Physicians leases approximately 1,892 square feet of office space in Columbus, Ohio for its headquarters. Sequoia leases office space for its and Citation's headquarters in Monterey, California and for regional claims and underwriting offices in Modesto, Monterey, Ventura, Visalia, Orange, Pleasanton, San Jose, Bakersfield, Clovis and Sacramento, California as well as Midvale, Utah. Nevada Land leases office space in Carson City, Nevada. Vidler and Nevada Land hold significant investments in land, water and mineral rights in the western United States. See "ITEM 1 - BUSINESS-INTRODUCTION."
Note: Prior year share values have been adjusted to reflect the 1-for-5 Reverse Stock Split effective December 16, 1998, the November 20, 1996 reverse merger of Physicians Insurance Company of Ohio and Citation Insurance Group, the treatment of American Physicians Life Insurance Company as discontinued operations and to reflect the investment results of HyperFeed and Jungfraubauhn using the equity method of accounting. Book value per share is computed by dividing shareholders' equity by the net of total shares issued less shares held as treasury shares.
The $5.3 million gross value of land and water rights sold and exchanged in 2000 came close to our target of meeting or exceeding 1999's level of $5.8 million.
In 2000 Nevada Land & Resource Company, LLC generated $3.7 million in revenue from selling 28,245 acres of land. The average sales price of $131.88 per acre compares to our average basis of $52.07 per acre in the parcels which were sold, and our average cost of $34.94 per acre for all of Nevada Land's property assets. Of 2000's land sales, 77.8% were settled for cash and Nevada Land provided partial financing for the balance. The vendor finance is collateralized by the land, carries a 10% interest rate, and is subject to a minimum 20% down payment.
Nevada Land recognizes revenue, and the resulting gross profit or loss, from a land sale when the transaction closes. On closing, the sales price is recorded as revenue, and a gross margin is recorded depending on the cost basis attributed to the land which was sold. Since the date of closing determines the accounting period in which the sales revenue and gain are recorded, Nevada Land's reported revenues and income can fluctuate from period to period, depending on the date when specific transactions close.
During 2000 and the first quarter of 2001, Nevada Land filed applications for additional water rights. Where these applications are successful, the value and marketability of the associated land is expected to increase. The applications consist of: - - 30,276 acre-feet of water rights for the beneficial use of irrigating the related 7,569 acres of arable land. Nevada Land began to receive permits for some of these applications in the first quarter of 2001; and - - 18,000 acre-feet of water rights in a northern valley for municipal and industrial use.
Following the sale, Vidler still owns, or has the right to acquire, approximately 49,426 acre-feet of transferable Harquahala Valley ground water. Discussions are continuing to supply this water to both municipalities and industrial users.
In October 1999, Vidler announced a public/private joint venture with Lincoln County, Nevada. The joint venture has filed applications for more than 100,000 acre-feet of water rights, covering substantially all of the unappropriated water in Lincoln County, with a view to supplying water to rapidly growing communities in southern Nevada. Vidler anticipates that up to 40,000 acre-feet of water rights will be permitted from these applications.
Tentative agreement has been reached to sell an electricity-generating company a minimum of 6,700 acre-feet of water, and a maximum of 9,000 acre-feet of water, at $3,300 per acre-foot. The sale of the water is subject to the electricity-generating company obtaining permitting and financing for a new power plant. The anticipated closing date is July 2003.
The Lincoln County joint venture is an example of a transaction where Vidler can partner with an entity, in this case a public entity, to provide the necessary capital and skills to commercially develop water assets.
During 2000, Vidler purchased a 51% interest in Fish Springs, LLC and a 50% interest in V&B, LLC. These companies own the 8,628-acre Fish Springs Ranch, and the associated water rights. Fish Springs Ranch is located in Honey Lake Valley in Washoe County, approximately 40 miles north of Reno, Nevada.
Vidler may also be able to commercially develop a limited quantity of the additional permitted water rights associated with the property.
Vidler purchased a property formerly known as Robison Ranch out of bankruptcy proceedings during 2000. Now known as Spring Valley Ranches, the property is located approximately 40 miles west of Ely in White Pine County, Nevada. The real estate assets acquired consist of approximately 9,985 acres of deeded land and 500,000 acres of Forest Service and Bureau of Land Management allotment land. We believe that the land has significant environmental value to federal agencies, making it suitable for a land exchange transaction.
Vidler has filed an application for approximately 2,000 acre-feet of water rights near Sandy, Nevada. As soon as the water rights have been permitted, we expect to close an agreement to supply water to support additional growth at Primm, Nevada, a town in the fast-growing Interstate 15 corridor.
Vidler has agreed to sell its interest in Cline Ranch to Centennial Water and Sanitation District for approximately $2.1 million. This sale requires the approval of the Denver Water Court, which is expected by the end of 2001.
Discussions are continuing to either lease or sell the remaining water rights in Colorado, including the 97 acre-feet of senior water rights which are currently unutilized.
The water will be stored in a large aquifer underlying much of the valley and recovered, when needed, by ground water wells. Vidler intends to charge customers an annual fee based on the amount of water stored.
In October 1998, construction of a pilot-scale plant was completed and recharging began on schedule. The pilot plant was constructed to determine the most cost-effective method of recharging water, and to obtain the hydrogeologic data required to submit an application for a permit for full-scale recharge. During the third quarter of 2000, Vidler received the necessary permits to operate a full-scale recharge facility.
During 1999, Federal interstate water "banking" regulations were adopted which allow water from the Colorado River to be stored off-stream in Arizona's Lower Basin for use in the Lower Division States. The Arizona Department of Water Resources accepted these regulations in January 2000. Vidler is able to provide storage to effect interstate transfers of water. Potential users include developers and local governmental political subdivisions in Arizona, and out-of-state users such as the Las Vegas metropolitan area and California.
The Arizona Water Banking Authority is negotiating with Vidler, on behalf of the potential interstate end users, to "bank", or store, water in the Vidler Arizona Recharge Facility. Vidler expects to enter into its first agreements to lease storage capacity, and to begin recharging water and generating cash flow from the facility, later in 2001.
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. It is anticipated that the users of the facility will bear the capital cost of the improvements required to recover water at commercial rates.
Vidler has an 18.5% right to participate in a 1,000,000 acre-foot water storage facility at Semitropic, near the California Aqueduct, northwest of Bakersfield. Currently Vidler is not storing any water at Semitropic for third parties; however, it is actively pursuing a number of potential customers. In particular, we anticipate demand from developers in Kern County and Los Angeles County, who must now--before they are permitted to begin development--be able to demonstrate that they have sufficient back-up supplies of water in the case of a drought year.
Over the first 10 years of the agreement with the Semitropic Water Storage District, Vidler is required to make a minimum annual payment of $2.3 million. Vidler began making the annual payments in November 1998. In return, Vidler has the right to store up to 185,000 acre-feet of water underground over a 35-year period. Vidler has the right to recover up to 42,000 acre-feet of water in any one year, including the right to a guaranteed minimum recovery of 16,650 acre-feet every year. This guaranteed amount of annual minimum recovery is important because it means that a customer who has stored water at Semitropic is assured of being able to recover this quantity of water in a dry year. Vidler is also required to make an annual payment for operating expenses.
During 1999 and 2000, Vidler purchased approximately 12,537 acre-feet of water and "banked" it at Semitropic, with the intention of selling or leasing the water in a dry year. Vidler purchased the water from the Interruptible State Water Project, and was the first private entity to purchase water from the Project for resale. During the third quarter of 2000, Vidler sold 3,691 acre-feet of this water to a federal agency for $509,000. The resulting gross profit of $342,000 helped to offset fixed costs for depreciation and operations and maintenance at Semitropic.
Following several successive years of declining premium volume, in 2000 Sequoia Insurance Company generated 33.5% growth in direct written premiums to $47.1 million. The increase in written premiums resulted from both growth in the existing book of business, which was principally in commercial lines of insurance, and the acquisition of Personal Express, which greatly expanded Sequoia's business in personal lines of insurance.
From 1997 until 1999, intense competition in the California market led many insurance companies to lower premiums in an attempt to attract business. In this environment, given that our strategy is to price policies with the objective of earning an underwriting profit, Sequoia declined to write policies which its management felt were inadequately priced, even if this resulted in lower volume overall. Faced with inadequate underwriting returns, during 1999 the focus of many companies in the California market returned to adequate pricing of policies, and some of our competitors began to raise premium rates. Consequently, the rate of decline in Sequoia's premium volume steadily slowed throughout 1999, before turning around to year-over-year growth from January 2000.
In 2000, direct written premiums in commercial lines increased 17.8% to $39.7 million. This included 29.1% growth to $21.4 million in the second half, following the change in Sequoia's A.M. Best rating.
Direct written premium in personal lines began to increase markedly in the second quarter as new revenues from Personal Express began. In mid-May, Sequoia began to write new policies which were generated by the Personal Express Bakersfield office. From July 1, the amount of premium written for Personal Express customers increased significantly as Sequoia had the opportunity to renew existing policies for clients of the Bakersfield office as these expired with the former carrier. Reflecting a full contribution from Personal Express, written premium in personal lines reached $6.4 million in the second half of 2000.
In 2001, Sequoia expects to generate upwards of $50 million in direct written premiums, with approximately 82% coming from commercial lines and approximately 18% from personal lines.
During 1998 and 1999, Sequoia and Citation "pooled," or shared, most of their premiums and expenses. This pooling arrangement was terminated from January 1, 2000, and all business is now written directly by Sequoia. In December 2000, Citation ceased writing business and is now "running off" the claims reserves from business written in previous years.
Citation did not need to increase claims reserves in the artisans/contractors line of business in 2000. In each of the preceding three years, Citation had taken charges to increase claims reserves in this line of business, including a pre-tax charge of $10.1 million in 1999.
If current claims trends continue, we believe that our loss reserves in this line of business are adequate; however, if the trend in claims worsens in the future, then additional charges could be required to increase reserves.
Physicians Insurance Company of Ohio and The Professionals Insurance Company are in "run off." This means that they are handling claims arising from policies written in previous years, but not writing new policies. The funds to pay claims come from the maturity and sale of investments, and, in some cases, collections from reinsurance companies, i.e., insurers to whom we pay reinsurance premiums to share in our claims risk. This segment is diminishing as the level of claims reserves liabilities and investment assets decrease as claims are paid and investments mature or are sold to provide the funds to make the payments. Accordingly, it is anticipated that investment income, and therefore revenue, in this segment will decline over time. We are attempting to minimize segment overhead expenses as much as possible, and reduced both head count and office space in 2000.
PICO first invested in HyperFeed in 1995 through the purchase of common stock. We invested further capital in HyperFeed as debt, which was later converted to equity, and received warrants for providing financing. We recently increased our investment in HyperFeed through purchases of common stock on the open market. During December 2000, we purchased 232,000 shares for $391,000. At December 31, 2000, we owned 2,602,000 shares of HyperFeed common stock. During January 2001, we purchased a further 13,000 shares for $22,000, increasing our holding to the current level of 2,615,000 common shares and 4,786,547 share equivalents from convertible preferred shares. Our current voting ownership in HyperFeed is approximately 36%.
For full year 2000, HyperFeed's revenues increased 40.2% to $46.4 million, gross margin more than doubled to $16.8 million, EBITDA (earnings before interest, taxes, depreciation and amortization) was $7.7 million, and the company earned net income of $1.7 million.
In the fourth quarter of 2000, HyperFeed generated revenues of $10.7 million, gross margin of $4.5 million, $2.4 million in EBITDA, and net income of $998,000. Although revenues declined by $1.6 million, or 13.3%, from the preceding third quarter, net income actually increased $231,000, or 30.2%, sequentially. HyperFeed explained that this was due to "internal cost efficiencies implemented in 1999 and increased sales focus on higher margin datafeed products and services."
PICO uses the equity method to account for this investment. HyperFeed contributed equity income of $175,000 to Long Term Holdings segment in 2000.
At December 31, 2000, our investment in Jungfraubahn had a cost basis of $17.4 million, a market value of $18.9 million, and a net carrying value of $21.7 million, after allowing for taxes.
On January 29, 2001, Jungfraubahn issued a press release containing an initial review of 2000 operations. The full text is available on Jungfraubahn's web-site www.jungfraubahn.ch. Jungfraubahn described the year 2000 as "exceptional" with successful marketing initiatives leading to an 18% increase in revenue from transporting passengers to approximately 84 million Swiss francs (the equivalent of $US 51.2 million).
information, and did not have significant influence over Accu Holding's activities in 2000, this investment is not accounted for under the equity method, but carried at market value, with the unrealized after-tax gain or loss being included in shareholders' equity.
During the year we purchased 981,584 shares in AOG, lifting our shareholding to 8,426,044 shares, representing approximately 18% of the company at December 31, 2000. The investment is carried at market value, with the unrealized after-tax gain or loss being included in shareholders' equity.
At December 31, 2000, our investment in AOG had a cost basis of $7.6 million, a market value of $8.2 million, and a net carrying value of $8 million after allowing for taxes on the unrealized gain. This investment was funded in US dollars. To this point, depreciation in the Australian dollar relative to the US dollar has offset part of the unrealized gain in local Australian currency terms.
On February 20, 2001, AOG reported its results for the six months to December 31, 2000 ($A1.00 = $US0.5592). For the half-year, AOG's revenues increased 93% to $A59.7 million, and the company earned net income of $A3 million, or $A0.064 per share. The accompanying letter to shareholders ended with the statement that "The current contract book is satisfactory and barring unforeseen events the likelihood of maintaining and improving upon the present positive results is excellent."
Rig utilization averaged 54% for the half-year; however, late in the period, on November 24, 2000, AOG indicated in an announcement to the Australian Stock Exchange that "rig utilization has now reached 70%."
Conex's principal asset is a 60% interest in Guizhou Jonyang Machinery Industry Limited, a joint venture which manufactures wheeled and tracked hydraulic excavation equipment in the Guizhou province of the People's Republic of China. Despite significant restructuring efforts, improved product quality, and domestic market share of over 90% for wheeled excavators, the joint venture was unable to achieve profitability. As a result of the sale of the investment in Conex, PICO no longer records a $4.5 million liability which had previously been included in our financial statements to reflect a commitment to fund a third round of financing for the joint venture.
We have been building our investment in SISCOM since 1996, which culminated in SISCOM becoming a consolidated subsidiary in 1999. We now own 4,431,000 common shares and 1,250,000 convertible preferred shares in SISCOM, which represents 54.7% of SISCOM's voting stock.
SISCOM is in the process of a capital restructuring. Pending transactions to convert debt to equity, which are expected to close in the first half of 2001, PICO will own more than 85% of SISCOM common stock, and more than 60% of the Company on a fully-diluted basis.
SISCOM is a software developer and systems integrator for video-based content management systems for the professional broadcast, sports, and entertainment industries. SISCOM's proprietary technology includes integrated tools for real-time logging, data management, archive management, browsing, search and retrieval, and analytics/data mining tools.
In the first quarter of 2000, Mendell Technologies, Inc., a private oil and gas company, acquired our subsidiary Prospect Oil & Gas, Inc. for $1 million in stock. Prospect Oil & Gas, Inc. was engaged in precision horizontal drilling in proven oil and gas fields in North Dakota.
Mendell is currently attempting to raise additional capital from new investors to develop several oil and gas interests.
At December 31, 2000, PICO had shareholders' equity of $205.2 million, or $16.56 per share, compared to $173.4 million, or $19.15 per share, at the end of 1999. The principal factors leading to the $31.8 million increase in shareholders' equity were:
- - a $49.8 million increase from the new equity capital raised through the rights offering; - - a $4.6 million decrease from the 2000 net loss from continuing operations; - - a $5 million decrease resulting from the elimination of accumulated discount on medical professional liability claims reserves; - - a decrease of $7.6 million from net unrealized after-tax depreciation in investments. This is primarily due to a decrease in the carrying value of our HyperFeed warrants. As explained in Item 1, on page 9, we are required to carry the HyperFeed, at estimated fair value, which introduces volatility to our reported shareholders' equity; and - - a decrease of $963,000 from unrealized foreign currency translation loss.
Total assets at December 31, 2000 were $395.1 million, compared to $380 million at December 31, 1999. Total assets increased due to the $49.8 million in new equity capital raised in the rights offering during the first quarter. As the year progressed, Vidler utilized part of the money raised in the rights offering to acquire water-righted properties and develop its existing water rights and water storage assets. The increase in assets was partly offset by the payment of claims by our insurance subsidiaries, which reduced both insurance liabilities and the corresponding assets, and by the sale of land and water rights at Nevada Land.
PICO reported a net loss of $9.5 million in 2000. The net loss from operations of $4.6 million consisted of a $13.5 million pre-tax loss, which was partially offset by $8.2 million in income tax benefits and the addition of $717,000 to reflect the interest of minority shareholders in the losses of subsidiaries which are less than 100%-owned by PICO. In addition, the cumulative effect of a change in accounting principle reduced income by $5 million after-tax. Until December 31, 1999, PICO had discounted the carrying value of its medical professional liability claims reserves, to reflect the fact that some claims will not be paid until many years in the future, but funds from the corresponding premiums can be invested in the meantime. After December 31, 1999, PICO's medical professional liability insurance subsidiaries were no longer allowed to discount claims reserves in the statements they file with the Ohio Department of Insurance, which are prepared on the statutory basis of accounting. With this change in accounting principle, we have also eliminated the discounting in our financial statements which are prepared on a GAAP basis (i.e., generally accepted accounting principles).
In June 1997, the Financial Accounting Standards Board established standards for disclosure of comprehensive income, which PICO adopted in 1998. Comprehensive income includes more than just the income reported in the statement of operations. For PICO, it also includes foreign currency translation and the change in unrealized investment gains and losses on securities which are available for sale.
In 2000, total revenues were $45.4 million, compared to $54.5 million in 1999 and $47.2 million in 1998. The principal factors leading to the $7.3 million increase in revenues from 1998 to 1999 were higher land sales at Nevada Land and the recognition of a net realized investment gain in the Long Term Holdings segment in 1999, as opposed to a net realized loss in 1998. These revenue increases were partly offset by lower earned premiums in the Property and Casualty Insurance segment. From 1999 to 2000, revenues declined by $9.1 million, primarily due to the recognition of a $7.6 million net realized investment loss in the Long Term Holdings segment in 2000, as opposed to a $626,000 net realized gain in 1999.
pay claims. In 2000, loss and loss adjustment expense was $24 million, compared to $35.2 million in 1999 and $30.5 million in 1998. In 1999 and 1998, loss and loss adjustment expenses were inflated by the need to strengthen reserves in both the medical professional liability segment and in Citation's artisan/contractors liability book of business.
LAND, MINERALS AND RELATED WATER RIGHTS NEVADA LAND & RESOURCE COMPANY, LLC
Also during 2000 we sold 61 acre-feet of certificated water rights for $244,000, compared to revenues of $379,000 from the sale of 125 acre-feet of certificated water rights in 1999, and $40,000 from the sale of 8 acre-feet of certificated water rights in 1998.
After deducting the cost of land sold, the gross margin on land sales increased from $926,000 in 1998 to $1.5 million in 1999 and $2.2 million in 2000.
We entered the water business with the understanding that most of the assets we acquired were not ready for immediate commercial use. There has been a considerable lead-time in developing and commercializing these assets. While we believe that considerable value has been created from these efforts, this is not reflected in our financial statements because the Company's most significant assets did not begin to generate cash flow until the first quarter of 2001. During the investment and building phase, the segment incurred costs associated with the development and acquisition of assets which would not generate positive cash flow and earnings until future years.
Segment expenses, including the cost of water rights and other assets sold, increased from $3 million in 1998 to $5 million in 1999 and $8 million in 2000. Excluding the cost of water rights and other assets sold, operating expenses were $2.6 million in 1998, $4.8 million in 1999, and $5.7 million in 2000. The increase in operating costs primarily resulted from the growth in Vidler's asset base, including expenses related to individual projects (e.g., depreciation and interest) which were recorded prior to the related revenues being earned.
The $907,000 increase in segment loss from 1999 to 2000 was caused by the $1.2 million realized loss on the sale of the land and tunnel assets described above. Excluding this item, the segment loss declined by $296,000, primarily due to the $342,000 gross profit on the sale of Semitropic water and $482,000 higher agricultural lease revenues, which were partially offset by higher charges for depreciation, interest, and other expenses.
The principal factors in the $1.9 million increase in segment loss from 1998 to 1999 were $1.5 million higher expenses related to Semitropic, $547,000 of additional interest expense on non-recourse financing to purchase land and the associated water rights in the Harquahala Valley, and $645,000 higher personnel and operating expenses.
The Property & Casualty Insurance segment generated total revenues of $39.3 million in 2000, compared to $40 million in 1999, and $42.9 million in 1998.
Most revenues in this segment come from earned premiums. When an insurance company writes a policy, the premium charged is referred to as "written" premium; however, the premium is recognized as revenue, or "earned," evenly over the term of the policy. Therefore, there is a lag between changes in written premium and the resulting change in earned premium.
As explained on page 18, the amount of premium "written" by Sequoia and Citation declined in 1997, 1998, and 1999, leading to a corresponding decrease in segment "earned" premium from $36.3 million in 1998, to $34.4 million in 1999, and $32.6 million in 2000. During 1998 and 1999, Sequoia and Citation "pooled," or shared, most of their premiums and expenses. This pooling arrangement was terminated from January 1, 2000, and all business has been transitioned to Sequoia, which accounts for the near doubling in Sequoia's earned premiums in 2000. In December 2000, Citation ceased writing business and is now "running off" the claims reserves from business written in previous years.
The Property and Casualty Insurance segment produced $2.5 million of income before taxes in 2000, compared to a $3.7 million loss before taxes in 1999, and before-tax income of $2.8 million in 1998. Most of the variance between years is due to the 1999 segment loss, which was caused by a $10.1 million pre-tax charge to strengthen Citation's claims reserves, principally in the artisan/contractors line of business. Citation ceased writing this type of coverage in 1995, the year before the reverse merger with Physicians Insurance Company of Ohio.
The 2000 $2.5 million segment profit was comprised of a $1.3 million pre-tax profit from Sequoia and a $1.2 million pre-tax profit from Citation. The individual results of Sequoia and Citation cannot be directly compared to previous years due to the termination of the pooling agreement, and the acquisition of Personal Express.
In 2000, Sequoia earned $32.7 million in premiums. This is primarily composed of $29.8 million from commercial lines and $2.9 million from personal lines, which includes some initial revenues from Personal Express. During 2000 Sequoia experienced higher claims costs than it has in recent years. Sequoia management believes this is principally due to premium rates not keeping up with the rate of increase in costs such as construction, medical care, and automobile repair. This resulted in a loss and loss adjustment expense ratio (i.e., the cost of making provision to pay claims as a percentage of earned premiums) of 67.6% in 2000, compared to 53.5% in 1999, and 52.3% in 1998. This included additional expense in 2000 to recognize unfavorable development in prior year loss reserves of $252,000, compared to favorable development of $401,000 in 1999, and favorable development of $2.1 million in 1998. The higher loss ratio was partially offset by a lower underwriting expense ratio (i.e., operating expenses as a percentage of earned premiums) of 38.6% in 2000, compared to 46.3% in 1999, and 43.4% in 1998. The reduction in the underwriting expense ratio in 2000 was due to:
(1) economies of scale. Following the termination of the pooling agreement with Citation, Sequoia's earned premiums increased 93.4% for the year. This meant that fixed underwriting expense items were spread over a larger base of revenue, therefore reducing them as a percentage of revenue; and
For 2000, Sequoia's combined ratio was 106.3%, compared to 99.8% in 1999, and 95.7% in 1998.
In 2000, Citation reported negative earned premiums of $158,000. Although Citation earned $564,000 in property and casualty premiums, this was more than offset by a $722,000 reduction in earned premium revenues related to reinsurance. This represented additional reinsurance on contracts for 1998 and prior years where the premium paid by Citation depends on loss experience in the reinsured business. Under GAAP, reinsurance is recorded as a reduction in earned premiums. Citation changed to fixed rate reinsurance contracts in 1999.
Favorable reserve development of $282,000 contributed to Citation earning a $1.2 million pre-tax profit for the year. Since Citation reported negative earned premiums in 2000, and is now in "run off," its Combined Ratio is no longer meaningful.
The 1999 $3.7 million segment loss consisted of $2.2 million in income from Sequoia, which was more than offset by a $5.9 million loss from Citation.
The additions to reserves in 1999 and 1998 were based upon actuarial analysis which indicated some deterioration of Physicians' loss experience (i.e., a greater than expected number and/or amount of claims, resulting in a greater than expected liability to pay claims) in most coverage years.
The negative effect of the increased number of claims exceeded the positive effect of the smaller average amount claimed. This resulted in a $2 million increase in direct and assumed loss and loss adjustment expense reserves, a $3.6 million decrease in ceded (transferred) reinsurance reserves, and a $560,000 increase in general reserves for the future adjustment of claims (unallocated loss adjustment expense). As well as these additions to reserves, claims payments in excess of established reserves throughout 1999 and loss reserve discount accretion added $3.3 million to 1999 incurred losses and loss adjustment expenses. These increases were partially offset by the recovery of $1.9 million in reinsurance premiums due to the reduction in ceded loss reserves, and $1.2 million from the discounting of these reserve increases.
In 1998, approximately $5 million was added to loss and loss adjustment expense reserves after actuarial analysis indicated deterioration in Physicians' loss experience in most prior years. The principal factor causing the deterioration was an increased number of a new type of claim, related to patients who were allegedly injured as minors but who could not take action until they reached the legal age of adulthood. No significant unusual activity was noticed in this area in 1999 or 2000.
At December 31, 2000, medical professional liability reserves totaled $51.6 million net of reinsurance. This compares to $53.7 million at December 31, 1999, and $61.5 million at December 31, 1998, net of reinsurance and discount.
A net realized investment loss of $7.6 million was recorded in 2000. The principal components were a $4.6 million loss on the sale of Conex, a $2.5 million write-down of the loan to MKG Enterprises to realizable value, and a $562,000 loss when a former employee exercised an option which required PICO to sell existing shares in Vidler for less than current book value. When PICO acquired Vidler in the merger with Global Equity Corporation, call options had already been granted to certain employees over existing shares in Vidler. All of these call options have now been exercised.
Discontinued operations comprise PICO's former life and health insurance subsidiary, American Physicians Life Insurance Company, which was sold on December 4, 1998. In the 1998 income year, prior to its sale, American Physicians Life produced revenues of $9.2 million and pre-tax income of $300,000. PICO realized cash proceeds of $17 million from the disposal, and recorded a gain of $1.1 million, which is included in the discontinued operations segment result in the consolidated statements of operations.
PICO Holdings, Inc. is a diversified holding company. Our assets primarily consist of investments in our operating subsidiaries, investments in other public companies, and cash and cash equivalents. On a consolidated basis, the Company had $13.6 million in cash and cash equivalents at December 31, 2000, compared to $36.7 million at December 31, 1999, and $71.7 million at December 31, 1998.
In broad terms, here is the cash flow profile of our principal operating subsidiaries:
- - Nevada Land & Resource Company, LLC is actively selling land which 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. Since these receipts and other revenues exceed Nevada Land's operating costs, Nevada Land is generating strong positive cash flow which provides a potential source of funds to finance other group activities;
- - Over the next 12 months, we expect that Sequoia Insurance Company will generate positive cash flow from increased written premium volume, primarily as a result of growth in the existing commercial insurance business and the Personal Express acquisition. Shortly after a policy is written, the premium is collected and the funds can be invested for a period of time before they are required to pay claims. Free cash flow generated by Sequoia will likely be deployed in the company's investment portfolio;
The Departments of Insurance in Ohio and California prescribe minimum levels of capital and surplus for insurance companies, and set guidelines for insurance company investments. PICO's insurance subsidiaries structure the maturity of fixed-income securities
to match the projected pattern of claims payments; however, it is possible that fixed-income and equity securities may occasionally need to be sold at unfavorable times when the bond market and/or the stock market are depressed.
During 2000, $10.7 million of cash was used in Operating Activities. Operating Activities used cash of $26.2 million in 1999, and $23.6 million in 1998. In all three years, the principal uses of cash were claims payments by our insurance subsidiaries and operating expenses and lease payments by Vidler.
In 2000, there was a $49.5 million cash inflow from Financing Activities, principally due to the rights offering which raised $49.8 million in new equity capital during the first quarter. Financing Activities resulted in a $8.4 million net inflow in 1999, as Swiss franc borrowings to finance part of PICO's portfolio of European value stocks raised $6.1 million, the exercise of PICO warrants provided $2.9 million, and the purchase of treasury stock used $292,000. In 1998, Financing Activities used $1.4 million in cash due to the net purchase of treasury stock.
In addition to the risks and uncertainties discussed in the preceding sections of "Management's Discussion and Analysis of Financial Condition and Results of Operations," and elsewhere in this document, the following risk factors should be considered carefully in evaluating PICO and its business. The statements contained in this Form 10-K that are not purely historical are forward-looking statements within the meaning of Section 27A of the Exchange Act, including statements regarding our expectations, beliefs, intentions, plans or strategies regarding the future. All forward-looking statements included in this document are based on information available to us on the date thereof, and we assume no obligation to update any such forward-looking statements.
We do not know of any reliable statistical data that would enable us to predict the probability of success or failure of our investments, or to predict the availability of suitable investments at the time we have available cash. You will be relying on the experience and judgment of management to locate, select and develop new acquisition and investment opportunities. Sufficient opportunities may not be found and this business strategy may not be successful. We have made a number of investments in the past that have been highly successful, such as Fairfield Communities, Inc., which we sold in 1996, and Resource America, Inc., which we sold in 1997. We have also made investments that have lost money, such as our approximate $4 million loss from the Korean investments in 1997, an approximate $5 million write-down of investments in 1998, a $3.2 million write-down of an oil and gas investment in 1999, and $7.1 million in investment losses in the third quarter of 2000. We reported net realized investment gains of $441,000 of gains in 1999 and gains of $21.4 million in 1997; however, we reported net realized investment losses of $7.5 million in 2000 and $4.4 million for 1998. We reported a net unrealized investment loss of $7 million at December 31, 2000, compared to a net unrealized gain of $575,000 at December 31, 1999.
We generally make investments and acquisitions that tend to be long term in nature. We invest in businesses that we believe to be undervalued or may benefit from additional capital, restructuring of operations or management or improved competitiveness through operational efficiencies with our existing operations. We may not be able to develop acceptable revenue streams and investment returns. We may lose part or all of our investment in these assets. The negative impacts on cash flows, income, assets and shareholders' equity may be temporary or permanent. We make investments for the purpose of enhancing and realizing additional value by means of appropriate levels of shareholder influence and control. This may involve restructuring of the financing or management of the entities in which we invest and initiating or facilitating mergers and acquisitions. These processes can consume considerable amounts of time and resources. Consequently, costs incurred as a result of these investments and acquisitions may exceed their revenues and/or increases in their values for an extended period of time until we are able to develop the potential of these investments and acquisitions and increase the revenues, profits and/or values of these investments. Ultimately, however, we may not be able to develop the potential of these assets that we anticipated.
Under the terms of our medical malpractice liability policies, there is an extended reporting period for claims. Under Ohio law, the statute of limitations is one year after the cause of action accrues. Also, under Ohio law, a person must make a claim within four years; however, the courts have determined that the period may be longer in situations where the insured could not have reasonably discovered the injury in that four-year period. Claims of minors must be brought within one year of the date of majority. As a result, some claims may be reported a number of years following the expiration of the medical malpractice liability policy period.
IF WE UNDERESTIMATE THE AMOUNT OF INSURANCE CLAIMS, OUR FINANCIAL CONDITION COULD BE MATERIALLY MISSTATED AND OUR FINANCIAL CONDITION COULD SUFFER
Our insurance subsidiaries may not have established reserves adequate to meet the ultimate cost of losses arising from claims. It has been, and will continue to be, necessary for our insurance subsidiaries to review and make appropriate adjustments to reserves for claims and expenses for settling claims. Inadequate reserves could have a material adverse effect on our business, financial condition, and the results of operations and cash flows. Inadequate reserves could cause our financial condition to fluctuate from period to period and cause our financial condition to appear to be better than it actually is for periods in which insurance claims reserves are understated. In subsequent periods when we discover the underestimation and pay the additional claims, our cash needs will be greater than expected and our financial the results of operations for that period will be worse than they would have been had our reserves been accurately estimated originally.
During the past several years, the levels of the reserves for our insurance subsidiaries have been very volatile. As a result of our claims experience, we have had to significantly increase these reserves in the past several years.
The property and casualty insurance industry has been highly cyclical, and the industry has been in a cyclical downturn over the last several years. This is due primarily to competitive pressures on pricing, which has resulted in lower profitability for us. Pricing is a function of many factors, including the capacity of the property and casualty industry as a whole to underwrite business, create policyholders' surplus and generate positive returns on their investment portfolios. The level of surplus in the industry varies with returns on invested capital and regulatory barriers to withdrawal of surplus. Increases in surplus have generally been accompanied by increased price competition among property and casualty insurers.
The cyclical trends in the industry and the industry's profitability can also be affected by volatile and unpredictable developments, including natural disasters, fluctuations in interest rates, and other changes in the investment environment which affect market prices of investments and the income generated from those investments. Inflationary pressures affect the size of losses and court decisions affect insurers' liabilities. These trends may adversely affect our business, financial condition, the results of operations and cash flows by reducing revenues and profit margins, by increasing ratios of claims and expenses to premiums, and by decreasing cash receipts. Capital invested in our insurance companies may produce inferior investment returns during periods of downturns in the insurance cycle due to reduced profitability.
Failure to meet one or more reserve levels may result in state regulators requiring the insurance company to submit a business plan demonstrating achievement of the required reserve levels. This may include the addition of capital, a restructuring of assets and liabilities, or changes in operations. At or below certain lower reserve levels, state regulators may supervise the operation of the insurance company and/or require the liquidation of the insurance company. Such insurance department actions could adversely affect our business, financial condition, and the results of operations and cash flows and decrease the value of our investments in our insurance subsidiaries. If the insurance departments were to require changes in the operations of our insurance subsidiaries, we may incur additional expenses and we may lose customers. If the insurance departments were to require additional capital in our insurance subsidiaries or a restructuring of our assets and liabilities, our investment returns could suffer. If the insurance departments were to place our insurance companies under their supervision, we would lose customers, our revenues may decrease more rapidly than our expenses, and our investment returns would suffer. We may even lose part or all of our investments in our insurance subsidiaries if our insurance subsidiaries are liquidated by the insurance departments.
a given area and on the probable maximum loss created by that event. While our insurance subsidiaries attempt to limit their exposure to acceptable levels, it is possible that an actual catastrophic event or multiple catastrophic events could significantly exceed the maximum loss anticipated, resulting in a material adverse effect on our business, financial condition, and the results of operations and cash flows. Such events could cause unexpected insurance claims and expenses for settling claims well in excess of premiums, increasing cash needs, reducing surplus and reducing assets available for investments. Capital invested in our insurance companies may produce inferior investment returns as a result of these additional funding requirements.
Our insurance subsidiaries' ratings may not be maintained or increased, and a downgrade would likely adversely affect our business, financial condition, and the results of operations and cash flows. A.M. Best Company's ("A.M. Best") ratings reflect the assessment of A.M. Best of an insurer's financial condition, as well as the expertise and experience of its management. Therefore, A.M. Best ratings are important to policyholders. A.M. Best ratings are subject to review and change over time. Failure to maintain or improve our A.M. Best ratings could have a material adverse effect on the ability of our insurance subsidiaries to underwrite new insurance policies, as well as potentially reduce their ability to maintain or increase market share. Management believes that many potential customers will not insure with an insurer that carries an A.M. Best rating of less than B+, and that customers who do so will demand lower rates.
ENVIRONMENTAL REGULATIONS MAY DETRACT FROM OUR FUTURE REVENUE STREAMS AND PROFITABILITY BY LIMITING OUR CUSTOMER BASE
The trading price of our common stock has historically been, and is expected to be, subject to fluctuations. The market price of the common stock may be significantly impacted by:
- - quarterly variations in financial performance; - - shortfalls in revenue or earnings from levels forecast by securities analysts; - - changes in estimates by such analysts; - - product introductions; - - our competitors' announcements of extraordinary events such as acquisitions; - - litigation; and - - general economic conditions.
Our results of operations have been subject to significant fluctuations, particularly on a quarterly basis, and our future results of operations could fluctuate significantly from quarter to quarter and from year to year. Causes of such fluctuations may include the inclusion or exclusion of operating earnings from newly acquired or sold operations. At December 31, 1998, the closing price of our common stock on the NASDAQ National Market was $13.25 per share, compared to $12.4375 at December 31, 2000. On a quarterly basis between these two dates, closing prices have ranged from a high of $25.3125 at June 30, 1999 to a low of $11.125 at March 31, 2000. During 2000, closing prices have ranged from a low of $9.875 per share on March 27 to a high of $14.125 on January 18.
At the Annual Meeting of Shareholders on October 19, 2000, our shareholders voted to amend the Articles of Incorporation to eliminate the preferred shares. The change took effect during the first quarter of 2001.
Liabilities for unpaid loss and loss adjustment expenses are estimated based upon actual and industry experience, and assumptions and projections as to claims frequency, severity and inflationary trends and settlement payments. Such estimates may vary from the eventual outcome. The inherent uncertainty in estimating reserves is particularly acute for lines of business for which both reported and paid losses develop over an extended period of time.
discounting was based upon historical payment patterns and assumed an interest rate at or below Physicians' investment yield, and was the same rate used for statutory reporting purposes. A discount rate of 4% was used for medical professional liability insurance reserves. Discounting was discontinued effective January 1, 2000. See Note 24 of Notes to Consolidated Financial Statements.
All of PICO's insurance companies seek to reduce the loss that may arise from individually significant claims or other events that cause unfavorable underwriting results by reinsuring certain levels of risk with other insurance carriers.
Various reinsurance treaties remain in place to limit PICO's exposure levels. See "REINSURANCE" following this section and NOTE 13 OF NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, "REINSURANCE."
Discontinued personal lines insurance Balance sheet liability (discounted for 1998 and 1999)
Each decrease or increase amount includes the effects of all changes in amounts during the current year for prior periods. For example, the amount of the redundancy related to losses settled in 1993, but incurred in 1990 will be included in the decrease or increase amount for 1990, 1991 and 1992. 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.
There can be no assurance that the insurance companies have established reserves adequate to meet the ultimate cost of losses arising from such claims. It has been necessary, and will over time continue to be necessary, for the insurance companies to review and make appropriate adjustments to reserves for estimated ultimate losses and loss adjustment expenses. To the extent reserves prove to be inadequate, the insurance companies would have to adjust their reserves and incur a charge to income, which could have a material adverse effect on PICO's financial results.
An analysis of changes in the liability for unpaid losses and loss adjustment expenses for 2000, 1999 and 1998 is set forth in NOTE 14 OF NOTES TO PICO'S CONSOLIDATED FINANCIAL STATEMENTS, "RESERVE FOR UNPAID LOSS AND LOSS ADJUSTMENT EXPENSES."
Effective January 1, 1998, Sequoia and Citation entered into an inter-company reinsurance pooling agreement for business in force as of January 1, 1998 and business written thereafter. Per the agreement, Citation cedes 100% of its net premium and losses to
Citation and Sequoia have the same reinsurance program which is outlined as follows. For property business, reinsurance provides coverage of $10.4 million excess of $150,000. For casualty business, excluding umbrella coverage, reinsurance provides coverage of $4.9 million excess of $150,000. Umbrella coverages are reinsured $9.9 million excess of $100,000. The catastrophe treaties for 1998 and thereafter provide coverage of 95% of $19 million excess of $1 million per occurrence for the combined losses of Citation and Sequoia. The catastrophe treaties for 1998 and thereafter provide coverage of 95% of $14 million excess of $1 million per occurrence. Facultative reinsurance is placed with various reinsurers.
With regard to Sequoia, all policy and claims liabilities prior to August 1, 1995 have been 100% reinsured with Sydney Reinsurance Corporation and unconditionally guaranteed by QBE Insurance Group Limited. Sequoia, however, retains primary responsibility to its policyholders and claimants should Sydney and QBE fail.
See Note 13 of Notes to Consolidated Financial Statements, "Reinsurance" with regard to reinsurance recoverable concentration for all property and casualty lines of business, including medical professional liability, as of December 31, 2000. PICO remains contingently liable with respect to reinsurance contracts in the event that reinsurers are unable to meet their obligations under the reinsurance agreements in force.
Beginning in 1994, Physicians, Professionals, Citation, and Sequoia became subject to the provisions of the Risk-Based Capital for Insurers Model Act which has been adopted by the National Association of Insurance Commissioners for the purpose of helping regulators identify insurers that may be in financial difficulty. The Model Act contains a formula which takes into account asset risk, credit risk, underwriting risk and all other relevant risks. Under this formula, each insurer is required to report to regulators using formulas which measure the quality of its capital and the relationship of its modified capital base to the level of risk assumed in specific aspects of its operations. The formula does not address all of the risks associated with the operations of an insurer. The formula is intended to provide a minimum threshold measure of capital adequacy by individual insurance company and does not purport to compute a target level of capital. Companies which fall below the threshold will be placed into one of four categories: Company Action Level, where the insurer must submit a plan of corrective action; Regulatory Action Level, where the insurer must submit such a plan of corrective action, the regulator is required to perform such examination or analysis the Superintendent of Insurance considers necessary and the regulator must issue a corrective order; Authorized Control Level, which includes the above actions and may include rehabilitation or liquidation; and Mandatory Control Level, where the regulator must rehabilitate or liquidate the insurer.
Summarized unaudited quarterly financial data (in thousands, except share and per share amounts) for 2000 and 1999 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. In the fourth quarter of 2000, the Company received notification from the Ohio Department of Insurance that it would no longer permit the Company to discount its MPL reserves for statutory accounting practices. Accordingly, the Company discontinued discounting its MPL reserves in its statutory filing with the ODI and financial statements prepared in accordance with US GAAP for the year ended December 31, 2000. The cumulative effect was recorded as of January 1, 2000 and the previously filed quarterly data has been adjusted below to reflect this change. In addition, a reconciliation of the previously reported net loss is also included below. The effect for the year ended December 31, 2000 was to increase the unpaid losses and loss adjustment expenses reserve by $7.5 million and an cumulative effect of accounting principle of $5 million, or $0.43 per share, net of an income tax benefit of approximately $2.5 million.
We have audited the accompanying consolidated balance sheets of PICO Holdings, Inc. and its subsidiaries (collectively "the Company") as of December 31, 2000 and 1999, and the related consolidated statements of operations, shareholders' equity, and cash flows for each of the three years in the period ended December 31, 2000. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
As discussed in Note 24 to the financial statements, in 2000 the Company changed its method of accounting for medical professional liability claims reserves.
PICO HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
PICO HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY, CONTINUED FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
PICO HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 2000, 1999, AND 1998
- "running off" the loss reserves of our medical professional liability insurance companies; and
The Company's primary subsidiaries as of December 31, 2000 are as follows:
Vidler Water Company, Inc. ("Vidler"). Vidler is a majority-owned Delaware corporation that was originally formed under the laws of the state of Colorado. Vidler's business involves identifying end users, namely municipalities or developers, in the Southwest who require water, and then locating a source and supplying the demand, utilizing the company's own assets where possible. These assets comprise water rights in the states of Colorado, Arizona, and Nevada, and water storage facilities in Arizona and California.
Sequoia Insurance Company ("Sequoia"). Sequoia is a California insurance company licensed to write insurance coverage for property and casualty risks ("P&C") within the states of California and Nevada. Sequoia writes business through independent agents and brokers. In recent years, Sequoia has primarily written farm and small to medium-sized commercial insurance in California and Nevada. During 2000, Sequoia significantly expanded its personal insurance business with the acquisition of Personal Express Insurance Services, Inc.
SISCOM, Inc. ("SISCOM"). SISCOM is a Colorado corporation that is a software developer and systems integrator for video-based content management systems for the professional broadcast, sports, and entertainment industries. Unconsolidated Affiliates:
HyperFeed Technologies, Inc. ("HyperFeed") provides financial market data and data delivery solutions to the financial services industry. PICO owns approximately 36% of the outstanding voting stock of HyperFeed.
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 unpaid losses and loss adjustment expenses, deferred policy acquisition costs, land and water rights, deferred income taxes and contingent liabilities. While management believes that the carrying value of such assets and liabilities are appropriate as of December 31, 2000 and 1999, it is reasonably possible that actual results could differ from the estimates upon which the carrying values were based.
The Company regularly reviews the carrying value of its investments for impairment. A decline in the value of any investment below cost that is deemed other than temporary is written down to net realizable value. Adjustments for write-downs are reflected in net realized gain or loss on investments in the consolidated statements of operations. During the year ended December 31, 2000, the Company's investment in MKG was considered permanently impaired, and a charge of $2.5 million was recorded to reduce the investment to its net realizable value of $500,000 (See Note 17). During 1999, the Company recorded impairment losses of $3.2 million related to a portion of an oil and gas investment.
The Company invests domestically and abroad. Approximately $41.2 million and $41.8 million of the Company's investments at December 31, 2000 and 1999, respectively, were invested internationally, including equity values of affiliates. The Company's most significant foreign currency exposure is in Swiss francs and Australian dollars.
Land, minerals, 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 for its intended use. Amortization of land improvements is computed on the straight-line method over the estimated useful lives of the improvements ranging from 5 to 15 years. Provision is made for any diminution in value that is considered to be other than temporary.
In assessing the realization of deferred income taxes, management considers whether it is more likely than not that any deferred income tax assets will be realized. The ultimate realization of deferred income tax assets is dependent upon the generation of future taxable income during the period in which temporary differences become deductible. If future income does not occur as expected, a deferred income tax valuation allowance may be established or modified.
Basic earnings per share are computed by dividing net earnings by the weighted average shares outstanding during the period. Diluted earnings per share are computed similar to basic earnings per share except the weighted average shares outstanding are increased to include additional shares from the assumed exercise of stock options and warrants, if dilutive. The number of additional shares is calculated by assuming that the outstanding options and warrants were exercised, and that the proceeds were used to acquire shares of common stock at the average market price during the period.
The Company reported a loss from operations in each of the three years ended December 31, 2000 and consequently the calculation of diluted earnings per share in each year excludes the options and warrants outstanding in those years because the impact would be anti-dilutive. Stock options of 1.1 million in 2000, and 1 million in 1999 and 1998 and 223,187 warrants in 1998 were excluded from the calculation of the diluted weighted average shares outstanding.
In December 1999, the SEC issued Staff Accounting Bulletin (SAB) No. 101, "Revenue Recognition in Financial Statements," which summarizes the SEC's interpretation of applying generally accepted accounting principles to revenue recognition in the financial statements. SAB No. 101 was subsequently amended in June 2000 and became effective for the fourth fiscal quarter of 2000 for the Company. Based on the Company's current revenue recognition policies, the adoption of SAB No. 101, as amended, did not have a material impact on PICO's consolidated financial position or the results of operations.
Under the terms of the joint venture agreement between Conex and the sino-foreign joint venture in The People's Republic of China, Conex had a commitment to fund a third round of financing in the amount of $5 million. This liability was included in the consolidated financial statements at December 31, 1999, but following the sale of Conex, this liability, as well as all the other assets and liabilities of Conex, are no longer included in PICO's consolidated financial statements.
On January 31, 2000, PICO sold its interest in Summit Global Management for $100,000, and recorded a pretax loss on sale of $75,400.
The amortized cost and carrying value of investments in fixed maturities at December 31, 2000, 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 2000 and 1999, the Company recorded $2.5 million and $3.2 million, respectively, in permanent write downs of investments to recognize what is expected to be other than temporary declines in the value of those securities.
During 2000, the Company purchased 981,584 shares of Australian Oil and Gas ("AOG") for $858,000. During 1999, the Company purchased 6,166,657 shares of Australian Oil and Gas for $6.6 million and received 420,494 shares as a dividend valued at $452,000. At December 31, 2000, the Company owns a total of 8,426,044 shares, representing a 17.97% interest in AOG.
During the fourth quarter of 2000, the Company increased its voting ownership in Accu Holding AG, a Swiss corporation, to 28.3%. Generally, with a voting ownership percentage of 20% or more, the investment should be recorded under the equity method unless the investee lacks the ability to exercise significant influence. PICO lacks the ability to exercise significant influence based on the inability to obtain the financial information necessary to apply equity accounting and is accounting for this investment at cost and recording an unrealized gain under SFAS 115.
Based on the Company's 19.3% voting ownership and a seat on the Board of Directors of Jungfraubahn Holding AG, beginning in the third quarter of 2000, the Company adopted the equity method of accounting for this investment. Previously the Company recorded the investment at market value under SFAS 115. The application of equity accounting requires the investment account, results of operations, retained earnings, unrealized gain/loss, and accumulated foreign currency to be adjusted retroactively to report the investment on the equity method for the percentage owned, for all periods presented. The difference between the cost of the investment and underlying equity in the net assets of the company of approximately $18 million was considered negative goodwill and was allocated to the non-current assets of Jungfraubahn. Under the equity method of accounting, the carrying value before tax of the Company's investment in Jungfraubahn was $23.7 million and $20.8 at December 31, 2000 and 1999, respectively. The market value of the investment at December 31, 2000 and 1999 was approximately $18.9 million and $15.3 million, respectively.
During 2000, the Company purchased 3,472 shares of Jungfraubahn for $493,000. During 1999, the Company purchased 76,600 shares of Jungfraubahn for $11.8 million. The acquisition was financed with $7 million in cash and the remaining balance in debt. At December 31, 2000 the Company owns 112,672 shares, or 19.3% of the Jungfraubahn.
The following is the market value of the common shares and preferred shares based on the December 31, 2000 and 1999 closing price of HyperFeed common stock:
At December 31, 1999, the Company's investment in HyperFeed consisted of 2,370,000 shares of common stock, representing 15% of the common shares outstanding; 4,786,547 shares of preferred stock, representing a 23% diluted voting interest; and an additional 4,055,195 common stock warrants which on a diluted basis would represent an additional 17% voting interest. The common and preferred stock are presented using the equity method of accounting for investments in common stock as prescribed by APB No. 18, and have a combined carrying value of $2.8 million at December 31, 1999. The difference between the carrying value of the investment and the underlying equity in the net assets or liabilities of HyperFeed is considered goodwill and is being amortized over 10 years on a straight-line basis. At December 31, 1999, the common stock warrants are carried in accordance with SFAS No. 115 at an estimated fair value of $15.4 million, prior to $3.8 million in deferred tax, using the Black Scholes option-pricing model. The pre-tax unrealized gain on the warrants is $11.3 million.
During the three years ended December 31, 2000, HyperFeed recorded various capital transactions that affected PICO's voting ownership percentage. In 2000, HyperFeed issued 164,000 shares of common stock related to conversion of stock options which resulted in a dilution gain to PICO of approximately $208,000. Deferred taxes are provided on each dilution transaction. In 1999, HyperFeed issued common stock related to the conversion of options and warrants and stock in a private placement. These transactions diluted PICO's ownership percentage approximately 3% to 35% at the end of 1999 and the purchase of additional shares by PICO increased our ownership to 36% by the end of December 31, 2000. During 1998, there were various capital transactions, other than the debt conversion, that affected PICO's voting ownership percentage. In summary, PICO's ownership percentage increased from 16.5% at the beginning of 1998 to 18% at June 30, 1998 then declined to 17.7% at September 30, 1998. The debt conversion during the fourth quarter of 1998 increased PICO's voting percentage to approximately 38% at the end of 1998.
Through its subsidiary Nevada Land, the Company owns land and the related mineral and water rights. Through its subsidiary Vidler, the Company owns 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:
At December 31, 2000 and 1999, the book value of Vidler's interest in the Semitropic Water Storage facility was $5.7 million and $4 million, respectively. During the first ten years of the agreement through November 2008, Vidler is required to make a minimum annual payment of $2.3 million. In return, Vidler is entitled to store up to 185,000 acre-feet of water underground at Semitropic for 35 years. The cash payments made during the first ten years are being capitalized and the asset is being amortized over its useful life of thirty-five years. In 2000 and 1999, the $2.3 million payments each year were capitalized to water storage, and $667,000 of expense was amortized against it each year. In addition, Vidler is required to pay annual operating and maintenance costs. In 2000 and 1999, operating costs of $889,000 and $863,000, respectively, were expensed to the Water Rights and Water Storage segment.
On June 16, 1997, the Company announced a definitive agreement to sell its life and health insurance subsidiary, American Physicians Life ("American Physicians"). The closing was completed on December 4, 1998. Proceeds from the sale were $17 million in cash. Because American Physicians represented a major segment of the Company's business, in accordance with APB No. 30 "Reporting the Results of Operations -- Reporting the Effects of Disposal of a Segment of a Business," operations have been classified as discontinued operations.
Other accounts receivable include $2.2 million due from Dominion Capital Pty. Ltd which is affiliated with the Company through a mutual ownership in Solpower Corporation. Also included in other accounts receivable is a $100,000 note receivable from the President and CEO of Summit Global Management for the purchase of Summit in January 2000.
The Company and its U.S. subsidiaries, excluding U.S. subsidiaries of Global Equity, file a consolidated federal income tax return. Non-U.S. subsidiaries file tax returns in various foreign countries.
The deferred tax asset valuation allowance as of December 31, 2000 and 1999 relates primarily to the net operating loss carryforwards (NOL's) of Global Equity and its Canadian subsidiaries. Global Equity and its subsidiaries are subject to rules that limit the ability to utilize their NOL's. Due to these limitations and the uncertainty of future taxable income, a valuation allowance has been recorded for the deferred tax asset that may not be realized. Prior to the enactment, in 1999, of U.S. tax legislation that removed certain limitations on the Company's ability to utilize its U.S. NOLs, the Company carried a valuation allowance on a portion of its U.S. NOLs. As a result of this legislation, in 1999 most of the valuation allowance for U.S. NOL's was removed. Deferred tax assets and liabilities, the recorded valuation allowance, and federal income tax expense in future years can be significantly affected by changes in circumstances that would influence management's conclusions as to the ultimate realization of deferred tax assets.
Provision has not been made for U.S. or additional foreign tax on the undistributed earnings of foreign subsidiaries. It is not practical to estimate the amount of additional tax that might be payable. At December 31, 2000 the Company had an income
The major classifications of the Company's fixed assets are as follows at December 31:
The Company has used the $49.8 million net proceeds to develop existing water and water storage assets, acquire additional water assets, acquire investments, and for general working capital needs.
The rights offering closed on March 27, 2000 and the Company issued 3,335,690 additional shares of common stock for proceeds of $50 million. The Company incurred approximately $192,500 of expenses directly related to the transaction. On December 16, 1998, PICO acquired the remaining shares of Global Equity. This was accomplished through an exchange of PICO shares for Global Equity shares at the exchange ratio of .4628 of a PICO share for each share of Global Equity. PICO issued a total of 6,810,426 shares of PICO common stock to former Global Equity shareholders. PICO subsidiaries hold 3,110,837 of these newly issued shares which are recorded as treasury stock in the consolidated balance sheets of the Company. Following the transaction, PICO had 13,328,778 shares of common stock issued and outstanding of which 4,380,779 million are accounted for as treasury stock, at cost in the consolidated balances sheets. In addition, PICO exchanged 223,187 PICO warrants with an exercise price of $23.80 per share for all the outstanding Global Equity warrants using the same exchange ratio. The original October 23, 1998 expiration date of the warrants was extended to June 30, 1999. During 1999, 120,000 of the warrants were exercised for $2.9 million. The remaining warrants expired. No other warrants exist. PICO also exchanged 484,967 stock options to Global Equity officers, two current Global Equity directors and a former Global Equity director in exchange for surrendering their Global Equity stock options. These grants placed the participants in a substantially similar position regarding shares and exercise price, vested according to their original terms.
PICO Holdings 1998 Stock Option Plan. PICO is authorized to issue 100,000 shares of common stock pursuant to awards granted in various forms, including incentive stock options (intended to qualify under Section 422 of the Internal Revenue Code of 1986, as amended), non-qualified stock options, and other similar stock-based awards. On October 22, 1998, PICO granted 100,000 non-qualified common stock options to an officer of the Company at an exercise price of $15.625 per share. The options granted vest monthly over three years, expiring October 22, 2008. During 1999, 61,111 of these options expired when the officer left the Company.
exposure and diversifying their business. Reinsurance contracts do not relieve the Company's insurance subsidiaries from their obligations to policyholders.
Physicians and PRO prepare their statutory financial statements in accordance with accounting practices prescribed or permitted by the Ohio Department of Insurance ("Ohio Department"). Citation and Sequoia prepare their statutory financial statements in accordance with accounting practices prescribed or permitted by the California Department of Insurance. Prescribed statutory accounting practices include guidelines contained in various publications of the National Association of Insurance Commissioners ("NAIC"), as well as state laws, regulations, and general administrative rules. Permitted statutory accounting practices encompass all accounting practices not so prescribed. The Ohio Department's prescribed accounting practices do not allow for discounting of claim liabilities. However, for years prior to 2000, the Ohio Department permitted Physicians to discount its losses and loss adjustment expenses related to its MPL claims to reflect anticipated investment income. Permission was granted due primarily to the longer claims settlement period related to MPL business as compared to most other types of property and casualty insurance lines of business. In 2000 the Ohio Department of Insurance withdrew
permission to discount MPL claims reserves in Physicians' statutory financial statements. In addition, Physicians no longer discounts MPL reserves in its GAAP financials.
PICO maintains a 401(k) Defined Contribution Plan covering substantially all employees of the Company. Matching contributions are based on a percentage of employee compensation. In addition, the Company may make a discretionary contribution at the end of the Plan's fiscal year within limits established by the Employee Retirement Income Securities Act. Contribution expense incurred by the Company for the three years ended December 31, 2000 was $578,000, $862,000 and $618,000, respectively.
On March 6, 1996, Charles E. Bancroft, the President and Chief Executive Officer of Sequoia entered into an incentive agreement with Sequoia after its acquisition by Physicians. Under the terms of this incentive agreement, Mr. Bancroft is to receive a payment equal to ten percent of the increase in Sequoia's value upon his retirement, removal from office for reasons other than cause, or the sale of Sequoia to a third party. For purposes of the incentive agreement, the increase in Sequoia's value is to be measured from August 1, 1995; the date Physicians acquired Sequoia. Mr. Bancroft was not eligible to receive any incentive payment, until he was continuously employed by Sequoia from August 1, 1995 through August 1, 1998. On March 20, 1998 this incentive agreement was clarified to include the combined increase in value of Sequoia and Citation. The increase in value of Citation will be measured from January 1, 1998. The Company recorded compensation expense related to this arrangement of $160,000, $210,000 and $110,000 during the years ended December 31, 2000, 1999 and 1998, respectively.
Certain of the Company's subsidiaries have stock option arrangements with officers and other employees for stock of the respective subsidiary. Options are granted under these arrangements at the estimated fair value of the subsidiary's stock at the time of grant. Therefore, no compensation has been recorded by the Company related to these arrangements. During 1998, 18,950 options to acquire approximately 1.9% of existing shares of Vidler were exercised for $108,000. During 2000, 19,037 options to acquire 1.9% of the existing shares of Vidler were exercised for $109,000 and a loss, calculated in accordance with Staff Accounting Bulletin No. 51, of $525,000 before tax was recorded on the sale.
(3) Deferred federal income taxes are not recognized for statutory accounting purposes.
(4) Equity in net income of subsidiaries and affiliates is credited directly to shareholders' equity for statutory accounting purposes.
(5) Fixed maturity securities classified as available for sale are carried at amortized cost.
The Company and its wholly-owned insurance subsidiaries' policyholders' surplus and net income (loss) as of and for the years ended December 31, 2000, 1999 and 1998 on the statutory accounting basis are as follows:
Certain insurance subsidiaries are owned by other insurance subsidiaries. In the table above, investments in such subsidiary-owned insurance companies are reflected in statutory surplus of both the parent and subsidiary-owned insurance company. As a result, at December 31, 2000, 1999, and 1998, statutory surplus of approximately $27.2 million, $28.8 million and $27.1 million, respectively, is reflected in both the parent and subsidiary-owned insurance companies.
At December 31, 2000, $9.7 million of the total outstanding debt is within Vidler, incurred with the acquisition of land in the Harquahala Valley. The weighted average rate of interest on these notes is 8.5% which are collateralized by the purchased properties.
Nevada Land & Resource Company issued a $5 million promissory note, maturing on October 1, 2000 in connection with the acquisition of lands. The note was collateralized by 9.4 acres of land, which held geothermal leases. The notes bore interest at 9% and were paid monthly to the extent that payment was received on four geothermal leases associated with the land. In April 1999, Nevada Land & Resource Company settled the note payable by exchanging the particular land deed, which was collateral for the note. As a result of this settlement the Company recognized a net extraordinary gain of $442,000.
On March 19, 2001, Vidler sold 2,165.5 acres of land, and the related 6,496.5 acre-feet of water rights, in the Harquahala Valley to a unit of Allegheny Energy, Inc. for approximately $9.1 million. The transaction resulted in a pre-tax gain of approximately $2.4 million, which will be recorded in the first quarter of 2001.