| PICO HOLDINGS INC /NEW ITEM 1A RISK FACTORS In addition to the risks and uncertainties discussed in certain sections of “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Item 7 and elsewhere in this document, the following risk factors should be considered carefully in evaluating PICO and our 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 |
| If we do not successfully locate, select and manage investments and acquisitions, or if our investments or acquisitions otherwise fail or decline in value, our financial condition could suffer |
| We invest in businesses that we believe are undervalued or that will benefit from additional capital, restructuring of operations or improved competitiveness through operational efficiencies |
| If a business in which we invest fails or its market value declines, we could experience a material adverse effect on our business, financial condition, the results of operations and cash flows |
| Additionally, our failure to successfully locate, select and manage investment and acquisition opportunities could have a material adverse effect on our business, financial condition, the results of operations and cash flows |
| Such business failures, declines in market values, and/or failure to successfully locate, select and manage investments and acquisitions could result in an inferior return on shareholders’ equity |
| We could also lose part or all of our capital in these businesses and experience reductions in our net income, cash flows, assets and shareholders’ equity |
| Failure to successfully manage newly acquired companies could adversely affect our business |
| Our management of the operations of acquired businesses requires significant efforts, including the coordination of information technologies, research and development, sales and marketing, operations, and finance |
| These efforts result in additional expenses and involve significant amounts of management’s time |
| To successfully manage newly acquired companies, we must, among other things, continue to attract and retain key management and other personnel |
| The diversion of the attention of management from the day-to-day operations, or difficulties encountered in the integration process, could have a material adverse effect on our business, financial condition, and the results of operations and cash flows |
| If we fail to integrate acquired businesses into our operations successfully, we may be unable to achieve our strategic goals and the value of your investment could suffer |
| Our acquisitions may not achieve expected rates of return, and we may not realize the value of the funds we invest |
| We will continue to make selective acquisitions, and endeavor to enhance and realize additional value to these acquired companies through our influence and control |
| You will be relying on the experience and judgment of management to locate, select and develop new acquisition and investment opportunities |
| Any acquisition could result in the use of a significant portion of our available cash, significant dilution to you, and significant acquisition-related charges |
| Acquisitions may also result in the assumption of liabilities, including liabilities that are unknown or not fully known at the time of the acquisition, which could have a material adverse effect on us |
| We do not know of any reliable statistical data that would enable us to predict the probability of success or failure of our acquisitions and investments, or to predict the availability of suitable investments at the time we have available cash |
| We may not be able to find sufficient opportunities to make this business strategy successful |
| Additionally, when any of our acquisitions do not achieve acceptable rates of return or we do not realize the value of the funds invested, we may write-down the value of such acquisitions or sell the acquired businesses at a loss |
| We have made a number of acquisitions in the past that have been highly successful, and we have also made acquisitions that have lost either part or all of the capital invested |
| Further details of realized and unrealized gains and losses can be found in the Notes 1, 2, 3 and 4 to the accompanying consolidated financial statements and in Item 7A in this Form 10-K Our ability to achieve an acceptable rate of return on any particular investment is subject to a number of factors which are beyond our control, including increased competition and loss of market share, quality of management, cyclical or uneven financial results, technological obsolescence, foreign currency risks and regulatory delays |
| 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 shareholders’ equity |
| We generally make investments and acquisitions that tend to be long term in nature |
| We acquire 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 acquisitions 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 originally anticipated |
| We may not be able to sell our investments when it is advantageous to do so and we may have to sell these investments at a discount |
| No active market exists for some of the companies in which we invest |
| We acquire stakes in private companies that are not as liquid as investments in public companies |
| Additionally, some of our acquisitions may be in restricted or unregistered stock of US public companies |
| Moreover, even our investments for which there is an established market are subject to dramatic fluctuations in their market price |
| These illiquidity factors may affect our ability to divest some of our acquisitions and could affect the value that we receive for the sale of such investments |
| Our acquisitions of and investments in foreign companies subject us to additional market and liquidity risks which could affect the value of our stock |
| We have acquired, and may continue to acquire, shares of stock in foreign public companies |
| Typically, these foreign companies are not registered with the SEC and regulation of these companies is under the jurisdiction of the relevant foreign country |
| The respective foreign regulatory regime may limit our ability to obtain timely and comprehensive financial information for the foreign companies in which we have invested |
| In addition, if a foreign company in which we invest were to take actions which could be deleterious to its shareholders, foreign legal systems may make it difficult or time-consuming for us to challenge such actions |
| These factors may affect our ability to acquire controlling stakes, or to dispose of our foreign investments, or to realize the full fair value of our foreign investments |
| In addition, investments in foreign countries may give rise to complex cross-border tax issues |
| We aim to manage our tax affairs efficiently, but given the complexity of dealing with domestic and foreign tax jurisdictions, we may have to pay tax in both the US and in foreign countries, and we may be unable to offset any US tax liabilities with foreign tax credits |
| If we are unable to manage our foreign tax issues efficiently, our financial condition and the results of operations and cash flows could be adversely affected |
| 9 _________________________________________________________________ [64]Table of Contents Variances in physical availability of water, along with environmental and legal restrictions and legal impediments, could impact profitability from our water rights |
| The water rights held by us and the transferability of these rights to other uses and places of use are governed by the laws concerning water rights in the states of Arizona, Colorado and Nevada |
| The volumes of water actually derived from the water rights applications or permitted rights may vary considerably based upon physical availability and may be further limited by applicable legal restrictions |
| As a result, the amounts of acre-feet anticipated from the water rights applications or permitted rights do not in every case represent a reliable, firm annual yield of water, but in some cases describe the face amount of the water right claims or management’s best estimate of such entitlement |
| Legal impediments may exist to the sale or transfer of some of these water rights, which in turn may affect their commercial value |
| If we were unable to transfer or sell our water rights, we may lose some or all of our value in our water rights acquisitions |
| Water we lease or sell may be subject to regulation as to quality by the United States Environmental Protection Agency acting pursuant to the federal Safe Drinking Water Act |
| While environmental regulations do not directly affect us, the regulations regarding the quality of water distributed affects our intended customers and may, therefore, depending on the quality of our water, impact the price and terms upon which we may in the future sell our water rights |
| Our future water revenues are uncertain and depend on a number of factors, which may make our revenue streams and profitability volatile |
| We engage in various water rights acquisitions, management, development, and sale and lease activities |
| Accordingly, our long-term future profitability will primarily be dependent on our ability to develop and sell or lease water and water rights, and will be affected by various factors, including timing of acquisitions, transportation arrangements, and changing technology |
| To the extent we possess junior or conditional water rights, such rights may be subordinated to superior water right holders in periods of low flow or drought |
| In addition to the risk of delays associated with receiving all necessary regulatory approvals and permits, we may also encounter unforeseen technical difficulties which could result in construction delays and cost increases with respect to our water resource and water storage development projects |
| Our profitability is significantly affected by changes in the market price of water |
| In the future, water prices may fluctuate widely as demand is affected by climatic, demographic and technological factors |
| Our water activities may become concentrated in a limited number of assets, making our growth and profitability vulnerable to fluctuations in local economies and governmental regulations |
| 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 Nevada and Arizona 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, primarily located in Arizona and Nevada |
| Our water sales may meet with political opposition in certain locations, thereby limiting our growth in these areas |
| The transfer of water rights from one use to another may affect the economic base of a community and will, in some instances, be met with local opposition |
| Moreover, certain of the end users of our water rights, namely municipalities, regulate the use of water in order to manage growth |
| If we are unable to effectively transfer water rights, our liquidity will suffer and our revenues would decline |
| The market values of our real estate and water assets are linked to external growth factors |
| The real estate and water assets we hold have market values that are significantly affected by the growth in population and the general state of the local economies where our real estate and water assets are located, primarily in the states of Arizona and Nevada |
| In certain circumstances, we finance sales of real estate and water assets, and we secure such financing through deeds of trust on the property, which are only released once the financing has been fully paid off |
| Purchasers of our real estate and water assets may default on their financing obligations and the market value of the secured property may be affected by the factors noted above |
| Accordingly, such defaults and declines in market values may have an adverse effect on our business, financial condition, and the results of operations and cash flows |
| 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 that are 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 results of operations for that period will be worse than they would have been had our reserves been accurately estimated originally |
| The inherent uncertainties in estimating loss reserves are greater for some insurance products than for others, and are dependent on various factors including: · the length of time in reporting claims; · the diversity of historical losses among claims; · the amount of historical information available during the estimation process; · the degree of impact that changing regulations and legal precedents may have on open claims; and · the consistency of reinsurance programs over time |
| Because medical malpractice liability, commercial property and casualty, and workers’ compensation 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 |
| During the past several years, the levels of the reserves for our insurance subsidiaries have been very volatile |
| We have had to significantly increase and decrease these reserves in the past several years |
| Furthermore, we have reinsurance agreements on all of our insurance books of business with reinsurance companies |
| We base the level of reinsurance purchased on our direct reserves on our assessment of the overall direct underwriting risk |
| We attempt to ensure that we have acceptable net risk, but it is possible that we may underestimate the amount of reinsurance required to achieve the desired level of net claims risk |
| 10 _________________________________________________________________ [65]Table of Contents In addition, while we carefully review the credit worthiness of the companies we have reinsured part, or all, of our initial direct underwriting risk with, our reinsurers could default on amounts owed to us for their portion of the direct insurance claim |
| Our insurance subsidiaries, as direct writers of lines of insurance, have ultimate responsibility for the payment of claims, and any defaults by reinsurers may result in our established reserves not being adequate to meet the ultimate cost of losses arising from claims |
| Significant increases in the reserves may be necessary in the future, and the level of reserves for our insurance subsidiaries may be volatile in the future |
| These increases or volatility may have an adverse effect on our business, financial condition, and the results of operations and cash flows |
| State regulators could require changes to our capitalization and/or to the operations of our insurance subsidiaries, and/or place them into rehabilitation or liquidation |
| Beginning in 1994, Physicians and Citation 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 |
| All companies’ risk-based capital results as of December 31, 2005 exceed the Company Action Level |
| If we are required to register as an investment company, then we will be subject to a significant regulatory burden |
| At all times we intend to conduct our business so as to avoid being regulated as an investment company under the Investment Company Act of 1940 |
| However, if we were required to register as an investment company, our ability to use debt would be substantially reduced, and we would be subject to significant additional disclosure obligations and restrictions on our operational activities |
| Because of the additional requirements imposed on an investment company with regard to the distribution of earnings, operational activities and the use of debt, in addition to increased expenditures due to additional reporting responsibilities, our cash available for investments would be reduced |
| The additional expenses would reduce income |
| These factors would adversely affect our business, financial condition, and the results of operations and cash flows |
| We are directly impacted by international affairs, which directly exposes us to the adverse effects of any foreign economic or governmental instability |
| As a result of global investment diversification, our business, financial condition, the results of operations and cash flows may be adversely affected by: · exposure to fluctuations in exchange rates; · the imposition of governmental controls; · the need to comply with a wide variety of foreign and US export laws; · political and economic instability; · trade restrictions; · changes in tariffs and taxes; · volatile interest rates; · changes in certain commodity prices; · exchange controls which may limit our ability to withdraw money; · the greater difficulty of administering business overseas; and · general economic conditions outside the United States |
| Changes in any or all of these factors could result in reduced market values of investments, loss of assets, additional expenses, reduced investment income, reductions in shareholders’ equity due to foreign currency fluctuations and a reduction in our global diversification |
| 11 _________________________________________________________________ [66]Table of Contents Because our operations are diverse, analysts and investors may not be able to evaluate us adequately, which may negatively influence our share price |
| PICO is a diversified holding company with operations in real estate and related water rights and mineral rights; water resource development and water storage; insurance operations in run-off; and business acquisitions and financing |
| Each of these areas is unique, complex in nature, and difficult to understand |
| In particular, the water resource business is a developing industry within the western United States with very little historical data, very few experts and a limited following of analysts |
| Because we are complex, analysts and investors may not be able to adequately evaluate our operations and PICO in total |
| These factors could have a negative impact on the trading volume and price of our stock |
| Fluctuations in the market price of our common stock may affect your ability to sell your shares |
| 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 and condition; · 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, 2005, the closing price of our common stock on the NASDAQ National Market was dlra32dtta26 per share, compared to dlra15dtta67 at December 31, 2003 |
| Statements or changes in opinions, ratings, or earnings estimates made by brokerage firms or industry analysts relating to the markets in which we do business or relating to us specifically could result in an immediate and adverse effect on the market price of our common stock |
| We may not be able to retain key management personnel we need to succeed, which could adversely affect our ability to make sound investment decisions |
| We rely on the services of several key executive officers |
| If they depart, it could have a significant adverse effect |
| Langley and Hart, our Chairman and CEO, respectively, are key to the implementation of our strategic focus, and our ability to successfully develop our current strategy is dependent upon our ability to retain the services of Messrs |
| Langley and Hart |
| We use estimates and assumptions in preparing financial statements in accordance with accounting principles generally accepted in the United States of America |
| The preparation of our financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent liabilities at the date of financial statements and the reported amount of revenues and expenses during the reporting period |
| We regularly evaluate our estimates, which are based on historical experience and on various other assumptions that are believed to be reasonable under the circumstances |
| The result of these evaluations forms the basis for making judgments about the carrying values of assets and liabilities and the reported amount of revenues and expenses that are not readily apparent from other sources |
| The carrying values of assets and liabilities and the reported amount of revenues and expenses may differ by using different assumptions |
| In addition, in future periods, in order to incorporate all known experience at that time, we may have to revise assumptions previously made which may change the value of previously reported assets and liabilities |
| This potential subsequent change in value may have a material adverse effect on our business, financial condition, and the results of operations and cash flows |
| Our Board of Directors has authorized the repurchase of up to dlra10 million of our common stock |
| The stock purchases may be made from time to time at prevailing prices though open market, or negotiated transactions, depending on market conditions, and will be funded from available cash resources of the company |
| Future changes in financial accounting standards may cause adverse unexpected revenue fluctuations and affect our reported results of operations |
| A change in accounting standards could have a significant effect on our reported results and may even affect our reporting transactions completed before the change is effective |
| New accounting pronouncements and varying interpretations of pronouncements have occurred and may occur in the future |
| Changes to existing rules or the questioning of current practices may adversely affect our reported financial results of the way we conduct our business |
| Compliance with changing regulation of corporate governance and public disclosure may result in additional expenses |
| Changing laws, regulations and standards relating to corporate governance and public disclosure, SEC regulations and NASDAQ Stock Market rules, are creating uncertainty for companies such as ours |
| These new or changed laws, regulations and standards are subject to varying interpretations in many cases due to their lack of specificity, and as a result, their application in practice may evolve over time as new guidance is provided by regulatory and governing bodies, which could result in continuing uncertainty regarding compliance matters and higher costs necessitated by ongoing revisions to disclosure and governance practices |
| We are committed to maintaining high standards of corporate governance and public disclosure |
| As a result, our efforts to comply with evolving laws, regulations and standards have resulted in, and are likely to continue to result in, increased general and administrative expenses and a diversion of management time and attention from revenue-generating activities to compliance activities |
| In particular, our efforts to comply with Section 404 of the Sarbanes-Oxley Act of 2002 and the related regulations regarding our required assessment of our internal controls over financial reporting and our external auditors’ audit of that assessment has required the commitment of substantial financial and managerial resources |
| We expect these efforts to require the continued commitment of significant resources |
| Further, our board members, chief executive officer, and chief financial officer could face an increased risk of personal liability in connection with the performance of their duties |
| As a result, we may have difficulty attracting and retaining qualified board members and executive officers, which could harm our business |
| If our efforts to comply with new or changes laws, regulations, and standards differ from the activities intended by regulatory or governing bodies due to ambiguities related to practice, our reputation could be harmed |
| Absence of dividends could reduce our attractiveness to investors |
| Some investors favor companies that pay dividends, particularly in market downturns |
| We have never declared or paid any cash dividends on our common stock |
| We currently intend to retain any future earnings for funding growth and, therefore, we do not currently anticipate paying cash dividends on our common stock |
| We may need additional capital in the future to fund the growth of our business, and financing may not be available |
| We currently anticipate that our available capital resources and operating income will be sufficient to meet our expected working capital and capital expenditure requirements for at least the next 12 months |
| However, we cannot assure you that such resources will be sufficient to fund the long-term growth of our business |
| We may raise additional funds through public or private debt or equity financings if such financings become available on favorable terms, but such financing may dilute our stockholders |
| We cannot assure you that any additional financing we need will be available on terms favorable to us, or at all |
| If adequate funds are not available or are not available on acceptable terms, we may not be able to take advantage of unanticipated opportunities or otherwise respond to competitive pressures |
| In any such case, our business, operating results or financial condition could be materially adversely affected |
| Litigation may harm our business or otherwise distract our management |
| Substantial, complex or extended litigation could cause us to incur large expenditures and distract our management |
| For example, lawsuits by employees, stockholders or customers could be very costly and substantially disrupt our business |
| Disputes from time to time with such companies or individuals are not uncommon, and we cannot assure that that we will always be able to resolve such disputes out of court or on terms favorable to us |