* A $1.1 million realized gain from the sale of the Company's life and health insurance subsidiary, American Physicians Life Insurance Company; and
Water Storage District to acquire 185,000 acre-feet of underground water storage and associated rights to recharge and recover water at the District, located near the California Aqueduct northwest of Bakersfield, California. The strategic location of the District relative to other water delivery systems and storage facilities will enable Vidler to complete exchanges and water transfers in California. The acquisition also complements Vidler's underground water storage facility located adjacent to the Central Arizona Project in Arizona.
Each company within the group is operated to sustain its own operations without the need for long-term borrowings or additional capital infusions from within the Company, with the possible exceptions of additional capital requirements of Sequoia and CIC to maintain or improve their Best ratings or to meet minimum capital requirements. Physicians contributed an additional $5.5 million to Sequoia in 1997 for this purpose. Nevertheless, funds may be needed to cover short-term operating shortfalls, to purchase investments or proceed with an acquisition.
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.
Financing activities during 1998 used cash of $3.8 million, primarily due the purchase of the Company'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, "OTHER RELATED PARTY TRANSACTIONS." In addition, $2.4 million was paid to Semitropic for water storage. These payments are required annually through the year 2008. During 1997, financing activities used $14.3 million primarily to repay borrowings, offset by proceeds of $2 million from the sale of GEC warrants. In 1996, financing activities provided cash of $69,000.
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 losses, future policy benefits, claims, and annuity and other policyholder funds. Inadequate reserves could have a material adverse effect on our business, financial condition, results of operations and cash flows.
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.
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 overtime. 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.
The Company's primary subsidiaries as of December 31, 1998 are as follows:
Conex Continental Inc. ("Conex"). Formed under the laws of the Province of Ontario, Canada and re-domiciled in Delaware on April 6, 1998, shares of Conex trade on the Canadian Dealer Network. The principal asset of Conex is a 60% interest in a foreign joint venture, Guizhou Jonyang Machinery Industry Co., Ltd. The joint venture operates a manufacturing plant in Guiyang City, Guizhou Province, China, producing wheeled and tracked hydraulic excavators.
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.
The Company leases some of its offices under non-cancelable operating leases that expire at various dates through October 2008. Total rent expense was $1.5 million, $1.5 million and $1.7 million for the years ended December 31, 1998, 1997 and 1996, respectively. Future minimum rental payments required under the leases for the years ending December 31, are as follows:
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 1998, 1997, or 1996.
(A) Investment Operations 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, 1998 was insignificant compared to $6 million and $56 million as of December 31, 1997, and 1996, respectively. Investment revenues (charges) thereon was approximately $(1.6) million, $2 million and $27 million, for the years ended December 31, 1998, 1997, and 1996, respectively.