(1) presenting Sequoia Insurance Company and two businesses sold by HyperFeed Technologies, Inc. as discontinued operations. See Note 2 of Notes to Consolidated Financial Statements, "Discontinued Operations"; and
(2) presenting HyperFeed Technologies, Inc. as a separate segment beginning May 15, 2003. See Note 4 of Notes To Consolidated Financial Statements, "Consolidation of HyperFeed Technologies, Inc."
Based on figures prepared by the Nevada State Demographer, in the year ended July 2003, the population of Clark County, Nevada, which includes metropolitan Las Vegas, increased 4.6% to more than 1.6 million residents. Around 70,000 people are moving to the area annually. Currently Las Vegas takes most of its water supply from Lake Mead. Due to the continued growth in demand for water and 5 years of drought, the level of Lake Mead has reached 50 year lows. Accordingly, Las Vegas is aggressively seeking to conserve water (e.g., rules have been introduced restricting water use in new homes) and to diversify its sources of water supply. At the same time, the increasing cost of housing in Las Vegas is leading to more rapid growth in outlying areas within commuting distance.
Over time, we believe that these factors will lead to demand for water in parts of southern Nevada where Vidler owns or has an interest in water rights, including Sandy Valley and Muddy River in Clark County, and southern Lincoln County. If growth management initiatives are introduced in Las Vegas, these will lead to even more rapid growth in the areas surrounding metropolitan Las Vegas.
The Arizona State Legislature has passed several pieces of legislation which recognize the Harquahala Valley ground water as a future municipal supply for the greater Phoenix metropolitan area. 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 were moving into the Basin, legislation was enacted in 2000 placing 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.
- - in March 2001, Vidler sold 6,496.5 acre-feet of water rights and 2,589 acres of land to an industrial user, for $9.4 million;
- - in May 2002, Vidler sold 480 acre-feet of water rights and 240 acres of land to an industrial user, for $1 million.
Vidler is working on further sales of Harquahala Valley ground water to both industrial users and communities and developers in the greater Phoenix metropolitan area who need to secure further water to support expected growth.
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 maximize the value of.
Nevada is the state experiencing the most rapid population growth and new home construction in the United States. The population is concentrated in southern Nevada, which includes the Las Vegas metropolitan area.
The water rights awarded to Vidler are the only known water to support future growth in Sandy Valley and surrounding areas in southwestern Nevada near the California state line, including Primm, Nevada. Primm is a resort town on the border between California and Nevada, in the Interstate 15 corridor. Primm requires additional water to support future growth, which could result from expansion of the existing hotel/casino and retail/commercial operations.
In October 2002, the Regional Water Planning Committee accepted the North Valley Water Supply Comparison report. This study re-evaluated the feasibility and potential cost of supplying future North Valley's water demands with continued exportation of water from the Truckee River Basin, or, alternatively, meeting the demands from Fish Springs and two other basins. The study indicated that ground water from Fish Springs would be the most economical source of supply. Alternatively, if the capacity of nearby transmission lines can be expanded, we believe that Fish Springs Ranch would be an attractive site for gas-fired electricity generation.
In December 2003, Vidler closed on the sale of approximately 37,500 acres of deeded ranch land and the related water rights at Big Springs Ranch for $2.8 million. The ranch land was located approximately 65 miles east of Elko, in northeastern Nevada.
In December 2003, in a separate but related transaction, Vidler closed on the sale of approximately 6,500 acres of developable land near West Wendover, Nevada for $12 million. West Wendover is adjacent to the Nevada/Utah border in the Interstate 80 corridor. The land at West Wendover was acquired in 1999 through a land exchange with the Bureau of Land Management, under which Vidler gave up approximately 70,500 acres of ranch land at Big Springs Ranch in return for the parcels of developable land.
The assets at Big Springs Ranch and West Wendover were different in nature from Vidler's remaining assets in Arizona and Nevada, in that the land comprised the bulk of the value of Big Springs Ranch and West Wendover, with the water rights being a lesser component.
- - in 2000, Vidler closed on the sale of various water rights and related assets to the City of Golden, Colorado for $1 million, and granted the City options to acquire other water rights over the next 15 years. The City exercised options to acquire water assets for $390,000 in 2001, $145,000 in 2002, and $146,000 in 2003. If the remaining options are exercised, the present value of the aggregate purchase price is approximately $1 million;
Vidler has the only permitted, complete private water storage facility in Arizona. Given that Arizona is the only southwestern state with surplus flows of water available for storage, we believe that Vidler's is the only private water storage facility where it is practical to "bank," or store, water for users in other states, which is known as "interstate banking." Having a permitted water storage facility also allows Vidler to acquire, and store, surplus water for re-sale in future years.
Vidler is able to provide storage for users located both within Arizona and out-of-state. Potential users include industrial companies, developers, and local governmental political subdivisions in Arizona, and out-of-state users such as municipalities and water agencies in Nevada and California. The Arizona Water Banking Authority ("AWBA") has the responsibility for intrastate and interstate storage of water for governmental entities.
The Southern Nevada Water Authority Water Resource Plan, which can be viewed at www.snwa.com, calls for 1.25 million acre-feet of water to be stored in Arizona in order to meet forecast demand. The AWBA is currently finalizing agreements to store water on behalf of Nevada. Once these agreements have been concluded, the AWBA can begin to negotiate storage for California. The AWBA will be able to store water at existing publicly owned sites and at the Vidler Arizona Recharge Facility, which is one of the largest water storage facilities. Under the current agreement, which expires in 2004, Vidler has agreed on a price of $48.00 per acre-foot of water recharged for users represented by the AWBA.
Once Vidler has concluded agreements to store water, it will know the rate at which customers will 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 users of the facility will bear the capital cost of the improvements required to recover water at commercial rates.
Vidler originally had an 18.5% right to participate in the Semitropic Water Banking and Exchange Program, which operates a 1,000,000 acre-foot water storage facility at Semitropic, near the California Aqueduct, northwest of Bakersfield, California.
Vidler's remaining interest includes approximately 30,000 acre-feet of storage capacity. We have the guaranteed right to recover a minimum of approximately 2,700 acre-feet every year. In some circumstances, we have the right to recover up to approximately 6,800 acre-feet in any one year. We are considering various alternatives for the remaining interest, including sale to developers or industrial users. Currently Vidler is not storing any water at Semitropic for third parties. Vidler is required to make annual payments of $519,000 under its agreement with Semitropic Water Storage District.
After adjusting for HyperFeed's 1:10 reverse stock split in August 2003, PICO holds warrants to buy approximately 310,616 shares of HyperFeed common stock at an average price of $15.75 per share, exercisable by April 2005. At December 31, 2003, the price of HyperFeed's common stock was $6.14, and the warrants were carried at estimated fair value of $556,000.
PICO owns 130,577 shares of Jungfraubahn, which represents approximately 22.4% of that company. At December 31, 2003, the market (carrying) value of our holding was $26.7 million.
In September 2002, we increased our holding to 22.3% of Jungfraubahn, and became the largest shareholder in that company. Despite the increase in our shareholding to more than 20%, we continue to account for this investment under SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities." At this time, we do not believe that we have the requisite ability to exercise "significant influence" over the financial and operating policies of Jungfraubahn, and therefore do not apply the equity method of accounting.
In February 2004, Jungfraubahn issued a press release containing an initial review of 2003 operations, using Swiss accounting principles. The full text is available on Jungfraubahn's website www.jungfraubahn.com. The contents of Jungfraubahn's website are not incorporated in this 10-K.
In the most recent published balance sheet -- December 31, 2002 -- Jungfraubahn had shareholders' equity of CHF 302 million, or approximately CHF 517.5 (US$374.70) book value per share. At December 31, 2003, Jungfraubahn's stock price was CHF 254 (US$ 204.80). At December 31, 2002, Jungfraubahn's stock price was CHF 255 (US$ 184.64).
During 2003, the market price of Raetia stock increased by 83.8% in Swiss francs, and the carrying value of our holding appreciated by $5.8 million, or almost 105%, in U.S. dollars. We first purchased this stock in 1997, and increased our holding in 1998, 2002, and 2003. Over the life of the investment so far, we have generated a total return (i.e., realized and unrealized gains, plus dividends received in U.S. dollars) upwards of 225%.
PICO has acquired 8,125 shares in Accu Holding for $5 million, which represents a voting ownership interest of approximately 28.3%. Due to a number of factors, we do not have the ability to exercise significant influence over Accu Holding's activities, so the investment is carried at market value under SFAS No. 115.
In 2000 and 2001, we acquired approximately 10.6% of SIHL for $4 million, through participation in a restructuring/capital raising and open market purchases. Our investment in SIHL is accounted for under SFAS No. 115.
At the time, SIHL's core business was digital imaging, but the company had surplus property assets in and around Zurich, including a major development project known as Sihlcity. SIHL's operations were adversely affected by the economic downturn in late 2001 and 2002, and SIHL was unable to improve profitability and reduce debt as previously expected. In 2003, SIHL sold its core business, and announced a debt restructuring with its banks which assures the shareholders of a return in certain circumstances.
Given the extent and duration of the decline in the market price of Accu stock, we determined that the decline in Accu's market value is also other-than-temporary. Accordingly, we recorded pre-tax charges for other-than-temporary impairment of our holding in Accu of $2.2 million in 2002, and $823,000 in the first nine months of 2003. These charges were recorded as realized losses and reduced the basis of the investment. At December 31, 2003, the holding had a market (carrying) value of $ 3.1 million (CHF 3.9 million).
Typically, most of the revenues of an insurance company in "run off" come from investment income (i.e., interest from fixed-income securities and dividends from stocks) earned on funds held as part of their insurance business. In addition, from time to time, gains or losses are realized from the sale of investments.
In broad terms, Physicians and Citation hold cash and fixed-income securities corresponding to their loss reserves, and the excess is invested in value stocks in the U.S. and selected foreign markets.
The equities component of the insurance company portfolios is concentrated on a limited number of asset-rich small-capitalization value stocks in the U.S. These positions have been accumulated at a significant discount to our estimate of the private market value of each company's underlying "hard" assets (i.e., land and other tangible assets). The insurance company portfolios also have a degree of international diversification through holdings of small-capitalization value stocks in New Zealand and Australia, and selected large-capitalization resource stocks with world class mining operations in foreign countries. Dividends and realized gains or losses from stocks held in the insurance company portfolios are reported in the Insurance Operations in Run Off segment.
In 2003, we estimate that the total return on the fixed-income securities and unaffiliated common stocks in Citation's portfolio was approximately 19.6%, including better than 40% for the stocks component (40.7% of the portfolio at December 31, 2003.) We estimate that the total return on the fixed-income securities and unaffiliated common stocks in Physicians' portfolio was approximately 21.5% in 2003, including better than 39% for the stocks component (53.7% of the portfolio at December 31, 2003.)
By its nature, medical professional liability insurance involves a relatively small number (frequency) of relatively large (severity) claims. We have purchased excess of loss reinsurance to limit our potential losses. The amount of risk we have retained on each claim varies depending on the accident year but, in general, we are liable for the first $1 million to $2 million per claim.
PHYSICIANS INSURANCE COMPANY OF OHIO -- LOSS AND LOSS ADJUSTMENT EXPENSE RESERVES
At December 31, 2003, approximately $7.8 million, or 33% of our direct reserves were case reserves, which are the loss reserves established when a claim is reported to us. Our provision for incurred but not reported claims ("IBNR" i.e., the event giving rise to the claim has allegedly occurred, but the claim has not been reported to us) were $9.9 million, or 42% of our direct reserves. The loss adjustment expense reserves, totaling $5.9 million, or 25% of direct reserves, recognize the cost of handling claims over the next 13 years while the Physicians loss reserves run off.
During 2003, our medical professional liability insurance claims reserves, net of reinsurance, decreased by $10.7 million, from $30.3 million to $19.6 million. Claims and loss adjustment expense payments for the year were approximately $4 million, accounting for 37% of the net decrease in reserves. During 2003, Physicians continued to experience favorable trends in the "severity" (size) of claims, and, to a lesser extent, the "frequency" (number) of claims. Consequently, independent actuarial analysis of Physicians' loss reserves concluded that Physicians' reserves against claims were significantly greater than the actuary's projections of future claims payments. Reserves were reduced in all of Physicians' 20 accident years from 1976 until 1996, resulting in a net reduction of approximately $6.7 million, or 22.1% of reserves at the start of the year.
There were no changes in key actuarial assumption in 2003. It should be noted that such actuarial analyses involves estimation of future trends in many factors which may vary significantly from expectation, which could lead to further reserve adjustments -- either increases or decreases -- in future years. See "Critical Accounting Policies" and "Risk Factors."
During 2002, our medical professional liability insurance claims reserves, net of reinsurance, decreased $3.6 million, from $34.9 million to $30.3 million. Loss and loss adjustment expense payments for the year were approximately $3.6 million, accounting for 78% of the net decrease in reserves during 2002. Due to continued favorable trends in the "severity" (size) of claims, and, to a lesser extent, the "frequency" (number) of claims, independent actuarial analysis of Physicians' loss reserves concluded that Physicians' reserves against claims were greater than the actuary's projections of future claims payments. Reserves were increased in 10 of Physicians' 20 accident years from 1976 until 1996 (by $3.4 million), and reduced in the other 10 accident years (by $4.4 million),
During 2001, our medical professional liability insurance claims reserves, net of reinsurance, decreased $16.7 million, from $51.6 million to $34.9 million. Loss and loss adjustment expense payments for the year were $6.1 million, accounting for 36% of the net decrease in reserves during 2001. Actuarial analysis of Physicians' loss reserves concluded that Physicians' reserves against claims were significantly greater than the actuary's projections of future claims payments in 18 of 20 accident years, due to favorable trends in both the "frequency" and "severity" of claims. Consequently, Physicians reduced its reserve for IBNR claims by approximately $10.6 million, which accounted for the remaining 64% of the net decrease in reserves for the year.
There was a change in a key actuarial assumption in 2001: when estimating the reserves required for losses greater than $200,000 per claim, the independent actuary began to use Physicians' own claims experience, rather than industry averages. Since Physicians' own experience had been less severe than the industry averages, the actuary reduced the reserves required for losses in excess of $200,000 per claim, which contributed to the reduction in reserves. In reaching the best estimate, the appointed actuary also took note of both a decrease in the number of open claims, and favorable development in known claims during 2001.
Citation went into "run off" from January 1, 2001. At December 31, 2003, after three years of "run off," Citation had $13.3 million in property and casualty insurance loss and loss adjustment expense reserves, after reinsurance.
Approximately 97% of Citation's net property and casualty insurance reserves are related to one line of business, artisans/contractors liability insurance. The remaining 3% is comprised of commercial property and casualty insurance policies all of which expired in 2001. As a general rule, based on state statutes of limitations, we believe that no new commercial property and casualty insurance claims can be filed in California and Arizona. However, in certain limited circumstances, claims filing periods may be extended.
Citation wrote artisans/contractors insurance until 1995, the year before Physicians merged with Citation's parent company. No artisans/contractors business was renewed after the merger. Artisans/contractors liability insurance has been a problematic line of business for all insurers who offered this type of coverage in California during the 1980's and 1990's. California experienced a severe recession in the early 1990's, which caused a steep downturn in real estate values. In an attempt to improve their position, many homeowners filed claims against developers of new home communities and condominiums, and related parties such as general contractors, 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%. The nature of this line of business is that we receive a large number (high frequency) of small (low severity) claims.
Citation primarily insured subcontractors, and only rarely insured general contractors. A large percentage of the claims received in 2002 and 2003 related to Additional Insured Endorsements ("AIE"). In general, these represent claims from general contractors who were not direct policyholders of Citation's, but were named as insureds on policies issued to Citation's subcontractor policyholders. Most of Citation's subcontractor insureds are not initially named as defendants in construction defect law suits, but are drawn into litigation against general contractors, typically when the general contractor's legal expenses reach the limit of their own insurance policy. The courts have held that subcontractors who performed only a minor role in the construction can be held in on complicated litigation against general contractors. Accordingly, the cost of legal defenses can be as significant as claims payments. Typically, AEI claims are shared among more than one subcontractor and more than one insurance carrier. This reduces the expense to any one carrier, so AEI claims typically involve smaller claims payments than claims from actual policyholders.
Although Citation wrote its last artisans/contractors policy in 1995 and the statute of limitations in California is 10 years, this can be extended in some situations.
Due to the long "tail" (i.e., period between the occurrence of the alleged event giving rise to the claim and the claim being reported to us) in the artisans/contractors line of business, it is difficult to accurately quantify future claims liabilities and establish appropriate loss reserves. Our loss reserves are reviewed at September 30 and December 31 of each year by an independent actuary who issues an opinion annually, as required by California state law. The independent actuary analyzes past, current, and projected claims trends for all active accident years, using several forecasting methods. The appointed actuary believes this will result in more accurate reserve estimates than using a single method. We typically book our reserves to the actuary's best estimate, or above the actuary's best estimate.
Changes in assumptions about future claim trends and the cost of handling claims can lead to significant increases and decreases in our loss property and casualty reserves. Due to the large number of claims received in the artisans/contractors line of business in 1997, 1998, and 1999, Citation was forced to increase its reserves in each of those years. Citation reduced claims reserves (net of reinsurance) by $282,000 in 2000, but increased reserves by $56,000 in 2001. In both cases, the reserve changes were less than 1% of beginning reserves. In 2002, primarily due to reduced severity of claims as described in preceding paragraphs, Citation reduced reserves by $889,000, representing a 4.6% change in beginning reserves. However, in 2003 Citation increased reserves by $847,000, or 5.8% of beginning reserves, primarily due to the increased number of new claims received (higher frequency).
At December 31, 2003, Citation's net property and casualty reserves were carried at $13.3 million, approximately $295,000 more than the actuary's best estimate. Given the uncertainties inherent in projecting trends in loss development, we elected to set higher reserves than the actuary's best estimate, to partially guard against unexpected reserve increases in future years if claims experience deteriorates.
It should be noted that such actuarial analyses involves estimation of future trends in many factors which may vary significantly from expectation, which could lead to further reserve adjustments -- either increases or decreases - -- in future years.
Until 1997, Citation was a direct writer of workers' compensation insurance in California, Arizona, and Nevada. In 1997, Citation reinsured 100% of its workers' compensation business with a subsidiary, Citation National Insurance Company ("CNIC"), and sold CNIC to Fremont Indemnity Company ("Fremont"). As part of the sale of CNIC, all assets and liabilities, including the assets which corresponded to the workers' compensation reserves reinsured with CNIC, and all records, computer systems, policy files, and reinsurance arrangements were transferred to Fremont. Fremont merged CNIC into Fremont, and administered and paid all of the workers' compensation claims which it had been sold to it. Since 1997, Citation has booked the losses reported by Fremont but recorded an equal and offsetting reinsurance recoverable from Fremont (as an admitted reinsurer) for all losses and loss adjustment expenses. This resulted in no net impact on Citation's reserves and financial statements.
Workers' compensation has been a problematic line of business for all insurers who offered this type of coverage in California during the 1990's. We believe that this is primarily due to claims costs escalating at a greater than anticipated rate, in particular for medical care.
The nature of this line of business is that we receive a relatively small number (low frequency) of relatively large (high severity) claims. Although the last of Citation's workers' compensation policies expired in 1998, new workers' compensation claims can still be filed for events which allegedly occurred during the term of the policy. The state statute of limitations is 10 years, but claims filing periods may be extended in some circumstances. At December 31, 2003, Citation had 227 open workers' compensation claims. Few
new claims have been filed in the past 3 years. Since Citation ceased writing workers' compensation coverage 6 years ago, most of the claims which are still open tend to be severe, and likely to lead to claims payments for a prolonged period of time.
- - the long "tail" (i.e., period between the occurrence of the alleged event giving rise to the claim and the claim being reported to us); and
During 2003, HyperFeed continued to restructure operations, which culminated in the sale of two business units:
- - in June 2003, HyperFeed sold its retail trading business, PCQuote.com, for approximately $370,000; and
Now, HyperFeed is purely a developer and provider of software, ticker plant technologies, and managed services to the financial markets industry. In a November 13, 2003 press release, HyperFeed indicated that it expects to generate long-term revenues from providing products and services to customers such as the Chicago Board Options Exchange, Moneyline Telerate, and Interactive Data Corporation. The release also indicated that, following the disposals HyperFeed "expects to realize an $8.0 million annual reduction in overhead." At December 31, 2003, HyperFeed had $4.7 million in cash and cash equivalents.
- - Vidler and Nevada Land's land, water rights, and water storage operations;
- - the "run off" of property and casualty insurance, workers' compensation, and medical professional liability insurance loss reserves; and
there was a $1 million net reduction in claims reserves, and in 2001 we reduced claims reserves by $10.6 million. There can be no assurance that our claims reserves are adequate and that there will not be reserve increases or decreases in the future.
As required by California insurance law, Citation's loss reserves are reviewed quarterly, and certified annually, by an independent actuarial firm.
In addition, we have to make judgments about the recoverability of reinsurance owed to us on direct claims reserves. In making this assessment, we carefully review the creditworthiness of reinsurers, as well as relying on schedules in statutory filings with state Departments of Insurance which show separate deposits held as assets for the benefit of reinsureds.
As discussed on preceding pages in the "Insurance Operations in Run Off" section of Item 7, during 2003 we booked a reversal of reinsurance recoverable of approximately $7.5 million from Fremont Indemnity Company, as it is uncertain whether we can recover the corresponding deposit assets in the Fremont liquidation. If we cannot reach a satisfactory resolution, we plan to take legal action against the California Department of Insurance, as we believe that we have very strong arguments which could enable us to recover the deposit assets. However, for accounting purposes, due to the inherent uncertainties in attempting to recover the deposit assets in this situation, we have adopted a prudent policy, consistent with the principles of our accounting policies, and fully reserved against the reinsurance recoverable from Fremont related to the workers' compensation claims reserves.
See "Insurance Operations In Run Off" and "Regulatory Insurance Disclosure" in Item 7.
Our principal long-lived assets are land, water rights, and interests in water storage operations owned by Vidler, and land at Nevada Land. At December 31, 2003, the total carrying value of land, water rights, and interests in water storage assets was $112.3 million, or 33.9% of PICO's total assets.
As required by GAAP, our long-lived assets are reviewed regularly to ensure that the estimated future undiscounted cash flows from these assets will at least recover their carrying value. Our management conducts these reviews utilizing the most recent information available; however, the review process inevitably involves the significant use of estimates and assumptions, especially the estimated market values of our real estate and water assets.
If we determine that the carrying value of an asset cannot be justified by the forecast future cash flows of that asset, the carrying value of the asset is written down to fair value immediately,in accordance with Statement of Financial Accounting Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets."
At December 31, 2003, PICO and its subsidiaries held equities with a carrying value of approximately $96.3 million. These holdings are primarily small-capitalization value stocks listed in the U.S., Switzerland, Australia, and New Zealand. Depending on the circumstances, and our judgment about the level of our involvement with the investee company, we apply one of two accounting policies.
In the case of most holdings, we apply Statement of Financial Accounting Standards ("SFAS") No. 115, "Accounting for Certain Investments in Debt and Equity Securities." Under this method, the investment is carried at market value in our balance sheet, with unrealized gains or losses being included in shareholders' equity, and the only income recorded being from dividends.
The application of the equity method (APB No. 18) to an investment may result in a different outcome in our financial statements than market value accounting (SFAS No. 115). The most significant difference between the two policies is that, under the equity method, we include our proportionate share of the investee's earnings or losses in our statement of operations, and dividends received are used to reduce the carrying value of the investment in our balance sheet. Under market value accounting, the only income recorded is from dividends.
The use of market value accounting or the equity method can result in significantly different carrying values at specific balance sheet dates, and contributions to our statement of operations in any individual year during the course of the investment. The total impact of the investment on PICO's shareholders' equity over the entire life of the investment will be the same whichever method is adopted.
For equity and debt securities accounted for under SFAS No. 115 which are in an unrealized loss position in local currency terms, we regularly review whether the decline in market value is other-than-temporary. In general, this review requires management to consider several factors, including specific adverse conditions affecting the investee's business and industry, the financial condition of the investee, the long-term prospects of the investee, and the extent and duration of the decline in market value of the investee. Accordingly, management has to make important assumptions regarding our intent and ability to hold the security, and our assessment of the overall worth of the security. Risks and uncertainties in our methodology for reviewing unrealized losses for other-than-temporary declines include our judgments regarding the overall worth of the issuer and its long-term prospects, and our ability to realize on our assessment of the overall worth of the business.
In a subsequent quarterly review, if we conclude that an unrealized loss previously determined to be temporary is other-than-temporary, an impairment loss will be recorded. The other-than-temporary impairment charge will have no impact on shareholders' equity or book value per share, as the decline in market value will already have been recorded through shareholders' equity. However, there will be an impact on income before and after tax and on our reported earnings per share, due to recognition of the unrealized loss and related tax effects. When a charge for other-than-temporary impairment is recorded, our basis in the security is decreased. Consequently, if the market value of the security later recovers and we sell the security, a correspondingly greater gain will be recorded in the statement of operations.
We recognize revenue on the sale of land, water, and water rights based on the guidance of FASB 66. Specifically we recognize revenue when:
(d) the buyer's initial and continuing investment are sufficient to demonstrate a commitment to pay for the property.
At December 31, 2003, PICO had shareholders' equity of $229.2 million ($18.52 per share), compared to $221 million ($17.86 per share) at the end of 2002, and $207.9 million ($16.81 per share) at the end of 2001. Book value per share increased 3.7% in 2003, and 6.2% in 2002.
The most notable change on the asset side of the balance sheet is an increase in equity securities from $47.4 million at December 31, 2002, to $96.3 million at December 31, 2003. If the equity securities held by Sequoia (which were transferred to Physicians as part of the sale of Sequoia) are included in the 2002 total, equity securities increased from $60.8 million to $96.3 million during 2003. Approximately 65% of the $35.5 million adjusted year over year increase is attributable to an increase in the market value of equity securities during 2003, and the balance is due to net additions to the stock portfolios (i.e., new purchases less sales.)
As discussed in the preceding Insurance Operations In Run Off section of Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations," the unpaid losses and loss adjustment expenses of continuing operations increased by $8.2 million year over year. The net increase was primarily due to the reversal of the Fremont reinsurance recoverable and adverse development in Citation's property and casualty insurance claims reserves and workers' compensation reserves, which more than offset reductions in reserves due to favorable development at Physicians and claims payments during 2003.
At December 31, 2003, on a consolidated basis, available for sale equity securities showed a net unrealized gain of $20.1 million after tax. This total consists of approximately $20.3 million in gains, partially offset by $192,000 in losses. No individual equity security had an unrealized loss, net of tax, of more than $95,000.
The net loss of $3.2 million, or $0.26 per share, consisted of:
- - a $13.9 million loss before taxes and minority interest from continuing operations; and
- - the deduction of $1 million in minority interest, which reflects the interest of outside shareholders in the net income of subsidiaries which are less than 100%-owned by PICO; partially offset by
- - income from discontinued operations of $10.5 million after tax.
The $1.2 million tax benefit for 2003 consists of several items, which are detailed in Note 7 of Notes to the Consolidated Financial Statements, "Federal, Foreign and State Income Tax."
The $5.9 million net income reported in 2002 consisted of $3.9 million net income before a change in accounting principle, or $0.32 per share, and a change in accounting principle which increased income by $2 million after-tax, or $0.16 per share. From January 1, 2002, PICO adopted Statement of Financial Accounting Standards No. 142, "Goodwill and Intangible Assets," which requires that goodwill and intangible assets with indefinite lives be tested for impairment annually rather than amortized over time. The $2 million in net income recognized reflected the surplus of negative goodwill arising from the 1996 reverse merger of Physicians
The $3.9 million in net income before a change in accounting principle was comprised of:
- - income from discontinued operations of $2.8 million after tax and a change in accounting principle.
In 2001, PICO generated $5.1 million in net income, consisting of $6.1 million in net income before a change in accounting principle, or $0.49 per share, and a change in accounting principle which reduced income by $981,000 after-tax, or $0.08 per share. The change in accounting principle resulted from the adoption of the Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities." This non-cash charge recognized the accumulated after-tax decline in the estimated fair value of warrants we own to buy shares in other companies (principally HyperFeed) from the date we acquired the warrants through to January 1, 2001.
- - $5.8 million in income before taxes and minority interest;
- - comprehensive income of $13 million in 2002, primarily consisting of the $5.9 million net income and movements of $4.5 million in net unrealized appreciation in investments and $2.6 million in foreign currency translation; and
The principal items in the $13.9 million loss before taxes and minority interest in 2003 were:
- - Vidler incurred a $543,000 loss on $16.8 million in revenues. Vidler closed on two significant sales of land and related assets in Nevada, which generated $14.8 million in revenues and $4.6 million in gross margin. The gross margin on these land sales was more than offset by Vidler's on-going operating expenses and the costs of developing water assets which will not be monetized until future years;
- - income of $2 million from Nevada Land on revenues of $5.9 million, which included $4.4 million from the sale of land and water rights;
- - an $8.1 million loss from Business Acquisitions and Financing. This primarily represented $1.7 million in gains on the sale of two stocks, which was more than offset by segment expenses, including a $6 million charge from the PICO Holdings, Inc. SAR Program, which replaced the previous option programs;
- - a $2.9 million loss from Insurance Operations in Run Off, consisting of an $7.3 million profit from Physicians and a $10.2 million loss from Citation; and
Since we entered the water resource business, the water rights and water storage operations acquired by Vidler have been development-stage assets, which were not ready for immediate commercial use. Although Vidler began to generate significant revenues from the sale of water rights in 2001, the segment is still incurring costs related to long-lived assets which will not generate revenues until future years, e.g., operating, maintenance, and amortization expenses at storage facilities which are not yet storing water for customers.
- - the sale of 29.7% of Vidler's original interest in the Semitropic Water Banking and Exchange Program (i.e., approximately 55,000 acre-feet of storage capacity, out of the original 185,000 acre-feet) for $3.3 million. This transaction added $1.6 million to revenues and to gross margin; and
Other Revenues include lease income from water rights in Colorado, interest, and various revenues from properties farmed by Vidler (e.g., sales of hay and cattle). In 2001, Other Revenues included a $600,000 gain from granting an easement to El Paso Natural Gas Company in the Harquahala Valley.
Total segment expenses, including the cost of water rights and other assets sold, increased from $13 million in 2001, to $14.7 million in 2002, and $17.4 million in 2003. However, excluding the cost of water rights and other assets sold and related selling costs, segment operating expenses were $5.6 million in 2001, $5.7 million in 2002, and $6.1 million in 2003.
The 2003 segment loss was $354,000 less than in 2002. The narrower loss resulted from a $940,000 increase in the gross margin from the sale of land and water rights, which was partially offset by a $203,000 decrease in other revenues and a $383,000 increase in all other expenses.
Interest and other revenues contributed $803,000 in 2003, compared to $580,000 in 2002, and $596,000 in 2001.
Nevada Land recorded income of $2 million in 2003, compared to $484,000 in 2002 and $131,000 in 2001.
The Business Acquisitions and Financing segment recorded revenues of $5.5 million in 2003, compared to $8.5 million in 2002, and negative $3.7 million in 2001. Revenues in this segment vary considerably from year to year, primarily due to fluctuations in net realized gains or losses on the sale or impairment of holdings. We do not sell holdings on a regular basis. A holding may be sold if the price of a 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. In addition, in this segment various income items relate to investments held during that period, and since investments change over time, comparability from year to year is limited.
We regularly review any securities in which we have an unrealized loss. If we determine that the decline in market value is other-than-temporary, under GAAP we record a charge to reduce the basis of the security from its original cost to current carrying value, which is usually the market price at the balance sheet date when the provision is recorded. The determination is based on various factors, including the extent and the duration of the unrealized loss. A charge for other-than-temporary impairment is a non-cash charge, which is recorded as a realized loss.
- - charges for other-than-temporary impairments do not affect book value per share, as the after-tax decline in the market value of investments carried under SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities," is already reflected in shareholders equity in our balance sheet; and
- - a $1.6 million charge for other-than-temporary impairment of our investment in SIHL;
- - a $2.2 million charge for other-than-temporary impairment of our investment in Accu Holding;
In addition, income of $402,000 was recorded under SFAS No. 133, primarily consisting of income of $900,000 from AOG options, which was partially offset by a $410,000 reduction in the estimated fair value of HyperFeed warrants.
In 2001, a $6 million net realized investment loss was recorded. This consisted of charges of $3 million for other-than-temporary impairment of our holdings in SIHL and Solpower, a $2.5 million loss under SFAS No. 133 reflecting a decrease in the value of warrants during 2001, and a $500,000 write-off of the remaining carrying value of the loan to MKG Enterprises. In addition, although this did not affect the segment, a cumulative effect of a change in accounting principle reduced income by $981,000 to reflect the after-tax decline in the estimated fair value of warrants during the period from the acquisition of the various warrants through to December 31, 2000.
PICO's equity share of investees' income (loss) represents our proportionate share of the net income (loss) and other events affecting equity in the investments which we carry under the equity method, less any dividends received from those investments. Our equity share of investees' losses, principally HyperFeed, was $565,000 in 2003, $2.2 million in 2002, and $1.5 million in 2001.
In 2003, the segment loss consists of the $2.2 million net realized investment gains, investment income of $2.1 million, and other revenues of $1.3 million, which were more than offset by the $565,000 equity share of investees' losses and segment expenses of $13.1 million. Segment expenses include $6 million related to the PICO Holdings, Inc. 2003 Stock Appreciation Rights ("SAR") Program, the accrual of $1.3 million in incentive compensation, other parent company overhead of $6.6 million, and $1.5 million in
Our interests in Swiss public companies are held by Global Equity SA, a wholly owned subsidiary which is incorporated in Switzerland. Part of Global Equity SA's funding comes from a loan from PICO, which is denominated in Swiss Francs. During accounting periods when the Swiss Franc appreciates relative to the US dollar -- such as 2002 and 2003 -- under GAAP we are required to record a benefit through the statement of operations to reflect the fact that Global Equity SA owes PICO more US dollars. In Global Equity SA's financial statements, an equivalent debit is included in the foreign currency translation component of shareholders' equity (since it owes PICO more dollars); however, this does not go through the statement of operations. During accounting periods when the Swiss Franc depreciates relative to the US dollar, opposite entries are made and an expense is recorded in the statement of operations. Accordingly, we were required to record a benefit of $2.3 million in our statement of operations in 2003, even though there was no net impact on shareholders' equity.
In 2002, the segment loss consists of the $3.8 million in net realized investment gains, investment income of $2.5 million and other revenues of $2.1 million, which were more than offset by the $2.2 million equity share of investees' losses and segment expenses of $7.4 million. Segment expenses include the accrual of $2 million in incentive compensation, other parent company overhead of $4.6 million, and SISCOM expenses of $1.4 million. Segment expenses were reduced by a $2.7 million benefit resulting from the effect of appreciation in the Swiss Franc on an inter-company loan during 2002.
Once an insurance company has gone into run off and the last of its policies has expired, typically most revenues will come from investment income. However, even when an insurance company is in "run off," earned premium can arise. For example, with "swing rated" reinsurance, the reinsurance premiums we pay are recalculated based on actual loss experience (i.e., the number and size of claims). Under GAAP, if we are required to pay for additional reinsurance this is recorded as a reduction in the earned premium line, while a reduction in the amount of reinsurance we need to pay is recorded as an increase in earned premiums.
Physicians recorded earned premiums of $382,000 in 2002 and $755,000 in 2001, representing a reduction in the amount of reinsurance that we need to pay on "swing rated" contracts. The reduced reinsurance requirement resulted from the reduction in IBNR reserves.
In 2003, Physicians recorded a $5.9 million underwriting recovery. The $6.7 million net reduction in reserves more than offset regular loss and loss adjustment expense and operating expenses of $876,000 for the year. The changes in reserves are more fully explained in the Physicians section of the "Company Summary, Recent Developments, and Future Outlook" portion of Item 7.
In 2003, Citation generated total revenues of $1.8 million, primarily consisting of $1.3 million in investment income and net realized investment gains of $478,000. Underwriting expenses totaled $12 million, including the $7.5 million reversal of the reinsurance recoverable from Fremont related to the workers' compensation book of business. Underwriting expenses also included increases in reserves of $3 million in workers' compensation, and $847,000 in property and casualty insurance, due to unfavorable development. As a result of these factors, Citation incurred a loss of $10.2 million before taxes for 2003.
In 2001, Citation's revenues included investment income of $2.3 million, earned premiums of $225,000, and negative goodwill amortization of $568,000 (explained in the following paragraph). The $225,000 in earned premiums represents the final premiums earned from the policies on Citation's books when the company went into "run off." After expenses of $570,000, Citation earned income of $2.9 million before taxes for 2001. In 2001, an expense of $56,000 was recorded for development in prior year loss reserves.
When Citation Insurance Group acquired Physicians in the reverse merger in 1996, a $5.7 million negative goodwill item arose because the fair value of the assets acquired (i.e., Physicians) exceeded the cost of the investment (i.e., the fair value of the shares in Citation issued to Physicians shareholders). The negative goodwill was being recognized as income over a period of 10 years in this segment. On January 1, 2002, PICO adopted Statement of Financial Accounting Standards No. 142, "Goodwill and Intangible Assets," which requires that goodwill and intangible assets with indefinite lives be tested for impairment annually rather than amortized over time. As a result of adopting this standard, the remaining negative goodwill of approximately $2.8 million was recognized as an extraordinary gain in 2002. See Note 1 of Notes to Consolidated Financial Statements, "Nature of Operations and Significant Accounting Policies."
For more detail, please refer to HyperFeed's Annual Report on Form 10-K, which will be filed with the SEC on or before March 15, 2004. The contents of HyperFeed's 10-K are not incorporated into this 10-K.
PICO also recorded a $443,000 after-tax gain from the sale of Sequoia in 2003, which forms part of the "Gain on disposal of discontinued operations, net" line in the Consolidated Statement of Operations for 2003.
LIQUIDITY AND CAPITAL RESOURCES -- YEARS ENDED DECEMBER 31, 2003, 2002, AND 2001
Our cash flow position fluctuates depending on the requirements of our operating subsidiaries for capital, and activity in our insurance company investment portfolios. Our primary sources of funds include cash balances, cash flow from operations, the sale of holdings, and -- potentially -- the proceeds of borrowings or offerings of equity and debt. We endeavor to ensure that funds are always available to take advantage of new acquisition opportunities.
- - As commercial use of Vidler's water assets increases, we expect that Vidler will generate free cash flow as receipts from leasing water or storage capacity, and the proceeds from selling land and water rights, begin to overtake maintenance capital expenditure, financing costs, and operating expenses. As water lease and storage contracts are signed, we anticipate that Vidler may be able to monetize some of the contractual revenue streams, which could potentially provide another source of funds;
- - Nevada Land is actively selling land which has reached its highest and best use, and is not part of PICO's long-term utilization plan for the property. Nevada Land's principal sources of cash flow are the proceeds of cash sales, and collections of principal and interest on sales contracts where Nevada Land has provided vendor financing. These receipts and other revenues exceed Nevada Land's operating costs, so Nevada Land is generating strong positive cash flow;
- - At this stage of its "run off", investment income more than covers Citation's operating expenses. The funds required to pay claims are coming from the sale or maturity of fixed-income investments in the Citation's investment portfolio, and recoveries from reinsurance companies;
- - HyperFeed finances its operations from its own cash and cash equivalent balances on a stand-alone basis. At December 31, 2003, HyperFeed held approximately $4.7 million in cash and cash equivalents.
As shown in the Consolidated Statements of Cash Flow, there was a $2.2 million net increase in cash and cash equivalents in 2003, compared to a $5.7 million net increase in 2002, and a $1.8 million net increase in 2001.
During 2003, Operating Activities used cash of $426,000, compared to $10.8 million generated in 2002, and $4.1 million used in 2001.
- - in 2003, approximately $4 million in proceeds of land and related assets sold by Nevada Land, and $5.5 million from two significant sales of land and related assets by Vidler. In addition, part of the price of land sold by Vidler was satisfied by a $9.3 million collateralized note, which Vidler expects to receive in cash in 2004;
- - in 2001, $9.4 million in total receipts from Vidler's sale of water rights and land in the Harquahala Valley Irrigation District.
In all three years, the principal uses of cash were operating expenses at Vidler and Nevada Land, claims payments by Physicians and Citation, and overhead expenses in the Business and Acquisitions and Financing segment.
Investing Activities generated cash of $5.0 million in 2003. The cash inflow in 2003 primarily resulted from cash received of $25.1 million from the sale of Sequoia (gross proceeds of approximately $43 million, less the $17.9 million dividend of common stocks and debt securities received). The remaining 2003 cash flow items principally reflect the net investment of $6.3 million in fixed-income securities and $10.9 million in marketable equity securities, and the payment of $1.2 million in cash to acquire additional shares of HyperFeed. The net investment in fixed-income securities represents routine activity in the investment portfolios of our insurance companies, and the temporary investment of surplus funds in fixed-income securities. The investment in marketable equity securities principally represents the net investment of $6.9 million of common stocks by the insurance companies, and the net investment of $2.6 million in common stocks by the parent company and Global Equity SA.
In 2001, Investing Activities generated cash of $7.2 million. The most significant cash inflow was $10.2 million from the sale of part of our interest in Semitropic. Significant cash outflows included the investment of approximately $4 million in SIHL and AOG common stock. Most of the remaining Investing Activities cash flow represents activity in the investment portfolios of our insurance companies, and the temporary investment of surplus funds in fixed-income securities.
In 2002, Financing Activities used $1.4 million of cash, primarily due to the repayment of $1.1 million in non-recourse borrowings collateralized by the farm properties in the Harquahala Valley Irrigation District by Vidler, and a net reduction of $586,000 in Swiss Franc borrowings.
We believe that our cash and cash equivalent balances and short-term investments will be sufficient to satisfy cash requirements for at least the next twelve months. Although we cannot accurately predict the effect of inflation on our operations, we do not believe that inflation has had, or is likely in the foreseeable future to have, a material impact on our net revenues or results of operations.
- - PICO has no commitments to provide additional collateral for financing arrangements. PICO's Swiss subsidiary, Global Equity SA, has Swiss Franc borrowings which partially finance the Company's European stock holdings. If the market value of those stocks declines below certain levels, we could be required to provide additional collateral or to repay a portion of the Swiss Franc borrowings.
In January 2003, the FASB issued FASB Interpretation No. 46 ("FIN 46"), Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51. FIN 46 requires the consolidation of certain variable interest entities by the primary beneficiary of the entity if the equity investment at risk is not sufficient to permit the entity to finance its activities without additional subordinated financial support from other parties or if the equity investors lack the characteristics of a controlling financial interest. FIN 46 is effective for variable interest entities created or acquired after January 31, 2003. For variable interest entities created or acquired prior to February 1, 2003, the provisions of FIN 46 must be applied in the first interim or annual period beginning after December 15, 2003. The Company believes the effect of the adoption of FIN 46 will not have any effect on its results of operations and financial position.
In April 2003, the FASB approved Statement of Financial Accounting Standards No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities." This Statement is effective for contracts entered into or modified after June 30, 2003, except as stated, and for hedging relationships designated after June 30, 2003. In addition, except as stated, all provisions of this Statement should be applied prospectively. SFAS 149 amends Statement 133 for certain decisions made as part of the Derivatives Implementation Group (DIG) process. For those amendments that relate to Statement 133 implementation guidance, the specific Statement 133 Implementation Issue necessitating the amendment is identified. If the amendment relates to a cleared issue, the clearance date also is noted. This Statement also amends Statement 133 to incorporate clarifications of the definition of a derivative. This Statement contains amendments relating to FASB Concepts Statement No. 7, "Using Cash Flow Information and Present Value in Accounting Measurements," and FASB Statements No. 65, "Accounting for Certain Mortgage Banking Activities," No. 91, "Accounting for Nonrefundable Fees and Costs Associated with Originating or Acquiring Loans and Initial Direct Costs of Leases," No. 95, "Statement of Cash Flows," and No. 126, "Exemption from Certain Required Disclosures about Financial Instruments for Certain Nonpublic Entities." The Company adoption of this statement did not have a material effect on the Company's results of operations and financial position.
See Note 11 of Notes to PICO's Consolidated Financial Statements, "Reserves for Unpaid Loss and Loss Adjustment Expenses" for additional information regarding reserve changes.
The following table presents the development of balance sheet liabilities for 1993 through 2003 for all continuing operations property and casualty and workers' compensation lines of business and 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.
Each decrease or increase 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 1994, but incurred in 1991, will be included in the decrease or increase amount for 1991, 1992 and 1993. 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.
The data in the above table is based on Schedule P from each of Physician's and Citation's 1993 to 2003 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.
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), on 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, commercial casualty and workers' compensation 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 statement of operations and financial condition.
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 Note 10 of Notes to PICO's Consolidated Financial Statements, "Reinsurance." PICO's insurance subsidiaries are contingently liable with respect to reinsurance contracts in the event that reinsurers are unable to meet their obligations under the reinsurance agreements in force.
On July 14, 1995, Physicians entered into an Agreement for the Purchase and Sale of Certain Assets with Mutual Assurance, Inc. This transaction closed on August 28, 1995. Pursuant to the agreement, Physicians sold their professional liability insurance business and related liability insurance business for physicians and other health care providers.
Prior to July 1, 1993, Physicians ceded a portion of the risk it wrote under numerous reinsurance treaties at various retentions and risk limits. However, during the last two accident years that Physicians wrote premium (July 1, 1993 to July 15, 1995), Physicians ceded reinsurance contracts through TIG Reinsurance Group (rated B+ by A. M. Best Company) and Medical Assurance Company, a wholly owned subsidiary of Pro Assurance Group (rated A- by Standard & Poors),. 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.
If the reinsurers are "not admitted" for regulatory purposes, Citation has to maintain sufficient collateral with approved financial institutions to secure cessions of paid losses and outstanding reserves.
See Note 10 of Notes to Consolidated Financial Statements, "Reinsurance," with regard to reinsurance recoverable concentration for all property and casualty lines of business as of December 31, 2003. Citation 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.
During the period from June 30, 1997 (the date on which Citation ceded its workers' compensation insurance liabilities) through July 2, 2003 (the date on which Fremont was placed in liquidation), Fremont maintained a workers' compensation insurance securities deposit in California for the benefit of claimants under workers' compensation insurance policies issued, or assumed, by Fremont (hereafter, the "Deposit"). As set forth in Part III of the Special California Schedule P's filed by Fremont during such time period, a portion of the Deposit was specifically allocated by Fremont for the benefit of Citation and claimants under workers' compensation insurance policies issued by Citation and thereafter assumed and administered by Fremont (hereafter, the "Citation Allocated Deposit"). Fremont's 2001 Special Schedule P reflects that it had posted a deposit for the benefit of Citation of approximately $12.1 million (subject to a "reserve discount adjustment" discussed below). Fremont's 2002 Special Schedule P reflects that it had posted a deposit for the benefit of Citation of approximately $7.1 million (subject to a "reserve discount adjustment" discussed below). The portion of the Deposit other than the Citation Allocated Deposit is hereafter referred to as the "Unallocated Deposit."
In accordance with the aforementioned permitted accounting practice(s), Fremont appears to have reduced its loss and loss adjustment expense reserves for accidents occurring in 2001 and earlier. In addition, and without explanation or justification, Fremont appears to have reduced its Special Schedule P Deposits. A review of Part III of Fremont's 2002 Special Schedule P reveals that Fremont had posted total deposits on account of assumed reinsurance of $7,165,921, of which $7,138,757 was for the benefit of Citation, and that Fremont made a "reserve discount adjustment" of $3,109,557 and thereby reduced its total Part III Special Schedule P deposits to $4,056,364. Neither Fremont nor the Department informed Citation of Fremont's request to reduce the Citation Allocated Deposit, the Department's approval of the same (if any) or Fremont's subsequent reduction of the Citation Allocated Deposit. As a result, Citation only recently became aware of the reduction of the Citation Allocated Deposit. Given its prior lack of knowledge, Citation did not previously challenge the
Under Citation's interpretation of the applicable law, the Citation Allocated Deposit assets are required to be (i) held by the Commissioner in trust, "separate and apart" from Fremont's general account and other assets of its Estate, and (ii) applied solely towards the payment of the assumed claims and allocated claims expenses arising from the workers' compensation insurance policies that Citation ceded/transferred to Fremont and its predecessor-in-interest. Accordingly, in the wake of the aforementioned events, in the Fourth Quarter of 2003, Citation requested that the Commissioner, in his capacity as the Liquidator, (i) maintain the Citation Allocated Deposit assets separate and apart from other assets of the Estate and (ii) apply the same solely to the payment of the direct and assumed claims and allocated claims expenses arising from the workers' compensation insurance liabilities that Citation ceded/transferred to CNIC and Fremont. Alternatively, Citation requested that the Commissioner pay Citation's ceded liabilities from the totality of Fremont's Special Schedule P Deposit on a pari passu basis with Fremont's direct and assumed workers' compensation claims and allocated claims expenses.
Shortly thereafter, Citation concluded that, because Fremont had been placed in liquidation, Citation was no longer entitled to take a reinsurance credit for the Citation Allocated Deposit under the statutory basis of accounting. Consequently, Citation reversed the $7.5 million reinsurance recoverable from Fremont in its June 30, 2003 financial statements prepared on the statutory basis of accounting. In addition, Citation made a corresponding provision for the reinsurance recoverable from Fremont at June 30, 2003 for GAAP purposes, as disclosed in PICO's Form 10-Q dated June 30, 2003. Accordingly, Citation has, for both its statutory and GAAP financial statements, provided for the reinsurance recoverable from Fremont on its Workers' Compensation policy liabilities.
Citation remains contingently liable with respect to reinsurance contracts in the event that reinsurers do not meet their obligations under the reinsurance agreements in force.
Summarized unaudited quarterly financial data (in thousands, except share and per share amounts) for 2003 and 2002 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 and are of a normal recurring nature. The following total revenue figures for the three months ended June 30, 2003 differ from previously reported quarterly results due to reporting certain operations of HyperFeed as discontinued operations.
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 and the report of other auditors provide a reasonable basis for our opinion.
As discussed in Note 20 to the financial statements, in 2002 the Company changed its accounting for goodwill as a result of the adoption of Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets.
We have audited the accompanying consolidated balance sheets of HyperFeed Technologies, Inc. and subsidiary as of December 31, 2003 and 2002, and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the years in the three-year period ended December 31, 2003. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of HyperFeed Technologies, Inc. and subsidiary as of December 31, 2003 and 2002, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2003, in conformity with accounting principles generally accepted in the United States of America.
PICO HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY FOR THE YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
PICO HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY, CONTINUED FOR THE YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
- owning and developing water rights and water storage operations in the southwestern United States through Vidler Water Company, Inc.;
- owning and developing land and the related mineral rights and water rights in Nevada through Nevada Land & Resource Company, LLC;
- "running off" the insurance loss reserves of Citation Insurance Company and Physicians Insurance Company of Ohio.
The preparation of financial statements in accordance with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent liabilities at the date of the financial statements and the reported amounts of revenues and expenses for each reporting period. The significant estimates made in the preparation of the Company's consolidated financial statements relate to the assessment of the carrying value of investments, unpaid losses and loss adjustment expenses, real estate and water assets, deferred income taxes and contingent liabilities. While management believes that the carrying value of such assets and liabilities are appropriate as of December 31, 2003 and 2002, it is reasonably possible that actual results could differ from the estimates upon which the carrying values were based.
The Company's investment portfolio at December 31, 2003 and 2002 is comprised of investments with fixed maturities, including U.S. government bonds, government sponsored enterprise bonds, and investment-grade corporate bonds; equity securities, including common stock, and common stock purchase warrants; and mortgage participation interests.
The Company has subsidiaries and makes acquisitions in the U.S. and abroad. Approximately $51.5 million and $41.1 million of the Company's investments at December 31, 2003 and 2002, respectively, were invested internationally, including equity values of affiliates. The Company's most significant foreign currency exposure at December 31, 2003 is in Swiss francs.
Land, water rights, 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 and water rights 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.
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. Intangibles are generally assets arising out of a contractual or legal right. The Company applies the provisions of SFAS No. 141, "Business Combinations," and SFAS No. 142, "Goodwill and Other Intangible Assets." Consequently, goodwill and intangible assets that have indefinite useful lives are not amortized but rather are tested at least annually, or on an interim basis if an event occurs or circumstances change that would reduce the fair value of a reporting unit below its carrying value for impairment. The adoption of SFAS No. 142 is reflected in the Company's consolidated financial statements for the year ended December 31, 2002 as a cumulative effect of change in accounting principle. The cumulative adjustment of $2 million is comprised of a gain from recognizing negative goodwill of $2.8 million offset by the write-off of goodwill of $800,000. The positive goodwill of $800,000 was deemed impaired based on the present value of the underlying cash flows. Included within the 2002 balance sheet caption "Other assets of discontinued operations" is $2.2 million of intangible assets that were being amortized over seven years.
The Company applies the provisions of SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." As such, the Company records an impairment charge when the condition exists where the carrying amount of a long-lived asset (asset group) is not recoverable and exceeds its fair value. Impairment of long-lived assets is triggered when the estimated future undiscounted cash flows, excluding interest charges, for the lowest level for which there is 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 cash flows at appropriate levels of grouped assets under SFAS No. 144. If the events or circumstances indicate that the remaining balance may be permanently impaired, such potential impairment will be measured based upon the
For the years ended December 31, 2002 and 2001, there was no difference between basic and diluted earnings per share because the average stock price of PICO stock during the year was less than the strike prices of the options outstanding and to include those options would be anti-dilutive to the calculation. Stock options of 1.7 million in 2002, and 1.8 million in 2001 were excluded from the calculation of the diluted weighted average shares outstanding.
On July 2, 2003, all 1,687,242 outstanding stock options were voluntarily surrendered by employees and directors. On July 17, 2003, the Company's shareholders voted to adopt the PICO Holdings, Inc. 2003 Stock Appreciation Rights Program (the "SAR program") to replace the Company's stock option plans and call option agreements. Upon adoption of the SAR program, all 355,539 outstanding options under call option agreements were also surrendered by the holders. The maximum number of SARs issuable under the SAR program may not exceed 2,042,781. 1,962,781 SAR's were issued to the prior option holders upon adoption of the SAR program at an exercise price equal to that of the surrendered options. All SARs are fully vested, never expire, and only 20% of the initial number can be exercised by an individual in any 12 month period unless
permission is given by the Compensation Committee. Upon exercise, the holder is entitled to a cash benefit equal to the difference between the exercise price and the then current market price of PICO stock.
Compensation cost is measured at the end of each period as the amount by which the quoted market price of PICO stock exceeds the exercise price. Changes in the quoted market price are reflected as an adjustment to the accrued compensation obligation and compensation expense in the Company's consolidated financial statements. The Company recorded compensation expense and accrued compensation of $6 million for the year ended December 31, 2003, representing the difference between the exercise price of the vested SARs and the market value of PICO stock at December 31, 2003. This amount is included in operating and other costs on the consolidated statement of operations for the year ended December 31, 2003 and the corresponding obligation resides within other liabilities in the consolidated balance sheet at December 31, 2003.
The effects of applying SFAS No. 148 in this pro forma disclosure are not indicative of future amounts.
The Black-Scholes valuation model was used in estimating the fair value of the Company's SARs that are fully vested and are non-transferable. This model requires the input of highly subjective assumptions including the expected stock price volatility and estimated life of the SAR. Because the Company SARs have characteristics significantly different from those of any like instrument that is publicly traded, and because changes in the subjective input assumptions can materially change the fair value estimate, management believes the existing model does not necessarily provide a reliable single measure of the fair value of its SARs.
Comprehensive income or loss includes foreign currency translation, and unrealized holding gains and losses, net of taxes on available for sale securities. The components are as follows:
The accumulated balance is net of deferred income tax liabilities of $7.2 million and $3.5 million at December 31, 2003 and 2002, respectively.
In November 2002, the FASB issued FASB Interpretation No. 45 ("FIN 45"), "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others." FIN 45 requires that a liability be recorded in the guarantor's balance sheet upon issuance of a guarantee at its fair value. In addition, FIN 45 requires certain disclosures about each of the entity's guarantees. At December 31, 2003, the Company has no guarantees that require the application of FIN 45.
On March 31, 2003, the sale of Sequoia Insurance Company ("Sequoia") closed for gross proceeds of $43.1 million, which consisted of $25.2 million in cash and a dividend of equity and debt securities previously held by Sequoia with a market value of $17.9 million. The net income from Sequoia included in PICO's condensed consolidated results for the year ended December 31, 2003 was $2.4 million, which is reported as "Income from discontinued operations, net." The Company also recorded a $443,000 gain on sale, net of estimated income taxes of $281,000 and selling costs of $845,000, which is reported as "Gain on disposal of discontinued operations, net" for the year ended December 31, 2003.
HyperFeed, a 51% owned subsidiary of the Company, sold its consolidated market data feed service contracts to Interactive Data Corporation for $8.5 million in the fourth quarter of 2003. The gain recorded within discontinued operations is $7 million. This gain is included in the accompanying condensed consolidated statements of operations in the line item titled "Gain on disposal of discontinued operations, net" for the year ended December 31, 2003. In addition, HyperFeed generated income of $659,000 from discontinued operations during the 2003 period HyperFeed was a consolidated subsidiary of the Company. Such amount is included in "Income from discontinued operations, net". The assets and liabilities of this HyperFeed subsidiary are reported as discontinued operations in the December 31, 2003 balance sheet.
In accordance with SFAS No. 144, Sequoia's results of operations for all periods presented have been reclassified as discontinued operations in the accompanying consolidated financial statements. Certain major assets and liabilities of Sequoia are grouped and presented on the face of the accompanying 2002 consolidated balance sheet as assets and liabilities of discontinued operations, and results of operations from discontinued operations are shown on the face of the statement of operations as a single line. The following is a detail of Sequoia's results for the period included in the accompanying consolidated financial statements:
The amortized cost and carrying value of investments in fixed maturities at December 31, 2003, 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.
During 2003, 2002 and 2001, the Company recorded other-than-temporary impairments of $1.1 million, $4.1 million and $3 million, respectively, on equity securities to recognize what are expected to be other-than-temporary declines in value primarily due to the extent and duration of the decline in market values of the equity securities.
During 2002, the Company sold its interest in Australian Oil and Gas ("AOG") for a realized gain of $8.8 million in response to a take over bid. The sale proceeds of $21.1 million were received in cash.
In 2001, the Company recorded a pre-tax provision of $2.1 million for an other-than-temporary decline in the market value of this security. During 2002, the stock continued to decline which, combined with an announcement from SIHL that a total sale of the company for more than the current market value of the stock was unlikely, caused the Company to record an additional other-than-temporary impairment of $1.6 million. The charge reduced our basis in SIHL to $768,000, which was equivalent to market value at December 31, 2002. In 2003, the Company recorded an additional other-than-temporary impairment of $293,000. At December 31, 2003 the market value of SIHL is $433,000.
At December 31, 2003, the Company's investment in HyperFeed consisted of 1.5 million shares of common stock, representing 51% of the common shares outstanding; and 310,616 common stock warrants which on a diluted basis would represent an additional 5% voting interest if exercised. At December 31, 2003, the carrying value of the investment in common stock warrants is an estimated fair value of $556,000, using the Black-Scholes option-pricing model. The warrants are reported as a derivative instrument under the provisions of SFAS No. 133 and consequently gains and losses for each period are reflected in the caption "Net Realized Loss on Investments" in the Statement of Operations.
Through its subsidiary Nevada Land, the Company owns land and the related mineral rights and water rights. Through its subsidiary Vidler, the Company owns land and water rights and water storage assets consisting of various real properties in California, Arizona, Colorado and Nevada. The costs assigned to the various components at December 31, were as follows:
Notes and other receivables consisted of the following at December 31:
Other accounts receivable includes $2.3 million due from Dominion Capital Pty. Ltd ("Dominion"), which is completely offset by an allowance for doubtful accounts due to the uncertainty surrounding the recovery of the balance.
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.
Provision has not been made for U.S. or additional foreign tax on the $2.5 million of undistributed earnings of foreign subsidiaries. It is not practical to estimate the amount of additional tax that might be payable. Rate differences within the difference between statutory and effective tax rates reflect foreign results taxed at the local statutory rate, which can be as much as 20% lower than the US statutory rate of 34%. At December 31, 2003 and 2002, the Company had no material federal income tax payable or receivable. As of December 31, 2003, the Company has net operating loss carryforwards of $30.8 million, which includes $3.7 million of which that may not be utilized due to certain limitation imposed by current tax law .
PICO Holdings 2003 Stock Appreciation Rights Plan. On July 2, 2003, all 1,687,242 outstanding stock options were voluntarily surrendered by employees and directors. On July 17, 2003, the Company's shareholders voted to adopt the PICO Holdings, Inc. 2003 Stock Appreciation Rights Program (the "SAR program") to replace the Company's stock option plans and call option agreements. Upon adoption of the SAR program, all 355,539 outstanding options under call option agreements were also surrendered by the holders. The maximum number of SARs issuable under the SAR program may not exceed 2,042,781. 1,962,781 were issued to the prior option holders upon adoption of the SAR program at an exercise price equal to that of the surrendered options. In future periods, in the case of "in the money" SARs (i.e., the market price of PICO stock is higher than the exercise price of the SAR), a charge or benefit is recorded in the Company's consolidated financial statements. The charge or benefit will recognize the change during the period in the difference between the exercise price of "in the money" SARs and the market value of PICO stock at the end of the period.
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:
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 prepares its statutory financial statements in accordance with accounting practices prescribed or permitted by the Ohio Department of Insurance ("Ohio Department"). Citation prepares its 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. Activity in the reserve for unpaid claims and claim adjustment expenses was as follows for each of the years ended December 31:
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. Total contribution expense for the year ended December 31, 2003, 2002 and 2001 was $427,000, $837,000, and $855,000, respectively.
The Company leases some of its offices under non-cancelable operating leases that expire at various dates through October 2008. Rent expense for office space was $323,000 in 2003 and $1 million in 2002 and 2001.
In 2000, PICO Holdings loaned a total of $2.2 million to Dominion Capital Pty. Ltd. ("Dominion Capital"), a private Australian company. In 2001, $1.2 million of the loans became overdue. Negotiations between PICO and Dominion Capital to reach a settlement agreement on both the overdue loan of $1.2 million and the other loan of $1 million proved unsuccessful. Accordingly, PICO has commenced a legal action through the Australian courts against Dominion Capital to recover the total amount due to PICO Holdings. Due to the inherent uncertainty involved in pursuing legal action, and our ability to realize the assets collateralizing the loans, PICO has recorded an allowance for the total outstanding balance of $2.3 million for the loans and interest. The court appointed receiver is in the process of ascertaining Dominion Capital's assets and liabilities. PICO has been awarded summary judgment in relation to the principal and interest on the loan for $1.2 million and as a result, Dominion Capital has been placed in receivership. A trial was held in July 2003 concerning both loans, and the Company is awaiting judgment from the Australian court.
The Commissioner has refused to comply with Citation's request; instead, the Commissioner indicated that he intended to transfer the Citation deposit to the California Insurance Guarantee Association ("CIGA").
Citation concluded that, because Fremont had been placed in liquidation, Citation was no longer entitled to take a reinsurance credit for the Citation deposit under the statutory basis of accounting. Consequently, during 2003 Citation reversed $7.5 million reinsurance recoverable from Fremont in its financial statements prepared on the statutory basis of accounting. In addition, Citation made a corresponding provision for the reinsurance recoverable from Fremont for GAAP purposes. Accordingly, Citation has, for both its statutory and GAAP financial statements, provided for the reinsurance recoverable from Fremont on its workers' compensation policy liabilities.
Under the circumstances, it appears that Citation must litigate its claim to the Citation deposit. To date, Citation has not filed a claim seeking the benefit. In the event that Citation asserts, but fails to prevail on such a claim, it is unlikely to receive any distribution from Fremont or any credit for the Citation deposit. If, however, Citation prevails on such a claim, it may obtain the benefit, directly or indirectly, of the Citation deposit, as well as other relief.
The Company is presently unable to predict the outcome of this dispute with a reasonable degree of certainty.
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 was 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. The Company recorded compensation expense related to this arrangement of $105,000, $283,000, and $250,000 during the years ended December 31, 2003, 2002 and 2001, respectively. The total accrued balance of $1.3 million was paid upon completion of the sale of Sequoia, which closed on March 31, 2003.
(3) Equity in net income of subsidiaries and affiliates is credited directly to shareholders' equity 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, 2003, 2002 and 2001 on the statutory accounting basis are as follows:
PICO Holdings, Inc. is a diversified holding company. The Company acquire businesses which management believes are undervalued at the time, and have the potential to provide a superior rate of return over time, after considering the risk involved. The Company's over-riding objective is to generate superior long-term growth in shareholders' equity, as measured by book value per share. The Company accounts for segments as described in the significant accounting policies in Note 1.
Currently the major businesses are owning and developing water rights and water storage operations through Vidler Water Company, Inc.; owning and developing land and the related mineral rights and water rights through Nevada Land & Resource Company, LLC; "running off" the property and casualty and workers' compensation loss reserves of Citation Insurance Company and the medical professional liability loss reserves of Physicians Insurance Company of Ohio; and the acquisition and financing of businesses.
In the past, Citation wrote commercial property and casualty insurance in California and Arizona and workers' compensation insurance in California. Citation ceded all its workers' compensation business in 1997, and ceased writing property and casualty business in December 2000 and is run off.
HyperFeed is a developer and provider of software, ticker plant technologies and managed services to the financial markets industry. PICO owns approximately 51% of the outstanding voting stock of HyperFeed.
- INVESTMENTS: Fair values are estimated based on quoted market prices, or dealer quotes for the actual or 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. 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.
The Company's future minimum principal debt repayments for the years ending December 31 are as follows: