In 1998, Lincoln/Vidler filed for 14,000 acre-feet of water rights for industrial use from the Tule Desert Groundwater Basin. In November 2002, the Nevada State Engineer granted an application for 2,100 acre-feet of water rights, and ruled that another 7,244 acre-feet could be granted, but would be held in abeyance while Lincoln/Vidler pursues additional studies.
anticipate that Muddy River water rights may be utilized to support development in southern Nevada. The Southern Nevada Water Authority has been acquiring Muddy River water rights as a water resource to support future growth in Clark County, Nevada.
In 2000, Vidler purchased a 51% interest in Fish Springs Ranch, LLC ("Fish Springs") and a 50% interest in V&B, LLC. These companies own the Fish Springs Ranch and other properties totaling approximately 8,600 acres in Honey Lake Valley in Washoe County, 45 miles north of Reno, Nevada. Approximately 8,000 acre-feet of permitted water rights associated with Fish Springs Ranch are transferable to the Reno/Sparks area. The water rights at Fish Springs have been identified as the most economical and proven new source of supply to support new growth in the North Valley communities of Washoe County. This county was in the top 2% of all counties in the U.S. for new home construction between April 1, 2000 and July 1, 2001. According to census data, almost 5,500 new homes were constructed over that 15 month period, a 3.8% increase.
Recharge and recovery capacity is critical, because it indicates how quickly water can be put into storage or recovered from storage. 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 crucial factor is the ability to recover water as quickly as possible. There is a long history of farmers recovering significant quantities of water from the Harquahala Valley ground water aquifer for irrigation purposes.
The financial results of insurance companies in "run off" can be volatile if there is favorable or unfavorable development in the loss reserves. Physicians recorded significant income from favorable reserve development in 2001 and 2003; however, Citation recorded a significant loss in 2003, partly due to increases in the workers' compensation and property and casualty insurance loss reserves.
At December 31, 2003, $2.8 million of Citation's net property and casualty reserves (approximately 21%) were case reserves, $3.8 million represented provision for IBNR claims (29%), and the unallocated loss adjustment expense reserve was $6.7 million (50%).
The change in Citation's reserves over the past 3 years has resulted from:
During 2002, Citation's property and casualty insurance claims reserves, net of reinsurance, decreased from $19.2 million to $14.6 million. Claims payments for the year were $3.7 million, accounting for approximately 80% of the net decrease in reserves during 2002. Actuarial analysis of Citations' loss reserves as of December 31, 2002 showed a redundancy in the carried reserves of Citation, which we reduced during 2002 by $889,000. The reserve redundancy reflected a reduction in the "severity" (size) of claims.
- - the extended period over which policy benefits are paid.
- - comprehensive income of $6.1 million in 2001, consisting of net income of $5.1 million and a movement of $1.9 million in net unrealized appreciation in investments, which were partially offset by a $955,000 reduction in foreign currency translation.
In each of the past 3 years, land sales have been the largest contributor to revenues in this segment. The timing of land sales is unpredictable, and historically the level of land sales has fluctuated from year to year. In 2003, Nevada Land recorded revenues of $4.1 million from the sale of 75,131 acres of land. In 2002, Nevada Land generated revenues of $2.8 million from the sale of 28,451 acres of land, compared to $1.9 million in revenues from the sale of 15,632 acres of land in 2001. In some years, including 2002 and 2003, Nevada Land also generates revenues from the sale of water rights.
Lease and royalty income amounted to $695,000 in 2003, compared to $721,000 in 2002, and $707,000 in 2001. Most of this revenue comes from land leases, principally for grazing, agricultural, communications, and easements.
After deducting the cost of land sold, the gross margin on land sales was $2.2 million in 2003, $1.7 million in 2002, and $1.1 million in 2001. This represented a gross margin percentage of 54.3% in 2003, 59.6% in 2002, and 59.8% in 2001.
The $1.5 million increase in segment income from 2002 to 2003 is principally attributable to a $553,000 increase in gross margin on land sales year over year, and the unusually high expenses of approximately $900,000 in 2002, which did not recur in 2003. Segment income increased $353,000 from 2001 to 2002, primarily due to a $548,000 increase in gross margin on land sales year over year.
In 2002, a net realized gain of $3.4 million was recognized. This principally consisted of:
Investment income was $1.4 million in 2003, compared to $679,000 in 2002 and $1.1 million in 2001. Investment income varies from year to year, depending on the amount of fixed-income securities held in the portfolio and the prevailing level of interest rates. Investment income was higher in 2003 than in the two previous years due to the expansion of Physicians' investment portfolio following the receipt of the proceeds from selling Sequoia.
The following table provides a summary of our contractual cash obligations and other commitments and contingencies as of December 31, 2003.
Net investment income is as follows for each of the years ended December 31:
On May 15, 2003 the Company increased its ownership of HyperFeed from 44% to 51% by purchasing 443,623 shares for $1.2 million and accordingly, now has a controlling financial interest through a direct ownership of a majority voting interest. Consequently, PICO consolidated HyperFeed's results from the date of acquisition forward. The acquisition was accounted for using the purchase method of accounting and accordingly, the accompanying condensed consolidated financial statements include the revenues and expenses and costs of HyperFeed beginning May 15. Prior to May 15, the Company accounted for its investment in HyperFeed using the equity method of accounting. The following is an allocation of the purchase price to the assets acquired and liabilities assumed at the date of acquisition:
On October 31, 2003, HyperFeed sold its consolidated market data feed service contracts to Interactive Data Corporation for $8.5 million. The gain recorded within discontinued operations is $7 million. Based on PICO's 51% ownership, net of minority interest, the gain to PICO is approximately $3.6 million.
Through November 2008, Vidler is required to make a minimum annual payment for the Semitropic water storage facility of $378,000. These payments are being capitalized and the asset is being amortized over its useful life of thirty-five years. Amortization expense was $102,000 in 2003 and 2002 and $438,000 in 2001. In 2001, Vidler sold approximately 84% of its right, title and interest under the lease for a gain of $5.7 million. As a result, at December 31, 2003 and 2002, Vidler owns the right to store 30,000 acre-feet of water. Vidler is also required to pay annual operating and maintenance charges and for the years ended December 31, 2003, 2002 and 2001, the Company expensed a total of $155,000, $152,000 and $146,000, respectively.
Although the ultimate outcome of these audits is uncertain, management believes the Company is adequately reserved in the event the additional state income taxes assessments are upheld.
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 were amortized into income over the expected payout of the underlying claims using the interest method. Deferred gains of $439,000, and $530,000 in 2002 and 2001, respectively, were recorded in income. At December 31, 2002 the deferred gain was fully amortized.
Until 1995, Physicians and its subsidiaries wrote medical professional liability insurance, mostly in the state of Ohio. Physicians has stopped writing new business and is in "run off." This means that it is handling claims arising from historical business, and selling investments when funds are needed to pay claims.