PICO leases approximately 6,354 square feet in La Jolla, California for its principal executive offices.
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
Note: 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" FOR ADDITIONAL DISCUSSION.
In addition, during 2000: - - we exchanged 25,828 acres of land for assets with an exchange value of approximately $1.3 million, or $52 per acre. The consideration received consisted of $430,000 in cash and 17,558 acres of land, which we believe will be more readily marketable, with an exchange value of $913,000. Nevada Land recorded a gain of $270,000 on the proportion of the total exchange value for which cash was received (i.e., approximately 32%). No gain was recognized on the portion of the exchange for which land was received (i.e., approximately 68%). Any gain related to the land received will be recorded when that land is sold; and - - we sold 61 acre-feet of certificated water rights for $244,000, or $4,000 per acre-foot.
We expect that land sales and land exchange activity in 2001 will be at a similar level to 2000. In particular, there is strong demand from electricity-generating companies that are looking to acquire land to construct power plants where water is available, and there is also the requisite proximity to rail transport and the electricity transmission grid. We also expect continued demand from ranchers who prefer to own land rather than lease it.
Progress continues on a number of possible sale and exchange transactions involving significantly larger parcels of land. It can take several years to complete land exchange transactions.
As well as developing its existing assets in 2000, Vidler Water Company, Inc. acquired two properties with significant water rights in northern Nevada. These investments were made as part of Vidler's strategy of increasing its ownership of water rights in Nevada, the state which experienced the most rapid population growth over the past decade. It has been publicly stated that, in the long term, the northern counties are the only practical source of water to support the continued growth of southern Nevada.
At December 31, 2000, Vidler owned or had the right to acquire approximately 55,905 acre-feet of transferable ground water in the HARQUAHALA VALLEY, approximately 75 miles northwest of metropolitan Phoenix, Arizona. Vidler owns 44,100 acre-feet, the purchase of 2,019 acre-feet is in escrow, and we have the option to purchase 9,786 acre-feet.
The Arizona State Legislature has passed several pieces of legislation which recognize the Harquahala Valley ground water as a special resource. In 1991, the expansion of irrigated farming in the Valley was prohibited, and the transfer of the ground water to municipalities was authorized. In order to protect the Harquahala Valley ground water from large commercial and industrial users which are moving into the Basin, Vidler supported legislation enacted in 2000 which places restrictions on commercial and industrial users utilizing more than 100 acre-feet of water annually. These users are required to purchase irrigable land and to withdraw the water that they need from the land at no more than 3 acre-feet per annum per acre of land.
There is also demand for the water within the Harquahala Basin.
In the first quarter of 2000, we disclosed that Vidler had granted an electricity-generating company an option to acquire land and the associated water rights in the Harquahala Valley. The quantity of land and water under option was later increased, and on March 19, 2001, we closed the sale of 2,165.5 acres of irrigable land and the associated 6,496.5 acre-feet of water rights to a unit of Allegheny Energy, Inc. for approximately $9.1 million. The purchase price equates to $4,200 per acre of land, or $1,400 per acre-foot of water. In addition, Vidler received a non-refundable option premium of $300,000 late in 2000. As a result of this transaction, Vidler will record a pre-tax gain of approximately $2.4 million in the first quarter of 2001.
Vidler has been increasing its ownership of water rights in northern Nevada through the purchase of ranch properties and entering into joint ventures with parties owning water rights which they wish to commercialize.
The joint venture has announced an initial agreement to supply developers near Mesquite with up to 17,000 acre-feet of water.
Currently, 8,000 acre-feet of permitted water rights associated with Fish Springs Ranch are transferable to the Reno/Sparks area. Vidler is in discussions with a number of potential users for the Fish Springs water rights. These include an industrial user, developers in Washoe County, and customers in Nevada's north valleys where there is strong demand for water and few alternative sources of supply.
There are 5,832 acre-feet of permitted agricultural water rights related to the property. Vidler intends to commercially develop these water rights, although this will be a long-term project. In addition, we have filed applications for 14,500 acre-feet of additional water rights for the beneficial use of irrigating more of the ranch property.
Please refer to Note 17, Commitments and Contingencies, on page 76 of this Form 10-K report.
Vidler is progressing with the sale of all of its Colorado water assets, in order to focus resources on states experiencing faster growth in demand for water.
We believe that a number of events during the past year have increased the scarcity value of the project's storage capacity. At a public hearing on March 14, 2000, the Arizona Water Banking Authority disclosed that the Bureau of Reclamation has indicated that, before permits are issued for new facilities to store water for interstate users, extensive environmental impact studies will be required. The Arizona Water Banking Authority also indicated that the first priority for publicly owned storage capacity in Arizona is to store water for Arizona users. At the same hearing, the states of California and Nevada again confirmed that their demand for storage far exceeds the total amount of storage available at existing facilities in Arizona. Consequently, interstate users will need to rely, at least in part, on privately owned storage capacity.
It is anticipated that Vidler's full-scale recharge facility will have the capacity to recharge 100,000 acre-feet per year, and that Vidler will be able to store in excess of 1 million acre-feet of water in the aquifer underlying Harquahala Valley. Vidler's estimate of the aquifer's storage volume is 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.
Recharge and recovery capacity is important because it indicates how quickly water can be put into storage underground 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 critical 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 aquifer.
Recent examples include: - - a Water Resource Planning Memorandum of Understanding which was signed on November 1, 2000 with the MUDDY RIVER IRRIGATION DISTRICT in Nevada. Under the agreement, Vidler will work with the Irrigation District to maximize the efficiency of its irrigation system, and then evaluate opportunities to commercially utilize water which is surplus to agricultural needs; - - a Memorandum of Understanding which was signed on December 18, 2000 with the City of SURPRISE, ARIZONA, for Vidler to conduct a feasibility study of a joint venture water recharge project; and - - approaches to develop water rights in two states where Vidler does not currently own assets.
In 2001, Vidler's focus will be on: - - generating cash flow from the water rights in Nevada and Arizona through lease agreements or the sale of water rights; - - leasing storage capacity to customers at the Vidler Arizona Recharge Facility; and - - pursuing present and additional water rights applications and partnerships to commercially develop water rights.
Commercial insurance premium volume also benefited when A.M. Best Company, a leading insurance company rating service, favorably re-rated Sequoia from "B++" (Very Good) to "A-" (Excellent) in the second quarter. This allowed Sequoia to compete for business in an additional market segment -- customers which can only purchase coverage from "A" rated insurance companies.
In May 2000, Sequoia acquired Personal Express Insurance Services, Inc. for approximately $3 million. Personal Express had few tangible assets, so the bulk of the purchase price was recorded as goodwill, an intangible asset which is being charged off over 10 years. Personal Express markets personal insurance products to customers in the central California cities of Bakersfield and Fresno. The acquisition is expected to add approximately $7.5 million in additional premiums for Sequoia annually. Historically this block of business has generated an underwriting profit.
The artisan/contractors business was written under the previous management of Citation. In fact, Citation ceased writing this type of insurance coverage in 1995, the year before the reverse merger with Physicians Insurance Company of Ohio, and no artisans/contractors business was renewed after the merger. The decline in the California real estate market in the early 1990's encouraged property owners to try and improve their position by filing claims against contractors and related parties for alleged construction defects. Citation's average loss ratio (i.e., the cost of making provision to pay claims as a percentage of earned premium) for all years from 1989 to 1995 for this insurance coverage is over 375%. This experience is not unique to Citation, but is shared by all insurers who wrote this type of coverage in California in the 1980's and 1990's.
During 2000, our medical professional liability insurance claims reserves, net of reinsurance, but before discount, decreased from $61.2 million to $51.6 million. We anticipate a slightly smaller decrease in 2001.
There were no unusual trends in claims in 2000. The net effect of prior year reserve development was a $1.1 million expense, which represented a significant improvement from the two preceding years.
Since our initial investment in HyperFeed, the Company's revenues have grown from $13.4 million in 1995 to $46.4 million in 2000.
During 2000, PICO's shareholding in Jungfraubahn increased slightly to 112,672 shares, which represents approximately 19.3% of the company. Due to our percentage ownership, and because our Chairman, Ronald Langley, joined the Board of Jungfraubahn during the year, we now account for our shareholding in Jungfraubahn under the equity method. Our results for all periods presented in these financial statements have been restated as if our investment had always been carried under the equity method of accounting, beginning with our original purchase in 1996.
PICO's equity share of Jungfraubahn's 2000 undistributed net income is included in our total equity income of $1.8 million. Jungfraubahn will announce its full year 2000 results later this year.
During 2000, PICO's shareholding in Accu Holding increased to 2,086 registered shares and 6,039 bearer shares, which represents a voting ownership interest of approximately 28.3% of the company. Since PICO was not able to obtain the necessary financial
At December 31, 2000, our investment in Accu Holding had a cost basis of $4.7 million, a market value of $4.9 million, and a net carrying value of $4.9 million, after allowing for taxes.
On September 8, 2000, PICO sold its investment in Conex for a nominal sum, realizing a pre-tax loss of $4.6 million, which is included in realized investment losses in the third quarter and full year results. After allowing for related taxes, the realized loss on sale was $1.8 million.
SISCOM contributed a segment loss of $1.6 million to PICO in 2000, and a net loss of approximately $1.1 million after taxes and minority interest.
We currently own 49.5% of the voting stock in Mendell, and use the equity method to account for the investment. In 2000, a pre-tax loss of $516,000 was recorded in the Long Term Holdings segment, being our equity share of Mendell's 2000 net loss. At December 31, 2000, the investment in Mendell has a carrying value of $657,000 after allowing for related taxes.
Other assets in the Long-Term Holdings segment include: - 2,500,000 common shares and 1 million warrants in Solpower Corporation, a publicly-traded Arizona-based distributor and manufacturer of refrigerant gas and fuel additives, which had a carrying value after taxes of $1.1 million at December 31, 2000; - a 50% interest in Protocol Resource Management, Inc., the largest refrigerant repackager in Canada, which is owned in conjunction with Solpower. PICO paid approximately $338,000 for its shareholding, and loaned $500,000 to Solpower to acquire the other 50% and for working capital; and - short term advances of $2.2 million to Dominion Capital Pty. Limited, Solpower's major shareholder, which are due to be repaid in 2001.
RESULTS OF OPERATIONS -- YEARS ENDED DECEMBER 31, 2000, 1999, AND 1998
PICO reported a net loss of $9.5 million, or $0.82 per diluted share, in 2000, compared with a net loss of $6.8 million, or $0.76 per diluted share, in 1999, and a net loss of $7.9 million, or $1.32 per diluted share, in 1998. The weighted average number of shares outstanding in 2000 includes new shares issued in the rights offering at $15.00 per share in March 2000. The weighted average number of shares outstanding in 1998 includes new shares issued to acquire the minority shareholdings in Global Equity Corporation on December 16, 1998. Per-share calculations for 1998 have also been adjusted to reflect the 1-for-5 reverse stock split which followed the PICO/Global Equity Corporation combination.
In 1999, the $6.8 million net loss was comprised of a $20.5 million before-tax loss, which was partially offset by the addition of $12.5 million in income tax benefits, $706,000 in minority interest, and a $442,000 after-tax extraordinary gain. This compares to a $12 million loss from continuing operations in 1998, prior to the deduction of $1.5 million in income tax expense and the addition of $4.5 million of minority interest and $1.1 million in income from discontinued operations.
The $8.2 million in tax benefits recorded in 2000 is made up of several items. These include a $4.4 million cash refund resulting from the successful appeal of a prior year tax ruling in Canada, and a $3.3 million expense which was recognized to increase federal income tax valuation allowances recorded against tax assets in some of our subsidiaries. In 1999, $12.5 million of income tax benefits were recognized, including an $8.4 million reduction in valuation allowances that had previously been recorded to reduce income tax assets. Of this amount, $6.5 million became available as a result of changes in federal income tax legislation in 1999.
Detailed information on the performance of each segment is contained later in this report; however, the principal items in the 2000 $13.5 million loss from continuing operations before taxes and minority interest were:
Land, Minerals and Related Water Rights - - income of $1.9 million from Nevada Land on revenues of $5.3 million, which included $3.7 million in land sales and a $270,000 gain from a land exchange transaction;
Water Rights and Water Storage - - Vidler generated $3.1 million in revenues and incurred a pre-tax loss of $4.9 million. The operating loss decreased by $296,000 as higher revenues from leasing agricultural land and the sale of water at Semitropic exceeded increases in depreciation, financing, and operating expenses; however, the reduced operating loss was more than offset by a $1.2 million loss on the sale of land and tunnel assets related to water rights sold during the year;
Property and Casualty Insurance - - segment income of $2.5 million, consisting of a $1.3 million pre-tax profit from Sequoia and $1.2 million from Citation;
Medical Professional Liability Insurance - - a pre-tax profit of $768,000;
Revenues and income before taxes and minority interests from continuing operations, by business segment, were:
Total expenses in 2000 were $60.6 million, compared to $73.9 million in 1999 and $58.4 million in 1998. The largest expense item in each of the past 3 years was loss and loss adjustment expense in our insurance businesses i.e., the cost of making provision to
Nevada Land generated revenues of $5.3 million in 2000, compared to $7.1 million in 1999, and $2.5 million during 1998. Fluctuations in the level of land sales caused most of the variation in revenue from year to year.
In 2000 we recorded $3.7 million in revenues from the sale of 28,245 acres of land, compared to $5.4 million from the sale of 48,715 acres in 1999, and $1.7 million from the sale of 5,866 acres in 1998.
In 2000, Nevada Land completed its first major land exchange transaction, in which we exchanged 25,828 acres of land for assets with an exchange value of approximately $1.3 million, or $52 per acre. The consideration received consisted of $430,000 in cash and 17,558 acres of land, which we believe will be more readily marketable, with an exchange value of $913,000. The revenue recorded as a result of this transaction was the $270,000 net gain on the cash portion of the total exchange value (i.e., approximately 32%). This gain represents the difference between the cash received and our basis in approximately 32% of the land given up in the exchange. No gain was recognized on the portion of the exchange value for which land was received (i.e., approximately 68%). Any gain related to the land received will be recorded when that land is sold.
Lease and other income amounted to $1 million in 2000, $1.3 million in 1999, and $775,000 in 1998. Most of this revenue comes from land leases, principally for grazing, agricultural, communications, and easements, which totaled $608,000 in 2000, $737,000 in 1999, and $440,000 in 1998.
Nevada Land recorded income of $1.9 million in 2000, compared to $1.1 million in 1999 and $204,000 in 1998. In 2000, segment income was $824,000 higher than 1999, principally due to a $685,000 higher gross profit from land sales and the $270,000 net gain from the land exchange transaction. The $890,000 increase in segment income between 1998 and 1999 resulted from a $594,000 increase in gross profit from the sale of land, and lease and other revenues growing at a faster pace than operating expenses.
To this point, the bulk of recurring segment revenue has come from leasing agricultural land in Arizona. Over the past three years, revenue from leasing agricultural land has climbed each year as Vidler continued to purchase farm properties and the related water rights in the Harquahala Valley, and lease the land to farmers. Agricultural lease revenues rose from $144,000 in 1998 to $477,000 in 1999 and $959,000 in 2000.
Vidler generated water service revenue of $245,000 in 1998, $185,000 in 1999, and $188,000 in 2000, from leasing some of the company's Colorado water rights. These assets are leased in perpetuity. The lease payments are indexed for inflation, with a minimum annual escalation of 3%. Once assets have been leased in perpetuity, they cannot be leased again unless the lease is canceled, where that is possible.
The segment loss grew from $2.1 million in 1998, to $3.9 million in 1999, and $4.9 million in 2000.
Due to the lag between changes in written premium and earned premium, the effect of the increased volume in Sequoia's commercial insurance business, the increase in Sequoia's A.M. Best rating, and the acquisition of Personal Express, will not be fully reflected in Sequoia's reported results until 2001.
Investment income represents interest earned from cash and cash equivalents and fixed-maturity securities, and dividends received from stocks held in the insurance company portfolios. During 2000, the average income yield on the bond portfolio increased due to both the higher prevailing level of interest rates and a refocusing onto high-grade corporate issues. This led to an 8.7% increase in segment investment income to $5.4 million. The segment investment income had declined from $5.6 million in 1998 to $5 million in 1999 because the decline in written premium volume reduced the pool of assets available for investment.
(2) Sequoia began to earn premiums from Personal Express. Sequoia does not pay commission on Personal Express business, so commission expense fell as a percentage of revenue.
In 1998, the segment income of $2.8 million consisted of $3.6 million in income from Sequoia, which was partially offset by an $773,000 loss from Citation. Sequoia's reported profit benefited from $2.1 million of favorable claims experience, which was partially offset by an estimated $1 million in additional claims due to the 1997-1998 "El Nino" weather pattern. Citation's $773,000 loss was caused by $3.7 million of unfavorable claims experience in the artisans/contractors line of business.
Medical professional liability insurance segment revenues were $3.4 million in 2000, compared to $3.1 million in 1999, and $2.4 million in 1998. Although most of the revenues of an insurance company in "run off" come from investment income, a minor amount of earned premium can arise, for example from the recalculation of reinsurance premiums based upon loss experience.
Investment income has been declining--from $2.6 million in 1998, to $1.2 million in 1999, and $1.5 million in 2000--because the amount of income-generating investments held by Physicians and Professionals has decreased as claims are paid.
Loss and loss adjustment expenses were $1.1 million in 2000, $6.6 million in 1999, and $5.6 million in 1998. Other operating expenses were $1.6 million in 2000, $1.3 million in 1999, and $1.2 million in 1998.
Medical professional liability operations produced $768,000 of income before taxes in 2000, compared to losses in the two preceding years of $4.8 million in 1999 and $4.4 million in 1998, when results were adversely affected by the need to increase loss and loss adjustment expense reserves. A $1.1 million net increase in reserves was required in 2000. As well, reserves increased by $7.5 million due to the elimination of reserve discount included in the cumulative effect of change in accounting principle. Positive income was recorded following the return of approximately $1.9 million in premium for reinsurance which actuarial analysis indicated was not required.
Until December 31, 1999, we discounted our medical professional liability claims reserves to reflect the fact that some claims will not be paid until future years, but funds from the corresponding premiums can be invested in the meantime. In each quarter until December 31, 1999, a portion of this discount was removed and recognized as an expense called "reserve discount accretion." From January 1, 2000, we ceased discounting our reserves to be consistent with the accounting treatment in our statutory financial statements, which no longer permitted us to discount after December 31, 1999. The elimination of discounting resulted in a $5 million after-tax charge to income, which is shown in the "Cumulative Effect of Change in Accounting Principle" line in our Consolidated Statement of Operations. See Notes 14 and 24 of Notes to Consolidated Financial Statements.
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 discounting to reflect the time value of money. The addition to claims reserves was necessary because of a higher than expected number of claims (increased "frequency"). This was compounded by the fact that many of the claims were for smaller than expected amounts (reduced "severity"), causing more of them to fall below our reinsurance deductibles (i.e., the initial part of each claim which is not covered by reinsurance). This meant that Physicians had to pay a greater proportion of each claim, and that we could not recover as much as previously anticipated from reinsurance.
Physicians' own claims department staff continues to process the run off of the remaining medical professional liability loss and loss adjustment expense claims. As the "run off" continues, overhead costs are being minimized as much as possible.
Although, as required by Ohio insurance regulations, our medical professional liability insurance reserves are certified annually by two independent actuaries, 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.
The Long Term Holdings segment recorded negative revenues of $5.7 million in 2000, compared to revenues of $3.2 million in 1999, and negative revenues of $1.5 million in 1998. Revenues in this segment vary considerably from year to year, primarily because of fluctuations in net realized gains or losses on the sale of investments. PICO does not sell investments on a regular basis, but when the price of an individual security has significantly exceeded our target, or if there have been changes which we believe limit further appreciation potential on a risk-adjusted basis. Consequently, the amount of net realized gains or losses recognized during any accounting period has no predictive value.
Realized gains from the sale of securities from the Company's European portfolio were recorded in both 1999 and 1998. In 1999, these gains were partially offset by the $3.2 million write-down of an investment in an oil and gas investment, resulting in net realized gains of $626,000. In 1998, realized gains were more than offset by $8.2 million in write-downs. These consisted of a $3 million reduction in the carrying value of our investment in MKG Enterprises, $2.9 million related to Sri Lankan securities received by Global Equity when it sold its Sri Lankan subsidiary, and $2.2 million on a portfolio investment in North America.
In this segment, investment income includes interest on cash and cash equivalents and dividends from long term holdings. Investment income totaled $988,000 in 2000, compared to $505,000 in 1999, and $1.9 million in 1998. The decrease in 1999 was due to lower levels of cash and cash equivalents and a reduction in income earning investments in the medical professional liability insurance company portfolios as the "run off" progressed. Investment income rose in 2000, primarily due to interest income on funds raised in the rights offering.
The principal expenses recognized in this segment are PICO's corporate overhead and operating expenses from SISCOM and Conex. In 2000, segment expenses were $9.9 million, compared to $11.3 million in 1999 and $6.2 million in 1998. Segment expenses decreased in 2000 due to overhead reductions.
PICO's equity share of investee's income represents our proportionate share of the net income and other events affecting equity in the investments which we carry under the equity method, less any dividends received from those investments. For 2000, equity income was approximately $1.8 million, compared to a $1 million loss in 1999, and a $780,000 loss in 1998. Here is a summary of the material investments which we accounted for under the equity method in each of the past three years:
The Long Term Holdings produced a loss before taxes of $13.9 million in 2000, compared to a loss of $9.2 million in 1999, and an $8.5 million loss in 1998. In 2000, the segment loss included a $4.6 million realized loss on the sale of Conex, and a $2.3 million operating loss for the period prior to sale, and a $1.6 million loss from SISCOM before tax and minority interest. In 1999, Conex accounted for $1.8 million of the segment loss and SISCOM $672,000.
LIQUIDITY AND CAPITAL RESOURCES--YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
- - Over the past 3 years, Vidler Water Company, Inc. has utilized cash to purchase properties with significant water rights, to construct improvements at the Vidler Arizona Recharge Facility, to maintain and develop existing assets, to pursue applications for water rights, and to cover financing and operating expenses. Other group companies have provided financing to meet Vidler's on-going expenses and to fund capital expenditure and the purchase of additional water-righted properties.
- - Citation Insurance Company has ceased writing business and is "running off" its existing claims reserves. Investment income more than covers Citation's operating expenses. Most of the funds required to pay claims are coming from the maturity of fixed-income securities in the company's investment portfolio and recoveries from reinsurance companies; and
- - As the "run off" progresses, Physicians Insurance Company of Ohio and The Professionals Insurance Company are obtaining funds to pay operating expenses and claims from the maturity of fixed-income securities, the realization of investments, and recoveries from reinsurance companies.
As shown in the Consolidated Statements of Cash Flow, there was a $23.1 million net decrease in cash and cash equivalents in 2000, compared to a $34.9 million net decrease in 1999, and a $15.2 million net increase during 1998.
Investing Activities used $62 million of cash in 2000. This primarily reflects:
(a) activity in the investment portfolios of our insurance companies, where the proceeds of cash and cash equivalents and maturing fixed-income securities were reinvested in high-grade corporate bonds and, to a lesser extent, in small-capitalization value stocks; (b) the investment of a total of $14.9 million in the purchase of two water-righted ranch properties in Nevada and the construction of improvements necessary to recharge water on a commercial scale at Vidler's Arizona water storage facility; and (c) the acquisition of Personal Express for approximately $3 million; partly offset by (d) cash receipts of $5.5 million from land, water, water rights, and related assets sold by Nevada Land and Vidler.
BECAUSE OUR OPERATIONS ARE SO DIVERSE, ANALYSTS AND INVESTORS MAY NOT BE ABLE TO EVALUATE OUR COMPANY ADEQUATELY, WHICH MAY NEGATIVELY INFLUENCE OUR SHARE PRICE
PICO is a diversified holding company with operations in land, minerals and related water rights; water rights and water storage; property and casualty insurance; medical professional liability insurance; and other long-term holdings. Each of these areas is unique, complex in nature, and difficult to understand. In particular, water rights is a developing industry within the western United States with very little historical data, very few experts and a limited following of analysts. Because we are so complex, analysts and
investors may not be able to adequately evaluate our operations, and PICO in total. This could cause them to make inaccurate evaluations of our stock, or to overlook PICO, in general. These factors could have a negative impact on the trading volume and price of our stock.
Failures and/or declines in the market values of businesses we invest in or acquire, as well as our failure to successfully locate, select and manage investment and acquisition opportunities, could have a material adverse effect on our business, financial condition, the results of operations and cash flows. Such business failures, declines in market values, and/or failure to successfully locate, select and manage investments and acquisitions could result in inferior investment returns compared to those which may have been attained had we successfully located, selected and managed new investments and acquisition opportunities, or had our investments or acquisitions not failed or declined in value. We could also lose part or all of our investments in these businesses and experience reductions in our net income, cash flows, assets and shareholders' equity.
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, and the 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, and the results of operations and cash flows.
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
- - Sequoia Insurance Company A- (Excellent) - - Citation Insurance Company B+ (Very Good) - - Physicians Insurance Company of Ohio NR-3 (rating procedure inapplicable) - - The Professionals Insurance Company NR-3 (rating procedure inapplicable)
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, and the results of operations and cash flows.
In the future, we anticipate that a significant amount of Vidler's revenues and asset value will come from a limited number of assets, including our water rights in the Harquahala Valley and the Vidler Arizona Recharge Facility.
Historically, a majority of Vidler's water service revenue has come from our Colorado water assets. Although we continue to acquire and develop additional water assets, in the foreseeable future we anticipate that our revenues will still be derived from a limited number of assets.
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
As a result of global investment diversification, our business, financial condition, the results of operations and cash flows may be adversely affected by:
- - exposure to fluctuations in exchange rates; - - the imposition of governmental controls; - - the need to comply with a wide variety of foreign and U.S. export laws; - - political and economic instability;
- - trade restrictions; - - changes in tariffs and taxes; - - volatile interest rates; - - changes in certain commodity prices; - - exchange controls which may limit our ability to withdraw money; - - the greater difficulty of administering business overseas; and - - general economic conditions outside the United States.
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.
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.
SEE SCHEDULE IN NOTE 14 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 was discounted through December 31, 1999, to reflect investment income as permitted by the Ohio Department of Insurance. The method of
The following table presents the development of balance sheet liabilities for 1990 through 2000 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, prior to 2000, 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.
RECONCILIATION TO FINANCIAL STATEMENTS Gross liability - end of year Reinsurance recoverable Net liability before discount - end of year Net discount Net liability - end of year (discounted for 1998 and 1999) Reinsurance recoverable (discounted for 1998 and 1999)
Gross re-estimated liability - latest Re-estimated recoverable - latest Net re-estimated liability before discount - latest Net re-estimated discount - latest Net re-estimated liability - latest Net cumulative redundancy (deficiency) before discount
The data in the above table is based on Schedule P from each of the insurance companies' 1990 to 2000 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.
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.
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.
Sequoia and Sequoia then cedes 50% of its net premiums and losses to Citation. Sequoia and Citation share equally in the underwriting expenses. This arrangement was terminated effective January 1, 2000.
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, 2000 exceed the Company Action Level.
PICO's financial statements as of December 31, 2000 and 1999 and for each of the three years in the period ended December 31, 2000 and the independent auditors' report is included in this report as listed in the index.
PICO HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2000 AND 1999 AND FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 2000
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of PICO Holdings, Inc. and subsidiaries as of December 31, 2000 and 1999, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2000, in conformity with accounting principles generally accepted in the United States of America.
- owning and developing water rights & water storage operations through Vidler Water Company, Inc.;
On 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 effected a 1-for-5 reverse stock split (the "Reverse Stock Split").
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 is in "run off".
Investments in which the Company owns between 20% to 50% of the voting interest and/or 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 most significant investments the Company classifies as equity affiliates are:
Jungfraubahn Holding AG ("Jungfraubahn") is a Swiss corporation engaged in the transportation, tourism and recreation sectors in Switzerland. During 2000, PICO increased ownership to 19.3% and obtained a board seat and adopted the equity method of accounting. Previously, the investment was held at cost and marked to market under Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities" ("SFAS 115"). All prior year results have been adjusted to reflect the investment at equity.
The accompanying consolidated financial statements include the accounts of the Company and its majority-owned subsidiaries, and have been prepared in accordance with accounting principles generally accepted in the United States of America. All significant intercompany balances and transactions have been eliminated.
The Company applies the provisions of SFAS No. 115, 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. Unrealized gains or losses on investments recorded at fair value are recorded net of tax and included in accumulated other comprehensive income or loss.
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. At December 31, 2000 and 1999, the Company had accumulated negative goodwill amortization of $2.3 million and $1.8 million, respectively. The Company also recorded goodwill related to its investment in Conex, SISCOM, Personal Express and Sequoia and amortizes the balances over various lives not exceeding 10 years. At December 31, 2000 and 1999, the Company had $1.3 million and $1.1 million in accumulated amortization, respectively.
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 discounted, prior to 2000, to reflect the time value of money (See Note 24).
Accumulated other comprehensive loss is net of deferred income tax asset of $3.2 million and a deferred tax liability of $523,000 at December 31, 2000 and 1999, respectively.
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:
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 earnings contribution recorded using equity accounting is included in the statement of operations under Equity in income of unconsolidated affiliates for the percentage owned in all periods presented. The results of Jungfraubahn are adjusted to conform to US GAAP. Dividends received from Jungfraubahn are recorded as a reduction in the cost basis of the investment.
At December 31, 2000, the Company's investment in HyperFeed consisted of 2,602,000 shares of common stock, representing 16.5% of the common shares outstanding; 4,786,547 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 20.5% voting interest. The common and preferred stock are presented using the equity method of accounting for investments in common stock, and have a combined carrying value of $3.3 million at December 31, 2000. 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, 2000, the common stock warrants are carried in accordance with SFAS No. 115 at an estimated fair value of $2.9 million, prior to a $435,000 deferred tax asset, using the Black Scholes option-pricing model. The pre-tax unrealized loss on the warrants is $1.3 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 5.6%; a one year expected life; and a historical 5 year cumulative volatility of 119%.
In July of 2000, Vidler purchased a 51% interest in Fish Springs Ranch, LLC for $4.5 million and a commitment to invest an additional $500,000 in July 2001 and a 50% interest in V&B, LLC for $1.2 million. These companies own the 8,628-acre Fish Springs Ranch, and the associated water rights. The purchase price was allocated based on estimated fair values at the date of contribution. Vidler acts as manager and effectively controls both companies. Consequently, the companies are included in the accompanying consolidated financial statements as of the date of the investment in the companies. As a result of consolidation, water rights increased approximately $6.6 million, land increased approximately $306,000, various other assets increased $2.1 million and liabilities increased $145,000. Also during the year, Vidler purchased Spring Valley Ranches (formerly, Robison Ranch), for approximately $4.5 million. Approximately $3.7 million of the purchase price was recorded as land.
Following is an unaudited summary of American Physicians' stand-alone financial results for the periods included in the statements of operations as discontinued operations:
tax payable of $324,000 and at December 31, 1999 the Company had an income tax receivable of $3.6 million. The aggregate NOL's of approximately $59 million expire between 2001 and 2020. There is a $1.4 million annual limitation on the utilization of the NOL's of PICO, Citation and Sequoia.
An investment partnership registered as PICO Equity Investors, L.P. agreed to acquire shares which were 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 remained unpurchased by shareholders on March 27, 2000, PICO committed to sell and PICO Equity Investors, L.P. 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. 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.
In August 1998, PICO acquired 412,846 shares of its own 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 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.
PICO Holdings 1995 Non-Qualified Stock Option Plan. PICO was authorized to issue 521,030 shares of common stock pursuant to awards granting non-qualified stock options to full-time employees (including officers) and directors. The options granted to employees vest 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 2000. 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 2000 Non-Statutory Stock Option Plan. PICO is authorized to issue 1,200,000 shares of common stock to employees and directors of and consultants to the Company, pursuant to awards granted as non-qualified stock options. On April 7, 2000, PICO granted, subject to approval by the Company's shareholders obtained on October 19, 2000, 1,091,223 non-qualified common stock options to employees and directors of the Company (1,082,223 to employees and 9,000 to directors) at an exercise price of $15.00 per share. Of the options granted to employees, one-third vested upon grant, one-third vest April 7, 2001 and one-third vest April 7, 2002. The options granted to directors were fully vested on the grant date. A summary of the status of the Company's stock options is presented below for the years ended December 31:
Had compensation cost for the Company's stock-based compensation plans been determined consistent with SFAS No. 123, the Company's net loss and net loss per share would approximate the following pro forma amounts for the years ended December 31:
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
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, 2000 and 1999 was $969,000 and $1.2 million, respectively.
Prior to 2000, Physicians used a discount rate of 4% for financial reporting purposes. The method of determining the discount was based on historical payment patterns and assumed an interest rate at or below Physicians' own investment yield. The carrying value of MPL reserves gross as to reinsurance and undiscounted was approximately $58.6 million at December 31, 2000, and $71.9 million, net of discounting of $9.7 million, at December 31 1999.
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, 2000, $10.2 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.
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 million, $1.3 million, and $1.5 million for the years ended December 31, 2000, 1999 and 1998, respectively.
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 summary of future minimum rental payments. On October 7, 1998, PICO signed an agreement guaranteeing payment of Vidler's obligations under the agreement. PICO's 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") and 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. During 2000, Global Equity entered into settlement discussions with the third party to liquidate the underlying assets of MKG. Although discussions still continue, Global Equity would receive approximately $500,000 of the proceeds as full satisfaction of the loan.
BSND, Inc. ("BSND"), a wholly-owned subsidiary of Vidler Water Company, has resolved a partnership dispute relating to Big Springs Associates, a partnership which owns real property and water rights in Nevada (the "Partnership"). BSND owns 50% of the Partnership. Under the terms of an agreement resolving the dispute, BSND agreed to sell its interest in the
Partnership to the other partner for $12.65 million in cash, a gain to Vidler of approximately $2.0 million. If the transaction has not closed by August 1, 2001, BSND will own the Partnership in its entirety.
The employment agreements entered into with Ronald Langley and John R. Hart in 1997 for annual base salaries of $800,000 also entitles each 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 2000, 1999 or 1998 under this program.
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 deferred compensation 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 or 2000.
In August 1998, 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.
During 2000, the Company sold its interest in Conex Continental Inc. to Dominion Capital Pty. Limited, an Australian corporation. PICO and Dominion each have an ownership interest in the common stock of Solpower Corporation. PICO accounts for Solpower at cost and records unrealized gains or losses under SFAS 115. PICO loaned Solpower $500,000 to purchase its 50% interest in Protocol Resource Management, Inc. and PICO acquired the other 50% of Protocol. The loan bears interest at 10.8% and PICO received a warrant to purchase 1 million shares of Solpower common stock. PICO records its interest in Protocol using the equity method of accounting. During 2000, PICO loaned approximately $2.2 million to Dominion
Capital Pty. Limited. The loans bear interest at a weighted rate of 10.2% and are due in 2001. PICO carries the loans at cost plus accrued interest.
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 publications of the National Association of Insurance Commissioners, 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 medical professional liability unpaid loss and loss adjustment expense reserves, including related reinsurance recoverable using a 4% discount rate through December 31, 1999. Effective January 1, 2000, the Ohio Department of Insurance withdrew its permission for Physicians to discount reserves. Statutory practices vary in certain respects from generally accepted accounting principles. The principal variances are as follows:
(6) Loss and loss adjustment expense reserves and unearned premiums are reported net of the impact of reinsurance for statutory accounting purposes.
The Company is a diversified holding company engaged in five major operating segments: Land, Minerals and Related Water Rights; Water Rights and Water Storage; Property and Casualty Insurance; Medical Professional Liability ("MPL") Insurance and Long Term Holdings.
PICO is engaged in land, water and mineral rights operations through its subsidiary Nevada Land. Nevada Land owns approximately 1.2 million acres of land and related mineral and water rights in northern Nevada. Revenue is generated by land sales, 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 agreements.
- - 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;
- - purchase and storage of water for resale in dry years.
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.
We also have a small portfolio of alternative investments, where we deviated from our traditional value criteria in an attempt to capitalize on areas of potentially greater growth without incurring undue risk
Investments directly related to the insurance operations are included within those segments
- CASH AND CASH EQUIVALENTS, SHORT-TERM INVESTMENTS, RECEIVABLES, PAYABLES AND ACCRUED LIABILITIES: Carrying amounts for these items approximate fair value because of the short maturity of these instruments.
- 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 23, are not significantly different from the original terms.
At December 31, 2000 and 1999, bank and other borrowings consisted of loans and promissory notes incurred to finance the purchase of land and investment securities. The weighted average interest rate on these borrowings was approximately 7.4% and 6.9% at December 31, 2000 and 1999, respectively.
At December 31, 2000, Global Equity SA has a loan facility with a Swiss bank for a maximum of 15 million CHF based on a margin not higher than 30% of the securities deposited with the bank. The actual amount available is dependent on the value of the collateral held after a safety margin established by the bank. It may be used as an overdraft or for payment obligations arising from securities transactions. At December 31, 2000 $9.5 million CHF (approximately $5.9 million US dollars) is outstanding bearing interest at approximately 5.6%.