The Company's San Jose branch office and the northern California regional claims operation share approximately 28,000 square feet of space in San Jose, California pursuant to a lease expiring in March 2001. The Company also leases space for branch offices located in Rancho Cordova, Denver, Colorado and Phoenix, Arizona. The Rancho Cordova and Phoenix leases expire in 1997 and the Denver lease expires in 1998.
Readers of Citation Insurance Group's prior financial statements will find that these financial statements differ greatly from those presented in the past. Whereas Citation Insurance Group was predominantly engaged in property and casualty operations, PICO Holdings, Inc. operates primarily as an insurance and investment company, specializing in portfolio investing, property and casualty insurance, life and health insurance, and investment management and other services.
Prior to July 16, 1995, the effective date of Physicians and PRO's 100% quota share reinsurance of their MPL businesses with Mutual and the subsequent sale of the rights to these MPL books of business, effective January 1, 1996, the Physicians group of affiliated companies consisted primarily of two property and casualty insurance companies writing MPL insurance (Physicians and PRO) and one life and health insurance company, APL. In November 1994, the respective boards of directors of Physicians and PRO determined that it was in the best interests of Physicians and PRO and their respective shareholders to sell their MPL insurance businesses. This sale was part of an overall shift in the strategic direction of Physicians and PRO.
On September 5, 1995, Physicians purchased 38.2% of the common stock of GEC, a Canadian company operating in portfolio investments, agricultural services, and other business segments.
In addition to the operation of its subsidiaries, the Company's objective is to use its resources and those of its subsidiaries and affiliates to increase shareholder value through investments in businesses that the Company believes are undervalued. The Company's acquisition philosophy is to make selective investments, predominantly in public companies, for the purpose of enhancing and realizing additional value by means of appropriate levels of shareholder influence and control. This could involve the restructuring of the financing or management of the companies in which the Company invests. It may also encompass initiating and facilitating mergers and acquisitions within the relevant industry to achieve constructive rationalization. This business strategy was adopted in late 1994, but was not fully implemented in 1994 and 1995; therefore, the results of this business strategy are not fully reflected in the historical financial statements.
During 1996, the Company's assets increased $68.6 million to $490.4 million. Much of this increase was due to the reverse acquisition.
Revenues from 1996 portfolio investing operations of $27.0 million increased $19.0 million over the $8.0 million reported for 1995 and surpassed the $2.0 million 1994 level by $25.0 million. Portfolio investing revenues are shown
Nearly all of the $27.0 million portfolio investing revenues, or $26.4 million, was attributable to realized investment gains. These gains were principally a result of the sale of Physicians' investment in Fairfield common stock, a strategic "value investment" identified late in 1994. Realized investment gains attributable to portfolio investing for 1995 and 1994 were $5.0 million and $0.8 million, respectively.
Unrealized investment gains at December 31, 1996, net of income taxes, amounted to $ 11.8 million. This does not include all of the appreciation of PICO's Global Equity Corporation common stock, since GEC is recorded on PICO's books at GEC's equity value which, per share, is less than the December 31, 1996 market value of the GEC stock. See Note 19 to the Consolidated Financial Statements.
The Company's management believes its new strategic focus is succeeding as well as or better than expected, as evidenced by the Company's growth during the past two to three years. The Company intends to continue to make selective investments for the purpose of enhancing and realizing additional value by means of appropriate levels of shareholder influence and control, as well as to operate its subsidiaries to obtain maximum shareholder value. Nevertheless, while past results are very encouraging, future results cannot and should not be predicted based upon past performance alone.
The decline in 1996 investment income compared to 1995 was principally due to a significant shift in the mix of the Company's investment portfolio from interest bearing fixed maturity and cash equivalent securities toward equity securities. See "PART I -- BUSINESS -- HISTORY OF THE COMPANY -- PHYSICIANS." Also, the rate used to discount MPL loss and LAE reserves was reduced to 4% from an average of around 5% in 1994, resulting in a reduction in discount accretion from 1995 forward. As a result, 1995 investment income attributed to portfolio investing operations increased over 1994 due to less investment income having been allocated to MPL operations to cover discount accretion.
APL produced $9.0 million in revenues during 1996, $2.2 million more than during the comparable 1995 period and $800,000 more than 1994. The breakdown of these revenues follows:
The exit from the group health insurance market (primarily major medical) was a result of management's decision to concentrate APL's marketing and sales efforts on the Survivor Key product line. This life insurance product combines the benefits of a lump sum cash payout upon the diagnosis of certain critical illnesses with a death benefit. Gross written premiums for Survivor Key have increased from $96,000 in 1994 to $257,000 in 1995 and $547,000 in 1996.
Other 1996 revenues were down $600,000 compared to 1995 and $300,000 compared to 1994. This category includes APL's commission income for outside company products as well as its fees for administrative services contracts. Beginning January 1, 1996, APL ceased to be the agent of record on a block of group health business. This decrease in commission revenue was directly offset by a corresponding reduction in commission expenses which is included with the "Insurance underwriting and other expenses" line of the income statement.
Investment income revenues were down $600,000 compared to 1995 and $300,000 compared to 1994. These decreases were principally due to an increased level of equity securities in APL's investment portfolio.
Life and health operations resulted in 1996 pre-tax operating income of $4.0 million. This compares to $859,000 in 1995 and $2.9 million in 1994. As discussed above, realized investment gains were the primary source of the increase in 1996 income. The 1995 decrease as compared to 1994 was primarily attributable to the exit from the group health insurance market. APL's claims experience was excellent in the major medical product line in 1994, which resulted in a reserve decrease for 1994 and contributed to the 1994 operating income.
Sequoia, CIC and CNIC currently account for all of the ongoing property and casualty ("P & C") insurance revenues. These companies write predominately light commercial and multiple peril insurance coverage in central and northern California.
Sequoia produced $28.7 million in revenues during 1996 as compared to $2.5 million for last five months of 1995, from the date of purchase of Sequoia to year-end. As shown below, earned premiums made up most of these revenues. Premiums are earned pro-rata throughout the year according to the coverage dates of the underlying policies.
Included in the total P & C revenues shown below are $6.5 million from CIC and CNIC for the short period of their
Sequoia's 1996 GAAP combined ratio was 93.7%, consisting of a 62.9% loss and LAE ratio and an expense ratio of 30.8%.
Although MPL reserves are certified annually by two independent actuaries, as required by state law, significant fluctuations in reserve levels can occur based upon a number of variables used in actuarial projections of ultimate incurred losses and LAE.
It is expected that each of the major companies currently within the PICO group will be able to stand on its own and cover its own cash flow needs without the need for borrowing or additional capital infusions, with the possible exceptions of additional capital requirements of Sequoia and CIC to maintain or improve their AMBest ratings or to meet minimum capital requirements.
The Company's insurance subsidiaries attempt to structure the duration of their invested assets to match the cash flows required to settle the related unpaid claims liabilities. Their invested assets provide adequate liquidity to fund projected claims and LAE payments for the coming years.
To the extent that funds necessary for settling claims and paying operating expenses are not provided by existing cash and cash equivalents, investment income, reinsurance recoveries, and rental other income, invested assets will be liquidated. Short term and fixed maturity investments are managed to mature according to projected cash flow needs. Equity securities will be converted to cash as additional funds are required, with an anticipated maximum liquidation lead-time of approximately six months.
As previously mentioned, reinsurance recoveries (reimbursement of covered losses from reinsurers) will be a significant source of incoming funds in upcoming years as claims are settled. As shown in the accompanying financial statements, consolidated reinsurance receivables amounted to $97.0 million at December 31, 1996 compared to $100.7 million at December 31, 1995. Physicians' reinsurance receivables were $38.0 million at December 31, 1996 and $35.9 million at December 31, 1995. Of the $59 million difference between the $97.0 million consolidated total at December 31, 1996 and the $38.0 million of Physicians, $49.2 million was recorded on Sequoia's financial statements, most of which is due from SRC and guaranteed by QBE. See "Item 1 - -Business--History of the Company." Of the remainder, $6.6 million resulted from the inclusion of Citation.
Unsecured reinsurance risk is concentrated in the companies and amounts shown in the table under Note 11 ("Reinsurance") to the Consolidated Financial Statements as of December 31, 1996. All companies listed are highly rated companies with significant sources of capital.
As shown in the accompanying Consolidated Statements of Cash Flows, the Company used cash flows of $10.8 million for operations in 1996 and $15.1 million in 1995, compared to $5.0 million in 1994. Cash used for 1994 operations was greatly inflated by an approximate $20 million increase in MPL reinsurance premiums as a result of significant changes in the Company's reinsurance treaties. The increased cash outflows for 1995 principally relate to a $27 million reduction in MPL premium collections as compared to 1994, increased claims payments of $1.3 million, increased operating expenses of approximately $2 million, increased federal income tax payments of $1.5, and increased deposits with reinsurers of $4.2 million, partially offset by a $11.7 million decrease in reinsurance cessions. Cash consumed by operations in 1996 decreased from the $15.1 million level to $10.8 million, even though MPL premium collections decreased by more than $16 million and investment income receipts, excluding capital gains, decreased more than $3.4 million. Partially offsetting the decline in MPL premiums, MPL claims payments decreased $7 million during 1996 as compared to 1995. Most of the remaining positive cash flow increase from operations was attributable to
Sequoia, not only due to its inclusion in the consolidation for the full year, but also as a result of reduced claims and expense payments and increased premiums.
Cash provided by investing activities in 1996 of $31.4 million principally reflects fixed income securities maturities and investment gains realized from the sale of Fairfield. Cash provided in 1995 of $37.6 million and 1994 of $9.4 million reflect PICO's liquidation of much of its fixed income investment portfolio in limiting its exposure to the fluctuations of market values due to changing interest rates and, at the same time, providing the Company flexibility and liquidity to take advantage of consolidation and market opportunities. Also reflected in the 1995 cash provided by investing activities is $6 million in proceeds from the sale of Physicians' MPL business. Excluding cash invested in Sequoia, Summit and Stonebridge, 1995 investment cash inflows were $47.4 million.
Shareholder dividends payable by Physicians or its insurance subsidiaries are subject to certain limitations imposed by Ohio or California law, according to the state of domicile. Generally, the limitations are determined using the greater of the prior year's statutory net income or 10% of statutory policyholder surplus. On December 30, 1996, Physicians paid a dividend to PICO in the amount of $13.2 million, the maximum amount allowable without Ohio Department approval. On April 14, 1997, Physicians paid a dividend of approximately $8.6 million to PICO. See Note 20 to the Consolidated Financial Statements entitled "Subsequent Events." No dividends were eligible to be paid out of Sequoia, CIC or CNIC as of January 1, 1997.
In the past few years, the NAIC has developed risk-based capital ("RBC") measurements for both property and casualty and life insurers. The measures provide the various state regulators with varying levels of authority based on
INTEGRATION OF CERTAIN OPERATIONS. Citation and Physicians completed the Merger with the expectation that the Merger would result in certain benefits for the combined company. Achieving the anticipated benefits of the Merger will depend in part upon whether certain of the two companies' business operations can be integrated in an efficient and effective manner. There can be no assurance that this will occur or that cost savings in operations will be achieved. The successful combination of the two companies will require, among other things, integration of the companies' respective product offerings, medical management of health care claims and management information systems enhancements. The difficulties of such integration may be increased by the necessity of coordinating geographically separated organizations. The integration of certain operations following the Merger will require the dedication of management resources which may temporarily distract attention from the day-to-day business of the combined companies. There can be no assurance that integration will be accomplished smoothly or successfully. Failure to effectively accomplish the integration of the two companies' operations could have an adverse effect on the Company's results of operations and financial condition following the Merger.
RISKS REGARDING PHYSICIANS; CONTINUING MPL LIABILITY. In August 1995, Physicians sold its and PRO's MPL insurance business and related liability insurance business. Physicians and PRO retained all assets and liabilities related to insurance policies written prior to the sale of the recurring book of business. Physicians and PRO will continue to administer claims and loss adjustment expenses under MPL insurance policies issued or renewed prior to July 16, 1995.
Under Ohio law the statute of limitations is one year after the cause of action accrues. Also under Ohio law there is a four-year statutory time bar; however this has been construed judicially to be unconstitutional in situations where the plaintiff 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.
Consolidated Balance Sheets as of December 31, 1996 and 1995 .......... 47-48
Consolidated Statements of Cash Flows for the Years Ended December 31, 1996, 1995 and 1994 .......................... 52
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of PICO Holdings, Inc. and subsidiaries as of December 31, 1996 and 1995, and the consolidated results of their operations and cash flows for each of the three years in the period ended December 31, 1996, in conformity with generally accepted accounting principles.
CONSOLIDATED STATEMENTS OF CASH FLOWS For the years ended December 31, 1996, 1995, and 1994 -------
PICO Holdings, Inc. and subsidiaries (the "Company") is predominately an insurance and investment company, specializing in life and health insurance, property and casualty insurance, portfolio investing and other services. As discussed in Note 3, Physicians Insurance Company of Ohio consummated a reverse merger transaction on November 20, 1996 with a wholly-owned subsidiary of Citation Insurance Group, with Physicians Insurance Company of Ohio being the accounting acquiror. Pursuant to the merger, each outstanding share of the Common Stock of Physicians Insurance Company of Ohio was converted into the right to receive 5.0099 shares of Citation Insurance Group common stock. Upon the consummation of the merger, Citation Insurance Group changed its name to PICO Holdings, Inc., which is the continuing registrant. Any references to "the Company" herein as of dates or for periods prior to the merger, refer to Physicians Insurance Company of Ohio and its subsidiaries, which included Summit Global Management, Inc. prior to the consummation of the merger. The Company's principal subsidiaries and investee carried on the equity basis as of December 31, 1996 are as follows:
- Physicians Investment Company ("PIC"), (100%, 100% and 97% owned in 1996, 1995 and 1994, respectively), which owns American Physicians Life Insurance Company ("APL"), which owns Living Benefit Administrators Agency, Inc.
- Citation Insurance Company ("CIC"), which owns Citation National Insurance Company ("CNIC")
APL provides life and health insurance coverage in a number of states. Sequoia, acquired August 1, 1995, writes property and casualty insurance (primarily light commercial and multi-peril) in California (Note 3). CIC and its wholly-owned subsidiary, CNIC, were acquired November 20, 1996 through a reverse acquisition (Note 3). CIC writes workers' compensation and commercial property and casualty. Insurance in Arizona, California, Colorado, and Utah. However, as discussed in Notes 3 and 20, the Company entered into a Letter of Intent in January 1997 to sell the net assets related to CIC's workers' compensation business. Such net assets are reflected in the accompanying consolidated balance sheet as "Net Assets of Acquired Business Held for Sale." CNIC previously wrote commercial property and casualty insurance primarily in the state of California, but ceased writing new business effective December 1994. For the years ended December 31, 1996 and 1995, approximately 89% and 95%, respectively, of CIC's direct written premiums were in California. Consequently, CIC's and Sequoia's operating results are expected to be largely dependent on their ability to write profitable insurance in California.
SGM offers investment management services, primarily to its affiliates. GEC provides investment banking and other services, operating primarily in Canada, the United States, Asia, Europe, and the Caribbean. At times, GEC may come to hold securities of companies for which no market exists or which may be subject to restrictions on resale. As a result, a portion of GEC's assets may not be liquid. Furthermore, as a result of its global diversification with respect to existing investments, GEC's revenues may be adversely affected by economic, political and governmental conditions in countries where it maintains investments or operations, such as volatile interest rates or inflation, the imposition of exchange controls which could restrict or prohibit GEC's ability to withdraw funds, political instability and fluctuations in currency exchange rates.
The accompanying consolidated financial statements include the accounts of the Company and its subsidiaries (Note 1). All significant intercompany accounts and transactions have been eliminated in consolidation.
Effective January 1, 1994, the Company adopted the provisions of Statement of Financial Accounting Standards ("SFAS") No. 115, Accounting for Certain Investments in Debt and Equity Securities. Under SFAS No. 115, investments in available for sale securities are recorded at estimated fair value. Unrealized holding gains and losses on investments classified as available-for-sale, net of the adjustment to deferred policy acquisition costs and deferred income taxes, are excluded from earnings and are reported as a separate component of shareholders' equity. Upon the adoption of SFAS No. 115 effective January 1, 1994, the Company classified its entire portfolio of debt and equity securities as available for sale and reported the cumulative effect of this accounting change, represented by the unrealized appreciation on available-for-sale securities of $7,419,901, net of adjustment to deferred policy acquisition costs of $635,756 and deferred taxes of $497,091, as an increase in shareholders' equity. The Company's entire portfolio of debt and equity securities as of December 31, 1996 and 1995 has been designated as available-for-sale.
The cost and related accumulated depreciation of assets sold are removed from the related accounts, and the resulting gains or losses are reflected in operations.
As more fully described in Note 12, reserves for MPL and property and casualty unpaid losses and loss adjustment expenses include amounts determined on the basis of actuarial estimates of ultimate claim settlements, which include estimates of individual reported claims and estimates of incurred but not reported claims. The methods of making such estimates and for establishing the resulting liabilities are continually reviewed and updated based on current circumstances, and any adjustments resulting therefrom are reflected in current operations. Reserves for MPL unpaid losses and loss adjustment expenses for medical professional liability claims have been adjusted to reflect the time value of money (discounting).
Amounts charged on universal life-type contracts that represent the cost of the insurance component of payments received are recognized as premium income when earned. Amounts assessed against universal life policyholder funds to compensate the Company for future services are reported in unearned premiums and are recognized in income using the same assumptions and factors used to amortize capitalized acquisition costs.
In assessing the realization of deferred income taxes, the Company's management considers whether it is more likely than not that the 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 need to be established.
Separate account assets and liabilities represent contract-holders' funds that have been segregated into accounts with specific investment objectives and are recorded at estimated fair market value based upon quoted market prices. The investment income and gains or losses of these accounts accrue directly to the contract-holders. The activity of the separate accounts is not reflected in the consolidated statements of operations and cash flows, except for the fees that the Company receives for administrative services.
Revenues and expenses of foreign operations are translated at average rates of exchange in effect during the year. Assets and liabilities are translated at the exchange rates in effect at the balance sheet date. Unrealized exchange gains and losses arising on translation, net of applicable deferred income taxes, are reflected in shareholders' equity.
Certain amounts in the financial statements for prior periods have been reclassified to conform with the 1996 presentation.
As a result of the Merger, the former shareholders of Physicians own approximately 80% of the outstanding common stock of the Company and control the Board of Directors of the Company. Accordingly, for accounting purposes, the merger has been treated as a recapitalization of Physicians with Physicians as the acquirer (i.e., a reverse acquisition). Therefore, the balance sheets as of December 31, 1995 and the statements of operations, changes in shareholders' equity and cash flows for each of the two years in the period ended December 31, 1995 represent the historical results of Physicians and its subsidiaries, which is the predecessor entity. Physicians' equity as of December 31, 1995 and the changes in its equity for the years ended December 31, 1995 and 1994 have been retroactively recapitalized for the equivalent number of shares of PICO Holdings, Inc.'s common stock received in the merger transaction. The difference between the par value of Physicians' and PICO Holdings, Inc.'s common stock has been added to additional paid-in capital.
The FASB's Emerging Issues Task Force Abstract 87-11 "Allocation of Purchase Price to Assets to be Sold" ("EITF 87-11") provides guidance on the accounting for the purchase price allocation to components of acquired businesses expected to be sold within one year of the acquisition date. The guidance in EITF 87-11 states the following:
- earnings or losses relating to the operation of the net assets to be sold should not affect earnings or losses of the acquiring company during the holding period (i.e., the date of acquisition to the date of sale).
The Company is required to maintain a minimum surplus in Sequoia of $7.5 million and, through a management agreement, will supervise the run-off of SRC's liabilities. As part of the management agreement, Sequoia will be reimbursed $4.8 million in management fees by the seller for processing the run off of claims and policy receivables and servicing the business existing prior to closing. This management fee is to be received from SRC over a three-year period and is recognized based on the percentage of completion method based on total anticipated claims. Approximately $1.7 million and $1.6 million have been recognized as management fee income and for the year ended December 31, 1996 and for the period August 1, 1995 through December 31, 1995, respectively.
The following unaudited pro forma information presents (i) a summary of consolidated results of operations of the Company and CIG and its subsidiaries for the years ended December 31, 1996 and 1995 as if the acquisition of CIG and its subsidiaries occurred at the beginning of 1995, with proforma adjustments to give effect to the amortization of goodwill and the accounting for CIC's workers' compensation line of business held for sale in accordance with EITF 87-11, as discussed above (in thousands, except per share data) and (ii) a summary of consolidated results of operations of the Company and Sequoia for the years ended December 31, 1995 and 1994 as if the acquisition of Sequoia had occurred at the beginning of 1994, with pro forma adjustments to give effect to the amortization of goodwill and related income tax effects (in thousands, except per share data):
These unaudited pro forma results have been prepared for comparative purposes and do not purport to be indicative of the results of operations which actually would have resulted had the combinations been in effect on January 1, 1995 and 1994 or of future results of operations of the consolidated entities.
The amortized cost and estimated fair value of investments in fixed maturities at December 31, 1996, by contractual maturity, are shown below. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
The following information presents a summary of the financial position of GEC as of December 31, 1996 and 1995 along with the results of operations for the year ended December 31, 1996 and the three month period ended December 31, 1995.
The Company and its U.S. subsidiaries file a consolidated life/nonlife federal income tax return. Non-U.S. subsidiaries file tax returns in various foreign countries.
At December 31, 1994 and prior, the Company had recorded a valuation allowance for nearly all its net deferred tax assets, as management believed the realizability of the net deferred tax assets did not exceed the "more likely than not" criteria required by SFAS No. 109. During 1995, because of the significant increase in the net unrealized appreciation in the Company's available-for-sale securities, the Company reconsidered its need for a valuation allowance for its net deferred tax assets. The Company reduced its valuation allowance, resulting in a decrease in deferred federal income tax expense of approximately $9.4 million. The deferred tax asset valuation allowance as of December 31, 1996 relates to the net operating loss carryforwards (NOL's) of CIG and Sequoia. Such NOL's are subject to the separate return limitation year rules and, therefore, can only be used to offset the respective future taxable income generated by CIG and Sequoia. Given management's uncertainty as to the ability of CIG and Sequoia to generate sufficient future taxable income to utilize such NOL's, they do not currently believe that it is more likely than not that the deferred tax asset related to such NOL's will be realized. Net deferred tax assets, the recorded valuation allowance and federal income tax expense in future years can be significantly affected by changes in enacted tax rates or by changes in circumstances that would influence management's conclusions as to the ultimate realizability of deferred tax assets.
At December 31, income tax expense (benefit) consists of the following:
The aggregate NOL's of approximately $19,760,000 expire between 1999 and 2010. There is an annual limitation on the NOL's of approximately $1,400,000.
The major classifications of property and equipment at December 31 are as follows:
Depreciation expense was $751,000, $589,000, and $688,000 in 1996, 1995, and 1994 respectively.
In connection with the merger, PICO Holdings, Inc. Board of Directors adopted a Stockholders' Rights Plan and, pursuant to such Plan, declared a dividend on its common stock of one right (a "Right") for each share of common stock outstanding. Upon the occurrence of certain events, each Right becomes exercisable to purchase 1/100 of a share of Series A Junior Participating Cumulative Preferred Stock at an initial price of $35.00. The Rights expire on July 22, 2001 and prior to the occurrence of certain events, may be redeemed at a price of $.01 per Right. Of the Company's 2,000,000 authorized shares of preferred stock, 1,000,000 shares have been designated as Series A Junior Participating cumulative Preferred Stock. Each share of Series A Junior Participating Preferred Stock shall entitle the holder thereof to 100 votes on all matters submitted to a vote of the stockholders of the Company.
The fair value of each stock option granted is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions for grants in 1996 and 1995, respectively: no dividend yield for all years; risk-free interest rates are different for each grant and range from 5.94% to 6.97%; the expected lives of options are estimated at 7 years; and a volatility of 50% for all grants.
The following table summarizes information about stock options outstanding at December 31, 1996:
Had the compensation cost for the Company's stock-based compensation plans been determined consistent with SFAS 123, the Company's net income and net income per common share for 1996 and 1995 would approximate the pro forma amounts below:
The Company entered into a reinsurance treaty in 1995 with Mutual in connection with the sale of Physicians' MPL business to Mutual. This treaty is a 100% quota share treaty covering all claims arising from policies issued or renewed with an effective date after July 15, 1995. At the same time, Physicians terminated two treaties entered into in 1994 and renewed in 1995. The first of these was a claims-made agreement under which Physicians' retention was $200,000, for both occurrence and claims-made insurance policies. Claims are covered up to $1 million. The second treaty reinsured claims above $1 million up to policy limits of $5 million on a trueoccurrence and claims-made basis, depending on the underlying insurance policy.
In 1996 and 1995, the lower accretion of discount compared to that of 1994 is due to the lower MPL reserves in 1996 and 1995 compared to 1994, and an additional $3.6 million of discount accretion added to 1994 as a result of large prior years' reserve reductions taken in 1994 due to favorable loss experience.
Physicians, Sequoia, APL and Summit maintain a 401(k) defined contribution plan (the "Plan") covering substantially all employees. Physicians', Sequoia's, APL's and Summit's matching contributions to the Plan are based on a percentage of employee compensation, as well as amounts contributed by employees. During 1996, 1995, and 1994, Physicians', Sequoia's, APL's and Summit's expenses for contributions made to the Plan were $392,000, $207,000, and $154,000, respectively.
In 1994, the Company entered into a consulting agreement for a combined annual fee of $200,000 with two of its directors for consulting services related to the Company's investment activities, investment banking services and analysis of operations. Effective January 1, 1995, the Company revised the agreement with these directors to a combined annual fee of $300,000. Effective September 11, 1995, the previous agreements were terminated and the Company entered into consulting arrangements with the same two Directors for a three-year period at a combined fee of $300,000 annually for their services as officers of the Company related to analysis of the Company's operations, investment banking activities, and analysis and recommendation on the Company's investment portfolio. The Company paid a combined fee of $300,000, $305,000 and $200,000 to each of these two Directors for 1996, 1995 and 1994, respectively. In addition, the aforementioned directors were awarded a bonus of $450,000 each in 1996.
Effective September 11, 1995, the same two directors also entered into consulting contracts with a subsidiary of GEC. They are to render services in the areas of investment banking, investment portfolio analysis, and management and operational analysis. The compensation paid to each of those Directors under this arrangement was $150,000 and $45,445 in 1996 and 1995, respectively. Each was to receive $150,000 annually for rendering such services through September 11, 1998. These contracts were superseded by the January 1997 contracts described below.
The Company and its wholly owned insurance subsidiaries' net income (loss) for the years ended December 31, 1996, 1995 and 1994 and policyholders' surplus as of December 31, 1996, 1995, and 1994 on the statutory accounting basis are as follows:
The Company's operations are organized into four principal segments: portfolio investing, life and health insurance, MPL insurance (see Note 1), and property & casualty insurance. Other operations include the Company's real estate development and other activities.
- DEPOSITS WITH REINSURERS AND REINSURANCE RECOVERABLES: The carrying amounts of deposits with reinsurers and reinsurance recoverables with fixed amounts due are reasonable estimates of fair value.
- SEPARATE ACCOUNTING: Separate account assets and liabilities are carried at market value, which is based upon quoted market prices.
On April 14, 1997, GEC and PICO announced an agreement for the purchase of Nevada Land and Resource Company, LLC, owner of approximately 1,365,000 acres of deeded land in northern Nevada. The total purchase price is approximately $53.7 million, with the closing date set for April 23, 1997. GEC will own approximately 75 percent of Nevada Land and Resource. PICO Holdings, Inc. will pay approximately $12 million for the remaining interest. PICO Holdings, Inc. and Physicians have committed to purchase a debenture from GEC for approximately $30 million to help finance GEC's portion.
Also on April 14, 1997, Physicians paid a dividend of approximately $8.6 million to PICO Holdings, Inc. This dividend was not considered an "extraordinary" dividend requiring specific regulatory approval, since (1) it was paid out of statutory earned surplus and (2) it, plus all other dividends paid by Physicians within the previous twelve months, did not exceed Physicians net income as filed with the ODI for the previous calendar year ended December 31, 1996 of approximately $21.8 million.
Summarized unaudited financial data for 1995 and 1996 are shown below. In management's opinion, the interim financial data contains all adjustments, consisting of only normal recurring accruals, necessary for a fair presentation of results for such interim periods.