ 7,807,971
================ ============== ================
</TABLE>
Provision has not been made for U.S. or additional foreign tax on the
undistributed earnings of foreign subsidiaries. It is not practical to
estimate the amount of additional tax that might be payable. At December
31, 1999 and 1998, the Company had an income tax receivable of $3.6
million and $6.5 million, respectively. The aggregate NOL's of
approximately $44.1 million expire between 1999 and 2013. There is a $1.4
million annual limitation on the utilization of the NOL's of PICO,
Citation and Sequoia.
67
<PAGE> 68
9. PROPERTY AND EQUIPMENT:
The major classifications of property and equipment are as follows at
December 31:
<TABLE>
<CAPTION>
1999 1998
-------------- ---------------
<S> <C> <C>
Office furniture, fixtures and equipment $ 6,838,170 $ 5,796,110
Building and leasehold improvements 375,975 22,988
-------------- ---------------
7,214,145 5,819,098
Accumulated depreciation (5,461,325) (3,967,596)
-------------- ---------------
Property and equipment, net $ 1,752,820 $ 1,851,502
============== ===============
</TABLE>
Depreciation expense was $1 million, $1.3 million, and $873,000, in
1999, 1998, and 1997, respectively.
10. DEFERRED POLICY ACQUISITION COSTS:
Changes in deferred policy acquisition costs were as follows:
<TABLE>
<CAPTION>
1999 1998 1997
---------------- ---------------- ----------------
<S> <C> <C> <C>
Balance, January 1 $ 5,548,634 $ 5,320,716 $ 5,377,339
Additions:
Commissions 5,559,587 6,711,752 7,677,146
Other 3,966,560 4,540,307 4,431,623
Ceding commissions 230,792 (43,819) (13,596)
---------------- ---------------- ----------------
Deferral of expense 9,756,939 11,208,240 12,095,173
---------------- ---------------- ----------------
Adjustment for premium deficiency (103,180) (584,366)
Amortization to expense (10,484,345) (10,877,142) (11,567,430)
---------------- ---------------- ----------------
Balance, December 31 $ 4,821,228 $ 5,548,634 $ 5,320,716
================ ================ ================
</TABLE>
11. SHAREHOLDERS' EQUITY:
On December 16, 1998, PICO acquired the remaining shares of Global
Equity. This was accomplished through an exchange of PICO shares for
Global Equity shares at the exchange ratio of .4628 of a PICO share for
each share of Global Equity. PICO issued a total of 6,810,426 shares of
PICO common stock to former Global Equity shareholders. PICO subsidiaries
hold 3,110,837 of these newly issued shares which are recorded as
treasury stock in the consolidated balance sheets of the Company.
Following the transaction, PICO had 13,328,778 shares of common stock
issued and outstanding of which 4,380,779 million are accounted for as
treasury stock, at cost in the consolidated balances sheets. In addition,
PICO exchanged 223,187 PICO warrants with an exercise price of $23.80 per
share for all the outstanding Global Equity warrants using the same
exchange ratio. The original October 23, 1998 expiration date of the
warrants was extended to June 30, 1999. During 1999, 120,000 of the
warrants were exercised for $2.9 million. The remaining warrants expired.
No other warrants exist. PICO also exchanged 484,967 stock options to
Global Equity officers, two current Global Equity directors and a former
Global Equity director in exchange for surrendering their Global Equity
stock options. These grants placed the participants in a substantially
similar position regarding shares and exercise price, vested according to
their original terms.
On July 23, 1998, Guinness Peat Group plc ("GPG") sold 672,517
unregistered shares of PICO common stock to several institutional
investors, representing substantially all of GPG's holdings in PICO. PICO
acquired 412,846 of the above shares at a cost of $1.6 million, and
assumed call option obligations for the delivery of these shares when the
options are exercised. These call options expire on December 30, 2003 and
are held by PICO's chairman of the board and president and chief
executive officer. On December 31, 1998, 57,307 of these options were
exercised for a total of $200,000.
68
<PAGE> 69
On November 30, 1998, the Company eliminated the 1991 Shareholder
Rights Plan, which had been adopted by Citation Insurance Group prior to
its acquisition by PICO. The action was taken by unanimous vote of PICO's
independent directors, as required by the terms of the Plan, and on the
recommendation of management.
Pursuant to direction by the Board of Directors in the last quarter of
1997, management is in the process of terminating the CIG ESOP. No
contributions were made to the plan in 1999, 1998 or 1997.
Stock Option Plans
PICO Holdings' 1995 Non-Qualified Stock Option Plan. PICO was
authorized to issue 521,030 shares of common stock pursuant to awards
granted in various forms, including incentive stock options (intended to
qualify under Section 422 of the Internal Revenue Code of 1986, as
amended), non-qualified stock options, and other similar stock-based
awards to full-time employees (including officers) and directors. The
options granted to employees vest either (i) at the rate of 25%, 33% or
50% per year on each of the first four, three or two year anniversaries
of the date of grant, as applicable, or (ii) at a rate of 33% upon grant
and 33% per year on each of the first two anniversaries of the date of
grant. A total of 512,005 options have been issued from this plan. No
options were granted from the plan in 1998. The Company granted stock
options in 1996 and 1995 under this plan in the form of incentive stock
options and non-qualified stock options. All issued options from this
plan are fully vested.
PICO Holdings' 1998 Option Plan. PICO is authorized to issue 100,000
shares of common stock pursuant to awards granted in various forms,
including incentive stock options (intended to qualify under Section 422
of the Internal Revenue Code of 1986, as amended), non-qualified stock
options, and other similar stock-based awards. On October 22, 1998, PICO
granted 100,000 non-qualified common stock options to an officer of the
Company at an exercise price of $15.625 per share. The options granted
vest monthly over three years, expiring October 22, 2008. During 1999,
61,111 of these options expired when the officer left the Company.
PICO Holdings' 1998 Global Equity/PICO Option Plan. As discussed
above, PICO assumed 484,967 options to existing Global Equity option
holders pursuant to the acquisition of the remaining shares of Global
Equity by exchanging PICO options for Global Equity options. The options
granted from this plan placed the participants in an economically
equivalent position regarding the number of shares, exercise price, and
with vesting according to their original terms.
PICO Holdings' 1999 Option Plan. PICO is authorized to issue 10,665
shares of common stock pursuant to awards granted in various forms,
including incentive stock options (intended to qualify under Section 422
of the Internal Revenue Code of 1986, as amended), non-qualified stock
options, and other similar stock-based awards. On January 1, 1999, PICO
granted 10,665 non-qualified common stock options to an officer of the
Company at an exercise price of $13.25 per share. The options were
immediately vested and expire in 10 years.
A summary of the status of the Company's stock options is presented
below for the years ended December 31:
<TABLE>
<CAPTION>
1999 1998 1997
------------------------ ------------------------- ------------------------
Weighted Weighted Weighted
Shares Average Shares Average Shares Average
Underlying Exercise Underlying Exercise Underlying Exercise
Options Prices Options Prices Options Prices
------------ ---------- ------------ ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year 1,096,972 $15.89 514,405 $ 13.55 551,901 $ 14.15
Granted 10,665 13.25 100,000 15.63
Exercised (21,000) 16.45
Canceled (61,111) 15.63 (2,400) 30.00 (16,496) 33.20
Options assumed in merger 484,967 18.41
Outstanding at end of year 1,046,526 15.83 1,096,972 15.89 514,405 13.55
Exercisable at end of year 1,046,526 15.83 1,002,528 15.91 514,405 13.55
Weighted-average fair value
of options granted during
the year $ 9.02 $ 10.23 $ 18.10
========== ========== ===========
</TABLE>
69
<PAGE> 70
The following table summarizes information about stock options
outstanding at December 31, 1999:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
- -------------------------------------------------------------- ---------------------------
Weighted
Average Weighted
Number Remaining Average Number Weighted
Range of Outstanding Contractual Exercise Exercisable Average
Exercise Prices at 12/31/99 Life Price at 12/31/99 Exercise Price
- -------------------- ------------- ----------- ----------- ------------- ------------
<C> <C> <C> <C> <C> <C>
$13.25 to $14.40 522,670 5.71 $13.46 522,670 $13.46
$15.63 to $23.95 523,856 1.07 $18.20 523,856 $18.20
------------- -------------
$13.25 to $23.95 1,046,526 3.39 $15.83 1,046,526 $15.83
============= =============
</TABLE>
The fair value of each stock option granted is estimated on the date
of grant using the Black-Scholes option-pricing model with the following
weighted-average assumptions for grants in 1999 and 1998, respectively:
no dividend yield for all years; risk-free interest rates are different
for each grant ranging from 5% to 6.97%; the expected lives of options
are estimated at 10 years and 7 years, respectively; and a volatility of
54% for the 1999 grants, and 62% for the 1998 grants.
Had compensation cost for the Company's stock-based compensation plans
been determined consistent with SFAS No. 123, the Company's net income
(loss) and net income (loss) per share would approximate the following
pro forma amounts for the years ended December 31:
<TABLE>
<CAPTION>
1999 1998 1997
---------------- ---------------- ----------------
<S> <C> <C> <C>
Reported net income (loss) $ (8,786,102) $ (8,244,179) $ 19,612,018
SFAS No. 123 charge (96,249) (56,836) (1,462,477)
---------------- ---------------- ----------------
Pro forma net income (loss) $ (8,882,351) $ (8,301,015) $ 18,149,541
================ ================ ================
Pro forma net income (loss) per share - basic $ (0.99) $ (1.39) $ 2.88
================ ================ ================
Pro forma net income (loss) per share - diluted $ (0.99) $ (1.39) $ 2.78
================ ================ ================
</TABLE>
The effects of applying SFAS No. 123 in this pro forma disclosure are
not indicative of future amounts.
12. REINSURANCE:
In the normal course of business, the Company's insurance subsidiaries
have entered into various reinsurance contracts with unrelated
reinsurers. The Company's insurance subsidiaries participate in such
agreements for the purpose of limiting their loss exposure and
diversifying their business. Reinsurance contracts do not relieve the
Company's insurance subsidiaries from their obligations to policyholders.
All reinsurance assets and liabilities are shown on a gross basis in
the accompanying consolidated financial statements. Amounts recoverable
from reinsurers are estimated in a manner consistent with the claim
liability associated with the reinsured policy. Such amounts are included
in "reinsurance receivables" in the consolidated balance sheets as
follows:
<TABLE>
<CAPTION>
1999 1998
--------------- ---------------
<S> <C> <C>
Estimated reinsurance recoverable on:
Unpaid losses and loss adjustment expense (net of
discount of $2,180,701 and $2,739,332, respectively) $ 40,333,000 $ 52,000,444
Reinsurance recoverable on paid losses and loss expenses 2,209,867 1,126,785
--------------- ---------------
42,542,867 53,127,229
Other balances receivable from reinsurers 2,497,501 2,497,601
--------------- ---------------
Reinsurance receivables $ 45,040,368 $ 55,624,830
=============== ===============
</TABLE>
70
<PAGE> 71
Unsecured reinsurance risk is concentrated in the companies shown in
the table below. The Company remains contingently liable with respect to
reinsurance contracts in the event that reinsurers are unable to meet
their obligations under the reinsurance agreements in force.
CONCENTRATION OF REINSURANCE
<TABLE>
<CAPTION>
Unearned Reported Unreported Reinsurer
Premiums Claims Claims Balances
---------------- ----------------- ------------------ -------------------
<S> <C> <C> <C> <C>
Sydney Reinsurance Corporation $ 5,080,000 $ 8,024,000 $ 13,104,000
Continental Casualty Company $ 1,201,000 2,667,000 790,000 4,658,000
San Francisco Reinsurance Group 8,000 8,000
TIG Reinsurance Group 417,000 4,385,000 4,802,000
Transatlantic Reinsurance Company 6,286,000 6,286,000
Cologne Reinsurance Company of America 700,000 700,000
Mutual Assurance, Inc. 5,188,000 609,000 5,797,000
General Reinsurance 2,000 2,071,000 70,000 2,143,000
National Reinsurance Corporation 410,000 230,000 640,000
PXRE 312,000 1,056,000 185,000 1,553,000
Hartford Fire Insurance Company 295,000 952,000 370,000 1,617,000
---------------- ----------------- ------------------ -------------------
$ 1,818,000 $ 17,841,000 $ 21,649,000 $ 41,308,000
================ ================= ================== ===================
</TABLE>
Immediately prior to the sale of Sequoia to Physicians by Sydney
Reinsurance Corporation ("SRC") in 1995, Sequoia and SRC entered into a
reinsurance treaty whereby all policy and claims liabilities of Sequoia
prior to the date of purchase by Physicians are the responsibility of
SRC. Payment of SRC's reinsurance obligations under this treaty has been
unconditionally and irrevocably guaranteed by QBE Insurance Group Limited
should SRC be unable to meet its obligations under the reinsurance
agreement.
The Company entered into a reinsurance treaty in 1995 with Mutual
Assurance Inc. ("Mutual") in connection with the sale of Physicians' MPL
business to Mutual. This treaty is a 100% quota share treaty covering all
claims arising from policies issued or renewed with an effective date
after July 15, 1995. At the same time, Physicians terminated two treaties
entered into in 1994 and renewed in 1995. The first of these was a
claims-made agreement under which Physicians' retention was $200,000, for
both occurrence and claims-made insurance policies. Claims are covered up
to $1 million. The second treaty reinsured claims above $1 million up to
policy limits of $5 million on a true occurrence and claims-made basis,
depending on the underlying insurance policy.
In 1994, the Company entered into a retroactive reinsurance
arrangement with respect to its MPL business. As a result, Physicians
initially recorded a deferred gain on retroactive reinsurance of $3.4
million in 1994. Deferred gains are being amortized into income over the
expected payout of the underlying claims using the interest method. The
unamortized gain as of December 31, 1999 and 1998 was $1.2 million and
$1.8 million, respectively.
Effective October 1, 1997, PRO and Physicians entered into a 100%
quota share reinsurance treaty wherein PRO agreed to cede and Physicians
agreed to assume all of PRO's existing claims liabilities including
allocated loss adjustment expenses, but excluding unallocated loss
adjustment expenses. Physicians is to administer the settlement of all
claims under PRO's policies issued prior to the effective date of the
100% quota share treaty for which Physicians will be reimbursed for
direct expenses incurred in adjusting PRO's claims. This 100% quota share
reinsurance treaty is secondary to all of PRO's reinsurance treaties in
effect prior to its effective date.
71
<PAGE> 72
The following is a summary of the net effect of reinsurance activity
on the consolidated financial statements for each of the years ended
December 31:
<TABLE>
<CAPTION>
1999 1998 1997
----------------- ---------------- ----------------
<S> <C> <C> <C>
Direct premiums written $ 36,558,158 $ 41,792,175 $ 46,634,157
Reinsurance premiums assumed 16,478,155 93,277 183,945
Reinsurance premiums ceded (19,377,029) (6,598,800) (7,125,152)
----------------- ---------------- ----------------
Net premiums written $ 33,659,284 $ 35,286,652 $ 39,692,950
================= ================ ================
Direct premiums earned 39,162,007 42,760,312 60,474,680
Reinsurance premiums assumed 17,947,838 141,734 220,564
Reinsurance premiums ceded (20,730,813) (6,770,631) (10,818,840)
----------------- ---------------- ----------------
Net premiums earned $ 36,379,032 $ 36,131,415 $ 49,876,404
================= ================ ================
Losses and loss adjustment expenses incurred:
Direct 47,939,738 32,124,801 47,890,333
Assumed 9,243,904 261,504 427,371
Ceded (22,966,351) (2,501,772) (17,045,189)
----------------- ---------------- ----------------
34,217,291 29,884,533 31,272,515
Effect of discounting on losses and
loss adjustment expenses (Note 13) 994,545 643,474 3,057,812
----------------- ---------------- ----------------
Net losses and loss adjustment expenses $ 35,211,836 $ 30,528,007 $ 34,330,327
================= ================ ================
</TABLE>
13. RESERVES FOR UNPAID LOSS AND LOSS ADJUSTMENT EXPENSES:
Reserves for unpaid losses and loss adjustment expenses on MPL and
property and casualty business represent management's estimate of
ultimate losses and loss adjustment expenses and fall within an
actuarially determined range of reasonably expected ultimate unpaid
losses and loss adjustment expenses.
Reserves for unpaid losses and loss adjustment expenses are estimated
based on both company-specific and industry experience, and assumptions
and projections as to claims frequency, severity, and inflationary trends
and settlement payments. Such estimates may vary significantly from the
eventual outcome. In management's judgment, information currently
available has been appropriately considered in estimating the loss
reserves and reinsurance recoverable of the insurance subsidiaries.
Physicians and PRO prepare their statutory financial statements in
accordance with accounting practices prescribed or permitted by the Ohio
Department of Insurance ("Ohio Department"). Citation and Sequoia prepare
their statutory financial statements in accordance with accounting
practices prescribed or permitted by the California Department of
Insurance. Prescribed statutory accounting practices include guidelines
contained in various publications of the National Association of
Insurance Commissioners ("NAIC"), as well as state laws, regulations, and
general administrative rules. Permitted statutory accounting practices
encompass all accounting practices not so prescribed. The Ohio
Department's prescribed accounting practices do not allow for discounting
of claim liabilities. However, for the three years ended December 31,
1999, the Ohio Department permitted Physicians to discount its losses and
loss adjustment expenses related to its MPL claims to reflect anticipated
investment income. Permission was granted due primarily to the longer
claims settlement period related to MPL business as compared to most
other types of property and casualty insurance lines of business.
Property and casualty insurance companies are permitted to discount
claims liabilities under generally accepted accounting principles to the
extent that the discounting of claims liabilities is prescribed or
permitted by statutory accounting principles.
Physicians uses a discount rate of 4% for statutory and financial
reporting purposes. The method of determining the discount is based on
historical payment patterns and assumes an interest rate at or below its
own investment yield. The carrying value of MPL reserves gross as to
reinsurance was approximately $71.9 million, net of discounting of $9.7
and $85.8 million, net of discounting of $11.3 million at December 31,
1999 and 1998, respectively.
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<PAGE> 73
Activity in the reserve for unpaid claims and claim adjustment
expenses was as follows for each of the years ended December 31:
<TABLE>
<CAPTION>
1999 1998 1997
----------------- ----------------- ------------------
<S> <C> <C> <C>
Balance at January 1 $ 155,020,696 $ 196,095,518 $ 252,023,546
Less reinsurance recoverable (52,000,444) (67,654,430) (89,493,139)
----------------- ----------------- ------------------
Net balance at January 1 103,020,252 128,441,088 162,530,407
----------------- ----------------- ------------------
Incurred loss and loss adjustment expenses
for current accident year claims 18,903,062 23,242,512 33,440,000
Incurred loss and loss adjustment expenses
for prior accident year claims 15,878,697 7,009,420 (980,469)
Retroactive reinsurance (564,469) (367,399) (1,187,016)
Accretion of discount 994,545 643,474 3,057,812
----------------- ----------------- ------------------
Total incurred 35,211,835 30,528,007 34,330,327
----------------- ----------------- ------------------
Effect of retroactive reinsurance 564,469 367,399 1,187,018
----------------- ----------------- ------------------
Payments for claims occurring during:
Current accident year (8,940,341) (11,468,646) (13,886,002)
Prior accident years (31,056,340) (44,847,596) (55,720,662)
----------------- ----------------- ------------------
Total paid (39,996,681) (56,316,242) (69,606,664)
----------------- ----------------- ------------------
Net balance at December 31 98,799,875 103,020,252 128,441,088
Plus reinsurance recoverable 40,333,000 52,000,444 67,654,430
----------------- ----------------- ------------------
Balance at December 31 $ 139,132,875 $ 155,020,696 $ 196,095,518
================= ================= ==================
</TABLE>
14. EMPLOYEE BENEFIT PLAN:
PICO maintains a 401(k) Defined Contribution Plan covering
substantially all employees of the Company. Matching contributions are
based on a percentage of employee compensation. In addition, the Company
may make a discretionary contribution at the end of the Plan's fiscal
year within limits established by the Employee Retirement Income
Securities Act. Contribution expense incurred by the Company for the
three years ended December 31, 1999 was $862,000, $618,000 and $365,000,
respectively.
15. REGULATORY MATTERS:
The regulations of the Departments of Insurance in the states where
the Company's insurance subsidiaries are domiciled generally restrict the
ability of insurance companies to pay dividends or make other
distributions. Based upon statutory financial statements filed with the
insurance departments as of December 31, 1999, $3.5 million was available
for distribution by the Company's wholly-owned insurance subsidiaries to
the parent company without the prior approval of the Department of
Insurance in the states in which the Company's insurance subsidiaries are
domiciled. On July 31, 1998, American Physicians paid an $8 million
dividend to Physicians Investment Company. On December 17, 1997, a
subsidiary of Physicians, The Professional Insurance Company ("PRO"),
paid Physicians a cash dividend of approximately $5.5 million. A dividend
payment of $13.2 million was made on December 30, 1997 from Physicians to
PICO Holdings, Inc. in the form of Global Equity common stock.
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<PAGE> 74
16. COMMITMENTS AND CONTINGENCIES:
The Company leases some of its offices under non-cancelable operating
leases that expire at various dates through October 2008. Total rent
expense was $1.3 million, $1.5 million, and $1.5 million for the years
ended December 31, 1999, 1998 and 1997, respectively. Future minimum
rental payments required under the leases for the years ending December
31, are as follows:
<TABLE>
<S> <C>
2000 $3,263,579
2001 3,122,341
2002 2,972,350
2003 2,425,900
2004 2,333,640
Thereafter 8,751,150
----------------
Total $22,868,960
================
</TABLE>
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. The $2.3 million
minimum annual lease payment is included in the above summary of future
minimum rental payments. 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 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.
In connection with the sale of their interests in Nevada Land by the
former members, a limited partnership agreed to act as consultant to
Nevada Land in connection with the maximization of the development,
sales, leasing, royalties or other disposition of land, water, mineral
and oil and gas rights with respect to the Nevada property. In exchange
for these services, the partnership was to receive from Nevada Land a
consulting fee calculated as 50% of any net proceeds that Nevada Land
actually receives from the sale, leasing or other disposition of all or
any portion of the Nevada property or refinancing of the Nevada property
provided that Nevada Land has received such net proceeds in a threshold
amount equal to the aggregate of: (i) the capital investment by Global
Equity and the Company in the Nevada property (ii) a 20% cumulative
return on such capital investment, and (iii) a sum sufficient to pay the
United States federal income tax liability, if any, of Nevada Land in
connection with such capital investment. Either party could terminate
this consulting agreement in April 2002 if the partnership had not
received or become entitled to receive by that time any amount of the
consulting fee. No payments have been made under this agreement through
December 31, 1998. By letter dated March 13, 1998, Nevada Land gave
notice of termination of the consulting agreement based on Nevada Land's
determination of default by the partnership under the terms of the
agreement. In November 1998, the partnership sued Nevada Land for
wrongful termination of the consulting contract. On March 12, 1999,
Nevada Land filed a cross-complaint against the partnership for breach of
written contract, breach of fiduciary duty and seeking declaratory
relief. Effective September 1, 1999, the parties entered into a
settlement agreement wherein they agreed that the lawsuit would be
dismissed without prejudice, and that Nevada Land would deliver a report
on or before June 30, 2002 to the limited partnership of the amount of
the consulting fee which would be owed by Nevada Land to the limited
partnership if the consulting agreement were in effect.
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.
74
<PAGE> 75
The Company is subject to various other litigation that arises in the
ordinary course of its business. Based upon information presently
available, management is of the opinion that such litigation will not
have a material adverse effect on the consolidated financial position,
results of operations or cash flows of the Company.
17. RELATED-PARTY TRANSACTIONS:
In January 1997, the consulting arrangements with two directors were
terminated and replaced with a revised consulting contract that increased
the annual base consulting fees for the two directors to $800,000 each
beginning January 1, 1997. On December 31, 1997, these two directors
became employees of the Company; the terms of employment were similar to
the consultant arrangements described above. The employment agreements
entered into by the two directors superceded the prior consulting
agreements. Each is entitled to an incentive award based on the growth of
the Company's book value per share in excess of a threshold that is
calculated as 80% of the previous five year average return for the S&P
500. No award was paid during 1999, 1998 or 1997 under this program.
Summit is a Registered Investment Advisor providing investment
advisory services to managed accounts including the Company's
subsidiaries. On January 1, 1995, Summit's President and CEO was granted
an option expiring December 31, 2004 to purchase 49% of Summit's common
shares for a nominal amount, which represented the fair value on the
grant date. No options have been exercised under this agreement. Two of
the Company's directors, now officers of the Company, were instrumental
in establishing the operations of Summit and are entitled to receive 50%
of the first $1 million of profits attributed to PICO's ownership of
Summit's common stock. No compensation was paid under this arrangement
during 1999, 1998, or 1997. Subsequent to year-end, PICO sold its
interest in Summit Global Management, Inc. to Summit's Chief Executive
Officer for $100,000.
On March 6, 1996, Charles E. Bancroft, the President and Chief
Executive Officer of Sequoia entered into an incentive agreement with
Sequoia after its acquisition by Physicians. Under the terms of this
incentive agreement, Mr. Bancroft is to receive a payment equal to ten
percent of the increase in Sequoia's value upon his retirement, removal
from office for reasons other than cause, or the sale of Sequoia to a
third party. For purposes of the incentive agreement, the increase in
Sequoia's value is to be measured from August 1, 1995; the date
Physicians acquired Sequoia. Mr. Bancroft was not eligible to receive any
incentive payment, until he was continuously employed by Sequoia from
August 1, 1995 through August 1, 1998. On March 20, 1998 this incentive
agreement was clarified to include the combined increase in value of
Sequoia and Citation. The increase in value of Citation will be measured
from January 1, 1998. The Company recorded compensation expense related
to this arrangement of $210,000, $110,000 and $250,000 during the years
ended December 31, 1999, 1998 and 1997, respectively.
Certain of the Company's subsidiaries have stock option arrangements
with officers and other employees for stock of the respective subsidiary.
Options are granted under these arrangements at the estimated fair value
of the subsidiary's stock at the time of grant. Therefore, no
compensation has been recorded by the Company related to these
arrangements. During 1998, 18,950 options to acquire approximately 1.9%
of Vidler were exercised for $108,000.
In 1998, the Company entered into an agreement with its president and
chief executive officer to defer a portion of his 1998 regular
compensation in a Rabbi Trust account held in the name of the Company.
The deferrals are included within the Company's consolidated balance
sheet. Salary deferrals to the trust amounted to $316,000 for 1998. There
were no deferrals into this trust in 1999.
The Company acquired 412,846 shares of its common stock at a cost of
$1.6 million, and assumed call option obligations for the delivery of
these shares when the options are exercised. These call options expire on
December 30, 2003 and are held by the chairman of PICO's board and its
chief executive officer. On December 31, 1998, 57,307 of these options
were exercised for a total of $200,000.
18. STATUTORY INFORMATION:
The Company and its insurance subsidiaries are subject to regulation
by the insurance departments of the states of domicile and other states
in which the companies are licensed to operate and file financial
statements using statutory accounting practices prescribed or permitted
by the respective Departments of Insurance. Prescribed statutory
accounting practices include a variety of
75
<PAGE> 76
publications of the NAIC, as well as state laws, regulations and general
administrative rules. Permitted statutory accounting practices encompass
all accounting practices not so prescribed. Physicians has received
written approval from the Ohio Department to discount its MPL unpaid loss
and loss adjustment expense reserves, including related reinsurance
recoverable using a 4% discount rate. Statutory practices vary in certain
respects from generally accepted accounting principles. The principal
variances are as follows:
1) Certain assets are designated as "non-admitted assets" and
charged to shareholders' equity for statutory accounting
purposes (principally certain agents' balances and office
furniture and equipment).
2) Deferred policy acquisition costs are expensed for statutory
accounting purposes.
3) Deferred federal income taxes are not recognized for
statutory accounting purposes.
4) Equity in net income of subsidiaries and affiliates is
credited directly to shareholders' equity for statutory
accounting purposes.
5) Fixed maturity securities classified as available for sale
are carried at amortized cost.
6) Loss and loss adjustment expense reserves and unearned
premiums are reported net of the impact of reinsurance for
statutory accounting purposes.
The Company and its wholly-owned insurance subsidiaries'
policyholders' surplus and net income (loss) as of and for the years
ended December 31, 1999, 1998 and 1997 on the statutory accounting basis
are as follows:
<TABLE>
<CAPTION>
1999 1998 1997
-------------- --------------- --------------
<S> <C> <C> <C>
Physicians Insurance Company of Ohio: (Unaudited)
Statutory net income (loss) $ (6,578,611) $ 2,556,946 $ 28,967,115
Policyholders' surplus 35,022,961 31,515,421 54,790,265
The Professionals Insurance Company:
Statutory net income $ 158,012 $ 105,286 $ 1,167,208
Policyholders' surplus 3,437,580 3,516,143 3,922,382
American Physicians Life Insurance:*
Statutory net income $ 220,968
Policyholders' surplus 12,776,934
Sequoia Insurance Company:
Statutory net income $ 497,523 $ 4,284,251 $ 1,161,670
Policyholders' surplus 25,389,791 23,568,505 21,069,190
Citation Insurance Company:
Statutory net loss $ (5,519,801) $ (4,395,534) $ (1,380,920)
Policyholders' surplus 16,502,888 21,811,840 29,112,651
</TABLE>
- -----------------
* Sold December 4, 1998
Certain insurance subsidiaries are owned by other insurance
subsidiaries. In the table above, investments in such subsidiary-owned
insurance companies are reflected in statutory surplus of both the parent
and subsidiary-owned insurance company. As a result, at December 31,
1999, 1998, and 1997, statutory surplus of approximately $28.8 million,
$27.1 million and $37.8 million, respectively, is reflected in both the
parent and subsidiary-owned insurance companies.
19. 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 Other Strategic
Holdings.
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<PAGE> 77
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.
Information by geographic region is also similarly disclosed.
Land, Mineral and Related Water Rights
PICO is engaged in land, water and mineral rights operations through
its subsidiary Nevada Land. Nevada Land owns approximately 1.28 million
acres of land and related mineral and related water rights in northern
Nevada. Revenue is generated by land sales, land development, land
exchanges and leasing for grazing, agricultural and other uses. Revenue
is also generated from the development of water rights and mineral rights
in the form of outright sales and royalty streams.
Water Rights and Water Storage
PICO is engaged in water rights and water storage through its
subsidiary Vidler. Vidler is engaged in the following activities:
- acquiring water rights, redirecting the water to its highest
and best use, and then generating cash flow from either
leasing the water or selling the right;
- development of storage and distribution infrastructure;
- purchase and storage of water for resale in dry years; and
- working with municipalities and state legislators to
facilitate the passing of legislation which will result in
the efficient allocation of water.
Vidler's business involves identifying end users, namely
municipalities or developers, in the Southwest who require water, and
then locating a source and supplying the demand, utilizing the company's
own assets where possible.
Property and Casualty Insurance
PICO's Property and Casualty Insurance operations are conducted by our
California-based subsidiaries Sequoia and Citation.
Sequoia writes property and casualty insurance in California and
Nevada, focusing on the niche markets of farm insurance and small to
medium-sized commercial insurance. Sequoia writes a small amount of
personal insurance, and is pursuing two opportunities to increase this
business.
In the past, Citation wrote commercial property and casualty insurance
in California and Arizona. After the reverse merger was completed,
management identified redundancies between Citation and Sequoia, and
combined the operations of the two companies into one location. Sequoia
now directly writes all business in California and Nevada. Citation is
licensed in 7 states, but only writes insurance in Arizona. The level of
premium generated is minor.
In this segment, revenues come from premiums earned on policies
written and investment income on the assets held by the insurance
companies.
MPL Operations
Until 1995, Physicians and Professionals wrote medical professional
liability insurance, mostly in the state of Ohio. Physicians and
Professionals have stopped writing new business and are being "run off".
This means that they are handling claims arising from historical
business, and selling investments when funds are needed to pay claims.
As expected during the run-off process, the bulk of this segment's
revenues come from investment income. The Physicians' and Professionals'
portfolios contain some of the Company's strategic investments.
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<PAGE> 78
Other Strategic Holdings
The Other Strategic Holdings segment comprises investments where we
own less than 50% of the company, and our smaller subsidiaries.
PICO invests in companies, which our management identifies as
undervalued based on fundamental analysis. Typically the stocks will be
selling for less than tangible book value or appraised intrinsic value
(i.e. what we think the company is worth). Often the stocks will also be
trading for low ratios of earnings and cash flow, or on high dividend
yields. Additionally the company must have special qualities, such as
unique assets, potential catalysts for change, or attractive industry
characteristics.
Investments directly related to the insurance operations are included
within those segments.
Segment information by major operating segment follows (in thousands):
<TABLE>
<CAPTION>
Land, Mineral Water Rights Property Other
and Related and Water and Strategic
Water Rights Storage Casualty MPL Holdings (A) Consolidated
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1999:
- -----
Revenues $ 7,147 $ 1,055 $ 39,960 $ 3,153 $ 3,390 $ 54,705
Income (loss) before income taxes 1,094 (4,551) (3,679) (4,805) (11,318) (23,259)
Identifiable assets 53,810 80,313 136,589 39,827 65,115 375,654
Depreciation and amortization 33 810 971 1,255 3,069
Capital expenditures 355 147 75 577
1998:
- -----
Revenues (charges) $ 2,820 $ 592 $ 42,927 $ 2,420 $ (1,350) $ 47,409
Income (loss) before income taxes 188 (2,006) 2,825 (4,442) (9,125) (12,560)
Identifiable assets 52,540 65,748 138,408 62,774 75,706 395,176
Depreciation and amortization 33 152 496 81 730 1,492
Capital expenditures 4,783 648 86 124 5,641
1997:
- -----
Revenues $ 2,770 $ 335 $ 56,933 $ 3,896 $ 26,085 $ 90,019
Income (loss) before income taxes 638 (626) 5,556 765 17,428 23,761
Identifiable assets 55,044 19,693 158,760 78,756 118,238 430,491
Depreciation and amortization 6 28 761 53 333 1,181
Capital expenditures 28 634 44 279 985
</TABLE>
78
<PAGE> 79
Segment information by geographic region follows (in thousands):
<TABLE>
<CAPTION>
United
States Canada Europe Australia Asia Consolidated
--------------------------------------------------------------------- --------------
<S> <C> <C> <C> <C> <C> <C>
1999
- ----
Revenues $ 51,148 $ 2,889 $ 668 $ 54,705
Income (loss) before income taxes (23,094) 1,612 (1,777) (23,259)
Identifiable assets 332,830 25,506 $ 8,280 9,038 375,654
Depreciation and amortization 2,770 299 3,069
Capital expenditures 577 577
1998:
- -----
Revenues (charges) $ 48,308 $ (2,233) $ 3,364 $ (2,030) $ 47,409
Income (loss) before income taxes (13,666) 560 2,588 (2,042) (12,560)
Identifiable assets 361,458 7,811 21,653 4,254 395,176
Depreciation and amortization 1,233 259 1,492
Capital expenditures 5,641 5,641
1997:
- -----
Revenues $ 94,002 $ 3,861 $ 175 $ (8,019) $ 90,019
Income (loss) before income taxes 34,393 (2,700) 87 (8,019) 23,761
Identifiable assets 364,907 37,411 21,080 7,093 430,491
Depreciation and amortization 852 329 1,181
Capital expenditures 985 985
</TABLE>
(A) Other strategic holdings identifiable assets include certain
investments held by one of the Company's regulated insurance
subsidiaries, which is no longer writing new business. Management
believes that this component of the insurance subsidiary's assets is
in excess of the amount of the subsidiary's assets that will be
required to settle its claims liabilities. The amount of the insurance
subsidiary's assets included in the Investment Operations segment at
December 31, 1999 and 1998 was insignificant compared to $6 million of
December 31, 1997. Investment charges were approximately $0.2 million
and $1.6 million and investment revenues were $2 million, for the
years ended December 31, 1999, 1998, and 1997, respectively.
20. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS:
The following methods and assumptions were used to estimate the fair
value of each class of financial instruments for which it is practicable
to estimate that fair value:
- CASH AND CASH EQUIVALENTS, SHORT-TERM INVESTMENTS, RECEIVABLES,
PAYABLES AND ACCRUED LIABILITES: Carrying amounts for these items
approximate fair value because of the short maturity of these
instruments.
- INVESTMENTS: Fair values are estimated based on quoted market prices,
or dealer quotes for comparable securities. Fair value of warrants to
purchase common stock of publicly traded companies is estimated based
on values determined by the use of accepted valuation models at the
time of acquisition. Fair value for equity securities that do not have
a readily determinable fair value is estimated based on the value of
the underlying common stock. The Company regularly evaluates the
carrying value of securities to determine whether there has been any
diminution in value that is other than temporary and adjusts the value
accordingly.
- DEPOSITS WITH REINSURERS AND REINSURANCE RECOVERABLES: The carrying
amounts of deposits with reinsurers and reinsurance recoverable with
fixed amounts due are reasonable estimates of fair value.
79
<PAGE> 80
- - INVESTMENT IN AFFILIATE: Investments in which the Company owns between
20% and 50%, and has the ability to significantly influence the
operations and policies of the investee are carried at equity value.
The balance of the investment is regularly evaluated for impairment.
- - BANK AND OTHER BORROWINGS: Carrying amounts for these items
approximate fair value because current interest rates and, therefore,
discounted future cash flows for the terms and amounts of loans
disclosed in Note 22, are not significantly different from the
original terms.
<TABLE>
<CAPTION>
December 31, 1999 December 31, 1998
-------------------------------------- --------------------------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
----------------- ---------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Financial assets:
Cash and cash equivalents and
short-term investments $ 53,232,048 $ 53,232,048 $ 92,752,898 $ 92,752,898
Investment securities 106,477,690 106,477,536 88,351,032 98,318,103
Investment in unconsolidated affiliates 11,297,812 41,624,116 4,915,361 15,207,662
Deposits with reinsurers and
reinsurance recoverables 4,707,367 4,707,367 3,624,285 3,624,285
Financial liabilities:
Bank and other borrowings 15,704,507 15,704,507 8,966,707 8,966,707
</TABLE>
21. OTHER LIABILITES
<TABLE>
<CAPTION>
1999 1998
------------------ -------------------
<S> <C> <C>
Other liabilities $ 10,953,623 $ 11,402,000
Financing commitment 5,000,000
Minority interest 926,371
------------------ -------------------
$ 16,879,994 $ 11,402,000
================== ===================
</TABLE>
The financing commitment relates to a $5 million capital contribution
by Conex to the sino-foreign joint venture. This commitment is
anticipated to be drawn down as required.
22. BANK AND OTHER BORROWINGS:
At December 31, 1999 and 1998, bank and other borrowings consists of
loans and promissory notes borrowed to finance the purchase of land and
investment securities. The weighted average interest rate on these
borrowings was approximately 6.9% and 8.5% at December 31, 1999 and 1998,
respectively.
Global Equity SA entered into two loan agreements with Swiss banks to
partially finance the purchase of additional shares of Jungfraubahn
Holding A.G. The loans are collateralized by a portion of the shares held
in custody at the banks, are due February 3, 2000, and bear interest at
3.95% (LIBOR 1.45 + 250 basis points). The loans were repaid in full upon
maturity and were replaced by a credit facility with a Swiss bank which
provides for flexible terms with interest rates ranging from LIBOR + 2%
for fixed term loans to 4 1/4% for current advances. A portion of the
shares held at the bank collateralizes the new loan.
The lands and water assets collateralize the notes incurred to
purchase lands.
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<PAGE> 81
Nevada Land & Resource Company issued a $5 million promissory note,
maturing on October 1, 2000 in connection with the acquisition of lands.
The note was collateralized by 9.4 acres of land, which held geothermal
leases. The notes bore interest at 9% and were paid monthly to the extent
that payment was received on four geothermal leases associated with the
land. In April 1999, Nevada Land & Resource Company settled the note
payable by exchanging the particular land deed, which was collateral for
the note. As a result of this settlement the Company recognized an
extraordinary gain of $442,240, net of taxes.
At December 31, the Company's borrowings consisted of the following:
<TABLE>
<CAPTION>
1999 1998
------------------ ----------------
<S> <C> <C>
4% Loans due in 2000 $ 5,718,911
8% Notes due:
2007 - 2008 489,366 $ 222,750
2012 376,745 392,938
8.5% Notes due:
2004 1,560,000
2008 - 2009 3,909,648 1,716,630
2019 2,833,533
9% Notes due:
2000 5,760,061
2003 204,025 218,400
2008 612,279 655,928
------------------ ----------------
$ 15,704,507 $ 8,966,707
================== ================
</TABLE>
The Company's future minimum principal debt repayments for the years
ending December 31, are as follows:
<TABLE>
<S> <C>
2000 $6,052,190
2001 361,719
2002 392,669
2003 558,640
2004 1,884,697
Thereafter 6,454,592
----------------
Total $15,704,507
================
</TABLE>
23. SUBSEQUENT EVENT
On February 9, 2000, PICO registered on Form S-3 with the U. S.
Securities and Exchange Commission to offer 6,546,497 shares of PICO
stock at a price of $15 per share through a rights offering.
Shareholders were offered 1 right to buy 1 new share at $15 for every
2 common shares held at March 1, 2000.
An investment partnership called PICO Equity Investors, L.P. has
agreed to acquire shares which are not subscribed for, up to a total of
3,333,333 shares with an aggregate subscription price of $50 million. In
the event that less than 3,333,333 shares of common stock remain
unpurchased by our shareholders on March 27, 2000, PICO has committed to
sell and PICO Equity Investors, L.P. has committed to purchase the number
of shares necessary to increase the total number of shares purchased by
PICO Equity Investors, L.P. to 3,333,333. If no rights are exercised and
PICO Equity Investors, L.P. purchases all the standby commitment shares
of common stock it is required to purchase under the standby commitment,
PICO Equity Investors will own approximately 19.9% of PICO's common stock
after the rights offering. PICO Equity Investors, an entity managed by
PICO Equity Investors Management, LLC, which is owned by three of PICO's
current directors (including PICO's Chairman of the Board and PICO's
President and Chief Executive Officer), will exercise all voting and
investment decisions with respect to these shares for up to 10 years.
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<PAGE> 82
The Company will use the net proceeds of the offering to develop
existing water and water storage assets, acquire additional water assets,
acquire strategic investments, and for general working capital needs.
The rights offering closed on March 27, 2000 resulting in the issuance
of 3,415 additional shares of common stock with proceeds of $51,225. On
March 28, 2000, 3,333,333 additional shares of common stock were issued
to PICO Equity Investors, L.P. under the standby commitment for
$50,000,000.
ITEM 9. CHANGE IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
During 1997, PICO changed its accountants as described in the following
documents: 8-K, filed June 12, 1997; 8-K/A, filed June 26, 1997; 8-K, filed July
16, 1997; 8-K/A, filed September 24, 1997; and 8-K/A2, filed September 26, 1997.
All these reports were filed with the SEC concerning the Company's change in
accountants.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT
The Board of Directors is divided into three classes, with the terms of
office of each class ending in successive years.
The following table sets forth information regarding the Company's
directors, including their ages, a brief description of their business
experience, certain directorships held by each of them and the year in which
each became a director of the Company.
<TABLE>
<CAPTION>
DIRECTOR NAME BUSINESS EXPERIENCE AGE SINCE
NOMINEES STANDING FOR ELECTION FOR TERMS ENDING IN 2003:
<S> <C> <C> <C>
S. Walter Foulkrod, III, Esq. Attorney; owner of S. Walter Foulkrod, III & Associates, Attorneys at 58 1996
Law, Harrisburg, PA, since 1994; President and
Chairman of Foulkrod, Reynolds & Havas, PC,
from 1984 to 1994; Director of Physicians since
1988.
Richard D. Ruppert, MD Physician; President of Medical College of Ohio from 1978 to 1993; 69 1996
President of American Society of Internal Medicine from 1992 to 1993;
Director of Physicians since 1988.
DIRECTORS WITH TERMS ENDING IN 2001:
Robert R. Broadbent Retail consultant since 1989; Chairman of Higbee Company from 1984 to 78 1996
1989; President, CEO, Director and Vice Chairman of the Higbee Company
from 1979 to 1984; President and Chief Executive Officer of Liberty
House - Mainland from 1976 to 1978; Chairman and CEO of Gimbel's from
1973 to 1976; Director of Physicians from 1993 to 1995.
Carlos C. Campbell President of C.C. Campbell & Company, Reston, Virginia, since 1985; 62 1998
Director of Resource America, Inc., Fidelity Mortgage Funding, Inc., and
Passport Health.
</TABLE>
82
<PAGE> 83
<TABLE>
<S> <C> <C> <C>
David A. Williams CEO of Beutel Goodman & Co. Ltd. From 1991 to 1995; President, 57 1998
Roxborough Holdings Limited, Toronto, Ontario since 1995; Director of
Global Equity Corporation, Enhanced Marketing Services, Equisure
Financial Network, FRI Corporation, Krystal Bond Corporation, Octagon
Industries Ltd., Phoenix Duff and Phelps Corp., Pinetree Capital
Corporation, Micropulse Inc., Radiant Energy Corporation, and Signature
Brands Ltd.
DIRECTORS WITH TERMS ENDING IN 2002:
John R. Hart President of Quaker Holdings Limited, an investment company, since 40 1996
1991; Principal with Detwiler, Ryan & Company, Inc., an investment
bank, from 1982 to 1991; Director of Physicians since 1993; President
and CEO of Physicians since 1995; President and CEO and Director of
Global Equity Corporation since 1995; Director of PC Quote, Inc;
President and CEO and Director of the Company since 1996.
Ronald Langley Director of Physicians since 1993; Chairman of Physicians since 1995: 55 1996
Chairman and Director of Global Equity Corporation since 1995;
Director of PC Quote, Inc; Chairman and Director of the Company since
1996. Director of MC Shipping, Inc. since 1997.
John D. Weil President, Clayton Management Company, a strategic investment company; 58 1996
Director of Todd Shipyards Corporation, Oglebay Norton Company,
Southern Investors Service Company, Inc., Allied Health Products,
Inc., and Baldwin & Lyons, Inc.
</TABLE>
For information on the executive officers of Registrant, see Part I, Item
1., "Executive Officers."
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
executive officers, directors and persons who beneficially own more than 10% of
the Company's Common Stock to file initial reports of ownership and reports of
changes in ownership with the Securities and Exchange Commission ("SEC"). Such
persons are required by SEC regulations to furnish the Company with copies of
all Section 16(a) forms filed by such persons.
Based on a review of the copies of these reports received by the Company
and written representations from certain reporting persons that they have
complied with the relevant filing requirements, the Company believes that all
filing requirements have been complied with on a timely basis for the fiscal
year ended December 31, 1999.
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth information concerning the compensation for
fiscal year 1998 of the (i) Chief Executive Officer of the Company (ii) the
executive officers of the Company as of December 31, 1998 (Messrs. Langley,
Hart, Sharpe, Burchfield, and Mosier are sometimes hereinafter referred to as
"Named Officers"). Amounts under the caption "Bonus" are amounts earned for
performance during the year including amounts paid after the end of the year.
83
<PAGE> 84
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS
SECURITIES
NAME AND PRINCIPAL UNDERLYING
POSITION OPTIONS ALL OTHER
CHIEF EXECUTIVE OFFICER: YEAR SALARY BONUS (SHARES) COMPENSATION
----------------------- ---- ------ ----- -------- ------------
<S> <C> <C> <C> <C> <C>
John R. Hart(1) 1999 $800,000 -0- -0- $29,840(7)
President and Chief 1998 $800,000 -0- -0- $22,000(7)
Executive Officer 1997 $800,000(3) -0- -0- -0-
EXECUTIVE OFFICERS:
------------------
Ronald Langley(2) 1999 $800,000 -0- -0- $29,840(7)
Chairman of the 1998 $800,000 -0- -0- $22,000(7)
Board of Directors 1997 $800,000(3) -0- -0- -0-
Richard H. Sharpe(4) 1999 $192,570 -0- -0- $29,840(7)
Chief Operating Officer 1998 $199,029 -0- -0- $22,000(7)
1997 $165,317 $18,340 -0- $18,734(7)
Gary W. Burchfield(5) 1999 $141,750 -0- -0- $26,121(7)
Chief Financial Officer 1998 $164,640 -0- -0- $20,930(7)
And Treasurer 1997 $135,000 $13,500 -0- $15,618(7)
James F. Mosier(6) 1999 $131,985 -0- -0- $24,323(7)
General Counsel 1998 $126,910 -0- -0- $18,512(7)
and Secretary 1997 $113,017 $12,570 -0- $12,796(7)
- ----------------------
(1) Mr. Hart became President and CEO of the Company on November 20, 1996. Prior to that time he was President and CEO of
Physicians since July 15, 1995.
(2) Mr. Langley became Chairman of the Board of Directors of Physicians on July 15, 1995. He became Chairman of the Board of
Directors of the Company on November 20, 1996.
(3) Mr. Langley and Mr. Hart were each compensated $533,328 by the Company for consulting services in 1997 in the areas of
investment banking, investment portfolio analysis, and analysis of operations. In addition, Mr. Langley and Mr. Hart
entered into consulting agreements with a subsidiary of Global Equity Corporation for annual compensation of $266,672
each for consulting services in the areas of investment banking, investment portfolio analysis, and analysis of
operations. On December 31, 1997, Mr. Langley and Mr. Hart each signed employment agreements with the Company on terms
substantially similar to the consulting agreements.
(4) Mr. Sharpe became Chief Operating Officer of Physicians on June 3, 1994. He became Chief Operating Officer of the Company
on November 20, 1996.
(5) Mr. Burchfield became Chief Financial Officer and Treasurer of Physicians on November 3, 1995. He became Chief Financial
Officer and Treasurer of the Company on November 20, 1996.
</TABLE>
84
<PAGE> 85
<TABLE>
<S> <C>
(6) Mr. Mosier became General Counsel and Secretary of Physicians in 1984. He became General Counsel
and Secretary of the Company on November 20, 1996.
(7) Represents amounts contributed by the Company to the PICO Holdings, Inc. Employees 401(k) Retirement
Plan and Trust. This retirement plan conforms to the requirements of the Employee Retirement Income
Security Act.
</TABLE>
OPTION GRANTS IN LAST FISCAL YEAR
Options to purchase 10,665 shares of the Company's Common Stock at an
exercise price of $13.25 per share were granted during the year ended December
31, 1999 to Maxim C.W. Webb, Vice President, Investments.
OPTION EXERCISES AND FISCAL 1999 YEAR-END VALUE
The following table provides information concerning options held as of
December 31, 1999 by the persons named in the Summary Compensation Table. No
options were exercised in 1999 by such individuals.
AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED IN-THE-MONEY-OPTIONS
OPTIONS AT 12/31/99 AT 12/31/99 (1)
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---------- ------------ ------------- ------------ -------------
<S> <C> <C> <C> <C>
Ronald Langley(2) 406,747 -0- -0- -0-
John R. Hart(2) 406,747 -0- -0- -0-
Richard H. Sharpe 60,119 -0- -0- -0-
Gary W. Burchfield 42,083 -0- -0- -0-
James F. Mosier 42,083 -0- -0- -0-
</TABLE>
(1) Based on the closing price of the Company's Common Stock on December 31,
1999 on the Nasdaq National Market of $12.3125 per share.
(2) In addition to these options shown above, Mr. Langley and Mr. Hart have a
right to purchase shares of the Company under Call Option Agreements
assumed by the Company in August 1998; see Item 12, footnote 4.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Messrs. Weil and Foulkrod, and Dr. Ruppert, serve as members of the
Compensation Committee. Mr. Langley and Mr. Hart have been directors and
executive officers of Global Equity since September 5, 1995.
REPORT OF THE COMPENSATION COMMITTEE
This report of the Compensation Committee (the "Compensation Committee"),
and the Stock Price Performance Graph set forth below, shall not be deemed
incorporated by reference by any general statement incorporating by reference
this Form 10-K into any filing under the Securities Act of 1933, as amended (the
"Securities Act") or under the Securities Exchange Act of 1934, as amended (the
"Exchange Act") except to the extent that the Company specifically incorporates
this information by reference, and shall not otherwise be deemed filed under the
Securities Act or the Exchange Act.
85
<PAGE> 86
COMMITTEE MEMBERS
The three-member Compensation Committee of the Board of Directors is a
standing committee composed entirely of outside Directors. Mr. Weil is the
chairman and Mr. Foulkrod and Dr. Ruppert are the other members.
COMMITTEE FUNCTIONS
The Compensation Committee is responsible for assuring that all of the
executive compensation programs of the Company are developed, implemented, and
administered in a way that supports the Company's fundamental philosophy that a
significant proportion of executive compensation should be effectively linked to
company performance.
The Compensation Committee meets on a regularly scheduled basis. It reviews
and approves the overall executive compensation program, which includes both
base pay and incentive compensation. It considers and approves individual
executive officer compensation packages based on recommendations of the
Company's Chief Executive Officer. It recommends, for the approval of the full
Board, any modification to the compensation package of the Company's Chief
Executive Officer.
EXECUTIVE COMPENSATION PHILOSOPHY
The Board of Directors of Physicians retained an independent compensation
expert, William M. Mercer, Incorporated ("Mercer"). In 1996, Mercer conducted an
analysis of marketplace executive compensation levels. The scope of Mercer's
study covered the Company's Chairman and President and Chief Executive Officer.
The objectives of Mercer's study were as follows:
- - Analyze the scope, responsibilities and skill requirements of the jobs
performed by Messrs. Langley and Hart and compare and contrast to
comparable benchmark executive positions found in the marketplace.
- - Develop an appropriate methodology for selecting comparable benchmark jobs,
industry categories and a peer group of companies comparable to the Company
in terms of business focus, industry classification and size; and competing
for senior executives with the skills, expertise and talent demonstrated by
the Company's top two executives.
- - For the appropriate benchmark jobs, industry category and Peer Company
group, collect information on marketplace compensation levels and practices
from compensation surveys and peer company proxy statements. The companies
included in the peer company group are not necessarily those included in
the Nasdaq Insurance Stock Index. Determine the most relevant marketplace
compensation levels and to compare actual Company compensation levels.
- - Develop alternate approaches for structuring the total compensation package
for the Company's top two executives, in terms of compensation elements to
be used, the mix of total pay and how short and long term incentive
compensation might be structured to accurately reflect performance.
Mercer's study recommended to the Compensation Committee a compensation
strategy with the following objectives:
- - To provide a total compensation package that:
- is competitive with market rates for executives with similar skill,
talent and job requirements.
- is closely linked to the Company's strategy and the role of covered
executives in building shareholder value through growing the book
value and, ultimately, the market value of the Company.
- - To retain critical executive talent by:
- providing a reasonable and competitive level of current income (cash
flow).
- providing for loss of future incentive opportunity if an executive
terminates employment before unrealized investment gains are realized.
86
<PAGE> 87
- - To link executive rewards to shareholder interests by:
- tying incentive awards to growth in book value which ultimately
translates into increased market price per share (as investments are
liquidated for gains, and the Company grows earnings).
- granting additional stock options in the future once current options
are exercised or expire.
The Compensation Committee believes that to accomplish these goals, the
executive compensation program should be based on three distinct components:
base pay, annual incentives, and long-term incentives. The Company obtains
industry and peer group surveys, and consults with independent experts, to
evaluate the Company's executive compensation programs in comparison with those
offered by its comparable competitors.
The Compensation Committee has considered amendments to the Internal
Revenue Code denying deductions for annual compensation to certain executives in
excess of $1 million, subject to certain exceptions. The Company's compensation
structure has been such that it does not believe that it is likely that the $1
million cap will affect the Company in the near future. The Internal Revenue
Service has issued proposed regulations which, among other things, provide for a
transition period of three years for plans previously approved by shareholders.
The Company is studying the proposed regulations, but has not yet determined
what steps may be required or desirable with respect to its existing plans.
EXECUTIVE COMPENSATION PROGRAM
The features of the executive compensation program as recommended by Mercer
and approved by the Compensation Committee are:
BASE COMPENSATION. A fixed rate, to be reviewed annually. Future adjustments
will take into account movement in executive compensation levels, changes in job
responsibilities, and the size of the Company.
INCENTIVE AWARDS. Based on growth of book value per share in a fiscal year.
Awards are earned when a pre-determined threshold is surpassed. If book value
per share of the Company exceeds this threshold, the incentive award is equal to
5% of the increase in book value per share multiplied by the number of shares
outstanding at the beginning of the fiscal year. The threshold for 1999 is 19%.
In addition, the Board of Directors of Physicians granted options under the
Physicians Insurance Company of Ohio 1995 Non-Qualified Stock Option Plan. The
options granted under said option plan were designed to reinforce the
relationship between the Company's future performance and the executive's
potential future financial rewards. These options were assumed by PICO Holdings,
Inc. on November 20, 1996. In line with this philosophy of providing incentives
to Executive Officers, the Company agreed to convert the Global Equity options
of said officers on an economically equivalent basis, to options to purchase
shares of the Company effective with the close of the PICO/Global Equity
Combination.
GOALS OF COMPENSATION COMMITTEE
The Compensation Committee attempts to align executive compensation with
the value achieved by the executives for the Company's shareholders. The
Company's compensation program for executives emphasizes a combination of base
salary, discretionary bonuses, and stock options designed to attract, retain,
and motivate executives who will maximize shareholder value. The Compensation
Committee considers individual and Company performance, as well as compensation
paid by comparable companies.
Executives also participate in other employee benefit programs, including
health insurance, group life insurance, and the Company's 401(k) Plan.
DISCUSSION OF 1999 COMPENSATION FOR THE CHIEF EXECUTIVE OFFICER
No bonus was paid with respect to the Company's performance in 1999. In
1997, the Compensation Committee recommended to the Board of Directors, and the
Board of Directors accepted the recommendation, that it was appropriate for the
CEO and the Chairman to be compensated as employees, rather than as consultants.
Accordingly, effective December 31, 1997, the CEO and Chairman entered into
employment agreements with the Company. The terms of these employment agreements
are substantially similar to the terms of the consulting agreements.
87
<PAGE> 88
August 1, 1999 Compensation Committee
John D. Weil, Chairman
S. Walter Foulkrod, III, Esq.
Richard D. Ruppert, MD
As stated above, the Compensation Committee believes the interest of the
Company shareholders is best served by aligning the CEO's short-term
compensation, over and above competitive fixed annual rate of pay, with an
increase in the Company's book value per share which will ultimately be
reflected in higher market values per share. Specifically, a threshold was set
at 80% of the S&P 500's annualized total return for the five previous calendar
years. For 1999, this threshold was approximately 23%. Since the Company's book
value per share decreased in 1999, and did not exceed the threshold, no bonus,
i.e. short-term incentive, was payable for 1999.
The Compensation Committee awarded long term incentives in 1995 in the form
of 175,247 non-qualified stock options at the then current market value. In
addition, the Committee recommended that the CEO's options with Global Equity,
initially granted in 1995, be converted on an economically equivalent basis to
purchase shares of the Company upon consummation of the Global Equity/PICO
transaction, December 16, 1998. Finally the Committee recommended and the Board
agreed that the Company assume in August 1998 GPG's obligations to the CEO and
Chairman under November 1993 Call Option Agreements.
The Committee believes that the compensation provided by this combination
of fixed annual compensation, and short-term and long term incentives provides a
mechanism to fairly compensate the CEO while providing the CEO with a strong
incentive to maximize shareholder value.
The Committee believes that the compensation provided by this combination
of fixed annual compensation, and short-term and long term incentives provides a
mechanism to fairly compensate the CEO while providing the CEO with a strong
incentive to maximize shareholder value.
STOCK PRICE PERFORMANCE GRAPH
The graph below compares cumulative total return of the Company, the Nasdaq
Insurance Stocks Index, and the Nasdaq Stock Market (U.S. Companies) for the
period January 1, 1995 through December 31, 1999.
<TABLE>
<CAPTION>
Dec-94 Dec-95 Dec-96 Dec-97 Dec-98 Dec-99
<S> <C> <C> <C> <C> <C> <C>
PICO Holdings 100.00 127.27 150.00 234.09 96.36 89.55
NASDAQ Insurance
Stock Index 100.00 139.61 158.28 194.19 194.07 204.81
Russell 2000 Index 100.00 126.21 144.84 174.56 168.54 201.61
</TABLE>
The graph assumes $100 was invested on January 1, 1995 in the Company's
Common Stock, the Nasdaq Insurance Stocks Index, and the Russell 2000 Index, and
that all dividends were reinvested. The performance of PICO Holdings, Inc. stock
on this graph represents the historical performance of shares of Citation
Insurance Group, which was renamed PICO Holdings, Inc. on November 20, 1996. It
does not represent the historical stock performance of Physicians Insurance
Company of Ohio.
88
<PAGE> 89
EMPLOYMENT AND CHANGE IN CONTROL ARRANGEMENTS
Mr. Langley and Mr. Hart each entered into employment agreements effective
December 31, 1997 with the Company. Total compensation to Mr. Langley and Mr.
Hart under these employment agreements is $800,000 each on an annual basis.
These employment agreements include a change in control clause providing that if
there was a change of control before December 31, 1999, the Company was required
to immediately pay each employee a total lump sum of $2.4 million and an amount
equal to three times the highest annual bonus paid to the employee in the last
three years.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information, as of March 1, 2000, with
respect to the beneficial ownership of the Company's Common Stock entitled to
vote by each person known by the Company to be the beneficial owner of more that
5% of Common Stock, and by each director, each Named Officer (as defined below)
and all executive officers, former chief executive officers, and directors as a
group. Except as otherwise indicated, each person has sole investment and voting
power, subject to community property laws. As of March 1, 2000, there were
13,448,553 shares of the Company issued and outstanding. Of these shares,
4,394,127 are held by the Company and its subsidiaries, and may therefore not be
voted under California law. The following table excludes shares of the Company
held by the Company and its subsidiaries since those shares are not entitled to
vote.
<TABLE>
<CAPTION>
NUMBER OF SHARES AND NATURE PERCENTAGE OWNERSHIP OF
NAME AND ADDRESS OF BENEFICIAL OWNER OF BENEFICIAL OWNERSHIP (1) VOTING SHARES
------------------------------------ --------------------------- - -------------
<S> <C> <C> <C>
Ronald Langley(2)(4) 622,592 6.0%
John R. Hart(3)(4) 636,110 6.1%
Robert R. Broadbent 10,949 *
Carlos C. Campbell -0- *
S. Walter Foulkrod, III, Esq. 2,904 *
Richard D. Ruppert, MD (5) 7,298 *
John D. Weil (6) 590,259 5.7%
David A. Williams 105,000 1.0%
Richard H. Sharpe (7) 67,909 *
Gary W. Burchfield (8) 47,160 *
James F. Mosier (9) 47,303 *
Sheila C. Ferguson (10) 9,307 *
Maxim C. W. Webb (11) 30,428 *
Executive Officers and Directors as a Group (13 persons) 2,177,219 20.9%
*Less than one percent (1%)
</TABLE>
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<PAGE> 90
(1) Sole voting and investment power unless otherwise indicated.
(2) Of these shares, 555,863 represent beneficial ownership of currently
exercisable options. 1,418 shares are held in the Company's 401(k) Plan.
Mr. Langley has been Chairman and a Director of Global Equity since
September 5, 1995. He has been Chairman and a Director of the Company since
November 20, 1996.
(3) Of these shares, 613,170 represent beneficial ownership of currently
exercisable options. Mr. Hart has been President and CEO and a Director of
Global Equity since September 5, 1995. He has been President and CEO of the
Company since November 20, 1996. Included are 19,940 shares held in a Rabbi
Trust account in the name of the Company.
(4) Mr. Langley and Mr. Hart formerly had stock options, granted in 1995, to
purchase shares of Global Equity; these shares were converted on December
17, 1998 into economically equivalent stock options to purchase shares of
the Company. Mr. Langley and Mr. Hart each had 1993 call option agreements
with GPG; in August 1998, the Company assumed GPG's obligations with
respect to these 412,846 options. Mr. Langley exercised 57,307 of his call
options in December 1998 and has 149,116 call option remaining. Mr. Hart
has not exercised any call options and has 206,423 call options remaining.
(5) Dr. Ruppert shares voting and investment power with his wife.
(6) Of these shares, 535,258 are owned by a partnership which Mr. Weil
controls.
(7) Of these shares, 60,119 represent beneficial ownership of currently
exercisable options. 3,279 shares are held in the Company's 401(k) Plan.
(8) Of these shares, 42,083 represent beneficial ownership of currently
exercisable options. 922 shares are held in the Company's 401(k) Plan.
(9) Of these shares, 42,083 represent beneficial ownership of currently
exercisable options. 2,371 shares are held in the Company's 401(k) Plan.
(10) Of these shares, 3,702 represent beneficial ownership of currently
exercisable options. 1,076 shares are held in the Company's 401(k) Plan.
(11) Of these shares, 29,177 represent beneficial ownership of currently
exercisable options. 870 shares are held in the Company's 401(k) Plan.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Mr. Langley and Mr. Hart entered into employment agreements with the
Company, effective December 31, 1997. See Part II, Item 8., NOTE 17,
"Related-Party Transactions."
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<PAGE> 91
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) FINANCIAL STATEMENTS, SCHEDULES AND EXHIBITS.
1. FINANCIAL STATEMENTS.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Independent Auditors' Reports............................... 45-46
Consolidated Balance Sheets as of December 31, 1999 and 1998 47-48
Consolidated Statements of Operations for the Years
Ended December 31, 1999, 1998 and 1997 ............... 49
Consolidated Statements of Shareholders' Equity
for the Years Ended December 31, 1999, 1998, and 1997 50-52
Consolidated Statements of Cash Flows for the Years
Ended December 31, 1999, 1998 and 1997............... 53
Notes to Consolidated Financial Statements................. 54
2 FINANCIAL STATEMENT SCHEDULES.
Independent Auditors' Reports............................... 92
Schedule I - Condensed Financial Information of Registrant.. 93
Schedule II - Valuation and Qualifying Accounts............. 95
Schedule V - Supplementary Insurance Information............ 96
91
<PAGE> 92
INDEPENDENT AUDITORS' REPORT ON FINANCIAL STATEMENT SCHEDULES
To the Shareholders and Board of Directors of
PICO Holdings, Inc.:
We have audited the consolidated financial statements of PICO Holdings, Inc. and
subsidiaries (the "Company") at December 31, 1999 and 1998, and for the three
years in the period ended December 31, 1999, and our report thereon (which
expresses an unqualified opinion) appears on page 46. Our audits of the
consolidated financial statements also included the 1999, 1998 and 1997
financial statement schedules of the Company, listed in Item 14. These financial
statement schedules are the responsibility of the Company's management. Our
responsibility is to express an opinion based on our audits. We did not audit
the 1997 consolidated financial statements of Global Equity Corporation (all
expressed in Canadian dollars), a 51.2% owned consolidated subsidiary as of
December 31, 1997, which constituted 42% of the Company's consolidated total
assets as of December 31, 1997. Those statements were audited by other auditors
whose report has been furnished to us, and our opinion, insofar as it relates to
the amounts included in the Company's 1997 financial statement schedules for
Global Equity Corporation (as expressed in Canadian dollars), is based solely on
the report of such other auditors. In our opinion, based on our audits and the
report of the other auditors, such 1999, 1998 and 1997 financial statement
schedules, when considered in relation to the basic consolidated financial
statements taken as a whole, present fairly in all material respects the
information set forth therein.
DELOITTE & TOUCHE LLP
San Diego, California
March 10, 2000
92
<PAGE> 93
SCHEDULE I
CONDENSED FINANCIAL INFORMATION OF REGISTRANT (PARENT COMPANY ONLY)
On December 16, 1998, following the requisite regulatory and shareholder
approvals, PICO Holdings, Inc. ("PICO") and Global Equity Corporation ("Global
Equity") announced completion of the combination of the two corporations through
PICO's acquisition of Global Equity's remaining 48.8% minority interest. PICO
acquired the remaining shares through the issuance to Global Equity shareholders
of PICO common stock. Immediately following the closing, PICO effected a 1-for-5
reverse stock split, reducing the number of PICO shares issued and outstanding.
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, December 31,
1999 1998
------------- -------------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 2,917,203 $ 437,303
Investments in subsidiaries 165,562,282 167,796,130
Equity securities and other investments 11,694,590 3,528,522
Deferred income taxes 1,423,175 3,077,667
Other assets 4,867,756 11,358,091
------------- -------------
Total assets $ 186,465,006 $ 186,197,713
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Accrued expense and other liabilities $ 17,477,781 $ 12,768,121
------------- -------------
Preferred stock, $.01 par value, authorized 2,000,000 shares; none issued
Common stock, $.001 par value, authorized 100,000,000 shares: issued and
outstanding 13,448,533 in 1999 and 13,328,778 in, respectively 13,449 13,329
Additional paid-in capital 186,004,827 183,154,588
Accumulated other comprehensive loss (5,920,196) (7,705,165)
Retained earnings 66,718,780 75,504,882
------------- -------------
246,816,860 250,967,634
Less treasury stock, at cost (4,394,127 in 1999 and 4,380,780 shares in 1998) (77,829,635) (77,538,042)
------------- -------------
Total shareholders' equity 168,987,225 173,429,592
------------- -------------
Total liabilities and shareholders' equity $ 186,465,006 $ 186,197,713
============= =============
</TABLE>
This statement should be read in conjunction with the notes to the consolidated
financial statements included in the Company's 1999 Form 10-K
93
<PAGE> 94
SCHEDULE I
CONDENSED FINANCIAL INFORMATION OF REGISTRANT (PARENT COMPANY ONLY)
CONDENSED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31,
<TABLE>
<CAPTION>
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Investment income, net $ 659,312 $ 544,424 $ 648,229
Equity in loss of subsidiaries (5,905,023) (5,910,480) 20,578,825
------------ ------------ ------------
Total revenues (5,245,711) (5,366,056) 21,227,054
Expenses 5,024,583 2,660,813 2,874,895
------------ ------------ ------------
Income (loss) from continuing operations before income taxes (10,270,294) (8,026,869) 18,352,159
Expense (benefit) for income taxes (1,484,192) 1,292,334 (803,576)
------------ ------------ ------------
Income (loss) from continuing operations (8,786,102) (9,319,203) 19,155,735
Income from discontinued operations of subsidiaries, net 1,075,024 456,283
------------ ------------ ------------
Net income (loss) $ (8,786,102) $ (8,244,179) $ 19,612,018
============ ============ ============
CONDENSED STATEMENTS OF CASH FLOWS
Cash flow from operating activities:
Net income (loss) $ (8,786,102) $ (8,244,179) $ 19,612,018
Adjustments to reconcile net income (loss) to net cash used or provided
in operating activities:
Equity in income (loss) of subsidiaries 5,905,023 5,910,480 (20,578,825)
Income from discontinued operations of subsidiaries, net (1,075,024) (456,283)
Changes in assets and liabilities:
Accrued expenses and other liabilities 4,709,660 10,074,675 (1,040,789)
Other assets 8,144,827 (11,559,294) 1,296,193
------------ ------------ ------------
Net cash provided by (used in) operating activities 9,973,408 (4,893,342) (1,167,686)
------------ ------------ ------------
Cash flow from investing activities:
Dividends from subsidiary 22,152,608
Sale of investments 14,527,455
Purchase of investments (10,052,274) (9,278,630) (33,561,639)
------------ ------------ ------------
Net cash provided by (used in) investing activities (10,052,274) 5,248,825 (11,409,031)
Cash flow from financing activities:
Cash received from exercise of warrants 2,850,359
Purchase of treasury shares (291,593)
------------ ------------ ------------
Net cash provided by investing activities 2,558,766
------------ ------------ ------------
Increase (decrease) in cash and cash equivalents 2,479,900 355,483 (12,576,717)
Cash and cash equivalents, beginning of year 437,303 81,820 12,658,537
------------ ------------ ------------
Cash and cash equivalents, end of year $ 2,917,203 $ 437,303 $ 81,820
============ ============ ============
</TABLE>
This statement should be read in conjunction with the notes to the
consolidated financial statements included in the Company's Form 10-K
94
<PAGE> 95
SCHEDULE II
PICO HOLDINGS, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
Additions
--------------
(1)
Balance at Charged to Balance
Beginning Costs and End
Description of Period Expenses Deductions of Period
----------- -------------- --------------- ------------- --------------
<S> <C> <C> <C> <C>
Year-end December 31, 1999
Allowance for Doubtful Accounts, net $ 94,525 $ 4,963 $ 99,488
Valuation Allowance for
Deferred Federal Income Taxes $ 12,184,499 $ (8,448,347) $ 3,736,152
Year-end December 31, 1998
Allowance for Doubtful Accounts, net $ 119,024 $ 61,204 $ (85,703) $ 94,525
Valuation Allowance for
Deferred Federal Income Taxes $ 6,800,000 $ 5,384,499 $ 12,184,499
Year-end December 31, 1997
Allowance for Doubtful Accounts, net $ 116,917 $ 142,789 $ (140,682) $ 119,024
Valuation Allowance for
Deferred Federal Income Taxes $ 6,664,000 $ 136,000 $ 6,800,000
</TABLE>
(1) Increases and decreases in provisions for the allowance for doubtful
accounts are charged to expense accounts. Changes in the allowance for
deferred federal income taxes are charged to provision (benefit) for
federal, foreign and state income taxes except for amounts relating to
unrealized investment gains and losses.
(2) Changes in the valuation allowance relating to unrealized investment gains
and losses are netted against the net unrealized appreciation
(depreciation) on investments account.
95
<PAGE> 96
SCHEDULE V
PICO HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED SUPPLEMENTARY INSURANCE INFORMATION
(In thousands)
December 31, 1999
<TABLE>
<CAPTION>
Future
Policy
Benefits, Amortization
Deferred Losses, Losses of Deferred
Policy Claims Net and Policy Other Net
Acquisition and Loss Unearned Premium Investment Loss Acquisition Operating Premiums
Costs Expenses Premiums Revenue Income Expenses Costs Expenses Written
------------ ---------- ---------- --------- ---------- ---------- ------------- ------------ ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Medical
professional
liability $ 71,859 $ 1,940 $ 1,188 $ 6,599 $ 857 $ 1,934
Other property
and casualty $ 4,821 67,274 $ 17,205 34,439 4,950 28,613 $ 10,484 4,528 31,725
------------ ---------- ---------- --------- ---------- ---------- ------------- ------------ ---------
Total medical
professional
liability and property
and casualty 4,821 139,133 17,205 36,379 6,138 35,212 10,484 5,385 33,659
Other operations 467 22,868
------------ ---------- ---------- --------- ---------- ---------- ------------- ------------ ---------
Total continuing $ 4,821 $ 139,133 $ 17,205 $36,379 $ 6,605 $ 35,212 $ 10,484 $ 28,253 $ 33,659
============ ========== ========== ========= ========== ========== ============= ============ =========
</TABLE>
96
<PAGE> 97
SCHEDULE V
PICO HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED SUPPLEMENTARY INSURANCE INFORMATION
(In thousands)
December 31, 1998
<TABLE>
<CAPTION>
Losses, Amortization
Deferred Claims Losses of Deferred
Policy and Loss Net and Policy Other Net
Acquisition Expense Unearned Premium Investment Loss Acquisition Operating Premiums
Costs Reserves Premiums Revenue Income Expenses Costs Expenses Written
----------- ----------- --------- -------- ---------- ---------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Medical
professional
liability $ 85,877 $ (159) $ 2,580 $ 5,628 $ 1,156 $ (220)
Other property
and casualty $ 5,549 69,144 $ 20,804 36,290 5,500 24,900 $ 10,877 4,325 35,507
----------- ----------- --------- -------- ---------- ---------- ----------- ----------- ----------
Total medical
professional
liability and property
and casualty 5,549 155,021 20,804 36,131 8,080 30,528 10,877 5,481 35,287
Other operations 1,352 11,560
----------- ----------- --------- -------- ---------- ---------- ----------- ----------- ----------
Total continuing $ 5,549 $ 155,021 $ 20,804 $36,131 $ 9,432 $ 30,528 $ 10,877 $ 17,041 $ 35,287
=========== =========== ========= ======== ========== ========== =========== =========== ==========
</TABLE>
97
<PAGE> 98
SCHEDULE V
PICO HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED SUPPLEMENTARY INSURANCE INFORMATION
(In thousands)
December 31, 1997
<TABLE>
<CAPTION>
Losses, Amortization
Deferred Claims Losses of Deferred
Policy and Loss Net and Policy Other Net
Acquisition Expense Unearned Premium Investment Loss Acquisition Operating Premiums
Costs Reserves Premiums Revenue Income Expenses Costs Expenses Written
---------- ----------- --------- --------- ---------- --------- ----------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Medical
professional
liability $ 108,926 $ 239 $ 3,656 $ 1,244 $ 1,887 $ 240
Other property
and casualty $ 5,321 87,170 $ 21,635 49,637 5,614 33,086 $ 11,567 6,461 39,453
--------- ----------- --------- --------- ---------- --------- ----------- ----------- ---------
Total medical
professional
liability and property
and casualty 5,321 196,096 21,635 49,876 9,270 34,330 11,567 8,348 39,693
Other operations 4,250 10,435
--------- ----------- --------- --------- ---------- --------- ----------- ----------- ---------
Total continuing $ 5,321 $ 196,096 $ 21,635 $49,876 $ 13,520 $ 34,330 $ 11,567 $ 18,783 $ 39,693
========= =========== ========= ========= ========== ========= =========== =========== =========
</TABLE>
In 1997, the Company entered into a definitive agreement to sell its
indirectly wholly owned life and health insurance subsidiary, American
Physicians Life Insurance Company and its wholly owned subsidiary. The closing
occurred on December 4, 1998. The Company's 1997 life and health insurance
operations have been classified as discontinued operations in accordance with
Accounting Principles Board Opinion No. 30, "Reporting the Results of
Operations--Reporting the Effects of Disposal of a Segment of a Business." Net
income for 1996 has also been reclassified for comparative purposes to reflect
the discontinued operations. See Note 6 to the Consolidated Financial
Statements, "Discontinued Operations."
98
<PAGE> 99
3. EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Description
-------- -----------
<S> <C>
+ 2.2 Agreement and Plan of Reorganization, dated as of May 1, 1996, among PICO,
Citation Holdings, Inc. and Physicians and amendment thereto dated August 14, 1996 and
related Merger Agreement.
+++++ 2.3 Second Amendment to Agreement and Plan of Reorganization dated November 12, 1996.
# 2.4 Agreement and Debenture, dated November 14, 1996 and November 27, 1996,
Respectively, by and between Physicians and HyperFeed.
# 2.5 Purchase and Sale Agreement by, between and among Nevada Land & Resource Company, LLC,
Global Equity, Western Water Company and Western Land Joint Venture dated April 9,
1997.
+++++3.1 Amended and Restated Articles of Incorporation of PICO.
+ 3.2.2 Amended and Restated By-laws of PICO.
* 10.8 Flexible Benefit Plan
* 10.16 Office Lease between Citation and North Block Partnership dated July, 1990.
*** 10.16.1 Amendments Nos. 1 and 2 to Office Lease between Citation and North Block Partnership
dated January 6, 1992 and February 5, 1992, respectively.
**** 10.16.2 Amendments Nos. 3 and 4 to Office Lease between Citation and North Block Partnership
dated December 6, 1993 and October 4, 1994, respectively.
-***** 10.23 PICO Severance Plan for Certain Executive Officers, Senior Management and Key
Employees of the Company and its Subsidiaries, including form of agreement.
-10.55 Consulting Agreements, effective January 1, 1997, regarding retention of Ronald Langley
and John R. Hart as consultants by Physicians and Global Equity.
++ 10.57 PICO 1995 Stock Option Plan
-+++ 10.58 Key Employee Severance Agreement and Amendment No. 1 thereto, each made as of
November 1, 1992, between PICO and Richard H. Sharpe and Schedule A identifying
other substantially identical Key Employee Severance Agreements between PICO and
certain of the executive officers of PICO.
+++ 10.59 Agreement for Purchase and Sale of Shares, dated May 9, 1996, among Physicians,
GPG and Global Equity.
++ 10.60 Agreement for the Purchase and Sale of Certain Assets, dated July 14, 1995 between
Physicians, PRO and Mutual Assurance, Inc.
++ 10.61 Stock Purchase Agreement dated March 7, 1995 between Sydney Reinsurance
Corporation and Physicians.
++ 10.62 Letter Agreement, dated September 5, 1995, between Physicians, Christopher Ondaatje
and the South East Asia Plantation Corporation Limited.
++++ 10.63 Amendment No. 1 to Agreement for Purchase and Sale of Certain Assets, dated July 30,
1996 between Physicians, PRO and Mutual Assurance, Inc.
+++++ 16.1. Letter regarding change in Certifying Accountant from Deloitte & Touche LLP,
Independent auditors.
# 21. Subsidiaries of PICO.
23.1. Independent Auditors' Consent - Deloitte & Touche LLP.
23.2. Accountants' Consent - KPMG LLP.
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.
------------------------
</TABLE>
99
<PAGE> 100
<TABLE>
<S> <C>
* Incorporated by reference to exhibit of same number filed with Registration Statement
on Form S-1 (File No. 33-36383).
*** Incorporated by reference to exhibit of same number filed With 1992 Form 10-K.
**** Incorporated by reference to exhibit of same number filed with 1994 Form 10-K.
***** Incorporated by reference to exhibit bearing the same number filed with Registration
Statement on Form S-4 (File No. 33-64328).
+ Filed as Appendix to the prospectus in Part I of Registration Statement on Form S-4
(File No. 333-06671)
++ 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).
</TABLE>
(b) REPORTS ON FORM 8-K.
On December 22, 1998 and January 8, 1999, PICO filed
Form 8-K and Form 8-K/A, respectively, announcing jointly
with Global Equity the December 16, 1998 closing of the
PICO/Global Equity Combination and the 1-for-5 Reverse Stock
Split.
On October 9, 1998, PICO filed a Form 8-K announcing
the conversion of the Company's HyperFeed subordinated
convertible debenture, working capital loans and accrued
interest into HyperFeed 5% Convertible Preferred Stock and
common stock warrants.
On October 9, 1998, PICO filed a Form 8-K announcing
jointly with Global Equity the September 18, 1998 filing
with the SEC of their Joint Proxy Statement in connection
with the PICO/Global Equity Combination.
On July 21, 1998, PICO filed a Form 8-K announcing the
favorable response by Global Equity's independent committee
of directors regarding the PICO/Global Equity Combination
including disclosure of the share exchange ratio.
On May 20, 1998, PICO filed a Form 8-K announcing
PICO's consideration of the proposed PICO/Global Equity
Combination through a Plan of Arrangement.
See also Item 9 of Part II of this report for a
listing of additional 8-K documents filed.
100
<PAGE> 101
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
Date: March 30, 2000
PICO Holdings, Inc.
By: /S/ JOHN R. HART
------------------------------------------------
John R. Hart
Chief Executive Officer
President and Director
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below on March 30, 2000 the following persons in the
capacities indicated.
/S/ RONALD LANGLEY Chairman of the Board
- -----------------------------------
Ronald Langley
/S/ JOHN R. HART Chief Executive Officer, President and
- -----------------------------------
John R. Hart Director
/S/ GARY W. BURCHFIELD Chief Financial Officer and Treasurer
- -----------------------------------
Gary W. Burchfield (Chief Accounting Officer)
/S/ S. WALTER FOULKROD, III, ESQ. Director
- -----------------------------------
S. Walter Foulkrod, III, Esq.
/S/ RICHARD D. RUPPERT, MD Director
- -----------------------------------
Richard D. Ruppert, MD
/S/ DAVID A. WILLIAMS Director
- -----------------------------------
David A. Williams
/S/ CARLOS C. CAMPBELL Director
- -----------------------------------
Carlos C. Campbell
/S/ ROBERT R. BROADBENT Director
- -----------------------------------
Robert R. Broadbent
/S/ JOHN D. WEIL Director
- -----------------------------------
John D. Weil
101
<PAGE> 1
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement Nos.
333-36881 and 333-32045 of PICO Holdings, Inc. (the "Company") on Form S-8 of
our reports dated March 10, 2000 appearing in this Annual Report on Form 10-K of
the Company for the year ended December 31, 1999.
DELOITTE & TOUCHE LLP
San Diego, California
March 10, 2000
102
<PAGE> 1
EXHIBIT 23.2
ACCOUNTANTS' CONSENT
The Board of Directors
Global Equity Corporation
We consent to the incorporation by reference in Registration Statements (Nos.
333-36881 and 333-32045) on Form S-8 of PICO Holdings, Inc. of our report dated
March 17, 1998 relating to the consolidated statement of financial position of
Global Equity Corporation as at December 31, 1997, and the related consolidated
statements of operations, deficit and changes in financial position for the year
then ended, which report appears in the annual report on Form 10-K of PICO
Holdings, Inc. for the year ended December 31, 1999.
KPMG LLP
Chartered Accountants
Toronto, Canada
March 30, 2000
103
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AND CONSOLIDATED STATEMENT OF INCOME OF PICO
HOLDINGS, INC. AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> DEC-31-1999
<DEBT-HELD-FOR-SALE> 47,234
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 70,451
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 134,269
<CASH> 36,738
<RECOVER-REINSURE> 2,210
<DEFERRED-ACQUISITION> 4,821
<TOTAL-ASSETS> 375,654
<POLICY-LOSSES> 139,133
<UNEARNED-PREMIUMS> 17,205
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 0
0
0
<COMMON> 13
<OTHER-SE> 168,974
<TOTAL-LIABILITY-AND-EQUITY> 375,654
36,379
<INVESTMENT-INCOME> 6,605
<INVESTMENT-GAINS> 441
<OTHER-INCOME> 11,281
<BENEFITS> 35,212
<UNDERWRITING-AMORTIZATION> 10,484
<UNDERWRITING-OTHER> 28,253
<INCOME-PRETAX> (22,553)
<INCOME-TAX> (13,324)
<INCOME-CONTINUING> (9,228)
<DISCONTINUED> 0
<EXTRAORDINARY> 442
<CHANGES> 0
<NET-INCOME> (8,786)
<EPS-BASIC> (0.98)
<EPS-DILUTED> (0.98)
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
