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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549 ----------

FORM 10-K/A (MARK10-K

(MARK ONE) [ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
x
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2001 2005

OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM

o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Transition Period from __________ TOto __________ COMMISSION FILE NUMBER

Commission File Number 0-18786 ----------

PICO HOLDINGS, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) CALIFORNIA 94-2723335 (STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
(Exact Name of Registrant as Specified in its Charter)

California
94-2723335
(State or Other Jurisdiction of Incorporation or Organization)
(I.R.S. Employer Identification No.)

875 PROSPECT STREET, SUITEProspect Street, Suite 301 LA JOLLA, CALIFORNIA
La Jolla, California 92037 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE
(Address of Principal Executive Offices)

Registrant’s Telephone Number, Including Area Code (858) 456-6022 SECURITIES REGISTERED PURSUANT TO SECTION

Securities Registered Pursuant to Section 12(b) OF THE ACT: NONE SECURITIES REGISTERED PURSUANT TO SECTIONof the Act:
None

Securities Registered Pursuant to Section 12(g) OF THE ACT: COMMON STOCK,of the Act:
Common Stock, $.001 PAR VALUE (TITLE OF CLASS) Par Value
(Title of Class)
Indicate by check mark whether the registrant is a well known seasoned issuer, as defined by Rule 405 of the Securities Act. Yes o No x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No x

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X]x No [ ] o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant'sregistrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III or this Form 10-K or any amendment to this Form 10-K. [ X ] x

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer” and “large accelerated filer” in Rule 12b-2 of the Exchange Act.

Large accelerated filer o
Accelerated filer x
Non-accelerated filer o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12-b of the Act). Yes o  No x

Approximate aggregate market value of the registrant'sregistrant’s voting and non-voting common stockequity held by non-affiliates of the registrant (based on the closing sales price of such stock as reported in the NASDAQ National Market) on March 13, 2002 was $75,185,221. This excludes sharesas of common stock held by directors, officers and each person who holds 5% or moreJune 30, 2005 the last business day of the registrant's common stock. registrant’s most recently completed second fiscal quarter, was $193,820,064.

On March 13, 2002,8, 2006, the Registrantregistrant had 12,368,61613,271,440 shares of common stock, $.001 par value, outstanding, excluding 4,415,6073,228,300 shares of common stock which are held by the registrant and itsregistrant’s subsidiaries.
DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant'sregistrant’s Definitive Proxy Statement to be filed with the Commission pursuant to Regulation 14A in connection with the registrant's 2002registrant’s 2006 Annual Meeting of Stockholders,Shareholders, to be filed subsequent to the date hereof, are incorporated by reference into Part III of this Report. Such Definitive Proxy Statement will be filed with the Securities and Exchange Commission not later than 120 days after the conclusion of the registrant'sregistrant’s fiscal year ended December 31, 2001. ================================================================================ 2005.

PICO HOLDINGS, INC.

ANNUAL REPORT ON FORM 10-K/A 10-K


Page No. -----
PART I............................................................................................................ 3 I
PART II........................................................................................................... 12 II
PART III.......................................................................................................... 92 III
PART IV
1 EXPLANATORY NOTE


PART I

This amended Annual Report on Form 10-K/A amends and restates in its entirety PICO Holdings, Inc. ("PICO") Annual Report on Form 10-K for(including the fiscal year ended December 31, 2001 as of the date of the filing of the original Form 10-K, March 18, 2002. PICO has filed this amended Annual Report on Form 10-K/A as a result of the restatement of its consolidated financial statements for all years from 1996 to 2001, inclusive. The effects of the restatement are incorporated into our consolidated financial statements included herein as well as in "Management'sManagement’s Discussion and Analysis of Financial Condition and Results of Operations"Operations section) contains forward-looking statements regarding our business, financial condition, results of operations and prospects, including, without limitation, statements about our expectations, beliefs, intentions, anticipated developments, and other portionsinformation concerning future matters. Words such as “expects,”“anticipates,”“intends,”“plans,”“believes,”“seeks,”“estimates” and similar expressions or variations of this Report. See Note 22such words are intended to identify forward-looking statements, but are not the Consolidated financialexclusive means of identifying forward-looking statements in Item 8 for the nature of the restatement. This amendedthis Annual Report on Form-K/A speaks as of the end of the fiscal year 2001 as required byForm 10-K.

Although forward-looking statements in this Annual Report on Form 10-K reflect the good faith judgment of our management, such statements can only be based on facts and factors currently known by us. Consequently, forward-looking statements are inherently subject to risks and uncertainties, and the actual results and outcomes could differ from those discussed in or anticipated by the forward-looking statements. Factors that could cause or contribute to such differences in results and outcomes include, without limitation, those discussed under the heading “Risk Factors” below, as well as those discussed elsewhere in this Annual Report on Form 10-K. We urge you not to place undue reliance on these forward-looking statements, which speak only as of the date of filing the originalthis Annual Report on Form 10-K. It does notWe undertake no obligation to revise or update any forward-looking statements in order to reflect any event or circumstance that may arise after the date of this Annual Report on Form 10-K. Readers are urged to carefully review and consider the various disclosures made in this Annual Report, which attempt to advise interested parties of the statements contained therein except with respect to the effectrisks and factors that may affect our business, financial condition, results of the restatement. PART I THIS FORM 10-K/A CONTAINS FORWARD-LOOKING STATEMENTS. THESE INCLUDE, BUT ARE NOT LIMITED TO, STATEMENTS ABOUT OUR INVESTMENT PHILOSOPHY, PLANS FOR EXPANSION, BUSINESS EXPECTATIONS, AND REGULATORY FACTORS. THESE STATEMENTS REFLECT OUR CURRENT VIEWS ABOUT FUTURE EVENTS WHICH COULD AFFECT OUR FINANCIAL PERFORMANCE. ALTHOUGH WE AIM TO PROMPTLY DISCLOSE ANY NEW DEVELOPMENT WHICH WILL HAVE A MATERIAL EFFECT ON PICO, WE DO NOT UNDERTAKE TO UPDATE ALL FORWARD-LOOKING STATEMENTS. YOU SHOULD NOT PLACE UNDUE RELIANCE ON FORWARD-LOOKING STATEMENTS, BECAUSE THEY ARE SUBJECT TO VARIOUS RISKS AND UNCERTAINTIES, INCLUDING THOSE LISTED UNDER "RISK FACTORS" AND ELSEWHERE IN THIS FORM 10-K/A, WHICH COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM SUCH FORWARD-LOOKING STATEMENTS, OR FROM OUR PAST RESULTS. operations, and prospects.


Introduction

PICO Holdings, Inc. ("PICO," or "the Company"(PICO and its subsidiaries are referred to as “PICO,”“the Company,”“we,” and “our”) is a diversified holding company. WePICO seeks to acquire businesses and interests in businesses which we identify as undervalued based on fundamental analysis--that is, our assessment of what the business is worth, based on the private market value of its assets, earnings, and cash flow. We prefer long-established businesses, with a history of operating successfully through industry cycles, recessions and geo-political disruptions, in basic, “old economy” industries. Typically, the business will be generating free cash flow and have a low level of debt, or, alternatively, strong interest coverage ratios or the ability to realize surplus assets. As well as being undervalued, the business must have special qualities such as unique assets, a potential catalyst for change, or be in an industry with attractive economics. We are also interested in acquiring businesses and interests in businesses where there is significant unrecognized value in land and other tangible assets.

We have acquired businesses and interests in businesses by the acquisition of private companies, which ourand the purchase of shares in public companies, both directly through participation in financing transactions, and through open market purchases. When acquisitions become core operating subsidiaries, we become actively involved in the management believes: - - are undervalued atand strategic direction of the time we buy them; and - - have the potential to provide a superior rate of return over time, after considering the risk involved. business.

Our over-riding objective is to generate superior long-term growth in shareholders'shareholders’ equity, as measured by book value per share. To accomplish this,We anticipate that PICO’s earnings will fluctuate from year to year, and that the results for any one year are not necessarily indicative of our future performance.

Our business is separated into five major operating segments:
·water resource & water storage operations;
·real estate operations in Nevada;
·Business Acquisitions & Financing, which contains businesses, interests in businesses, and other parent company assets;
·insurance operations in “run off”; and
·the operations of HyperFeed Technologies, Inc. (“HyperFeed”).
Each of these business segments is discussed in greater detail below.

Currently our major consolidated subsidiaries are:
·Vidler Water Company, Inc. (“Vidler”), which develops and owns water rights and water storage operations in the southwestern United States, primarily in Nevada and Arizona;
·Nevada Land and Resource Company, LLC (“Nevada Land”), which owns approximately 767,000 acres of land in Nevada, and the mineral rights and water rights related to the property;
·Citation Insurance Company, which is “running off” its historical property & casualty and workers’ compensation loss reserves, and Physicians Insurance Company of Ohio, which is “running off” its medical professional liability loss reserves;
·Global Equity AG, which holds our interest in Jungfraubahn Holding AG; and
·HyperFeed, which became a subsidiary in 2003. HyperFeed is a leading provider of ticker plant technologies, data distribution, smart order routing and managed data services to the financial community.

In 2003, we are seeking to build a profitable operating base and to realize gains from our investment holdings. In the long term, we expect that most of the growth in shareholders' equity will come from realized gainsclosed on the sale of assets, rather than operating earnings. Accordingly, when analyzing PICO's performance, our management places more weight on increased asset values than on reported earnings. Over time, the assets and operations owned by PICO will change. Currently our major activities are: - - owning and developing water rights and water storage operations through Vidler Water Company, Inc.; - - owning and developing land and the related mineral rights and water rights through Nevada Land & Resource Company, LLC; - - property and casualty insurance in California and Nevada through Sequoia Insurance Company (“Sequoia”), which is accounted for in our consolidated financial statements for 2003 and "running off" the property and casualty loss reserves of Citation Insurance Company; - - "running off" the medical professional liability loss reserves of Physicians Insurance Company of Ohio; and - - making long term value-based investments in other public companies. prior years as a discontinued operation. See “Discontinued Operations.”

The address of our main office is 875 Prospect Street, Suite 301, La Jolla, California 92037, and our telephone number is (858) 456-6022.

Our web-site at annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports are made available on our website (www.picoholdings.com) as soon as reasonably practicable after the reports are electronically filed with the SEC. Our website also contains furtherother material about PICO, our Securities and Exchange Commission filings, and links to other sites, including some of the companies with which we are associated with. You should check the site periodically during the year for press releases and updated information. 3 HISTORY associated.

History

PICO was incorporated in 1981 and began operations in 1982. The Companycompany was known as Citation Insurance Group until a reverse merger with Physicians Insurance Company of Ohio on November 20, 1996. After the reverse merger, the former shareholders of Physicians owned approximately 80% of Citation Insurance Group, the Board of Directors and management of Physicians replaced their Citation counterparts, and Citation Insurance Group changed its name to PICO Holdings, Inc. You should be aware that some data on Bloomberg and other information services pre-dating the reverse merger relates to the old Citation Insurance Group only, and does not reflect the performance of Physicians prior to the merger. MAJOR OPERATING SEGMENTS & SUBSIDIARY COMPANIES This section describes

Operating Segments and Major Subsidiary Companies

The following is a description of our operating segments and lists the important subsidiaries in each segment.major subsidiaries. Unless otherwise indicated, we own 100% of each subsidiary. WATER RIGHTS AND WATER STORAGE This segment

Water Resource and Water Storage Operations - Vidler Water Company, Inc.

Vidler is compriseda leading private company in the water resource development business in the southwestern United States. PICO identified water resource development in the Southwest as an attractive business opportunity due to the continued growth in demand for water resulting from population growth, economic development, environmental requirements, and the claims of two distinct but inter-related activities: the ownership and developmentNative Americans. We develop new sources of water rightsfor municipal and industrial use, and necessary storage infrastructure to facilitate the efficient allocation of available water supplies. Vidler is not a water utility, and does not intend to enter into regulated utility activities.

The inefficient allocation of available water between agricultural users and municipal or industrial users, or the lack of available known water supply in Nevada, Arizona, and Colorado; and our interests in water storage facilities in Arizona and California. a particular location, provide opportunities for Vidler:
·the majority of water rights are currently owned or controlled by agricultural users, and in many locations there are insufficient water rights owned or controlled by municipal and industrial users to meet present and future demand;

·certain areas of the Southwest experiencing rapid growth have insufficient supplies of known water to support future growth. Vidler identifies and develops new water supplies for communities with no other known water resources to support future growth; and
·currently there are not effective procedures in place for the transfer of water from private parties with excess supply in one state to end-users in other states. However, regulations and procedures are steadily being developed to facilitate the interstate transfer of water. Infrastructure to store water will be required to accommodate and allow interstate transfer, and transfers from wet years to dry years. Currently there is limited storage capacity in place.

We entered the water rights and water storageresource development business with the acquisition of Vidler Water Company, Inc. ("Vidler") in 1995. At the time, Vidler owned a limited quantity of water rights and related assets in Colorado. Since then, Vidler has acquired: - - additional water rights and related assets, predominantly in Arizona and Nevada. Vidler seeks to acquire water rights at prices consistent with their current use, with the expectation of an increase in value if the water right can be converted to a higher use. The majority of Vidler's water rights are in Nevada and Arizona, the two states which experienced the most rapid population growth in the past 10 years; and - - interests in water storage facilities in Arizona and California. PICO currently owns approximately 96.2% of Vidler. Vidler is the leading private company in the water rights and water storage business in the southwestern United States. PICO identified water rights and water storage as attractive niches to invest in due to the escalating supply/demand imbalance for water in the Southwest. There are already disparities between the time and place of highest demand and the time and place where supplies of water are available. Meanwhile, demand continues to rise rapidly, fueled by population growth, economic development, environmental requirements, and the claims of Native Americans. While, physically, there is enough water in the region to meet foreseeable demand, some of the water is in remote locations and available water is allocated inefficiently, which creates opportunity for private providers such as Vidler. For example: - - the majority of water rights are currently controlled by agricultural users. In many locations, there are insufficient water rights controlled by municipal users to meet present and future demand; - - currently there are not effective procedures in place for the transfer of water from private parties with excess supply in one state to end-users in other states, although regulation and procedures are steadily being developed to facilitate the interstate transfer of water; and - - infrastructure to store water will be required to accommodate and allow interstate transfer, and transfers from wet years to dry years. Currently there is limited storage capacity in place. The water rights and water storage business is relatively new and complex, and water law and terminology vary from state to state.acquired or developed:
·additional water rights and related assets, predominantly in Arizona and Nevada, the two leading states in population growth and new home construction. A water right is the legal right to divert water and put it to beneficial use. Water rights are tradable assets which can be bought and sold. In some states, the use of the water can also be leased. The value of a water right depends on a number of factors, including location, the seniority of the right, and whether or not the right and whether or not the water is transferable. Vidler seeks to acquire water rights at prices consistent with their current use, with the expectation of an increase in value if the water right can be converted to a higher use. Our objective is to monetize our water rights for municipal and industrial use. Typically, our water rights are the most competitive source of water to support new growth in municipalities and new industry; and
·a water storage facility in Arizona and an interest in Semitropic, a water storage facility in California. At December 31, 2005, Vidler had “net recharge credits” representing more than 90,000 acre-feet of water in storage on its own account at the Vidler Arizona Recharge Facility. An acre-foot is a unit commonly used to measure the volume of water, being the volume of water required to cover one acre to a depth of one foot. As a rule of thumb, one acre-foot of water would sustain two families of four persons each for one year.

Vidler is engaged in the following activities: - - identifying end-users in the Southwest who require water, namely water utilities, municipalities, developers, or industrial users, and then locating a source of water and supplying the demand, utilizing the Company's own assets where possible; 4 - - acquiring water rights, redirecting the water right to its highest and best use, and then generating cash flow from either leasing the water or selling the right; - - development of storage and distribution infrastructure, and then generating cash flow from charging customers fees for "recharge," or placing water into storage; and - - purchase and storage of water for resale in dry years.
·supplying water to end-users in the Southwest, namely water utilities, municipalities, developers, or industrial users. The source of water could be from identifying and developing a new water supply, or a change in the use of water from agricultural to municipal and industrial; and
·development of storage and distribution infrastructure to generate cash flow from the purchase and storage of water for resale, and charging customers fees for “recharge,” or placing water into storage.

After an acquisition and development phase spanning several years, Vidler'sVidler completed its first significant sales of water rights for industrial use in 2001 and municipal use in 2002. During 2005, Vidler sold approximately 42,000 acre-feet of water rights, and the related land, in the Harquahala Valley Irrigation District of Arizona for $94.4 million, which added $55.5 million to income. The sales price of $94.4 million for this one asset exceeded the carrying value of Vidler’s total assets on our balance sheet prior to the sale ($83.5 million at December 31, 2004).

Vidler’s priority is to either monetize or develop recurring cash flow from theseits most important assets and additional water assets which we may acquire or develop in the future. If Vidler is successful in commercially developing its water and water storage assets, revenues could be significantly higher in future years if the company: - - secures significant supply contracts utilizing its water rights in Arizona and Nevada; and - - obtains contracts to store water at the Vidler Arizona Recharge Facility. by:
·securing supply contracts utilizing its water rights in Nevada; and
·storing additional water at the Vidler Arizona Recharge Facility, and providing water supplies from net recharge credits already in storage.

Vidler has also entered into joint venturespartnering arrangements with parties who have water assets but lack the capital or expertise to commercially develop water rights.these assets. Vidler continues to explore additional joint venturepartnering opportunities throughout the Southwest. This

The following table details the water rights and water storage assets owned by Vidler at December 31, 2001.2005. Please note that this is intended as a summary, and that some numbers are rounded. Item 7 of this Form 10-K/A10-K contains more detail about these assets, recent developments affecting them, and the current outlook. An acre-foot is a unit commonly used to measure the volume of water. An acre-foot is the volume of water required to cover one acre to a depth of one foot. As a rule of thumb, one acre-foot of water would sustain two families of four persons each for one year.
NAME OF ASSET
Name of asset & APPROXIMATE LOCATION BRIEF DESCRIPTION PRESENT COMMERCIAL USE - ------------------------------------------------------------------------------------------------------------------------------- approximate location
Brief Description
Present commercial use
WATER RIGHTS ARIZONA: HARQUAHALA VALLEY GROUND WATER BASIN 16,520 acres of land, plus 4,814 acres under Leased to farmers LA PAZ & MARICOPA COUNTIES option
Arizona:
Harquahala Valley ground water basin
La Paz County
75 miles northwest of metropolitan Phoenix 39,911
2,703 acres of land
2,880 acre-feet of transferable ground water plus 13,764 acre-feet under option State legislation allows use of the Central Arizona Project Aqueduct
Leased to convey up to 20,000farmers
42,000 acre-feet of transferable ground water, from this area to cities and communitiesthe related land in the Phoenix metropolitan area as an assured municipal water supply - ------------------------------------------------------------------------------------------------------------------------------- NEVADA: FISH SPRINGS RANCH,Maricopa County, sold for $94.4 million in 2005
Nevada:
Fish Springs Ranch, LLC (51% INTEREST)interest) & 8,600 acres of deeded ranchland Vidler is currently farming the V&B, LLC (50% INTEREST) property. Cattle graze on part of the interest)
Washoe County, 40 miles north of Reno property on a revenue-sharing basis
8,600 acres of deeded ranchland
8,000 acre-feet of permitted water rights, which are transferable to the Reno/Sparks area - ------------------------------------------------------------------------------------------------------------------------------- LINCOLN COUNTY JOINT VENTURE
Vidler is currently farming the property. Cattle graze on part of the property on a revenue- sharing basis
Lincoln County Agreement
Applications* for more than 100,000 acre-feet Agreement to supply an of water rights through a joint venturean agreement with electricity-generating company Lincoln County, of which it is currently with between 6,700 and 9,000 acre- anticipated that up to 40,000 acre-feet feet of water at $3,300 per acre-foot will be permitted and put to use in Lincoln County. The purchaseCounty/northern Clark County
2,100 acre-feet of approximately 822permitted water rights in the Tule Desert Groundwater Basin sold in 2005 for $15.7 million
Agreement to sell 7,240 acre-feet of water as, and when, supplies are permitted from existing applications
Agreement to sell water to a developer as, and when, supplies are permitted from applications in Kane Springs Basin in Lincoln County, Nevada
570 acre-feet of permitted water rights at Meadow Valley, islocated in escrow
5 - ------------------------------------------------------------------------------------------------------------------------------- SANDY VALLEY Application* for 2,000Lincoln and Clark counties
Agreement to sell 570 acre-feet of water, Agreement to supply water to support pending resolution of a protest
Clark County
Sandy Valley
Near the Nevada / California state line rights additional growth at Primm, Nevada in the Interstate 15 corridor once
415 acre-feet of permitted water rights
Application for 1,000 acre-feet of water rights
Agreement to sell at least 415 acre-feet of water pending resolution of a protest of the permitting of the water rights have been permitted *The
Muddy River water rights
In the Moapa Valley, approximately 35 miles east of Las Vegas in the Interstate 15 corridor
221 acre-feet of water rights, plus approximately 46 acre-feet under option
*The numbers indicated for water rights applications are the maximum amount which we have filed for. In some cases, we anticipate that the actual permits received will be for smaller quantities. - ------------------------------------------------------------------------------------------------------------------------------- WEST WENDOVER Approximately 6,300 acresquantities
Colorado:
Colorado water rights
87 acre-feet of land near West water rightsAgreement to sell 7 acres of Adjacent to the Nevada / Utah state line Wendover, Nevada industrial land in the Interstate 80 corridor - ------------------------------------------------------------------------------------------------------------------------------- BIG SPRINGS RANCH Approximately 37,500 acres of deeded ranch Leased to ranchers 65 miles from Elko in Elko County, Nevada land 6,000 acre-feet of certificated water rights 6,000 acre-feet of permitted water rights - ----------------------------------------------------------------------------------------------------------------------------------- COLORADO: CLINE RANCH Approximately 50087 acre-feet of senior water Sale agreement in final stages of rights regulatory approval - ----------------------------------------------------------------------------------------------------------------------------------- VIDLER TUNNEL WATER RIGHTS Agreement to sell 200 acre-feet of (the Vidler Tunnel itself was divested in senior water rights, 640 2000) acre-feet of junior water rights, and related land and tunnel assets to the City of Golden, Colorado Agreement to sell 86over a period of 10 years
201 acre-feet of water rights to East Dillon Water District 163 acre-feet of senior water rights 65.7366 acre-feet leased. Vidler has appliedThe balance is available for remaining water rights to be upgraded, which will increase their commercial value - ----------------------------------------------------------------------------------------------------------------------------------- WET MOUNTAIN 600 acre-feet of priority water rights Vidler is in discussions with potential users - ----------------------------------------------------------------------------------------------------------------------------------- sale or lease
WATER STORAGE ARIZONA: VIDLER ARIZONA RECHARGE FACILITY
Arizona:
Vidler Arizona Recharge Facility
Harquahala Valley, Arizona
An underground water storage facility with Harquahala Valley, Arizona estimated capacity exceeding 1 million acre-feet and permitted annual recharge capability of up to 100,00035,000 acre-feet - ----------------------------------------------------------------------------------------------------------------------------------- CALIFORNIA: SEMITROPIC WATER STORAGE FACILITY Vidler is currently buying water and storing it on its own account. At December 31, 2005, Vidler had net recharge credits equivalent to approximately 90,666 acre-feet of water in storage at the Arizona Recharge Facility. In addition, Vidler has purchased or ordered approximately 35,000 acre-feet of water for recharge in 2006
California:
Semitropic water storage facility
The right to store 30,000 acre-feet of water underground for 35 years.until 2035. This includes the right to minimum guaranteed recovery of approximately 2,700 acre-feet of water every year, and the right to recover up to approximately 6,800 acre-feet in any one year and minimum guaranteed recovery of approximately 2,700 acre-feet every year - ----------------------------------------------------------------------------------------------------------------------------------- in certain circumstances
LAND AND RELATED MINERAL RIGHTS AND WATER RIGHTS


Real Estate Operations in Nevada - Nevada Land And Resource Company, LLC

In April 1997, PICO paid $48.6 million to acquire Nevada Land, & Resource Company, LLC ("Nevada Land"), which at the time owned approximately 1,352,723 acres of deeded land in northern Nevada, and the water, mineral, and geothermal rights related to the property. Much of Nevada Land'sLand’s property is checker-boarded in square mile sections with publicly owned land. The lands generally parallel the Interstate-80Interstate 80 corridor and the Humboldt River, from West Wendover, in northeast Nevada, to Fernley, in western Nevada, to Elko County, in northeast Nevada.

Nevada Land is the largest private landowner in the state of Nevada. According to census data, Nevada has experienced the most rapid population growth of any state in the United States for the past 19 years in a row. The population of Nevada increased 66% in the 10 years ended April 1, 2000, which was the most rapid population growth of any state in the United States. In the fifteen months from April 1, 2000 to July 1, 2001, Nevada's populationand increased another 5.4%24.4%, to approximately 2.12.5 million people.people, from 2000 to 2005. Most of 6 the growth is centered in southern Nevada, which includes the city of Las Vegas and surrounding municipalities. GovernmentalLand available for private development in Nevada is relatively scarce, as governmental agencies own approximately 87% of the land in Nevada, so developable land is relatively scarce. Nevada.
Before we acquired Nevada Land, the property had been under the ownership of a succession of railway companies, to whom it was a non-core asset. Accordingly, when we believeacquired the company, we believed that the commercial potential of the property had nevernot been exploited. maximized.

After acquiring Nevada Land, we completed a "highest“highest and best use study." Theuse” study which divided the land into 7seven major categories andcategories. We developed strategies to maximize the value of each type of asset.asset, with the objective of monetizing assets once they had reached their highest and best use. These strategies include: - - the sale of land and water rights. There is demand for land and water for a variety of purposes including residential development, residential estate living, farming, ranching, and from industrial users -- for example, electricity-generating companies, which wish to locate new plants in Nevada; - - land exchanges where Nevada Land transfers parcels of its land in return for land owned by government agencies or private parties. The Bureau of Land Management and other government agencies are motivated to conduct land exchanges for many purposes, including obtaining environmentally sensitive lands for conservation purposes or consolidating their land holdings into more manageable contiguous parcels. Nevada Land completed its first land exchange in 2000, and is working on other potential exchanges; - - the development of water rights. Nevada Land has applied for additional water rights on land owned by the company. Where water rights are permitted, we anticipate that the value and marketability of the related land will increase; - - the development of land in and around growing municipalities; and - - the management of mineral rights. A cost basis has been assigned to each category of land and other asset, which, in aggregate, equals Nevada Land's original purchase price.
·the sale of land and water rights. There is demand for land and water for a variety of purposes including residential development, residential estate living, farming, ranching, and from industrial users;
·the development of water rights. Nevada Land has applied for additional water rights on land it owns and intends to improve. Where water rights are permitted, we anticipate that the value, productivity, and marketability of the related land will increase;
·the development of land in and around growing municipalities; and
·the management of mineral rights.

During the period from April 23, 1997 to December 31, 2001,2005, Nevada Land received consideration of approximately $15.5$53.6 million from the sale and exchange of land, and the sale of water rights. This is comprised of $13.6$52.5 million in salesfrom the sale and exchange of land, $1.3and $1.1 million of cash and land received in a land exchange transaction, and $624,000 from the sale of water rights.rights related to land that was sold. Over this period, we sold 113,128divested approximately 615,000 acres and divested 25,828 acres in aof land exchange. Theat an average price received in land disposals has been $112of $87 per acre, comparedwhich compares to our average basis of $57$37 in the acres disposed of. The average gross margin percentage on the disposal of land and thewater rights over this period is 57.2%. The average cost of $35 per acre for the total land, water, and mineral assets acquired. Therefore, the proceeds from selling and exchanging 10.3% of the land area acquired represent 31.5% of the cost basis of the original land, water, and mineral assets. with Nevada Land was $35 per acre.

At December 31, 2001,2005, Nevada Land owned approximately 1,213,767740,000 acres of former railroad land. We anticipate continuing to sell parcels of land for residential, agricultural, and industrial use, and that significantly larger parcels could be divested through land exchanges. In addition to the former railroad property, Nevada Land has acquired: - - 17,558 acres of land in a land exchange with a private landowner. This land is contiguous with Native American tribal lands and is culturally sensitive. We have agreed to a second transaction, with the Bureau of Land Management, where we will give up the 17,558 acres in exchange for lands in the Highway 50 corridor, which runs from the state capital of Carson City, Nevada to Fernley, Nevada. While agreement has been reached, it will likely take several
·17,558 acres of land in a land exchange with a private landowner. This land is contiguous with Native American tribal lands and is culturally sensitive; and
·Spring Valley Ranches, which comprises 8,626 acres of deeded land located approximately 40 miles east of Ely in White Pine County, Nevada. We believe that the land has potential for the development of vacation home sites. Nevada Land is working on an initial development plan, and will seek to either develop the land in conjunction with a developer, or to sell the project to a developer.

In recent years, to complete the exchange; and - - Spring Valley Ranches, which is located approximately 40 miles west of Ely in White Pine County, Nevada. This property was purchased out of bankruptcy proceedings in 2000. We believe that the land has significant environmental value to federal agencies, making it suitable for a land exchange transaction. The real estate assets consist of approximately 9,500 acres of deeded land and 500,000 acres of Forest Service and Bureau of Land Management allotment land. There are 5,582 acre-feet of permitted agricultural water rights related to the property. Nevada Land intends to develop these water rights in conjunction with the property. During 2000 and 2001, Nevada Landhas filed additional applications for an additional 105,516approximately 69,040 acre-feet of water rights on properties owned by Nevada Land.the Company’s lands. The applications consist of: - - 39,076
·on the former railroad lands, approximately 4,791 acre-feet of water rights have been certificated and permitted, and applications are pending for approximately 42,840 acre-feet of water use for agricultural, municipal, and industrial use. Potentially, some of these water rights could be utilized to support the growth of municipalities in northern Nevada; and
·26,200 acre-feet of water rights for the beneficial use of irrigating another 6,550 acres of Spring Valley Ranches.


Business Acquisitions and Financing

Our Business Acquisitions and Financing segment contains businesses, interests in businesses, and other parent company assets.

PICO seeks to acquire businesses which we identify as undervalued based on fundamental analysis -- that is, our assessment of what the business is worth, based on the private market value of its assets, earnings, and cash flow. We prefer long-established businesses, with a history of operating successfully through industry cycles, recessions and wars, in basic “old economy” industries. Typically, the business will be generating free cash flow and have a low level of debt, or, alternatively, strong interest coverage ratios or the ability to realize surplus assets. As well as being undervalued, the business must have special qualities such as unique assets, a potential catalyst for the beneficial use of irrigating the related 9,769 acres of arablechange, or be in an industry with attractive economics. We are also interested in acquiring businesses and interests in businesses where there is significant unrecognized value in land and 40,240 acre-feetother tangible assets.

We have acquired businesses and interests in businesses through the acquisition of waterprivate companies, and the purchase of shares in public companies, both directly through participation in financing transactions and through open market purchases.

When we acquire an interest in a public company, we are prepared to play an active role, for example encouraging companies to use proper financial criteria when making capital expenditure decisions, or by providing financing or strategic input.

At the time we acquire an interest in a public company, we believe that the intrinsic value of the underlying business significantly exceeds the current market capitalization. The gap between market price and intrinsic value may persist for several years, and the stock price may decline while our estimate of intrinsic value is stable or increasing. Sometimes the gap is not eliminated until another party attempts to acquire the company, as was the case with our holding in Australian Oil & Gas Corporation Limited (“AOG”).

Between 1998 and 2002, we became the largest shareholder in AOG, an international provider of drilling services. We identified AOG as undervalued as rig utilization, which is critical to earnings and cash flow for drilling companies, had begun to recover in the U.S., but was still near cyclical lows in the international markets where AOG operates. Historically, there has been a time lag between recovery in rig utilization in the U.S. and in international markets.

We acquired our interest, at an average cost of approximately A$1.35 per share, through open market purchases, the reinvestment of dividends, and assisting AOG with a financing in early 2002. AOG had secured two major new contracts with multinational oil companies, but needed to raise capital to purchase equipment necessary to perform the contracts. We provided AOG with a bridging loan facility, which was repaid with the proceeds of a rights offering which we partly underwrote. After AOG’s expanded activities and earnings base became apparent, Ensign (Australia) Holdings Pty. Limited, a subsidiary of a Canadian oil services company which was already a shareholder in AOG, made a takeover offer for municipal and industrial use, on the former railroad lands; and - - 26,200 acre-feet of water rights for the beneficial use of irrigating another 6,550 acres of Spring Valley Ranches. Progress continues onAOG at A$1.70 per share. Ensign was overbid by a number of potential land exchange transactions,other companies, before lifting its bid several times and eventually acquiring AOG in July 2002 for A$2.70 per share. Immediately prior to Ensign’s first bid, AOG shares had been trading at A$1.40. We believe that our active participation as shareholders was instrumental in achieving this outcome.

PICO began to invest in European companies in 1996. We have been accumulating shares in a number of undervalued asset-rich companies, particularly in Switzerland, which Nevada Landwe believe will give up land with environmental, cultural, orbenefit from pan-European consolidation. We also believe that conversion to international standards of accounting would make the underlying value of such companies more visible. Due to historical value, in exchange for land which is either more marketable, or suitable for future development.restrictions on foreign ownership of Swiss real estate, many Swiss companies are partially-owned by cantons and local governments. In some cases, the ownership structure may not survive future business challenges.

At December 31, 2005, the market value (and carrying value) of our European portfolio was $83.7 million. This includes our 22.5% interest in Jungfraubahn Holding AG (“Jungfraubahn”), which had a market value (and carrying value) of $42 million at the end of 2005.

Before a substantial acquisition is made, after significant research and analysis, we may form joint venturesmust be convinced that -- for an acceptable level of risk -- there is sufficient value to provide the opportunity for superior returns. We also have a small portfolio of alternative investments where intrinsic value is more speculative, in an attempt to capitalize on areas of potentially greater growth without incurring undue risk. At December 31, 2005, the total pre-tax carrying value of this portfolio was less than $100,000.

During the late 1990’s, the businesses we acquired were primarily private companies and foreign public companies. During this period, we perceived that acquisitions in these areas carried less downside risk and offered greater upside potential than the acquisition opportunities available among publicly traded companies in North America.

In the foreseeable future, our acquisition efforts are likely to be focused on domestic and foreign public companies, where we perceive greater scope for value creation than with developersprivate companies.

Insurance Operations in order to participateRun Off

Our Insurance Operations in the upside from developing the land acquired. 7 Nevada Land is currently working on the following land exchange opportunities, each of which could take up to several years to complete: - - the exchange of mountain lands in Washoe County for land suitable for industrial use in Lincoln County; - - the exchange of mountain lands in Washoe County for land suitable for residential, commercial, and industrial use near Dayton, in Lyon County; - - the exchange of working ranch land at Spring Valley Ranches and mountain lands in Pershing County for developable land in southeastern Nevada; and - - the exchange of mountain lands in Elko County for land which would be suitable for agricultural use in Independence Valley, Elko County. PROPERTY AND CASUALTY INSURANCE PICO's Property and Casualty InsuranceRun Off segment is comprised of our California-based subsidiaries Sequoia Insurance Company and Citation Insurance Company. Physicians Insurance Company of Ohio acquired Sequoiaand Citation Insurance Company.

Physicians Insurance Company of Ohio
Until 1995, Physicians and The Professionals Insurance Company (“Professionals”) wrote medical professional liability insurance, mostly in the state of Ohio.

Due to persistent uneconomic pricing by competitors, Physicians and Professionals were unable to generate adequate premium volume in 1994 and the early part of 1995. Faced with these market conditions and with the opportunity for higher returns from activities other than medical professional liability insurance, in 1995 we concluded that maximum value would be obtained by placing Physicians in “run off.” This means handling and merged with Citation's parent company in 1996. Sequoia's coreresolving the claims arising from its historical business, is property and casualty insurance in California and Nevada, focusing onbut not writing new business. In addition, the niche markets of commercial insurance for small to medium-sized businesses and farm insurance. While Sequoia had previously written some personal insurance in California, the company'sfuture book of business -- essentially the opportunity to renew expiring policies -- was sold for $6 million in personalcash.

After Physicians went into “run off,” the company expanded its insurance operations by acquisition:
·in 1995, we purchased Sequoia Insurance Company, which primarily wrote commercial lines of insurance in California and Nevada. After the acquisition, we re-capitalized Sequoia, which provided the capital to support growth in the book of business; and
·
in 1996, Physicians completed a reverse merger with the parent company of Citation Insurance Company. At that time, Citation wrote various lines of insurance increased significantly with the acquisition of the Personal Express Insurance Services, Inc. book of business in May 2000. Personal Express has a unique business model, writing insurance direct with the customer, but with branches providing local service for underwriting and claims. At present Personal Express operates in two central California cities -- Bakersfield and Fresno. In the past, Citation wrote commercial property and casualty insurance and workers’ compensation insurance, primarily in California and Arizona. The operations of Sequoia and Citation were combined, and eventually the business previously written by Citation was transferred to Sequoia. At the end of 2000, Citation ceased writing business and went into “run off”. In 2003, we sold Sequoia Insurance Company. See “Discontinued Operations” later in Item 1.

Physicians and Citation obtain the funds to pay claims from the maturity of fixed-income securities, the sale of investments, and collections from reinsurance companies (that is, specialized insurance companies who share in our claims risk).

Typically, most of the revenues of an insurance company in “run off” come from investment income on funds held as part of the insurance business. During the “run off” process, as claims are paid, both the loss reserve liabilities and the corresponding fixed-income investment assets decrease. Since interest income in this segment will decline over time, we are attempting to minimize segment overhead expenses as much as possible. For example, we have reduced head count and office space, and merged Professionals into Physicians, which simplified administration and reduced costs.

Although we regularly evaluate the strategic alternatives, we currently believe that the most advantageous option is for Physicians’ own claims personnel to manage the “run off.” We believe that this will ensure a high standard of claims handling for our policyholders and, from the Company’s perspective, ensure the most careful examination of claims made to minimize loss and loss adjustment expense payments. If we were to reinsure Physicians’ entire book of business and outsource claims handling, this would involve giving up management of the corresponding investment assets.

Administering our own “run off” also provides us with the following opportunities:
·we retain management of the associated investment portfolios. After we resumed direct management of our insurance company portfolios in 2000, we believe that the return on our portfolio assets has been attractive in absolute terms, and very competitive in relative terms. The fixed-income securities and unaffiliated common stocks in the “run off” insurance company investment portfolios generated total returns upwards of 20% in 2003, 22% in 2004, and 29% in 2005. This included total returns for the stocks component in excess of 39% in 2003, 41% in 2004, and 44% in 2005. Since the claims reserves of the “run off” insurance companies effectively recognize the cost of paying and handling claims in future years, the investment return on the corresponding investment assets, less non-insurance expenses, accrues to PICO. We aim to maximize this source of income; and
·to participate in favorable development in our claims reserves if there is any, although this entails the corresponding risk that we could be exposed to unfavorable development.

As the “run off” progresses, at an indeterminate time in the future, Physicians’ claims reserves may diminish to the point where it is more cost-effective to outsource claims handling to a third party administrator.

At December 31, 2005, Physicians had $11.9 million in medical professional liability loss reserves, net of reinsurance.

Citation Insurance Company
In 1996, Physicians completed a reverse merger with Citation’s parent company. In the past, Citation wrote various lines of commercial property and casualty insurance and workers’ compensation insurance, primarily in California and Arizona.

After the merger was completed, we identified redundancy between CitationSequoia and Sequoia,Citation, and combined the operations of the two companies. After we assumed management of Citation, we tightened underwriting standards significantly and did not renew much of the business which Citation had written previously. Eventually all business in California and Nevada was transitioned to Sequoia. Citation ceased writing businessSequoia, and at the end of 2000 Citation ceased writing business and is nowwent into “run off.”

Prior to the reverse merger, Citation had been a direct writer of workers’ compensation insurance. Since PICO did not wish to be exposed to that line of business, shortly after the merger was completed Citation reinsured 100% of its workers compensation business with a subsidiary, Citation National Insurance Company (“CNIC”), and sold CNIC to Fremont Indemnity Company (“Fremont”) in "run off." This means that Citation is handling claims arising from its historical business, but not writing new business. Most1997. As part of the revenuessale of CNIC, all assets and liabilities, including the assets which corresponded to the workers’ compensation reserves reinsured with CNIC, and all records, computer systems, policy files, and reinsurance arrangements were transferred to Fremont. Fremont merged CNIC into Fremont, and administered and paid all of the workers’ compensation claims which had been sold to it. From 1997 until the second quarter of 2003, Citation booked the losses reported by Fremont, and recorded an equal and offsetting reinsurance recoverable from Fremont, as an admitted reinsurer, for all losses and loss adjustment expenses. This resulted in no net impact on Citation’s reserves and financial statements, and no net impact on PICO’s consolidated financial statements.

On June 4, 2003, the California Department of Insurance obtained a conservation order over Fremont, and applied for a court order to liquidate Fremont. On July 2, 2003, the California Superior Court placed Fremont in liquidation. Since Fremont was no longer an admitted reinsurance company under the statutory basis of insurance accounting, Citation reversed the $7.5 million reinsurance recoverable from Fremont in both its statutory basis and GAAP basis financial statements in the three months ended June 30, 2003 and year ended December 31, 2003. Citation was unsuccessful in court action to recover deposits reported as held by Fremont for Citation’s insureds.

In September 2004, Citation entered into a third-party administration agreement with Cambridge Integrated Services, Inc. to administer the claims handling and claims payment for Citation’s workers’ compensation insurance run-off book of business.

At December 31, 2005, Citation had $18.9 million in loss reserves, net of reinsurance. Citation’s loss reserves consist of $6.4 million for property and casualty insurance, principally in the artisans/contractors line of business, and $12.5 million for workers’ compensation insurance.

HyperFeed Technologies, Inc.

HyperFeed is a leading provider of enterprise-wide ticker plant and transaction technology software and services enabling financial institutions to process and use high performance exchange data with Smart Order Routing and other applications.

HyperFeed is a publicly traded company (OTCBB: HYPR), based in "run off" comeChicago, Illinois, and became a subsidiary of PICO Holdings in 2003, when we acquired direct ownership of a majority voting interest. HyperFeed became a separate reporting segment from May 15, 2003. Previously, HyperFeed was part of the Business Acquisitions & Financing segment.

PICO first invested in HyperFeed in 1995 through the purchase of common stock. We invested further capital as debt, which was later converted to equity, and received warrants for providing financing:
·in 2000, 2001, and 2002, we increased our holding through open market purchases, the conversion of preferred stock, and the exercise of warrants;
·on May 15, 2003, PICO purchased 443,622.9 HyperFeed common shares in a private placement for $1.2 million; and
·during 2004 and 2005, PICO loaned money to HyperFeed under a secured convertible promissory note agreement. On November 1, 2005, PICO elected to convert the $6.1 million in principal and interest outstanding on the note into 4,546,479 newly-issued common shares of HyperFeed, which represents a conversion price of $1.36 per share.
PICO now owns 6,117,790 HyperFeed common shares, representing a voting ownership of approximately 80.1%.

During 2002 and 2003, HyperFeed restructured its operations, culminating in the sale of its consolidated market data feed customers to Interactive Data Corporation for $8.5 million on October 31, 2003.


Discontinued Operations

Sequoia Insurance Company
On March 31, 2003, we closed on the sale of Sequoia. The gross sale proceeds were approximately $43.1 million, consisting of $25.2 million in cash and a dividend of $17.9 million. The dividend included the common stocks previously held in Sequoia’s investment income. Citation's loss reserve liabilitiesportfolio, primarily consisted of a number of holdings in small-capitalization value stocks, which we believed were still undervalued based on the private market value of the underlying assets, earnings, and correspondingcash flow. These common stocks were added to the investment assets are decreasing as claims are paid withportfolio of Physicians, which was Sequoia’s direct parent company.

Physicians acquired Sequoia in 1995. Sequoia’s core business was property and casualty insurance in California and Nevada, focusing on the funds from maturing fixed-income securities. Sequoia'sniche markets of commercial insurance for small to medium-sized businesses and farm insurance. Sequoia also wrote selected lines of personal insurance in California. During the period of our ownership, Sequoia’s management takesapplied a selective approach to underwriting, and aimsaiming to earn a profit from underwriting (that is, a profit before investment income). During the period of our ownership of both companies, there have also been a number of management, and implemented numerous initiatives to improve efficiency and reduce expenses. These includeAs a result, Sequoia consistently had loss ratios and combined ratios better than the combinationindustry averages. During 2000, 2001, and 2002, Sequoia generated increased average premiums per commercial policy, and significant growth in its book of business, with combined ratios of 106.3%, 105.4%, and 101.6%, in those respective years.
From April 1, 2000, when we resumed direct management of Sequoia’s investment portfolio, the company’s portfolio of unaffiliated stocks, bonds, and cash equivalents earned returns (that is, interest and dividend income plus realized and unrealized gains, before fees and taxes) of approximately 6.1% in the last nine months of 2000, 10.4% in 2001, 12.6% in 2002, and 2.5% in the first three months of 2003.

Despite these factors, Sequoia continued to generate a return on capital lower than our expectation, and we concluded that value would be maximized by sale of the operations of Sequoia and Citation,company, particularly given the introduction of an innovative information system,increasingly restrictive regulatory & rating environment, and the re-underwriting of each company's book of business. Sequoia has earned a profit from its insurance activities, before investment income, in 3 of the past 5 years. In 1998 and 1999, Citation incurred losses from its insurance business due to a large number of claims in one line of business -- artisans/contractors construction defect insurance -- which Citation stopped writing in 1995, the year before the merger. In this segment, revenues come from premiums earned on policies written and investment income on the assets held by the insurance companies. Typically more than 80% of the insurance companies' portfolios are invested in fixed-income securities, and up to 20% in equities. The fixed-income portfolios focus on high quality corporate bonds with 10 or less years to maturity. The equities portion of the Sequoia and Citation portfolios contains some of PICO's long term holdings, as well as a number of small-capitalization value investments. MEDICAL PROFESSIONAL LIABILITY INSURANCE Until 1995, Physicians Insurance Company of Ohio and The Professionals Insurance Company wrote medical professional liability insurance, mostly in the state of Ohio. In 1995, Physicians and Professionals stopped writing new business and went into "run off." On December 21, 2001, Professionals merged with, and into, Physicians. 8 Although we periodically evaluate the strategic alternatives, we currently believe that the most advantageous option is for Physicians' own claims personnel to manage the "run off" and for us to retain management of the associated investment portfolios. LONG TERM HOLDINGS This segment contains our long-term investments in public companies, subsidiaries, and other assets which individually are too small to constitute a segment, and parent company assets. PICO invests in companies which we identify as undervalued based on fundamental analysis. Typically, the stocks will be selling for less than tangible book value or appraised intrinsic value -- that is, our assessment of what the company is worth. Often the stocks will also be trading for low ratios of earnings and cash flow, or on high dividend yields. Additionally, the company must have special qualities, such as unique assets, a potential catalyst for change, or it may be in an industry with attractive characteristics. We invest for the long term, typically 5 years or more, and seek to develop a constructive relationship with the company. This may include an appropriate level of shareholder influence, such as encouraging companies to use proper financial criteria when making capital expenditure decisions, or providing financing or strategic input. In the case of large holdings, this will usually include board representation. Before a substantial sum is invested, after significant research and analysis, we must be convinced that -- for an acceptable level of risk -- there is sufficient value to provide the opportunity for superior returns. On rare occasions, we will deviate from our strict value criteria. In these cases, given the higher level of risk, we invest smaller sums. We sell investments if their price has significantly exceeded our objective, or if there have been changes in the business or in the company which we believe limit further appreciation potential, on a risk-adjusted basis. PICO began to invest in European companies in 1996. We have been accumulating shares in a number of undervalued asset-rich companies, particularly in Switzerland, which we believe will benefit from pan-European consolidation. Our largest long-term investments are in highly competitive marketplace.

HyperFeed Technologies, Inc., Jungfraubahn Holding AG, and Australian Oil & Gas Corporation Limited. After allowing for related taxes,
During 2003, HyperFeed completed the carrying valuesale of these three holdings on December 31, 2001 was approximately $30.2 million,two businesses, which represents 14.5%are now recorded as discontinued operations:
·its retail trading business, PCQuote.com, which was sold for $370,000 in June 2003; and
·
its consolidated market data feed customers, which were sold to Interactive Data Corporation, for $8.5 million. HyperFeed received $7 million in cash on closing, $500,000 in 2004, and $545,000 in 2005. HyperFeed could realize an additional $330,000 if, and when, milestones are met.

7

Table of PICO's shareholders' equity.
---------------------------------------------------------------------------------------------------------------- DECEMBER 31, 2001 CARRYING VALUE UNITS HELD CLOSING PRICE Carrying value before taxes: HyperFeed Technologies, Inc. Common $2,128,000 10,077,856 $0.61 Warrants 527,000 4,055,195 unlisted ---------------- Total 2,655,000 Jungfraubahn Holding AG 17,676,000 112,672 $156.88 Australian Oil & Gas Corporation Limited 7,489,000 9,867,391 $0.76 ---------------- Total carrying value before taxes $27,820,000 Deferred taxes $2,399,000 ---------------- Carrying value $30,219,000
Notes: 1. Our HyperFeed common shares are carried under the equity method. This is cost, adjusted for our proportionate share of net income (or losses) and other events affecting equity. This is explained in the Long Term Holdings section of Item 7, and in Note 4 of Notes to Consolidated Financial Statements, "Investment in Unconsolidated Affiliates." 2. Our HyperFeed warrants are carried at estimated fair value, based on the Black-Scholes model. Full detail is provided in Note 4 of Notes to Consolidated Financial Statements, "Investment in Unconsolidated Affiliates"; however, the volatility of the common shares, and their price at December 31, 2001 are important inputs in the valuation. Since the HyperFeed price can be volatile, the carrying value of the warrants can fluctuate considerably from quarter to quarter. We are required to use this accounting treatment; however, it introduces volatility to our reported shareholders' equity. 3. Contents

Employees

At December 31, 2001, it would have cost $5.5 million to exercise our HyperFeed warrants. 4. Our investments in Jungfraubahn and Australian Oil & Gas Corporation are accounted for under Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities." --------------------------------------------------------------------- We also have a small portfolio of alternative investments where, in previous years, we deviated from our traditional value criteria in an attempt to capitalize on areas of potentially greater growth without incurring undue risk. The total after-tax carrying value of this portfolio at year-end was $3.2 million, which represents approximately 1.5% of shareholders' equity. The largest investment in this group is SISCOM, Inc. 9 FUTURE STRATEGY Over the past 4 years, the majority of PICO's new investments have been in private companies and foreign public companies. New investments were focused in these areas because we perceived that selected private companies and foreign public companies carried less downside risk and offered greater upside potential than investment in publicly-traded small-capitalization value equities in North America. Although the actual investments which PICO makes depend on many factors, in the foreseeable future it is likely that new investments will be focused on domestic and foreign small-capitalization value equities, rather than private companies. EMPLOYEES At December 31, 2001,2005, PICO had 13982 employees. A total of 87 employees were engaged in land and related mineral rights and water rights operations; 45 in water rights and storage; 105storage operations; 3 in property and casualty insurance operations; 42 in medical professional liability operations; and 1817 in holding company activities. EXECUTIVE OFFICERS HyperFeed Technologies, Inc. has 48 employees.


Executive Officers

The executive officers of PICO are as follows:

Name
Age
Position ---- --- --------
Ronald Langley 57 61Chairman of the Board, Director
John R. Hart 42 46President, Chief Executive Officer and Director
Richard H. Sharpe 46 50Chief Operating Officer
James F. Mosier 54 58General Counsel and Secretary
Maxim C. W. Webb 40 44Chief Financial Officer and Treasurer
W. Raymond Webb44Vice President, Investments
John T. Perri36Vice President, Controller


Except for Maxim C. W. Webb, W. Raymond Webb and John T. Perri, each executive officer of PICO was an executive officer of Physicians prior to the 1996 merger between Physicians Insurance Company of Ohio and Citation Insurance Group, the predecessors to PICO Holdings, Inc. Each became an officer of PICO in November 1996 as a result of the merger. Maxim C. W. Webb was an officer of Global Equity Corporation and became an officer of PICO upon the effective date of the PICO/Global Equity Corporation Combination in December 1998. W. Raymond Webb and John T. Perri were elected as officers of PICO in April 2003.

Mr. Langley has been Chairman of the Board of PICO since November 1996 and of Physicians since July 1995. Mr. Langley has been a Director of PICO since November 1996 and a Director of Physicians since 1993. Mr. Langley has been a Director of HyperFeed Technologies, Inc., formerly, PC Quote, Inc. ("HyperFeed", (“HyperFeed”) since 1995 and a Director of Jungfraubahn Holding AG since 2000. Mr. Langley became a Director of Australian Oil & Gas Corporation Limited in September 2001.

Mr. Hart has been President and Chief Executive Officer of PICO since November 1996 and of Physicians since July 1995. Mr. Hart has been a Director of PICO since November 1996 and a Director of Physicians since 1993. Mr. Hart has been a Director of HyperFeed since 1997, and a Director of SISCOM, Inc. since November 1996. 1997.

Mr. Sharpe has served as Chief Operating Officer of PICO since November 1996 and in various executive capacities since joining Physicians in 1977.

Mr. Mosier has served as General Counsel and Secretary of PICO since November 1996 and of Physicians since October 1984 and in various other executive capacities since joining Physicians in 1981.

Mr. Maxim Webb has been Chief Financial Officer and Treasurer of PICO since May 14, 2001. Mr. Webb served in various capacities with the Global Equity Corporation group of companies since 1993, including Vice President, Investments of Forbes Ceylon Limited from 1994 through 1996. Mr. Webb became an officer of Global Equity Corporation in November 1997 and Vice President, Investments of PICO on November 20, 1998.  

Mr. Raymond Webb has been a Directorwith the Company since August 1999 as Chief Investment Analyst and became Vice President, Investments in April 2003.

Mr. Perri has been Vice President, Controller of SISCOM, Inc.PICO since November 1996. 10 April 2003 and served in various capacities since joining the Company in 1998, including Financial Reporting Manager and Corporate Controller.


ITEM 2. PROPERTIES PICO leases approximately 6,354 square feet in La Jolla, California for its principal executive offices. 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 rights and mineral rights in the western United States. See "Item 1-Business-Introduction." ITEM 3. LEGAL PROCEEDINGS The Company is subject to various litigation that arises in the ordinary course of its business. Members of PICO's insurance group are frequently a party in claims proceedings and actions regarding insurance coverage, all of which PICO considers routine and incidental to its business. Based upon information presently available, management is of the opinion that such litigation will not have a material adverse effect on the consolidated financial position, the results of operations or cash flows of the Company. Neither PICO nor its subsidiaries are parties to any potential material pending legal proceedings other than the following: On January 10, 1997, Global Equity Corporation ("Global Equity"), a wholly owned PICO subsidiary, commenced an action in British Columbia against MKG Enterprises Corp. ("MKG") to enforce repayment of a loan made by Global Equity to MKG. On the same day, the Supreme Court of British Columbia granted an order preventing MKG from disposing of certain assets pending resolution of the action. 1A. RISK FACTORS

In March 1999 Global Equity filed an action in the Supreme Court of British Columbia against a third party. This action states the third party had fraudulently entered into loan agreements with MKG. Accordingly, under this action Global Equity is claiming damages from the third party and restraining the third party from further action. During 2000 and 2001, Global Equity entered into settlement negotiations with a third party to dispose of the remaining assets of MKG. Dueaddition to the protracted naturerisks and uncertainties discussed in certain sections of these discussions and the increasing uncertainty of whether the remaining asset can be realized, Global Equity wrote off the remaining balance of $500,000 of the investment in the quarter ended June 30, 2001. (See Long Term Holdings in "Management's“Management’s Discussion and Analysis of Financial Condition and Results of Operations.") Global Equity is currently reviewing its legal options before deciding if it will continue pursuing the outstanding legal actions. As disclosed in our 2000 Annual Report on Form 10-K and subsequent SEC filings, in September and December 2000, PICO Holdings loaned a total of $2.2 million to Dominion Capital Pty. Ltd. ("Dominion Capital"), a private Australian company. In May 2001, one of the loans for $1.2 million became overdue. Negotiations between PICO and Dominion Capital to reach a settlement agreement on both the overdue loans of $1.2 million and the other loan of $1 million proved unsuccessful. Accordingly, PICO has commenced legal actions through the Australian courts against Dominion Capital to recover the total amount due to PICO Holdings. Due to the inherent uncertainty involved in pursuing a legal action and our ability to realize the assets collateralizing the loans, PICO fully provided for these loans and interest accrued in 2001. PICO has been awarded summary judgment in relation to the principal and interest on the $1.2 million loan and, as a result, Dominion Capital has been placed in receivership. The court appointed receiver is in the process of ascertaining Dominion Capital's assets and liabilities. The court trial in connection with PICO's $1 million loan (with interest) has been adjourned pending the receiver's investigations. In addition, PICO has commenced proceedings in Australia to secure the proceeds from the sale of real estate in Australia offered as collateral under the $1.2 million loan. See Note 15 of Notes to Consolidated Financial Statements, "Commitments and Contingencies." ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS (a) The Company held its Annual Meeting of Shareholders on October 11, 2001. (b) At the October 11, 2001 Annual Meeting of Shareholders, Robert R. Broadbent and Carlos C. Campbell were elected to terms ending in 2004. The other Directors whose terms continued after the meeting are John R. Hart, Ronald Langley, John D. Weil, S. Walter Foulkrod, III, Esq., and Richard D. Ruppert, MD. 11 (c) The following matters were voted upon and approved by the Company's shareholders at the Company's October 11, 2001 Annual Meeting of Shareholders: 1) To elect Robert R. Broadbent and Carlos C. Campbell as Directors. Both Mr. Broadbent and Mr. Campbell were elected as Directors for terms ending in 2004. The vote for Mr. Broadbent was 9,287,300 votes in favor, no votes against, and 240,887 abstentions. The vote for Mr. Campbell was 9,288,291 votes in favor, no votes against, and 239,890 abstentions. 2) To ratify the Board's selection of Deloitte & Touche LLP to serve as the Company's independent auditor for the fiscal year ended December 31, 2001. There were 7,981,086 votes in favor, 1,541,702 votes against, 5,393 abstentions. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The common stock of PICO is traded on the NASDAQ National Market under the symbol PICO. The following table sets forth the high and low sale prices as reported on the NASDAQ National Market. These reported prices reflect inter-dealer prices without adjustments for retail markups, markdowns or commissions.
2001 2000 -------------------------------- --------------------------- High Low High Low ------------- ------------- ---------- ---------- 1st Quarter $ 14.38 $ 11.88 $ 14.13 $ 9.88 2nd Quarter $ 14.62 $ 12.50 $ 14.06 $ 10.00 3rd Quarter $ 15.91 $ 10.80 $ 14.06 $ 11.59 4th Quarter $ 14.25 $ 10.70 $ 13.38 $ 10.44
On December 31, 2001, the closing sale price of PICO's common stock was $12.50 and there were 1,179 holders of record. PICO has not declared or paid any dividends in the last two years and does not expect to pay any dividends in the foreseeable future. 12 ITEM 6. SELECTED FINANCIAL DATA The following table presents PICO's selected consolidated financial data. The information set forth below is not necessarily indicative of the results of future operations and should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations"Operations” in Item 7 of this Form 10-K/A and the consolidated financial statements and the related notes thereto included elsewhere in this document.
Year Ended December 31, ------------------------------------------------------------------------------- 2001 (1) 2000 (1) 1999 (1) 1998 (1) 1997 (1) --------------- ------------ ------------ ------------ ------------ OPERATING RESULTS (In thousands, except share data) Revenues: Premium income earned $ 43,290 $ 34,436 $ 36,379 $ 36,131 $ 49,876 Net investment income 9,767 8,861 6,605 9,432 13,521 Other income 18,215 2,517 10,670 (2,804) 26,623 ------------ ------------ ------------ ------------ ------------ Total revenues $ 71,272 $ 45,814 $ 53,654 $ 42,759 $ 90,020 ============ ============ ============ ============ ============ Income (loss) from continuing operations before extraordinary gain and cumulative effect $ 6,095 $ (6,337) $ (10,183) $ (12,388) $ 19,360 Income from discontinued operations, net 1,075 456 Extraordinary gain, net of tax 442 Cumulative effect of change in accounting principle (981) (4,964) ------------ ------------ ------------ ------------ ------------ Net income (loss) $ 5,114 $ (11,301) $ (9,741) $ (11,313) $ 19,816 ============ ============ ============ ============ ============ INCOME (LOSS) PER COMMON SHARE: BASIC - ------------------------------------- Income (loss) from continuing operations $ 0.49 $ (0.55) $ (1.13) $ (2.07) $ 3.07 Income from discontinued operations 0.18 0.07 Extraordinary gain, net of tax 0.05 Cumulative effect of change in accounting principle (0.08) (0.43) ------------ ------------ ------------ ------------ ------------ Net income (loss) $ 0.41 $ (0.97) $ (1.08) $ (1.89) $ 3.14 ============ ============ ============ ============ ============ Weighted Average Shares Outstanding 12,384,682 11,604,120 8,998,442 5,981,814 6,302,401 ============ ============ ============ ============ ============ INCOME (LOSS) PER COMMON SHARE: DILUTED - --------------------------------------- Income (loss) from continuing operations $ 0.49 $ (0.55) $ (1.13) $ (2.07) $ 2.96 Income from discontinued operations 0.18 0.07 Extraordinary gain, net of tax 0.05 Cumulative effect of change in accounting principle (0.08) (0.43) ------------ ------------ ------------ ------------ ------------ Net income (loss) $ 0.41 $ (0.97) $ (1.08) $ (1.89) $ 3.03 ============ ============ ============ ============ ============ Weighted Average Shares Outstanding 12,384,682 11,604,120 8,998,442 5,981,814 6,540,264 ============ ============ ============ ============ ============
(1) Restated to reflect a change in the equity method of accounting for the investment in Jungfraubahn and the recording of other-than-temporary impairments on marketable securities. See Note 22, Restatement of Previously Reported Financial Information, in the notes to consolidated financial statements.
Year Ended December 31 ------------------------------------------------------------------ 2001 (1) 2000 (1) 1999 (1) 1998 (1) 1997 (1) -------- -------- -------- -------- -------- (In thousands, except per share data) FINANCIAL CONDITION Assets $374,419 $392,082 $376,171 $395,465 $430,362 Unpaid losses and loss adjustment expenses, net of discount (1999 and prior) $ 98,449 $121,542 $139,133 $155,021 $196,096 Total liabilities and minority interest $166,520 $189,977 $206,665 $221,709 $318,016 Shareholders' equity $207,899 $202,105 $169,506 $173,756 $112,346 Book value per share $ 16.81 $ 16.31 $ 18.72 $ 19.42 $ 18.66
(1) Restated to reflect a change in the equity method of accounting for the investment in Jungfraubahn and the recording of other-than-temporary impairments on marketable securities. See Note 22, Restatement of Previously Reported Financial Information, in the notes to consolidated financial statements. 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 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. 13 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS INTRODUCTION As discussed in Note 22, "Restatement of Previously Reported Financial Information" in the Notes to the Consolidated Financial Statements, the Company has filed this amended Form 10-K. ("Form 10-K/A") to restate its previously issued financial statements for the years ended December 31, 2001, 2000, and 1999. Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operation," reflects this restatement. COMPANY SUMMARY, RECENT DEVELOPMENTS AND FUTURE OUTLOOK WATER RIGHTS AND WATER STORAGE ASSETS WATER RIGHTS ARIZONA At December 31, 2001, Vidler owned or had the right to acquire approximately 53,675 acre-feet of transferable ground water in the HARQUAHALA VALLEY, approximately 75 miles northwest of metropolitan Phoenix, Arizona. Vidler owns 39,911 acre-feet, and we have the option to purchase a further 13,764 acre-feet. The Arizona State Legislature has passed several pieces of legislation which recognize the Harquahala Valley ground water as a special resource. In 1991, the expansion of irrigated farming in the Valley was prohibited, and the transfer of the ground water to municipalities was authorized. In order to protect the Harquahala Valley ground water from large commercial and industrial users which were moving into the Basin, Vidler supported legislation, which was enacted in 2000, placing restrictions on commercial and industrial users utilizing more than 100 acre-feet of water annually. These users are required to purchase irrigable land and to withdraw the water that they need from the land at no more than 3 acre-feet per annum per acre of land. One of the constraints on beginning to supply Harquahala Valley water to municipalities is the need for the water to be conveyed through the Central Arizona Project Aqueduct ("CAP"). The Arizona State Legislature has passed legislation which commits the CAP to convey up to 20,000 acre-feet per annum of Harquahala groundwater to cities and communities in Arizona as an assured municipal water supply. Any new residential development in Arizona must obtain a permit from the Arizona Department of Water Resources certifying a "designated assured water supply" sufficient to sustain the development for at least 100 years. The Harquahala Valley ground water meets the designation of assured water supply, and Vidler is meeting with communities and developers in the Phoenix metropolitan area, some of whom need to secure further water to support expected growth. On March 1, 2002, Vidler closed the sale, to developers near Scottsdale, of 3,645 acre-feet of water rights and 1,215 acres of land in the Harquahala Valley ground water basin, for approximately $5.3 million, or $1,450 per acre-foot of water. The sale was originally scheduled to close in 2001, but closing was extended until 2002 and the price was increased. This transaction is expected to add $5.3 million to revenues and approximately $2.3 million to segment income in the first quarter of 2002. There is also demand for the water within the Harquahala Basin. On March 19, 2001, Vidler closed the sale of 6,496.5 acre-feet of water rights and 2,589 acres of land in the Harquahala Valley to a unit of Allegheny Energy, Inc. for approximately $9.1 million. The purchase price equated to $1,400 per acre-foot of water. This transaction added $9.4 million to revenues and $2.3 million to pre-tax income for Vidler in 2001; however, we paid $4.4 million in cash to acquire the assets which were sold, resulting in a $5 million 14 cash surplus. Most of the difference between the $2.3 million pre-tax income on an accounting basis and the $5 million cash surplus was recorded as an increase in book value of the assets when PICO acquired Vidler's ultimate parent company, Global Equity Corporation, in 1998. Following these sales, Vidler owns or has the right to acquire approximately 50,030 acre-feet of transferable Harquahala Valley ground water. NEVADA Vidler has been increasing its ownership of water rights in northern Nevada through the purchase of ranch properties and entering into joint ventures with parties owning water rights, which they wish to maximize the value of. Nevada is the state experiencing the most rapid population growth in the United States. THE LINCOLN COUNTY JOINT VENTURE In October 1999, Vidler announced a public/private joint venture with Lincoln County, Nevada for the location and development of water resources in Lincoln County. The joint venture has filed applications for more than 100,000 acre-feet of water rights, covering substantially all of the unappropriated water in the County, with the intention of supplying water to rapidly growing communities and industrial users. Vidler anticipates that up to 40,000 acre-feet of water rights will ultimately be permitted from these applications, and put to use in Lincoln County. Under the Lincoln County Land Act, more than 13,000 acres of publicly owned land in southern Lincoln County will be offered for sale near the fast growing City of Mesquite. Additional water supply will be required if this land is to be developed. 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. Among other things, the agreement is subject to the water rights being permitted, and the electricity-generating company obtaining permitting and financing for a new power plant. The agreement specifies a closing date of July 2003. Under the terms of the Lincoln County joint venture, when a water sale occurs, Vidler will first recover its costs, and then the remaining revenues will be split on a 50:50 basis. Vidler has agreed to purchase 822.29 acre-feet of permitted water rights in Meadow Valley, which is located in Lincoln County. The agreement went into escrow in March 2001. Vidler is in discussions to commercially utilize these water rights by supplying the water to an industrial user through the joint venture with Lincoln County. 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. 2. SANDY VALLEY, NEVADA Vidler has filed an application for approximately 2,000 acre-feet of water rights near Sandy Valley, Nevada. A hearing related to the application was held in December 2001. The Nevada State Engineer is expected to announce a decision regarding the permitting of the water rights in the second quarter of 2002. When, and if, the water rights are permitted, we expect to close an agreement to supply water to support additional growth at Primm, Nevada, a resort town on the border between California and Nevada, in the Interstate 15 corridor. 3. FISH SPRINGS RANCH During 2000, Vidler purchased a 51% interest in Fish Springs Ranch, LLC and a 50% interest in V&B, LLC. These companies own the Fish Springs Ranch and other properties totaling approximately 8,600 acres in Honey Lake Valley in Washoe County, 45 miles north of Reno, Nevada. Approximately 8,000 acre-feet of permitted water rights associated with Fish Springs Ranch are transferable to the Reno/Sparks area. Vidler is holding discussions with a number of potential users for the Fish Springs water rights, including developers and industrial users. There is strong demand for water in Nevada's north valleys, and few alternative sources of supply. If water from Fish Springs could be supplied to the north valleys, this would reduce their reliance on river water which comes through Reno, thereby providing additional water to support growth in and around Reno, an area which has been experiencing consistent growth. Alternatively, if the 15 capacity of nearby transmission lines can be expanded, we believe that Fish Springs Ranch would be an attractive site for gas-fired electricity generation. 4. BIG SPRINGS RANCH During 2001, a partnership dispute was resolved which resulted in Vidler attaining full ownership and direct management of Big Springs Ranch and related assets. Big Springs Ranch consists of approximately 37,500 acres of deeded ranch land, located approximately 65 miles east of Elko, Nevada, in the northeastern part of the state. Currently the ranch land is leased to farmers, although parts of the property have the potential for a higher and better use. There are 6,000 acre-feet of certificated water rights at Big Springs Ranch, which are the only known practical source of water to support new growth for West Wendover, Nevada and Wendover, Utah. In addition, there are 6,000 acre-feet of permitted water rights related to the ranch, and Vidler has filed applications for an additional 5,950 acre-feet of water rights. 5. WEST WENDOVER, NEVADA In 1999, a land exchange was completed in which approximately 70,500 acres of ranchland at Big Springs Ranch was exchanged with the Bureau of Land Management for several parcels of developable land near West Wendover, Nevada, totaling approximately 6,300 acres. West Wendover is adjacent to the Nevada/Utah border in the Interstate 80 corridor. Governmental officials are considering a proposal to move the state line and then merge the cities of West Wendover, Nevada and Wendover, Utah. West Wendover is approximately 120 miles from Salt Lake City, Utah, and attracts a significant number of drive-in visitors from Utah, a state where gaming is prohibited. The land owned by Vidler will stay in Nevada. Following the resolution of the partnership dispute, Vidler attained direct management of this land in 2001. The first parcel to be developed is approximately 82 acres of industrial land. Vidler has agreed to sell approximately 7 acres of unimproved land to a user who will then be responsible for installing offsite utilities and access road improvements for an industrial park. The transaction is expected to close later in 2002. We anticipate that these improvements will allow Vidler to sell the remaining 75 acres as higher-value industrial land. Vidler is examining alternatives for the remaining parcels, including industrial, commercial, hotel/casino, and residential development. COLORADO Vidler is progressing with the sale of all of its Colorado water assets, in order to focus resources on states experiencing faster growth in demand for water. In December 2000, Vidler closed the sale of various water rights and related assets to the City of Golden, Colorado for $1 million, and granted the City options to acquire other water rights. The City exercised an option to acquire water assets for $390,000 in 2001. If the remaining options are exercised, the aggregate purchase price is approximately $1.3 million. On December 15, 2000, Vidler entered into a definitive agreement to sell 86 acre-feet of water rights to the East Dillon Water District for $3.1 million. The agreement must be approved by a referendum, so closing is not expected until late 2002. In the meantime, part of the senior water rights is being leased out for approximately $110,000 per annum. 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 during 2002. 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. Vidler has applied to upgrade these water rights, which would increase their commercial value. 16 WATER STORAGE 1. VIDLER ARIZONA RECHARGE FACILITY During 2000, Vidler completed the second stage of construction at its facility to "bank," or store, water underground in the Harquahala Valley, and received the necessary permits to operate a full-scale water "recharge" facility. "Recharge" is the process of placing water into storage underground. Vidler has the permitted right to recharge 100,000 acre-feet of water per year at the Vidler Arizona Recharge Facility, and anticipates being able to store in excess of 1 million acre-feet of water in the aquifer underlying much of the valley. When needed, the water will be "recovered," or removed from storage, by ground water wells. The Vidler Arizona Recharge Facility is the first privately owned water storage facility for the Colorado River system, which is a primary source of water for the Lower Division States of Arizona, California, and Nevada. The water storage facility is strategically located adjacent to the Central Arizona Project aqueduct, a conveyance canal running from Lake Havasu to Phoenix and Tucson. The water to be recharged will come from surplus flows of CAP water. We believe that proximity to the CAP is a competitive advantage, because it minimizes the cost of water conveyance. Vidler is able to provide storage for users located both within Arizona and out-of-state. Potential users include industrial companies, developers, and local governmental political subdivisions in Arizona, and out-of-state users such as municipalities and water agencies in Nevada and California. The Arizona Water Banking Authority ("AWBA") has the responsibility for intrastate and interstate storage of water for governmental entities. Vidler intends to charge customers a fee based on the amount of water "recharged," and then an additional fee when the water is "recovered." The revenues generated from this asset will depend on the quantity of water which the AWBA, and private users, store at the facility. The quantity of water stored will depend on a number of factors, including the availability of water and available storage capacity at publicly owned facilities. We believe that a number of events in recent years have increased the scarcity value of the project's storage capacity. At a public hearing on March 14, 2000, the AWBA disclosed that the Bureau of Reclamation has indicated that, before permits are issued for new facilities to store water for interstate users, extensive environmental impact studies will be required. The AWBA also indicated that the first priority for publicly owned storage capacity in Arizona is to store water for Arizona users. At the same hearing, the states of California and Nevada again confirmed that their demand for storage far exceeds the total amount of storage available at existing facilities in Arizona. Consequently, interstate users will need to rely, at least in part, on privately owned storage capacity. The Southern Nevada Water Authority Water Resource Plan, which can be viewed at www.snwa.com, calls for 1.2 million acre-feet of water to be stored in Arizona in order to meet forecast demand after 2015. The AWBA is currently finalizing agreements to store water on behalf of Nevada. Once these agreements have been concluded, the AWBA can begin to negotiate storage for California. The AWBA will be able to store water at existing publicly owned sites and at the Vidler Arizona Recharge Facility, which is one of the largest water storage facilities. In April 2001, Vidler reached agreement with the Arizona Water Banking Authority concerning the terms under which water can be stored at the facility for the users represented by the Authority -- $45.00 per acre-foot of water recharged in 2001, rising to $46.50 in 2002, and $48.00 in 2003. The agreement concludes on December 31, 2003. In addition to the potential demand from the public users represented by the AWBA, demand from private users could potentially utilize up to 100% of the site's storage capacity. Vidler has not stored water for customers at the facility yet, but Vidler has been recharging water for its own account since 1998, when the pilot plant was constructed. Vidler purchased the water from the CAP, and intends to resell this water at an opportune time. At December 31, 2001, Vidler had recharged approximately 4,800 acre-feet of water at the facility. 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. It is anticipated that Vidler will be able to recharge 100,000 acre-feet of water per year at the facility, and to store in excess of 1 million acre-feet of water in the aquifer. Vidler's estimate of the aquifer's storage volume is primarily based on a hydrological report prepared by an independent engineering firm for the Central Arizona Water Conservation District in 1990. The report concluded that there is storage capacity of 3.7 million acre-feet, which is in excess of the 1 million acre-feet indicated by Vidler. 17 Recharge and recovery capacity is critical, because it indicates how quickly water can be put into storage or recovered from storage. In wet years, it is important to have a high recharge capacity, so that as much available water as possible may be stored. In dry years, the crucial factor is the ability to recover water as quickly as possible. There is a long history of farmers recovering significant quantities of water from the Harquahala Valley aquifer. 2. SEMITROPIC Vidler originally had an 18.5% right to participate in the Semitropic Water Banking and Exchange Program, which operates a 1,000,000 acre-foot water storage facility at Semitropic, near the California Aqueduct, northwest of Bakersfield, California. Over the first 10 years of the agreement with the Semitropic Water Storage District, Vidler was required to make a minimum annual payment of $2.3 million. Vidler began making the annual payments in November 1998. In return, Vidler had the right to store up to 185,000 acre-feet of water underground over a 35-year period. Vidler had 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. Vidler was also required to make an annual payment for operating expenses. The interest in Semitropic is Vidler's only asset in California, which has proved a difficult state to operate in due to the large number of entities involved in the water industry, each serving different, and sometimes conflicting, constituencies. In the meantime, the strategic value of the guaranteed right to recover an amount of water from Semitropic every year -- even in drought years -- became clear to water agencies, developers, and other parties seeking a reliable water supply. For example, developers of large residential projects in Kern County and Los Angeles County must now be able to demonstrate that they have sufficient back-up supplies of water in the case of a drought year before they are permitted to begin development. Accordingly, during 2001, Vidler took advantage of current demand for water storage capacity with guaranteed recovery, and began to sell its interest in Semitropic. On May 21, 2001, Vidler closed the sale of 29.7% of its original interest (i.e., approximately 55,000 acre-feet of water storage capacity) to The Newhall Land and Farming Company for $3.3 million, resulting in a pre-tax gain of $1.6 million. This transaction added $1.6 million to revenues and segment income in 2001. On September 30, 2001, Vidler closed the sale of another 54.1% of its original interest (i.e., approximately 100,000 acre-feet of water storage capacity) to the Alameda County Water District for $6.9 million, resulting in a pre-tax gain of $4.1 million. This transaction added $4.1 million to revenues and segment income in 2001. Vidler's remaining interest includes approximately 30,000 acre-feet of storage capacity, and the right to recover up to approximately 6,800 acre-feet in any one year and minimum guaranteed recovery of approximately 2,700 acre-feet every year. We are considering various alternatives for the remaining interest, including sale to developers or industrial users. Currently Vidler is not storing any water at Semitropic for third parties. OTHER PROJECTS Vidler routinely evaluates the purchase of further water-righted properties in Arizona and, potentially, Nevada. Vidler also continues to be approached by parties who are interested in obtaining a water supply, or discussing joint ventures to commercially develop water assets and/or develop water storage facilities. SUMMARY In 2002, Vidler's focus will be on: - - generating cash flow from the water rights in Nevada and Arizona through lease agreements or the sale of water rights; - - leasing storage capacity to customers at the Vidler Arizona Recharge Facility; and - - pursuing present and additional water rights applications and partnerships to commercially develop water rights. 18 LAND AND RELATED MINERAL RIGHTS AND WATER RIGHTS The majority of Nevada Land's revenues come from the sale of land and water rights. In addition, various types of recurring revenue are generated from use of Nevada Land's properties, including leasing, easements, and mineral royalties. Nevada Land also generates interest revenue from land sales contracts where Nevada Land has provided partial financing, and from temporary investment of the proceeds of land and water rights sales. 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. In 2001, Nevada Land generated $1.9 million in revenues from the sale of: - - 15,352 acres of former railroad land for $1.7 million. The average sales price of $113 per acre compares to our average basis of $43 per acre in the parcels which were sold, and our average cost of $35 per acre for all of Nevada Land's land, water, and mineral assets; and - - 280 acres of land at Spring Valley Ranches for $178,000, resulting in a gross profit of $70,000. This land was not contiguous with the main property, and was not part of the land exchange transaction we are proposing for the bulk of the land assets at Spring Valley Ranches. In 2001, 86% of land sales were settled for cash, and Nevada Land provided partial financing for the balance. Vendor financing has been collateralized by the land conveyed, carries a 10% interest rate, and is subject to a minimum 20% down payment. PROPERTY AND CASUALTY 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 low-single-digit percentage growth from January 2000. Growth in premium volume then accelerated significantly as a result of two developments in the second quarter of 2000. First, commercial insurance premium volume increased as a result of new policies issued after A.M. Best Company, a leading insurance company rating service, upgraded Sequoia's claims paying ability from "B++" (Very Good) to "A-" (Excellent). This allowed Sequoia to compete for business in an additional market segment -- customers who can only purchase coverage from "A"- rated insurance companies. Second, in May 2000, Sequoia acquired the Personal Express Insurance Services, Inc. book of business for approximately $3 million. Personal Express had few tangible assets, so the bulk of the purchase price was allocated to the book of business and recorded as an intangible asset, which is being charged off over 10 years. Personal Express markets personal insurance products to customers in the central California cities of Bakersfield and Fresno. Historically, this book of business has generated an underwriting profit. The acquisition greatly expanded Sequoia's business in personal lines of insurance, bringing approximately $7.5 million in additional premiums in 2001. As a result of these factors, Sequoia Insurance Company generated strong growth in direct written premiums in 2000 and 2001. In 2000, direct written premiums increased by 33.5% to $47.1 million, as a result of both growth in the existing book of business, which was principally in commercial lines of insurance, and new policies issued after the A.M. Best upgrade and the acquisition of Personal Express. Direct written premiums in commercial lines increased 17.8% to $39.7 million in 2000. This included 29.1% growth to $21.4 million in the second half of 2000, following the change in Sequoia's A.M. Best rating. 19 Direct written premiums in personal lines began to increase markedly in the second quarter of 2000, as new revenues from the Personal Express book of business 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, direct written premiums rose another 14.9%, to $54.1 million, comprised of $45 million in commercial lines and $9.1 million in personal lines. The growth in premium volume in 2001 was primarily due to growth in the commercial insurance book of business. In 2002, Sequoia is budgeting for approximately 10% growth in direct written premiums, with approximately 84% of direct written premiums coming from commercial lines and approximately 16% from personal lines. During 2001 and 2000, Sequoia's loss ratio, and consequently underwriting results, deteriorated because growth in claims costs (e.g., for construction, medical care, and automobile repair) had outpaced growth in effective premiums in recent years. In 2001, Sequoia introduced a number of initiatives to improve its loss ratio. Sequoia further tightened underwriting standards, for example, by ceasing to provide coverage for certain types of business. In addition, Sequoia increased rates for commercial automobile coverage. Rate increases are planned in most other commercial lines in 2002. While these initiatives have led to an increase in average premiums per policy, the effect on total written premiums was partially offset by a reduction in the number of policies issued. Average direct premiums per policy in commercial lines increased approximately 15% in 2001, but the number of commercial policies written declined by approximately 2.6%. The overall effect on profitability is expected to be positive. Due to the lag between a policy being "written" and the premium being "earned," the full effect of these initiatives will not be reflected in Sequoia's reported results until 2002. The growth in commercial premium volume and the acquisition of the Personal Express book of business have helped to reduce Sequoia's underwriting expense ratio (i.e., underwriting expenses as a percentage of earned premiums). Since some costs are fixed (i.e., do not vary with changes in volume), Sequoia's operating expenses have increased at a slower rate than premium volume, which has reduced Sequoia's average operating expense per policy and underwriting expense ratio. In December 2000, Citation ceased writing business and is now in "run off" (i.e., handling claims arising from policies written in previous years, but not writing new policies). In 1997, 1998, and 1999, Citation took charges to increase claims reserves in the artisans/contractors line of business, including a pre-tax charge of $10.1 million in 1999. Citation did not need to increase claims reserves in the artisans/contractors line of business in 2000 or 2001. 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. The artisan/contractors business was written under Citation's previous management. In fact, Citation ceased writing this type of insurance coverage in 1995, the year before the reverse merger with Physicians Insurance Company of Ohio, and no artisans/contractors business was renewed after the merger. The decline in the California real estate market in the early 1990's encouraged property owners to try and improve their position by filing claims against contractors and related parties for alleged construction defects. Citation's average loss ratio (i.e., the cost of making provision to pay claims as a percentage of earned premium) for all years from 1989 to 1995 for this insurance coverage is over 375%. This experience is not unique to Citation, but is shared by all insurers who wrote this type of coverage in California in the 1980's and 1990's. 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. The duration of a bond portfolio measures the amount of time it would take for the cash flows from scheduled interest payments and bond maturities to equal the current value of the portfolio. Duration is important because it indicates the sensitivity of the market value of a bond portfolio to changes in interest rates. Typically, the longer the duration, the greater the sensitivity of the value of the bond portfolio to changes in interest rates. 20 To minimize interest rate risk (i.e., the potential decrease in the market value of the bond portfolio which would be brought on by higher interest rates), Sequoia targets a duration of 5 years or less. At December 31, 2001, the duration of Sequoia's bond portfolio was 4.4 years. The maturity of securities in Citation's bond portfolio is structured to match the projected pattern of claims payouts. At December 31, 2001, the duration of Citation's bond portfolio was 3.1 years. Apart from treasury bonds which are held as deposits and collateral with regulators, and government-sponsored enterprise bonds (i.e., Freddie Mac and FNMA) held for capital purposes, the bond portfolio consists of high quality corporate issues. Our insurance companies do not own any bonds in the telecommunications, technology, utilities, energy, or consumer finance sectors which experienced difficulties in 2001 and the first two months of 2002. MEDICAL PROFESSIONAL LIABILITY INSURANCE Physicians Insurance Company of Ohio is in "run off." Physicians obtains the funds to pay claims from the maturity of fixed-income securities, the sale of investments, and collections from reinsurance companies (i.e., insurance companies who share in our claims risk). During the "run off," this segment will shrink as the level of claims reserve liabilities and investment assets decrease, as claims are paid with the proceeds of investment maturities and sales. 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. For example, in 2000 and 2001 we reduced head count and office space. On December 21, 2001, Professionals Insurance Company was merged into Physicians. This will simplify administration and result in cost savings, for example, from the elimination of duplication. During 2001, our medical professional liability insurance claims reserves, net of reinsurance, decreased from $51.6 million to $34.9 million. Actuarial analysis of Physicians' loss reserves as of September 30, 2001 concluded that Physicians' reserves against claims were significantly greater than the actuary's projections of future claims payments. Accordingly, Physicians reduced its claims reserves by approximately $11.2 million in the fourth quarter, which accounts for 67% of the net decrease in reserves during 2001. It should be noted that such actuarial analyses involve estimation of future trends in many factors which may vary significantly from expectation, which could lead to further reserve adjustments -- either increases or decreases -- in future years. We manage the Physicians investment portfolio with the objective of having sufficient cash and maturing fixed-income securities to meet the claims payments projected for at least the following twelve months. At December 31, 2001, the duration of the Physicians bond portfolio was 1.6 years. LONG TERM HOLDINGS 1. HYPERFEED TECHNOLOGIES, INC. HyperFeed provides financial market data and data-delivery solutions to the financial services industry. 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. During December 2000 and January 2001, we purchased 245,000 shares of common stock on the open market. In September 2001, the principal and accrued dividends on the HyperFeed Series A and Series B preferred stock held by PICO and its subsidiaries were converted into HyperFeed common shares at a conversion price of $1.03 per share. PICO received 7,462,856 shares on conversion, increasing our voting ownership of HyperFeed from approximately 35% to approximately 42.4%. At December 31, 2001, PICO and its subsidiaries held the following securities in HyperFeed: - - 10,077,856 common shares, which had a carrying value of $2.1 million (before taxes), compared to a potential market value of $6.1 million (before taxes) based on the last sale price of $0.61 on December 31, 2001; and - - warrants to buy 4,055,195 shares. The exercise price for the warrants to buy 3,106,163 shares is fixed at $1.575 per share. However, the warrants to buy 949,032 shares are exercisable at the lesser of the stated exercise price, which averages approximately $1.844, or the then market price of the common stock. At December 31, 2001, the warrants were carried at estimated fair value of $527,000 (before taxes). Since our initial investment in HyperFeed, the Company's revenues have grown from $13.4 million in 1995 to $33.3 million in 2001. 21 For full year 2001, HyperFeed generated revenues of $33.3 million, gross margin of $12.9 million, EBITDA (i.e., earnings before depreciation, amortization, interest and tax, a non-GAAP measure which investors frequently use as a proxy for gross cash flow) of $4 million, and a net loss from operations of $1.5 million, excluding non-cash preferred dividends of $927,000. Net cash flow from operating activities was $2.8 million. In the fourth quarter of 2001, HyperFeed generated revenues of $6.2 million, gross margin of $3.8 million, EBITDA of $1.2 million, and a net loss of $303,000. Net cash flow from operating activities was $522,000. We use the equity method to account for the common shares. HyperFeed contributed an equity loss of $1.2 million to the Long Term Holdings segment in 2001. The HyperFeed warrants are carried in our financial statements at estimated fair value. Following the adoption of Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities," the change in estimated fair value of warrants during an accounting period is recorded in the Consolidated Statement of Operations for that period. See Note 4 of Notes to Consolidated Financial Statements, "Investments." 2. JUNGFRAUBAHN HOLDING AG PICO owns 112,672 shares of Jungfraubahn, which represents approximately 19.3% of the company. Our holding in Jungfraubahn is accounted for under Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities." Under this method, the investment is carried at market value in our balance sheet, and the only income recorded is from dividends. At December 31, 2001, our investment in Jungfraubahn had a cost basis of $14.9 million and a carrying (market) value of $17.7 million. Jungfraubahn announced its result for the 2000 financial year on May 21, 2001, so the 2001 result will probably not be released until after this 10-K has been filed. Jungfraubahn described 2000 as an exceptional year, whose results "will not easily be repeated." Passenger numbers and revenues in 2000 were unusually high due to a 100-year anniversary promotion by Raiffeisen, a Swiss bank, which is estimated to have generated more than 50% of the increase in passenger visits to Jungfraujoch, and due to 22.4% growth in group travel. Revenues increased 19.7% to CHF (Swiss Francs) 110.3 million ($US65.5 million). EBITDA (i.e., earnings before depreciation, amortization, interest and tax, a non-GAAP measure which investors frequently use as a proxy for gross cash flow) increased 30.4% to CHF40.8 million ($US24.2 million). Net income increased 19.5% to CHF17.9 million ($US10.6 million), or CHF30.6 ($US18.20) per share. Jungfraubahn's operating activities generated net cash flow of CHF35.2 million ($US20.9 million). On August 31, 2001, Jungfraubahn announced its results for the first six months of 2001. Revenues declined by CHF5.4 million ($US3.2 million), or 10.6%, year over year to CHF45.7 million ($US27.1 million), principally due to the absence of revenues from the Raiffeisen promotion. Due to the CHF5.4 million ($US3.2 million) reduction in revenue and a CHF2.1 million ($US1.3 million) increase in operating expenses, EBITDA declined CHF7.6 million ($US4.5 million) to CHF10.3 million ($US6.1 million). Net income dropped CHF7.6 million ($US4.5 million) to CHF3.3 million ($US2 million), or CHF5.6 ($US3.33) per share. In addition, the sale of art contributed an extraordinary profit of CHF1.4 million ($US830,000). On January 23, 2002, Jungfraubahn issued a press release containing an initial review of 2001 operations. The full text is available on Jungfraubahn's web-site www.jungfraubahn.ch (in the "Shareholders" tab of the "Inside" section). In the press release, Jungfraubahn indicated that it expected transport revenues of approximately CHF74.5 million ($US44.2 million) for 2001, an 11.6% reduction from the record CHF84.3 million ($US50 million) of 2000, but the second highest in the company's history. Jungfraubahn signaled that "a satisfactory result" was anticipated, "despite the reduction in numbers of guests from Asia and the USA in the fourth quarter," although the result will likely be below the previous year. Jungfraubahn indicated that it expects that the September 11 terrorist attacks in the U.S. will lead to a redistribution in passenger numbers in 2002. Visitors from Japan, the most important inbound market, are expected to be down due to a fear of flying, compounded by the weak Japanese economy, although Jungfraubahn noted "positive signs" suggesting that "a recovery in the travel market may be expected as early as May 2002." Jungfraubahn expects this to be offset, to some extent, by increased visitation from the domestic Swiss market and nearby countries. Jungfraubahn noted that the U.S. is a "relatively small" inbound market. Jungfraubahn's most recent published balance sheet is as of December 31, 2000, when book value per share was CHF485 ($US292.64). On December 31, 2001, Jungfraubahn's stock price was CHF270 ($US162.92), and CHF1 equaled $US0.6034. 22 3. AUSTRALIAN OIL & GAS CORPORATION LIMITED During 2001, we acquired another 1,441,347 shares in AOG, lifting our shareholding to 9,867,391 shares, representing approximately 20.7% of the company at December 31, 2001. At December 31, 2001, our investment in AOG had a cost basis of $8.2 million, a market value of $7.5 million, and a net carrying value of $7.7 million after allowing for taxes. We reviewed the unrealized loss at December 31, 2001, and determined that an other-than-temporary impairment did not exist. This investment was funded in US dollars. On September 5, 2001, AOG announced that it had returned to profit in the financial year ended June 30, 2001. AOG's revenues increased 86.1% to $A130.1 million ($US66.3 million), and the company reported net income of $A8 million ($US4.1 million), or $A0.17 ($US0.09) per share. Rig utilization improved during the financial year, from 54% in the first half, to 65% in the second half. The increase in utilization during the year appears to have translated into profit growth, with net income for the second half estimated at $A5 million ($US2.6 million), compared to $A3 million ($US1.5 million) in the first half. In the letter accompanying the results, AOG indicated that rig utilization was "running at over 75%." On January 17, 2002, AOG announced that it was raising additional capital to purchase a new deep capacity drilling rig and to refit two existing rigs to perform new long term drilling contracts with ExxonMobil Indonesia and Petroleum Development - Oman. In January 2002, PICO provided AOG with a short term $US4 million bridging facility, and was issued 333,333 shares in AOG as a loan establishment fee. AOG is to repay the advance with the proceeds of a rights offering which closes on March 18, 2002. PICO is underwriting part of the offering, and has been issued with another 333,333 shares in AOG as an underwriting fee. On February 27, 2002, AOG announced its results for the six months ended December 31, 2001. Revenues increased 26.6% to $A76.1 million ($US38.8 million), and net income increased 21% to $A3.7 million ($US1.9 million), or $A0.077 ($US0.04) per share. Net cash flow from operating activities was $A10.2 million ($US5.2 million), shareholders' equity was $A100.7 million ($US51.3 million), and tangible book value per share was $A2.10 ($US1.07). In the letter to shareholders accompanying the results, AOG indicated that "the contract book is satisfactory and the Company can look forward to continuing and increasing profitability for the rest of this calendar year." AOG provides its shareholders with half-yearly financial information in accordance with the requirements of the Australian Stock Exchange and Australian securities laws. Given our 20.7% voting ownership at December 31, 2001, and that our Chairman joined AOG's Board of Directors in September 2001, we asked AOG for an on-going commitment to provide timely quarterly financial statements, so that the equity method could potentially be applied to this investment. AOG has declined to provide us with quarterly financial statements and other financial information which is not publicly available to other AOG shareholders. Based on this and other factors, we concluded that PICO does not have the ability to exercise significant influence over AOG which is required to apply the equity method of accounting. Instead, the investment is carried at market value, with the unrealized after-tax gain or loss being included in shareholders' equity. See the next section in Item 7, "Significant Accounting Policies." 4. OTHER DISCLOSED EUROPEAN INVESTMENTS SIHL During 2000 and 2001, we acquired approximately 10.6% of SIHL, a Swiss public company, through participation in a restructuring/capital raising and on-market purchases. SIHL's core business is digital imaging, but the company has surplus property assets in and around Zurich, including a major development project known as Sihlcity. Our investment in SIHL is accounted for under SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities." SIHL's operations were adversely affected by the economic downturn in 2001, and the company was unable to improve profitability and reduce debt as previously expected. Based on these developments and the extent and duration of the decline in the market value of SIHL's common stock, we concluded that the decline in SIHL's market value was other-than-temporary, and we recorded a $2.1 million pre-tax charge for impairment in the investment in 2001. This charge reduced our basis in the investment to its total market (carrying) value of $2.1 million at December 31, 2001. A charge for other-than-temporary impairment is a non-cash charge recorded as a realized loss. The basis of the investment is written down from its original cost to current carrying value, which typically is the market price at the balance sheet date when the charge is recorded. 23 It should be noted that: - - the charges for other-than-temporary impairment relating to SIHL do not affect book value per share, as the after-tax decline in the market value of investments carried under SFAS No. 115 is already reflected in shareholders' equity in our balance sheet; and - - the carrying value of the holding does not change. The impairment simply reclassifies the decline from an unrealized decrease in shareholders' equity to a realized loss in the statement of operations. The written-down value becomes our new basis in the investment. In future accounting periods, unrealized gains or losses from that level will be recorded in shareholders' equity, and when the investment is sold, a realized gain or loss from that level will be recorded in the statement of operations. See "Results of Operations -- Years Ended December 31, 2001, 2000, and 1999." ACCU HOLDING AG PICO owns 8,125 shares in Accu Holding, which represents a voting ownership interest of approximately 28.3% of the company. Due to a number of factors, we have concluded that we do not have the ability to exercise significant influence over Accu Holding's activities in 2001, so this investment is not accounted for under the equity method. Instead, the investment is accounted for under SFAS No. 115 and carried at market value, with the unrealized after-tax gain or loss being included in shareholders' equity. At December 31, 2001, our investment in Accu Holding had a cost basis of $4.6 million, and a carrying (market) value of $4.5 million. Accu Holding manufactures batteries at two plants in Switzerland. 5. ALTERNATIVE INVESTMENTS At December 31, 2001, PICO's remaining alternative investments had an aggregate carrying value of $3.2 million after taxes, or 1.5% of Shareholders' Equity. The principal alternative investment is SISCOM, Inc., which is a consolidated subsidiary. SISCOM is a software developer and systems integrator for video-based content management systems for the professional broadcast, sports, and entertainment industries. We are pursuing a number of alternatives to realize the value of this investment, including assisting SISCOM to enter into strategic licensing agreements with companies which have multi-national marketing and distribution channels. SIGNIFICANT ACCOUNTING POLICIES PICO's principal assets and activities comprise: - - land, water rights, and water storage assets; - - property and casualty insurance, and the "run off" of property and casualty insurance and medical professional liability insurance loss reserves; and - - long term investment in other companies. Following is a description of what we believe to be the critical accounting policies affecting our company, and how we apply these policies. 1. ESTIMATION OF RESERVES IN INSURANCE COMPANIES We must estimate future claims and ensure that our loss reserves are adequate to pay those claims. This process requires us to make estimates about future events. The accuracy of these estimates will not be known for many years. For example, part of our claims reserves cover "IBNR" claims (i.e., the event giving rise to the claim has occurred, but the claim has not been reported to us). In other words, in the case of IBNR claims, we must provide for claims which we do not know about yet. At December 31, 2001, the loss reserves, net of reinsurance, of our three insurance subsidiaries were: - - Sequoia Insurance Company, $21.2 million; - - Citation Insurance Company, $19.2 million; and - - Physicians Insurance Company of Ohio, $34.9 million. Physicians wrote its last policy in 1995. However, under current law, claims can be made until 2017 for events which allegedly occurred during the periods when we provided insurance coverage to medical professionals. 24 Our medical professional liability insurance reserves are certified annually by an independent actuary, as required by Ohio insurance law. Actuarial estimates of our future claims obligations have been volatile. In 2001, we reduced claims reserves by $11.2 million after actuarial studies by two independent firms concluded that Physicians' claims reserves were significantly greater than projected claims payments. However, based on actuarial analysis, we increased reserves by $2 million in 2000 and by $5 million in 1999. Accordingly, there can be no assurance that our claims reserves are adequate and there will not be reserve increases or decreases in the future. As required by California insurance law, the loss reserves of Sequoia Insurance Company and Citation Insurance Company are reviewed quarterly, and certified annually, by an independent actuarial firm. 2. CARRYING VALUE OF LONG-LIVED ASSETS Our principal long-lived assets are land, water rights, and interests in water storage assets owned by Vidler, and land at Nevada Land. At December 31, 2001, the total carrying value of land, water rights, and interests in water storage assets was $126 million, or 33.7% of PICO's total assets. As required by GAAP (i.e., accounting principles generally accepted in the United States of America), our long-lived assets are rigorously reviewed at least quarterly to ensure that the estimated future undiscounted cash flows from these assets will at least recover their carrying value. Our management conducts these reviews utilizing the most recent information available. The review process inevitably involves the significant use of estimates and assumptions. In our water rights and water storage business, we develop some projects and assets from scratch. This can require cash outflows (e.g., to drill wells to prove that water is available) in situations where there is no guarantee that the project will ultimately be commercially viable. If we determine that it is probable that the project will be commercially viable, the costs of developing the asset are capitalized (i.e., recorded as an asset in our balance sheet, rather than being charged as an expense). If the project ends up being viable, in the case of a sale, the capitalized costs are included in the cost of land and water rights sold and applied against the purchase price. In the case of a lease transaction or when the asset is fully developed and ready for use, the capitalized costs are amortized (i.e., charged as an expense in our income statement) and match any related revenues. If we determine that the carrying value of an asset cannot be justified by the forecast future cash flows of that asset, the carrying value of the asset is written down to fair value. At December 31, 2001, our balance sheet contained capitalized costs of $3 million for two projects at Vidler, which require regulatory approval to proceed. 3. ACCOUNTING FOR INVESTMENTS AND INVESTMENTS IN UNCONSOLIDATED AFFILIATES At December 31, 2001, PICO and its subsidiaries held equities with a carrying value of approximately $56.4 million. These holdings are primarily small-capitalization value stocks in the US, Switzerland, and Australia. Depending on the circumstances, and our judgment about the level of our involvement with the investee company, we apply one of two accounting policies. In the case of most holdings, we apply Statement of Financial Accounting Standards ("SFAS") No. 115, "Accounting for Certain Investments in Debt and Equity Securities." Under this method, the investment is carried at market value in our balance sheet, with unrealized gains or losses being included in shareholders' equity, and the only income recorded is from dividends. In the case of investments where we have the ability to exercise significant influence over the company we have invested in, we apply the equity method under Accounting Principles Board Opinion No. 18 ("APB No. 18"), "The Equity Method of Accounting for Investments in Common Stock." The application of the equity method (APB No. 18) to an investment may result in a different outcome in our financial statements than market value accounting (SFAS No. 115). The most significant difference between the two policies is that, under the equity method, we include our proportionate share of the investee's earnings or losses in our statement of operations, and dividends received are used to reduce the carrying value of the investment in our balance sheet. Under market value accounting, the only income recorded is dividends. 25 The assessment of what constitutes the ability to exercise "significant influence" requires our management to make significant judgments. We look at various factors in making this determination. These include our percentage ownership of voting stock, whether or not we have representation on the investee company's Board of Directors, transactions between us and the investee, the ability to obtain timely quarterly financial information, and whether PICO management can affect the operating and financial policies of the investee company. When we conclude that we have this kind of influence, we adopt the equity method and change all of our previously reported results of the investee to show the investment as if we had applied equity accounting from the date of our first purchase. This adds volatility to our reported results. While the method of accounting we use clearly has no impact on the underlying performance of the investee, the use of market value accounting or the equity method can result in significantly different carrying values at discrete balance sheet dates and contributions to our statement of operations over the course of the investment. It should be noted that the total impact of the investment on PICO's shareholders' equity over the entire life of the investment will be the same whichever method is adopted. For example, our investment in HyperFeed is carried under the equity method of accounting as we have determined that we have the ability to exercise significant influence over HyperFeed. As a result, at December 31, 2001, the carrying value of HyperFeed in our balance sheet is significantly below what it would be if we recorded this investment at market. For equity and debt securities accounted for under SFAS No. 115 which are in an unrealized loss position, we are required to regularly review whether the decline in market value is other-than-temporary. In general, this review requires management to consider several factors, including specific adverse conditions affecting the issuer's business and industry, the financial condition of the issuer, and the long-term prospects for the issuer. Accordingly, management has to make important assumptions regarding our intent and ability to hold the security, and our assessment of the overall worth of the security. Risks and uncertainties in our methodology for reviewing unrealized losses for other-than-temporary declines include our judgments regarding the overall worth of the issuer and its long-term prospects, our ability to realize on our assessment of the overall worth of the business. In a subsequent quarterly review, if we conclude that an unrealized loss previously determined to be temporary is other-than-temporary, an impairment loss will be recorded. There will be no impact on our financial condition or book value per share, as the decline in market value has already been recorded through shareholders' equity. However, there will be an impact on our net income before and after tax and on our reported earnings per share, due to recognition of the unrealized loss and related tax effects. When a charge for other-than-temporary impairment is recorded, our basis in the security is decreased. Consequently, if the market value of the security later recovers and we sell the security, a correspondingly greater gain will be recorded in the statement of operations. However, there will be no impact on book value as the gain, after related taxes, will already have been recorded in the unrealized appreciation component of shareholders' equity. RESULTS OF OPERATIONS -- YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999 SUMMARY PICO reported net income of $5.1 million, or $0.41 per diluted share in 2001, compared with a net loss of $11.3 million, or $0.97 per diluted share, in 2000, and a net loss of $9.7 million, or $1.08. per diluted share, in 1999. The weighted average number of shares outstanding in 2001 and 2000 increased as a result of the rights offering in March 2000. At December 31, 2001, PICO had shareholders' equity of $207.9 million, or $16.81 per share, compared to $202.1 million, or $16.31 per share, at the end of 2000. The principal factors leading to the $5.8 million increase in shareholders' equity were: - - net income of $5.1 million for the year; - - net unrealized appreciation in investments of $1.9 million; which were partially offset by - - a foreign currency translation debit of $955,000; and - - a $299,000 increase in treasury stock due to the purchase of PICO shares in deferred compensations plans. Total assets at December 31, 2001 were $374.4 million, compared to $392.1 million at December 31, 2000. Most of the $17.7 million decrease in total assets is attributable to the "run off" of Physicians and Citation, which reduced both insurance liabilities and the corresponding assets. Total liabilities decreased by $22.6 million, primarily due to a $16.7 million reduction in medical professional liability insurance loss reserves during the year. The $5.1 million in net income reported in 2001 consisted of $6.1 million in net income before a change in accounting principle, or $0.49 per share, and a change in accounting principle which had the cumulative effect of reducing income by $981,000 after taxes, or $0.08 per share. The $6.1 million in net income before a change in accounting principle was comprised of $9.1 million in income before taxes and minority interest, a $3.4 million provision for income tax expense, and the addition of $359,000 in minority interest. This reflects the interest of minority shareholders in the losses of subsidiaries which are less than 100%-owned by PICO. The accounting change was due to the adoption of the Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging 26 Activities." This non-cash charge recognized the accumulated after-tax decline in the estimated fair value of warrants we own to buy shares in other companies (principally HyperFeed Technologies, Inc.) from the date we acquired the warrants through to January 1, 2001. The decline in the estimated fair value of warrants during 2001 is recorded in the Long Term Holdings segment. The $3.4 million net provision for income tax expense for 2001 consists of several items, which are detailed in Note 7 of Notes to Consolidated Financial Statements, "Federal Income Tax." A gross provision for tax of approximately $4 million was partially offset by $630,000 in tax benefits, primarily represented by a cash refund following a successful appeal of a prior year tax ruling in Canada. We do not need to pay any taxes in cash for 2001 because prior year net operating loss carry-forwards offset our tax provision for the year. PICO incurred a net loss of $11.3 million in 2000. The $6.3 million net loss before an accounting change consisted of a $16.1 million pre-tax loss, which was partially offset by $9 million in income tax benefits and the addition of $717,000 in minority interest. In addition, the cumulative effect of the accounting change 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 U.S. GAAP basis. The $9 million in tax benefits recorded in 2000 is made up of several items. These include a $4.4 million cash refund resulting from the successful appeal of a prior year tax ruling in Canada, and a $3.3 million expense which was recognized to increase federal income tax valuation allowances recorded against tax assets in some of our subsidiaries. In 1999, the $9.7 million net loss was comprised of a $24.3 million loss before taxes and minority interest, which was partially offset by the addition of $13.4 million in income tax benefits, $706,000 in minority interest, and a $442,000 after-tax extraordinary gain from the early settlement of debt. The income tax benefits recognized include an $8.4 million reduction in valuation allowances that had previously been recorded to reduce income tax assets. Of this amount, $6.5 million became available as a result of changes in federal income tax legislation in 1999. From 1998, PICO began to report comprehensive income (loss) in addition to the income (loss) reported in the Consolidated Statement of Operations. Comprehensive income includes items resulting in unrealized changes in shareholders' equity. For PICO, comprehensive income (loss) includes foreign currency translation and change in unrealized investment gains and losses on securities which are available for sale. PICO reported comprehensive income of $6.1 million in 2001, consisting of net income of $5.1 million and a $1.9 million after-tax increase in net unrealized change in investments, which were partially offset by a foreign currency translation debit of $955,000. In 2000, PICO incurred a $17.2 million comprehensive loss. This was comprised of the $11.3 million net loss, a decrease in net unrealized change in investments of $4.3 million after-tax, and a foreign currency translation debit of $1.6 million. A $6.8 million comprehensive loss was recorded in 1999, consisting of a $9.7 million net loss, a $1.5 million decrease due to foreign currency translation, and a $4.4 million increase in net unrealized change in investments. Detailed information on the performance of each segment is contained later in this report; however, the principal items in the 2001 $9.1 million income before taxes and minority interest were: Water Rights and Water Storage - - Vidler generated $17.8 million in revenues and a $5 million pre-tax profit. The principal contributors to segment income were $2.3 million from the sale of land and related water rights in the Harquahala Valley Irrigation District, and $5.7 million in pre-tax gains from the sale of part of Vidler's interest in the Semitropic water storage facility; Land and Related Mineral Rights & Water Rights - - income of $131,000 from Nevada Land on revenues of $3.2 million, which included $1.9 million in land sales; Property and Casualty Insurance - - segment income of $6.2 million, consisting of a $3.3 million pre-tax profit from Sequoia and $2.9 million from Citation; 27 Medical Professional Liability Insurance - - a pre-tax profit of $13.1 million, principally due to an $11.2 million reduction in claims reserves; Long Term Holdings - - a $15.3 million loss before taxes, primarily due to parent company overhead of $4.8 million, a $3 million provision for other-than-temporary impairment in two unrelated equity securities, a $2.5 million SFAS No. 133 decrease in the value of warrants during the year, a $2.3 million provision against loans to Dominion Capital Pty. Ltd., and our $1.5 million share of the net losses of investments accounted for under the equity method. Revenues and income before taxes and minority interests by business segment were: OPERATING REVENUES:
YEAR ENDED DECEMBER 31, -------------------------------------------- 2001 2000 1999 ------------ ------------ ------------ Water Rights and Water Storage $ 17,763,000 $ 3,123,000 $ 1,056,000 Land and Related Mineral Rights & Water Rights 3,221,000 5,276,000 7,147,000 Property and Casualty Insurance 51,349,000 39,257,000 39,836,000 Medical Professional Liability Insurance 2,601,000 3,396,000 3,121,000 Long Term Holdings (3,662,000) (5,238,000) 2,494,000 ------------ ------------ ------------ Total Revenues $ 71,272,000 $ 45,814,000 $ 53,654,000 ============ ============ ============
In 2001, total revenues were $71.3 million, compared to $45.8 million in 2000, and $53.7 million in 1999. Revenues in 2001 were $25.5 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 $7.9 million, primarily due to the recognition of a $7.8 million net realized investment loss which reduced revenues in the Long Term Holdings segment in 2000. Total expenses in 2001 were $60.6 million, unchanged from $60.6 million in 2000, and compared to $73.9 million in 1999. The largest expense item in each of the past 3 years was loss and loss adjustment expense in our insurance businesses (i.e., the cost of making provision to pay claims). In 2001, loss and loss adjustment expense was $18.3 million, compared to $24 million in 2000, and $35.2 million in 1999. Loss and loss adjustment expense for 2001 was reduced by favorable reserve development of $11.2 million in the Medical Professional Liability segment. Due to the greater amount of land and water rights sold in 2001, the cost of land, water rights and water sold was higher than previous years at $7.6 million, compared to $4 million in 2000, and $4.5 million in 1999. INCOME (LOSS) BEFORE TAXES AND MINORITY INTEREST:
YEAR ENDED DECEMBER 31, -------------------------------------------- 2001 2000 1999 ------------ ------------ ------------ Water Rights and Water Storage $ 4,989,000 $ (4,854,000) $ (3,947,000) Land and Related Mineral Rights & Water Rights 131,000 1,918,000 1,094,000 Property and Casualty Insurance 6,178,000 2,541,000 (3,803,000) Medical Professional Liability Insurance 13,132,000 768,000 (4,805,000) Long Term Holdings (15,288,000) (16,438,000) (12,850,000) ------------ ------------ ------------ Income (Loss) Before Taxes and Minority Interest $ 9,142,000 $(16,065,000) $(24,311,000) ============ ============ ============
28 WATER RIGHTS AND WATER STORAGE VIDLER WATER COMPANY, INC.
Year Ended December 31, -------------------------------------------- 2001 2000 1999 ------------ ------------ ------------ REVENUES: Sale of Land, Water Rights, & Water $ 9,487,000 $ 1,509,000 $ 270,000 Gain on sale of Semitropic Water Storage interests 5,701,000 Lease of Water 235,000 188,000 185,000 Lease of Agricultural Land 795,000 959,000 477,000 Other 1,545,000 467,000 124,000 ------------ ------------ ------------ Segment Total Revenues $ 17,763,000 $ 3,123,000 $ 1,056,000 ============ ============ ============ EXPENSES: Cost of Land, Water Rights, & Water Sold (6,796,000) (2,244,000) (185,000) Commission and Other Cost of Sales (553,000) Depreciation & Amortization (1,285,000) (988,000) (810,000) Interest (646,000) (821,000) (678,000) Operations & Maintenance (311,000) (612,000) (214,000) Other (3,183,000) (3,312,000) (3,116,000) ------------ ------------ ------------ Segment Total Expenses (12,774,000) (7,977,000) (5,003,000) ============ ============ ============ INCOME (LOSS) BEFORE TAX $ 4,989,000 $ (4,854,000) $ (3,947,000) ============ ============ ============
We entered the water business with the realization that most of the assets which Vidler acquired were not ready for immediate commercial use, and that there would be a lead-time in developing and commercializing these assets. Vidler's water assets did not begin to generate significant revenues until the first quarter of 2001. In 2000 and prior years, Vidler was generating modest revenues from the lease and sale of water assets in Colorado and from leasing agricultural land, and incurring significant costs associated with the development of assets and expansion of the water rights portfolio. Consequently, Vidler reported operating losses until 2001. Vidler generated total revenues of $17.8 million in 2001, compared to $3.1 million in 2000, and $1.1 million in 1999. In 2001, Vidler's results were dominated by three transactions, which generated $15.1 million in revenues: - - the sale of 6,496.5 acre-feet of transferable ground water and 2,589 acres of land in Arizona's Harquahala Valley Irrigation District to a unit of Allegheny Energy, Inc. This transaction added $9.4 million to revenues, comprised of the $9.1 million sales price and a $300,000 option fee earned which is included in Other Revenues, and contributed $2.3 million to segment income; - - the sale of 29.7% of Vidler's original interest in the Semitropic Water Banking and Exchange Program (i.e., approximately 55,000 acre-feet of storage capacity, out of the original 185,000 acre-feet) for $3.3 million. This transaction added $1.6 million to revenues and to segment income; and - - the further sale of 54.1% of Vidler's original interest in the Semitropic Water Banking and Exchange Program (i.e., approximately 100,000 acre-feet of storage capacity) for $6.9 million. This transaction added $4.1 million to revenues and to segment income. Over the past three years, Vidler has sold water rights, water, and related assets which were not essential to its strategy in Nevada and Arizona. In addition to the Allegheny transaction described in the preceding paragraph, in 2001 Vidler recognized revenues of $390,000 from the sale of water rights to the City of Golden, Colorado. In 2000, Vidler sold 3,691 acre-feet of water which had been "banked" at the Semitropic water storage facility for $509,000, and water rights and the related land and tunnel assets to the City of Golden for $1 million. Due to the potential for significant capital outlays for repairs and maintenance, Vidler disposed of the land and tunnel assets in conjunction with the water rights in 2000, even though this resulted in a loss of $1.2 million being recognized on the sale of the land and tunnel assets. In 1999, Vidler sold 300 acre-feet of priority water rights at Wet Mountain, Colorado for $270,000. The leasing of agricultural land generated revenues of $795,000 in 2001, $959,000 in 2000, and $477,000 in 1999. Agricultural land lease revenues decreased in 2001 as a result of the sale of farm properties in the Harquahala Valley to Allegheny, as described above. The increase from 1999 to 2000 primarily reflects the purchase of additional Harquahala Valley farm properties during 1999. Vidler generated revenue of $235,000 in 2001, $188,000 in 2000, and $185,000 in 1999, from leasing some of the company's Colorado water rights. These assets are leased in perpetuity. The lease payments are indexed for inflation, with a minimum annual escalation of 3%. 29 Other Revenues were $1.5 million in 2001, $467,000 in 2000, and $124,000 in 1999. The most significant items in Other Revenues in 2001 were a $600,000 gain from granting an easement to El Paso Natural Gas Company in the Harquahala Valley, interest revenue of $357,000, and various revenues from properties farmed by Vidler (e.g., sales of hay and cattle). In 2001, Other Revenues were reduced by a $202,000 loss on the condemnation (i.e., compulsory acquisition) of a commercially zoned property in Mesa, Arizona due to freeway construction. This property, which was located in greater metropolitan Phoenix, was not part of Vidler's water business. It was acquired in conjunction with MTB Ranch in 1996, and was being held for sale. Originally, a $442,000 provision for loss on condemnation was recorded in the first quarter of 2001; however, this was partially offset by an additional $240,000 payment to be received from a negotiated settlement after Vidler challenged the value at which the property was condemned. Total segment expenses, including the cost of water rights and other assets sold, increased from $5 million in 1999, to $8 million in 2000, and $12.8 million in 2001. Segment operating expenses (i.e., excluding the cost of water rights and other assets sold and related selling costs, and the $40,000 Silver State write-down described in the "Land and Related Mineral Rights & Water Rights" section) were $4.8 million in 1999, $5.7 million in 2000, and $5.4 million in 2001. Segment operating expenses in 2000 and 2001 were higher than in 1999 due to growth in Vidler's asset base (e.g., the acquisition of Fish Springs Ranch), including expenses related to individual projects (e.g., depreciation and interest) which were recognized prior to the related revenues being earned. The $348,000 net reduction in segment operating expenses in 2001 from 2000 was primarily attributable to decreases of $301,000 in operations and maintenance expense, $175,000 in interest expense, and $129,000 in other expenses. The decrease in operations and maintenance expense was primarily due to a lower obligation to contribute to operations and maintenance expense at the Semitropic water storage facility, as our interest in the asset reduced. Interest expense declined due to the repayment of the non-recourse debt on the Harquahala Valley farm properties which were sold to Allegheny. These expense reductions were partially offset by a $297,000 increase in depreciation and amortization expense, primarily due to the start of amortization of improvements at the Vidler Arizona Recharge Facility. Since construction of the improvements required to recharge water is complete and the facility is ready for use, on March 1, 2001, Vidler began to amortize the improvements at the facility over 15 years. The annual amortization charge will be approximately $518,000. The amortization charge for 2001 was $421,000. Segment operating expenses increased $915,000 from 1999 to 2000, due to increases of $398,000 in operations and maintenance, $178,000 in depreciation and amortization, $143,000 in interest, and $196,000 in other expenses. The increase in segment expenses reflected the growth in Vidler's asset base, including the purchase of farm properties and the related water rights in the Harquahala Valley. 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. The principal causes of the $9.9 million improvement in the segment result from 2000 to 2001 were the contributions to income of $5.7 million from the sale of interests in Semitropic, $2.3 million from the Allegheny transaction, and $600,000 from the easement granted in 2001. 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 a $342,000 gross profit on the sale of the water "banked" at Semitropic and $482,000 higher agricultural lease revenues, which were partially offset by higher charges for depreciation, interest, and other expenses. 30 LAND AND RELATED MINERAL RIGHTS & WATER RIGHTS NEVADA LAND & RESOURCE COMPANY, LLC
Year Ended December 31, ----------------------------------------- 2001 2000 1999 ----------- ----------- ----------- REVENUES: Sale of Land $ 1,918,000 $ 3,725,000 $ 5,432,000 Sale of Water Rights 244,000 379,000 Gain on Land Exchange 270,000 Lease and Royalty 734,000 716,000 980,000 Interest and Other 569,000 321,000 356,000 ----------- ----------- ----------- Segment Total Revenues $ 3,221,000 $ 5,276,000 $ 7,147,000 =========== =========== =========== EXPENSES: Cost of Land and Water Rights Sold (772,000) (1,751,000) (4,273,000) Operating Expenses (1,777,000) (1,607,000) (1,780,000) Write-down of Silver State Resources, LLC (541,000) ----------- ----------- ----------- Segment Total Expenses $(3,090,000) $(3,358,000) $(6,053,000) =========== =========== =========== INCOME BEFORE TAX $ 131,000 $ 1,918,000 $ 1,094,000 =========== =========== ===========
Nevada Land generated revenues of $3.2 million in 2001, compared to $5.3 million in 2000, and $7.1 million in 1999. Most of the variation in revenue from year to year is caused by fluctuations in the level of land sales. In 2001, Nevada Land recorded revenues of $1.9 million from the sale of 15,632 acres of land. In 2000, we generated $3.7 million in revenues from the sale of 28,245 acres of land, compared to $5.4 million from the sale of 48,715 acres in 1999. Lease and royalty income amounted to $734,000 in 2001, compared to $716,000 in 2000, and $980,000 in 1999. Most of this revenue comes from land leases, principally for grazing, agricultural, communications, and easements. Interest and other revenues contributed $569,000 in 2001, compared to $321,000 in 2000, and $356,000 in 1999. Nevada Land also generated revenues from a gain on a land exchange transaction in 2000, and the sale of water rights in 2000 and 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, Nevada Land sold 61 acre-feet of certificated water rights for $244,000. In 1999, we sold 125 acre-feet of certificated water rights for $379,000. After deducting the cost of land sold, the gross margin on land sales was $1.1 million in 2001, $2.2 million in 2000, and $1.5 million in 1999. This represented a gross margin percentage of 59.8% in 2001, 59.2% in 2000, and 28% in 1999. Operating expenses were little changed over the three-year period, at $1.8 million in 2001, $1.6 million in 2000, and $1.8 million in 1999. As part of our strategy of increasing our ownership of water rights in northern Nevada, in 1998 Nevada Land and Vidler jointly acquired a controlling interest in Silver State Land, LLC, which had filed applications for approximately 51,000 acre-feet of water rights in various locations that were geographically unrelated to Nevada Land's properties. In 1999, 2000, and 2001, our priority has been to pursue the water rights applications filed by the Vidler/Lincoln County joint venture, and by Nevada Land on its own properties. Accordingly, due to the uncertainty of realizing the value of these applications, in 2001 we reduced the carrying value of Silver State to zero, which resulted in expenses of $541,000 in this segment and $40,000 in the "Water Rights and Water Storage" segment. The Silver State water rights applications were the only water rights applications with a carrying value in our financial statements. 31 Nevada Land recorded income of $131,000 in 2001, compared to $1.9 million in 2000, and $1.1 million in 1999. Segment income decreased $1.8 million from 2000 to 2001, principally due to a $1.1 million reduction in the gross margin on land sales, the $541,000 write down of Silver State, and the $270,000 land exchange gain included in 2000. In 2000, segment income was $824,000 higher than 1999, principally due to a $685,000 higher gross profit from land sales and the $270,000 gain from the land exchange transaction. PROPERTY AND CASUALTY INSURANCE
Year Ended December 31, -------------------------------------------- 2001 2000 1999 ------------ ------------ ------------ P&C INSURANCE REVENUES: Earned Premiums $ 42,535,000 $ 32,583,000 $ 34,439,000 Net Investment Income 5,997,000 5,381,000 4,951,000 Realized Investment Gains 1,818,000 172,000 (310,000) Negative Goodwill 568,000 568,000 568,000 Other 431,000 553,000 188,000 ------------ ------------ ------------ Segment Total Revenues $ 51,349,000 $ 39,257,000 $ 39,836,000 ============ ============ ============ P&C INSURANCE EXPENSES: Loss and Loss Adjustment Expense $(29,460,000) $(22,963,000) $(28,613,000) Underwriting Expenses (15,711,000) (13,753,000) (15,026,000) ------------ ------------ ------------ Segment Total Expenses $(45,171,000) $(36,716,000) $(43,639,000) ============ ============ ============ P&C INSURANCE INCOME (LOSS) BEFORE TAXES: Sequoia Insurance Company $ 3,314,000 $ 1,344,000 $ 2,083,000 Citation Insurance Company 2,864,000 1,197,000 (5,886,000) ------------ ------------ ------------ Total P&C Income (Loss) Before Taxes $ 6,178,000 $ 2,541,000 $ (3,803,000) ============ ============ ============
The Property & Casualty Insurance segment generated total revenues of $51.3 million in 2001, compared to $39.3 million in 2000, and $39.8 million in 1999. 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. The "written" premium is recognized as revenue, or "earned," evenly over the term of the policy. Therefore, there is a time lag between changes in written premium and the resulting change in earned premium. As described in the Property and Casualty Insurance section of "Company Summary, Recent Developments and Future Outlook" in Item 7, the amount of premium "written" by Sequoia and Citation declined in 1998 and 1999. This led to a corresponding decrease in segment "earned" premium from $34.4 million in 1999 to $32.6 million in 2000. 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. Segment investment income increased 8.7% to $5.4 million during 2000. The average income yield on the bond portfolio increased throughout 2000 due to the higher prevailing level of interest rates and the purchase of high quality corporate bonds with 5 years or less to maturity with the proceeds of lower-yielding treasury bills and money market funds. The increase in the income yield was partially offset by the purchase of several small-capitalization value stocks with lower income (i.e., dividend) yields but greater appreciation potential than bonds. Segment Investment income increased another 11.4% to $6 million in 2001. This reflected a higher average yield to maturity in the bond portfolio, resulting from the purchase of high quality corporate bonds with 5 to 10 years to maturity and the sale of some shorter term securities whose yields had fallen to low levels. Investment gains of $1.8 million were realized in 2001, primarily due to the sale of bonds with 5 years or less to maturity, compared to realized gains of $172,000 in 2000. Given the historic drop in interest rates during 2001, particularly in shorter-term (5 years or less) interest rates, realized gains of this magnitude from bonds are unlikely to be repeated. The $310,000 net realized 32 investment loss in 1999 represented a $186,000 realized loss on the sale of a portfolio investment and a $124,000 provision for other-than-temporary impairment in the value of an unrelated portfolio investment. The Property and Casualty Insurance segment produced $6.2 million of pre-tax income in 2001, consisting of a $3.3 million pre-tax profit from Sequoia and $2.9 million from Citation. This compares to segment income of $2.5 million in 2000, and a segment pre-tax loss of $3.8 million in 1999. During 1998 and 1999, Sequoia and Citation "pooled," or shared, most of their premiums and expenses, and all business in California and Nevada was transitioned to Sequoia. From January 1, 2000, the pooling arrangement was terminated, and Citation only wrote a minor amount of premium in Arizona. Citation ceased writing business in December 2000, and went into "run off" in 2001. Citation's last policy expired in December 2001. Due to these factors, as well as the acquisition of the Personal Express book of business, the individual results of Sequoia and Citation for 2001 cannot be directly compared to previous years. In 2000, the $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 $3.6 million increase in segment income in 2001 over 2000 is primarily due to $1.6 million higher realized investment gains and a $616,000 increase in investment income for the segment, and a $1.4 million decrease in expenses at Citation after the company went into "run off." The 1999 $3.8 million segment loss consisted of $2.1 million in income from Sequoia, which was more than offset by a $5.9 million loss from Citation. From 1999 to 2000, the segment result improved by $6.3 million, from a $3.8 million loss in 1999 to a $2.5 million profit in 2000. The 1999 segment loss was caused by a $10.1 million pre-tax charge to strengthen Citation's claims reserves, principally in the artisan/contractors line of business. SEQUOIA INSURANCE COMPANY In 2001, Sequoia's revenues included earned premiums of $42.3 million, investment income of $3.7 million, and realized gains of $1.5 million. Earned premiums increased 29.2% from the previous year, and consisted of $34.1 million from commercial lines and $8.2 million from personal lines. Earned premiums for 2001 reflected most, but not a full 12 months, of the annualized increase in premium resulting from the acquisition of the Personal Express book of business. For 2001, Sequoia reported a loss from operations (i.e., income before investment income, realized gains, and taxes) of $1.9 million, and income before taxes of $3.3 million. This included an additional expense of $738,000 to recognize adverse development in prior year loss reserves. In 2000, Sequoia's revenues included $32.7 million in earned premiums, $2.8 million in investment income, and realized gains of $99,000. The earned premiums were composed of $29.6 million from commercial lines and $3.1 million from personal lines, which included some initial revenues from the Personal Express book of business. For 2000, Sequoia reported a loss from operations of $1.5 million, which included an additional expense of $252,000 to recognize adverse development in prior year loss reserves, and income before taxes of $1.3 million. In 1999, when the pooling agreement with Citation was still in force, Sequoia's revenues included $16.9 million in earned premium and $2.1 million in investment income. The company earned a profit from operations of $114,000 and income before taxes of $2.1 million, including the benefit of a $401,000 credit from favorable development in prior year loss reserves. The operating performance of insurance companies is frequently analyzed using their "combined ratio." A combined ratio below 100% indicates that the insurance company made a profit on its base insurance business, prior to investment income, realized gains or losses, taxes, extraordinary items, and other non-insurance items. Sequoia manages its business so as to have a combined ratio of less than 100% each year; however, this is not always achieved. Sequoia's combined ratio, determined on the basis of generally accepted accounting principles, for the past 3 years have been: SEQUOIA'S GAAP INDUSTRY RATIOS
--------------------------------------------------------------------------------------------------- 2001 2000 1999 ------------ ----------- ------------ Loss and LAE Ratio 69.1% 67.6% 53.5% Underwriting Expense Ratio 36.3% 38.6% 46.3% ----- ---- ---- Combined Ratio 105.4% 106.3% 99.8% ---------------------------------------------------------------------------------------------------
For 2001, Sequoia's combined ratio was 105.4%, compared to 106.3% in 2000, and 99.8% in 1999. 33 Sequoia's loss and loss adjustment expense ratio (i.e., the cost of making provision to pay claims as a percentage of earned premiums) was 69.1% in 2001 and 67.6% in 2000, compared to 53.5% in 1999. In 2001, this included an additional expense of $738,000 to recognize adverse development in prior year loss reserves, compared to an additional $252,000 expense in 2000, and a $401,000 credit from favorable development in 1999. The higher loss ratio was partially offset by a lower underwriting expense ratio (i.e., operating expenses as a percentage of earned premiums) of 36.3% in 2001, compared to 38.6% in 2000, and 46.3% in 1999. The reduction in the underwriting expense ratio was due to: - - economies of scale. Sequoia's earned premiums grew by 29.2% in 2001, following a 93.4% increase in 2000 after the pooling agreement with Citation was terminated. In 2001 and 2000, fixed underwriting expense items (i.e., expenses which do not change with volume) were spread over a larger base of revenue, and therefore reduced as a percentage of revenue; and - - earned premiums from the Personal Express book of business. Sequoia does not pay commission on Personal Express business, so commission expense fell as a percentage of revenue in 2001 and 2000. CITATION INSURANCE COMPANY Citation went into "run off" from January 1, 2001. In future years, this will significantly affect the company's level of revenues and expenses. It is anticipated that the majority of Citation's future revenues will come from investment income, which is expected to decline over time as fixed-income investments mature or are sold to provide the funds to pay down the company's claims reserves. Unless there is adverse development in prior year loss reserves, typically the expenses of an insurance company in "run off" will be lower than the expenses of an insurance company which is actively writing business. In 2001, Citation's revenues included investment income of $2.3 million, earned premiums of $225,000, and negative goodwill amortization of $568,000 (explained in the following paragraph). The $225,000 in earned premiums represents the final premiums earned from the policies on Citation's books when the company went into "run off." After expenses of $571,000, Citation earned income of $2.9 million before taxes for 2001. The "run off" of Citation's loss reserves appears to be proceeding in line with expectation. In 2001, an expense of just $56,000 was recorded for development in prior year loss reserves. When Citation Insurance Group acquired Physicians in the reverse merger in 1996, a $5.7 million negative goodwill asset arose because the fair value of the assets acquired (i.e., Physicians) exceeded the cost of the investment (i.e., the fair value of the shares in Citation issued to Physicians shareholders). The negative goodwill was being recognized as income over a period of 10 years in this segment. From January 1, 2002, PICO is adopting Statement of Financial Accounting Standards No. 142, "Goodwill and Intangible Assets," which requires that goodwill and intangible assets with indefinite lives be tested for impairment annually rather than amortized over time. As a result of adopting this standard, the remaining negative goodwill of approximately $2.8 million will be recognized as an extraordinary gain in 2002. See Note 1 of Notes to Consolidated Financial Statements, "Nature of Operations and Significant Accounting Policies." In 2000, Citation's revenues included investment income of $2.7 million, earned premiums of negative $158,000, and negative goodwill amortization of $568,000. Although Citation earned $564,000 in property and casualty premiums in 2000, this was more than offset by a $722,000 reduction in earned premium revenues related to reinsurance. After expenses of $1.9 million, including a partially offsetting $282,000 benefit from favorable development in prior year loss reserves, Citation earned a $1.2 million pre-tax profit for 2000. From 2000 to 2001, Citation's pre-tax profit increased $1.7 million. While revenues increased $309,000 year over year, underwriting and other expenses declined by $1.4 million after the company went into "run off." During 1999, Citation was "pooling" most of its revenues and expenses with Sequoia so revenues and expenses were significantly greater than in 2000 and 2001. In 1999, Citation's revenues included earned premiums of $17.5 million, investment income of $2.9 million, and negative goodwill amortization of $568,000. Following expenses of $26.7 million, which included a $10.1 million charge to strengthen loss reserves, Citation reported a pre-tax loss of $5.9 million. Since Citation is in "run off," its Combined Ratio is no longer meaningful. 34 PROPERTY AND CASUALTY INSURANCE - LOSS AND LOSS EXPENSE RESERVES
December 31, 2001 December 31, 2000 December 31, 1999 ----------------------------------------------------------------------------- SEQUOIA INSURANCE COMPANY: Direct Reserves $ 36.9 million $ 37.2 million $ 39.4 million Ceded Reserves (15.7) (18.1) (28.9) ----------------------------------------------------------------------------- Net Reserves $ 21.2 million $ 19.1 million $ 10.5 million ============================================================================= CITATION INSURANCE COMPANY: Direct Reserves $ 21.0 million $ 25.8 million $ 36.6 million Ceded Reserves (1.8) (2.4) (2.0) ----------------------------------------------------------------------------- Net Reserves $ 19.2 million $ 23.4 million $ 34.6 million =============================================================================
MEDICAL PROFESSIONAL LIABILITY INSURANCE
Year Ended December 31, ---------------------------------------- 2001 2000 1999 ----------- ----------- ----------- MPL REVENUES: Net Investment Income $ 1,096,000 $ 1,543,000 $ 1,180,000 Net Realized Investment Gain 750,000 Earned Premiums 755,000 1,853,000 1,941,000 ----------- ----------- ----------- Segment Total Revenues $ 2,601,000 $ 3,396,000 $ 3,121,000 =========== =========== =========== Underwriting Recoveries (Expenses) 10,531,000 (2,628,000) (7,926,000) ----------- ----------- ----------- SEGMENT TOTAL RECOVERIES (EXPENSES) 10,531,000 (2,628,000) (7,926,000) =========== =========== =========== Income (Loss) Before Taxes $13,132,000 $ 768,000 $(4,805,000) =========== =========== ===========
Actuarial analysis of Physicians' loss reserves as of September 30, 2001 concluded that Physicians' reserves against future claims were significantly greater than the actuary's projections of future claims payments. This was due to favorable trends in both the "frequency" (number) and "severity" (size) of claims. Accordingly, Physicians took down $11.2 million of excess reserves in the fourth quarter of 2001. Medical professional liability insurance segment revenues were $2.6 million in 2001, compared to $3.4 million in 2000, and $3.1 million in 1999. Investment income was $1.1 million in 2001, $1.5 million in 2000, and $1.2 million in 1999. The principal reason for the variation in investment income from year to year is fluctuation in the amount of fixed-income securities held in the portfolio and the prevailing level of interest rates. The $750,000 net realized investment gain in 2001 principally represented a $731,000 realized gain on the redemption of all units held in the Rydex URSA mutual fund. The Rydex URSA Fund is designed to deliver a return which is the inverse of the return on the S&P 500 Index. The investment was originally acquired in 1995 when Physicians had greater exposure to listed stocks, and was accounted for under SFAS No. 115. In 1996, we recorded a pre-tax provision of $4.7 million for other-than-temporary impairment of this investment as the rise in the S&P 500 Index had caused a corresponding decline in the value of the Rydex URSA Fund. In 2000 and the first four months of 2001, the S&P 500 Index declined sharply, which led to a corresponding increase in the price of the Rydex URSA Fund. When we redeemed the investment in 2001, this resulted in a gain because the sales proceeds exceeded the basis of the investment, which had been written down in 1996. Although Physicians is in "run off" and no longer writing premiums, earned premium does arise, for example, from "swing rated" reinsurance, where the reinsurance premiums we pay are recalculated based on loss experience (i.e., number and size of claims). Under GAAP, reinsurance is recorded in the earned premium line. Earned premiums of $755,000 were recorded in 2001, which primarily reflects a reduction in the amount of reinsurance we need to pay in line with the reduction in our claims reserves during 2001. Similarly, earned premiums of $1.9 million were recorded in both 2000 and 1999. Underwriting expenses consist of loss and loss adjustment expense and other operating expenses. 35 In 2001, the segment reported a $10.5 million underwriting recovery, as an $11.2 million reduction in reserves more than offset regular loss and loss adjustment expense and operating expenses for the year. Combined with $2.6 million in segment revenues, this resulted in segment income of $13.1 million. In 2000, after underwriting expenses of $2.6 million, which included a $1.1 million net increase in reserves, segment income of $768,000 was recorded. In addition, reserves increased by $7.5 million due to the elimination of reserve discount included in the cumulative effect of change in accounting principle. The elimination of discounting did not affect the segment in 2000, but resulted in a $5 million after-tax charge to income, which is shown in the "Cumulative Effect of Change in Accounting Principle" line in our Consolidated Statement of Operations. See Note 21 of Notes to Consolidated Financial Statements, "Cumulative Effect of Change in Accounting Principle." Until December 31, 1999, we discounted our medical professional liability claims reserves to reflect the fact that some claims will not be paid until future years, but funds from the corresponding premiums can be invested in the meantime. In each quarter until December 31, 1999, a portion of this discount was removed and recognized as an expense called "reserve discount accretion." From January 1, 2000, we ceased discounting our reserves to be consistent with the accounting treatment in our statutory financial statements, where discounting was not permitted after December 31, 1999. In 1999, underwriting expenses were $7.9 million. This included a pre-tax charge to increase Physicians' loss reserves by $5 million, or $3.8 million after discounting to reflect the time value of money. The addition to claims reserves was based upon actuarial analysis which indicated some deterioration of Physicians' loss experience in most coverage years, resulting in a greater than expected liability to pay claims. At that time, Physicians was receiving a higher than expected number of claims, which was compounded by the fact that many of the claims were for smaller than expected amounts. This meant that a greater proportion of each claim fell below our reinsurance deductible (i.e., the initial part of each claim which is not covered by reinsurance), so Physicians had to pay a greater proportion of each claim, and could not recover as much as previously anticipated from reinsurance. The negative effect of the increased number of claims exceeded the positive effect of the smaller average amount claimed. Medical professional liability operations reported a $4.8 million loss in 1999. At December 31, 2001, medical professional liability reserves totaled $34.9 million, net of reinsurance, compared to $51.6 million net of reinsurance at December 31, 2000. At December 31, 1999, medical professional liability reserves were $53.7 million, net of reinsurance and discount. MEDICAL PROFESSIONAL LIABILITY INSURANCE--LOSS AND LOSS EXPENSE RESERVES
Year Ended December 31, ------------------------------------------------------------ 2001 2000 1999 ------------- ------------- ------------- Direct Reserves $40.6 million $58.6 million $81.6 million Ceded Reserves (5.7) (7.0) (20.4) Discount of Net Reserves (7.5) ------------- ------------- ------------- Net Medical Professional Liability Insurance Reserves $34.9 million $51.6 million $53.7 million ============= ============= =============
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. See "Risk Factors." LONG TERM HOLDINGS
Year Ended December 31, -------------------------------------------- 2001 2000 1999 ------------ ------------ ------------ LONG TERM HOLDINGS REVENUES (CHARGES): Realized Investment Gains (Losses): On Sale or Impairment of Investments $ (3,531,000) $ (7,784,000) $ (302,000) SFAS No. 133 Change In Warrants (2,453,000) Investment Income 1,856,000 1,610,000 723,000 Other 466,000 936,000 2,073,000 ------------ ------------ ------------ Segment Total Revenues (Charges) $ (3,662,000) $ (5,238,000) $ 2,494,000 SEGMENT TOTAL EXPENSES (10,097,000) (9,949,000) (11,329,000) ------------ ------------ ------------ LOSS BEFORE INVESTEE INCOME (LOSS) $(13,759,000) $(15,187,000) $ (8,835,000) Equity Share of Investees' Net Income (Loss) (1,529,000) (1,251,000) (4,015,000) ------------ ------------ ------------ LOSS BEFORE TAXES $(15,288,000) $(16,438,000) $(12,850,000) ============ ============ ============
36 The Long Term Holdings segment recorded negative revenues $3.7 million in 2001, negative revenues of $5.2 million in 2000, and positive revenues of $2.5 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. A $6 million net realized investment loss was recorded in 2001. This included a $2.5 million loss to reflect a decrease in the value of warrants we own in other companies, principally HyperFeed Technologies, Inc., during 2001. Following the introduction of Statement of Financial Accounting Standards No. 133, "Accounting For Derivative Instruments and Hedging Activities," we are now required to recognize changes in the estimated fair value of warrants (before taxes) during an accounting period through the Consolidated Statement of Operations for that period. In addition, although this did not affect the segment, a change in accounting principle had the cumulative effect of reducing income by $981,000 to reflect the after-tax decline in the estimated fair value of warrants during the period from the acquisition of the various warrants through to December 31, 2000. See Note 4 of Notes to Consolidated Financial Statements, "Investments." In addition, we recorded a $500,000 write-off of the remaining carrying value of the loan to MKG Enterprises, and charges for other-than-temporary impairment of $2.1 million in SIHL (see the SIHL section of the "Company Summary, Recent Developments and Future Outlook" portion of Item 7), and $888,000 in Solpower. Solpower Corporation is a development stage company, which was one of the final Alternative Investments discussed in Item 1. Given the duration of the decline in value in this stock, in the absence of factors indicating otherwise, led us to determine that the decline is other-than-temporary. Accordingly, we reduced the basis of the investment to its market value at December 31, 2001. Charges other-than-temporary impairment do not affect shareholders' equity, or book value per share. In 2000, a net realized loss of $7.8 million was incurred. This primarily represented a $4.6 million loss on the sale of Conex, a $2.5 million write-down of the loan to MKG Enterprises, and $161,000 in provisions for other-than-temporary impairment in the value of an international equity security. In addition, we recognized a $526,000 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. On September 8, 2000, PICO sold its investment in Conex, representing approximately 83% of Conex's issued common stock, for a nominal sum. Conex's principal asset was 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. In 1999, net realized losses of $302,000 were recorded. This primarily represented net realized gains of approximately $3.2 million from the sale of securities, primarily from the Company's European portfolio, and $670,000 from the sale of property, which were partially offset by the $3.2 million write-down of an oil and gas investment. In addition, we recorded charges for other-than-temporary impairment of $609,000 in Raetia Energy and $319,000 in an unrelated international equity security, primarily due to the extent and duration of the decline in market price. Raetia Energy is a Swiss public company, which is a producer of hydro-electricity. The 1999 charge reduced our basis in Raetia Equity to approximately $2.1 million, being its market value at December 31, 1999. Charges for other-than-temporary impairment do not affect shareholders' equity, or book value per share. In this segment, investment income includes interest on cash and short term fixed-income investments, and dividends from long term holdings. Investment income totaled $1.9 million in 2001, compared to $1.6 million in 2000, and $723,000 in 1999. In 2001, investment income was $246,000 higher than in 2000, principally due to the receipt of $391,000 in dividends from AOG in 2001 after AOG had not paid a dividend in 2000. The $887,000 increase in investment income from 1999 to 2000 was primarily due to interest revenue earned on the proceeds from the rights offering in the first quarter of 2000, and a $405,000 increase in the dividend from Jungfraubahn year over year. Other revenues were $466,000 in 2001, $936,000 in 2000, and $2.1 million in 1999. The principal expenses recognized in this segment are PICO's corporate overhead and operating expenses from SISCOM and, in 2000 and 1999, Conex. In 2001, segment expenses were $10.1 million, compared to $9.9 million in 2000, and $11.3 million in 1999. 37 In 2001, segment expenses 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. The other principal components of segment expenses were parent company overhead of $4.8 million, and SISCOM expenses of $1.7 million. In 2000, segment expenses include a $2.3 million operating loss from Conex for the period prior to its sale, and a $1.6 million operating loss from SISCOM. For 1999, segment expenses include a $1.8 million operating loss from Conex, and a $672,000 operating loss from SISCOM. PICO's equity share of investees' income (loss) represents our proportionate share of the net income (loss) and other events affecting equity in the investments which we carry under the equity method, less any dividends received from those investments. In 2001, an equity share of investees' loss of $1.5 million was recorded, compared to equity shares of investees' losses of $1.3 million in 2000, and $4 million in 1999. Here is a summary of the principal investments which we accounted for under the equity method in each of the past three years:
------------------------------------------------------------------------------------------------------------ 2001 2000 1999 ------------------------------------------------------------------------------------------------------------ HyperFeed HyperFeed HyperFeed Conex - until August 1, 1999 Conex's sino-foreign joint Conex's sino-foreign joint venture venture - until September 8, 2000 ------------------------------------------------------------------------------------------------------------
The Long Term Holdings segment produced a loss before taxes of $15.3 million in 2001, compared to a $16.4 million loss in 2000 and a $12.9 million loss in 1999. The 2001 segment loss includes investment income and other revenues of $2.3 million, which were more than offset by the $2.5 million SFAS No. 133 loss, the $3.5 million realized investment loss, the $1.5 million equity share of investees' losses, and segment expenses of $10.1 million. In 2000, the segment loss included equity income of $1.3 million and investment income and other revenues of $2.5 million. These were more than offset by segment expenses of $9.9 million, the $7.8 million in realized losses described above, and the equity share of investees' losses of $13 million. In 1999, the segment loss included $302,000 in net realized losses and $2.8 million in investment income and other revenues, which were more than offset by segment expenses of $11.3 million and a $4 million equity share of investees' loss. LIQUIDITY AND CAPITAL RESOURCES -- YEARS ENDED DECEMBER 31, 2001, 2000, AND 1999 PICO Holdings, Inc. is a diversified holding company. Our assets primarily consist of investments in our operating subsidiaries, investments in other public companies, marketable securities, and cash and cash equivalents. On a consolidated basis, the Company had $17.4 million in cash and cash equivalents at December 31, 2001, compared to $13.6 million at December 31, 2000. Our cash flow position fluctuates depending on the requirements of our operating subsidiaries for capital, and activity in our investment portfolios. Our primary sources of funds include cash balances, cash flow from operations, the sale of investments, and -- potentially -- the proceeds of borrowings or offerings of equity and debt. We endeavor to ensure that funds are always available to take advantage of new investment opportunities. 38 In broad terms, the cash flow profile of our principal operating subsidiaries is: - - During the company's investment and development phase, Vidler Water Company, Inc. utilized cash to purchase properties with significant water rights, to construct improvements at the Vidler Arizona Recharge Facility, to maintain and develop existing assets, to pursue applications for water rights, and to meet financing and operating expenses. During this period, other group companies provided financing to meet Vidler's on-going expenses and to fund capital expenditure and the purchase of additional water-righted properties. Vidler's water-related assets began to generate significant cash flow in the first quarter of 2001. As commercial use of these assets increases, we expect that Vidler will start to generate free cash flow as receipts from leasing water or storage and the proceeds from selling land and water rights begin to overtake maintenance capital expenditure, financing costs, and operating expenses. As water lease and storage contracts are signed, we anticipate that Vidler may be able to monetize some of the contractual revenue streams, which could potentially provide another source of funds; - - Nevada Land & Resource Company, LLC is actively selling land which has reached its highest and best use, and is not part of PICO's long-term utilization plan for the property. Nevada Land's principal sources of cash flow are the proceeds of cash sales, and collections of principal and interest on sales contracts where Nevada Land has provided vendor financing. Since these receipts and other revenues exceed Nevada Land's operating costs, Nevada Land is generating strong positive cash flow which provides funds to finance other group activities; - - Sequoia Insurance Company is currently generating positive cash flow from increased written premium volume. 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 is being deployed in the company's investment portfolio; - - Citation Insurance Company has ceased writing business and is "running off" its existing claims reserves. Investment income more than covers Citation's operating expenses. Most of the funds required to pay claims are coming from the maturity of fixed-income investments in the company's investment portfolio and recoveries from reinsurance companies; and - - As the "run off" progresses, Physicians Insurance Company of Ohio is obtaining funds to pay operating expenses and claims from the maturity of fixed-income securities, the realization of investments, and recoveries from reinsurance companies. 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. As shown in the Consolidated Statements of Cash Flow, there was a $3.7 million net increase in cash and cash equivalents in 2001, compared to a $23.1 million net decrease in 2000. During 2001, Operating Activities used cash of $3.9 million. Operating Activities used cash of $17.3 million in 2000, and $23.5 million in 1999. The most significant cash inflow in 2001 was $9.4 million in total receipts from the sale of water rights and land in the Harquahala Valley. The principal uses of cash were claims payments by our insurance subsidiaries and operating expenses in all three years. In 2001, Investing Activities generated cash of $9 million. The most significant cash inflow was $10.2 million from the sale of part of our interest in Semitropic. Significant cash outflows included the investment of $3.5 million in Sihl, a Swiss public company, and $941,000 in AOG. Most of the remaining Investing Activities cash flow represents activity in the investment portfolios of our insurance companies: - - Sequoia Insurance Company, which is the only insurance company writing new business, has been realigning its bond portfolio through the purchase of high quality corporate bonds with 5 to 10 years to maturity, utilizing the proceeds from the sale of bonds with lower yields to maturity; and - - the "run off" insurance companies, Physicians and Citation, structuring their fixed-income portfolios to match the projected pattern of claims payouts, utilizing the proceeds of maturing fixed-income securities, the sale of investments, and investment income. In addition, Vidler and Nevada Land invested $7.5 million in high quality corporate bonds with less than 1 year to maturity to maximize the return on the proceeds of land and water rights sales. 39 Investing Activities used $55.4 million of cash in 2000. Most of the Investing Activities cash flow represents activity in the investment portfolios of our insurance companies, where the proceeds of cash and cash equivalents and maturing fixed-income securities were reinvested in longer-dated corporate bonds and, to a lesser extent, in small-capitalization value stocks. In addition, Vidler made a $2.3 million payment related to the Semitropic Water Banking and Exchange Program. In 1999, Investing Activities used $20.2 million of cash. This primarily represented the purchase of additional shares in Jungfraubahn and AOG, and the $2.3 million Semitropic payment. Financing Activities used $1.8 million of cash in 2001. Vidler paid off approximately $2.9 million in non-recourse borrowings collateralized by the farm properties in the Harquahala Valley Irrigation District which it sold to Allegheny. Global Equity SA took on an additional $1.9 million of Swiss Franc-denominated borrowings to help finance the acquisition of investments in Swiss public companies, principally Sihl. 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. At December 31, 2001, PICO had no significant commitments for future capital expenditures, other than in the ordinary course of business. PICO is committed to maintaining Sequoia's capital and statutory surplus at a minimum of $7.5 million. At December 31, 2001, Sequoia had approximately $29.3 million in capital and statutory surplus. PICO also aims to maintain Sequoia's A.M. Best rating at or above its present "A-" (Excellent) level. At some time in the future, this may require the injection of additional capital. SUPPLEMENTARY DISCLOSURES At December 31, 2001: - - PICO had no "off balance sheet" financing arrangements; - - PICO has not provided any debt guarantees; and - - PICO has no commitments to provide additional collateral for financing arrangements. PICO's Swiss subsidiary, Global Equity SA, has Swiss Franc borrowings which partially finance the Company's European stock holdings. If the market value of those stocks declines below certain levels, we could be required to provide additional collateral or to repay a portion of the Swiss Franc borrowings. See Note 15 of Notes To Consolidated Financial Statements, "Commitments and Contingencies." 40 RISK FACTORS 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 itsour business. The statements contained in this Form 10-K/A10-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. BECAUSE OUR OPERATIONS ARE DIVERSE, ANALYSTS AND INVESTORS MAY NOT BE ABLE TO EVALUATE OUR COMPANY ADEQUATELY, WHICH MAY NEGATIVELY INFLUENCE OUR SHARE PRICE PICO is a diversified holding company with operations

If  we do not successfully locate, select and manage investments and acquisitions, or if our investments or acquisitions otherwise fail or decline in land and related water rights and mineral rights; water rights and water storage; property and casualty insurance; medical professional liability insurance; and other long-term holdings. Each of these areas is unique, complex in nature, and difficult to understand. In particular, water rights 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 so complex, analysts and investors may not be able to adequately evaluatevalue, our operations, and PICO in total. Thisfinancial condition could cause them to make inaccurate evaluations of our stock, or to overlook PICO, in general. These factors could have a negative impact on the trading volume and price of our stock. 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 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. Failures and/or declinesIf a business in the market values of businesseswhich we invest infails or acquire, as well asits 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 investment returns compared to those which may have been attained had we successfully located, selected and managed new investments and acquisition opportunities, or had our investments or acquisitions not failed or declined in value.return on shareholders’ equity. We could also lose part or all of our investmentscapital in these businesses and experience reductions in our net income, cash flows, assets and shareholders'shareholders’ equity. We will continue

Failure to make selective investments, and endeavor to enhance and realize additional value to thesesuccessfully manage newly acquired companies throughcould adversely affect our influence and control. This could involve the restructuring of the financing orbusiness.

Our management of the entities in which we investoperations of acquired businesses requires significant efforts, including the coordination of information technologies, research and initiatingdevelopment, sales and facilitating mergersmarketing, operations, and acquisitions. Any acquisition couldfinance. These efforts result in the useadditional expenses and involve significant amounts 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 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, and we have also made investments that have lost money. Further details of the realized and unrealized gains and losses can be found in the accompanying consolidated financial statements (see notes 1, 3 and 4) and Item 7 in this 10-K/A. 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. Our investments may not achieve acceptable rates of return and we may not realize the value of the funds invested; accordingly, these investments may have to be written down or sold at their then-prevailing market values. 41 We may not be able to sell our investments in both private and public companies when it appears to be advantageous to do so and we may have to sell these investments at a discount. Investments in private companies are not as marketable as investments in public companies. Investments in public companies are subject to prices determined in the public markets and, therefore, values can vary dramatically. In particular, the ability of the public markets to absorb a large block of shares offered for sale can affect our ability to dispose of an investment in a public company. 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.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. 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 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 invest inacquire 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'shareholders’ equity may be temporary or permanent. We make investmentsacquisitions 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. IF MEDICAL MALPRACTICE INSURANCE CLAIMS TURN OUT TO BE GREATER THAN THE RESERVES WE ESTABLISH TO PAY THEM, WE MAY NEED TO LIQUIDATE CERTAIN INVESTMENTS IN ORDER TO SATISFY OUR RESERVE REQUIREMENTS Under

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 termscompanies in which we invest. We acquire stakes in private companies that are not as liquid as investments in public companies. Additionally, some of our medical malpractice liability policies,acquisitions may be in restricted or unregistered stock of U.S. public companies. Moreover, even our investments for which there is an extended reporting periodestablished 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 claims. Under Ohio law, the statutesale of limitationssuch 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 one year afterunder the causejurisdiction of action accrues. Also, under Ohio law,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 person mustforeign company in which we invest were to take actions which could be deleterious to its shareholders, foreign legal systems may make a claim within four years; however,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 courtsfull 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 determined thatto pay tax in both the periodU.S. and in foreign countries, and we may be longerunable to offset any U.S. 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.

Variances in situations wherephysical 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 insured could not have reasonably discoveredtransferability of these rights to other uses and places of use are governed by the injurylaws concerning water rights in that four-year period. Claimsthe states of minors mustArizona, 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 brought within one year of the date of majority.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 reportedsubject 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 years followingfactors, 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 expirationextent we possess junior or conditional water rights, such rights may be subordinated to superior water right holders in periods of the medical malpractice liability policy period. Physicians Insurance Company of Ohio has established reserves to cover losses on claims incurred under the medical malpractice liability policies including not only those claims reported to date, but also those that may have been incurred but not yet reported. The reserves for losses are estimates based on various assumptions and, in accordance with Ohio law, were discounted to reflect the time value of money for years prior to 2000. These estimates are based on actual and industry experience and assumptions and projections as to claims frequency, severity and inflationary trends and settlement payments. low flow or drought.

In accordance with Ohio law, Physicians Insurance Company of Ohio annually obtains a certification from an independent actuary that its reserves for losses are adequate. Physicians Insurance Company of Ohio also obtains a concurring actuarial opinion. Dueaddition to the inherent uncertainties in the reserving process, there is a risk that Physicians Insurance Company of Ohio's reserves for losses could prove to be inadequate. Thisdelays 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 decreaselimited number of assets, making our growth and profitability vulnerable to fluctuations in incomelocal economies and shareholders' equity. 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 reserves, theyfinancial condition could reach levels which are lower than required by law. Reserves are provisions that we make to pay insurance claims. We strive to establish a balance between maintaining adequate reserves to pay claims while at the same time usingbe materially misstated and our cash resources to invest in new companies. 42 IF WE UNDERESTIMATE THE AMOUNT OF INSURANCE CLAIMS, OUR FINANCIAL CONDITION COULD BE MATERIALLY MISSTATED AND OUR FINANCIAL CONDITION COULD SUFFER 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: - - 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. 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 commercial 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. As a result, precise reserve estimates cannot be made for several years following the year for which reserves were initially established.

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.


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. THE PROPERTY & CASUALTY INSURANCE BUSINESS IS CYCLICAL, WHICH COULD HINDER OUR ABILITY TO PROFIT FROM THIS INDUSTRY IN THE FUTURE The property and casualty insurance industry has been highly cyclical. Pricing is a function

State regulators could require changes to our capitalization and/or to the operations 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. During the late 1990's, the industry was in a cyclical downturn, due primarily to competitive pressures on pricing, which resulted in lower profitability for our property and casualty insurance operations. In 2000 and 2001, competitive pressures began to ease and pricing began to improve, which is referred to as a hardening market. 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. 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 subsidiaries, and/or place them into rehabilitation or liquidation.

Beginning in 1994, Physicians Professionals,and 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 43 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'companies’ risk-based capital results as of December 31, 20012005 exceed the Company Action Level. WE MAY BE INADEQUATELY PROTECTED AGAINST MAN-MADE AND NATURAL CATASTROPHES, WHICH COULD REDUCE THE AMOUNT OF CAPITAL SURPLUS AVAILABLE FOR INVESTMENT OPPORTUNITIES As with other property and casualty insurers, operating results and financial condition can

If we are required to register as an investment company, then we will be adversely affected by volatile and unpredictable natural and man-made disasters, such as hurricanes, windstorms, earthquakes, fires, and explosions. Our insurance subsidiaries generally seek to reduce their exposure to catastrophic events through individual risk selection and the purchase of reinsurance. Our insurance subsidiaries' estimates of their exposures depend on their views of the possibility of a catastrophic event in 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. We insure ourselves against catastrophic losses by obtaining insurance through other insurance companies known as reinsurers. The future financial results of our insurance subsidiaries could be adversely affected by disputes with their reinsurers with respect to coverage and by the solvency of the reinsurers. OUR INSURANCE SUBSIDIARIES COULD BE DOWNGRADED, WHICH WOULD NEGATIVELY IMPACT OUR BUSINESS 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. Our insurance subsidiaries are currently rated as follows: - - Sequoia Insurance Company A- (Excellent) - - Citation Insurance Company B+ (Very Good) - - Physicians Insurance Company of Ohio NR-3 (rating procedure inapplicable) POLICY HOLDERS MAY NOT RENEW THEIR POLICIES, WHICH WOULD UNEXPECTEDLY REDUCE OUR REVENUE STREAM Insurance policy renewals have historically accounted for a significant portion of our net revenue. We may not be able to sustain historic renewal rates for our products in the future. A decrease in renewal rates would reduce our revenues. It would also decrease our cash receipts and the amount of funds available for investments and acquisitions. If we were not able to reduce overhead expenses correspondingly, this would adversely affect our business, financial condition, and the results of operations and cash flows. IF WE ARE REQUIRED TO REGISTER AS AN INVESTMENT COMPANY, THEN WE WILL BE SUBJECT TO A SIGNIFICANT REGULATORY BURDEN 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 44 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. 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

We are directly impacted by international affairs, which directly exposes 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 exist to the saleadverse effects of any foreign economic 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 will not be able to make a profit, we will not have enough cash receipts to cover cash needs, and we may lose some or all of our value in our water rights investments. 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 or 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 acquisition, management, development, and sale and lease activities. Accordingly, our long-term future profitability will be primarily 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 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 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. 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 control or deter growth. 45 WE ARE DIRECTLY IMPACTED BY INTERNATIONAL AFFAIRS, WHICH DIRECTLY EXPOSES US TO THE ADVERSE EFFECTS OF ANY FOREIGN ECONOMIC OR GOVERNMENTAL INSTABILITY 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 U.S. 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.
·exposure to fluctuations in exchange rates;
·the imposition of governmental controls;
·the need to comply with a wide variety of foreign and U.S. 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'shareholders’ equity due to foreign currency fluctuations and a reduction in our global diversification. OUR COMMON STOCK PRICE MAY BE LOW WHEN YOU WANT TO SELL YOUR SHARES


Because our operations are diverse, analysts and investors maynot 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. This could cause them to make inaccurate evaluations of our stock, or to overlook PICO, in general. 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; - - 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.
·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, 2001,2005, the closing price of our common stock on the NASDAQ National Market was $12.50$32.26 per share, compared to $12.3125$15.67 at December 31, 1999.2003. On a quarterly basis between these two dates, closing prices have ranged from a high of $14.62 at June 30, 2001$35.14 to a low of $11.00 at September 30, 2001. During 2001, closing prices have ranged from a low of $10.70 per share on October 9 to a high of $15.91 on July 20. $15.67.

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 havemay 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. Messrs. Langley and Hart, have entered into employment agreements with us dated as of December 31, 1997, for a period of four years. Messrs. Langleyour Chairman and HartCEO, 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 U.S. 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.



Repurchases of our common stock could have a negative effect on our cash flows and our stock price.
Our Board of Directors has authorized the repurchase of up to $10 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. Such a repurchase program may have a negative impact on our cash flows, and could result in market pressure to sell our common stock.

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 employment agreements were entered intoaccounting 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 Mr. Langleychanging regulation of corporate governance and Mr. Hartpublic 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 January 1, 2002our common stock. We currently intend to retain any future earnings for a further four years. (See Part II, Item 8, Note 16, "Related-Party Transactions.") 46 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.

THE FOREGOING FACTORS, INDIVIDUALLY OR IN AGGREGATE, COULD MATERIALLY ADVERSELY AFFECT OUR OPERATING RESULTS AND CASH FLOWS AND FINANCIAL CONDITION AND COULD MAKE COMPARISON OF HISTORIC OPERATING RESULTS AND CASH FLOWS AND BALANCES DIFFICULT OR NOT MEANINGFUL. REGULATORY



PICO leases approximately 6,354 square feet in La Jolla, California for its principal executive offices.

Physicians leases approximately 1,892 square feet of office space in Columbus, Ohio for its headquarters. Citation leases office space for a claims office in Orange County, California. Vidler and Nevada Land lease office space in Carson City, Nevada. HyperFeed leases 15,000 square feet of office space in Chicago, Illinois, approximately 11,000 square feet of office space at two sites in Aurora, Illinois, approximately 3,000 square feet of office space in New York City, approximately 1,300 square feet of office space in San Francisco, California, and approximately 50 square feet of office space in London, England. Vidler and Nevada Land hold significant investments in land, water rights and mineral rights in the southwestern United States. We continually evaluate our current and future space capacity in relation to our business needs. We believe that our existing facilities are suitable and adequate to meet our current business requirements. See “Item 1-Business-Introduction.”



The Company is subject to various litigation that arises in the ordinary course of its business. Members of PICO’s insurance group are frequently a party in claims proceedings and actions regarding insurance coverage, all of which PICO considers routine and incidental to its business. Based upon information presently available, management is of the opinion that such litigation will not have a material adverse effect on the consolidated financial position, the results of operations or cash flows of the Company.



On December 8, 2005, a Special Meeting of the Company’s Shareholders was held. The only matter presented to the Company’s shareholders was the approval of the PICO Holdings, Inc. Long-Term Incentive Plan. The Proxy Statement for the Special Meeting of shareholders was dated November 8, 2005, and was filed with the SEC on November 8, 2005. The vote was 6,789,752 votes in favor, and 3,326,625 against.


PART II



The common stock of PICO is traded on the NASDAQ National Market under the symbol “PICO.” The following table sets out the high and low daily closing sale prices as reported on the NASDAQ National Market. These reported prices reflect inter-dealer prices without adjustments for retail markups, markdowns or commissions.
  2005 2004 
  High Low High Low 
1st Quarter $27.00 $20.93 $16.60 $15.31 
2nd Quarter $29.76 $23.94 $19.04 $15.38 
3rd Quarter $35.14 $28.41 $19.04 $17.12 
4th Quarter $35.35 $32.12 $22.00 $18.57 
On March 8, 2006, the closing sale price of PICO’s common stock was $33.06 and there were approximately 642 holders of record.

PICO has not declared or paid any dividends in the last two years, and does not expect to pay any dividends in the foreseeable future.


ISSUER PURCHASES OF EQUITY SECURITIES

Period(a) Total number of shares purchased(b) Average Price Paid per Share(c) Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans or Programs (1)(d) Maximum Number (or Approximate Dollar Value) of Shares (or Units) that May Yet Be Purchased Under the Plans or Programs (1)
10/1/05 - 10/31/05--
11/1/05 - 11/30/05--
12/1/05 - 12/31/05--
(1) In October 2002, PICO’s Board of Directors authorized the repurchase of up to $10 million of PICO common stock. The stock purchases may be made from time to time at prevailing prices through open market or negotiated transactions, depending on market conditions, and will be funded from available cash. As of December 31, 2005, no stock had been repurchased under this authorization.



The following table presents the Company’s selected consolidated financial data. The information set forth below is not necessarily indicative of the results of future operations and should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Item 7 of this Form 10-K and the consolidated financial statements and the related notes thereto included elsewhere in this document.

  Year Ended December 31, 
  2005 2004 2003 2002 2001 
OPERATING RESULTS (In thousands, except share data) 
Revenues:           
Premium income earned (charged)          $(42)$
980
 
Net investment income (loss) $15,918  $9,065 $8,116  9,595  1,161 
Sale of real estate and water assets (Note 1)  124,984  10,879  19,751  15,232  17,106 
Other income  5,481  8,183  5,011  4,489  4,313 
Total revenues $146,383 $28,127 $32,878 $29,274  $23,560 
                 
Income (loss) from continuing operations $16,165 $(10,636$(13,622$1,110 $3,778 
Income from discontinued operations, net  37  78  10,384  2,834  2,317 
Cumulative effect of change in accounting principle, net           1,985  (981)
Net income (loss) $16,202 $(10,558)$(3,238)$5,929 $5,114 
PER COMMON SHARE BASIC AND DILUTED:
                
Income (loss) from continuing operations $1.25 $(0.86)$(1.10)$0.09 $0.30 
Income from discontinued operations     0.01  0.84  0.23  0.19 
Cumulative effect of change in accounting principle           0.16  (0.08)
Net income (loss) $1.25 $(0.85)$(0.26)$0.48 $0.41 
Weighted Average Shares Outstanding  12,959,029  12,368,068  12,375,933  12,375,466  12,384,682 

Note 1: See Vidler Water Company in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations”.

  Year Ended December 31, 
  2005 2004 2003 2002 2001 
FINANCIAL CONDITION
 (In thousands, except per share data) 
Assets (2) $441,773 $354,624 $330,897 $265,587 $270,742 
Unpaid losses and loss adjustment expenses $46,647 $55,944 $60,864 $52,703 $61,538 
Bank and other borrowings (2) $12,335 $18,021 $15,377 $14,636 $14,596 
Discontinued operations, net (liabilities) assets $(476$(752$(1,351$37,332  $33,266 
Total liabilities and minority interest (2) $140,421 $113,942 $99,566 $81,888 $96,110 
Shareholders' equity $300,875 $239,929 $229,160 $221,032 $207,899 
Book value per share $22.67 $19.40 $18.52 $17.86 $16.81 

Note:Book value per share is computed by dividing shareholders’ equity by the net of total shares issued less shares held as treasury shares.
(2) Excludes balances classified as discontinued operations.



INTRODUCTION

The consolidated financial statements and other portions of this Annual Report on Form 10-K for the fiscal year ended December 31, 2005, including Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” reflect the effects of:
(1)
presenting Sequoia Insurance Company and two businesses sold by HyperFeed Technologies, Inc. as discontinued operations. See Note 2 of Notes to Consolidated Financial Statements, “Discontinued Operations”; and
(2)
presenting HyperFeed Technologies, Inc. as a separate segment beginning May 15, 2003. See Note 4 of Notes To Consolidated Financial Statements, “Consolidation of HyperFeed Technologies, Inc.”


COMPANY SUMMARY, RECENT DEVELOPMENTS, AND FUTURE OUTLOOK


WATER RESOURCES AND WATER STORAGE OPERATIONS - VIDLER WATER COMPANY, INC.

BACKGROUND
We believe that continuing trends in Nevada and Arizona indicate strong future demand for Vidler’s water rights and water storage assets.

Based on figures published by the Nevada State Demographer, in the five years from 2000 to 2005, the population of Clark County, Nevada, which includes metropolitan Las Vegas, increased 28.8% to almost 1.8 million residents. Around 70,000 people are moving to the area annually. Currently Las Vegas takes most of its water supply from Lake Mead, which is primarily fed by water flows from the Colorado River. Due to the continued growth in demand for water and a prolonged drought, the level of Lake Mead is close to 50 year lows. Accordingly, Las Vegas is aggressively seeking to conserve water (e.g., rules have been introduced restricting water use in new homes) and to diversify its sources of water supply. At the same time, the increasing cost of housing in Las Vegas is leading to more rapid growth in outlying areas within commuting distance.

Over time, we believe that these factors will lead to demand for water in parts of southern Nevada where Vidler owns or has an interest in water rights, including southern Lincoln County, Sandy Valley, and Moapa Valley (Muddy River) in Clark County. If growth management initiatives are introduced in Las Vegas, this will lead to even more rapid growth in the areas surrounding metropolitan Las Vegas.

Due to the low level of Lake Mead, the states of Arizona, California, and Nevada may be required to take no more than their current allotments of water from the Colorado River. This is likely to increase demand for the net recharge credits owned by Vidler, representing water which Vidler has in storage in its Arizona Recharge Facility. We also anticipate demand from developers and other entities to store water for various purposes, including back-up water supply for dry years by developers, and assured water supply for new development projects.

The Central Arizona Water Conservation District (“CAWCD”) is a three-county water district servicing the most populous parts of the state, including Maricopa County. A 2003 CAWCD study predicted that CAWCD will be able to use 9 million acre-feet of water from Arizona’s Colorado River supplies in the years from 2004 through 2050, assuming average annual precipitation. The CAWCD also estimated that 8.6 million acre-feet will be required over the same period by the Central Arizona Groundwater Replenishment District, the authority responsible for protecting groundwater supplies in the CAWCD three-county service area. The CAWCD also estimated demand of 3.5 million acre-feet from the Arizona Water Bank for various purposes (e.g., use in Nevada), and a further 4.3 million acre-feet to replenish groundwater reserves. Based on these forecasts, Arizona appears to be faced with a shortfall of 7.4 million acre-feet of water in the period through 2050, which will require CAWCD to purchase additional supplies.

The Southern Nevada Water Authority has released an updated 2006 water resource plan (which can be viewed at www.snwa.com) to develop and deliver water supplies to meet regional growth demands. This plan consists of (1) the storage of water, including up to 1.25 million acre-feet in Arizona, combined with (2) the development of further water resources in Nevada. We believe that Vidler’s assets are favorably positioned to contribute to the water resource solutions required in Nevada.

WATER RESOURCES

Arizona

During 2005, Vidler closed on the sale of its holdings of approximately 42,000 acre-feet of groundwater rights and the related land in the Harquahala ValleyIrrigation Districtto a real estate developer. The sales price of $94.4 million represented approximately $2,200 per acre-foot of transferable Harquahala Valley Irrigation District groundwater. This transaction added approximately $55.5 million to pre-tax income in 2005.

Any new residential development in Arizona must obtain a permit from the Arizona Department of Water Resources certifying a “designated assured water supply” sufficient to sustain the development for at least 100 years. Harquahala Valley ground water meets the designation of assured water supply, but in order to be used by municipalities in the heavily populated parts of Arizona, the water must be transported from the Harquahala Valley to the end users. Arizona state legislation allows Harquahala Valley ground water to be made available as assured water supply to cities and communities in Arizona through agreements with the Central Arizona Groundwater Replenishment District.

At December 31, 2005, Vidler owned approximately 2,880 acre-feet of ground water and the related land in the Harquahala Valley. The Harquahala Valley is located in La Paz County and Maricopa County, approximately 75 miles northwest of metropolitan Phoenix, Arizona. According to census data, the population of Maricopa County increased 15.9% from 2000 to 2004, with the addition of more than 120,000 people per year. Vidler anticipates that as the boundaries of the greater Phoenix metropolitan area push out, this is likely to lead to demand for water to support growth within the Harquahala Valley itself. The remaining water can also be transferred for municipal use outside of the Harquahala Valley.

Nevada

Vidler has acquired water rights in northern Nevada through the purchase of ranch properties, filing applications for new water rights, and entering into partnering arrangements with parties owning water rights, which they wish to maximize the value of.

Nevada is the state experiencing the most rapid population growth and new home construction in the United States. The population is concentrated in southern Nevada, which includes the Las Vegas metropolitan area.

1.
Lincoln County

Vidler is working jointly with the Lincoln County Water District to locate and develop water resources in Lincoln County, Nevada. Lincoln County Water District and Vidler (“Lincoln/Vidler”) have filed applications for more than 100,000 acre-feet of water rights with the intention of supplying water for residential, commercial, and industrial use, as contemplated by the County’s approved master plan. We believe that this is the only known new source of water for Lincoln County. Vidler anticipates that up to 40,000 acre-feet of water rights will ultimately be permitted from these applications, and put to use in Lincoln County and northern Clark County.

Under the Lincoln County Land Act, more than 13,300 acres of federal land in southern Lincoln County near the fast growing City of Mesquite was offered for sale in February 2005. According to press reports, the eight parcels offered sold to various developers for approximately $47.5 million. The land was sold without environmental approvals, water, and city services, which will be required before development can proceed. Additional water supply will be required in Lincoln County if this land is to be developed.

Tule Desert Groundwater Basin
In 1998, Lincoln/Vidler filed for 14,000 acre-feet of water rights for industrial use from the Tule Desert Groundwater Basin. In November 2002, the Nevada State Engineer granted an application for 2,100 acre-feet of water rights, and ruled that another 7,244 acre-feet could be granted, but would be held in abeyance while Lincoln/Vidler pursues additional studies:
·in October 2005, Lincoln/Vidler closed on the sale of 2,100 acre-feet of water to a developer in Lincoln County for approximately $15.7 million, which represents a price of $7,500 per acre-foot. Under the agreement between the Lincoln County Water District and Vidler, the proceeds from the sale of water will be shared equally after Vidler is reimbursed for the expenses incurred in developing water resources in Lincoln County. Consequently, the net cash proceeds to Vidler were approximately $10.8 million, and the transaction added $10.1 million to revenues and $9.1 million to pre-tax income in 2005; and
·the developer has up to 10 years to purchase an additional 7,240 acre-feet of water, as and when supplies are permitted from the applications. We anticipate that the hearings to permit these applications will commence in 2006. During 2005, Vidler successfully drilled a series of production and monitoring wells to provide evidence to support the applications. The initial price of $7,500 per acre-foot will increase at 10% each year. In addition, the developer will pay a commitment fee equal to 10% of the outstanding balance of unpurchased water each year, beginning August 9, 2006, which will be applied to the purchase of water.

The Lincoln County undertaking is an example of a transaction where Vidler can partner with an entity, in this case a government entity, to provide the necessary capital and skills to commercially develop water assets, thereby providing a significant economic benefit to the partner.

Coyote Springs
Coyote Springs is a planned mixed-use development to be located approximately 40 miles north of Las Vegas, at the junction of U.S. Highway 93 and State Highway 168, partially within Lincoln County, Nevada, and partially within Clark County, Nevada. Coyote Springs is the largest privately-held property for development in southern Nevada. The developer, Coyote Springs Investment, LLC (“CSIL”), has received entitlements for approximately 50,000 residential units, 6 golf courses, and 1,200 acres of retail and commercial development on 13,100 acres in Clark County. CSIL expects to receive additional entitlements for its 29,800 acres in Lincoln County. Based on the entitlements obtained so far, it is estimated that the community will require approximately 35,000 acre-feet of permanent water. Additional water will be required as further entitlements are obtained. It is expected that full absorption of the residential units will take 25 years or more.

Pardee Homes has agreed to be the master residential developer on the first phase of the development. Construction of a golf course has begun, and CSIL has stated that the first houses should start going up in 2007.

Lincoln/Vidler have agreed to sell approximately 560 acre-feet of water rights at Meadow Valley, located in Lincoln and Clark counties, to CSIL for approximately $3.4 million, or $6,050 per acre-foot. The water rights are the subject of an existing protest, and escrow will close within 14 days of the protest being successfully resolved.

We anticipate that Lincoln County/Vidler could provide the majority of the water required for the Coyote Springs project from the jointly filed applications for water rights in various basins in Lincoln County.

Lincoln/Vidler have agreed to sell additional water to CSIL, as and when supplies are permitted from existing applications in Kane Springs, Nevada. The applications are for up to 17,375 acre-feet of water, although the actual permits received may be for a lesser quantity, which cannot be accurately predicted. It is anticipated that the applications will be heard in 2006, and that it could take up to 12 months after the hearing for the application to be permitted and the sale closed. The initial purchase price for the water will be $6,050 per acre-foot for the first year of the agreement. The price of unpurchased water will increase 10% each year on the anniversary of the agreement.

Lincoln County Power Plant Project
Vidler has entered into an option agreement to sell its interest in a project to construct a new electricity-generating plant in southern Lincoln County, for $4.8 million. It is anticipated that the new plant will supply electricity to the new communities to be developed near Mesquite, and surrounding areas, which are expected to be fast-growing. If the purchaser exercises the option to purchase the interest in the power project, the agreement is scheduled to close in 2007. The purchaser has made all of the scheduled option exercise payments to date.

This project is 100% owned by Vidler, and does not form part of the Lincoln/Vidler undertaking.

2.
Sandy Valley, Nevada

In June 2002, the Nevada State Engineer awarded Vidler 415 acre-feet of water rights near Sandy Valley, Nevada. Vidler has filed another application for 1,000 acre-feet.

The award of the permit for the 415 acre-feet of water rights has been appealed, and is currently in the Nevada Supreme Court, which we believe is the final court of appeal for the matter. Once the appeal has been concluded, we anticipate utilizing the water rights to support future growth in Sandy Valley or surrounding areas in southwestern Nevada.

3.
Muddy River water rights

The Muddy River is a perennial river fed by the Muddy Springs in southern Nevada, originating in Nevada and flowing into Lake Mead. Currently, Muddy River water rights are utilized for agriculture and electricity generation; however, in the future, we anticipate that Muddy River water rights may be utilized to support development in southern Nevada. The Southern Nevada Water Authority 2006 water resource plan identifies Muddy River water rights as a water resource to support future growth in Clark County, Nevada.

At December 31, 2005, Vidler owned approximately 221 acre-feet of Muddy River water rights, and had the right to acquire an additional 46 acre-feet.

4.
Fish Springs Ranch

In 2000, Vidler purchased a 51% interest in Fish Springs Ranch, LLC (“Fish Springs”) and a 50% interest in V&B, LLC. These companies own the Fish Springs Ranch and other properties totaling approximately 8,600 acres in Honey Lake Valley in Washoe County, 45 miles north of Reno, Nevada, and permitted water rights related to the properties, which are transferable to the Reno/Sparks area. The Fish Springs Ranch water rights have been identified as the most economical and proven new source of supply to support new growth in the north valley communities of Washoe County. According to census data, from 2000 to 2004, the population of Washoe County (including Reno/Sparks) increased by 12.1% to approximately 381,000 people.

Residential property developers have publicly stated that Reno is constrained for land. If additional water can be supplied to Reno and the surrounding areas, this will allow the development of additional land. Indicative market prices for new water delivered to Reno have appreciated strongly, commensurate with increases in the value of raw land and finished homes.  Given these market conditions, Fish Springs has determined that it would be advantageous to construct, at its own expense, a pipeline approximately 35 miles long, to convey 8,000 acre-feet of water annually from Fish Springs Ranch to a central storage tank in northern Reno to supply the northern valleys.  A Final Environmental Impact Statement for the pipeline has been completed, and the comment period has ended. Fish Springs is awaiting the Record of Decision and the granting of rights-of-way by the Department of the Interior. The total cost of the pipeline is estimated to be in the $65 million to $70 million range. We are exploring various forms of project financing.

As of March 2006, Vidler has commitments for future capital expenditures amounting to approximately $12 million, relating to the construction of a pipeline to convey water from the Fish Springs Ranch to Reno, Nevada. See Note 14 of Notes To Consolidated Financial Statements, “Commitments and Contingencies”.

5.
Big Springs Ranch and West Wendover, Nevada

In December 2003, Vidler closed on the sale of approximately 37,500 acres of deeded ranch land and the related water rights at Big Springs Ranch for $2.8 million. The ranch land was located approximately 65 miles east of Elko, in northeastern Nevada.

In December 2003, Vidler closed on the sale of approximately 6,500 acres of developable land near West Wendover, Nevada for $12 million. West Wendover is adjacent to the Nevada/Utah border in the Interstate 80 corridor. The land at West Wendover was acquired in 1999 through a land exchange with the Bureau of Land Management, under which Vidler gave up approximately 70,500 acres of ranch land at Big Springs Ranch in return for the parcels of developable land.

The assets at Big Springs Ranch and West Wendover were different in nature from Vidler’s remaining assets in Arizona and Nevada, in that the land comprised the bulk of the value of Big Springs Ranch and West Wendover, with the water rights being a lesser component.

Colorado

Vidler is completing the process of monetizing its water rights in Colorado, through sale or lease:
·in 2000, Vidler closed on the sale of various water rights and related assets to the City of Golden, Colorado for $1 million, and granted the City options to acquire other water rights over the following 15 years. The City exercised options to acquire water assets for $146,000 in 2003, $142,000 in 2004, and $143,000 in 2005. If the remaining options are exercised, the present value of the aggregate purchase price is approximately $1 million;
·in 2003, Vidler closed on the sale of the Wet Mountain water rights for $414,000;
·in 2004, Vidler closed on the sale of approximately 6.5 acre-feet of water rights for $266,000; and
·in 2005, Vidler closed on the sale of approximately 5.5 acre-feet of water rights for $261,000.


Discussions are continuing to either lease or sell the remaining water rights in Colorado, which are listed in the table in the Vidler section of Item 1, “Business.”


WATER STORAGE

1.
Vidler Arizona Recharge Facility

During 2000, Vidler completed the second stage of construction at its facility to “bank,” or store, water underground in the Harquahala Valley, and received the necessary permits to operate a full-scale water “recharge” facility. “Recharge” is the process of placing water into storage underground. Vidler has the permitted right to recharge 100,000 acre-feet of water per year at the Vidler Arizona Recharge Facility, and anticipates being able to store in excess of 1 million acre-feet of water in the aquifer underlying much of the valley. When needed, the water will be “recovered,” or removed from storage, by ground water wells.

Vidler has the only permitted, complete private water storage facility in Arizona. Given that Arizona is the only southwestern state with surplus flows of Colorado River water available for storage, we believe that Vidler’s is the only private water storage facility where it is practical to “bank,” or store, water for users in other states, which is known as “interstate banking.” Having a permitted water storage facility also allows Vidler to acquire, and store, surplus water for re-sale in future years.

The Vidler Arizona Recharge Facility is the first privately owned water storage facility for the Colorado River system, which is a primary source of water for the Lower Division States of Arizona, California, and Nevada. The water storage facility is strategically located adjacent to the Central Arizona Project (“CAP”) aqueduct, a conveyance canal running from Lake Havasu to Phoenix and Tucson. The water to be recharged will come from surplus flows of CAP water. We believe that proximity to the CAP is a competitive advantage, because it minimizes the cost of water conveyance.

Vidler is able to provide storage for users located both within Arizona and out-of-state. Potential users include industrial companies, developers, and local governmental political subdivisions in Arizona, and out-of-state users such as municipalities and water agencies in Nevada and California. The Arizona Water Banking Authority (“AWBA”) has the responsibility for intrastate and interstate storage of water for governmental entities.

Vidler has not yet stored water for customers at the facility, but the company has been recharging water for its own account since 1998, when the pilot plant was constructed. At the end of 2005, Vidler had “net recharge credits” representing approximately 90,666 acre-feet of water in storage at the facility, and had purchased or ordered a further 35,000 acre-feet for recharge in 2006. Vidler purchased the water from the CAP, and intends to resell this water at an appropriate time.

Vidler is in discussions with a number of developers and other entities which could lead to the sale of net recharge credits. We believe that the storage site, the net recharge credits, and Vidler’s remaining water rights and land in the Harquahala Valley could be an attractive combination to developers looking to secure water supply to support new development in the Harquahala Valley, which is approximately 75 miles northwest of metropolitan Phoenix, Arizona. The Vidler Arizona Recharge Facility is located in La Paz County, close to the county line with fast-growing Maricopa County. According to census data, the population of Maricopa County increased 15.9% from 2000 to 2004, with the addition of more than 120,000 people per year. Vidler anticipates that as the boundaries of the greater Phoenix metropolitan area push out, this is likely to lead to demand for water to support growth within the Harquahala Valley itself.

Vidler anticipates being able to recharge 35,000 acre-feet of water per year at the facility, and to store in excess of 1 million acre-feet of water in the aquifer. Vidler’s estimate of the aquifer’s storage volume is primarily based on a hydrological report prepared by an independent engineering firm for the Central Arizona Water Conservation District in 1990, which concluded that there is storage capacity of 3.7 million acre-feet.

Recharge and recovery capacity is critical, because it indicates how quickly water can be put into storage or recovered from storage. In wet years, it is important to have a high recharge capacity, so that as much available water as possible may be stored. In dry years, the crucial factor is the ability to recover water as quickly as possible. There is a long history of farmers recovering significant quantities of water from the Harquahala Valley ground water aquifer for irrigation purposes.


2.
Semitropic

Vidler originally had an 18.5% right to participate in the Semitropic Water Banking and Exchange Program, which operates a 1,000,000 acre-foot water storage facility at Semitropic, near the California Aqueduct, northwest of Bakersfield, California.

The strategic value of the guaranteed right to recover an amount of water from Semitropic every year -- even in drought years -- became clear to water agencies, developers, and other parties seeking a reliable water supply. For example, developers of large residential projects in Kern County and Los Angeles County must be able to demonstrate that they have sufficient back-up supplies of water in the case of a drought year before they are permitted to begin development. Accordingly, during 2001, Vidler took advantage of current demand for water storage capacity with guaranteed recovery, and began to sell its interest in Semitropic. The strategic value of the guaranteed right to recover water was again highlighted by two court decisions in February 2003 which held that developers could not rely on water from state water projects.

In May 2001, Vidler closed the sale of 29.7% of its original interest (i.e., approximately 55,000 acre-feet of water storage capacity) to The Newhall Land and Farming Company for $3.3 million, resulting in a pre-tax gain of $1.6 million.

In September 2001, Vidler closed the sale of another 54.1% of its original interest (i.e., approximately 100,000 acre-feet of water storage capacity) to the Alameda County Water District for $6.9 million, resulting in a pre-tax gain of $4.1 million.

Vidler’s remaining interest includes approximately 30,000 acre-feet of storage capacity. We have the guaranteed right to recover a minimum of approximately 2,700 acre-feet every year. In some circumstances, we have the right to recover up to approximately 6,800 acre-feet in any one year. We are considering various alternatives for the remaining interest, including sale to developers or industrial users. Currently Vidler is not storing any water at Semitropic for third parties. Vidler is required to make annual payments of approximately $530,000 under its agreement with Semitropic Water Storage District.


Other Projects
During 2005, Vidler received net cash proceeds of approximately $105.1 million from the sales in the Harquahala Valley Irrigation District and Lincoln County described above. After the payment of federal and state tax liabilities arising from these sales, which are estimated at $26 million ($24.2 million of which was paid in 2005), likely uses of Vidler’s available cash include continuing:
·to develop new supplies of water in Lincoln County, Nevada (e.g., drilling costs and legal & professional fees); and
·to investigate and evaluate water and land opportunities in the southwestern United States, which meet our risk/reward and value criteria, in particular assets which have the potential to add value to our existing assets. Vidler routinely evaluates the purchase of further water-righted properties in Arizona and Nevada. Vidler also continues to be approached by parties who are interested in obtaining a water supply, or discussing joint ventures to commercially develop water assets and/or develop water storage facilities in Arizona, Nevada, and other southwestern states.


NEVADA REAL ESTATE OPERATIONS - NEVADA LAND AND RESOURCE COMPANY, LLC

The majority of Nevada Land’s revenues come from the sale of land. In addition, various types of recurring revenue are generated from use of the Nevada Land’s properties, including leasing, easements, and mineral royalties. Nevada Land also generates interest revenue from land sales contracts where Nevada Land has provided partial financing, and from temporary investment of the proceeds of land sales.

Nevada Land recognizes revenue from land sales, and the resulting gross margin, when the sales 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 margin are recorded, Nevada Land’s reported revenues and income fluctuate from period to period, depending on the dates when specific transactions close, and land sales for any one year are not necessarily indicative of land sales in future years.

In 2005, Nevada Land generated $20.2 million in revenues from the sale of approximately 252,000 acres of former railroad land. The average sales price of $80 per acre compares to our average basis of $30 per acre in the parcels which were sold. In 2005, 69.5% of land sales were settled for cash, and Nevada Land provided partial financing for the remainder. Vendor financing is collateralized by the land conveyed, and typically is subject to a minimum 30% down payment and carries a 10% interest rate.

In 2004 and 2005, land sales were significantly higher than in preceding years. The $20.2 million in total sales in 2005 consisted of 66 individual sales transactions, reflecting demand for various types of land with various uses, including rural-suburban-urban living, desert lands, and ranching.

During 2004 and 2005, the market for many types of real estate in Nevada was buoyant. We believe that higher prices for land in and around municipalities has increased the demand for, and in some locations the price of, property 50 miles or more from municipalities, which our lands typically are. It can take a year or more to complete a land sale transaction, the timing of land sales is unpredictable, and historically the level of land sales has fluctuated from year to year. Accordingly, it should not be assumed that the higher level of sales in 2004 and 2005 can be maintained.


BUSINESS ACQUISITIONS AND FINANCING

This section describes the most significant interests in public companies included in this segment during 2005.

Excluding HyperFeed, we estimate that the common stock interests in public companies reported in this segment generated a total return (i.e., realized and unrealized gains, plus dividends received, in U.S. dollars) of approximately 19% in 2005, compared to approximately 39% in 2004, and 29% in 2003.

Notes
Conversion of Swiss Franc amounts to U.S. dollars
Income statement items (revenues, expenses, gains, and losses) for foreign operations are translated into U.S. dollars using the average foreign exchange rate for the year, and balance sheet items (assets and liabilities) are translated at the actual exchange rate at the balance sheet date.

For the convenience of the reader, the average Swiss Franc exchange rate for 2005 used for income statement items was CHF1.2450 to the U.S. dollar (2004: CHF1.2279), and the actual Swiss Franc exchange rate at December 31, 2005 used for balance sheet items was CHF1.3139 (December 31, 2004: CHF1.1395).

HyperFeed Technologies, Inc.
In 2001, 2002, and 2003 until May 15, PICO’s investment in HyperFeed common shares was recorded in this segment using the equity method under Accounting Principles Board (“APB”) Opinion No. 18, “The Equity Method of Accounting for Investments in Common Stock.” Since May 15, 2003, when HyperFeed became a consolidated subsidiary, its results have been recorded in a separate segment, “HyperFeed Technologies”.


1.
Jungfraubahn Holding AG

PICO owns 1.3 million shares of Jungfraubahn, which represents approximately 22.5% of that company. At December 31, 2005, the market (carrying) value of our holding was $42 million.

In September 2002, we increased our holding to more than 20% of Jungfraubahn, and became the largest shareholder in that company. Despite the increase in our shareholding to more than 20%, we continue to account for this investment under SFAS No. 115, “Accounting for Certain Investments in Debt and Equity Securities.” At this time, we do not believe that we have the requisite ability to exercise “significant influence” over the financial and operating policies of Jungfraubahn, and therefore do not apply the equity method of accounting.

In February 2006, Jungfraubahn issued a press release containing an initial review of 2005 operations, using Swiss accounting principles. The full text is available on Jungfraubahn’s website www.jungfraubahn.com. The contents of Jungfraubahn’s website are not incorporated in this 10-K.

In the press release, Jungfraubahn reported that passenger traffic revenues increased by 7.3% in 2005, and that the winter sports business recorded a 9.7% increase in revenues. Jungfraubahn indicated that it expected an “improved” financial result from the previous year. Jungfraubahn went on to say that the “2005/2006 winter season is showing very positive development” with a 6.9% increase in guests in the Jungfrau region through to the end of January 2006, and that forward bookings from tour operators and “the general economic environment” put the company in a “confident mood for the coming summer season.”


The release also stated that two long-serving directors will be retiring from the Jungfraubahn board in May 2006, and that Professor Dr. Thomas Bieger has the board’s support to become the new Chairman of Jungfraubahn. It was also disclosed that Jungfraubahn’s Chief Executive Officer, Mr. Walter Steuri, intends to retire in 2008.

In September 2005, Jungfraubahn announced its results for the six months to June 30, 2005. Reported revenues were CHF 60.2 million (US$48.4 million), increasing 7% year over year in Swiss francs, and exceeding CHF 60 million for the first time. Net income was CHF 7.3 million (US$5.8 million), or approximately CHF 1.24 per share (US$1.00), a 34% increase year over year.

Jungfraubahn announced its results for the 2004 financial year in June 2005, so the 2005 results will not be released until after this 10-K has been filed. Revenues were CHF 116.1 million (US$94.6 million), and net income was CHF 14.6 million (US$11.9 million), or CHF 2.5 per share (US$2.04). Jungfraubahn’s operating activities generated net cash flow of CHF 27.5 million (US$22.4 million).

At June 30, 2005, Jungfraubahn had shareholders’ equity of CHF 314.4 million or approximately CHF 53.88 (US$42.04) in book value per share. At December 31, 2005, Jungfraubahn’s stock price was CHF 42.05 (US$32.00). At December 31, 2004, Jungfraubahn’s stock price was CHF 35.5 (US$ 31.15).

2.
Other European Investments

Raetia Energie AG
PICO owns 70,556 shares in Raetia Energie, which is a producer of hydro electricity. At December 31, 2005, our investment in Raetia Energie had a basis of $3.2 million, and a market value of $18.2 million.

We first purchased this stock in 1997, increased our holding in 1998, 2002 & 2003, and sold part of our holding in 2004 and 2005. Over the life of the investment so far, we have generated a total return (i.e., realized and unrealized gains, plus dividends received in U.S. dollars) in the range of 400%.

During 2003, the carrying value of our holding appreciated by $5.8 million (almost 105%) in U.S. dollars. In 2004, our holding in Raetia generated a total return of $6.5 million (almost 58%). In 2005, our holding in Raetia generated a total return of $3 million (18%), consisting of approximately $2.8 million in realized and unrealized gains, and $236,000 in dividends.

Accu Holding AG
PICO has acquired 29,294 shares in Accu Holding, which represents a voting ownership interest of approximately 29.2%. We do not have the ability to exercise significant influence over Accu Holding’s activities, so the investment is carried at market value under SFAS No. 115.

Accu Holding manufactures batteries at two plants in Switzerland. Following a decline in demand for batteries during the 2001-2003 economic slowdown, Accu adjusted its production and cost structure. Accu is also preparing to redevelop the site of a former factory near Zurich, which could have significant value.

Our initial holding (14,164 shares) in Accu had a cash cost of approximately $5 million. During 2004, we subscribed for our full entitlement in, and partly underwrote, a 1:1 rights offering at CHF100 per share, acquiring an additional 15,130 shares for approximately $1.2 million.

The Accu stock price declined significantly during 2002, 2003, and 2004. As explained in the Business Financing and Acquisitions portion of “Results of Operations -- Years Ended December 31, 2004, 2003, and 2002,” we regularly review stocks which have declined in price from our cost. If we determine that the decline in market value is other-than-temporary, we record a charge which writes our basis in the investment down from its original cost to current carrying value, which typically is the market price at the balance sheet date when the provision is recorded. It should be noted that charges for other-than-temporary impairments do not affect shareholders’ equity or book value per share, since the after-tax decline in the market value of investments carried under SFAS No. 115 is already reflected in shareholders equity in our balance sheet. Also, the carrying (book) value of the holding does not change. If the stock price subsequently recovers, the basis does not change.

Given the extent and duration of the decline in the market price of Accu stock, we determined that the decline in Accu’s market value is also other-than-temporary. Accordingly, we recorded pre-tax charges for other-than-temporary impairment of our holding in Accu of $2.2 million in 2002, $823,000 in 2003, and $1.3 million in 2004. These charges were recorded as realized losses and reduced the basis of the investment. At December 31, 2005, the holding had a basis of $2.3 million, and a market (carrying) value of $4.2 million (CHF5.6 million).

SIHL
In 2000 and 2001, we acquired approximately 10.6% of SIHL for $4 million, through participation in a restructuring/capital raising and open market purchases. Our investment in SIHL is accounted for under SFAS No. 115.

At the time, SIHL’s core business was digital imaging, but the company had surplus property assets in and around Zurich, including a major development project known as Sihlcity. SIHL’s operations were adversely affected by the economic downturn in late 2001 and 2002, and SIHL was unable to improve profitability and reduce debt as previously expected. In 2003, SIHL sold its core business, and announced a debt restructuring with its banks. Although there is no longer a public trading market for SIHL, the agreement with the banks provides the shareholders with a partial return in certain circumstances.

Due to the extent and duration of the decline in the market value of SIHL stock, we recorded pre-tax charges for other-than-temporary impairment of our holding in SIHL of $1.6 million in 2002, and $293,000 in 2003. A $547,000 charge for permanent impairment in 2004 reduced our basis in SIHL to zero at December 31, 2004.


INSURANCE DISCLOSURES OPERATIONS IN RUN OFF

Typically, most of the revenues of an insurance company in “run off” come from investment income (i.e., interest from fixed-income securities and dividends from stocks) earned on funds held as part of their insurance business. In addition, from time to time, gains or losses are realized from the sale of investments.

In broad terms, Physicians and Citation hold cash and fixed-income securities corresponding to their loss reserves and state capital & deposit requirements, and the excess is invested in small-capitalization value stocks in the U.S. and selected foreign markets.
Given the relatively low level of interest rates, we expect to generate limited income from our bond holdings. To maintain liquidity and to guard against capital losses which would be brought on by higher interest rates, our bond holdings are concentrated in issues maturing in 5 years or less. At December 31, 2005, the duration of Citation’s bond portfolio was 3.5 years, and the duration of the Physicians bond portfolio was 2.2 years. The duration of a bond portfolio measures the amount of time it will take for the cash flows from scheduled interest payments and the maturity of bonds to equal the current value of the portfolio. Duration indicates the sensitivity of the market value of a bond portfolio to changes in interest rates. If interest rates increase, the market value of existing bonds will decline. During periods when market interest rates decline, such as 2003 and 2004, the market value of existing bonds increases. Typically, the longer the duration, the greater the sensitivity of the value of the bond portfolio to changes in interest rates. Duration of less than 5 years is generally regarded as medium term, and less than 3 years is generally regarded as short term.

Typically, we hold bonds issued by the U.S. Treasury and government-sponsored enterprises (e.g., Freddie Mac and FNMA) only to the extent required for capital under state insurance codes, or as required for deposits or collateral with state regulators. Otherwise, the bond portfolios consist almost entirely of investment-grade corporate issues with 10 or less years to maturity. At December 31, 2005, the aggregate market value of Physicians’ and Citation’s bond portfolio was within 1% of amortized cost. We do not own any municipal bonds, and did not own any corporate bonds in the telecommunications, utilities, energy trading, automotive, and auto finance sectors, which experienced difficulties in recent years.

The equities component of the insurance company portfolios is concentrated on a limited number of asset-rich small-capitalization value stocks in the U.S. These positions have been accumulated at a significant discount to our estimate of the private market value of each company’s underlying “hard” assets (i.e., land and other tangible assets). The insurance company portfolios also have a degree of international diversification through holdings of small-capitalization value stocks in New Zealand and Australia, and selected large-capitalization resource stocks with world class mining operations in foreign countries. Dividends and realized gains or losses from stocks held in the insurance company portfolios are reported in the Insurance Operations in Run Off segment.

During 2004 and 2005, we sold our holdings in the shares of Keweenaw Land Association, Limited (Pink Sheets: KEWL). Keweenaw owns approximately 155,000 acres of northern hardwood timberlands on the Upper Peninsula of Michigan, including some acreage with a higher and better use than timberland. The Keweenaw stock price increased 55% in 2003, and 35% in 2004. We had been accumulating shares of Keweenaw since 1998, and earned a total return over the life of the investment of better than 20% per annum.

On February 7, 2005, we reported on Schedule 13G that Physicians and Citation own a total of 310,000 common shares of Consolidated-Tomoka Land Co. (Amex: CTO), representing approximately 5.5% pf CTO. Consolidated-Tomoka owns approximately 12,000 acres of land in and around Daytona Beach, Florida, and a portfolio of income properties in the southeastern United States. The investment was purchased between September 2002 and February 2004 at a cash cost of $6.5 million, or approximately $20.90 per share. At December 31, 2005, the market value and carrying value of the investment was $22 million (before taxes).

No other investments of the insurance companies have reached a threshold requiring public disclosure under the securities laws of the countries where the investments are held (typically a 5% voting interest).

In 2005, we estimate that the total return on the fixed-income securities and unaffiliated common stocks in Citation’s portfolio was approximately 22.6%, including approximately 41.8% for the stocks component (70.2% of the portfolio at December 31, 2005). We estimate that the total return on the fixed-income securities and unaffiliated common stocks in Physicians’ portfolio was approximately 32.1% in 2005, including approximately 49.3% for the stocks component (74.0% of the portfolio at December 31, 2005).

In 2004, we estimate that the total return on the fixed-income securities and unaffiliated common stocks in Citation’s portfolio was approximately 22.0%, including approximately 44% for the stocks component (53.7% of the portfolio at December 31, 2004). We estimate that the total return on the fixed-income securities and unaffiliated common stocks in Physicians’ portfolio was approximately 25.5% in 2004, including approximately 41% for the stocks component (64.3% of the portfolio at December 31, 2004).
In 2003, we estimate that the total return on the fixed-income securities and unaffiliated common stocks in Citation’s portfolio was approximately 19.6%, including better than 40% for the stocks component (40.7% of the portfolio at December 31, 2003). We estimate that the total return on the fixed-income securities and unaffiliated common stocks in Physicians’ portfolio was approximately 21.5% in 2003, including better than 39% for the stocks component (53.7% of the portfolio at December 31, 2003).

Over time, the investment assets and investment income of a “run off” insurance company are expected to decline, as fixed-income investments mature or are sold to provide the funds to pay down the company’s claims reserves. However, since the sale of Sequoia closed on March 31, 2003, the investment assets of the Insurance Operations in Run Off segment have actually increased, as appreciation in stocks has more than offset the maturity or sale of fixed-income securities to pay claims.

The financial results of insurance companies in “run off” can be volatile if there is favorable or unfavorable development in the loss reserves. For example, in 2003 and 2005 Physicians recorded significant income from favorable reserve development, but Citation recorded a significant loss in 2003, partly due to increases in the workers’ compensation and property and casualty insurance loss reserves.

Physicians Insurance Company of Ohio

Physicians wrote its last policy in 1995; however, claims can be filed until 2017 resulting from events allegedly occurring during the period when Physicians provided coverage.

By its nature, medical professional liability insurance involves a relatively small number (frequency) of relatively large (severity) claims. We have purchased excess of loss reinsurance to limit our potential losses. The amount of risk we have retained on each claim varies depending on the accident year but, in general, we are liable for the first $1 million to $2 million per claim.

Due to the long “tail” (i.e., period of time between the occurrence of the alleged event giving rise to the claim, and the claim being reported to us) in the medical professional liability insurance business, it is difficult to accurately quantify future claims liabilities and establish appropriate loss reserves. Our loss reserves are reviewed by management every quarter and are assessed in the fourth quarter of each year, based on independent actuarial analysis of past, current, and projected claims trends in the 12 months ended September 30 of each year.

At December 31, 2005, medical professional liability reserves totaled $11.9 million, net of reinsurance, compared to $16.4 million net of reinsurance at December 31, 2004, and $19.6 million net of reinsurance at December 31, 2003.


PHYSICIANS INSURANCE COMPANY OF OHIO -- LOSS AND LOSS ADJUSTMENT EXPENSE RESERVES

  Year Ended December 31, 
  2005 2004 2003 
        
Direct Reserves $12.9 million $19.6 million $23.6 million 
Ceded Reserves                           ( 1.0)                           ( 3.2)                     (4.0) 
Net Medical Professional Liability Insurance Reserves $11.9 million $16.4 million $19.6 million 

At December 31, 2005, our direct reserves, or reserves before reinsurance, essentially equaled the independent actuary’s best estimate. The independent actuary is continually reviewing our claims experience and projected claims trends in order to arrive at the most accurate estimate possible. The independent actuary did not explicitly forecast a range of reserves, but arrived at a best estimate through weighting the results of five different projection methods for each accident year, and in total. Under the different projection methods, the lowest direct reserve calculation was approximately $9.2 million, and the highest direct reserve calculation was $12.9 million. Consequently, our loss reserves could differ depending on the particular method of calculation chosen.

Changes in assumptions about future claim trends, and the cost of handling claims, could lead to significant increases and decreases in our loss reserves. When loss reserves are reduced, this is referred to as favorable development. If loss reserves are increased, the development is referred to as adverse or unfavorable.

At December 31, 2005, approximately $3.1 million, or 24% of our direct reserves were case reserves, which are the loss reserves established when a claim is reported to us. Our provision for incurred but not reported claims (“IBNR”, i.e., the event giving rise to the claim has allegedly occurred, but the claim has not been reported to us) was $6.3 million, or 49% of our direct reserves. The loss adjustment expense reserves, totaling $3.5 million, or 27% of direct reserves, recognize the cost of handling claims over the next 11 years while Physicians’ loss reserves run off.

Over the past 3 years, the trends in open claims and claims paid have been:

  Year Ended December 31, 
  2005 2004 2003 
        
Open claims at the start of the year  41  68  144 
New claims reported during the year  6  11  22 
Claims closed during the year  -19  -38  -98 
Open claims at the end of the year  28  41  68 
           
Total claims closed during the year  19  38  98 
Claims closed with no indemnity payment  -16  -22  -91 
Claims closed with an indemnity payment  3  16  7 
           
Net indemnity payments $878,000 $1,778,000 $3,048,000 
Net loss adjustment expense payments  499,000  898,000  912,000 
Total claims payments during the year $1,377,000 $2,676,000 $3,960,000 
           
Average indemnity payment $293,000 $111,000 $435,000 


PHYSICIANS INSURANCE COMPANY OF OHIO - CHANGE IN LOSS AND LOSS ADJUSTMENT EXPENSE RESERVES

  Year Ended December 31, 
  2005 2004 2003 
        
Beginning Reserves $16.4 million $19.6 million $30.3 million 
Loss & Loss Adjustment Expense Payments                           ( 1.4)                           ( 2.7)                           ( 4.0) 
Re-estimation of Prior Year Loss Reserves                           ( 3.1)                           ( 0.5)                           ( 6.7) 
Net Medical Professional Liability Insurance Reserves $11.9 million $16.4 million $19.6 million 
           
Re-estimation as a percentage of undiscounted beginning reserves                                   - 19%                                     - 3%                                   - 22% 

During 2005, our medical professional liability insurance claims reserves, net of reinsurance, decreased by $4.5 million, from $16.4 million to $11.9 million. Claims and loss adjustment expense payments for the year were approximately $1.4 million, accounting for 31% of the net decrease in reserves. During 2005, Physicians continued to experience favorable trends in the “severity” (size) of claims, and, to a lesser extent, the “frequency” (number) of claims. Consequently, independent actuarial analysis of Physicians’ loss reserves concluded that Physicians’ reserves against claims were significantly greater than the actuary’s projections of future claims payments. Reserves were reduced in 10 of Physicians’ 20 accident years from 1976 until 1996, resulting in a net reduction of approximately $3.1 million, or 19.2% of reserves at the start of the year.


The net reduction in reserves of approximately $3.1 million was primarily due to a decrease in claims severity, and was recorded in Physicians’ reserve for IBNR claims.

As shown in the table above, in 2005 Physicians made $878,000 in net indemnity payments to close 3 cases, an average indemnity payment of $293,000 per case. Total claims payments in 2005 were less than anticipated. At December 31, 2005, the average case reserve per open claim was approximately $111,000.

There were no changes in key actuarial assumption in 2005. It should be noted that such actuarial analyses involves estimation of future trends in many factors which may vary significantly from expectation, which could lead to further reserve adjustments -- either increases or decreases -- in future years. See “Critical Accounting Policies” and “Risk Factors.”

During 2004, our medical professional liability insurance claims reserves, net of reinsurance, decreased by $3.2 million, from $19.6 million to $16.4 million. Claims and loss adjustment expense payments for the year were approximately $2.7 million, accounting for 84% of the net decrease in reserves. During 2004, Physicians continued to experience favorable trends in the “severity” of claims, and, to a lesser extent, the “frequency” of claims. Consequently, independent actuarial analysis of Physicians’ loss reserves concluded that Physicians’ reserves against claims were greater than the actuary’s projections of future claims payments. Reserves were reduced in 16 of Physicians’ 20 accident years from 1976 until 1996, resulting in a net reduction of approximately $489,000, or 2.5% of reserves at the start of the year.

In 2004 Physicians made $1.8 million in net indemnity payments to close 16 cases, an average indemnity payment of $111,000 per case. Total claims payments in 2004 were less than anticipated, and the average indemnity payment returned to more typical levels than in 2003. There were no changes in key actuarial assumption in 2004.

During 2003, our medical professional liability insurance claims reserves, net of reinsurance, decreased by $10.7 million, from $30.3 million to $19.6 million. Claims and loss adjustment expense payments for the year were approximately $4 million, accounting for 37% of the net decrease in reserves. During 2003, Physicians continued to experience favorable trends in the “severity” of claims, and, to a lesser extent, the “frequency” of claims. Consequently, independent actuarial analysis of Physicians’ loss reserves concluded that Physicians’ reserves against claims were significantly greater than the actuary’s projections of future claims payments. Reserves were reduced in all of Physicians’ 20 accident years from 1976 until 1996, resulting in a net reduction of approximately $6.7 million, or 22.1% of reserves at the start of the year.

In 2003 Physicians made $3 million in net indemnity payments to close 7 cases, an average indemnity payment of $435,000 per case. Although total claims payments in 2003 were less than anticipated, the average indemnity payment was higher than in 2002 and our future projection, due to the mix of cases closed in 2003. There were no changes in key actuarial assumptions in 2003.

Since it is almost ten years since Physicians wrote its last policy, and the reserves for direct IBNR claims and unallocated loss adjustment expenses at December 31, 2005 are approximately $9.5 million ($8.8 million net of reinsurance), it is conceivable that further favorable development could be recorded in future years if claims trends remain favorable, particularly claims severity. However, given that favorable development of $3.1 million was recorded in 2005, there is less potential for favorable development in future years than there has been in the past, particularly as Physicians’ remaining claims reserves get smaller. In addition, we caution (1) that claims can be reported until 2017, and (2) against over-emphasizing claims count statistics -- for example, the last claims to be resolved by a “run off” insurance company could be the most complex and the most severe.

Citation Insurance Company

Property and Casualty Insurance Loss Reserves
Citation went into “run off” from January 1, 2001. At December 31, 2005, after five years of “run off,” Citation had $6.4 million in property and casualty insurance loss and loss adjustment expense reserves, after reinsurance.

Approximately 99.4% of Citation’s net property and casualty insurance reserves are related to one line of business, artisans/contractors liability insurance. The remaining 0.6% is comprised of commercial property and casualty insurance policies, all of which expired in 2001. As a general rule, based on state statutes of limitations, we believe that no new commercial property and casualty insurance claims can be filed in California and Arizona, although in these states claims filing periods may be extended in certain limited circumstances.

We have purchased excess of loss reinsurance to limit our potential losses. The amount of risk we have retained on each claim varies depending on the accident year, but we can be liable for the first $50,000 to $250,000 per claim.

Citation wrote artisans/contractors insurance until 1995, the year before Physicians merged with Citation’s parent company. No artisans/contractors business was renewed after the merger. Artisans/contractors liability insurance has been a problematic line of business for all insurers who offered this type of coverage in California during the 1980’s and 1990’s. California experienced a severe recession in the early 1990’s, which caused a steep downturn in real estate values. In an attempt to improve their position, many homeowners filed claims against developers of new home communities and condominiums, and related parties such as general contractors, for alleged construction defects. Citation’s average loss ratio (i.e., the cost of making provision to pay claims as a percentage of earned premium) for all years from 1989 to 1995 for this insurance coverage is over 375%. The nature of this line of business is that we receive a large number (high frequency) of small (low severity) claims.

Citation primarily insured subcontractors, and only rarely insured general contractors. A large percentage of the claims received in 2003, 2004, and 2005 related to Additional Insured Endorsements (“AIE”). In general, these represent claims from general contractors who were not direct policyholders of Citation’s, but were named as insureds on policies issued to Citation’s subcontractor policyholders. Most of Citation’s subcontractor insureds are not initially named as defendants in construction defect law suits, but are drawn into litigation against general contractors, typically when the general contractor’s legal expenses reach the limit of their own insurance policy. The courts have held that subcontractors who performed only a minor role in the construction can be held in on complicated litigation against general contractors. Accordingly, the cost of legal defenses can be as significant as claims payments. Typically, AIE claims are shared among more than one subcontractor and more than one insurance carrier. This reduces the expense to any one carrier, so AIE claims typically involve smaller claims payments than claims from actual policyholders.

Although Citation wrote its last artisans/contractors policy in 1995 and the statute of limitations in California is 10 years, this can be extended in some situations.

Over the past 3 years, the trends in open claims and claims paid in the artisans/contractors line of business has been:

  Year Ended December 31, 
  2005 2004 2003 
        
Open claims at the start of the year  217  317  290 
New claims reported during the year  101  183  290 
Claims closed during the year  -169  -283  -263 
Open claims at the end of the year  149  217  317 
           
Total claims closed during the year  169  283  263 
Claims closed with no payment  -77  -158  -106 
Claims closed with LAE payment only (no indemnity payment)  -17  -39  - 40 
Claims closed with an indemnity payment  75  86  117 

Due to the long “tail” (i.e., period between the occurrence of the alleged event giving rise to the claim and the claim being reported to us) in the artisans/contractors line of business, it is difficult to accurately quantify future claims liabilities and establish appropriate loss reserves. Our loss reserves are regularly reviewed, and certified annually by an independent actuarial firm, as required by California state law. The independent actuary analyzes past, current, and projected claims trends for all active accident years, using several forecasting methods. The appointed actuary believes this will result in more accurate reserve estimates than using a single method. We typically book our reserves to the actuary’s best estimate.

Changes in assumptions about future claim trends and the cost of handling claims can lead to significant increases and decreases in our property and casualty loss reserves. Due to the large number of claims received in the artisans/contractors line of business in 1997, 1998, and 1999, Citation was forced to increase its reserves in each of those years. In 2000 and 2001, reserve changes were less than 1% of beginning reserves. In 2002, Citation reduced reserves by $889,000, representing a 4.6% change in beginning reserves, primarily due to reduced severity of claims as described in preceding paragraphs. However, in 2003 Citation increased reserves by $847,000, or 5.8% of beginning reserves, primarily due to the increased number of new claims received (higher frequency). In 2004, we reduced reserves by $254,000, or 1.9% of beginning reserves, principally due to reduced severity of claims. In 2005, we reduced reserves by $1.8 million, or 18% of beginning reserves, principally due to reduced severity of claims.


There were no changes in key actuarial assumptions during 2003, 2004, and 2005. See “Critical Accounting Policies” and “Risk Factors.”

At December 31, 2005, Citation’s net property and casualty reserves were carried at $6.4 million, approximately equal to the actuary’s best estimate.


CITATION INSURANCE COMPANY - PROPERTY & CASUALTY INSURANCE LOSS AND LOSS ADJUSTMENT EXPENSE RESERVES
 
        
  December 31, 2005 December 31, 2004 December 31, 2003 
Direct Reserves $8.2 million $11.6 million $14.8 million 
Ceded Reserves                           ( 1.8)                           ( 1.4)                           ( 1.5) 
Net Reserves $6.4 million $10.2 million $13.3 million 

At December 31, 2005, $0.6 million of Citation’s net property and casualty reserves (approximately 10%) were case reserves, $2.6 million represented provision for IBNR claims (40%), and the loss adjustment expense reserve was $3.2 million (50%).

The change in Citation’s reserves over the past 3 years has resulted from:

CITATION INSURANCE COMPANY - CHANGE IN PROPERTY & CASUALTY INSURANCE LOSS AND LOSS ADJUSTMENT EXPENSE RESERVES

  Year Ended December 31, 
  2005 2004 2003 
        
Beginning Reserves $10.2 million $13.3 million $14.6 million 
Loss & Loss Adjustment Expense Payments                           ( 2.0)                           ( 2.8)                           ( 2.2) 
Re-estimation of Prior Year Loss Reserves                           ( 1.8)                            (0.3)                             0.9 
Net Property & Casualty Insurance Reserves $6.4 million $10.2 million $13.3 million 
           
Re-estimation as a percentage of beginning reserves                                  - 18%                                     - 2%                                   + 6% 

During 2005, Citation’s property and casualty insurance claims reserves, net of reinsurance, decreased from $10.2 million to $6.4 million. Claims payments for the year were approximately $2 million. Following actuarial analysis during 2005, Citation decreased loss reserves by approximately $1.8 million due to favorable development in the artisans/contractors book of business resulting from decreased claims severity.  

During 2004, Citation’s property and casualty insurance claims reserves, net of reinsurance, decreased from $13.3 million to $10.2 million. Claims payments for the year were $2.8 million. Following actuarial analysis during 2004, Citation decreased loss reserves by $254,000 due to favorable development in the artisans/contractors book of business resulting from decreased claims severity.  

During 2003, Citation’s property and casualty insurance claims reserves, net of reinsurance, decreased from $14.6 million to $13.3 million. Claims payments for the year were $2.2 million. Following actuarial analysis during 2003, Citation increased loss reserves by $847,000 due to adverse development in the artisans/contractors book of business resulting from an increased frequency of new claims.  

It should be noted that such actuarial analyses involves estimation of future trends in many factors which may vary significantly from expectation, which could lead to further reserve adjustments--either increases or decreases--in future years.

Workers’ Compensation Loss Reserves
Until 1997, Citation was a direct writer of workers’ compensation insurance in California, Arizona, and Nevada. In 1997, Citation reinsured 100% of its workers’ compensation business with a subsidiary, Citation National Insurance Company (“CNIC”), and sold CNIC to Fremont Indemnity Company (“Fremont”). As part of the sale of CNIC, all assets and liabilities, including the assets which corresponded to the workers’ compensation reserves reinsured with CNIC, and all records, computer systems, policy files, and reinsurance arrangements were transferred to Fremont. Fremont merged CNIC into Fremont, and administered and paid all of the workers’ compensation claims which had been sold to it. From 1997 until the second quarter of 2003, Citation booked the losses reported by Fremont but recorded an equal and offsetting reinsurance recoverable from Fremont (as an admitted reinsurer) for all losses and loss adjustment expenses. This resulted in no net impact on Citation’s reserves and financial statements.


On July 2, 2003, the California Superior Court placed Fremont in liquidation. Since Fremont is in liquidation, it was no longer an admitted reinsurance company under the statutory basis of insurance accounting. Consequently, Citation reversed the reinsurance recoverable from Fremont of approximately $7.5 million in its financial statements prepared on both the statutory basis and GAAP basis in the second quarter of 2003.

Workers’ compensation has been a problematic line of business for all insurers who offered this type of coverage in California during the 1990’s. We believe that this is primarily due to claims costs escalating at a greater than anticipated rate, in particular for medical care.

The nature of this line of business is that we receive a relatively small number (low frequency) of relatively large (high severity) claims. Although the last of Citation’s workers’ compensation policies expired in 1998, new workers’ compensation claims can still be filed for events which allegedly occurred during the term of the policy. The state statute of limitations is 10 years, but claim filing periods may be extended in some circumstances. At December 31, 2005, Citation had 232 open workers’ compensation claims, compared to 227 open claims at both December 31, 2004 and December 31, 2003. During 2005, 33 new claims were filed, 22 claims were reopened, and 50 claims were closed. During 2004, 17 claims were closed during the year, which were offset by an additional 17 claims being allocated to Citation from the Fremont liquidation. Since Citation ceased writing workers’ compensation coverage 6 years ago, most of the claims which are still open tend to be severe, and likely to lead to claims payments for a prolonged period of time.

At December 31, 2005, Citation had workers’ compensation reserves of $25.6 million before reinsurance, and $12.5 million after reinsurance. Citation purchased excess reinsurance to limit its potential losses in this line of business. In general, we have retained the risk on the first $150,000 to $250,000 per claim. The workers’ compensation reserves are reinsured with General Reinsurance, a subsidiary of Berkshire Hathaway, Inc.

CITATION INSURANCE COMPANY - WORKERS’ COMPENSATIONLOSS AND LOSS ADJUSTMENT EXPENSE RESERVES

  December 31, 
  2005 2004 2003 
        
Direct Reserves $25.6 million $24.8 million $22.4 million 
Ceded Reserves                          (13.1)                          (12.7)                          (11.9) 
Net Reserves $12.5 million $12.1 million $10.5 million 

It is difficult to accurately quantify future claims liabilities and establish appropriate loss reserves in the workers’ compensation line of business due to:
·the long “tail” (i.e., period between the occurrence of the alleged event giving rise to the claim and the claim being reported to us); and
·the extended period over which policy benefits are paid.
Our workers’ compensation loss reserves were reviewed at December 31, 2005 by an independent actuary who issues an opinion annually, as required by California state law. The independent actuary analyzes past, current, and projected claims trends for all active accident years, using several forecasting methods. The appointed actuary believes this will result in more accurate reserve estimates than using a single method. Our reserves are typically booked at close to the actuary’s best estimate. Until 2003, we booked the direct reserves and an equal offsetting reinsurance recoverable based on reports provided by Fremont.

Changes in assumptions about future trends in claims and the cost of handling claims can lead to significant increases and decreases in our loss reserves.

Following independent actuarial analysis at September 30, 2005 and December 31, 2005, Citation increased its workers’ compensation net loss reserves by $1.3 million, or approximately 11% of $12.1 million in net reserves at the start of 2005. This adverse development was primarily due to an increase in projected medical care costs, and an adjustment to reinsurance. There can be no assurance that our workers’ compensation reserves will not develop adversely in the future, particularly if medical care costs continue to inflate.

Following independent actuarial analysis, during 2004 Citation increased its workers’ compensation net loss reserves by $1.2 million, or approximately 11.4% of net reserves at the start of 2004. The adverse development was primarily due to an increase in projected medical care costs.

When the Fremont reinsurance recoverable was reversed after Fremont went into liquidation in 2003, our workers’ compensation reserves were approximately $7.5 million. Following independent actuarial analysis at September 30, 2003 and December 31, 2003, Citation increased its workers’ compensation net loss reserves by $3 million, or approximately 39.9% of the initial $7.5 million in reserves. This adverse development was primarily as a result of setting reserves at a more realistic level than Fremont had previously carried them based on management and actuarial review and assessment of claims files after Fremont had been placed in liquidation.
The change in Citation’s workers’ compensation reserves during 2003, 2004, and 2005 resulted from:

CITATION INSURANCE COMPANY - CHANGE IN WORKERS’ COMPENSATION LOSS AND LOSS ADJUSTMENT EXPENSE RESERVES

  
Year Ended December 31,
 
  
2005
 
2004
 
2003
 
        
Beginning Net Reserves $12.1 million $10.5 million $0.0 million 
Reversal of reinsurance recoverable from Fremont                                   7.5 
Adjusted Beginning Net Reserves $12.1 million $10.5 million $7.5 million 
Loss and Loss Adjustment Expense liability / (payments)                            (0.9)                             0.4    
Re-estimation of Prior Year Loss Reserves                             1.3                             1.2                             3.0 
Net Workers’ Compensation Insurance Reserves $12.5 million $12.1 million $10.5 million 
           
Re-estimation as a percentage of adjusted beginning reserves                                   + 11%                                   + 11%                                   + 40% 

There were no changes in key actuarial assumptions during 2003, 2004, and 2005. It should be noted that such actuarial analyses involves estimation of future trends in many factors which may vary significantly from expectation, which could lead to further reserve adjustments--either increases or decreases--in future years. See “Critical Accounting Policies” and “Risk Factors.”

At December 31, 2005, Citation’s net workers’ compensation reserves were carried at $12.5 million, approximately equal to the actuary’s best estimate. Approximately $3.1 million of Citation’s net workers’ compensation reserves (25%) were case reserves, $5.9 million represented provision for IBNR claims (47%), and the unallocated loss adjustment expense reserve was $3.5 million (28%).

Until September 30, 2004, the workers’ compensation claims were handled by Fremont and the California Insurance Guarantee Association. Since then, the workers’ compensation claims have been handled by a third-party administrator on Citation’s behalf.


HYPERFEED TECHNOLOGIES

During 2003, HyperFeed continued to restructure its operations, which culminated in the sale of two business units:
·in June 2003, HyperFeed sold its retail trading business, PCQuote.com, for approximately $370,000; and
·in November 2003, HyperFeed sold its consolidated market data feed service contracts for $8.5 million. HyperFeed recorded a gain on the sale of $6.6 million in 2003.
Through these disposals, HyperFeed exited two low margin businesses, and replaced the business with revenues from providing products and services to the purchasers.

Now, HyperFeed is purely a developer and provider of software, ticker plant technologies, and managed services to the financial markets industry.

During 2004 and 2005, PICO loaned money to HyperFeed under a secured convertible promissory note agreement. On November 1, 2005, PICO elected to convert the $6.2 million in principal and interest outstanding on the note into 4,546,479 newly-issued common shares of HyperFeed, which represents a conversion price of $1.36 per share. PICO now owns 6,117,790 HyperFeed common shares, representing a voting ownership of approximately 80.1%.

For 2005, HyperFeed generated revenues of $4.3 million and a reported net loss of $9.2 million. At December 31, 2005, HyperFeed had $302,000 in cash and cash equivalents, and $500,000 in external borrowings (i.e., excluding borrowings from PICO).

As of December 31, 2005, PICO had advanced $810,000 to HyperFeed in the form of a promissory note. It is anticipated that this promissory note, as well as subsequent promissory notes issued in 2006 and additional funding, will be consolidated into a secured convertible promissory note agreement later in 2006.



CRITICAL ACCOUNTING POLICIES

PICO’s principal assets and activities comprise:
·Vidler and Nevada Land’s land, water rights, and water storage operations;
·the “run off” of property and casualty insurance, workers’ compensation, and medical professional liability insurance loss reserves;
·business acquisitions and financing; and
·HyperFeed Technologies.

Following is a description of what we believe to be the critical accounting policies affecting PICO, and how we apply these policies.

1.
Estimation of reserves in insurance companies

We must estimate future claims and ensure that our loss reserves are adequate to pay those claims. This process requires us to make estimates about future events. The accuracy of these estimates will not be known for many years. For example, part of our claims reserves cover “IBNR” claims (i.e., the event giving rise to the claim has occurred, but the claim has not been reported to us). In other words, in the case of IBNR claims, we must provide for claims which we do not know about yet.

At December 31, 2005, the loss reserves, net of reinsurance, of our two insurance subsidiaries were:
·Citation, $18.9 million; and
·Physicians, $11.9 million. Physicians wrote its last policy in 1995. However, under current law, claims can be made until 2017 for events which allegedly occurred during the periods when we provided insurance coverage to medical professionals.

Our medical professional liability insurance reserves are certified annually by an independent actuary, as required by Ohio insurance law. Actuarial estimates of our future claims obligations have been volatile. Net reserves were reduced by $3.1 million in 2005, $503,000 in 2004 and $6.7 million in 2003, after independent actuarial studies concluded that Physicians’ claims reserves were greater than projected claims payments. There can be no assurance that our claims reserves are adequate and that there will not be reserve increases or decreases in the future.

Citation’s loss reserves are reviewed regularly, and certified annually by an independent actuarial firm, as required by California insurance law.

In addition, we have to make judgments about the recoverability of reinsurance owed to us on direct claims reserves. In making this assessment, we carefully review the creditworthiness of reinsurers, as well as relying on schedules in statutory filings with state Departments of Insurance which show separate deposits held as assets for the benefit of reinsureds.

As discussed on preceding pages in the “Insurance Operations in Run Off” section of Item 7, during 2003 we booked a reversal of reinsurance recoverable of approximately $7.5 million from Fremont Indemnity Company, which fully reserved against the reinsurance recoverable from Fremont.

See “Insurance Operations In Run Off” and “Regulatory Insurance Disclosure” in Item 7.

2.
Carrying value of long-lived assets

Our principal long-lived assets are real estate and water assets owned by Vidler, and real estate at Nevada Land. At December 31, 2005, the total carrying value of real estate and water assets was $76.9 million, or 17% of PICO’s total assets.

As required by GAAP, our long-lived assets are reviewed regularly to ensure that the estimated future undiscounted cash flows from these assets will at least recover their carrying value. Our management conducts these reviews utilizing the most recent information available; however, the review process inevitably involves the significant use of estimates and assumptions, especially the estimated market values of our real estate and water assets.

In our water resource and water storage business, we develop some projects and assets from scratch. This can require cash outflows (e.g., to drill wells to prove that water is available) in situations where there is no guarantee that the project will ultimately be commercially viable. If we determine that it is probable that the project will be commercially viable, the costs of developing the asset are capitalized (i.e., recorded as an asset in our balance sheet, rather than being charged as an expense). If the project ends up being viable, in the case of a sale, the capitalized costs are included in the cost of real estate and water assets sold and applied against the purchase price. In the case of a lease transaction, or when the asset is fully developed and ready for use, the capitalized costs are amortized (i.e., charged as an expense in our income statement) and match any related revenues.

If we determine that the carrying value of an asset cannot be justified by the forecast future cash flows of that asset, the carrying value of the asset is written down to fair value immediately, in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” and SFAS No. 142, “Goodwill and Other Intangible Assets.”

3.
Accounting for investments and investments in unconsolidated affiliates

At December 31, 2005, PICO and its subsidiaries held equities with a carrying value of approximately $195 million. These holdings are primarily small-capitalization value stocks listed in the U.S., Switzerland, New Zealand, and Australia. Depending on the circumstances, and our judgment about the level of our involvement with the investee company, we apply one of two accounting policies.

In the case of most holdings, we apply SFAS No. 115, “Accounting for Certain Investments in Debt and Equity Securities.” Under this method, the investment is carried at market value in our balance sheet, with unrealized gains or losses being included in shareholders’ equity, and the only income recorded being from dividends.

In the case of investments where we have the ability to exercise significant influence over the company we have invested in, we apply the equity method under Accounting Principles Board (“APB”) Opinion No. 18, “The Equity Method of Accounting for Investments in Common Stock.”

The application of the equity method (APB No. 18) to an investment may result in a different outcome in our financial statements than market value accounting (SFAS No. 115). The most significant difference between the two policies is that, under the equity method, we include our proportionate share of the investee’s earnings or losses in our statement of operations, and dividends received are used to reduce the carrying value of the investment in our balance sheet. Under market value accounting, the only income recorded is from dividends received.

The assessment of what constitutes the ability to exercise “significant influence” requires our management to make significant judgments. We look at various factors in making this determination. These include our percentage ownership of voting stock, whether or not we have representation on the investee company’s Board of Directors, transactions between us and the investee, the ability to obtain timely quarterly financial information, and whether PICO management can affect the operating and financial policies of the investee company. When we conclude that we have this kind of influence, we adopt the equity method and change all of our previously reported results from the investee to show the investment as if we had applied equity accounting from the date of our first purchase. This adds volatility to our reported results.

The use of market value accounting or the equity method can result in significantly different carrying values at specific balance sheet dates, and contributions to our statement of operations in any individual year during the course of the investment. The total impact of the investment on PICO’s shareholders’ equity over the entire life of the investment will be the same whichever method is adopted.

For equity and debt securities accounted for under SFAS No. 115 which are in an unrealized loss position in local currency terms, we regularly review whether the decline in market value is other-than-temporary. In general, this review requires management to consider several factors, including specific adverse conditions affecting the investee’s business and industry, the financial condition of the investee, the long-term prospects of the investee, and the extent and duration of the decline in market value of the investee. Accordingly, management has to make important assumptions regarding our intent and ability to hold the security, and our assessment of the overall worth of the security. Risks and uncertainties in our methodology for reviewing unrealized losses for other-than-temporary declines include our judgments regarding the overall worth of the issuer and its long-term prospects, and our ability to realize on our assessment of the overall worth of the business.

In a subsequent quarterly review, if we conclude that an unrealized loss previously determined to be temporary is other-than-temporary, an impairment loss will be recorded. The other-than-temporary impairment charge will have no impact on shareholders’ equity or book value per share, as the decline in market value will already have been recorded through shareholders’ equity. However, there will be an impact on reported income before and after tax and on our earnings per share, due to recognition of the unrealized loss and related tax effects. When a charge for other-than-temporary impairment is recorded, our basis in the security is decreased. Consequently, if the market value of the security later recovers and we sell the security, a correspondingly greater gain will be recorded in the statement of operations.

These accounting treatments for investments and investments in unconsolidated affiliates add volatility to our statements of operations.

4.
Revenue recognition

We recognize revenue on the sale of real estate and water rights based on the guidance of FASB No. 66, “Accounting for Sales of Real Estate”. Specifically, we recognize revenue when:
(a)there is a legally binding sale contract;
(b)the profit is determinable (i.e., the collectability of the sales price is reasonably assured, or any amount that will not be collectable can be estimated);
(c)the earnings process is virtually complete (i.e., we are not obliged to perform significant activities after the sale to earn the profit, meaning we have transferred all risks and rewards to the buyer); and
(d)the buyer’s initial and continuing investment are sufficient to demonstrate a commitment to pay for the property.

Unless all of these conditions are met, we use the deposit method of accounting. Under the deposit method of accounting, until the conditions to fully recognize a sale are met, payments received from the buyer are recorded as liabilities and no gain is recognized


RESULTS OF OPERATIONS -- YEARS ENDED DECEMBER 31, 2005, 2004, AND 2003


Shareholders’ Equity
At December 31, 2005, PICO had shareholders’ equity of $300.9 million ($22.67 per share), compared to $239.9 million ($19.40 per share) at the end of 2004, and $229.2 million ($18.52 per share) at the end of 2003. Book value per share increased 16.9% in 2005, compared to increases of 4.8% in 2004, and 3.7% in 2003.

The principal factors leading to the $61 million increase in shareholders’ equity during 2005 were:
·the year’s $16.2 million in net income;
·a $24.2 million net increase in unrealized appreciation in investments after-tax; and
·the issuance of 905,000 new shares for net proceeds of $21.4 million.

The principal factors leading to the $10.7 million increase in shareholders’ equity during 2004 were a net increase of $21.1 million in unrealized appreciation in investments, which was partially offset by a $10.6 million net loss.

Balance Sheet
Total assets at December 31, 2005 were $441.8 million, compared to $354.6 million at December 31, 2004. During 2005, total assets increased by $87.2 million, principally due to the receipt of the proceeds from sale of water rights and land at prices significantly higher than the previous carrying value of the assets sold.

At December 31, 2005, on a consolidated basis, available for sale equity securities showed a net unrealized gain of $66.1 million after tax. This total consists of approximately $66.2 million in gains, partially offset by $136,000 in losses.

Total liabilities at December 31, 2005 were $139.9 million, compared to $112.4 million at December 31, 2004. During 2005, total liabilities increased by $27.5 million, primarily due to a net $27 million increase in deferred compensation liability at December 31, 2005 over the SAR liability at December 31, 2004, which resulted from the amendment of the 2003 SAR program in September 2005. See “Business Acquisitions and Financing” segment analysis later in Item 7.

Net Income
PICO reported net income of $16.2 million in 2005 ($1.25 per share), compared to a net loss of $10.6 million ($0.85 per share) in 2004, and a net loss of $3.2 million ($0.26 per share) in 2003.

2005
The $16.2 million ($1.25 per share) in net income consisted of:
·income before taxes and minority interest of $32.9 million from continuing operations;
·the add-back of $1.2 million in minority interest, which reflects the interest of outside shareholders in the net losses of subsidiaries which are less than 100%-owned by PICO (principally HyperFeed); and
·income from discontinued operations of $37,000 after tax; which were partially offset by
·an $18 million provision for income taxes.

2004
The net loss of $10.6 million ($0.85 per share) consisted of:
·a $16.9 million loss before taxes and minority interest from continuing operations; which was partially offset by
·a $3 million income tax benefit;
·the add-back of $3.2 million in minority interest, which reflects the interest of outside shareholders in the net losses of subsidiaries which are less than 100%-owned by PICO (principally HyperFeed); and
·income from discontinued operations of $78,000 after tax.

2003
The net loss of $3.2 million ($0.26 per share) consisted of:
·a $13.8 million loss before taxes and minority interest from continuing operations; and
·the deduction of $1 million in minority interest, which reflects the interest of outside shareholders in the net income of subsidiaries which are less than 100%-owned by PICO; partially offset by
·a $1.2 million income tax benefit; and
·income from discontinued operations of $10.5 million after tax.


Comprehensive Income
In accordance with Statement of Financial Accounting Standards No. 130, “Reporting Comprehensive Income,” PICO reports comprehensive income as well as net income from the Consolidated Statement of Operations. Comprehensive income measures changes in shareholders’ equity, and includes unrealized items which are not recorded in the Consolidated Statement of Operations, for example, foreign currency translation and the change in investment gains and losses on available-for-sale securities.

Over the past three years, PICO has recorded:
·comprehensive income of $39.6 million in 2005, primarily consisting of a $24.2 million net increase in net unrealized appreciation in investments and net income of $16.2 million, which were partially offset by a $810,000 net decrease in foreign currency translation;
·comprehensive income of $10.9 million in 2004, primarily consisting of net increases of $21.1 million in net unrealized appreciation in investments and $374,000 in foreign currency translation, which were partially offset by the $10.6 million net loss;
·comprehensive income of $8.2 million in 2003, primarily consisting of net increases of $10.9 million in net unrealized appreciation in investments and $570,000 in foreign currency translation, which were partially offset by the $3.2 million net loss.


Operating Revenues

  
Year Ended December 31,
 
  
2005
 
2004
 
2003
 
        
Vidler Water Company $106,449,000  $1,964,000  $16,816,000 
Nevada Land & Resource Company  21,811,000  11,560,000  5,889,000 
Business Acquisitions and Financing  5,743,000  2,852,000  5,549,000 
Insurance Operations in Run Off  8,108,000  5,747,000  3,245,000 
HyperFeed Technologies  4,271,000  6,004,000  1,379,000 
Total Revenues $146,382,000 $28,127,000 $32,878,000 

In 2005, total revenues were $146.4 million, compared to $28.1 million in 2004, and $32.9 million in 2003. Revenues increased by $118.3 million year over year in 2005, primarily due to $104.5 million higher revenues from Vidler due to two significant water sales, which added $104.4 million to revenues. In addition, revenues from Nevada Land increased $10.3 million year over year, principally as a result of $9.7 million higher land sales revenues. Revenues decreased by $4.8 million year over year in 2004.

Total expenses in 2005 were $113.3 million, compared to $45 million in 2004, and $46.2 million in 2003. In 2005, the largest expense was $46.5 million, being the cost of land and water rights sold by Vidler and Nevada Land. In 2004, the largest expense item was SAR expense of $9.9 million. In 2003, the largest expense item was the $12.6 million cost of land and water rights sold. See “Business Acquisitions and Financing” segment analysis later in Item 7.


Income (Loss) Before Taxes and Minority Interest

  
Year Ended December 31,
 
  
2005
 
2004
 
2003
 
        
Vidler Water Company $56,212,000 $( 5,701,000)$( 543,000)
Nevada Land & Resource Company  12,038,000  5,290,000  2,004,000 
Business Acquisitions and Financing  (38,463,000 (15,156,000 (8,112,000)
Insurance Operations in Run Off  10,539,000  4,060,000  (2,902,000)
HyperFeed Technologies  ( 7,410,000) ( 5,390,000) (4,225,000)
Income (Loss) Before Taxes and Minority Interest $32,916,000 $(16,897,000)$(13,778,000)

The principal items in the $32.9 million in income before taxes and minority interest in 2005 were:
·Vidler generated segment income of $56.2 million, principally due to the $65.7 million in gross margin earned from the two significant sales of water;
·income of $12 million from Nevada Land, which included $12.6 million in gross margin from the sale of land;
·a $38.5 million loss from Business Acquisitions and Financing, which included a $23.9 million SAR expense;
·income of $10.5 million from Insurance Operations in Run Off, which included $5.1 million in realized gains on the sale of investments, and a benefit of approximately $3.7 million from favorable reserve development; and
·a $7.4 million loss from the continuing operations of HyperFeed.


Vidler Water Company, Inc.

  
Year Ended December 31,
 
  
2005
 
2004
 
2003
 
Revenues:
       
Sale of Real Estate & Water Assets $104,812,000 $408,000 $15,360,000 
Lease of Agricultural Land  298,000  485,000  703,000 
Interest  1,177,000  471,000  80,000 
Other  162,000  600,000  673,000 
Segment Total Revenues $106,449,000 $1,964,000 $16,816,000 
           
Expenses:
          
Cost of Real Estate & Water Assets  (38,957,000) ( 240,000) (10,682,000)
Commission and Other Cost of Sales  ( 1,066,000)    ( 601,000)
Depreciation & Amortization  ( 1,173,000) (1,184,000) ( 1,020,000)
Interest  ( 270,000) ( 403,000) ( 431,000)
Overhead  ( 4,449,000) (1,574,000) ( 1,400,000)
Project Expenses  ( 4,322,000) (4,264,000) ( 3,225,000)
Segment Total Expenses $(50,237,000$(7,665,000$(17,359,000)
           
Income (Loss) Before Tax
 $56,212,000 $(5,701,000)$(543,000)

Vidler generated total revenues of $106.4 million in 2005, compared to $2 million in 2004 and $16.8 million in 2003. Over the past 5 years, several large sales of water rights and land have generated the bulk of Vidler’s revenues. Since the date of closing determines the accounting period in which the sales revenue and gross margin are recorded, Vidler’s reported revenues and income fluctuate from period to period depending on the dates when specific transactions close. Consequently, sales of water rights and land for any year are not indicative of likely revenues in future years.

In 2005, Vidler generated $104.8 million in revenues from the sale of water rights and land. This primarily represented two transactions, which generated $104.4 million in revenues:
·the sale of approximately 42,000 acre-feet of transferable groundwater rights, and the related land, in the Harquahala Valley Irrigation District of Arizona. This transaction added $94.4 million to revenues and $56.6 million to gross margin, and the net cash proceeds to Vidler were $83.1 million (after the repayment of borrowings related to the land sold); and
·the sale of approximately 2,100 acre-feet of water in Lincoln County by Lincoln/Vidler. Under the agreement between the Lincoln County Water District and Vidler, the proceeds from the sale of water will be shared equally after Vidler is reimbursed for the expenses incurred in developing water resources in Lincoln County. Consequently, the net cash proceeds to Vidler were approximately $10.8 million, and the transaction added $10.1 million to revenues and $9.1 million to gross margin.

In 2004, Vidler generated revenues of $408,000 and gross margin of $168,000 from the sale of water rights in Colorado.

In 2003, Vidler generated $15.4 million in revenues from the sale of water rights and land. This primarily represented two transactions, which generated $14.8 million in revenues:
·the sale of approximately 6,500 acres of land and the related water rights near West Wendover, Nevada. This transaction added $12 million to revenues and $4.1 million to gross margin; and
·the sale of approximately 37,500 acres of land and the related water rights at Big Springs Ranch in Elko County, Nevada. This transaction added $2.8 million to revenues and $505,000 to gross margin.

Other Revenues include income from leasing out farm properties owned by Vidler and water rights in Colorado, and various revenues from properties farmed by Vidler (e.g., sales of hay and cattle).

In 2005, interest revenue was $1.2 million, which was significantly higher than in previous years due to interest earned from temporary investment of the proceeds from water rights and land sales in government obligations money market funds and investment-grade corporate bonds, mostly maturing in 2005 and 2006.

In 2004, interest revenue was $471,000, which primarily consisted of interest earned on notes receivable resulting from the sale of land and water rights at West Wendover and Big Springs Ranch in 2003. The West Wendover note was fully repaid during 2005, and the remaining principal of $158,000 on the Big Springs Ranch note is scheduled to be repaid in 2006.
Total segment expenses, including the cost of water rights and other assets sold, were $50.2 million in 2005, $7.7 million in 2004, and $17.4 million in 2003. However, excluding the cost of water rights and other assets sold and related selling costs, segment operating expenses were $10.2 million in 2005, $7.4 million in 2004, and $6.1 million in 2003. After we entered the water resource business, the water rights and water storage operations acquired by Vidler were development-stage assets, which were not ready for immediate commercial use. Although Vidler is generating significant revenues from the sale of water rights, the segment is still incurring costs related to long-lived assets which will not generate revenues until future years, e.g., operating, maintenance, and amortization expenses at storage facilities which are not yet storing water for customers.
Overhead Expenses consist of costs which are not related to the development of specific water resources, such as salaries and benefits, rent, and audit fees. Overhead Expenses were $4.4 million in 2005, $1.6 million in 2004, and $1.4 million in 2003. In 2005, overhead expenses include the accrual of approximately $2.9 million in incentive compensation for Vidler management.

Project Expenses consist of costs related to the development of existing water resources, such as maintenance and professional fees. Project Expenses are recorded as expenses are incurred, and could fluctuate from period to period depending on activity regarding Vidler’s various water resource projects. Costs related to the development of water resources which meet the criteria to be recorded as assets in our financial statements are capitalized to the cost of the asset, and amortized against matching revenues once revenues are generated. Project Expenses were $4.3 million in 2005, $4.3 million in 2004, and $3.2 million in 2003. Project expenses principally relate to:
·the operation and maintenance of the Vidler Arizona Recharge Facility;
·the development of water rights in the Tule Desert groundwater basin (part of the Lincoln County agreement);
·the utilization of water rights at Fish Springs Ranch as future municipal water supply for the north valleys of the Reno, Nevada area; and
·the operation of Fish Springs Ranch, and maintenance of the associated water rights.

In 2005, segment operating expenses (i.e., all expenses other than cost of sales and related selling expenses) were $2.8 million higher than in 2004, principally due to the $2.9 million in incentive compensation accrued in 2005.

In 2004, segment operating expenses were $1.3 million higher than in 2003, principally due to a $1 million increase in project expenses.

Vidler recorded segment income of $56.2 million in 2005, compared to segment losses of $5.7 million in 2004 and $543,000 in 2003.

Segment income for 2005 was $61.9 million higher than in 2004, principally due to a $65.7 million increase in the gross margin from the sale of water rights and land year over year, from $168,000 in 2004 to $65.9 million in 2005, which included the sales in the Harquahala Valley Irrigation District and by Lincoln/Vidler described above.

The 2004 segment loss was $5.2 million greater than in 2003, primarily as a result of a $3.9 million decrease in the gross margin from the sale of land and water rights and a $1.3 million increase in segment operating expenses year over year.


Nevada Land & Resource Company, LLC

  
Year Ended December 31,
 
  
2005
 
2004
 
2003
 
Revenues:
       
Sale of Land $20,173,000 $10,472,000 $4,141,000 
Sale of Water Rights      250,000 
Lease and Royalty  584,000  611,000  695,000 
Interest and Other  1,054,000  477,000  803,000 
Segment Total Revenues $21,811,000 $11,560,000 $5,889,000 
           
Expenses:
          
Cost of Land and Water Rights Sold  (7,573,000 (4,257,000) (1,968,000)
Operating Expenses  (2,200,000) (2,013,000) (1,917,000)
Segment Total Expenses $(9,773,000)$(6,270,000$(3,885,000)
           
Income Before Tax
 $12,038,000 $5,290,000 $2,004,000 

Nevada Land generated revenues of $21.8 million in 2005, compared to $11.6 million in 2004, and $5.9 million in 2003.

In each of the past 3 years, land sales have been the largest contributor to revenues in this segment. It can take a year or more to complete a land sale transaction, the timing of land sales is unpredictable, and historically the level of land sales has fluctuated from year to year. Accordingly, it should not be assumed that the level of sales in 2005 can be maintained. In 2005, Nevada Land recorded revenues of $20.2 million from the sale of 252,094 acres of land. In 2004, Nevada Land recorded revenues of $10.5 million from the sale of 120,683 acres of land, compared to revenues of $4.1 million from the sale of 75,131 acres of land in 2003. In 2003, Nevada Land also generated revenues from the sale of water rights of $250,000.

Lease and royalty income amounted to $584,000 in 2005, compared to $611,000 in 2004, and $695,000 in 2003. Most of this revenue comes from land leases, principally for grazing, agricultural, communications, and easements.

Interest and other revenues contributed $1.1 million in 2005, compared to $477,000 in 2004 and $803,000 in 2003.

After deducting the cost of land sold, the gross margin on land sales was $12.6 million in 2005, $6.2 million in 2004, and $2.2 million in 2003. This represented a gross margin percentage of 62.5% in 2005, 59.3% in 2004, and 54.3% in 2003.

Segment operating expenses were $2.2 million in 2005, $2 million in 2004, and $1.9 million in 2003.

Nevada Land recorded income of $12 million in 2005, compared to $5.3 million in 2004, and $2 million in 2003.

The $6.7 million increase in segment income from 2004 to 2005 is principally attributable to a $6.4 million increase in gross margin on land sales year over year. The volume of land sold increased 109% year over year, land sales revenue rose 93%, and the gross margin percentage on land sales improved 3.2%, from 59.3% in 2004 to 62.5% in 2005. The $3.3 million increase in segment income from 2003 to 2004 is principally attributable to a $4 million increase in gross margin on land sales year over year.


Business Acquisitions And Financing

  
Year Ended December 31,
 
  
2005
 
2004
 
2003
 
Business Acquisitions & Financing Revenues (Charges):
       
Realized Gains (Losses):       
On Sale or Impairment of Holdings $2,666,000 $840,000 $1,707,000 
SFAS No. 133 Change In Warrants     (556,000) 461,000 
Investment Income  2,957,000  2,088,000  2,092,000 
Other  120,000  480,000  1,289,000 
Segment Total Revenues $5,743,000 $2,852,000 $5,549,000 
           
Stock Appreciation Rights Expense $(23,894,000)$( 9,875,000)$( 5,970,000)
Other Expenses  (20,312,000) ( 8,133,000) ( 7,126,000)
Segment Total Expenses
 $(44,206,000)$(18,008,000)$(13,096,000)
           
Loss Before Investees’ Loss
 $(38,463,000$(15,156,000$( 7,547,000)
           
Equity Share of Investees’ Net Loss      ( 565,000)
Loss Before Taxes
 $(38,463,000)$(15,156,000)$(8,112,000)

The Business Acquisitions and Financing segment recorded revenues of $5.7 million in 2005, $2.9 million in 2004, and $5.5 million in 2003. Revenues in this segment vary considerably from year to year, primarily due to fluctuations in net realized gains or losses on the sale or impairment of holdings. We do not sell holdings on a regular basis. A holding may be sold if the price of a security has significantly exceeded our target, or if there have been changes which we believe limit further appreciation potential on a risk-adjusted basis. Consequently, the amount of net realized gains or losses recognized during any accounting period has no predictive value. In addition, in this segment various income items relate to specific investments held during a particular accounting period. Since our investments change over time, results in this segment are not necessarily comparable from year to year.

In 2005, net realized gains were $2.7 million, the largest of which was a $1.8 million realized gain on the sale of part of our holding in Raetia Energie AG. These realized gains were partially offset by a $142,000 charge for other-than-temporary impairment of our holding in a Swiss public company, to reflect a decline in the market value of that stock during 2005.

In 2004, net realized gains were $284,000. Net realized gains on the sale or impairment of holdings were $840,000. This primarily represented realized gains of $1.4 million on the sale of a domestic stock and $1 million on the sale of two unrelated foreign stocks, which were largely offset by charges of $1.3 million for other-than-temporary impairment of our holding in Accu Holding AG during 2004, and $547,000 for impairment of our holding in SIHL during 2004. In addition, a $556,000 charge, to reduce the carrying value of our HyperFeed warrants to zero, was recorded as a realized loss in accordance with Statement of Financial Accounting Standards No. 133, “Accounting For Derivative Instruments and Hedging Activities”.

In 2003, net realized gains of $2.2 million were recorded. This primarily represented $1.7 million in realized gains on the sale of two unrelated foreign stocks. In addition, income of $461,000 was recorded under SFAS No. 133, primarily representing an increase in the estimated fair value of HyperFeed warrants during 2003.

We regularly review any securities in which we have an unrealized loss. If we determine that the decline in market value is other-than-temporary, under GAAP we record a charge to reduce the basis of the security from its original cost to current carrying value, which is usually the market price at the balance sheet date when the provision is recorded. The determination is based on various factors, including the extent and the duration of the unrealized loss. A charge for other-than-temporary impairment is a non-cash charge, which is recorded as a realized loss.

It should be noted that:
·charges for other-than-temporary impairments do not affect book value per share, as the after-tax decline in the market value of investments carried under SFAS No. 115, “Accounting for Certain Investments in Debt and Equity Securities,” is already reflected in shareholders’ equity in our balance sheet; and
·the carrying (book) value of the holding does not change. The impairment simply reclassifies the decline from an unrealized decrease in shareholders’ equity to a realized loss in the consolidated statement of operations.
The written-down value becomes our new basis in the investment. In future accounting periods, unrealized gains or losses from that basis will be recorded in shareholders’ equity, and when the investment is sold a realized gain or loss from that basis will be recorded in the statement of operations. For example, during 2003 and 2004 we sold our holding in MC Shipping, Inc. Although this resulted in realized gains of $1.3 million under GAAP in 2003 and 2004, the gains only recovered part of a charge for other-than-temporary impairment of this holding recorded in 1998.

In this segment, investment income includes interest on cash and short-term fixed-income securities, and dividends from partially owned businesses. Investment income totaled $3 million in 2005, $2.1 million in 2004, and $2.1 million in 2003. Investment income fluctuates depending on the level of cash and temporary investments, the level of interest rates, and the dividends paid by partially owned businesses.

PICO’s equity share of investees’ income (loss) represents our proportionate share of the net income (loss) and other events affecting equity in the investments which we carry under the equity method, less any dividends received from those investments. We did not carry any investments under the equity method in 2004 and 2005. In 2003, our equity share of investees’ losses, principally HyperFeed, was $565,000.

Total segment expenses were $44.2 million in 2005, $18 million in 2004, and $13.1 million in 2003. The expenses recognized in this segment primarily consist of holding company costs which are not allocated to our other segments, most notably Stock Appreciation Rights (SAR) expense, PICO’s corporate overhead, and the U.S. dollar change in value of a Swiss franc inter-company loan. SAR expense was $23.9 million in 2005, $9.9 million in 2004, and $6 million in 2003. Other expenses were $20.2 million in 2005, $8.1 million in 2004, and $7.1 million in 2003.

The Business Acquisitions and Financing segment generated pre-tax losses of $38.5 million in 2005, $15.2 million in 2004, and $8.1 million in 2003.

In 2005, SAR expense was $23.9 million (see below), and other expenses were $20.3 million, principally consisting of:
·the accrual of $8.4 million in incentive compensation. Six of PICO’s officers participate in an incentive compensation program tied to growth in the Company’s book value per share relative to a pre-determined threshold;
·other parent company overhead of $8.3 million; and
·a $3.6 million expense resulting from the effect of depreciation in the Swiss Franc on the inter-company loan during 2005.

Our interests in Swiss public companies are held by Global Equity AG, a wholly owned subsidiary which is incorporated in Switzerland. Part of Global Equity AG’s funding comes from a loan from PICO, which is denominated in Swiss Francs. During accounting periods when the Swiss Franc appreciates relative to the US dollar -- such as 2003 and 2004 -- under GAAP we are required to record a benefit through the statement of operations to reflect the fact that Global Equity AG owes PICO more US dollars. In Global Equity AG’s financial statements, an equivalent debit is included in the foreign currency translation component of shareholders’ equity (since it owes PICO more dollars); however, this does not go through the statement of operations. During accounting periods when the Swiss Franc depreciates relative to the US dollar -- such as 2005 -- opposite entries are made and an expense is recorded in the statement of operations. Accordingly, we were required to record an expense of $3.6 million before tax in our statement of operations in 2005, even though there was no net impact on shareholders’ equity, before any related tax effects.

Since 2003, the change in the “in the money” amount (i.e., the difference between the market value of PICO stock and the exercise price of the SAR) of SAR outstanding during each accounting period has been recorded through the consolidated statement of operations. An increase in the “in the money” amount of SAR (i.e., if the price of PICO stock rises during the accounting period) was recorded as an expense.

During 2005, in conjunction with the Company entering into new employment agreements with its Chairman and President & CEO, PICO’s Compensation Committee retained an independent compensation expert to review the various components of executive compensation. The independent compensation expert suggested a number of changes to the existing compensation programs, particularly in light of new accounting pronouncements concerning stock-based compensation, and recent developments in the law relating to executive compensation, both of which have changed significantly since the programs were introduced.

After receiving the consultant’s report, the Company’s Compensation Committee elected to amend the 2003 SAR Program, and to replace it with a stock-based incentive plan, the PICO Holdings, Inc. 2005 Long-Term Incentive Plan (the “2005 Incentive Plan”), which was approved by the Company’s shareholders on December 8, 2005.

On September 21, 2005, the 2003 SAR program was amended, and the spread value of the SAR outstanding was monetized based on the last sale price of PICO stock on that date ($33.23). This resulted in a $23.9 million expense to record the increase in SAR liability from the start of 2005 through September 21, 2005, which comprised our total SAR expense for 2005. During 2005, excluding new shares issued, PICO’s equity market capitalization increased by approximately $142.1 million. See “Equity Compensation Plan Information” in Item 5, “Market for Registrant’s Common Equity and Related Stockholder Matters.”


On December 8, 2005, the Company’s Shareholders approved the 2005 Incentive Plan. On December 12, 2005, the Compensation Committee granted 2,185,965 stock-based SAR, with an exercise price of $33.76, to various of the Company’s officers, employees, and non-employee Directors. When stock-based SAR are exercised, new shares of stock will be issued to the participant to satisfy the spread value of the SAR being exercised (i.e., the difference between the market value of the stock and the exercise price of the SAR).

No expense was recorded in 2005 related to the 2005 Incentive Plan as the PICO stock price ($32.26) was below the exercise price ($33.76) at the end of 2005.

In 2004, SAR expense was $9.9 million, consisting of a $9.8 million increase in SAR liability, and $113,000 in payments on the exercise of SAR. The increase in SAR liability resulted from a $5.10 per share (32%) increase in the PICO stock price during 2004, which represented an increase of approximately $63.1 million in PICO’s equity market capitalization. Other expenses were $8.1 million, including the accrual of $1.7 million in incentive compensation, other parent company overhead of $6.6 million, and SISCOM expenses of $1.5 million. SISCOM ceased operations in January 2005. Segment expenses were reduced by a $2.1 million benefit resulting from the effect of appreciation in the Swiss Franc on the inter-company loan during 2004.

In 2003, SAR expense was $6 million, consisting of a $3.5 million charge on the initial adoption of the SAR program in July 2003, and a $2.5 million expense to record the increase in the “in the money” amount of SAR during the period from July 17, 2003 through the end of 2003. Other expenses were $7.1 million, including the accrual of $1.3 million in incentive compensation, other parent company overhead of $6.6 million, and $1.5 million in SISCOM expenses. Segment expenses were reduced by a $2.3 million benefit resulting from the effect of appreciation in the Swiss Franc on the inter-company loan during 2003.


Insurance Operations in Run Off

  
Year Ended December 31,
 
  
2005
 
2004
 
2003
 
Revenues:
       
Net Investment Income $3,051,000 $2,765,000 $2,680,000 
Realized Gains On Sale or Impairment of Investments  5,057,000  2,982,000  562,000 
Other        3,000 
Segment Total Revenues $8,108,000 $5,747,000 $3,245,000 
           
(Expenses) / Recoveries :
          
Underwriting (Expenses) / Recoveries  2,431,000  (1,687,000) (6,147,000)
Segment Total (Expenses) / Recoveries $2,431,000$(1,687,000)$(6,147,000)
           
Income (Loss) Before Taxes:
          
Physicians Insurance Company of Ohio $8,552,000 $3,417,000 $7,314,000 
Citation Insurance Company  1,987,000  643,000  (10,216,000)
Income (Loss) Before Taxes $10,539,000 $4,060,000 $( 2,902,000)

Once an insurance company has gone into “run off” and the last of its policies has expired, typically most revenues come from investment income and realized gains or losses on the sale of the securities investments which correspond to the insurance company’s reserves and shareholders’ equity.

The financial results of insurance companies in run off can be volatile if there is favorable or unfavorable development in their loss reserves. Physicians recorded significant income from favorable reserve development in 2003 and 2005. Citation recorded income from favorable reserve development in 2005; however in 2003 Citation recorded a significant loss, principally due to the reversal of the $7.5 million Fremont reinsurance recoverable and $3.9 million in reserve increases in the property and casualty insurance and workers’ compensation loss reserves. See the Citation section of the “Company Summary, Recent Developments, and Future Outlook” portion of Item 7.

The Insurance Operations in Run Off segment generated income of $10.5 million in 2005, consisting of $8.5 million from Physicians and $2 million from Citation. In 2004, the segment generated income of $4.1 million, consisting of $3.4 million from Physicians and $643,000 from Citation. In 2003, the segment incurred a $2.9 million loss, consisting of a $7.3 million profit from Physicians, which was more than offset by a $10.2 million loss from Citation


Physicians Insurance Company of Ohio

  
Year Ended December 31,
 
  
2005
 
2004
 
2003
 
MPL Revenues:
       
Net Investment Income $2,016,000 $1,546,000 $1,353,000 
Net Realized Investment Gain  4,016,000  2,109,000  84,000 
Earned Premium          
Segment Total Revenues $6,032,000   $3,655,000 $1,437,000 
           
MPL Underwriting Recoveries (Expenses)
 $2,520,000 $(238,000$5,877,000 
           
Income Before Taxes
 $8,552,000 $3,417,000 $7,314,000 

Physicians’ total revenues were $6 million in 2005, compared to $3.7 million in 2004 and $1.4 million in 2003.

Investment income was $2 million in 2005, compared to $1.5 million in 2004 and $1.4 million in 2003. Investment income varies from year to year, depending on the amount of fixed-income securities in the portfolio, the prevailing level of interest rates, and the dividends paid on the common stocks in the portfolio. The $470,000 year over year increase in investment income from 2004 to 2005 is primarily due to higher dividends received from common stocks and, to a lesser extent, higher interest income from cash balances as a result of higher short-term interest rates.

The $4 million net realized investment gain recorded in 2005 included a $1.3 million gain on the sale of the remaining shares in Keewenaw Land Association Limited, and gains on the sale of various other portfolio holdings. The $2.1 million net realized investment gain recorded in 2004 included a $1.7 million gain on the sale of shares in Keewenaw and gains on the sale of various other portfolio holdings.

In 2005, Physicians recorded a $2.5 million underwriting recovery. The $3.1 million net reduction in reserves more than offset regular loss and loss adjustment expense and operating expenses of $635,000 for the year. The changes in reserves are more fully explained in the Physicians section of the “Company Summary, Recent Developments, and Future Outlook” portion of Item 7.

In 2004, Physicians’ operating and underwriting expenses totaled $238,000. A $489,000 net reduction in reserves partially offset Physicians’ regular loss and loss adjustment expense and operating expenses of $727,000 in 2004.

In 2003, Physicians recorded a $5.9 million underwriting recovery. The $6.7 million net reduction in reserves more than offset regular loss and loss adjustment expense and operating expenses of $876,000 for the year.


Citation Insurance Company

  
Year Ended December 31,
 
  
2005
 
2004
 
2003
 
Revenues:
       
Net Investment Income $1,035,000 $1,219,000 $1,327,000 
Realized Investment Gains  1,041,000  873,000  478,000 
Other        3,000 
Segment Total Revenues $2,076,000 $2,092,000 $1,808,000 
           
Expenses:
          
Underwriting Expenses $(89,000$(1,449,000$(12,024,000)
           
Income (Loss) Before Taxes
 $1,987,000 $643,000 $(10,216,000)

In 2005, Citation generated total revenues of $2.1 million, primarily consisting of $1 million in investment income and net realized investment gains of $1.1 million from the sale of various portfolio holdings. Citation’s investment income has declined in recent years, as its bond portfolio is being run down to provide the funds to pay claims. Underwriting expenses totaled $89,000. Underwriting expenses were reduced by the $510,000 net decrease in loss reserves, consisting of a $1.8 million reduction in property and casualty reserves, which was partially offset by a $1.3 million increase in workers’ compensation reserves. As a result of these factors, Citation recorded income of $2 million before taxes for 2005.

In 2004, Citation generated total revenues of $2.1 million, primarily consisting of $1.2 million in investment income and net realized investment gains of $873,000 from the sale of various portfolio holdings. Underwriting expenses totaled $1.4 million, including a net increase in loss reserves of $932,000, consisting of a $1.2 million increase in workers’ compensation reserves, which was partially offset by a $254,000 reduction in property and casualty insurance reserves. Consequently, Citation recorded income of $643,000 before taxes for 2004.

In 2003, Citation generated total revenues of $1.8 million, primarily consisting of $1.3 million in investment income and net realized investment gains of $478,000. Underwriting expenses totaled $12 million, including the $7.5 million reversal of the reinsurance recoverable from Fremont related to the workers’ compensation book of business. Underwriting expenses also included increases in reserves of $3 million in workers’ compensation, and $847,000 in property and casualty insurance, due to unfavorable development in prior year loss reserves. As a result of these factors, Citation incurred a loss of $10.2 million before taxes for 2003.

The $1.3 million improvement in Citation’s result from 2004 to 2005 is primarily due to a $1.4 million reduction in underwriting expenses year over year. The $1.4 million favorable change in underwriting expenses year over year was due to the combined effect of the reserve increase in 2004 which increased expenses by $932,000 last year, and the reserve reduction in 2005 which reduced expenses by $510,000 this year. Excluding the reserve changes in both years, underwriting expenses would have been approximately $599,000 in 2005, and approximately $517,000 in 2004.

The $10.9 million improvement in Citation’s result from 2003 to 2004 is primarily due to (1) the $7.5 million reinsurance reversal in 2003 which did not recur in 2004; and (2) a lower expense for reserve increases in 2004 ($932,000) than in 2003 ($3.9 million).

HyperFeed Technologies

  
Year Ended December 31,
 
  
2005
 
2004
 
2003
 
Revenues:
       
Service $4,270,000 $5,995,000 $1,363,000 
Investment Income  1,000  9,000  16,000 
Segment Total Revenues $4,271,000 $6,004,000 $1,379,000 
           
Expenses:
          
Cost of Service  ( 1,443,000) ( 1,585,000) (1,069,000)
Depreciation and Amortization  ( 757,000) ( 870,000) ( 624,000)
Other  ( 9,481,000) ( 8,939,000) (3,911,000)
Segment Total Expenses $(11,681,000$(11,394,000$(5,604,000)
           
Segment Loss Before Taxes
 $( 7,410,000)$(5,390,000)$(4,225,000)

In 2005, HyperFeed generated $4.3 million in revenues. Service revenues were $4.3 million and the costs of service were $1.4 million, resulting in gross margin of $2.9 million. After the deduction of $9.5 million in other operating expenses, HyperFeed generated a segment loss before taxes and minority interest of $7.4 million.

In 2004, HyperFeed generated $6 million in revenues. Service revenues were $6 million and the costs of service were $1.6 million, resulting in gross margin of $4.4 million. After the deduction of $9.8 million in other operating expenses, HyperFeed generated a segment loss before taxes and minority interest of $5.4 million.

During the period from May 15, 2003 (commencement of consolidation) to December 31, 2003, HyperFeed generated $1.4 million in revenues. Service revenues were $1.4 million and the costs of service were $1.1 million, resulting in gross margin of $294,000. After $4.5 million in other operating expenses, HyperFeed generated a segment loss of $4.2 million.


Discontinued Operations

Sequoia Insurance Company

  
Year Ended December 31,
 
  
2005
 
2004
 
2003
 
Revenues       $16,433,000 
Expenses        (12,759,000)
Income Before Taxes       $3,674,000 
Income Taxes        (1,285,000)
Net Income
       $2,389,000 

In the first three months of 2003 prior to its sale, Sequoia Insurance Company generated income of $2.4 million after-tax, which is included in the “Income from discontinued operations, net of tax” line in the Consolidated Statement of Operations for 2003.

PICO also recorded a $443,000 after-tax gain from the sale of Sequoia in 2003, which forms part of the “Gain on disposal of discontinued operations, net” line in the Consolidated Statement of Operations for 2003.

Discontinued Operations of HyperFeed

  
Year Ended December 31,
 
  
2005
 
2004
 
2003
 
Income (Loss) $(508,000$(422,000$545,000 
Gain on Sale of Discontinued Operations  545,000  500,000  7,008,000 
Net Income & Gain
 $37,000 $78,000 $7,553,000 

The discontinued operations of HyperFeed consist of the consolidated market data feed customers, which were sold for $8.5 million in 2003.

In 2005, the discontinued operations of HyperFeed generated a net gain of $37,000. A $545,000 gain was recorded on the sale of discontinued operations, which forms part of the “Gain on disposal of discontinued operations, net” line in the Consolidated Statement of Operations for 2005. This gain was more than offset by a loss from discontinued operations of $508,000, which is included in the “Income from discontinued operations, net of tax” line in the Consolidated Statement of Operations for 2005.

In 2004, the discontinued operations of HyperFeed recorded a net gain of $78,000. This consisted of a $500,000 gain from the sale of discontinued operations, which was partially offset by a loss from discontinued operations of $422,000.

During the period from May 15, 2003 until December 31, 2003, the discontinued operations of HyperFeed generated a net gain of $7.6 million. This consisted of income of $545,000, and a $7 million gain from the sale of discontinued operations.


LIQUIDITY AND CAPITAL RESOURCES -- YEARS ENDED DECEMBER 31, 2005, 2004, AND 2003

Cash Flow
PICO’s assets primarily consist of our operating subsidiaries, holdings in other public companies, marketable securities, and cash and cash equivalents. On a consolidated basis, the Company had $37.8 million in cash and cash equivalents at December 31, 2005, compared to $17.4 million at December 31, 2004. In addition to cash and cash equivalents, at December 31, 2005 the consolidated group held fixed-income securities with a market value of $92.8 million, and equities with a market value of $194.6 million.

These totals include cash of $3.8 million, fixed-income securities with a market value of $31.3 million, and equities with a market value of $90.8 million, held by our insurance companies. The totals also include cash of $5.5 million, fixed-income securities with a market value of $33.9 million, and equities with a market value of $1.5 million held in the deferred compensation Rabbi Trusts.

Our cash flow position fluctuates depending on the requirements of our operating subsidiaries for capital, and activity in our insurance company investment portfolios. Our primary sources of funds include cash balances, cash flow from operations, the sale of holdings, and -- potentially -- the proceeds of borrowings or offerings of equity and debt.

In broad terms, the cash flow profile of our principal operating subsidiaries is:

·As Vidler’s water assets are monetized, Vidler is generating free cash flow as receipts from the sale of water rights and land have overtaken maintenance capital expenditure, financing costs, and operating expenses;

·Nevada Land is actively selling land which has reached its highest and best use. Nevada Land’s principal sources of cash flow are the proceeds of cash sales, and collections of principal and interest on sales contracts where Nevada Land has provided vendor financing. These receipts and other revenues significantly exceed Nevada Land’s operating costs, so Nevada Land is generating strong cash flow;

·Investment income more than covers the operating expenses of the “run off” insurance companies, Physicians and Citation. The funds to pay claims are coming from the maturity of fixed-income investments, the realization of fixed-income investments and stocks held in their investment portfolios, and recoveries from reinsurance companies; and

·
HyperFeed maintains its own cash & cash equivalent balances, and borrowings. At December 31, 2005, HyperFeed had approximately $302,000 in cash and cash equivalents, and external borrowings of $500,000. In addition to the external borrowings, at December 31, 2005, PICO had advanced $810,000 to HyperFeed in the form of a promissory note. It is anticipated that this promissory note, as well as subsequent promissory notes issued in 2006 and additional funding, will be consolidated into a secured convertible promissory note agreement later in 2006. See Note 4 to the Company’s Notes to Consolidated Financial Statements, “Investment in HyperFeed Technologies, Inc.”.

The Departments of Insurance in Ohio and California prescribe minimum levels of capital and surplus for insurance companies, set guidelines for insurance company investments, and restrict the amount of profits which can be distributed as dividends. At December 31, 2005 the insurance companies had statutory surplus of $82.8 million, which cannot be distributed without regulatory approval. Physicians Insurance Company of Ohio intends to seek approval to pay a dividend of $6.5 million in 2006.

Typically, our insurance subsidiaries structure the maturity of fixed-income securities to match the projected pattern of claims payments. When interest rates are at very low levels, to insulate the capital value of the bond portfolios against a decline in value which could be brought on by a future increase in interest rates, the bond portfolios may have a shorter duration than the projected pattern of claims payments.

As shown in the Consolidated Statements of Cash Flow, there was a $20.4 million net increase in cash and cash equivalents in 2005, compared to a $6.9 million net decrease in 2004, and a $2.2 million net increase in 2003.

During 2005, Operating Activities provided cash of $69.2 million, compared to $7 million used in 2004, and $426,000 used in 2003.

The most significant cash inflows from operating activities were:
·In 2005, Vidler’s sale of water rights and land in the Harquahala Valley Irrigation District generated an operating cash flow of approximately $87.4 million ($94.4 million gross sales price, less $5.7 million to exercise options to acquire certain farms that we sold in the transaction, and $1.2 million closing and other costs). In addition, Lincoln/Vidler’s sale of 2,100 acre-feet of water resulted in an operating cash flow to Vidler of approximately $10.8 million. Due to the income recognized on these sales, we paid $24.2 million in estimated federal and state taxes in 2005. All other operating activities resulted in an operating cash outflow of approximately $4.8 million;
·in 2004, the collection of $6.3 million of principal on two collateralized notes receivable, related to Vidler’s sale of assets at Big Springs Ranch and West Wendover in 2003, and $4.2 million from cash land sales by Nevada Land;
·in 2003, approximately $4 million in proceeds of land and related assets sold by Nevada Land, and $5.5 million from the cash portion of two significant sales of land and related assets by Vidler.
In all three years, the principal uses of cash were operating expenses at Vidler and Nevada Land, claims payments by Physicians and Citation, and group overhead.

Investing Activities used cash of $70.1 million in 2005. The sale or maturity of fixed-income securities provided cash of $23.6 million, but $78.7 million of cash was used to purchase fixed-income securities. This principally reflected the temporary investment of liquid funds from Vidler’s water sales and the May 2005 PICO stock offering, in corporate bonds maturing in 2006 and 2007. Cash outflows of $22.6 million for the purchase of stocks exceeded cash inflows of $12 million from the sale of stocks.

In 2004, Investing Activities generated cash of $580,000. The sale and maturity of fixed-income securities exceeded new purchases, providing a $12.3 million net cash inflow. During 2004, a net $7.6 million was invested in stocks, consisting of $10.9 million in sales, and $18.5 million of new purchases. In addition, $1.3 million was expended to purchase the minority shareholdings in Vidler and SISCOM.


Investing Activities generated cash of $5.0 million in 2003. The cash inflow in 2003 primarily resulted from cash received of $25.1 million from the sale of Sequoia (gross proceeds of approximately $43 million, less the $17.9 million dividend of common stocks and debt securities received). The remaining 2003 cash flow items principally reflect the net investment of $6.3 million in fixed-income securities and $10.9 million in marketable equity securities, and the payment of $1.2 million in cash to acquire additional shares of HyperFeed. The net investment in fixed-income securities represents routine activity in the investment portfolios of our insurance companies, and the temporary investment of surplus funds in fixed-income securities.

Financing Activities provided $17.5 million of cash in 2005. This primarily represented the sale of 905,000 newly-issued shares of PICO common stock for net proceeds of $21.4 million, partially offset by the repayment of $3.9 million in principal on notes collateralized by certain of the farm properties which Vidler sold in the Harquahala Valley Irrigation District.

In 2004, Financing Activities provided cash of $1.5 million. This was principally due to a $2.4 million increase in Swiss franc borrowings to fund additional purchases of stocks in Switzerland, which was partially offset by the repayment of $1.3 million in borrowings by Vidler.

Financing Activities used $617,000 of cash in 2003, primarily due to the repayment of $534,000 in non-recourse borrowings collateralized by farm properties owned by Vidler. In addition, during 2003 Global Equity A.G. repaid borrowings to a Swiss bank of $9.1 million (CHF 12.1 million) and took out an equivalent amount of new borrowings from another Swiss bank.

We believe that our cash and cash equivalent balances and short-term investments will be sufficient to satisfy cash requirements for at least the next twelve months. Although we cannot accurately predict the effect of inflation on our operations, we do not believe that inflation has had, or is likely in the foreseeable future to have, a material impact on our net revenues or results of operations.

As of March 2006, Vidler had commitments for future capital expenditures amounting to approximately $11.8 million, relating to the construction of a pipeline to convey water from the Fish Springs Ranch to Reno, Nevada.


Share Repurchase Program

In October 2002, PICO’s Board of Directors authorized the repurchase of up to $10 million of PICO common stock. The stock purchases may be made from time to time at prevailing prices through open market or negotiated transactions, depending on market conditions, and will be funded from available cash.

As of December 31, 2005, no stock had been repurchased under this authorization.


Commitments and Supplementary Disclosures

1.
At December 31, 2005:
·PICO had no “off balance sheet” financing arrangements;
·PICO has not provided any debt guarantees; and
·PICO has no commitments to provide additional collateral for financing arrangements. PICO’s Swiss subsidiary, Global Equity AG, has Swiss Franc borrowings which partially finance some of the Company’s European stock holdings. If the market value of those stocks declines below certain levels, we could be required to provide additional collateral or to repay a portion of the Swiss Franc borrowings.

Vidler, a PICO subsidiary, is party to a lease to acquire 30,000 acre-feet of underground water storage privileges and associated rights to recharge and recover water located near the California Aqueduct, northwest of Bakersfield. The agreement requires a minimum payment of $401,000 per year adjusted annually by the engineering price index until 2007. PICO signed a Limited Guarantee agreement with Semitropic Water Storage District (“Semitropic”) that requires PICO to guarantee Vidler’s annual obligation up to $519,000, adjusted annually by the engineering price index.

Aggregate Contractual Obligations:

The following table provides a summary of our contractual cash obligations and other commitments and contingencies as of December 31, 2005.

  
Payments Due by Period
 
Contractual Obligations Less than 1 year 1 -3 years 3 -5 years More than 5 years Total 
Bank borrowings $12,296,940 $37,928       $12,334,868 
Operating leases  1,464,331  2,213,707 $752,540 $3,124,420  7,554,998 
Expected claim payouts  10,077,054  16,845,308  10,448,305  9,276,239  46,646,906 
Other borrowings/obligations  8,265,665  3,505,900        11,771,565 
Total $32,103,990 $22,602,843 $11,200,845 $12,400,659 $78,308,337 


Recent Accounting Pronouncements
In December 2004, FASB issued Statement 123(Revised), Share-Based Payment, which replaces FASB Statement No. 123, Accounting for Stock-Based Compensation, and supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees.Statement 123(Revised) is effective for public entities as of the beginning of the annual period that begins after June 15, 2005. The new Statement establishes standards for the accounting for transactions in which an entity exchanges its equity instruments for goods or services. It also addresses transactions in which an entity incurs liabilities in exchange for goods or services that are based on the fair value of the entity’s equity instruments or that may be settled by the issuance of those equity instruments. This Statement focuses primarily on accounting for transactions in which an entity obtains employee services in share-based payment transactions. This Statement does not change the accounting guidance for share-based payment transactions with parties other than employees provided in Statement 123 as originally issued and EITF Issue No. 96-18, “Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services.” This Statement requires a public entity to measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award (with limited exceptions). That cost should be recognized over the period during which an employee is required to provide service in exchange for the award--the requisite service period (usually the vesting period). As all of the stock-settled SARs granted under PICO’s 2005 Plan were fully vested at December 31, 2005, no stock-based compensation will be recorded for these awards under SFAS 123R. If and when PICO grants additional awards, the fair value of such awards will be recognized and recorded over the vesting period.
In March 2005, FASB issued Interpretation number 47, Accounting for Conditional Asset Retirement Obligations—an interpretation of FASB Statement No. 143 which clarifies the term conditional asset retirement obligation as used in FASB Statement No. 143, Accounting for Asset Retirement Obligations ,andrefers to a legal obligation to perform an asset retirement activity in which the timing and (or) method of settlement are conditional on a future event that may or may not be within the control of the entity. The obligation to perform the asset retirement activity is unconditional even though uncertainty exists about the timing and (or) method of settlement. Thus, the timing and (or) method of settlement may be conditional on a future event. Accordingly, an entity is required to recognize a liability for the fair value of a conditional asset retirement obligation if the fair value of the liability can be reasonably estimated. The fair value of a liability for the conditional asset retirement obligation should be recognized when incurred—generally upon acquisition, construction, or development and (or) through the normal operation of the asset. Uncertainty about the timing and (or) method of settlement of a conditional asset retirement obligation should be factored into the measurement of the liability when sufficient information exists. Statement 143 acknowledges that in some cases, sufficient information may not be available to reasonably estimate the fair value of an asset retirement obligation. There was no effect of adoption of the statement on the accompanying consolidated financial statement of the Company.

Regulatory Insurance Disclosures

Liabilities for Unpaid Loss and Loss Adjustment Expenses

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.

Several years or more may elapse between the occurrence of an insured medical professional liability insurance or casualty loss or workers’ compensation claim, the reporting of the loss and the final payment of the loss. Loss reserves are estimates of what an insurer expects to pay claimants, legal and investigative costs and claims administrative costs. PICO'sPICO’s insurance subsidiaries are required to maintain reserves for payment of estimated losses and loss adjustment expenses for both reported claims and claims which have occurred but have not yet been reported. Ultimate actual liabilities may be materially more or less than current reserve estimates.

Reserves for reported claims are established on a case-by-case basis. Loss and loss adjustment expense reserves for incurred but not reported claims are estimated based on many variables including historical and statistical information, inflation, legal developments, the regulatory environment, benefit levels, economic conditions, judicial administration of claims, general trends in claim severity and frequency, medical costs and other factors which could affect the adequacy of loss reserves. Management reviews and adjusts incurred but not reported claims reserves regularly.

The liabilities for unpaid losses and loss adjustment expenses of Physicians Sequoia, and Citation were $98.4$46.6 million at December 31, 2001, $121.52005, $56 million at December 31, 2000,2004 and $139.1$60.9 million at December 31, 1999, net of discount on medical professional liability insurance reserves in 1999, and2003 before reinsurance reserves, which reduce net unpaid losses and loss adjustment expenses. Of those amounts, the liabilities for unpaid loss and loss adjustment expenses of prior years decreased by $10.4$3.7 million in 2001,2005, increased by $443,000 in 2004 and increased by $8.6$4.7 million in 2000, and $16.3 million in 1999. The 2000 increase included $7.5 million of accumulated discount on reserves that was expensed as a result of our decision to discontinue discounting reserves effective January 1, 2000. 2003.

See Note 2111 of Notes to PICO’s Consolidated Financial Statements, "Cumulative Effect of Change in Accounting Principle." These changes to prior years' reserves were due to the following: CHANGE IN UNPAID LOSS AND LAE RESERVES FOR PRIOR YEARS
2001 2000 1999 ----------------- ------------------- ----------------- Increase (decrease) in provision for prior year claims $ (9,833,352) $ 1,300,413 $ 15,878,697 Retroactive reinsurance (529,993) (267,653) (564,469) Accretion of reserve discount 994,545 Cumulative effect of change in accounting principle 7,520,744 ---------------- ------------------ ---------------- Net increase (decrease) in liabilities for unpaid loss and LAE of prior years $ (10,363,345) $ 8,553,504 $ 16,308,773 ================ ================== ================
See schedule in Note 12 of Notes to PICO's Consolidated Financial Statements, "Reserves“Reserves for Unpaid Loss and Loss Adjustment Expenses"Expenses” for additional information regarding reserve changes.

Although insurance reserves are certified annually by independent actuaries for each insurance company 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 loss adjustment expenses. Physicians' liability for unpaid medical professional liability insurance losses and loss adjustment expenses was discounted through December 31, 1999, to reflect investment income as permitted by the Ohio Department

ANALYSIS OF LOSS AND LOSS ADJUSTMENT EXPENSE DEVELOPMENT

The following table presents the development of balance sheet liabilities for 19911995 through 20012005 for all continuing operations property and casualty and workers’ compensation lines of business includingand medical professional liability insurance. The "Net“Net liability as originally estimated"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“Gross liability as originally estimated"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.
Year Ended December 31, ------------------------------------------------------------------------------------------ 1991 1992 1993 1994 1995 1996 -------------- ------------- ------------- ------------- ------------- ---------- (In thousands) Net liability as originally estimated: $129,768 $159,804 $179,390 $153,212 $137,523 $164,817 Discount 30,647 31,269 32,533 20,144 16,568 12,216 Gross liability as originally estimated: 160,415 191,073 211,923 173,356 154,091 177,033 Cumulative payments as of: One year later 42,986 41,550 34,207 35,966 27,128 59,106 Two years later 81,489 73,012 69,037 61,263 65,062 95,574 Three years later 103,505 103,166 90,904 93,908 86,865 115,160 Four years later 120,073 116,278 118,331 110,272 100,967 129,907 Five Years later 127,725 139,028 128,773 119,879 111,553 138,505 Six years later 142,973 143,562 136,820 129,819 116,575 Seven years later 147,142 148,426 145,683 132,394 Eight years later 151,751 156,620 147,386 Nine years later 159,205 157,975 Ten years later 160,426 Liability re-estimated as of: One year later 188,811 197,275 183,560 170,411 147,324 176,922 Two years later 184,113 179,763 184,138 163,472 146,653 192,203 Three years later 174,790 182,011 175,308 162,532 151,752 202,014 Four years later 177,811 176,304 178,544 165,696 156,482 202,767 Five Years later 172,431 181,721 178,584 167,145 159,266 191,728 Six years later 175,830 181,868 178,371 167,821 150,375 Seven years later 177,603 181,029 178,717 160,233 Eight years later 178,419 183,229 171,926 Nine years later 180,624 179,052 Ten years later 177,577 Cumulative Redundancy (Deficiency) ($17,162) $12,021 $39,997 $13,123 $3,716 ($14,695)
48
Year Ended December 31, --------------------------------------------------------------------- 1997 1998 1999 2000 2001 ------------- ------------- ----------- ------------ --------- (In thousands) Net liability as originally estimated: $128,205 $102,877 $98,655 $93,997 $75,259 Discount 9,159 8,515 7,521 Gross liability before discount as originally estimated: 137,364 111,392 106,176 93,997 75,259 Cumulative payments as of: One year later 44,750 31,056 25,625 21,688 Two years later 69,571 51,184 41,029 Three years later 85,896 62,494 Four years later 95,591 Five Years later Six years later Seven years later Eight years later Nine years later Ten years later Liability re-estimated as of: One year later 144,367 127,269 107,521 83,511 Two years later 160,325 127,898 97,614 Three years later 160,239 117,246 Four years later 149,723 Five Years later Six years later Seven years later Eight years later Nine years later Ten years later Cumulative Redundancy (Deficiency) ($12,359) ($5,854) $8,562 $10,486 RECONCILIATION TO FINANCIAL STATEMENTS Gross liability - end of year $148,689 $121,442 $98,409 Reinsurance recoverable (42,514) (27,445) (23,190) ----------- ------------ --------- Net liability before discount - end of year 106,175 93,997 75,219 Net discount (7,521) ----------- ------------ --------- Net liability - end of year (discounted for 1998 and 1999) 98,654 93,997 75,219 Reinsurance recoverable (discounted for 1998 and 1999) 40,334 27,445 23,190 ----------- ------------ --------- 138,988 121,442 98,409 Discontinued personal lines insurance 145 100 40 ----------- ------------ --------- Balance sheet liability (discounted for 1998 and 1999) $139,133 $121,542 $98,449 =========== ============ ========= Gross re-estimated liability - latest $146,131 $114,299 Re-estimated recoverable - latest (48,518) (30,788) ----------- ------------ Net re-estimated liability before discount - latest 97,613 83,511 Net re-estimated discount - latest ----------- ------------ Net re-estimated liability - latest $97,613 $83,511 =========== ============ Net cumulative redundancy before discount $8,562 $10,486 =========== ============

            
  
1995
 
1996
 
1997
 
1998
 
1999
 
  
(In thousands)
 
Net liability as originally estimated: $135,825  $153,891  $110,931  $89,554  $88,112 
Discount  16,568  12,217  9,159  8,515  7,521 
Gross liability as originally estimated:  152,393  166,108  120,090  98,069  95,633 
Cumulative payments as of:                
One year later  26,331  54,500  37,043  23,696  22,636 
Two years later  63,993  88,298  57,622  41,789  31,987 
Three years later  85,649  107,094  73,096  50,968  39,150 
Four years later  99,730  121,698  82,249  58,129  45,140 
Five Years later  110,299  130,247  89,398  64,119  51,566 
Six years later  115,312  137,462  95,454       
Seven years later  118,396  143,532          
Eight years later  121,837             
Nine years later                
Ten years later                
Liability re-estimated as of:                
One year later  145,824  166,870  129,225  114,347  96,727 
Two years later  145,031  182,963  145,543  115,539  85,786 
Three years later  150,439  193,498  146,618  104,689  83,763 
Four years later  155,183  194,423  135,930  102,704  88,460 
Five Years later  157,973  183,333  133,958  107,409  88,167 
Six years later  149,074  181,705  138,520       
Seven years later  147,525  185,201          
Eight years later  141,028             
Nine years later                
Ten years later                
Cumulative Redundancy (Deficiency) $11,365   ($19,093 ($18,430 ($9,340$7,466 
    
Year Ended December 31,
 
  
2000
 
2001
 
2002
 
2003
 
2004
 
2005
 
  
(In Thousands)
 
Net liability as originally estimated: $74,896 $54,022 $44,906 $43,357 $36,603 $28,618 
Discount                   
Gross liability before discount as originally estimated:  74,896  54,022  44,906  43,357  36,603  28,618 
Cumulative payments as of:                   
One year later  9,767  7,210  6,216  6,515  4,227    
Two years later  16,946  13,426  12,729  10,740       
Three years later  23,162  19,939  16,956          
Four years later  29,675  24,166             
Five Years later  33,902                
Six years later                   
Seven years later                   
Eight years later                   
Nine years later                   
Ten years later                   
Liability re-estimated as of:                   
One year later  63,672  52,115  49,574  43,115  32,845    
Two years later  61,832  56,782  49,331  39,358       
Three years later  66,494  56,540  45,574          
Four years later  66,275  52,784             
Five Years later  62,519                
Six years later                   
Seven years later                   
Eight years later                   
Nine years later                   
Ten years later                   
Cumulative Redundancy (Deficiency) $12,377  $(2,518)$(668)$3,999 $3,758  

RECONCILIATION TO FINANCIAL STATEMENTS       
Gross liability - end of year $60,847  $53,905  $44,476 
Reinsurance recoverable  (17,490 (17,302 (15,858)
Net liability - end of year  43,357  36,603  28,618 
Reinsurance recoverable  17,490  17,302  15,858 
   60,847  53,905  44,476 
Discontinued personal lines insurance  17  51  132 
Liability to California Insurance Guarantee Association for Workers' Compensation payouts     2,038  2,038 
Balance sheet liability $60,864 $55,994 $46,646 
           
Gross re-estimated liability - latest $59,506 $51,898    
Re-estimated recoverable - latest  (20,148) (19,053)   
Net re-estimated liability - latest $39,358 $32,845    
Net cumulative redundancy $3,999 $3,758    

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 1994,1995, but incurred in 1991,1992, will be included in the decrease or increase amount for 1991, 1992, 1993 and 1993.1994. 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. 49

The data in the above table is based on Schedule P from each of the insurance companies' 1991Physician’s and Citation’s 1995 to 20012005 Annual Statements, as filed with state insurance departments; however, the development table above differs from the development displayed in Schedule P, Part-2, of the insurance Annual Statements as Schedule P, Part-2, excludes unallocated loss adjustment expenses. LOSS RESERVE EXPERIENCE

Loss Reserve Experience

The inherent uncertainties in estimating loss reserves are greater for some insurance products than for others, and are dependent on the length of the reporting lag or "tail"“tail” associated with a given product (i.e., the lapse of time between the occurrence of a claim and the report of the claim to the insurer), on the diversity of historical development patterns among various aggregations of claims, the amount of historical information available during the estimation process, the degree of impact that changing regulations and legal precedents may have on open claims, and the consistency of reinsurance programs over time, among other things. Because medical professional liability insurance, and commercial casualty and workers’ compensation claims may not be fully paid for several years or more, estimating reserves for such claims can be more uncertain than estimating reserves in other lines of insurance. As a result, precise reserve estimates cannot be made for several years following a current accident year for which reserves are initially established.


There can be no assurance that the insurance companies have established reserves that are 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'sPICO’s statement of operations and financial results. condition.

Reconciliation of Unpaid Loss and Loss Adjustment Expenses

An analysis of changes in the liability for unpaid losses and loss adjustment expenses for 2001, 2000,2005, 2004 and 19992003 is set forth in Note 1211 of Notes to PICO'sPICO’s Consolidated Financial Statements, "Reserves“Reserves for Unpaid Loss and Loss Adjustment Expenses." REINSURANCE

Reinsurance

All of PICO’s insurance companies seek to reduce the loss that may arise from individually significant claims or other events that cause unfavorable underwriting results by reinsuring certain levels of risk with other insurance carriers. Various reinsurance treaties remain in place to limit PICO’s exposure levels. See Note 10 of Notes to PICO’s Consolidated Financial Statements, “Reinsurance.” PICO’s insurance subsidiaries are contingently liable with respect to reinsurance contracts in the event that reinsurers are unable to meet their obligations under the reinsurance agreements in force.

Medical Professional Liability Insurance through Physicians Insurance Company of Ohio

On July 14, 1995, Physicians and Professionals entered into an Agreement for the Purchase and Sale of Certain Assets with Mutual Assurance, Inc. This transaction closed on August 28, 1995. Pursuant to the agreement, Physicians and Professionals sold their professional liability insurance business and related liability insurance business for physicians and other health care providers.

Simultaneously with execution of the agreement, Physicians and Mutual entered into a reinsurance treaty pursuant to which Mutual agreed to assume all risks attaching after July 15, 1995 under medical professional liability insurance policies issued or renewed by Physicians on physicians, surgeons, nurses, and other health care providers, dental practitioner professional liability insurance policies including corporate and professional premises liability coverage issued by Physicians, and related commercial general liability insurance policies issued by Physicians, net of applicable reinsurance.

Prior to July 1, 1993, Physicians ceded a portion of the risk it wrote under numerous reinsurance treaties at various retentions and risk limits. However, during the last two accident years that Physicians wrote premium (July 1, 1993 to July 15, 1995), Physicians ceded reinsurance contracts through TIGOdyssey America Reinsurance CompanyCorporation, a subsidiary of Odyssey Re Holdings Corp. (rated A [Strong]by A. M. Best Company) and Medical Assurance Company, a wholly owned subsidiary of Pro Assurance Group (rated A- by Standard & Poors), Transatlantic Reinsurance Company (rated AA [Very Strong] by S&P) and Cologne Reinsurance Company of America (rated BBBpi [Good] by S&P). Physicians ceded insurance to these carriers on an automatic basis when retention limits were exceeded. Physicians retained all risks up to $200,000 per occurrence. All risks above $200,000, up to policy limits of $5 million, were transferred to reinsurers, subject to the specific terms and conditions of the various reinsurance treaties. Physicians remains primarily liable to policyholders for ceded insurance should any reinsurer be unable to meet its contractual obligations.

Property and Casualty Insurance Effective January 1, 1998, Sequoia andthrough Citation entered into an inter-company reinsurance pooling agreement for business in force as of January 1, 1998 and business written thereafter. PerInsurance Company

For the agreement, Citation ceded 100% of its net premium and losses to Sequoia and Sequoia then ceded 50% of its net premiums and losses to Citation. Sequoia and Citation shared equally in the underwriting expenses. This arrangement was terminated effective January 1, 2000. 50 During this period, Citation and Sequoia had the same reinsurance program. For property business, reinsurance providedprovides coverage of $10.4 million excess of $150,000 per occurrence. For casualty business, excluding umbrella coverage, reinsurance provided coverage of $4.9 million excess of $150,000 per occurrence. Umbrella coveragescoverage’s were reinsured $9.9 million excess of $100,000 per occurrence. The catastrophe treaties for 1998 and thereafter provided coverage of 95% of $14 million excess of $1 million per occurrence. Facultative reinsurance was placed with various reinsurers. Effective January 1, 2002, Sequoia increased its retention for property and casualty losses from $150,000 to $200,000 per occurrence. Therefore, reinsurance provides property coverage of $10.3 million excess of $200,000 per occurrence, and casualty coverage of $4.8 million excess of $200,000 per occurrence. In addition, Sequoia changed the umbrella reinsurance from $9.9 million excess of $100,000 per occurrence to 98% quota share reinsurance for the first $5 million. Therefore, Sequoia will retain 2% of each umbrella loss while the reinsurance provides for 98% of each umbrella loss. The reinsurance for umbrella business $5 million excess of $5 million per occurrence remains at 100%. The catastrophe treaties for 2002 provide coverage of 70% for $1.5 million excess of $1 million per occurrence, and 95% for $12.5 million per occurrence excess of $2.5 million.

Citation does not require reinsurance from 2002 onwards for all its property and casualty lines of business, as its last policy expired in December 2001. Where

If the reinsurers are "not admitted"“not admitted” for regulatory purposes, Sequoia and Citation presentlyhas to maintain sufficient collateral with approved financial institutions to secure cessions of paid losses and outstanding reserves. All policy and claims liabilities of Sequoia prior to August 1, 1995 have been 100% reinsured with Sydney Reinsurance Corporation and unconditionally guaranteed by QBE Insurance Group Limited.

See Note 1110 of Notes to Consolidated Financial Statements, "Reinsurance,"“Reinsurance,” with regard to reinsurance recoverable concentration for all property and casualty lines of business as of December 31, 2001. PICO2005. Citation remains contingently liable with respect to reinsurance contracts in the event that reinsurers are unable to meet their obligations under the reinsurance agreements in force.

Workers’ Compensation Insurance through Citation Insurance Company

Claims and Liabilities Related to the Insolvency of Fremont Indemnity Company

In 1997, pursuant to a Quota Share Reinsurance Agreement (the “Reinsurance Agreement”), Citation ceded its California workers’ compensation insurance liabilities to Citation National Insurance Company (“CNIC”) and transferred all administrative services relating to these liabilities to Fremont. The Reinsurance Agreement became effective upon Fremont’s acquisition, with approval from the California Department of Insurance (the “Department”), of CNIC on or about June 30, 1997. Thereafter, on or about December 31, 1997, CNIC merged, with Department approval, with and into Fremont. Accordingly, since January 1, 1998, Fremont has been both the reinsurer and the administrator of the California workers’ compensation business ceded by Citation.

During the period from June 30, 1997 (the date on which Citation ceded its workers’compensation insurance liabilities) through July 2, 2003 (the date on which Fremont was placed in liquidation), Fremont maintained a workers’ compensation insurance securities deposit in California for the benefit of claimants under workers’ compensation insurance policies issued, or assumed, by Fremont. 

Concurrent with Fremont’s posting of the portion of the total deposit that related to Citation’s insureds, Citation reduced its own workers’ compensation insurance reserves by the amount of that deposit.

On June 4, 2003, the Superior Court of the State of California for the County of Los Angeles (the “Liquidation Court”) entered an Order of Conservation over Fremont and appointed the California Department of Insurance Commissioner (the “Commissioner”) as the conservator. Pursuant to such order, the Commissioner was granted authority to take possession of all of Fremont’s assets, including its rights in the deposit for Citation’s insureds. Shortly thereafter, on July 2, 2003, the Liquidation Court entered an Order appointing the Commissioner as the liquidator of Fremont’s Estate.

Shortly thereafter, Citation concluded that, because Fremont had been placed in liquidation, Citation was no longer entitled to take a reinsurance credit for the deposit for Citation’s insureds under the statutory basis of accounting. Consequently, Citation reversed the $7.5 million reinsurance recoverable from Fremont in its June 30, 2003 financial statements prepared on the statutory basis of accounting. In addition, Citation made a corresponding provision for the reinsurance recoverable from Fremont at June 30, 2003 for GAAP purposes.

In June 2004, Citation filed litigation against the California Department of Insurance in the Superior Court of California to recover its workers’ compensation trust deposits held by Fremont prior to Fremont’s liquidation.

In September 2004, the Superior Court ruled against Citation’s action. As a result, Citation did not receive any distribution from the California Insurance Guarantee Association or Fremont and will not receive any credit for the deposit held by Fremont for Citation’s insureds.
In consideration of the potential cost and the apparent limited prospect of obtaining relief, Citation decided not to file an appeal.

Reinsurance Agreements on Workers’ Compensation Insurance Liabilities

In addition to the reinsurance agreements with Fremont noted above, Citation’s workers’ compensation insurance liabilities from policy years 1986 to 1997 retain additional reinsurance coverage with General Reinsurance, a wholly owned subsidiary of Berkshire Hathaway, Inc. (Standard & Poors rating of AAA.) Policy years 1986 and 1987 have a Company retention of $150,000; policy years 1988 and 1989 have a Company retention of $200,000 and policy years 1990 through to 1997 have a Company retention of $250,000. For policy years 1983 to 1985 partial reinsurance exists and is administered through Guy Carpenter Company as broker. These treaties are for losses in excess of $75,000 retention for 1983 and 1984 and $100,000 retention for 1985. The subscriptions on these treaties are for 30%, 35% and 52.5% for the respective treaty years.

See Note 10 of Notes to Consolidated Financial Statements, “Reinsurance,” with regard to reinsurance recoverable concentration for Citation’s workers’ compensation line of business as of December 31, 2005. Citation remains contingently liable with respect to reinsurance contracts in the event that reinsurers are unable to meet their obligations under the reinsurance agreements in force.



PICO’s balance sheets include a significant amount of assets and liabilities whosethe fair value of which are subject to market risk. Market risk is the risk of loss arising from adverse changes in market interest rates or prices. PICO currently has interest rate risk as it relates to its fixed maturity securities and mortgage participation interests, equity price risk as it relates to its marketable equity securities, and foreign currency risk as it relates to investments denominated in foreign currencies. PICO's bank debt is short-termGenerally, PICO’s borrowings are short to medium term in nature as PICO generally secures rates for periods of approximately one to three years and therefore approximatesapproximate fair value. At December 31, 2001,2005, PICO had $100.9$92.8 million of fixed maturity securities and mortgage participation interests, $57$194.6 million of marketable equity securities that were subject to market risk, of which $36.8$98.6 million were denominated in foreign currencies, primarily Swiss francs and Australian dollars. PICO'sfrancs. PICO’s investment strategy is to manage the duration of the portfolio relative to the duration of the liabilities while managing interest rate risk.

PICO uses two models to analyzereport the sensitivity of its assets and liabilities subject to the above risks. For its fixed maturity securities and mortgage participation interests, PICO uses duration modeling to calculate changes in fair value. For its marketable securities, PICO uses a hypothetical 20% decrease in the fair value to analyze the sensitivity of its market risk assets and liabilities. For investments denominated in foreign currencies, PICO uses a hypothetical 20% decrease in the local currency of that investment. Actual results may differ from the hypothetical results assumed in this disclosure due to possible actions taken by management to mitigate adverse changes in fair value and because the fair value of a securities may be affected by credit concerns of the issuer, prepayment rates, liquidity, and other general market conditions. The sensitivity analysis duration model produced a loss in fair value of $3.5$1.1 million for a 100 basis point decline in interest rates on itsPICO’s fixed securities and mortgage participation interests. The hypothetical 20% decrease in fair value of PICO'sPICO’s marketable equity securities produced a loss in fair value of $10.9$38.9 million before tax, that would impact the unrealized appreciation in shareholders'shareholders’ equity. The hypothetical 20% decrease in the local currency of PICO'sPICO’s foreign denominated investments produced a loss of $5.8$17.4 million that would impact the unrealized appreciation and foreign currency translation in shareholders'shareholders’ equity.



PICO’s financial statements as of December 31, 20012005 and 20002004 and for each of the three years in the period ended December 31, 20012005 and the independent auditors'auditors’ report is included in this report as listed in the index. 51


SELECTED QUARTERLY FINANCIAL DATA

Summarized unaudited quarterly financial data (in thousands, except share and per share amounts) for 20012005 and 20002004 are shown below. In management'smanagement’s opinion, the interim financial statements from which the following data containshas been derived contain all adjustments necessary for a fair presentation of results for such interim periods and are of a normal recurring nature. In the fourth quarter


  
Three Months Ended
 
  March 31, June 30, September 30, December 31, 
  2005 2005 2005 2005 
Net investment income and net realized gain  $4,670  $5,657  $2,611  $2,981 
Sale of land and water rights  2,154  96,171  3,914  22,745 
Total revenues  8,116  103,211  8,138  26,918 
Gross profit - Land and water rights  1,412   57,888   2,468   16,686  
Gross profit - Service revenue   606   766   967   488  
Net income (loss)  (6,963) 23,592  (9,283) 8,856 
              
Basic and Diluted:             
Net income (loss) per share $(0.56)$1.83 $(0.70)$0.67 
              
Weighted average common and equivalent shares outstanding  12,366,440  12,919,496  13,271,440  13,271,440 


  
Three Months Ended
 
  March 31, June 30, September 30, December 31, 
  2004 2004 2004 2004 
          
Net investment income and net realized gain  $743  $1,782  $704  $5,836 
Sale of land and water rights  276  2,096  1,151  7,355 
Total revenues  2,397  5,766  4,307  15,658 
Gross profit - Land and water rights  165   923   624   4,671  
Gross profit - Service revenue  374   959   1,544   1,532  
Net income (loss)  (5,018) (4,532) (2,183) 1,174 
              
Basic and Diluted:             
Net income (loss) per share $(0.41)$(0.37)$(0.18)$0.09 
              
Weighted average common and equivalent shares outstanding  12,370,264  12,368,928  12,367,664  12,366,479 

45

Table 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 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. AS PREVIOUSLY REPORTED
THREE MONTHS ENDED ---------------------------------------------------------------- March 31, June 30, September 30, December 31, 2001 2001 2001 2001 ------------- ----------- -------------- --------------- Premium income $10,039 $10,536 $10,665 $12,051 Net investment income and net realized gain (loss) 795 2,203 (473) 2,131 Total revenues 20,721 15,658 15,749 17,452 Net income (loss) (2,263) (2,462) 1,364 8,134 ------------- ----------- -------------- --------------- Basic: ------------- ----------- -------------- --------------- Net income (loss) per share $ (0.18) $ (0.20) $ 0.11 $ 0.66 ------------- ----------- -------------- --------------- Weighted average common and equivalent shares outstanding 12,390,096 12,390,096 12,390,096 12,368,616 Diluted: Net income (loss) per share $ (0.18) $ (0.20) $ 0.11 $ 0.66 ------------- ----------- -------------- --------------- Weighted average common and equivalent shares outstanding 12,390,096 12,390,096 12,408,408 12,368,616 ------------- ----------- -------------- ---------------
AS RESTATED, SEE NOTE 22
THREE MONTHS ENDED ------------------------------------------------------------- March 31, June 30, September 30, December 31, 2001 2001 2001 2001 ----------- ----------- ----------- - ----------- Premium income $ 10,039 $ 10,536 $ 10,665 $ 12,051 Net investment income and net realized gain (loss) 2,370 3,877 (1,014) 1,115 Total revenues 22,296 17,332 15,208 16,436 Net income (loss) (1,439) (1,534) 866 7,221 ----------- ----------- -------------- --------------- Basic: ----------- ----------- -------------- --------------- Net income (loss) per share $ (0.12) $ (0.12) $ 0.07 $ 0.58 ----------- ----------- -------------- --------------- Weighted average common and equivalent shares outstanding 12,390,096 12,390,096 12,390,096 12,368,616 Diluted: Net income (loss) per share $ (0.12) $ (0.12) $ 0.07 $ 0.58 ----------- ----------- -------------- --------------- Weighted average common and equivalent shares outstanding 12,390,096 12,390,096 12,408,408 12,368,616 ----------- ----------- -------------- ---------------
52 AS PREVIOUSLY REPORTED
THREE MONTHS ENDED ---------------------------------------------------------- March 31, June 30, September 30, December 31, 2000 2000 2000 2000 ------------ ------------ ------------- ------------- Premium income $7,514 $7,678 $8,272 $10,972 Net investment income and net realized gain (loss) 1,443 1,558 (4,589) 2,301 Total revenues 10,095 11,027 4,940 19,291 Net income (loss) (8,521) 121 (2,805) 1,679 ------------ ------------ ------------- ------------- Basic: ------------ ------------ ------------- ------------- Net income (loss) per share $ (0.93) $ 0.01 $ (0.23) $ 0.14 ------------ ------------ ------------- ------------- Weighted average common and equivalent shares outstanding 9,200,926 12,390,070 12,390,096 12,390,096 Diluted: Net income (loss) per share $ (0.93) $ 0.01 $ (0.23) $ 0.14 ------------ ------------ ------------- ------------- Weighted average common and equivalent shares outstanding 9,200,926 12,390,070 12,390,096 12,390,096 ------------ ------------ ------------- -------------
AS RESTATED, SEE NOTE 22
THREE MONTHS ENDED -------------------------------------------------------- March 31, June 30, September 30, December 31, 2000 2000 2000 2000 ---------- ----------- ----------- ----------- Premium income $ 7,514 $ 7,678 $ 8,272 $ 10,972 Net investment income and net realized gain (loss) 1,999 1,510 (4,589) 2,255 Total revenues 10,651 10,979 4,940 19,245 Net income (loss) (8,444) (401) (3,823) 1,368 ------------ ----------- ------------- ----------- Basic: ------------ ----------- ------------- ----------- Net income (loss) per share $ (0.92) $ (0.03) $ (0.31) $ 0.11 ------------ ----------- ------------- ----------- Weighted average common and equivalent shares outstanding 9,200,926 12,390,070 12,390,096 12,390,096 Diluted: Net income (loss) per share $ (0.92) $ (0.03) $ (0.31) $ 0.11 ------------ ----------- ------------- ----------- Weighted average common and equivalent shares outstanding 9,200,926 12,390,070 12,390,096 12,390,096 ------------ ----------- ------------- -----------
53 Contents

PICO HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 20012005 AND 2000 2004
AND FOR EACH OF THE
THREE YEARS IN THE PERIOD
ENDED DECEMBER 31, 2001, 2000 and 1999 2005




INDEX TO CONSOLIDATED FINANCIAL STATEMENTS



To the Board of Directors and Shareholders of PICO HOLDINGS, INC. Holdings, Inc.
We have audited the accompanying consolidated balance sheets of PICO Holdings, Inc. and its subsidiaries (collectively "the Company"(the “Company”) as of December 31, 20012005 and 2000,2004, and the related consolidated statements of operations, shareholders'shareholders’ equity and comprehensive income, and cash flows for each of the three years in the period ended December 31, 2001.2005.  These financial statements are the responsibility of the Company'sCompany’s management.  Our responsibility is to express an opinion on these financial statements based on our audits.  We did not audit the financial statements of HyperFeed Technologies, Inc. (a consolidated subsidiary) for the year ended December 31, 2003, which statements reflect net income of $1,600,818 for the year then ended. Those statements were audited by other auditors whose report has been furnished to us, and our opinion, insofar as it relates to the amounts included for HyperFeed Technologies, Inc., is based solely on the report of such other auditors.
We conducted our audits in accordance with auditingthe standards generally accepted inof the United States of America.Public Company Accounting Oversight Board (United States).  Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.  An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements.  An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.  We believe that our audits and the report of other auditors provide a reasonable basis for our opinion.
In our opinion, based on our audits and the report of other auditors, such consolidated financial statements present fairly, in all material respects, the financial position of PICO Holdings, Inc. and subsidiaries as of December 31, 20012005 and 2000,2004, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2001,2005, in conformity with accounting principles generally accepted in the United States of America. As discussed
We have also audited, in Note 21accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of the Company’s internal control over financial reporting as of December 31, 2005, based on the criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 9, 2006 expressed an unqualified opinion on management’s assessment of the effectiveness of the Company’s internal control over financial reporting and an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.
/s/ Deloitte & Touche LLP
San Diego, California
March 9, 2006

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of
HyperFeed Technologies, Inc.:
We have audited the consolidated statement of operations, stockholders' equity, and cash flows of HyperFeed Technologies, Inc. and subsidiary (the Company) as of December 31, 2003.  These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in 2000 the Company changed its method offinancial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for medical professional liability claims reserves. As discussed in Note 22,our opinion.

In our opinion, the accompanying consolidated financial statements have been restated. DELOITTE & TOUCHEreferred to above present fairly, in all material respects, the results of operations and the cash flows of HyperFeed Technologies, Inc. and subsidiary for the year then ended December 31, 2003 in conformity U.S. generally accepted accounting principles.

/s/ KPMG LLP San Diego, California
Chicago, Illinois
March 8, 2002 (March 27, 2003 as to Note 22) 55 4, 2004


PICO HOLDINGS, INC. AND SUBSIDIARIES


December 31, 20012005 and 2004

ASSETS
  2005 2004 
Available for Sale Investments (Note 3):     
Fixed maturities $92,813,137   $39,479,216 
Equity securities  194,633,197  142,978,213 
Total investments  287,446,334  182,457,429 
        
Cash and cash equivalents  37,794,416  17,407,138 
Notes and other receivables, net (Note 6)  14,692,888  14,951,973 
Reinsurance receivables (Note 10)  16,186,105  17,157,329 
Real estate and water assets (Note 5)  76,891,435  110,700,456 
Property and equipment, net (Note 8)  1,572,492  2,436,921 
Other assets  7,188,858  9,512,807 
Assets of discontinued operations (Note 2)  57,094  6,970 
Total assets $441,829,622 $354,631,023 
PICO HOLDINGS, INC. AND 2000 ASSETS
2001 2000 ------------------ ------------------ (AS RESTATED, (AS RESTATED, SEE NOTE 22) SEE NOTE 22) Investments (Note 3): Available for sale: Fixed maturities $ 100,895,244 $ 101,895,274 Equity securities 54,364,542 55,051,049 Investment in unconsolidated affiliates (Note 4) 2,583,590 4,139,830 ------------------ ------------------ Total investments 157,843,376 161,086,153 Cash and cash equivalents 17,361,624 13,644,312 Premiums and other receivables, net (Note 6) 18,076,561 19,032,603 Reinsurance receivables (Note 11) 23,783,106 27,594,039 Accrued investment income 1,595,400 1,717,109 Land and related mineral rights and water rights (Note 5) 125,997,642 137,235,241 Property and equipment, net (Note 8) 2,727,931 2,944,513 Deferred policy acquisition costs (Note 9) 6,913,589 6,299,819 Goodwill and intangibles, net (Note 1) 3,487,414 4,000,508 Net deferred income taxes (Note 7) 8,583,265 13,100,328 Other assets 8,048,856 5,427,828 ------------------ ------------------ Total assets $ 374,418,764 $ 392,082,453 ================== ==================
SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

December 31, 2005 and 2004

LIABILITIES AND SHAREHOLDERS’ EQUITY

  2005 2004 
Policy liabilities and accruals:     
Unpaid losses and loss adjustment expenses (Note 11) $46,646,906 $55,994,375 
Reinsurance balance payable  325,081  673,024 
Stock appreciation rights payable (Note 1)     15,731,741 
Deferred compensation (Note 1)  42,737,293  2,730,069 
Other liabilities  20,039,392  9,259,188 
Bank and other borrowings (Note 19)  12,334,868  18,020,559 
Net deferred income taxes (Note 7)  17,239,062  9,193,060 
Other liabilities of discontinued operations (Note 2 )  533,548  759,372 
Total liabilities  139,856,150  112,361,388 
Minority interest  1,098,515  2,340,337 
        
Commitments and Contingencies (Notes 10, 11, 12, 13, 14, 15 and 19)       
        
Common stock, $.001 par value; authorized 100,000,000; 17,706,923 issued and outstanding at December 31, 2005 and 16,801,923 at December 31, 2004  17,707  16,802 
Additional paid-in capital  257,466,412  236,089,222 
Accumulated other comprehensive income (Note 1)  60,092,462  36,725,700 
Retained earnings  61,725,860  45,524,219 
   379,302,441  318,355,943 
Less treasury stock, at cost (common shares: 4,435,483 in 2005 and 4,435,444 in 2004)  (78,427,484) (78,426,645)
Total shareholders' equity  300,874,957  239,929,298 
Total liabilities and shareholders' equity $441,829,622 $354,631,023 



PICO HOLDINGS, INC. AND SUBSIDIARIES


For the years ended December 31, 2005, 2004 and 2003

  2005 2004 2003 
Revenues:       
Sale of real estate and water assets $124,984,427 $10,879,172 $19,751,160 
Net investment income (Note 3)  8,196,470  5,799,357  5,370,104 
Net realized gain on investments (Note 3)  7,721,774  3,265,505  2,745,657 
Service revenue  4,269,618  5,994,688  1,363,925 
Other  1,210,320  2,188,114  3,647,748 
Total revenues  146,382,609  28,126,836  32,878,594 
Costs and expenses:          
Operating and other costs  42,470,210  25,568,411  19,203,015 
Stock appreciation rights expense  23,894,241  9,874,865  5,969,762 
Cost of real estate and water assets sold  46,530,763  4,496,652  12,648,864 
Cost of service revenue  1,443,084  1,585,129  1,069,174 
Loss and loss adjustment (recoveries) expenses (Note 11)  (3,664,832) 443,284  4,667,024 
Interest expense  692,159  792,076  721,322 
Depreciation and amortization  2,101,252  2,263,355  1,813,114 
Total costs and expenses  113,466,877  45,023,772  46,092,275 
Equity in loss of unconsolidated affiliates        (564,785)
Income (loss) before income taxes and minority interest  32,915,732  (16,896,936) (13,778,466)
Provision (benefit) for federal, foreign and state income taxes (Note 7)  17,993,165  (3,047,721) (1,202,407)
Income (loss) before minority interest  14,922,567  (13,849,215) (12,576,059)
Minority interest in (income) loss of subsidiaries  1,241,822  3,212,811  (1,045,605)
Income (loss) from continuing operations  16,164,389  (10,636,404) (13,621,664)
Income (loss) from discontinued operations, net (Note 2)  (507,748) (422,280) 2,933,366 
Gain on sale of discontinued operations, net  545,000  500,000  7,450,486 
Net income (loss) $16,201,641 $(10,558,684)$(3,237,812)
           
Net income (loss) per common share - basic and diluted:          
Income (loss) from continuing operations $1.25 $(0.86)$(1.10)
Discontinued operations     0.01  0.84 
Net income (loss) per common share $1.25 $(0.85)$(0.26)
Weighted average shares outstanding  12,959,029  12,368,354  12,375,933 


PICO HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS, CONTINUED DECEMBER 31, 2001 AND 2000 LIABILITIES AND SHAREHOLDERS' EQUITY
2001 2000 ----------------- ------------------ Policy liabilities and accruals: (AS RESTATED, (AS RESTATED, SEE NOTE 22) SEE NOTE 22) Unpaid losses and loss adjustment expenses (Note 12) $ 98,449,053 $ 121,541,722 Unearned premiums 28,143,296 25,505,189 Reinsurance balance payable 5,458,720 5,631,603 Deferred gain on retroactive reinsurance 438,879 968,872 Other liabilities 13,579,220 13,148,093 Bank and other borrowings (Note 20) 14,596,302 15,550,387 Taxes payable 350,133 Excess of fair value of net assets acquired over purchase price (Note 1) 2,792,597 3,360,581 ----------------- ------------------ Total liabilities 163,458,067 186,056,580 ----------------- ------------------ Minority interest 3,062,190 3,920,739 ----------------- ------------------ Commitments and Contingencies Common stock, $.001 par value; authorized 100,000,000; 16,784,223 issued and outstanding at December 31, 2001 and 2000 16,784 16,784 Additional paid-in capital 235,844,655 235,844,655 Accumulated other comprehensive loss (Note 1) (3,225,867) (4,204,335) Retained earnings 53,391,570 48,277,665 ----------------- ------------------ 286,027,142 279,934,769 Less treasury stock, at cost (common shares: 4,415,607 in 2001 and 4,394,127 in 2000) (78,128,635) (77,829,635) ----------------- ------------------ Total shareholders' equity 207,898,507 202,105,134 ----------------- ------------------ Total liabilities and shareholders' equity $ 374,418,764 $ 392,082,453 ================= ==================
The accompanying notes are an integral part of the consolidated financial statements. 57 PICO HOLDINGS, INC. AND SUBSIDIARIES
For the years ended December 31, 2001, 2000 AND 1999
2001 2000 1999 ------------------- ------------------ ------------------- Revenues: (AS RESTATED, (AS RESTATED, (AS RESTATED, SEE NOTE 22) SEE NOTE 22) SEE NOTE 22) Premium income $ 43,289,676 $ 34,435,754 $ 36,379,102 Net investment income (Note 3) 9,766,893 8,860,921 6,604,822 Net realized loss on investments (Note 3) (3,418,496) (7,686,963) (611,373) Sale of land and water rights 17,106,174 5,478,263 6,081,764 Other income 4,528,090 4,726,419 5,199,172 ------------------- ------------------ ------------------- Total revenues 71,272,337 45,814,394 53,653,487 ------------------- ------------------ ------------------- Expenses: Loss and loss adjustment expenses (Note 12) 18,302,320 24,026,218 35,211,836 Amortization of policy acquisition costs (Note 9) 13,044,382 10,250,348 10,484,345 Cost of land and water rights 7,568,229 3,995,508 4,458,694 Insurance underwriting and other expenses 21,685,855 22,355,463 23,794,385 ------------------- ------------------ ------------------- Total expenses 60,600,786 60,627,537 73,949,260 ------------------- ------------------ ------------------- Equity in loss of unconsolidated affiliates (1,529,060) (1,252,020) (4,014,892) ------------------- ------------------ ------------------- Income (loss) before income taxes and minority interest 9,142,491 (16,065,163) (24,310,665) Provision (benefit) for federal, foreign and state income taxes (Note 7) 3,406,464 (9,011,222) (13,422,069) ------------------- ------------------ ------------------- Income (loss) before minority interest 5,736,027 (7,053,941) (10,888,596) Minority interest in loss of subsidiaries 358,449 717,076 706,076 ------------------- ------------------ ------------------- Income (loss) before extraordinary gain and accounting change 6,094,476 (6,336,865) (10,182,520) Extraordinary gain, net of income tax expense of $227,821 442,240 Cumulative effect of change in accounting principle, net (Note 21) (980,571) (4,963,691) ------------------- ------------------ ------------------- Net income (loss) $ 5,113,905 $ (11,300,556) $ (9,740,280) =================== ================== =================== Net income (loss) per common share - basic and diluted: Income (loss) per share before extraordinary gain and cumulative effect $ 0.49 $ (0.55) $ (1.13) Extraordinary gain 0.05 Cumulative effect of change in accounting principle (0.08) (0.43) ------------------- ------------------ ------------------- Net income (loss) per common share $ 0.41 $ (0.97) $ (1.08) =================== ================== =================== Weighted average shares outstanding 12,384,682 11,604,120 8,998,442 =================== ================== ===================
The accompanying notes are an integral part of the consolidated financial statements. 58 PICO HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
Additional Common Paid-In Retained Stock Capital Earnings ---------- ----------------- ----------------- Balance, January 1, 1999, as previously reported $13,329 $ 183,154,588 $ 76,240,000 Prior period adjustments (See Note 22) (6,921,499) ---------- ----------------- ----------------- Balance, January 1, 1999 (*) 13,329 183,154,588 69,318,501 Comprehensive Loss for 1999 Net loss (*) (9,740,280) Net unrealized appreciation on investments net of deferred tax of $2.3 million and reclassification adjustment of $1.3 million (*) Foreign currency translation (*) Total Comprehensive Loss Exercise of 120,000 warrants at $23.80 per share 120 2,850,239 Purchase of 13,000 PICO treasury shares ---------- ----------------- ----------------- Balance, December 31, 1999 (*) $13,449 $ 186,004,827 $ 59,578,221 ========== ================= ================= (*) As Restated, See Note 22
Accumulated Other Comprehensive Income -------------------------------------- Net Unrealized Foreign Appreciation Currency Treasury on Investments Translation Stock Total ----------------- ----------------- ----------------- ---------------- Balance, January 1, 1999, as previously reported $ (3,087,565) $ (4,763,872) $ (77,538,042) $ 174,018,438 Prior period adjustments (See Note 22) 6,640,753 17,968 (262,778) ----------------- ----------------- ----------------- ---------------- Balance, January 1, 1999 (*) (3,553,188) (4,745,904) (77,538,042) 173,755,660 Comprehensive Loss for 1999 Net loss (*) Net unrealized appreciation on investments net of deferred tax of $2.3 million and reclassification adjustment of $1.3 million (*) 4,413,947 Foreign currency translation (*) (1,481,998) Total Comprehensive Loss (6,808,331) Exercise of 120,000 warrants at $23.80 per share 2,850,359 Purchase of 13,000 PICO treasury shares (291,593) (291,593) ----------------- ----------------- ----------------- ---------------- Balance, December 31, 1999 (*) $ 7,967,135 $ (6,227,902) $ (77,829,635) $ 169,506,095 ================= ================= ================= ================ (*) As Restated, See Note 22
The accompanying notes are an integral part of the consolidated financial statements. 59 PICO HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
Additional Common Paid-In Retained Stock Capital Earnings ----------- ------------------ ------------------ Balance, December 31, 1999 (*) $13,449 $ 186,004,827 $ 59,578,221 Comprehensive Loss for 2000 Net loss (*) (11,300,556) Net unrealized depreciation on investments net of deferred tax of $2.2 million (*) Foreign currency translation (*) Total Comprehensive Loss Rights offering, net of $193,000 of expenses 3,335 49,839,828 ---------- ----------------- ----------------- Balance, December 31, 2000 (*) $ 16,784 $ 235,844,655 $ 48,277,665 ========== ================= ================= (*) As Restated, See Note 22
Accumulated Other Comprehensive Loss -------------------------------------- Net Unrealized Appreciation Foreign (Depreciation) Currency Treasury on Investments Translation Stock Total ------------------ ------------------ ------------------ ------------------ Balance, December 31, 1999 (*) $ 7,967,135 $ (6,227,902) $ (77,829,635) $ 169,506,095 Comprehensive Loss for 2000 Net loss (*) Net unrealized depreciation on investments net of deferred tax of $2.2 million (*) (4,355,660) Foreign currency translation (*) (1,587,908) Total Comprehensive Loss (17,244,124) Rights offering, net of $193,000 of expenses 49,843,163 ----------------- ----------------- ----------------- ----------------- Balance, December 31, 2000 (*) $ 3,611,475 $ (7,815,810) $ (77,829,635) $ 202,105,134 ================= ================= ================= ================= (*) As Restated, See Note 22
2005, 2004 and 2003
        Accumulated Other Comprehensive Income     
            
  Common Stock 
Additional
Paid-In
Capital
 Retained Earnings Net Unrealized Appreciation on Investments Foreign Currency Translation Treasury Stock Total 
                
Balance, January 1, 2003 $16,802 $236,082,703 $59,320,715 $9,999,442 $(6,165,766)$(78,222,192)$221,031,704 
                       
Comprehensive Income for 2003    ��                 
Net loss        (3,237,812)            
                       
Net unrealized appreciation on investments net of deferred tax of $3.7 million and reclassification adjustment of $1.5 million           10,879,588          
                       
Foreign currency translation              570,140       
Total Comprehensive Income                    8,211,916 
                       
Acquisition of shares of treasury stock for deferred compensation plans                 (83,218) (83,218)
                       
Balance, December 31, 2003 $16,802 $236,082,703 $56,082,903 $20,879,030 $(5,595,626)$(78,305,410)$229,160,402 


PICO HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS'SHAREHOLDERS’ EQUITY FOR THE YEARS ENDED DECEMBERAND COMPREHENSIVE INCOME, CONTINUED
For the years ended December 31, 2001, 2000 AND 1999
Additional Common Paid-In Retained Stock Capital Earnings ------------ ------------------ --------------- Balance, December 31, 2000 (*) $ 16,784 $ 235,844,655 $ 48,277,665 Comprehensive Loss for 2001 Net income (*) 5,113,905 Net appreciation on investments net of deferred tax of $996,000 and reclassification adjustment of $2.6 million (*) Foreign currency translation (*) Total Comprehensive Loss Acquisition of 21,846 shares of treasury stock for deferred compensation plans ----------- ----------------- -------------- Balance, December 31, 2001 (*) $ 16,784 $ 235,844,655 $ 53,391,570 =========== ================= ============== (*) As Restated, See Note 22
Accumulated Other Comprehensive Loss ---------------------------------- Net Unrealized Foreign Appreciation Currency Treasury on Investments Translation Stock Total ---------------- --------------- ---------------- ---------------- Balance, December 31, 2000 (*) $ 3,611,475 $ (7,815,810) $ (77,829,635) $ 202,105,134 Comprehensive Loss for 2001 Net income (*) Net appreciation on investments net of deferred tax of $996,000 and reclassification adjustment of $2.6 million (*) 1,933,582 Foreign currency translation (*) (955,114) Total Comprehensive Loss 6,092,373 Acquisition of 21,846 shares of treasury stock for deferred compensation plans (299,000) (299,000) --------------- -------------- --------------- --------------- Balance, December 31, 2001 (*) $ 5,545,057 $ (8,770,924) $ (78,128,635) $ 207,898,507 =============== ============== =============== =============== (*) As Restated, See Note 22
2005, 2004 and 2003

        Accumulated Other Comprehensive Income     
  Common Stock 
Additional
Paid-In
Capital
 Retained Earnings Net Unrealized Appreciation on Investments Foreign Currency Translation Treasury Stock Total 
                
Balance, December 31, 2003 $16,802  $236,082,703  $56,082,903  $20,879,030  $(5,595,626$(78,305,410$229,160,402 
                       
Comprehensive Loss for 2004                      
Net loss        (10,558,684)            
Net unrealized appreciation on investments net of deferred tax of $11 million and reclassification adjustment of $2.2 million           21,068,132          
Foreign currency translation              374,164       
Total Comprehensive Income                    10,883,612 
                       
Acquisition of treasury stock for deferred compensation plans                 (121,235) (121,235)
                       
Other     6,519              6,519 
Balance, December 31, 2004 $16,802 $236,089,222 $45,524,219 $41,947,162 $(5,221,462)$(78,426,645)$239,929,298 



PICO HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBERSHAREHOLDERS’ EQUITY AND COMPREHENSIVE INCOME, CONTINUED
For the years ended December 31, 2001, 2000, AND 1999
2001 2000 1999 ----------- ------------- ------------ CASH FLOWS FROM OPERATING ACTIVITIES: (AS RESTATED, (AS RESTATED, (AS RESTATED, SEE NOTE 22) SEE NOTE 22) SEE NOTE 22) Net income (loss) $ 5,113,905 $ (11,300,556) $ (9,740,280) Adjustments to reconcile net income (loss) to net cash used in operating activities: Provision for deferred taxes 4,036,227 (3,910,103) (13,217,925) Cumulative effect of accounting change 980,571 (2,557,053) Depreciation and amortization 2,034,657 2,678,267 3,076,471 Loss on sale of investments 3,418,468 7,686,963 611,373 Gain on sale of interest in Semitropic (5,700,720) Loss on condemnation of property 201,822 Allowance for uncollectible accounts 2,633,204 114,812 4,963 Extraordinary gain on early extinguishment of debt (442,240) Equity in loss of unconsolidated affiliates 1,529,060 1,252,020 4,014,892 Minority interest (358,449) (717,076) (706,076) Changes in assets and liabilities, net of effects of acquisitions: Premiums and other receivables (1,677,162) (7,001,894) 938,386 Land, water and mineral rights 4,922,434 (8,922,701) 329,364 Income taxes (324,837) (883,883) 8,049,785 Reinsurance receivable 3,810,933 17,446,329 10,584,462 Reinsurance payable (172,883) (2,080,999) (4,356,288) Deferred policy acquisition costs (613,770) (1,478,591) 727,406 Deferred gain on retroactive insurance (529,993) (267,653) (564,469) Unpaid losses and loss adjustment expenses (23,092,669) (17,591,153) (15,887,821) Unearned premiums 2,638,107 8,300,499 (3,599,742) Other adjustments, net (2,784,077) 1,927,280 (3,346,702) ------------- -------------------- --------------- Net cash used in operating activities (3,935,172) (17,305,492) (23,524,441) ------------- -------------------- --------------- CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from the sale of available for sale investments: Fixed maturities 68,452,287 4,690,829 Equity securities 7,818,540 1,170,169 11,817,436 Proceeds from maturity of investments 20,470,000 13,900,000 3,815,669 Purchases of available for sale investments: Fixed maturities (83,598,484) (55,497,642) (14,442,126) Equity securities (14,562,923) (14,335,900) (19,166,770) Semitropic lease payment (378,429) (2,333,640) (2,333,333) Proceeds from the sale of interest in Semitropic 10,202,733 Proceeds from the condemnation of property 1,098,178 Proceeds from the sales of real estate 2,741,980 Purchases of property and equipment (760,095) (1,107,898) (739,748) Investments in and advances to affiliates (1,390,851) (753,928) Other investing activities, net 273,000 (537,258) (1,094,370) ------------- -------------------- --------------- Net cash provided by (used in) investing activities 9,014,807 (55,442,191) (20,155,190) ------------- -------------------- --------------- CASH FLOWS FROM FINANCING ACTIVITIES: Repayment of bank and other borrowings (2,903,407) (329,968) (191,787) Proceeds from borrowings 1,949,321 6,068,781 Cash paid to minority shareholders of partnership (500,000) Proceeds from rights offering, net 49,843,163 Proceeds from the sale of warrants 2,850,359 Repurchase of treasury stock (for deferred compensation in 2001) (299,000) (291,593) ------------- -------------------- --------------- Net cash provided by (used in) financing activities (1,753,086) 49,513,195 8,435,760 ------------- -------------------- --------------- Effect of exchange rate changes on cash 390,763 140,427 328,048 ------------- -------------------- --------------- Net increase (decrease) in cash and cash equivalents 3,717,312 (23,094,061) (34,915,823) Cash and cash equivalents, beginning of year 13,644,312 36,738,373 71,654,196 ------------- -------------------- --------------- Cash and cash equivalents, end of year $ 17,361,624 $ 13,644,312 $ 36,738,373 ============= ==================== =============== Supplemental disclosure of cash flow information: Cash paid during the year for: Interest $ 880,000 $ 847,000 $ 284,000 ============= ==================== =============== Income taxes recovered $ (1,190,000) $ (4,907,000) $ (4,627,000) ============= ==================== ===============
2005, 2004 and 2003


        Accumulated Other Comprehensive Income     
  Common Stock 
Additional
Paid-In
Capital
 
Retained
Earnings
 Net Unrealized Appreciation on Investments Foreign Currency Translation Treasury Stock Total 
                
Balance, December 31, 2004 $16,802  $236,089,222  $45,524,219  $41,947,162  $(5,221,462$(78,426,645$239,929,298 
                       
Comprehensive Income for 2005                      
Net income        16,201,641             
Net unrealized appreciation on investments net of deferred tax of $14.6 million and reclassification adjustment of $5.2 million           24,177,250          
Foreign currency translation              (810,488)      
Total Comprehensive Income                    39,568,403 
                       
Acquisition of treasury stock for deferred compensation plans                 (839) (839)
                       
Common stock offering, net of expenses of $1.2 million  905  21,377,190              21,378,095 
                       
Balance, December 31, 2005 $17,707 $257,466,412 $61,725,860 $66,124,412 $(6,031,950)$(78,427,484)$300,874,957 



PICO HOLDINGS, INC. AND SUBSIDIARIES
For the years ended December 31, 2005, 2004 and 2003

  2005 2004 2003 
CASH FLOWS FROM OPERATING ACTIVITIES:       
Net income (loss) $16,201,641 $(10,558,684$(3,237,812)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities, net of acquisitions:          
Provision for deferred taxes  (6,682,146 (2,211,306) (876,207)
Depreciation and amortization  4,175,936  4,127,120  2,757,493 
(Gain) loss on sale of investments  (7,721,774) (3,265,505) (2,745,657)
(Gain) loss on sale of fixed assets  2,617  70,183  23,737 
Gain on sale of Sequoia        (1,568,278)
Allowance for uncollectible accounts  17,278  308,917  270,000 
Impairment of goodwill     194,095    
Equity in loss of unconsolidated affiliates        564,785 
Minority interest  (1,241,822) (3,212,811) 1,045,605 
Changes in assets and liabilities, net of effects of acquisitions:          
Notes and other receivables  241,807  1,169,650  (9,467,051)
Other liabilities  10,000,132  (38,288) (1,278,704)
Other assets  2,421,731  (2,333,997) 217,549 
Real estate and water assets  35,659,806  2,740,891  9,914,760 
Income taxes  809,291  (9,291) 71,846 
Reinsurance receivable  971,224  556,683  (9,881,304)
Reinsurance payable  (347,943) 1,993  133,031 
SAR payable and deferred compensation  24,275,483  10,918,238  7,163,360 
Unpaid losses and loss adjustment expenses  (9,347,469) (4,869,509) 8,160,771 
Net operating cash provided by (used in) discontinued operations  (275,948) (598,940) (1,558,754)
Other adjustments, net  (8,102) 6,516  (135,323)
Net cash provided by (used in) operating activities  69,151,742  (7,004,045) (426,153)
CASH FLOWS FROM INVESTING ACTIVITIES:          
Proceeds from the sale of available for sale investments:          
Fixed maturities  13,757,855  18,334,850  12,637,514 
Equity securities  11,993,556  10,871,372  14,735,268 
Proceeds from maturity of investments  9,822,000  5,325,000  27,537,091 
Purchases of available for sale investments:          
Fixed maturities  (78,685,009) (11,322,556) (46,476,107)
Equity securities  (22,552,436) (18,503,481) (25,667,968)
Proceeds from the sale of Sequoia        25,144,350 
Purchases of minority interest in subsidiaries     (1,322,138)   
Real estate and water asset capital expenditure  (2,563,728) (790,961) (2,315,322)
Capitalized software costs  (1,529,828) (1,382,361)   
Purchases of property and equipment  (324,300) (669,598) (490,078)
Proceeds from sales of property and equipment  1,550  40,249    
Other investing activities, net  119     (98,429)
Net cash provided by (used in) investing activities  (70,080,221) 580,376  5,006,319 
CASH FLOWS FROM FINANCING ACTIVITIES:          
Proceeds from common stock, net  21,378,095       
Repayment of bank and other borrowings  (3,915,176) (1,344,516) (9,645,053)
Proceeds from borrowings  35,000  2,908,196  9,111,446 
Cash received on exercise of stock options (HyperFeed in 2005 and 2004)  8,880  41,416    
Cash paid for purchase of PICO stock (for deferred compensation plans)  (839) (121,235) (83,218)
Net cash provided by (used in) financing activities  17,505,960  1,483,861  (616,825)
Effect of exchange rate changes on cash  3,809,797  (2,001,747) (1,693,730)
Net increase (decrease) in cash and cash equivalents  20,387,278  (6,941,555) 2,269,611 
           
Cash and cash equivalents, beginning of year  17,407,138  24,348,693  22,079,082 
Cash and cash equivalents, end of year $37,794,416 $17,407,138 $24,348,693 
Supplemental disclosure of cash flow information:          
Cash paid during the year for:          
Interest $692,615 $826,894 $327,608 
Income taxes paid $25,487,931 $179,635  555,600  



PICO HOLDINGS, INC. AND SUBSIDIARIES

_______________

1.
NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES:

Organization and Operations:

PICO Holdings, Inc. and subsidiaries (collectively, "PICO"“PICO” or "the Company"“the Company”) is a diversified holding company.

Currently PICO'sPICO’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.
·Owning and developing water rights and water storage operations in the southwestern United States through Vidler Water Company, Inc.
·Owning and developing land and the related mineral rights and water rights in Nevada through Nevada Land & Resource Company, LLC.
·The acquisition and financing of businesses.
·“Running off” the insurance loss reserves of Citation Insurance Company and Physicians Insurance Company of Ohio.
·Developing and providing ticker plant technologies and services to the financial markets through HyperFeed Technologies, Inc.

PICO was incorporated in 1981 and began operations in 1982. The company was known as Citation Insurance Group until a reverse merger with Physicians Insurance Company of Ohio ("Physicians"(“Physicians”) on November 20, 1996. Following the reverse merger, the Company changed its name to PICO Holdings, Inc. On December 16, 1998, PICO acquired the remaining 48.8% of the outstanding stock of Global Equity Corporation ("Global Equity") through a Plan of Arrangement (the "PICO/Global Equity Combination") whereby Global Equity shareholders received .4628 of a newly issued PICO common share for each Global Equity share surrendered. Immediately following the close of the transaction, PICO effected a 1-for-5 reverse stock split (the "Reverse Stock Split").

The Company'sCompany’s primary operating subsidiaries as of December 31, 20012005 are as follows:

Vidler Water Company, Inc. ("Vidler"(“Vidler”). Vidler is a 96.2%wholly owned DelawareNevada corporation. Vidler'sVidler’s business involves identifying end users, namely water utilities, municipalities or developers, in the Southwest who require water, and then locating a source and supplying the demand, either by utilizing Vidler'sthe company’s own assets or securing other sources of supply. These assets comprise water rights in the states of Colorado, Arizona, and Nevada, and water storage facilities in Arizona and California.

Nevada Land & Resource Company, LLC ("(“Nevada Land"Land”). In April 1997, PICO acquired Nevada Land is a Nevada Limited Liability Company, which then ownedowns approximately 1.4 million767,000 acres of deeded land in northern Nevada. Nevada together with the relatedLand’s business includes selling land and water mineralrights, and geothermal rights. 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 the book of business of Personal Express Insurance Services, Inc. leasing property.

Citation Insurance Company ("Citation"(“Citation”). Citation is a California-domiciled insurance company licensed to write commercial property and casualty insurance in Arizona, California, Colorado, Nevada, Hawaii, New Mexico and Utah. Citation ceased writing premiums in December 2000, and is now "running off"“running off” the loss reserves from its existing property and casualty and workers’ compensation lines of business. This means that it is handling claims arising from historical business, and selling investments when funds are needed to pay claims.

Physicians Insurance Company of Ohio ("Physicians"(“Physicians”). Prior to selling its book of medical professional liability ("MPL"(“MPL”) insurance business in 1995, Physicians engaged in providing MPL insurance coverage to physicians and surgeons, primarily in Ohio. On August 28, 1995, Physicians entered into an agreement with Mutual Assurance, Inc. ("Mutual"(“Mutual”) pursuant to which Physicians sold its recurring MPL insurance business to Mutual. Physicians is in "run“run off." This means that it is handling claims arising from historical business, and selling investments when funds are needed to pay claims. 63 SISCOM,

HyperFeed Technologies, Inc. ("SISCOM"(“HyperFeed”). SISCOMHyperFeed is a Colorado corporation that is a software developer and systems integrator for video-based content management systems forprovider of software, ticker plant technologies and managed services to the professional broadcast, sports, and entertainment industries. financial markets industry. PICO owns approximately 80% of the outstanding voting stock of HyperFeed.

Unconsolidated Affiliates:

Investments in which the Company owns betweenat least 20% tobut not more than 50% of the voting interest and/and, or has the ability to exercise significant influence are generally accounted for under the equity method of accounting. Accordingly, the Company'sCompany’s share of the income or losses areloss of the affiliate is included in PICO’s consolidated results. Currently, the only significant investmentthere are no investments the Company classifies asconsiders an unconsolidated equity affiliate is HyperFeed Technologies, Inc. ("HyperFeed"). Hyperfeed provides financial market data and data delivery solutions to the financial services industry. PICO owns approximately 42% of the outstanding voting stock of HyperFeed. affiliate.

Principles of Consolidation:

The accompanying consolidated financial statements include the accounts of the Company and its majority-owned and controlled subsidiaries, and have been prepared in accordance with accounting principles generally accepted in the United States of America ("(“US GAAP"GAAP”). All significant intercompany balances and transactions have been eliminated.

Use of Estimates in Preparation of Financial Statements:

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'sCompany’s consolidated financial statements relate to the assessment of the carrying value of investments, unpaid losses and loss adjustment expenses, deferred policy acquisition costs, landreal estate and water rights,assets, deferred income taxes and contingent liabilities. While management believes that the carrying value of such assets and liabilities are appropriate as of December 31, 20012005 and 2000,2004, it is reasonably possible that actual results could differ from the estimates upon which the carrying values were based.

Revenue Recognition:

Sale of Real Estate and Water Assets

Revenue on the sale of real estate and water assets conforms with Statement of Financial Accounting Standards (“SFAS”) No. 66, “Accounting for Sales of Real Estate,” and is recognized in full when (a) there is a legally binding sale contract; (b) the profit is determinable (i.e., the collectibility of the sales price is reasonably assured, or any amount that will not be collectible can be estimated); (c) the earnings process is virtually complete (i.e., the Company is not obligated to perform significant activities after the sale to earn the profit, meaning the Company has transferred all risks and rewards to the buyer); and (d) the buyer’s initial and continuing investment are adequate to demonstrate a commitment to pay for the property. If these conditions are not met, the Company records the cash received as a deposit until the conditions to recognize full profit are met.

Service Revenue (HyperFeed Technologies)

HyperFeed derives revenue primarily from licensing technology and providing management and maintenance services of HTPX and HBox software, ticker plant technologies, and managed services. Additionally, HyperFeed derives revenue from the development of customized software.

HyperFeed applies the provisions of Statement of Position 97-2, “Software Revenue Recognition,” as amended, which specifies the following four criteria that must be met prior to recognizing revenue: (1) persuasive evidence of the existence of an arrangement, (2) delivery, (3) fixed or determinable fee, and (4) probable collection. In addition, revenue earned on software arrangements involving multiple elements is allocated to each element based on the relative fair value of the elements.

Investments:

The Company'sCompany’s investment portfolio at December 31, 20012005 and 20002004 is comprised of investments with fixed maturities, including U.S. government bonds, government -- sponsored enterprise bonds, and investment-grade corporate bonds; equity securities, including investments in common stock, and preferred stocks, andcommon stock purchase warrants; convertible debt instruments and mortgage participation interests.

The Company applies the provisions of Statement of Financial Accounting Standards ("SFAS")SFAS No. 115, "Accounting“Accounting for Certain Investments in Debt and Equity Securities." This statement, among other things, requires investment securities to be divided into three categories: held to maturity, available for sale, and trading. The Company classifies all investments as available for sale. Unrealized investment gains or losses on investments recorded at fair valuesecurities available for sale are recorded net of tax and included indirectly to shareholders’ equity as accumulated other comprehensive income, or loss.loss, net of applicable tax effects. The Company also applies the provisions of Accounting Principles Board ("APB"(“APB”) Opinion No. 18, "The“The Equity Method of Accounting for Investments in Common Stock," is used to account for investments where management determines the Company has the ability to exercise significant influence over the operating and financial policies of the investee. The Company’s share of the income or loss of the investee is included in the consolidated statement of operations and any dividends are recorded as a reduction in the carrying value of the investment.


The Company regularly and methodically reviews the carrying value of its investments for impairment. AWhen there is a decline in the value of anyan investment to below cost, that is deemed other than temporaryother-than-temporary, a loss is recorded within net realized gains or losses in the consolidated statement of operations and the security is written down to net realizableits fair value. AdjustmentsImpairment charges of $142,000, $1.9 million, and $1.1 million are included in realized losses for write-downs are reflected in net realized gain or loss on investments in the consolidated statements of operations. During the three years ended December 31, 2001, the Company recorded impairment losses on equity securities of $3 million, $161,0002005, 2004 and $1.1 million, respectively. In addition, the Company wrote off its investment in a loan by expensing $500,000 in 2001, and $2.5 million in 2000 (See Note 15). During 1999, the Company recorded an impairment loss of $3.2 million2003, respectively, related to various securities where the unrealized losses had been deemed other-than-temporary. If a portionsecurity is impaired and continues to decline in value, additional impairment charges are recorded in the period of the decline if deemed other-than-temporary. Subsequent recoveries of such securities are reported as an oilunrealized gain and gas investment. part of other comprehensive results in future periods. Realized gains on impaired securities are recorded only when sold.

Net investment income includes amortization of premium and accretion of discount on the level yield method relating to bonds acquired at other than par value. Realized investment gains and losses are included in income andrevenues, are determined on the identified certificatean average basis and are recorded on athe trade date basis. 64 date.

The Company invests domesticallyhas subsidiaries and makes acquisitions in the U.S. and abroad. Approximately $36.8$98.6 million and $41.2$81 million of the Company'sCompany’s investments at December 31, 20012005 and 2000,2004, respectively, were invested internationally, including any equity values of affiliates. The Company'sCompany’s most significant foreign currency exposure is in Swiss francs and Australian dollars. francs.

Cash and Cash Equivalents:

Cash and cash equivalents include highly liquid debt instruments purchased with original maturities of three months or less. Land,

Real Estate and Water Rights, Water Storage and Land Improvements: Assets:

Land, water rights, water storage, and land improvements are carried at cost. Water rights consist of various water interests acquired independently or in conjunction with the acquisition of real properties. Water rights are stated at cost and, when applicable, consist of an allocation of the original purchase price between water rights and other assets acquired based on their relative fair values. In addition, costs directly related to the acquisition and development of water rights are capitalized. This cost includes, when applicable, the allocation of the original purchase price and other costs directly related to acquisition, and interest and otherany costs directly relatedincurred to developing landget the property ready 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.

Property and Equipment:

Property and equipment are carried at cost, net of accumulated depreciation. Depreciation is computed on the straight-line method over the estimated lives of the assets. Buildings and leasehold improvements are depreciated over 15-20 years;years, office furniture and fixtures are generally depreciated over 7seven years, and computer equipment is depreciated over 3three years. Maintenance and repairs are charged to expense as incurred, while significant improvements are capitalized. Gains or losses on the sale of property and equipment are included in other income. Deferred Acquisition Costs: Costs of the insurance companies that vary with and are primarily related to the acquisition of new and renewal insurance contracts, net of reinsurance ceding commissions, are deferred and amortized over the terms of the policies for property and liability insurance. Future investment income has been taken into consideration in determining the recoverability of such costs. revenues.

Goodwill and Intangibles:

Goodwill represents the difference between the purchase price and the fair value of the net assets (including tax attributes) of companies acquired in purchase transactions. The Company recorded negative goodwill (i.e., excessIntangibles are generally assets arising out of fair value of assets acquired over purchase price) as a result of the reverse merger between Citation and Physicians in November 1996. Negative goodwill is amortized using the straight-line method over 10 years. At December 31, 2001 and 2000, the Company had accumulated negative goodwill amortization of $2.9 million and $2.3 million, respectively. The Company also recorded goodwill and intangibles related to its acquisitions of SISCOM, Personal Express and Sequoia and amortizes the balances over various lives not exceeding 10 years. At December 31, 2001 and 2000, the Company had $1.5 million and $1.3 million in accumulated amortization, respectively. Impairment of Long-Lived Assets:contractual or legal right. The Company applies the provisions of SFAS No. 121 "Accounting141, “Business Combinations,” and SFAS No. 142, “Goodwill and Other Intangible Assets.” Consequently, goodwill and intangible assets that have indefinite useful lives are not amortized but rather are tested for impairment at least annually, or on an interim basis if an event occurs or circumstances change that would reduce the fair value of a reporting unit below its carrying value.


Impairment of Long-Lived Assets:

The Company applies the provisions of SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived AssetsAssets.” As such, the Company records an impairment charge when the condition exists where the carrying amount of a long-lived asset (asset group) is not recoverable and for Long-Lived Assets to Be Disposed Of" and periodically evaluates whether events or circumstances have occurred that may affect the estimated useful life or the recoverability of long-lived assets.exceeds its fair value. Impairment of long-lived assets is triggered when the estimated future undiscounted cash flows, excluding interest charges, for the lowest level for which there areis identifiable cash flows that are independent of the cash flows of other groups of assets do not exceed the carrying amount. The Company prepares and analyzes cash flows at variousappropriate levels of grouped assets. The Company reviews cash flows for significant individual assets held within a subsidiary, and for a subsidiary taken as a whole.under SFAS No. 144. If the events or circumstances indicate that the remaining balance may be permanently impaired, such potential impairment will be measured based upon the difference between the carrying amount and the fair value of such assets determined using the estimated future discounted cash flows, excluding interest charges, generated from the use and ultimate disposition of the respective long-lived asset. 65

Reinsurance:

The Company records all reinsurance assets and liabilities on the gross basis, including amounts due from reinsurers and amounts paid to reinsurers relating to the unexpired portion of reinsured contracts (prepaid reinsurance premiums).

Unpaid Losses and Loss Adjustment Expenses:

Reserves for MPL and property and casualty and workers’ compensation insurance 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 are reflected in current operations. (See Note 21). Recognition of Premium Revenue: 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.

Income Taxes:

The Company'sCompany’s provision for income tax expense includes federal, state, local and foreign income taxes currently payable and those deferred because of temporary differences between the income tax and financial reporting bases of the assets and liabilities. The liability method of accounting for income taxes also requires the Company to reflect the effect of a tax rate change on accumulated deferred income taxes in income in the period in which the change is enacted.

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 doesit is more likely than not occur as expected, athat some or all of the deferred income tax assets will not be realized a valuation allowance may be established or modified. is recorded.

Earnings per Share:

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 similarsimilarly to basic earnings per share except the weighted average shares outstanding are increased to include additional shares from the assumed exercise of any common stock options and warrants,equivalents - PICO’s stock-settled stock appreciation rights are common stock equivalents for this purpose - using the treasury method, if dilutive. The number of additional shares is calculated by assuming that the outstanding options and warrantscommon stock equivalents were exercised, and that the proceeds were used to acquire shares of common stock at the average market price during the period. For

During 2005, the year endedCompany issued 2,185,965 stock-settled stock appreciation rights at a strike price of $33.76 per share (at December 31, 2001, there2005 the market price of a share of PICO common stock was no difference between basic and$32.26). Such rights are common stock equivalents for purposes of earnings per share computations; however, none of the stock appreciation rights are included in the diluted earnings per share calculation for 2005 because they are out-of-the-money and consequently their effect on earnings per share is anti-dilutive.

During 2003 and 2004, the averageCompany had cash-settled stock appreciation rights outstanding. The rights were not considered common stock equivalents for purposes of earnings per share because they were not convertible into common shares of the Company when exercised; the benefit was payable in cash. Consequently, diluted earnings per share was identical to that of the basic earnings per share in those years.


Stock-Based Compensation:

On September 21, 2005, the Company amended its 2003 Cash-Settled Stock Appreciation Rights Program. The amendment of the SAR Program froze and monetized the value of each participant’s SAR. At the date of the amendment, the accrued benefit payable under this program was $39.4 million based on a PICO stock price of $33.23 per share. Concurrently with the amendment of the SAR Program, the participants elected to defer substantially all of amounts due to them by transferring the amounts into deferred compensation Rabbi Trusts established by the Company. Consequently, including previously deferred compensation, the Company has a total deferred compensation liability of $42.7 million at December 31, 2005 representing deferred compensation payable to various members of management and its Directors, and no remaining cash-settled stock appreciation rights payable.

On December 8, 2005 shareholders approved the PICO Holdings, Inc. 2005 Long Term Incentive Plan (the "2005 Plan"). The 2005 Plan provides for the grant or award of various equity incentives to PICO employees, non-employee directors and consultants. A total of 2,654,000 shares of common stock are issuable under the 2005 Plan and it provides for the issuance of incentive stock options, non-statutory stock options, free-standing stock-settled stock appreciation rights, restricted stock awards, performance shares, performance units, restricted stock units, deferred compensation awards and other stock-based awards. The plan allows for a broker assisted cashless exercise and net-settlement of tax withholding required. On December 12, 2005 2,185,965 stock-settled SARs were issued to various employees and non-employee directors of the Company with a strike price (market price of PICO common stock on the date of grant) of $33.76. The awards are fully vested and exercisable at anytime.

The Company applies the provisions of Emerging Issues Task Force No. 97-14, Accounting for Deferred Compensation Arrangements Where Amounts Earned Are Held in a Rabbi Trust and Invested. In summary, investment returns generated are reported within the Company’s financial statements (with a corresponding increase in the trust assets) and an expense is recorded within the caption, “Operating and other costs” for increases in the market value of the assets held with a corresponding increase in the deferred compensation liability (except in the case of PICO stock, which is reported as Treasury Stock, at cost). In the event the trust assets decline in value, the Company will recover previously expensed compensation.

The trusts hold various investments that are consistent with the Company’s investment policy. Such investments are held in separate accounts, accounted for as available for sale securities, and are reported in the accompanying consolidated balance sheets within the line item “Investments”. Assets of the trust will be distributed according to predetermined payout elections established by each employee.

In each of the three years presented in the accompanying consolidated financial statements, there is compensation expense recorded for the cash settled SARs issued from the 2003 Plan. Compensation cost was measured at the end of each period (in 2005 compensation cost was measured until the September 21, 2005 Plan Amendment) as the amount by which the quoted market price of PICO stock exceeded the exercise price. Changes in the quoted market price were reflected as an adjustment to the accrued compensation obligation and compensation expense in the Company’s consolidated financial statements. The Company recorded compensation expense of $23.9 million, $9.9 million and $6 million for the years ended December 31, 2005, 2004 and 2003, respectively, representing the difference between the exercise price of the vested SARs and the market value of PICO stock at the end of the reporting period (September 21 for the 2005 year). The cash liability for the accrued benefit was $15.7 million at December 31, 2004, reached $39.4 million during 2005 and as discussed above, when the yearPlan was amended, the liability was transferred to Rabbi Trust accounts leaving no accrued stock appreciation rights payable and increasing deferred compensation in the accompanying consolidated balance sheets.

At December 31, 2005 the Company has 2,185,965 stock-settled stock appreciation rights outstanding that are fully vested and all have an exercise price of $33.76. Since the number of shares to be issued upon exercise is not known at the grant date, the plan is considered a variable plan for accounting purposes and under APB 25, any in-the-money value of the vested options would be recorded as compensation expense. However, at December 31, 2005, the market value of PICO stock was less than the strike pricesprice of the options outstanding stock-settled SARs and therefore no compensation expense was recorded in 2005 for the awards granted.
In December 2002, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 148, “Accounting for Stock-Based Compensation, Transition and Disclosure.” SFAS No. 148 provides alternative methods of transition for those entities that elect to include those options would be anti-dilutive tovoluntarily adopt the calculation. Similarly, in 2000 and 1999, the calculationfair value accounting provision of diluted earnings per share excludes the options and warrants outstanding in those years because the Company reported a loss from operations and consequently the impact of those options and warrants would be anti-dilutive. Stock options of 1.8 million in 2001, 1.1 million in 2000, and 1 million in 1999 were excluded from the calculationSFAS No. 123, “Accounting for Stock-Based Compensation.” SFAS No. 148 also requires more prominent disclosures of the diluted weighted average shares outstanding. Stock Based Compensationpro forma effect of using the fair value method of accounting for stock-based employee compensation as well as pro forma disclosure of the effect in interim financial statements. The Company accountstransition and annual disclosure provision of SFAS No. 148 are effective for stock basedfiscal years ending after December 15, 2002 until SFAS 123 Revised becomes effective in 2006. PICO has not adopted the fair value accounting provisions of SFAS No. 123, and will continue accounting for stock-based compensation under the intrinsic value method of APB No. 25, "Accounting For“Accounting for Stock Issued to Employees." NoEmployees”, until SFAS No. 123(R) becomes effective on January 1, 2006.

Had compensation expense was recorded duringcost for the Company’s stock-based compensation plans been determined consistent with SFAS No. 148, the Company’s net income or loss and related per share amounts would approximate the following pro forma amounts for the years ended December 31 2001, 2000(Note that the Company’s cash-settled SARs that were outstanding in 2003, 2004 and 1999. 66 Comprehensive Loss: until September 21, 2005 have no impact on the following table as cash-settled SARs are accounted for the same way under both APB No. 25 and SFAS No. 123, however the stock-settled SARs issued in December 2005 are included in the 2005 disclosure):
  2005 2004 2003 
Reported net income (loss) $16,201,641 $(10,558,684)$(3,237,812)
Add: Stock-based compensation recorded, net of tax          
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of tax  (19,623,058)    (99,680)
Pro forma net loss $(3,421,417)$(10,558,684)$(3,337,492)
Reported net income (loss) per share: basic and diluted $1.25 $(0.85)$(0.26)
Pro forma net loss per share: basic and diluted $(0.26)$(0.85)$(0.27)
The effects of applying SFAS No. 148 in this pro forma disclosure are not indicative of future amounts.

No stock-based compensation is reported in the table above in 2004 since the only awards outstanding were cash-settled SARs, which are not subject to the fair value method prescribed by SFAS 123. The fair value of each stock-settled SAR granted in 2005 and the 2003 stock options outstanding granted in previous years is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions: no dividend yield; risk-free interest rate ranging from 4.4% to 4.5% for grants in 2005, 1% for grants in 2003; expected life of a stock-settled SAR ranges from 3 to 10 years (10 years for previous stock-option grants); and volatility of 33% for 2005 grants and 36% for the 2003 grants.
The Black-Scholes model was used in estimating the fair value of the Company’s stock-settled SARs that are fully vested and are non-transferable. This model requires the input of highly subjective assumptions including the expected stock price volatility and estimated life of the stock-settled SAR. Because the Company’s stock-settled SARs have characteristics significantly different from those of any like instrument that is publicly traded, and because changes in the subjective input assumptions can materially change the fair value estimate, management believes the existing model does not necessarily provide a reliable single measure of the fair value of its stock-settled SARs.


Comprehensive Income:

Comprehensive income or loss includes foreign currency translation and unrealized holding gains and losses, net of taxes on available for sale securities. The components of accumulated other comprehensive loss are as follows:
December 31, 2001 2000 ---------------- ---------------- Net unrealized gain on securities $ 5,545,057 $ 3,611,475 Foreign currency translation (8,770,924) (7,815,810) ---------------- ---------------- Accumulated other comprehensive loss $ (3,225,867) $ (4,204,335) ================ ================
Accumulated other comprehensive loss

  December 31, 
  2005 2004 
      
Net unrealized gain on securities $66,124,412 $41,947,162 
Foreign currency translation  (6,031,950 (5,221,462)
Accumulated other comprehensive income $60,092,462 $36,725,700 

The accumulated balance is net of deferred income tax assetliabilities of $1.4$32.7 million and $3.2$18.2 million at December 31, 20012005 and 2000,2004, respectively.

Translation of Foreign Currency:

Financial statements of foreign operations are translated into U.S. dollars using average rates of exchange in effect during the year for revenues, expenses, realized gains and losses, and the exchange rate in effect at the balance sheet date for assets and liabilities. Unrealized exchange gains and losses arising on translation are reflected within accumulated other comprehensive income or loss.
Reclassifications:

Certain amounts in the financial statements for prior periods have been reclassified to conform to the current year presentation. Recent


Recently Issued Accounting Pronouncements: Pronouncements
In June 2001, the Financial December 2004, FASB issued Statement 123(Revised), Share-Based Payment, which replaces FASB Statement No. 123, Accounting Standards Board ("FASB") approved SFASfor Stock-Based Compensation, and supersedes APB Opinion No. 141, "Business Combinations," and SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 prospectively prohibits the pooling of interest method of accounting25, Accounting for business combinations initiated after June 30, 2001. The provisions of this Stock Issued to Employees.Statement are required to be applied starting with fiscal years beginning after December 15, 2001. However, as an exception, any goodwill resulting from acquisitions completed after June 30, 2001 will not be amortized. SFAS No. 142 also establishes a new method of testing goodwill for impairment on an annual basis or on an interim basis if an event occurs or circumstances change that would reduce the fair value of a reporting unit below its carrying value. At December 31, 2001, PICO's balance sheet included goodwill and intangible assets of $5.8 million, $2.3 million of which123(Revised) is included within the investment balances of the unconsolidated affiliates, and negative goodwill ("excess of fair value of net assets acquired over purchase price") of $2.8 million. Management has estimated that the adoption of SFAS No. 142 will have the following effects. The initial consequence will be reflected in the Company's consolidated financial statements for the quarter ending March 31, 2002: 1) The write-off of negative goodwill of $2.8 million; 2) The write-off of goodwill of $1 million. The net effect of the above of $1.8 million addition to net income or reduction in net loss will be reported as a cumulative effect of a change in accounting principle. The remaining balance of $2.5 million will be classified as an intangible asset with a finite life. Accordingly, it will be amortized over its remaining life of 8 years and tested for impairment at least annually. In August 2001, the FASB adopted SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." This statement supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed of" and defines an impairment as "the condition that exists when the carrying amount of a long-lived asset (asset group) 67 is not recoverable and exceeds its fair value." Based on the SFAS No. 121 framework, this statement develops a single accounting model for the disposal of long-lived assets, whether previously held or newly acquired. The statement will be effective for financial statements issued for fiscal years beginning after December 15, 2001, and interim periods within those fiscal years, with initial applicationpublic entities as of the beginning of the fiscal year. Managementannual period that begins after June 15, 2005. The new Statement establishes standards for the accounting for transactions in which an entity exchanges its equity instruments for goods or services. It also addresses transactions in which an entity incurs liabilities in exchange for goods or services that are based on the fair value of the entity’s equity instruments or that may be settled by the issuance of those equity instruments. This Statement focuses primarily on accounting for transactions in which an entity obtains employee services in share-based payment transactions. This Statement does not believe this statement will havechange the accounting guidance for share-based payment transactions with parties other than employees provided in Statement 123 as originally issued and EITF Issue No. 96-18, Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services.  This Statement requires a material impactpublic entity to measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award (with limited exceptions). That cost should be recognized over the period during which an employee is required to provide service in exchange for the award--the requisite service period (usually the vesting period). As all of the stock-settled SARs granted under PICO’s 2005 Plan were fully vested at December 31, 2005, no stock-based compensation will be recorded for these awards under SFAS 123R. If and when PICO grants additional awards, the fair value of such awards will be recognized and recorded over the vesting period.
In March 2005, FASB issued Interpretation number 47, Accounting for Conditional Asset Retirement Obligations—an interpretation of FASB Statement No. 143 which clarifies the term conditional asset retirement obligation as used in FASB Statement No. 143, Accounting for Asset Retirement Obligations, andrefers to a legal obligation to perform an asset retirement activity in which the timing and (or) method of settlement are conditional on a future event that may or may not be within the control of the entity. The obligation to perform the asset retirement activity is unconditional even though uncertainty exists about the timing and (or) method of settlement. Thus, the timing and (or) method of settlement may be conditional on a future event. Accordingly, an entity is required to recognize a liability for the fair value of a conditional asset retirement obligation if the fair value of the liability can be reasonably estimated. The fair value of a liability for the conditional asset retirement obligation should be recognized when incurred—generally upon acquisition, construction, or development and (or) through the normal operation of the asset. Uncertainty about the timing and (or) method of settlement of a conditional asset retirement obligation should be factored into the measurement of the liability when sufficient information exists. Statement 143 acknowledges that in some cases, sufficient information may not be available to reasonably estimate the fair value of an asset retirement obligation. There was no effect of adoption of the statement on the accompanying consolidated financial statements. 2. DISPOSITIONS: statement of the Company.

2.
DISCONTINUED OPERATIONS:

On September 8, 2000, the Company sold its investment in Conex for nominal consideration, and recorded a pretax loss onMarch 31, 2003, the sale of $4.6Sequoia Insurance Company (“Sequoia”) closed for gross proceeds of $43.1 million, ($1.8which consisted of $25.2 million after tax). Prior to the sale, on November 3, 1999, the Company increased its ownershipin cash and a dividend of Conexequity and debt securities previously held by Sequoia with a market value of $17.9 million. The net income from 66% to 83% through the redemption of its remaining preferred shares and conversion of intercompany loans into common stock. On August 2, 1999, the Company increased its ownership of Conex from 32% to 66% through the redemption of preferred shares, the proceeds from which were used to exercise warrants for common shares. TheSequoia included in PICO’s condensed consolidated results of operations for the year ended December 31, 1999 reflect the consolidation2003 was $2.4 million, which is reported as “Income from discontinued operations, net.” The Company also recorded a $443,000 gain on sale, net of Conex for the period August 3 to December 31. Prior to consolidation, the investment was accounted for using the equity method. Consequently, the resultsestimated income taxes of $281,000 and selling costs of $845,000, which is reported as “Gain on disposal of discontinued operations, net” for the year ended December 31, 1999 include 32%2003.

In 2003, HyperFeed sold its consolidated market data feed service contracts and its retail trading business and recorded a gain within discontinued operations of $7 million. In 2005 and 2004, HyperFeed recorded a gain of $545,000 and $500,000, respectively within discontinued operations on the lossessale of its Consolidated Market Data Feed business as certain milestones on the sale were met. These gains are included in the unconsolidated affiliate foraccompanying consolidated statements of operations in the line item titled “Gain on disposal of discontinued operations, net”. For the years ended December 31, 2005 and 2004, HyperFeed generated losses from discontinued operations of $508,000 and $422,000, respectively. During the 2003 period January 1 to August 2, 1999. The reported results in 2000 include Conex asHyperFeed was a consolidated subsidiary until September 8, 2000. Conex's primary asset was a 60% joint venture that manufactures wheeled and tracked excavators in The People's Republic of China. Conex accounted for its 60% interest in the joint venture using the equity method of accounting due the fact that it did not have majority financial control over the policies and procedures of the joint venture. The functional currency for the joint venture is the Chinese Renminbi. Under the termsCompany, discontinued operations generated income of the joint venture agreement between Conex and the 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$545,000. Such amounts are included in the consolidated financial statements at December 31, 1999, but following the sale of Conex, this liability, as well as all the other“Income from discontinued operations, net”. The assets and liabilities of Conex,this HyperFeed operation are no longer includedreported as discontinued operations in the Company'sDecember 31, 2005 and 2004 consolidated balance sheets.

In accordance with SFAS No. 144, Sequoia’s results and the results of the HyperFeed operation have been reclassified for all periods presented as discontinued operations in the accompanying consolidated financial statements. The results of operations from discontinued operations and any gain on sale are each reported separately, net of tax on the face of the statement of operations. The results of HyperFeed’s discontinued operation are not material and not presented in detail in these notes to the Company’s consolidated financial statements. The following is thea detail of Sequoia’s results of operations of Conex for the year ended December 31, 1999 and for the period included in 2000 prior to its disposition: 2000 1999 --------------- -------------- Expenses $1,393,721 $ 1,114,938 Equity in lossesthe accompanying consolidated financial statements:

Statements of unconsolidated affiliates 889,627 1,873,874 --------------- -------------- Loss from operations 2,283,348 2,988,812 Minority interest (168,988) (1,491,417) --------------- -------------- Net loss $2,114,360 $ 1,497,395 =============== ============== On JanuaryOperations for the Three Months Ended March 31, 2000, the Company sold its interest in Summit Global Management for $100,000, and recorded a pretax loss on sale2003:
  2003 
Revenues:   
Premium income $13,478,457 
Net investment income and realized gains/losses  2,863,487 
Other income  91,303 
Total revenues  16,433,247 
     
Expenses:    
Loss and loss adjustment expenses  7,657,813 
Policy acquisition costs  4,163,270 
Insurance underwriting and other expenses  938,341 
Total expenses  12,759,424 
Income before provision for income taxes  3,673,823 
Provision for income taxes  1,284,974 
Net income $2,388,849 
     
Income per common share - basic and diluted $0.19 


3.
INVESTMENTS:

At December 31, the cost and carrying value of investments were as follows:
Gross Gross Unrealized Unrealized Carrying 2001: Cost Gains Losses Value ----------------- --------------- ----------------- ----------------- Fixed maturities: U.S. Treasury securities and obligations of U.S. government - sponsored enterprises $ 12,179,670 $ 326,884 $ (90,457) $ 12,416,097 Corporate securities 83,172,507 1,247,644 (614,004) 83,806,147 Mortgage participation interests 4,673,000 4,673,000 ----------------- --------------- ----------------- ----------------- 100,025,177 1,574,528 (704,461) 100,895,244 Equity securities 48,183,148 7,178,436 (997,042) 54,364,542 Investment in unconsolidated affiliates 2,583,590 2,583,590 ----------------- --------------- ----------------- ----------------- Total $150,791,915 $ 8,752,964 $ (1,701,503) $ 157,843,376 ================= =============== ================= =================
Gross Gross Unrealized Unrealized Carrying 2000: Cost Gains Losses Value ----------------- --------------- ----------------- ----------------- Fixed maturities: U.S. Treasury securities and obligations of U.S. government - sponsored enterprises $ 20,774,818 $ 186,444 $ (22,329) $ 20,938,933 Corporate securities 67,621,386 1,026,850 (41,895) 68,606,341 Mortgage participation interests 12,350,000 12,350,000 ----------------- --------------- ----------------- ----------------- 100,746,204 1,213,294 (64,224) 101,895,274 Equity securities 52,201,758 5,043,089 (2,193,798) 55,051,049 Investment in unconsolidated affiliates 4,139,830 4,139,830 ----------------- --------------- ----------------- ----------------- Total $ 157,087,792 $ 6,256,383 $ (2,258,022) $ 161,086,153 ================= =============== ================= =================

2005: Cost Gross Unrealized Gains Gross Unrealized Losses Carrying Value 
Fixed maturities:         
U.S. Treasury securities and obligations of U.S. government - sponsored enterprises $11,003,785    $(175,787)$10,827,998 
Corporate securities  79,842,934  461,413  (592,208) 79,712,139 
Mortgage participation interests  2,273,000        2,273,000 
   93,119,719  461,413  (767,995) 92,813,137 
Equity securities  95,643,097  99,223,898  (233,798) 194,633,197 
Total $188,762,816  $99,685,311  $(1,001,793)  $287,446,334 

2004: Cost Gross Unrealized Gains Gross Unrealized Losses Carrying Value 
Fixed maturities:         
U.S. Treasury securities and obligations of U.S. government - sponsored enterprises $10,544,388 $53,575 $(16,993)$10,580,970 
Corporate securities  23,621,118  727,452  (123,324) 24,225,246 
Mortgage participation interests  4,673,000        4,673,000 
   38,838,506  781,027  (140,317) 39,479,216 
Equity securities  83,759,017  59,316,810  (97,614) 142,978,213 
Total $122,597,523  $60,097,837  $(237,931$182,457,429 

The amortized cost and carrying value of investments in fixed maturities at December 31, 2001,2005, 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.
Amortized Carrying Cost Value ------------------- ------------------ Due in one year or less $19,272,532 $19,308,867 Due after one year through five years 41,193,744 41,903,362 Due after five years 34,885,901 35,010,015 Mortgage participation interests 4,673,000 4,673,000 ------------------- ------------------ $100,025,177 $100,895,244 =================== ==================
69 Investment

  Amortized Carrying 
  Cost Value 
      
Due in one year or less $59,743,168  $59,551,654 
Due after one year through five years  21,391,559  21,136,860 
Due after five years  9,711,992  9,851,623 
Mortgage participation interests  2,273,000  2,273,000 
  $93,119,719 $92,813,137 

Net investment income is summarized as follows for each of the years ended December 31:
2001 2000 1999 --------------- --------------- --------------- Investment income from: Available for sale: Fixed maturities $ 6,171,014 $ 5,196,831 $ 1,593,052 Equity securities 1,795,248 965,836 470,628 Other 1,871,738 2,884,099 4,809,821 --------------- --------------- --------------- Total investment income 9,838,000 9,046,766 6,873,501 Investment expenses (71,107) (185,845) (268,679) --------------- --------------- --------------- Net investment income $ 9,766,893 $ 8,860,921 $ 6,604,822 =============== =============== ===============

  2005 2004 2003 
Investment income:       
Fixed maturities $2,468,733 $1,956,838 $2,465,683 
Equity securities  3,074,692  2,556,841  1,951,462 
Other  2,696,075  1,318,073  999,387 
Total investment income  8,239,500  5,831,752  5,416,532 
Investment expenses:  (43,030 (32,395 (46,428)
Net investment income $8,196,470 $5,799,357 $5,370,104 

Pre-tax net realized gain (loss)or loss on investments is as follows for each of the years ended December 31:
2001 2000 1999 ------------------ --------------- --------------- Gross realized gains: Fixed maturities $ 1,788,474 $ 110,708 Equity securities and other investments 803,760 15,127 $ 3,395,323 Real estate 670,451 ------------------ --------------- --------------- Total gains 2,592,234 125,835 4,065,774 ------------------ --------------- --------------- Gross realized losses: Fixed maturities (84,446) (123) Equity securities and other investments (5,926,284) (7,812,798) (4,677,024) ------------------ --------------- --------------- Total losses (6,010,730) (7,812,798) (4,677,147) ------------------ --------------- --------------- Net realized loss $ (3,418,496) $(7,686,963) $ (611,373) ================== =============== ===============

  2005 2004 2003 
Gross realized gains:       
Fixed maturities $27,303 $205,017 $142,509 
Equity securities and other investments  7,843,098  5,629,155  3,797,245 
Total gain  7,870,401  5,834,172  3,939,754 
Gross realized losses:          
Fixed maturities  (6,899) (50,393) (33,960)
Equity securities and other investments  (141,728) (2,518,274) (1,160,137)
Total loss  (148,627 (2,568,667 (1,194,097)
Net realized gain $7,721,774 $3,265,505 $2,745,657 

Realized Gains

During 2001, 20002005, the Company sold various securities generating $7.9 million in realized gains. Included in realized gains for the year is a $1.8 million gain from the sale of Keweenaw Land Association and 1999,a $1.8 million gain on the sale of Raetia Energy, a Swiss holding. During 2004, the Company sold various securities generating $5.8 million in realized gains. The most significant gain in 2004 was a $3.2 million gain from the sale of Keweenaw Land Association. In 2003, the Company realized a gain of $1.5 million on the sale of shares in Guinness Peat Group.

Realized Losses

Included in realized losses are impairment charges on securities. During 2005, 2004 and 2003, the Company recorded $3other-than-temporary impairments of $142,000, $1.9 million $161,000 and $1.1 million, respectively, in other-than-temporary impairments ofon equity securities primarily due to the extent and duration of the decline in market value of the equity securities. Also, during 2001 the Company sold an investment that had previously been impaired. The total pre-tax loss was $4.7 million and the accounting effect in 2001 was a pre-tax gain of $731,000. During 2001, 2000 and 1999, the Company recorded $500,000, $2.5 million and $3.2 million, respectively, in permanent write downs of non-equity security investments to recognize what isare expected to be other than temporaryother-than-temporary declines in the valuevalue. The impairment charges are primarily within two securities, Accu Holding and SIHL.


Accu Holding:

At December 31, 2001,2005, the Company owned 9,867,391 shares, representing29.2% of Accu Holding AG, a 20.7% interest in Australian Oil and Gas ("AOG"). During 2001, the Company purchased 1,026,732 shares of AOG for $941,000 and received 414,615 shares as a dividend valued at $333,000. During 2000, the Company purchased 981,584 shares of 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. Generally, with a voting ownership percentage of 20% or more, the investment may be recorded under the equity method unless the investor lacks the ability to exercise significant influence.Swiss corporation. PICO lacks the ability to exercise significant influence based on a numberconsideration of factors. During the fourth quarter of 2000, the Company increased its voting ownership in Accu Holding AG, a Swiss corporation, to 28.3%. As is the case with AOG, PICO lacks the ability to exercise significant influence based on a number of factors and therefore accounts for the holding as available for sale under SFAS No. 115 “Accounting for Certain Investments in Debt and Equity Securities.” In 2004 and 2003, the Company recorded other-than-temporary impairments of $1.3 million and $823,000, respectively, due to the severity and duration of the decline of Accu’s stock price. The stock value improved in 2005 and consequently, no impairment was recorded for the year ended December 31, 2005 on this holding. At December 31, 2005, the market value of PICO’s interest was $4.2 million.

SIHL:

At December 31, 2005 and 2004, the carrying value of SIHL was zero as the stock did not improve from the declines suffered in 2004. Given the severity and duration, the cause of the decline and lack of any evidence to support a recovery of the fair value, PICO recorded an impairment charge of $547,000 in 2004 effectively reducing the carrying amount to zero. The stock continues to trade, however, there is no material market value of the investment at December 31, 2005. In 2003, the Company recorded other-than-temporary impairment of $293,000.

Jungfraubahn Holding AG:

At December 31, 2005, the Company owned 1,313,657 shares of Jungfraubahn, which represents approximately 22.5% of the outstanding shares of Jungfraubahn. At December 31, 2005, the market value of the investment was $42 million and had an unrealized gain of $19.8 million, before tax. At December 31, 2004, the Company owned 1,308,160 shares of Jungfraubahn, which represented approximately 22.4% of the outstanding shares of Jungfraubahn. At December 31, 2004, the market value of the investment was $40.8 million and had an unrealized gain of $15.4 million, before tax. In 2005, 2004 and 2003, the Company received dividends from this security of $1.1 million, $1.1 million and $983,000, respectively.

Despite ownership of more than 20% of the voting stock of Jungfraubahn, the Company continues to account for this investment as available for sale under SFAS No. 115. At this time, the Company does not believe that it has the requisite ability to exercise “significant influence” over the financial and operating policies of Jungfraubahn, and therefore does not apply the equity method of accounting and is accounting for this investment at cost and has recorded an unrealized loss under SFAS 115. 70 During 2000, the Company purchased 3,472 shares of Jungfraubahn Holding AG ("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. accounting.


4.
INVESTMENT IN HYPERFEED TECHNOLOGIES, INC:

At December 31, 20012005 PICO owned 80% of the outstanding common stock of HyperFeed. In November 2005, PICO elected to convert the outstanding balance of $6.2 million of the convertible note with HyperFeed increasing its ownership from 51% to 80%. As the acquisition of the shares under the conversion did not represent a substantive acquisition from the minority shareholders, it was not accounted for using purchase method. HyperFeed will now be included in the combined federal income tax return with PICO and 2000,its other subsidiaries. By the end of the first quarter of 2005, the continued losses of HyperFeed reduced the carrying value of the minority interest to zero and from that date forward, PICO has reported all the losses of HyperFeed in these consolidated financial statements without any charge to the minority interest. PICO is currently evaluating whether it can use net operating losses of HyperFeed generated in years prior to PICO reaching 80% ownership under Section 382 of the Internal Revenue Code but does not expect to be able to utilize any significant amount of such losses.

On November 2, 2004, the Company owns 112,672 shares, or 19.3%entered into a Secured Convertible Promissory Note Agreement (“Note”) with HyperFeed that gave PICO the right to convert the balance into common stock of HyperFeed at any time. On March 28, 2005, the terms of the Jungfraubahn.note were modified to increase the maximum borrowing under the note from $1.5 million to $4 million and to change the exercise price of the conversion right to the lesser of 80% of the 5 day average at March 28, 2005, or 80% of the 5 day average at the exercise date. In August 2005 the note was again modified to increase the line to $6 million and change the exercise price to the lesser of $1.36 per share or 80% of the 5 day average at the date of exercise and in doing so, HyperFeed issued to PICO a warrant to purchase 125,000 common shares of HyperFeed at $1.70 per share. By September 30, 2005 the principal and interest outstanding on the note was $4.7 million. Then during October 2005, HyperFeed drew $1.4 million to bring the outstanding principal balance to $6 million. On November 1, 2005, PICO elected to convert the entire outstanding principal and interest of $6.2 million in accordance with the provisions of the convertible note into 4,546,479 newly issued common shares of HyperFeed ($1.36 per share).

During 2005, 2004 and 2003 PICO provided funding of $7.2 million to HyperFeed either by acquiring common stock directly from HyperFeed or loaning HyperFeed money through the convertible note, which was subsequently converted to common stock as discussed above. Since the conversion of the note in November 2005, PICO has loaned HyperFeed an additional $3.3 million ($810,000 through December 31, 2005) which is planned to be rolled into a convertible note during the first quarter of 2006.

On May 15, 2003 the Company increased its ownership of HyperFeed from 44% to 51% by purchasing 443,623 shares for $1.2 million and at that time had the controlling financial interest through a direct ownership of a majority voting interest. Consequently, PICO consolidated HyperFeed’s results from that date forward. The Company accountsaccompanying consolidated financial statements for the investment under SFAS 115 and reported a net unrealized gain of $2.6 million atyear ended December 31, 2001. 4. INVESTMENTS IN UNCONSOLIDATED AFFILIATES:2003 include the revenues and expenses and costs of HyperFeed Technologies, Inc.: beginning May 15, 2003. Prior to May 15 2003, the Company accounted for its investment in HyperFeed using the equity method of accounting.

At December 31, 2001,2005 and 2004, the Company'sCompany’s investment in HyperFeed consisted of 10,077,8566,117,791 and 1,546,312 shares of common stock, representing 42.4%80% and 51%, respectively of the common shares outstanding; and 4,055,195outstanding. PICO also owned 310,616 common stock warrants which on a diluted basis would represent an additional 14.5% voting interest if exercised. The common stock is recorded using the equity method of accounting and has a carrying value of $2.1 million atthat expired in April 2005. At December 31, 2001. The difference between2004, these warrants had zero fair value as the exercise price is substantially higher than the market price of HyperFeed stock. At December 31, 2003, the carrying value of the investment and the underlying equity in the net assets or liabilities of HyperFeed of $2.2 million considered goodwill and is being amortized over 10 years on a straight-line basis. At December 31, 2001, the common stock warrants are valued atwas an estimated fair value of $527,000, prior to a $1.2 million deferred tax asset,$556,000, using the Black-Scholes option-pricing model. The warrants arewarrant was reported as a derivative instrument under the provisions of SFAS No. 133 and consequently gains and losses, while the loss for the 2001 year iswarrant had a fair value in 2004 and 2003, are reflected in the caption "Realized“Net Realized Loss on Investments"Investments” in the Statement of Operations. The cumulative change in fair valuewarrant PICO holds from the date of acquisition to January 1, 2001 was a decline of $1.3 million and is recorded net2005 transactions does not meet the definition of a deferred tax benefitderivative and no value is recognized on the Statement of Operations. those instruments.
The Black-Scholes pricing model incorporates assumptions in calculating an estimated fair value. The following assumptions were used in the computations: no dividend yield for all years; a risk-free interest rate of 2% - 5.6%; a one year expected life; and a historical 5 year cumulative volatility of 109% to 119%. At December 31, 2000, the Company's investment in HyperFeed consisted of 2,602,000 shares of common stock, representing 16.5% 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 20.5% voting interest. The common and preferred stock are recorded using the equity method of accounting for investments in common stock, and have a combined carrying value of $3.3 million at December 31, 2000. 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, 2000, the common stock warrants are carried in accordance with SFAS No. 115 at an estimated fair value of $2.9 million, prior to a $435,000 deferred tax asset, using the Black-Scholes option-pricing model. The pre-tax unrealized loss on the warrants is $1.3 million. During the three years ended December 31, 2001, HyperFeed recorded various capital transactions that affected PICO's voting ownership percentage. In 2001, HyperFeed issued 491,000 shares of common stock related to an acquisition which resulted in a dilution gain of $352,000 to PICO. 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 1% to 35% at June of 2001 and through the conversion of preferred shares PICO increased ownership to 42.4% by the end of December 31, 2001. In September 2001, the Company converted its HyperFeed Series A voting convertible preferred shares, and its Series B voting convertible preferred shares into 7,462,856 newly issued common shares. After the conversion, PICO owned 42.4% of the outstanding voting interest. The following is the market value of the common shares at December 31, 2005 and preferred shares (preferred shares existed in 2000 only)2004, based on the December 31, 2001 and 2000 closing price of HyperFeed common stock: 2001 2000 ------------------ ----------------- Common stock, $ 6,147,492 $ 4,065,625 Preferred stock 7,478,980 ------------------ ----------------- $ 6,147,492 $ 11,544,605 ================== ================= 71 5. LAND AND RELATED MINERAL RIGHTS AND WATER RIGHTS: is $8.3 million and $4.2 million, respectively.


5.
REAL ESTATE AND WATER ASSETS:

Through its subsidiary Nevada Land, the Company owns land and the related mineral rights and water rights. Through its subsidiary Vidler, the Company owns land and water rights and water storage assets consisting of various real properties in California, Arizona, Colorado and Nevada. The costs assigned to the various components at December 31, were as follows:
2001 2000 ------------------ ------------------ NLRC: Land and related mineral rights and

  2005 2004 
Nevada Land:     
Land and related mineral rights and water rights $30,066,419 $37,642,378 
        
Vidler:       
Water and water rights  22,595,686   25,999,698 
Land  11,213,306  35,482,710 
California water storage (Semitropic)  2,472,697  2,036,240 
Land improvements, net  10,543,327  9,539,430 
   46,825,016  73,058,078 
  $76,891,435 $110,700,456 

On June 30, 2005, the Company completed a sale of approximately 42,000 acre-feet of water rights $ 45,249,039 $ 42,799,043 ------------------ ------------------ Vidler: Water and water rights 24,530,412 25,743,707 Land 46,803,276 55,960,544 California water storage 1,206,737 5,740,483 Land improvements, net 8,208,178 6,991,464 ------------------ ------------------ 80,748,603 94,436,198 ------------------ ------------------ $ 125,997,642 $ 137,235,241 ================== ==================
At December 31, 2001 and 2000, the book valuerelated 15,470 acres of Vidler's interestland in the SemitropicHarquahala Valley for $94.4 million in cash. The cost of the land and water sold was $37.8 million.

In 2005, Lincoln County Water Storage facilityDistrict and Vidler (“Lincoln/Vidler”) closed on a sale of 2,100 acre feet of water to a developer for $15.7 million. The Company’s share of the revenues allocated to the sale of the 2,100 acre-feet was $1.2$10.1 million and $5.7 million, respectively. During the first ten yearscost of the agreement throughwater sold was approximately $983,000.

Through November 2008, Vidler is required to make a minimum annual payment.payment for the Semitropic water storage facility of $401,000. These payments are being capitalized and the asset is being amortized over its useful life of thirty-five years. In May 2001, Vidler sold 29.73%Amortization expense was $102,000 in each of its right, title and interest under the lease to Newhall Land and Farming Company. In 2001 Vidler sold 84% of its right, title and interest under the lease for a gain of $5.7 million. As a result, atthree years ended December 31, 2001,2005. At December 31, 2005 and 2004, Vidler owns the right to store 30,000 acre-feet of water andwater. Vidler is required to make a minimum annual payment of $519,000. At December 31, 2000, Vidler owned the right to store 185,000 acre-feet and was required to make a minimum annual payment of $2.3 million. The amortization expense in 2001 and 2000 was $438,000 and $667,000, respectively. In addition, Vidler isalso required to pay annual operating and maintenance costs. In 2001, 2000charges and 1999, operating costsfor the years ended December 31, 2005, 2004 and 2003, the Company expensed a total of $146,000, $889,000$169,000, $148,000 and $863,000, respectively, were expensed. In July of 2000, Vidler purchased a 51% interest in Fish Springs Ranch, LLC for $4.5 million and a commitment to invest an additional $500,000 in July 2001, and also purchased a 50% interest in V&B, LLC for $1.2 million. These companies own the 8,628-acre Fish Springs Ranch, and the associated water rights. The purchase price was allocated based on estimated fair values at the date of acquisition. Vidler acts as manager and effectively controls both companies. Consequently, the companies are included in the accompanying consolidated financial statements as of the date of the investment in the companies. As a result of consolidation, water rights increased approximately $6.6 million, land increased approximately $306,000, various other assets increased $2.1 million and liabilities increased $184,000 and minority interest of $3.8 million. Also during the year, Vidler purchased Spring Valley Ranches (formerly, Robison Ranch), for approximately $4.5 million. Approximately $3.7 million of the purchase price was recorded as land. 6. PREMIUMS AND OTHER RECEIVABLES: Premiums$155,000, respectively.


6.
NOTES AND OTHER RECEIVABLES:

Notes and other receivables consisted of the following at December 31:
2001 2000 ---------------- ---------------- Agents' balances and unbilled premiums $ 11,081,153 $ 10,008,197 Finance receivables 5,961,567 3,329,670 Trade receivables 49,288 263,400 Other accounts receivable 3,535,157 5,645,636 ---------------- ---------------- 20,627,165 19,246,903 Allowance for doubtful accounts (2,550,604) (214,300) ---------------- ---------------- $ 18,076,561 $ 19,032,603 ================ ================
72 Other accounts

  2005 2004 
Notes receivable $13,103,326 $12,741,852 
Trade receivable  303,795  1,121,298 
Interest receivable  1,042,520  462,631 
Other receivables  619,442  985,109 
   15,069,083  15,310,890 
Allowance for doubtful accounts  (376,195 (358,917)
  $14,692,888 $14,951,973 

Notes receivable, include $2.3primarily from the sale of real estate and water assets have a weighted average interest rate of 9.2% and a weighted average life to maturity of approximately 7 years at December 31, 2005.

At December 31, 2004, notes receivable included $3 million dueof outstanding receivables arising from Dominion Capital Pty. Ltd ("Dominion"), which is affiliated withsales in 2003 of properties in West Wendover, Nevada. The properties were sold for $14.8 million, and through December 31, 2004 the Company through a mutual ownership in Solpower Corporation. During 2001, an allowance forbuyer made principal and interest payments of approximately $12.2 million. The balance of the total outstanding balance owed by Dominion of $2.3 millionreceivable was recorded due to be repaid in full by December 31, 2004. However, the uncertainty surroundingregularly scheduled principal and interest payment due were not paid and the recoveryreceivable went past due. The Company restructured the note to allow the buyer additional time to pay the balance by extending the due date. By July 2005, the balance was paid in full.


7.
FEDERAL, FOREIGN AND STATE INCOME TAX:

The Company and its U.S. subsidiaries file a consolidated federal income tax return.return, which will include the results of HyperFeed from November 1, 2005. HyperFeed has various deferred tax balances, primarily NOL’s, on which the Company has provided a 100% valuation allowance at December 31, 2005 and 2004. In 2005, the Company has included the HyperFeed NOL's and the related 100% valuation allowance, in the accompanying tables in 2005 and 2004; in prior periods such amounts were excluded.  PICO is currently evaluating whether it can use some of the net operating losses that arose prior to PICO owning 80% of HyperFeed in its 2005 and future federal income tax returns under section 382 of the Internal Revenue Code but does not expect to be able to utilize any significant amount of such losses. Non-U.S. subsidiaries file tax returns in various foreign countries. Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes.


Significant components of the Company'sCompany’s deferred tax assets and liabilities are as follows at December 31:
2001 2000 ---------------- ---------------- Deferred tax assets: Net operating loss carryforwards $ 12,155,883 $ 20,598,362 Capital loss carryforwards 2,947,945 Loss reserves 7,100,265 9,023,860 Unearned premium reserves 1,913,744 1,734,353 Unrealized depreciation on securities 292,122 364,041 Deferred gain on retroactive reinsurance 149,219 329,417 Write down of securities 5,961,979 6,742,018 Equity in unconsolidated affiliates 1,392,552 681,104 Deferred loss on SFAS 133 505,144 Other, net 1,187,741 550,044 ---------------- ---------------- Total deferred tax assets 33,606,594 40,023,199 ---------------- ---------------- Deferred tax liabilities: Discounting of reserves 2,823,237 2,823,237 Deferred policy acquisition costs 2,350,620 2,141,939 Unrealized appreciation on securities 1,669,697 714,769 Revaluation of surface, water and mineral rights 12,991,330 14,880,795 NLRC land sales 1,065,315 1,065,315 Accretion of bond discount 109,664 61,795 Capitalized lease 279,313 1,133,434 ---------------- ---------------- Total deferred tax liabilities 21,289,176 22,821,284 ---------------- ---------------- Net deferred tax assets before valuation allowance 12,317,418 17,201,915 Less valuation allowance (3,734,153) (4,101,587) ---------------- ---------------- Net deferred tax asset $ 8,583,265 $ 13,100,328 ================ ================
The deferred tax asset valuation allowance as of December 31, 2001 and 2000 relates primarily to the net operating loss carryforwards (NOL's) of Global Equity, a Canadian company. Global Equity is 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. NOL's, the Company carried a valuation allowance on a portion of its U.S. NOL's. As a result of this legislation, in 1999 most of the valuation allowance for U.S. NOL's was removed.

  2005 2004 
Deferred tax assets:     
Net operating loss carryforwards $16,422,288 $20,284,732 
Deferred compensation and SAR expense  13,992,344  5,478,064 
Capital loss carryforwards  156,757  152,278 
Loss reserves  1,633,853  2,797,075 
Basis difference on securities  1,074,277  1,158,813 
Impairment charges  5,587,354  2,968,817 
Depreciation on fixed assets  1,141,768  974,079 
Allowance for bad debts  992,244  963,894 
Employee benefits  1,977,876  646,293 
Cumulative loss on SFAS 133 derivatives  1,385,576  1,385,576 
Other  2,226,762  1,444,529 
Total deferred tax assets  46,591,099  38,254,150 
Deferred tax liabilities:       
Unrealized appreciation on securities  35,588,675  17,781,313 
Revaluation of real estate and water assets  5,330,587  10,855,277 
Foreign receivables  1,108,702  2,317,623 
Installment land sales  3,941,476  1,781,292 
Accretion of bond discount  83,540  83,097 
Capitalized lease  287,528  279,313 
Other  2,325,154  1,696,284 
Total deferred tax liabilities  48,665,662  34,794,199 
Net deferred tax liability before valuation allowance  (2,074,563) 3,459,951 
Valuation allowance  (15,164,499) (12,653,011)
Net deferred income tax liability $(17,239,062)$(9,193,060)

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'smanagement’s conclusions as to the ultimate realization of deferred tax assets. 73

Pre-tax income (loss) from continuing operations for the years ended December 31 was under the following jurisdictions:
2001 2000 1999 ----------------- ---------------- ----------------- Domestic $ 12,508,221 $ (11,129,866) $ (14,716,953) Foreign (3,365,730) (4,935,297) (9,593,712) ----------------- ---------------- ----------------- Total $ 9,142,491 $ (16,065,163) $ (24,310,665) ================= ================ =================

  2005 2004 2003 
Domestic $32,119,040 $(15,660,549)$(12,548,084)
Foreign  796,692  (1,236,387) (1,230,382)
Total $32,915,732 $(16,896,936)$(13,778,466)

Income tax expense (benefit) from continuing operations for each of the years ended December 31 consists of the following:
2001 2000 1999 ---------------- ---------------- ----------------- Current tax benefit: U.S. federal $ (15,373) $ (450,125) $ (718,240) Foreign (614,389) (4,650,993) 514,096 ---------------- ---------------- ----------------- Total current tax benefit (629,762) (5,101,118) (204,144) ---------------- ---------------- ----------------- Deferred tax expense (benefit): U.S. federal $ 4,365,247 $ (3,775,786) $ (9,394,066) Foreign (329,021) (134,318) (3,823,859) ---------------- ---------------- ----------------- Total deferred tax expense (benefit) 4,036,226 (3,910,104) (13,217,925) ---------------- ---------------- ----------------- Total income tax expense (benefit) $ 3,406,464 $ (9,011,222) $ (13,422,069) ================ ================ =================
  2005 2004 2003 
Current tax expense (benefit):       
U.S. federal and state $24,602,202 $(908,367)$(326,200)
Foreign  73,107  71,952    
Total current tax expense (benefit)  24,675,309  (836,415) (326,200)
Deferred tax expense (benefit):          
U.S. federal and state $(6,715,681)$(1,957,765)$(177,746)
Foreign  33,537  (253,541) (698,461)
Total deferred tax benefit  (6,682,144) (2,211,306) (876,207)
           
Total income tax expense (benefit) $17,993,165 $(3,047,721)$(1,202,407)

The difference between income taxes provided at the Company'sCompany’s federal statutory rate and effective tax rate is as follows:
2001 2000 1999 ---------------- ---------------- ----------------- Federal income tax provision (benefit) at statutory rate $ 3,108,447 $(5,462,155) $ (8,265,626) Book tax difference on sale of securities (1,247,596) Settlement of tax appeal (495,976) (4,398,731) Change in valuation allowance (367,434) 3,285,416 (8,448,347) Amortization of goodwill (63,165) 208,268 217,934 Non-deductible capital loss (166,750) 294,188 Investment valuation (971,105) 171,115 Accrued liabilities 1,578,000 Extraordinary gain 227,821 Permanent differences 1,224,592 (258,569) 802,846 ---------------- ---------------- ----------------- Federal income tax provision (benefit) $ 3,406,464 $(9,011,222) $(13,422,069) ================ ================ =================

  2005 2004 2003 
Federal income tax provision (benefit) at statutory rate $11,520,506 $(5,744,958)$(4,723,807)
Change in valuation allowance  2,690,123  1,832,458  2,351,656 
State taxes  3,318,795       
Write off of NOL's previously valued and other items     (809,124) 493,420 
Foreign rate differences  (216,626) 277,366  243,870 
Rate changes  (470,424)      
Permanent differences  1,150,791  1,396,537  432,454 
Total $17,993,165 $(3,047,721)$(1,202,407)

The expense for income taxes for the year ended December 31, 2005 includes estimated federal and state tax charges based on the consolidated pre-tax income. The effective tax rate charge for the year ended December 31, 2005 is 55% primarily due to the losses of HyperFeed without tax benefit, prior to HyperFeed becoming an 80% subsidiary on November 1, 2005, the accrual of state taxes on Vidler’s pre-tax income and permanent differences between accounting and taxable income primarily arising from certain management compensation which is not tax-deductible. For the year ended December 31, 2004 and December 31, 2003, the effective rate for the recorded tax benefit is 18% and 9%, respectively, primarily due to the losses of HyperFeed without tax benefit, and the increase in valuation allowances related to NOL’s within the group.

Provision has not been made for U.S. or additional foreign tax on the $5.9approximately $10 million of undistributed earnings of foreign subsidiaries. It is not practical to estimate the amount of additional tax that might be payable. Rate differences within the difference between statutory and effective tax rates reflect foreign results taxed at the local statutory rate, which can be as much as 25% lower than the U.S. statutory rate of 35%. At December 31, 2001,2005 and 2004, the Company had no material federal income tax payable or receivable, and at December 31, 2000, the Company had an income tax payable of $324,000.receivable. As of December 31, 2001,2005 the Company has a U.S. net operating loss carryforwardscarryforward before valuation allowance of $35 million. $46.3 million, of which $43.3 million is unlikely to be utilized primarily due to the uncertainty of generating taxable income in the subsidiary in which the NOLs reside.

The Company’s U.S. NOLs expire as follows:

    
Year Amount 
2005 $1,557,196 
2006  300,612 
2009  590,840 
2010  773,628 
2011  4,167,626 
2012  9,490,363 
2013  4,251,152 
2014  4,607,516 
2016  29,980 
2017  1,902,826 
2018  4,885,040 
2019  4,784,512 
2020  7,944,563 
2021  1,013,711 
   46,299,565 
Valuation allowance  (43,327,254)
Total $2,972,311 


Included in the table above are HyperFeed NOLs of $40 million on which the Company has $2.2 million, $620,000, and $6.7 millionprovided a 100% valuation allowance at December 31, 2005.


8.
PROPERTY AND EQUIPMENT:

The major classifications of the Company'sCompany’s fixed assets are as follows at December 31:
2001 2000 -------------- --------------- Office furniture, fixtures and equipment $ 6,833,972 $ 6,834,381 Building and leasehold improvements 1,135,071 1,192,123 -------------- --------------- 7,969,043 8,026,504 Accumulated depreciation (5,241,112) (5,081,991) -------------- --------------- Property and equipment, net $ 2,727,931 $ 2,944,513 ============== ===============

  2005 2004 
Office furniture, fixtures and equipment $5,478,684 $6,366,383 
Building and leasehold improvements  536,478  1,352,303 
   6,015,162  7,718,686 
Accumulated depreciation  (4,442,670 (5,281,765)
Property and equipment, net $1,572,492 $2,436,921 

Depreciation expense was $969,000,$990,000, $1.2 million and $1.1 million in 2005, 2004, and $1 million in 2001, 2000, and 1999,2003, respectively. 9. DEFERRED POLICY ACQUISITION COSTS: Changes in deferred policy acquisition costs were as follows:


2001 2000 1999 ---------------- ---------------- ---------------- Balance, January 1 $ 6,299,819 $ 4,821,228 $ 5,548,634 Additions: Commissions 7,884,474 7,232,606 5,559,587 Other 5,903,573 4,613,034 3,966,560 Ceding commissions (129,895) (116,701) 230,792 ---------------- ---------------- ---------------- Deferral of expense 13,658,152 11,728,939 9,756,939 ---------------- ---------------- ---------------- Amortization to expense (13,044,382) (10,250,348) (10,484,345) ---------------- ---------------- ---------------- Balance, December 31 $ 6,913,589 $ 6,299,819 $ 4,821,228 ================ ================ ================
9.
SHAREHOLDERS’ EQUITY:
10. SHAREHOLDERS' EQUITY: At the Annual Meeting of Shareholders on October 19, 2000, shareholders voted to amend the Articles of Incorporation to eliminate the Company's preferred shares. This amendment became effective January 16, 2001.

On February 9, 2000,May 6, 2005, the Company registeredcompleted a sale of 905,000 shares of newly-issued common stock to institutional investors at a price of $25 per share. After placement costs, the net proceeds to the Company were $21.4 million. The Company filed a registration statement on Form S-3 to register the shares under the Securities Act, which became effective in July 2005.

Long Term Inventive Plan

PICO Holdings, Inc. 2005 Long Term Incentive Plan (the "2005 Plan"). The 2005 Plan was adopted by the Board and approved by shareholders on December 8, 2005. The 2005 Plan provides for the grant or award of various equity incentives to PICO employees, non-employee directors and consultants. A total of 2,654,000 shares of common stock are issuable under the 2005 Plan and it provides for the issuance of incentive stock options, non-statutory stock options, free-standing stock-settled stock appreciation rights, restricted stock awards, performance shares, performance units, restricted stock units, deferred compensation awards and other stock-based awards. On December 12, 2005, the Company granted 2,185,965 stock-settled SARs with an exercise price of $33.76 per share (being the U. S. Securities and Exchange Commission to offer 6,546,497 sharesmarket value of PICO stock at the date of grant) that were fully vested on that date. These are the only awards granted and outstanding and there are no restrictions that would prevent an employee from exercising these awards. Upon exercise, the Company will issue newly issued shares equal to the in-the-money value of the exercised SARs, net of the applicable federal and state employee taxes withheld. The Plan is considered a pricevariable plan for accounting purposes since the number of $15shares to be issued is not known at the date of grant.


10.
REINSURANCE:

In the normal course of business, the Company’s insurance subsidiaries have entered into various reinsurance contracts with unrelated reinsurers. The Company’s insurance subsidiaries participate in such agreements for the purpose of limiting their loss exposure and diversifying risk. Reinsurance contracts do not relieve the Company’s insurance subsidiaries from their obligations to policyholders. All reinsurance assets and liabilities are shown on a gross basis in the accompanying consolidated financial statements. Amounts recoverable from reinsurers are estimated in a manner consistent with the claim liability associated with the reinsured policy. Such amounts are included in “reinsurance receivables” in the consolidated balance sheets at December 31 as follows:

  2005 2004 
Estimated reinsurance recoverable on:     
Unpaid losses and loss adjustment expense $15,858,000 $17,302,699 
Reinsurance recoverable (payable) on paid losses and loss expenses  328,105  (145,370)
Reinsurance receivables $16,186,105  $17,157,329 

Unsecured reinsurance risk of $100,000 or more is concentrated in the companies shown in the table below. The Company 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.

CONCENTRATION OF REINSURANCE AT DECEMBER 31, 2005

  
Reported
Claims
 
Unreported
Claims
 
Reinsurer
Balances
 
General Reinsurance $7,483,950 $6,408,794 $13,892,744 
TIG Reinsurance Group  312,612  350,000  662,612 
Mutual Assurance  27,901  297,487  325,388 
National Reinsurance Corporation  152,039     152,039 
North Star Reinsurance Corp.  37,671  112,587  150,258 
Swiss American Reinsurance Corporation  28,220  78,477  106,697 
  $8,042,393  $7,247,345  $15,289,738 

The following is a summary of the net effect of reinsurance activity on the consolidated financial statements for each of the years ended December 31:

  2005 2004 2003 
Losses and loss adjustment expenses incurred (recovered):       
Direct  (2,092,123) 1,159,439  4,941,702 
Assumed  176,880  192,102  137,376 
Ceded  (1,749,589) (908,257) (412,054)
Net losses and loss adjustment expense (recovery)  (3,664,832) 443,284  4,667,024 
11.
RESERVES FOR UNPAID LOSS AND LOSS ADJUSTMENT EXPENSES:

Reserves for unpaid losses and loss adjustment expenses on MPL, property and casualty and workers’ compensation business represent management’s estimate of ultimate losses and loss adjustment expenses and fall within an actuarially determined range of reasonably expected ultimate unpaid losses and loss adjustment expenses.

Reserves for unpaid losses and loss adjustment expenses are estimated based on both company-specific and industry experience, and assumptions and projections as to claims frequency, severity, and inflationary trends and settlement payments. Such estimates may vary significantly from the eventual outcome. In management’s judgment, information currently available has been appropriately considered in estimating the loss reserves and reinsurance recoverable of the insurance subsidiaries.

Management prepares its statutory financial statements of Physicians in accordance with accounting practices prescribed or permitted by the Ohio Department of Insurance (“Ohio Department”). Conversely, Management prepares its statutory financial statements for Citation 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 prescribed accounting practices of the Ohio Department of Insurance do not allow for discounting of claim liabilities. Activity in the reserve for unpaid claims and claim adjustment expenses was as follows for each of the years ended December 31:

  2005 2004 2003 
Balance at January 1 $55,994,375 $60,863,884 $52,703,113 
Less reinsurance recoverable  (17,302,699 (17,490,157 (7,780,432)
Net balance at January 1  38,691,676  43,373,727  44,922,681 
Incurred loss and loss adjustment expenses (recoveries) for prior accident year claims  (3,664,832) 443,284  4,667,024 
Payments for claims occurring during prior accident years  (4,237,938) (5,125,335) (6,215,978)
Net change for the year  (7,902,770) (4,682,051) (1,548,954)
Net balance at December 31  30,788,906  38,691,676  43,373,727 
Plus reinsurance recoverable  15,858,000  17,302,699  17,490,157 
Balance at December 31 $46,646,906 $55,994,375 $60,863,884 

In 2005 Physicians reported positive development of $3.2 million in its medical professional line of business. Citation’s property and casualty line reported positive development of $1.8 million offset by adverse development in its workers’ compensation line of $1.3 million. In 2004, Physicians reported positive development of $489,000 in its medical professional line of business. Citation’s property and casualty line of business also reported positive development in 2004 of $254,000 but reported $1.2 million in adverse development in its workers’ compensation line of business.

In 1997, Citation ceded its workers’ compensation business to Fremont Indemnity Company (“Fremont”). However, in July 2003, Fremont was placed in liquidation and as a result Citation recorded a provision of $7.5 million of reinsurance recoverable from Fremont, which is included in incurred loss and loss adjustment expenses for the year ended December 31, 2003. In addition, during 2003, Citation also recorded adverse development in its property and casualty business of $3.9 million. The $11.4 million in negative development in Citation was offset by $6.7 million of positive development within Physicians’ medical professional liability loss reserves, reduced after actuarial analysis concluded that Physicians’ reserves against claims were significantly greater than the actuary’s projections of future claims payments.


12.
EMPLOYEE BENEFITS, COMPENSATION AND INCENTIVE PLAN:

For the year ended December 31, 2005, the Company accrued $8.4 million in incentive awards payable to certain members of management in accordance with the provisions of the Company’s bonus plan which, if certain thresholds are attained, is calculated based on growth in book value per share of the Company.  In addition, $2.8 million in incentive awards were recorded for certain members of Vidler’s management based on the combined net income of Vidler and Nevada Land and Resource Company in accordance with the related bonus plan.

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 profit sharing contribution at the end of the Plan’s fiscal year within limits established by the Employee Retirement Income Securities Act. Total contribution expense for the years ended December 31, 2005, 2004 and 2003 was $384,000, $397,000 and $427,000, respectively.


13.
REGULATORY MATTERS:

The regulations of the Departments of Insurance in the states where the Company’s insurance subsidiaries are domiciled generally restrict the ability of insurance companies to pay dividends or make other distributions. Based upon statutory financial statements filed with the insurance departments as of December 31, 2005, $6.5 million was available for distribution by the Company’s wholly-owned insurance subsidiaries to the parent company without the prior approval of the Department of Insurance in the states in which the Company’s insurance subsidiaries are domiciled. At December 31, 2005, the total statutory surplus in these insurance companies was $82.8 million and apart from the $6.5 million noted above, was unavailable for distribution without Department of Insurance approval.


14.
COMMITMENTS AND CONTINGENCIES:

The Company leases some of its offices under non-cancelable operating leases that expire at various dates through October 2009. Rent expense for the years ended December 31, 2005, 2004 and 2003 for office space was $958,000, $959,000 and $323,000, respectively.

Vidler is party to a lease to acquire 30,000 acre-feet of underground water storage privileges and associated rights offering. Shareholders were offeredto recharge and recover water located near the California Aqueduct, northwest of Bakersfield. The agreement requires a minimum payment of $401,000 per year adjusted annually by the engineering price index until 2007. PICO signed a Limited Guarantee agreement with Semitropic Water Storage District (“Semitropic”) that requires PICO to guarantee Vidler’s annual obligation up to $519,000, adjusted annually by the engineering price index.

Future minimum payments under all operating leases for the years ending December 31, are as follows:

Year   
2006 $1,464,331 
2007  1,351,073 
2008  862,634 
2009  546,819 
2010  205,721 
Thereafter  3,124,420 
Total $7,554,998 


Not included in the table above is an $11.8 million commitment Vidler made for capital expenditures related to the proposed construction of a pipeline to convey water from the Fish Springs Ranch in northern Nevada to Reno, Nevada.

The Company is subject to various other litigation that arises in the ordinary course of its business. Based upon information presently available, management is of the opinion that such litigation will not have a material adverse effect on the consolidated financial position, results of operations or cash flows of the Company.


15.
RELATED-PARTY TRANSACTIONS:

On September 21, 2005, the Compensation Committee approved new Employment Agreements for Ronald Langley, Chairman, and John R. Hart, President and CEO, to take effect January 1, right2006 and to buyexpire on December 31, 2010. These Employment Agreements replaced the current Employment Agreements, which the Company entered into with Mr. Langley and Mr. Hart on January 1, new2002 which expired on December 31, 2005.

Each Employment Agreement provides for an annual salary of $1.1 million and an annual incentive award based on the growth of the Company’s book value per share, at $15adjusted for every 2 common shares held at March 1, 2000. any impact on book value by 7/8 of all stock appreciation rights-related expenses, net of tax, during the fiscal year above a threshold. Incentive awards of 5% of the increase in book value is earned when the Company’s percentage increase in book value per share as adjusted for a given fiscal year exceeds the threshold of 80% of the S&P 500 annualized total return for the five previous calendar years, including the given fiscal year.

The growth in book value per share exceeded the threshold each year in the three years ended December 31, 2005 and an award was accrued in the accompanying consolidated financial statements for PICO’s President and its Chairman of $5.9 million, $1.2 million, and $935,000, respectively.

In March 2000, an investment partnership registered as PICO Equity Investors, L.P. acquired 3,333,333 shares of PICO stock for approximately $50 million. PICO Equity Investors, an entity managed by PICO Equity Investors Management, LLC, which is owned by three of PICO'sPICO’s current directors (including PICO's chairman ofDirectors, including the boardChairman, and PICO'sits president and chief executive officer),officer, will exercise all voting and investment decisions with respect to these shares for up to 10 years. There is no monetary compensation for the management of either partnership. PICO 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. Stock Option Plans PICO Holdings 1995 Non-Qualified Stock Option Plan. PICO was authorized to issue 521,030 shares of common stock pursuant to awards granting non-qualified stock options to full-time employees (including officers) and directors. The options granted to employees vest at a rate of 33% upon grant and 33% per year on each of the first two anniversaries of the date of grant. A total of 512,005 options have been issued from this plan. The Company granted stock options in 1996 and 1995 under this plan in the form of incentive stock options and non-qualified stock options. All issued options from this plan are fully vested. 75 PICO Holdings 1998 Stock Option Agreement. PICO was 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. The remaining options expired during 2001. None of these stock options were exercised. PICO Holdings 1998 Global Equity/PICO Stock Option Plan. As discussed above, PICO assumed 484,967 options to existing Global Equity option holders pursuant to the acquisition of the remaining shares of Global Equity by exchanging PICO options for Global Equity options. The options granted from this plan placed the participants in an economically equivalent position regarding the number of shares, exercise price, and with vesting according to their original terms. PICO Holdings 1999 Stock Option Agreement. PICO is authorized to issue 10,665 shares of common stock pursuant to awards granted as non-qualified stock options and other similar stock-based awards. On January 1, 1999, PICO granted 10,665 non-qualified common stock options to an officer of the Company at an exercise price of $13.25 per share. The options were immediately vested and expire in 10 years. PICO Holdings 2000 Non-Statutory Stock Option Plan. PICO is authorized to issue 1,200,000 shares of common stock to employees and non-employee directors of and consultants to the Company, pursuant to awards granted as non-qualified stock options. On April 7, 2000, PICO granted, subject to approval by the Company's shareholders obtained on October 19, 2000, 1,091,223 non-qualified common stock options to employees and non-employee directors of the Company (1,082,223 to employees and 9,000 to directors) at an exercise price of $15.00 per share. Of the options granted to employees, one-third vested upon grant, one-third vest April 7, 2001 and one-third vest April 7, 2002. The options granted to non-employee directors were fully vested on the grant date. On July 9, 2001, PICO granted 100,000 non-statutory stock options to an employee at an exercise price of $15.00 per share. 66,000 of these stock options vested on July 9, 2001 and the remaining 34,000 stock options will vest on July 9, 2002. These stock options expire on July 9, 2021. On August 2, 2001, PICO granted 8,777 non-statutory stock options to an employee at an exercise price of $15.00 per share. 2,925 of those stock options vested on August 2, 2001, 2,926 stock options will vest on August 2, 2002, and 2,926 stock options will vest on August 2, 2003. They expire on August 2, 2021. PICO Holdings 2001 Stock Option Agreements. PICO is authorized to issue 46,223 shares of common stock pursuant to awards granted in individual non-qualified stock option agreements. In August 2001, PICO granted a total of 46,223 non-qualified stock options to three employees of the Company. The exercise price for all these non-statutory stock options is $15.00 per share. One-third of these stock options vested in August 2001, one-third will vest in August 2002, and the remaining one-third will vest in August 2003. All of these non-statutory stock options expire in August 2021. 76 A summary of the status of the Company's stock options is presented below for the years ended December 31:
2001 2000 1999 ------------------------ ------------------------- -------------------------- Weighted Weighted Weighted Shares Average Shares Average Shares Average Underlying Exercise Underlying Exercise Underlying Exercise Options Prices Options Prices Options Prices ------------ ---------- ------------ ---------- ------------- ----------- Outstanding at beginning of year 1,834,599 $14.93 1,046,575 $ 15.83 1,097,021 $ 15.89 Granted 155,000 15.00 1,091,223 15.00 10,665 13.25 Canceled - expired (208,879) 17.72 (303,199) 18.31 (61,111) 15.63 Outstanding at end of year 1,780,720 14.60 1,834,599 14.93 1,046,575 15.83 Exercisable at end of year 1,349,312 14.48 1,113,117 14.88 1,046,575 15.83 Weighted-average fair value of options granted during the year $ 8.52 $ 7.15 $ 9.02 ========== ========== ===========
The following table summarizes information about stock options outstanding at December 31, 2001:
Options Outstanding Options Exercisable - -------------------------------------------------------------- --------------------------- Weighted Average Weighted Number Remaining Average Number Weighted Range of Outstanding Contractual Exercise Exercisable Average Exercise Prices at 12/31/01 Life Price at 12/31/01 Exercise Price - -------------------- ------------- ----------- ----------- ------------- ------------ $13.45 to $23.80 522,672 3.71 $13.45 522,672 $13.45 $15.63 to $23.95 1,258,048 18.19 $15.08 826,640 $15.13 ------------- ------------- $13.25 to $23.95 1,780,720 13.94 $14.60 1,349,312 $14.48 ============= =============
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 each year: no dividend yield; risk-free interest rates are different for each grant and range from 4.9% to 6.97%; expected lives of options are estimated at 10 years for 2001, 10 years for 2000 and 7 years for 1999; and volatility of 42% for the 2001 grants, 51% for the 2000 grants, and 54% for the 1999 grants. Had compensation cost for the Company's stock-based compensation plans been determined consistent with SFAS No. 123, the Company's net loss and net loss per share would approximate the following pro forma amounts for the years ended December 31:
2001 2000 1999 --------------- ----------------- ---------------- Reported net income (loss) $ 5,113,905 $ (11,300,556) $ (9,740,280) SFAS No. 123 charge (711,521) (2,616,496) (96,249) --------------- ----------------- ---------------- Pro forma net income (loss) $ 4,402,384 $ (13,917,052) $ (9,836,529) =============== ================= ================ Pro forma net income (loss) per share: basic and diluted $ 0.36 $ (1.20) $ (1.09) =============== ================= ================
The effects of applying SFAS No. 123 in this pro forma disclosure are not indicative of future amounts. 77 11. REINSURANCE: In the normal course of business, the Company's insurance subsidiaries have entered into various reinsurance contracts with unrelated reinsurers. The Company's insurance subsidiaries participate in such agreements for the purpose of limiting their loss exposure and diversifying their risk. Reinsurance contracts do not relieve the Company's insurance subsidiaries from their obligations to policyholders. All reinsurance assets and liabilities are shown on a gross basis in the accompanying consolidated financial statements. Amounts recoverable from reinsurers are estimated in a manner consistent with the claim liability associated with the reinsured policy. Such amounts are included in "reinsurance receivables" in the consolidated balance sheets at December 31 are as follows:
2001 2000 --------------- ---------------- Estimated reinsurance recoverable on: Unpaid losses and loss adjustment expense $23,190,015 $27,444,846 Reinsurance recoverable on paid losses and loss expenses 593,091 149,193 --------------- ---------------- Reinsurance receivables $23,783,106 $27,594,039 =============== ================
Unsecured reinsurance risk is concentrated in the companies shown in the table below. The Company remains continently liable with respect to reinsurance contracts in the event that reinsurers are unable to meet their obligations under the reinsurance agreements in force. CONCENTRATION OF REINSURANCE AS OF DECEMBER 31, 2001 Unearned Reported Unreported Reinsurer Premiums Claims Claims Balances -------------- --------------- --------------- --------------- Sydney Reinsurance Corporation $ 4,662,052 $ 2,390,600 $ 7,052,652 Continental Casualty Company 1,647,722 2,165,000 3,812,722 American Reinsurance Corp. $ 170,308 37,400 207,708 Hartford Steam & Boiler 100,105 34,000 134,105 TIG Reinsurance Group 312,612 (10,612) 302,000 Transatlantic Reinsurance Company 958,151 958,151 Cologne Reinsurance Company of America 103,601 103,601 Gerling Global Reinsurance 53,574 195,000 248,574 Mutual Assurance, Inc. 3,236,656 218,446 3,455,102 GE Reinsurance Corp. 203,928 1,500,000 1,703,928 General Reinsurance 38,291 1,209,135 10,000 1,257,426 National Reinsurance Corporation 299,877 299,877 PXRE Reinsurance Company 749,474 1,130,000 1,879,474 Hartford Fire Insurance Company 117,746 80,000 197,746 Partner Reinsurance 302,775 330,000 632,775 Lumberman's Mutual Casualty Company 219,553 219,553 North Star Reinsurance Corp. 137,818 137,818 Swiss American Reinsurance Corporation 137,818 137,818 -------------- --------------- --------------- --------------- $ 308,704 $13,362,140 $ 9,070,186 $22,741,030 ============== =============== =============== ===============
Immediately prior to the sale of Sequoia to Physicians by Sydney Reinsurance Corporation ("SRC") in 1995, Sequoia and SRC entered into a reinsurance treaty whereby all policy and claims liabilities of Sequoia prior to the date of purchase by Physicians are the responsibility of SRC. Payment of SRC's reinsurance obligations under this treaty has been unconditionally and irrevocably guaranteed by QBE Insurance Group Limited should SRC be unable to meet its obligations under the reinsurance agreement. 78 The Company entered into a reinsurance treaty in 1995 with Mutual Assurance Inc. ("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 true occurrence and claims-made basis, depending on the underlying insurance policy. In 1994, the Company entered into a retroactive reinsurance arrangement with respect to its MPL business. As a result, Physicians initially recorded a deferred gain on retroactive reinsurance of $3.4 million in 1994. Deferred gains are being amortized into income over the expected payout of the underlying claims using the interest method. The unamortized gain at December 31, 2001 and 2000 was $439,000 and $969,000, respectively. The following is a summary of the net effect of reinsurance activity on the consolidated financial statements for each of the years ended December 31:
2001 2000 1999 ----------------- ---------------- ---------------- Direct premiums written $ 54,110,160 $ 47,620,431 $ 36,558,158 Reinsurance premiums assumed 282,541 (3,020) 120,185 Reinsurance premiums ceded (8,464,918) (3,573,715) (3,019,059) ----------------- ---------------- ---------------- Net premiums written $ 45,927,783 $ 44,043,696 $ 33,659,284 ================= ================ ================ Direct premiums earned 51,355,206 39,987,563 39,162,077 Reinsurance premiums assumed 267,215 2,967 144,499 Reinsurance premiums ceded (8,332,745) (5,554,776) (2,927,474) ----------------- ---------------- ---------------- Net premiums earned $ 43,289,676 $ 34,435,754 $ 36,379,102 ================= ================ ================ Losses and loss adjustment expenses incurred: Direct 29,442,055 25,883,270 47,939,738 Assumed 164,500 (681,716) (825,369) Ceded (11,304,235) (1,175,336) (12,897,078) ----------------- ---------------- ---------------- 18,302,320 24,026,218 34,217,291 Effect of discounting on losses and loss adjustment expenses (Note 12) 994,545 ----------------- ---------------- ---------------- Net losses and loss adjustment expenses $ 18,302,320 $ 24,026,218 $ 35,211,836 ================= ================ ================
12. RESERVES FOR UNPAID LOSS AND LOSS ADJUSTMENT EXPENSES: Reserves for unpaid losses and loss adjustment expenses on MPL and property and casualty business represent management's estimate of ultimate losses and loss adjustment expenses and fall within an actuarially determined range of reasonably expected ultimate unpaid losses and loss adjustment expenses. Reserves for unpaid losses and loss adjustment expenses are estimated based on both company-specific and industry experience, and assumptions and projections as to claims frequency, severity, and inflationary trends and settlement payments. Such estimates may vary significantly from the eventual outcome. In management's judgment, information currently available has been appropriately considered in estimating the loss reserves and reinsurance recoverable of the insurance subsidiaries. Physicians prepares its statutory financial statements in accordance with accounting practices prescribed or permitted by the Ohio Department of Insurance ("Ohio Department"). Citation 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 79 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. Prior to 2000, Physicians used a discount rate of 4% for financial reporting purposes. The method of determining the discount was based on historical payment patterns and assumed an interest rate at or below Physicians' own investment yield. The carrying value of MPL reserves gross as to reinsurance and undiscounted was approximately $40.6 million at December 31, 2001 and $58.6 million at December 31, 2000. Activity in the reserve for unpaid claims and claim adjustment expenses was as follows for each of the years ended December 31:
2001 2000 1999 ----------------- ----------------- ------------------ Balance at January 1 $ 121,541,722 $ 139,132,875 $ 155,020,696 Less reinsurance recoverable (27,444,846) (40,333,000) (52,000,444) ----------------- ----------------- ------------------ Net balance at January 1 94,096,876 98,799,875 103,020,252 ----------------- ----------------- ------------------ Incurred loss and loss adjustment expenses for current accident year claims 28,665,664 22,993,457 18,903,062 Incurred loss and loss adjustment expenses for prior accident year claims (9,833,352) 1,300,414 15,878,697 Retroactive reinsurance (529,993) (267,653) (564,469) Accretion of discount 994,545 ----------------- ----------------- ------------------ Total incurred 18,302,319 24,026,218 35,211,835 ----------------- ----------------- ------------------ Effect of retroactive reinsurance 529,993 267,653 564,469 ----------------- ----------------- ------------------ Cumulative effect of accounting change 7,520,744 ----------------- ----------------- ------------------ Payments for claims occurring during: Current accident year (15,269,960) (10,880,842) (8,940,341) Prior accident years (22,400,190) (25,636,772) (31,056,340) ----------------- ----------------- ------------------ Total paid (37,670,150) (36,517,614) (39,996,681) ----------------- ----------------- ------------------ Net balance at December 31 75,259,038 94,096,876 98,799,875 Plus reinsurance recoverable 23,190,015 27,444,846 40,333,000 ----------------- ----------------- ------------------ Balance at December 31 $ 98,449,053 $ 121,541,722 $ 139,132,875 ================= ================= ==================
During 2001, our medical professional liability insurance claims reserves, net of reinsurance, decreased from $51.6 million to $34.9 million. Actuarial analysis of Physicians' loss reserves as of September 30, 2001 concluded that Physicians' reserves against claims were significantly greater than the actuary's projections of future claims payments. Accordingly, Physicians reduced its claims reserves by approximately $11.2 million in the fourth quarter of 2001. 13. EMPLOYEE BENEFIT PLAN: PICO maintains a 401(k) Defined Contribution Plan covering substantially all employees of the Company. Matching contributions are based on a percentage of employee compensation. In addition, the Company may make a discretionary contribution at the end of the Plan's fiscal year within limits established by the Employee Retirement Income Securities Act. Total contribution expense incurred by the Company was $855,000 in 2001, $864,000 in 2000, and $862,000 in 1999. 14. REGULATORY MATTERS: The regulations of the Departments of Insurance in the states where the Company's insurance subsidiaries are domiciled generally restrict the ability of insurance companies to pay dividends or make other distributions. Based upon statutory financial statements filed with the insurance departments as of December 31, 2001, $5.4 million was available for distribution by the Company's wholly-owned insurance subsidiaries to the parent company without the prior approval of the Department of Insurance in the states in which the Company's insurance subsidiaries are domiciled. 80 15. COMMITMENTS AND CONTINGENCIES: The Company leases some of its offices under non-cancelable operating leases that expire at various dates through October 2008. Total rent expense was $1 million, $1 million, and $1.3 million for the years ended December 31, 2001, 2000 and 1999, respectively. Future minimum rental payments required under the leases for the years ending December 31, are as follows: 2002 1,450,605 2003 815,851 2004 639,928 2005 586,942 2006 544,928 Thereafter 3,837,728 ---------------- Total $7,875,982 ================ In November 1998, Vidler Water Company, Inc., a PICO subsidiary, entered into an operating lease to acquire 185,000 acre-feet of underground water storage privileges and associated rights to recharge and recover water located near the California Aqueduct, northwest of Bakersfield. The agreement required Vidler to pay a minimum of $2.3 million per year for 10 years beginning October 1998. On October 7, 1998, PICO signed a Limited Guarantee agreement with Semitropic Water Storage District ("Semitropic") that required PICO to guarantee a maximum obligation of $3.2 million, adjusted annually by the engineering price index. In May 2001, Vidler permanently assigned 29.73% of its right, title and interest under the operating lease to Newhall Land and Farming Company. As a result of the permanent assignment by Vidler, PICO entered into an amended Limited Guarantee agreement effective May 21, 2001. Under the amended Limited Guarantee, the maximum obligation of PICO was revised to $2.2 million adjusted annually by the engineering price index. In September 2001, Vidler permanently assigned a further 54.05% of its right, title and interest under the operating lease to Alameda County Water District. Accordingly, PICO entered into a second amendment to the Limited Guarantee effective September 28, 2001. Under the second amendment to the Limited Guarantee, the maximum obligation of PICO was revised to $519,000 adjusted annually by the engineering price index. The guarantee expires October 7, 2008. On January 10, 1997, Global Equity Corporation ("Global Equity"), a wholly owned PICO subsidiary at December 31, 2001, commenced an action in British Columbia against MKG Enterprises Corp. ("MKG") to enforce repayment of a loan made by Global Equity to MKG. On the same day, the Supreme Court of British Columbia granted an order preventing MKG from disposing of certain assets pending resolution to the action. In March 1999, Global Equity filed an action in the Supreme Court of British Columbia against a third party. This action states the third party had fraudulently entered into loan agreements with MKG. Accordingly, under this action Global Equity is claiming damages from the third party and restraining the third party from further action. During 2000 and 2001, Global Equity entered into settlement negotiations with a third party to dispose of the remaining assets of MKG. Due to the protracted nature of these discussions and the increasing uncertainty of whether the remaining asset can be realized, Global Equity wrote off the remaining balance of $500,000 of the investment during 2001. (See Long Term Holdings in "Management's Discussion and Analysis of Financial Condition" and "Results of Operations.") Global Equity is currently reviewing its legal options before deciding if it will continue pursuing the outstanding legal actions. In connection with the sale of their interests in Nevada Land by the former members, a limited partnership agreed to act as consultant to Nevada Land in connection with the maximization of the development, sales, leasing, royalties or other disposition of land, water, mineral and oil and gas rights with respect to the Nevada property. In exchange for these services, the partnership was to receive from Nevada Land a consulting fee calculated as 50% of any net proceeds that Nevada Land actually receives from the sale, leasing or other disposition of all or any portion of the Nevada property or refinancing of the Nevada property provided that Nevada Land has received such net proceeds in a threshold amount equal to the aggregate of: (i) the capital investment by Global Equity and the Company in the Nevada property, (ii) a 20% cumulative return on such capital investment, and (iii) a sum sufficient to pay the United States federal income tax liability, if any, of Nevada Land in connection with such capital investment. Either party could terminate this consulting agreement in April 2002 if the partnership had not received or become entitled to receive by that time any amount of the consulting fee. No payments have been made under this agreement through December 31, 2001. By letter dated March 13, 1998, Nevada Land gave notice of termination of the consulting agreement based on Nevada Land's determination of default by the partnership under the terms of the agreement. In 81 November 1998, the partnership sued Nevada Land for wrongful termination of the consulting contract. On March 12, 1999, Nevada Land filed a cross-complaint against the partnership for breach of written contract, breach of fiduciary duty and seeking declaratory relief. Effective September 1, 1999, the parties entered into a settlement agreement wherein they agreed that the lawsuit would be dismissed without prejudice, and that Nevada Land would deliver a report on or before June 30, 2002 to the limited partnership of the amount of the consulting fee which would be owed by Nevada Land to the limited partnership if the consulting agreement were in effect. At December 31, 2001, Nevada Land has no liability to the partnership. BSND, Inc. ("BSND"), a wholly-owned subsidiary of Vidler has resolved a partnership dispute relating to Big Springs Associates, a partnership which owned real property and water rights in Nevada (the "Partnership"). Under the terms of an agreement resolving the dispute, BSND, Inc. is now the sole owner and manager of all the Partnership's assets. In September and December 2000, PICO Holdings loaned a total of $2.2 million to Dominion Capital Pty. Ltd. ("Dominion Capital"), a private Australian Company. In May 2001, one of the loans for $1.2 million became overdue. Negotiations between PICO and Dominion Capital to reach a settlement agreement on both the overdue loan of $1.2 million and the other loan of $1 million proved unsuccessful. Accordingly, PICO has commenced a legal action through the Australian courts against Dominion Capital to recover the total amount due to PICO Holdings. Due to the inherent uncertainty involved in pursuing a legal action and our ability to realize the assets collateralizing the loans, PICO recorded an allowance for the total outstanding balance of $2.3 million for the loans and interest. PICO has been awarded summary judgment in relation to the principal and interest on the $1.2 million loan and, as a result, Dominion Capital has been placed in receivership. The court appointed receiver is in the process of ascertaining Dominion Capital's assets and liabilities. The court trial in connection with PICO's $1 million loan (with interest) has been adjourned pending the receiver's investigations. In addition, PICO has commenced proceedings in Australia to secure the proceeds from the sale of real estate in Australia offered as collateral under the $1.2 million loan. In January 2002, AOG announced that it was raising additional capital to purchase a drilling rig and to refit two existing rigs. PICO subsequently provided AOG with a short term bridge loan of $4 million, and was issued 333,333 shares in AOG as a loan establishment fee. AOG is to repay the loan with the proceeds of a rights offering which is expected to close in March of 2002. PICO has made a commitment to underwrite part of the offering, and was issued another 333,333 shares of AOG in March 2002, as an underwriting fee. The maximum commitment to PICO is just over $4 million. The Company is subject to various other litigation that arises in the ordinary course of its business. Based upon information presently available, management is of the opinion that such litigation will not have a material adverse effect on the consolidated financial position, results of operations or cash flows of the Company. 16. RELATED-PARTY TRANSACTIONS: 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. On March 27, 2000, the Company sold 3,333,333 shares of common stock to PICO Equity Investors, LP ("PEI") in a rights offering. PEI is managed by PICO Equity Investors Management, LLC, which is owned by three of PICO's current directors (including PICO's chairman of the board and PICO's president and chief executive officer). PICO Equity Investors will exercise all voting and investment decisions with respect to these shares for up to 10 years. There is no monetary compensation for management of either partnership. Summit Global Management, Inc. is a Registered Investment Advisor providing investment advisory services to managed accounts including the Company's subsidiaries, until June 30, 2000. In January 2000, the Company sold its interest in Summit to its chief executive officer in exchange for a note receivable of $100,000 bearing interest at 7% per annum, and due 2002. In addition, Summit owed the Company approximately $65,000 for operating expenses. 82

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 iswas to receive a payment equal to ten percent of the increase in Sequoia'sSequoia’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 $250,000, $160,000, and $210,000 during the years ended December 31, 2001, 2000 and 1999, respectively. Certain$105,000 in 2003. The total accrued balance payable of $1.3 million was paid upon completion of the Company's subsidiaries have stock option arrangements with officers and other employees for stocksale 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 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 $526,000 before tax was recordedSequoia, which closed on the sale. In 1998, theMarch 31, 2003.

The Company entered into an agreementagreements with its president and chief executive officer, and certain other officers and Directors, to defer a portion of his 1998 regular compensation in a deferred compensationinto Rabbi Trust accountaccounts held in the name of the Company. The deferrals aretotal value of the Rabbi Trusts of $42.7 million, of which $1.3 million represents PICO stock with the balance in various stocks and bonds, is included withinin the Company'sCompany’s consolidated balance sheet. Salary deferrals tosheets. Within these accounts the trust amounted to $316,000 for 1998. There were no deferrals into this trust in 1999, 2000 or 2001. During 2001, two otherfollowing officers and Directors elected to defer their fees into a Rabbi Trust account. Combined deferrals to these two accounts were $17,000are the beneficiaries of the following number of PICO shares: John Hart owns 19,940 PICO shares, Dr. Richard Ruppert owns 2,505 PICO shares, John Weil owns 8,084 PICO shares, Robert Broadbent, (retired from the Board on August 1, 2005) owns 8,183 PICO shares, and Carlos Campbell owns 2,644 PICO shares. The trustee for the year. All PICO stock purchased in the Rabbi Trust accounts is Huntington National Bank. The accounts are subject to the claims of outside creditors, and any PICO stock held in the accounts is reported as treasury stock in the consolidated financial statements. In August 1998, the Company acquired 412,846 shares

70

Table of its common stock at a cost of $1.6 million, and assumed call option obligations for the delivery of these shares when the options are exercised. These call options expire on December 30, 2003 and are held by the chairman of PICO's board and its chief executive officer. On December 31, 1998, 57,307 of these options were exercised for a total of $200,000. During 2000, the Company sold its interest in Conex Continental Inc. to Dominion Japan, a Japanese corporation. PICO and Dominion, through its parent, Dominion Capital Pty. Ltd., each have an ownership interest in the common stock of Solpower Corporation. PICO accounts for Solpower at cost and records unrealized gains or losses under SFAS 115. PICO loaned Solpower $500,000 to purchase its 50% interest in Protocol Resource Management, Inc. and PICO acquired the other 50% of Protocol. The loan bears interest at 10.8% and PICO received a warrant to purchase 1 million shares of Solpower common stock. PICO records its interest in Protocol using the equity method of accounting. During 2000, PICO loaned approximately $2.2 million to Dominion Capital Pty. Limited. The loans bear interest at a weighted rate of 10.2% and were due in 2001. In May 2001, one of the loans for $1.2 million became overdue. Negotiations between PICO and Dominion Capital to reach a settlement agreement on both the overdue loan of $1.2 million and the other loan of $1 million proved unsuccessful. Accordingly, PICO has commenced legal actions through the Australian courts against Dominion Capital to recover the total amount due to PICO Holdings. Due to the inherent uncertainty involved in pursuing a legal action and our ability to realize the assets collateralizing the loans, PICO recorded an allowance for the total outstanding balance of $2.3 million for the loans and interest during 2001. 17. STATUTORY INFORMATION: Contents

16.
STATUTORY INFORMATION:

The Company and its insurance subsidiaries are subject to regulation by the insurance departments of the states of domicile and other states in which the companies are licensed to operate and file financial statements using statutory accounting practices prescribed or permitted by the respective Departments of Insurance. Prescribed statutory accounting practices include a variety of publications of the National Association of Insurance Commissioners, as well as state laws, regulations and general administrative rules. Permitted statutory accounting practices encompass all accounting practices not so prescribed. Physicians had received written approval from the Ohio Department of Insurance to discount its medical professional liability unpaid loss and loss adjustment expense reserves, including related reinsurance recoverable using a 4% discount rate through December 31, 1999. Effective January 1, 2000, the Ohio Department of Insurance withdrew its permission for Physicians to discount reserves. Statutory practices vary in certain respects from US GAAP.generally accepted accounting principles. The principal variances are as follows: 83 (1) Certain assets are designated as "non-admitted assets" and charged to shareholders' equity for statutory accounting purposes (principally certain agents' balances and office furniture and equipment). (2) Deferred policy acquisition costs are expensed for statutory accounting purposes. (3) Equity in net income of subsidiaries and affiliates is credited directly to shareholders' equity for statutory accounting purposes. (4) Fixed maturity securities are carried at amortized cost. (5) Loss and loss adjustment expense reserves and unearned premiums are reported net of the impact of reinsurance for statutory accounting purposes.

(1)Certain assets are designated as “non-admitted assets” and charged to policyholders’ surplus for statutory accounting purposes (principally certain agents’ balances and office furniture and equipment).
(2)Deferred policy acquisition costs are expensed for statutory accounting purposes.
(3)Equity in net income of subsidiaries and affiliates is credited directly to shareholders’ equity for statutory accounting purposes.
(4)Fixed maturity securities are carried at amortized cost.
(5)Loss and loss adjustment expense reserves and unearned premiums are reported net of the impact of reinsurance for statutory accounting purposes.

The Company and its wholly-owned insurance subsidiaries' policyholders'subsidiaries’ policyholders’ surplus and net income (loss) as of and for the years ended December 31, 2001, 20002005, 2004 and 19992003 on the statutory accounting basis are as follows:

  2005 2004 2003 
Physicians Insurance Company of Ohio: (Unaudited)     
Policyholders' surplus $57,409,969 $43,255,603 $45,778,599 
Statutory net income $6,514,608 $9,628,569 $7,659,200 
Citation Insurance Company:          
Policyholders' surplus $25,401,061 $19,293,135 $14,303,039 
Statutory net income (loss) $1,655,790 $562,129 $(7,589,951)

2001 2000 1999 ---------------- -------------- -------------- Physicians Insurance Company of Ohio: (Unaudited) Statutory net income (loss) $ 5,412,626 $ 10,212,601 $ (6,578,611) Policyholders' surplus 42,859,837 33,996,556 35,022,961 The Professionals Insurance Company: (1) Statutory net income $ 130,790 $ 158,012 Policyholders' surplus 3,773,247 3,437,580 Sequoia Insurance Company: Statutory net income (loss) $ (50,861) $ (2,660,660) $ 497,523 Policyholders' surplus 29,271,877 23,442,970 25,389,791 Citation Insurance Company: Statutory net income (loss) $ 2,317,209 $ 4,549,292 $ (5,519,801) Policyholders' surplus 16,629,106 14,328,017 16,502,888
17.
SEGMENT REPORTING:
(1)

PICO Holdings, Inc. is a diversified holding company. The ProfessionalsCompany acquires businesses which management believes are undervalued at the time, and have the potential to provide a superior rate of return over time, after considering the risk involved. The Company’s over-riding objective is to generate superior long-term growth in shareholders’ equity, as measured by book value per share. The Company accounts for segments as described in the significant accounting policies in Note 1.

Currently the major businesses that constitute operating and reportable segments are owning and developing water resources and water storage operations through Vidler Water Company, Inc.; owning and developing land and the related mineral rights and water rights through Nevada Land & Resource Company, LLC; “running off” the property and casualty and workers’ compensation loss reserves of Citation Insurance Company was merged with Physicians Insurance Company of Ohio on December 21, 2001. Sequoia Insurance Company is a wholly owned subsidiaryand the medical professional liability loss reserves of Physicians Insurance Company of Ohio. InOhio; developing and providing ticker plant technologies and services to the table above,financial markets through HyperFeed Technologies, Inc.; and the statutory surplusacquisition and financing of Sequoia ($29.3 million in 2001, $23.4 million in 2000, and $25.4 million in 1999) is also reflected in statutory surplus of Physicians. 18. SEGMENT REPORTING: The Company is a diversified holding company engaged in five major operating segments: Water Rights and Water Storage; Land and Related Mineral Rights and Water Rights; Property and Casualty Insurance; Medical Professional Liability ("MPL") Insurance; and Long Term Holdings. businesses.

Segment performance is measured by revenues and segment profit before tax. In addition, assets identifiable with segments are disclosed as well as capital expenditures, and depreciation and amortization. The Company has operations and investments both in the U.S. and abroad. Information by geographic region is also similarly disclosed. We account for segments as described in the significant accounting policies contained in Note 1.


Water RightsResources and Water Storage

Vidler is engaged in the following water rightsresources and water storage activities: - - 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; - - development of storage and distribution infrastructure; and - - purchase and storage of water for resale in dry years. 84
·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;
·development of storage and distribution infrastructure; and
·purchase and storage of water for resale in dry years.

Land and Related Mineral Rights and Water Rights

PICO is engaged in land and related mineral rights and water rights operations through its subsidiary Nevada Land. Nevada Land owns approximately 1.2 million767,000 acres of land and related mineral and water rights in northern Nevada. Revenue is generated by land sales, land exchanges and leasing for grazing, agricultural and other uses. Revenue is also generated from the development of water rights and mineral rights in the form of outright sales and royalty agreements. Property

Insurance Operations in Run Off

This segment is comprised of Physicians Insurance Company of Ohio and CasualtyCitation Insurance PICO's PropertyCompany.

Until 1995, Physicians and Casualty Insurance operationsits subsidiaries wrote medical professional liability insurance, primarily in the state of Ohio. Physicians has stopped writing new business and is in “run off.” This means that it is handling claims arising from historical business, and selling investments when funds are conducted by our California-based subsidiaries Sequoia and Citation. Sequoia writes property and casualty insurance in California and Nevada, focusing on the niche markets of farm insurance and smallneeded to medium-sized commercial insurance. Sequoia also writes personal insurance, and expanded this line of business through the acquisition of Personal Express Insurance Services, Inc. during 2000. pay claims.

In the past, Citation wrote commercial property and casualty insurance in California and Arizona. Sequoia now directly writesArizona and workers’ compensation insurance in California. Citation ceded all its workers’ compensation business in California1997, and Nevada. Citation ceased writing property and casualty business in December 2000 and is now "running-off" the loss reserves from its existing business. in run off.

In this segment, revenues come from premiums earned on policies written and investment income on the assets held by the insurance companies. MPL Operations Until 1995, Physicians and Professionals wrote medical professional liability insurance, mostly in the state of Ohio. Professionals merged with and into Physicians on December 21, 2001. Physicians has stopped writing new business and is being "run off." This means that it is handling claims arising from historical business, and selling investments when funds are needed to pay claims. As expected during the run-off process, the bulk of this segment'ssegment’s revenues come from investment income. The Physicians' portfolio contains some of the Company's long term holdings. Long Term Holdings The Long Term Investments segment comprises investments where we own less than 50% of the company, or the company is too small to constitute a segment of its own. PICO invests in companies, which our management identifies as undervalued based on fundamental analysis. Typically, the stocks will be selling for less than tangible book value or appraised intrinsic value (i.e., what we assess the company to be worth). Often the stocks will also be trading for low ratios of earnings and cash flow, or on high dividend yields. Additionally, the company must have special qualities, such as unique assets, potential catalysts for change, or attractive industry characteristics. We also have a small portfolio of alternative investments, where we have deviated from our traditional value criteria in an attempt to capitalize on areas of potentially greater growth without incurring undue risk. 85 Investments directly related to the insurance operations are included within those segments. The assets of Sequoia, reported as discontinued operations for all periods presented, are included within the Insurance Run Off segment in those years as the equity of the discontinued operations was owned by Physicians. Sequoia was sold on March 31, 2003.

HyperFeed Technologies, Inc.

HyperFeed is a developer and provider of software, ticker plant technologies and managed services to the financial markets industry. PICO owns approximately 80% of the outstanding voting stock of HyperFeed.

Business Acquisitions and Financing

This segment contains businesses, interests in businesses, and other parent company assets.

PICO seeks to acquire businesses which are undervalued based on fundamental analysis--that is, the assessment of what the company is worth, based on the private market value of its assets, and/or earnings and cash flow. The Company has acquired businesses and interests in businesses through the purchase of private companies and shares in public companies, both directly through participation in financings and from open market purchases.


Segment information by major operating segment follows (in thousands):
Land and Related Water Rights Property Long- Mineral Rights and Water and Term and Water Rights Storage Casualty MPL Investments Consolidated ------------------------------------------------------------------------------ -------------- 2001: - ----- Revenues (charges) $ 3,221 $ 17,763 $ 51,349 $ 2,602 $ (3,663) $ 71,273 Income (loss) before income taxes 131 4,989 6,178 13,132 (15,288) 9,142 Identifiable assets 59,682 97,216 152,751 28,782 35,988 374,419 Depreciation and amortization 58 1,285 346 99 247 2,035 Capital expenditures 43 277 364 76 760 2000: - ----- Revenues (charges) $ 5,276 $ 3,123 $ 39,257 $ 3,396 $ (5,238) $ 45,814 Income (loss) before income taxes 1,918 (4,854) 2,541 768 (16,438) (16,065) Identifiable assets 52,002 108,215 137,808 30,155 63,902 392,082 Depreciation and amortization 28 988 253 396 1,013 2,678 Capital expenditures 628 321 8 151 1,108 1999: - ----- Revenues $ 7,147 $ 1,056 $ 39,836 $ 3,121 $ 2,493 $ 53,653 Income (loss) before income taxes 1,094 (3,947) (3,803) (4,805) (12,850) (24,311) Identifiable assets 53,810 80,313 136,589 39,827 65,632 376,171 Depreciation and amortization 33 810 971 1,255 3,069 Capital expenditures 385 147 208 740
86 follows:

  Land and Related Mineral Rights and Water Rights Water Rights and Water Storage 
Insurance
Operations in
Run Off
 
Business
Acquisitions & Finance
 HyperFeed Consolidated 
2005:
             
Revenues $21,811,469 $106,448,584 $8,108,639 $5,743,002 $4,270,915 $146,382,609 
Income (loss) before income taxes  12,038,040  56,211,819  10,539,533  (38,463,986) (7,409,674) 32,915,732 
Identifiable assets  66,513,641  86,353,051  156,366,749  127,980,663  4,615,518  441,829,622 
Net investment income  1,010,194  1,177,078  3,051,278  2,956,623  1,297  8,196,470 
Interest expense     269,954     391,360  30,845  692,159 
Depreciation and amortization  81,228  1,172,974  11,276  78,892  1,959,002  3,303,372 
Capital expenditures  5,947  4,658,969     122,753  1,779,446  6,567,115 
                    
2004:
                   
Revenues $11,559,905 $1,963,943 $5,747,244 $2,851,629 $6,004,115 $28,126,836 
Income (loss) before income taxes  5,290,153  (5,701,110) 4,059,818  (15,156,217) (5,389,580) (16,896,936)
Identifiable assets  47,391,982  83,533,742  131,824,847  87,905,906  3,974,546  354,631,023 
Net investment income  465,606  470,667  2,765,372  2,088,285  9,427  5,799,357 
Interest expense     402,706     385,219  4,151�� 792,076 
Depreciation and amortization  90,757  1,183,829  15,526  108,978  711,163  2,110,253 
Capital expenditures  25,536  2,976,546  23,267  122,753  1,746,429  4,894,531 
                    
2003:
                   
Revenues $5,889,560 $16,815,624 $3,244,748 $5,548,563 $1,380,099 $32,878,594 
Income (loss) before income taxes  2,004,626  (543,146) (2,902,354) (8,111,741) (4,225,851) (13,778,466)
Identifiable assets  46,267,828  88,134,979  118,351,511  68,278,691  9,864,258  330,897,267 
Net investment income  503,129  79,613  2,679,658  2,091,530  16,174  5,370,104 
Interest expense     430,786     282,285  8,251  721,322 
Depreciation and amortization  82,344  1,020,341  22,551  63,511  591,772  1,780,519 
Capital expenditures  44,496  2,447,180  3,577  77,186  232,961  2,805,400 


Segment information by geographic region follows (in thousands): follows:

  United States Europe Consolidated 
2005
       
Revenues $143,166,274 $3,216,335 $146,382,609 
Income before income taxes  32,119,765  795,967  32,915,732 
Identifiable assets  356,663,916  85,165,706  441,829,622 
Net investment income  6,764,018  1,432,452  8,196,470 
Interest expense  300,799  391,360  692,159 
Depreciation and amortization  3,303,372     3,303,372 
Capital expenditures  6,567,115     6,567,115 
           
2004
          
Revenues $27,616,915 $509,921 $28,126,836 
Loss before income taxes  (15,623,800) (1,273,136) (16,896,936)
Identifiable assets  285,687,909  68,943,114  354,631,023 
Net investment income  4,475,589  1,323,768  5,799,357 
Interest expense  406,857  385,219  792,076 
Depreciation and amortization  2,110,253     2,110,253 
Capital expenditures  4,894,531     4,894,531 
           
2003
          
Revenues $32,722,396 $156,198 $32,878,594 
Loss before income taxes  (12,548,084) (1,230,382) (13,778,466)
Identifiable assets  285,378,620  45,518,647  330,897,267 
Net investment income  4,281,653  1,088,451  5,370,104 
Interest expense  439,037  282,285  721,322 
Depreciation and amortization  1,780,519     1,780,519 
Capital expenditures  2,805,400     2,805,400 


United States Canada Europe Australia Asia Consolidated --------------------------------------------------------------------- ----------------- 2001 - ---- Revenues (charges) $ 71,809 $ (928) $ 391 $ 71,272 Income before income taxes 9,194 (52) 9,142 Identifiable assets 341,372 25,558 $ 7,489 374,419 Depreciation and amortization 2,035 2,035 Capital expenditures 760 760 2000 - ---- Revenues (charges) $ 48,149 $ (2,482) $ 147 $ 45,814 Income (loss) before income taxes (12,977) $ (2,616) (472) (16,065) Identifiable assets 354,609 2,115 27,207 $ 8,151 392,082 Depreciation and amortization 2,544 $ 134 2,678 Capital expenditures 1,108 1,108 1999: - ----- Revenues (charges) $ 53,084 $ (99) $ 668 $ 53,653 Income (loss) before income taxes (24,146) 1,612 (1,777) (24,311) Identifiable assets 333,894 24,959 $ 8,280 9,038 376,171 Depreciation and amortization 2,770 299 3,069 Capital expenditures 740 740
18.
DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS:
19. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS:

The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that fair value: - CASH AND CASH EQUIVALENTS, SHORT-TERM INVESTMENTS, RECEIVABLES, PAYABLES AND ACCRUED LIABILITES: Carrying amounts for these items approximate fair value because of the short maturity of these instruments. - INVESTMENTS: Fair values are estimated based on quoted market prices, or dealer quotes for the actual or comparable securities. Fair value of warrants to purchase common stock of publicly traded companies is estimated based on values determined by the use of accepted valuation models at the time of acquisition. Fair value for equity securities that do not have a readily determinable fair value is estimated based on the value of the underlying common stock. The Company regularly evaluates the carrying value of securities to determine whether there has been any diminution in value that is other than temporary and adjusts the value accordingly. - DEPOSITS WITH REINSURERS AND REINSURANCE RECOVERABLES: The carrying amounts of deposits with reinsurers and reinsurance recoverable with fixed amounts due are reasonable estimates of fair value. - INVESTMENT IN AFFILIATE: Investments in which the Company owns between 20% and 50%, and/or has the ability to significantly influence the operations and policies of the investee, are carried at equity. The balance of the investment is regularly evaluated for impairment. - BANK AND OTHER BORROWINGS: Carrying amounts for these items approximate fair value because current interest rates and, therefore, discounted future cash flows for the terms and amounts of loans disclosed in Note 20, are not significantly different from the original terms. 87

December 31, 2001 December 31, 2000 --------------------------------------- ---------------------------------------
-CASH AND CASH EQUIVALENTS, SHORT-TERM INVESTMENTS, RECEIVABLES, PAYABLES AND ACCRUED LIABILITIES: Carrying Estimated Carrying Estimated Amountamounts for these items approximate fair value because of the short maturity of these instruments.

-INVESTMENTS: Fair Value Amountvalues are estimated based on quoted market prices, or dealer quotes for the actual or comparable securities. Fair Value ----------------- ----------------- ------------------ ----------------- Financial assets: Fixed maturities $ 100,895,244 $ 100,895,244 $ 101,895,274 $ 101,895,274 Equityvalue of warrants to purchase common stock of publicly traded companies is estimated based on values determined by the use of accepted valuation models. Fair value for equity securities 54,364,542 54,364,542 55,051,049 55,051,049 Investmentthat do not have a readily determinable fair value is estimated based on the value of the underlying common stock. The Company regularly evaluates the carrying value of securities to determine whether there has been any diminution in unconsolidated affiliates 2,583,590 6,602,760 4,139,830 7,181,670 Cashvalue that is other-than-temporary and cash equivalents 17,361,624 17,361,624 13,644,312 13,644,312 Deposits with reinsurers and reinsurance recoverables 6,745,010 6,745,010 7,604,288 7,604,288 Financial liabilities: Bank and other borrowings 14,596,302 14,596,302 15,550,387 15,550,387 adjusts the value accordingly.
20.

-BANK AND OTHER BORROWINGS: Carrying amounts for these items approximate fair value because current interest rates and, therefore, discounted future cash flows for the terms and amounts of loans disclosed in Note 19, are not significantly different from the original terms.

  December 31, 2005 December 31, 2004 
  Carrying Amount Estimated Fair Value Carrying Amount Estimated Fair Value 
Financial assets:         
Fixed maturities $92,813,137  $92,813,137  $39,479,216  $39,479,216 
Equity securities  194,633,197  194,633,197  142,978,213  142,978,213 
Cash and cash equivalents  37,794,416  37,794,416  17,407,138  17,407,138 
Financial liabilities:         
Bank and other borrowings  12,334,868  12,334,868  18,020,559  18,020,559 
19.
BANK AND OTHER BORROWINGS:

At December 31, 20012005 borrowings consisted primarily of notes used to finance the purchase of equity securities in Switzerland. During 2005, the notes payable incurred on land acquisition in Vidler were paid off in conjunction with the sale of real estate and 2000,water assets in Arizona. The weighted average interest rate on the outstanding borrowings was approximately 3.5% at December 31, 2005, with principal and interest due throughout the term. At December 31, 2004, bank and other borrowings consisted of loans and promissory notes incurred to finance the purchase of land in Vidler and investment securities.equity securities in Switzerland. The weighted average interest rate on these borrowings was approximately 7.2% and 7.4%4.1% at December 31, 2001, and 2000, respectively2004, with principal and interest due throughout the term. 2001 2000 ------------------ ----------------- 5.58% (5.58% in 2000) Swiss loans $ 7,844,084 $ 5,894,838 8% Notes due: 2007 - 2008 208,280 455,957 2012 359,218 8.5% Notes due: 2004 1,155,120 1,540,354 2008 - 2009 3,141,837 3,772,131 2019 1,563,063 2,774,894 9% Notes due: 2003 171,277 188,356 2008 512,641 564,639 ------------------ ----------------- $ 14,596,302 $ 15,550,387 ================== ================= At December 31, 2001,

  2005 2004 
3.27%-3.32% (2.74% in 2004) Swiss loans $11,796,940  $13,602,457 
7.25% (5.25% in 2004) Demand notes  500,000  465,000 
7% - 8% Notes due:       
2005 - 2006  37,928  73,293 
8.5% Notes due:       
2005 and 2004     240,511 
2006 - 2009     2,660,293 
2010 - 2019     652,671 
9% -10% Notes due:       
2005     73,793 
2006 - 2008     252,541 
  $12,334,868 $18,020,559 
PICO’s subsidiary, Global Equity SAAG, has a loan facility with a Swiss bank for a maximum of U.S. $9.1$11.8 million (CHF 15 million)(15.5 million CHF), $13.6 million (15.5 million CHF) at December 31, 2004. At December 31, 2005, the Company had borrowed $11.8 million, $9.5 million due to mature in May 2006 and $2.3 million due to mature in August 2006. The borrowing is based on a margin not higher thanto exceed 30% of the securities deposited with the bank. It is anticipated the Company will refinance the loan facility when it becomes due. The actual amount available is dependent on the value of the collateral held after a safety margin established by the bank. It may be used as an overdraft or for payment obligations arising from securities transactions. At December 31, 2001 approximately U.S. $7.8 million (13 million CHF) is outstanding bearing interest at approximately 6%. At December 31, 2001, $6.8 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% and is collateralized by the purchased properties. Nevada Land 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 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. 88 The Company'sCompany’s future minimum principal debt repayments for the years ending December 31 are as follows: 2002 $ 8,199,865 2003 518,749 2004 1,376,519 2005 362,652 2006 393,826 Thereafter 3,744,691 ------------------------------- Total $14,596,302 ================ 21. CUMULATIVE EFFECT

2006 $12,334,868 
2007    
2008    
2009    
2010    
Thereafter    
Total $12,334,868 


CHANGE IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.


CONTROLS AND PROCEDURES

EVALUATION OF CHANGE IN ACCOUNTING PRINCIPLE: InDISCLOSURE CONTROLS AND PROCEDURES

Under 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 filingsupervision and with the Ohio Departmentparticipation of Insuranceour management, including our principal executive officer and principal financial officer, we evaluated the effectiveness of our disclosure controls and procedures, as such term is defined under Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended. Based on this evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this annual report. There were no changes in the Registrant’s internal control over financial reporting that occurred during the Registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Registrant’s internal control over financial reporting.

MANAGEMENT’S RESPONSIBILITY FOR FINANCIAL STATEMENTS

Management is responsible for the preparation of the Company's consolidated financial statements preparedand related information appearing in this report. Management believes that the consolidated financial statements fairly present the form and substance of transactions and that the financial statements reasonably present the Company's financial position and results of operations in conformity with generally accepted accounting principles. Management also has included in the company's financial statements amounts that are based on estimates and judgments, which it believes are reasonable under the circumstances.

Deloitte & Touche LLP, an independent registered public accounting firm, audits the Company's consolidated financial statements in accordance with US GAAPthe standards of the Public Company Accounting Oversight Board and provides an objective, independent opinion on the Company’s financial statements.

The board of directors of the Company has an Audit Committee composed of three independent directors. The committee meets periodically with financial management and Deloitte & Touche LLP to review accounting, control, auditing and financial reporting matters.

MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

Management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Exchange Act Rules 13a-15(f). Under the supervision and with the participation of company management, including the principal executive officer and principal financial officer, the Company conducted an evaluation of the effectiveness of its internal control over financial reporting based on the framework in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on the Company’s evaluation under the framework in Internal Control-Integrated Framework, management concluded that the Company's internal control over financial reporting was effective as of December 31, 2005. Management's assessment of the effectiveness of internal control over financial reporting as of December 31, 2005 has been audited by Deloitte & Touche LLP, as stated in their report, which is included herein.


REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of PICO Holdings, Inc.
We have audited management’s assessment, included in the accompanying Management’s Report on Internal Control over Financial Reporting, that PICO Holdings, Inc. and subsidiaries (the “Company”) maintained effective internal control over financial reporting as of December 31, 2005, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.  The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting.  Our responsibility is to express an opinion on management’s assessment and an opinion on the effectiveness of the Company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States).  Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.  Our audit included obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances.  We believe that our audit provides a reasonable basis for our opinions.
A company’s internal control over financial reporting is a process designed by, or under the supervision of, the company’s principal executive and principal financial officers, or persons performing similar functions, and effected by the company’s board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.  A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis.  Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, management’s assessment that the Company maintained effective internal control over financial reporting as of December 31, 2005, is fairly stated, in all material respects, based on the criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.  Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2005, based on the criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements as of and for the year ended December 31, 2000. 2005 of the Company and our report dated March 9, 2006 expressed an unqualified opinion on those financial statements.
/s/ Deloitte & Touche LLP
San Diego, California
March 9, 2006


ITEM 9A.
OTHER INFORMATION

None.

PART III


DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The effectinformation required by this item regarding directors will be set forth in the section headed “Election of Directors” in our definitive proxy statement with respect to our 2006 annual meeting of shareholders, to be filed on or before April 30, 2006 and is incorporated herein by reference. The information required by this item regarding the Company’s code of ethics will be set forth in the section headed “Code Of Ethics” in our definitive 2006 proxy statement and is incorporated herein by reference. Information regarding executive officers is set forth in Item 1 of Part 1 of this change 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. Had the change been made as of the first day of the earliest period presented, the net loss and loss per share for 1999 and 1998 would have been reduced by $995,000 and $0.11 per share and $643,000, and $0.11 per share, respectively. Effective January 1, 2001, the Company adopted SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," as amended by SFAS 138, "Accounting for Certain Derivative Instruments and Hedging Activities." As amended, SFAS 133 requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position, measure those instruments at fair value and recognize changes in fair value in earnings for the period of change unless the derivative qualifies as an effective hedge that offsets certain exposure. As a result of this adoption, the Company recorded a transition adjustment in the first quarter of 2001 that decreased net income by approximately $1 million, net of a $500,000 tax benefit and increased other comprehensive income by the same amount (no effect on shareholders' equity). These adjustments are reported as a cumulative effect of change in accounting principle in the accompanying consolidated financial statements. The current impacts of SFAS 133, are included in realized investment gains and losses on the statement of operations and primarily includes the fluctuation in the value of the warrants to purchase shares of HyperFeed Technologies, Inc. The value of the warrants is determined each period using the Black-Scholes option pricing model. The model uses the current market price of the common stock of HyperFeed, and the following assumptions in calculating an estimated fair value: no dividend yield; a risk-free interest rate of 2% - 5.6%; a one year expected life; and a historical 5 year cumulative volatility of 109% to 119%. The value of the 4.1 million warrants derived from the model was $527,000 and $2.9 million at December 31, 2001 and 2000, respectively. The change in value is reported within the realized investment gain/loss in the consolidated statement of operations. Future effects on net income will depend on market conditions. 22. RESTATEMENT OF PREVIOUSLY REPORTED FINANCIAL INFORMATION: Subsequent to the issuance of the Company's consolidated financial statements for the year ended December 31, 2001 the company determined that it needed to record other-than-temporary impairments on marketable securities and reverse the equity method of accounting for the investment in Jungfraubahn. Other-Than-Temporary Impairments: The Company has previously recorded realized gains or losses from other-than-temporary impairment on certain marketable securities. However, the Company determined that it should have recorded additional other-than-temporary impairment charges on other marketable securities. For the year ended December 31, 2001, 2000 and 1999, additional impairment charges of $3 million, $161,000 and $1.1 million, respectively were recorded. The Company reversed $4.7 million in losses originally reported in the year ended December 31, 2001 since it was determined that an other-than-temporary impairment had occurred in an earlier period. The total net effect in 2001 was a decrease in realized losses of $1.7 million. The $4.7 million in losses were 89 subsequently recorded in the year ended December 31, 1996. In addition, the Company recorded impairment charges of $4.6 million for the year ended December 31, 1998. Accounting for Jungfraubahn: In September 2000, the Company adopted the equity method of accounting related to its investment in Jungfraubahn. It was subsequently determined that the Company should account for Jungfraubahn in accordance with SFAS No. 115. The Company has reversed its accounting which reduced earnings in unconsolidated affiliates by $241,000, $3 million and $3 million in 2001, 2000 and 1999, respectively. Net investment income increased by dividends received from Jungfraubahn of $622,000 and $217,000 in 2000 and 1999, respectively. Under the equity method of accounting, dividends had been recorded as a reduction in the equity basis. The after tax effect of the other-than-temporary impairments and the adjustments related to the equity method of accounting increased net income by $340,000 in 2001, and increased net loss by $1.8 million in 2000 and $2.9 million in 1999, respectively. Beginning retained earnings at January 1, 1999 decreased $6.9 million to $69.3 million due primarily to reversing an accumulated $737,000 in net earnings of affiliate recorded on Jungfraubahn and $6.2 million in net realized losses recorded for other-than-temporary impairments recorded in 1996 and 1998. At December 31, 2001, the net deferred income tax asset increased from the removal of deferred income tax liabilities related to a timing difference for the equity in income from Jungfraubahn. Previously reported net unrealized losses at December 31, 2001 went from a loss of $10.6 million to a net unrealized gain of $5.5 million primarily due to 1) reversing the equity basis of our investment in Jungfraubahn and reporting the investment at fair valueReport under the accounting provisions of SFAS No. 115 and 2) recording impairment charges for other-than-temporary impairment losses. Accumulated foreign currency losses also increased by $3.6 million due to the change from equity method to fair value. At December 31, 2000, equity securities increased $18.9 million for the market value of the investment in Jungfraubahn and investment in unconsolidated affiliate decreased $23.7 million related to reversing the equity method accounting for Jungfraubahn. The net deferred income tax asset increased from the relief of deferred income tax liabilities that represented a timing difference due to recording the equity in income on the investment in Jungfraubahn offset by an increase in deferred tax liabilities related to the unrealized gain on the investment in Jungfraubahn using the accounting provisions of SFAS No. 115. Reported net unrealized losses at December 31, 2000 went from a loss of $7 million to a net unrealized gain of $3.6 million primarily due to 1) reporting the investment at fair value under the accounting provisions of SFAS No. 115, and 2) recording charges for the other-than-temporary impairment losses described above. Accumulated foreign currency losses increased by $2.1 million due to the change from equity method to fair value for the investment in Jungfraubahn. As a result, the Company has restated its consolidated financial statements for the years ended December 31, 2001, 2000 and 1999 from amounts previously reported to record other-than-temporary impairments on marketable securities and to reverse the equity method of accounting for its investment in Jungfraubahn. 90 A summary of the significant effects on the consolidated financial statements is as follows: caption “Executive Officers.”


Year Ended Year Ended December 31, 2001 December 31, 2000 As Previously Reported As Restated As Previously Reported As Restated -------------------------------------------- ---------------------------------------------- Realized gain (loss) $ (5,110,963) $ (3,418,496) $ (7,525,762) $ (7,686,963) Net investment income $ 8,238,296 $ 8,860,921 Total revenues $ 69,579,870 $ 71,272,337 $ 45,352,970 $ 45,814,394 Equity in income (loss) of unconsolidated affiliates $ (1,288,460) $ (1,529,060) $ 1,794,069 $ (1,252,020) Income (loss) before minority interest $ 7,690,623 $ 9,142,491 $(13,480,498) $(16,065,163) Income tax expense (benefit) $ 2,295,540 $ 3,406,464 $ (8,201,176) $ (9,011,222) Income (loss) from continuing operations $ 5,753,532 $ 6,094,476 $ (4,562,246) $ (6,336,865) Net income (loss) $ 4,772,961 $ 5,113,905 $ (9,525,937) $(11,300,556) Basic and Diluted income (loss) per share $ (0.39) $ 0.41 $ (0.82) $ (0.97)
EXECUTIVE COMPENSATION
Year Ended December 31, 1999 As Previously Reported As Restated ----------------------------------------- Realized gain (loss) $ 440,611 $ (611,373) Net investment income $ 6,386,887 $ 6,604,822 Total revenues $ 54,487,537 $ 53,653,488 Equity in income (loss) of unconsolidated affiliates $ (1,026,245) $ (4,014,892) Income (loss) before minority interest $(20,487,968) $(24,310,665) Income tax expense (benefit) $(12,519,374) $(13,422,069) Income (loss) from continuing operations $ (7,262,518) $(10,182,520) Net income (loss) $ (6,820,278) $ (9,740,280) Basic and Diluted income (loss) per share $ (0.76) $ (1.08)
December 31, 2001 December 31, 2000 As Previously Reported As Restated As Previously Reported As Restated --------------------------------------------- ------------------------------------------- Equity securities $ 36,174,505 $ 55,051,049 Investment in unconsolidated affiliate $ 27,824,291 $ 4,139,830 Net deferred income tax asset $ 7,299,015 $ 8,583,265 $ 11,354,592 $ 13,100,328 Total assets $ 373,134,514 $ 374,418,764 $ 395,144,634 $ 392,082,453 Total liabilities $ 163,432,771 $ 163,458,067 $ 186,031,284 $ 186,056,580 Unrealized loss, net of tax $ (10,633,199) $ 5,545,057 $ (6,977,748) $ 3,611,475 Accumulated foreign currency (5,126,798) (8,770,924) (5,755,230) (7,815,810) ------------- ------------- ------------- ------------- Accumulated other comprehensive loss $ (15,759,997) $ (3,225,867) $ (12,732,978) $ (4,204,335) Retained earnings $ 64,666,746 $ 53,391,570 $ 59,893,785 $ 48,277,665 Total shareholders' equity $ 206,639,553 $ 207,898,507 $ 205,192,611 $ 202,105,134
23. SUBSEQUENT EVENT: On March 1, 2002, Vidler closed a sale for 1,215 acres of land, and the related 3,645 acre-feet of water rights, to developers near the city of Scottsdale for approximately $5.3 million. The transaction resulted in a gross profit of approximately $2.3 million, which will be recorded in the first quarter of 2002. ITEM 9. CHANGE IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. 91 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT

The information required by this item will be set forth in the section headed “Executive Compensation” in our 2006 definitive proxy statement with respect to our 2002 annual meeting of shareholders, to be filed on or before April 10, 2002 and is incorporated herein by reference. ITEM 11. EXECUTIVE COMPENSATION


SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

The information required by this item will be set forth in the section headed “Security Ownership of Certain Beneficial Owners and Management” in our 20022006 definitive proxy statement and is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT


CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information required by this item will be set forth in the section headed “Certain Relationships and Related Transactions” and “Compensation Committee, Interlocks and Insider Participation” in our 2002definitive 2006 proxy statement and is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS


PRINCIPAL ACCOUNTING FEES AND SERVICES

The information required by this item will be set forth in the section headed “Fees Paid to Deloitte & Touche LLP” in our 2002definitive 2006 proxy statement and is incorporated herein by reference. 92


PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) FINANCIAL STATEMENTS, SCHEDULES AND EXHIBITS. 1. FINANCIAL STATEMENTS.


EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(a)
FINANCIAL STATEMENTS, SCHEDULES AND EXHIBITS.

1.
Financial Statements.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS


2. FINANCIAL STATEMENT SCHEDULES.
Financial Statement Schedules.


3.
Exhibits


(1)Incorporated by reference to exhibit of same number filed with Form 8-K dated December 4, 1996.
(2)Filed as Appendix to the prospectus in Part I of Registration Statement on Form S-4 (File No. 333-06671).
(3)Incorporated by reference to Proxy Statement for Special Meeting of Shareholders on December 8, 2005, dated November 8, 2005, and filed with the SEC on November 8, 2005.
(4)Incorporated by reference to exhibit of same number filed with Form 10-Q for the quarterly period ended September 30, 2005.
(5)Incorporated by reference to Form 8-K filed with the SEC on February 25, 2005.

To the Shareholders and Board of Directors and Shareholders of PICO Holdings, Inc.:
We have audited the consolidated financial statements of PICO Holdings, Inc. and subsidiaries (the "Company"“Company”) as of December 31, 20012005 and 2000,2004, and for each of the three years in the period ended December 31, 2001,2005, management’s assessment of the effectiveness of the Company’s internal control over financial reporting as of December 31, 2005, and the effectiveness of the Company’s internal control over financial reporting as of December 31, 2005, and have issued our reportreports thereon dated March 8, 2002 (March 27, 2003 as to Note 22) which report includes explanatory paragraphs relating to the change9, 2006; such reports are included elsewhere in accounting for medical professional liability claims reserves in 2000 as discussed in Note 21 and the restatement discussed in Note 22.this Form 10-K.  Our audits of the consolidated financial statements also included the consolidated financial statement schedules of the Company listed in Item 14.15.  These consolidated financial statement schedules are the responsibility of the Company'sCompany’s management.  Our responsibility is to express an opinion based on our audits.  In our opinion, such consolidated financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein. DELOITTE
/s/ Deloitte & TOUCHETouche LLP
San Diego, California
March 8, 2002 (March 27, 2003 as to Note 22) 94 9, 2006

CONDENSED FINANCIAL INFORMATION OF REGISTRANT (PARENT COMPANY ONLY)

CONDENSED BALANCE SHEETS
December 31, December 31, 2001 2000 ---------------- ---------------- ASSETS (AS RESTATED, (AS RESTATED, SEE NOTE 1) SEE NOTE 1) Cash and cash equivalents $ 1,559,584 $ 4,331,102 Investments in subsidiaries 134,957,362 123,804,711 Equity securities and other investments 29,279,888 31,464,151 Deferred income taxes 10,486,309 5,670,439 Other assets 32,690,726 38,546,947 ---------------- ---------------- Total assets $208,973,869 $203,817,350 ================ ================ LIABILITIES AND SHAREHOLDERS' EQUITY Accrued expense and other liabilities $ 1,075,362 $ 1,712,216 ---------------- ---------------- Common stock, $.001 par value, authorized 100,000,000 shares: issued and outstanding 16,784,223 at December 31, 2001 and 2000, respectively 16,784 16,784 Additional paid-in capital 235,844,655 235,844,655 Accumulated other comprehensive loss (3,225,867) (4,204,335) Retained earnings 53,391,570 48,277,665 ---------------- ---------------- 286,027,142 279,934,769 Less treasury stock, at cost (2001: 4,415,607 shares and 2000: 4,394,127 shares) (78,128,635) (77,829,635) ---------------- ---------------- Total shareholders' equity 207,898,507 202,105,134 ---------------- ---------------- Total liabilities and shareholders' equity $208,973,869 $203,817,350 ================ ================
This statement should be read in conjunction with the notes to the consolidated financial statements included in the Company's 2001 Form 10-K/A 95 SCHEDULE I CONDENSED FINANCIAL INFORMATION OF REGISTRANT (PARENT COMPANY ONLY) CONDENSED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2001 2000 1999 --------------- ---------------- --------------- (AS RESTATED, (AS RESTATED, (AS RESTATED, SEE NOTE 1) SEE NOTE 1) SEE NOTE 1) Investment income (loss), net $ 3,058,533 $ (4,067,068) $ 659,312 Equity in income (loss) of subsidiaries 10,741,775 1,310,463 (6,859,201) --------------- ---------------- --------------- Total revenues (charges) 13,800,308 (2,756,605) (6,199,889) Expenses 8,587,153 6,055,643 5,024,583 --------------- ---------------- --------------- Income (loss) from continuing operations before income taxes 5,213,155 (8,812,248) (11,224,472) Benefit for income taxes (881,321) (2,475,383) (1,484,192) --------------- ---------------- --------------- Income (loss) before cumulative effect 6,094,476 (6,336,865) (9,740,280) Cumulative effect of accounting change, net (980,571) (4,963,691) --------------- ---------------- --------------- Net income (loss) $ 5,113,905 $ (11,300,556) $ (9,740,280) =============== ================ =============== CONDENSED STATEMENTS OF CASH FLOWS 2001 2000 1999 --------------- ---------------- --------------- Cash flow from operating activities: (AS RESTATED, (AS RESTATED, (AS RESTATED, SEE NOTE 1) SEE NOTE 1) SEE NOTE 1) Net income (loss) $ 5,113,905 $ (11,300,556) $ (9,740,280) Adjustments to reconcile net income (loss) to net cash used or provided by operating activities: Equity in (income) loss of subsidiaries (10,741,775) (1,310,463) 6,859,201 Cumulative effect of accounting change, net 980,571 4,963,691 Changes in assets and liabilities: Accrued expenses and other liabilities (636,854) (15,765,565) 4,709,660 Other assets 1,040,351 (37,926,455) 8,144,827 --------------- ---------------- --------------- Net cash provided by (used in) operating activities (4,243,802) (61,339,348) 9,973,408 --------------- ---------------- --------------- Cash flow from investing activities: Sale of investments 1,771,284 12,910,084 Purchase of investments (10,052,274) --------------- ---------------- --------------- Net cash provided by (used in) investing activities 1,771,284 12,910,084 (10,052,274) Cash flow from financing activities: Cash received from exercise of warrants 2,850,359 Cash received from rights offering, net 49,843,163 Purchase of treasury shares (299,000) (291,593) --------------- ---------------- --------------- Net cash provided by (used in) financing activities (299,000) 49,843,163 2,558,766 --------------- ---------------- --------------- Increase (decrease) in cash and cash equivalents (2,771,518) 1,413,899 2,479,900 Cash and cash equivalents, beginning of year 4,331,102 2,917,203 437,303 --------------- ---------------- --------------- Cash and cash equivalents, end of year $ 1,559,584 $ 4,331,102 $ 2,917,203 =============== ================ ===============

  
December 31,
2005
 
December 31,
2004
 
ASSETS     
      
Cash and cash equivalents $9,993,387 $9,291,851 
Investments in subsidiaries (eliminated in consolidation)  279,054,059  205,073,285 
Equity securities and other investments  54,835,786  11,967,876 
Deferred income taxes  11,315,901  7,188,824 
Other assets (Intercompany receivable of $0 in 2005, and $32.3 million in 2004 eliminated in consolidation)  2,973,165  33,434,215 
Total assets $358,172,298 $266,956,051 
        
LIABILITIES AND SHAREHOLDERS' EQUITY       
Accrued expense and other liabilities (Intercompany payable of $283,000 in 2005, and $0 in 2004 eliminated in consolidation) $57,297,341 $27,026,753 
        
Common stock, $.001 par value, authorized 100,000,000 shares: issued 17,706,923 at December 31, 2005 and 16,801,923 at December 31, 2005  17,707  16,802 
Additional paid-in capital  257,466,412  236,089,222 
Accumulated other comprehensive income  60,092,462  36,725,700 
Retained earnings  61,725,860  45,524,219 
   379,302,441  318,355,943 
Less treasury stock, at cost (2005: 4,435,483 shares and 2004: 4,435,444 shares)  (78,427,484) (78,426,645)
Total shareholders' equity  300,874,957  239,929,298 
Total liabilities and shareholders' equity $358,172,298 $266,956,051 

SCHEDULE I

CONDENSED FINANCIAL INFORMATION OF REGISTRANT (PARENT COMPANY ONLY) NOTE 1. RESTATEMENT
CONDENSED STATEMENTS OF PREVIOUSLY REPORTED FINANCIAL INFORMATION: SubsequentOPERATIONS
FOR THE YEARS ENDED DECEMBER 31,

  2005 2004 2003 
Investment income, net (Intercompany interest of $2.8 million in 2005, $3.1 million in 2004, and $3.2 million in 2003 eliminated in consolidation) $4,659,888 $5,484,542 $6,417,240 
Equity in loss of subsidiaries  39,424,867  (2,135,617) (8,528,754)
Total revenues (charges)  44,084,755  3,348,925  (2,111,514)
Expenses (Intercompany interest of $1.4 million in 2005, $1.1 million in 2004, and $1.7 million in 2003 eliminated in consolidation)  39,991,535  18,639,014  15,017,239 
Income (loss) from continuing operations before income taxes  4,093,220  (15,290,089) (17,128,753)
Benefit for income taxes  (12,071,169) (4,653,685) (3,392,527)
Income (loss) before cumulative effect  16,164,389  (10,636,404) (13,736,226)
Income from discontinued operations, net  37,252  77,720  10,498,414 
Cumulative effect of accounting change, net          
Net income (loss) $16,201,641 $(10,558,684)$(3,237,812)
           
CONDENSED STATEMENTS OF CASH FLOWS
          
Cash flow from operating activities:  2005  2004  2003 
Net income (loss) $16,201,641 $(10,558,684)$(3,237,812)
Adjustments to reconcile net income (loss) to net cash used or provided by operating activities:          
Equity in loss of subsidiaries  (39,424,867) 2,135,617  8,528,754 
Income from discontinued operations, net  (37,252) (77,720) (10,498,414)
Cumulative effect of accounting change, net        - 
Changes in assets and liabilities:          
Accrued expenses and other liabilities  30,270,588  9,739,501  8,685,843 
Other assets  26,420,985  6,638,581  (3,094,770)
Net cash provided by (used in) operating activities  33,431,095  7,877,295  383,601 
           
Cash flow from investing activities:          
Proceeds from sale of investments  7,731,833  10,988,612  8,539,180 
Proceeds from maturities of investments  4,860,000     18,673,000 
Purchases of proerty and equipment  (87,012)      
Purchase of investments (Intercompany purchases of $39.2 million eliminated in consolidation, none in 2004 or 2003)  (66,611,636) (16,105,426) (34,296,877)
Net cash used in investing activities  (54,106,815) (5,116,814) (7,084,697)
           
Cash flow from financing activities:          
Proceeds from stock offering, net  21,378,095       
Other     6,519    
Purchase of treasury shares for deferred compensation plans  (839) (121,235) (83,218)
Net cash provided by (used in) financing activities  21,377,256  (114,716) (83,218)
           
Increase (decrease) in cash and cash equivalents  701,536  2,645,765  (6,784,314)
Cash and cash equivalents, beginning of year  9,291,851  6,646,086  13,430,400 
Cash and cash equivalents, end of year $9,993,387 $9,291,851 $6,646,086 


79

Table of the adjustments related to other-than-temporary impairments in 2001 was an increase in gross realized gains of $2.5 million, a $1.1 million increase after tax. The $4.7 million in losses were subsequently recorded in the year ended December 31, 1996. In addition, the subsidiaries recorded impairment charges of $4.6 million for the year ended December 31, 1998. Accounting for Jungfraubahn: In September 2000, the Company adopted the equity method of accounting related to its investment in Jungfraubahn. It was subsequently determined that the Company should account for Jungfraubahn in accordance with SFAS No. 115. The Company has reversed its accounting which reduced equity in income (loss) of subsidiaries by $241,000, $3 million and $3 million in 2001, 2000 and 1999, respectively. In addition, equity in income (loss) of subsidiaries increased by dividends received from Jungfraubahn of $622,000 and $217,000 in 2000 and 1999, respectively. Under the equity method of accounting, dividends had been recorded as a reduction in the equity basis. The after tax effect of the other-than-temporary impairments and the adjustments related to the equity method of accounting increased net income by $340,000 in 2001, and increased net loss by $1.8 million in 2000 and $2.9 million in 1999, respectively. Beginning retained earnings at January 1, 1999 decreased $6.9 million to $69.3 million due primarily to reversing an accumulated $737,000 in net earnings of affiliate recorded on Jungfraubahn and $6.2 million in net realized losses recorded for other than temporary impairments recorded in 1996 and 1998. At December 31, 2001, investment in subsidiaries increased from the removal of deferred income tax liabilities related to a timing difference for the equity in income from Jungfraubahn. Previously reported net unrealized losses at December 31, 2001 went from a loss of $10.6 million to a net unrealized gain of $5.5 million primarily due to 1) reversing the equity basis of our investment in Jungfraubahn and reporting the investment at fair value under the accounting provisions of SFAS No. 115, and 2) recording impairment charges for other-than-temporary impairment losses. Accumulated foreign currency losses also increased by $3.6 million due to the change from equity method to fair value. At December 31, 2000, investment in subsidiaries decreased by $3.1 million primarily due to an increase of $18.9 million for the market value of the investment in Jungfraubahn, and a decrease to the of $23.7 million related to reversing the equity method accounting for Jungfraubahn. Reported net unrealized losses at December 31, 2000 went from a loss of $7 million to a net unrealized gain of $3.6 million primarily due to 1) reporting the investment at fair value under the accounting provisions of SFAS No. 115, and 2) recording charges for the other-than-temporary impairment losses described above. Accumulated foreign currency losses increased by $2.1 million due to the change from equity method to fair value for the investment in Jungfraubahn. As a result, the Condensed Financial Statements (Parent Only) have been restated for the years ended December 31, 2001, 2000 and 1999 from amounts previously reported to record other than temporary impairments on marketable securities and to reverse the equity method of accounting for its investment in Jungfraubahn. A summary of the significant effects on the parent company financial statements is as follows:
Year Ended Year Ended December 31, 2001 December 31, 2000 As Previously Reported As Restated As Previously Reported As Restated ------------------------------------------ ---------------------------------------------- Investment income, net $ 3,946,033 $ 3,058,533 Equity in income (loss) of subs $ 9,815,081 $ 10,741,775 $ 3,085,082 $ 1,310,463 Total revenues $ 13,761,114 $ 13,800,308 $ (981,986) $ (2,756,605) Income tax expense (benefit) $ (579,571) $ (881,321) Income (loss) from continuing operations before cumulative effect $ 5,753,532 $ 6,094,476 $ (4,562,246) $ (6,336,865) Net income (loss) $ 4,772,961 $ 5,113,905 $ (9,525,937) $(11,300,556) Basic and Diluted income (loss) per share $ 0.39 $ 0.41 $ (0.82) $ (0.97)
Year Ended December 31, 1999 As Previously Reported As Restated ----------------------------------------- Investment income, net Equity in income (loss) of subs $ (3,939,199) $ (6,859,201) Total revenues $ (3,279,887) $ (6,199,889) Income tax expense (benefit) Income (loss) from continuing operations before cumulative effect $ (6,820,278) $ (9,740,280) Net income (loss) $ (6,820,278) $ (9,740,280) Basic and Diluted income (loss) per share $ (0.76) $ (1.08)
December 31, 2001 December 31, 2000 As Previously Reported As Restated As Previously Reported As Restated ------------------------------------------ ---------------------------------------------- Investment in subsidiaries $133,698,408 $134,957,362 $ 126,892,188 $ 123,804,711 Unrealized loss, net of tax $(10,633,199) $ 5,545,057 $ (6,977,748) $ 3,611,475 Accumulated foreign currency (5,126,798) (8,770,924) (5,755,230) (7,815,810) ------------------- -------------------- ---------------------- ---------------------- Accumulated other comprehensive loss $(15,759,997) $ (3,225,867) $ (12,732,978) $ (4,204,335) Retained earnings $ 64,666,746 $ 53,391,570 $ 59,893,785 $ 48,277,665 Total shareholders' equity $206,639,553 $207,898,507 $ 205,192,611 $ 202,105,134
97 Contents


PICO HOLDINGS, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
Beginning Costs and End Description of Period Expenses Deductions of Period ----------- -------------- ----------------- ------------- ------------- Year-end December 31, 2001 Allowance for Doubtful Accounts, net $ 214,300 $ 2,633,204 $ (296,900) $ 42,550,604 Valuation Allowance for Deferred Federal Income Taxes $ 4,101,587 $ (367,434) $ 43,734,153 Year-end December 31, 2000 Allowance for Doubtful Accounts, net $ 99,488 $ 114,812 $ 214,300 Valuation Allowance for Deferred Federal Income Taxes $ 816,171 $ 3,285,416 $ 4,101,587 Year-end December 31, 1999 Allowance for Doubtful Accounts, net $ 94,525 $ 4,963 $ 99,488 Valuation Allowance for Deferred Federal Income Taxes $ 12,184,507 $(11,368,336) $ 816,171
98
    Additions (1)     
Description Balance at Beginning of Period Charged to Costs and Expenses Deductions Balance at End of Period 
          
Year-end December 31, 2005:         
Allowance for doubtful accounts $358,917  17,278    $376,195 
Year-end December 31, 2004:             
Allowance for doubtful accounts $2,450,604  308,917 $(2,400,604)$358,917 
Year-end December 31, 2003:             
Allowance for doubtful accounts $2,500,604  420,000 $(470,000)$2,450,604 

(1) Includes $150,000 in 2003 from the consolidation of HyperFeed.



PICO HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED SUPPLEMENTARY INSURANCE INFORMATION (In
(In thousands)
Year Ended December 31, 2001
Losses, Amortization Deferred Claims Losses of Deferred Policy and Loss Net and Policy Acquisition Expense Unearned Premium Investment Loss Acquisition Costs Reserves Premiums Revenue Income Expenses Costs ------------ ------------- ----------- ---------- ------------ ------------ ------------- Medical professional liability $ 40,543 $ 755 $ 1,097 $ (11,158) Other property and casualty $ 6,914 57,906 $ 28,143 42,535 5,997 29,460 $ 13,044 ------------ ------------- ----------- ---------- ------------ ------------ ------------- Total medical professional liability and property and casualty 6,914 98,449 28,143 43,290 7,094 18,302 13,044 Other operations 2,673 ------------ ------------- ----------- ---------- ------------ ------------ ------------- Total continuing $ 6,914 $ 98,449 $ 28,143 $43,290 $ 9,767 $ 18,302 $ 13,044 ============ ============= =========== ========== ============ ============ ============= Other Net Operating Premiums Expenses Written ------------ ---------- Medical professional liability $ 524 $ 755 Other property and casualty 2,667 45,173 ------------ ---------- Total medical professional liability and property and casualty 3,191 45,928 Other operations 26,063 ------------ ---------- Total continuing $ 29,254 $ 45,928 ============ ==========
99 2005

  Losses, Claims and Loss Expense Reserves Net Investment Income Losses and Loss Expenses Other Operating Expenses 
Medical professional liability $12,844 $2,016 $(3,155)$635 
              
Property and casualty and workers' compensation  33,803  1,035  (510) 599 
              
Total medical professional liability and property and casualty and workers' compensation  46,647  3,051  (3,665) 1,234 
              
Other operations     5,145     115,898 
              
Total continuing $46,647 $8,196 $(3,665)$117,132 

SCHEDULE V

PICO HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED SUPPLEMENTARY INSURANCE INFORMATION (In
(In thousands)
Year Ended December 31, 2000
Future Policy Benefits, Amortization Deferred Losses, Losses of Deferred Policy Claims Net and Policy Acquisition and Loss Unearned Premium Investment Loss Acquisition Costs Expenses Premiums Revenue Income Expenses Costs ------------ ------------- ----------- ---------- ------------ ----------- ------------- Medical professional liability $ 58,610 $ 1,853 $ 1,543 $ 1,063 Other property and casualty $ 6,300 62,932 $ 25,505 32,583 5,381 22,963 $ 10,250 ------------ ------------- ----------- ---------- ------------ ----------- ------------- Total medical professional liability and property and casualty 6,300 121,542 25,505 34,436 6,924 24,026 10,250 Other operations 1,937 ------------ ------------- ----------- ---------- ------------ ----------- ------------- Total continuing $ 6,300 $ 121,542 $ 25,505 $34,436 $ 8,861 $ 24,026 $ 10,250 ============ ============= =========== ========== ============ =========== ============= Other Net Operating Premiums Expenses Written ------------ ---------- Medical professional liability $ 1,580 $ 1,853 Other property and casualty 3,514 42,191 ------------ ---------- Total medical professional liability and property and casualty 5,094 44,044 Other operations 21,257 ------------ ---------- Total continuing $ 26,351 $ 44,044 ============ ==========
100 2004


  Losses, Claims and Loss Expense Reserves Net Investment Income Losses and Loss Expenses Other Operating Expenses 
Medical professional liability $19,593 $3,656 $(489)$728 
              
Property and casualty and workers' compensation  36,401  2,092  932  516 
              
Total medical professional liability and property and casualty and workers' compensation  55,994  5,748  443  1,244 
              
Other operations     51     43,337 
              
Total continuing $55,994 $5,799 $443 $44,581 

SCHEDULE V

PICO HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED SUPPLEMENTARY INSURANCE INFORMATION (In
(In thousands)
Year Ended December 31, 1999 Losses, Amortization Deferred Claims Losses of Deferred Policy and Loss Net and Policy Acquisition Expense Unearned Premium Investment Loss Acquisition Costs Reserves Premiums Revenue Income Expenses Costs ----------- ------------ ----------- ----------- ------------ ---------- ------------- Medical professional liability $ 71,859 $ 1,941 $ 1,180 $ 6,599 Other property and casualty $ 4,821 67,274 $ 17,205 34,439 4,951 28,613 $ 10,484 ----------- ------------ ----------- ----------- ------------ ---------- ------------- Total medical professional liability and property and casualty 4,821 139,133 17,205 36,380 6,131 35,212 10,484 Other operations 474 ----------- ------------ ----------- ----------- ------------ ---------- ------------- Total continuing $ 4,821 $ 139,133 $ 17,205 $ 36,380 $ 6,605 $ 35,212 $ 10,484 =========== ============ =========== =========== ============ ========== ============= Other Net Operating Premiums Expenses Written ------------- ----------- Medical professional liability $ 857 $ 1,934 Other property and casualty 4,528 31,719 ------------- ----------- Total medical professional liability and property and casualty 5,385 33,653 Other operations 22,868 ------------- ----------- Total continuing $ 28,253 $ 33,653 ============= ===========
101 3. Exhibits
Exhibit Number Description ------ ----------- + 2.2 Agreement and Plan of Reorganization, dated as of May 1, 1996, among PICO, Citation Holdings, Inc. and Physicians and amendment thereto dated August 14, 1996 and related Merger Agreement. +++++ 2.3 Second Amendment to Agreement and Plan of Reorganization dated November 12, 1996. # 2.4 Agreement and Debenture, dated November 14, 1996 and November 27, 1996, respectively, by and between Physicians and HyperFeed. # 2.5 Purchase and Sale Agreement by, between and among Nevada Land & Resource Company, LLC, Global Equity, Western Water Company and Western Land Joint Venture dated April 9, 1997. +++++ 3.1 Amended and Restated Articles of Incorporation of PICO. + 3.2.2 Amended and Restated By-laws of PICO. * 10.8 Flexible Benefit Plan. ++ 10.57 PICO 1995 Stock Option Plan. -+++ 10.58 Key Employee Severance Agreement and Amendment No. 1 thereto, each made as of November 1, 1992, between PICO and Richard H. Sharpe and Schedule A identifying other substantially identical Key Employee Severance Agreements between PICO and certain of the executive officers of PICO. +++ 10.59 Agreement for Purchase and Sale of Shares, dated May 9, 1996, among Physicians, Guinness Peat Group plc and Global Equity. ++ 10.60 Agreement for the Purchase and Sale of Certain Assets, dated July 14, 1995 between Physicians, PRO and Mutual Assurance, Inc. ++ 10.61 Stock Purchase Agreement dated March 7, 1995 between Sydney Reinsurance. Corporation and Physicians. ++ 10.62 Letter Agreement, dated September 5, 1995, between Physicians, Christopher Ondaatje and the South East Asia Plantation Corporation Limited. ++++ 10.63 Amendment No. 1 to Agreement for Purchase and Sale of Certain Assets, dated July 30, 1996 between Physicians, PRO and Mutual Assurance, Inc. +++++ 16.1. Letter regarding change in Certifying Accountant from Deloitte & Touche LLP, Independent Auditors. # 21. Subsidiaries of PICO. 23.1. Independent Auditors' Consent - Deloitte & Touche LLP. 99.1 Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 99.2 Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
- ------------------------ * Incorporated by reference to exhibit2003


  Losses, Claims and Loss Expense Reserves Net Investment Income Losses and Loss Expenses Other Operating Expenses 
Medical professional liability $23,626 $1,353 $(6,753)$876 
              
Property and casualty and workers' compensation  37,238  1,327  11,420  604 
              
Total medical professional liability and property and casualty and workers' compensation  60,864  2,680  4,667  1,480 
              
Other operations     2,690     39,945 
              
Total continuing $60,864 $5,370 $4,667 $41,425 
81

Table of same number filed with Registration Statement on Form S-1 (File No. 33-36383). *** Incorporated by reference to exhibit of same number filed With 1992 Form 10-K. **** Incorporated by reference to exhibit of same number filed with 1994 Form 10-K. ***** Incorporated by reference to exhibit bearing the same number filed with Registration Statement on Form S-4 (File No. 33-64328). + Filed as Appendix to the prospectus in Part I of Registration Statement on Form S-4 (File No. 333-06671). ++ Incorporated by reference to exhibit filed with Physicians' Registration Statement No. 33-99352 on Form S-1 filed with the SEC on November 14, 1995. +++ Incorporated by reference to exhibit filed with Registration Statement on Form S-4 (File no. 333-06671). 102 ++++ Incorporated by reference to exhibit filed with Amendment No. 1 to Registration Statement No. 333-06671 on Form S-4. +++++ Incorporated by reference to exhibit of same number filed with Form 8-K dated December 4, 1996. - - Executive Compensation Plans and Agreements. # Incorporated by reference to exhibit of same number filed with Form 10-K dated April 15, 1997. ## Incorporated by reference to exhibit of same number filed with 10-K/A dated April 30, 1997. ### Incorporated by reference to Form S-8 filed with the Securities and Exchange Commission (File No. 333-36881). #### Incorporated by reference to Form S-8 filed with the Securities and Exchange Commission (File No. 333-32045). ##### Incorporated by reference to Form S-8 filed with the Securities and Exchange Commission (File No. 333-51688). ###### Incorporated by reference to Form S-8 filed with the Securities and Exchange Commission (File No. 333-74072). (b) REPORTS ON FORM 8-K. On March 19, 2001, PICO filed a form 8-K announcing that its water rights and water storage subsidiary, Vidler Water Company, Inc., had sold a portion of its land and water rights in Arizona's Harquahala Valley ground water basin to a unit of Allegheny Energy, Inc. 103 Contents


Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.

Date: March 31, 2003 PICO Holdings, Inc. By: /s/ John R. Hart ------------------------------------ John R. Hart Chief Executive Officer President and Director 10, 2006
PICO Holdings, Inc.
By:/s/ John R. Hart
John R. Hart
Chief Executive Officer
President and Director

Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below on March 18, 200210, 2006 by the following persons in the capacities indicated. /s/ Ronald Langley

/s/ Ronald Langley
Chairman of the Board
Ronald Langley
/s/ John R. Hart
Chief Executive Officer, President and Director
John R. Hart(Principal Executive Officer)
/s/ Maxim C. W. Webb
Chief Financial Officer and Treasurer
Maxim C. W. Webb(Chief Accounting Officer)
/s/ S. Walter Foulkrod, III, Esq.
Director
S. Walter Foulkrod, III, Esq.
/s/ Richard D. Ruppert, MD
Director
Richard D. Ruppert, MD
/s/ Carlos C. Campbell
Director
Carlos C. Campbell
/s/ Kenneth J. Slepicka
Director
Kenneth J. Slepicka
/s/ John D. Weil
Director
John D. Weil
82

Table of the Board - ----------------------------------- Ronald Langley /s/ John R. Hart Chief Executive Officer, President - ----------------------------------- and Director John R. Hart /s/ Maxim C. W. Webb Chief Financial Officer and Treasurer - ----------------------------------- (Chief Accounting Officer) Maxim C. W. Webb /s/ S. Walter Foulkrod, III, Esq. Director - ----------------------------------- S. Walter Foulkrod, III, Esq. /s/ Richard D. Ruppert, MD Director - ----------------------------------- Richard D. Ruppert, MD /s/ Carlos C. Campbell Director - ----------------------------------- Carlos C. Campbell /s/ Robert R. Broadbent Director - ----------------------------------- Robert R. Broadbent /s/ John D. Weil Director - ----------------------------------- John D. Weil 104 CERTIFICATIONS I, John R. Hart, Chief Executive Officer of PICO Holdings, Inc. (the "Registrant") certify that: 1. I have reviewed this annual report on Form 10-K/A of the Registrant; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this annual report; Date: March 31, 2003 /s/ John R. Hart -------------------------- John R. Hart Chief Executive Officer 105 CERTIFICATIONS I, Maxim C. W. Webb, Chief Financial Officer and Treasurer of PICO Holdings, Inc. (the "Registrant") certify that: 1. I have reviewed this annual report on Form 10-K/A of the Registrant; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this annual report; Date: March 31, 2003 /s/ Maxim C. W. Webb -------------------------- Maxim C. W. Webb Chief Financial Officer and Treasurer 106
Contents
INDEX TO EXHIBITS


Exhibit Number
Description
3.1Amended and Restated Articles of Incorporation of PICO.(1)
3.2Amended and Restated By-laws of PICO. (2)
10.1PICO Holdings, Inc. 2005 Long-Term Incentive Plan.(3)
10.4Bonus Plan of Dorothy A. Timian-Palmer.(5)
10.5Bonus Plan of Stephen D. Hartman.(5)
10.7Employment Agreement of Ronald Langley.(4)
10.8Employment Agreement of John R. Hart.(4)

(1)Incorporated by reference to exhibit of same number filed with Form 8-K dated December 4, 1996.
(2)Filed as Appendix to the prospectus in Part I of Registration Statement on Form S-4 (File No. 333-06671).
(3)Incorporated by reference to Proxy Statement for Special Meeting of Shareholders on December 8, 2005, dated November 8, 2005, and filed with the SEC on November 8, 2005.
(4)Incorporated by reference to exhibit of same number filed with Form 10-Q for the quarterly period ended September 30, 2005.
(5)Incorporated by reference to Form 8-K filed with the SEC on February 25, 2005.
111