Note: Prior year share values have been adjusted to reflect the 1-for-5 Reverse Stock Split effective December 16, 1998, the treatment of American Physicians Life Insurance Company as discontinued operations and to reflect the investment results of HyperFeed and Jungfraubahn using the equity method of accounting (Jungfraubahn was accounted for using the equity method until April 1, 2001). Book value per share is computed by dividing shareholders' equity by the net of total shares issued less shares held as treasury shares.
The Lincoln County joint venture is an example of a transaction where Vidler can partner with an entity, in this case a governmental entity, to provide the necessary capital and skills to commercially develop water assets.
Nevada Land recognizes revenue from land sales, and the resulting gross profit or loss, when transactions close. On closing, the entire sales price is recorded as revenue, and a gross margin is recognized 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 fluctuate from period to period, depending on the date when specific transactions close.
As a result of these factors, Sequoia Insurance Company generated strong growth in direct written premiums in 2000 and 2001.
Income from the investment of funds held as part of their insurance business is an important component of the profitability of insurance companies. Investment income consists of interest from fixed-income securities and dividends from stocks held in the insurance company portfolios. In addition, from time to time, gains or losses are realized from the sale of investments.
However, based on our inability to obtain financial information for the second quarter of 2001, and the absence of a commitment to provide quarterly financial statements on an on-going timely basis, we concluded that we do not have the requisite ability to exercise "significant influence" to apply the equity method. Accordingly, we ceased to account for the investment under the equity method from the start of the second quarter (i.e., from April 1, 2001), and reverted to market value accounting under Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities." The impact of this change on our financial statements is:
Revenues and income before taxes and minority interests by business segment, were:
In 2001, total revenues were $69.6 million, compared to $45.4 million in 2000, and $54.5 million in 1999. Revenues in 2001 were $24.2 million higher than 2000, primarily due to $14.6 million higher revenues from Vidler and $12.1 million higher revenues in the Property and Casualty Insurance segment. The most significant items in the revenue growth at Vidler were revenues of $9.4 million from the sale of water rights and land in the Harquahala Valley, and $5.7 million from pre-tax gains on the sale of interests in Semitropic. The principal sources of the $12.1 million revenue growth in the Property and Casualty Insurance segment were $10 million higher earned premiums, and a $1.6 million increase in realized investment gains. From 1999 to 2000, total revenues declined by $9.1 million, primarily due to the recognition of a $7.6 million net realized investment loss which reduced revenues in the Long Term Holdings segment in 2000, as opposed to a $626,000 net realized gain in 1999.
Vidler recorded segment income of $5 million in 2001, compared to segment losses of $4.9 million in 2000, and $3.9 million in 1999.
In the 2000 land exchange, we exchanged 25,828 acres of land for assets with an exchange value of approximately $1.3 million, or $52 per acre. The consideration received consisted of $430,000 in cash and 17,558 acres of land, which we believe will be more readily marketable, with an exchange value of $913,000, or $52 per acre. The revenue recorded as a result of this transaction was the $270,000 net gain on the cash portion of the total exchange value (i.e., approximately 32%). This gain represents the difference between the cash received and our basis in approximately 32% of the land given up in the exchange. No gain was recognized on the portion of the exchange value for which land was received (i.e., approximately 68%). Any gain related to the land received will be recorded when that land is sold.
In 2000, Citation wrote only a minor amount of premium in one state, and Sequoia was responsible for practically all written premiums in the segment. During 2000, Sequoia experienced 33.5% growth in written premiums to $47.1 million, due to an improved pricing environment, the increase in the company's A.M. Best rating to "A-" (Excellent), and the acquisition of Personal Express. Due to the lag between changes in written premium and earned premium, the increase in premium written in 2000 led to the $9.9 million increase in earned premium, from $32.6 million to $42.5 million, in 2001.
For 2001, Sequoia's combined ratio was 105.4%, compared to 106.3% in 2000, and 99.8% in 1999.
Significant fluctuations in reserve levels can occur based upon a number of variables used in actuarial projections of ultimate incurred losses and loss adjustment expenses.
The Long Term Holdings segment recorded revenues of negative $631,000 in 2001, negative $5.7 million in 2000, and positive $3.2 million in 1999. Revenues in this segment vary considerably from year to year, primarily due to fluctuations in net realized gains or losses on the sale of investments. Investments are not sold on a regular basis, but when the price of an individual security has significantly exceeded our target, or if there have been changes which we believe limit further appreciation potential on a risk-adjusted basis. Consequently, the amount of net realized gains or losses recognized during any accounting period has no predictive value.
Segment expenses in 2001 included a $2.3 million provision against the principal and accrued interest on two loans receivable from Dominion Capital Pty. Limited. As disclosed in the Long Term Holdings section of Item 7 in our 2000 Form 10-K, PICO made short term advances to Dominion Capital Pty. Limited, a private Australian company. The advances consisted of two loans, which were due to be repaid in 2001. The assets collateralizing the loans include real estate in Australia. We have instituted legal proceedings in Australia to realize on the collateral and to obtain additional legal remedies, if required. Given the delays and uncertainties inherent in the legal process and in realizing on the collateral, we have fully provided against the principal and accrued interest on both loans.
BECAUSE OUR OPERATIONS ARE DIVERSE, ANALYSTS AND INVESTORS MAY NOT BE ABLE TO EVALUATE OUR COMPANY ADEQUATELY, WHICH MAY NEGATIVELY INFLUENCE OUR SHARE PRICE
We may acquire shares of stock in U.S. public companies that are not registered with the SEC, and we may not be able to register the stock during our period of ownership. Accordingly, this may affect our ability to dispose of an investment in a public company or achieve the full market price quoted by the stock exchange that the particular stock is listed on.
WE MAY MAKE INVESTMENTS AND ACQUISITIONS THAT MAY YIELD LOW OR NEGATIVE RETURNS FOR AN EXTENDED PERIOD OF TIME, WHICH COULD TEMPORARILY OR PERMANENTLY DEPRESS OUR RETURN ON INVESTMENTS
Because medical malpractice liability and commercial casualty claims may not be completely paid off for several years, estimating reserves for these types of claims can be more uncertain than estimating reserves for other types of insurance. As a result, precise reserve estimates cannot be made for several years following the year for which reserves were initially established.
THE PROPERTY & CASUALTY INSURANCE BUSINESS IS CYCLICAL, WHICH COULD HINDER OUR ABILITY TO PROFIT FROM THIS INDUSTRY IN THE FUTURE
In the future, we anticipate that a significant amount of Vidler's revenues and asset value will come from a limited number of assets, including our water rights in the Harquahala Valley and the Vidler Arizona Recharge Facility. Although we continue to acquire and develop additional water assets, in the foreseeable future we anticipate that our revenues will still be derived from a limited number of assets.
THE FOREGOING FACTORS, INDIVIDUALLY OR IN AGGREGATE, COULD MATERIALLY ADVERSELY AFFECT OUR OPERATING RESULTS AND COULD MAKE COMPARISON OF HISTORIC OPERATING RESULTS AND BALANCES DIFFICULT OR NOT MEANINGFUL.
The following table presents the development of balance sheet liabilities for 1991 through 2001 for all property and casualty lines of business including medical professional liability insurance. The "Net liability as originally estimated" line shows the estimated liability for unpaid losses and loss adjustment expenses recorded at the balance sheet date on a discounted basis, prior to 2000, for each of the indicated years. Reserves for other lines of business that Physicians ceased writing in 1989, which are immaterial, are excluded. The "Gross liability as originally estimated" represents the estimated amounts of losses and loss adjustment expenses for claims arising in all prior years that are unpaid at the balance sheet date on an undiscounted basis, including losses that had been incurred but not reported.
Currently PICO's major activities are: - owning and developing water rights & water storage operations through Vidler Water Company, Inc.; - owning and developing land and the related mineral rights and water rights through Nevada Land & Resource Company, LLC; - property and casualty insurance; - "running off" the loss reserves of Citation Insurance Company and Physicians Insurance Company of Ohio; and - making long term value-based investments in other public companies.
MPL and other property and casualty insurance premiums written are earned principally on a monthly pro rata basis over the terms of the policies. The premiums applicable to the unexpired terms of the policies are included in unearned premiums.
Pre-tax net realized gain (loss) on investments is as follows for each of the years ended December 31:
2001 2000 1999 -------------- ------------- ------------- Gross realized gains: Available for sale: Fixed maturities $ 1,788,474 $ 110,708 Equity securities and other investments 74,675 15,127 $ 3,395,323 Real estate 670,451 -------------- ------------- ------------- Total gain 1,863,149 125,835 4,065,774 -------------- ------------- ------------- Gross realized losses: Available for sale: Fixed maturities (84,446) (123) Equity securities and other investments (6,889,666) (7,651,597) (3,625,040) Real estate -------------- ------------- ------------- Total loss (6,974,112) (7,651,597) (3,625,163) -------------- ------------- ------------- Net realized gain (loss) $ (5,110,963) $(7,525,762) $ 440,611 ============== ============= =============
The employment agreements entered into with Ronald Langley and John R. Hart in 1997 for annual base salaries of $800,000 also entitled each to an incentive award based on the growth of the Company's book value per share in excess of a threshold that is calculated as 80% of the previous five year average return for the S&P 500. No award was paid during 2001, 2000 or 1999 under this program. New employment agreements were entered into with Mr. Langley and Mr. Hart on January 1, 2002 for a further four years. The terms of these new employment agreements are substantially similar to the agreements entered into in 1997. The base salary in each agreement is $800,000, subject to annual adjustment in January of each year in the same percentage applicable to PICO's other staff members in an amount deemed adequate to provide for inflation, cost of living, and merit increases based on the CPI and major compensation studies.
- acquiring water rights, redirecting the water to its highest and best use, and then generating cash flow from either leasing the water or selling the right;